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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - KINGSWAY FINANCIAL SERVICES INCcertification311201910qq3.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - KINGSWAY FINANCIAL SERVICES INCcertification322201910qq3.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - KINGSWAY FINANCIAL SERVICES INCcertification321201910qq3.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14 (A) - KINGSWAY FINANCIAL SERVICES INCcertification312201910qq3.htm
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, 2019
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)
_________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
 
98-0475673                                                                                  (I.R.S. Employer
Identification No.)
150 E. Pierce Road, Itasca, IL 60143
(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 o No x

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 April 10, 2020 was 22,958,519.


KINGSWAY FINANCIAL SERVICES INC.

Table Of Contents
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (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, 2019

 
December 31, 2018

 
 
(unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $17,269 and $12,432, respectively)
 
$
17,309

 
$
12,260

Equity investments, at fair value (cost of $1,487 and $2,274, respectively)
 
157

 
856

Limited liability investments
 
3,838

 
4,790

Limited liability investments, at fair value
 
29,559

 
26,015

Investments in private companies, at adjusted cost
 
2,035

 
3,090

Real estate investments, at fair value (cost of $10,225 and $10,225, respectively)
 
10,662

 
10,662

Other investments, at cost which approximates fair value
 
750

 
2,079

Short-term investments, at cost which approximates fair value
 
154

 
152

Total investments
 
64,464

 
59,904

Cash and cash equivalents
 
13,078

 
14,619

Restricted cash
 
20,762

 
16,959

Investment in investee
 
994

 
951

Accrued investment income
 
453

 
420

Service fee receivable, net of allowance for doubtful accounts of $413 and $191, respectively
 
6,407

 
3,434

Other receivables, net of allowance for doubtful accounts of $201 and $184, respectively
 
10,854

 
9,523

Deferred acquisition costs, net
 
8,247

 
6,904

Property and equipment, net of accumulated depreciation of $19,408 and $15,958, respectively
 
100,110

 
103,142

Right-of-use asset
 
2,502

 

Goodwill
 
82,104

 
74,659

Intangible assets, net of accumulated amortization of $12,466 and $10,594, respectively
 
87,100

 
83,266

Other assets
 
5,319

 
4,459

Total Assets
 
$
402,394

 
$
378,240

Liabilities and Shareholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Accrued expenses and other liabilities
 
19,117

 
14,786

Income taxes payable
 
2,584

 
2,400

Deferred service fees
 
63,312

 
47,130

Unpaid loss and loss adjustment expenses
 
1,857

 
2,073

Bank loans
 
10,757

 
3,917

Notes payable
 
195,841

 
199,316

Subordinated debt, at fair value
 
50,565

 
50,023

Lease liability
 
2,604

 

Net deferred income tax liabilities
 
29,019

 
28,537

Total Liabilities
 
375,656

 
348,182

 
 
 
 
 
Redeemable Class A preferred stock, no par value; 1,000,000 and unlimited number authorized at September 30, 2019 and December 31, 2018, respectively; 222,876 and 222,876 issued and outstanding at September 30, 2019 and December 31, 2018, respectively; redemption amount of $7,591 and $7,278 at September 30, 2019 and December 31, 2018, respectively
 
6,555

 
5,800

 
 
 
 
 
Shareholders' Equity:
 
 
 
 
Common stock, no par value; 50,000,000 and unlimited number authorized at September 30, 2019 and December 31, 2018, respectively; 21,866,959 and 21,787,728 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
 

 

Additional paid-in capital
 
353,665

 
353,890

Accumulated deficit
 
(384,080
)
 
(382,196
)
Accumulated other comprehensive income
 
38,419

 
40,768

Shareholders' equity attributable to common shareholders
 
8,004

 
12,462

Noncontrolling interests in consolidated subsidiaries
 
12,179

 
11,796

Total Shareholders' Equity
 
20,183

 
24,258

Total Liabilities, Class A preferred stock and Shareholders' Equity
 
$
402,394

 
$
378,240


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,
 
 
2019

 
2018

 
2019

 
2018

Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service fee and commission income
 
$
12,904

 
$
9,871

 
$
34,491

 
$
28,382

Rental income
 
3,341

 
3,341

 
10,023

 
10,034

Other income
 
110

 
(17
)
 
368

 
304

Total revenues
 
16,355

 
13,195

 
44,882

 
38,720

Operating expenses:
 
 
 
 
 
 
 
 
Claims authorized on vehicle service agreements
 
2,445

 
1,442

 
6,838

 
4,206

Loss and loss adjustment expenses
 
2

 
(19
)
 
710

 
1,628

Commissions
 
1,256

 
971

 
3,277

 
2,718

Cost of services sold
 
1,533

 
2,033

 
4,052

 
5,749

General and administrative expenses
 
9,156

 
5,404

 
26,722

 
20,175

Leased real estate segment interest expense
 
1,513

 
1,540

 
4,560

 
4,638

Total operating expenses
 
15,905

 
11,371

 
46,159

 
39,114

Operating income (loss)
 
450

 
1,824

 
(1,277
)
 
(394
)
Other revenues (expenses), net:
 
 
 
 
 
 
 
 
Net investment income
 
897


629

 
2,345

 
2,277

Net realized gains (losses)
 
1,001


(414
)
 
760

 
(17
)
(Loss) gain on change in fair value of equity investments
 
(38
)

337

 
(23
)
 
1,081

(Loss) gain on change in fair value of limited liability investments, at fair value
 
(3,356
)
 
(131
)
 
3,256

 
(1,592
)
Net change in unrealized (loss) gain on private company investments
 
(343
)
 
19

 
(324
)
 
(136
)
Other-than-temporary impairment loss
 



 
(75
)
 

Non-operating other income
 
50


14

 
223

 
35

Interest expense not allocated to segments
 
(2,314
)
 
(1,900
)
 
(6,755
)
 
(5,461
)
Amortization of intangible assets
 
(675
)
 
(1,339
)
 
(1,872
)
 
(1,848
)
Gain (loss) on change in fair value of debt
 
610

 
(1,450
)
 
2,104

 
(2,511
)
Gain on disposal of subsidiary
 

 

 

 
17

Equity in net (loss) income of investee
 
(126
)
 
(339
)
 
42

 
(623
)
Total other revenues (expenses), net
 
(4,294
)
 
(4,574
)
 
(319
)
 
(8,778
)
Loss from continuing operations before income tax expense (benefit)
 
(3,844
)
 
(2,750
)
 
(1,596
)
 
(9,172
)
Income tax expense (benefit)
 
162

 
(144
)
 
(383
)
 
300

Loss from continuing operations
 
(4,006
)
 
(2,606
)
 
(1,213
)
 
(9,472
)
Income from discontinued operations, net of taxes
 

 
417

 

 
1,397

Loss on disposal of discontinued operations, net of taxes
 

 
(1,172
)
 

 
(7,800
)
Net loss
 
(4,006
)
 
(3,361
)
 
(1,213
)
 
(15,875
)
Less: net income attributable to noncontrolling interests in consolidated subsidiaries
 
202

 
200

 
671

 
717

Less: dividends on preferred stock, net of tax
 
258

 
265

 
756

 
777

Net loss attributable to common shareholders
 
$
(4,466
)
 
$
(3,826
)
 
$
(2,640
)
 
$
(17,369
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.20
)
 
$
(0.14
)
 
$
(0.12
)
 
$
(0.51
)
Diluted:
 
$
(0.20
)
 
$
(0.14
)
 
$
(0.12
)
 
$
(0.51
)
Loss per share - discontinued operations:
 
 
 
 
 
 
 
 
Basic:
 
$

 
$
(0.03
)
 
$

 
$
(0.29
)
Diluted:
 
$

 
$
(0.03
)
 
$

 
$
(0.29
)
Loss per share – net loss attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.20
)
 
$
(0.18
)
 
$
(0.12
)
 
$
(0.80
)
Diluted:
 
$
(0.20
)
 
$
(0.18
)
 
$
(0.12
)
 
$
(0.80
)
Weighted-average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
21,867

 
21,708

 
21,858

 
21,708

Diluted:
 
21,867

 
21,708

 
21,858

 
21,708


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,
 
 
2019

 
2018

 
2019

 
2018

 
 
 
 
 
 
 
 
 
Net loss
 
$
(4,006
)
 
$
(3,361
)
 
$
(1,213
)
 
$
(15,875
)
Other comprehensive (loss) income, net of taxes(1):
 
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments:
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
 
52

 
(44
)
 
284

 
(481
)
Reclassification adjustment for amounts included in net loss
 
(6
)
 
6

 
(19
)
 
(5
)
Change in fair value of debt attributable to instrument-specific credit risk
 
(951
)
 
658

 
(2,646
)
 
1,002

Equity in other comprehensive income of limited liability investment
 

 

 
45

 

Other comprehensive (loss) income
 
(905
)
 
620

 
(2,336
)
 
516

Comprehensive loss
 
(4,911
)
 
(2,741
)
 
(3,549
)
 
(15,359
)
Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries
 
203

 
200

 
684

 
711

Comprehensive loss attributable to common shareholders
 
$
(5,114
)
 
$
(2,941
)
 
$
(4,233
)
 
$
(16,070
)
(1) Net of income tax expense (benefit) of $0 and $0 for the three and nine months ended September 30, 2019 and September 30, 2018, respectively.

See accompanying notes to unaudited consolidated financial statements

 
5
 

KINGSWAY FINANCIAL SERVICES INC.

Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
 
 
Three Months Ended September 30, 2019
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Shareholders' Equity Attributable to Common Shareholders
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 1, 2019
 
21,866,959

 
$

 
$
353,778

 
$
(379,872
)
 
$
39,325

 
$
13,231

 
$
11,976

 
$
25,207

Net (loss) income
 

 

 

 
(4,208
)
 

 
(4,208
)
 
202

 
(4,006
)
Preferred stock dividends
 

 

 
(258
)
 

 

 
(258
)
 

 
(258
)
Other comprehensive (loss) income
 

 

 

 

 
(906
)
 
(906
)
 
1

 
(905
)
Stock-based compensation
 

 

 
145

 

 

 
145

 

 
145

Balance, September 30, 2019
 
21,866,959

 
$

 
$
353,665

 
$
(384,080
)
 
$
38,419

 
$
8,004

 
$
12,179

 
$
20,183


 
 
Three Months Ended September 30, 2018
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Shareholders' Equity Attributable to Common Shareholders
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 1, 2018
 
21,708,190

 
$

 
$
356,247

 
$
(365,126
)
 
$
36,546

 
$
27,667

 
$
10,289

 
$
37,956

Net (loss) income
 

 

 

 
(3,561
)
 

 
(3,561
)
 
200

 
(3,361
)
Contributions from noncontrolling interest holders
 

 

 

 

 

 

 
255

 
255

Preferred stock dividends, net of tax
 

 

 
(265
)
 

 

 
(265
)
 

 
(265
)
Other comprehensive income
 

 

 

 

 
620

 
620

 

 
620

Stock-based compensation
 

 

 
(2,468
)
 

 

 
(2,468
)
 

 
(2,468
)
Balance, September 30, 2018
 
21,708,190

 
$

 
$
353,514

 
$
(368,687
)
 
$
37,166

 
$
21,993

 
$
10,744

 
$
32,737


 
6
 

KINGSWAY FINANCIAL SERVICES INC.

 
 
Nine Months Ended September 30, 2019
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Shareholders' Equity Attributable to Common Shareholders
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
21,787,728

 
$

 
$
353,890

 
$
(382,196
)
 
$
40,768

 
$
12,462

 
$
11,796

 
$
24,258

Vesting of restricted stock awards, net of share settlements for tax withholdings
 
79,231

 

 

 

 

 
 
 

 

Net (loss) income
 

 

 

 
(1,884
)
 

 
(1,884
)
 
671

 
(1,213
)
Preferred stock dividends
 

 

 
(756
)
 

 

 
(756
)
 

 
(756
)
Deconsolidation of noncontrolling interest
 

 

 

 

 

 

 
(301
)
 
(301
)
Other comprehensive (loss) income
 

 

 

 

 
(2,349
)
 
(2,349
)
 
13

 
(2,336
)
Stock-based compensation
 

 

 
531

 

 

 
531

 

 
531

Balance, September 30, 2019
 
21,866,959

 
$

 
$
353,665

 
$
(384,080
)
 
$
38,419

 
$
8,004

 
$
12,179

 
$
20,183

 
 
Nine Months Ended September 30, 2018
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive (Loss) Income
 
Shareholders' Equity Attributable to Common Shareholders
 
Noncontrolling Interests in Consolidated Subsidiaries
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
21,708,190

 
$

 
$
356,171

 
$
(310,953
)
 
$
(3,852
)
 
$
41,366

 
$
9,361

 
$
50,727

Cumulative effect of adoption of ASU 2014-09
 

 

 

 
(647
)
 

 
(647
)
 
(7
)
 
(654
)
Cumulative effect of adoption of ASU 2016-01
 

 

 

 
(40,495
)
 
40,495

 

 

 

Balance at January 1, 2018, as adjusted
 
21,708,190

 

 
356,171

 
(352,095
)
 
36,643

 
40,719

 
9,354

 
50,073

Net (loss) income
 

 

 

 
(16,592
)
 

 
(16,592
)
 
717

 
(15,875
)
Contributions from noncontrolling interest holders
 

 

 

 

 

 

 
680

 
680

Preferred stock dividends, net of tax
 

 

 
(777
)
 

 

 
(777
)
 

 
(777
)
Other comprehensive income (loss)
 

 

 

 

 
523

 
523

 
(7
)
 
516

Stock-based compensation, net of forfeitures
 

 

 
(1,880
)
 

 

 
(1,880
)
 

 
(1,880
)
Balance, September 30, 2018
 
21,708,190

 
$

 
$
353,514

 
$
(368,687
)
 
$
37,166

 
$
21,993

 
$
10,744

 
$
32,737

See accompanying notes to unaudited consolidated financial statements




 
7
 

KINGSWAY FINANCIAL SERVICES INC.

Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
Nine months ended September 30,
 
 
2019

 
2018

Cash provided by (used in):
 
 
 
 
Operating activities:
 
 
 
 
Net loss
 
$
(1,213
)
 
$
(15,875
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Income from discontinued operations, net of taxes
 

 
(1,397
)
Loss on disposal of discontinued operations, net of taxes
 

 
7,800

Equity in net (income) loss of investee
 
(42
)
 
623

Dividend received from investee
 

 
780

Equity in net income of limited liability investments
 
(34
)
 
(203
)
Depreciation and amortization expense
 
5,146

 
5,099

Stock-based compensation expense (benefit), net of forfeitures
 
531

 
(1,880
)
Net realized (gains) losses
 
(760
)
 
17

Loss (gain) on change in fair value of equity investments
 
23

 
(1,081
)
(Gain) loss on change in fair value of limited liability investments, at fair value
 
(3,256
)
 
1,592

Net change in unrealized loss on private company investments
 
324

 
136

(Gain) loss on change in fair value of debt
 
(2,104
)
 
2,511

Deferred income taxes, adjusted for Geminus liabilities assumed
 
(781
)
 
(265
)
Other-than-temporary impairment loss
 
75

 

Amortization of fixed maturities premiums and discounts
 
(20
)
 
47

Amortization of note payable premium
 
(689
)
 
(707
)
Gain on disposal of subsidiary
 

 
(17
)
Changes in operating assets and liabilities:
 
 
 
 
Service fee receivable, net, adjusted for Geminus assets acquired
 
(2,460
)
 
(2,356
)
Other receivables, net, adjusted for Geminus assets acquired
 
(1,319
)
 
(1,739
)
Deferred acquisition costs, net
 
(1,343
)
 
(574
)
Unpaid loss and loss adjustment expenses
 
(216
)
 
963

Deferred service fees, adjusted for Geminus liabilities assumed
 
5,618

 
4,872

Other, net, adjusted for Geminus assets acquired and liabilities assumed
 
2,529

 
(6,264
)
Cash provided by (used in) operating activities - continuing operations
 
9

 
(7,918
)
Cash used in operating activities - discontinued operations
 

 
(7,378
)
Net cash provided by (used in) operating activities
 
9

 
(15,296
)
Investing activities:
 
 
 
 
Proceeds from sales and maturities of fixed maturities
 
9,401

 
5,241

Proceeds from sales of equity investments
 
683

 
4,966

Purchases of fixed maturities
 
(9,794
)
 
(1,885
)
Purchases of equity investments
 

 
(857
)
Net proceeds from limited liability investments
 
355

 
4,113

Net proceeds from (purchases of) limited liability investments, at fair value
 
507

 
(945
)
Net proceeds from investments in private companies
 
824

 
119

Net proceeds from other investments
 
1,384

 
404

Net proceeds from short-term investments
 
50

 

Proceeds from sale of investee
 

 
1,001

Proceeds from disposal of subsidiary
 

 
565

Net proceeds from sale of discontinued operations
 

 
1,129

Acquisition of business, net of cash acquired
 
(4,847
)
 

Net disposals of property and equipment, adjusted for Geminus assets acquired
 
(164
)
 
550

Cash (used in) provided by investing activities - continuing operations
 
(1,601
)
 
14,401

Cash provided by investing activities - discontinued operations
 

 
1,977

Net cash (used in) provided by investing activities
 
(1,601
)
 
16,378

Financing activities:
 
 
 
 
Taxes paid related to net share settlements of restricted stock awards
 
(89
)
 
(376
)
Principal proceeds from bank loan, net of debt issuance costs of $981
 
9,019

 

Principal payments on bank loans
 
(2,290
)
 
(750
)
Principal payments on notes payable
 
(2,786
)
 
(2,507
)
Cash provided by (used in) financing activities - continuing operations
 
3,854

 
(3,633
)
Cash used in financing activities - discontinued operations
 

 

Net cash provided by (used in) financing activities
 
3,854

 
(3,633
)
Net increase in cash and cash equivalents and restricted cash from continuing operations
 
2,262

 
2,850

Cash and cash equivalents and restricted cash at beginning of period
 
31,578

 
43,874

Less: cash and cash equivalents and restricted cash of discontinued operations at beginning of period
 

 
23,512

Cash and cash equivalents and restricted cash of continuing operations at beginning of period
 
31,578

 
20,362

Cash and cash equivalents and restricted cash of continuing operations at end of period
 
$
33,840

 
$
23,212


See accompanying notes to unaudited consolidated financial statements.

 
8
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019








NOTE 1 BUSINESS
Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Effective December 31, 2018, the Company changed its jurisdiction of incorporation from the province of Ontario, Canada, to the State of Delaware. Kingsway is a 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 ("2018 Annual Report") for the year ended December 31, 2018.
The unaudited consolidated interim financial statements include the accounts of the Company and its subsidiaries, as well as certain variable interest entities as further described in Note 7, "Variable Interest Entities," to the consolidated financial statements in the 2018 Annual Report. 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 investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; valuation of mandatorily redeemable preferred stock; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for subordinated debt obligations; and revenue recognition.
The fair values of the Company's investments in fixed maturities and equity investments, limited liability investments, at fair value, real estate investments, subordinated debt and warrant liability 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 and cash equivalents, restricted 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
Except as set forth below and as discussed in Note 4, "Recently Issued Accounting Standards," related to the Company's adoption of ASU 2016-02 effective January 1, 2019, there have been no material changes to our significant accounting policies as reported in our 2018 Annual Report.
Holding Company Liquidity
The Company's Extended Warranty subsidiaries fund their obligations primarily through service fee and commission income. The Company's Leased Real Estate subsidiary funds its obligations through rental income. The Company's insurance subsidiaries fund their obligations primarily through investment income and maturities in the investments portfolios.

 
9
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; and any other extraordinary demands on the holding company.
Actions available to the holding company to increase liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; distributions from the Company’s Extended Warranty subsidiaries, subject to certain restrictions; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.
Dividends from the Leased Real Estate segment are not generally considered a source of liquidity for the holding company, except upon the occurrence of certain events that would trigger payment of service fees. There can be no assurance as to the timing of the occurrence, or the resulting outcome, from one of these events.
The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc., was $1.9 million and $1.9 million at September 30, 2019 and December 31, 2018, respectively, which excludes future actions available to the holding company that could be taken to increase liquidity and reflects approximately four months of operating cash. These amounts are reflected in the cash and cash equivalents of $13.1 million and $14.6 million reported at September 30, 2019 and December 31, 2018, respectively, on the Company’s consolidated balance sheets. The cash and cash equivalents and restricted cash other than the holding company’s liquidity represent restricted and unrestricted cash held by Kingsway Amigo Insurance Company ("Amigo"), Kingsway Reinsurance Corporation and the Company’s Extended Warranty and Leased Real Estate segments.
As of March 31, 2020, there are 182,876 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. Any outstanding Preferred Shares would be required to be redeemed by the Company on April 1, 2021 ("Redemption Date") at a redemption value of$6.7 million (assuming all current outstanding Preferred Shares would be redeemed), if the Company has sufficient legally available funds to do so. Additionally, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, because of the deferral which totaled $10.5 million at March 31, 2020, the Company is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred. If, as of April 1, 2021, the Company was required to pay both the deferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company currently projects that it would not have sufficient legally available funds to do so. However, the Company would be prohibited from doing so under Delaware law and, as such, (a) the interest estimated to be $14.9 million on March 31, 2021 on the trust preferred securities would remain on deferral as permitted under the indentures and (b) in accordance with Delaware law the Preferred Shares would not be redeemed on the Redemption Date (with a redemption value of $6.7 million) and would instead remain outstanding and continue to accrue dividends until such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. In such a situation, the Company would continue to operate in the ordinary course.
The Company notes there are several variables to consider in such a situation, and management is currently exploring the following opportunities: negotiating with the holders of the Preferred Shares with respect to the Redemption Date and/or other key provisions, raising additional funds through capital market transactions, as well as the Company’s continued strategy of working to monetize its non-core investments while attempting to maximize the tradeoff between liquidity and value received. The Company also notes that the conversion of any Preferred Shares that might occur prior to April 1, 2021 would impact its analysis as of April 1, 2021.
Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, excluding the cash that may be required to redeem the Preferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic.

 
10
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







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, GAP commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders. With the exception of GAP commissions and homebuilder warranty service fees, the adoption of ASU 2014-09 did not change the way the Company recognized revenue for the year ended December 31, 2018. The new guidance affects IWS' GAP commissions and PWSC's 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. As a result of the adoption of ASU 2014-09, the Company also recorded a cumulative effect adjustment to increase accumulated deficit by $0.6 million and increase deferred service fees by $0.6 million. Prior periods have not been restated to conform to the current presentation. Refer to Note 15, "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); however, an entity may choose to measure equity investments that do not have readily determinable fair values at cost, adjusted for observable price changes and impairments; 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. The Company has elected to measure its investments in private companies at cost, adjusted for observable price changes and impairments. Previously, the Company recorded its equity investments at fair value with net unrealized gains or losses reported in accumulated other comprehensive income (loss) and 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 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 January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash ("ASU 2016-18"). The objective of ASU 2016-18 is to explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents.  Amounts generally described as restricted cash and cash equivalents should be included with the cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows.  As a result of the adoption of the standard, the change in restricted cash is included in the 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,

 
11
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







the Company granted restricted common stock awards to a nonemployee. Refer to Note 18, "Stock-Based Compensation," for further details.

Effective January 1, 2019, the Company adopted 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 requires 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 amortized over the lease term on a straight-line basis, with all cash flows included within operating activities in the statement of cash flows. The accounting treatment for lessors will remain relatively unchanged. The Company adopted ASU 2016-02 using the modified retrospective transition method and did not restate comparative periods. The adoption had a significant effect on the Company's consolidated balance sheet. Refer to Note 14, "Leases," for further information regarding the adoption of ASU 2016-02.

(b)    Accounting Standards Not Yet Adopted:
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 irreversible write-downs. On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, per ASU 2019-10 the Company would adopt ASU 2016-13 beginning January 1, 2023, as the Company is considered to be a smaller reporting company. 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.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). Among other things, ASU 2018-17 changes how all entities that apply the variable interest entity ("VIE") guidance evaluate decision making fees. Under ASU 2018-17, when an entity determines whether a decision-making fee is a variable interest, it considers indirect interests held through related parties under common control on a proportionate basis rather than in their entirety. The new approach is consistent with how indirect interests held by related parties under common control are evaluated when determining whether a reporting entity is the primary beneficiary of a VIE. ASU 2018-17 is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating ASU 2018-17 to determine the potential impact that adopting this standard will have on its consolidated financial statements.
NOTE 5 ACQUISITION AND DISCONTINUED OPERATIONS
(a)     Acquisition
Geminus Holdings Company, Inc.:
On March 1, 2019, the Company acquired 100% of the outstanding shares of Geminus Holding Company, Inc. ("Geminus") for cash consideration of $8.4 million, comprised of $7.7 million of cash and an installment payable to the seller of $0.7 million due February 15, 2020. The payable to seller was paid in full by February 15, 2020. At September 30, 2019, the balance of the payable to seller was $0.1 million. As further discussed in Note 20, "Segmented Information," Geminus is included in the Extended Warranty segment. Geminus is a specialty, full-service provider of vehicle service agreements and other finance and insurance products to used car buyers around the country. Geminus, headquartered in Wilkes-Barre, Pennsylvania, has been creating, marketing and administering these products on high-mileage used cars through its subsidiaries, The Penn Warranty Corporation

 
12
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







("Penn") and Prime Auto Care, Inc. ("Prime"), since 1988. Penn and Prime distribute these products via independent used car dealerships and franchised car dealerships, respectively. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.
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. Goodwill of $7.4 million was recognized, and $5.7 million of separately identifiable intangible assets were recognized resulting from the valuations of acquired customer relationships and trade names. Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition. The goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to grow its portfolio of warranty companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes. During the three months ended September 30, 2019 and September 30, 2018, the Company incurred acquisition-related expenses of zero and $0.0 million, respectively, ($0.0 million year to date compared to $0.0 million prior year to date), which are included in general and administrative expenses in the consolidated statements of operations.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
 
 
 
 
March 1, 2019

Investments
 
$
4,405

Cash and cash equivalents
 
755

Restricted cash
 
2,650

Accrued investment income
 
32

Service fee receivable
 
513

Other receivables
 
12

Property and equipment, net
 
79

Goodwill
 
7,445

Intangible assets not subject to amortization - trade names
 
1,974

Intangible asset subject to amortization - customer relationships
 
3,732

Other assets
 
620

Total assets
 
$
22,217

 
 
 
Accrued expenses and other liabilities
 
$
2,018

Income taxes payable
 
1

Deferred service fees
 
10,564

Net deferred income tax liabilities
 
1,263

Total liabilities
 
$
13,846

 
 
 
Purchase price
 
$
8,371

The consolidated statements of operations include the earnings of Geminus from the date of acquisition. From the date of acquisition through September 30, 2019, Geminus earned revenue of $6.8 million and net income of $0.6 million. The following unaudited pro forma summary presents the Company's consolidated financial statements for the three and nine months ended September 30, 2019 and September 30, 2018 as if Geminus had been acquired on January 1, 2018. The pro forma summary is presented for illustrative purposes only and does not purport to represent the results of our operations that would have actually occurred had the acquisition occurred on January 1, 2018 or project our results of operations as of any future date or for any future period, as applicable.


 
13
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands, except per share data)
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2019

 
2018

 
2019

 
2018

Revenues
 
$
16,355

 
$
16,182

 
$
46,846

 
$
47,164

Loss from continuing operations attributable to common shareholders
 
$
(4,466
)
 
$
(3,607
)
 
$
(3,790
)
 
$
(12,481
)
Basic loss per share - continuing operations
 
$
(0.20
)
 
$
(0.17
)
 
$
(0.17
)
 
$
(0.57
)
Diluted loss per share - continuing operations
 
$
(0.20
)
 
$
(0.17
)
 
$
(0.17
)
 
$
(0.57
)
(b)     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. As a result of this announcement, Mendota, which was 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, 2018 as a result of adjusting the net carrying value of Mendota to be equal to the final purchase price. For the year ended December 31, 2018, the Company recognized a loss on disposal of Mendota of $8.5 million.

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. During the first quarter of 2019, Mendota settled one of the two specified claims for $0.5 million, resulting in no loss to the Company. During the fourth quarter of 2019, Mendota notified the Company that Mendota had entered into an agreement to settle the remaining specified claim. The Company estimates it will incur a net loss of approximately $1.6 million related to the settlement of the remaining specified claim, which the Company will report in its consolidated statement of operations for the year ended December 31, 2019. The $1.6 million settlement was funded from the $5.0 million escrow account, and the $3.4 million remaining in the escrow account was released to the Company during the first quarter of 2020 consistent with the terms of the escrow agreement.

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 for the nine months ended September 30, 2018. As a result of the sale, ARS, previously disclosed as part of the Extended Warranty segment, has been classified as a discontinued operation.

 
14
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Summary financial information for Mendota and ARS included in income (loss) from discontinued operations, net of taxes in the statements of operations for the three and nine months ended September 30, 2018 is presented below:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2018
Income (loss) from discontinued operations, net of taxes:
 
 
 
 
Revenues:
 
 
 
 
Net premiums earned
 
$
16,727

 
$
68,319

Total revenues
 
16,727

 
68,319

Other revenues (expenses), net:
 
 
 
 
Loss and loss adjustment expenses
 
(14,104
)
 
(55,832
)
Commissions and premium taxes
 
(713
)
 
(7,101
)
General and administrative expenses
 
(3,925
)
 
(11,703
)
Net investment income
 
240

 
674

Net realized gains (losses)
 
130

 
(4
)
Loss on change in fair value of equity investments
 
(122
)
 
(16
)
Other income
 
2,184

 
7,060

Total other revenue (expenses), net
 
(16,310
)
 
(66,922
)
Income from discontinued operations before income tax benefit
 
417

 
1,397

Income tax benefit
 

 

Income from discontinued operations, net of taxes
 
417

 
1,397

Loss on disposal of discontinued operations before income tax expense
 
(1,172
)
 
(7,800
)
Income tax expense
 

 

Loss on disposal of discontinued operations, net of taxes
 
(1,172
)
 
(7,800
)
Total loss from discontinued operations, net of taxes
 
$
(755
)
 
$
(6,403
)

NOTE 6 INVESTMENTS

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at September 30, 2019 and December 31, 2018 are summarized in the tables shown below:
(in thousands)
 
September 30, 2019
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
11,544

 
$
59

 
$
9

 
$
11,594

States, municipalities and political subdivisions
 
603

 
1

 
2

 
602

Mortgage-backed
 
2,137

 
2

 
17

 
2,122

Corporate
 
2,985

 
10

 
4

 
2,991

Total fixed maturities
 
$
17,269

 
$
72

 
$
32

 
$
17,309



 
15
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
December 31, 2018
 
 
 
Amortized Cost

 
Gross Unrealized Gains

 
Gross Unrealized Losses

 
Estimated  Fair Value

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
5,594

 
$
1

 
$
48

 
$
5,547

States, municipalities and political subdivisions
 
621

 

 
14

 
607

Mortgage-backed
 
3,256

 

 
70

 
3,186

Corporate
 
2,961

 

 
41

 
2,920

Total fixed maturities
 
12,432

 
1

 
173

 
12,260


The table below summarizes the Company's fixed maturities at September 30, 2019 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, 2019
 
 
 
Amortized Cost

 
Estimated Fair Value

Due in one year or less
 
$
9,124

 
$
9,148

Due after one year through five years
 
6,912

 
6,937

Due after five years through ten years
 
181

 
180

Due after ten years
 
1,052

 
1,044

Total
 
$
17,269

 
$
17,309


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, 2019 and December 31, 2018. 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, 2019
 
 
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
$
700

 
$
2

 
$
1,501

 
$
7

 
$
2,201

 
$
9

States, municipalities and political subdivisions

 

 
453

 
2

 
453

 
2

Mortgage-backed
150

 

 
1,394

 
17

 
1,544

 
17

Corporate
270

 
1

 
753

 
3

 
1,023

 
4

Total fixed maturities
$
1,120

 
$
3

 
$
4,101

 
$
29

 
$
5,221

 
$
32



 
16
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
 
 
 
 
 
 
 
December 31, 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
$
1,497

 
$
1

 
$
2,609

 
$
47

 
$
4,106

 
$
48

States, municipalities and political subdivisions

 

 
606

 
14

 
606

 
14

Mortgage-backed
800

 
1

 
2,134

 
69

 
2,934

 
70

Corporate
595

 
1

 
2,151

 
40

 
2,746

 
41

Total fixed maturities
$
2,892

 
$
3

 
$
7,500

 
$
170

 
$
10,392

 
$
173

There are approximately 33 and 64 individual available-for-sale investments that were in unrealized loss positions as of September 30, 2019 and December 31, 2018, 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;
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 any potential 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, the Company recorded no write-downs for other-than-temporary impairment related to limited liability investments for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.1 million year to date compared to zero prior year to date). There were no write-downs recorded for other-than-temporary impairments related to available-for sale investments for the three and nine months ended September 30, 2019 and September 30, 2018, respectively.

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.

 
17
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







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, 2019 and December 31, 2018, the carrying value of limited liability investments totaled $3.8 million and $4.8 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 income in the consolidated statements of operations. At September 30, 2019, the Company has no unfunded commitments related to limited liability investments.
Limited liability investments, at fair value represents the Company's investment in 26.7% of the outstanding units of 1347 Investors LLC ("1347 Investors") as well as the underlying investments of the Company’s consolidated entities Net Lease Investment Grade Portfolio LLC ("Net Lease") and Argo Holdings Fund I, LLC ("Argo Holdings").
The fair value of the Company's investment in 1347 Investors is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. The most significant input to the model is the observed stock price of Limbach Holdings, Inc. ("Limbach") common stock.
During the fourth quarter of 2019, the Company’s investment in 1347 Investors was dissolved, which resulted in the Company holding shares of Limbach common stock directly.  During the third and fourth quarters of 2019 and through the first quarter of 2020, the Limbach common stock price has declined, which has resulted in the Company recording loss on change in fair value related to its investment in 1347 Investors and Limbach of $2.7 million, $0.7 million and $0.6 million, respectively.
As of September 30, 2019 and December 31, 2018, the carrying value of the Company's limited liability investments, at fair value was $29.6 million and $26.0 million, respectively. The Company recorded impairments related to limited liability investments, at fair value of $0.0 million and $0.1 million for the three months ended September 30, 2019 and September 30, 2018, respectively, ($0.0 million and $0.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively), which are included in (loss) gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At September 30, 2019, the Company has unfunded commitments totaling $0.6 million to fund limited liability investments, at fair value, all of which related to the Company’s commitment to Argo Holdings. On December 4, 2019, Argo Management informed members of Argo Holdings that no more requests for funds are planned.
Investments in private companies consist of convertible preferred stocks and notes in privately owned companies and investments in limited liability companies in which the Company’s interests are deemed minor. The Company's investments in private companies do not have readily determinable fair values. The Company has elected to record investments in private companies at cost, adjusted for observable price changes and impairments. As of September 30, 2019 and December 31, 2018, the carrying value of the Company's investments in private companies totaled $2.0 million and $3.1 million, respectively. For the three months ended September 30, 2019 and September 30, 2018, the Company recorded adjustments of $0.2 million and $0.0 million, respectively, ($0.2 million and $0.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively), to adjust the fair value of certain investments in private companies for observable price changes, which are included in net change in unrealized (loss) gain on private company investments in the consolidated statements of operations.
The Company performs a quarterly impairment analysis of its investments in private companies. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
the opinions of external investment and portfolio managers;
the financial condition and prospects of the investee;
recent operating trends and forecasted performance of the investee;
current market conditions in the geographic area or industry in which the investee operates;
changes in credit ratings; and
changes in the regulatory environment.

As a result of the analysis performed, the Company recorded impairments related to investments in private companies of $0.2 million and zero for the three months ended September 30, 2019 and September 30, 2018, respectively, ($0.2 million and zero for the nine months ended September 30, 2019 and September 30, 2018, respectively), which are included in net change in unrealized (loss) gain on private company investments in the consolidated statements of operations.
Real estate investments are reported at fair value. As of September 30, 2019 and December 31, 2018, the carrying value of the Company's real estate investments totaled $10.7 million and $10.7 million, respectively.

 
18
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Other investments include collateral loans and are reported at their unpaid principal balance. As of September 30, 2019 and December 31, 2018, the carrying value of other investments totaled $0.8 million and $2.1 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 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.
On January 2, 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 (loss) 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, 2019.
Net investment income for the three and nine months ended September 30, 2019 and September 30, 2018 is comprised as follows:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Investment income:
 
 
 
 
 
 
 
 
  Interest from fixed maturities
 
$
136

 
$
73

 
$
331

 
$
163

Dividends
 
69

 
79

 
197

 
235

Income from limited liability investments
 
20

 
22

 
34

 
203

Income from limited liability investments, at fair value
 
372

 
236

 
839

 
937

Income from real estate investments
 
200

 
200

 
600

 
600

Other
 
105

 
23

 
395

 
160

Gross investment income
 
902

 
633

 
2,396

 
2,298

Investment expenses
 
(5
)
 
(4
)
 
(51
)
 
(21
)
Net investment income
 
$
897

 
$
629

 
$
2,345

 
$
2,277

Gross realized gains and losses on available-for-sale investments and limited liability investments for the three and nine months ended September 30, 2019 and September 30, 2018 are comprised as follows:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Gross realized gains
 
$
1,004

 
$

 
$
1,363

 
$
398

Gross realized losses
 
(3
)
 
(414
)
 
(603
)
 
(415
)
Net realized gains gains
 
$
1,001

 
$
(414
)
 
$
760

 
$
(17
)

 
19
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(Loss) gain on change in fair value of equity investments for the three and nine months ended September 30, 2019 and September 30, 2018 is comprised as follows:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Net (losses) gains recognized on equity investments sold during the period
 
$
(11
)
 
$
905

 
$
(112
)
 
$
1,450

Change in unrealized (losses) gains on equity investments held at end of the period
 
(27
)
 
(568
)
 
89

 
(369
)
(Loss) gain on change in fair value of equity investments
 
$
(38
)
 
$
337

 
$
(23
)
 
$
1,081

Short-term investments and fixed maturities with an estimated fair value of $0.2 million and $0.2 million at September 30, 2019 and December 31, 2018, respectively, were on deposit with state and provincial regulatory authorities. The Company also has restricted cash of $20.8 million and $17.0 million at September 30, 2019 and December 31, 2018, respectively. Included in restricted cash are (i) $5.1 million and $5.0 million at September 30, 2019 and December 31, 2018, respectively, held in escrow as part of the transaction to sell Mendota; (ii) $13.5 million and $10.0 million at September 30, 2019 and December 31, 2018, respectively, held as deposits by IWS Acquisition Corporation ("IWS"), Professional Warranty Service Corporation ("PWSC"), and Geminus; (iii) $1.9 million and $1.9 million at September 30, 2019 and December 31, 2018, respectively, on deposit with state and provincial regulatory authorities; and (iv) $0.3 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively, pledged to third-parties as deposits or to collateralize liabilities. Collateral pledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company's standard risk management controls.

Impact of COVID-19 on Investments
As discussed in Note 24, "Subsequent Event," in March 2020 the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. There remain many unknowns.

As part of the Company’s March 31, 2020 quarterly impairment analysis of its investments in private companies, the Company determined that it should write-down one of its investments by 90%, or $0.7 million, for other-than-temporary impairments as a result of the impacts of COVID-19 on the investment's underlying business. The Company continues to assess the impact that the COVID-19 pandemic may have on the value of its various investments, which could result in future material decreases in the underlying investment value. Such decreases may be considered temporary or could be deemed to be other-than-temporary and management may be required to record write-downs of the related investments in future reporting periods.

NOTE 7 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the common stock of Itasca Capital Ltd. ("ICL"). The carrying value of the Company’s investment in investee is accounted for under the equity method, calculated using ICL’s reported financial statements. The carrying value, estimated fair value and approximate equity percentage for the Company's investment in investee at September 30, 2019 and December 31, 2018 were as follows:
(in thousands, except for percentages)
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
 
 
Equity Percentage
 
Estimated Fair Value
 
Carrying Value
 
Equity Percentage
 
Estimated Fair Value
 
Carrying Value
ICL
 
22.9
%
 
$
1,318

 
$
994

 
22.9
%
 
$
951

 
$
951


The estimated fair value of the Company's investment in ICL at September 30, 2019 in the table above is calculated based on the published closing price of ICL at September 30, 2019.
The carrying value of the Company's investment in investee at December 31, 2018, using ICL’s financial statements reported as of and for the period ended September 30, 2018, was calculated to be $2.7 million. The Company performed an analysis to

 
20
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







determine whether its $2.7 million carrying value calculated under the equity method is recoverable. As part of its analysis, the Company considered that the estimated fair value of the Company's investment in investee at December 31, 2018, as presented in the table above and as calculated based on the published closing price of ICL common stock at December 31, 2018, was $1.0 million. The Company concluded that the $2.7 million carrying value of its investment in investee, as calculated under the equity method, had an other-than-temporary impairment as of December 31, 2018. As a result, the Company wrote down the carrying value of its investment in investee as of December 31, 2018, as presented in the table above, by $1.7 million such that its carrying value equaled the $1.0 million estimated fair value of the Company's investment in investee as calculated based on the published closing price of ICL common stock at December 31, 2018.
For the three months ended September 30, 2019 and September 30, 2018, equity in net (loss) income of investee was loss of $0.1 million and $0.3 million, respectively (income of $0.0 million and loss of $0.6 million for the nine months ended September 30, 2019 and September 30, 2018, respectively). During the fourth quarter of 2019, the Company sold its remaining investment in the common stock of ICL. See Note 22(c), "Related Parties," for more information.

NOTE 8 DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist primarily of commissions and agency expenses incurred related to successful efforts to acquire vehicle service agreements and are amortized over the period in which the related revenues are earned in accordance with ASC 606.
The components of deferred acquisition costs and the related amortization expense for the three and nine months ended September 30, 2019 and September 30, 2018 are comprised as follows:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Beginning balance, net
 
$
7,724

 
$
6,662

 
$
6,904

 
$
6,325

Additions
 
1,615

 
1,047

 
4,316

 
3,545

Amortization
 
(1,092
)
 
(810
)
 
(2,973
)
 
(2,971
)
Balance at September 30, net
 
$
8,247

 
$
6,899

 
$
8,247

 
$
6,899

NOTE 9 INTANGIBLE ASSETS
Intangible assets at September 30, 2019 and December 31, 2018 are comprised as follows:
(in thousands)
 
 
September 30, 2019
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization:
 
 
 
 
 
 
Database
 
$
4,918

 
$
3,382

 
$
1,536

Vehicle service agreements in-force
 
3,680

 
3,677

 
3

Customer relationships
 
12,646

 
5,101

 
7,545

In-place lease
 
1,125

 
202

 
923

Non-compete
 
266

 
104

 
162

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

 

 
73,667

Trade names
 
3,264

 

 
3,264

Total
 
$
99,566

 
$
12,466

 
$
87,100



 
21
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
 
December 31, 2018
 
 
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets subject to amortization:
 
 
 
 
 
 
Database
 
$
4,918

 
$
3,013

 
$
1,905

Vehicle service agreements in-force
 
3,680

 
3,671

 
9

Customer relationships
 
8,914

 
3,691

 
5,223

In-place lease
 
1,125

 
155

 
970

Non-compete
 
266

 
64

 
202

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

 

 
73,667

Trade names
 
1,290

 

 
1,290

Total
 
$
93,860

 
$
10,594

 
$
83,266

As further discussed in Note 5, "Acquisition and Discontinued Operations," during the first quarter of 2019, the Company recorded $5.7 million of separately identifiable intangible assets, related to acquired customer relationships and trade names, as part of the acquisition of Geminus. The customer relationships intangible asset of $3.7 million is being amortized over ten years based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. The trade name intangible assets of $2.0 million are deemed to have indefinite useful lives and are 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 $0.7 million and $1.3 million for the three months ended September 30, 2019 and September 30, 2018, respectively ($1.9 million and $1.8 million for the nine months ended September 30, 2019 and September 30, 2018, respectively).
The tenant relationship and trade name intangible assets have indefinite useful lives and are not amortized. No impairment charges were taken on intangible assets during the three and nine months ended September 30, 2019 and September 30, 2018.
NOTE 10 PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2019 and December 31, 2018 are comprised as follows:
(in thousands)
 
 
 
 
September 30, 2019
 
 
 
Total Property and Equipment
 
Property leased to others under operating leases included in property and equipment
 
 
Cost
 
Accumulated Depreciation
 
Carrying Value
 
Cost
 
Accumulated Depreciation
 
Carrying Value
Land
 
$
21,120

 
$

 
$
21,120

 
$
21,120

 
$

 
$
21,120

Site improvements
 
91,308

 
13,261

 
78,047

 
91,308

 
13,261

 
78,047

Buildings
 
580

 
47

 
533

 
580

 
47

 
533

Leasehold improvements
 
154

 
107

 
47

 

 

 

Furniture and equipment
 
1,070

 
965

 
105

 

 

 

Computer hardware
 
5,286

 
5,028

 
258

 

 

 

Total
 
$
119,518

 
$
19,408

 
$
100,110

 
$
113,008

 
$
13,308

 
$
99,700



 
22
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
 
December 31, 2018
 
 
 
Total Property and Equipment
 
Property leased to others under operating leases included in property and equipment
 
 
Cost
 
Accumulated Depreciation
 
Carrying Value
 
Cost
 
Accumulated Depreciation
 
Carrying Value
Land
 
$
21,120

 
$

 
$
21,120

 
$
21,120

 
$

 
$
21,120

Site improvements
 
91,308

 
10,161

 
81,147

 
91,308

 
10,161

 
81,147

Buildings
 
580

 
36

 
544

 
580

 
36

 
544

Leasehold improvements
 
104

 
102

 
2

 

 

 

Furniture and equipment
 
993

 
901

 
92

 

 

 

Computer hardware
 
4,995

 
4,758

 
237

 

 

 

Total
 
$
119,100

 
$
15,958

 
$
103,142

 
$
113,008

 
$
10,197

 
$
102,811


NOTE 11 VEHICLE SERVICE AGREEMENT LIABILITY
Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement fees are initially recorded as deferred service fees. On a quarterly basis, the Company compares the remaining deferred service fees balance to the estimated amount of expected future claims under the vehicle service agreement contracts and records an additional accrual when the deferred service fees balance is less than expected future claims costs.

In certain jurisdictions the Company is required to refund to a customer a pro-rata share of the vehicle service agreement fees if a customer cancels the agreement prior to the end of the term. Depending on the jurisdiction, the Company may be entitled to deduct from the refund a cancellation fee and/or amounts for claims incurred prior to cancellation. While refunds vary depending on the term and type of product offered, historically refunds have averaged 9% to 13% of the original amount of the vehicle service agreement fee. Revenues recorded by the Company are net of refunds and the associated refund liability is included in deferred service fees.

A reconciliation of the changes in the vehicle service agreement liability, including deferred service fees related to vehicle service agreements, as of September 30, 2019 and September 30, 2018 were as follows:
(in thousands)
 
September 30, 2019
 
September 30, 2018
Balance at January 1, net
 
$
43,734

 
$
40,794

Vehicle service agreement liability acquired during the year related to the purchase of Geminus
 
10,792

 

Gross service fees for vehicle service agreements sold
 
22,941

 
17,247

Recognition of service fees on vehicle service agreements
 
(20,489
)
 
(14,421
)
Liability for claims authorized on vehicle service agreements
 
6,838

 
4,206

Payments of claims authorized on vehicle service agreements
 
(4,305
)
 
(4,378
)
Re-estimation of deferred service fees
 
(351
)
 
(252
)
Balance at September 30, net
 
$
59,160

 
$
43,196

The vehicle service agreement liability is presented as components of deferred services fees and accrued expenses and other liabilities in the consolidated balance sheets as follows:
(in thousands)
 
September 30,

 
December 31,

 
 
2019

 
2018

Deferred service fees
 
$
58,630

 
$
43,495

Accrued expenses and other liabilities
 
530

 
239

Balance at end of period, net
 
$
59,160

 
$
43,734


 
23
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







NOTE 12 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 the 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.
The results of this comparison and the changes in the provision for unpaid loss and loss adjustment expenses, net of amounts recoverable from reinsurers, as of September 30, 2019 and September 30, 2018 were as follows:
(in thousands)
 
September 30, 2019

 
September 30, 2018

Balance at beginning of period, gross
 
$
2,073

 
$
1,329

Less reinsurance recoverable related to unpaid loss and loss adjustment expenses
 

 
72

Balance at beginning of period, net
 
2,073

 
1,257

Incurred related to:
 
 
 
 

      Current year
 

 

      Prior years
 
710

 
1,628

Paid related to:
 
 
 
 

      Current year
 

 

      Prior years
 
(926
)
 
(672
)
Balance at end of period, net
 
1,857

 
2,213

Plus reinsurance recoverable related to unpaid loss and loss adjustment expenses
 

 
79

Balance at end of period, gross
 
$
1,857

 
$
2,292

The Company reported unfavorable development on unpaid loss and loss adjustment expenses of $0.7 million and $1.6 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. The unfavorable development for the nine months ended September 30, 2019 and September 30, 2018 was primarily related to an increase in loss and loss adjustment expenses at Amigo.

 
24
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







NOTE 13 DEBT
Debt consists of the following instruments at September 30, 2019 and December 31, 2018:
(in thousands)
 
September 30, 2019
 
December 31, 2018
 
 
Principal

 
Carrying Value

 
Fair Value

 
Principal

 
Carrying Value

 
Fair Value

Bank loans:
 
 
 
 
 
 
 
 
 
 
 
 
PWSC Loan
 
$
1,877

 
$
1,877

 
$
1,856

 
$
3,917

 
$
3,917

 
$
3,829

KWH Loan
 
9,750

 
8,880

 
12,031

 

 

 

 
 
11,627

 
10,757

 
13,887

 
3,917

 
3,917

 
3,829

Notes payable:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage
 
170,689

 
179,394

 
185,368

 
173,155

 
182,548

 
174,265

Flower Note
 
7,447

 
7,447

 
8,269

 
7,768

 
7,768

 
8,565

Net Lease Note
 
9,000

 
9,000

 
9,449

 
9,000

 
9,000

 
9,409

 
 
187,136

 
195,841

 
203,086

 
189,923

 
199,316

 
192,239

Subordinated debt
 
90,500

 
50,565

 
50,565

 
90,500

 
50,023

 
50,023

Total
 
$
289,263

 
$
257,163

 
$
267,538

 
$
284,340

 
$
253,256

 
$
246,091


(a)          Bank loans:
As part of the acquisition of PWSC on October 12, 2017, the Company borrowed a principal amount of $5.0 million from a bank at a fixed interest rate of 5.0% (the "PWSC Loan"). The carrying value of the PWSC Loan represents its unpaid principal balance. The fair value of the PWSC Loan disclosed in the table above is derived from quoted market prices of B and B minus rated industrial bonds with similar maturities. The PWSC Loan was scheduled to mature on October 12, 2022; however, the principal totaling $0.3 million was fully repaid on January 30, 2020.
As part of the acquisition of Geminus on March 1, 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH") and contributed IWS and Trinity to KWH, which then borrowed a principal amount of $10.0 million from a bank at an annual interest rate equal to LIBOR plus 9.25% (the "KWH Loan"), using most of the proceeds to acquire Geminus. The KWH Loan matures on March 1, 2024. As part of the KWH Loan, KWH also issued warrants (the "KWH Warrants") to the lender exercisable to purchase an aggregate 1.25% membership interest in KWH. The Company allocated $0.4 million of the KWH loan proceeds to a liability, recorded as part of accrued expenses and other liabilities in the consolidated balance sheets, to reflect the estimated fair value of the KWH Warrants, as the warrants contain a put right exercisable by the holder. Changes in the estimated fair value of the KWH Warrants are recorded in the consolidated statements of operations. The Company also recorded as a discount to the carrying value of the KWH Loan issuance costs of $1.0 million specifically related to the KWH Loan. The KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the discount using the effective interest rate method. The fair value of the KWH Loan disclosed in the table above is derived from quoted market prices of B and BB minus rated industrial bonds with similar maturities. The KWH Loan is secured by certain of the equity interests and assets of KWH and its subsidiaries.
(b)          Notes payable:
As part of the acquisition of CMC Industries, Inc. ("CMC") in July 2016, the Company assumed a mortgage, which is recorded as note payable in the consolidated balance sheets ("the Mortgage"). The Mortgage is nonrecourse indebtedness with respect to CMC and its subsidiaries, and the Mortgage is not, nor will it be, guaranteed by Kingsway or its affiliates. The Mortgage was recorded at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 million as of the date of acquisition plus a premium of $11.7 million. The Mortgage matures on May 15, 2034 and has a fixed interest rate of 4.07%. The Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the premium using the effective interest rate method. The fair value of the Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities.

On January 5, 2015, Flower Portfolio 001, LLC ("Flower") assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Flower Note"). The Flower Note requires monthly payments of principal and interest and is secured by certain investments of Flower. The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The carrying value of the Flower Note at September 30, 2019 of $7.4 million represents its unpaid principal balance. The fair value of the Flower Note disclosed in the table above is derived from quoted market prices of A and B rated industrial bonds with similar maturities.

 
25
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







On October 15, 2015, Net Lease assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Net Lease Note"). The Net Lease Note requires monthly payments of interest and is secured by certain investments of Net Lease. The Net Lease Note matures on November 1, 2020 and has a fixed interest rate of 10.25%. The carrying value of the Net Lease Note at September 30, 2019 of $9.0 million represents its unpaid principal balance. The fair value of the Net Lease Note disclosed in the table above is derived from quoted market prices of B and B minus rated industrial bonds with similar maturities.
(c)          Subordinated debt:
The subordinated debt is carried in the consolidated balance sheets at fair value. See Note 21, "Fair Value of Financial Instruments," for further discussion of the subordinated debt. Of the $0.5 million increase in fair value of the Company’s subordinated debt between December 31, 2018 and September 30, 2019, $2.6 million is reported as change in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive loss, partially offset by $2.1 million reported as gain on change in fair value of debt in the Company’s consolidated statements of operations.

During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. At September 30, 2019, deferred interest payable of $7.4 million is included in accrued expenses and other liabilities in the consolidated balance sheets.

Subordinated debt consists of the following trust preferred debt instruments:
Issuer
Principal (in thousands)
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

12/16/2003
annual interest rate equal to LIBOR, plus 4.00% payable quarterly
1/8/2034

NOTE 14 LEASES
Financial Statement Impact of Adopting Accounting Standards Update No. 2016-02 "Leases (Topic 842)" ("ASU 2016-02" or "ASC 842")
The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective adoption method. The reported results for 2019 reflect the adoption of ASC 842 guidance while the reported results for 2018 were prepared and continue to be reported under the guidance of ASC 840, Leases, referred to herein as "previous guidance."
ASC 842 provides guidance for both lessees and lessors. The Company is the lessee where it leases certain office properties from lessors. The Company is the lessor when it leases certain property to lessees.
The guidance requires lessees to recognize right-of-use assets and lease liabilities in the balance sheet and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended guidance will require both operating and finance leases to be recognized in the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset (“ROU”) representing its right to use the underlying asset for the lease term.
The guidance requires lessors to classify leases as a sales-type, direct financing, or operating lease. A lease is classified as a sales-type lease if any one of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all the risks and benefits of the underlying asset to the lessee and a third party, the lease is classified as a direct financing lease. All leases that are not classified as sales-type or direct financing leases are classified as operating leases.

 
26
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The Company elected certain of the practical expedients that are permitted under the transition guidance which allowed the Company to carryforward the historical lease classification, not reassess initial direct costs for any existing leases as of January 1, 2019 or reassess whether any expired or existing contracts are or contain leases. In addition, the Company elected to adopt the "hindsight" practical expedient to determine the reasonably certain lease term for existing leases. The Company has revised its relevant policies and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements of ASC 842 and have updated internal controls accordingly.
The main difference between the guidance in ASU 2016-02 and prior guidance for lessees is the recognition of right-of-use assets and lease liabilities for those leases classified as operating leases. Recognition of the right-of-use assets and liabilities had a material impact to the Company’s consolidated balance sheet upon adoption. However, since all its leases are operating leases under ASC 840 and the Company will carryforward the historical lease classification, the new standard did not have a material impact on the Company’s consolidated statements of operations, consolidated statements of shareholder’s equity, or consolidated statements of cash flows.
The adoption resulted in an increase of the ROU assets of approximately $2.7 million and lease liabilities of $2.9 million. The difference of $0.2 million relates to straight-line rent accruals and lease incentive liabilities that were reclassified to ROU assets for operating leases.
The main difference between the guidance in ASU 2016-02 and prior guidance for lessors is a modification of what qualifies as a sales-type and direct financing lease. All the Company’s lessor leases are classified as operating leases.
Lease Accounting Policy
The Company determines lease classification at commencement date. Leases not classified as sales-type (lessor) or financing leases (lessor and lessee) are classified as operating leases. The primary accounting criteria the Company uses that results in operating lease classification are: (a) the lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term, (b) the lease does not grant the lessee a purchase option that the lessee is reasonably certain to exercise, (c) using a seventy-five percent or more threshold, the lease term is not for a major part of the remaining economic life of the underlying asset, (d) using a ninety percent or more threshold, the present value of the sum of the lease payments and residual value guarantee from the lessee does not equal or substantially exceeds all of the fair value of the underlying asset.
Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental expense for operating leases is recognized on a straight-line basis over the lease term, net of any applicable lease incentive amortization.
Lessee Leases
The Company has operating leases for office space which include fixed base rent payments, as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred. The Company includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. There are no residual value guarantees. The Company does not currently have leases that meet the finance lease classification as defined under ASC 842.
The Company treats contracts as a lease when the contract: (1) conveys the right to use a physically distinct asset for a period of time in exchange for consideration, (2) the Company directs the use of the asset and (3) the Company obtains substantially all the economic benefits of the asset. Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the Company’s leases are office leases, the Company is unable to determine an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments for those leases. The Company includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that such options will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
As an accounting policy, the Company has elected not to apply the recognition requirements in ASC 842 to short-term leases (generally those with terms of twelve months or less). Instead, the Company recognizes the lease payments as expense on a straight-line basis over the lease term and any variable lease payments in the period in which the obligation for those payments is incurred.
The ROU assets and lease liability are presented as separate line items on the face of the Company’s consolidated balance sheet as of September 30, 2019.

 
27
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Operating lease costs and variable lease costs included in selling and administrative costs for the three months ended September 30, 2019 were $0.3 million and de minimis, respectively. Operating lease costs and variable lease costs included in selling and administrative costs for the nine months ended September 30, 2019 were $0.7 million and de minimis, respectively.
The annual maturities of lease liabilities as of September 30, 2019 were as follows:
(in thousands)
 
Lease Commitments
2019
 
$
228

2020
 
475

2021
 
487

2022
 
500

2023
 
525

2024 and thereafter
 
920

Total undiscounted lease payments
 
3,135

Imputed interest
 
531

Total lease liabilities
 
$
2,604

The weighted-average remaining lease term for our operating leases was 6.28 years as of September 30, 2019. The weighted average discount rate of our operating leases was 5.38% as of September 30, 2019. Cash paid for amounts included in the measurement of lease liabilities was $0.8 million for the nine months ended September 30, 2019.
Supplemental non-cash information related to leases for the nine months ended September 30, 2019 includes ROU assets of $0.5 million acquired in exchange for $0.5 million of lease obligations.
Lessor Leases
The Company owns a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") that is subject to a long-term triple net lease agreement with an unrelated third-party. The lease provides for future rent escalations and renewal options. The initial lease term ends in May 2034. The lessee bears the cost of maintenance and property taxes. Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental income includes a de minimus amount of amortization of below market lease liabilities for the three and nine months ended September 30, 2019 and September 30, 2018. The estimated aggregate future amortization of below market lease liabilities is $0.1 million for 2019, $0.1 million for 2020, $0.1 million for 2021, $0.1 million for 2022 and $0.1 million for 2023. Realization of the residual values of the assets under lease is dependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included in Property and Equipment (Note 10, "Property and Equipment").
Lease income related to operating leases for the three months ended September 30, 2019 and September 30, 2018 was $3.3 million and $3.3 million, respectively ($10.0 million year to date compared to $10.0 million prior year to date).
The following table provides the net book value of operating lease property included in property and equipment in the consolidated balance sheets:
(in thousands)
 
As of September 30, 2019
 
 
 
Property leased to lessees
 
113,008

Accumulation depreciation
 
(13,308
)
Net property and equipment leased
 
$
99,700



 
28
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







As of September 30, 2019, future undiscounted cash flows to be received in each of the next five years and thereafter, on non-cancelable operating leases are as follows:
(in thousands)
 
 
2019
 
$
2,920

2020
 
11,832

2021
 
12,099

2022
 
12,371

2023
 
12,649

Thereafter
 
149,896

NOTE 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers relates to Extended Warranty segment service fee and commission income. Service fee and commission income represents vehicle service agreement fees, GAP commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warranty contract or commission product sale, or on terms subject to the Company’s customary credit reviews.
The following table disaggregates revenues from contracts with customers by revenue type:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

 
 
 
 
 
 
 
 
 
Vehicle service agreement fees - IWS
 
$
4,495

 
$
4,410

 
$
13,525

 
$
13,025

GAP commissions - IWS
 
261

 
200

 
745

 
592

Maintenance support service fees - Trinity
 
2,451

 
2,720

 
6,151

 
7,655

Warranty product commissions - Trinity
 
791

 
739

 
2,190

 
1,971

Homebuilder warranty service fees - PWSC
 
1,547

 
1,599

 
4,445

 
4,574

Homebuilder warranty commissions - PWSC
 
227

 
203

 
636

 
565

Vehicle service agreement fees - Geminus
 
3,116

 

 
6,760

 

GAP commissions - Geminus
 
16

 

 
39

 

 
 
 
 
 
 
 
 
 
Service fee and commission income
 
$
12,904

 
$
9,871

 
$
34,491

 
$
28,382


IWS' vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement contract fees are earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied.

IWS' GAP commissions include fees collected from the sale of GAP contracts. IWS acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these GAP contracts. IWS does not assume any insurance risk from the sale of GAP contracts. IWS receives a single commission fee as its transaction price at the time it sells a GAP contract to a customer. Each GAP contract contains two separate performance obligations - sale of a GAP contract and GAP claims administration. The first performance obligation is related to the sale of a GAP contract and is satisfied upon closing the sale. The second performance obligation is related to the administration of claims during the GAP contract period, generally four years.

Standalone selling prices are not directly observable in the GAP contract for each of the separate performance obligations. As a result, IWS has applied the expected cost plus a margin approach to develop models to estimate the standalone selling price for each of its performance obligations in order to allocate the transaction price to the two separate performance obligations identified.

For the model related to the sale of a GAP contract performance obligation, IWS makes judgments about which of its actual costs are associated with selling activities. For the model related to the GAP claims administration performance obligation, IWS makes judgments about which of its actual costs are associated with claim-handling activities, which are performed over the life of the GAP contract period. The relative percentage of expected costs plus a margin associated with the sale of a GAP contract performance obligation is applied to the transaction price to determine the estimated standalone selling price of the sale of a GAP contract performance obligation, which IWS recognizes as earned at the time of the GAP contract sale. The relative percentage of expected

 
29
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







costs plus a margin associated with the GAP claims administration performance obligation is applied to the transaction price to determine the estimated standalone selling price of the GAP claims administration performance obligation, which IWS recognizes as earned as services are performed over the GAP contract period.

For the GAP claims administration performance obligation, IWS applies an input method of measurement, based on the expected costs plus a margin of providing services, to determine the transfer of its services over the GAP contract period. IWS uses historical data regarding the number of claims it receives and activities performed, in addition to the number of GAP contracts sold, to estimate the number of claims to be received by year until coverage expires, which allows IWS to develop a revenue recognition pattern that it believes provides a faithful depiction of the transfer of services over time for the GAP claims administration performance obligation.

Trinity Warranty Solutions LLC's (Trinity") maintenance support service fees include the service fees collected to administer equipment breakdown and maintenance support services and are earned as services are rendered.
Trinity’s warranty product commissions include the commissions from the sale of warranty contracts for certain new and used heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration equipment. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. Warranty product commissions are earned at the time of the warranty product sales.

PWSC’s homebuilder warranty service fees include fees collected from the sale of warranties issued by new homebuilders. PWSC receives a single warranty service fee as its transaction price at the time it enters into a written contract with each of its builder customers. Each contract contains two separate performance obligations - warranty administrative services and other warranty services. Warranty administrative services include enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product. Other warranty services include answering builder or homeowner questions regarding the home warranty and dispute resolution services.

Standalone selling prices are not directly observable in the contract for each of the separate performance obligations. As a result, PWSC has applied the expected cost plus a margin approach to develop models to estimate the standalone selling price for each of its performance obligations in order to allocate the transaction price to the two separate performance obligations identified.

For the model related to the warranty administrative services performance obligation, PWSC makes judgments about which of its actual costs are associated with enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product. For the model related to the other warranty services performance obligation, PWSC makes judgments about which of its actual costs are associated with activities, such as answering builder or homeowner questions regarding the home warranty and dispute resolution services, which are performed over the life of the warranty coverage period. The relative percentage of expected costs plus a margin associated with the warranty administrative services performance obligation is applied to the transaction price to determine the estimated standalone selling price of the warranty administrative services performance obligation, which PWSC recognizes as earned at the time the home is enrolled and the warranty product is delivered. The relative percentage of expected costs plus a margin associated with the other warranty services performance obligation is applied to the transaction price to determine the estimated standalone selling price of the other warranty services performance obligation, which PWSC recognizes as earned as services are performed over the warranty coverage period.

For the other warranty services performance obligation, PWSC applies an input method of measurement, based on the expected costs plus a margin of providing services, to determine the transfer of its services over the warranty coverage period. PWSC uses historical data regarding the number of calls it receives and activities performed, in addition to the number of homes enrolled, to estimate the number of complaints and dispute resolution requests to be received by year until coverage expires, which allows PWSC to develop a revenue recognition pattern that it believes provides a faithful depiction of the transfer of services over time for the other warranty services performance obligation.

PWSC’s homebuilder warranty commissions include commissions from the sale of warranty contracts for those builders who have requested and receive insurance backing of their warranty obligations. PWSC acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions are earned on the certification date, which is typically the date of the closing of the sale of the home to the buyer. The Company also earns fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which are earned when the claims are closed, and a profit-sharing bonus on eligible warranties, which is determined based on expected ultimate loss ratio targets and is earned at the time the profit-sharing bonus is received.

 
30
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Geminus' vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement contract fees are earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied.

Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at September 30, 2019 and December 31, 2018 were $6.4 million and $3.4 million, respectively.
The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. The Company expects to recognize within one year as service fee and commission income approximately 40.7% of the deferred service fees as of September 30, 2019. Approximately $11.3 million of service fee and commission income recognized during the nine months ended September 30, 2019 was included in deferred service fees as of December 31, 2018.
 
NOTE 16 INCOME TAXES
The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The Tax Act makes broad and complex changes to the U.S. tax code, including a permanent reduction in the U.S. federal corporate income tax rate to 21% starting in 2018. Previously, the Company was subject to a 34% U.S. federal corporate income tax rate.

Income tax expense (benefit) for the three and nine months ended September 30, 2019 and September 30, 2018 varies from the amount that would result by applying the applicable U.S. federal corporate income tax rate of 21% to loss from continuing operations before income tax expense (benefit). The following table summarizes the differences:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Income tax benefit at United States statutory income tax rate
 
$
(807
)
 
$
(578
)
 
$
(335
)
 
$
(1,926
)
Valuation allowance
 
813

 
772

 
(421
)
 
2,127

Non-deductible compensation
 
27

 
(638
)
 
61

 
(515
)
Disposition of subsidiary
 

 
332

 
(24
)
 
332

State income tax
 
33

 
(27
)
 
91

 
106

Change in unrecognized tax benefits(1)
 
67

 
25

 
208

 
155

Indefinite life intangibles
 
54

 
23

 
141

 
69

Foreign operations subject to different tax rates
 
4

 
(3
)
 
(13
)
 
(57
)
Other
 
(29
)
 
(50
)
 
(91
)
 
9

Income tax expense (benefit)
 
$
162

 
$
(144
)
 
$
(383
)
 
$
300

(1) Includes interest and penalty expense related to unrecognized tax benefits.
The Company maintains a valuation allowance for its gross deferred tax assets at September 30, 2019 and December 31, 2018. The Company's operations have generated substantial operating losses in prior 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 September 30, 2019 and December 31, 2018 net deferred tax asset, excluding the deferred income tax asset and liability amounts set forth in the paragraph below. In the quarter ended March 31, 2019, the Company released into income $0.8 million of its valuation allowance, as a result of its acquisition of Geminus, due to net deferred income tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available.
The Company carries net deferred income tax liabilities of $29.0 million and $28.5 million at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $8.0 million relates to deferred income tax liabilities scheduled to reverse in periods after the expiration of the Company's consolidated U.S. net operating loss carryforwards, $21.6 million relates to deferred income tax liabilities associated with land and indefinite lived intangible assets, $0.6 million relates to deferred income tax assets associated with state income taxes and $0.0 million relates to deferred income tax assets associated with alternative minimum tax credits. At December 31, 2018, $8.0 million relates to deferred income tax liabilities scheduled to reverse in periods after the expiration of the Company's consolidated U.S. net operating loss carryforwards, $21.1 million relates to deferred income tax liabilities associated

 
31
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







with land and indefinite lived intangible assets, $0.5 million relates to deferred income tax assets associated with state income taxes and $0.1 million relates to deferred income tax assets associated with alternative minimum tax credits. The Company considered a tax planning strategy in arriving at its December 31, 2018 net deferred income tax liabilities.
As of September 30, 2019 and December 31, 2018, the Company carried a liability for unrecognized tax benefits of $1.4 million and $1.4 million, respectively, which is included in income taxes payable in the consolidated balance sheets. The Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense. The Company recorded income tax expense of $0.1 million and $0.0 million related to interest and penalty accruals for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.2 million and $0.2 million for the nine months ended September 30, 2019 and September 30, 2018, respectively). At September 30, 2019 and December 31, 2018, the Company carried an accrual for the payment of interest and penalties of $1.3 million and $1.1 million, respectively, included in income taxes payable in the consolidated balance sheets.
NOTE 17 LOSS FROM CONTINUING OPERATIONS PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted loss from continuing operations per share computation for the three and nine months ended September 30, 2019 and September 30, 2018:
(in thousands, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(4,006
)
 
$
(2,606
)
 
$
(1,213
)
 
$
(9,472
)
Less: net income attributable to noncontrolling interests
 
(202
)
 
(200
)
 
(671
)
 
(717
)
Less: dividends on preferred stock, net of tax
 
(258
)
 
(265
)
 
(756
)
 
(777
)
Loss from continuing operations attributable to common shareholders
 
$
(4,466
)
 
$
(3,071
)
 
$
(2,640
)
 
$
(10,966
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average basic shares
 
 
 
 
 
 
 
 
       Weighted average common shares outstanding
 
21,867

 
21,708

 
21,858

 
21,708

Weighted average diluted shares
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
21,867

 
21,708

 
21,858

 
21,708

        Effect of potentially dilutive securities
 

 

 

 

Total weighted average diluted shares
 
21,867

 
21,708

 
21,858

 
21,708

Basic loss from continuing operations per share
 
$
(0.20
)
 
$
(0.14
)
 
$
(0.12
)
 
$
(0.51
)
Diluted loss from continuing operations per share
 
$
(0.20
)
 
$
(0.14
)
 
$
(0.12
)
 
$
(0.51
)
Basic loss from continuing operations per share is calculated using weighted-average common shares outstanding. Diluted loss from continuing operations per share is calculated using weighted-average diluted shares. Weighted-average diluted shares is calculated by adding the effect of potentially dilutive securities to weighted-average common shares outstanding. Potentially dilutive securities consist of stock options, unvested restricted stock awards, unvested restricted stock units, warrants and convertible preferred stock. Because the Company is reporting a loss from continuing operations for the three and nine months ended September 30, 2019 and September 30, 2018, all potentially dilutive securities outstanding were excluded from the calculation of diluted loss from continuing operations per share since their inclusion would have been anti-dilutive.

 
32
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







NOTE 18 STOCK-BASED COMPENSATION
(a)     Stock Options
The following table summarizes the stock option activity during the nine months ended September 30, 2019:
 
 
 
 
 
 
 
 
 
 
Number of Options Outstanding
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (in Thousands)
Outstanding at December 31, 2018
 
40,000

 
$
4.67

 
1.3
 
$

Granted
 

 

 
 
 
 
Expired
 

 

 
 
 
 
Outstanding at September 30, 2019
 
40,000

 
$
4.67

 
0.6
 
$

Exercisable at September 30, 2019
 
40,000

 
$
4.67

 
0.6
 
$

The aggregate intrinsic value of stock options outstanding and exercisable is the difference between the September 30, 2019 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 nine months ended September 30, 2019.
(b)     Restricted Stock Awards
Under the 2013 Equity Incentive Plan (the "2013 Plan"), the Company made grants of restricted common stock awards to certain officers of the Company on March 28, 2014 (the "2014 Restricted Stock Awards"). The 2014 Restricted Stock Awards shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officers' continued employment through the vesting date. The 2014 Restricted Stock Awards are amortized on a straight-line basis over the ten-year requisite service period. The grant-date fair value of the 2014 Restricted Stock Awards was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2014 Restricted Stock Awards at September 30, 2019 was $0.4 million.
During the third quarter of 2018, the Company modified the terms of the 2014 Restricted Stock Awards for two of its officers.
On September 5, 2018, the Company executed an Amended and Restated Restricted Stock Award Agreement ("Amended RSA Agreement") with its former Chief Executive Officer. Under the terms of the Amended RSA Agreement, the former Chief Executive Officer was deemed to have forfeited 1,382,665 shares of the 2014 Restricted Stock Awards. The Company’s accounting policy is to account for forfeitures when they occur. As a result, the Company reversed during the third quarter of 2018 $2.4 million of compensation expense previously recognized from March 28, 2014 through June 30, 2018.
Pursuant to the terms of the Amended RSA Agreement, the Company granted to the former Chief Executive Officer a modified award of 350,000 shares of restricted common stock (the "2018 Restricted Stock Award"). The Company deemed the 2018 Restricted Stock Award to be taxable to the former Chief Executive Officer on the modification date. Pursuant to the terms of the 2013 Plan and the Amended RSA Agreement, the former Chief Executive Officer was entitled to satisfy the tax withholding obligation by authorizing the Company to withhold restricted common shares, which would otherwise be deliverable, having an aggregate fair market value, determined as of the tax date, equal to the tax withholding obligation. The former Chief Executive Officer chose to satisfy the tax withholding obligation in this manner. As a result, the Company cancelled 102,550 of the 350,000 shares of the 2018 Restricted Stock Award and recognized payroll tax expense of $0.3 million during the third quarter of 2018.

The remaining 247,450 shares of the 2018 Restricted Stock Award shall become fully vested after the satisfaction of certain performance conditions, as defined in the Amended RSA Agreement. There is no defined term under which the performance conditions must be completed. The unamortized compensation expense for the 2018 Restricted Stock Award will be recognized at the time the performance condition has been satisfied. The grant-date fair value of the 2018 Restricted Stock Award was determined using the closing price of Kingsway common stock on the modification date. Total unamortized compensation expense

 
33
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







related to the unvested 2018 Restricted Stock Award at September 30, 2019 was $0.6 million. During the fourth quarter of 2019, the Company acquired the remaining 247,450 shares of the 2018 Restricted Stock Award as partial consideration in exchange for selling its remaining investment in the common stock of ICL. See Note 22, "Related Parties," for more information.
 
On September 15, 2018, the Company executed an Employee Separation Agreement and Release ("Separation Agreement") with a former officer. Under the terms of the Separation Agreement, the former officer forfeited 112,500 shares of the 2014 Restricted Stock Awards. The Company’s accounting policy is to account for forfeitures when they occur. As a result, the Company reversed during the third quarter of 2018 $0.4 million of compensation expense previously recognized from March 28, 2014 through June 30, 2018.
The Separation Agreement modified the vesting terms related to the remaining 112,500 shares of the original 2014 Restricted Stock Awards ("Modified Restricted Stock Award"), such that they became fully vested on September 22, 2018. The Company deemed the Modified Restricted Stock Award to be taxable to the former officer on the vesting date. Pursuant to the terms of the 2013 Plan and the Separation Agreement, the former officer was entitled to satisfy the tax withholding obligation by authorizing the Company to withhold restricted common shares, which would otherwise be deliverable, having an aggregate fair market value, determined as of the tax date, equal to the tax withholding obligation. The former officer chose to satisfy the tax withholding obligation in this manner. As a result, the Company cancelled 32,962 of the 112,500 shares of the Modified Restricted Stock Award and recognized payroll tax expense of $0.1 million during the third quarter of 2018.
The Company also recorded during the third quarter of 2018 $0.2 million of compensation expense equal to the fair value of the remaining 79,538 fully vested shares of the Modified Restricted Stock Award. The grant-date fair value of the Modified Restricted Stock Award was determined using the closing price of Kingsway common stock on the modification date. Total unamortized compensation expense related to the unvested Modified Restricted Stock Award at September 30, 2019 was zero.

On January 31, 2019, the Company executed an Employee Separation Agreement and Release ("Separation Agreement") with a former officer. The Separation Agreement modified the vesting terms related to 115,500 shares of the original 2014 Restricted Stock Awards ("Modified Restricted Stock Award"), such that they became fully vested on January 31, 2019. The Company deemed the Modified Restricted Stock Award to be taxable to the former officer on the vesting date. Pursuant to the terms of the 2013 Plan and the Separation Agreement, the former officer was entitled to satisfy the tax withholding obligation by authorizing the Company to withhold restricted common shares, which would otherwise be deliverable, having an aggregate fair market value, determined as of the tax date, equal to the tax withholding obligation. The former officer chose to satisfy the tax withholding obligation in this manner. As a result, the Company cancelled 36,269 of the 115,500 shares of the Modified Restricted Stock Award and recognized payroll tax expense of $0.1 million during the first quarter of 2019.
The Company also recorded during the first quarter of 2019 $0.1 million of compensation expense equal to the fair value of the remaining 79,231 fully vested shares of the Modified Restricted Stock Award. The grant-date fair value of the Modified Restricted Stock Award was determined using the closing price of Kingsway common stock on the modification date. Total unamortized compensation expense related to the unvested Modified Restricted Stock Award at September 30, 2019 was zero.


 
34
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The Company granted restricted common stock units ("Restricted Stock Units") to an officer of the Company pursuant to a Restricted Stock Unit Agreement dated August 24, 2016. On September 5, 2018, the Restricted Stock Unit Agreement was cancelled and 500,000 restricted common stock awards were granted to the officer (the "2018 Restricted Stock Award"). There was no change to the vesting terms. The 2018 Restricted Stock Award shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officer's continued employment through the vesting date. The 2018 Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The grant-date fair value of the 2018 Restricted Stock Award was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2018 Restricted Stock Award at September 30, 2019 was $1.7 million.
The following table summarizes the activity related to unvested 2014 Restricted Stock Awards, 2018 Modified Restricted Stock Award, Modified Restricted Stock Award and 2018 Restricted Stock Award (collectively "Restricted Stock Awards") for the nine months ended September 30, 2019:
 
 
 
 
 
 
 
Number of Restricted Stock Awards
 
Weighted-Average Grant Date Fair Value (per Share)
Unvested at December 31, 2018
 
1,092,450

 
$
4.51

Vested
 
(79,231
)
 
4.14

Cancelled for Tax Withholding
 
(36,269
)
 
4.14

Unvested at September 30, 2019
 
976,950

 
$
4.55

The unvested balance at September 30, 2019 in the table above is comprised of 229,500 shares of 2014 Restricted Stock Awards, 247,450 shares of 2018 Modified Restricted Stock Award and 500,000 shares of the 2018 Restricted Stock Award.
(c)     Restricted Stock Awards of PWSC
PWSC granted 1,000 restricted common stock awards ("PWSC Restricted Stock Award") to an officer of PWSC pursuant to an agreement dated September 7, 2018. The PWSC Restricted Stock Award contains both a service and a performance condition that affects vesting. The service condition vests according to a graded vesting schedule and shall become fully vested on February 20, 2022 subject to the officer's continued employment through the applicable vesting dates. The service condition component of the PWSC Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The performance condition vests on February 20, 2022 and is based on the internal rate of return of PWSC. Accruals of compensation expense for the performance condition component of the PWSC Restricted Stock Award is estimated based on the probable outcome of the performance condition. The grant-date fair value of the PWSC Restricted Stock Award was estimated using a valuation model. At September 30, 2019, there were 875 unvested shares of the PWSC Restricted Stock Award with a weighted-average grant date fair value of $824.47 per share. Total unamortized compensation expense related to unvested PWSC Restricted Stock Award at September 30, 2019 was $0.7 million.
Total stock-based compensation, inclusive of Stock Options, Restricted Stock Awards and Restricted Stock Awards of PWSC described above, net of forfeitures, was an expense of $0.1 million and a benefit of $2.5 million for the three months ended September 30, 2019 and September 30, 2018, respectively (expense of $0.5 million and benefit of $1.9 million for the nine months ended September 30, 2019 and September 30, 2018, respectively).

NOTE 19 ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below detail the changes in the balances of each component of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2019 and September 30, 2018 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 present the components of other comprehensive (loss) income, net of tax, only for the three and nine months ended September 30, 2019 and September 30, 2018 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.

 
35
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
Three months ended September 30, 2019
 
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Foreign Currency Translation Adjustments
 
Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk
 
Total Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
Balance at July 1, 2019
 
$
47

 
$
(3,286
)
 
$
42,564

 
$
39,325

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) arising during the period
 
51

 

 
(951
)
 
(900
)
Amounts reclassified from accumulated other comprehensive income
 
(6
)
 

 

 
(6
)
Net current-period other comprehensive income (loss)
 
45

 

 
(951
)
 
(906
)
 
 
 
 
 
 
 
 
 
Balance at September 30, 2019
 
$
92

 
$
(3,286
)
 
$
41,613

 
$
38,419

(in thousands)
 
Three months ended September 30, 2018
 
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Foreign Currency Translation Adjustments
 
Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk
 
Total Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
Balance at July 1, 2018
 
$
(967
)
 
$
(3,286
)
 
$
40,799

 
$
36,546

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income arising during the period
 
(44
)
 

 
658

 
614

Amounts reclassified from accumulated other comprehensive income
 
6

 

 

 
6

Net current-period other comprehensive (loss) income
 
(38
)
 

 
658

 
620

 
 
 
 
 
 
 
 
 
Balance at September 30, 2018
 
$
(1,005
)
 
$
(3,286
)
 
$
41,457

 
$
37,166



 
36
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
Nine months ended September 30, 2019
 
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Foreign Currency Translation Adjustments
 
Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk
 
Equity in Other Comprehensive (Loss) Income of Limited Liability Investment
 
Total Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
$
(160
)
 
$
(3,286
)
 
$
44,259

 
$
(45
)
 
$
40,768

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) arising during the period
 
271

 

 
(2,646
)
 

 
(2,375
)
Amounts reclassified from accumulated other comprehensive income
 
(19
)
 

 

 
45

 
26

Net current-period other comprehensive income (loss)
 
252

 

 
(2,646
)
 
45

 
(2,349
)
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2019
 
$
92

 
$
(3,286
)
 
$
41,613

 
$

 
$
38,419


(in thousands)
 
Nine months ended September 30, 2018
 
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Foreign Currency Translation Adjustments
 
Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk
 
Total Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
$
(566
)
 
$
(3,286
)
 
$

 
$
(3,852
)
Cumulative effect of adoption of ASU 2016-01
 
40

 

 
40,455

 
40,495

Balance at January 1, 2018, as adjusted
 
(526
)
 
(3,286
)
 
40,455

 
36,643

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income arising during the period
 
(474
)
 

 
1,002

 
528

Amounts reclassified from accumulated other comprehensive income
 
(5
)
 

 

 
(5
)
Net current-period other comprehensive (loss) income
 
(479
)
 

 
1,002

 
523

 
 
 
 
 
 
 
 
 
Balance at September 30, 2018
 
$
(1,005
)
 
$
(3,286
)
 
$
41,457

 
$
37,166




 
37
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Components of accumulated other comprehensive income were reclassified to the following lines of the unaudited consolidated statements of operations for the three and nine months ended September 30, 2019 and September 30, 2018:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
  
 
2019

 
2018

 
2019

 
2018

Reclassification of accumulated other comprehensive income from unrealized gains (losses) on available-for-sale investments to:
 
 
 
 
 
 
 
 
Net realized gains (losses)
 
$
6

 
$
3

 
$
(26
)
 
$
11

Other-than-temporary impairment loss
 

 

 

 

Loss from continuing operations before income tax expense (benefit)
 
6

 
3

 
(26
)
 
11

Income tax expense (benefit)
 

 

 

 

Loss from continuing operations
 
6

 
3

 
(26
)
 
11

Income from discontinued operations, net of taxes
 

 
(9
)
 

 
(6
)
Net loss
 
$
6

 
$
(6
)
 
$
(26
)
 
$
5

NOTE 20 SEGMENTED INFORMATION
The Company conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
The Company previously conducted its business through a third reportable segment, Insurance Underwriting. Insurance Underwriting included the following subsidiaries of the Company: Mendota, Amigo and Kingsway Reinsurance Corporation ("Kingsway Re"). As further discussed in Note 5, "Acquisition and Discontinued Operations," on October 18, 2018, the Company announced that it had completed the sale of Mendota. As a result, Mendota has been classified as discontinued operations and the results of their operations are reported separately for all periods presented. As a result of classifying Mendota as discontinued operations, the composition of the Insurance Underwriting segment has changed such that it no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented.
Extended Warranty Segment
Extended Warranty includes the following subsidiaries of the Company: IWS, Trinity, PWSC and Geminus (collectively, "Extended Warranty").

IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 23 states and the District of Columbia to their members.
Trinity sells HVAC, standby generator, commercial LED lighting and refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.
PWSC sells new home warranty products and provides administration services to home builders and homeowners across the United States. PWSC distributes its products and services through an in house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.
Geminus sells vehicle service agreements and other finance and service products to used car buyers across the United States. Penn and Prime distribute these products via independent used car dealerships and franchised car dealerships, respectively.
Leased Real Estate Segment
Leased Real Estate includes the Company's subsidiary, CMC, which was acquired on July 14, 2016. CMC owns a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") that is leased to a third party pursuant to a long-term triple net lease. The Real Property is also subject to the Mortgage. When assessing and measuring the

 
38
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







operational and financial performance of the Leased Real Estate segment, interest expense related to the Mortgage is included in Leased Real Estate's segment operating income.

Revenues and Operating Income by Reportable 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.
Revenues by reportable segment reconciled to consolidated revenues for the three and nine months ended September 30, 2019 and September 30, 2018 were:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Revenues:
 
 
 
 
 
 
 
 
Extended Warranty:
 
 
 
 
 
 
 
 
Service fee and commission income
 
$
12,904

 
$
9,871

 
$
34,491

 
$
28,382

Other income
 
43

 
34

 
159

 
136

Total Extended Warranty
 
12,947

 
9,905

 
34,650

 
28,518

Leased Real Estate:
 
 
 
 
 
 
 
 
Rental income
 
3,341

 
3,341

 
10,023

 
10,023

Other income
 
67

 
(51
)
 
209

 
168

Total Leased Real Estate
 
3,408

 
3,290

 
10,232

 
10,191

Total segment revenues
 
16,355

 
13,195

 
44,882

 
38,709

Rental income not allocated to segments
 

 

 

 
11

Total revenues
 
$
16,355

 
$
13,195

 
$
44,882

 
$
38,720


 
39
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The operating income by reportable segment in the following table is before income taxes and includes revenues and direct segment costs. Total segment operating income reconciled to the consolidated loss from continuing operations for the three and nine months ended September 30, 2019 and September 30, 2018 were:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Segment operating income:
 
 
 
 
 
 
 
 
Extended Warranty
 
$
1,579

 
$
1,155

 
$
3,181

 
$
3,091

Leased Real Estate
 
784

 
473

 
1,989

 
1,965

Total segment operating income
 
2,363

 
1,628

 
5,170

 
5,056

Net investment income
 
897

 
629

 
2,345

 
2,277

Net realized gains (losses)
 
1,001

 
(414
)
 
760

 
(17
)
(Loss) gain on change in fair value of equity investments
 
(38
)
 
337

 
(23
)
 
1,081

(Loss) gain on change in fair value of limited liability investments, at fair value
 
(3,356
)
 
(131
)
 
3,256

 
(1,592
)
Net change in unrealized (loss) gain on private company investments
 
(343
)
 
19

 
(324
)
 
(136
)
Other-than-temporary impairment loss
 

 

 
(75
)
 

Interest expense not allocated to segments
 
(2,314
)
 
(1,900
)
 
(6,755
)
 
(5,461
)
Other income and expenses not allocated to segments, net
 
(1,863
)
 
210

 
(6,224
)
 
(5,415
)
Amortization of intangible assets
 
(675
)
 
(1,339
)
 
(1,872
)
 
(1,848
)
Gain (loss) on change in fair value of debt
 
610

 
(1,450
)
 
2,104

 
(2,511
)
Gain on disposal of subsidiary
 

 

 

 
17

Equity in net (loss) income of investee
 
(126
)
 
(339
)
 
42

 
(623
)
Loss from continuing operations before income tax expense (benefit)
 
(3,844
)
 
(2,750
)
 
(1,596
)
 
(9,172
)
Income tax expense (benefit)
 
162

 
(144
)
 
(383
)
 
300

Loss from continuing operations
 
$
(4,006
)
 
$
(2,606
)
 
$
(1,213
)
 
$
(9,472
)
NOTE 21 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1:

Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.


 
40
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The Company classifies its investments in fixed maturities as available-for-sale and reports these investments at fair value. The Company's equity investments, limited liability investments, at fair value, real estate investments and subordinated debt are measured and reported at fair value.
Fixed maturities - 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. All classes of the Company’s fixed maturities, primarily consisting of investments in US. Treasury bills and government bonds; obligations of states, municipalities and political subdivisions; mortgage-backed securities; and corporate securities, are classified as Level 2. Level 2 is applied to valuations based upon quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are inactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.
The Company engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our fixed maturities. The market approach includes primarily obtaining prices from independent third-party pricing services as well as, to a lesser extent, quotes from broker-dealers. Our third-party vendor also monitors market indicators, as well as industry and economic events, to ensure pricing is appropriate. All classes of our fixed maturities are valued using this technique. The Company has obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Company.

The following is a description of the significant inputs, by asset class, used by the third-party pricing services to determine the fair values of our fixed maturities included in Level 2:

U.S. government, government agencies and authorities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets and maturity.

States, municipalities and political subdivisions are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, new issuances and credit spreads.

Mortgage-backed securities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, expected prepayments, expected credit default rates, delinquencies and issue specific information including, but not limited to, collateral type, seniority and vintage.

Corporate securities are generally priced using the market approach using pricing vendors. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, issuer rating, benchmark yields, maturity and credit spreads.

Equity investments - 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.
Limited liability investments, at fair value - Limited liability investments, at fair value include the Company's investment in 1347 Investors as well as the underlying investments of Net Lease and Argo Holdings. 1347 Investors owns common stock in Limbach Holdings, Inc., a publicly traded company. Net Lease owns investments in limited liability companies that hold investment properties. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.
The fair value of the Company's investment in 1347 Investors is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. This investment is categorized in Level 2 of the fair value hierarchy.
The fair value of Net Lease's investments in limited liability companies is based upon the net asset values of the underlying investments companies as a practical expedient to estimate fair value. The Company applies the net asset value practical expedient to Net Lease's limited liability investments on an investment-by-investment basis unless it is probable that the Company will sell a portion of an investment at an amount different from the net asset value of the investment. Investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy.

The fair value of Argo Holdings' limited liability investments that hold investments in search funds is based on the initial investment in the search funds. The fair value of Argo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach including valuation multiples applied to corresponding

 
41
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







performance metrics, such as earnings before interest, tax, depreciation and amortization; revenue; or net earnings. The selected valuation multiples were estimated using multiples provided by the investees and review of those multiples in light of investor updates, performance reports, financial statements and other relevant information. These investments are categorized in Level 3 of the fair value hierarchy.

Real estate investments - The fair value of real estate investments involves a combination of the market and income valuation techniques. Under this approach, a market-based capitalization rate is derived from comparable transactions, adjusted for any unique characteristics of each asset, and applied to the asset under consideration. The cap rates used during underwriting and subsequent valuation incorporate the consideration of risks of vacancy and collection loss, administrative costs of owning net leased assets and possible capital expenditures that could be determined a landlord expense. These investments are categorized in Level 3 of the fair value hierarchy.
Subordinated debt - The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. These inputs include credit spread assumptions developed by a third party and market observable swap rates. The subordinated debt is categorized in Level 2 of the fair value hierarchy.
Warrant liability - As described in Note 13, "Debt," the Company issued the KWH Warrants on March 1, 2019. The KWH Warrants 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 the warrant liability is estimated using an internal model without relevant observable market inputs. The significant inputs used in the model include an enterprise value multiple applied to earnings before interest, tax, depreciation and amortization. The implied enterprise value is reduced by the remaining debt associated with the KWH Loan to determine an implied equity value. The liability classified warrants are categorized in Level 3 of the fair value hierarchy.


 
42
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2019 and December 31, 2018 are as follows. Certain investments in limited liability companies that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following tables to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets:
(in thousands)
 
 
 
 
 
September 30, 2019
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Measured at Net Asset Value
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
11,594

 
$

 
$
11,594

 
$

 
$

States, municipalities and political subdivisions
 
602

 

 
602

 

 

Mortgage-backed
 
2,122

 

 
2,122

 

 

Corporate
 
2,991

 

 
2,991

 

 

Total fixed maturities
 
17,309

 

 
17,309

 

 

Equity investments:
 
 
 
 
 
 
 
 
 
 
Common stock
 
150

 
150

 

 

 

Warrants
 
7

 
6

 
1

 

 

Total equity investments
 
157

 
156

 
1

 

 

Limited liability investments, at fair value
 
29,559

 

 
3,565

 
3,570

 
22,424

Real estate investments
 
10,662

 

 

 
10,662

 

Other investments
 
750

 

 
750

 

 

Short-term investments
 
154

 

 
154

 

 

Total assets
 
$
58,591

 
$
156

 
$
21,779

 
$
14,232

 
$
22,424

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Subordinated debt
 
$
50,565

 
$

 
$
50,565

 
$

 
$

Warrant liability
 
280

 

 

 
280

 

Total liabilities
 
$
50,845

 
$

 
$
50,565

 
$
280

 
$



 
43
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







(in thousands)
 
 
 
 
 
December 31, 2018
 
 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
 
 
 
 
 
 
 
 
 
 
Total

 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Measured at Net Asset Value
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
$
5,547

 
$

 
$
5,547

 
$

 
$

States municipalities and political subdivisions
 
607

 

 
607

 

 

Mortgage-backed
 
3,186

 

 
3,186

 

 

Corporate
 
2,920

 

 
2,920

 

 

Total fixed maturities
 
12,260

 

 
12,260

 

 

Equity investments:
 
 
 
 
 
 
 
 
 
 
Common stock
 
801

 
801

 

 

 

Warrants
 
55

 
19

 
36

 

 

Total equity investments
 
856

 
820

 
36

 

 

Limited liability investments, at fair value
 
26,015

 

 
206

 
4,124

 
21,685

Real estate investments
 
10,662

 

 

 
10,662

 

Other investments
 
2,079

 

 
2,079

 

 

Short-term investments
 
152

 

 
152

 

 

Total assets
 
$
52,024

 
$
820

 
$
14,733

 
$
14,786

 
$
21,685

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Subordinated debt
 
$
50,023

 
$

 
$
50,023

 
$

 
$

Total liabilities
 
$
50,023

 
$

 
$
50,023

 
$

 
$



 
44
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the three and nine months ended September 30, 2019 and September 30, 2018:
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

 
2018

 
2019

 
2018

Assets:
 
 
 
 
 
 
 
 
Limited liability investments, at fair value:
 
 
 
 
 
 
 
 
Beginning balance
 
$
4,635

 
$
2,083

 
$
4,124

 
$
1,397

Purchases
 
72

 
307

 
746

 
1,285

Distributions received
 
(915
)
 
(34
)
 
(1,253
)
 
(596
)
Realized gains included in net loss
 
711

 

 
794

 
251

Change in fair value of limited liability investments, at fair value included in net loss
 
(933
)
 
(26
)
 
(841
)
 
(7
)
Ending balance
 
$
3,570

 
$
2,330

 
$
3,570

 
$
2,330

Unrealized (losses) gains recognized in net loss on limited liability investments, at fair value held at end of period
 
$
(909
)
 
$
27

 
$
(793
)
 
$
65

Real estate investments:
 
 
 
 
 
 
 
 
Beginning balance
 
$
10,662

 
$
10,662

 
$
10,662

 
$
10,662

Change in fair value of real estate investments included in net loss
 

 

 

 

Ending balance
 
$
10,662


$
10,662

 
$
10,662

 
$
10,662

Unrealized gains recognized in net loss on real estate investments held at end of period
 
$

 
$

 
$

 
$

Ending balance - assets
 
$
14,232

 
$
12,992

 
$
14,232

 
$
12,992

Liabilities:
 
 
 
 
 
 
 
 
Warrant liability:
 
 
 
 
 
 
 
 
Beginning balance
 
$
307

 
$

 
$

 
$

Issuance of warrants
 

 

 
361

 

Change in fair value of warrant liability included in net loss
 
(27
)
 

 
(81
)
 

Ending balance - liabilities
 
$
280

 
$

 
$
280

 
$

Unrealized gains recognized in net loss on warrant liability held at end of period
 
$
(27
)
 
$

 
$
(81
)
 
$


The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at September 30, 2019 :
Categories
 
Fair Value
 
Valuation Techniques
 
Unobservable Inputs
 
Input Value(s)
Limited liability investments, at fair value
 
$
3,570

 
Market approach
 
Valuation multiples
 
5.0x-8.8x

Real estate investments
 
$
10,662

 
Market and income approach
 
Cap rates
 
7.5
%
Warrant liability
 
$
280

 
Market approach
 
Valuation multiple
 
6.0x


The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at December 31, 2018:
Categories
 
Fair Value
 
Valuation Techniques
 
Unobservable Inputs
 
Input Value(s)
Limited liability investments, at fair value
 
$
4,124

 
Market approach
 
Valuation multiples
 
5.0x-8.8x

Real estate investments
 
$
10,662

 
Market and income approach
 
Cap rates
 
7.5
%


 
45
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







All transfers are recognized by the Company at the beginning of each reporting period. Transfers between Levels 2 and 3 generally relate to whether significant unobservable inputs are used for the fair value measurements. There were no transfers between levels in 2019 or 2018.

Investments Measured Using the Net Asset Value per Share Practical Expedient
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at September 30, 2019:
Category
 
Fair Value (in thousands)
 
Unfunded Commitments
 
Redemption Frequency
 
Redemption Notice Period
Limited liability investments, at fair value
 
$
22,424

 
n/a
 
n/a
 
n/a
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at December 31, 2018:
Category
 
Fair Value (in thousands)
 
Unfunded Commitments
 
Redemption Frequency
 
Redemption Notice Period
Limited liability investments, at fair value
 
$
21,685

 
n/a
 
n/a
 
n/a
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are adjusted for observable price changes or written down to fair value as a result of an impairment. For the three and nine months ended September 30, 2019, the Company recorded adjustments to decrease the fair value of an certain investments in private companies for observable price changes of $0.2 million and $0.2 million, respectively, (adjustments of $0.0 million to increase the fair value and $0.1 million to decrease the fair value for the three and nine months ended September 30, 2018, respectively), which are included in net change in unrealized (loss) gain on private company investments in the consolidated statements of operations. The Company recorded impairments related to investments in private companies of $0.2 million and zero for the three months ended September 30, 2019 and September 30, 2018, respectively, ($0.2 million and zero for the nine months ended September 30, 2019 and September 30, 2018, respectively), which are included in net change in unrealized (loss) gain on private company investments in the consolidated statements of operations. To determine the fair value of investments in these private companies, the Company considered rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable transactions, trading multiples and changes in market outlook, among other factors. The Company has classified the fair value measurements of these investments in private companies as Level 3 because they involve significant unobservable inputs.
As further discussed in Note 5, "Acquisition and Discontinued Operations," the Company acquired Geminus on March 1, 2019. The fair values of intangible assets and deferred service fees associated with the acquisition of Geminus were determined to be Level 3 under the fair value hierarchy. The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for these Level 3 measurements:

 
46
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







Categories
 
Fair Value
 
Valuation Techniques
 
Unobservable Inputs
 
Input Value(s)
Customer relationships
 
$
3,732

 
Multi-period excess earnings
 
Growth rate
 
3.0
%
 
 
 
 
 
 
Attrition rate
 
20.0
%
 
 
 
 
 
 
Discount rate
 
13.0
%
Trade names
 
$
1,974

 
Relief from royalty
 
Royalty rate
 
0.25% - 2.0%

 
 
 
 
 
 
Discount rate
 
13.0
%
Deferred service fees - Penn
 
$
8,734

 
Bottom-up
 
Normal profit margin
 
15.5
%
 
 
 
 
 
 
Total direct costs
 
70.3
%
 
 
 
 
 
 
Discount rate
 
5.0
%
Deferred service fees - Prime
 
$
1,830

 
Bottom-up
 
Normal profit margin
 
8.5
%
 
 
 
 
 
 
Total direct costs
 
69.8
%
 
 
 
 
 
 
Discount rate
 
5.0
%

NOTE 22 RELATED PARTIES

Related party transactions, including services provided to or received by the Company's subsidiaries, are measured in part by the amount of consideration paid or received as established and agreed by the parties. Except where disclosed elsewhere in these unaudited consolidated interim financial statements, the following is a summary of related party transactions.
(a)    Argo Management Group, LLC
The Company acquired Argo Management Group, LLC ("Argo Management") in April 2016. Argo Management's primary business is to act as Managing Member of Argo Holdings. At September 30, 2019 and December 31, 2018, each of the Company, John T. Fitzgerald ("Fitzgerald"), the Company's Chief Executive Officer and President, and certain of Fitzgerald’s immediate family members owns equity interests in Argo Holdings, all of which interests were acquired prior to the Company’s acquisition of Argo Management. Subject to certain limitations, Argo Holdings' governing documents require all individuals and entities owning an equity interest in Argo Holdings to fund upon request his/her/its pro rata share of any funding requirements of Argo Holdings up to an aggregate maximum amount equal to his/her/its total capital commitment (each request for funds being referred to as a "Capital Call"). During 2018, the Company funded approximately $0.5 million in response to Capital Calls. During 2018, Fitzgerald and Fitzgerald’s immediate family members funded their respective Capital Calls. Argo Holdings used the proceeds of the Capital Calls to make investments, cover general operating expenses and pay the management fee owed to Argo Management. Argo Holdings made no Capital Calls during the nine months ended September 30, 2019.
(b)    1347 Property Insurance Holdings, Inc.

In November 2012, the Company formed Maison Insurance Company ("Maison"), a Louisiana domiciled property and casualty insurance company. In preparation for a transaction to take Maison public, the Company formed 1347 Property Insurance Holdings, Inc. (“PIH”). Maison was a wholly owned subsidiary of PIH, which completed an initial public offering effective March 31, 2014, pursuant to which the Company disposed of a majority interest in PIH. The Company owned zero and zero of the common shares of PIH at September 30, 2019 and December 31, 2018, respectively.

D. Kyle Cerminara ("Cerminara") was appointed to the PIH Board of Directors on December 27, 2016 and became Chairman of the Board of Directors of PIH on May 11, 2018. Since April 2012, Cerminara has also served as the Chief Executive Officer of Fundamental Global Investors, LLC ("FGI"). During 2018, FGI was a shareholder known by the Company to be a beneficial owner of more than 5% of the Company’s outstanding common shares. As of September 30, 2019, FGI is not known to be a shareholder or beneficial owner of more than 5% of the Company’s outstanding common shares. Larry G. Swets, Jr. ("Swets") has served as a member of the PIH Board of Directors since November 21, 2013 and served as the Chairman of the Board of Directors of PIH from March 5, 2017 to May 11, 2018. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018.


 
47
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







On February 11, 2014, the Company's subsidiary, 1347 Advisors, entered into a management services agreement with 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 management services agreement. Pursuant to the transaction, 1347 Advisors received the following consideration: $2.0 million in cash; $3.0 million of 8% preferred stock of PIH, mandatorily 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.

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).

On January 2, 2018, the Company entered into an agreement with PIH to cancel the $10.00 per share Performance Share Grant Agreement in exchange for cash consideration of $0.3 million and to sell the $3.0 million of 8% preferred stock of PIH, mandatorily redeemable on February 24, 2020, for $3.0 million plus accrued but unpaid dividends. On July 24, 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. No shares were received by the Company under either of the performance share grant agreements as of September 30, 2019.
(c)    Itasca Capital Ltd.
Investment in investee includes the Company's investment in the common stock of ICL, a publicly traded Canadian corporation, and is accounted for under the equity method. The Company owned 22.9% and 22.9% of the common shares of ICL at September 30, 2019 and December 31, 2018, respectively.

Ballantyne Strong Inc. ("Ballantyne") owned 40.6% and 40.6% of the common shares of ICL at September 30, 2019 and December 31, 2018, respectively. Cerminara has served as the Chief Executive Officer of Ballantyne since November 2015 and as Chairman of the Board of Ballantyne since May 2015. Cerminara was appointed to the ICL Board of Directors on June 13, 2016 and became Chairman of the Board of Directors of ICL on June 4, 2018. Since April 2012, Cerminara has also served as the Chief Executive Officer of FGI. During 2018, FGI was a shareholder known by the Company to be a beneficial owner of more than 5% of the Company’s outstanding common shares. As of September 30, 2019, FGI is not known to be a shareholder or beneficial owner of more than 5% of the Company’s outstanding common shares. Swets has served as the ICL Chief Executive Officer and a member of the ICL Board of Directors since June 9, 2016. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. Fitzgerald has served as a member of the ICL Board of Directors since June 9, 2016. Fitzgerald joined the Company as an Executive Vice President in April 2016 following the Company’s acquisition of Argo. Fitzgerald has served as the Company’s Chief Executive Officer since September 5, 2018 and has served on the Company’s Board of Directors since April 21, 2016.

ICL and the Company executed a management service agreement effective June 10, 2016 pursuant to which the Company provided management services to ICL, including the non-exclusive use and services of appropriately qualified individuals to serve as ICL’s Chief Executive Officer and Chief Financial Officer, for an annual service fee of $0.0 million. This agreement was later amended on November 17, 2017 to provide an annual service fee of $0.0 million, beginning with full year 2017. The agreement was ultimately terminated effective January 31, 2019.

On October 9, 2019, the Company executed an agreement to sell 1,974,113 shares of ICL common stock, at a price of C$0.35 per share, to FGI for cash proceeds totaling C$0.7 million. On October 31, 2019, the Company executed an agreement to sell 3,011,447

 
48
 

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







shares of ICL common stock, at a price of C$0.35 per share, to Swets for consideration totaling C$1.1 million, comprised of cash proceeds of C$0.2 million and 247,450 shares of the Company’s common stock. Both transactions closed during the fourth quarter of 2019. The 247,450 shares of the Company’s common stock were awarded to Swets pursuant to an Amended and Restated Restricted Stock Agreement (the "Swets Restricted Stock Agreement") executed on September 5, 2018 related to Swets’ departure from the Company. Pursuant to the Swets Restricted Stock Agreement, Swets retained 350,000 shares of restricted Company common stock that were to vest upon (i) the completion of the sale by 1347 Investors of its entire interest in the shares of Limbach common stock and (ii) the subsequent completion of the liquidation of 1347 Investors and the distribution of its assets to its members. Pursuant to a Distribution and Redemption Agreement, dated as of September 30, 2019, by and among 1347 Investors and its members, the Company received distributions of cash proceeds of $0.6 million, 594,750 shares of Limbach common stock and 400,000 warrants, exercisable at $15 and expiring July 20, 2023, on Limbach common shares, which the Company deemed as having satisfied the performance obligations described in the Swets Restricted Stock Agreement. Also, pursuant to the Swets Restricted Stock Agreement, Swets exercised his right to authorize the Company to withhold 102,550 shares of restricted Company common stock, which would otherwise have been delivered or available for vesting, in order to satisfy all federal, state, local or other taxes required to be withheld or paid in connection with such award, leaving Swets with 247,450 shares of the Company’s common stock.
(d)    Fundamental Global Investors, LLC
During 2018, FGI was a shareholder known by the Company to be a beneficial owner of more than 5% of the Company’s outstanding common shares. As of September 30, 2019, FGI is not known to be a shareholder or beneficial owner of more than 5% of the Company’s outstanding common shares.

On October 25, 2017, the Company executed an agreement to sell 900,000 shares of PIH common stock, at a price of $7.85 per share, to FGI in two separate transactions for cash proceeds totaling $7.1 million. On November 1, 2017, the Company sold 475,428 of the 900,000 shares of PIH common stock to FGI for cash proceeds totaling $3.7 million. The second transaction, for the sale of the remaining 424,572 shares of PIH common stock for cash proceeds totaling $3.4 million, closed on March 15, 2018 following FGI having obtained the necessary regulatory approvals.

On July 30, 2018, the Company executed an agreement to sell its remaining 75,000 shares of PIH common stock, at a price of $7.13 per share, to FGI for cash proceeds totaling $0.5 million.

On July 30, 2018, the Company executed an agreement to sell 1,813,889 shares of ICL common stock, at a price of C$0.72 per share, to FGI for cash proceeds totaling C$1.3 million.

(e)    Insurance Income Strategies Ltd.
IIS is a Bermuda corporation, formed in October 2017, organized to offer collateralized reinsurance in the property catastrophe market through its wholly owned operating subsidiary IIS Re Ltd. The Company held 100% of the outstanding common stock of IIS at September 30, 2019 and December 31, 2018. The Company did not invest any capital against the common shares and has not invested any capital in IIS via any other security of IIS. The Company also does not have any commitment to provide capital to IIS. See Note 7, "Variable Interest Entities," in the Company’s 2018 Annual Report for further discussion of IIS. Swets has served as the Chairman of the Board of Directors of IIS since its formation. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018.

Effective August 10, 2018, simultaneous with IIS issuing preferred stock to a third-party investor, the Company and IIS entered into a management service agreement, which describes the Company’s duties and rights to remuneration. The management service agreement describes the Company’s duties to include (a) identification and due diligence of potential transaction counterparties for consideration by IIS management; (b) advice on capital structure and corporate development opportunities; (c) support for compliance with the rules and regulations of the SEC; and (d) other periodic and special requests deemed within the scope of the management service agreement. The management service agreement provides for a fee 0.9% of the assets of IIS and 9% of the annual net profits.

Pursuant to other agreements executed August 10, 2018 simultaneous with IIS issuing preferred stock to a third-party investor, the Company (a) is obligated to share with the IIS third-party investor 50% of any future fees generated under the management service agreement and (b) waives its right to receive any fees until such time that the IIS third-party investor is either redeemed or exchanged into publicly traded equity shares of IIS, in either case for consideration not less than the IIS third-party investor’s

 
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







original $15.0 million investment. As of December 31, 2018, neither of these scenarios had occurred, so the Company is not entitled to any fees under the management service agreement and has not recorded any such fees.
(f)    Limited liability investments
The Company’s investments include investments in limited liability companies in which an officer or former officer of the Company is named as a Manager or is authorized to act on behalf of the Manager under the respective operating agreement.
Itasca Golf Investors, LLC:
Itasca Golf Investors, LLC ("IGI") was formed on April 8, 2014 for the general purpose of real estate investment. The members entered into an operating agreement under which the Company acquired a 42.9% membership interest in IGI. 1347 Capital LLC, a wholly owned subsidiary of the Company, was named the Manager of IGI in the operating agreement. Swets was authorized to act on behalf of the Manager. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. On September 5, 2018, the Company sold its investment in IGI to IGI Partners LLC for $1.5 million. Swets is a member of IGI Partners LLC.
AK Realty I LLC:
AK Realty I LLC ("AKR") was formed on September 21, 2015 for the purpose of becoming a member of AKA Opportunity Investments I LLC, a limited liability company formed for the purpose of investing, directly or indirectly, in real estate projects. The members of AKR entered into an operating agreement under which the Company acquired a 33.3% membership interest in AKR. Management of AKR is vested in a two-member Executive Committee. The Company designates one of the two members of the Executive Committee. Decisions of the Executive Committee require the unanimous approval of the members of the Executive Committee. The Company designated Swets as its representative on the Executive Committee. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018.
Logistics Leasing, LLC:
Logistics Leasing ("Logistics") was formed on July 26, 2017 for the purpose of acquiring and leasing small vehicles. The members of Logistics entered into an operating agreement under which the Company acquired a 50% membership interest in Logistics. The Company designates one of the two managers of Logistics. Major Decisions, as defined in the operating agreement, require the approval of members holding at least 51% of the membership interest. The Company designated Swets as a manager. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. During the first quarter of 2019, the Company impaired its investment in Logistics.
1347 Energy Holdings LLC:
1347 Energy Holdings LLC ("Energy") was formed on April 20, 2016 for the purpose of making investments in hydrocarbon assets as described in the operating agreement. At September 30, 2019 and December 31, 2018, the Company owned zero and 45.6% of the membership interests. The Company also held collateralized notes in principal amount of zero and $0.6 million at September 30, 2019 and December 31, 2018, respectively. Fitzgerald owned 0% and 0.8% of the membership interests at September 30, 2019 and December 31, 2018, respectively. Energy was managed through a Board of Managers comprised of five managers, two of whom, Swets and Fitzgerald, were appointed by 1347 Capital LLC, a wholly owned subsidiary of the Company. With respect to any matter before the Board of Managers, the act of a majority of the managers constituting a quorum constituted the act of the Board. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. Fitzgerald joined the Company as an Executive Vice President in April 2016 following the Company’s acquisition of Argo. Fitzgerald has served as the Company’s Chief Executive Officer since September 5, 2018 and has served on the Company’s Board of Directors since April 21, 2016. During 2018, Energy entered into a purchase and sale agreement dated, February 12, 2018, for the sale of Energy to an unrelated third party, pursuant to which the Company’s $1.8 million collateralized loan to Energy and $0.7 million surety deposit were repaid in full and the Company’s equity investment, previously written down to zero under the equity method of accounting, was purchased. The transaction closed in a series of installments during the fourth quarter of 2018 and the first quarter of 2019.
1347 Investors LLC:
1347 Investors was formed on April 15, 2014 for the purpose of investing in and holding securities of 1347 Capital Corp., which subsequently merged with Limbach Holdings, Inc., a publicly traded company. The Company owned 26.7% of the membership units at September 30, 2019 and December 31, 2018. The Company's investment in 1347 Investors is accounted for at fair value and reported as limited liability investments, at fair value in the consolidated balance sheets, with any changes in fair value to be

 
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







reported in gain (loss) on change in fair value of limited liability investment, at fair value in the consolidated statements of operations. The fair value of this investment is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. The most significant input to the model is the observed stock price of Limbach common stock.

ICL owned 47.6% of the membership units at September 30, 2019 and December 31, 2018. Ballantyne owned 40.6% and 40.6% of the common shares of ICL at September 30, 2019 and December 31, 2018, respectively.

Swets and Cerminara are the named managers of 1347 Investors. All acts of the managers must be unanimous. Cerminara has served as the Chief Executive Officer of Ballantyne since November 2015 and as Chairman of the Board of Ballantyne since May 2015. Cerminara was appointed to the ICL Board of Directors on June 13, 2016 and became Chairman of the Board of Directors of ICL on June 4, 2018. Since April 2012, Cerminara has also served as the Chief Executive Officer of FGI. During 2018, FGI was a shareholder known by the Company to be a beneficial owner of more than 5% of the Company’s outstanding common shares.

As of September 30, 2019, FGI is not known to be a shareholder or beneficial owner of more than 5% of the Company’s outstanding common shares. Swets has served as the ICL Chief Executive Officer and a member of the ICL Board of Directors since June 9, 2016. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. Fitzgerald has served as a member of the ICL Board of Directors since June 9, 2016. Fitzgerald joined the Company as an Executive Vice President in April 2016 following the Company’s acquisition of Argo. Fitzgerald has served as the Company’s Chief Executive Officer since September 5, 2018 and has served on the Company’s Board of Directors since April 21, 2016.

Pursuant to a Distribution and Redemption Agreement, dated as of September 30, 2019, by and among 1347 Investors and its members, the Company received distributions on November 19, 2019 of cash proceeds of $0.6 million, 594,750 shares of Limbach common stock and 400,000 warrants, exercisable at $15 and expiring July 20, 2023, on Limbach common shares. As a result of this distribution, the Company no longer owns membership units in 1347 Investors.
(g)    Atlas Financial Holdings, Inc.
In November 2010, the Company issued promissory notes (the "Notes") to five employees (each a "Debtor" and collectively the "Debtors") for a total of $1.1 million, each Note bearing an interest rate of 3% (not compounding). The Debtors used the proceeds to purchase shares of common stock in Atlas Financial Holdings, Inc. ("Atlas"). Atlas was created via a triangular merger and spun-off from the Company in December 2010, at which time the Debtors became employees of Atlas and were no longer employees of the Company. The Notes required annual payments of interest on the anniversary date of the Notes, with the principal and any unpaid interest due in full on or before January 1, 2017, in the case of one of the Debtors, and November 1, 2017, in the case of the other four Debtors. Each Debtor was required to pledge to the Company the shares purchased utilizing the Notes proceeds, and such pledge was to be released once the note was paid in full. The current market value of the pledged shares is $0.0 million.

The Notes have been amended three times since their issuance, generally to extend payments of principal while also requiring progress payments that were not part of the original Notes. No principal has been waived, and interest continues to accrue on unpaid principal. The remaining principal amount outstanding on the Notes was $0.7 million as of September 30, 2019. The Company has concluded there are no indications the Debtors were experiencing financial difficulties at the time of the amendments, and the Company expects to collect all amounts due. The Debtors are current with the amended terms of the Notes. As a result, the Company has concluded the Notes are not impaired.
(h)    Other related party transactions
On July 16, 2018, the Company entered into a definitive agreement to sell Mendota to Premier Holdings LLC. Steve Harrison, President of Mendota, is a minority investor in Premier Holdings LLC.

On September 5, 2018, the Company entered into a Senior Advisor Agreement with Swets, its former Chief Executive Officer. The Senior Advisor Agreement was for a one-year term with an annual consulting fee of $0.3 million. After September 5, 2019, Swets will continue to provide certain consulting services for an hourly fee on an as-needed basis.

On February 28, 2020, the Company entered into a Consulting Agreement (the "Consulting Agreement") with William A. Hickey, Jr. ("Hickey"), its former Chief Financial Officer, pursuant to which Hickey will provide consulting and transition support through at least April 30, 2020, subject to renewal thereafter by agreement of the parties. In accordance with the Consulting Agreement, Hickey will receive a consulting fee of $0.1 million for the months of March and April 2020 and an hourly consulting fee of $165 for time worked in subsequent months.

 
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







NOTE 23 COMMITMENTS AND CONTINGENCIES
(a)    Legal proceedings:
In April 2018, TRT LeaseCo, LLC ("TRT LeaseCo"), an indirect subsidiary of Kingsway, was named as a defendant in a lawsuit filed in the United States District Court for the Southern District of New York relating to CMC and its subsidiaries.  Kingsway indirectly owns 81% of CMC.  TRT LeaseCo (an indirect wholly owned subsidiary of CMC) entered into a Management Services Agreement (the "MSA") with DGI-BNSF Corp. ("DGI") (an affiliate of the entity that owns the remaining 19% of CMC) in July 2016 pursuant to which, among other things, DGI agreed to provide services to TRT LeaseCo in exchange for the fees specified in the MSA.  The complaint filed by DGI alleges that DGI is owed certain fees under the MSA that have not been paid.  If the case is decided against TRT LeaseCo, CMC and its subsidiaries (including TRT LeaseCo) would be unable to fulfill certain payment obligations to Kingsway under the transaction documents such that Kingsway may no longer be able to realize a material portion of the economic benefits originally anticipated to result from the CMC transaction, which could have a material adverse effect on Kingsway’s financial position, results of operations and cash flows.  Kingsway disagrees with DGI’s allegations and is vigorously defending these claims; however, there can be no assurance that Kingsway will ultimately prevail. The Company’s potential exposure under these agreements is not reasonably determinable, and no liability has been recorded in the audited consolidated financial statements at September 30, 2019.  No assurances can be given, however, that the Company will not be required to perform under these agreements in a manner that would have a material adverse effect on the Company’s financial position, results of operations and cash flow.
In May 2016, Aegis Security Insurance Company ("Aegis") filed a complaint for breach of contract and declaratory relief against the Company in the Eastern District of Pennsylvania alleging, among other things, that the Company breached a contractual obligation to indemnify Aegis for certain customs bond losses incurred by Aegis under the indemnity and hold harmless agreements provided by the Company to Aegis for certain customs bonds reinsured by Lincoln General Insurance Company ("Lincoln General") during the period of time that Lincoln General was a subsidiary of the Company.  Lincoln General was placed into liquidation in November 2015 and Aegis subsequently invoked its rights to indemnity under the indemnity and hold harmless agreements.  Effective January 20, 2020, Aegis and the Company entered into a Settlement Agreement with respect to such litigation pursuant to which the Company agreed to pay Aegis a one-time settlement amount of $0.9 million, which the Company will report in its consolidated statement of operations for the three months ended March 31, 2020, and to reimburse Aegis for 60% of future losses that Aegis may sustain in connection with such customs bonds, up to a maximum reimbursement amount of $4.8 million. The Company’s potential exposure under these agreements was not reasonably determinable at September 30, 2019, and no liability has been recorded in the audited consolidated financial statements at September 30, 2019.
(b)    Guarantee:
As further discussed in Note 5, "Acquisition and Discontinued Operations," as part of the transaction to sell Mendota, the Company will indemnify the buyer for 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 related to the open claims and specified claims. The Company's potential exposure under these agreements was not reasonably determinable at September 30, 2019, and no liability has been recorded in the unaudited consolidated interim financial statements at September 30, 2019.
(c)    Commitments:
The Company has entered into subscription agreements to commit up to $2.6 million of capital to allow for participation in limited liability investments. At September 30, 2019, the unfunded commitment was $0.6 million, all of which related to the Company’s commitment to Argo Holdings. On December 4, 2019, Argo Management informed members of Argo Holdings that no more Capital Calls are planned.
NOTE 24 SUBSEQUENT EVENT
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and reduced consumer pending due to both job losses and other effects attributable to COVID-19. The near-term impacts of COVID-19 are primarily with respect to the Company’s Extended Warranty segment. As consumer spending has been impacted, including a decline in the purchase of new and used vehicles, and many businesses through which the Company distributes its products remain closed, the Company has seen cash flows being affected by a reduction in new warranty sales for vehicle service agreements. With respect to homeowner warranties, the Company expects to see a reduction in new enrollments in its home warranty programs associated with the impact of COVID-19 on new home sales in the United States. There remain many unknowns and the Company continues to monitor the expected trends and related demand for its services and has and will continue to adjust its operations accordingly.

 
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) September 30, 2019







The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, potential impairment charges to the carrying amounts of goodwill, indefinite-lived intangibles and long-lived assets. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated.


 
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KINGSWAY FINANCIAL SERVICES INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “seeks” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect Kingsway management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see Kingsway’s securities filings, including its Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Annual Report"). The Company's securities filings can be accessed on the Canadian Securities Administrators’ website at www.sedar.com, on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov or through the Company’s website at www.kingsway-financial.com. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements because of new information, future events or otherwise.
OVERVIEW
Kingsway is a Delaware 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. Kingsway conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
The Company previously conducted its business through a third reportable segment, Insurance Underwriting. Insurance Underwriting included the following subsidiaries of the Company: Mendota Insurance Company, Mendakota Insurance Company, Mendakota Casualty Company, Kingsway Amigo Insurance Company ("Amigo") and Kingsway Reinsurance Corporation ("Kingsway Re"). Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company are referred to collectively herein as "Mendota." On July 16, 2018, the Company announced that it had entered into a definitive agreement to sell Mendota. On October 18, 2018, the Company announced that the sale was completed. As a result, Mendota has been classified as discontinued operations and the results of their operations are reported separately for all periods presented. As a consequence of classifying Mendota as discontinued operations, the remaining composition of the Insurance Underwriting segment no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented. The operating results of Amigo and Kingsway Re, previously included in the Insurance Underwriting segment, are now included in Other income and expenses not allocated to segments, net.
Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Trinity Warranty Solutions LLC ("Trinity"), Professional Warranty Service Corporation ("PWSC") and Geminus Holding Company, Inc. ("Geminus"). Throughout Management's Discussion and Analysis, the term "Extended Warranty" is used to refer to this segment.
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 23 states and the District of Columbia to their members.
Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.
PWSC sells new home warranty products and provides administration services to home builders and homeowners across the United States. PWSC distributes its products and services through an in house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.
Geminus sells vehicle service agreements and other finance and service products to used car buyers across the United States. Penn and Prime distribute these products via independent used car dealerships and franchised car dealerships, respectively.


 
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KINGSWAY FINANCIAL SERVICES INC.

Leased Real Estate includes the Company's subsidiary, CMC Industries, Inc. ("CMC"). CMC owns, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property"), which is subject to a long-term triple net lease agreement. The Real Property is also subject to a mortgage, which is recorded as note payable in the consolidated balance sheets (the "Mortgage"). Throughout Management's Discussion and Analysis, the term "Leased Real Estate" is used to refer to this segment.
Impact of COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; “shelter in place” and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. There remain many unknowns.
The near-term impacts of COVID-19 are primarily with respect to our Extended Warranty segment. As consumer spending has been impacted, including a decline in the purchase of new and used vehicles, and many businesses through which we distribute our products remain closed, we have seen cash flows being affected by a reduction in new warranty sales for vehicle service agreements. With respect to homeowner warranties, we expect to see a reduction in new enrollments in our home warranty programs associated with the impact of COVID-19 on new home sales in the United States. 
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. We continue to monitor the impact of the COVID-19 outbreak closely, as well as any effects that may result from the CARES Act. However, the extent to which the COVID-19 outbreak will impact our operations or financial results is uncertain.
NON-U.S. GAAP FINANCIAL MEASURE
Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. Our 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. In addition to the U.S. GAAP presentation of net loss, we present segment operating income as a non-U.S. GAAP financial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measure and its relationship to U.S. GAAP.
Segment Operating Income
Segment operating income represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses are presented in the unaudited consolidated statements of operations, but are not subtotaled by segment; however, this information is available in total and by segment in Note 20, "Segmented Information," to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure is loss from continuing operations before income tax expense (benefit) that, in addition to segment operating income, includes net investment income, net realized gains (losses), (loss) gain on change in fair value of equity investments, (loss) gain on change in fair value of limited liability investments, at fair value, net change in unrealized (loss) gain on private company investments, other-than-temporary impairment loss, interest expense not allocated to segments, other income and expenses not allocated to segments, net, amortization of intangible assets, gain (loss) on change in fair value of debt, gain on disposal of subsidiary and equity in net (loss) income of investee. A reconciliation of segment operating income to loss from continuing operations before income tax expense (benefit) for the three and nine months ended September 30, 2019 and September 30, 2018 is presented in Table 1 of the "Results of Continuing Operations" section of Management's Discussion and Analysis.

 
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KINGSWAY FINANCIAL SERVICES INC.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of unaudited consolidated interim 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 investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; valuation of mandatorily redeemable preferred stock; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for subordinated debt obligations; and revenue recognition.
The Company’s critical accounting estimates and assumptions are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2018 Annual Report. There has been no material change subsequent to December 31, 2018 to the information previously disclosed in the 2018 Annual Report with respect to these critical accounting estimates and assumptions.
RESULTS OF CONTINUING OPERATIONS
A reconciliation of total segment operating income to net loss for the three and nine months ended September 30, 2019 and September 30, 2018 is presented in Table 1 below:
Table 1 Segment Operating Income
(in thousands of dollars)
 
For the three months ended September 30,
For the nine months ended September 30,
 
2019

2018

Change

2019

2018

Change

Segment operating income:
 
 
 
 
 
 
Extended Warranty
$
1,579

$
1,155

$
424

$
3,181

$
3,091

$
90

Leased Real Estate
784

473

311

1,989

1,965

24

Total segment operating income
2,363

1,628

735

5,170

5,056

114

Net investment income
897

629

268

2,345

2,277

68

Net realized gains (losses)
1,001

(414
)
1,415

760

(17
)
777

(Loss) gain on change in fair value of equity investments
(38
)
337

(375
)
(23
)
1,081

(1,104
)
(Loss) gain on change in fair value of limited liability investments, at fair value
(3,356
)
(131
)
(3,225
)
3,256

(1,592
)
4,848

Net change in unrealized (loss) gain on private company investments
(343
)
19

(362
)
(324
)
(136
)
(188
)
Other-than-temporary impairment loss



(75
)

(75
)
Interest expense not allocated to segments
(2,314
)
(1,900
)
(414
)
(6,755
)
(5,461
)
(1,294
)
Other income and expenses not allocated to segments, net
(1,863
)
210

(2,073
)
(6,224
)
(5,415
)
(809
)
Amortization of intangible assets
(675
)
(1,339
)
664

(1,872
)
(1,848
)
(24
)
Gain (loss) on change in fair value of debt
610

(1,450
)
2,060

2,104

(2,511
)
4,615

Gain on disposal of subsidiary




17

(17
)
Equity in net (loss) income of investee
(126
)
(339
)
213

42

(623
)
665

Loss from continuing operations before income tax expense (benefit)
(3,844
)
(2,750
)
(1,094
)
(1,596
)
(9,172
)
7,576

Income tax expense (benefit)
162

(144
)
306

(383
)
300

(683
)
Loss from continuing operations
(4,006
)
(2,606
)
(1,400
)
(1,213
)
(9,472
)
8,259

Income from discontinued operations, net of taxes

417

(417
)

1,397

(1,397
)
Loss on disposal of discontinued operations, net of taxes

(1,172
)
1,172


(7,800
)
7,800

Net loss
$
(4,006
)
$
(3,361
)
$
(645
)
$
(1,213
)
$
(15,875
)
$
14,662


 
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KINGSWAY FINANCIAL SERVICES INC.

Loss from Continuing Operations and Net Loss
In the third quarter of 2019, we reported loss from continuing operations of $4.0 million compared to $2.6 million in the third quarter of 2018. For the nine months ended September 30, 2019, we reported loss from continuing operations of $1.2 million compared to $9.5 million for the nine months ended September 30, 2018. The loss from continuing operations for the three months ended September 30, 2019 is primarily due to loss on change in fair value of limited liability investments, at fair value, interest expense not allocated to segments and other income and expenses not allocated to segments, net partially offset by operating income in Extended Warranty and Leased Real Estate and net realized gains. The loss from continuing operations for the nine months ended September 30, 2019 is primarily due to interest expense not allocated to segments and other income and expenses not allocated to segments, net partially offset by operating income in Extended Warranty and Leased Real Estate, net investment income and gain on change in fair value of limited liability investments, at fair value. The loss from continuing operations for the three months ended September 30, 2018 is primarily due to interest expense not allocated to segments, loss on change in fair value of debt and amortization of intangible assets, partially offset by operating income in Extended Warranty and Leased Real Estate and net investment income. The loss from continuing operations for the nine months ended September 30, 2018 is primarily due to interest expense not allocated to segments, other income and expenses not allocated to segments, net, loss on change in fair value of debt, amortization of intangible assets and loss on change in fair value of limited liability investments, at fair value partially offset by operating income in Extended Warranty and Leased Real Estate and net investment income.
For the three months ended September 30, 2019, we reported net loss of $4.0 million compared to $3.4 million for the three months ended September 30, 2018. For the nine months ended September 30, 2019, we reported net loss of $1.2 million compared to $15.9 million for the nine months ended September 30, 2018.
Extended Warranty
The Extended Warranty service fee and commission income increased 30.3% to $12.9 million for the three months ended September 30, 2019 compared with $9.9 million for the three months ended September 30, 2018 ($34.5 million year to date compared to $28.4 million prior year to date, representing a 21.5% increase). The increase in service fee and commission income is primarily reflective of the inclusion of Geminus in 2019 following its acquisition effective March 1, 2019. Geminus service fee and commission income was $3.1 million and zero for the three months ended September 30, 2019 and September 30, 2018, respectively, ($6.8 million and zero for the nine months ended September 30, 2019 and September 30, 2018, respectively). The Extended Warranty service fee and commission income for the nine months ended September 30, 2019 also reflects decreases at Trinity and PWSC partially offset by an increase at IWS compared to the nine months ended September 30, 2018.
The Extended Warranty operating income was $1.6 million for the three months ended September 30, 2019 compared with $1.2 million for the three months ended September 30, 2018 ($3.2 million year to date compared to $3.1 million prior to date). The increase in operating income for the three and nine months ended September 30, 2019 is primarily reflective of the inclusion of Geminus in 2019 following its acquisition effective March 1, 2019. Geminus operating income was $0.2 million and zero for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.3 million and zero for the nine months ended September 30, 2019 and September 30, 2018, respectively).
Leased Real Estate
In the third quarter of 2019, Leased Real Estate rental income was $3.3 million compared to $3.3 million in the third quarter of 2018 ($10.0 million year to date compared to $10.0 million prior year to date). The rental income is derived from CMC's long-term triple net lease. The Leased Real Estate operating income was $0.8 million for the three months ended September 30, 2019 compared with $0.5 million for the three months ended September 30, 2018 ($2.0 million year to date compared to $2.0 million prior year to date). The increase in operating income for the three months ended September 30, 2019 is primarily attributable to lower litigation expenses during the three months ended September 30, 2019 compared to the same period in 2018. See Note 23, "Commitments and Contingencies," to the unaudited consolidated interim financial statements for further details. Leased Real Estate operating income includes interest expense of $1.5 million and $1.5 million for the three months ended September 30, 2019 and September 30, 2018, respectively ($4.6 million and $4.6 million, respectively, year to date and prior year to date). See "Investments" section below for further discussion.
Net Investment Income
Net investment income was $0.9 million in the third quarter of 2019 compared to $0.6 million in the third quarter of 2018 ($2.3 million year to date compared to $2.3 million prior year to date). The increase in net investment income for the three months ended September 30, 2019 primarily relates to higher net investment income recorded from the Company’s limited liability investments, at fair value and interest income on higher balances of fixed maturities and collateral loans following the Company’s acquisition of Geminus effective March 1, 2019.

 
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Net Realized Gains (Losses)
Net realized gains were $1.0 million in the third quarter of 2019 compared to net realized losses of $0.4 million in the third quarter of 2018 (net realized gains of $0.8 million year to date compared to net realized losses of $0.0 million prior year to date). The net realized gains for the three months ended September 30, 2019 relate to sales of investments by Argo Holdings and the sale of one of the Company’s investments in private companies, at adjusted cost. The net realized gains for the nine months ended September 30, 2019 also include a realized loss on the sale of one of the Company’s investments in private companies, at adjusted cost and a realized gain on the sale of 1347 Energy Holdings LLC ("Energy"). See Note 21, "Related Parties," to the unaudited consolidated interim financial statements, for further information about the sale of Energy. The net realized losses for the three months ended September 30, 2018 relate to the sale of Itasca Golf Investors, LLC ("IGI"). See Note 22, "Related Parties," to the unaudited consolidated interim financial statements, for further information about the sale of IGI. The net realized losses for the nine months ended September 30, 2018 also include realized gains from sales of investments by Argo Holdings.
(Loss) Gain on Change in Fair Value of Equity Investments
Loss on change in fair value of equity investments was $0.0 million in the third quarter of 2019 compared to a gain of $0.3 million in the third quarter of 2018 (loss of $0.0 million year to date compared to gain of $1.1 million prior year to date). The loss on change in fair value of equity investments includes net realized losses of $0.0 million and net realized gains of $0.9 million on equity investments sold during the three months ended September 30, 2019 and September 30, 2018, respectively (net realized losses of $0.1 million year to date compared to net realized gains of $1.5 million prior year to date) and unrealized losses of $0.0 million and $0.6 million on equity investments held during the three months ended September 30, 2019 and September 30, 2018, respectively (unrealized gains of $0.1 million and unrealized losses of $0.4 million, respectively, year to date and prior year to date).
(Loss) Gain on Change in Fair Value of Limited Liability Investments, at Fair Value
(Loss) gain on change in fair value of limited liability investments, at fair value was a loss of $3.4 million in the third quarter of 2019 compared to $0.1 million in the third quarter of 2018 (gain of $3.3 million year to date compared to a loss of $1.6 million prior year to date). The decrease is primarily due to a $2.7 million decrease in fair value of 1347 Investors recorded for the three months ended September 30, 2019 compared to a $0.5 million decrease in fair value of 1347 Investors recorded for the three months ended September 30, 2018 (increase in fair value of $3.4 million year to date compared to decrease in fair value of $2.3 million prior year to date) and a $0.9 million decrease in fair value of investments held by Argo Holdings recorded for the three months ended September 30, 2019 compared to a $0.0 million decrease in fair value of investments held by Argo Holdings recorded for the three months ended September 30, 2018 (decrease in fair value of $0.8 million year to date compared to decrease in fair value of $0.0 million prior year to date). The fair value of the Company's investment in 1347 Investors is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. The most significant input to the model is the observed stock price of Limbach Holdings, Inc. ("Limbach") common stock. During the fourth quarter of 2019, the Company’s investment in 1347 Investors was dissolved, which resulted in the Company holding shares of Limbach common stock directly.  During the second half of 2019 through the first quarter of 2020, the Limbach common stock price has declined, which has resulted in a lower valuation of 1347 Investors through the date of dissolution, as well as a decrease in the value of the Limbach common stock held directly. 
Net Change in Unrealized (Loss) Gain on Private Company Investments
Net change in unrealized (loss) gain on private company investments was a loss of $0.3 million in the third quarter of 2019 compared to a gain of $0.0 million in the third quarter of 2018 (loss of $0.3 million year to date compared to $0.1 million prior year to date). For the three months ended September 30, 2019 and September 30, 2018, the Company recorded adjustments of $0.2 million and $0.0 million, respectively, ($0.2 million and $0.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively), to adjust the fair value of certain investments in private companies for observable price changes. Also, as a result of the quarterly impairment analysis performed, the Company recorded impairments related to investments in private companies of $0.2 million and zero for the three months ended September 30, 2019 and September 30, 2018, respectively, ($0.2 million and zero for the nine months ended September 30, 2019 and September 30, 2018, respectively).
Other-Than-Temporary Impairment Loss
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company recorded write-downs of zero and zero for other-than-temporary impairment related to limited liability investments for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.1 million year to date compared to zero prior year to date).


 
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Interest Expense not Allocated to Segments
Interest expense not allocated to segments for the third quarter of 2019 was $2.3 million compared to $1.9 million in the third quarter of 2018 ($6.8 million year to date compared to $5.5 million prior year to date). The increase for the three and nine months ended September 30, 2019 is primarily attributable to generally higher London interbank offered interest rates for three-month U.S. dollar deposits ("LIBOR") during the three and nine months ended September 30, 2019 compared to the same periods in 2018. The Company's subordinated debt bears interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. Interest expense during the three and nine months ended September 30, 2019 also includes $0.3 million and $0.8 million, respectively, related to the Company’s acquisition of Geminus. See Note 5, "Acquisition and Discontinued Operations," to the unaudited consolidated interim financial statements for further details.
Other Income and Expenses not Allocated to Segments, Net
Other income and expenses not allocated to segments, net was a net expense of $1.9 million in the third quarter of 2019 compared to a net income of $0.2 million in the third quarter of 2018 (net expense of $6.2 million year to date compared to $5.4 million prior year to date). Included in other income and expenses not allocated to segments are expenses of $0.0 million and $0.0 million for Amigo for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.9 million year to date compared to $1.8 million prior year to date). Amigo was previously included in the Insurance Underwriting segment along with Mendota, Mendakota and MCC. As a consequence of classifying Mendota, Mendakota and MCC as discontinued operations, the remaining composition of the Insurance Underwriting segment no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented. The operating results of Amigo previously included in the Insurance Underwriting segment are now included in Other income and expenses not allocated to segments, net. Also included in other income and expenses not allocated to segments is stock-based compensation, net of forfeitures, of an expense of $0.1 million and a benefit of $2.5 million for the three months ended September 30, 2019 and September 30, 2018, respectively (expense of $0.5 million and benefit of $1.9 million for the nine months ended September 30, 2019 and September 30, 2018, respectively). The three and nine months ended September 30, 2018 also included $0.4 million of payroll tax expense related to stock-based compensation transactions. See Note 18, "Stock-Based Compensation," to the unaudited consolidated interim financial statements, for further discussion.
Amortization of Intangible Assets
The Company's intangible assets with definite useful lives are amortized over their estimated useful lives. Amortization of intangible assets was $0.7 million in the third quarter of 2019 compared to $1.3 million in the third quarter of 2018 ($1.9 million year to date compared to $1.8 million prior year to date). During the third quarter of 2018, the Company completed its fair value analysis of the PWSC assets acquired and liabilities assumed. As a result, the Company recorded amortization expense of $0.2 million and $1.1 million for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.7 million and $1.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively). Amortization of intangible assets during the three and nine months ended September 30, 2019 also includes $0.2 million and $0.5 million, respectively, related to the Company’s acquisition of Geminus. See Note 5, "Acquisition and Discontinued Operations," to the unaudited consolidated interim financial statements for further details on the Company’s acquisition of Geminus.
Gain (Loss) on Change in Fair Value of Debt
Gain (loss) on change in fair value of debt amounted to a gain of $0.6 million in the third quarter of 2019 compared to a loss of $1.5 million in the third quarter of 2018 (gain of $2.1 million year to date compared to a loss of $2.5 million prior year to date). The gain for the three and nine months ended September 30, 2019 reflects a decrease in the fair value of the subordinated debt resulting from changes in inputs, other than the instrument-specific credit risk, to the Company’s fair value model. The loss for the three and nine months ended September 30, 2018 reflects an increase in the fair value of the subordinated debt resulting from changes in inputs, other than the instrument-specific credit risk, to the Company’s fair value model. As further discussed in Note 4, "Recently Issued Accounting Standards," to the unaudited consolidated interim financial statements, effective January 1, 2018, the Company adopted ASU 2016-01. As a result, the portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is now recognized in other comprehensive income (loss). See "Debt" section below for further information.
Equity in Net (Loss) Income of Investee
Equity in net loss of investee for the third quarter of 2019 was $0.1 million compared to $0.3 million in the third quarter of 2018 (income of $0.0 million year to date compared to a loss of $0.6 million prior year to date). Equity in net (loss) income of investee represents the Company's investment in Itasca Capital Ltd. See Note 7, "Investment in Investee," to the unaudited consolidated interim financial statements, for further discussion.

 
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Income Tax Expense (Benefit)
Income tax expense for the third quarter of 2019 was $0.2 million compared to a benefit of $0.1 million in the third quarter of 2018 (benefit of $0.4 million year to date compared to expense of $0.3 million prior year to date). See Note 16, "Income Taxes," to the unaudited consolidated interim financial statements, for additional detail of the income tax expense (benefit) recorded for the three and nine months ended September 30, 2019 and September 30, 2018.

INVESTMENTS
Portfolio Composition
All of our investments in fixed maturities are classified as available-for-sale and are reported at fair value. All of our equity investments are reported at fair value. All of our limited liability investments are accounted for under the equity method of accounting. The most recently available financial statements of the limited liability investments are used in applying the equity method. The difference between the end of the reporting period of the limited liability investments and that of the Company is no more than three months. Limited liability investments, at fair value represent the Company's investment in 1347 Investors LLC as well as the underlying investments of the Company’s consolidated entities Net Lease and Argo Holdings. Investments in private companies consist of convertible preferred stocks and notes in privately owned companies and investments in limited liability companies in which the Company’s interests are deemed minor. These investments do not have readily determinable fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments. Real estate investments are reported at fair value. Other investments include collateral loans and are reported at their unpaid principal balance. Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value.
At September 30, 2019, we held cash and cash equivalents, restricted cash and investments with a carrying value of $98.3 million.
Investments held by our insurance subsidiary, Amigo, must comply with domiciliary state regulations that prescribe the type, quality and concentration of investments. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.

 
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Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated.
TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash
(in thousands of dollars, except for percentages)
Type of investment
 
September 30, 2019

 
% of Total

 
December 31, 2018

 
% of Total

Fixed maturities:
 
 
 
 
 
 
 
 
U.S. government, government agencies and authorities
 
11,594

 
11.8
%
 
5,547

 
6.1
%
States, municipalities and political subdivisions
 
602

 
0.6
%
 
607

 
0.6
%
Mortgage-backed
 
2,122

 
2.2
%
 
3,186

 
3.5
%
Corporate
 
2,991

 
3.0
%
 
2,920

 
3.2
%
Total fixed maturities
 
17,309

 
17.6
%
 
12,260

 
13.4
%
Equity investments:
 
 
 
 
 
 
 
 
Common stock
 
150

 
0.2
%
 
801

 
0.9
%
Warrants
 
7

 
%
 
55

 
%
Total equity investments
 
157

 
0.2
%
 
856

 
0.9
%
Limited liability investments
 
3,838

 
3.9
%
 
4,790

 
5.2
%
Limited liability investments, at fair value
 
29,559

 
30.1
%
 
26,015

 
28.4
%
Investments in private companies
 
2,035

 
2.1
%
 
3,090

 
3.4
%
Real estate investments
 
10,662

 
10.8
%
 
10,662

 
11.7
%
Other investments
 
750

 
0.8
%
 
2,079

 
2.3
%
Short-term investments
 
154

 
0.1
%
 
152

 
0.2
%
Total investments
 
64,464

 
65.6
%
 
59,904

 
65.5
%
Cash and cash equivalents
 
13,078

 
13.3
%
 
14,619

 
16.0
%
Restricted cash
 
20,762

 
21.1
%
 
16,959

 
18.5
%
Total
 
98,304

 
100.0
%
 
91,482

 
100.0
%
Other-Than-Temporary Impairment
The Company performs a quarterly analysis of its investments classified as available-for-sale to determine if declines in market value are other-than-temporary. Further information regarding our detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within Note 6, "Investments," to the unaudited consolidated interim financial statements. 
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 recorded for other-than-temporary impairments related to available-for sale investments for the three and nine months ended September 30, 2019 and September 30, 2018, respectively. As a result of the analysis performed with respect to limited liability investments, the Company recorded no write-downs for other-than-temporary impairment for the three months ended September 30, 2019 and September 30, 2018, respectively ($0.1 million year to date compared to zero prior year to date). As a result of the analysis performed with respect to limited liability investments, at fair value, the Company recorded impairments of $0.0 million and $0.1 million for the three months ended September 30, 2019 and September 30, 2018, respectively, ($0.0 million and $0.1 million for the nine months ended September 30, 2019 and September 30, 2018, respectively), which are included in (loss) gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. As a result of the analysis performed with respect to investments in private companies, the Company recorded impairments of $0.2 million and zero for the three months ended September 30, 2019 and September 30, 2018, respectively, ($0.2 million and zero for the nine months ended September 30, 2019 and September 30, 2018, respectively), which are included in net change in unrealized (loss) gain on private company investments in the consolidated statements of operations.

The length of time a fixed maturity investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In the case of a fixed maturity investment where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, we would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell a fixed maturity investment at a loss.

 
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At September 30, 2019 and December 31, 2018, the gross unrealized losses for fixed maturities amounted to $0.0 million and $0.2 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each of September 30, 2019 and December 31, 2018, all unrealized losses on individual investments were considered temporary.
Impact of COVID-19 on Investments
As discussed in Note 24, "Subsequent Event" to the unaudited consolidated interim financial statements, in March 2020 the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. There remain many unknowns.

As part of the Company’s March 31, 2020 quarterly impairment analysis of its investments in private companies, the Company determined that it should write-down one of its investments by 90%, or $0.7 million, for other-than-temporary impairments as a result of the impacts of COVID-19 on the investment's underlying business. The Company continues to assess the impact that the COVID-19 pandemic may have on the value of its various investments, which could result in future material decreases in the underlying investment value. Such decreases may be considered temporary or could be deemed to be other-than-temporary and management may be required to record write-downs of the related investments in future reporting periods.

UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Unpaid loss and loss adjustment expenses represent the estimated liabilities for reported loss events, incurred but not reported ("IBNR") loss events and the related estimated loss adjustment expenses.
Tables 5 and 6 present distributions, by line of business, of the provision for unpaid loss and loss adjustment expenses gross and net of external reinsurance, respectively.
TABLE 5 Provision for unpaid loss and loss adjustment expenses - gross
(in thousands of dollars)

Line of Business
September 30, 2019

December 31, 2018

Non-standard automobile
470

686

Commercial automobile
170

794

Other
1,217

593

Total
1,857

2,073


TABLE 6 Provision for unpaid loss and loss adjustment expenses - net of reinsurance recoverable
(in thousands of dollars)
Line of Business
September 30, 2019

December 31, 2018

Non-standard automobile
470

686

Commercial automobile
170

794

Other
1,217

593

Total
1,857

2,073

Non-Standard Automobile
At September 30, 2019 and December 31, 2018, the gross provisions for unpaid loss and loss adjustment expenses for our non-standard automobile business were $0.5 million and $0.7 million, respectively. The decrease is due to payments of loss and loss adjustment expenses at Amigo.
Commercial Automobile
At September 30, 2019 and December 31, 2018, the gross provisions for unpaid loss and loss adjustment expenses for our commercial automobile business were $0.2 million and $0.8 million, respectively. The decrease is due to payments of loss and loss adjustment expenses at Amigo.

 
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Other
At September 30, 2019 and December 31, 2018, the gross provisions for unpaid loss and loss adjustment expenses for our other business were $1.2 million and $0.6 million, respectively. The increase is due to an increase in unpaid loss and loss adjustment expenses at Amigo, partially offset by a decrease in unpaid loss and loss adjustment expenses at Kingsway Re.
Information with respect to development of our provision for prior years' loss and loss adjustment expenses is presented in Table 7.
TABLE 7 Increase (decrease) in prior years' provision for loss and loss adjustment expenses
(in thousands of dollars)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019

2018

2019

2018

Unfavorable (favorable) change in provision for loss and loss adjustment expenses for prior accident years
2

(19
)
710

1,628

For the three months ended September 30, 2019, the Company reported $0.0 million of unfavorable development for loss and loss adjustment expenses from prior accident years compared with favorable development of $0.0 million for the three months ended September 30, 2018 (unfavorable development of $0.7 million year to date compared to unfavorable development of $1.6 million prior year to date). The unfavorable development reported for the three and nine months ended September 30, 2019 and the nine months ended September 30, 2018 was related to an increase in loss and loss adjustment expenses at Amigo. The favorable development reported for the three months ended September 30, 2018 was related to a decrease in loss and loss adjustment expenses due to the continuing voluntary run-off of Amigo.
See the "Critical Accounting Estimates and Assumptions" section of Management's Discussion and Analysis of Financial Condition included in the 2018 Annual Report for additional information pertaining to the Company’s process of estimating the provision for unpaid loss and loss adjustment expenses.
DEBT
Bank Loans
On October 12, 2017, the Company borrowed a principal amount of $5.0 million from a bank to partially finance its acquisition of PWSC (the "PWSC Loan"). The PWSC Loan has a fixed interest rate of 5.0% and is carried in the consolidated balance sheets at its unpaid principal balance. The PWSC Loan was scheduled to mature on October 12, 2022; however, the principal was fully repaid on January 30, 2020.
On March 1, 2019, the Company borrowed a principal amount of $10.0 million from a bank to finance its acquisition of Geminus (the "KWH Loan"). The KWH Loan matures on March 1, 2024 and has an annual interest rate equal to LIBOR plus 9.25%. The KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the discount using the effective interest rate method. See Note 13, "Debt," to the unaudited consolidated interim financial statements for further details.
Notes Payable
As part of the acquisition of CMC in July 2016, the Company assumed the Mortgage and recorded the Mortgage at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 million as of the date of acquisition plus a premium of $11.7 million. The Mortgage matures on May 15, 2034 and has a fixed interest rate of 4.07%. The Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the premium using the effective interest rate method.

On January 5, 2015, Flower Portfolio 001, LLC assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties ("the Flower Note"). The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The Flower Note is carried in the consolidated balance sheets at its unpaid principal balance.
On October 15, 2015, Net Lease Investment Grade Portfolio LLC assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties ("the Net Lease Note"). The Net Lease Note matures on November 1, 2020 and has a fixed interest rate of 10.25%. The Net Lease Note is carried in the consolidated balance sheets at its unpaid principal balance.

 
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Subordinated Debt
Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by Kingsway America Inc. to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. The Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity.
During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. At September 30, 2019, deferred interest payable of $7.4 million is included in accrued expenses and other liabilities in the consolidated balance sheets.
The Company's subordinated debt is measured and reported at fair value. At September 30, 2019, the carrying value of the subordinated debt is $50.6 million. The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. For a description of the market observable inputs and inputs developed by a third party used in determining fair value of debt, see Note 21, "Fair Value of Financial Instruments," to the unaudited consolidated interim financial statements.
During the nine months ended September 30, 2019, the market observable swap rates changed, and the Company experienced a decrease in the credit spread assumption developed by the third party. Changes in the market observable swap rates affect the fair value model in different ways. An increase in the LIBOR swap rates has the effect of increasing the fair value of the Company's subordinated debt while an increase in the risk-free swap rates has the effect of decreasing the fair value. The increase in the credit spread assumption has the effect of decreasing the fair value of the Company's subordinated debt while a decrease in the credit spread assumption has the effect of increasing the fair value. The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt. The changes to the credit spread and swap rate variables during the nine months ended September 30, 2019, along with the passage of time, contributed to the $0.5 million increase in fair value of the Company’s subordinated debt between December 31, 2018 and September 30, 2019.
Of the $0.5 million increase in fair value of the Company’s subordinated debt between December 31, 2018 and September 30, 2019, $2.6 million is reported as increase in fair value of debt attributable to instrument-specific credit risk in the Company's unaudited consolidated statements of comprehensive loss and $2.1 million is reported as gain on change in fair value of debt in the Company’s unaudited consolidated statements of operations.
Also, as a result of the adoption of ASU 2016-01, 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) as of January 1, 2018. As long as the Company repays its subordinated debt at maturity, it can be expected that this $40.5 million reclassification will reverse without being reported in the Company’s consolidated statements of operations. Though changes in the market observable swap rates will continue to introduce some volatility each quarter to the Company’s reported gain or loss on change in fair value of debt, changes in the credit spread assumption developed by the third party will no longer introduce volatility to the Company’s consolidated statements of operations. The fair value of the Company’s subordinated debt will eventually equal the principal value of the subordinated debt by the time of the stated redemption date of each trust, beginning with the trust maturing on December 4, 2032 and continuing through January 8, 2034, the redemption date of the last of the Company’s outstanding trusts.

For a description of each of the Company's six subsidiary trusts, see Note 13, "Debt," to the unaudited consolidated interim financial statements.

RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 4, "Recently Issued Accounting Standards," to the unaudited consolidated interim financial statements, for discussion of certain accounting standards that may be applicable to the Company's current and future consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, capital raising, disposal of discontinued operations, investment maturities and income and other returns received on investments or from the sale of investments. Cash provided from these sources is used primarily for making investments and for warranty expenses and loss and loss adjustment expense payments, debt servicing and other operating expenses. The timing and

 
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amount of payments for loss and loss adjustment expenses may differ materially from our provisions for unpaid loss and loss adjustment expenses, which may create increased liquidity requirements.
Cash Flows from Continuing Operations
During the nine months ended September 30, 2019, the Company reported on the unaudited consolidated statements of cash flows $0.0 million of net cash provided by operating activities from continuing operations. The reconciliation between the Company's reported net loss of $1.2 million and the $0.0 million of net cash provided by operating activities from continuing operations can be explained primarily by the $5.1 million of depreciation and amortization expense the $5.6 million increase in deferred service fees and the $2.5 million increase in other, net, partially offset by the $3.3 million gain on change in fair value of limited liability investments, at fair value, the $2.1 million gain on change in fair value of debt, the $2.5 million increase in service fee receivable, the $1.3 million increase in other receivables, the $1.3 million increase in deferred acquisition costs, the $0.8 million increase in deferred income taxes and $0.8 million in net realized gains.
During the nine months ended September 30, 2019, the net cash used in investing activities from continuing operations as reported on the unaudited consolidated statements of cash flows was $1.6 million. This use of cash was driven primarily by acquisition of business, net of cash acquired, partially offset by proceeds from sales and maturities of fixed maturities and sales of other investments in excess of purchases of fixed maturities.
During the nine months ended September 30, 2019, the net cash provided by financing activities from continuing operations as reported on the unaudited consolidated statements of cash flows was $3.9 million. This source of cash is attributed to $9.0 million of net bank loan proceeds offset by principal repayments on bank loans of $2.3 million and principal repayments of $2.8 million on the notes payable.
In summary, as reported on the unaudited consolidated statements of cash flows, the Company's net increase in cash and cash equivalents from continuing operations during the nine months ended September 30, 2019 was $2.3 million.
Receipt of dividends from the Company's insurance subsidiaries has not generally been considered a source of liquidity for the holding company. The insurance subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. At September 30, 2019, the insurance subsidiaries of the Company were restricted from making any dividend payments to the holding company without regulatory approval pursuant to the domiciliary insurance regulations.
The Company's Extended Warranty subsidiaries fund their obligations primarily through service fee and commission income. The Company's Leased Real Estate subsidiary funds its obligations through rental income. The Company's insurance subsidiaries fund their obligations primarily through investment income and maturities in the investments portfolios.
The liquidity of the holding company is managed separately from its subsidiaries. Actions available to the holding company to increase liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; distributions from the Company’s Extended Warranty subsidiaries, as further described below; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.
On March 1, 2019, the Company closed on the acquisition of Geminus, a specialty, full-service provider of vehicle service agreements and other finance and insurance products offered through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Geminus, Penn and Prime are included in Extended Warranty. Related to the Geminus acquisition, the Company secured the KWH Loan. IWS, Trinity, Geminus, Penn and Prime are borrowers under the KWH Loan. Pursuant to satisfying the covenants under the KWH Loan, IWS, Trinity, Geminus, Penn and Prime are permitted to make distributions to the holding company in an aggregate amount not to exceed $1.5 million in any 12-month period. Separately, pursuant to covenants under the PWSC Loan secured to partially finance the acquisition of PWSC on October 12, 2017, PWSC is not permitted to make distributions to the holding company without the consent of the lender. The PWSC Loan was scheduled to mature on October 12, 2022; however, the principal totaling $0.3 million was fully repaid on January 30, 2020.

Dividends from the Leased Real Estate segment are not generally considered a source of liquidity for the holding company. Because of the Lease Amendment, CMC may be in a position to distribute to the Company some of the cash received from the additional rental income. Any material cash flow to the Company, however, to help the Company meet its holding company obligations remains likely to occur only upon the occurrence of one of the three events described in the next paragraph that would trigger payment of service fees. There can be no assurance as to the timing of the occurrence, or the resulting outcome, from one of these events.

Pursuant to the terms of the management services agreement entered into at the closing of the acquisition of CMC, an affiliate of the seller (the "Service Provider") will provide certain services to CMC and its subsidiaries in exchange for service fees. Such

 
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services (collectively, the "Services") will include (i) causing an affiliate of the Service Provider to guaranty certain obligations of the Property Owner (pursuant to an Indemnity and Guaranty Agreement between such affiliate and the holder of the Mortgage (the "Mortgagor")), (ii) providing certain individuals to serve as members of the board of directors and/or certain executive officers of CMC and/or its subsidiaries and (iii) providing asset management services with respect to the Real Property. In exchange for the Services, the Property Owner will pay certain fees to the Service Provider. The payment of such service fees may be triggered by (i) a sale of the Real Property, (ii) a restructuring of the lease to which the Real Property is subject or (iii) a refinancing or restructuring of the Mortgage. The amount of the service fees will range from 40%-80% of the net proceeds generated by the event triggering the payment of the service fees (depending on the nature and timing of the triggering event). The Lease Amendment has not triggered the payment of service fees to the Service Provider.

The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc., was $1.9 million and $1.9 million at September 30, 2019 and December 31, 2018, respectively. These amounts are reflected in the cash and cash equivalents of $13.1 million and $14.6 million reported at September 30, 2019 and December 31, 2018, respectively, on the Company’s consolidated balance sheets. The cash and cash equivalents and restricted cash other than the holding company’s liquidity represent restricted and unrestricted cash held by Amigo, Kingsway Re and the Company’s Extended Warranty and Leased Real Estate subsidiaries and are not considered to be available to meet holding company obligations, except as described above with respect to the Company’s Extended Warranty subsidiaries, which primarily consist of holding company operating expenses; transaction-related expenses; investments; and any other extraordinary demands on the holding company.
The holding company’s liquidity of $1.9 million at September 30, 2019 represented approximately four months of regularly recurring operating expenses before any transaction-related expenses, any new holding company investments or any other extraordinary demands on the holding company. As of the filing date of this report on Form 10-Q for the three and nine months ended September 30, 2019, the holding company’s liquidity of $3.7 million represented approximately seven months of regularly recurring operating expenses before any transaction-related expenses, any new holding company investments or any other extraordinary demands on the holding company. During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral.
The holding company’s liquidity of $1.9 million at September 30, 2019 and $3.7 million as of the filing date of this report on Form 10-Q for the three and nine months ended September 30, 2019 represents only actual cash on hand and does not include cash that would be made available to the holding company from the sale of investments, particularly investments in publicly traded securities, owned by the holding company. In addition, the holding company has access to some of the operating cash generated by the Extended Warranty subsidiaries as described above. While these sources do not represent cash of the holding company as of the filing date of this report on Form 10-Q for the three and nine months ended September 30, 2019, they do represent future sources of liquidity.
As of March 31, 2020, there are 182,876 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. Any outstanding Preferred Shares would be required to be redeemed by the Company on April 1, 2021 ("Redemption Date") at a redemption value of $6.7 million (assuming all current outstanding Preferred Shares would be redeemed), if the Company has sufficient legally available funds to do so. Additionally, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, because of the deferral which totaled $10.5 million at March 31, 2020, the Company is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred. If, as of April 1, 2021, the Company was required to pay both the deferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company currently projects that it would not have sufficient legally available funds to do so. However, the Company would be prohibited from doing so under Delaware law and, as such, (a) the interest estimated to be $14.9 million on March 31, 2021 on the trust preferred securities would remain on deferral as permitted under the indentures and (b) in accordance with Delaware law the Preferred Shares would not be redeemed on the Redemption Date (with a redemption value of $6.7 million) and would instead remain outstanding and continue to accrue dividends until such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. In such a situation, the Company would continue to operate in the ordinary course.
The Company notes there are several variables to consider in such a situation, and management is currently exploring the following opportunities: negotiating with the holders of the Preferred Shares with respect to the Redemption Date and/or other key provisions, raising additional funds through capital market transactions, as well as the Company’s continued strategy of working to monetize its non-core investments while attempting to maximize the tradeoff between liquidity and value received. The Company also notes that the conversion of any Preferred Shares that might occur prior to April 1, 2021 would impact its analysis as of April 1, 2021.

 
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Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, excluding the cash that may be required to redeem the Preferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic.
Regulatory Capital
In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualty insurance companies that may not be adequately capitalized. In general, insurers reporting surplus as regards policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 are subject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2018, surplus as regards policyholders reported by Amigo exceeded the 200% threshold.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. In April 2013, Kingsway filed a comprehensive run-off plan with the Florida Office of Insurance Regulation, which outlines plans for Amigo's run-off. Amigo remains in compliance with that plan.
Kingsway Re, our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimum statutory capital of $125,000. Kingsway Re is currently operating with statutory capital near the regulatory minimum, requiring us to periodically contribute capital to fund operating expenses. Kingsway Re incurs operating expenses of approximately $0.1 million per year.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has off-balance sheet arrangements related to guarantees, which are further described in Note 23, "Commitments and Contingent Liabilities," to the unaudited consolidated interim financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Market risk is the risk that we will incur losses due to adverse changes in interest or currency exchange rates and equity prices. We have exposure to market risk through our investment activities and our financing activities.
Given our U.S. operations typically invest in U.S. dollar denominated fixed maturity instruments, our primary market risk exposures in the investments portfolio are to changes in interest rates. Periodic changes in interest rate levels generally affect our financial results to the extent that the investments are recorded at market value and reinvestment yields are different than the original yields on maturing instruments. During periods of rising interest rates, the market values of the existing fixed maturities will generally decrease. The reverse is true during periods of declining interest rates.
We manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and Board of Directors, consultation with third-party financial advisors and by managing the maturity profile of our fixed maturity portfolio. Our goal is to maximize the total after-tax return on all of our investments. An important strategy we employ to achieve this goal is to try to hold enough in cash and short-term investments in order to avoid liquidating longer-term investments to pay loss and loss adjustment expenses or warranty contract expenses.

Table 8 below summarizes the fair value by contractual maturities of the fixed maturities portfolio, excluding cash and cash equivalents, at September 30, 2019 and December 31, 2018.

TABLE 8 Fair value of fixed maturities by contractual maturity date
(in thousands of dollars, except for percentages)
 
 
September 30, 2019

 
% of Total

 
December 31, 2018

 
% of Total

Due in less than one year
 
9,148

 
52.9
%
 
5,445

 
44.4
%
Due in one through five years
 
6,937

 
40.1
%
 
5,233

 
42.7
%
Due after five through ten years
 
180

 
1.0
%
 
210

 
1.7
%
Due after ten years
 
1,044

 
6.0
%
 
1,372

 
11.2
%
Total
 
17,309

 
100.0
%
 
12,260

 
100.0
%

 
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At September 30, 2019, 93.0% of fixed maturities, including treasury bills, government bonds and corporate bonds, had contractual maturities of five years or less. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. The Company holds cash and high-grade short-term assets that, along with fixed maturities, management believes are sufficient in amount for the payment of unpaid loss and loss adjustment expenses, warranty contract expenses and other obligations on a timely basis. In the event additional cash is required to meet obligations to our policyholders and customers, we believe the high-quality investments in the portfolios provide us with sufficient liquidity.
Based upon the results of interest rate sensitivity analysis, Table 9 below shows the interest rate risk of our investments in fixed maturities, measured in terms of fair value (which is equal to the carrying value for all our fixed maturity securities), at September 30, 2019 and December 31, 2018.
TABLE 9 Sensitivity analysis on fixed maturities
(in thousands of dollars)
 
 
100 Basis Point Decrease in Interest Rates
 
No Change
 
100 Basis Point Increase in Interest Rates
As of September 30, 2019
 
 
 
 
 
 
Estimated fair value
 
$
17,475

 
$
17,309

 
$
17,143

Estimated increase (decrease) in fair value
 
$
166

 
$

 
$
(166
)
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
Estimated fair value
 
$
12,436

 
$
12,260

 
$
12,084

Estimated increase (decrease) in fair value
 
$
176

 
$

 
$
(176
)
We use both fixed and variable rate debt as sources of financing. Because our subordinated debt and KWH Loan are LIBOR-based, our primary market risk related to financing activities is to changes in LIBOR. As of September 30, 2019, each one hundred basis point increase in LIBOR would result in an approximately $1.0 million increase in our annual interest expense.
Equity Risk
Equity risk is the risk we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques and by continuously evaluating market conditions.

Credit Risk
Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation. Credit risk arises from our positions in short-term investments, corporate debt instruments and government bonds.
The Investment Committee of the Board of Directors is responsible for the oversight of key investment policies and limits. These policies and limits are subject to annual review and approval by the Investment Committee. The Investment Committee is also responsible for ensuring these policies are implemented and procedures are in place to manage and control credit risk.
Table 10 below summarizes the composition of the fair values of fixed maturities, excluding cash and cash equivalents, at September 30, 2019 and December 31, 2018, by rating as assigned by Standard and Poor's ("S&P") or Moody's Investors Service ("Moody's"). Fixed maturities consist of predominantly high-quality instruments in corporate and government bonds with 100.0% of those investments rated 'A' or better at September 30, 2019.

 
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TABLE 10 Credit ratings of fixed maturities
(ratings as a percentage of total fixed maturities)
Rating (S&P/Moody's)
September 30, 2019

December 31, 2018

AAA/Aaa
69.3
%
72.0
%
AA/Aa
16.8

16.1

A/A
13.9

10.9

Percentage rated A/A2 or better
100.0
%
99.0
%
BBB/Baa

1.0

Total
100.0
%
100.0
%
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of September 30, 2019. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Our disclosure controls and procedures have been designed to meet reasonable assurance standards.   In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on the evaluation of our disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019, the Company’s disclosure controls and procedures were not effective as a result of material weaknesses in the Company's internal control over financial reporting related to the accounting for and disclosure of certain complex and nonrecurring transactions; the accounting for and disclosure of certain other items; monitoring the collectability of accounts receivable balances; other-than-temporary impairment on equity method investments; and certain account reconciliations. The material weaknesses were discovered during the course of the 2018 external audit of the accounts and, as such, not all material weaknesses necessarily present the same risks from period to period as a result of differing events and transactions which have occurred or may occur in current and future periods.
Material Weaknesses in Internal Control over Financial Reporting
A material weakness is defined as a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
With respect to the accounting for and disclosure of certain complex and nonrecurring transactions, the execution of the controls over the application of accounting literature did not operate effectively with respect to:
the reclassification of investment income, related to equity method investments, from loss from discontinued operations, net of taxes to net investment income in the consolidated statement of operations;
the identification, accounting and disclosure of investments demonstrating characteristics of variable interest entities, including the consolidation of certain investments;
the adoption and application of ASU 2014-09;
identification, disclosure and accounting for equity-classified warrants; and
purchase accounting, as it relates to the identification and valuation of intangible assets and goodwill.

Concerning the accounting for and disclosure of certain other items, the execution of the controls over the application of accounting literature did not operate effectively with respect to separating restricted cash from cash and cash equivalents on the face of the

 
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consolidated balance sheet. Additionally, the Company did not have adequate controls in place pertaining to disclosure of related parties.
Regarding the collectability of accounts receivable balances, the Company did not have adequate controls and procedures with respect to evaluating balances for collectability, including the lack of a formal policy governing the review of accounts, as well as calculating and documenting necessary reserves.
With respect to other-than-temporary impairment on equity method investments, the Company did not properly apply the accounting literature when performing its analysis in determining whether its investment in investee was other-than-temporarily impaired as of December 31, 2018.
Finally, with respect to the lack of adequate procedures regarding certain account reconciliations, there were errors in the reconciliation of account balances as they were not performed timely and/or at a level of precision to identify errors and incorrect balance sheet and income statement classification for certain cash, receivable, deposit, accounts payable, deferred revenue, escheat liability and investment income accounts.
These matters were discovered during the course of the 2018 external audit of the accounts and were reviewed with the Company's Audit Committee. Certain of these material weaknesses resulted in the restatement described in Note 3, "Restatement of Previously Issued Financial Statements," to the Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 27, 2020.
As a result of the identified material weaknesses, the Company’s management directed a comprehensive review of its consolidated financial statements to assess the possibility of further material misstatements that may remain unidentified. As a result of such review, and notwithstanding the material weaknesses described above, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, believes that the unaudited consolidated financial statements contained in this Form 10-Q for the three and nine months ended September 30, 2019 and September 30, 2018 fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Remediation Process
The Company has been evaluating the material weaknesses and is developing a plan of remediation to strengthen the effectiveness of the design and operation of its internal control environment. The remediation plan will include the following actions:
Perform a comprehensive assessment of all existing accounting policies and revise existing policies and/or introduce new policies, as needed;
Enhance the formality of its review procedures with respect to its accounting for any new investments, as well as the periodic evaluation of existing investments;
Implement additional review procedures with respect to its accounting under ASU 2014-09 to ensure the Company’s accounting will continue to be in accordance with that standard on a go-forward basis;
Implement additional identification, accounting and review controls with respect to complex and nonrecurring transactions, as well as augment existing staff with outside skilled accounting resources, as appropriate, and strengthen the review process to improve the operation of financial reporting and corresponding internal controls;
Enhance the formality and rigor with respect to identifying and tracking all material related party transactions, as well updating its disclosures controls to enhance the focus on related party disclosure requirements; and
Enhance the formality and rigor of review with respect to the collectability of accounts receivable balances, and the account reconciliation procedures.

The actions that the Company is taking are subject to ongoing senior management review as well as Audit Committee oversight. The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in its controls. The Company has started to implement these steps; however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weaknesses described above will continue to exist.

Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the period beginning January 1, 2019, and ending September 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


 
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning pending legal proceedings is incorporated herein by reference to Note 23, "Commitments and Contingencies," to the unaudited consolidated interim financial statements in Part I of this Form 10-Q.
Item 1A. Risk Factors
Except as set forth below, as of the date of this report, there have been no material changes with respect to those risk factors previously disclosed in our 2018 Annual Report.
We will be adversely impacted by the outbreak of COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. We are currently taking steps to assess the effects, and mitigate the adverse consequences to our businesses, of the outbreak; however, though the magnitude of the impact remains to be seen, our businesses will be adversely impacted by the outbreak of COVID-19.
In addition to adverse United States domestic and global macroeconomic effects, including the adverse impacts on automobile sales and new home construction, which may decrease consumer demand for our products and services, reduce our ability to access capital, and otherwise adversely impact the operation of our businesses, the outbreak of COVID-19 has caused, and will continue to cause, substantial disruption to our employees, distribution channels, investors, tenants, and customers through self-isolation, travel limitations, business restrictions, and otherwise. Many areas within the United States have imposed mandatory closures for businesses not deemed to be essential, and it is currently unclear for how long such closures will last. Though most of our employees are able to work remotely, these closures have nevertheless affected many of our customers and many businesses through which we sell our products and services, resulting in significant declines in sales. These effects, individually or in the aggregate, will adversely impact our businesses, financial condition, operating results and cash flows and such adverse impacts may be material.
Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our sales and damage the company’s results of operations and its liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted.
A difficult economy generally could materially adversely affect our business, results of operations or financial condition.
An adverse change in market conditions, including changes caused by the COVID-19 pandemic, leading to instability in the global credit markets presents additional risks and uncertainties for our business. Depending on market conditions going forward, we could incur substantial realized and unrealized losses in future periods, which could have an adverse affect on our results of operations or financial condition. Certain trust accounts and letters of credit for the benefit of related companies and third-parties have been established with collateral on deposit under the terms and conditions of the relevant trust and/or letter of credit agreements. The value of collateral could fall below the levels required under these agreements putting the subsidiary or subsidiaries in breach of the agreements.
Market volatility may also make it more difficult to value certain of our investments if trading becomes less frequent. Disruptions, uncertainty and volatility in the global credit markets may also adversely affect our ability to obtain financing for future acquisitions. If financing is available, it may only be available at an unattractive cost of capital, which would decrease our profitability. There can be no assurance that market conditions will not deteriorate in the near future.
Financial disruption or a prolonged economic downturn could materially and adversely affect our business.
Worldwide financial markets have recently experienced periods of extraordinary disruption and volatility, which has been exacerbated by the COVID-19 pandemic, resulting in heightened credit risk, reduced valuation of investments and decreased economic activity. Moreover, many companies have experienced reduced liquidity and uncertainty as to their ability to raise capital during such periods of market disruption and volatility. In the event that these conditions recur or result in a prolonged economic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected. These market conditions may affect the Company's ability to access debt and equity capital markets. In addition, as a result of recent financial events, we may face increased regulation. Many of the other risk factors discussed in this Risk Factors section identify risks that result from, or are exacerbated by, financial economic downturn. These include risks related to our investments portfolio, the competitive environment and regulatory developments.

 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None

 
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KINGSWAY FINANCIAL SERVICES INC.


Item 6. Exhibits
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase



 
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KINGSWAY FINANCIAL SERVICES INC.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
KINGSWAY FINANCIAL SERVICES INC.
 
 
 
 
Date:
April 10, 2020
By:
/s/ John T. Fitzgerald
 
 
 
John T. Fitzgerald, President, Chief Executive Officer and Director
 
 
 
(principal executive officer)
 
 
 
 
Date:
April 10, 2020
By:
/s/ Kent A. Hansen
 
 
 
Kent A. Hansen, Chief Financial Officer and Executive Vice President
 
 
 
(principal financial officer)
 
 
 
 


 
74