Process for Establishing the Provision for Unpaid Loss and Loss Adjustment Expenses
We monitor the actual emergence of loss and loss adjustment expenses data and compare it to the expected emergence implied by our booked estimates. Differences in these are part of our considerations for whether it is appropriate to modify our assumptions for developing the estimated provision for unpaid loss and loss adjustment expenses.
Indefinite-lived intangible assets consist of a tenant relationship and trade names. Intangible assets with an indefinite life are assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Company has the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If facts and circumstances indicate that it is more likely than not that the intangible asset is impaired, a fair value-based impairment test would be required. Management must make estimates and assumptions in determining the fair value of indefinite-lived intangible assets that may affect any resulting impairment write-down. This includes assumptions regarding future cash flows and future revenues from the related intangible assets or their reporting units. Management then compares the fair value of the indefinite-lived intangible assets to their respective carrying amounts. If the carrying amount of an intangible asset exceeds the fair value of that intangible asset, an impairment is recorded. No impairment charges were recorded against intangible assets in 2018 or 2017. Additional information regarding our intangible assets is included in Note 13, "Intangible Assets," to the Consolidated Financial Statements.
A reconciliation of total segment operating income to net loss for the years ended December 31, 2018 and December 31, 2017 is presented in Table 1 below:
The Company recorded a $0.7 million gain for the year ended December 31, 2017 related to the termination of a financing lease, as further discussed in Note 18, "Finance Lease Obligation Liability," to the Consolidated Financial Statements.
Equity in net loss of investee was $2.5 million in 2018 compared to equity in net income of investee of $2.1 million in 2017. Equity in net (loss) income of investee represents the Company's investment in Itasca Capital Ltd. See Note 9, "Investment in Investee," to the Consolidated Financial Statements, for further discussion.
At December 31, 2018, the gross unrealized losses for fixed maturities amounted to $0.2 million, and there were no unrealized losses attributable to non-investment grade fixed maturities. At December 31, 2017, the gross unrealized losses for fixed maturities and equity investments amounted to $0.8 million, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each of December 31, 2018 and December 31, 2017, all unrealized losses on individual investments were considered temporary.
As a result of classifying Mendota as discontinued operations, the results of their operations are reported separately for all periods presented and their liabilities are presented as held for sale in the consolidated balance sheets at December 31, 2017. All unpaid loss and loss adjustment expenses information in the section below has been restated to exclude Mendota for all periods presented.
During 2018, the net cash provided by investing activities from continuing operations as reported on the consolidated statements of cash flows was $18.1 million. This source of cash was driven primarily by net proceeds from the sale of discontinued operations, in addition to proceeds from sales and maturities of fixed maturities, equity investments, limited liability investments, other investments and investee in excess of purchases of fixed maturities, equity investments and limited liability investments, at fair value.
The holding company’s liquidity of $1.9 million at December 31, 2018 represented approximately four months of regularly recurring operating expenses before any transaction-related expenses, any new holding company investments or any other extraordinary demands on the holding company. As of the filing date of the Company’s 2018 Annual Report, the holding company’s liquidity of $1.5 million represented approximately three months of regularly recurring operating expenses before any transaction-related expenses, any new holding company investments or any other extraordinary demands on the holding company. During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. As a result of this action, the projected cash obligations of the holding company over the next 12 months have been reduced by approximately $6.4 million, calculated by holding constant the most recent coupon for each of the six subsidiary trusts of the Company’s subordinated debt.
Our provision for unpaid loss and loss adjustment expenses does not have contractual payment dates. In Table 6 below, we have included a projection of when we expect our unpaid loss and loss adjustment expenses to be paid, based on historical payment patterns. The exact timing of the payment of unpaid loss and loss adjustment expenses cannot be predicted with certainty. We maintain a substantial amount in short-term investments to provide adequate cash flows for the projected payments in Table 6. The unpaid loss and loss adjustment expenses in Table 6 have not been reduced by amounts recoverable from reinsurers.
We have audited the accompanying consolidated balance sheet of Kingsway Financial Services Inc. and subsidiaries (the “Company”) as of December 31, 2017 and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the year then ended, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 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.
Under the 2013 Plan, the Company made grants of restricted common stock awards to certain officers of the Company on March 28, 2014 (the "2014 Restricted Stock Awards"). The 2014 Restricted Stock Awards shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officers' continued employment through the vesting date. The 2014 Restricted Stock Awards are amortized on a straight-line basis over the ten-year requisite service period. The grant-date fair value of the 2014 Restricted Stock Awards was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2014 Restricted Stock Awards at December 31, 2018 was $0.7 million.
The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the years ended December 31, 2018 and December 31, 2017:
Itasca Golf Investors, LLC ("IGI") was formed on April 8, 2014 for the general purpose of real estate investment. The members entered into an operating agreement under which the Company acquired a 42.9% membership interest in IGI. 1347 Capital LLC, a wholly owned subsidiary of the Company, was named the Manager of IGI in the operating agreement. Swets was authorized to act on behalf of the Manager. Swets also served as the Company’s Chief Executive Officer from July 1, 2010 until September 5, 2018 and served on the Company’s Board of Directors from September 16, 2013 through December 21, 2018. On September 5, 2018, the Company sold its investment in IGI to IGI Partners LLC for $1.5 million. Swets is a member of IGI Partners LLC. For the year ended December 31, 2018, the Company recorded loss, included in net realized (losses) gain in the consolidated statements of operations, of $0.4 million related to this transaction.
In May 2016, Aegis Security Insurance Company ("Aegis") filed a complaint for breach of contract and declaratory relief against the Company in the Eastern District of Pennsylvania alleging, among other things, that the Company breached a contractual obligation to indemnify Aegis for certain customs bond losses incurred by Aegis under the indemnity and hold harmless agreements provided by the Company to Aegis for certain customs bonds reinsured by Lincoln General Insurance Company ("Lincoln General") during the period of time that Lincoln General was a subsidiary of the Company. Lincoln General was placed into liquidation in November 2015 and Aegis subsequently invoked its rights to indemnity under the indemnity and hold harmless agreements. Effective January 20, 2020, Aegis and the Company entered into a Settlement Agreement with respect to such litigation pursuant to which the Company agreed to pay Aegis a one-time settlement amount of $0.9 million and to reimburse Aegis for 60% of future losses that Aegis may sustain in connection with such customs bonds, up to a maximum reimbursement amount of $4.8 million. The Company’s potential exposure under these agreements was not reasonably determinable at December 31, 2018, and no liability has been recorded in the audited consolidated financial statements at December 31, 2018.