The following discussion and analysis of our financial condition and results of operations should be read together with the Consolidated Financial Statements included in Part II, Item 8 of this 2018 Annual Report and reflects the effects of the error corrections and previously identified immaterial accounting adjustments discussed in Note 3, "Restatement of Previously Issued Financial Statements," to the Consolidated Financial Statements.
Kingsway is a Delaware holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries. Kingsway conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Trinity Warranty Solutions LLC ("Trinity") and Professional Warranty Service Corporation ("PWSC"). Throughout this 2018 Annual Report, the term "Extended Warranty" is used to refer to this segment.
PWSC sells new home warranty products and provides administration services to homebuilders and homeowners across the United States. PWSC distributes its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.
Segment operating income represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses presented in the consolidated statements of operations are not subtotaled by segment; however, this information is available in total and by segment in Note 28, "Segmented Information," to the Consolidated Financial Statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure to segment operating income is loss from continuing operations before income tax expense (benefit) that, in addition to segment operating income, includes net investment income, net realized (losses) gains, gain on change in fair value of equity investments, loss on change in fair value of limited liability investments, at fair value, net change in unrealized loss on private company investments, interest expense not allocated to segments, other income and expenses not allocated to segments, net, amortization of intangible assets, contingent consideration benefit, loss on change in fair value of debt, gain on disposal of subsidiary and equity in net (loss) income of investee. A reconciliation of segment operating income to loss from continuing operations before income tax expense (benefit) for the years ended December 31, 2018 and December 31, 2017 is presented in Table 1 of the "Results of Continuing Operations" section of MD&A.
The Company records a provision for 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 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 the Company’s external reserving actuaries in their analyses to estimate ultimate claim liabilities. Such data is occasionally supplemented with external data as available and when appropriate.
Frequency and Severity - we use historical claim count development over discrete periods of time to estimate future claim counts. We divide projected ultimate claim counts by an exposure base (earned premiums or exposures), select expected claim frequencies from the results, and adjust them for trends based on internal and external information. Concurrently, we divide projected ultimate losses by the projected ultimate claim counts to select expected loss severities. We use internal and external information to trend the severities and combine them with the trended, projected frequencies to develop ultimate loss projections.
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 assumptions being meaningful for all coverages or segments. For example, Paid Loss Development does not make use of case reserves, and can be more stable when there are changes to the case reserving process. Frequency and Severity, by estimating the frequency separately from severity, can assist in understanding the underlying dynamics when either frequency or severity is changing substantially.
We review the adequacy of the provision for unpaid loss and loss adjustment expenses quarterly. For our year-end analysis, we re-estimate the ultimate losses for each coverage, by accident year. This involves performing a complete update of the historical development factors used in our analysis, incorporating the experience of the most recent calendar year. On a quarterly basis, we perform a more limited review, which can entail, for example, a comparison of the expected losses to be paid during the quarter versus actual payments, or other similar comparisons to determine the extent to which a given segment is performing as expected. In some cases, a re-estimation (similar to the year-end analysis) may be determined to be useful as part of a quarterly analysis, and we may make adjustments to ultimate losses in response to the results of this analysis. We adjust carried unpaid loss and loss
adjustment expenses as we learn additional information, and reflect these adjustments in the accounting periods in which they are determined.
Our equity investments, including warrants, are recorded at fair value with changes in fair value recognized in net loss in 2018. Prior to 2018, changes in fair value of equity investments were recognized in other comprehensive loss. See Note 4, "Recently Issued Accounting Standards," to the Consolidated Financial Statements, for further details regarding the adoption of ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). Fair value for our equity investments are determined 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 for similar assets in active markets; quoted prices for identical or similar assets in markets that are inactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data. We do not have any fixed maturities and equity investments in our portfolio that require us to use unobservable inputs. The Company engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our fixed maturities. The market approach includes primarily obtaining prices from independent third-party pricing services as well as, to a lesser extent, quotes from broker-dealers. Our third-party vendor also monitors market indicators, as well as industry and economic events, to ensure pricing is appropriate. All classes of our fixed maturities are valued using this technique. We have obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Company.
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 using the interest method and charged or credited to net investment income.
Prior to the adoption of ASU 2016-01, equity investments were considered available-for-sale and were included in the analysis of other-than-temporary impairments. Following the adoption of ASU 2016-01 beginning with the first quarter of 2018, the Company includes only its investments in fixed maturities and investments in private companies in its quarterly impairment analysis.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write downs for other-than-temporary impairment related to available-for-sale investments recorded for the years ended December 31, 2018 and December 31, 2017. As a result of the analysis performed with respect to limited liability investments, at fair value, the Company recorded impairments of $0.1 million and $0.1 million, which are included in loss on change in fair value of limited liability investments, at fair value in the consolidated statements of operations, for the years ended December 31, 2018 and December 31, 2017, respectively.
We perform a quarterly analysis of our investments in private companies. The analysis includes some or all of the following procedures, as applicable:
As a result of the analysis performed with respect to investments in private companies, the Company recorded impairments of $1.0 million and $2.0 million for the years ended December 31, 2018 and December 31, 2017, respectively, which are included in net change in unrealized loss on private company investments in the consolidated statements of operations.
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, database, customer relationships, in-place lease and non-compete agreement. 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.
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. No impairment charges were recorded against goodwill in 2018 or 2017. Additional information regarding our goodwill is included in Note 12, "Goodwill," to the Consolidated Financial Statements.
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 and agency expenses related to issuing vehicle service agreements, are deferred and charged against income ratably over the terms of the related vehicle service agreements. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset.
Refer to Note 2, "Summary of Significant Accounting Policies," and Note 20, "Revenue from Contracts with Customers," to the Consolidated Financial Statements for information about our revenue recognition accounting policies.
For the year ended December 31, 2018, we incurred a loss from continuing operations of $22.3 million ($1.13 per diluted share) compared to income from continuing operations of $4.2 million (loss of $0.05 per diluted share) for the year ended December 31, 2017. The loss from continuing operations for the year ended December 31, 2018 is primarily attributable to interest expense not allocated to segments, other income and expenses not allocated to segments, net, amortization of intangible assets, loss on change in fair value of limited liability investments, at fair value, loss on change in fair value of debt and equity in net loss of investee, partially offset by operating income in Extended Warranty and Leased Real Estate. The income from continuing operations for the year ended December 31, 2017 is primarily attributable to operating income in Extended Warranty and Leased Real Estate, net investment income, gain on change in fair value of limited liability investments, at fair value, equity in net income of investee and income tax benefit, partially offset by interest expense not allocated to segments, other income and expenses not allocated to segments, net, amortization of intangible assets and loss on change in fair value of debt.
The Extended Warranty service fee and commission income increased 25.6% to $38.3 million for the year ended December 31, 2018 compared with $30.5 million for the year ended December 31, 2017. The increase in service fee and commission income is primarily reflective of the inclusion of PWSC for the full year of 2018 following its acquisition effective October 12, 2017. PWSC service fee and commission income was $7.3 million and $2.5 million for the years ended December 31, 2018 and December 31, 2017, respectively. The increase in service fee and commission income is also partially due to increases at both IWS and Trinity. IWS experienced increased sales of vehicle service agreements due to higher automobile sales, improved penetration at its existing partners and the development of new credit union relationships. Trinity experienced increased sales to existing customers of both its maintenance support and warranty products, in addition to sales to new customers of its warranty products.
Leased Real Estate rental income was $13.4 million for the year ended December 31, 2018 compared to $13.4 million for the year ended December 31, 2017. The rental income is derived from CMC's long-term triple net lease. The Leased Real Estate operating income was $2.5 million for the year ended December 31, 2018 compared to $3.1 million for the year ended December 31, 2017. The decrease in operating income for the year ended December 31, 2018 is due to increased legal expenses, compared to the same period in 2017. Leased Real Estate recorded legal expense of $0.7 million for the year ended December 31, 2018 compared with zero for the year ended December 31, 2017. Leased Real Estate operating income includes interest expense of $6.2 million and $6.3 million for the years ended December 31, 2018 and 2017, respectively. See "Investments" section below for further discussion.
The Company incurred net realized losses of $0.0 million in 2018 compared to net realized gains of $0.3 million in 2017. The net realized losses in 2018 resulted primarily from the sale of a limited liability investment as one part of a broader set of arrangements with certain former officers of the Company (refer to Note 30, "Related Parties," to the Consolidated Financial Statements, for further discussion) offset by net realized gains recorded by Argo Holdings. The net realized gains in 2017 resulted primarily from the sale of a limited liability investment.
Gain on change in fair value of equity investments was $0.4 million in 2018 compared to zero in 2017. As further discussed in Note 4, "Recently Issued Accounting Standards," to the Consolidated Financial Statements, effective January 1, 2018, the Company adopted ASU 2016-01. As a result, all changes in the fair value of equity investments are now recognized in net income (loss). The gain on change in fair value of equity investments for the year ended December 31, 2018 includes realized gains of $1.5 million on equity investments sold during 2018 and unrealized losses of $1.1 million on equity investments held as of December 31, 2018.
Loss on Change in Fair Value of Limited Liability Investments, at Fair Value
Loss on change in fair value of limited liability investments, at fair value was $7.4 million in 2018 compared to $1.8 million in 2017. The change from 2017 to 2018 is primarily explained by the difference between the $10.1 million fair value loss recorded during 2018 related to 1347 Investors compared to the $0.4 million fair value loss recorded during 2017 related to 1347 Investors. Limited liability investments, at fair value include the Company's investment in 26.7% of the outstanding units of 1347 Investors,
which owns common stock in Limbach Holdings, Inc. ("Limbach"), a publicly traded company. The Company's investment in 1347 Investors is accounted for at fair value and reported as limited liability investments, at fair value in the consolidated balance sheets, with any changes in fair value to be reported in loss on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. As of December 31, 2018 and December 31, 2017, the carrying value of the Company's limited liability investment, at fair value related to 1347 Investors was $0.2 million and $10.3 million, respectively. The fair value of this investment is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. The most significant input to the model is the observed stock price of Limbach common stock, which was $13.83 on December 31, 2017 and $3.68 on December 31, 2018, with 75% of the decline in the Limbach common stock price occurring during the fourth quarter of 2018. Due to the decline in Limbach stock price, particularly during the fourth quarter of 2018, and the resulting effect of the model on the Company’s membership interests in 1347 Investors, the Company recorded a fair value loss of $10.1 million related to its investment in 1347 Investors for the year ended December 31, 2018 compared to a fair value loss of $0.4 million related to this investment for the year ended December 31, 2017. The change between 2017 and 2018 in loss on change in fair value of limited liability investments, at fair value was partially offset by fair value gains of $1.5 million and $1.2 million recorded during 2018 by Argo Holdings and Net Lease, respectively, compared to fair value losses of $0.1 million and $1.3 million recorded during 2017 by Argo Holdings and Net Lease, respectively.
Net change in unrealized loss on private company investments was an unrealized loss of $1.6 million in 2018 compared to $0.8 million in 2017. The increased loss in 2018 reflects a net increase in impairments and negative fair value adjustments on private company investments during the year ended December 31, 2018 compared to the year ended December 31, 2017.
The Company recorded $1.3 million less of general and administrative expense, primarily attributable to less compensation, employee benefits and professional fees in 2018 compared to 2017.
Loss and loss adjustment expenses were an expense of $1.6 million and $0.4 million for the years ended December 31, 2018 and December 31, 2017, respectively, primarily as a result of unfavorable development in 2018 and 2017 due to the continuing voluntary run-off of Amigo. Amigo was previously included in the Insurance Underwriting segment along with Mendota. As a consequence of classifying Mendota as discontinued operations, the remaining composition of the Insurance Underwriting segment no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented. The operating results of Amigo previously included in the Insurance Underwriting segment are now included in Other income and expenses not allocated to segments, net.
The Company's intangible assets with definite useful lives are amortized over their estimated useful lives. Amortization of intangible assets was $2.4 million in 2018 compared to $1.1 million in 2017. The higher amortization expense for the year ended December 31, 2018 is related to amortization of intangible assets recorded in conjunction with the Company's acquisition of PWSC on October 12, 2017. During 2018, the Company finalized its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWSC, which resulted in the Company recording $1.4 million of amortization expense during 2018 for the period from the date of acquisition through December 31, 2018. See Note 5, "Acquisition," to the Consolidated Financial Statements for further details.
The loss on change in fair value of debt amounted to $1.7 million in 2018 compared to $8.5 million in 2017. The loss for 2018 reflects an increase in the fair value of the subordinated debt resulting from changes in inputs, other than the instrument-specific credit risk, to the Company’s fair value model. The loss for 2017 reflects an increase in the fair value of the subordinated debt resulting from changes in all of the inputs to the Company’s fair value model. As further discussed in Note 4, "Recently Issued Accounting Standards," to the Consolidated Financial Statements, effective January 1, 2018, the Company adopted ASU 2016-01. As a result, the portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is now recognized in other comprehensive income (loss), whereas for 2017, the total change in fair value of subordinated debt was recorded in net income (loss). See "Debt" section below for further information.
Income tax expense for 2018 was $0.3 million compared to income tax benefit of $16.7 million in 2017. The 2018 income tax expense is primarily related to the change in unrecognized tax benefits and state income taxes.
The 2017 income tax benefit is primarily related to a release of deferred income tax liabilities and an adjustment to the deferred income tax valuation allowance resulting from the Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22, 2017. The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, a permanent reduction in the U.S. federal corporate income tax rate to 21%.
the fourth quarter of 2018, the Company finalized its calculation of the income tax effects of the Tax Act on its deferred income taxes by recording an additional tax benefit of $0.1 million.
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. Prior to the adoption of ASU 2016-01, the Company considered the ability and intent to hold an equity investment for a period of time sufficient to allow for anticipated recovery.
At December 31, 2018 and December 31, 2017, the gross provisions for unpaid loss and loss adjustment expenses for our commercial automobile business were $0.8 million and $0.6 million, respectively. This increase is due to an increase in unpaid loss and loss adjustment expenses at Amigo.
As part of its acquisition of CMC in July 2016, the Company assumed the Mortgage and recorded the Mortgage at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 million as of the date of acquisition plus a premium of $11.7 million. The Mortgage matures on May 15, 2034 and has a fixed interest rate of 4.07%. The Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the premium using the effective interest rate method.
Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by Kingsway America Inc. to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. The Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity.
The Company's subordinated debt is measured and reported at fair value. At December 31, 2018, the carrying value of the subordinated debt is $50.0 million. The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third-party. For a description of the market observable inputs and inputs developed by a third-party used in determining fair value of debt, see Note 29, "Fair Value of Financial Instruments," to the Consolidated Financial Statements.
During the year ended December 31, 2018, the market observable swap rates changed, and the Company experienced an increase in the credit spread assumption developed by the third-party. Changes in the market observable swap rates affect the fair value
model in different ways. An increase in the LIBOR swap rates has the effect of increasing the fair value of the Company's subordinated debt while an increase in the risk-free swap rates has the effect of decreasing the fair value. The increase in the credit spread assumption has the effect of decreasing the fair value of the Company's subordinated debt while a decrease in the credit spread assumption has the effect of increasing the fair value. The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt. The changes to the credit spread and swap rate variables during 2018, along with the passage of time, contributed to the $2.1 million decrease in fair value of the Company’s subordinated debt between December 31, 2017 and December 31, 2018.
As further discussed in Note 4, "Recently Issued Accounting Standards," to the Consolidated Financial Statements, effective January 1, 2018, the Company adopted ASU 2016-01. As a result, the portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is now recognized in other comprehensive income (loss), whereas for 2017, the total change in fair value of subordinated debt was recorded in net income (loss). Of the $2.1 million decrease in fair value of the Company’s subordinated debt between December 31, 2017 and December 31, 2018, $3.8 million is reported as decrease in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive loss and $1.7 million is reported as loss on change in fair value of debt in the Company’s consolidated statements of operations.
For a description of each of the Company's six subsidiary trusts, see Note 17, "Debt," to the Consolidated Financial Statements.
During 2018, the net cash used in financing activities from continuing operations as reported on the consolidated statements of cash flows was $4.1 million. This use of cash is primarily attributed to principal repayments of $3.4 million on notes payable and $1.0 million on the bank loan.
Dividends from the Leased Real Estate segment are not generally considered a source of liquidity for the holding company. Because of the Lease Amendment, CMC may be in a position to distribute to the Company some of the cash received from the additional rental income. Any material cash flow to the Company, however, to help the Company meet its holding company obligations remains likely to occur only upon the occurrence of one of the three events described in the next paragraph that would trigger payment of service fees. There can be no assurance as to the timing of the occurrence, or the resulting outcome, from one of these events.
Table 6 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 6 related to the subordinated debt assume LIBOR remains constant throughout the projection period.
The Company has off-balance sheet arrangements related to guarantees, which are further described in Note 31, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements.
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2018 and 2017
We have audited the accompanying consolidated balance sheet of Kingsway Financial Services Inc. and its subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements and schedules (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
March 16, 2018, except for Notes 3, 6 and 28, as to which the date is February 27, 2020
The accompanying consolidated financial statements include the accounts of Kingsway and its majority owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships or investments for consolidation pursuant to authoritative accounting guidance related to the consolidation of variable interest entities under the Variable Interest Model prescribed by the Financial Accounting Standards Board ("FASB"). A variable interest entity ("VIE") is consolidated when the Company has the power to direct activities that most significantly impact the economic performance of the variable interest entity and has the obligation to absorb losses or the right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity. When a variable interest entity is not consolidated, the Company uses either the equity method or the cost method to account for the investment. Under the equity method, the carrying value is generally the Company’s share of the net asset value of the unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income.
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 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 are included up to the date control ceased, and any difference between the fair value of the consideration received and the carrying value of a subsidiary that has been disposed is 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, 2018 based on individual company financial statements at the same date, or in the case of certain limited liability companies that are consolidated, on a three-month lag basis. 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 Capital LLC; 1347 Venture Opportunity LLC; Appco Finance Corporation; American Country Underwriting Agency Inc.; Argo Holdings Fund I, LLC ("Argo Holdings"); Argo Management Group, LLC ("Argo Management"); ARM Holdings, Inc.; CMC Industries, Inc. ("CMC"); DPM SPV, LLC ("DPM"); Flower Portfolio 001, LLC ("Flower"); Itasca Capital Corp.; Itasca Investors LLC; IWS Acquisition Corporation ("IWS"); KAI Management Services Inc.; 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 Re"); Kingsway Warranty Holdings LLC; Mattoni Insurance Brokerage, Inc.; Net Lease Investment Grade Portfolio LLC ("Net Lease"); Professional Warranty Service Corporation ("PWSC"); Professional Warranty Services LLC; and Trinity Warranty Solutions LLC ("Trinity").
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment expenses; valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; valuation of mandatorily redeemable preferred stock; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for subordinated debt obligations; and revenue recognition.
Foreign currency translation adjustments are included in shareholders' equity under the caption accumulated other comprehensive income (loss). Foreign currency gains and losses resulting from transactions denominated in currencies other than the entity's functional currency are reflected in non-operating other income in the consolidated statements of operations.
Investments in fixed maturities are classified as available-for-sale and reported at fair value. Unrealized gains and losses are included in accumulated other comprehensive income (loss), 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.
Equity investments include common stocks and warrants and are reported at fair value. Effective January 1, 2018, changes in fair value of equity investments are recognized in net income (loss). Prior to 2018, changes in fair value of equity investments were recognized in other comprehensive income (loss).
Limited liability investments, at fair value represent the Company's investment in 1347 Investors LLC ("1347 Investors") as well as the underlying investments of Net Lease and Argo Holdings. The Company accounts for these investments at fair value with changes in fair value reported in the consolidated statements of operations. Income from limited liability investments, at fair value is included in loss on change in fair value of limited liability investments, at fair value.
Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value.
Cash and cash equivalents and restricted cash include cash and investments with original maturities of no more than three months when purchased that are readily convertible into cash.
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.
At December 31, 2018 and December 31, 2017, investment in investee includes the Company's investment in the common stock of Itasca Capital Ltd. ("ICL"). This investment is reported as investment in investee in the consolidated balance sheets and accounted for under the equity method of accounting, with the Company's share of income (loss) and other comprehensive income (loss) of the investee reported in the corresponding lines 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. Distributions received are classified using the cumulative earnings approach.
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 equity in net (loss) income of investee in the consolidated statements of operations.
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 forty years for buildings; five to fifty years for site improvements; four to six years for leasehold improvements; three to ten years for furniture and equipment; and three to five years for computer hardware.
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.
The Company has notes payable at Flower, Net Lease and CMC. The Flower and Net Lease notes payable balances are reported at their unpaid principal balance. The CMC note payable is reported at amortized cost. The CMC note payable includes a premium that is being amortized through the maturity date of the note payable using the effective interest rate method.
The Company's subordinated debt is measured and reported at fair value. The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third-party. These inputs include credit spread assumptions developed by a third-party and market observable swap rates. Effective January 1, 2018, the portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is recognized in other comprehensive income (loss), whereas for 2017, the total change in fair value of subordinated debt was recorded in net income (loss).
The consideration for certain of the Company's acquisitions included future payments to the former owners that were 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 expense (benefit).
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
Service fee and commission income represents vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders.
GAP commissions include commissions from the sale of GAP products. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these GAP contracts. The Company does not assume any insurance risk from the sale of GAP contracts. IWS receives a single commission fee as its transaction price at the time it sells a GAP contract to a customer. Each GAP contract contains two separate performance obligations - sale of a GAP contract and GAP claims administration. The first performance obligation is related to the sale of a GAP contract and is satisfied upon closing the sale. The second performance obligation is related to the administration of claims during the GAP contract period, generally four years.
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 and is incurred when the services are performed.
On June 13, 2019, the Audit Committee of the Board of Directors of the Company concluded, after review and discussion with management, that the Company's audited consolidated financial statements for the year ended December 31, 2017 should no longer be relied upon. On February 26, 2020, the Audit Committee of the Board of Directors of the Company concluded, after further review and discussion with management following the completion of the Company’s audit for the year ended December 31, 2018, that the Company's consolidated financial statements for the year ended December 31, 2017 should be further restated as a result of additional error corrections identified subsequent to June 13, 2019.
In addition to these items, certain other amounts have been reclassified in the consolidated balance sheet to conform to current year presentation. Such reclassifications had no impact on previously reported total shareholders' equity.
The following table presents the effects of the error corrections, immaterial accounting adjustments and reclassifications on the Company’s consolidated statement of operations for the year ended December 31, 2017:
The following table presents the effects of the error corrections, immaterial accounting adjustments and reclassifications on the Company’s consolidated statement of cash flows for the year ended December 31, 2017:
Reclassifications to conform to current presentation. Such reclassifications have no impact on previously reported net loss or total shareholders' equity.
Adjustment to decrease redeemable Class A preferred stock, with an offsetting increase to additional paid-in capital and an offsetting decrease to general and administrative expenses related to the Company’s issuance of Class A preferred stock and Class C Warrants on February 3, 2014. Also includes the related reclassifications of accrued dividends on equity-classified warrants from accrued expenses and other liabilities to redeemable Class A preferred stock and dividend expense from accumulated deficit to additional paid-in-capital.
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 amortized over the lease term on a straight-line basis, with all cash flows included within operating activities in the statement of cash flows. The accounting treatment for lessors will remain relatively unchanged. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. The Company will adopt ASU 2016-02 effective January 1, 2019 using the modified retrospective transition method and will not restate comparative periods. The Company plans to elect the package of practical expedients permitted under the transition guidance within ASU 2016-02, which will allow the Company to carry forward prior conclusions about lease identification, classification and initial direct costs for leases entered into prior to adoption of ASU 2016-02. The adoption of ASU 2016-02 will have no impact on the Company's shareholders' equity as of January 1, 2019, but the Company estimates it will record a right-of-use asset of approximately $2.7 million; a corresponding lease liability of approximately $2.9 million; and a reversal of December 31, 2018 accrued rent expense of $0.2 million.
incurred acquisition-related expenses of $0.0 million and $0.2 million, respectively, which are included in general and administrative expenses in the consolidated statement of operations.
On June 1, 2018, the Company disposed of its subsidiary, Itasca Real Estate Investors, LLC ("Itasca Real Estate"). As a result of the disposal, the Company recognized a gain of $0.0 million during the year ended December 31, 2018. The earnings of Itasca Real Estate are included in the consolidated statements of operations through the June 1, 2018 disposal date.
As a result of this announcement, Mendota, which was previously disclosed as part of the Insurance Underwriting segment, has been classified as a discontinued operation and the results of their operations are reported separately for all periods presented. The Company recognized a loss on disposal of Mendota of $8.5 million for the year ended December 31, 2018. The assets and liabilities of Mendota are presented as held for sale in the consolidated balance sheets at December 31, 2017.
The assets and liabilities of Mendota are presented as held for sale in the consolidated balance sheets at December 31, 2017. The carrying amounts of the major classes of assets and liabilities of Mendota at December 31, 2017 are as follows:
During 2017, the Company's subsidiary, Kingsway ROC GP ("ROC GP"), was liquidated. As a result of the liquidation of this subsidiary, the Company realized a net after-tax loss of $0.5 million for the year ended December 31, 2017. This loss represents the foreign exchange loss previously recorded in accumulated other comprehensive loss and now recognized in the statements of operations as a result of the liquidation of ROC GP. Summarized financial information for liquidation of subsidiary is shown below:
The Company’s investments include certain investments, primarily in limited liability companies and limited partnerships in which the Company holds a variable interest. The Company evaluates these investments for the characteristics of a VIE. The Variable Interest Model identifies the characteristics of a VIE to include investments (1) lacking sufficient equity to finance activities without additional subordinated support or (2) in which the holders of equity at risk in the investments lack characteristics of a controlling financial interest, such as the power to direct activities that most significantly impact the legal entity’s economic performance; the obligation to absorb the legal entity’s expected losses; or the right to receive the expected residual returns of the legal entity. The equity investors as a group are considered to lack the power to direct activities that most significantly impact the legal entity’s economic performance when (1) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the legal entity or their rights to receive the expected residual returns of the legal entity and (2) substantially all of the activities of the legal entity are conducted on behalf of an investor with disproportionately few voting rights. When evaluating whether an investment lacks characteristics of a controlling financial interest, the Company considers limited liability companies and limited partnerships to lack the power of a controlling financial interest if neither of the following exists: (1) a simple majority
The Company held a 43.4% investment in Argo Holdings at December 31, 2018 and December 31, 2017. Argo Holdings makes investments, primarily in established lower middle market companies based in North America, through investments in search funds. The managing member of Argo Holdings is Argo Management, a wholly owned subsidiary of the Company. Argo Holdings is considered to be a VIE as the members holding equity at risk lack characteristics of a controlling financial interest. The Company holds a variable interest in Argo Holdings due to its right to absorb significant economics in Argo Holdings and through its controlling interest in Argo Management, through which the Company holds the power to direct the significant activities of Argo Holdings. As such, the Company was the primary beneficiary of Argo Holdings and consolidated Argo Holdings at December 31, 2018 and December 31, 2017.
Insurance Income Strategies Ltd. ("IIS") is a Bermuda corporation organized to offer collateralized reinsurance in the property catastrophe market through its wholly owned operating subsidiary IIS Re Ltd. The Company held 100% of the outstanding common stock of IIS at December 31, 2018 and December 31, 2017. IIS was considered to be a VIE at December 31, 2017 as IIS did not hold sufficient equity to finance its activities without additional subordinated support. At December 31, 2017, the Company was deemed to have the power to direct the activities of IIS through its voting rights and had the right to absorb significant economics in IIS; therefore, the Company was the primary beneficiary of IIS and consolidated IIS at December 31, 2017. The results of consolidation of IIS at December 31, 2017 were immaterial and are reflected as zero in the following table at December 31, 2017.
including at December 31, 2018. Due to the contractual agreements executed in conjunction with the third-party investment, the Company no longer holds power over IIS as of August 10, 2018. As such, the Company is no longer considered the primary beneficiary as of August 10, 2018 and deconsolidated IIS.
As further discussed in Note 4, "Recently Issued Accounting Standards," effective January 1, 2018, the Company adopted ASU 2016-01. As a result of the adoption, equity investments are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation.
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at December 31, 2018 and December 31, 2017 are summarized in the tables shown below:
Net unrealized gains and losses in the tables above are reported as other comprehensive income (loss) with the exception of net unrealized losses of $0.1 million, at December 31, 2017, related to warrants - not publicly traded, which are reported in the consolidated statements of operations.
The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized loss positions as of December 31, 2018 and December 31, 2017. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
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:
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write-downs for other-than-temporary impairment related to available-for-sale investments recorded for the years ended December 31, 2018 and December 31, 2017.
Limited liability investments, at fair value represent the Company's investment in 1347 Investors as well as the underlying investments of Net Lease and Argo Holdings. As of December 31, 2018 and December 31, 2017, the carrying value of the Company's limited liability investments, at fair value was $26.0 million and $32.2 million, respectively. The Company recorded impairments related to limited liability investments, at fair value of $0.1 million and $0.1 million for the years ended December 31, 2018 and December 31, 2017, respectively, which are included in loss on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At December 31, 2018, the Company has unfunded commitments totaling $0.6 million to fund limited liability investments, at fair value.
As of December 31, 2018 and December 31, 2017, the carrying value of the Company's investments in private companies totaled $3.1 million and $4.9 million, respectively.
Real estate investments are reported at fair value. As of December 31, 2018 and December 31, 2017, the carrying value of the Company's real estate investments totaled $10.7 million and $10.7 million, respectively.
On January 2, 2018, the Company entered into an agreement with PIH to cancel the $10.00 per share performance shares grant agreement in exchange for cash consideration of $0.3 million. On July 24, 2018, the Company entered into an agreement with PIH to cancel the $12.00 per share, $15.00 per share and $18.00 per share performance share grant agreement in exchange for cash consideration of $1.0 million. For the year ended December 31, 2018, the Company recorded gains, included in gain on change in fair value of equity investments in the consolidated statements of operations, of $1.3 million related to these transactions. No shares were received by the Company under either of the performance share grant agreements as of December 31, 2018.
Gain on change in fair value of equity investments for the years ended December 31, 2018 and December 31, 2017 is comprised as follows:
The carrying value of the Company's investment in investee at December 31, 2017 in the table above is calculated using ICL’s financial statements reported as of and for the period ended September 30, 2017. The estimated fair value of the Company's investment in investee at December 31, 2017 in the table above is calculated based on the published closing price of ICL common stock at September 30, 2017 to be consistent with the three-month lag in calculating its carrying value under the equity method.
The carrying value of the Company's investment in investee at December 31, 2018, using ICL’s financial statements reported as of and for the period ended September 30, 2018, was calculated to be $2.7 million. The Company performed an analysis to determine whether its $2.7 million carrying value calculated under the equity method is recoverable. As part of its analysis, the Company considered that the estimated fair value of the Company's investment in investee at December 31, 2018, as presented in the table above and as calculated based on the published closing price of ICL common stock at December 31, 2018, was $1.0 million. The Company concluded that the $2.7 million carrying value of its investment in investee, as calculated under the equity method, had an other than temporary impairment as of December 31, 2018. As a result, the Company wrote down the carrying value of its investment in investee as of December 31, 2018, as presented in the table above, by $1.7 million such that its carrying value equals the $1.0 million estimated fair value of the Company's investment in investee as calculated based on the published closing price of ICL common stock at December 31, 2018.
Ceded loss and loss adjustments expenses, unpaid loss and loss adjustment expenses and commissions as of and for the years ended December 31, 2018 and December 31, 2017 are summarized as follows:
Goodwill was $74.7 million and $80.8 million at December 31, 2018 and December 31, 2017, respectively, and is attributable to the Extended Warranty and Leased Real Estate reportable segments. As further discussed in Note 5, "Acquisition," during the third quarter of 2018, the Company completed its fair value analysis of the assets acquired and liabilities assumed related to the acquisition of PWSC on October 12, 2017. As a result, the Company recorded a decrease to goodwill of $6.2 million related to the acquisition of PWSC from the amount recorded at December 31, 2017.
The tenant relationship and trade names 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 2018 or 2017.
Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement fees are initially recorded as deferred service fees. On a quarterly basis, the Company compares the remaining deferred service fees balance to the estimated amount of expected future claims under the vehicle service agreement contracts and records an additional accrual when the deferred service fees balance is less than expected future claims costs.
The following tables contain information about incurred and paid loss and loss adjustment expenses development as of and for the year December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities, including expected development on reported unpaid loss and loss adjustment expenses included within the net incurred losses and allocated loss adjustment expenses amounts. The information about incurred and paid loss and loss adjustment expenses development for the years ended December 31, 2009 through 2017, and the average annual percentage payout of incurred claims by age as of December 31, 2018, is presented as supplementary information.
On January 5, 2015, Flower assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Flower Note"). The Flower Note requires monthly payments of principal and interest and is secured by certain investments of Flower. The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The carrying value of the Flower Note at December 31, 2018 of $7.8 million represents its unpaid principal balance. The fair value of the Flower Note disclosed in the table above is derived from quoted market prices of A and B rated industrial bonds with similar maturities.
Pursuant to indentures governing the Company’s outstanding bank loan, subordinated debt and a bank loan associated with the Company’s acquisition on March 1, 2019, described more fully in Note 34, "Subsequent Event," the Company is obligated to deliver audited financial statements for certain of its subsidiaries as of and for the year ended December 31, 2018. Due to the delay in filing its 2018 Annual Report, the Company has been unable to meet these obligations, the failure of which could be declared events of default under the respective indentures. As of the date of the filing of its 2018 Annual Report, none of the lenders or trustees responsible for administering any of our outstanding debt has declared an event of default, if required by the applicable indenture, notified us of an intent to accelerate any portion of the outstanding debt or charge default interest thereon, or pursued any other remedies available to it. Were any of these lenders or trustees to declare an event of default, the Company would have a period of time to cure the default. Now that the Company has filed its 2018 Annual Report, the Company expects to be in a position to deliver to the trustees the requisite audited financial statements for certain of its subsidiaries as of and for the year ended December 31, 2018.
The Company owns a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") that is subject to a long-term triple net lease agreement with an unrelated third-party. The lease provides for future rent escalations and renewal options. The initial lease term ends in May 2034. The lessee bears the cost of maintenance and property taxes. Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental income includes amortization of below market lease liabilities of $0.1 million and $0.1 million for the years ended December 31, 2018 and December 31, 2017. The estimated aggregate future amortization of below market lease liabilities is $0.1 million for 2019, $0.1 million for 2020, $0.1 million for 2021, $0.1 million for 2022 and $0.1 million for 2023.
The Company also leases certain office space under non-cancelable leases, with initial terms ranging from five to eight years, along with options that permit renewals for additional periods. The Company also leases certain equipment under non-cancelable operating leases, with initial terms of five years. Minimum rent is expensed on a straight-line basis over the term of the lease.
Revenue from contracts with customers relates to Extended Warranty segment service fee and commission income. Service fee and commission income represents vehicle service agreement fees, GAP commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders.
The following table disaggregates revenues from contracts with customers by revenue type:
PWSC’s homebuilder warranty service fees include fees collected from the sale of warranties issued by new homebuilders. PWSC receives a single warranty service fee as its transaction price at the time it enters into a written contract with each of its builder customers. Each contract contains two separate performance obligations - warranty administrative services and other warranty services. Warranty administrative services include enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product. Other warranty services include answering builder or homeowner questions regarding the home warranty and dispute resolution services.
For the other warranty services performance obligation, PWSC applies an input method of measurement, based on the expected costs plus a margin of providing services, to determine the transfer of its services over the warranty coverage period. PWSC uses historical data regarding the number of calls it receives and activities performed, in addition to the number of homes enrolled, to estimate the number of complaints and dispute resolution requests to be received by year until coverage expires, which allows PWSC to develop a revenue recognition pattern that it believes provides a faithful depiction of the transfer of services over time for the other warranty services performance obligation.
Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at December 31, 2018 and December 31, 2017 were $3.4 million and $4.4 million, respectively.
The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. The Company expects to recognize within one year as service fee and commission income approximately 34.3% of the deferred service fees as of December 31, 2018. Approximately $16.0 million of service fee and commission income recognized during the year ended December 31, 2018 was included in deferred service fees as of December 31, 2017.
The Company and its non-U.S. subsidiaries file separate foreign income tax returns. Kingsway America Agency Inc. files a separate U.S. federal income tax return. 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 U.S. consolidated federal income tax return. The Company's U.S. subsidiaries not included in the KAI Tax Group file separate U.S. federal income tax returns. As a result of its domestication to the U.S. on December 31, 2018, the Company will no longer file foreign income tax returns in 2019 and later years. Starting in 2019, the Company and all of its eligible U.S. subsidiaries will file a U.S. consolidated federal income tax return.
The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1) a permanent reduction in the U.S. federal corporate income tax rate to 21% and (2) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized.
The Company is subject to the provisions of the ASC 740-10, Income Taxes, which requires that the effect on deferred income tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. In December of 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include a provisional amount based on their reasonable estimate in their financial statements.
Pursuant to SAB 118, the Company recorded provisional amounts for the estimated income tax effects of the Tax Act on deferred income taxes. The Company estimated that (1) the reduction in the corporate income tax rate decreased its net deferred income tax liability as of December 31, 2017 by $18.0 million and (2) the change in the AMT credit rules allowed the Company to reduce its valuation allowance against its gross deferred income tax assets by $0.1 million, for a combined Tax Act total of $18.1 million. The $18.1 million Tax Act amount was recorded as a decrease to income tax expense in the Company’s consolidated statements of operations for the year ended December 31, 2017. In addition, as result of the reduction in the corporate income tax rate, the Company provisionally reduced its December 31, 2017 net deferred income tax asset balance and the related net deferred income tax valuation allowance by $105.6 million, the net effect of which had no impact on the Company’s consolidated statements of operations for the year ended December 31, 2017.
Income tax expense (benefit) varies from the amount that would result by applying the applicable U.S. corporate income tax rate of 21% in 2018 and 34% in 2017 to loss from continuing operations before income tax expense (benefit). The following table summarizes the differences:
The Company maintains a valuation allowance for its gross deferred income tax assets of $171.5 million (U.S. operations - $171.5 million; Other - $0.0 million) and $174.0 million (U.S. operations - $167.6 million; Other - $6.4 million) at December 31, 2018 and December 31, 2017, respectively. The Company's businesses have generated substantial operating losses in prior years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income; however, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its December 31, 2018 and December 31, 2017 net deferred income tax assets, excluding the deferred income tax liability, deferred state income tax assets, and deferred income tax assets relating to AMT credit amounts set forth in the paragraph below. In 2018 and 2017, the Company released into income zero and $0.4 million, respectively, of its valuation allowance, as a result of its acquisition of CMC, due to net deferred income tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available.
The Tax Act modified the U.S. net operating loss deduction, effective with respect to losses arising in tax years beginning after December 31, 2017. The Tax Act, however, did not limit the utilization, in 2018 and later tax years, of U.S. net operating losses generated in 2017 and prior tax years.
As of December 31, 2018 and December 31, 2017, the Company carried a liability for unrecognized tax benefits of $1.4 million and $1.4 million, respectively, that is included in income taxes payable in the consolidated balance sheets. The Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense. During the years ended December 31, 2018 and December 31, 2017, the Company recognized an expense for interest and penalties of $0.2 million and
$0.5 million, respectively. At December 31, 2018 and December 31, 2017, the Company carried an accrual for the payment of interest and penalties of $1.1 million and $0.9 million, respectively, that is included in income taxes payable in the consolidated balance sheets.
The federal income tax returns of the Company's U.S. operations for the years through 2014 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 2013 are closed for Canada Revenue Agency ("CRA") examination. The Company's Canadian federal income tax returns are not currently under examination by the CRA for any open tax years.
The Replacement Options and New Stock Options (collectively, the "Stock Options") are fully vested and exercisable at the date of grant and are exercisable for a period of four years.
The aggregate intrinsic value of stock options outstanding and exercisable is the difference between the December 31, 2018 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, 2018 and December 31, 2017 the number of options exercisable was 40,000 and 651,875 respectively, with weighted average prices of $4.67 and $4.51, respectively. No options were exercised during the years ended December 31, 2018 and December 31, 2017.
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 years ended December 31, 2018 and December 31, 2017.
During the third quarter of 2018, the Company modified the terms of the 2014 Restricted Stock Awards for two of its officers.
the 350,000 shares of the 2018 Modified Restricted Stock Award and recognized payroll tax expense of $0.3 million during the third quarter of 2018.
PWSC granted 1,000 restricted common stock awards ("PWSC Restricted Stock Award") to an officer of PWSC pursuant to an agreement dated September 7, 2018. The PWSC Restricted Stock Award contains both a service and a performance condition that affects vesting. The service condition vests according to a graded vesting schedule and shall become fully vested on February 20, 2022 subject to the officer's continued employment through the applicable vesting dates. The service condition component of the PWSC Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The performance condition vests on February 20, 2022 and is based on the internal rate of return of PWSC. Accruals of compensation expense for the performance condition component of the PWSC Restricted Stock Award is estimated based on the probable outcome of the performance condition. The grant-date fair value of the PWSC Restricted Stock Award was estimated using a valuation model. At December 31, 2018, there were 1,000 unvested shares of the PWSC Restricted Stock Award with a weighted-average grant date fair value of $824.47 per share. Total unamortized compensation expense related to unvested PWSC Restricted Stock Award at December 31, 2018 was $0.7 million.
Total stock-based compensation, net of forfeitures, was a benefit of $1.7 million and an expense of $1.2 million for the years ended December 31, 2018 and December 31, 2017, respectively.
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. After one year of employment, 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, 2018 and December 31, 2017 totaled $0.1 million and $0.1 million, respectively.
There were 222,876 shares of Class A preferred stock ("Preferred Shares") outstanding at December 31, 2018 and December 31, 2017. 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. As of December 31, 2018, the maximum number of common shares issuable upon conversion of the Preferred Shares is 1,392,975 common shares.
During 2017, 40,000 Preferred Shares were converted into 250,000 common shares at the conversion price of $4.00 per common share, or $1.0 million, at the option of the holders. As a result, $1.0 million was reclassified from Class A preferred stock to Shareholders' Equity on the consolidated balance sheet at December 31, 2017.
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, 2018 and December 31, 2017, accrued dividends of $1.7 million and $1.6 million were included in Class A preferred stock in the consolidated balance sheets. The redemption amount of the Preferred Shares as if they were currently redeemable was $7.3 million and $7.2 million at December 31, 2018 and December 31, 2017, respectively.
The Company is authorized to issue an unlimited number of zero par value common stock. There were 21,787,728 and 21,708,190 shares of common stock outstanding at December 31, 2018 and December 31, 2017, respectively.
There were no dividends declared during the years ended December 31, 2018 and December 31, 2017.
The Company conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
Prior to the second quarter of 2018, the Company conducted its business through a third reportable segment, Insurance Underwriting. Insurance Underwriting included the following subsidiaries of the Company: Mendota, Amigo and Kingsway Re. As further discussed in Note 6, "Disposal, Discontinued Operations and Liquidation," on October 18, 2018, the Company announced that it had completed the sale of Mendota. As a result, Mendota has been classified as discontinued operations and the results of their operations are reported separately for all periods presented. As a result of classifying Mendota as discontinued operations, the composition of the Insurance Underwriting segment has changed such that it no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented.
Leased Real Estate includes the Company's subsidiary, CMC. CMC owns the Real Property that is leased to a third-party pursuant to a long-term triple net lease with a single customer. For the year ended December 31, 2018, revenue of $13.4 million from this single customer represents more than 10% of the Company’s consolidated revenues. The Real Property is also subject to the Mortgage. When assessing and measuring the operational and financial performance of the Leased Real Estate segment, interest expense related to the Mortgage is included in Leased Real Estate's segment operating income.
The operating income by reportable segment in the following table is before income taxes and includes revenues and direct segment costs. Total segment operating income reconciled to the consolidated (loss) income from continuing operations for the years ended December 31, 2018 and December 31, 2017 were:
The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1:
Mortgage-backed securities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, expected prepayments, expected credit default rates, delinquencies and issue specific information including, but not limited to, collateral type, seniority and vintage.
Limited liability investments, at fair value - Limited liability investments, at fair value include the Company's investment in 1347 Investors as well as the underlying investments of Net Lease and Argo Holdings. 1347 Investors owns common stock in Limbach Holdings, Inc., a publicly traded company. Net Lease owns investments in limited liability companies that hold investment properties. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at December 31, 2017:
All transfers are recognized by the Company at the beginning of each reporting period. Transfers between Levels 2 and 3 generally relate to whether significant unobservable inputs are used for the fair value measurements. There were no transfers between levels in 2018 or 2017.
The Company acquired Argo Management in April 2016. Argo Management's primary business is to act as Managing Member of Argo Holdings. At December 31, 2018 and December 31, 2017, each of the Company, John T. Fitzgerald ("Fitzgerald"), the Company's Chief Executive Officer and President, and certain of Fitzgerald’s immediate family members owns equity interests in Argo Holdings, all of which interests were acquired prior to the Company’s acquisition of Argo Management. Subject to certain limitations, Argo Holdings' governing documents require all individuals and entities owning an equity interest in Argo Holdings to fund upon request his/her/its pro rata share of any funding requirements of Argo Holdings up to an aggregate maximum amount equal to his/her/its total capital commitment (each request for funds being referred to as a "Capital Call"). During 2018 and 2017, the Company funded approximately $0.5 million and $0.3 million, respectively, in response to Capital Calls. During 2018 and 2017, Fitzgerald and Fitzgerald’s immediate family members funded their respective Capital Calls. Argo Holdings used the proceeds of the Capital Calls to make investments, cover general operating expenses and pay the management fee owed to Argo Management.
On February 11, 2014, the Company's subsidiary, 1347 Advisors, entered into a management services agreement with PIH which provides for certain services, including forecasting, analysis of capital structure and reinsurance programs, consultation in future restructuring or capital raising transactions, and consultation in corporate development initiatives, that 1347 Advisors will provide to PIH unless and until 1347 Advisors and PIH agree to terminate the services. On February 24, 2015, the Company announced that it had entered into a definitive agreement with PIH to terminate the management services agreement. Pursuant to the transaction, 1347 Advisors received the following consideration: $2.0 million in cash; $3.0 million of 8% preferred stock of PIH, mandatorily redeemable on February 24, 2020; a Performance Shares Grant Agreement with PIH, whereby 1347 Advisors will be entitled to receive 100,000 shares of PIH common stock if at any time the last sales price of PIH's common stock equals or exceeds $10.00 per share for any 20 trading days within any 30-trading day period; and warrants to purchase 1,500,000 shares of common stock of PIH with a strike price of $15.00, expiring on February 24, 2022. For the year ended December 31, 2018, the Company recognized $0.7 million of loss on change in fair value of equity investments in its consolidated statement of operations related to the change in fair value of the warrants to purchase 1,500,000 shares of common stock of PIH.
On March 26, 2014, the Company entered into a Performance Share Grant Agreement with PIH, whereby the Company will be entitled to receive up to an aggregate of 375,000 shares of PIH common stock upon achievement of certain milestones for PIH’s stock price. Pursuant to the terms of the Performance Share Grant Agreement, if at any time the last sales price of PIH’s common stock equals or exceeds: (i) $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock; (ii) $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock (in addition to the 125,000 shares of common stock earned pursuant to clause (i) herein); and (iii) $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, the Company will receive 125,000 shares of PIH common stock (in addition to the 250,000 shares of common stock earned pursuant to clauses (i) and (ii) herein).
On January 2, 2018, the Company entered into an agreement with PIH to cancel the $10.00 per share Performance Share Grant Agreement in exchange for cash consideration of $0.3 million and to sell the $3.0 million of 8% preferred stock of PIH, mandatorily redeemable on February 24, 2020, for $3.0 million plus accrued but unpaid dividends. On July 24, 2018, the Company entered into an agreement with PIH to cancel the $12.00 per share, $15.00 per share and $18.00 per share Performance Share Grant Agreement in exchange for cash consideration of $1.0 million. For the year ended December 31, 2018, the Company recorded gains, included in gain on change in fair value of equity investments in the consolidated statements of operations, of $1.3 million related to these transactions. No shares were received by the Company under either of the performance share grant agreements as of December 31, 2018.
Board of Directors since June 9, 2016. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. Fitzgerald has served as a member of the ICL Board of Directors since June 9, 2016. Fitzgerald joined the Company as an Executive Vice President in April 2016 following the Company’s acquisition of Argo. Fitzgerald has served as the Company’s Chief Executive Officer since September 5, 2018 and has served on the Company’s Board of Directors since April 21, 2016.
During 2018 and 2017, FGI was a shareholder known by the Company to be a beneficial owner of more than 5% of the Company’s outstanding common shares.
For the year ended December 31, 2018, the Company recorded losses, included in gain on change in fair value of equity investments in the consolidated statements of operations, of $0.1 million related to these transactions. For the year ended December 31, 2017, the Company recorded gain, included in net realized (losses) gain in the consolidated statements of operations, of $0.1 million related to this transaction.
Directors of IIS since its formation. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018.
The Company’s investments include investments in limited liability companies in which an officer of the Company is named as a Manager or is authorized to act on behalf of the Manager under the respective operating agreement.
AK Realty I LLC ("AKR") was formed on September 21, 2015 for the purpose of becoming a member of AKA Opportunity Investments I LLC, a limited liability company formed for the purpose of investing, directly or indirectly, in real estate projects. The members of AKR entered into an operating agreement under which the Company acquired a 33.3% membership interest in AKR. Management of AKR is vested in a two-member Executive Committee. The Company designates one of the two members of the Executive Committee. Decisions of the Executive Committee require the unanimous approval of the members of the Executive Committee. The Company designated Swets as its representative on the Executive Committee. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018.
Logistics Leasing ("Logistics") was formed on July 26, 2017 for the purpose of acquiring and leasing small vehicles. The members of Logistics entered into an operating agreement under which the Company acquired a 50% membership interest in Logistics. The Company designates one of the two managers of Logistics. Major Decisions, as defined in the operating agreement, require the approval of members holding at least 51% of the membership interest. The Company designated Swets as a manager. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018.
1347 Investors was formed on April 15, 2014 for the purpose of investing in and holding securities of 1347 Capital Corp., which subsequently merged with Limbach Holdings, Inc., a publicly traded company. The Company owned 26.7% of the membership units at December 31, 2018 and December 31, 2017. The Company's investment in 1347 Investors is accounted for at fair value and reported as limited liability investments, at fair value in the consolidated balance sheets, with any changes in fair value to be reported in (loss) gain on change in fair value of limited liability investment, at fair value in the consolidated statements of operations. The fair value of this investment is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. The most significant input to the model is the observed stock price of Limbach common stock.
ICL owned 47.6% of the membership units at December 31, 2018 and December 31, 2017. Ballantyne owned 40.6% and 32.3% of the common shares of ICL at December 31, 2018 and December 31, 2017, respectively.
The Notes have been amended three times since their issuance, generally to extend payments of principal while also requiring progress payments that were not part of the original Notes. No principal has been waived, and interest continues to accrue on unpaid principal. The remaining principal amount outstanding on the Notes was $0.7 million as of December 31, 2018. The Company has concluded there are no indications the Debtors were experiencing financial difficulties at the time of the amendments, and the Company expects to collect all amounts due. The Debtors are current with the amended terms of the Notes. As a result, the Company has concluded the Notes are not impaired.
On July 16, 2018, the Company entered into a definitive agreement to sell Mendota to Premier Holdings LLC. Steve Harrison, President of Mendota, is a minority investor in Premier Holdings LLC.
In April 2018, TRT LeaseCo, LLC ("TRT LeaseCo"), an indirect subsidiary of Kingsway, was named as a defendant in a lawsuit filed in the United States District Court for the Southern District of New York relating to CMC and its subsidiaries. Kingsway indirectly owns 81% of CMC. TRT LeaseCo (an indirect wholly owned subsidiary of CMC) entered into a Management Services Agreement (the "MSA") with DGI-BNSF Corp. ("DGI") (an affiliate of the entity that owns the remaining 19% of CMC) in July 2016 pursuant to which, among other things, DGI agreed to provide services to TRT LeaseCo in exchange for the fees specified in the MSA. The complaint filed by DGI alleges that DGI is owed certain fees under the MSA that have not been paid. If the case is decided against TRT LeaseCo, CMC and its subsidiaries (including TRT LeaseCo) would be unable to fulfill certain payment obligations to Kingsway under the transaction documents such that Kingsway may no longer be able to realize a material portion of the economic benefits originally anticipated to result from the CMC transaction, which could have a material adverse effect on Kingsway’s financial position, results of operations and cash flows. Kingsway disagrees with DGI’s allegations and is vigorously defending these claims; however, there can be no assurance that Kingsway will ultimately prevail. The Company’s potential exposure under these agreements is not reasonably determinable, and no liability has been recorded in the audited consolidated financial statements at December 31, 2018. No assurances can be given, however, that the Company will not be required to perform under these agreements in a manner that would have a material adverse effect on the Company’s financial position, results of operations and cash flow.
In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualty insurance companies that may not be adequately capitalized. In general, insurers reporting surplus as regards policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 are subject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2018, surplus as regards policyholders reported by Amigo exceeded the 200% threshold.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. 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, 2018, Amigo's RBC was 1,905%.
Amigo is 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 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 (loss) income.
At December 31, 2018, Amigo was restricted from making any dividend payments to the holding company without regulatory approval.