Insurance Underwriting leases facilities with an aggregate square footage of approximately 57,804 at four locations in four states. The latest expiration date of the existing leases is in January 2018.
Insurance Services leases facilities with an aggregate square footage of approximately 96,678 at six locations in four states. The latest expiration date of the existing leases is in May 2019.
Insurance Underwriting actively conducts business in 16 states. In 2013, production in the following states represented 85.7% of the Company's gross premiums written: Florida (22.2%), Illinois (14.7%), Texas (13.5%), Louisiana (11.1%), California (9.8%), Colorado (7.7%) and Nevada (6.7%).
Kingsway, like many insurance companies, analyzes performance based on underwriting ratios such as loss, expense and combined ratios. The loss ratio is derived by dividing the amount of net loss and loss adjustment expenses incurred by net premiums earned. The expense ratio is derived by dividing the sum of commissions and premium taxes and general and administrative expenses by net premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss.
A significant degree of judgment is required to determine amounts recorded in the consolidated financial statements for the provision for unpaid loss and loss adjustment expenses. The process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events. As such, the process is inherently complex and imprecise and estimates are constantly refined. The process of establishing the provision for unpaid loss and loss adjustment expenses relies on the judgment and opinions of a large number of individuals, including the opinions of the Company's actuaries. Further information regarding estimates used in determining our provision for unpaid loss and loss adjustment expenses is discussed in the “Unpaid Loss and Loss Adjustment Expenses” section of Part I, Item 1 of this Annual Report and Note 14, "Unpaid Loss and Loss Adjustment Expenses," to the Consolidated Financial Statements.
During 2012, the Company moved responsibility for evaluating the adequacy of our provision for unpaid loss and loss adjustment expenses under the terms of our policies and vehicle service agreements to an external process for most of our operating subsidiaries.
The provision is evaluated by the Company's actuaries with the results then shared with management, which is responsible for establishing the provision recorded in the consolidated balance sheets.
Our equity investments are recorded at fair value using quoted prices from active markets. For fixed maturities, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We do not have any investments in our portfolio which require us to use unobservable inputs. Any change in the estimated fair value of our investments could impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive (loss) income on our consolidated balance sheets.
The Company did not recognize any impairment related to its fixed maturities that was considered other-than-temporary for the years ended December 31, 2013 and 2012. As further discussed in the "Results of Continuing Operations" section below, the Company recorded a write-down for other-than-temporary impairment related to its investment in Atlas Financial Holdings, Inc. preferred stock of $1.8 million for the year ended December 31, 2013. The Company recorded write-downs for other-than-temporary impairment related to investment in investee and other investments of $2.2 million and $0.5 million, respectively, for the year ended December 31, 2012.
Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of a company's deferred income tax asset balances when significant negative evidence exists. Cumulative losses are the most compelling form of negative evidence considered by management in this determination. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of operations. As of December 31, 2013, the Company maintains a valuation allowance of $284.3 million, $279.0 million of which relates to its U.S. deferred income taxes. The largest component of the U.S. deferred income tax asset balance relates to tax loss carryforwards that have arisen as a result of the continued losses of the Company's U.S. operations. Uncertainty over the Company's ability to utilize these losses over the short-term has led the Company to record a valuation allowance.
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
Our Linked Return of Capital ("LROC") preferred units, senior unsecured debentures and subordinated debt are measured and reported at fair value. The fair value of the LROC preferred units is based on quoted market prices, and the fair value of the subordinated debt is estimated using an internal model based on significant market observable inputs. The fair value of the senior unsecured debentures, for which no active market exists, is derived from quoted market prices of similar instruments or other third-party evidence. Any change in the estimated fair value of our debt is reflected in the gain or loss on change in fair value of debt we record in the consolidated statements of operations and in the carrying value for our debt on our consolidated balance sheets.
The consideration for certain of the Company's acquisitions includes future payments to the former owners that are contingent upon the achievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and reported at fair value at the date of acquisition with subsequent changes reported in the consolidated statements of operations as contingent consideration expense. The fair value of contingent consideration liabilities is estimated using valuation models designed to estimate the probability of such contingent payments based on various assumptions. Estimated payments are discounted using present value techniques to arrive at estimated fair value at the balance sheet date. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the discount rates or changes in the assumed achievement or timing of any targets. These fair value measurements are based on significant inputs not observable in the market. Management must use judgment in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Changes in assumptions could have an impact on the payout of contingent consideration liabilities.
For the year ended December 31, 2013, we incurred a loss from continuing operations of $43.3 million ($3.07 per diluted share) compared to $53.3 million ($4.05 per diluted share) for the year ended December 31, 2012. The loss from continuing operations for the year ended December 31, 2013 is attributable to operating losses in Insurance Underwriting, corporate general expenses, interest expense, other-than-temporary impairment loss, impairment of asset held for sale and loss on the change in fair value of debt. The loss from continuing operations for the year ended December 31, 2012 is due to operating losses in Insurance Underwriting, corporate general expenses, interest expense, other-than-temporary impairment loss, equity in net loss of investee and loss on the change in fair value of debt.
For the year ended December 31, 2013, we incurred net loss of $36.1 million ($2.56 per diluted share) compared to $53.3 million ($4.05 per diluted share) for the year ended December 31, 2012.
For the year ended December 31, 2013, Insurance Underwriting gross premiums written were $144.7 million compared to $145.9 million for the year ended December 31, 2012, representing a 0.8% decrease. Net premiums written were $113.6 million for the year ended December 31, 2013 compared to $115.3 million for the year ended December 31, 2012, representing a 1.5% decrease. Net premiums earned were $109.6 million for the year ended December 31, 2013 compared to $114.9 million for the year ended December 31, 2012, representing a 4.6% decrease.
The Insurance Services service fee and commission income increased 39.4% to $49.5 million for the year ended December 31, 2013 compared with $35.5 million for the year ended December 31, 2012. This increase was primarily driven by the inclusion of IWS in 2013 following its acquisition during the fourth quarter of 2012. The Insurance Services operating income was $1.8 million for the year ended December 31, 2013 compared with $4.5 million for the year ended December 31, 2012. The decrease in operating income in 2013 is due to reduced premium volumes managed by ARS, increased loss and loss adjustment expenses at IWS and operating losses at Trinity, which was acquired during the fourth quarter of 2013.
Net investment income decreased to $2.4 million in 2013 compared to $3.2 million in 2012. The decrease is primarily a result of a decline in the Company's fixed maturities, which resulted from reduced volumes of business and acceleration of claim payments in Insurance Underwriting. Additionally, yields on fixed maturities remain at historically low levels such that reinvestment of maturing investments occurs at yields lower than the yields on the maturing investments.
On July 8, 2013, the Company announced that it had entered into a non-binding letter of intent with Atlas to sell its holdings of Atlas preferred stock for 90% of liquidation value, or $16.2 million. On August 1, 2013, the Company announced that the transaction
There were no write-downs related to fixed maturities for other-than-temporary impairments for the years ended December 31, 2013 and 2012.
Other income and expenses not allocated to segments was a net expense of $10.8 million in 2013 compared to $8.9 million in 2012. The increase in net expense is primarily due to $0.6 million more in foreign exchange losses and $2.1 million more of corporate general and administrative expenses, including professional fees, salaries and benefits, offset by $0.8 million more of other income recorded in 2013 than 2012.
The Company's intangible assets related to VSA in-force, acquired database, customer-related relationships and non-compete agreement have definite useful lives and are amortized over their estimated useful lives. Amortization of intangible assets was $2.2 million in 2013 compared to $1.0 million in 2012. The increase is due to the inclusion of a full year of amortization expense related to the IWS intangible assets acquired during the fourth quarter of 2012, as well as the inclusion of amortization expense related to the Trinity intangible asset acquired during the second quarter of 2013. See Note 4, "Acquisitions," to the Consolidated Financial Statements for further details.
The loss on change in fair value of debt amounted to $9.1 million in 2013 compared to $9.2 million in 2012. The 2013 loss is due to increase in the fair values of the Company's senior unsecured debentures, subordinated debt and LROC preferred units, whereas the 2012 loss is primarily due to an increase in the fair values of the Company's subordinated debt and LROC preferred units.
the use of the equity method of accounting for Atlas, the Company used a reporting lag of three months to report its proportionate share of Atlas' results. Accordingly, equity in net income of investee recorded during the first quarter of 2013 of $0.3 million relates to the Company's proportionate share of Atlas' results reported for the three months ended December 31, 2012. For the year ended December 31, 2012, the Company recorded a loss of $1.0 million from this investment.
Income tax benefit for 2013 was $0.1 million compared to expense of $3.0 million in 2012. The increase in income tax benefit for the year ended December 31, 2013 is primarily attributable to a decrease in the change in unrecognized tax benefits recorded in 2013 compared to 2012.
As of December 31 (in millions of dollars, except for percentages)
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company recorded write-downs for other-than-temporary impairment related to investment in investee and other investments of $2.2 million and $0.5 million, respectively, for the year ended December 31, 2012.
At each of December 31, 2013 and December 31, 2012, all unrealized losses on individual investments were considered temporary. Fixed maturities in unrealized loss positions continued to pay interest and were not subject to material changes in their respective debt ratings. We concluded that default risk did not exist at the time and, therefore, the declines in value were considered temporary. As we have the capacity to hold these investments to maturity, no impairment provision was considered necessary.
At December 31, 2013 and 2012, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our commercial automobile business were $6.7 million and $20.9 million, respectively. This decrease primarily reflects the actions begun by the Company during the fourth quarter of 2012 to place Amigo into voluntary run-off as well as the payment of claims
related to UCC's continuing voluntary run-off. Further information regarding Amigo and UCC is discussed within "Liquidity and Capital Resources" below.
For the year ended December 31, 2013 (in millions of dollars)
The favorable development in 2013 was primarily related to the decrease in property and casualty unpaid loss and loss adjustment expenses at UCC. In 2012, the majority of the unfavorable development is attributable to an increase in unpaid loss and loss adjustment expenses of $11.4 million at Amigo and Mendota as part of the Company's September 17, 2012 announcement that it was restructuring its Insurance Underwriting and Insurance Services segments. The remaining adverse development in 2012 is generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims.
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, disposal of discontinued operations, investment maturities and income and other returns received on investments. Cash provided from these sources is used primarily for loss and loss adjustment expense payments, debt servicing and other operating expenses. The timing and amount of payments for loss and loss adjustment expenses may differ materially from our provisions for unpaid loss and loss adjustment expenses, which may create increased liquidity requirements.
During 2013, the net cash used in financing activities as reported on the consolidated statements of cash flows was $0.4 million. This use of cash is attributed to the partial, early redemption of $12.0 million of par value and buy-back of $0.6 million of par value of senior unsecured debentures due February 1, 2014 as further discussed in Note 15, "Debt," to the Consolidated Financial Statements, offset by the net proceeds received from the Company's rights offering of $12.1 million as further discussed in Note 21, "Shareholders' Equity," to the Consolidated Financial Statements. On September 16, 2013 the Company completed its previously announced rights offering.
The senior unsecured debentures due February 1, 2014 issued by the Company contain negative covenants in the trust indenture, placing limitations and restrictions over certain actions without the prior written consent of the indenture trustee. Included in the negative covenants is the limitation on the incurrence of additional debt in the event that the total debt-to-total capital ratio or the senior debt-to-total capital ratio exceeds 50% or 35%, respectively. The total debt is calculated on a pro-forma basis taking into account the issuance of additional debt. The indenture also includes covenants limiting the issuance and sale of voting stock of restricted subsidiaries, the payment of dividends or any other payment in respect of capital stock of the Company, or the retirement of debt subordinate to the debentures covered by the trust indenture if, after giving effect to such payments as described in the trust indenture, the total debt-to-total capital ratio exceeds 50%. Following the Company's redemption of its remaining senior unsecured debentures due February 1, 2014, these negative covenants no longer apply.
Throughout 2013 and 2012, the Company has continued to experience losses. The reduction in equity as a result of these ongoing losses can detrimentally impact the Company's capital flexibility by triggering negative covenants in its trust indenture described above and/or limiting the dividend capacity of the operating subsidiaries. As of December 31, 2013, the Company's total debt-to-total capital and senior debt-to-total capital ratios were 65.8% and 27.5%, respectively. These ratios have been calculated based on the consolidated financial statements prepared in accordance with U.S. GAAP, under which the Company's shareholders' equity has materially improved primarily due to fair valuation of its debt.
Our reinsurance subsidiary, which is domiciled in Barbados, is required by the regulator in Barbados to maintain minimum capital levels. As of December 31, 2013, the capital maintained by Kingsway Reinsurance Corporation was in excess of the regulatory capital requirements in Barbados.
The Company had 90 days from the date of the notice to submit a business plan to the NYSE demonstrating its ability to achieve compliance with the listing standards within 18 months of receiving the notice. The Company submitted a business plan to the NYSE on July 17, 2013, intended to demonstrate its ability to achieve compliance with the listing standards within 18 months of receiving the notice. On October 8, 2013, the NYSE accepted the Company's business plan submission. During such 18-month period, Kingsway's common shares will continue to be listed and traded on the NYSE, subject to compliance with other NYSE continued listing standards; however, the consolidated tape now includes a “.BC” indicator, which will be removed at such time as the Company is deemed compliant with the NYSE's continued listing standards.
On January 29, 2004, KAI completed the sale of $100.0 million 7.50% senior notes due 2014. In March 2004, an additional $25.0 million of these senior notes were issued. Interest payments are to be made on February 1 and August 1 in each year. The notes are fully and unconditionally guaranteed by the Company. The notes are redeemable at KAI's option in whole at any time or in part from time to time on or after February 1, 2009 subject to the conditions stated in the trust indenture.
Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third-parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by KAI to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR"), plus spreads ranging from 3.85% to 4.20%, but until dates ranging from December 4, 2007 to January 8, 2009, the interest rates will not exceed 12.45% to 12.75%. The Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity. During the first quarter of 2011, the Company gave notice to its trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding indentures, which permit interest deferral. This action does not constitute a default under the Company's indentures or any of its other debt indentures. At December 31, 2013, deferred interest payable of $12.8 million is included in accrued expenses and other liabilities in the consolidated balance sheets.
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013 and 2012
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kingsway Financial Services Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements are prepared as of December 31, 2013 based on individual company financial statements at the same date. Accounting policies of subsidiaries have been aligned where necessary to ensure consistency with those of Kingsway. The consolidated financial statements include the following subsidiaries, all of which are owned, directly or indirectly: 1347 Advisors LLC ("1347 Advisors"); 1347 Capital LLC; 1347 Property Insurance Holdings, Inc. (formerly Maison Insurance Holdings, Inc.); Appco Finance Corporation; American Country Underwriting Agency Inc.; ARM Holdings, Inc.; Assigned Risk Solutions Ltd. ("ARS"); Boston General Agency, Inc.; Hamilton Risk Management Company ("Hamilton"); Insurance Management Services Inc.; IWS Acquisition Corporation ("IWS"); KAI Advantage Auto, Inc.; KFS Capital LLC ("KFS Capital"); Kingsway America II Inc.; Kingsway America Inc. ("KAI"); Kingsway America Agency Inc.; Kingsway Amigo Insurance Company ("Amigo"); Kingsway General Insurance Company; Kingsway LGIC Holdings, LLC; Kingsway Linked Return of Capital Trust ("KLROC Trust"); Kingsway Reinsurance Corporation; Maison Insurance Company ("Maison"); Maison Managers, Inc.; Market Solutions Insurance Agency LLC; Mattoni Insurance Brokerage, Inc.; Mendakota Insurance Company ("Mendakota"); Mendota Insurance Agency, Inc.; Mendota Insurance Company ("Mendota"); MIC Insurance Agency Inc.; Trinity Warranty Solutions LLC ("Trinity"); and Universal Casualty Company ("UCC").
The Company has noncontrolling interests attributable to its subsidiaries, IWS and KLROC Trust. A noncontrolling interest arises where the Company owns less than 100% of the voting rights and economic interests in a subsidiary and is initially recognized at the proportionate share of the identifiable net assets of the subsidiary at the acquisition date and is subsequently adjusted for the noncontrolling interest's share of the acquiree's net income (losses) and changes in capital. The effects of transactions with noncontrolling interests are recorded in shareholders' equity where there is no change of control.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment
expenses, valuation of fixed maturities and equity investments, valuation of deferred income taxes, valuation of intangible assets, goodwill recoverability, deferred acquisition costs, fair value assumptions for debt obligations and contingent consideration.
The unrealized foreign currency translation gains and losses arising from available-for-sale financial assets are recognized in other comprehensive (loss) income until realized, at which date they are reclassified to the consolidated statements of operations. Unrealized foreign currency translation gains and losses on certain interest bearing debt obligations carried at fair value are included in the consolidated statements of operations.
Dividends and interest income are included in net investment income. Investment income is recorded as it accrues. Income from limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities and is included in net investment income.
The investment in common stock of the Company's former investee, Atlas Financial Holdings, Inc. ("Atlas") was accounted for under the equity method of accounting and reported as investment in investee in the consolidated balance sheets at December 31, 2012. Investment in investee is accounted for using the equity method and is comprised of investments in entities 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. These investments are reported as investment in investee in the consolidated balance sheets, with the Company's share of income (loss) and other comprehensive loss of the investee reported in the corresponding line in the consolidated statements of operations and consolidated statements of comprehensive income (loss), respectively. Under the equity method of accounting, an investment in investee is initially recognized at cost and adjusted thereafter for the post-acquisition change in the Company's share of net assets of the investee.
The fair values of the Company's investments in fixed maturities and equity investments, LROC preferred units, senior unsecured debentures, subordinated debt and contingent consideration are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. The fair value of the Company's investment in investee was based on quoted market prices. Fair values for other investments approximate their unpaid principal balance. The carrying amounts reported in the consolidated balance sheets approximate fair values for cash, short-term investments and certain other assets and other liabilities because of their short-term nature.
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. Effective January 1, 2013, the Company adopted ASU 2012-02 and the adoption did not have an impact on the consolidated financial statements. There have been no triggering events that would suggest possible impairment or that it is more-likely-than-not that the fair values of indefinite-lived intangible assets are less than their carrying amounts.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. The ASU requires an entity to report, either on the face of the income statement or in the notes to the financial statements, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the income statement if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other required disclosures that provide additional detail about those amounts. Effective January 1, 2013, the Company adopted ASU 2013-02. Except for the new disclosure requirements, the adoption of the standard did not have an impact on the consolidated financial statements. The required disclosures are included in Note 22, "Accumulated Other Comprehensive Income."
This acquisition was accounted for as a business combination using the purchase method of accounting. The purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. During the fourth quarter of 2012, the Company began its fair value analysis on the assets acquired and liabilities assumed. In accordance with U.S. GAAP, fair value accounting effects may be adjusted up to one year from the acquisition date upon finalization of the valuation process. The Company completed its fair value analysis on the assets acquired and liabilities assumed during the second quarter of 2013. The Company recorded adjustments related to the acquisition during 2013, which resulted in an increase to goodwill of $1.1 million from the amount recorded at December 31, 2012.
After allocation of additional purchase price, goodwill of $9.0 million was recognized in addition to $12.4 million of separately identifiable intangible assets. Of this amount, $8.7 million of separately identifiable intangible assets related to this acquisition resulted from the valuations of acquired database, customer-related relationships, trade name and non-compete agreement. An additional $3.7 million of separately identifiable intangible assets resulted from the valuation of vehicle service agreements in-force ("VSA in-force"). Refer to Note 11, "Intangible Assets," for further disclosure on intangible assets related to this acquisition. The fair value analysis performed included $3.9 million related to present value of future contingent payments. The maximum the Company can pay in future contingent payments is $11.1 million, on an undiscounted basis. The contingent payments are payable annually beginning in 2014 through 2019 and are subject to the achievement of certain targets and may be adjusted in future periods based on actual performance achieved. As of December 31, 2013, the recorded value of the contingent earn-out agreement is $4.6 million, which is included in accrued expenses and other liabilities on the consolidated balance sheets.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition, as adjusted.
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's investments at December 31, 2013 and December 31, 2012 are summarized in the tables shown below:
The table below summarizes the Company's fixed maturities at December 31, 2013 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
During 2012, the Company recorded a write-down for other-than-temporary impairment related to its investment in investee. Refer to Note 7, "Investment in Investee," for further discussion.
The Company does not have any exposure to subprime mortgage-backed investments.
Limited liability investments include investments in limited liability companies and a limited partnership that primarily invest in income-producing real estate. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. As of December 31, 2013 and December 31, 2012, the carrying value of limited liability investments totaled $4.4 million and $2.3 million, respectively. At December 31, 2013, the Company has unfunded commitments totaling $1.8 million to fund limited liability investments.
Other investments include collateral loans and are reported at their unpaid principal balance. As of December 31, 2013 and December 31, 2012, the carrying value of other investments totaled $3.0 million and $2.0 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the years ended December 31, 2013 and 2012 were as follows:
Net investment income for the years ended December 31, 2013 and 2012, respectively, is comprised as follows:
At December 31, 2012, investment in investee included the Company's investment in the preferred and restricted voting common stock of Atlas. On February 12, 2013, the Company executed an underwriting agreement to sell 2,625,000 shares of Atlas common stock. The shares were being offered as part of Atlas' United States initial public offering at a price per share of $5.85. During the first quarter of 2013, the Company received net proceeds of $13.6 million and recognized a loss of $1.7 million, which is included in net realized gains on the consolidated statements of operations, resulting from commissions and other expenses incurred as part of the sale. As a result of this sale, the Company's approximate voting percentage in Atlas was reduced to 16.5%. As a result of this change in ownership and other qualitative factors, the Company determined that its investment in the common stock of Atlas no longer qualified for the equity method of accounting. Accordingly, the Company's investment in Atlas common stock is included in equity investments and reported at its fair value of $2.0 million in the consolidated balance sheets at December 31, 2013. The Company's share of its investee's equity adjustments for other comprehensive income of $0.7 million was offset against the carrying value of the Company's investment in Atlas common stock during the second quarter of 2013. Prior to discontinuing the use of the equity method of accounting for Atlas, the Company used a reporting lag of three months to report its proportionate share of Atlas' results.
The carrying value, estimated fair value and approximate voting and equity percentages for the Company's investment in the common stock of Atlas, which was accounted for under the equity method of accounting and reported as investment in investee in the Company's consolidated balance sheets at December 31, 2012, were as follows:
The fair value of the Company's investment in Atlas at December 31, 2012 in the table above is calculated based on the published closing price of Atlas at September 30, 2012 to be consistent with the three-month lag in reporting its carrying value under the equity method.
During the fourth quarter of 2012, the Company sold 2,142,454 shares of Atlas common stock. The Company received proceeds of $4.0 million and realized losses of $0.5 million from the sales.
For most of the non-standard automobile business, the liability is limited to the minimum statutory liability limits, which are typically not greater than $50,000 per occurrence, depending on the state. The Company's reinsurance includes excess of loss reinsurance to reduce its exposure to individual losses as well as losses related to catastrophic events which may simultaneously affect many of our policyholders. During 2012, the Company also purchased excess of loss reinsurance to protect against awards in excess of our policy limits. During 2013 and 2012, the Company purchased quota-share reinsurance to increase its capacity to underwrite additional insurance risks.
Ceded premiums, loss and loss adjustments expenses, and commissions as of and for the years ended December 31, 2013 and 2012 are summarized as follows:
The amounts of assumed premiums written were $19.6 million and $15.5 million for the years ended December 31, 2013 and 2012, respectively. The amounts of assumed premiums earned were $19.4 million and $13.4 million for the years ended December 31, 2013 and 2012, respectively.
Policy acquisition costs consist primarily of commissions, premium taxes, and underwriting and agency expenses incurred related to successful efforts to acquire new or renewal insurance contracts, net of ceding commission income, and vehicle service agreements. Acquisition costs deferred on both property and casualty insurance products and vehicle service agreements are amortized over the period in which the related revenues are earned.
Goodwill was $10.6 million and $8.4 million at December 31, 2013 and 2012. The Company's goodwill at December 31, 2013 and 2012 is attributable to the Insurance Services reportable segment.
Goodwill is assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable, by applying a fair value-based test. Any potential impairment is identified by comparing the fair value of a reporting unit to its carrying value. If the fair value of the reporting segment exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value of the reporting segment exceeds its fair value, a more detailed goodwill impairment assessment must be undertaken. A goodwill impairment charge is recognized to the extent that, at the reporting unit level, the carrying value of goodwill exceeds the implied fair value.
During 2013, the Company recorded $0.5 million of a separately identifiable intangible asset for acquired customer-related relationships as part of the acquisition of intangible assets and liabilities of Trinity Warranty Corp. Refer to Note 4, "Acquisitions," for further discussion related to the acquisition. The customer-related relationships intangible asset is being amortized over ten years based on the pattern in which the economic benefits of the intangible asset are expected to be consumed.
All intangible assets with indefinite useful lives are reviewed annually by the Company for impairment. No impairment charges were taken on intangible assets in 2013 or 2012.
The establishment of the provision for unpaid loss and loss adjustment expenses is based on known facts and interpretation of circumstances and is therefore a complex and dynamic process influenced by a variety of factors. These factors include the
Company's experience with similar cases and historical trends involving loss payment patterns, pending levels of unpaid loss and loss adjustment expenses, product mix or concentration, loss severity and loss frequency patterns.
Beginning in 2009, KFS Capital began purchasing LROC preferred units. On June 9, 2010, KFS Capital commenced the take-over bid (“the KLROC Offer”) to acquire up to 750,000 LROC preferred units at a price per unit of C$17.50 in cash. On July 9, 2010, KFS Capital increased the size and price of its previously announced KLROC Offer to 1,500,000 units at a price per unit of C$20.00 in cash. The KLROC Offer expired on July 23, 2010, and 1,525,150 units were tendered, of which 1,500,000 were purchased on a pro-rata basis. The tender was paid for using available cash.
Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third-parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by KAI to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR"), plus spreads ranging from 3.85% to 4.20%, but until dates ranging from December 4, 2007 to January 8, 2009, the interest rates will not exceed 12.45% to 12.75%. The Company has the right to call each of these securities at par value anytime after five years from their issuance until their maturity.
The Company maintains a valuation allowance for its gross deferred income tax assets of $284.3 million (U.S. operations - $279.0 million; Other - $5.3 million) and $265.6 million (U.S. operations - $262.4 million; Other - $3.2 million) at December 31, 2013 and December 31, 2012, respectively. The Company's businesses have generated substantial operating losses during the last several years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income. The Company's operations, however, remain challenged, and, as a result, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its December 31, 2013 and December 31, 2012 net deferred income tax assets. The Company carries a deferred income tax liability of $4.2 million and $3.1 million at December 31, 2013 and December 31, 2012, respectively, all of which relates to intangible assets with indefinite useful lives.
The U.S. operating loss carryforward amounts disclosed above contain consolidated and separate company operating loss carryforwards, the most significant of which is the KAI Tax Group operating loss carryforward of approximately $854.4 million. In addition, there are operating loss carryforwards relating to the operations in Barbados in the amount of $83.0 million, which losses will expire by 2018, and operating loss carry forwards relating to operations in Canada in the amount of $14.5 million, which losses will expire by 2033.
The federal income tax returns of the Company's U.S. operations for the years through 2009 are closed for Internal Revenue Service ("IRS") examination. The Company's U.S. operations 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 2008 are closed
Net loss per share is based on the weighted-average number of shares outstanding. Diluted weighted-average shares is calculated by adjusting basic weighted-average shares outstanding by all potentially dilutive stock options. Since the Company is reporting a net loss for the each of the years ended December 31, 2013 and 2012, all stock options outstanding were excluded from the calculation of both basic and diluted loss per share since their inclusion would have been anti-dilutive.
The exercise price of Replacement Options and New Stock Options (collectively, the "Stock Options") is equal to $4.50 provided that in no event shall the exercise price be less than the fair market value of the shares as of the date of grant. The Stock Options will be fully vested and exercisable as of the date such options are granted and are exercisable for a period of four years.
Additionally under the 2013 Plan, the Company will make grants of restricted common shares ("Restricted Stock") to certain officers of the Company equal to three times the aggregate number of common shares held and entitled to be purchased through the exercise of any warrants held by each such officer as of December 31, 2013. The Restricted Stock vests evenly over a ten-year period and is subject to the officer's continued employment through the vesting date. The aggregate number of common shares available for Restricted Stock awards is 1,972,345. No Restricted Stock awards were granted during the year ended December 31, 2013.
The intrinsic value of a stock option grant is the difference between the current market price for the Company's common shares and the exercise price of the option. The aggregate intrinsic values for the stock options outstanding at each of December 31, 2013 and 2012 were zero. The aggregate intrinsic values for stock options exercisable at each of December 31, 2013 and 2012 were zero.
The following tables summarize information about stock options outstanding as of December 31, 2013 and December 31, 2012.
The Company maintains a defined contribution plan in the United States for all of its qualified employees. Qualifying employees can choose to voluntarily contribute up to 60% of their annual earnings subject to an overall limitation of $17,500 and $17,000 in 2013 and 2012, respectively. The Company matches an amount equal to 50% of each participant's contribution, limited to contributions up to 5% of a participant's earnings.
As part of the restructuring, the Company will reduce staffing levels to be consistent with placing Amigo into run-off. The Company estimated that Insurance Underwriting would incur approximately $2.0 million in cash severance expenses due to reductions-in-force as part of the restructuring during the period beginning with the announcement through the end of 2013. From the time the restructuring was announced on September 17, 2012 through December 31, 2013, Insurance Underwriting has incurred severance expense of $2.1 million, $1.9 million of which has been paid as of December 31, 2013.
On July 3, 2012, the Company announced that the Board of Directors of the Company authorized the implementation of a share consolidation at a ratio of one post-consolidation share for every four pre-consolidation shares. The share consolidation, which was approved by the stockholders at the Company's Annual and Special Meeting held on May 31, 2012, was effective as of July 3, 2012 (the "Effective Date"). As a result of the consolidation, every four of the Company's common shares that were issued and outstanding on the Effective Date were automatically combined into one issued and outstanding common share, without any change in the par value of such shares. Any fractional shares resulting from the consolidation were rounded up to the nearest whole. The consolidation had the effect of reducing the number of common shares of the Company issued and outstanding from 52,595,828 shares pre-consolidation to 13,148,971 shares post-consolidation. The issued and outstanding shares reported in the consolidated balance sheets; the number of weighted-average shares outstanding included in the loss per share computations, as reported in the consolidated statements of operations; and the number of stock options outstanding have been restated for all periods presented to reflect the impact of the share consolidation.
On May 13, 2013, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to create an unlimited number of zero par value class A preferred shares. The Company's Board of Directors will have the ability to fix the designation, rights, privileges, restrictions and conditions attaching to the shares of each series of preferred shares. The preferred shares will have priority over the common shares. No Class A preferred shares were issued or outstanding at December 31, 2013.
There were no dividends declared during the years ended December 31, 2013 and 2012.
statement on Form S-1 that was previously filed with the Securities and Exchange Commission and became effective on July 24, 2013.
The following table summarizes information about warrants outstanding at December 31, 2013:
The table below details the change in the balance of each component of accumulated other comprehensive income, net of tax, for the years ended December 31, 2013 and 2012 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets. On the other hand, the consolidated statements of comprehensive loss present the components of other comprehensive (loss) income, net of tax, only for the years ended December 31, 2013 and 2012 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
Components of accumulated other comprehensive income were reclassified to the following lines of the consolidated statements of operations for the years ended December 31, 2013 and 2012:
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. On November 19, 2012, the OIR approved Amigo's plan to withdraw from the business of offering commercial lines insurance in Florida. On January 30, 2013, the OIR approved Amigo's plan to withdraw from the business of offering personal lines insurance in Florida. In April 2013, Kingsway filed a comprehensive run-off plan with the OIR, which outlines plans for Amigo's run-off. Kingsway continues to manage Amigo in a manner consistent with its filed run-off plan.
Insurance Services includes the following subsidiaries of the Company: ARS, IWS and Trinity (collectively, "Insurance Services"). During the first quarter of 2013, NEA, formerly included in Insurance Services, was merged into ARS.
ARS is a licensed property and casualty agent, full service managing general agent and third-party administrator focused primarily on the assigned risk market. ARS is licensed to administer business in 22 states but generates its revenues primarily by operating in the states of New York and New Jersey.
Revenue by reportable segment reconciled to consolidated revenues for the years ended December 31, 2013 and 2012 were:
The Company classifies its investments in fixed maturities and equity investments as available-for-sale and reports these investments at fair value. The Company's LROC preferred units, senior unsecured debentures, subordinated debt and contingent consideration liabilities are measured and reported at fair value.
The fair value of contingent consideration liabilities is estimated using internal models without relevant observable market data over fair value inputs such as probability weighting of payment outcomes.
Fixed maturities and short-term investments with an estimated fair value of $14.2 million and $15.0 million were on deposit with state and provincial regulatory authorities at December 31, 2013 and 2012, respectively. Also, from time to time, the Company pledges investments to third-parties to collateralize liabilities incurred under its policies of insurance. The amount of such pledged investments was $24.4 million and $22.3 million at December 31, 2013 and 2012, respectively. Collateral pledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company's standard risk management controls.
Statutory capital and surplus and statutory net loss for the Company's insurance subsidiaries are:
At December 31, 2013, the U.S. insurance subsidiaries of the Company were restricted from making any dividend payments without regulatory approval pursuant to the domiciliary state insurance regulations.
On February 3, 2014, the Company announced that it had closed on its previously announced private placement totaling $6.6 million. At closing, the Company received gross proceeds of $6.6 million, resulting from the sale and issuance of 262,876 units for a purchase price of $25.00 per unit. Each unit consists of one class A convertible preferred share, series 1 (the "Preferred Shares"), and 6.25 common share class C purchase warrants. Each Preferred Share is convertible into 6.25 common shares at a conversion price of $4.00 per common share any time at the option of the holder prior to April 1, 2021. The maximum number of common shares issuable upon conversion of the Preferred Shares is 1,642,975 common shares. Each warrant will entitle the subscriber to purchase one common share of Kingsway at a price of $5.00 per common share at any time after September 16, 2016 and prior to expiry on September 15, 2023.