Insurance Underwriting includes the following subsidiaries of the Company: Mendota Insurance Company ("Mendota"), Mendakota Insurance Company ("Mendakota"), Mendakota Casualty Company ("MCC"), Kingsway Amigo Insurance Company ("Amigo") and Kingsway Reinsurance Corporation. Throughout this 2017 Annual Report, the term "Insurance Underwriting" is used to refer to this segment.
Effective April 1, 2015, the Company closed on the sale of its wholly owned subsidiary, Assigned Risk Solutions Ltd. ("ARS"). As a result, ARS has been classified as discontinued operations and the results of their operations are reported separately for all periods presented. Prior to the transaction, ARS was included in the Extended Warranty segment. As a result of classifying ARS as a discontinued operation, all segmented information has been restated to exclude ARS from the Extended Warranty segment.
While net premiums earned is the related U.S. GAAP measure used in the consolidated statements of operations, gross premiums written is the component of net premiums earned that measures insurance business produced before the effect of ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. We use this measure as an overall gauge of gross business volume in Insurance Underwriting.
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 recorded a $19.0 million decrease to income tax expense in the consolidated statements of operations for the year ended December 31, 2017, $18.9 million of which related to a decrease in the Company’s net deferred income tax liability as of December 31, 2017 because of the reduction in the corporate income tax rate.
Loss from Continuing Operations, Net Income and Diluted Earnings (Loss) per Share
interest expense not allocated to segments, other income and expenses not allocated to segments, net and loss on deconsolidation of subsidiary, partially offset by net investment income and gain on change in fair value of debt.
Interest expense not allocated to segments for 2016 was $4.5 million compared to $5.3 million in 2015. The decrease is attributable to the repayment during June 2015 of the outstanding principal balance on the LROC preferred units due June 30, 2015.
The Company has been increasing its exposure to triple net lease investments. These can take the form of limited liability investments as well as the Company’s investment in CMC. See Note 4, "Acquisitions," to the Consolidated Financial Statements for further discussion regarding CMC.
With respect to CMC, the Company expects to record income each year based upon the rental income recognized under its existing triple net lease agreement on the Real Property less operating expenses, which are comprised principally of interest on the Mortgage and depreciation and amortization of certain of the assets acquired. Over the next three years, the Company generally expects to recognize in its consolidated statements of operations income of approximately $2.8 to $3.1 million per year related to its ownership of CMC. 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, remains likely to occur only upon the occurrence of one of the three events that would trigger payment of service fees. There can be no assurance as to the timing of the occurrence, or the resulting outcome, from one of these events. Refer to the "Liquidity and Capital Resources" section below for further discussion.
On July 21, 2016, Limbach Holdings LLC announced the closing of its previously announced merger with 1347 Capital Corp. and was renamed Limbach Holdings, Inc. ("Limbach"). As a result of this transaction, the Company's ownership percentage in 1347 Investors was reduced from 61.0% to 26.7%, leading the Company to record a $5.6 million gain during the third quarter of 2016 related to the deconsolidation of 1347 Investors. This gain resulted from removing the carrying value of the noncontrolling interest in 1347 Investors and the carrying value of the consolidated net assets of 1347 Investors, and recording the fair value at the time of the transaction of the Company's 26.7% retained investment in 1347 Investors. At the time of the transaction, the noncontrolling interest representing 39.0% of 1347 Investors had been carried by the Company at $1.5 million.
The net movements in prior years' provisions for property and casualty loss and loss adjustment expenses, net of reinsurance, was an increase of $20.7 million, $8.1 million and $0.6 million, respectively, for the years ended December 31, 2017, 2016 and 2015. Table 8 identifies the relative contribution of the increases (decreases) in the provisions for property and casualty loss and loss adjustment expenses attributable to the respective lines of business and accident years.
The unfavorable development in 2017 was primarily related to the increase in property and casualty loss and loss adjustment expenses at Mendota. The Company experienced an accelerated recognition and payment of claim exposures during 2017 related to accident years 2016 and prior as a result of two primary factors. First, the non-standard automobile industry experienced an increase in claim severities related to material damage and third-party injury claims. Second, the Company experienced significant disruptions within its claim staff during 2016, resulting in a build-up of its claim inventory. Mendota installed a new claim management team during the fourth quarter of 2016. This new claim management team overhauled the claim department staff and claim processes throughout 2017 and began the task of reducing the pending inventory of open claims; however, the age of the outstanding claims combined with the deteriorating industry trends led to a significant increase in claim payments beyond what had been previously reserved for accident years 2016 and prior. The unfavorable development in 2016 was primarily related to the increase in property and casualty loss and loss adjustment expenses at Mendota and MCC, offset by a decrease in property and casualty loss and loss adjustment expenses due to the continuing voluntary run-off of Amigo. Refer to the "Results of Continuing Operations, Insurance Underwriting" section above for further discussion. The unfavorable development in 2015 was primarily related to the increase in property and casualty loss and loss adjustment expenses at Mendota, offset by a decrease in property and casualty loss and loss adjustment expenses due to the continuing voluntary run-offs of Amigo and MCC. Original estimates are increased or decreased as additional information becomes known regarding individual claims.
Receipt of dividends from the Insurance Underwriting subsidiaries is not generally considered a source of liquidity for the holding company. The insurance subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. At December 31, 2017, the U.S. insurance subsidiaries of the Company were restricted from making any dividend payments to the holding company without regulatory approval pursuant to the domiciliary state insurance regulations.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company recorded write downs of $0.3 million for other-than-temporary impairment related to equity investments for the year ended December 31, 2017, $0.1 million and $0.1 million for other-than-temporary impairment related to equity investments and
The carrying value, estimated fair value and approximate equity percentage for the Company's investment in investee at December 31, 2017 and December 31, 2016 were as follows:
The Company carries net deferred income tax liabilities of $30.3 million at December 31, 2017, $8.0 million of which relates to deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KAI Tax Group's consolidated U.S. net operating loss carryforwards, $22.4 million of which relates to deferred income tax liabilities related to land and indefinite life intangible assets, and $0.1 million of which relates to deferred income tax assets relating to AMT credits. The Company carries net deferred income tax liabilities of $48.7 million at December 31, 2016, $13.4 million of which relates to deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KAI Tax Group's consolidated U.S. net operating loss carryfowards and $35.3 million of which relates to deferred income tax liabilities related to land and indefinite life intangible assets. The Company considered a tax planning strategy in arriving at its December 31, 2017 and December 31, 2016 net deferred income tax liabilities.