Document
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, 2018
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 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 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" and "emerging growth 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
Emerging Growth Company o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, including restricted common shares, outstanding of the registrant's common stock as of November 9, 2018 was 22,380,178.

KINGSWAY FINANCIAL SERVICES INC.

Table Of Contents
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (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 share data)
 
 
September 30, 2018

 
December 31, 2017

 
 
(unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $11,316 and $14,707, respectively)
 
$
11,076

 
$
14,541

Equity investments, at fair value (cost of $2,038 and $4,854, respectively)
 
1,334

 
4,476

Limited liability investments
 
6,230

 
4,922

Limited liability investment, at fair value
 
4,529

 
5,771

Other investments, at cost which approximates fair value
 
1,917

 
2,321

Short-term investments, at cost which approximates fair value
 
151

 
151

Total investments
 
25,237

 
32,182

Cash and cash equivalents
 
23,591

 
20,774

Investment in investee
 
2,827

 
5,230

Accrued investment income
 
194

 
331

Service fee receivable, net of allowance for doubtful accounts of $331 and $318, respectively
 
6,747

 
4,286

Other receivables, net of allowance for doubtful accounts of zero and zero, respectively
 
7,877

 
6,536

Deferred acquisition costs, net
 
6,899

 
6,325

Property and equipment, net of accumulated depreciation of $14,875 and $11,683, respectively
 
104,196

 
108,008

Goodwill
 
73,928

 
80,112

Intangible assets, net of accumulated amortization of $10,232 and $8,333, respectively
 
84,359

 
80,062

Other assets
 
2,560

 
4,302

Assets held for sale
 
133,365

 
136,452

Total Assets
 
$
471,780

 
$
484,600

Liabilities and Shareholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Property and casualty unpaid loss and loss adjustment expenses
 
$
2,292

 
$
1,329

Note payable
 
183,561

 
186,469

Bank loan
 
4,167

 
4,917

Subordinated debt, at fair value
 
53,614

 
52,105

Net deferred income tax liabilities
 
28,472

 
28,745

Deferred service fees
 
46,275

 
42,257

Income taxes payable
 
2,501

 
2,644

Accrued expenses and other liabilities
 
11,492

 
10,924

Liabilities held for sale
 
107,076

 
105,900

Total Liabilities
 
439,450

 
435,290

 
 
 
 
 
Class A preferred stock, no par value; unlimited number authorized; 222,876 and 222,876 issued and outstanding at September 30, 2018 and December 31, 2017, respectively; redemption amount of $5,572
 
5,486

 
5,461

 
 
 
 
 
Shareholders' Equity:
 
 
 
 
Common stock, no par value; unlimited number authorized; 21,708,190 and 21,708,190 issued and outstanding at September 30, 2018 and December 31, 2017, respectively
 
—

 
—

Additional paid-in capital
 
354,141

 
356,021

Accumulated deficit
 
(369,771
)
 
(313,487
)
Accumulated other comprehensive income (loss)
 
36,961

 
(3,852
)
Shareholders' equity attributable to common shareholders
 
21,331

 
38,682

Noncontrolling interests in consolidated subsidiaries
 
5,513

 
5,167

Total Shareholders' Equity
 
26,844

 
43,849

Total Liabilities, Class A preferred stock and Shareholders' Equity
 
$
471,780

 
$
484,600


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,
 
 
 
2018

 
2017

 
2018

 
2017

Revenues:
 
 
 
 
 
 
 
 
Service fee and commission income
 
$
9,104

 
$
7,670

 
$
28,938

 
$
20,738

Rental income
 
3,341

 
3,345

 
10,033

 
10,041

Net investment (loss) income
 
(84
)
 
1,289

 
(697
)
 
126

Net realized losses
 
(414
)
 
—

 
(405
)
 
(1
)
Gain on change in fair value of equity investments
 
337

 
—

 
951

 
—

Other income
 
15

 
692

 
1,323

 
1,261

Total revenues
 
12,299

 
12,996

 
40,143

 
32,165

Operating expenses:
 
 
 
 
 
 
 
 
Claims authorized on vehicle service agreements
 
1,442

 
1,387

 
4,206

 
4,066

Loss and loss adjustment expenses
 
(19
)
 
266

 
1,628

 
266

Commissions
 
971

 
525

 
2,843

 
2,154

Cost of services sold
 
2,033

 
1,951

 
5,749

 
4,546

General and administrative expenses
 
5,410

 
6,515

 
20,078

 
18,740

Leased real estate segment interest expense
 
1,540

 
1,563

 
4,638

 
4,706

Total operating expenses
 
11,377

 
12,207

 
39,142

 
34,478

Operating income (loss)
 
922

 
789

 
1,001

 
(2,313
)
Other expenses (revenues), net:
 
 
 
 
 
 
 
 
Interest expense not allocated to segments
 
1,571

 
1,261

 
4,476

 
3,636

Amortization of intangible assets
 
1,356

 
286

 
1,899

 
866

Contingent consideration benefit
 
—

 
—

 
—

 
(212
)
Loss on change in fair value of debt
 
1,450

 
1,178

 
2,511

 
5,769

Gain on disposal of subsidiary
 
—

 
—

 
(17
)
 
—

Equity in net loss (income) of investee
 
339

 
897

 
623

 
(1,343
)
Total other expenses, net
 
4,716

 
3,622

 
9,492

 
8,716

Loss from continuing operations before income tax (benefit) expense
 
(3,794
)
 
(2,833
)
 
(8,491
)
 
(11,029
)
Income tax (benefit) expense
 
(147
)
 
120

 
291

 
1,636

Loss from continuing operations
 
(3,647
)
 
(2,953
)
 
(8,782
)
 
(12,665
)
Income from discontinued operations, net of taxes
 
740

 
1,391

 
2,069

 
960

(Loss) gain on disposal of discontinued operations, net of taxes
 
(1,172
)
 
—

 
(7,800
)
 
1,017

Net loss
 
(4,079
)
 
(1,562
)
 
(14,513
)
 
(10,688
)
Less: net income attributable to noncontrolling interests in consolidated subsidiaries
 
110

 
79

 
353

 
284

Less: dividends on preferred stock, net of tax
 
132

 
(115
)
 
391

 
213

Net loss attributable to common shareholders
 
$
(4,321
)
 
$
(1,526
)
 
$
(15,257
)
 
$
(11,185
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.18
)
 
$
(0.14
)
 
$
(0.44
)
 
$
(0.61
)
Diluted:
 
$
(0.18
)
 
$
(0.14
)
 
$
(0.44
)
 
$
(0.61
)
(Loss) earnings per share - discontinued operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.02
)
 
$
0.06

 
$
(0.26
)
 
$
0.09

Diluted:
 
$
(0.02
)
 
$
0.06

 
$
(0.26
)
 
$
0.09

Loss per share – net loss attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.20
)
 
$
(0.07
)
 
$
(0.70
)
 
$
(0.52
)
Diluted:
 
$
(0.20
)
 
$
(0.07
)
 
$
(0.70
)
 
$
(0.52
)
Weighted-average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
21,708

 
21,559

 
21,708

 
21,492

Diluted:
 
21,708

 
21,559

 
21,708

 
21,492


See accompanying notes to unaudited consolidated financial statements.

 
4
 
KINGSWAY FINANCIAL SERVICES INC.


Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Net loss
 
$
(4,079
)
 
$
(1,562
)
 
$
(14,513
)
 
$
(10,688
)
Other comprehensive income (loss), net of taxes(1):
 
 
 
 
 
 
 
 
Unrealized (losses) gains on available-for-sale investments:
 
 
 
 
 
 
 
 
Unrealized losses arising during the period
 
(44
)
 
(3,262
)
 
(481
)
 
(4,489
)
Reclassification adjustment for amounts included in net loss
 
6

 
764

 
(5
)
 
735

Change in fair value of debt attributable to instrument-specific credit risk
 
658

 
—

 
1,002

 
—

Equity in other comprehensive income (loss) of limited liability investment
 
19

 
—

 
(205
)
 
—

Other comprehensive income (loss)
 
639

 
(2,498
)
 
311

 
(3,754
)
Comprehensive loss
 
(3,440
)
 
(4,060
)
 
(14,202
)
 
(14,442
)
Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries
 
109

 
79

 
346

 
287

Comprehensive loss attributable to common shareholders
 
$
(3,549
)
 
$
(4,139
)
 
$
(14,548
)
 
$
(14,729
)
(1) Net of income tax (benefit) expense of $0 and $0 for the three and nine months ended September 30, 2018 and September 30, 2017, respectively.

See accompanying notes to unaudited consolidated financial statements

 
5
 
KINGSWAY FINANCIAL SERVICES INC.

Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

Cash provided by (used in):
 
 
 
 
Operating activities:
 
 
 
 
Net loss
 
$
(14,513
)
 
$
(10,688
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Income from discontinued operations, net of taxes
 
(2,069
)
 
(960
)
Loss (gain) on disposal of discontinued operations, net of taxes
 
7,800

 
(1,017
)
Equity in net loss (income) of investee
 
623

 
(1,343
)
Dividend received from investee
 
780

 
—

Equity in net (income) loss of limited liability investments
 
(275
)
 
258

Loss on change in fair value of limited liability investment
 
1,492

 
372

Depreciation and amortization expense
 
5,149

 
4,089

Contingent consideration benefit
 
—

 
(212
)
Stock-based compensation (benefit) expense, net of forfeitures
 
(1,881
)
 
887

Net realized losses
 
405

 
1

Gain on change in fair value of equity investments
 
(951
)
 
—

Loss on change in fair value of debt
 
2,511

 
5,769

Deferred income taxes
 
(273
)
 
1,123

Amortization of fixed maturities premiums and discounts
 
47

 
72

Amortization of note payable premium
 
(707
)
 
(722
)
Gain on disposal of subsidiary
 
17

 
—

Changes in operating assets and liabilities:
 
 
 
 
Service fee receivable, net
 
(2,461
)
 
(1,311
)
Other receivables, net
 
(1,341
)
 
(2,663
)
Deferred acquisition costs, net
 
(574
)
 
(414
)
Unpaid loss and loss adjustment expenses
 
963

 
(708
)
Deferred service fees
 
4,018

 
1,603

Other, net
 
(2,617
)
 
3,623

Cash used in operating activities - continuing operations
 
(3,857
)
 
(2,241
)
Cash used in operating activities - discontinued operations
 
(12,670
)
 
(11,283
)
Net cash used in operating activities
 
(16,527
)
 
(13,524
)
Investing activities:
 
 
 
 
Proceeds from sales and maturities of fixed maturities
 
5,241

 
982

Proceeds from sales of equity investments
 
4,966

 
—

Purchases of fixed maturities
 
(1,885
)
 
(192
)
Purchases of equity investments
 
(857
)
 
(4,654
)
Net acquisitions of limited liability investments
 
(1,489
)
 
(1,650
)
Net proceeds from other investments
 
404

 
3

Net proceeds from short-term investments
 
—

 
250

Proceeds from sale of investee
 
1,001

 
—

Proceeds from disposal of subsidiary
 
565

 
—

Net proceeds from sale of discontinued operations
 
1,129

 
860

Net disposals of property and equipment
 
550

 
34

Cash provided by (used in) investing activities - continuing operations
 
9,625

 
(4,367
)
Cash provided by investing activities - discontinued operations
 
7,270

 
13,981

Net cash provided by investing activities
 
16,895

 
9,614

Financing activities:
 
 
 
 
Principal payments on bank loan
 
(750
)
 
—

Principal payments on note payable
 
(2,201
)
 
(1,951
)
Cash used in financing activities - continuing operations
 
(2,951
)
 
(1,951
)
Cash used in financing activities - discontinued operations
 
—

 
—

Net cash used in financing activities
 
(2,951
)
 
(1,951
)
Net increase (decrease) in cash and cash equivalents from continuing operations
 
2,817

 
(8,559
)
Cash and cash equivalents at beginning of period
 
44,286

 
36,475

Less: cash and cash equivalents of discontinued operations at begininng of period
 
23,512

 
4,524

Cash and cash equivalents of continuing operations at beginning of period
 
20,774

 
31,951

Cash and cash equivalents of continuing operations at end of period
 
$
23,591

 
$
23,392


See accompanying notes to unaudited consolidated financial statements.

 
6
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018








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 owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries.

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.
Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no impact on previously reported net loss or total shareholders' equity.
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 ("2017 Annual Report") for the year ended December 31, 2017.
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 the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. 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; impairment assessment of investments; valuation of limited liability investment, at fair value; valuation of deferred income taxes; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; and fair value assumptions for subordinated debt obligations.
The fair values of the Company's investments in fixed maturities and equity investments, limited liability investment, at fair value and subordinated debt are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal 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 2017 Annual Report.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
(a)    Adoption of New Accounting Standards:
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), and the related amendments, utilizing the modified retrospective approach, which created a new comprehensive revenue recognition standard that serves as the single source of revenue guidance for all contracts with customers to transfer goods or services or contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. 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. Insurance contracts, lease contracts and investments are not within the scope of ASU 2014-09. ASU 2014-09 is applicable to the Company's service fee and commission income. Service fee and commission income represents vehicle service agreement fees, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and

 
7
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders. With the exception of homebuilder warranty service fees, which is discussed further below, the adoption of ASU 2014-09 did not change the way the Company recognized revenue for the three and nine months ended September 30, 2018.
The new guidance affects Professional Warranty Service Corporation's ("PWSC") homebuilder warranty service fees, which will be recognized more slowly as compared to the historic revenue recognition pattern prior to the Company’s adoption of ASU 2014-09. During the third quarter of 2018, the Company corrected its initial adoption of ASU 2014-09 and applied the expected cost plus a margin approach to develop models to estimate the standalone selling price for each of PWSC’s performance obligations in order to allocate the transaction price to the two separate performance obligations identified. Prior to applying this approach, the Company used a different methodology to allocate the transaction price to the two separate performance obligations. This expected cost plus a margin approach will result in the Company recognizing homebuilder warranty service fees more slowly compared to the previously calculated revenue recognition pattern initially utilized during the six months ended June 30, 2018. During the third quarter of 2018, the Company recorded an adjustment to decrease service fee and commission income by $1.0 million and increase deferred service fees by $1.0 million related to the correction of our prior accounting for PWSC’s homebuilder warranty service fees during the six months ended June 30, 2018. The effect of this adjustment on our previously reported revenues, loss from continuing operations, net loss and loss per share for the three months ended March 31, 2018 and the three and six months ended June 30, 2018, is as follows:
(in thousands)
 
Three months ended March 31, 2018
 
 
Three months ended June 30, 2018
 
 
Six months ended June 30, 2018
 
 
 
As Reported (1)
 
Adjustment
 
As Adjusted
 
As Reported
 
Adjustment
 
As Adjusted
 
As Reported
 
Adjustment
 
As Adjusted
Total revenues
 
$
14,000

 
$
(497
)
 
$
13,503

 
$
13,670

 
$
(493
)
 
$
13,177

 
$
27,670

 
$
(990
)
 
$
26,680

Loss from continuing operations
 
(2,435
)
 
(497
)
 
(2,932
)
 
(2,706
)
 
(493
)
 
(3,199
)
 
(5,141
)
 
(990
)
 
(6,131
)
Net loss
 
(2,028
)
 
(497
)
 
(2,525
)
 
(8,406
)
 
(493
)
 
(8,899
)
 
(10,434
)
 
(990
)
 
(11,424
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.12
)
 
$
(0.03
)
 
$
(0.15
)
 
$
(0.14
)
 
$
(0.02
)
 
$
(0.16
)
 
$
(0.26
)
 
$
(0.05
)
 
$
(0.31
)
Diluted
 
$
(0.12
)
 
$
(0.03
)
 
$
(0.15
)
 
$
(0.14
)
 
$
(0.02
)
 
$
(0.16
)
 
$
(0.26
)
 
$
(0.05
)
 
$
(0.31
)
Loss per share - net loss attributable to common shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.11
)
 
$
(0.02
)
 
$
(0.13
)
 
$
(0.40
)
 
$
(0.02
)
 
$
(0.42
)
 
$
(0.50
)
 
$
(0.05
)
 
$
(0.55
)
Diluted
 
$
(0.11
)
 
$
(0.02
)
 
$
(0.13
)
 
$
(0.40
)
 
$
(0.02
)
 
$
(0.42
)
 
$
(0.50
)
 
$
(0.05
)
 
$
(0.55
)
(1) The Company did not report discontinued operations in its Quarterly Report on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on May 14, 2018; however, the Company is presenting the As Reported column for the three months ended March 31, 2018 as if it had reported total revenues from continuing operations, loss from continuing operations and loss per share from continuing operations to be comparable to the three and six-month periods ended June 30, 2018 as presented in the table above.

As a result of the adoption of ASU 2014-09, the Company also recorded a cumulative effect adjustment to increase accumulated deficit by $0.5 million and increase deferred service fees by $0.5 million. Prior periods have not been restated to conform to the current presentation. Refer to Note 14, "Revenue from Contracts with Customers," for further details.

Effective January 1, 2018, the Company adopted 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 (1) 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); and (2) an entity to present separately in other comprehensive income (loss) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Previously, the Company recorded its equity investments at fair value with net unrealized gains or losses reported in accumulated other comprehensive income (loss) and recorded its subordinated debt at fair value with the total change in fair value reported in net income (loss). As a result of the adoption of ASU 2016-01, at January 1, 2018 cumulative net unrealized losses on equity investments of $0.0 million were reclassified from accumulated other comprehensive income (loss) into accumulated deficit and a cumulative $40.5 million change in fair value of subordinated debt attributable to instrument-specific credit risk was reclassified from accumulated deficit to accumulated other comprehensive income (loss). Prior periods have not been restated to conform to the current presentation.
Effective January 1, 2018, the Company adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). The objective of ASU 2016-15 is to reduce diversity in the classification of cash receipts and payments for specific

 
8
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination and proceeds from the settlement of insurance claims. The adoption of the standard did not affect the Company's consolidated statements of cash flows.

Effective July 1, 2018, the Company adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). ASU 2018-07 was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. During the third quarter of 2018, the Company granted restricted common stock awards to a nonemployee. Refer to Note 17, "Stock-Based Compensation," for further details.

(b)    Accounting Standards Not Yet Adopted:
In February 2016, the Financial Accounting Standards Board ("FASB") 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. The accounting treatment for lessors will remain relatively unchanged. 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 potential effect of the adoption of ASU 2016-02 on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss model used to measure impairment losses with an expected loss model for trade, reinsurance, and other receivables as well as financial instruments measured at amortized cost. ASU 2016-13 will require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net loss. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale investments is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods with early adoption permitted for fiscal years beginning after December 31, 2018 and interim periods within such year. The Company is currently evaluating ASU 2016-13 to determine the potential impact that adopting this standard will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 was issued to simplify the subsequent measurement of goodwill. This update changes the impairment test by requiring an entity to compare the fair value of a reporting unit with its carrying amount as opposed to comparing the carrying amount of goodwill with its implied fair value. ASU 2017-04 is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not believe the adoption of ASU 2017-04 will have a material effect on its consolidated financial statements.
NOTE 5 ACQUISITION, DISPOSAL AND DISCONTINUED OPERATIONS
(a)     Acquisition
Professional Warranty Service Corporation:

On October 12, 2017, the Company acquired 100% of the outstanding shares of PWSC for cash consideration of $10.0 million. As further discussed in Note 19, "Segmented Information," PWSC is included in the Extended Warranty segment. PWSC is based in Virginia and is a leading provider of new home warranty products and administration services to the largest tier of domestic residential construction firms in the United States. This acquisition allows the Company to grow its portfolio of warranty companies and expand into the home warranty business.

 
9
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018








This acquisition was accounted for as a business combination using the acquisition method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. During the third quarter of 2018, the Company completed its fair value analysis of the assets acquired and liabilities assumed. Goodwill of $2.9 million was recognized. The goodwill is not deductible for tax purposes. Separately identifiable intangible assets of $6.2 million were recognized resulting from the valuations of acquired customer relationships, non-compete agreement and trade name. Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
 
 
 
 
October 12, 2017

Cash and cash equivalents
 
$
2,071

Other receivables
 
50

Service fee receivable
 
1,422

Deferred tax asset
 
118

Property and equipment
 
238

Goodwill
 
2,867

Intangible assets - subject to amortization
 
5,569

Intangible asset - not subject to amortization
 
627

Other assets
 
206

Total assets
 
$
13,168

 
 
 
Deferred service fees
 
$
2,079

Accrued expenses and other liabilities
 
1,089

Total liabilities
 
$
3,168

 
 
 
Purchase price
 
$
10,000

(b)     Disposition
On June 1, 2018, the Company disposed of its subsidiary, Itasca Real Estate Investors, LLC ("Itasca Real Estate"). As a result of the disposal, the Company recognized a gain of $0.0 million during the second quarter of 2018. The earnings of Itasca Real Estate are included in the consolidated statements of operations through the June 1, 2018 disposal date.
(c)     Discontinued Operations
Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company:
On July 16, 2018, the Company announced it had entered into a definitive agreement to sell its non-standard automobile insurance companies Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"). On October 18, 2018, the Company completed the previously announced sale of Mendota. The final aggregate purchase price of $28.6 million was redeployed primarily to acquire equity investments, limited liability investments, limited liability investment, at fair value and other investments, which were owned by Mendota at the time of the closing, and to fund $5.0 million into an escrow account to be used to satisfy potential indemnity obligations under the definitive stock purchase agreement. As part of the transaction, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims and certain specified claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018. The maximum obligation to the Company with respect to the open claims is $2.5 million. There is no maximum obligation to the Company with respect to the specified claims.

As a result of this announcement, Mendota, previously disclosed as part of the Insurance Underwriting segment, has been classified as a discontinued operation and the results of their operations are reported separately for all periods presented. The Company recognized a loss on disposal of Mendota of $1.2 million and $9.1 million for the three and nine months ended September 30,

 
10
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







2018, as a result of adjusting the net carrying value of Mendota to be equal to the final purchase price. The assets and liabilities of Mendota are presented as held for sale in the consolidated balance sheets at September 30, 2018 and December 31, 2017.

Assigned Risk Solutions Ltd.:
On April 1, 2015, the Company closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. ("ARS").  The terms of the sale provided for receipt by the Company of future earnout payments equal to 1.25% of ARS' written premium and fee income during the earnout periods. The earnout payments were payable in three annual installments beginning in April 2016 through April 2018. During the second quarter of 2018, the Company received cash consideration, before expenses, of $1.7 million for the third annual installment earnout payment. Net of expenses, the Company recorded an additional gain on disposal of ARS of $1.3 million and $1.0 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. As a result of the sale, ARS, previously disclosed as part of the Extended Warranty (formerly Insurance Services) segment, has been classified as a discontinued operation.
Summary financial information for Mendota and ARS included in (loss) income from discontinued operations, net of taxes in the statements of operations for the three and nine months ended September 30, 2018 and September 30, 2017 is presented below:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

Income (loss) from discontinued operations, net of taxes:
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Net premiums earned
 
$
16,727

 
$
32,556

 
$
68,319

 
$
98,996

Net investment income
 
563

 
1,652

 
1,082

 
1,174

Net realized gains
 
130

 
1,976

 
132

 
3,109

(Loss) gain on change in fair value of equity investments
 
(122
)
 
—

 
115

 
—

Other income
 
2,184

 
2,467

 
7,060

 
7,490

Total revenues
 
19,482

 
38,651

 
76,708

 
110,769

Expenses:
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
14,104

 
27,732

 
55,832

 
79,053

Commissions and premium taxes
 
713

 
5,128

 
7,102

 
15,762

General and administrative expenses
 
3,925

 
4,400

 
11,705

 
14,829

Impairment of intangible assets
 
—

 
—

 
—

 
250

Total expenses
 
18,742

 
37,260

 
74,639

 
109,894

Income from discontinued operations before income tax benefit
 
740

 
1,391

 
2,069

 
875

Income tax benefit
 
—

 
—

 
—

 
(85
)
Income from discontinued operations, net of taxes
 
740

 
1,391

 
2,069

 
960

(Loss) gain on disposal of discontinued operations, net of taxes:
 
 
 
 
 
 
 
 
(Loss) gain on disposal of discontinued operations before income tax expense
 
(1,172
)
 
—

 
(7,800
)
 
1,017

Income tax expense
 
—

 
—

 
—

 
—

(Loss) gain on disposal of discontinued operations, net of taxes
 
(1,172
)
 
—

 
(7,800
)
 
1,017

Total (loss) income from discontinued operations, net of taxes
 
$
(432
)
 
$
1,391

 
$
(5,731
)
 
$
1,977









 
11
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







The assets and liabilities of Mendota are presented as held for sale in the consolidated balance sheets. The carrying amounts of the major classes of assets and liabilities of Mendota at September 30, 2018 and December 31, 2017 are as follows:
(in thousands)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value
 
$
40,910

 
$
38,673

Equity investments, at fair value
 
242
 
4,518
Limited liability investments
 
16,236
 
20,251
Limited liability investment, at fair value
 
3,453
 
4,543
Other investments, at cost which approximates fair value
 
1,400
 
1,400
Total investments
 
62,241
 
69,385
Cash and cash equivalents
 
18,112
 
23,512
Accrued investment income
 
247

 
195

Premiums receivable, net
 
25,243

 
27,855

Other receivables
 
1

 
603

Deferred acquisition costs, net
 
1,130

 
6,720

Property and equipment, net
 
138

 
222

Intangible assets, net
 
—

 
7,553

Other assets
 
26,253

 
407

Assets held for sale
 
$
133,365

 
$
136,452

Liabilities
 
 
 
 
Property and casualty unpaid loss and loss adjustment expenses
 
$
56,332

 
$
62,323

Unearned premiums
 
31,159

 
36,686

Net deferred income tax liabilities
 
—

 
1,586

Accrued expenses and other liabilities
 
19,585

 
5,305

Liabilities held for sale
 
$
107,076

 
$
105,900



NOTE 6 INVESTMENTS

As further discussed in Note 4, "Recently Issued Accounting Standards," effective January 1, 2018, the Company adopted ASU 2016-01. As a result of the adoption, equity investments are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation.
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at September 30, 2018 and December 31, 2017 are summarized in the tables shown below:
(in thousands)
 
September 30, 2018
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
5,504

 
$
—

 
$
75

 
$
5,429

States, municipalities and political subdivisions
 
622

 
—

 
21

 
601

Mortgage-backed
 
2,618

 
—

 
92

 
2,526

Corporate
 
2,572

 
—

 
52

 
2,520

Total fixed maturities
 
$
11,316

 
$
—

 
$
240

 
$
11,076



 
12
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







(in thousands)
 
December 31, 2017
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
5,671

 
$
—

 
$
59

 
$
5,612

States, municipalities and political subdivisions
 
639

 
—

 
13

 
626

Mortgage-backed
 
2,933

 
—

 
57

 
2,876

Corporate
 
5,464

 
—

 
37

 
5,427

Total fixed maturities
 
14,707

 
—

 
166

 
14,541

Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
3,883

 
—

 
313

 
3,570

Warrants - publicly traded
 
11

 
47

 
—

 
58

Warrants - not publicly traded
 
960

 
173

 
285

 
848

Total equity investments
 
4,854

 
220

 
598

 
4,476

Total fixed maturities and equity investments
 
$
19,561

 
$
220

 
$
764

 
$
19,017


Net unrealized gains and losses in the tables above are reported as other comprehensive income (loss) with the exception of net unrealized losses of $0.1 million, at December 31, 2017, related to warrants - not publicly traded, which are reported in the consolidated statements of operations.
The table below summarizes the Company's fixed maturities at September 30, 2018 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, 2018
 
 
 
Amortized Cost

 
Estimated Fair Value

Due in one year or less
 
$
5,138

 
$
5,117

Due after one year through five years
 
4,937

 
4,781

Due after five years through ten years
 
125

 
117

Due after ten years
 
1,116

 
1,061

Total
 
$
11,316

 
$
11,076



 
13
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized loss positions as of September 30, 2018 and December 31, 2017. 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, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
$
2,342

 
$
3

 
$
3,087

 
$
72

 
$
5,429

 
$
75

States, municipalities and political subdivisions
—

 
—

 
602

 
21

 
602

 
21

Mortgage-backed
369

 
9

 
2,157

 
83

 
2,526

 
92

Corporate
368

 
2

 
2,152

 
50

 
2,520

 
52

Total fixed maturities
$
3,079

 
$
14

 
$
7,998

 
$
226

 
$
11,077

 
$
240


(in thousands)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
$
4,067

 
$
50

 
$
1,545

 
$
9

 
$
5,612

 
$
59

States, municipalities and political subdivisions
626

 
13

 
—

 
—

 
626

 
13

Mortgage-backed
2,876

 
57

 
—

 
—

 
2,876

 
57

Corporate
2,427

 
37

 
—

 
—

 
2,427

 
37

Total fixed maturities
9,996

 
157

 
1,545

 
9

 
11,541

 
166

Equity investments:
 
 
 
 
 
 
 
 
 
 
 
Common stock
3,570

 
313

 
—

 
—

 
3,570

 
313

Warrants
675

 
285

 
—

 
—

 
675

 
285

Total equity investments
4,245

 
598

 
—

 
—

 
4,245

 
598

Total
$
14,241

 
$
755

 
$
1,545

 
$
9

 
$
15,786

 
$
764

There are approximately 64 and 68 individual available-for-sale investments that were in unrealized loss positions as of September 30, 2018 and December 31, 2017, 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 management believes may affect 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;

 
14
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







•
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 and nine months ended September 30, 2018 and September 30, 2017.
The Company has reviewed currently available information regarding investments with estimated fair values less than their carrying amounts and believes 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 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. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. The most recently available financial statements are used in applying the equity method. The difference between the end of the reporting period of the limited liability entities and that of the Company is no more than three months. As of September 30, 2018 and December 31, 2017, the carrying value of limited liability investments totaled $6.2 million and $4.9 million, respectively. Income or loss 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.
Limited liability investment, at fair value represents the Company's investment in 15.9% of the outstanding units of 1347 Investors LLC ("1347 Investors"). The Company has made an irrevocable election to account for this investment at fair value. As of September 30, 2018 and December 31, 2017, the carrying value of the Company's limited liability investment, at fair value was $4.5 million and $5.8 million, respectively.
Other investments include collateral loans and are reported at their unpaid principal balance. As of September 30, 2018 and December 31, 2017, the carrying value of other investments totaled $1.9 million and $2.3 million, respectively.
The Company had previously entered into two separate performance share grant agreements with 1347 Property Insurance Holdings, Inc. ("PIH"), whereby the Company will be entitled to receive up to an aggregate of 475,000 shares of PIH common stock upon achievement of certain milestones for PIH’s stock price. Pursuant to the performance share grant agreements, if at any time the last sales price of PIH’s common stock equals or exceeds: (i) $10.00 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 100,000 shares of PIH common stock; (ii) $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 (in addition to the 100,000 shares of common stock earned pursuant to clause (i) herein); (iii) $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 225,000 shares of common stock earned pursuant to clauses (i) and (ii) herein); and (iv) $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 350,000 shares of common stock earned pursuant to clauses (i), (ii) and (iii) herein). To the extent shares of PIH common stock are granted to the Company under either of the performance share grant

 
15
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







agreements, 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.
During the first quarter of 2018, the Company entered into an agreement with PIH to cancel the $10.00 per share performance shares grant agreement in exchange for cash consideration of $0.3 million. During the third quarter of 2018, the Company entered into an agreement with PIH to cancel the $12.00 per share, $15.00 per share and $18.00 per share performance share grant agreement in exchange for cash consideration of $1.0 million. For the three and nine months ended September 30, 2018, the Company recorded a gain, included in gain on change in fair value of equity investments in the consolidated statements of operations, of $1.0 million and $1.3 million, respectively, related to these transactions. No shares were received by the Company under either of the performance share grant agreements as of September 30, 2018.
Net investment (loss) income for the three and nine months ended September 30, 2018 and September 30, 2017 is comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

Investment (loss) income:
 
 
 
 
 
 
 
 
  Interest from fixed maturities
 
$
73

 
$
51

 
$
163

 
$
134

Dividends
 
54

 
98

 
162

 
294

Income (loss) from limited liability investments
 
111

 
(92
)
 
275

 
(258
)
(Loss) gain on change in fair value of limited liability investment, at fair value
 
(340
)
 
1,126

 
(1,492
)
 
(394
)
(Loss) gain on change in fair value of warrants - not publicly traded
 
—

 
(25
)
 
—

 
22

Other
 
22

 
135

 
216

 
347

Gross investment (loss) income
 
(80
)
 
1,293

 
(676
)
 
145

Investment expenses
 
(4
)
 
(4
)
 
(21
)
 
(19
)
Net investment (loss) income
 
$
(84
)
 
$
1,289

 
$
(697
)
 
$
126

Gross realized gains and losses on available-for-sale investments and limited liability investments for the three and nine months ended September 30, 2018 and September 30, 2017 are comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

Gross realized gains
 
$
—

 
$
—

 
$
10

 
$
—

Gross realized losses
 
(414
)
 
—

 
(415
)
 
(1
)
Net realized losses
 
$
(414
)
 
$
—

 
$
(405
)
 
$
(1
)

Gain on change in fair value of equity investments for the three and nine months ended September 30, 2018 and September 30, 2017 is comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

Net gains recognized on equity investments sold during the period
 
$
905

 
$
—

 
$
1,450

 
$
—

Change in unrealized losses on equity investments held at end of the period
 
(568
)
 
—

 
(499
)
 
—

Gain on change in fair value of equity investments
 
$
337

 
$
—

 
$
951

 
$
—

Fixed maturities and short-term investments with an estimated fair value of $1.9 million and $1.8 million were on deposit with state and provincial regulatory authorities at September 30, 2018 and December 31, 2017, respectively. From time to time, the Company pledges investments to third parties as deposits or to collateralize liabilities incurred under its policies of insurance. The amount of such pledged investments was $1.2 million and $1.1 million at September 30, 2018 and December 31, 2017, respectively.

 
16
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







NOTE 7 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the common stock of Itasca Capital Ltd. ("ICL") and is accounted for under the equity method. The Company's investment in ICL is recorded on a three-month lag basis. The carrying value, estimated fair value and approximate equity percentage for the Company's investment in investee at September 30, 2018 and December 31, 2017 were as follows:
(in thousands, except for percentages)
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
 
Equity Percentage
 
Estimated Fair Value
 
Carrying Value
 
Equity Percentage
 
Estimated Fair Value
 
Carrying Value
ICL
 
22.9
%
 
$
2,389

 
$
2,827

 
31.2
%
 
$
3,816

 
$
5,230


The estimated fair value of the Company's investment in ICL at September 30, 2018 in the table above is calculated based on the published closing price of ICL at June 30, 2018 to be consistent with the three-month lag in reporting its carrying value under the equity method. The estimated fair value of the Company's investment in ICL based on the published closing price of ICL at September 30, 2018 is $1.7 million.
Prior to the third quarter of 2018, the Company owned 6,799,499 shares of ICL common stock. On July 30, 2018, the Company executed an agreement to sell 1,813,889 shares of ICL common stock, having a carrying value of $1.3 million, for $1.0 million. As a result, the Company recorded a loss of $0.3 million on the sale, which is reflected in equity in net loss of investee in the Company’s consolidated statements of operations, and reduced its ownership percentage in ICL to 22.9%.

Also during the third quarter of 2018, the Company received a dividend of $0.8 million from ICL. As a result of the sale and dividend, the carrying value of the Company’s remaining investment in shares of ICL common stock was reduced from $4.9 million as of June 30, 2018 to $2.8 million as of September 30, 2018.

For the three months ended September 30, 2018 and September 30, 2017, equity in net loss of investee was $0.3 million and $0.9 million, respectively (loss of $0.6 million and income of $1.3 million for the nine months ended September 30, 2018 and September 30, 2017, respectively).

NOTE 8 DEFERRED ACQUISITION COSTS
Policy acquisition costs consist primarily of commissions and agency expenses incurred related to successful efforts to acquire vehicle service agreements. Acquisition costs deferred on 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, 2018 and September 30, 2017 are comprised as follows:
(in thousands)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

Beginning balance, net
 
$
6,662

 
$
6,054

 
$
6,325

 
$
5,827

Additions
 
1,047

 
1,255

 
3,545

 
3,572

Amortization
 
(810
)
 
(1,068
)
 
(2,971
)
 
(3,158
)
Balance at September 30, net
 
$
6,899

 
$
6,241

 
$
6,899

 
$
6,241


 
17
 
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2018







NOTE 9 INTANGIBLE ASSETS
Intangible assets at September 30, 2018 and December 31, 2017 are comprised as follows:
(in thousands)
 
 
September 30, 2018
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization:
 
 
 
 
 
 
Database
 
$
4,918

 
$
2,890

 
$
2,028

Vehicle service agreements in-force
 
3,680

 
3,663

 
17

Customer relationships
 
8,914

 
3,327

 
5,587

In-place lease
 
1,125

 
139

 
986

Contract-based revenues
 
731

 
162

 
569

Non-compete
 
266

 
51

 
215

Intangible assets not subject to amortization:
 
 
 
 
 
 
Tenant relationship
 
73,667

 
—

 
73,667

Trade names
 
1,290

 
—

 
1,290

Total
 
$
94,591

 
$
10,232

 
$
84,359


(in thousands)
 
 
December 31, 2017
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization:
 
 
 
 
 
 
Database
 
$
4,918

 
$
2,521

 
$
2,397

Vehicle service agreements in-force
 
3,680

 
3,640

 
40

Customer relationships
 
3,611

 
1,965

 
1,646

In-place lease
 
1,125

 
92

 
1,033

Contract-based revenues
 
731

 
115

 
616

Intangible assets not subject to amortization:
 
 
 
 
 
 
Tenant relationship
 
73,667

 
—

 
73,667

Trade name
 
663

 
—

 
663

Total
 
$
88,395

 
$
8,333

 
$
80,062

As further discussed in Note 5, "Acquisition, Disposition and Discontinued Operations," during the third quarter of 2018, the Company recorded $6.2 million of separately identifiable intangible assets, related to acquired customer relationships, non-compete agreement and trade name, as part of the acquisition of PWSC. The customer relationships intangible asset of $5.3 million is being amortized over fifteen years based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. The non-compete agreement intangible asset of $0.3 million is being amortized on a straight-line basis over five years. The trade name intangible asset of $0.6 million is deemed to have an indefinite useful life and is not amortized.
The Company's other intangible assets with definite useful lives are amortized either based on the patterns in which the economic benefits of the intangible assets are expected to be consumed or using the straight-line method over their estimated useful lives, which range from seven to eighteen years. Amortization of intangible assets was $1.4 million and $0.3 million for the three months ended September 30, 2018 and September 30, 2017, respectively ($1.9 million and $0.9 million for the nine months ended September 30, 2018 and September 30, 2017