UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period from _____ to _____
Commission File Number 001-15204
Kingsway Financial Services Inc.
(Exact name of registrant as specified in its charter)
Ontario, Canada
(State or other jurisdiction of
incorporation or organization)
Not Applicable
(I.R.S. Employer Identification No.)
45 St. Clair Avenue West, Suite 400
Toronto, Ontario
(Address of principal executive offices)
M4V 1K9
(Zip Code)
1-416-848-1171
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, no par value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
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 during the preceding 12 months (or for such shorter period that
No
the registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. Large accelerated filer
Smaller reporting company
Non-accelerated filer
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2015, the aggregate market value of the registrant's voting common stock held by non-affiliates of registrant was $77,000,523
based upon the closing sale price of the common stock as reported by the New York Stock Exchange. Solely for purposes of this calculation,
all executive officers and directors of the registrant are considered affiliates.
The number of shares of the Registrant's Common Stock outstanding as of March 10, 2016 was 19,709,706.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference to certain sections of the Proxy Statement for the 2015 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended December 31,
2015.
KINGSWAY FINANCIAL SERVICES INC.
Caution Regarding Forward-Looking Statements
Table Of Contents
PART I
Item 1. Business
Item 1A. Risk Factors
Item IB. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
3
4
4
17
26
27
27
27
28
28
29
30
46
47
89
90
93
93
93
93
93
93
93
94
94
104
105
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KINGSWAY FINANCIAL SERVICES INC.
Caution Regarding Forward-Looking Statements
This 2015 Annual Report on Form 10-K (the "2015 Annual Report"), including the accompanying consolidated financial statements
of Kingsway Financial Services Inc. ("Kingsway") and its subsidiaries (individually and collectively referred to herein as the
"Company") and the notes thereto appearing in Item 8 herein (the "Consolidated Financial Statements"), Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in Item 7 herein (the "MD&A"), and the other Exhibits
and Financial Statement Schedules filed as a part hereof or incorporated by reference herein may contain or incorporate by reference
information that includes or is based on 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.
Forward-looking statements relate to future events or future performance and reflect Kingsway management's current beliefs,
based on information currently available. The words "anticipate," "expect," "believe," "may," "should," "estimate," "project,"
"outlook," "forecast" and variations or similar words and expressions are used to identify such forward looking information, but
these words are not the exclusive means of identifying forward-looking statements. Specifically, statements about (i) the Company's
ability to preserve and use its net operating losses; (ii) the Company's expected liquidity; and (iii) the potential impact of volatile
investment markets and other economic conditions on the Company's investment portfolio and underwriting results, among others,
are forward-looking, and the Company may also make forward-looking statements about, among other things:
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its results of operations and financial condition (including, among other things, premium volume, premium rates, net and
operating income, investment income and performance, return on equity, and expected current returns and combined ratios);
changes in facts and circumstances affecting assumptions used in determining the provision for unpaid loss and loss adjustment
expenses;
the number and severity of insurance claims (including those associated with catastrophe losses) and their impact on the
adequacy of the provision for unpaid loss and loss adjustment expenses;
the impact of emerging claims issues as well as other insurance and non-insurance litigation;
orders, interpretations or other actions by regulators that impact the reporting, adjustment and payment of claims;
changes in industry trends and significant industry developments;
uncertainties related to regulatory approval of insurance rates, policy forms, license applications and similar matters;
the impact of certain guarantees made by the Company;
the ability to complete current or future acquisitions successfully;
the ability to successfully implement our restructuring activities; and
strategic initiatives.
For a discussion of some of the factors that could cause actual results to differ, see Item 1A,"Risk Factors," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates and Assumptions," in
this 2015 Annual Report.
Except as expressly required by applicable securities laws, the Company disclaims any intention or obligation to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise, that might arise subsequent
to the date of this 2015 Annual Report.
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KINGSWAY FINANCIAL SERVICES INC.
Part I
Item 1. BUSINESS
Kingsway Financial Services Inc. was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. In
this report, the terms "Kingsway," the "Company," "we," "us" or "our" mean Kingsway Financial Services Inc. and all entities
included in our Consolidated Financial Statements.
The Company's registered office is located at 45 St. Clair Avenue West, Suite 400, Toronto, Ontario, Canada M4V 1K9. The
common shares of Kingsway are listed on the Toronto Stock Exchange and the New York Stock Exchange under the trading symbol
"KFS."
Kingsway is a Canadian holding company with operating subsidiaries located in the United States. The Company operates as a
merchant bank primarily engaged, through its subsidiaries, in the property and casualty insurance business. Kingsway conducts
its business through the following two reportable segments: Insurance Underwriting and Insurance Services. Insurance
Underwriting and Insurance Services conduct their business and distribute their products in the United States. Certain of the
business descriptions below, particularly "Investments," "Reinsurance" and "Regulatory Environment," are principally or
exclusively related to Insurance Underwriting. The "Debt" description below is unrelated to either segment.
Financial information about Kingsway's reportable business segments for the years ended December 31, 2015 and 2014 is contained
in the following sections of this 2015 Annual Report: (i) Note 22, "Segmented Information," to the Consolidated Financial
Statements; and (ii) "Results of Continuing Operations" section of MD&A.
REPORTING CURRENCY
The Consolidated Financial Statements have been presented in U.S. dollars because the Company's principal investments and cash
flows are denominated in U.S. dollars. The Company's functional currency is the U.S. dollar since the substantial majority of its
operations is conducted in the United States. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are
translated to U.S. dollars at period-end exchange rates, while revenue and expenses are translated at average monthly rates and
shareholders' equity is translated at the rates in effect at dates of capital transactions. Foreign currency translation adjustments are
included in shareholders' equity under the caption accumulated other comprehensive income. Foreign currency gains and losses
resulting from transactions which are denominated in currencies other than the entity's functional currency are reflected in foreign
exchange losses, net in the consolidated statements of operations.
All of the dollar amounts in this 2015 Annual Report are expressed in U.S. dollars, except where otherwise indicated. References
to "dollars" or "$" are to U.S. dollars, and any references to "C$" are to Canadian dollars.
GENERAL DEVELOPMENT OF BUSINESS
Discontinued Operations
On April 1, 2015, the Company closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. ("ARS") for $47.0 million in
cash. During the second quarter of 2015, the Company received additional post-closing cash consideration of $2.0 million. The
terms of the sale also provide for potential future earnout payments to the Company equal to 1.25% of ARS' written premium and
fee income during the earnout periods. The earnout payments are payable in three annual installments beginning in April 2016
through April 2018. The Company recorded a net gain on disposal of ARS, not including future earnout payments, of $11.3 million
during 2015. As a result of the sale, ARS, previously disclosed as part of the Insurance Services segment, has been classified as
a discontinued operation. The earnings of ARS are disclosed as discontinued operations in the consolidated statements of operations
for all periods presented. Further information is contained in Note 4, "Disposition, Deconsolidation and Discontinued Operations,"
to the Consolidated Financial Statements.
Termination of Management Services Agreement
On February 24, 2015, the Company announced that it had entered into a definitive agreement with 1347 Property Insurance
Holdings, Inc. ("PIH") to terminate the Management Services Agreement ("MSA") previously entered into on February 11, 2014.
Pursuant to the transaction, the Company received the following consideration: $2.0 million in cash; $3.0 million of 8% preferred
stock of PIH, mandatorily redeemable in five years; a Performance Shares Grant Agreement with PIH, whereby the Company 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 in seven years. The Company recorded a gain of $6.0 million during
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KINGSWAY FINANCIAL SERVICES INC.
2015 related to the termination of the MSA, which is included in other income in the consolidated statements of operations. Further
information is contained in Note 24, "Related Party Transactions," to the Consolidated Financial Statements.
Deconsolidation
During the second quarter of 2015, the Company's controlling interest in Kingsway Linked Return of Capital Trust ("KLROC
Trust") was reduced to zero upon the Company's repayment of its C$15.8 million outstanding on its Linked Return of Capital
("LROC") preferred units due June 30, 2015. As a result, the Company recorded a non-cash loss on deconsolidation of KLROC
Trust of $4.4 million during 2015. This reported loss results from removing the net assets and accumulated other comprehensive
loss of KLROC Trust from the Company’s consolidated balance sheets. The deconsolidation reduced consolidated shareholders’
equity by $2.8 million at June 30, 2015. Further information is contained in Note 4, "Disposition, Deconsolidation and Discontinued
Operations," to the Consolidated Financial Statements.
INSURANCE UNDERWRITING SEGMENT
The Company's property and casualty insurance business operations are conducted primarily through the following subsidiaries:
Mendota Insurance Company ("Mendota"), Mendakota Insurance Company ("Mendakota"), Mendakota Casualty Company
(formerly Universal Casualty Company) ("MCC"), Kingsway Amigo Insurance Company ("Amigo") and Kingsway Reinsurance
Corporation (collectively, "Insurance Underwriting").
The insurance subsidiaries in Insurance Underwriting issue insurance policies and retain the risk of operating profit or loss related
to the ultimate loss and loss adjustment expenses incurred on the underlying policies. Insurance Underwriting provides non-
standard automobile insurance to individuals who do not meet the criteria for coverage by standard automobile insurers. Insurance
Underwriting has policyholders in 12 states; however, new business is accepted in only nine states. In 2015, the following states
accounted for 84.8% of Insurance Underwriting's gross premiums written: Florida (24.0%), Texas (16.3%), Illinois (15.7%),
California (10.3%), Nevada (9.9%) and Colorado (8.6%).
The Company previously placed Amigo and MCC into voluntary run-off in 2012 and 2011, respectively. Each of Amigo and MCC
entered into a comprehensive run-off plan which was approved by its respective state of domicile. Kingsway continues to manage
Amigo and MCC in a manner consistent with the run-off plans. During the first quarter of 2015, MCC sent a letter of intent to
the Illinois Department of Insurance to resume writing private passenger automobile policies in the state of Illinois. MCC began
writing these policies on April 1, 2015.
Effective March 31, 2014, the Company's wholly owned subsidiary, PIH, formerly known as Maison Insurance Holdings, Inc.,
completed an initial public offering of its common stock. Upon completion of the transaction, the Company maintained a minority
ownership interest in the common shares of PIH. The earnings of PIH are included in the consolidated statements of operations
through the March 31, 2014 transaction date. Prior to the transaction, PIH was included in the Insurance Underwriting segment.
As a result of the disposal of the Company's majority interest in PIH on March 31, 2014, all segmented information has been
restated to exclude PIH from the Insurance Underwriting segment.
Insurance Underwriting Products
Insurance Underwriting primarily markets automobile insurance products which provide coverage in three major areas: liability,
accident benefits and physical damage. Liability insurance provides coverage for claims against the Company's insureds legally
responsible for automobile accidents which have injured third-parties or caused property damage to third-parties. Accident benefit
policies or personal injury protection policies provide coverage for loss of income, medical and rehabilitation expenses for insured
persons who are injured in an automobile accident, regardless of fault. Physical damage policies cover damages to an insured
automobile arising from a collision with another object or from other risks such as fire or theft.
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KINGSWAY FINANCIAL SERVICES INC.
Table 1 and Table 2 summarize Insurance Underwriting's gross premiums written by line of business and by state, respectively,
for the years ended December 31, 2015 and 2014.
TABLE 1 Gross premiums written by line of business
For the years ended December 31 (in thousands of dollars, except for percentages)
Private passenger auto liability
Auto physical damage
Total gross premiums written
2015
78,811
37,592
116,403
% of Total
67.7%
32.3%
100.0%
TABLE 2 Gross premiums written by state
For the years ended December 31 (in thousands of dollars, except for percentages)
Florida
Texas
Illinois
California
Nevada
Colorado
Other
Total gross premiums written
2015
27,935
18,989
18,265
12,046
11,572
10,027
17,569
116,403
% of Total
24.0%
16.3%
15.7%
10.3%
9.9%
8.6%
15.2%
100.0%
2014
76,487
37,515
114,002
2014
21,440
20,142
17,786
11,363
10,863
11,033
21,375
114,002
% of Total
67.1%
32.9%
100.0%
% of Total
18.8%
17.7%
15.6%
10.0%
9.5%
9.7%
18.7%
100.0%
Non-standard automobile insurance is principally provided to individuals who do not qualify for standard automobile insurance
coverage because of their payment history, driving record, place of residence, age, vehicle type or other factors. Such drivers
typically represent higher than normal risks and pay higher insurance rates for comparable coverage.
Non-standard automobile insurance loss experience is generally driven by higher frequency and lower severity than the standard
automobile market. The higher frequency, however, is mitigated to some extent by higher premium rates; the tendency of high-
risk individuals to own low-value automobiles; and generally lower limits of insurance coverage as insureds tend to purchase
coverage at the minimum prescribed limits. In the United States, non-standard automobile insurance policies generally have lower
limits of insurance commensurate with the minimum coverage requirements under the statute of the states in which we write the
business. These limits of liability are typically not greater than $50,000 per occurrence.
The insuring of non-standard automobile drivers is often transitory. When their driving records improve, insureds may qualify to
obtain insurance in the standard market at lower premium rates. We often cancel policies for non-payment of premium and,
following a period of lapse in coverage, insureds frequently return to purchase a new policy at a later date. As a result, our non-
standard automobile insurance policies experience a retention rate that is lower than that experienced for standard market risks.
This creates an on-going requirement to replace non-renewing policyholders with new policyholders and to react promptly to issue
cancellation notices for non-payment of premiums to mitigate potential bad debt write-offs. Most of our insureds pay their premiums
on a monthly installment basis, and we typically limit our risk related to non-payment of premiums by requiring a deposit for
future insurance premiums and the prepayment of subsequent installments.
In the United States, automobile insurers are generally required to participate in various involuntary residual market pools and
assigned risk plans that provide automobile insurance coverage to individuals or other entities that are unable to purchase such
coverage in the voluntary market. Participation in these pools in most jurisdictions is in proportion to voluntary writings of selected
lines of business in those jurisdictions.
Non-standard automobile insurance accounted for 100.0% of Insurance Underwriting's gross premiums written in 2015 and 2014.
For the year ended December 31, 2015, gross premiums written for non-standard automobile insurance increased 2.1% to $116.4
million as compared to $114.0 million in 2014. The increase in gross premiums written resulted primarily from increased premium
volumes written in Florida during the year ended December 31, 2015 compared to prior year.
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KINGSWAY FINANCIAL SERVICES INC.
Marketing and Distribution
Our strategy focuses on developing and maintaining strong relationships with our independent agents. Insurance Underwriting's
products and services are marketed through approximately 3,700 independent agencies. We maintain an "open market" approach
which enables these agents to place business with us without the obligation of minimum production commitments, providing us
with a broad, flexible and scalable distribution network. We continually strive to provide excellent service in the markets in which
we operate, communicating through a variety of channels as we look for opportunities to increase efficiency and reduce operating
costs with our agents. Our independent agents have the ability to bind insurance policies on our behalf, subject to our underwriting
guidelines. Our proprietary point-of-sale systems, however, prevent any agent from binding an unacceptable risk. We do not,
though, delegate authority to settle or adjust claims, establish underwriting guidelines, develop rates or enter into other transactions
or commitments through our independent agents.
Texas business is originated through an affiliated managing general agent and written through an unaffiliated Texas county mutual
insurance company. This business is then 100% assumed through a quota-share arrangement by one of our insurance subsidiaries.
This represents a common way of originating non-standard automobile business in the state of Texas due to the greater rating and
underwriting flexibility accorded Texas county mutual insurance companies under Texas statutes.
No customer or group of affiliated customers accounts for 10% or more of Insurance Underwriting's revenues, and no loss of a
customer or group of affiliated customers would have a material adverse effect on the Company.
Competition
Insurance Underwriting operates in a highly competitive environment. Our core non-standard automobile offerings are policies
at the minimum prescribed limits in each state produced entirely through our independent agents. We compete with large national
insurance companies and smaller regional insurance companies which produce through independent agents. We also compete
with insurance companies which sell policies directly to their customers.
Large national insurance companies and direct underwriters typically operate in standard lines of personal automobile and property
insurance in addition to non-standard lines and generally bring with them increased name recognition obtained through extensive
media advertising, loyalty of the customer base to the insurer rather than to an independent agency and, potentially, reduced policy
acquisition costs and increased customer retention.
From time to time, the non-standard automobile market attracts competition from new entrants. In many cases, these entrants are
looking for growth and, as a result, price their insurance below the rates that we believe provide an acceptable return for the related
risk. We firmly believe that it is not in our best interest to compete solely on price; consequently, we are willing to experience a
loss of market share during periods of intense price competition or soft market conditions. During the last few years, the Company
carried out a detailed review of its premium adequacy in the territories in which it operates and implemented steps to terminate
business where premium adequacy was unlikely to be achieved within an acceptable period of time.
In order to stay competitive while striving to generate an economic rate of return, we compete on a number of factors such as
distribution strength and breadth, premium adequacy, agency relationships, ease of doing business and market reputation.
Ultimately, we believe that our ability to compete successfully in our industry is based, among other things, on our ability to:
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identify markets that are most likely to produce an underwriting profit;
operate with a disciplined underwriting approach;
practice prudent claims management;
establish an appropriate provision for unpaid loss and loss adjustment expenses;
strive for cost containment and the economics of shared support functions where deemed appropriate; and
provide our independent agents and brokers with competitive commissions, an ease of doing business and additional value-
added products and services for them and their customers.
Insurance Underwriting generally does not compete on the basis of ratings assigned by insurance rating agencies. Previously, the
Company's insurance subsidiaries were assigned ratings by A.M. Best. In October, 2011 the Company had the A.M. Best ratings
for all of its insurance subsidiaries withdrawn. As a result, the Company's insurance subsidiaries are currently unrated.
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KINGSWAY FINANCIAL SERVICES INC.
Underwriting
Our underwriting philosophy stresses receiving an adequate premium and spread of risks for the business we accept. We regularly
monitor premium adequacy by territory, line of business and agency and take actions as necessary. Actions include, but are not
limited to, tightening underwriting requirements, filing for rate increases, terminating underperforming programs and agents, non-
renewing policies (where permitted) and other administrative changes. Typically, we do not reduce our premiums when competitors
underwrite at premium rates that we believe are below acceptable levels. Instead, we focus on maintaining our premium per risk
rather than writing a large number of risks at premiums that we believe would be inadequate and thus unprofitable. As a result,
our premium volumes may be negatively impacted during a soft market.
Claims Management
Claims management is the process by which Insurance Underwriting determines the validity and amount of a claim. We believe
that claims management is fundamental to our operating results. With respect to Insurance Underwriting, proper and efficient
claims management has a direct effect on the operating profit or loss which has been retained related to the ultimate loss and loss
adjustment expenses incurred on the underlying policies.
The individual operating subsidiaries in Insurance Underwriting primarily employ their own claims adjusters who are responsible
for investigating and settling claims. Under certain circumstances, however, our operating subsidiaries will utilize each other's
claims expertise where appropriate. Our goal is to settle claims fairly for the benefit of our insureds in a manner that is consistent
with the insurance policy language and our regulatory and legal obligations.
In addition to claims adjusters, our operating subsidiaries also employ appraisers, special investigators and salvage, subrogation
and other personnel who are responsible for helping us reduce the net cost of claim-handling, particularly with respect to identifying
instances of fraud. We aggressively combat fraud and have processes in place to investigate suspicious claim activity. We may
also engage independent appraisers, private investigators, various experts and legal counsel to assist us in adjusting claims. When
necessary, we defend litigation against our insureds generally by retaining outside legal counsel.
INSURANCE SERVICES SEGMENT
Insurance Services includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS") and Trinity Warranty
Solutions LLC ("Trinity"), (collectively, "Insurance Services").
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed
by credit unions in 26 states to their members.
Trinity is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air
conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration industries. Trinity distributes its warranty
products through original equipment manufacturers, HVAC distributors and commercial and residential contractors. Trinity
distributes its maintenance support direct through corporate owners of retail spaces throughout the United States.
As described above, effective April 1, 2015, the Company closed on the sale of its wholly owned subsidiary, ARS. As a result,
ARS has been classified as discontinued operations and the results of their operations are reported separately for all periods
presented. Prior to the transaction, ARS was included in the Insurance Services segment. As a result of classifying ARS as a
discontinued operation, all segmented information has been restated to exclude ARS from the Insurance Services segment.
Insurance Services Products
IWS markets and administers vehicle service agreements and related products for new and used automobiles throughout the United
States. A vehicle service agreement is an agreement between IWS and the vehicle purchaser under which IWS agrees to replace
or repair, for a specific term, designated vehicle parts in the event of a mechanical breakdown. IWS serves as the administrator
on all contracts it originates. Vehicle service agreements supplement, or are in lieu of, manufacturers' warranties and provide a
variety of extended coverage options. Vehicle service agreements typically range from three months to seven years and/or 3,000
miles to 100,000 miles. The cost of the vehicle service agreement is a function of the contract term, coverage limits and type of
vehicle.
In addition to marketing vehicle service agreements, IWS also brokers a guaranteed asset protection product ("GAP") through its
distribution channel. GAP generally covers a consumer's out-of-pocket amount, related to an automobile loan or lease, if the
vehicle is stolen or damaged beyond repair. IWS earns a commission when a consumer purchases a GAP certificate but does not
take on any insurance risk.
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KINGSWAY FINANCIAL SERVICES INC.
Trinity is a provider of HVAC, standby generator, commercial LED lighting and refrigeration warranty products and provider of
equipment breakdown and maintenance support services to companies across the United States. As a provider 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. A warranty contract is an agreement between
Trinity and the purchaser of such HVAC, standby generator, commercial LED lighting and refrigeration equipment to replace or
repair, for a specific term, designated parts in the event of a mechanical breakdown. 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.
Marketing and Distribution
IWS markets its products primarily through credit unions. IWS enters into an exclusive agreement with each credit union whereby
the credit union receives a stipulated access fee for each vehicle service agreement issued to its members. The credit unions are
served by IWS employee representatives located throughout the United States in close geographical proximity to the credit unions
they serve. IWS distributes and markets its products in 26 states.
Trinity directly markets and distributes its warranty products to manufacturers, distributors and installers of HVAC, standby
generator, commercial LED lighting and refrigeration equipment. As a provider of equipment breakdown and maintenance support,
Trinity directly markets and distributes its product through its clients, which are primarily companies that directly own and operate
numerous locations across the United States.
No customer or group of affiliated customers accounts for 10% or more of Insurance Service's revenues, and no loss of a customer
or group of affiliated customers would have a material adverse effect on the Company.
Competition
IWS focuses exclusively on the automotive finance market with its core vehicle service agreement and related product offerings,
while much of its competition in the credit union channel has a less targeted product approach. IWS' typical competitor takes a
generalist approach to market by providing credit unions with a variety of different product offerings. They are thus unable to
deliver specialty expertise on par with IWS and do not give vehicle service agreement products the attention they require for
healthy profitability and strong risk management.
Trinity operates in an environment with few market competitors. Trinity competes on two important facets: its belief that it provides
superior customer service relative to its competitors and its ability, through the support of its insurance company partners, to
provide warranty solutions to a wider range of HVAC, standby generator, commercial LED lighting and refrigeration equipment
than that of its competitors.
Claims Management
Claims management is the process by which Insurance Services determines the validity and amount of a claim. We believe that
claims management is fundamental to our operating results. The individual operating subsidiaries in Insurance Services primarily
employ their own claims adjusters who are responsible for investigating and settling claims. Our goal is to settle claims fairly for
the benefit of our insureds and the insureds of our insurance company partners in a manner that is consistent with the insurance
policy language and our regulatory and legal obligations.
IWS effectively and efficiently manages claims by utilizing in-house expertise and information systems. IWS employs an
experienced claims staff comprised of Automotive Service Excellence certified mechanics, knowledgeable in all aspects of vehicle
repairs and potential claims. Additionally, IWS owns its own proprietary database of historical claims data dating back over twenty
years. Management analyzes this database to drive real-time pricing adjustments and strategic decision-making.
Trinity claims on warranty products are managed by the insurance companies with which Trinity partners. Trinity may, at times,
act as a third-party administrator of such claims; however at no time does Trinity bear the loss of claims on warranty products.
PRICING AND PRODUCT MANAGEMENT
Responsibility for pricing and product management rests with the Company's individual operating subsidiaries in each of Insurance
Underwriting and Insurance Services. Typically, teams comprised of pricing actuaries, product managers and business development
managers work together by territory to develop policy forms and language, rating structures, regulatory filings and new product
ideas. Data solutions and claims groups track loss performance on a monthly basis so as to alert the operating subsidiaries to the
potential need to adjust forms or rates.
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KINGSWAY FINANCIAL SERVICES INC.
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Kingsway records a provision for its unpaid losses that have occurred as of a given evaluation date as well as for its estimated
liability for loss adjustment expenses. The provision for unpaid losses includes a provision, commonly referred to as case reserves,
for losses related to reported claims as well as a provision for losses related to claims incurred but not reported ("IBNR"). The
provision for loss adjustment expenses represents the cost to investigate and settle claims.
The provision for unpaid loss and loss adjustment expenses does not represent an exact calculation of the liability but instead
represents management's best estimate at a given accounting date, utilizing actuarial and statistical procedures, of the undiscounted
estimates of the ultimate net cost of all unpaid loss and loss adjustment expenses. Management continually reviews its estimates
and adjusts its provision as new information becomes available. In establishing the provision for unpaid loss and loss adjustment
expenses, the Company also takes into account estimated recoveries, reinsurance, salvage and subrogation.
Any adjustments to the provision for unpaid loss and loss adjustment expenses are reflected in the consolidated statements of
operations in the periods in which they become known, and the adjustments are accounted for as changes in estimates. Even after
such adjustments, ultimate liability or recovery may exceed or be less than the revised provisions. An adjustment that increases
the provision for unpaid loss and loss adjustment expenses is known as an unfavorable development or a deficiency and will reduce
net income while an adjustment that decreases the provision is known as a favorable development or a redundancy and will increase
net income.
Process for Establishing the Provision for Unpaid Loss and Loss Adjustment Expenses
The process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant
judgmental factors inherent in predicting future results of both reported and IBNR claims. As such, the process is inherently
complex and imprecise and estimates are constantly refined. The process of establishing the provision for unpaid loss and loss
adjustment expenses relies on the judgment and opinions of a large number of individuals, including the opinions of the Company's
actuaries.
Factors affecting the provision for unpaid loss and loss adjustment expenses 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.
The process for establishing the provision for loss and loss adjustment expenses begins with the collection and analysis of claim
data. Data on individual reported claims, both current and historical, including paid amounts and individual claim adjuster estimates,
are grouped by common characteristics and evaluated by actuaries in their analyses of ultimate claim liabilities by product line.
Such data is occasionally supplemented with external data as available and when appropriate. The process of analyzing the
provision is undertaken on a regular basis, generally quarterly, in light of continually updated information.
Multiple estimation methods are available for the analysis of the provision for loss and loss adjustment expenses. Each estimation
method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being
better than the others in all situations and no one set of assumption variables being meaningful for all product line components.
The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also
change over time; therefore, the actual choice of estimation method can change with each evaluation. The estimation methods
chosen are those that are believed to produce the most reliable indication at that particular evaluation date.
In most cases, multiple estimation methods will be valid for the evaluation of the provision for loss and loss adjustment expenses.
This will result in a range of reasonable estimates for the provision. Reported values found to be closer to the endpoints of a range
of reasonable estimates are subject to further detailed reviews. These reviews may substantiate the validity of management's
recorded provision or lead to a change in the reported provision.
The exact boundary points of these ranges are more qualitative than quantitative in nature, as no clear line of demarcation exists
to determine when the set of underlying assumptions for an estimation method switches from being reasonable to unreasonable.
As a result, the Company does not believe that the endpoints of these ranges are or would be comparable across companies. In
addition, potential interactions among the different estimation assumptions for different product lines make the aggregation of
individual ranges a highly judgmental and inexact process.
A basic premise in most actuarial analyses is that past patterns demonstrated in the data will repeat themselves in the future, absent
a material change in the associated risk factors discussed below. To the extent a material change affecting the ultimate provision
for loss and loss adjustment expenses is known, such change is quantified to the extent possible through an analysis of internal
10
KINGSWAY FINANCIAL SERVICES INC.
company data and, if available and when appropriate, external data. Such a measurement is specific to the facts and circumstances
of the particular claim portfolio and the known change being evaluated. Significant structural changes to the available data, product
mix or organization can materially impact the provision for loss and loss adjustment expenses.
Informed judgment is applied throughout the process. This includes the application of various individual experiences and expertise
to multiple sets of data and analyses. In addition to actuaries, experts involved with the reserving process also include underwriting
and claims personnel and lawyers, as well as other company management. As a result, management may have to consider varying
individual viewpoints when establishing the provision for loss and loss adjustment expenses.
Variables Influencing the Provision for Unpaid Loss and Loss Adjustment Expenses
The variables discussed above have different impacts on estimation uncertainty for a given product line, depending on the length
of the claim tail, the reporting lag, the impact of individual claims and the complexity of the claim process for a given product
line.
Property and casualty insurance policies are either written on a claims-made or occurrence basis. Claims-made policies generally
cover, subject to requirements in individual policies, claims reported during the policy period. Policies that are written on an
occurrence basis require that the insured demonstrate that a loss occurred in the policy period, even if the insured reports the loss
in a later policy period.
Product lines are generally classifiable as either long-tail or short-tail, based on the average length of time between the event
triggering claims under a policy and the final resolution of those claims. Short-tail claims are reported and settled quickly, resulting
in less estimation variability. The longer the time before final claim resolution, the greater the exposure to estimation risks and
hence the greater the estimation uncertainty.
A major component of the claim tail is the reporting lag. The reporting lag, which is the time between the event triggering a claim
and the reporting of the claim to the insurer, makes estimating IBNR inherently more uncertain. In addition, the greater the reporting
lag, the greater the proportion of IBNR to the total provision for the product line. Writing new products with material reporting
lags can result in adding several years' worth of IBNR claim exposure before the reporting lag exposure becomes clearly observable,
thereby increasing the risk associated with pricing and reserving such products.
For some lines, the impact of large individual claims or loss events, such as catastrophes, can be material to the analysis. These
lines are generally referred to as being "low frequency/high severity," while lines without this "large claim" sensitivity are referred
to as "high frequency/low severity." The provision for low frequency/high severity lines can be sensitive to the impact of a small
number of potentially large claims or a small number of significant loss events, such as catastrophes. As a result, the role of
judgment is much greater for these provisions. In contrast, for high frequency/low severity lines, the impact of individual claims
is relatively minor and the range of reasonable provision estimates is narrower and more stable.
Claim complexity can also greatly affect the estimation process by impacting the number of assumptions needed to produce the
estimate, the potential stability of the underlying data and claim process, and the ability to gain an understanding of the data.
Product lines with greater claim complexity have inherently greater estimation uncertainty.
Actuaries have to exercise a considerable degree of judgment in the evaluation of all these factors in their analysis of the provision
for loss and loss adjustment expenses. The human element in the application of actuarial judgment is unavoidable when faced
with material uncertainty. Different actuaries may choose different assumptions when faced with such uncertainty, based on their
individual backgrounds, professional experiences and areas of focus. Hence, the estimates selected by the various actuaries may
differ materially from each other.
Lastly, significant structural changes to the available data, product mix or organization can also materially impact the process for
establishing the provision for loss and loss adjustment expenses.
Property and Casualty Insurance
The Company's insurance policies are generally written on an occurrence basis. Non-standard automobile includes both short and
long-tail coverages. The payments that are made quickly typically pertain to auto physical damage and property damage claims.
The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. Reporting lags are
relatively short, and the claim settlement process for personal automobile liability generally is the least complex of the liability
products. Given that our core non-standard automobile offerings are policies at the minimum prescribed limits in each state, our
non-standard automobile business is generally viewed as a high frequency, low severity business.
Examples of common risk factors that could change and, thus, affect the provision for loss and loss adjustment expenses for the
non-standard automobile product line include, but are not limited to:
11
KINGSWAY FINANCIAL SERVICES INC.
trends in jury awards;
changes in the underlying court system and its philosophy;
changes in case law;
litigation trends;
frequency of claims with payment capped by policy limits;
change in average severity of accidents, or proportion of severe accidents;
subrogation opportunities;
degree of patient responsiveness to treatment;
changes in claim handling philosophies;
effectiveness of no-fault laws;
frequency of visits to health providers;
number of medical procedures given during visits to health providers;
types of health providers used;
types of medical treatments received;
changes in cost of medical treatments;
changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.);
changes in underwriting standards; and
changes in the use of credit data for rating and underwriting.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Historical Development of Property and Casualty Unpaid Loss and Loss Adjustment Expenses
Table 3 summarizes the changes over time in the Company's provision for property and casualty unpaid loss and loss adjustment
expenses.
The first section of the table shows the provision for property and casualty unpaid loss and loss adjustment expenses recorded at
the balance sheet date for each of the indicated years. The original provision for each year is presented on a gross basis as well
as net of estimated reinsurance recoverable on unpaid loss and loss adjustment expenses.
The second section displays the cumulative amount of payments made through the end of each subsequent year with respect to
each original provision. The third section presents the re-estimation over subsequent years of each year's original net liability for
property and casualty unpaid loss and loss adjustment expenses as more information becomes known and trends become more
apparent. The final section compares the latest re-estimation to the original estimate for each year presented in the table on both
a gross and net basis.
The development of the provision for property and casualty unpaid loss and loss adjustment expenses is shown by the difference
between the original estimates and the re-estimated liabilities at each subsequent year-end. The re-estimated liabilities at each
year-end are based on actual payments in full or partial settlement of claims plus re-estimates of the payments required for claims
still open or IBNR claims. Favorable development (redundancy) means that the original estimated provision was higher than
subsequently re-estimated. Unfavorable development (deficiency) means that the original estimated provision was lower than
subsequently re-estimated. The cumulative development represents the aggregate change in the estimates over all prior years.
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KINGSWAY FINANCIAL SERVICES INC.
TABLE 3 Provision for property and casualty unpaid loss and loss adjustment expense, net of recoveries from reinsurers
As of December 31, 2015 (in thousands of dollars, except percentages)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Property and casualty
unpaid loss and loss
adjustment expenses
originally established - end
of year, gross
Less: reinsurance
recoverable on property
and casualty unpaid loss
and loss adjustment
expenses
Property and casualty
unpaid loss and loss
adjustment expenses
originally established - end
of year, net
Cumulative net paid as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Re-estimated liability as
of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
As of December 31, 2015:
Cumulative deficiency
(redundancy)
Cumulative deficiency
(redundancy) as a % of
property and casualty
unpaid loss and loss
adjustment expenses
originally established - net
Re-estimated liability -
gross
Less: re-established
reinsurance recoverable
Re-estimated provision -
net
Cumulative deficiency
(redundancy) - gross
% of property and
casualty unpaid loss and
loss adjustment expenses
originally established -
gross
55,471 63,895
84,534
103,116
120,258
174,708
186,685
183,151
197,951
119,150
106,825
1,207
3,203
7,942
5,478
298
7,974
—
499
327
301
481
54,264 60,692
76,592
97,638
119,960
166,734
186,685
182,652
197,624
118,849
106,344
39,068
42,428
56,746
53,426
72,091
70,046
105,201
111,676
107,139
108,615
99,444
141,165
155,494
156,753
150,535
81,279
108,966
162,233
175,318
180,437
174,313
115,386
170,194
188,024
190,763
183,621
174,897
192,260
196,034
186,908
195,048
197,798
188,791
198,905
189,399
190,133
61,308
71,471
69,787
96,459
90,193
89,578
133,790
133,793
174,640
185,019
201,086
201,978
184,462
197,621
190,176
186,915
127,131
187,144
206,787
197,961
193,305
125,930
182,517
209,636
200,983
191,902
181,774
206,123
201,276
191,969
205,593
197,705
192,913
197,169
188,604
188,487
48,817
75,525
90,925
98,801
101,392
102,749
103,020
103,295
103,571
108,978
104,908
106,018
106,835
105,977
105,992
105,942
104,164
103,894
50,040
71,018
83,889
91,333
94,894
96,144
97,365
97,560
97,684
97,950
105,095
98,230
96,552
97,618
98,024
98,340
99,079
99,340
98,764
98,576
616
(6,805)
(8,060)
5,970
15,040
18,908
14,517
(9,137)
(14,955)
(7,768)
1.0 %
(8.9)%
(8.3)%
5.0%
9.0%
10.1%
7.9%
(4.6)%
(12.6)%
(7.3)%
61,308
69,787
89,578
125,930
189,221
205,593
197,169
188,487
103,894
98,576
—
—
—
—
7,447
—
—
—
—
—
61,308
69,787
89,578
125,930
181,774
205,593
197,169
188,487
103,894
98,576
(2,587)
(14,747)
(13,538)
5,672
14,513
18,908
14,018
(9,464)
(15,256)
(8,249)
(4.0)%
(17.4)%
(13.1)%
4.7%
8.3%
10.1%
7.7%
(4.8)%
(12.8)%
(7.7)%
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KINGSWAY FINANCIAL SERVICES INC.
Rollforward of Property and Casualty Unpaid Loss and Loss Adjustment Expenses
Table 4 shows a rollforward of the provision for property and casualty unpaid loss and loss adjustment expenses, net of amounts
recoverable from reinsurers. The effect on the Company's net loss during the past two years due to changes in estimates of prior
year property and casualty unpaid loss and loss adjustment expenses is shown as the "prior years" contribution to incurred losses.
The consolidated financial statements are presented on a calendar year basis for all data. Calendar year results reflect payments
and re-estimation of the provision that have been recorded in the consolidated financial statements during the applicable reporting
period without regard to the periods in which the original losses were incurred. Calendar year results do not change after the end
of the applicable reporting period, even as new information develops.
TABLE 4 Rollforward of property and casualty unpaid loss and loss adjustment expenses
As of December 31 (in thousands of dollars)
Balance at beginning of period, gross
Less reinsurance recoverable related to property and casualty unpaid
loss and loss adjustment expenses
Balance at beginning of period, net
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
Disposal of unpaid loss and loss adjustment expenses related to PIH
Balance at end of period, net
Plus reinsurance recoverable related to property and casualty unpaid
loss and loss adjustment expenses
Balance at end of period, gross
INVESTMENTS
2015
63,895
3,203
60,692
86,439
616
(54,415)
(39,068)
—
54,264
1,207
55,471
2014
84,534
7,942
76,592
84,577
(5,123)
(52,521)
(42,428)
(405)
60,692
3,203
63,895
We manage our investments to support the liabilities of our insurance operations, preserve capital, maintain adequate liquidity and
maximize after-tax investment returns within acceptable risks. The fixed maturities portfolios are managed by a third-party firm
and are comprised predominantly of high-quality fixed maturities with relatively short durations. Equity, limited liability and other
investments are managed by a team of employees and advisors dedicated to the identification of investment opportunities that
offer asymmetric risk/reward potential with a margin of safety supported by private market values. The Investment and Capital
Committee of the Board of Directors is responsible for monitoring the performance of our investments and compliance with the
Company's investment policies and guidelines, which it reviews annually. We are also subject to the applicable state regulations
that prescribe the type, quality and concentration of investments that individual insurance companies can make.
For further descriptions of the Company's investments, see our disclosures under the headings "Net Investment Income," "Net
Realized Gains," "Investments," "Liquidity and Capital Resources" and "Critical Accounting Estimates and Assumptions" in the
MD&A and Note 5, "Investments," and Note 23, "Fair Value of Financial Instruments," to the Consolidated Financial Statements.
REINSURANCE
For most of the non-standard automobile business that we write, our exposure is generally limited to the minimum statutory liability
limits, which are typically not greater than $50,000 per occurrence, depending on the state. We have from time to time, though,
entered into different types of reinsurance arrangements as part of the management of our non-standard automobile business. For
2015 and 2014, we entered into an excess of loss reinsurance arrangement to reduce our exposure to losses related to certain
catastrophic events which may occur in any of the states in which we write non-standard automobile business.
Reinsurance ceded does not relieve us of our ultimate liability to our insureds in the event that any reinsurer is unable to meet its
obligations under its reinsurance contracts. We therefore enter into reinsurance contracts with only those reinsurers which we
believe have sufficient financial resources to meet their obligations to us. Reinsurance treaties generally have terms of one year
and, as a result, are subject to renegotiation annually.
14
KINGSWAY FINANCIAL SERVICES INC.
Because our reinsurance recoverable is generally unsecured, we regularly evaluate the financial condition of our reinsurers and
monitor the concentrations of credit risk to minimize our exposure to significant losses as a result of the insolvency of a reinsurer.
We believe that the amounts we have recorded as reinsurance recoverable are appropriately established. Estimating our reinsurance
recoverable, however, is subject to various uncertainties and the amounts ultimately recoverable may vary from amounts currently
recorded. Estimating amounts of reinsurance recoverable is also impacted by the uncertainties involved in the establishment of
provisions for unpaid loss and loss adjustment expenses. As our underlying provision develops, the amounts ultimately recoverable
may vary from amounts currently recorded.
As of December 31, 2015, we had $1.4 million recoverable from third-party reinsurers. As shown in Table 5 below, at December 31,
2015, 100.0% of the amounts recoverable from third-party reinsurers were due from reinsurers that were rated "A-" or higher by
the A.M. Best rating service. We regularly evaluate our reinsurers and their respective amounts recoverable, and an allowance for
uncollectible reinsurance is provided, if needed.
TABLE 5 Composition of amounts due from reinsurers by A.M. Best rating
As of December 31, 2015
A+
A-
Total
DEBT
65.0%
35.0%
100.0%
Debt includes LROC preferred units and subordinated debt, both of which are carried at fair value.
Debt consists of the following instruments:
TABLE 6 Debt
As of December 31 (in thousands of dollars)
LROC preferred units due 2015
Subordinated debt
Total
2015
Principal
—
90,500
90,500
Fair Value
—
39,898
39,898
2014
Principal
13,618
90,500
104,118
Fair Value
13,618
40,659
54,277
Further information regarding our debt is discussed within the "Debt" section of MD&A as well as in Note 13, "Debt," to the
Consolidated Financial Statements.
REGULATORY ENVIRONMENT
Our insurance subsidiaries are subject to extensive regulation in the states in which they do business. Such regulation pertains to
a variety of matters, including, but not limited to, policy forms, premium rate plans, licensing of agents, licenses to transact business,
trade practices, claims practices, investments, payment of dividends, transactions with affiliates and solvency. The majority of
our insurance is written in states requiring prior approval by regulators before proposed rates for property and casualty policies
may be implemented.
Our U.S. insurance subsidiaries are subject to the insurance holding company laws in the jurisdictions in which they conduct
business. These regulations require that each U.S insurance company in the holding company system register with the insurance
department of its state of domicile and furnish information concerning the operations of companies in the holding company system
which may materially affect the operations, management or financial condition of the insurers in the holding company domiciled
in that state. We have U.S. insurance subsidiaries that are organized and domiciled under the insurance statutes of Illinois, Minnesota
and Florida. The insurance laws in each of these states similarly provide that all transactions among members of a holding company
system be done at arm’s length and be shown to be fair and reasonable to the regulated insurer. Transactions between insurance
company subsidiaries and their parents and affiliates typically must be disclosed to the state regulators, and any material or
extraordinary transaction requires prior approval of the applicable state insurance regulator. A change of control of a domestic
insurer or of any controlling person requires the prior approval of the state insurance regulator. In general, any person who acquires
10% or more of the outstanding voting securities of the insurer or its parent company is presumed to have acquired control of the
domestic insurer. To the best of our knowledge, we are in compliance with the regulations discussed above.
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KINGSWAY FINANCIAL SERVICES INC.
We are a holding company with no business operations of our own. Our ability to meet our debt payment obligations and cover
our operating expenses is largely dependent on dividends or other payments from our non-insurance subsidiaries as well as the
sale of assets held by the holding company and the issuance of securities to raise capital. Dividends declared and paid by an
insurance subsidiary are subject to certain restrictions which may require prior approval by the insurance regulators of the state
in which such subsidiary is domiciled. At this time, the U.S. insurance subsidiaries of the Company are restricted from making
any dividend payments to the holding company without regulatory approval pursuant to the domiciliary state insurance regulations.
Other transactions between our insurance company subsidiaries and their affiliates generally must be disclosed to state regulators,
and prior regulatory approval generally is required before any material or extraordinary transaction may be consummated or any
management agreement, services agreement, expense sharing arrangement or other contract providing for the rendering of services
on a regular, systematic basis is executed.
Insurance companies are required to report their financial condition and results of operation in accordance with statutory accounting
principles prescribed or permitted by state insurance regulators in conjunction with the National Association of Insurance
Commissioners ("NAIC"). State insurance regulators also prescribe the form and content of statutory financial statements, perform
periodic financial examinations of insurers, set minimum reserve and loss ratio requirements, establish standards for the types and
amounts of investments and require minimum capital and surplus levels. Such statutory capital and surplus requirements reflect
risk-based capital ("RBC") standards promulgated by the NAIC. These RBC standards are intended to assess the level of risk
inherent in an insurance company's business and consider items such as asset risk, credit risk, underwriting risk and other business
risks relevant to its operations. In accordance with RBC formulas, an insurance company's RBC requirements are calculated and
compared to its total adjusted capital, as defined by the NAIC, to determine whether regulatory intervention is warranted. 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,
2015, surplus as regards policyholders reported by each of our insurance subsidiaries exceeded the 200% threshold.
Our insurance subsidiaries are required under the guaranty fund laws of most states in which they transact business to pay
assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. Our insurance
subsidiaries also are required to participate in various involuntary pools or assigned risk pools. In most states, the involuntary
pool participation of our insurance subsidiaries is in proportion to their voluntary writings of related lines of business in such states.
We operate under licenses issued by various state insurance authorities. These licenses govern, among other things, the types of
insurance coverage and agency and claim services that we may offer consumers in these states. Such licenses typically are issued
only after we file an appropriate application and satisfy prescribed criteria. We must apply for and obtain the appropriate new
licenses before we can implement any plan to expand into a new state or offer a new line of insurance or other new product that
requires separate licensing.
The insurance laws of most states in which our insurance subsidiaries operate require insurance companies to file insurance rate
schedules and insurance policy forms for review and approval. State insurance regulators have broad discretion in judging whether
our rates are adequate, not excessive and not unfairly discriminatory and whether our policy forms comply with law. The speed
at which we can change our rates depends, in part, on the method by which the applicable state's rating laws are administered.
Generally, state insurance regulators have the authority to disapprove our rates or request changes in our rates. In addition, certain
states in which we operate have laws and regulations that limit an automobile insurance company's ability to cancel or not renew
policies.
We are subject to state laws and regulations that require diversification of our investment portfolios and that limit the amount of
investments in certain categories. Failure to comply with these laws and regulations would cause non-conforming investments to
be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture.
The state insurance departments that have jurisdiction over our insurance company subsidiaries may conduct on-site visits and
examinations of the insurance companies' affairs, especially as to their financial condition, ability to fulfill their obligations to
policyholders, market conduct, claims practices and compliance with other laws and applicable regulations. Typically, these
examinations are conducted every three to five years. In addition, if circumstances dictate, regulators are authorized to conduct
special or target examinations of insurance companies to address particular concerns or issues. The results of these examinations
can give rise to regulatory orders requiring remedial, injunctive or other corrective action on the part of the company that is the
subject of the examination or the assessment of fines or other penalties against that company.
The Gramm-Leach-Bliley Act protects consumers from the unauthorized dissemination of certain personal information. The
majority of states have implemented additional regulations to address privacy issues. These laws and regulations apply to all
financial institutions, including insurance companies, and require us to maintain appropriate procedures for managing and protecting
certain personal information of our customers and to fully disclose our privacy practices to our customers. We may also be exposed
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KINGSWAY FINANCIAL SERVICES INC.
to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial
condition.
In July 2010, the Dodd-Frank Act (the "DFA") was enacted into law. Among other things, the DFA forms within the Treasury
Department a Federal Insurance Office ("FIO") that is charged with monitoring all aspects of the insurance industry, gathering
data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. FIO's
report, which was delivered to Congress in 2013, concluded that a hybrid approach to regulation, involving a combination of state
and federal government action, could improve the U.S. insurance system by attaining uniformity, efficiency and consistency,
particularly with respect to solvency and market conduct regulation. A hybrid approach was also recommended to address the
perceived need for uniform supervision of insurance companies with national and global activities. FIO established the Federal
Advisory Committee on Insurance ("FACI") whose mission is to provide recommendations to FIO on issues it monitors for
Congress. While the NAIC continues to promote the strengths of the U.S. state-based insurance regulatory system, both FIO/FACI
and international standard setting authorities such as the International Association of Insurance Supervisors are actively seeking
a role in shaping the future of the U.S. insurance regulatory framework.
Title V of the Wall Street Reform Act instructs the FIO Director to submit an update to the report that FIO submitted to Congress
in 2013 describing the impact of Part II of the Nonadmitted and Reinsurance Reform Act of 2010 ("NRRA") on the ability of state
regulators to access reinsurance information for regulated entities in their jurisdictions. The update, submitted by FIO in May
2015, concludes that Part II of NRRA has not had an adverse impact on the ability of state regulators to access reinsurance
information from regulated companies. It is not yet known whether or how these organizations' recommendations might result in
changes to the current state-based system of insurance industry regulation or ultimately impact Kingsway’s operations.
Vehicle service agreements are regulated in all states in the United States, and IWS is subject to these regulations. Most states
utilize the approach of the Uniform Service Contract Act which was adopted by the NAIC in the early 1990's. Under that scheme,
states regulate vehicle service contract companies by requiring them annually to file documentation, together with a copy of the
contract of insurance covering their liability under the service contracts, which complies with the particular state's regulatory
requirements. IWS is in compliance with the regulations of each state in which it sells vehicle service agreements.
Certain, but not all, states regulate the sale of HVAC and equipment warranty contracts. Trinity is licensed as a service contract
provider in those states where it is required.
EMPLOYEES
At December 31, 2015, we employed 305 personnel supporting our continuing operations, of which 301 were full-time employees.
ACCESS TO REPORTS
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge
through our website at www.kingsway-financial.com as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the U.S. Securities and Exchange Commission ("SEC").
Item 1A. Risk Factors
Most issuers, including Kingsway, are exposed to numerous risk factors that could cause actual results to differ materially from
recent results or anticipated future results. The risks and uncertainties described below are those specific to the Company which
we currently believe have the potential to be material, but they may not be the only ones we face. If any of the following risks,
or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur
or become material risks, our business, prospects, financial condition, results of operations and cash flows could be materially
and adversely affected. Investors are advised to consider these factors along with the other information included in this 2015
Annual Report and to consult any further disclosures Kingsway makes on related subjects in its filings with the SEC.
FINANCIAL RISK
Kingsway is a holding company, and its operating insurance subsidiaries are subject to dividend restrictions and are
required to maintain minimum capital and surplus levels, which could limit our operations and have a material adverse
effect on our financial condition.
Kingsway is a holding company with assets consisting primarily of the capital stock of its subsidiaries. Our operations are and
will continue to be limited by the earnings of our subsidiaries and their ability to pay dividends to us. The payment of dividends
by our operating insurance subsidiaries is subject to various statutory and regulatory restrictions imposed by the insurance laws
of the domiciliary jurisdiction, including Barbados, of each such subsidiary. As a result of operating losses recorded in recent
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KINGSWAY FINANCIAL SERVICES INC.
years, at this time none of our U.S. insurance subsidiaries is able to declare and pay a dividend to the holding company without
prior regulatory approval. The Company expects these restrictions to continue. In the case of other subsidiaries not currently
subject to these restrictions, these subsidiaries may be limited in their ability to make dividend payments or advance funds to
Kingsway in the future because of the need to support their own capital levels. The inability of our subsidiaries to pay dividends
to us could have a material adverse effect on our financial condition.
See the "Liquidity and Capital Resources" section of MD&A for a detailed description of the liquidity requirements of the holding
company and the regulatory capital requirements of the operating insurance subsidiaries. No assurances can be given that the
operating insurance subsidiaries will be able to maintain compliance with these regulatory capital requirements.
We have substantial outstanding debt, which could adversely affect our ability to obtain financing in the future, react to
changes in our business and satisfy our obligations.
As of December 31, 2015, we had $90.5 million principal value of outstanding subordinated debt, in the form of trust preferred
debt instruments, with redemption dates beginning in December, 2032. Because of our substantial outstanding debt:
•
•
•
our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing could be limited;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or
general corporate purposes and our ability to satisfy our obligations with respect to our debt may be impaired in the future;
a large portion of our cash flow must be dedicated to the payment of principal and interest on our debt, thereby reducing the
funds available to us for other purposes;
• we are exposed to the risk of increased interest rates because our outstanding subordinated debt, representing $90.5 million
of principal value, bears interest directly related to the London interbank offered interest rate for three-month U.S. dollar
deposits ("LIBOR");
it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and acceleration
of, such debt;
•
• we may be more vulnerable to general adverse economic and industry conditions;
• we may be at a competitive disadvantage compared to our competitors with proportionately less debt or with comparable debt
on more favorable terms and, as a result, they may be better positioned to withstand economic downturns;
our ability to refinance debt may be limited or the associated costs may increase;
•
•
our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited; and
• we may be prevented from carrying out capital spending that is, among other things, necessary or important to our growth
strategy and efforts to improve the operating results of our businesses.
Increases in interest rates would increase the cost of servicing our debt and could adversely affect our results of operation.
$90.5 million principal value of our outstanding debt bears interest directly related to LIBOR. As a result, increases in LIBOR
would increase the cost of servicing our debt and could adversely affect our results of operations. As of December 31, 2015, each
one percentage point increase in LIBOR would result in an approximately $0.9 million increase in our annual interest expense.
Our operations are restricted by the terms of our debt indentures, which could limit our ability to plan for or react to
market conditions or meet our capital needs.
Our debt indentures contain numerous covenants that may limit our ability, among other things, to make particular types of restricted
payments and pay dividends or redeem capital stock. The covenants under our debt agreements could limit our ability to plan for
or react to market conditions or to meet our capital needs. No assurances can be given that we will be able to maintain compliance
with these covenants.
If we are not able to comply with the covenants and other requirements contained in the debt indentures, an event of default under
the relevant debt instrument could occur. If an event of default does occur, it could trigger a default under our other debt instruments,
and the holders of the defaulted debt instrument could declare amounts outstanding with respect to such debt to become immediately
due and payable. Upon such an event, our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding
debt instruments. In addition, such a repayment under an event of default could adversely affect our liquidity and force us to sell
assets to repay borrowings.
The Investment and Capital Committee of the Board of Directors closely monitors the debt and capital position and, from time to
time, recommends capital initiatives based upon the circumstances of the Company.
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KINGSWAY FINANCIAL SERVICES INC.
We may not be able to realize our investment objectives, which could significantly reduce our earnings and liquidity.
We depend on our investments, particularly our fixed maturities, for a substantial portion of our liquidity. As of December 31,
2015, the fair value of our investments included $55.6 million of fixed maturities. Given the low interest rate environment which
exists for fixed maturities, a significant increase in investment yields or an impairment of investments that we own could have a
material adverse effect on our business, results of operations and financial condition by reducing the fair value of the investments
we own, particularly if we were forced to liquidate investments at a loss. The low interest rate environment for fixed maturities
which has existed for years also exposes us to reinvestment risk as these investments mature because the funds may be reinvested
at rates lower than those of the maturing investments.
Our ability to achieve our investment objectives is affected by general economic conditions that are beyond our control. General
economic conditions can adversely affect the markets for interest rate-sensitive instruments, including the extent and timing of
investor participation in such markets, the level and volatility of interest rates and, consequently, the fair value of fixed maturities.
In addition, changing economic conditions can result in increased defaults by the issuers of investments that we own. Interest
rates are highly sensitive to many factors, including monetary policies, domestic and international economic and political conditions
and other factors beyond our control. General economic conditions, stock market conditions and many other factors can also
adversely affect the securities markets and, consequently, the fair value of the investments we own. We may not be able to realize
our investment objectives, which could reduce our profitability significantly.
A difficult economy generally may materially adversely affect our business, results of operations and financial condition.
An adverse change in market conditions leading to instability in the global credit markets presents additional risks and uncertainties
for our business. In particular, deterioration in the public debt markets could lead to investment losses and an erosion of capital
in our insurance company subsidiaries as a result of a reduction in the fair value of investments.
Depending on market conditions going forward, we could incur substantial realized and unrealized losses in future periods, which
could have an adverse impact on our results of operations and financial condition. We could also experience a reduction in capital
in our insurance subsidiaries below levels required by the regulators in the jurisdictions in which they operate. 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 impact 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 may materially and adversely affect our business.
Worldwide financial markets have recently experienced periods of extraordinary disruption and volatility, 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, adequacy of unpaid loss and loss adjustment
expenses and regulatory developments.
We have provided a third-party guarantee which could materially adversely affect our business, results of operations and
financial condition.
We provided an indemnity and hold harmless agreement to a third-party for customs bonds reinsured by Lincoln General Insurance
Company ("Lincoln General") during the time Lincoln General was a subsidiary of ours. This agreement may require us to
compensate the third-party if Lincoln General is unable to fulfill its obligations relating to the customs bonds. Our potential
exposure under this agreement is not determinable, and no assurances can be given that we will not be required to perform under
this agreement in a manner that has a material adverse effect on our business, results of operations and financial condition.
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KINGSWAY FINANCIAL SERVICES INC.
We have generated net operating loss carryforwards for U.S. income tax purposes, but our ability to use these net operating
losses may be limited by our inability to generate future taxable income.
Our U.S. businesses have generated net operating loss ("NOL") carryforwards for U.S. federal income tax purposes of
approximately $849.9 million as of December 31, 2015. These losses can be available to reduce income taxes that might otherwise
be incurred on future U.S. taxable income. The utilization of these losses would have a positive effect on our cash flow. Our
operations, however, remain challenged, and there can be no assurance that we will generate the taxable income in the future
necessary to utilize these losses and realize the positive cash flow benefit.
We have generated NOL carryforwards for U.S. income tax purposes, but our ability to preserve and use these NOLs may
be limited or impaired by future ownership changes.
Our ability to utilize the NOL carryforwards after an "ownership change" is subject to the rules of Section 382 of the U.S. Internal
Revenue Code of 1986, as amended ("Section 382"). An ownership change occurs if, among other things, the shareholders (or
specified groups of shareholders) who own or have owned, directly or indirectly, five (5%) percent or more of the value of our
shares or are otherwise treated as five (5%) percent shareholders under Section 382 and the regulations promulgated thereunder
increase their aggregate percentage ownership of the value of our shares by more than 50 percentage points over the lowest
percentage of the value of the shares owned by these shareholders over a three-year rolling period. In the event of an ownership
change, Section 382 would impose an annual limitation on the amount of taxable income we may offset with NOL carryforwards.
This annual limitation is generally equal to the product of the value of our shares on the date of the ownership change multiplied
by the long-term tax-exempt rate in effect on the date of the ownership change. The long-term tax-exempt rate is published monthly
by the Internal Revenue Service. Any unused Section 382 annual limitation may be carried over to later years until the applicable
expiration date for the respective NOL carryforwards. In the event an ownership change as defined under Section 382 were to
occur, our ability to utilize our NOL carryforwards would become substantially limited. The consequence of this limitation would
be the potential loss of a significant future cash flow benefit because we would no longer be able to substantially offset future
taxable income with NOL carryforwards. There can be no assurance that such ownership change will not occur in the future.
Expiration of our tax benefit preservation plan may increase the probability that we will experience an ownership change
as defined under Section 382.
In order to reduce the likelihood that we would experience an ownership change without the approval of our Board of Directors,
our shareholders ratified and approved the tax benefit preservation plan agreement (the "Plan"), dated as of September 28, 2010,
between the Company and Computershare Investor Services Inc., as rights agent, for the sole purpose of protecting the NOLs.
The Plan expired on September 28, 2013. There can be no assurance that our Board of Directors will recommend to our shareholders
that a similar tax benefit preservation plan be approved to replace the expired Plan; furthermore, there can be no assurance that
our shareholders would approve any new tax benefit preservation plan were our Board of Directors to present one for shareholder
approval. The expiration of the Plan, without a new tax benefit preservation plan, exposes us to certain changes in share ownership
which we would not be able to prevent as we would have been able to prevent under the Plan. Such changes in share ownership
could trigger an ownership change as defined under Section 382 resulting in restrictions on the use of NOLs in future periods, as
discussed above.
COMPLIANCE RISK
If we fail to comply with applicable insurance and securities laws or regulatory requirements, our business, results of
operations and financial condition could be adversely affected.
As a publicly traded holding company listed on the Toronto and New York Stock Exchanges and which owns several property
and casualty insurance subsidiaries, we are subject to numerous laws and regulations. These laws and regulations delegate
regulatory, supervisory and administrative powers to federal, provincial or state regulators.
Insurance regulations are generally designed to protect policyholders rather than shareholders and are related to matters including:
rate-setting;
risk-based capital and solvency standards;
restrictions on the amount, type, nature, quality and quantity of investments;
the maintenance of adequate provisions for unearned premiums and unpaid loss and loss adjustment expenses;
restrictions on the types of terms that can be included in insurance policies;
standards for accounting;
•
•
•
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•
•
• marketing practices;
•
claims-settlement practices;
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KINGSWAY FINANCIAL SERVICES INC.
•
•
•
•
•
the examination of insurance companies by regulatory authorities, including periodic financial and market conduct
examinations;
the licensing of insurers and their agents;
limitations on dividends and transactions with affiliates;
approval of certain reinsurance transactions; and
insolvency proceedings.
In light of losses incurred in recent years, Kingsway and its regulated subsidiaries have been subject to intense review and supervision
by insurance regulators. Regulators have taken significant steps to protect the policyholders of the companies we own. These
steps have included:
•
•
requesting additional capital contributions from Kingsway to its insurance subsidiaries; and
requiring more frequent reporting, including with respect to capital and liquidity positions.
These and other actions have made it challenging for the Company to continue to maintain focus on the operation and development
of its businesses. The Company does not expect these conditions to change in the foreseeable future.
In light of financial performance and a number of material transactions executed during the year, the Company has been asked to
respond to questions from and provide information to regulatory bodies overseeing insurance and/or securities laws in Canada
and the United States. The Company has cooperated in all respects with these reviews and has responded to information requests
on a timely basis.
Any failure to comply with applicable laws or regulations could result in the imposition of fines or significant restrictions on our
ability to do business, which could adversely affect our results of operations or financial condition. In addition, any changes in
laws or regulations, including the adoption of consumer initiatives regarding rates charged for automobile or other insurance
coverage or claims-handling procedures, could materially adversely affect our business, results of operations and financial
condition. It is not possible to predict the future impact of changing federal, state and provincial regulation on our operations,
and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws and
regulations.
Our business is subject to risks related to litigation and regulatory actions.
We are a defendant in a number of legal actions relating to our insurance and other business operations. We may from time to
time be subject to a variety of legal and regulatory actions relating to our current and past business operations, including, but not
limited to:
•
•
•
•
•
disputes over coverage or claims adjudication;
disputes regarding sales practices, disclosure, premium refunds, licensing, regulatory compliance and compensation
arrangements;
disputes with our agents, producers or network providers over compensation and termination of contracts and related claims;
disputes with taxing authorities regarding our tax liabilities; and
disputes relating to certain businesses acquired or disposed of by us.
In addition, plaintiffs continue to bring new types of legal actions against insurance and related companies. Current and future
court decisions and legislative activity may increase our exposure to these types of claims. Multiparty or class action claims may
present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these
claims, if it resulted in a significant award or a judicial ruling that was otherwise detrimental, could create a precedent in our
industry that could have a material adverse effect on our results of operations and financial condition. This risk of potential liability
may make reasonable settlements of claims more difficult to obtain. We cannot determine with any certainty what new theories
of recovery may evolve or what their impact may be on our business.
We may be subject to governmental or administrative investigations and proceedings in the context of our highly regulated
businesses. We cannot predict the outcome of these investigations, proceedings and reviews, and cannot assure that such
investigations, proceedings or reviews or related litigation or changes in operating policies and practices would not materially
adversely affect our results of operations and financial condition. In addition, if we were to experience difficulties with our
relationship with a regulatory body in a given jurisdiction, it could have a material adverse effect on our ability to do business in
that jurisdiction.
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KINGSWAY FINANCIAL SERVICES INC.
STRATEGIC RISK
The achievement of our strategic objectives is highly dependent on effective change management.
We have restructured our operating insurance subsidiaries, including exiting states and lines of business, placing subsidiaries into
voluntary run-off and terminating managing general agent relationships, with the objective of focusing on core lines of business,
creating a more effective and efficient operating structure and focusing on profitability. These actions resulted in changes to our
structure and business processes. While these changes are expected to bring us benefits in the form of a more agile and focused
business, success is dependent on management effectively realizing the intended benefits. Ineffective change management may
result in disruptions to the operations of the business or may cause employees to act in a manner which is inconsistent with our
objectives. Any of these events could negatively impact our performance. We may not always achieve the expected cost savings
and other benefits of our initiatives.
We may experience difficulty continuing to reduce our holding company expenses while at the same time retaining staff
given the significant reduction in size and scale of our businesses.
We have divested a number of subsidiaries and significantly reduced our written premium in the insurance subsidiaries we continue
to own. At the same time, we have been downsizing our holding company expense base in an attempt to compensate for the
reduction in scale. There can be no assurance that our remaining businesses will produce enough cash flow to adequately compensate
and retain staff and to service our other holding company obligations, particularly the interest expense burden of our remaining
outstanding debt.
The insurance industry and related businesses in which we operate may be subject to periodic negative publicity which
may negatively impact our financial results.
Our products and services are ultimately distributed to individual consumers. From time to time, consumer advocacy groups or
the media may focus attention on insurance products and services, thereby subjecting our industry to periodic negative publicity.
We also may be negatively impacted if participants in one or more of our markets engage in practices resulting in increased public
attention to our businesses. Negative publicity may also result in increased regulation and legislative scrutiny of practices in the
property and casualty insurance industry as well as increased litigation. These factors may further increase our costs of doing
business and adversely affect our profitability by impeding our ability to market our products and services, requiring us to change
our products or services, or by increasing the regulatory burdens under which we operate.
The highly competitive environment in which we operate could have an adverse effect on our business, results of operations
and financial condition.
The property and casualty markets in which we operate are highly competitive. We compete with major North American and
other insurers, many of which have more financial, marketing and management resources than we do. There may also be other
companies of which we are not aware that may be planning to enter the property and casualty insurance industry. Insurers in our
markets generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability,
customer service and geographic coverage. Although our pricing is influenced to some degree by that of our competitors, we
generally believe that it is not in our best interest to compete solely on price. As a result, we are willing to experience from time
to time a loss of market share during periods of intense price competition. Our business could be adversely impacted by the loss
of business to competitors offering competitive insurance products at lower prices. This competition could affect our ability to
attract and retain profitable business.
In our non-standard automobile business, we compete with both large national underwriters and smaller regional companies. Our
competitors include other companies that, like us, serve the independent agency market, as well as companies that sell insurance
directly to customers. Direct underwriters may have certain competitive advantages over agency underwriters, including increased
name recognition, loyalty of the customer base to the insurer rather than to an independent agency and reduced costs to acquire
policies.
Additionally, in certain states, government-operated risk plans may provide non-standard automobile insurance products at lower
prices than we provide.
From time to time, our markets may also attract competition from new entrants. In some cases, such entrants may, because of
inexperience, the desire for new business or for other reasons, price their insurance below the rates that we believe offer acceptable
premiums for the related risk. Further, a number of our competitors, including new entrants to our markets, are developing e-
business capabilities which may impact the level of business transacted through our more traditional distribution channels or that
may affect pricing in the market as a whole.
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KINGSWAY FINANCIAL SERVICES INC.
The vehicle service agreement market in which we compete is comprised of a few large companies, which market service agreements
to credit unions on a national basis and have significantly more financial, marketing and management resources than we do, as
well as several other companies that are somewhat similar in size to IWS that market service agreements to credit unions either
on a regional basis or a less robust national basis. There may also be other companies of which we are not aware that may be
planning to enter the vehicle service agreement industry. Competitors in our market generally compete on coverages offered,
claims handling, customer service, financial stability and, to a lesser extent, price. Larger competitors of ours benefit from added
advantages such as industry endorsements and preferred vendor status. We do not believe that it is in our best interest to compete
solely on price. Instead, we focus our marketing on the total value experience to the credit union and its member, with an emphasis
on customer service. While we historically have been able to adjust our product offering to remain competitive when competitors
have focused on price, our business could be adversely impacted by the loss of business to competitors offering vehicle service
agreements at lower prices.
Engaging in acquisitions involves risks, and, if we are unable to effectively manage these risks, our business may be
materially harmed.
From time to time we engage in discussions concerning acquisition opportunities and, as a result of such discussions, may enter
into acquisition transactions.
Acquisitions entail numerous risks, including the following:
•
•
•
•
•
difficulties in the integration of the acquired business;
assumption of unknown material liabilities, including deficient provisions for unpaid loss and loss adjustment expenses;
diversion of management's attention from other business concerns;
failure to achieve financial or operating objectives; and
potential loss of policyholders or key employees of acquired companies.
We may not be able to integrate or operate successfully any business, operations, personnel, services or products that we may
acquire in the future.
Engaging in new business start-ups involves risks, and, if we are unable to effectively manage these risks, our business may
be materially harmed.
From time to time we engage in discussions concerning the formation of a new business venture and, as a result of such discussions,
may form and capitalize a new business.
New business start-ups entail numerous risks, including the following:
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•
•
identification of appropriate management to run the new business;
understanding the strategic, competitive and marketplace dynamics of the new business and, perhaps, industry;
establishment of proper financial and operational controls;
diversion of management's attention from other business concerns; and
failure to achieve financial or operating objectives.
We may not be able to operate successfully any business, operations, personnel, services or products that we may organize as a
new business start-up in the future.
OPERATIONAL RISK
Our provisions for unpaid loss and loss adjustment expenses may be inadequate, which would result in a reduction in our
net income and might adversely affect our financial condition.
Our provisions for unpaid loss and loss adjustment expenses do not represent an exact calculation of our actual liability but are
estimates involving actuarial and statistical projections at a given point in time of what we expect to be the cost of the ultimate
settlement and administration of reported and IBNR claims. The process for establishing the provision for unpaid loss and loss
adjustment expenses reflects the uncertainties and significant judgmental factors inherent in estimating future results of both
reported and IBNR claims and, as such, the process is inherently complex and imprecise. These estimates are based upon various
factors, including:
•
•
•
•
actuarial projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;
estimates of future trends in claims severity and frequency;
legal theories of liability;
variability in claims-handling procedures;
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KINGSWAY FINANCIAL SERVICES INC.
•
•
•
economic factors such as inflation;
judicial and legislative trends, actions such as class action lawsuits, and judicial interpretation of coverages or
policy exclusions; and
the level of insurance fraud.
Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and unforeseen
factors could negatively impact our ability to accurately assess the risks of the policies that we write. In addition, there may be
significant reporting lags between the occurrence of insured events and the time they are actually reported to us and additional
lags between the time of reporting and final settlement of claims.
As time passes and more information about the claims becomes known, the estimates are appropriately adjusted upward or
downward to reflect this additional information. Because of the elements of uncertainty encompassed in this estimation process,
and the extended time it can take to settle many of the more substantial claims, several years of experience may be required before
a meaningful comparison can be made between actual losses and the original provision for unpaid loss and loss adjustment expenses.
We cannot assure that we will not have unfavorable development in the future. In addition, we have in the past, and may in the
future, acquire other insurance companies. We cannot assure that the provisions for unpaid loss and loss adjustment expenses of
the companies that we acquire are or will be adequate.
In addition, government regulators for our insurance subsidiaries could require that we increase our provisions for unpaid loss and
loss adjustment expenses if they determine that our provisions are understated. Such an increase to the provision for unpaid loss
and loss adjustment expenses for one of our insurance subsidiaries could cause a reduction in its surplus as regards policyholders,
which could adversely affect our ability to sell insurance policies.
Our Insurance Services subsidiaries' deferred service fees may be inadequate, which would result in a reduction in our
net income and might adversely affect our financial condition.
Our Insurance Services subsidiaries' deferred service fees do not represent an exact calculation but are estimates involving actuarial
and statistical projections at a given point in time of what we expect to be the remaining future revenue to be recognized in relation
to our remaining future obligations to provide policy administration and claim-handling services. The process for establishing
deferred service fees reflects the uncertainties and significant judgmental factors inherent in estimating the length of time and the
amount of work related to our future service obligations. If we amortize the deferred service fees too quickly, we could overstate
current revenues which may adversely affect future reported operating results.
As time passes and more information about the remaining service obligations becomes known, the estimates are appropriately
adjusted upward or downward to reflect this additional information. We cannot assure that we will not have unfavorable re-
estimations in the future of our deferred service fees. In addition, we have in the past, and may in the future, acquire companies
which record deferred service fees. We cannot assure that the deferred service fees of the companies that we acquire are or will
be adequate.
Our reliance on independent agents can impact our ability to maintain business, and it exposes us to credit risk.
We market and distribute our automobile insurance products through a network of independent agents in the United States. As a
result, we rely heavily on these agents to attract new business. They typically represent more than one insurance company, which
may expose us to competition within the agencies and, therefore, we cannot rely on their commitment to our insurance products.
Loss of all or a substantial portion of the business provided by these intermediaries could have a material adverse effect on our
business, results of operations and financial condition.
In accordance with industry practice, our customers sometimes pay the premiums for their policies to agents for remittance to us.
These premiums are considered paid when received by the agents and thereafter the customer is no longer liable to us for those
amounts, whether or not we have actually received the premiums from the agents. Consequently, we assume a degree of risk
associated with our reliance on independent agents in connection with the settlement of insurance balances.
Our reliance on credit unions can impact our ability to maintain business.
We market and distribute our vehicle service agreements through a network of credit unions in the United States. As a result, we
rely heavily on these credit unions to attract new business. While these distribution arrangements tend to be exclusive between
us and each credit union, we have competitors which offer similar products exclusively through credit unions. Loss of all or a
substantial portion of our existing credit union relationships could have a material adverse effect on our business, results of
operations and financial condition.
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KINGSWAY FINANCIAL SERVICES INC.
Our reliance on a limited number of warranty and maintenance support clients and customers can impact our ability to
maintain business.
We market and distribute our warranty products and equipment breakdown and maintenance support services through a limited
number of customers and clients across the United States. Loss of all or a substantial portion of our existing customers and clients
could have a material adverse effect on our business, results of operations and financial condition.
Our gross premiums written are derived from the non-standard automobile markets. If the demand for insurance in this
market declines, our results of operations could be adversely affected.
For the year ended December 31, 2015, 100.0% of the gross premiums written from our Insurance Underwriting segment were
attributable to non-standard automobile insurance. The size of the non-standard automobile insurance market can be affected
significantly by many factors outside of our control, such as the underwriting capacity and underwriting criteria of standard
automobile insurance carriers, and we may be specifically affected by these factors. Additionally, the non-standard automobile
insurance market tends to contract during periods of high unemployment as was experienced in the United States throughout 2011
and 2012. To the extent that the non-standard automobile insurance markets are affected adversely for any reason, our gross
premiums written will be disproportionately affected due to our substantial reliance on these insurance markets.
We derive the majority of our non-standard automobile insurance gross premiums written from a few geographic areas,
which may cause our business to be affected by catastrophic losses or business conditions in these areas.
Certain jurisdictions, specifically Florida, Texas, Illinois, California, Colorado and Nevada, generated 84.8% of our non-standard
automobile insurance gross premiums written during 2015.
Our results of operations may, therefore, be adversely affected by any catastrophic losses in these areas. Catastrophic losses can
be caused by a wide variety of events, including earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires,
terrorism, riots and explosions, and their incidence and severity are inherently unpredictable. Catastrophic losses are characterized
by low frequency but high severity due to aggregation of losses and could result in adverse effects on our results of operations or
financial condition. Our results of operations may also be adversely affected by general economic conditions, competition,
regulatory actions or other business conditions that affect losses or business conditions in the specific areas in which we conduct
most of our business.
If reinsurance rates rise significantly or reinsurance becomes unavailable or reinsurers are unable to pay amounts due to
us, we may be adversely affected.
We purchase reinsurance from third-parties in order to reduce our liability on individual risks. Reinsurance does not relieve us
of our primary liability to our insureds. A third-party reinsurer's insolvency, inability or unwillingness to make payments under
the terms of a reinsurance treaty could have a material adverse effect on our financial condition or results of operations. As of
December 31, 2015, we had $2.6 million recoverable from third-party reinsurers, including reinsurance recoverable related to
property and casualty unpaid loss and loss adjustment expenses.
The amount and cost of reinsurance available to our insurance companies are subject, in large part, to prevailing market conditions
beyond our control. Our ability to provide insurance at competitive premium rates and coverage limits on a continuing basis
depends in part upon the extent to which we can obtain adequate reinsurance in amounts and at rates that will not adversely affect
our competitive position. We cannot assure that we will be able to maintain our current reinsurance facilities, which generally are
subject to annual renewal. If we are unable to renew any of these facilities upon their expiration or to obtain other reinsurance
facilities in adequate amounts and at favorable rates, we may need to modify our underwriting practices or reduce our underwriting
commitments.
Disruptions or security failures in our information technology systems could create liability for us and/or limit our ability
to effectively monitor, operate and control our operations and adversely impact our reputation, business, financial condition,
results of operation and cash flows.
Our information technology systems facilitate our ability to monitor, operate and control our operations. Changes or modifications
to our information technology systems could cause disruption to our operations or cause challenges with respect to our compliance
with laws, regulations or other applicable standards. For example, delays, higher than expected costs or unsuccessful
implementation of new information technology systems could adversely impact our operations. In addition, any disruption in or
failure of our information technology systems to operate as expected could, depending on the magnitude of the problem, adversely
impact our business, financial condition, results of operation and cash flows, including by limiting our capacity to monitor, operate
and control our operations effectively. Failures of our information technology systems could also lead to violations of privacy
laws, regulations, trade guidelines or practices related to our customers and employees. If our disaster recovery plans do not work
25
KINGSWAY FINANCIAL SERVICES INC.
as anticipated, or if the third-party vendors to which we have outsourced certain information technology or other services fail to
fulfill their obligations to us, our operations may be adversely impacted. Any of these circumstances could adversely impact our
reputation, business, financial condition, results of operation and cash flows.
Our success depends on our ability to price accurately the risks we underwrite.
Our results of operation and financial condition depend on our ability to underwrite and set premium rates accurately for a wide
variety of risks. Adequate rates are necessary to generate premiums sufficient to pay loss and loss adjustment expenses and other
expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data;
develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both
severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and as a result price
our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:
•
•
•
•
the availability of reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
Consequently, we could underprice risks, which would adversely affect our underwriting results, or we could overprice risks,
which would reduce our sales volume and competitiveness. In either case, our results of operation could be materially and adversely
affected.
Our results of operation may fluctuate as a result of cyclical changes in the property and casualty insurance industry.
Our results of operation are primarily attributable to the property and casualty insurance industry, which as an industry is cyclical
in nature and has historically been characterized by soft markets followed by hard markets. A soft market is a period of relatively
high levels of price competition, less restrictive underwriting standards and generally low premium rates. A hard market is a
period of capital shortages resulting in lack of insurance availability, relatively low levels of competition, more selective
underwriting of risks and relatively high premium rates. If we find it necessary to reduce premiums or limit premium increases
due to competitive pressures on pricing in a softening market, we may experience a reduction in our premiums written and,
therefore, in our earned premium revenues, which could adversely affect our results of operation.
Our results of operation and financial condition could be adversely affected by the results of our voluntary run-off of two
of our insurance subsidiaries.
The Company currently has two of its insurance subsidiaries, MCC and Amigo, operating in voluntary run-off. Our success at
managing these run-offs is highly dependent upon proper claim-handling and the availability of the necessary liquidity to pay
claims when due. As a result, we are dependent in part on our ability to retain the services of appropriately trained and supervised
claim-handling personnel. The loss of the services of any of our key claim-handling personnel working in our run-offs, or the
inability to identify, hire and retain other highly qualified claim-handling personnel in the future, could adversely affect our results
of operations. We are also dependent on the continuing availability of the necessary liquidity, from the sale of securities, collection
of reinsurance recoverables and, potentially, capital contributions, to properly settle claims. Our inability to sell securities when
needed or to collect outstanding reinsurance recoverables when due could have an adverse effect on our results of operation or
financial condition. See the "Liquidity and Capital Resources" section of MD&A for additional detail regarding the voluntary
run-offs of MCC and Amigo.
HUMAN RESOURCES RISK
Our business depends upon key employees, and if we are unable to retain the services of these key employees or to attract
and retain additional qualified personnel, our business may be adversely affected.
Our success at improving our performance will be dependent in part on our ability to retain the services of our existing key
employees and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key employees,
or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect our results of
operations.
Item 1B. Unresolved Staff Comments
None.
26
KINGSWAY FINANCIAL SERVICES INC.
Item 2. Properties
Leased Properties
Insurance Underwriting leases facilities with an aggregate square footage of approximately 75,810 at four locations in four states.
The latest expiration date of the existing leases is in November 2019.
Insurance Services leases facilities with an aggregate square footage of approximately 20,636 at four locations in two states. The
latest expiration date of the existing leases is in November 2019.
The Company leases facilities for its corporate offices with an aggregate square footage of approximately 8,996 at two locations
in one state. The latest expiration date of the existing leases is in September 2025.
The properties described above are in good condition. We consider our office facilities suitable and adequate for our current levels
of operations.
Item 3. Legal Proceedings
In connection with its operations in the ordinary course of business, the Company and its subsidiaries are named as defendants in
various actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate the loss, or range
of loss, if any, that may be incurred in connection with any of the various proceedings at this time, it is possible that some of the
actions may result in losses having a material adverse effect on the Company's financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
27
KINGSWAY FINANCIAL SERVICES INC.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") under the
trading symbol "KFS."
The following table sets forth, for the calendar quarters indicated, the high and low sales price for our common shares as reported
on the TSX and NYSE.
TSX
NYSE
High - C$
Low - C$
High - US$
Low - US$
C$
C$
6.51
7.62
7.62
7.49
7.30
7.55
7.30
4.88
5.43
5.95
6.69
6.44
6.05
6.41
4.82
4.15
$
$
4.90
5.97
6.12
5.94
6.40
6.91
6.69
4.32
4.09
4.43
5.47
5.41
5.40
6.00
4.33
3.85
2015
Quarter 4
Quarter 3
Quarter 2
Quarter 1
2014
Quarter 4
Quarter 3
Quarter 2
Quarter 1
Shareholders of Record
As of March 9, 2016, the closing sales price of our common shares as reported by the TSX was C$5.41 per share and as reported
by the NYSE was $4.18 per share.
As of March 10, 2016, we had 19,709,706 common shares issued and outstanding, held by approximately 3,800 shareholders of
record.
Dividends
The Company has not declared a dividend since the first quarter of 2009. The declaration and payment of dividends is subject to
the discretion of our Board of Directors after taking into account many factors, including financial condition, results of operations,
anticipated cash needs and other factors deemed relevant by our Board of Directors. For a discussion of our cash resources and
needs, see the "Liquidity and Capital Resources" section of MD&A.
We are a holding company and a legal entity separate and distinct from our operating subsidiaries. As a holding company without
significant operations of our own, our principal sources of funds are dividends or other payments from our non-insurance
subsidiaries as well as the sale of assets held by the holding company and the issuance of securities to raise capital. Dividends
declared and paid by an insurance subsidiary are subject to certain restrictions which may require prior approval by the insurance
regulators of the state in which such subsidiary is domiciled. At December 31, 2015, the U.S. insurance subsidiaries of the Company
were restricted from making any dividend payments to the holding company without regulatory approval pursuant to the domiciliary
state insurance regulations. There are no regulatory restrictions on the payment of dividends from the businesses which compromise
Insurance Services.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2015, we had one equity compensation plan under which our shares of common stock have been authorized
for issuance to key officers of the Company and its subsidiaries, namely our 2013 Equity Incentive Plan (the "2013 Plan") adopted
by the Board of Directors in 2013. The 2013 Plan has been approved by the shareholders of the Company.
28
KINGSWAY FINANCIAL SERVICES INC.
The following summary information is presented with respect to shares of our common stock that may be issued under our equity
compensation plans as of December 31, 2015:
Equity Compensation Plan Information
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
Recent Sales of Unregistered Securities
(a)
611,875
N/A
611,875
(b)
$4.50
N/A
$4.50
During 2015, we did not have any unregistered sales of our equity securities.
Repurchases of Equity Securities
During 2015, we did not have any repurchases of our equity securities.
Item 6. Selected Financial Data
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
40,000
N/A
40,000
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are
not required to make disclosures under this Item.
29
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Kingsway is a Canadian holding company with operating subsidiaries located in the United States. The Company operates as a
merchant bank primarily engaged, through its subsidiaries, in the property and casualty insurance business. Kingsway conducts
its business through the following two reportable segments: Insurance Underwriting and Insurance Services.
Insurance Underwriting includes the following subsidiaries of the Company: Mendota Insurance Company ("Mendota"),
Mendakota Insurance Company ("Mendakota"), Mendakota Casualty Company (formerly Universal Casualty Company) ("MCC"),
Kingsway Amigo Insurance Company ("Amigo") and Kingsway Reinsurance Corporation. Throughout this 2015 Annual Report,
the term "Insurance Underwriting" is used to refer to this segment.
Insurance Underwriting provides non-standard automobile insurance to individuals who do not meet the criteria for coverage by
standard automobile insurers. Insurance Underwriting has policyholders in 12 states; however new business is accepted in only
nine states. In 2015, production in the following states represented 84.8% of Insurance Underwriting's gross premiums written:
Florida (24.0%), Texas (16.3%), Illinois (15.7%), California (10.3%), Nevada (9.9%) and Colorado (8.6%). For the year ended
December 31, 2015, non-standard automobile insurance accounted for 100.0% of Insurance Underwriting's gross premiums written.
The Company previously placed Amigo and MCC into voluntary run-off in 2012 and 2011, respectively. Each of Amigo and MCC
entered into a comprehensive run-off plan which was approved by its respective state of domicile. Kingsway continues to manage
Amigo and MCC in a manner consistent with the run-off plans. During the first quarter of 2015, MCC sent a letter of intent to
the Illinois Department of Insurance to resume writing private passenger automobile policies in the state of Illinois. MCC began
writing these policies on April 1, 2015.
Insurance Services includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS") and Trinity Warranty
Solutions LLC ("Trinity"). Throughout this 2015 Annual Report, the term "Insurance Services" 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 26 states to their members.
Trinity is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air
conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration industries. Trinity distributes its warranty
products through original equipment manufacturers, HVAC distributors and commercial and residential contractors. Trinity
distributes its maintenance support direct through corporate owners of retail spaces throughout the United States.
Effective April 1, 2015, the Company closed on the sale of its wholly owned subsidiary, Assigned Risk Solutions Ltd. ("ARS").
As a result, ARS has been classified as discontinued operations and the results of their operations are reported separately for all
periods presented. Prior to the transaction, ARS was included in the Insurance Services segment. As a result of classifying ARS
as a discontinued operation, all segmented information has been restated to exclude ARS from the Insurance Services segment.
Effective March 31, 2014, the Company's wholly owned subsidiary, 1347 Property Insurance Holdings, Inc. ("PIH"), formerly
known as Maison Insurance Holdings, Inc., completed an initial public offering of its common stock. Upon completion of the
transaction, the Company maintained a minority ownership interest in the common shares of PIH. The earnings of PIH are included
in the consolidated statements of operations through the March 31, 2014 transaction date. Prior to the transaction, PIH was included
in the Insurance Underwriting segment. As a result of the disposal of the Company's majority interest in PIH on March 31, 2014,
all segmented information has been restated to exclude PIH from the Insurance Underwriting segment.
NON U.S.-GAAP FINANCIAL MEASURES
Throughout this 2015 Annual 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. In addition to the U.S. GAAP presentation of
net income (loss), we show certain statutory reporting information and other non-U.S. GAAP financial measures that we believe
are relevant in managing our business and drawing comparisons to our peers. These measures are segment operating (loss) income,
gross premiums written, net premiums written and underwriting ratios.
Following is a list of non-U.S. GAAP measures found throughout this report with their definitions, relationships to U.S. GAAP
measures and explanations of their importance to our operations.
30
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Segment Operating (Loss) Income
Segment operating (loss) 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 consolidated statements of
operations, but are not subtotaled by segment. However, this information is available in total and by segment in Note 22, "Segmented
Information," to the Consolidated Financial Statements, regarding reportable segment information. The nearest comparable U.S.
GAAP measure is loss from continuing operations before income tax expense (benefit) which, in addition to operating (loss)
income, includes net investment income, net realized gains, other-than-temporary impairment loss, other income not allocated to
segments, general and administrative expenses, amortization of intangible assets, contingent consideration benefit, impairment of
asset held for sale, interest expense, foreign exchange losses, net, (gain) loss on change in fair value of debt, loss on disposal of
subsidiary, loss on disposal of asset held for sale, loss on deconsolidation of subsidiary and equity in net loss of investee. A
reconciliation of segment operating (loss) income to loss from continuing operations before income tax expense (benefit) for the
year ended December 31, 2015 is presented in Table 1 of the "Results of Continuing Operations" section of MD&A.
Gross Premiums Written
While net premiums earned is the related U.S. GAAP measure used in the consolidated statements of operations, gross premiums
written is the component of net premiums earned that measures insurance business produced before the impact of ceding reinsurance
premiums, but without respect to when those premiums will be recognized as actual revenue. We use this measure as an overall
gauge of gross business volume in Insurance Underwriting.
Net Premiums Written
While net premiums earned is the related U.S. GAAP measure used in the consolidated statements of operations, net premiums
written is the component of net premiums earned that measures the difference between gross premiums written and the impact of
ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. We use this
measure as an indication of retained or net business volume in Insurance Underwriting.
Underwriting Ratios
Kingsway, like many insurance companies, analyzes performance based on underwriting ratios such as loss and loss adjustment
expense ratio, expense ratio and combined ratio. The loss and loss adjustment expense ratio is derived by dividing the amount of
net loss and loss adjustment expenses incurred by net premiums earned. The expense ratio is derived by dividing the sum of
commissions and premium taxes; general and administrative expenses and policy fee income by net premiums earned. The
combined ratio is the sum of the loss and loss adjustment expense ratio and the expense ratio. A combined ratio below 100%
demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
year. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing
basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates
and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment
expenses; valuation of fixed maturities and equity investments; valuation of deferred income taxes; impairment assessment of
intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for performance shares; fair value
assumptions for debt obligations; and contingent consideration.
Provision for Unpaid Loss and Loss Adjustment Expenses
A significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision
for unpaid loss and loss adjustment expenses. The process for establishing the provision for unpaid loss and loss adjustment
expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and
unknown loss events. As such, the process is inherently complex and imprecise and estimates are constantly refined. The process
of establishing the provision for unpaid loss and loss adjustment expenses relies on the judgment and opinions of a large number
of individuals, including the opinions of the Company's actuaries. Further information regarding estimates used in determining
our provision for unpaid loss and loss adjustment expenses is discussed in the “Unpaid Loss and Loss Adjustment Expenses”
section of Part I, Item 1 of this Annual Report and Note 12, "Unpaid Loss and Loss Adjustment Expenses," to the Consolidated
Financial Statements.
31
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Factors affecting the provision for unpaid loss and loss adjustment expenses include the continually evolving and changing
regulatory and legal environment; actuarial studies; the professional experience and expertise of the Company's claims 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.
The Company utilizes external actuaries to evaluate the adequacy of our provision for unpaid loss and loss adjustment expenses
under the terms of our insurance policies and vehicle service agreements. The provision is evaluated by the Company's actuaries
with the results then shared with management, which is responsible for establishing the provision recorded in the consolidated
balance sheets.
In the year-end actuarial review process, an analysis of the provision for unpaid loss and loss adjustment expenses is completed
for each insurance subsidiary and IWS. Unpaid deferred cost containment expenses and unpaid adjusting and other expenses,
which are components of the provision for loss adjustment expenses, and unpaid losses are each separately analyzed by line of
business and by accident year utilizing a wide range of actuarial methods. These unpaid losses and loss adjustment expenses are
further analyzed by looking separately at case reserves, which are specific reserves established for specific claims, and reserves
for losses incurred but not reported ("IBNR").
Because the establishment of the provision for unpaid loss and loss adjustment expenses is an inherently uncertain process involving
estimates, current provisions may need to be updated. Adjustments to the provision, both favorable and unfavorable, are reflected
in the consolidated statements of operations for the periods in which such estimates are updated. The Company's actuaries develop
a range of reasonable estimates and a point estimate of unpaid loss and loss adjustment expenses. The actuarial point estimate is
intended to represent the actuaries' best estimate and will not necessarily be at the mid-point of the high and low estimates of the
range.
Valuation of Fixed Maturities and Equity Investments
Our equity investments, including warrants, are recorded at fair value using 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. For fixed maturities,
we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments,
benchmark interest rates, broker quotes and other relevant inputs. We do not have any investments in our portfolio which require
us to use unobservable inputs. Any change in the estimated fair value of our investments could impact the amount of unrealized
gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive
income (loss) on our consolidated balance sheets.
Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged
to the consolidated statements of operations. Premium and discount on investments are amortized and accredited using the interest
method and charged or credited to net investment income.
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. We
perform 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 applicable:
•
•
•
•
•
•
•
•
identifying all unrealized loss positions that have existed for at least six months;
identifying other circumstances which management believes may impact the recoverability of the unrealized loss positions;
obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments based
on their knowledge and experience together with market-based valuation techniques;
reviewing the trading range of certain investments over the preceding calendar period;
assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit ratings
from third-party rating agencies;
assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit
rating based on the continuity of its debt service record;
determining the necessary provision for declines in market value that are considered other-than-temporary based on the analyses
performed; and
assessing the Company's ability and intent to hold these investments at least until the investment impairment is recovered.
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-
temporary include, but may not be limited to, the following:
•
the opinions of professional investment managers could be incorrect;
32
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
•
•
•
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 a write down of $0.0 million for other-than-temporary impairment related to fixed maturities for the year ended
December 31, 2015. The Company did not recognize any impairment related to its investments that was considered other-than-
temporary for the year ended December 31, 2014.
Valuation of Deferred Income Taxes
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in our consolidated
financial statements. In determining our provision for income taxes, we interpret tax legislation in a variety of jurisdictions and
make assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of
deferred income taxes.
The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during
the periods in which the Company's temporary differences reverse and become deductible. A valuation allowance is established
when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining
whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific
deferred income tax asset balances, including the Company's past and anticipated future performance, the reversal of deferred
income tax liabilities, and the availability of tax planning strategies.
Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of a
company's deferred income tax asset balances when significant negative evidence exists. Cumulative losses are the most compelling
form of negative evidence considered by management in this determination. To the extent a valuation allowance is established in
a period, an expense must be recorded within the income tax provision in the consolidated statements of operations. As of
December 31, 2015, the Company maintains a valuation allowance of $283.6 million, $277.1 million of which relates to its U.S.
deferred income taxes. The largest component of the U.S. deferred income tax asset balance relates to tax loss carryforwards that
have arisen as a result of losses generated from the Company's U.S. operations. Uncertainty over the Company's ability to utilize
these losses over the short-term has led the Company to record a valuation allowance.
Future events may result in the valuation allowance being adjusted, which could materially impact our financial position and results
of operations. If sufficient positive evidence were to arise in the future indicating that all or a portion of the deferred income tax
assets would meet the more likely than not standard, the valuation allowance would be reversed in the period that such a conclusion
was reached.
Impairment Assessment of Intangible Assets
Intangible assets are recorded at their estimated fair values at the date of acquisition. Intangible assets with definite useful lives
consist of vehicle service agreements in-force ("VSA in-force"), database and customer-related relationships. Intangible assets
with definite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. If circumstances require that a definite-lived intangible asset be tested
for possible impairment, we first compare the undiscounted cash flows expected to be generated by that definite-lived intangible
asset to its carrying amount. If the carrying amount of the definite-lived intangible asset is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value.
Indefinite-lived intangible assets consist of insurance licenses and trade name. Intangible assets with an indefinite life are assessed
for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may
not be recoverable. The Company has the option to perform a qualitative assessment to determine whether it is more likely than
not that an indefinite-lived intangible asset is impaired. If facts and circumstances indicate that it is more likely than not that the
intangible asset is impaired, a fair value-based impairment test would be required. Management must make estimates and
assumptions in determining the fair value of indefinite-lived intangible assets that may affect any resulting impairment write-
down. This includes assumptions regarding future cash flows and future revenues from the related intangible assets or their
reporting units. Management then compares the fair value of the indefinite-lived intangible assets to their respective carrying
amounts. If the carrying amount of an intangible asset exceeds the fair value of that intangible asset, an impairment is recorded.
33
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Additional information regarding our intangible assets is included in Note 10, "Intangible Assets," to the Consolidated Financial
Statements.
Goodwill Recoverability
Goodwill is assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the
carrying value may not be recoverable. The Company has the option to perform a qualitative assessment to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying amount. If facts and circumstances indicate
that it is more likely than not that the goodwill is impaired, a fair value-based impairment test would be required. The goodwill
impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the
calculation. The first step of the process consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair values with the
carrying values of the assets and liabilities of the reporting unit, which includes the allocated goodwill. If the estimated fair value
is less than the carrying value, a second step is performed to compute the amount of the impairment, if any, by determining an
implied fair value of goodwill. The determination of the implied fair value of goodwill of a reporting unit requires management
to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value
represents the implied fair value of goodwill, which is compared to its corresponding carrying value. For reporting units with a
negative book value, qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill
impairment test. Additional information regarding our goodwill is included in Note 9, "Goodwill," to the Consolidated Financial
Statements.
Deferred Acquisition Costs
Deferred acquisition costs represent the deferral of expenses that we incur related to successful efforts to acquire new business or
renew existing business. Acquisition costs, primarily commissions, premium taxes and underwriting and agency expenses related
to issuing insurance policies and vehicle service agreements, are deferred and charged against income ratably over the terms of
the related insurance policies and vehicle service agreements. Management regularly reviews the categories of acquisition costs
that are deferred and assesses the recoverability of this asset. For Insurance Underwriting, a premium deficiency and a corresponding
charge to income is recognized if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs and
maintenance costs exceeds related unearned premiums and anticipated net investment income.
Derivative Financial Instruments
Derivative financial instruments include investments in warrants and performance shares issued to the Company under various
performance share grant agreements. Refer to Note 24, "Related Party Transactions," to the Consolidated Financial Statements,
for further details regarding the performance shares. Warrants are classified as equity investments in the consolidated balance
sheets.
We measure derivative financial instruments at fair value. Warrants are recorded at fair value using 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. The performance shares, for which no active market exists, are required to be valued at fair value as determined in good
faith by the Company. Such determination of fair value would require us to develop a model based upon relevant observable
market inputs as well as significant unobservable inputs, including developing a sufficiently reliable estimate for an appropriate
discount to reflect the illiquidity and unique structure of the security. The Company determined that its model for the performance
shares was not sufficiently reliable. As a result, we have assigned a fair value of zero to the performance shares. The fair value
of derivative financial instruments is required to be revalued each reporting period, with corresponding changes in fair value
recorded in the consolidated statements of operations, or, in the case of derivative financial instruments that are actively traded,
in other comprehensive income (loss). Realized gains or losses are recognized upon settlement of the contracts.
Fair Value Assumptions for Debt Obligations
Our Linked Return of Capital ("LROC") preferred units due June 30, 2015 and subordinated debt are measured and reported at
fair value. The fair value of the LROC preferred units was based on quoted market prices prior to redemption in June 2015, and
the fair value of the subordinated debt is calculated by a third-party using a model based on significant market observable inputs.
Any change in the estimated fair value of our debt is reflected in the gain or loss on change in fair value of debt we record in the
consolidated statements of operations and in the carrying value for our debt on our consolidated balance sheets.
34
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Contingent Consideration
The consideration for certain of the Company's acquisitions includes future payments to the former owners that are contingent
upon the achievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and
reported at fair value at the date of acquisition with subsequent changes reported in the consolidated statements of operations as
contingent consideration benefit or expense. The fair value of contingent consideration liabilities is estimated using valuation
models designed to estimate the probability of such contingent payments based on various assumptions. Estimated payments are
discounted using present value techniques to arrive at the estimated fair value at the balance sheet date. We revalue these contingent
consideration liabilities each reporting period. Changes in the fair value of contingent consideration liabilities can result from
changes to one or multiple inputs, including adjustments to the discount rates or changes in the assumed achievement or timing
of any targets. These fair value measurements are based on significant inputs not observable in the market. Management must
use judgment in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
Changes in assumptions could have a material impact on the amount of contingent consideration benefit or expense reported in
the consolidated statements of operations and an impact on the payout of contingent consideration liabilities. Additional information
regarding our contingent consideration liabilities is included in Note 23, "Fair Value of Financial Instruments," to the Consolidated
Financial Statements.
RESULTS OF CONTINUING OPERATIONS
A reconciliation of total segment operating (loss) income to net income (loss) for the years ended December 31, 2015 and 2014
is presented in Table 1 below:
Table 1 Segment Operating (Loss) Income
For the years ended December 31 (in thousands of dollars)
Segment operating (loss) income
Insurance Underwriting
Insurance Services
Total segment operating (loss) income
Net investment income
Net realized gains
Other-than-temporary impairment loss
Other income and expenses not allocated to segments, net
Amortization of intangible assets
Contingent consideration benefit
Impairment of asset held for sale
Interest expense
Foreign exchange losses, net
Gain (loss) on change in fair value of debt
Loss on disposal of subsidiary
Loss on disposal of asset held for sale
Loss on deconsolidation of subsidiary
Equity in net loss of investee
Loss from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Loss from continuing operations
Income from discontinued operations, net of taxes
Gain on disposal of discontinued operations, net of taxes
Net income (loss)
35
2015
2014
Change
(1,147)
(628)
(1,775)
2,918
1,197
(10)
(3,753)
(1,244)
1,139
—
(5,278)
(1,215)
1,458
—
—
(4,420)
(339)
(11,322)
93
(11,415)
1,417
11,267
1,269
1,290
206
1,496
1,616
5,041
—
(4,887)
(1,620)
2,223
(1,180)
(5,645)
(419)
(10,953)
(1,244)
(125)
—
(190)
(15,887)
(1,221)
(14,666)
3,442
—
(11,224)
(2,437)
(834)
(3,271)
1,302
(3,844)
(10)
1,134
376
(1,084)
1,180
367
(796)
12,411
1,244
125
(4,420)
(149)
4,565
1,314
3,251
(2,025)
11,267
12,493
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Loss from Continuing Operations, Net Income (Loss) and Diluted Earnings (Loss) per Share
For the year ended December 31, 2015, we incurred a loss from continuing operations of $11.4 million ($0.60 per diluted share)
compared to $14.7 million ($0.95 per diluted share) for the year ended December 31, 2014. The loss from continuing operations
for the year ended December 31, 2015 is primarily attributable to operating loss in Insurance Underwriting and Insurance Services,
income and expenses not allocated to segments, interest expense, and loss on deconsolidation of subsidiary, partially offset by net
investment income and gain on change in fair value of debt. The loss from continuing operations for the year ended December 31,
2014 is attributable to income and expenses not allocated to segments, impairment of asset held for sale, interest expense, loss on
change in fair value of debt and loss on disposal of subsidiary, partially offset by net realized gains, contingent consideration benefit
and operating income in Insurance Services and Insurance Underwriting.
For the year ended December 31, 2015, we reported net income of $1.3 million ($0.04 per diluted share) compared to net loss of
$11.2 million ($0.75 per diluted share) for the year ended December 31, 2014.
Insurance Underwriting
For the year ended December 31, 2015, Insurance Underwriting gross premiums written were $116.4 million compared to $114.0
million for the year ended December 31, 2014, representing a 2.1% increase. Net premiums written decreased 1.5% to $116.2
million for the year ended December 31, 2015 compared with $118.0 million for the year ended December 31, 2014. Net premiums
earned increased 3.4% to $117.4 million for the year ended December 31, 2015 compared with $113.5 million for the year ended
December 31, 2014. The increase in gross premiums written and net premiums earned results primarily from increased premium
volumes written in Florida during the year ended December 31, 2015 compared to prior year.
The Insurance Underwriting operating loss increased to $1.1 million for the year ended December 31, 2015 compared to operating
income of $1.3 million for the year ended December 31, 2014. The increase in operating loss is primarily attributed to an increase
in loss and loss adjustment expenses, partially offset by an increase in net premiums earned and a decrease in general expenses in
2015 as compared to 2014.
The Insurance Underwriting loss and loss adjustment expense ratio for 2015 was 74.1% compared to 69.7% in 2014. The increase
in the loss and loss adjustment expense ratio is primarily attributable to lower favorable development related to property and
casualty unpaid loss and loss adjustment expenses at Amigo and MCC in 2015 compared to 2014 due to the continuing voluntary
run-offs of Amigo and MCC.
The Insurance Underwriting expense ratio was 27.4% in 2015 compared with 29.5% in 2014. The decrease in the expense ratio
is primarily due to an overall reduction in general expenses. The Insurance Underwriting expense ratio includes policy fee income
of $8.3 million and $8.1 million, respectively, for the years ended December 31, 2015 and December 31, 2014.
The Insurance Underwriting combined ratio was 101.5% in 2015 compared with 99.2% in 2014, reflecting the dynamics which
affected the loss and loss adjustment expense ratio and expense ratio.
Insurance Services
The Insurance Services service fee and commission income decreased 6.9% to $23.0 million for the year ended December 31,
2015 compared with $24.7 million for the year ended December 31, 2014. This decrease was due to decreased service fee and
commission income at IWS. The Insurance Services operating loss was $0.6 million for the year ended December 31, 2015
compared with operating income of $0.2 million for the year ended December 31, 2014. The increase in operating loss is primarily
related to decreased service fee and commission income at IWS and increased general and administrative expenses at Trinity for
the year ended December 31, 2015 compared to the same period in 2014.
Net Investment Income
Net investment income increased to $2.9 million in 2015 compared to $1.6 million in 2014. The increase in 2015 is due to an
increase in income from limited liability investments. Income from limited liability investments is recognized based on the
Company's share of the earnings of the limited liability entities.
Net Realized Gains
The Company incurred net realized gains of $1.2 million in 2015 compared to $5.0 million in 2014. The net realized gains in
2015 resulted primarily from the liquidation of limited liability investments in Insurance Underwriting. The net realized gains in
2014 resulted primarily from the liquidation of equity investments in Insurance Underwriting.
36
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Other Income and Expenses not Allocated to Segments, Net
Other income and expenses not allocated to segments was a net expense of $3.8 million in 2015 compared to $4.9 million in 2014.
The decrease in net expense is primarily the result of a $6.0 million gain recorded during the first quarter of 2015 related to the
termination of the Company's Management Services Agreement with PIH, as further discussed in Note 24, "Related Party
Transactions," to the Consolidated Financial Statements, partially offset by less general expense for salaries, employee benefits
and professional fees in 2014 as compared to 2015, and $2.3 million of income reported during the first quarter of 2014 related to
PIH. As further discussed in Note 4, "Disposition, Deconsolidation and Discontinued Operations," to the Consolidated Financial
Statements, effective March 31, 2014, PIH completed an initial public offering of its common stock. The earnings of PIH are
included in the consolidated statements of operations through the March 31, 2014 transaction date. Prior to the transaction, PIH
was included in the Insurance Underwriting segment. As a result of the disposal of the Company's majority interest in PIH on
March 31, 2014, all segmented information has been restated to exclude PIH from the Insurance Underwriting segment and to
include its earnings in other income and expenses not allocated to segments, net.
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 $1.2 million in 2015 compared to $1.6 million in 2014. The decrease is primarily attributed to less amortization expense
related to the IWS VSA in-force intangible asset in 2015 compared to 2014. The VSA in-force asset is amortized over a seven-
year term as the corresponding deferred service fees acquired are earned as revenue.
Contingent Consideration Benefit
Contingent consideration benefit was $1.1 million in 2015 compared to $2.2 million in 2014. Contingent consideration liabilities
resulting from the acquisitions of IWS and Trinity were estimated at their respective acquisition dates using valuation models
designed to estimate the probability of such contingent payments based on various assumptions. The valuation models assume
certain achievement of targets, discount rates related to riskiness of the projections used and the time value of money to calculate
the net present value of future consideration payments. Each reporting period, the Company reevaluates its contingent consideration
liabilities and, if significant, makes adjustments to the recorded liabilities. As a result of the analyses performed in 2015 and 2014,
the Company decreased contingent consideration liabilities by $1.5 million and $3.0 million, respectively, during the fourth quarters
of 2015 and 2014, resulting in a total liability of $2.0 million and $3.1 million, respectively, at December 31, 2015 and 2014, which
is included in accrued expenses and other liabilities on the consolidated balance sheets. See Note 23, "Fair Value of Financial
Instruments," to the Consolidated Financial Statements, for further details.
Impairment of Asset Held for Sale
Prior to the fourth quarter of 2014, property consisting of building and land located in Miami, Florida with a carrying value of
$5.2 million was classified as held for sale. As a result of declines in the fair value of the property, the Company recorded an
impairment write-down of $1.2 million related to the asset held for sale during the year ended December 31, 2014.
Interest Expense
Interest expense for 2015 was $5.3 million compared to $5.6 million in 2014. The decrease is attributable to the repayment during
June 2015 of the outstanding principal balance on the LROC preferred units due June 30, 2015.
Foreign Exchange Losses, Net
During 2015, the Company incurred foreign exchange losses, net of $1.2 million compared to $0.4 million in 2014. Foreign
exchange losses, net for the years ended December 31, 2015 and 2014 were incurred primarily related to conversion of the net
Canadian dollar assets of Kingsway Linked Return of Capital Trust ("KLROC Trust").
Gain (Loss) on Change in Fair Value of Debt
The gain on change in fair value of debt amounted to $1.5 million in 2015 compared to a loss of $11.0 million in 2014. The 2015
gain is primarily due to a decrease in the fair values of the subordinated debt and LROC preferred units, whereas the 2014 loss is
due to an increase in the fair value of the Company's subordinated debt, partially offset by a decrease in the fair value of the LROC
preferred units. For information regarding the Company's approach to determining fair value of debt, see Note 23, "Fair Value of
Financial Instruments," to the Consolidated Financial Statements.
37
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Loss on Disposal of Subsidiary
Effective March 31, 2014, the Company's wholly owned subsidiary, PIH, completed an initial public offering of its common stock.
Upon completion of the transaction, the Company maintained a minority ownership interest in the common shares of PIH. As a
result of the disposal, the Company recognized a loss of $1.2 million in 2014. See Note 4, "Disposition, Deconsolidation and
Discontinued Operations," to the Consolidated Financial Statements, for further details.
Loss on Disposal of Asset Held for Sale
During the fourth quarter of 2014, the Company completed a sale and leaseback transaction involving building and land located
in Miami, Florida, which was previously recorded as asset held for sale. Net proceeds were $4.3 million after deducting direct
costs of the transaction. The Company recognized a loss of $0.1 million equal to the difference between the fair market value and
the carrying value of the property at the date of the transaction. See Note 11, "Property and Equipment," to the Consolidated
Financial Statements, for further details.
Loss on Deconsolidation of Subsidiary
Prior to the second quarter of 2015, the Company beneficially owned and controlled 74.8% of KLROC Trust. As a result, the
Company had been consolidating the financial statements of KLROC Trust. During the second quarter of 2015, the Company’s
controlling interest in KLROC Trust was reduced to zero upon the Company's repayment of its C$15.8 million outstanding on its
LROC preferred units due June 30, 2015. As a result, the Company recorded a non-cash loss on deconsolidation of subsidiary of
$4.4 million during the year ended December 31, 2015. This reported loss results from removing the net assets and accumulated
other comprehensive loss of KLROC Trust from the Company’s consolidated balance sheets. The deconsolidation reduced
consolidated shareholders’ equity by $2.8 million at June 30, 2015. Refer to Note 4, "Disposition, Deconsolidation and Discontinued
Operations," to the Consolidated Financial Statements, for further discussion.
Equity in Net Loss of Investee
Equity in net loss of investee of $0.3 million and $0.2 million for the years ended December 31, 2015 and 2014, respectively,
represents the loss related to the Company's investment in 1347 Capital Corp. See Note 6, "Investment in Investee," to the
Consolidated Financial Statements, for further discussion.
Income Tax Expense (Benefit)
Income tax expense for 2015 was $0.1 million compared to a tax benefit of $1.2 million in 2014. See Note 15, "Income Taxes,"
to the Consolidated Financial Statements, for additional detail of the income tax expense (benefit) recorded for the years ended
December 31, 2015 and 2014, respectively.
38
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
INVESTMENTS
Portfolio Composition
All of our investments in fixed maturities and equity investments are classified as available-for-sale and are reported at fair value.
At December 31, 2015, we held cash and cash equivalents and investments with a carrying value of $159.4 million. As of
December 31, 2015, we held an investments portfolio comprised primarily of fixed maturities issued by the U.S. Government,
government agencies and high quality corporate issuers. Investments held by our insurance subsidiaries must comply with
applicable 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.
Table 2 below summarizes the carrying value of investments, including cash and cash equivalents, at the dates indicated.
TABLE 2 Carrying value of investments, including cash and cash equivalents
As of December 31 (in thousands of dollars, except for percentages)
Type of investment
Fixed maturities:
U.S. government, government agencies
and authorities
Canadian government
States, municipalities and political
subdivisions
Mortgage-backed
Asset-backed securities and
collateralized mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Limited liability investments
Other investments
Short-term investments
Total investments
Cash and cash equivalents
Total
2015
% of Total
2014
% of Total
12.8%
—%
1.4%
5.0%
3.8%
11.8%
34.8%
16.7%
0.6%
17.3%
12.6%
2.6%
0.3%
67.6%
32.4%
20,759
4,242
3,419
5,352
7,214
15,209
56,195
19,526
92
19,618
7,294
3,576
400
87,083
71,234
13.1%
2.7%
2.2%
3.4%
4.6%
9.6%
35.6%
12.3%
0.1%
12.4%
4.6%
2.3%
0.1%
55.0%
45.0%
100.0%
158,317
100.0%
20,453
—
2,256
7,963
6,023
18,864
55,559
26,586
973
27,559
20,141
4,077
400
107,736
51,701
159,437
39
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
Liquidity and Cash Flow Risk
Table 3 below summarizes the fair value by contractual maturities of the fixed maturities portfolio, excluding cash and cash
equivalents, at December 31, 2015 and 2014.
TABLE 3 Fair value of fixed maturities by contractual maturity date
As of December 31 (in thousands of dollars, except for percentages)
Due in less than one year
Due in one through five years
Due after five through ten years
Due after ten years
Total
2015
10,078
35,999
1,425
8,057
55,559
% of Total
18.1%
64.8%
2.6%
14.5%
100.0%
2014
19,256
30,166
1,540
5,233
56,195
% of Total
34.3%
53.7%
2.7%
9.3%
100.0%
At December 31, 2015, 82.9% 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
which, along with fixed maturities, management believes are sufficient in amount for the payment of unpaid loss and loss adjustment
expenses and other operating subsidiary obligations on a timely basis. In the event that additional cash is required to meet obligations
to our policyholders and customers, we believe that the high-quality, liquid investments in the portfolios provide us with sufficient
liquidity.
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.
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.
Because the investments portfolio is comprised of primarily fixed maturity instruments that are usually held to maturity, periodic
changes in interest rate levels generally impact 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.
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 and Capital 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 and Capital Committee. The
Investment and Capital Committee is also responsible for ensuring that these policies are implemented and that procedures are in
place to manage and control credit risk.
Table 4 below summarizes the composition of the fair values of fixed maturities, excluding cash and cash equivalents, at
December 31, 2015 and 2014, 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 approximately 90.8%
of those investments rated 'A' or better at December 31, 2015. During the first quarter of 2015, the Company received $3.0 million
of 8% preferred stock of PIH, redeemable in five years, related to the termination of the Company's Management Services Agreement
with PIH, as further discussed in Note 24, "Related Party Transactions," to the Consolidated Financial Statements. The preferred
stock is not rated.
40
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
TABLE 4 Credit ratings of fixed maturities
As of December 31
Rating (S&P/Moody's)
AAA/Aaa
AA/Aa
A/A
Percentage rated A/A2 or better
BBB/Baa
Not rated
Total
Other-Than-Temporary Impairment
2015
61.9%
10.5
18.4
90.8%
3.7
5.5
100.0%
2014
65.3%
8.4
21.9
95.6%
4.4
—
100.0%
The Company performs a quarterly analysis of its investment portfolio 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 the "Critical Accounting Estimates and Assumptions" section of MD&A.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the
Company recorded a write down of $0.0 million for other-than-temporary impairment related to fixed maturities for the year ended
December 31, 2015. There were no write-downs for other-than-temporary impairments related to investments for the year ended
December 31, 2014.
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.
Due to the inherent volatility of equity markets, we believe an equity investment may trade from time to time below its intrinsic
value based on historical valuation measures. In these situations, an equity investment may be maintained in an unrealized loss
position for different periods of time based on the underlying economic assumptions driving the investment manager’s valuation
of the holding.
At December 31, 2015 and 2014, the gross unrealized losses for fixed maturities and equity investments amounted to $2.6 million
and $0.7 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each
of December 31, 2015 and December 31, 2014, all unrealized losses on individual investments were considered temporary.
Limited Liability Investments
The Company owns investments in various limited liability companies ("LLCs") and limited partnerships ("LPs") that primarily
invest in income-producing real estate or real estate related investments. The Company's investments in the LLCs and LPs are
accounted for under the equity method of accounting and reported as limited liability investments in the consolidated balance
sheets. The real estate investments are held on a triple net lease basis whereby the lessee agrees to pay all real estate taxes, building
insurance and maintenance. The real estate investments typically yield between 7.5% - 8% minimum preferred return on invested
capital. Table 5 below presents additional information pertaining to the limited liability investments at December 31, 2015 and
2014.
41
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
TABLE 5 Limited liability investments
As of December 31 (in thousands of dollars)
Limited liability investments:
Real estate held through LP
Investments held through LLC
Other
Total
Investment in Investee
Unfunded
Commitment
Carrying Value
2015
—
1,650
350
2,000
2015
—
19,449
692
20,141
2014
4,524
2,636
134
7,294
At December 31, 2015, the Company owns 61.0% of the outstanding units of 1347 Investors LLC ("1347 Investors"). Because
the Company owns more than 50% of the outstanding units, 1347 Investors is included in the Consolidated Financial Statements
at December 31, 2015. 1347 Investors has an investment in the common stock and private units of 1347 Capital Corp. which is
reflected as investment in investee in the consolidated balance sheets. 1347 Capital Corp. was formed for the purpose of entering
into a merger, share exchange, asset acquisition or other similar business combination with one or more businesses or entities.
On July 21, 2014, 1347 Capital Corp. completed an initial public offering of 4.0 million units at a price to the public of $10.00
per unit for total gross proceeds of $40.0 million. Each unit issued in the initial public offering consists of one share of common
stock, one right to receive one-tenth of a share of common stock automatically on the consummation of an initial business
combination, and one warrant to acquire one-half of one share of common stock at a price of $11.50 per full share of common
stock. On July 23, 2014, the option to purchase an additional 0.6 million units that 1347 Capital Corp. had granted to the underwriters
for additional gross proceeds of $6.0 million was completed. As a result, 1347 Capital Corp. issued a total of 4.6 million units in
its initial public offering, generating total gross proceeds of $46.0 million.
1347 Capital Corp. has 24 months from July 21, 2014, the date of the initial public offering, to complete a successful business
combination. Had a successful business combination been consummated during 2015, and assuming the December 31, 2015
closing stock price for 1347 Capital Corp. common shares, the Company estimates the increase in its shareholders’ equity would
have been approximately $5.8 million at December 31, 2015. There can be no assurance that 1347 Capital Corp. will complete a
successful business combination. In the event 1347 Capital Corp. does not complete a successful business combination, the
Company estimates its shareholders’ equity would decrease by approximately $1.8 million.
PROPERTY AND CASUALTY UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Property and casualty unpaid loss and loss adjustment expenses represent the estimated liabilities for reported loss events, IBNR
loss events and the related estimated loss adjustment expenses.
Tables 6 and 7 present distributions, by line of business, of the provision for property and casualty unpaid loss and loss adjustment
expenses gross and net of external reinsurance, respectively.
TABLE 6 Provision for property and casualty unpaid loss and loss adjustment expenses - gross
As of December 31 (in thousands of dollars)
Line of Business
Non-standard automobile
Commercial automobile
Other
Total
42
2015
53,066
1,358
1,047
55,471
2014
58,493
4,248
1,154
63,895
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
TABLE 7 Provision for property and casualty unpaid loss and loss adjustment expenses - net of reinsurance recoverable
As of December 31 (in thousands of dollars)
Line of Business
Non-standard automobile
Commercial automobile
Other
Total
Non-Standard Automobile
2015
51,937
1,280
1,047
54,264
2014
55,476
4,062
1,154
60,692
At December 31, 2015 and 2014, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our
non-standard automobile business were $53.1 million and $58.5 million, respectively. The decrease is primarily due to the
continuing voluntary run-offs of Amigo and MCC.
Commercial Automobile
At December 31, 2015 and 2014, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our
commercial automobile business were $1.4 million and $4.2 million, respectively. This decrease is due to the continuing voluntary
run-offs of Amigo and MCC.
Information with respect to development of our provision for prior years' property and casualty unpaid loss and loss adjustment
expenses is presented in Table 8.
TABLE 8 Increase (decrease) in prior years' provision for property and casualty unpaid loss and loss adjustment expenses
by line of business and accident year
For the year ended December 31, 2015 (in thousands of dollars)
Accident Year
2010 & prior
2011
2012
2013
2014
Total
Non-standard
Automobile
(457)
(451)
1,018
(935)
2,300
1,475
Commercial
Automobile
(406)
(7)
(432)
(134)
—
(979)
For the year ended December 31, 2014 (in thousands of dollars)
Accident Year
2009 & prior
2010
2011
2012
2013
Total
Non-standard
Automobile
(2,560)
(724)
(1,981)
557
1,401
(3,307)
Commercial
Automobile
(109)
(381)
(56)
(161)
(180)
(887)
Other
120
—
—
—
—
120
Other
(845)
(8)
—
—
(76)
(929)
Total
(743)
(458)
586
(1,069)
2,300
616
Total
(3,514)
(1,113)
(2,037)
396
1,145
(5,123)
The net movements in prior years' provisions for property and casualty unpaid loss and loss adjustment expenses, net of reinsurance,
was an increase of $0.6 million and a decrease of $5.1 million, respectively, for the years ended December 31, 2015 and 2014.
Table 8 identifies the relative contribution of the increases (decreases) in the provisions for property and casualty unpaid loss and
loss adjustment expenses attributable to the respective lines of business and accident years.
43
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
The unfavorable development in 2015 was primarily related to the increase in property and casualty unpaid loss and loss adjustment
expenses at Mendota, offset by a decrease in property and casualty unpaid loss and loss adjustment expenses due to the continuing
voluntary run-offs of Amigo and MCC. The favorable development in 2014 was primarily related to the decrease in property and
casualty unpaid loss and loss adjustment expenses at Amigo and MCC. Original estimates are increased or decreased as additional
information becomes known regarding individual claims.
LIQUIDITY AND CAPITAL RESOURCES
The purpose of liquidity management is to ensure that 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, disposal of discontinued operations, investment maturities and income and other returns received on investments. Cash
provided from these sources is used primarily for loss and loss adjustment expense payments, debt servicing and other operating
expenses. The timing and 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
During 2015, the net cash used in operating activities as reported on the consolidated statements of cash flows was $32.8 million.
This use of cash can be explained primarily by the loss from continuing operations of $11.4 million, the decrease in the provision
for unpaid loss and loss adjustment expenses of $8.4 million and decrease in other, net of $20.0 million; offset by the loss on
deconsolidation of subsidiary of $4.4 million and the decrease in reinsurance recoverable of $2.2 million. The decrease in other,
net of $20.0 million primarily relates to the Company's payment to its Trust Preferred trustees of accrued interest which the Company
had been deferring since the first quarter of 2011.
During 2015, the net cash provided by investing activities as reported on the consolidated statements of cash flows was $26.2
million. This source of cash was driven primarily by the net proceeds from the sale of ARS of $44.9 million, as further discussed
in Note 4, "Disposition, Deconsolidation and Discontinued Operations," to the Consolidated Financial Statements, partially offset
by purchases of fixed maturities, equity investments and limited liability investments in excess of proceeds from sales and maturities
of fixed maturities and equity investments.
During 2015, the net cash used in financing activities as reported on the consolidated statements of cash flows was $12.9 million.
This use of cash is due to the redemption of C$15.8 million outstanding of LROC preferred units due June 30, 2015, as further
discussed in Note 4, "Disposition, Deconsolidation and Discontinued Operations," to the Consolidated Financial Statements.
In summary, as reported on the consolidated statements of cash flows, the Company's net decrease in cash and cash equivalents
during 2015 was $19.5 million.
The Company's Insurance Underwriting subsidiaries fund their obligations primarily through premium and investment income
and maturities in the investments portfolios. The Company's Insurance Services subsidiaries fund their obligations primarily
through service fee and commission income. As a holding company, Kingsway funds its obligations, which primarily consist of
interest payments on debt as well as holding company operating expenses, primarily through the sale of subsidiaries and other
assets; issuance of debt and equity securities; and receipt of dividends from its non-insurance subsidiaries. On the other hand, the
insurance subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of
dividends. At December 31, 2015, the U.S. insurance subsidiaries of the Company were restricted from making any dividend
payments to the holding company without regulatory approval pursuant to the domiciliary state insurance regulations.
On February 3, 2014, the Company closed on its previously announced private placement totaling $6.6 million, as further discussed
in Note 19, "Class A Preferred Stock," to the Consolidated Financial Statements. At closing, the Company received gross proceeds
of $6.6 million, resulting from the sale and issuance of 262,876 units for a purchase price of $25.00 per unit. Net proceeds to the
Company were $6.3 million after deducting expenses.
On August 18, 2014, the Company announced its intention to redeem its outstanding series A warrants, which were issued pursuant
to the September 2013 rights offering. Holders of series A warrants could exercise their outstanding series A warrants at $4.50
per common share. Any series A warrants that remained unexercised after September 19, 2014 were automatically redeemed by
the Company at the redemption price of $0.25 per series A warrant. During 2014, series A warrants to purchase 3,279,945 shares
of common stock were exercised, resulting in cash proceeds of $14.8 million. The 845 series A warrants that remained unexercised
were redeemed by the Company at the redemption price of $0.25.
44
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
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, 2015, surplus as
regards policyholders reported by each of our insurance subsidiaries exceeded the 200% threshold.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. As of December
31, 2012, Amigo’s RBC was 157%. 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. As of December 31,
2015, Amigo's RBC was 873%.
Kingsway previously placed MCC into voluntary run-off in early 2011. At the time it was placed into voluntary run-off, MCC's
RBC was 160%. MCC entered into a comprehensive run-off plan approved by the Illinois Department of Insurance in June 2011.
MCC remains in compliance with that plan. As of December 31, 2015, MCC's RBC was 1,111%.
Our reinsurance subsidiary, which is domiciled in Barbados, is required by the regulator in Barbados to maintain minimum capital
levels. As of December 31, 2015, the capital maintained by Kingsway Reinsurance Corporation was in excess of the regulatory
capital requirements in Barbados.
DEBT
U.S. Senior Note Offering
On January 29, 2004, the Company's subsidiary, Kingsway America Inc. ("KAI") completed the sale of $100.0 million 7.5% senior
notes due 2014. In March 2004, an additional $25.0 million of these senior notes were issued. Interest payments were made on
February 1 and August 1 of each year. The notes were fully and unconditionally guaranteed by the Company. The notes were
redeemable at KAI's option in whole at any time or in part from time to time on or after February 1, 2009 subject to the conditions
stated in the trust indenture.
KAI subsequently repurchased and retired most of the originally issued par value. In February 2014, KAI repaid the $14.4 million
remaining amount outstanding on its senior unsecured debentures due February 1, 2014.
LROC Preferred Units
On July 14, 2005, KLROC Trust completed its public offering of C$78.0 million through the issuance of 3,120,000 LROC 5%
preferred units due June 30, 2015, of which the Company was a promoter. KLROC Trust's net proceeds of the public offering
was C$74.1 million.
Beginning in 2009, KFS Capital LLC ("KFS Capital"), an affiliate of the Company, began purchasing LROC preferred units.
During 2009, KFS Capital acquired 833,715 LROC preferred units. On June 9, 2010, KFS Capital commenced the take-over bid
("the KLROC Offer") to acquire up to 750,000 LROC preferred units at a price per unit of C$17.50 in cash. On July 9, 2010, KFS
Capital increased the size and price of its previously announced KLROC Offer to 1,500,000 units at a price per unit of C$20.00
in cash. The KLROC Offer expired on July 23, 2010, and 1,525,150 units were tendered, of which 1,500,000 were purchased on
a pro-rata basis. The tender was paid for using available cash.
As a result of these acquisitions, the Company beneficially owned and controlled 2,333,715 units, representing 74.8% of the issued
and outstanding LROC preferred units and began consolidating the financial statements of KLROC Trust effective July 23, 2010.
In the consolidated financial statements, the par value of the units owned was netted against the liability related to the LROC
preferred units due June 30, 2015. At December 31, 2014, the Company's outstanding net obligation was C$15.8 million.
During the second quarter of 2015, the Company's controlling interest in KLROC Trust was reduced to zero upon the Company's
repayment of its C$15.8 million outstanding on its LROC preferred units due June 30, 2015. As a result, the Company recorded
a non-cash loss on deconsolidation of KLROC Trust of $4.4 million for the year ended December 31, 2015. This reported loss
results from removing the net assets and accumulated other comprehensive loss of KLROC Trust from the Company’s consolidated
balance sheets. The deconsolidation reduced consolidated shareholders’ equity by $2.8 million at June 30, 2015.
45
KINGSWAY FINANCIAL SERVICES INC.
Management's Discussion and Analysis
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 KAI to the trust in exchange for the proceeds from the private sale. The floating
rate debentures bear interest at the rate of the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR"),
plus spreads ranging from 3.85% to 4.20%, but until dates ranging from December 4, 2007 to January 8, 2009, the interest rates
will not exceed 12.45% to 12.75%. 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 first quarter of 2011, the Company gave notice to its Trust Preferred
trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual
terms of its outstanding 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. On November 6, 2015, the Company paid $22.1 million to its Trust
Preferred trustees to be used by the trustees to pay the interest which the Company had been deferring since the first quarter of
2011. At December 31, 2015 and 2014, deferred interest payable of zero and $17.4 million, respectively, is included in accrued
expenses and other liabilities in the consolidated balance sheets.
CONTRACTUAL OBLIGATIONS
Table 9 summarizes cash disbursements related to the Company's contractual obligations projected by period, including debt
maturities, interest payments on outstanding debt, the provision for unpaid loss and loss adjustment expenses and future minimum
payments under operating leases. Interest payments in Table 9 related to the subordinated debt assume LIBOR remains constant
throughout the projection period.
Our provision for unpaid loss and loss adjustment expenses does not have contractual payment dates. In Table 9 below, we have
included a projection of when we expect our unpaid loss and loss adjustment expenses to be paid, based on historical payment
patterns. The exact timing of the payment of unpaid loss and loss adjustment expenses cannot be predicted with certainty. We
maintain an investments portfolio with varying maturities and a substantial amount in short-term investments to provide adequate
cash flows for the projected payments in Table 9. The unpaid loss and loss adjustment expenses in Table 9 have not been reduced
by amounts recoverable from reinsurers.
TABLE 9 Cash payments related to contractual obligations projected by period
As of December 31, 2015 (in thousands of dollars)
Subordinated debt
Interest payments on outstanding debt
Unpaid loss and loss adjustment expenses
Future minimum lease payments
Total
2016
—
4,057
37,846
1,584
43,487
2017
—
4,136
12,101
1,561
17,798
2018
—
4,136
4,849
873
9,858
2019
—
4,136
2,065
666
6,867
2020 Thereafter
Total
—
4,136
722
18
90,500
50,531
863
70
90,500
71,132
58,446
4,772
4,876
141,964
224,850
OFF-BALANCE SHEET ARRANGEMENTS
The Company has an off-balance sheet arrangement related to a guarantee, which is further described in Note 25, "Commitments
and Contingent Liabilities," to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are
not required to make disclosures under this Item.
46
KINGSWAY FINANCIAL SERVICES INC.
Item 8. Financial Statements and Supplementary Data.
Index to the Consolidated Financial Statements of
Kingsway Financial Services Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Statements of Operations for the Years Ended December 31, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015 and
2014
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014
Notes to the Consolidated Financial Statements
Note 1-Business
Note 2-Summary of Significant Accounting Policies
Note 3-Recently Issued Accounting Standards
Note 4-Disposition, Deconsolidation and Discontinued Operations
Note 5-Investments
Note 6-Investment in Investee
Note 7-Reinsurance
Note 8-Deferred Acquisition Costs
Note 9-Goodwill
Note 10-Intangible Assets
Note 11-Property and Equipment
Note 12-Unpaid Loss and Loss Adjustment Expenses
Note 13-Debt
Note 14-Finance Lease Obligation Liability
Note 15-Income Taxes
Note 16-Loss from Continuing Operations per Share
Note 17-Stock-Based Compensation
Note 18-Employee Benefit Plan
Note 19-Class A Preferred Stock
Note 20-Shareholders' Equity
Note 21-Accumulated Other Comprehensive Income
Note 22-Segmented Information
Note 23-Fair Value of Financial Instruments
Note 24-Related Party Transactions
Note 25-Commitments and Contingent Liabilities
Note 26-Regulatory Capital Requirements and Ratios
Note 27-Statutory Information and Policies
47
48
49
50
51
52
53
54
54
54
59
61
63
67
67
68
68
69
70
70
72
73
73
76
76
78
78
79
79
81
84
87
87
88
89
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Kingsway Financial Services Inc.
Itasca, Illinois
We have audited the accompanying consolidated balance sheets of Kingsway Financial Services
Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income (loss), shareholders’ equity and cash flows for the years then ended. In
connection with our audits of the consolidated financial statements, we have also audited the
financial statement schedules listed in the accompanying index. These consolidated financial
statements and schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of
the financial statements and schedules. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kingsway Financial Services Inc. at December 31,
2015 and 2014, and the results of its operations and its cash flows for each of the years then
ended, in conformity with accounting principles generally accepted in the United States of
America.
Also, in our opinion, the financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Kingsway Financial Services Inc.’s internal control over
financial reporting as of December 31, 2015, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 10, 2016 expressed an unqualified
opinion thereon.
Grand Rapids, Michigan
March 10, 2016
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the
international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Balance Sheets
(in thousands, except per share data)
December 31, 2015
December 31, 2014
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $55,606 and $56,000, respectively)
$
55,559
$
Equity investments, at fair value (cost of $26,428 and $16,579, respectively)
Limited liability investments
Other investments, at cost which approximates fair value
Short-term investments, at cost which approximates fair value
Total investments
Cash and cash equivalents
Investment in investee
Accrued investment income
Premiums receivable, net of allowance for doubtful accounts of $165 and $1,889, respectively
Service fee receivable, net of allowance for doubtful accounts of $276 and $247, respectively
Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively
Reinsurance recoverable
Prepaid reinsurance premiums
Deferred acquisition costs, net
Income taxes recoverable
Property and equipment, net of accumulated depreciation of $12,537 and $15,751, respectively
Goodwill
Intangible assets, net of accumulated amortization of $6,009 and $4,765, respectively
Other assets
Assets held for sale
Total Assets
Liabilities and Shareholders' Equity
Liabilities:
Unpaid loss and loss adjustment expenses:
Property and casualty
Vehicle service agreements
Total unpaid loss and loss adjustment expenses
Unearned premiums
Reinsurance payable
LROC preferred units, at fair value
Subordinated debt, at fair value
Deferred income tax liability
Deferred service fees
Accrued expenses and other liabilities
Liabilities held for sale
Total Liabilities
Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and
outstanding at December 31, 2015 and December 31, 2014, respectively
Shareholders' Equity:
Common stock, no par value; unlimited number authorized; 19,709,706 and 19,709,706 issued and
outstanding at December 31, 2015 and December 31, 2014, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Shareholders' equity attributable to common shareholders
Noncontrolling interests in consolidated subsidiaries
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
241,022
$
301,722
$
$
27,559
20,141
4,077
400
107,736
51,701
1,772
594
27,090
911
3,789
1,422
7
12,143
61
5,577
10,078
14,736
3,405
—
55,471
$
2,975
58,446
35,234
145
—
39,898
2,924
34,319
19,959
—
190,925
6,394
—
341,646
(308,995)
9,300
41,951
1,752
43,703
56,195
19,618
7,294
3,576
400
87,083
71,234
2,115
141
28,885
964
5,145
3,652
8
12,197
74
5,975
10,078
15,980
3,638
54,553
63,895
2,975
66,870
36,432
525
13,618
40,659
2,837
35,096
35,836
21,653
253,526
6,330
—
340,844
(312,050)
8,670
37,464
4,402
41,866
301,722
See accompanying notes to Consolidated Financial Statements.
49
$
241,022
$
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Revenues:
Net premiums earned
Service fee and commission income
Net investment income
Net realized gains
Other-than-temporary impairment loss
Other income
Total revenues
Operating expenses:
Loss and loss adjustment expenses
Commissions and premium taxes
Cost of services sold
General and administrative expenses
Amortization of intangible assets
Contingent consideration benefit
Impairment of asset held for sale
Total operating expenses
Operating (loss) income
Other (revenues) expenses, net:
Interest expense
Foreign exchange losses, net
(Gain) loss on change in fair value of debt
Loss on disposal of subsidiary
Loss on disposal of asset held for sale
Loss on deconsolidation of subsidiary
Equity in net loss of investee
Total other expenses, net
Loss from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Loss from continuing operations
Income from discontinued operations, net of taxes
Gain on disposal of discontinued operations, net of taxes
Net income (loss)
Less: net income attributable to noncontrolling interests in consolidated subsidiaries
Less: dividends on preferred stock
Net income (loss) attributable to common shareholders
Loss per share - continuing operations:
Basic:
Diluted:
Earnings per share - discontinued operations:
Basic:
Diluted:
Earnings (loss) per share – net income (loss) attributable to common shareholders:
Basic:
Diluted:
Weighted average shares outstanding (in ‘000s):
Basic:
Diluted:
See accompanying notes to Consolidated Financial Statements.
50
$
$
$
$
$
$
$
$
Years ended December 31,
2014
2015
$
$
$
$
$
$
$
$
117,433
22,966
2,918
1,197
(10)
15,462
159,966
92,812
22,773
4,044
41,760
1,244
(1,139)
—
161,494
(1,528)
5,278
1,215
(1,458)
—
—
4,420
339
9,794
(11,322)
93
(11,415)
1,417
11,267
1,269
162
329
778
(0.60)
(0.60)
0.64
0.64
0.04
0.04
19,710
19,710
117,593
24,659
1,616
5,041
—
9,315
158,224
86,227
23,238
3,880
41,613
1,620
(2,223)
1,180
155,535
2,689
5,645
419
10,953
1,244
125
—
190
18,576
(15,887)
(1,221)
(14,666)
3,442
—
(11,224)
1,596
300
(13,120)
(0.95)
(0.95)
0.20
0.20
(0.75)
(0.75)
17,398
17,398
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income (loss)
Other comprehensive income (loss), net of taxes(1):
Unrealized (losses) gains on fixed maturities and equity investments:
Unrealized losses arising during the period
Reclassification adjustment for amounts included in net income (loss)
Foreign currency translation adjustments
Recognition of currency translation loss on deconsolidation of subsidiary
Other comprehensive income (loss)
Comprehensive income (loss)
Less: comprehensive (loss) income attributable to noncontrolling interests in
consolidated subsidiaries
Comprehensive income (loss) attributable to common shareholders
(1) Net of income tax expense (benefit) of $0 and $0 in 2015 and 2014, respectively
Years ended December 31,
2015
2014
$
1,269
$
(11,224)
(3,505)
1,564
858
1,243
160
1,429
$
(308)
1,737
$
(2,597)
1,552
(31)
—
(1,076)
(12,300)
1,451
(13,751)
$
$
See accompanying notes to Consolidated Financial Statements.
51
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Shareholders'
Equity
Attributable to
Common
Shareholders
Noncontrolling
Interests in
Consolidated
Subsidiaries
Total
Shareholders'
Equity
Common Stock
Shares
Amount
16,429,761
$
— $
324,803
$
(298,930) $
9,601
$
35,474
$
1,446
$
36,920
—
—
3,279,945
—
—
—
—
—
—
—
—
—
—
—
14,803
—
(1)
1,239
(12,820)
—
(12,820)
1,596
(11,224)
—
—
(300)
—
—
—
(931)
(931)
(145)
(1,076)
—
—
—
—
—
14,803
(300)
(1)
1,239
—
—
14,803
(300)
1,505
1,505
—
—
(1)
1,239
19,709,706
$
— $
340,844
$
(312,050) $
8,670
$
37,464
$
4,402
$
41,866
—
—
—
—
—
—
—
—
—
—
—
—
—
—
802
2,342
1,107
—
—
2,342
1,107
(2,342)
—
162
1,269
—
630
630
(470)
160
(394)
—
—
—
(394)
802
—
—
(394)
802
19,709,706
$
— $
341,646
$
(308,995) $
9,300
$
41,951
$
1,752
$
43,703
See accompanying notes to Consolidated Financial Statements.
Balance,
January 1, 2014
Net (loss)
income
Other
comprehensive
loss
Exercise of
warrants
Preferred stock
dividends
Consolidation
of 1347
Investors LLC
Forfeited
options
Stock-based
compensation
Balance,
December 31,
2014
Deconsolidation
of
noncontrolling
interest
Net income
Other
comprehensive
income (loss)
Preferred stock
dividends, net
of tax
Stock-based
compensation
Balance,
December 31,
2015
52
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Cash Flows
(in thousands)
Cash provided by (used in):
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Gain on disposal of discontinued operations, net of taxes
Equity in net loss of investee
Equity in net income of limited liability investments
Depreciation and amortization expense
Contingent consideration benefit
Stock-based compensation expense, net of forfeitures
Net realized gains
(Gain) loss on change in fair value of debt
Deferred income taxes
Other-than-temporary impairment loss
Amortization of fixed maturities premiums and discounts
Loss on disposal of subsidiary
Loss on disposal of asset held for sale
Loss on deconsolidation of subsidiary
Impairment of asset held for sale
Changes in operating assets and liabilities:
Premiums and service fee receivable, net
Other receivables, net
Reinsurance recoverable
Prepaid reinsurance premiums
Deferred acquisition costs, net
Income taxes recoverable
Unpaid loss and loss adjustment expenses
Unearned premiums
Reinsurance payable
Deferred service fees
Other, net
Net cash used in operating activities
Investing activities:
Proceeds from sales and maturities of fixed maturities
Proceeds from sales of equity investments
Proceeds from sales of other investments
Purchases of fixed maturities
Purchases of equity investments
Net acquisition of limited liability investments
Net purchases of other investments
Net proceeds from (purchases of) short-term investments
Net proceeds from sale of discontinued operations
Acquisition of investee
Net (purchases) disposals of property and equipment
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of preferred stock, net
Proceeds from exercise of warrants
Redemption of LROC preferred units
Redemption of senior unsecured debentures
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flows information:
Cash paid (received) during the year for:
Interest
Income taxes
Non-cash investing and financing activities:
Fixed maturities received in connection with termination of MSA
Equity investments received in connection with termination of MSA
Accrued dividends on preferred stock
Years ended December 31,
2014
2015
$
1,269
$
(11,224)
(11,267)
339
(1,596)
1,845
(1,139)
802
(1,197)
(1,458)
87
10
323
—
—
4,420
—
1,848
1,356
2,230
1
54
13
(8,424)
(1,198)
(380)
(777)
(19,966)
(32,805)
27,480
819
—
(26,351)
(9,564)
(10,312)
(600)
4
44,919
—
(203)
26,192
—
—
(12,920)
—
(12,920)
(19,533)
71,234
51,701
$
24,249
$
— $
3,000
960
329
$
$
$
—
190
(184)
1,635
(2,223)
1,239
(5,041)
10,953
263
—
618
1,244
125
—
1,180
3,001
(1,372)
6,683
6,808
195
(74)
(20,792)
(12,145)
(508)
493
2,597
(16,339)
27,655
8,047
3,000
(36,902)
(14,462)
(2,703)
(3,600)
(102)
—
(2,305)
4,663
(16,709)
6,330
14,803
—
(14,356)
6,777
(26,271)
97,505
71,234
5,288
(736)
—
—
300
$
$
$
$
$
$
See accompanying notes to Consolidated Financial Statements.
53
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 1 BUSINESS
Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario)
on September 19, 1989. Kingsway is a Canadian holding company with operating subsidiaries located in the United States. The
Company operates as a merchant bank primarily engaged, through its subsidiaries, in the property and casualty insurance business.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Principles of consolidation:
The accompanying information in the 2015 Annual Report has been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP").
Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no impact
on previously reported net income (loss) or total shareholders' equity.
Subsidiaries
The Company's consolidated financial statements include the assets, liabilities, shareholders' equity, revenues, expenses and cash
flows of the holding company and its subsidiaries and have been prepared on the basis of U.S. GAAP. A subsidiary is an entity
which is controlled, directly or indirectly, through ownership of more than 50% of the outstanding voting rights, or where the
Company has the power to govern the financial and operating policies so as to obtain benefits from its activities. Assessment of
control is based on the substance of the relationship between the Company and the entity and includes consideration of both existing
voting rights and, if applicable, potential voting rights that are currently exercisable and convertible. The operating results of
subsidiaries that have been disposed of are included up to the date control ceased and any difference between the fair value of the
consideration received and the carrying value of the subsidiary are recognized in the consolidated statements of operations. All
intercompany balances and transactions are eliminated in full.
The consolidated financial statements are prepared as of December 31, 2015 based on individual company financial statements at
the same date. Accounting policies of subsidiaries have been aligned where necessary to ensure consistency with those of Kingsway.
The consolidated financial statements include the following subsidiaries, all of which are owned, directly or indirectly: 1347
Advisors LLC ("1347 Advisors"); 1347 Capital LLC; 1347 Investors LLC ("1347 Investors"); Appco Finance Corporation;
American Country Underwriting Agency Inc.; ARM Holdings, Inc.; Boston General Agency, Inc.; Congress General Agency, Inc.;
Hamilton Risk Management Company; Insurance Management Services Inc.; Itasca Capital Corp.; Itasca Investors LLC; IWS
Acquisition Corporation ("IWS"); KAI Advantage Auto, Inc.; KFS Capital LLC ("KFS Capital"); Kingsway America II Inc.;
Kingsway America Inc. ("KAI"); Kingsway America Agency Inc.; Kingsway Amigo Insurance Company ("Amigo"); Kingsway
General Insurance Company; Kingsway LGIC Holdings, LLC; Kingsway Reinsurance Corporation; Kingsway ROC GP; Mattoni
Insurance Brokerage, Inc.; Mendakota Casualty Company (formerly Universal Casualty Company) ("MCC"); Mendakota
Insurance Company ("Mendakota"); Mendota Insurance Agency, Inc.; Mendota Insurance Company ("Mendota"); MIC Insurance
Agency Inc.; and Trinity Warranty Solutions LLC ("Trinity").
Noncontrolling interests
The Company has noncontrolling interests attributable to its subsidiaries, 1347 Investors and IWS. The Company previously had
a noncontrolling interest attributable to Kingsway Linked Return of Capital Trust ("KLROC Trust") prior to its deconsolidation
in June 2015. Refer to Note 4, "Disposition, Deconsolidation and Discontinued Operations," for information regarding the
deconsolidation of KLROC Trust. A noncontrolling interest arises where the Company owns less than 100% of the voting rights
and economic interests in a subsidiary and is initially recognized at the proportionate share of the identifiable net assets of the
subsidiary at the acquisition date and is subsequently adjusted for the noncontrolling interest's share of the acquiree's net income
(losses) and changes in capital. The effects of transactions with noncontrolling interests are recorded in shareholders' equity where
there is no change of control.
(b)
Use of estimates:
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
year. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing
basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates
54
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment
expenses; valuation of fixed maturities and equity investments; valuation of deferred income taxes; impairment assessment of
intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for performance shares; fair value
assumptions for debt obligations; and contingent consideration.
(c)
Foreign currency translation:
The consolidated financial statements have been presented in U.S. dollars because the Company's principal investments and cash
flows are denominated in U.S. dollars. The Company's functional currency is the U.S. dollar since the substantial majority of its
operations is conducted in the United States. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are
translated to U.S. dollars at period-end exchange rates, while revenue and expenses are translated at average monthly rates and
shareholders' equity is translated at the rates in effect at dates of capital transactions. The net unrealized gains or losses which
result from the translation of non-U.S. subsidiaries financial statements are recognized in accumulated other comprehensive income.
Such currency translation gains or losses are recognized in the consolidated statements of operations upon the sale of a foreign
subsidiary. Transactions settled in foreign currencies are translated to functional currencies at the exchange rate prevailing at the
transaction dates. The unrealized foreign currency translation gains and losses arising from available-for-sale financial assets are
recognized in other comprehensive income (loss) until realized, at which date they are reclassified to the consolidated statements
of operations. Unrealized foreign currency translation gains and losses on certain interest bearing debt obligations carried at fair
value are included in the consolidated statements of operations.
Foreign currency translation adjustments are included in shareholders' equity under the caption accumulated other comprehensive
income. Foreign currency gains and losses resulting from transactions which are denominated in currencies other than the entity's
functional currency are reflected in foreign exchange losses, net in the consolidated statements of operations.
(d)
Business combinations:
The acquisition method of accounting is used to account for acquisitions of subsidiaries or other businesses. The results of acquired
subsidiaries or other businesses are included in the consolidated statements of operations from the date of acquisition. The cost
of an acquisition is measured as the fair value of the assets received, equity instruments issued and liabilities incurred or assumed
at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination
are measured initially at their fair values at the acquisition date, irrespective of the extent of any noncontrolling interest. The
excess of the cost of an acquisition over the fair value of the Company's share of the identifiable net assets acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is
recognized in the consolidated statements of operations. Noncontrolling interests in the net assets of consolidated entities are
reported separately in shareholders' equity.
(e)
Investments:
Investments in fixed maturities and equity investments in common stocks and warrants are classified as available-for-sale and
reported at fair value. Unrealized gains and losses are included in accumulated other comprehensive income, net of tax, until sold
or until an other-than-temporary impairment is recognized, at which point cumulative unrealized gains or losses are transferred to
the consolidated statements of operations.
Limited liability investments include investments in limited liability companies and limited partnerships in which the Company's
interests are not deemed minor and, therefore, are accounted for under the equity method of accounting. Other investments include
mortgage and 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.
Realized gains and losses on sales, determined on a first-in first-out basis, are included in net realized gains.
Dividends and interest income are included in net investment income. Investment income is recorded as it accrues. Income from
limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities and is
included in net investment income.
The Company accounts for all financial instruments using trade date accounting.
The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible
impairment. Impairment is charged to the consolidated statements of operations if the fair value of an instrument falls below its
cost/amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-
than-temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-
55
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
term prospects of the issuer; and the Company's ability and intent to hold investments for a period of time sufficient to allow for
any anticipated recovery.
(f)
Derivative financial instruments:
Derivative financial instruments include investments in warrants and performance shares issued to the Company under various
performance share grant agreements. Refer to Note 24, "Related Party Transactions," for further details regarding the performance
shares. Warrants are classified as equity investments in the consolidated balance sheets.
The Company measures derivative financial instruments at fair value. The fair value of derivative financial instruments is required
to be revalued each reporting period, with corresponding changes in fair value recorded in the consolidated statements of operations,
or, in the case of derivative financial instruments that are actively traded, in other comprehensive income (loss). Realized gains
or losses are recognized upon settlement of the contracts.
(g)
Cash and cash equivalents:
Cash and cash equivalents include cash and investments with original maturities of three months or less that are readily convertible
into cash.
(h)
Investment in investee:
The investment in common stock and private units of the Company's investee, 1347 Capital Corp. is accounted for under the equity
method of accounting and reported as investment in investee in the consolidated balance sheets. Investment in investee is comprised
of an investment in an entity where the Company has the ability to exercise significant influence but not control. Significant
influence is presumed to exist when the Company owns, directly or indirectly, between 20% and 50% of the outstanding voting
rights of the investee. Assessment of significant influence is based on the substance of the relationship between the Company and
the investee and includes consideration of both existing voting rights and, if applicable, potential voting rights that are currently
exercisable and convertible. This investment is reported as investment in investee in the consolidated balance sheets, with the
Company's share of income (loss) and other comprehensive income (loss) of the investee reported in the corresponding line in the
consolidated statements of operations and consolidated statements of comprehensive income (loss), respectively. Under the equity
method of accounting, an investment in investee is initially recognized at cost and adjusted thereafter for the post-acquisition
change in the Company's share of net assets of the investee.
At each reporting date, and more frequently when conditions warrant, management assesses its investment in investee for potential
impairment. If management's assessment indicates that there is objective evidence of impairment, the investee is written down to
its recoverable amount, which is determined as the higher of its fair value less costs to sell and its value in use. Write-downs to
reflect other-than-temporary impairments in value are included in other-than-temporary impairment loss in the consolidated
statements of operations.
The most recently available financial statements of the investee are used in applying the equity method. Adjustments are made
for the effects of significant transactions or events that occur between the date of the investee's financial statements and the date
of the Company's consolidated financial statements.
(i)
Premiums and service fee receivables:
Premiums and service fee receivables include balances due and uncollected and installment premiums not yet due from agents
and insureds. Premiums and service fee receivables are reported net of an estimated allowance for doubtful accounts.
(j)
Reinsurance:
Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have
been reported as a reduction of premium revenue and incurred loss and loss adjustment expenses. Commissions paid to the
Company by reinsurers on business ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance
recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.
Prepaid reinsurance premiums are recorded for unearned premiums that have been ceded to other companies.
(k)
Deferred acquisition costs, net:
The Company defers commissions, premium taxes and other underwriting and agency expenses that are directly related to successful
efforts to acquire new or existing insurance policies and vehicle service agreements to the extent they are considered recoverable.
56
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Costs deferred on property and casualty insurance products are amortized over the period in which premiums are earned. Costs
deferred on vehicle service agreements are amortized as the related revenues are earned. The method followed in determining the
deferred acquisition costs limits the deferral to its realizable value by giving consideration to estimated future loss and loss
adjustment expenses to be incurred as revenues are earned. Changes in estimates, if any, are recorded in the accounting period in
which they are determined. Anticipated investment income is included in determining the realizable value of the deferred acquisition
costs. The Company's deferred acquisition costs are reported net of ceding commissions.
(l)
Property and equipment:
Property and equipment are reported in the consolidated financial statements at cost. Depreciation of property and equipment has
been provided using the straight-line method over the estimated useful lives of such assets. Repairs and maintenance are recognized
in operations during the period incurred. Land is not depreciated. The Company estimates useful life to be thirty-nine years for
buildings; three to six years for leasehold improvements; three to ten years for furniture and equipment; and three to five years for
computer hardware.
(m)
Goodwill and intangible assets:
When the Company acquires a subsidiary or other business where it exerts significant influence, the fair value of the net tangible
and intangible assets acquired is determined and compared to the amount paid for the subsidiary or business acquired. Any excess
of the amount paid over the fair value of those net assets is considered to be goodwill.
Goodwill is tested for impairment annually as of December 31, or more frequently if events or circumstances indicate that the
carrying value may not be recoverable, to ensure that its fair value is greater than or equal to the carrying value. Any excess of
carrying value over fair value is charged to the consolidated statements of operations in the period in which the impairment is
determined.
The Company has the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If facts and circumstances indicate
that it is more likely than not that the goodwill is impaired, a fair value-based impairment test would be required. The goodwill
impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the
calculation. In the first step, the fair value of the reporting unit is compared to its book value including goodwill. If the fair value
of the reporting unit is in excess of its book value, the related goodwill is not impaired and no further analysis is necessary. If the
fair value of the reporting unit is less than its book value, there is an indication of potential impairment and a second step is
performed. When required, the second step of testing involves calculating the implied fair value of goodwill for the reporting unit.
The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination, which is
the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible
assets as if the reporting unit had been acquired. If the carrying value of the reporting unit's goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting units with a negative book
value, qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment
test.
When the Company acquires a subsidiary or other business where it exerts significant influence or acquires certain assets, intangible
assets may be acquired, which are recorded at their fair value at the time of the acquisition. An intangible asset with a definite
useful life is amortized in the consolidated statements of operations over its estimated useful life. The Company writes down the
value of an intangible asset with a definite useful life when the undiscounted cash flows are not expected to allow for full recovery
of the carrying value.
Intangible assets with indefinite useful lives are not subject to amortization and are tested for impairment annually as of December
31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable, to ensure that fair values
are greater than or equal to carrying values. Any excess of carrying value over fair value is charged to the consolidated statements
of operations in the period in which the impairment is determined.
(n)
Unpaid loss and loss adjustment expenses:
Unpaid loss and loss adjustment expenses represent the estimated liabilities for reported loss events, incurred but not yet reported
loss events and the related estimated loss adjustment expenses, including investigation. Unpaid loss and loss adjustment expenses
are determined using case-basis evaluations and statistical analyses, including industry loss data, and represent estimates of the
ultimate cost of all claims incurred through the balance sheet date. Although considerable variability is inherent in such estimates,
management believes that the liability for unpaid loss and loss adjustment expenses is adequate. The estimates are continually
57
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
reviewed and adjusted as necessary, and such adjustments are included in current operations and accounted for as changes in
estimates.
(o)
Debt:
The Company's Linked Return of Capital ("LROC") preferred units and subordinated debt are measured and reported at fair value.
The fair value of the LROC preferred units was based on quoted market prices prior to redemption in June 2015, and the fair value
of the subordinated debt is calculated by a third-party using a model based on significant market observable inputs. Changes in
fair value are reported in the consolidated statements of operations as (gain) loss on change in fair value of debt.
(p)
Contingent consideration:
The consideration for certain of the Company's acquisitions includes future payments to the former owners that are contingent
upon the achievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and
reported at fair value at the date of acquisition and are included in accrued expenses and other liabilities in the consolidated balance
sheets. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including
adjustments to the discount rates or changes in the assumed achievement or timing of any targets. These fair value measurements
are based on significant inputs not observable in the market. Changes in assumptions could have an impact on the payout of
contingent consideration liabilities. Changes in fair value are reported in the consolidated statements of operations as contingent
consideration benefit.
(q)
Income taxes:
The Company and its non-U.S. subsidiaries file separate foreign income tax returns. Kingsway America II Inc. and its eligible
U.S. subsidiaries file a U.S. consolidated federal income tax return ("KAI Tax Group"). The method of allocating federal income
taxes among the companies in the KAI Tax Group is subject to written agreement, approved by each company's Board of Directors.
The allocation is made primarily on a separate return basis, with current credit for any net operating losses or other items utilized
in the consolidated federal income tax return. The Company's U.S. subsidiaries which are not included in the KAI Tax Group file
separate federal income tax returns.
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and
liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities
and their respective tax bases and (ii) loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely
than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be
realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. The Company accounts for uncertain tax positions in accordance
with the income tax accounting guidance. The Company recognizes interest and penalties, if any, related to unrecognized tax
benefits in income tax expense (benefit).
(r)
Revenue recognition:
Premium revenue and unearned premiums
Premium revenue is recognized on a pro rata basis over the terms of the respective policy contracts. Unearned premiums represent
the portion of premiums written that are applicable to the unexpired terms of policies in force.
Service charges on installment premiums are recognized as income upon receipt of related installment payments and are reflected
in other income. Revenue from policy fees is deferred and recognized over the terms of the respective policy contracts, with
revenue reflected in other income.
The reinsurers' share of unearned premiums is recognized as amounts recoverable using principles consistent with the Company's
method for determining the unearned premium liability.
Service fee and commission income and deferred service fees
Service fee and commission income represents vehicle service agreement fees and warranty product and maintenance support fees
based on terms of various agreements with credit unions, consumers and businesses.
58
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Vehicle service agreement fees include the administrative fees from the sale of vehicle service agreements as well as the fees to
administer future claims. The administrative fee component is recognized in proportion to the costs incurred in acquiring and
administering the vehicle service agreements. The claims fee component is earned over the life of the vehicle service agreements
based on the greater of expected claims or actual claims experience.
Warranty product and maintenance support fees include the fees from the sale of warranty contracts for certain new and used
heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration equipment as well
as the fees collected to administer equipment breakdown and maintenance support services. Warranty product and maintenance
support fees are earned at the time the warranty product sales and equipment breakdown and maintenance support transactions
are completed or services are rendered.
The assumptions and methodologies used are continually reviewed and any adjustments are reflected in the consolidated statements
of operations in the period in which the adjustments are made.
(s)
Cost of services sold:
Cost of services sold is comprised of direct costs incurred to generate maintenance support fee revenue. Cost of services sold
includes payments to third-party contractors who service equipment breakdowns and perform maintenance support.
(t)
Stock-based compensation:
The Company has a stock-based compensation plan for key officers of the Company. The Company uses the fair-value method
of accounting for stock-based compensation awards granted to employees. Expense is recognized on a straight-line basis over the
service period during which awards are expected to vest, with a corresponding increase to additional paid-in capital. The Company
determines the fair value of stock options on their grant date using the Black-Scholes option pricing model. When these stock
options are exercised, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in
shareholders' equity.
(u)
Fair value of financial instruments:
The fair values of the Company's investments in fixed maturities and equity investments, performance shares, LROC preferred
units, subordinated debt and contingent consideration are estimated using a fair value hierarchy to categorize the inputs it uses in
valuation techniques. The fair value of the Company's investment in investee is based on quoted market prices. Fair values for
other investments approximate their unpaid principal balance. The carrying amounts reported in the consolidated balance sheets
approximate fair values for cash, short-term investments and certain other assets and other liabilities because of their short-term
nature.
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS
(a)
Adoption of New Accounting Standards:
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). ASU 2014-08 amends the requirements
for reporting and disclosing discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of
components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or
will have a major effect on the entity’s operations and financial results. Effective January 1, 2015, the Company adopted ASU
2014-08. The adoption of the standard did not have an impact on the consolidated financial statements.
(b)
Accounting Standards Not Yet Adopted:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of
ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015,
the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ("ASU
2015-14"). This amendment defers the effective date of the previously issued ASU 2014-09 until the interim and annual reporting
periods beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning
after December 15, 2016. Insurance contracts are not within the scope of ASU 2014-09, therefore this standard would not apply
59
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
to the Company's Insurance Underwriting segment. The Company is currently evaluating the impact of the adoption of ASU
2014-09 on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU
2015-02"). The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate
certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the
amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs")
or voting interest entities while also eliminating the presumption that a general partner should consolidate a limited partnership.
ASU 2015-02 is effective for fiscal years beginning after December 15, 2015 and interim periods within those years with early
adoption being permissible. The Company is currently evaluating the impact of the adoption of ASU 2015-02 on its consolidated
financial statements.
In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration
Contracts ("ASU 2015-09"). ASU 2015-09 was issued to enhance disclosures about an entity’s insurance liabilities, including
the nature, amount, timing and uncertainty of cash flows related to those liabilities. ASU 2015-09 is effective for annual reporting
periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted.
Except for the increased disclosure requirements, the Company does not believe the adoption will have a material effect on its
consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments ("ASU 2015-16"). ASU 2015-16 simplifies the accounting for measurement-period adjustments
in a business combination by requiring the acquirer to recognize adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings as a result
of the change to the provisional amounts, calculated as if the accounting had been completed as of the acquisition date, must be
recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively. The effects, by line
item, if any, must be disclosed. The Company does not believe the adoption of ASU 2015-16 will have a material effect on its
consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities ("ASU 2016-01"). The amendments in ASU 2016-01 address certain aspects of
recognition, measurement, presentation, and disclosure of financial instruments. Most significantly, ASU 2016-01 requires equity
investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee)
to be measured at fair value with changes in fair value recognized in net income (loss). For public business entities, the amendments
in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years, and will be applied using a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year of
adoption. The Company currently records its equity investments at fair value with net unrealized gains or losses reported in
accumulated other comprehensive income. Adoption of ASU 2016-01 will require the changes in fair value on equity investments
with readily determinable fair values to be recorded in net income (loss). Adoption of ASU 2016-01 is not expected to have a
material impact on the Company's financial position, cash flows, or total comprehensive income (loss), but could have a significant
impact on the Company's results of operations and earnings (loss) per share as changes in fair value will be presented in net income
(loss) rather than other comprehensive income (loss).
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 was issued to improve the financial
reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain
criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and
a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases,
the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating
section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the
amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the
lease liability will be classified as a financing activity while the interest component will be included in the operating section of
the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15,
2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period
presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU
2016-02 on its consolidated financial statements.
60
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 4 DISPOSITION, DECONSOLIDATION AND DISCONTINUED OPERATIONS
(a)
Disposition
Effective March 31, 2014, the Company's wholly owned subsidiary, 1347 Property Insurance Holdings, Inc. ("PIH"), formerly
known as Maison Insurance Holdings, Inc., completed an initial public offering of its common stock. Total consideration to the
Company as a result of this transaction was $7.7 million, consisting of a 28.7% interest in the common shares of PIH. As a result
of the disposal, the Company recognized a loss of $1.2 million during the first quarter of 2014. The earnings of PIH are included
in the consolidated statements of operations through the March 31, 2014 transaction date. At March 31, 2014, the Company's
investment in the common stock of PIH was reported as investment in investee in the consolidated balance sheets.
During the second quarter of 2014, PIH announced the closing and settlement of an underwritten public offering of 2,875,000
shares of its common stock at a price to the public of $8.00 per share. As a result of the issuance of additional shares of common
stock, the Company's approximate voting percentage in PIH was reduced to 15.7% at June 30, 2014. As a result of this change in
ownership and other qualitative factors, the Company determined that its investment in the common stock of PIH no longer qualified
for the equity method of accounting. During the fourth quarter of 2014, the Company purchased additional shares of PIH which
increased the Company's approximate voting percentage in PIH to 16.9% at December 31, 2014. The Company's investment in
PIH common stock is included in equity investments and reported at its fair value of $8.2 million in the consolidated balance sheets
at December 31, 2015.
(b)
Deconsolidation
On July 14, 2005, KLROC Trust completed its public offering of C$78.0 million through the issuance of 3,120,000 LROC 5%
preferred units due June 30, 2015 (“LROC preferred units”), of which the Company was a promoter. KLROC Trust’s net proceeds
of the public offering was C$74.1 million.
Beginning in 2009, KFS Capital began purchasing LROC preferred units. During 2009, KFS Capital acquired 833,715 LROC
preferred units. During the second quarter of 2010, KFS Capital commenced the take-over bid (the “KLROC Offer”) to acquire
up to 1,500,000 units at a price per unit of C$20.00 in cash. The KLROC Offer expired on July 23, 2010, and 1,525,150 units
were tendered, of which 1,500,000 were purchased on a pro-rata basis. The tender was paid for using available cash.
As a result of these acquisitions, the Company beneficially owned and controlled 2,333,715 units, representing 74.8% of the issued
and outstanding LROC preferred units and began consolidating the financial statements of KLROC Trust effective July 23, 2010.
In the consolidated financial statements, the par value of the units owned was netted against the liability related to the LROC
preferred units due June 30, 2015. At December 31, 2014, the Company's outstanding net obligation was C$15.8 million.
During the second quarter of 2015, the Company's controlling interest in KLROC Trust was reduced to zero upon the Company's
repayment of its C$15.8 million outstanding on its LROC preferred units due June 30, 2015. As a result, the Company recorded
a non-cash loss on deconsolidation of KLROC Trust of $4.4 million for the year ended December 31, 2015. This reported loss
results from removing the net assets and accumulated other comprehensive loss of KLROC Trust from the Company’s consolidated
balance sheets. The deconsolidation reduced consolidated shareholders’ equity by $2.8 million at June 30, 2015.
(c)
Discontinued Operations
On April 1, 2015, the Company closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. ("ARS") for $47.0 million in
cash. During the second quarter of 2015, the Company received additional post-closing cash consideration of $2.0 million. The
terms of the sale also provide for potential future earnout payments to the Company equal to 1.25% of ARS' written premium and
fee income during the earnout periods. The earnout payments are payable in three annual installments beginning in April 2016
through April 2018. The Company recorded a net gain on disposal of ARS, not including future earnout payments, of $11.3 million
for the year ended December 31, 2015. As a result of the sale, ARS, previously disclosed as part of the Insurance Services segment,
has been classified as a discontinued operation. The earnings of ARS are disclosed as discontinued operations in the consolidated
statements of operations for all periods presented. Summary financial information included in income from discontinued operations,
net of taxes for the three months ended March 31, 2015 and the year ended December 31, 2014 is presented below:
61
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
Revenues:
Service fee and commission income
Other (expense) income
Total revenues
Expenses:
General and administrative expenses
Income from discontinued operations before income tax expense
Income tax expense
Income from discontinued operations, net of taxes
Gain on disposal of discontinued operations before income tax benefit
Income tax benefit
Gain on disposal of discontinued operations, net of taxes
$
Three months ended
March 31,
2015
8,342
$
(20)
8,322
6,462
1,860
443
1,417
11,177
(90)
11,267
Total gain from discontinued operations, net of taxes
$
12,684
$
Year ended
December 31,
2014
30,189
27
30,216
25,611
4,605
1,163
3,442
—
—
—
3,442
At December 31, 2014, the assets and liabilities of ARS are presented as held for sale in the consolidated balance sheets. The
carrying amounts of the major classes of assets and liabilities of ARS at December 31, 2014 were as follows:
(in thousands)
Assets
Cash and cash equivalents
Service fee receivable
Other receivables
Income taxes recoverable
Property and equipment, net of accumulated depreciation
Goodwill
Intangible assets, net of accumulated amortization
Other assets
Assets held for sale
Liabilities
Deferred income tax liability
Deferred service fees
Accrued expenses and other liabilities
Liabilities held for sale
December 31, 2014
2,792
19,006
257
150
193
510
31,318
327
54,553
2,550
14,358
4,745
21,653
$
$
$
$
For the three months ended March 31, 2015, ARS' net cash used in operating activities was $0.2 million. For the year ended
December 31, 2014, ARS' net cash provided by operating activities was $1.7 million. ARS had no cash flows from investing
activities for the three months ended March 31, 2015 and the year ended December 31, 2014.
62
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 5 INVESTMENTS
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's investments in fixed maturities
and equity investments at December 31, 2015 and December 31, 2014 are summarized in the tables shown below:
(in thousands)
Fixed maturities:
U.S. government, government agencies and
authorities
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed securities and collateralized
mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Total fixed maturities and equity investments
$
(in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
December 31, 2015
$
20,443
$
2,241
7,997
6,040
18,885
55,606
25,177
1,251
26,428
82,034
$
73
20
25
4
60
182
3,464
52
3,516
3,698
$
$
63
5
59
21
81
229
2,055
330
2,385
2,614
$
20,453
2,256
7,963
6,023
18,864
55,559
26,586
973
27,559
83,118
$
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
December 31, 2014
Fixed maturities:
U.S. government, government agencies and
authorities
Canadian government
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed securities and collateralized
mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
$
20,436
$
333
$
4,519
3,358
5,330
7,221
15,136
56,000
16,450
129
16,579
—
61
37
3
103
537
3,360
—
3,360
3,897
$
10
277
—
15
10
30
342
284
37
321
663
$
20,759
4,242
3,419
5,352
7,214
15,209
56,195
19,526
92
19,618
$
75,813
Total fixed maturities and equity investments
$
72,579
$
The table below summarizes the Company's fixed maturities at December 31, 2015 by contractual maturity periods. Actual results
may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity
of these obligations.
63
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized Cost
9,995
36,091
1,429
8,091
55,606
$
$
$
December 31, 2015
Estimated Fair
Value
10,078
35,999
1,425
8,057
55,559
$
The following tables highlight the aggregate unrealized loss position, by security type, of fixed maturities and equity investments
in unrealized loss positions as of December 31, 2015 and December 31, 2014. The tables segregate the holdings based on the
period of time the investments have been continuously held in unrealized loss positions.
(in thousands)
December 31, 2015
Less than 12 Months
Greater than 12 Months
Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Fixed maturities:
U.S. government, government agencies
and authorities
States, municipalities and political
subdivisions
Mortgage-backed
Asset-backed securities and
collateralized mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Total
$
12,635
$
63
$
— $
— $
12,635
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
745
5,685
5,035
9,171
15,711
897
16,608
33,271
229
63
5
59
21
81
2,055
330
2,385
2,614
$
— $
— $
49,879
$
745
5,685
5,035
9,171
5
59
21
81
33,271
229
15,711
897
16,608
$
49,879
$
2,055
330
2,385
2,614
64
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
December 31, 2014
Less than 12 Months
Greater than 12 Months
Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Fixed maturities:
U.S. government, government
agencies and authorities
Canadian government
States, municipalities and political
subdivisions
Mortgage-backed
Asset-backed securities and
collateralized mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Total
$
12,784
$
—
250
2,816
5,097
6,226
27,173
4,164
92
4,256
$
31,429
$
10
—
—
15
10
20
55
284
37
321
376
$
473
$
— $
13,257
$
4,242
277
—
—
—
—
—
—
—
10
4,242
250
2,816
5,097
6,226
4,715
287
31,888
—
—
—
—
—
—
4,164
92
4,256
$
4,715
$
287
$
36,144
$
10
277
—
15
10
30
342
284
37
321
663
Fixed maturities and equity investments contain approximately 127 and 71 individual investments that were in unrealized loss
positions as of December 31, 2015 and 2014, respectively.
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The
Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-
temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
•
•
•
•
•
•
•
•
identifying all unrealized loss positions that have existed for at least six months;
identifying other circumstances which management believes may impact the recoverability of the unrealized loss positions;
obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments
based on their knowledge and experience together with market-based valuation techniques;
reviewing the trading range of certain investments over the preceding calendar period;
assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit
ratings from third-party rating agencies;
assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit
rating based on the continuity of its debt service record;
determining the necessary provision for declines in market value that are considered other-than-temporary based on the
analyses performed; and
assessing the Company's ability and intent to hold these investments at least until the investment impairment is recovered.
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-
temporary include, but may not be limited to, the following:
•
•
•
•
the opinions of professional investment managers could be incorrect;
the past trading patterns of individual investments may not reflect future valuation trends;
the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts
related to a company's financial situation; and
the debt service pattern of non-investment grade instruments may not reflect future debt service capabilities and may not
reflect a company's unknown underlying financial problems.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the
Company recorded a write down of $0.0 million for other-than-temporary impairment related to fixed maturities for the year ended
65
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
December 31, 2015. The Company did not recognize any impairment related to its investments that was considered other-than-
temporary for the year ended December 31, 2014.
There were $0.0 million of other-than-temporary losses recognized in other comprehensive income for the year ended December 31,
2015. There were no other-than-temporary losses recognized in other comprehensive loss for the year ended December 31, 2014.
The Company has reviewed currently available information regarding investments with estimated fair values that are less than
their carrying amounts and believes that these unrealized losses are not other-than-temporary and are primarily due to temporary
market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell those investments,
and it is not likely that it will be required to sell those investments before recovery of its amortized cost.
The Company does not have any exposure to subprime mortgage-backed investments.
Limited liability investments include investments in limited liability companies and limited partnerships that primarily invest in
income-producing real estate or real estate related investments. The Company's interests in these investments are not deemed
minor and, therefore, are accounted for under the equity method of accounting. As of December 31, 2015 and December 31, 2014,
the carrying value of limited liability investments totaled $20.1 million and $7.3 million, respectively. At December 31, 2015, the
Company has unfunded commitments totaling $2.0 million to fund limited liability investments.
Other investments include mortgage and collateral loans and are reported at their unpaid principal balance. As of December 31,
2015 and December 31, 2014, the carrying value of other investments totaled $4.1 million and $3.6 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the years ended
December 31, 2015 and 2014 were as follows:
(in thousands)
Gross realized gains
Gross realized losses
Total
$
$
Years ended December 31,
2014
2015
5,474
1,198
(433)
(1)
5,041
1,197
$
$
Net investment income for the years ended December 31, 2015 and 2014, respectively, is comprised as follows:
(in thousands)
Investment income
Interest from fixed maturities
Dividends
Income from limited liability investments
Loss on change in fair value of warrants
Other
Gross investment income
Investment expenses
Net investment income
Years ended December 31,
2014
2015
$
$
907
702
1,596
(216)
186
3,175
(257)
2,918
$
$
1,084
203
184
—
372
1,843
(227)
1,616
66
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 6 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the common stock and private units of 1347 Capital Corp. and is
accounted for under the equity method. 1347 Capital Corp. was formed for the purpose of entering into a merger, share exchange,
asset acquisition or other similar business combination with one or more businesses or entities. The carrying value, estimated fair
value and approximate equity percentage for the Company's investment in 1347 Capital Corp. at December 31, 2015 and 2014
were as follows:
(in thousands, except for percentages)
December 31, 2015
December 31, 2014
Equity
percentage
Estimated
Fair Value
Carrying
value
Equity
percentage
Estimated
Fair Value
Carrying
value
1347 Capital Corp.
21.0%
$
12,369
$
1,772
22.7%
$
13,038
$
2,115
Equity in net loss of investee was $0.3 million and $0.2 million for the years ended December 31, 2015 and 2014, respectively.
NOTE 7 REINSURANCE
As is customary in the insurance industry, the Company reinsures portions of certain insurance policies it writes, thereby providing
a greater diversification of risk and minimizing exposure on larger risks. The Company remains contingently at risk with respect
to any reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the
reinsurance treaty.
The Company monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium and ceded unpaid
loss and loss adjustment expenses balances.
For most of the non-standard automobile business, the liability is limited to the minimum statutory liability limits, which are
typically not greater than $50,000 per occurrence, depending on the state. The Company's reinsurance includes excess of loss
reinsurance to reduce its exposure to individual losses as well as losses related to catastrophic events which may simultaneously
affect many of our policyholders. During 2015 and 2014, the Company entered into an excess of loss reinsurance arrangement to
reduce its exposure to losses related to certain catastrophic events which may occur in any of the states in which the Company
writes non-standard automobile business.
Ceded premiums, loss and loss adjustments expenses, and commissions as of and for the years ended December 31, 2015 and
2014 are summarized as follows:
(in thousands)
Ceded premiums written
Ceded premiums earned
Ceded loss and loss adjustment expenses
Ceded unpaid loss and loss adjustment expenses
Ceded unearned premiums
Ceding commissions
$
67
$
Years ended December 31,
2014
(3,695)
1,104
655
3,203
533
5
2015
165
166
(571)
1,207
7
(138)
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The maximum amount of return commission, which would have been due to reinsurers if they or the Company had canceled all
of the Company's reinsurance, with the return of the unearned premium, is as follows at December 31, 2015:
(in thousands)
Assumed
Ceded
Net
Unearned Premium Reserve
$
$
5,041
7
5,034
$
$
December 31, 2015
Commission Equity
776
—
776
The amounts of assumed premiums written were $19.0 million and $20.1 million for the years ended December 31, 2015 and
2014, respectively. The amounts of assumed premiums earned were $19.8 million and $19.9 million for the years ended
December 31, 2015 and 2014, respectively.
NOTE 8 DEFERRED ACQUISITION COSTS
Policy acquisition costs consist primarily of commissions, premium taxes, and underwriting and agency expenses, net of ceding
commission income, incurred related to successful efforts to acquire new or renewal insurance contracts and vehicle service
agreements. Acquisition costs deferred on both property and casualty insurance products and vehicle service agreements are
amortized over the period in which the related revenues are earned.
The components of deferred acquisition costs and the related amortization expense as of and for the years ended December 31,
2015 and 2014, respectively, are comprised as follows:
(in thousands)
Balance at January 1, net
Additions
Amortization
Acquisition costs disposed of during the year related to PIH
Balance at December 31, net
NOTE 9 GOODWILL
Years ended December 31,
2015
12,197
$
26,307
(26,361)
—
12,143
$
2014
12,392
26,627
(25,779)
(1,043)
12,197
$
$
Goodwill was $10.1 million at each of December 31, 2015 and 2014, respectively. The Company's goodwill at December 31,
2015 and 2014 is attributable to the Insurance Services reportable segment.
Goodwill is assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the
carrying value may not be recoverable. The Company tested goodwill for recoverability at December 31, 2015 and 2014. Based
on the assessment performed, no goodwill impairments were recognized in 2015 or 2014.
68
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 10 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
(in thousands)
December 31, 2015
Intangible assets subject to amortization
Database
Vehicle service agreements in-force
Customer-related relationships
Non-compete agreement
Intangible assets not subject to amortization
Insurance licenses
Trade name
Total
(in thousands)
Intangible assets subject to amortization
Database
Vehicle service agreements in-force
Customer-related relationships
Non-compete agreement
Intangible assets not subject to amortization
Insurance licenses
Trade name
Total
Gross Carrying
Value
Accumulated
Amortization
Net Carrying
Value
$
$
$
$
4,918
3,680
3,611
70
7,803
663
20,745
Gross Carrying
Value
4,918
3,680
3,611
70
7,803
663
20,745
$
$
$
$
1,537
3,362
1,040
70
—
—
6,009
$
$
3,381
318
2,571
—
7,803
663
14,736
December 31, 2014
Accumulated
Amortization
Net Carrying
Value
1,045
2,975
695
50
—
—
4,765
$
$
3,873
705
2,916
20
7,803
663
15,980
The Company's intangible assets with definite useful lives are amortized either based on the pattern in which the economic benefits
of the intangible asset are expected to be consumed or using the straight-line method over their estimated useful lives, which range
from three to fifteen years. Amortization of intangible assets was $1.2 million and $1.6 million for the years ended December 31,
2015 and 2014, respectively. The estimated aggregate future amortization expense of all intangible assets is $1.2 million for 2016,
$1.0 million for 2017, $1.0 million for 2018, $0.8 million for 2019 and $0.7 million for 2020.
The insurance licenses and trade name intangible assets have indefinite useful lives and are not amortized. All intangible assets
with indefinite useful lives are reviewed annually by the Company for impairment. No impairment charges were taken on intangible
assets in 2015 or 2014.
69
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 11 PROPERTY AND EQUIPMENT
Property and equipment are comprised as follows:
(in thousands)
Land
Building
Leasehold improvements
Furniture and equipment
Computer hardware
Total
(in thousands)
Land
Building
Leasehold improvements
Furniture and equipment
Computer hardware
Total
Cost
1,984
4,565
463
2,588
8,514
18,114
Cost
1,984
4,565
462
2,743
11,972
21,726
$
$
$
$
Accumulated
Depreciation
—
$
1,669
330
2,318
8,220
12,537
$
Accumulated
Depreciation
—
$
1,539
276
2,442
11,494
$
15,751
December 31, 2015
Carrying
Value
$
$
1,984
2,896
133
270
294
5,577
December 31, 2014
Carrying
Value
$
$
1,984
3,026
186
301
478
5,975
For the year ended December 31, 2015, depreciation expense on property and equipment of $0.4 million and $0.2 million is
included in general and administrative expenses and loss and loss adjustment expenses, respectively, in the consolidated statements
of operations. For the year ended December 31, 2014, depreciation expense on property and equipment of $0.8 million and $0.0
million is included in general and administrative expenses and loss and loss adjustment expenses, respectively, in the consolidated
statements of operations.
Prior to the fourth quarter of 2014, property consisting of building and land located in Miami, Florida with a carrying value of
$5.2 million was classified as held for sale. As a result of declines in the fair value of the property, the Company recorded an
impairment write-down of $1.2 million related to the asset held for sale during the year ended December 31, 2014. On October
2, 2014, the Company completed a sale and leaseback transaction involving the building and land located in Miami, Florida. Net
proceeds were $4.3 million after deducting direct costs of the transaction. The Company recognized a loss of $0.1 million equal
to the difference between the fair market value and the carrying value of the property at the date of the transaction. This transaction
is accounted for as a financing because it does not qualify for sales recognition under the sale-leaseback accounting guidance due
to the Company's continuing involvement with the property. As a result, at the date of the transaction, land and building with a
carrying value of $5.2 million was reclassified from asset held for sale to property and equipment in the consolidated balance
sheets, and the building is being depreciated over its estimated useful life. At December 31, 2015 and 2014, the carrying value
of the land and building was $4.9 million and $5.0 million, respectively. See Note 14, "Finance Lease Obligation Liability," for
further discussion.
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
70
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
settlement practices; the effect of inflationary trends on future loss settlement costs; court decisions; economic conditions; and
public attitudes.
Consequently, the process of determining the provision necessarily involves risks that the actual results will deviate, perhaps
materially, from the best estimates made.
The Company's evaluation of the adequacy of unpaid loss and loss adjustment expenses includes a re-estimation of the liability
for unpaid loss and loss adjustment expenses relating to each preceding financial year compared to the liability that was previously
established.
(a) Property and Casualty
The results of this comparison and the changes in the provision for property and casualty unpaid loss and loss adjustment expenses,
net of amounts recoverable from reinsurers, as of December 31, 2015 and December 31, 2014 were as follows:
(in thousands)
December 31,
Balance at beginning of period, gross
Less reinsurance recoverable related to property and casualty unpaid
loss and loss adjustment expenses
Balance at beginning of period, net
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
Disposal of unpaid loss and loss adjustment expenses related to PIH
Balance at end of period, net
Plus reinsurance recoverable related to property and casualty unpaid
loss and loss adjustment expenses
Balance at end of period, gross
$
$
2015
63,895
3,203
60,692
86,439
616
(54,415)
(39,068)
—
54,264
1,207
55,471
$
$
2014
84,534
7,942
76,592
84,577
(5,123)
(52,521)
(42,428)
(405)
60,692
3,203
63,895
The Company reported unfavorable development on property and casualty unpaid loss and loss adjustment expenses of $0.6 million
in 2015 compared to favorable development of $5.1 million in 2014. The unfavorable development in 2015 was primarily related
to the increase in property and casualty unpaid loss and loss adjustment expenses at Mendota, offset by a decrease in property and
casualty unpaid loss and loss adjustment expenses due to the continuing voluntary run-offs of Amigo and MCC. The favorable
development in 2014 was primarily related to the decrease in property and casualty unpaid loss and loss adjustment expenses at
Amigo and MCC. Original estimates are increased or decreased as additional information becomes known regarding individual
claims.
71
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(b) Vehicle Service Agreements
The results of the comparison and the changes in the provision for vehicle service agreement unpaid loss and loss adjustment
expenses as of December 31, 2015 and December 31, 2014 were as follows:
(in thousands)
Balance at beginning of period
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
Balance at end of period
NOTE 13 DEBT
Debt consists of the following instruments:
2015
2,975
5,757
—
(5,757)
—
2,975
$
$
December 31,
2014
3,128
6,773
—
(6,866)
(60)
2,975
$
$
(in thousands)
LROC preferred units due 2015
Subordinated debt
Total
2015
Principal
— $
90,500
90,500
$
$
$
December 31,
2014
Fair Value
—
39,898
39,898
Principal
13,618
90,500
104,118
Fair Value
13,618
40,659
54,277
$
$
$
$
Subordinated debt mentioned above consists of the following trust preferred debt instruments:
Issuer
Principal
(in thousands)
Issue date
Kingsway CT Statutory Trust I
Kingsway CT Statutory Trust II
Kingsway CT Statutory Trust III
Kingsway DE Statutory Trust III
Kingsway DE Statutory Trust IV
Kingsway DE Statutory Trust VI
$
$
$
$
$
$
(a) Senior unsecured debentures:
15,000
12/4/2002
17,500
5/15/2003
20,000
10/29/2003
15,000
5/22/2003
10,000
9/30/2003
13,000
1/8/2004
Interest
annual interest rate equal to LIBOR,
plus 4.00% payable quarterly
annual interest rate equal to LIBOR,
plus 4.10% payable quarterly
annual interest rate equal to LIBOR,
plus 3.95% payable quarterly
annual interest rate equal to LIBOR,
plus 4.20% payable quarterly
annual interest rate equal to LIBOR,
plus 3.85% payable quarterly
annual interest rate equal to LIBOR,
plus 4.00% payable quarterly
Redemption date
12/4/2032
5/15/2033
10/29/2033
5/22/2033
9/30/2033
1/8/2034
On January 29, 2004, KAI completed the sale of $100.0 million 7.50% senior notes due 2014. The notes were fully and
unconditionally guaranteed by the Company. In March 2004, an additional $25.0 million of these senior notes were issued. The
notes were redeemable at KAI's option in whole at any time or in part from time to time on or after February 1, 2009, subject to
the conditions stated in the trust indenture. Interest paid during the year ended December 31, 2014 was $0.5 million. KAI
subsequently repurchased and retired most of the originally issued par value. In February 2014, KAI repaid the $14.4 million
remaining amount outstanding on its senior unsecured debentures due February 1, 2014.
72
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(b) LROC preferred units:
On July 14, 2005, KLROC Trust completed its public offering of C$78.0 million of LROC preferred units due June 30, 2015, of
which the Company was a promoter. KLROC Trust's net proceeds of the public offering was C$74.1 million.
During 2009, KFS Capital acquired 833,715 LROC preferred units. On June 9, 2010, KFS Capital commenced the KLROC Offer
to acquire up to 750,000 LROC preferred units at a price per unit of C$17.50 in cash. On July 9, 2010, KFS Capital increased the
size and price of its previously announced KLROC Offer to 1,500,000 units at a price per unit of C$20.00 in cash. The KLROC
Offer expired on July 23, 2010, and 1,525,150 units were tendered, of which 1,500,000 were purchased on a pro-rata basis. The
tender was paid for using available cash.
As a result of these acquisitions, the Company beneficially owned and controlled 2,333,715 units, representing 74.8% of the issued
and outstanding LROC preferred units. At December 31, 2014, the Company's outstanding obligation was C$15.8 million. During
the second quarter of 2015, the Company repaid its C$15.8 million outstanding on its LROC preferred units due June 30, 2015.
(c) 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 KAI to the trust in exchange for the proceeds from the private sale. The floating
rate debentures bear interest at the rate of the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR"),
plus spreads ranging from 3.85% to 4.20%. At December 31, 2015, the interest rates ranged from 4.27% to 4.61%. The Company
has the right to call each of these securities at par value anytime after five years from their issuance until their maturity.
During the first quarter of 2011, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary
right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures,
which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of
its other debt indentures. On November 6, 2015, the Company paid $22.1 million to its Trust Preferred trustees to be used by the
trustees to pay the interest which the Company had been deferring since the first quarter of 2011. At December 31, 2015 and 2014,
deferred interest payable of zero and $17.4 million, respectively, is included in accrued expenses and other liabilities in the
consolidated balance sheets.
NOTE 14 FINANCE LEASE OBLIGATION LIABILITY
As described in Note 11, "Property and Equipment," on October 2, 2014, the Company completed a sale and leaseback transaction
involving building and land located in Miami, Florida. The transaction does not qualify for sales recognition and is accounted for
as a financing due to the Company's continuing involvement with the property as a result of nonrecourse financing provided to
the buyer in the form of prepaid rent. A finance lease obligation liability equal to the selling price of the property was established
at the date of the transaction. During the five-year lease term, the Company will record interest expense on the finance lease
obligation at its incremental borrowing rate and will increase the finance lease obligation liability by the same amount. At the end
of the lease term, the Company will no longer have continuing involvement with the property and will then recognize the sale of
the property as well as the gain of approximately $1.1 million that will result from removing the net book value of the land and
building and finance lease obligation liability from the consolidated balance sheets. At December 31, 2015 and 2014, finance
lease obligation liability of $4.9 million and $4.7 million, respectively, is included in accrued expenses and other liabilities in the
consolidated balance sheets.
NOTE 15 INCOME TAXES
Income tax expense (benefit) consists of the following:
(in thousands)
Current income tax expense (benefit)
Deferred income tax expense
Income tax expense (benefit)
73
Years ended December 31,
2014
2015
$
$
6
87
93
$
$
(1,484)
263
(1,221)
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) varies from the amount that would result by applying the applicable United States corporate income
tax rate of 34% to loss from continuing operations before income tax expense (benefit). The following table summarizes the
differences:
(in thousands)
Income tax benefit at United States statutory income tax rate
Deconsolidation of subsidiary
Valuation allowance
Non-taxable dividend income
Foreign operations subject to different tax rates
Indefinite life intangibles
Change in unrecognized tax benefits
Disposition of subsidiary
Prior year tax
Other
Income tax expense (benefit) for continuing operations
$
$
$
Years ended December 31,
2014
(5,402)
—
5,686
(1,669)
514
88
(1,256)
423
(341)
736
(1,221)
2015
(3,849)
2,384
1,033
(415)
223
88
—
—
—
629
93
$
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are
presented as follows:
(in thousands)
Deferred income tax assets:
Losses carried forward
Unpaid loss and loss adjustment expenses and unearned premiums
Intangible assets
Debt issuance costs
Deferred revenue
Depreciable assets
Foreign exchange adjustment on note payable
Other
Valuation allowance
Deferred income tax assets
Deferred income tax liabilities:
Fair value of debt
Deferred acquisition costs
Indefinite life intangibles
Investments
Other
Deferred income tax liabilities
Net deferred income tax liabilities
2015
295,320
5,314
1,941
983
297
117
—
1,518
(283,636)
21,854
(17,205)
(4,129)
(2,924)
(450)
(70)
(24,778)
(2,924)
$
$
$
$
December 31,
2014
302,246
5,693
1,820
1,004
319
82
1,449
1,067
(287,151)
26,529
(16,946)
(4,147)
(2,837)
(5,436)
—
(29,366)
(2,837)
$
$
$
$
The Company maintains a valuation allowance for its gross deferred income tax assets of $283.6 million (U.S. operations - $277.1
million; Other - $6.5 million) and $287.2 million (U.S. operations - $280.1 million; Other - $7.1 million) at December 31, 2015
and December 31, 2014, respectively. The Company's businesses have generated substantial operating losses during the last several
years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income. The
Company's operations, however, remain challenged, and, as a result, it is uncertain whether the Company will generate the taxable
income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to
place a full valuation allowance on its December 31, 2015 and December 31, 2014 net deferred income tax assets. The Company
carries a deferred income tax liability of $2.9 million and $2.8 million at December 31, 2015 and December 31, 2014, respectively,
all of which relates to indefinite life intangible assets.
74
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Amounts, originating dates and expiration dates of the U.S. net operating loss carryforwards are as follows:
Year of net operating loss
2000
2001
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Expiration date
2020
2021
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
$
Net operating loss
(in thousands)
485
186
5,607
62,308
55,917
515,335
92,095
45,311
34,131
31,049
7,342
118
The U.S. net operating loss carryforward amounts disclosed above contain consolidated and separate company net operating loss
carryforwards, the most significant of which is the KAI Tax Group net operating loss carryforward of approximately $843.4 million.
In addition, there are net operating loss carryforwards relating to the operations in Barbados in the amount of $85.3 million, which
losses will expire by 2024, and net operating loss carry forwards relating to operations in Canada in the amount of $18.2 million,
which losses will expire by 2035.
A reconciliation of the beginning and ending unrecognized tax benefits is as follows:
(in thousands)
Unrecognized tax benefits - beginning of year
Gross additions - current year tax positions
Gross additions - prior year tax positions
Gross reductions - prior year tax positions
Gross reductions - settlements with taxing authorities
Impact due to expiration of statute of limitations
Unrecognized tax benefits - end of year
$
$
2015
—
—
—
—
—
—
—
December 31,
2014
3,201
—
—
(1,256)
(1,945)
—
—
$
$
As of December 31, 2015, the Company had no unrecognized tax benefits. The Company analyzed its tax positions in accordance
with the provisions of ASC Topic 740, Income Taxes, and has determined that there are currently no uncertain tax positions. The
Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense (benefit).
During the years ended December 31, 2015 and 2014, the Company recognized a benefit of zero and $1.3 million, respectively,
in interest and penalties. At December 31, 2015 and December 31, 2014, the Company had no accrual for the payment of interest
and penalties.
The federal income tax returns of the Company's U.S. operations for the years through 2011 are closed for Internal Revenue Service
("IRS") examination. The Company's federal income tax returns are not currently under examination by the IRS for any open tax
years. The federal income tax returns of the Company's Canadian operations for the years through 2010 are closed for Canada
Revenue Agency ("CRA") examination. The Company's Canadian operations federal income tax returns are not currently under
examination by the CRA for any open tax years.
75
NOTE 16 LOSS FROM CONTINUING OPERATIONS PER SHARE
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 years ended December 31, 2015 and 2014:
(in thousands, except per share data)
Numerator:
Loss from continuing operations
Less: net income attributable to noncontrolling interests
Less: dividends on preferred stock
Loss from continuing operations attributable to common shareholders
Denominator:
Weighted average basic shares
Weighted average common shares outstanding
Weighted average diluted shares
Weighted average common shares outstanding
Effect of potentially dilutive securities
Total weighted average diluted shares
Basic loss from continuing operations per common share
Diluted loss from continuing operations per common share
Years ended December 31,
2015
2014
$
(11,415)
(162)
(329)
(11,906)
$
19,710
19,710
—
19,710
(0.60)
(0.60)
$
$
(14,666)
(1,596)
(300)
(16,562)
17,398
17,398
—
17,398
(0.95)
(0.95)
$
$
$
$
Loss from continuing operations per share is based on the weighted-average number of shares outstanding. Diluted weighted-
average shares is calculated by adjusting basic weighted-average shares outstanding by all potentially dilutive securities. Potentially
dilutive securities consist of stock options, unvested restricted stock awards, warrants and convertible preferred stock. Since the
Company is reporting a loss from continuing operations for the years ended December 31, 2015 and 2014, all potentially dilutive
securities outstanding were excluded from the calculation of both basic and diluted loss from continuing operations per share since
their inclusion would have been anti-dilutive.
NOTE 17 STOCK-BASED COMPENSATION
(a)
Stock Options
On May 13, 2013, the Company's shareholders approved the 2013 Equity Incentive Plan ("2013 Plan"). The 2013 Plan replaced
the Company's previous Amended and Restated Stock Option Plan ("Prior Plan"), with respect to the granting of future equity
awards. Under the 2013 Plan, the Company may grant new stock options ("New Stock Options") to purchase up to an additional
300,000 common shares to key employees selected by the Company. No New Stock Options were granted during the year ended
December 31, 2015.
On May 13, 2013, the Company's shareholders also approved the Option Exchange Program whereby the outstanding stock options
under the Prior Plan held by current employees will be canceled and replaced with stock options granted under the 2013 Plan
("Replacement Options"). The maximum number of common shares available to be granted as Replacement Options is 355,625.
No Replacement Options were granted during the year ended December 31, 2015.
The exercise price of Replacement Options and New Stock Options (collectively, the "Stock Options") is equal to $4.50. The Stock
Options are fully vested and exercisable at the date of grant and are exercisable for a period of four years.
76
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The following table summarizes the stock option activity during the year ended December 31, 2015:
Number of
Options
Outstanding
Weighted-
Average
Exercise Price
Outstanding at December 31, 2014
611,875
$
Granted
Exercised
Expired or Forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
—
—
—
611,875
611,875
$
$
4.50
—
—
—
4.50
4.50
Weighted-
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
(in thousands)
3.2
$
642
2.2
2.2
$
$
43
43
The aggregate intrinsic value of stock options outstanding and exercisable is the difference between the December 31, 2015 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.
At December 31, 2015 and 2014, the number of options exercisable was 611,875 and 611,875, respectively, with weighted average
prices of $4.50 and $4.50, respectively.
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 year ended December 31, 2015. The assumptions used in the Black-Scholes pricing model for
options granted or exchanged during the year ended December 31, 2014 were as follows:
Risk-free interest rate
Dividend yield
Expected volatility
Expected term (in years)
(b)
Restricted Stock Awards
Year ended December 31, 2014
0.06% - 1.4%
—
0.4%
0.78 - 4
Under the 2013 Plan, the Company made grants of restricted common stock ("Restricted Stock") to certain officers of the Company.
The aggregate number of common shares available for Restricted Stock awards was 1,972,345. The Restricted Stock vests after
a ten-year period and is subject to the officer's continued employment through the vesting date. The Restricted Stock is amortized
on a straight-line basis over the ten-year requisite service period. Total unamortized compensation expense related to unvested
awards at December 31, 2015 was $6.7 million. The grant-date fair value of Restricted Stock was determined using the closing
price of Kingsway common stock on the date of grant. The following table summarizes the activity related to unvested Restricted
Stock during the year ended December 31, 2015:
Unvested at December 31, 2014
Granted
Forfeited
Unvested at December 31, 2015
Number of Restricted
Stock Awards
Weighted-Average
Grant Date Fair Value
(per share)
1,972,345
$
—
(19,680)
1,952,665
$
4.14
—
4.14
4.14
Total stock-based compensation expense, net of forfeitures, was $0.8 million and $1.2 million for the years ended December 31,
2015 and 2014, respectively.
77
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(c)
Employee Share Purchase Plan
The Company has an employee share purchase plan ("ESPP Plan") whereby qualifying employees could choose each year to have
up to 5% of their annual base earnings withheld to purchase the Company's common shares. In 2014, the ESPP Plan was amended
and restated to allow qualifying employees to be eligible for matching Company contributions. The Company matches 100% of
the employee contribution amount, and the contributions vest immediately. All contributions are used by the plan administrator
to purchase common shares in the open market. The Company's contribution is expensed as paid and for the years ended
December 31, 2015 and 2014 totaled $0.2 million and $0.1 million, respectively.
NOTE 18 EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan in the United States for all of its qualified employees. Qualifying employees
can choose to voluntarily contribute up to 60% of their annual earnings subject to an overall limitation of $18,000 and $17,500
in 2015 and 2014, respectively. The Company matches an amount equal to 50% of each participant's contribution, limited to
contributions up to 5% of a participant's earnings.
The contributions for the plan vest based on years of service with 100% vesting after five years of service. The Company's
contribution is expensed as paid and for the years ended December 31, 2015 and 2014 totaled $0.3 million and $0.3 million,
respectively. All Company obligations to the plans were fully funded as of December 31, 2015.
NOTE 19 CLASS A PREFERRED STOCK
On May 13, 2013, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to create an
unlimited number of zero par value class A preferred shares. The Company's Board of Directors will have the ability to fix the
designation, rights, privileges, restrictions and conditions attaching to the shares of each series of preferred shares. The preferred
shares will have priority over the common shares. There were 262,876 shares of Class A preferred stock outstanding at December 31,
2015 and 2014, respectively.
On February 3, 2014, the Company closed on its previously announced private placement totaling $6.6 million. At closing, the
Company received gross proceeds of $6.6 million, resulting from the sale and issuance of 262,876 units for a purchase price of
$25.00 per unit. Net proceeds to the Company were $6.3 million after deducting expenses.
Each unit consists of one class A convertible preferred share, series 1 (the "Preferred Shares"), and 6.25 common share class C
purchase warrants. Each Preferred Share is convertible into 6.25 common shares at a conversion price of $4.00 per common share
any time at the option of the holder prior to April 1, 2021. The maximum number of common shares issuable upon conversion of
the Preferred Shares is 1,642,975 common shares. Each warrant will entitle the subscriber to purchase one common share of
Kingsway at a price of $5.00 per common share at any time after September 16, 2016 and prior to expiry on September 15, 2023.
The Preferred Shares are not entitled to vote. The holders of the Preferred Shares are entitled to receive fixed, cumulative,
preferential cash dividends at a rate of $1.25 per Preferred Share per year. The cash dividend rate shall be revised to $1.875 per
Preferred Share per year if the dividend accumulates for a period greater than 30 consecutive months from the date of the most
recent dividend payment. On and after February 3, 2016, the Company may redeem all or any part of the then outstanding Preferred
Shares for the price of $28.75 per Preferred Share, plus accrued but unpaid dividends thereon, whether or not declared, up to and
including the date specified for redemption. The Company will redeem any Preferred Shares not previously converted into common
shares, and which remain outstanding on April 1, 2021, for the price of $25.00 per Preferred Share, plus accrued but unpaid
dividends, whether or not declared, up to and including the date specified for redemption. At December 31, 2015 and 2014, accrued
dividends of $0.6 million and $0.3 million were included in accrued expenses and other liabilities in the consolidated balance
sheets.
In accordance with FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable
Securities, redemption features which are not solely within the control of the issuer are required to be presented outside of permanent
equity on the consolidated balance sheets. As described above, the holder has the option to convert the Preferred Shares at any
time; however, if not converted, they are required to be redeemed on April 1, 2021. As such, the Preferred Shares are presented
in temporary or mezzanine equity on the consolidated balance sheets and will be accreted up to the stated redemption value of
$6.6 million through the April 1, 2021 redemption date.
On July 8, 2014, the holders of the Company's series B warrants approved certain amendments to the terms of the Series B Warrant
Agreement dated September 16, 2013. The Series B Warrant Agreement Amendments permitted the Company to issue up to
1,642,975 additional Series B Warrants and complete the Series C Warrant Exchange. Under the Series C Warrant Exchange, each
class C purchase warrant was automatically exchanged for one Series B Warrant.
78
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 20 SHAREHOLDERS' EQUITY
The Company is authorized to issue an unlimited number of zero par value common stock. There were 19,709,706 shares of
common stock outstanding at December 31, 2015 and 2014, respectively.
There were no dividends declared during the years ended December 31, 2015 and 2014.
On August 18, 2014, the Company announced its intention to redeem its outstanding series A warrants, which were issued pursuant
to the Company's September 2013 rights offering. Holders of series A warrants could exercise their outstanding series A warrants
at $4.50 per common share. Any series A warrants that remained unexercised after September 19, 2014 were automatically
redeemed by the Company at the redemption price of $0.25 per series A warrant. During the year ended December 31, 2014, series
A warrants to purchase 3,279,945 shares of common stock were exercised, resulting in cash proceeds of $14.8 million. The 845
series A warrants that remained unexercised were redeemed by the Company at the redemption price of $0.25.
The following table summarizes information about warrants outstanding at December 31, 2015:
Exercise Price
5.00
$
5.00
$
Date of Issue
16-Sep-13
3-Feb-14
Expiry Date
15-Sep-23
15-Sep-23
Total:
Remaining Contractual
Life (in years)
7.7
7.7
7.7
December 31, 2015
Number
Outstanding
3,280,790
1,642,975
4,923,765
NOTE 21 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the change in the balance of each component of accumulated other comprehensive income, net of tax, for
the years ended December 31, 2015 and 2014 as relates to shareholders' equity attributable to common shareholders on the
consolidated balance sheets. On the other hand, the consolidated statements of comprehensive income (loss) present the components
of other comprehensive income (loss), net of tax, only for the years ended December 31, 2015 and 2014 and inclusive of the
components attributable to noncontrolling interests in consolidated subsidiaries.
79
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
Unrealized Gains
(Losses) on Fixed
Maturities and
Equity Investments
Foreign Currency
Translation
Adjustments
Total Accumulated
Other
Comprehensive
Income
Balance, January 1, 2014
$
15,583
$
(5,982) $
9,601
Other comprehensive (loss) income before
reclassifications
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive (loss) income
(2,513)
1,552
(961)
30
—
30
(2,483)
1,552
(931)
Balance, December 31, 2014
$
14,622
$
(5,952) $
8,670
Other comprehensive (loss) income before
reclassifications
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive (loss) income
(2,884)
1,342
(1,542)
929
1,243
2,172
Balance, December 31, 2015
$
13,080
$
(3,780) $
(1,955)
2,585
630
9,300
Components of accumulated other comprehensive income were reclassified to the following lines of the consolidated statements
of operations for the years ended December 31, 2015 and 2014:
(in thousands)
Reclassification of accumulated other comprehensive income from unrealized (losses)
gains on fixed maturities and equity investments to:
Net realized gains
Other-than-temporary impairment loss
Loss from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Reclassification of accumulated other comprehensive income from foreign currency
translation adjustments to:
Loss on deconsolidation of subsidiary
Loss from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Total reclassification from accumulated other comprehensive income to net income
(loss)
Years ended December 31,
2015
2014
$
$
(1,332)
(10)
(1,342)
—
(1,342)
(1,552)
—
(1,552)
—
(1,552)
(1,243)
(1,243)
—
(1,243)
—
—
—
—
$
(2,585)
$
(1,552)
80
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 22 SEGMENTED INFORMATION
The Company operates as a merchant bank primarily engaged, through its subsidiaries, in the property and casualty insurance
business. The Company conducts its business through the following two reportable segments: Insurance Underwriting and
Insurance Services.
Insurance Underwriting Segment
Insurance Underwriting includes the following subsidiaries of the Company: Mendota, Mendakota, MCC, Amigo and Kingsway
Reinsurance Corporation (collectively, "Insurance Underwriting"). Insurance Underwriting principally offers personal automobile
insurance to drivers who do not meet the criteria for coverage by standard automobile insurers. Insurance Underwriting has
policyholders in 12 states; however, new business is accepted in only nine states.
The Company previously placed Amigo and MCC into voluntary run-off in 2012 and 2011, respectively. Each of Amigo and MCC
entered into a comprehensive run-off plan which was approved by its respective state of domicile. Kingsway continues to manage
Amigo and MCC in a manner consistent with the run-off plans. During the first quarter of 2015, MCC sent a letter of intent to
the Illinois Department of Insurance to resume writing private passenger automobile policies in the state of Illinois. MCC began
writing these policies on April 1, 2015.
Effective March 31, 2014, the Company's wholly owned subsidiary, PIH, completed an initial public offering of its common stock.
Upon completion of the transaction, the Company maintained a minority ownership interest in the common shares of PIH. The
earnings of PIH are included in the consolidated statements of operations through the March 31, 2014 transaction date. Prior to
the transaction, PIH was included in the Insurance Underwriting segment. As a result of the disposal of the Company's majority
interest in PIH on March 31, 2014, all segmented information has been adjusted to exclude PIH from the Insurance Underwriting
segment.
Insurance Services Segment
Insurance Services includes the following subsidiaries of the Company: IWS and Trinity (collectively, "Insurance Services").
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed
by credit unions in 26 states to their members.
Trinity is a provider of warranty products and maintenance support to consumers and businesses in the HVAC, standby generator,
commercial LED lighting and refrigeration industries. Trinity distributes its warranty products through original equipment
manufacturers, HVAC distributors and commercial and residential contractors. Trinity distributes its maintenance support directly
through corporate owners of retail spaces throughout the United States.
Effective April 1, 2015, the Company closed on the sale of its wholly owned subsidiary, ARS. As a result, ARS has been classified
as discontinued operations and the results of their operations are reported separately for all periods presented. Prior to the transaction,
ARS was included in the Insurance Services segment. As a result of classifying ARS as a discontinued operation, all segmented
information has been restated to exclude ARS from the Insurance Services segment.
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent
with those followed in the preparation of the consolidated 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.
81
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Revenues by reportable segment reconciled to consolidated revenues for the years ended December 31, 2015 and 2014 were:
(in thousands)
Revenues:
Insurance Underwriting:
Net premiums earned
Other income
Total Insurance Underwriting
Insurance Services:
Service fee and commission income
Other income
Total Insurance Services
Total segment revenues
Net premiums earned not allocated to segments
Net investment income
Net realized gains
Other-than-temporary impairment loss
Other income not allocated to segments
Total revenues
Years ended December 31,
2014
2015
$
117,433
$
8,937
126,370
22,966
368
23,334
149,704
—
2,918
1,197
(10)
6,157
113,479
8,478
121,957
24,659
407
25,066
147,023
4,114
1,616
5,041
—
430
$
159,966
$
158,224
82
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The operating (loss) income of each segment in the following table is before income taxes and includes revenues and direct segment
costs.
Segment operating (loss) income reconciled to the consolidated loss from continuing operations for the years ended December 31,
2015 and 2014 were:
(in thousands)
Segment operating (loss) income
Insurance Underwriting
Insurance Services
Total segment operating (loss) income
Net investment income
Net realized gains
Other-than-temporary impairment loss
Other income and expenses not allocated to segments, net
Amortization of intangible assets
Contingent consideration benefit
Impairment of asset held for sale
Interest expense
Foreign exchange losses, net
Gain (loss) on change in fair value of debt
Loss on disposal of subsidiary
Loss on disposal of asset held for sale
Loss on deconsolidation of subsidiary
Equity in net loss of investee
Loss from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Loss from continuing operations
$
$
Years ended December 31,
2014
2015
$
(1,147)
(628)
(1,775)
2,918
1,197
(10)
(3,753)
(1,244)
1,139
—
(5,278)
(1,215)
1,458
—
—
(4,420)
(339)
(11,322)
93
(11,415)
$
1,290
206
1,496
1,616
5,041
—
(4,887)
(1,620)
2,223
(1,180)
(5,645)
(419)
(10,953)
(1,244)
(125)
—
(190)
(15,887)
(1,221)
(14,666)
Net premiums earned by line of business for the years ended December 31, 2015 and 2014 were:
(in thousands)
Insurance Underwriting:
Private passenger auto liability
Auto physical damage
Total Insurance Underwriting
Net premiums earned not allocated to segments:
Allied lines
Homeowners
Other
Total net premiums earned not allocated to segments
Total net premiums earned
83
Years ended December 31,
2015
2014
$
$
79,258
38,175
117,433
—
—
—
—
76,031
37,448
113,479
1,944
2,159
11
4,114
$
117,433
$
117,593
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 23 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing
parties who are under no compulsion to act. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active
market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent
transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available,
the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate
the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign
exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and
option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable
market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive
markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on
market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments
carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market
fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of
fair value, which may be to maturity.
The Company classifies its investments in fixed maturities and equity investments as available-for-sale and reports these investments
at fair value. The Company's performance shares, LROC preferred units, subordinated debt and contingent consideration liabilities
are measured and reported at fair value.
Fixed maturities and equity investments - Fair values of fixed maturities for which no active market exists are derived from quoted
market prices of similar instruments or other third-party evidence. Fair values of equity investments, including warrants, reflect
quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable
inputs, where no active markets exist.
Performance shares - The performance shares, for which no active market exists, are required to be valued at fair value as determined
in good faith by the Company. Such determination of fair value would require the Company to develop a model based upon
relevant observable market inputs as well as significant unobservable inputs, including developing a sufficiently reliable estimate
for an appropriate discount to reflect the illiquidity and unique structure of the security. The Company determined that its model
for the performance shares was not sufficiently reliable. As a result, the Company has assigned a fair value of zero to the performance
shares. Refer to Note 24, "Related Party Transactions," for further details regarding the performance shares.
Debt - The fair value of the LROC preferred units was based on quoted market prices prior to redemption in June 2015, and the
fair value of the subordinated debt is calculated by a third-party using a model based on significant market observable inputs.
Contingent consideration - The consideration for certain of the Company's acquisitions includes future payments to the former
owners that are contingent upon the achievement of certain targets over future reporting periods. Liabilities for contingent
consideration are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated
balance sheets. The fair value of contingent consideration liabilities is estimated using internal models without relevant observable
market inputs. Estimated payments are discounted using present value techniques to arrive at estimated fair value. Contingent
consideration liabilities are revalued each reporting period. Changes in the fair value of contingent consideration liabilities can
result from changes to one or multiple inputs, including adjustments to the discount rates or changes in the assumed achievement
or timing of any targets. Changes in assumptions could have an impact on the payout of contingent consideration liabilities.
Changes in fair value are reported in the consolidated statements of operations as contingent consideration benefit. As a result of
the analysis performed in 2015 and 2014, the Company decreased contingent consideration liabilities by $1.5 million and $3.0
million, respectively, during the fourth quarters of 2015 and 2014, resulting in a total liability of $2.0 million and $3.1 million,
respectively, at December 31, 2015 and 2014, which is included in accrued expenses and other liabilities on the consolidated
balance sheets. The maximum the Company can pay in future contingent payments is $13.5 million, on an undiscounted basis.
84
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The
extent of use of quoted market prices (Level 1), valuation models using observable market information (Level 2) and internal
models without observable market information (Level 3) in the valuation of the Company's financial assets and liabilities measured
at fair value on a recurring basis as of December 31, 2015 and December 31, 2014 was as follows:
(in thousands)
December 31, 2015
Fair Value Measurements at the End of the
Reporting Period Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Total
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recurring fair value measurements
Assets:
Fixed maturities:
U.S. government, government agencies and
authorities
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed securities and collateralized
mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Other investments
Short-term investments
Total assets
Liabilities:
Subordinated debt
Contingent consideration
Total liabilities
$
$
$
$
20,453
2,256
7,963
6,023
18,864
55,559
26,586
973
27,559
4,077
400
87,595
39,898
1,982
41,880
$
$
$
$
— $
—
—
—
—
—
26,586
229
26,815
—
—
26,815
$
— $
—
— $
20,453
2,256
7,963
6,023
18,864
55,559
—
744
744
4,077
400
60,780
39,898
—
39,898
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
1,982
1,982
85
(in thousands)
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
December 31, 2014
Fair Value Measurements at the End of the
Reporting Period Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Recurring fair value measurements
Assets:
Fixed maturities:
U.S. government, government agencies and
authorities
Canadian government
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed securities and collateralized
mortgage obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Other investments
Short-term investments
Total assets
Liabilities:
LROC preferred units
Subordinated debt
Contingent consideration
Total liabilities
$
20,759
$
— $
20,759
$
4,242
3,419
5,352
7,214
15,209
56,195
19,526
92
19,618
3,576
400
—
—
—
—
—
—
19,526
92
19,618
—
—
4,242
3,419
5,352
7,214
15,209
56,195
—
—
—
3,576
400
$
$
$
79,789
$
19,618
$
60,171
$
13,618
$
13,618
$
— $
40,659
3,121
—
—
40,659
—
57,398
$
13,618
$
40,659
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,121
3,121
The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the years ended
December 31, 2015 and 2014:
(in thousands)
Liabilities:
Contingent consideration:
Beginning balance
Change in fair value of contingent consideration included in net income (loss)
Ending balance
Years ended December 31,
2015
2014
$
$
3,121
(1,139)
1,982
$
$
5,344
(2,223)
3,121
86
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 24 RELATED PARTY TRANSACTIONS
Related party transactions, including services provided to or received by the Company's subsidiaries, are carried out in the normal
course of operations and are measured in part by the amount of consideration paid or received as established and agreed by the
parties. Management believes that consideration paid for such services in each case approximates fair value. Except where
disclosed elsewhere in these consolidated financial statements, the following is a summary of related party transactions.
On February 11, 2014, the Company's subsidiary, 1347 Advisors entered into a Management Services Agreement ("MSA") 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 MSA. Pursuant to the transaction, 1347
Advisors received the following consideration: $2.0 million in cash; $3.0 million of 8% preferred stock of PIH, mandatorily
redeemable in five years; 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 in seven years. The Company recorded a gain of $6.0 million during 2015 related to the
termination of the MSA, which is included in other income in the consolidated statements of operations. To the extent shares of
PIH common stock are granted to the Company under the Performance Shares Grant Agreement, they will be recorded at the time
the shares are granted and will have a valuation equal to the last sales price of PIH common stock on the day prior to such grant.
No shares were received by the Company under the Performance Shares Grant Agreement as of December 31, 2015. Refer to
Note 23, "Fair Value of Financial Instruments," for further details regarding the performance shares.
On March 26, 2014, the Company entered into a Performance Share Grant Agreement with PIH, whereby the Company will be
entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones for PIH’s
stock price. Pursuant to the terms of the Performance Share Grant Agreement, if at any time the last sales price of PIH’s common
stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and
the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock;
(ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading
days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock (in addition to the 125,000
shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive
125,000 shares of PIH common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii)
herein). To the extent shares of PIH common stock are granted to the Company under the Performance Share Grant Agreement,
they will be recorded at the time the shares are granted and will have a valuation equal to the last sales price of PIH common stock
on the day prior to such grant. No shares were received by the Company under the Performance Share Grant Agreement as of
December 31, 2015. Refer to Note 23, "Fair Value of Financial Instruments," for further details regarding the performance shares.
During the second quarter of 2014, the Company made an investment in Itasca Golf Investors, LLC ("Itasca Golf") which is
included in limited liability investments on the consolidated balance sheets. On August 28, 2014, the Company entered into a $0.5
million line of credit with Itasca Golf. On August 29, 2014, the Company advanced $0.5 million to Itasca Golf under the line of
credit which is included in other receivables on the consolidated balance sheets. On June 11, 2015, the line of credit was increased
by $0.2 million. On June 11, 2015, the Company advanced $0.2 million to Itasca Golf under the line of credit which is included
in other receivables on the consolidated balance sheets. The line of credit bears interest at 3% and matures on August 28, 2016.
NOTE 25 COMMITMENTS AND CONTINGENT LIABILITIES
(a) Legal proceedings:
In connection with its operations in the ordinary course of business, the Company and its subsidiaries are named as defendants in
various actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate the loss, or range
of loss, if any, that may be incurred in connection with any of the various proceedings at this time, it is possible that individual
actions may result in losses having material adverse effects on the Company's financial condition or results of operations.
87
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(b) Guarantee:
The Company provided an indemnity and hold harmless agreement to a third-party for customs bonds reinsured by Lincoln General
Insurance Company ("Lincoln General") during the time Lincoln General was a subsidiary of the Company. This agreement may
require the Company to compensate the third-party if Lincoln General is unable to fulfill its obligations relating to the customs
bonds. The Company's potential exposure under this agreement is not determinable, and no liability has been recorded in the
consolidated financial statements at December 31, 2015.
(c)
Commitment:
The Company has entered into subscription agreements to commit up to $2.5 million of capital to allow for participation in limited
liability investments which invest principally in income-producing real estate. At December 31, 2015, the unfunded commitment
was $2.0 million.
(d) Collateral pledged:
Fixed maturities and short-term investments with an estimated fair value of $12.9 million and $12.9 million were on deposit with
state and provincial regulatory authorities at December 31, 2015 and December 31, 2014, respectively. Also, from time to time,
the Company pledges investments to third-parties to collateralize liabilities incurred under its policies of insurance. The amount
of such pledged investments was $15.8 million and $17.5 million at December 31, 2015 and December 31, 2014, respectively.
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.
(e) Future minimum lease payments:
The Company leases certain office space under non-cancelable leases, with initial terms typically ranging from three to ten years,
along with options that permit renewals for additional periods. The Company also leases certain equipment under non-cancelable
operating leases, with initial terms typically ranging from four to five years. Minimum rent is expensed on a straight-line basis
over the term of the lease. Future minimum annual lease payments under operating leases for office space and equipment for the
next five years and thereafter are:
(in thousands)
2016
2017
2018
2019
2020
Thereafter
$
1,584
1,561
873
666
18
70
NOTE 26 REGULATORY CAPITAL REQUIREMENTS AND RATIOS
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, 2015, surplus as
regards policyholders reported by each of our insurance subsidiaries exceeded the 200% threshold.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. As of December
31, 2012, Amigo’s RBC was 157%. In April 2013, Kingsway filed a comprehensive run-off plan with the OIR, which outlines
plans for Amigo's run-off. Amigo remains in compliance with that plan. As of December 31, 2015, Amigo's RBC was 873%.
The Company previously placed MCC into voluntary run-off in early 2011. At the time it was placed into voluntary run-off, MCC's
RBC was 160%. MCC entered into a comprehensive run-off plan approved by the Illinois Department of Insurance in June 2011.
MCC remains in compliance with that plan. As of December 31, 2015, MCC's RBC was 1,111%.
The Company's reinsurance subsidiary, which is domiciled in Barbados, is required by the regulator in Barbados to maintain
minimum capital levels. As of December 31, 2015, the capital maintained by Kingsway Reinsurance Corporation was in excess
of the regulatory capital requirements in Barbados.
88
NOTE 27 STATUTORY INFORMATION AND POLICIES
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The Company's insurance subsidiaries prepare statutory basis financial statements in accordance with accounting practices
prescribed or permitted by the Departments of Insurance in states in which they are domiciled. "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all accounting practices that are not prescribed. Such practices may differ
from state to state; may differ from company to company within a state; and may change in the future.
The Company's insurance subsidiaries are required to report results of operations and financial position to insurance regulatory
authorities based upon statutory accounting practices. In converting from statutory to U.S. GAAP, typical adjustments include
deferral of acquisition costs, the inclusion of statutory non-admitted assets in the balance sheets, the inclusion of net unrealized
holding gains or losses related to fixed maturities in shareholders’ equity, and the inclusion of changes in deferred tax assets and
liabilities in net income (loss).
Statutory capital and surplus and statutory net income for the Company's insurance subsidiaries are:
(in thousands)
Combined net income, statutory basis
Combined capital and surplus, statutory basis
2015
6,298
42,387
$
$
December 31,
2014
2,725
39,042
$
$
The Company’s insurance subsidiaries are required to hold minimum levels of statutory capital and surplus to satisfy regulatory
requirements. The minimum statutory capital and surplus, or company action level RBC, necessary to satisfy regulatory
requirements for the Company's insurance subsidiaries collectively was $24.8 million at December 31, 2015. Company action
level RBC is the level at which an insurance company is required to file a corrective action plan with its regulators and is equal
to 200% of the authorized control level RBC.
Dividends paid by insurance subsidiaries are restricted by regulatory requirements of the insurance departments in the subsidiaries'
state of domicile. The maximum amount of dividends that can be paid to shareholders by insurance companies without prior
approval of the domiciliary state insurance commissioner is generally limited to the greater of (i) 10% of a company's statutory
capital and surplus at the end of the previous year or (ii) 100% of the company's net income for the previous year and is generally
required to be paid out of an insurance company's unassigned funds.
At December 31, 2015, the U.S. insurance subsidiaries of the Company were restricted from making any dividend payments to
the holding company without regulatory approval pursuant to the domiciliary state insurance regulations.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
89
KINGSWAY FINANCIAL SERVICES INC.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated
the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act"), as of the end of the period covered by
this Annual Report.
Based on this evaluation, the Company's management concluded that, as of December 31, 2015, the Company's disclosure controls
and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and communicated to
the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting includes policies
and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design
of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to
apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
The Company's management evaluated the effectiveness of its internal control over financial reporting based on the framework
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework). Based on that evaluation, management has concluded that the Company's internal control over financial
reporting was effective as of December 31, 2015. Management reviewed the results of its assessment with the Company's Audit
Committee. The effectiveness of the Company's internal control over financial reporting as of December 31, 2015 has been audited
by BDO USA, LLP, an independent registered public accounting firm. Their attestation report is included below under the heading
"Report of Independent Registered Public Accounting Firm," and is incorporated into this Item 9A by reference.
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 October 1,
2015, and ending December 31, 2015, that have materially affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
90
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Kingsway Financial Services Inc.
Itasca, Illinois
We have audited Kingsway Financial Services Inc.’s internal control over financial reporting as
of December 31, 2015, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Kingsway Financial Services Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying “Item 9A, Management’s
Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Kingsway Financial Services Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the
international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Kingsway Financial Services
Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income (loss), shareholders’ equity and cash flows for the years then ended, and
our report dated March 10, 2016 expressed an unqualified opinion thereon.
Grand Rapids, Michigan
March 10, 2016
KINGSWAY FINANCIAL SERVICES INC.
Item 9B. Other Information
None
PART III.
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2016 Annual Meeting
of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2015.
We have adopted a code of ethics applicable to our directors, chief executive officer, chief financial officer, and other senior
financial personnel ("Code of Ethics for Senior Financial Personnel") which is posted in the "Corporate Governance" section of
our website at www.kingsway-financial.com. Any future amendments to the Code of Ethics for Senior Financial Personnel and
any grant of waiver from a provision of the code requiring disclosure under applicable SEC rules will be disclosed in the "Corporate
Governance" section of our website.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2016 Annual Meeting
of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding our equity compensation plans is incorporated herein by reference to Item 5 of Part II of this Form 10-K.
All other information required by this Item is incorporated herein by reference to the Proxy Statement for our 2016 Annual Meeting
of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2016 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2015.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2016 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2015.
93
KINGSWAY FINANCIAL SERVICES INC.
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Report
(1) Financial Statements. We have filed the following documents, which are included in Part II, Item 8 of this Annual
Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following financial statement schedules are filed as a part hereof along with the
related reports of the Independent Registered Public Accounting Firm included in Part II, Item 8. Schedules not listed
here have been omitted because they are not applicable or the required information is included in the Consolidated
Financial Statements.
Schedule I
Investments Other Than Investments in Related Parties
Schedule II
Financial Information of Registrant (Parent Company)
Schedule III
Supplementary Insurance Information
Schedule IV
Reinsurance Schedule
Schedule V
Valuation and Qualifying Accounts
Schedule VI
Supplemental Information Concerning Property-Casualty Insurance Operations
(3) Exhibits. The exhibits listed in the accompanying "Index to Exhibits" that follow the signature pages of this report
are filed or incorporated by reference as part of this Form 10-K.
(b) Exhibits. Included in Item 15(a)(3) above
(c) Financial Statement Schedules. Included in Item 15(a)(2) above
94
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE I. Investments Other Than Investments in Related Parties
(in thousands)
Fixed maturities:
Cost or
Amortized
Cost
December 31, 2015
Amount Shown
on Consolidated
Balance Sheet
Fair Value
U.S. government, government agencies and authorities
$
20,443
$
20,453
$
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed securities and collateralized mortgage
obligations
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Limited liability investments
Other investments
Short-term investments
Total investments
2,241
7,997
6,040
18,885
55,606
25,177
1,251
26,428
20,141
4,077
400
2,256
7,963
6,023
18,864
55,559
26,586
973
27,559
—
—
—
20,453
2,256
7,963
6,023
18,864
55,559
26,586
973
27,559
20,141
4,077
400
$
106,652
$
83,118
$
107,736
NOTE 1: Cost approximates fair value for limited liability investments, other investments and short-term investments.
See accompanying report of independent registered accounting firm.
95
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE II. Financial Information of Registrant (Parent Company)
Parent Company Balance Sheets
(in thousands)
December 31, 2015
December 31, 2014
Assets
Investments in subsidiaries
Equity investments
Cash and cash equivalents
Other assets
Total Assets
Liabilities and Shareholders' Equity
Liabilities:
Accrued expenses and other liabilities
Total Liabilities
Class A preferred stock
Shareholders' Equity:
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
Total Liabilities and Shareholders' Equity
See accompanying report of independent registered accounting firm.
$
$
$
$
43,878
2,555
2,332
2,503
51,268
1,171
1,171
6,394
—
341,646
(308,995)
9,300
41,951
1,752
43,703
51,268
$
$
$
$
38,599
—
6,694
3,251
48,544
348
348
6,330
—
340,844
(312,050)
8,670
37,464
4,402
41,866
48,544
96
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE II. Financial Information of Registrant (Parent Company)
Parent Company Statements of Operations
(in thousands)
Revenues:
Net investment income
Total revenues
Expenses:
General and administrative expenses
Foreign exchange losses, net
Total expenses
Loss from continuing operations before income tax benefit and equity in income
(loss) of subsidiaries
Income tax benefit
Equity in income (loss) of subsidiaries
Net income (loss)
See accompanying report of independent registered accounting firm.
Years ended December 31,
2014
2015
$
5
5
2,715
553
3,268
(3,263)
—
4,532
1,269
$
7
7
2,796
298
3,094
(3,087)
(341)
(8,478)
(11,224)
$
$
97
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE II. Financial Information of Registrant (Parent Company)
Parent Company Statements of Comprehensive Income (Loss)
(in thousands)
Net income (loss)
Other comprehensive income (loss), net of taxes(1):
Unrealized (losses) gains on fixed maturities and equity investments:
Unrealized losses arising during the period
Reclassification adjustment for amounts included in net income (loss)
Foreign currency translation adjustments
Other comprehensive loss - parent only
Equity in other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss)
Comprehensive income (loss)
(1) Net of income tax expense (benefit) of $0 and $0 in 2015 and 2014
See accompanying report of independent registered accounting firm.
Years ended December 31,
2014
2015
$
1,269
$
(11,224)
(588)
—
—
(588)
748
160
1,429
$
—
—
(31)
(31)
(1,045)
(1,076)
(12,300)
$
98
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE II. Financial Information of Registrant (Parent Company)
Parent Company Statements of Cash Flows
(in thousands)
Cash provided by (used in):
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Equity in net (income) loss of subsidiaries
Stock-based compensation expense, net of forfeitures
Other, net
Net cash used in operating activities
Investing activities:
Purchases of equity investments
Net cash used in investing activities
Financing activities:
Proceeds from issuance of preferred stock, net
Proceeds from exercise of warrants
Capital contributions to subsidiaries
Cash dividends received from subsidiaries
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying report of independent registered accounting firm.
Years ended December 31,
2014
2015
$
1,269
$
(11,224)
(4,532)
802
1,242
(1,219)
(3,143)
(3,143)
—
—
(500)
500
—
(4,362)
6,694
2,332
$
8,478
1,239
(146)
(1,653)
—
—
6,330
14,803
(19,500)
2,152
3,785
2,132
4,562
6,694
$
99
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE III. Supplementary Insurance Information
(in thousands)
2015
Insurance
Underwriting
Amounts not
allocated to
segments
Total
2014
Insurance
Underwriting
Amounts not
allocated to
segments
Total
December 31,
Unpaid
Loss and
Loss
Adjustment
Expenses
Deferred
Acquisition
Costs
Years ended December 31,
Unearned
Premiums
Net
Premiums
Earned
Loss and
Loss
Adjustment
Expenses
Amortization
of Deferred
Acquisition
Costs
Other
Operating
Expenses
Net
Premiums
Written
$
$
$
$
6,696
$
55,471
$
35,234
$
117,433
$
87,055
$
23,333
$
17,130
$ 116,239
—
—
—
—
—
—
—
—
6,696
$
55,471
$
35,234
$
117,433
$
87,055
$
23,333
$
17,130
$ 116,239
6,786
$
63,895
$
36,432
$
113,479
$
79,070
$
21,713
$
19,888
$ 118,021
—
—
—
4,114
384
881
563
5,357
6,786
$
63,895
$
36,432
$
117,593
$
79,454
$
22,594
$
20,451
$ 123,378
NOTE 1: Net investment income is not allocated to segments, therefore net investment income is not provided in this schedule.
NOTE 2: Amounts not allocated to segments represent balances related to the Company's disposed subsidiary, PIH.
See accompanying report of independent registered accounting firm.
100
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE IV. Reinsurance
(in thousands, except for percentages)
Years ended December 31,
Direct
Premiums
Written
97,414
99,540
$
$
Premiums
Ceded to
Other
Companies
Premiums
Assumed
from Other
Companies
$
$
165
(3,695)
$
$
18,990
20,143
Net Premiums
Written
$
$
116,239
123,378
Percentage of
Premiums
Assumed to
Net
16.3%
16.3%
2015
2014
See accompanying report of independent registered accounting firm.
101
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE V. Valuation and Qualifying Accounts
(in thousands)
Valuation Allowance for Deferred Tax Assets:
Year Ended December 31, 2015
Year Ended December 31, 2014
Balance at
Beginning of
Year
Charged to
Expense
Disposals and
Other
Balance at
End of Year
$
$
287,151
281,613
$
$
1,033
5,686
$
$
(4,548) $
(148) $
283,636
287,151
See accompanying report of independent registered accounting firm.
102
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE VI. Supplemental Information Concerning Property-Casualty Insurance Operations
(in thousands)
Affiliation with
Registrant (1)
Year ended
December 31, 2015
Year ended
December 31, 2014
Deferred
Acquisition
Costs
Unpaid Loss
and Loss
Adjustment
Expenses
Unearned
Premiums
Net Earned
Premiums
Net
Investment
Income
Current
Year
Prior
Years
Amortization
of Deferred
Acquisition
Costs
Paid Loss
and Loss
Adjustment
Expenses
Net
Premiums
Written
Loss and Loss
Adjustment Expenses
Related to
$
6,696 $
55,471 $
35,234 $ 117,433 $
2,811 $ 86,439 $
616 $
23,333 $
93,483 $ 116,239
$
6,786 $
63,895 $
36,432 $ 117,593 $
1,281 $ 84,577 $
(5,123) $
22,594 $
94,949 $ 123,378
(1) Consolidated property-casualty insurance operations
See accompanying report of independent registered accounting firm.
103
KINGSWAY FINANCIAL SERVICES INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 10, 2016
/s/ Larry G. Swets, Jr.
By:
Name: Larry G. Swets, Jr.
Title:
President, Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Larry G. Swets, Jr.
Larry G. Swets, Jr.
President, Chief Executive Officer and Director
(principal executive officer)
March 10, 2016
/s/ William A. Hickey, Jr.
William A. Hickey, Jr.
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
(principal financial and accounting officer)
March 10, 2016
/s/ Terence Kavanagh
Terence Kavanagh
/s/ Gregory Hannon
Gregory Hannon
/s/ Gary Schaevitz
Gary Schaevitz
/s/ Joseph Stilwell
Joseph Stilwell
Chairman of the Board and Director
March 10, 2016
Director
Director
Director
March 10, 2016
March 10, 2016
March 10, 2016
104
KINGSWAY FINANCIAL SERVICES INC.
EXHIBIT INDEX
Exhibit Description
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1
10.2
10.3
10.4
Stock Purchase Agreement, dated April 1, 2015, by and between National General Holdings Corp., as Buyer, and Kingsway
America Inc. and Mendota Insurance Company, as Sellers (included as Exhibit 2.1 to the Form 8-K, filed April 7, 2015, and
incorporated herein by reference).
Certificate of Amendment to the Articles of Incorporation of Kingsway Financial Services Inc. (included as Exhibit 3.1 to the
Form 10-Q, filed November 7, 2013, and incorporated herein by reference).
By-law No. 5 of Kingsway Financial Services Inc. (included as Exhibit 3.2 to the Form 10-K, filed March 30, 2012, and
incorporated herein by reference).
Indenture dated January 28, 2004 among Kingsway America Inc., Kingsway Financial Services Inc. and BNY Midwest Trust
Company (included as Exhibit 4.1 to the Form F-4, filed May 27, 2004, and incorporated herein by reference).
Trust Indenture dated July 10, 2007 among Kingsway 2007 General Partnership, Kingsway Financial Services Inc., Kingsway
America Inc., and Computershare Trust Company of Canada (included as Exhibit 4.2 to the Form 10-K, filed March 30, 2012,
and incorporated herein by reference).
Indenture dated December 4, 2002 between Kingsway America Inc. and State Street Bank and Trust Company of Connecticut,
National Association (included as Exhibit 4.3 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated May 15, 2003 between Kingsway America Inc. and U.S. Bank National Association (included as Exhibit 4.4 to
the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated October 29, 2003 between Kingsway America Inc. and U.S. Bank National Association (included as Exhibit 4.5
to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated May 22, 2003 between Kingsway America Inc., Kingsway Financial Services Inc., and Wilmington Trust
Company (included as Exhibit 4.6 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Junior Subordinated Indenture dated September 30, 2003 between Kingsway America Inc. and J.P Morgan Chase Bank (included
as Exhibit 4.7 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated December 16, 2003 between Kingsway America Inc., Kingsway Financial Services Inc., and Wilmington Trust
Company (included as Exhibit 4.8 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Excerpt of the Articles of Amendment to the Articles of Incorporation of the Company (included as Exhibit 4.1 to the Form 8-K,
filed December 27, 2013, and incorporated herein by reference).
Form of Common Stock Series C Warrant Agreement (included as Exhibit 4.2 to the Form 8-K, filed December 27, 2013, and
incorporated herein by reference).
Amended and Restated Common Stock Series B Warrant Agreement, dated July 8, 2014 (included as Exhibit 4.1 to the Form 8-
K, filed July 10, 2014, and incorporated herein by reference).
Amended and Restated Stock Option Plan of Kingsway Financial Services Inc., dated as of May 2001 and amended most
recently as of May 2007 (included as Exhibit 10.1 to the Form 10-K, filed March 30, 2012, and incorporated herein by
reference). *
Purchase Agreement, dated January 25, 2010, between The Westaim Corporation and Kingsway Financial Services Inc.
(included as Exhibit 10.2 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Second Amendment to and Assignment and Assumption of Purchase Agreement, dated June 21, 2010, by and among FH
Enterprises Inc., JBA Associates Inc., the four individual holders of all of JBA's voting securities, and Kingsway America Inc.
(included as Exhibit 10.3 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Tax Benefit Preservation Plan Agreement, dated as of September 28, 2010, between Kingsway Financial Services Inc. and
Computershare Investor Services Inc. (included as Exhibit 10.4 to the Form 10-K, filed March 30, 2012, and incorporated herein
by reference).
105
KINGSWAY FINANCIAL SERVICES INC.
10.5
10.6
10.7
10.8
10.9
Agreement and Plan of Merger, dated December 14, 2010, among JJR VI Acquisition Corp., Atlas Acquisition Corp., Kingsway
Financial Services Inc., and American Insurance Acquisition Inc. (included as Exhibit 10.5 to the Form 10-K, filed March 30,
2012, and incorporated herein by reference).
Operating Agreement of Acadia GP, LLC dated March 16, 2011 (included as Exhibit 10.8 to the March 31, 2011 Form 10-Q,
filed March 27, 2012, and incorporated herein by reference).
Stock Purchase Agreement dated March 30, 2011 between HRM Acquisition Corp. and Kingsway America Inc. (included as
Exhibit 10.1 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
Senior Promissory Note dated March 30, 2011 issued by HRM Acquisition Corp. to Kingsway America Inc. (included as Exhibit
10.2 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
Junior Promissory Note dated March 30, 2011 issued by HRM Acquisition Corp to Kingsway America Inc. (included as Exhibit
10.3 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
10.10 Note Purchase Agreement dated March 30, 2011 between HRM Acquisition Corp. and United Property and Casualty Insurance
Company (included as Exhibit 10.4 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by
reference).
10.11
Promissory Note dated March 30, 2011 issued by HRM Acquisition Corp. to United Property and Casualty Insurance Company
(included as Exhibit 10.5 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
10.12 Agreement of Limited Partnership dated March 30, 2011 between Acadia GP, LLC (in its capacity as a general partner of Acadia
Acquisition Partners, L.P.) and limited partners (including United Property and Casualty Insurance Company) (included as
Exhibit 10.6 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
10.13
Intercreditor Agreement dated March 30, 2011 between HRM Acquisition Corp. and Kingsway America Inc. (included as
Exhibit 10.7 to the March 31, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
10.14
Subscription and Investment Representation Agreement dated March 30, 2011 (included as Exhibit 10.9 to the March 31, 2011
Form 10-Q, filed March 27, 2012, and incorporated herein by reference).
10.15 Management Services Agreement between United Insurance Management, L.C. and 1347 Advisors LLC, effective August 29,
2011 (included as Exhibit 10.1 to the September 30, 2011 Form 10-Q, filed March 27, 2012, and incorporated herein by
reference).
10.16 Kingsway Financial Services Inc. 2013 Equity Incentive Plan (included as Schedule B to the Definitive Proxy Statement on
Schedule 14A filed with the SEC on April 11, 2013, and incorporated herein by reference). *
10.17
Form of Subscription Agreement (included as Exhibit 10.1 to the Form 8-K, filed December 27, 2013, and incorporated herein
by reference).
10.18
Registration Rights Agreement, dated February 3, 2014, by and among the Company and the other parties signatory thereto
(included as Exhibit 10.2 to the Form 8-K, filed February 4, 2014, and incorporated herein by reference).
10.19 Kingsway America Inc. Employee Share Purchase Plan (included as Schedule B to the Definitive Proxy Statement on Schedule
14A filed with the SEC on April 30, 2014 and incorporated herein by reference). *
10.20 Agreement to Buyout and Release dated February 24, 2015 between 1347 Advisors LLC and 1347 Property Insurance Holdings,
Inc. (included as Exhibit 10.1 to the Form 8-K, filed February 27, 2015, and incorporated herein by reference).
14
21
23
Kingsway Financial Services Inc. Code of Business Conduct & Ethics (included as Exhibit 14 to the Form 10-K, filed March 30,
2012, and incorporated herein by reference).
Subsidiaries of Kingsway Financial Services Inc.
Consent of BDO USA, LLP
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
106
KINGSWAY FINANCIAL SERVICES INC.
32.1
32.2
Certification of Chief 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 Chief 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
* Management contract or compensatory plan or arrangement.
107
Subsidiaries of Kingsway Financial Services Inc.
Exhibit 21
Subsidiaries
Kingsway America II Inc.
1347 Advisors LLC
1347 Capital LLC
1347 Investors LLC
Itasca Investors LLC
Itasca Capital Corp.
IWS Acquisition Corporation
Trinity Warranty Solutions LLC
American Country Underwriting Agency Inc.
ARM Holdings, Inc.
Mattoni Insurance Brokerage, Inc.
Hamilton Risk Management Company
Appco Finance Corporation
Insurance Management Services Inc.
Kingsway Amigo Insurance Company
KAI Advantage Auto, Inc.
KFS Capital LLC
Kingsway America Inc.
Kingsway LGIC Holdings, LLC
Mendota Insurance Company
Boston General Agency, Inc.
Congress General Agency, Inc.
Jurisdiction of Incorporation/Organization
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Florida
Delaware
Illinois
Illinois
Washington
Florida
Pennsylvania
Florida
Florida
Illinois
Delaware
Delaware
Delaware
Minnesota
Texas
Texas
Mendakota Casualty Company (f/k/a Universal Casualty Company)
Illinois
Mendakota Insurance Company
Mendota Insurance Agency, Inc.
MIC Insurance Agency Inc.
Kingsway America Agency Inc.
Kingsway General Insurance Company
Kingsway Reinsurance Corporation
Kingsway ROC GP
Kingsway ROC LLC
Minnesota
Texas
Texas
Illinois
Ontario
Barbados
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Kingsway Financial Services Inc.
Itasca, Illinois
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8
(No. 333-194108) of Kingsway Financial Services Inc. of our reports dated March 10, 2016,
relating to the consolidated financial statements and financial statements schedules, and the
effectiveness of Kingsway Financial Services Inc.’s internal control over financial reporting
which appears in this Form 10-K.
Grand Rapids, Michigan
March 10, 2016
EXHIBIT 31.1
I, Larry G. Swets, Jr., certify that:
CERTIFICATION PURSUANT TO SECTION 302
1. I have reviewed this annual report on Form 10-K of Kingsway Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 10, 2016
By /s/ Larry G. Swets, Jr.
Larry G. Swets, Jr., President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
I, William A. Hickey, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Kingsway Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 10, 2016
By /s/ William A. Hickey, Jr.
William A. Hickey, Jr., Chief Financial Officer and Executive Vice President
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K (the “Report”) of Kingsway Financial Services Inc. (the “Company”) for
the year ended December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof, I, Larry G. Swets,
Jr., the Chief Executive Officer and Principal Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 10, 2016
By /s/ Larry G. Swets, Jr.
Larry G. Swets, Jr., President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K (the “Report”) of Kingsway Financial Services Inc. (the “Company”) for
the year ended December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof, I, William A.
Hickey, Jr., the Chief Financial Officer and Principal Financial Officer of the Company, hereby certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and
belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 10, 2016
By /s/ William A. Hickey, Jr.
William A. Hickey, Jr., Chief Financial Officer and Executive Vice President
(Principal Financial Officer)