|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
|
Consolidated Statements of Comprehensive Loss
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,416)
|
|
|
$
|
(4,313)
|
|
|
Other comprehensive income (loss), net of taxes(1):
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale investments:
|
|
|
|
|
|
Unrealized gains arising during the period
|
|
104
|
|
|
259
|
|
|
Reclassification adjustment for amounts included in net loss
|
|
64
|
|
|
(28)
|
|
|
|
|
|
|
|
|
Change in fair value of debt attributable to instrument-specific credit risk
|
|
2,555
|
|
|
(5,685)
|
|
|
Equity in other comprehensive income of limited liability investment
|
|
—
|
|
|
45
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
2,723
|
|
|
(5,409)
|
|
|
Comprehensive loss
|
|
$
|
(2,693)
|
|
|
$
|
(9,722)
|
|
|
Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries
|
|
1,320
|
|
|
1,585
|
|
|
Comprehensive loss attributable to common shareholders
|
|
$
|
(4,013)
|
|
|
$
|
(11,307)
|
|
|
(1) Net of income tax benefit of $0 and $0 in 2020 and 2019, respectively
|
|
|
See accompanying notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
|
Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Treasury Stock
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Shareholders' Equity Attributable to Common Shareholders
|
|
Noncontrolling Interests in Consolidated Subsidiaries
|
|
Total Shareholders' Equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
21,787,728
|
|
|
$
|
—
|
|
|
$
|
353,890
|
|
|
$
|
—
|
|
|
$
|
(382,196)
|
|
|
$
|
40,768
|
|
|
12,462
|
|
|
$
|
11,796
|
|
|
24,258
|
|
|
Vesting of restricted stock awards, net of share settlements for tax withholdings
|
|
79,231
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,886)
|
|
|
—
|
|
|
(5,886)
|
|
|
1,573
|
|
|
(4,313)
|
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
(1,019)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,019)
|
|
|
—
|
|
|
(1,019)
|
|
|
Deconsolidation of noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(301)
|
|
|
(301)
|
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(492)
|
|
|
—
|
|
|
|
|
(492)
|
|
|
—
|
|
|
(492)
|
|
|
Other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,421)
|
|
|
(5,421)
|
|
|
12
|
|
|
(5,409)
|
|
|
Stock-based compensation, net of forfeitures
|
|
—
|
|
|
—
|
|
|
1,230
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,230
|
|
|
—
|
|
|
1,230
|
|
|
Balance, December 31, 2019
|
|
21,866,959
|
|
|
$
|
—
|
|
|
$
|
354,101
|
|
|
$
|
(492)
|
|
|
$
|
(388,082)
|
|
|
$
|
35,347
|
|
|
$
|
874
|
|
|
$
|
13,080
|
|
|
$
|
13,954
|
|
|
Vesting of restricted stock awards, net of share settlements for tax withholdings
|
|
94,110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Conversion of redeemable Class A preferred stock to common stock
|
|
250,000
|
|
|
—
|
|
|
1,381
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,381
|
|
|
—
|
|
|
1,381
|
|
|
Net (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,725)
|
|
|
—
|
|
|
(6,725)
|
|
|
1,309
|
|
|
(5,416)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
(1,066)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,066)
|
|
|
—
|
|
|
(1,066)
|
|
|
Distributions to noncontrolling interest holders
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(243)
|
|
|
(243)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,712
|
|
|
2,712
|
|
|
11
|
|
|
2,723
|
|
|
Stock-based compensation, net of forfeitures
|
|
—
|
|
|
—
|
|
|
826
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
826
|
|
|
—
|
|
|
826
|
|
|
Balance, December 31, 2020
|
|
22,211,069
|
|
|
$
|
—
|
|
|
$
|
355,242
|
|
|
$
|
(492)
|
|
|
$
|
(394,807)
|
|
|
$
|
38,059
|
|
|
$
|
(1,998)
|
|
|
$
|
14,157
|
|
|
$
|
12,159
|
|
See accompanying notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
|
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Cash provided by (used in):
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(5,416)
|
|
|
$
|
(4,313)
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on disposal of discontinued operations, net of taxes
|
|
(6)
|
|
|
1,544
|
|
|
Equity in net income in investee
|
|
—
|
|
|
(169)
|
|
|
|
|
|
|
|
|
Equity in net income of limited liability investments
|
|
(30)
|
|
|
(36)
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
6,728
|
|
|
6,917
|
|
|
|
|
|
|
|
|
Stock based compensation expense, net of forfeitures
|
|
826
|
|
|
1,230
|
|
|
Net realized gains
|
|
(580)
|
|
|
(796)
|
|
|
Gain on change in fair value of equity investments
|
|
(1,267)
|
|
|
(561)
|
|
|
Gain on change in fair value of limited liability investments, at fair value
|
|
(4,046)
|
|
|
(4,475)
|
|
|
Net change in unrealized loss on private company investments
|
|
744
|
|
|
324
|
|
|
Gain on change in fair value of debt
|
|
(1,173)
|
|
|
(1,052)
|
|
|
Deferred income taxes, adjusted for PWI and Geminus liabilities assumed
|
|
(1,001)
|
|
|
(785)
|
|
|
Other-than-temporary impairment loss
|
|
117
|
|
|
75
|
|
|
|
|
|
|
|
|
Amortization of fixed maturities premiums and discounts
|
|
140
|
|
|
8
|
|
|
|
|
|
|
|
|
Amortization of note payable premium
|
|
(888)
|
|
|
(915)
|
|
|
Loss on extinguishment of debt, net
|
|
468
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Service fee receivable, net, adjusted for PWI and Geminus assets acquired
|
|
931
|
|
|
547
|
|
|
Other receivables, net, adjusted for PWI and Geminus assets acquired
|
|
438
|
|
|
(4,478)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs, net
|
|
(231)
|
|
|
(1,700)
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
|
(325)
|
|
|
(299)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred service fees, adjusted for PWI and Geminus liabilities assumed
|
|
(2,333)
|
|
|
(1,442)
|
|
|
Other, net, adjusted for PWI and Geminus assets acquired and liabilities assumed
|
|
8,576
|
|
|
9,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
1,672
|
|
|
(759)
|
|
|
Investing activities:
|
|
|
|
|
|
Proceeds from sales and maturities of fixed maturities
|
|
14,168
|
|
|
12,742
|
|
|
Proceeds from sales of equity investments
|
|
3,249
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturities
|
|
(12,560)
|
|
|
(18,075)
|
|
|
|
|
|
|
|
|
Net proceeds from limited liability investments
|
|
179
|
|
|
355
|
|
|
Net proceeds from (purchases of) limited liability investments, at fair value
|
|
787
|
|
|
(118)
|
|
|
Net proceeds from investments in private companies
|
|
719
|
|
|
824
|
|
|
Net proceeds from other investments
|
|
390
|
|
|
1,121
|
|
|
Net (purchases of) proceeds from short-term investments
|
|
(4)
|
|
|
49
|
|
|
Proceeds from sale of investee
|
|
—
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
(2,706)
|
|
|
(4,902)
|
|
|
Net disposals of property and equipment, adjusted for PWI and Geminus assets acquired
|
|
(213)
|
|
|
(212)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
4,009
|
|
|
(6,466)
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from noncontolling interest holders
|
|
(243)
|
|
|
—
|
|
|
Taxes paid related to net share settlements of restricted stock awards
|
|
(83)
|
|
|
(89)
|
|
|
Principal proceeds from bank loans, net of debt issuance costs of $403 and $981 in 2020 and 2019, respectively
|
|
25,297
|
|
|
9,019
|
|
|
Principal payments on bank loans
|
|
(10,062)
|
|
|
(3,855)
|
|
|
Principal proceeds from notes payable
|
|
2,858
|
|
|
—
|
|
|
Principal payments on notes payable
|
|
(4,164)
|
|
|
(3,767)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
13,603
|
|
|
1,308
|
|
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
|
19,284
|
|
|
(5,917)
|
|
|
Cash and cash equivalents and restricted cash at beginning of period
|
|
25,661
|
|
|
31,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash at end of period
|
|
$
|
44,945
|
|
|
$
|
25,661
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Supplemental disclosures of cash flows information:
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
|
$
|
7,816
|
|
|
$
|
8,481
|
|
|
Income taxes
|
|
$
|
81
|
|
|
$
|
138
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Treasury stock acquired as partial consideration for the sale of ICL common stock
|
|
$
|
—
|
|
|
$
|
(492)
|
|
|
Conversion of redeemable Class A preferred stock to common stock
|
|
$
|
250
|
|
|
$
|
—
|
|
|
Equity investments in Limbach received in connection with the liquidation of 1347 Investors
|
|
$
|
—
|
|
|
$
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends on Class A preferred stock issued
|
|
$
|
343
|
|
|
$
|
246
|
|
See accompanying notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
NOTE 1 BUSINESS
Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Effective December 31, 2018, the Company changed its jurisdiction of incorporation from the province of Ontario, Canada, to the State of Delaware. Kingsway is a 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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)Principles of consolidation:
The accompanying information in the 2020 Annual Report has been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
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 a variable interest entity ("VIE") under the Variable Interest Model prescribed by the Financial Accounting Standards Board ("FASB").
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 or lower threshold of partners or members with equity at risk are able to exercise substantive kick-out rights through voting interest over the general partner(s) or managing member(s) or (2) limited partners with equity at risk are able to exercise substantive participating rights over the general partner(s) or managing member(s).
If the characteristics of a VIE are met, the Company evaluates whether it meets the primary beneficiary criteria. The primary beneficiary is considered to be the entity holding a variable interest that has the power to direct activities that most significantly impact the economic performance of the VIE; the obligation to absorb losses of the VIE; or the right to receive benefits from the VIE that could potentially be significant to the VIE. In instances where the Company is considered to be the primary beneficiary, the Company consolidates the VIE. When the Company is not considered to be the primary beneficiary of the VIE, the VIE is not consolidated and the Company uses the equity method to account for the investment. Under this 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.
Subsidiaries
The Company's consolidated financial statements include the assets, liabilities, shareholders' equity, revenues, expenses and cash flows of the holding company and its subsidiaries and have been prepared in accordance with 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
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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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, 2020 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 Company's subsidiaries Argo Holdings Fund I, LLC ("Argo Holdings"), Flower Portfolio 001, LLC ("Flower") and Net Lease Investment Grade Portfolio LLC ("Net Lease") meet the definition of an investment company and follow the accounting and reporting guidance in Financial Accounting Standards Codification Topic 946, Financial Services-Investment Companies.
Noncontrolling interests
The Company has noncontrolling interests attributable to certain of its subsidiaries. A noncontrolling interest arises where the Company owns less than 100% of the voting rights and economic interests in a subsidiary. A noncontrolling interest is initially recognized at the proportionate share of the identifiable net assets of the subsidiary at the acquisition date and is subsequently adjusted for the noncontrolling interest's share of the acquiree's net income (losses) and changes in capital. The effects of transactions with noncontrolling interests are recorded in shareholders' equity where there is no change of control.
(b)Use of estimates:
The preparation of consolidated financial statements in accordance 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, but are not limited to, 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; fair value assumptions for stock-based compensation liabilities; and revenue recognition.
(c)Foreign currency translation:
Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated to U.S. dollars at period-end exchange rates, while revenue and expenses are translated at average monthly rates and shareholders' equity is translated at the rates in effect at dates of capital transactions. The net unrealized gains or losses which result from the translation of non-U.S. subsidiaries financial statements are recognized in accumulated other comprehensive income. Such currency translation gains or losses are recognized in the consolidated statements of operations upon the sale of a foreign subsidiary. Foreign currency translation adjustments are included in shareholders' equity under the caption accumulated other comprehensive income. Foreign currency gains and losses resulting from transactions denominated in currencies other than the entity's functional currency are reflected in non-operating other (expense) revenue in the consolidated statements of operations.
(d)Business combinations:
The acquisition method of accounting is used to account for acquisitions of subsidiaries or other businesses. The results of acquired subsidiaries or other businesses are included in the consolidated statements of operations from the date of acquisition. The cost of an acquisition is measured as the fair value of the assets received, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any noncontrolling interest. The excess of the cost of an acquisition over the fair value of the Company's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statements of operations. Noncontrolling interests in the net assets of consolidated entities are reported separately in shareholders' equity and initially measured at fair value.
(e)Investments:
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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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, net of tax, until sold or until an other-than-temporary impairment is recognized, at which point cumulative unrealized gains or losses are reclassified to the consolidated statements of operations.
Equity investments include common stocks and warrants and are reported at fair value. Changes in fair value of equity investments are recognized in net loss.
Limited liability investments include investments in limited liability companies and limited partnerships in which the Company's interests are not deemed minor and, therefore, are accounted for under the equity method of accounting. The most recently available financial statements are used in applying the equity method. The difference between the end of the reporting period of the limited liability entities and that of the Company is no more than three months. Income or loss 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.
Limited liability investments, at fair value are accounted for at fair value with changes in fair value included in gain on change in fair value of limited liability investments, at fair value. The difference between the end of the reporting period of the limited liability investments, at fair value and that of the Company is no more than three months.
Investments in private companies consist of convertible preferred stocks and notes in privately owned companies and investments in limited liability companies in which the Company’s interests are deemed minor. These investments do not have readily determinable fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments. Changes in carrying value are included in net change in unrealized loss on private company investments.
Real estate investments are reported at fair value.
Other investments include collateral loans and are reported at their unpaid principal balance, which approximates 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.
Realized gains and losses on sales, determined on a first-in first-out basis, are included in net realized gains.
Dividends and interest income are included in net investment income. Investment income is recorded as it accrues.
The Company accounts for all financial instruments using trade date accounting.
The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment. Impairment is charged to the consolidated statements of operations if the fair value of an instrument falls below its cost/amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the Company's ability and intent to hold investments for a period of time sufficient to allow for any anticipated recovery.
(f)Cash and cash equivalents:
Cash and cash equivalents include cash and investments with original maturities of no more than three months when purchased that are readily convertible into cash.
(g)Restricted cash:
Restricted cash represents certain cash and cash equivalent balances restricted as to withdrawal or use. The Company's restricted cash is comprised primarily of cash held for the payment of vehicle service agreement claims under the terms of certain contractual agreements, funds held in escrow, statutory deposits and amounts pledged to third-parties as deposits or to collateralize liabilities.
(h)Service fee receivable:
Service fee receivable includes balances due and uncollected from customers. Service fee receivable is reported net of an estimated allowance for doubtful accounts. The allowance for doubtful accounts is determined based on periodic evaluations of aged receivables, historical business data, management’s experience and current economic conditions.
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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(i)Deferred acquisition costs, net:
The Company defers commissions and agency expenses that are directly related to successful efforts to acquire new or existing vehicle service agreements to the extent they are considered recoverable. Costs deferred on vehicle service agreements are amortized as the related revenues are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred acquisition costs.
(j)Property and equipment:
Property and equipment are reported in the consolidated financial statements at cost. Depreciation of property and equipment has been provided using the straight-line method over the estimated useful lives of such assets. Repairs and maintenance are recognized in operations during the period incurred. Land is not depreciated. The Company estimates useful life to be forty years for buildings; five to fifty years for site improvements; three to ten years for leasehold improvements; four to ten years for furniture and equipment; and three years for computer hardware.
(k)Goodwill and intangible assets:
When the Company acquires a subsidiary or other business where it exerts significant influence, the fair value of the net tangible and intangible assets acquired is determined and compared to the amount paid for the subsidiary or business acquired. Any excess of the amount paid over the fair value of those net assets is considered to be goodwill.
Goodwill is tested for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable, to ensure that its fair value is greater than or equal to the carrying value. Any excess of carrying value over fair value is charged to the consolidated statements of operations in the period in which the impairment is determined.
When the Company acquires a subsidiary or other business where it exerts significant influence or acquires certain assets, intangible assets may be acquired, which are recorded at their fair value at the time of the acquisition. An intangible asset with a definite useful life is amortized in the consolidated statements of operations over its estimated useful life. The Company writes down the value of an intangible asset with a definite useful life when the undiscounted cash flows are not expected to allow for full recovery of the carrying value.
Intangible assets with indefinite useful lives are not subject to amortization and are tested for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable, to ensure that fair values are greater than or equal to carrying values. Any excess of carrying value over fair value is charged to the consolidated statements of operations in the period in which the impairment is determined.
(l)Unpaid loss and loss adjustment expenses:
Unpaid loss and loss adjustment expenses represent the estimated liabilities for reported loss events, incurred but not yet reported loss events and the related estimated loss adjustment expenses, including investigation. Unpaid loss and loss adjustment expenses are determined using case-basis evaluations and statistical analyses, including industry loss data, and represent estimates of the ultimate cost of all claims incurred through the balance sheet date. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid loss and loss adjustment expenses is adequate. The estimates are continually reviewed and adjusted as necessary, and such adjustments are included in current operations and accounted for as changes in estimates.
(m)Debt:
Bank loans and notes payable are reported in the consolidated balance sheets at par value adjusted for unamortized discount or premium and unamortized issuance costs. Discounts, premiums, and costs directly related to the issuance of debt are capitalized and amortized through the maturity date of the debt using the effective interest rate method and are recorded in interest expense not allocated to segments in the consolidated statements of operations. Gains and losses on the extinguishment of debt are recorded in loss on extinguishment of debt, net.
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. 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).
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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(n)Income taxes:
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and (ii) loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. The Company accounts for uncertain tax positions in accordance with the income tax accounting guidance. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax benefit.
(o)Leases:
Effective January 1, 2019 the Company records a right of use asset and lease liability for all leases in which the estimated term exceeds twelve months. The Company treats contracts as a lease when the contract: (1) conveys the right to use a physically distinct property or equipment asset for a period of time in exchange for consideration, (2) the Company directs the use of the asset and (3) the Company obtains substantially all the economic benefits of the asset. Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the Company’s leases are office leases, the Company is unable to determine an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments for those leases. The Company includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that such options will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company determines lease classification at commencement date. Leases not classified as sales-type (lessor) or financing leases (lessor and lessee) are classified as operating leases. The primary accounting criteria the Company uses that results in operating lease classification are: (a) the lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term, (b) the lease does not grant the lessee a purchase option that the lessee is reasonably certain to exercise, (c) using a seventy-five percent or more threshold in addition to other qualitative factors, the lease term is not for a major part of the remaining economic life of the underlying asset, (d) using a ninety percent or more threshold in addition to other qualitative factors, the present value of the sum of the lease payments and residual value guarantee from the lessee, if any, does not equal or substantially exceed the fair value of the underlying asset.
As an accounting policy, the Company has elected not to apply the recognition requirements in ASC 842 to short-term leases (generally those with terms of twelve months or less). Instead, the Company recognizes the lease payments as expense on a straight-line basis over the lease term and any variable lease payments in the period in which the obligation for those payments is incurred.
Rental income from operating leases in which the Company is the lessor 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 recognized in excess of amounts contractually due and collected pursuant to the underlying lease is recorded in other receivables in the consolidated balance sheets.
Rental expense for operating leases is recognized on a straight-line basis over the lease term, net of any applicable lease incentive amortization. Below market lease liabilities recorded in connection with the acquisition method of accounting are amortized on a straight-line basis over the remaining term of the lease, as determined at the acquisition date, and are included in accrued expenses and other liabilities in the consolidated balance sheets. Amortization of below market lease liabilities is included as an adjustment to rental revenue in the consolidated statements of operations.
(p)Revenue recognition:
Service fee and commission revenue and deferred service fees
Service fee and commission revenue represents vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warranty contract or commission product sale, or on terms subject to the Company’s customary credit reviews.
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 earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied. Vehicle service agreement fees are initially recorded as deferred service fees. 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 if the deferred service fees balance is less than expected future claims costs.
In certain jurisdictions the Company is required to refund to a customer a pro-rata share of the vehicle service agreement fees if a customer cancels the agreement prior to the end of the term. Depending on the jurisdiction, the Company may be entitled to deduct from the refund a cancellation fee and/or amounts for claims incurred prior to cancellation. While refunds vary depending on the term and type of product offered, historically refunds have averaged 9% to 13% of the original amount of the vehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included in accrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration current observable refund trends in estimating the expected amount of future customer refunds to be paid at each reporting period.
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 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. The amount of revenue the Company recognizes is based the costs to provide services during the GAP contract period, including an appropriate estimate of profit margin.
Maintenance support service fees include the service fees collected to administer equipment breakdown and maintenance support services and are earned as services are rendered.
Warranty product commissions include the commissions from the sale of warranty contracts for certain new and used heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration equipment. The Company acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. The Company does not guaranty the performance underlying the warranty contracts it sells. Warranty product commissions are earned at the time of the warranty product sales.
Homebuilder warranty service fees include fees collected from the sale of warranties issued by new homebuilders. The Company 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.
Standalone selling prices are not directly observable in the contract for each of the separate home warranty performance obligations. As a result, the Company has applied the expected cost plus a margin approach to develop models to estimate the standalone selling price for each of its performance obligations in order to allocate the transaction price to the two separate performance obligations identified.
For the model related to the warranty administrative services performance obligation, the Company makes judgments about which of its actual costs are associated with enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product. For the model related to the other warranty services performance obligation, the Company makes judgments about which of its actual costs are associated with activities, such as answering builder or homeowner questions regarding the home warranty and dispute resolution services, which are performed over the life of the warranty coverage period. The relative percentage of expected costs plus a margin associated with the warranty administrative services performance obligation is applied to the transaction price to determine the estimated standalone selling price of the warranty administrative services performance obligation, which the Company recognizes as earned at the time the
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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home is enrolled and the warranty product is delivered. The relative percentage of expected costs plus a margin associated with the other warranty services performance obligation is applied to the transaction price to determine the estimated standalone selling price of the other warranty services performance obligation, which the Company recognizes as earned as services are performed over the warranty coverage period.
For the other warranty services performance obligation, the Company 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. The Company 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 the Company 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.
Homebuilder warranty commissions include commissions from the sale of warranty contracts for those builders who have requested and receive insurance backing of their warranty obligations. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions are earned on the certification date, which is typically the date of the closing of the sale of the home to the buyer. The Company also earns fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which are earned when the claims are closed.
(q)Stock-based compensation:
The Company uses the fair-value method of accounting for stock-based compensation awards granted to employees. Expense is recognized on a straight-line basis over the requisite service period during which awards are expected to vest, with a corresponding increase to either additional paid-in capital for equity-classified awards or to a liability for liability-classified awards. Liability-classified awards are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets. For awards with a graded vesting schedule, expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. For awards subject to a performance condition, expense is recognized when the performance condition has been satisfied or is probable of being satisfied. Forfeitures are recognized in the period that the award is forfeited.
(r)Fair value of financial instruments:
The fair values of the Company's investments in fixed maturities and equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, warrant liability and stock-based compensation liabilities are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal balance. The carrying amounts reported in the consolidated balance sheets approximate fair values for cash and cash equivalents, restricted cash, short-term investments and certain other assets and other liabilities because of their short-term nature.
(s)Holding company liquidity:
The Company's Extended Warranty subsidiaries fund their obligations primarily through service fee and commission revenue. The Company's Leased Real Estate subsidiary funds its obligations through rental revenue. The Company's insurance subsidiaries fund their obligations primarily through available cash and cash equivalents.
The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; and any other extraordinary demands on the holding company.
Actions available to the holding company to increase liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; distributions from the Company’s Extended Warranty subsidiaries, subject to certain restrictions; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.
Historically, dividends from the Leased Real Estate segment were not generally considered a source of liquidity for the holding company, except upon the occurrence of certain events that would trigger payment of service fees. However, as more fully described in Note 27, "Commitments and Contingent Liabilities," the holding company is now expected to receive 20% of the
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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proceeds from the increased rental payments resulting from an earlier amendment to the lease (or any borrowings against such increased rental payments), as well as a one-time priority payment of $1.5 million.
The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc. ("KAI"), was $1.1 million (approximately two to three months of operating cash outflows) and $2.3 million at December 31, 2020 and December 31, 2019, respectively. The amount as of December 31, 2020 excludes: a $1.3 million distribution received from the Extended Warranty segment in January 2021; the cash expected to be received from the Leased Real Estate segment; and future actions available to the holding company that could be taken to increase liquidity. The holding company cash amounts are reflected in the cash and cash equivalents of $14.4 million and $13.5 million reported at December 31, 2020 and December 31, 2019, respectively, on the Company’s consolidated balance sheets. The cash and cash equivalents and restricted cash other than the holding company’s liquidity represent restricted and unrestricted cash held by Kingsway Amigo Insurance Company ("Amigo"), Kingsway Reinsurance Corporation ("Kingsway Re") and the Company’s Extended Warranty and Leased Real Estate segments.
As of December 31, 2020, there are 182,876 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. Any outstanding Preferred Shares would be required to be redeemed by the Company on April 1, 2021 ("Redemption Date") at a redemption value of $6.7 million (assuming all current outstanding Preferred Shares would be redeemed), if the Company has sufficient legally available funds to do so. Additionally, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, because of the deferral which totaled $14.1 million at December 31, 2020, the Company is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred. If, as of April 1, 2021, the Company was required to pay both the deferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company currently projects that it would not have sufficient liquidity and legally available funds to do so. However, the Company would be prohibited from doing so under Delaware law and, as such, (a) the interest estimated to be $14.9 million on March 31, 2021 on the trust preferred securities would remain on deferral as permitted under the indentures and (b) in accordance with Delaware law the Preferred Shares would not be redeemed on the Redemption Date (with a redemption value of $6.7 million) and would instead remain outstanding and continue to accrue dividends until such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. In such a situation, the Company would continue to operate in the ordinary course.
The Company notes there are several variables to consider in such a situation, and management is currently exploring the following opportunities: negotiating with the holders of the Preferred Shares with respect to the Redemption Date and/or other key provisions, raising additional funds through capital market transactions, as well as the Company’s continued strategy of working to monetize its non-core investments while attempting to maximize the tradeoff between liquidity and value received.
Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, excluding the cash that may be required to redeem the Preferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic.
(t)COVID-19:
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. The near-term impacts of COVID-19 are primarily with respect to the Company’s Extended Warranty segment. As consumer spending has been impacted, including a decline in the purchase of new and used vehicles, and many businesses through which the Company distributes its products either remain closed or are open but with capacity constraints, the Company has seen cash flows being affected by a reduction in new warranty sales for vehicle service agreements. With respect to homeowner warranties, the Company experienced an initial reduction in new enrollments in its home warranty programs associated with the impact of COVID-19 on new home sales in the United States. There remain many unknowns and the Company continues to monitor the expected trends and related demand for its services and has and will continue to adjust its operations accordingly.
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, potential impairment charges to the carrying amounts of goodwill, indefinite-lived intangibles and long-lived assets, the loss in value of investments, as well as the potential for adverse impacts on the Company's debt covenant financial ratios. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this 2020 Annual Report. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated.
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS
(a) Adoption of New Accounting Standards:
Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test which previously measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. This update changes the impairment test by requiring an entity to compare the fair value of a reporting unit with its carrying amount as opposed to comparing the carrying amount of goodwill with its implied fair value. The adoption of ASU 2017-04 did not have an impact on the Company's consolidated financial statements.
Effective January 1, 2020, the Company adopted ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). Among other things, ASU 2018-17 changes how all entities that apply the variable interest entity ("VIE") guidance evaluate decision making fees. Under ASU 2018-17, when an entity determines whether a decision-making fee is a variable interest, it considers indirect interests held through related parties under common control on a proportionate basis rather than in their entirety. The new approach is consistent with how indirect interests held by related parties under common control are evaluated when determining whether a reporting entity is the primary beneficiary of a VIE. The adoption of ASU 2018-17 did not have an impact on the Company's consolidated financial statements.
Effective January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed along with the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing to the entity or announced the timing publicly. As the amendments are only disclosure related, the effect of adoption did not have a material impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance in ASU 2020-04, if elected, apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective for contract modifications made between March 12, 2020 through December 31, 2022. The adoption of the new guidance did not have an impact on the Company’s consolidated financial statements as the Company does not have any designated hedging relationships. The Company will continue to evaluate the impact of this guidance on its consolidated financial statements.
(b) Accounting Standards Not Yet Adopted:
In January 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC815). ASU 2020-01 is effective for annual and interim reporting periods beginning after December 15, 2020. The Company is
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
currently evaluating ASU 2020-01 to determine the potential impact that adopting this standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss model used to measure impairment losses with an expected loss model for trade, reinsurance, and other receivables as well as financial instruments measured at amortized cost. ASU 2016-13 will require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net loss. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale investments is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through irreversible write-downs. On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, per ASU 2019-10 the Company would adopt ASU 2016-13 beginning January 1, 2023, as the Company is a smaller reporting company. The Company is currently evaluating ASU 2016-13 to determine the potential impact that adopting this standard will have on its consolidated financial statements.
NOTE 4 ACQUISITIONS
(a) PWI Holdings, Inc.
On December 1, 2020, the Company acquired 100% of the outstanding shares of PWI Holdings, Inc. for cash consideration of $24.4 million. The final purchase price is subject to a working capital true-up that will be finalized in 2021. PWI Holdings, Inc., through its subsidiaries Preferred Warranties, Inc., Superior Warranties, Inc., Preferred Warranties of Florida, Inc., and Preferred Nationwide Reinsurance Company, Ltd. (collectively, "PWI"), markets, sells and administers vehicle service agreements in all fifty states, primarily through a network of automobile dealer partners. As further discussed in Note 24, "Segmented Information," PWI is included in the Extended Warranty segment. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.
The Company has not completed its purchase price allocation associated with the acquisition of PWI due to the timing of the acquisition occurring in December and intends to finalize during 2021 its purchase price allocation fair value analysis of the assets acquired and liabilities assumed. The assets acquired and liabilities assumed are recorded in the consolidated financial statements at their estimated fair values before recognition of any identifiable intangible assets or other fair value adjustments with the excess purchase price all being provisionally allocated to goodwill. These estimates, allocations and calculations are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed are expected to change from the estimates included in these consolidated financial statements. Based upon historical acquisitions and a preliminary analysis of PWI, the Company would expect to record intangible assets relating to customer relationships and trade names, as well as to record a net deferred income tax liability and a reduction in deferred service fees. Any such adjustments would be made against the preliminary goodwill amount shown in the table below. The goodwill is not deductible for tax purposes. To the extent PWI records a net deferred income tax liability, the Company may be able to release a portion of its deferred income tax valuation allowance in the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table summarizes the estimated allocation of the PWI assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
December 1, 2020
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
90
|
|
|
Restricted cash
|
|
21,578
|
|
|
|
|
|
|
|
|
|
|
Service fee receivable
|
|
1,459
|
|
|
Other receivables
|
|
2,748
|
|
|
|
|
|
|
Income taxes recoverable
|
|
60
|
|
|
Property and equipment, net
|
|
175
|
|
|
Right-of-use asset
|
|
254
|
|
|
Goodwill
|
|
39,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
1,320
|
|
|
Total assets
|
|
$
|
66,710
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liability
|
|
255
|
|
|
Deferred service fees
|
|
34,026
|
|
|
Total liabilities
|
|
$
|
42,336
|
|
|
|
|
|
|
Purchase price
|
|
$
|
24,374
|
|
The consolidated statements of operations include the earnings of PWI from the date of acquisition. From the date of acquisition through December 31, 2020, PWI earned revenue of $2.5 million and net income of $0.7 million.
(b) Geminus Holdings Company, Inc.
On March 1, 2019, the Company acquired 100% of the outstanding shares of Geminus Holding Company, Inc. ("Geminus") for cash consideration of $8.4 million, comprised of $7.7 million of cash and an installment payable to the seller of $0.7 million due February 15, 2020. The payable to seller was paid in full by February 15, 2020. At December 31, 2019, the balance of the payable to seller was $0.1 million.
As further discussed in Note 24, "Segmented Information," Geminus is included in the Extended Warranty segment. Geminus is a specialty, full-service provider of vehicle service agreements and other finance and insurance products to used car buyers around the country. Geminus, headquartered in Wilkes-Barre, Pennsylvania, has been creating, marketing and administering these products on high-mileage used cars through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care Inc. ("Prime"), since 1988. Penn and Prime distribute these products via independent used car dealerships and franchised car dealerships, respectively. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.
This acquisition was accounted for as a business combination using the acquisition method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Goodwill of $7.4 million was recognized, and $5.7 million of separately identifiable intangible assets were recognized resulting from the valuations of acquired customer relationships and trade names. Refer to Note 11, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition. The goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to grow its portfolio of warranty companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table summarizes the estimated fair values of the Geminus assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
March 1, 2019
|
|
Investments
|
|
$
|
4,405
|
|
|
Cash and cash equivalents
|
|
755
|
|
|
Restricted cash
|
|
2,650
|
|
|
Accrued investment income
|
|
32
|
|
|
|
|
|
|
Service fee receivable
|
|
513
|
|
|
Other receivables
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
79
|
|
|
Goodwill
|
|
7,445
|
|
|
Intangible assets not subject to amortization - trade names
|
|
1,974
|
|
|
|
|
|
|
Intangible asset subject to amortization - customer relationships
|
|
3,732
|
|
|
Other assets
|
|
620
|
|
|
Total assets
|
|
$
|
22,217
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
2,018
|
|
|
Income taxes payable
|
|
1
|
|
|
Deferred service fees
|
|
10,564
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
1,263
|
|
|
Total liabilities
|
|
$
|
13,846
|
|
|
|
|
|
|
Purchase price
|
|
$
|
8,371
|
|
The consolidated statements of operations include the earnings of Geminus from the date of acquisition. From the date of acquisition through December 31, 2019, Geminus earned revenue of $9.9 million and net income of $0.6 million.
The following unaudited pro forma summary presents the Company's consolidated financial statements for the year ended December 31, 2020 and December 31, 2019 as if PWI and Geminus had been acquired on January 1 of the year prior to the acquisitions. The pro forma summary is presented for illustrative purposes only and does not purport to represent the results of our operations that would have actually occurred had the acquisitions occurred as of the beginning of the period presented or project our results of operations as of any future date or for any future period, as applicable. The pro forma results primarily include purchase accounting adjustments related to the acquisition of Geminus, interest expense and the amortization of debt issuance costs and discount associated with the related financing obtained in connection with the PWI acquisition (see Note 14, "Debt"), tax related adjustments and acquisition-related expenses. Purchase accounting adjustments related to the acquisition of PWI have not been included in the pro forma information below, pending the finalization of the fair value analysis of the assets acquired and liabilities assumed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Revenues
|
|
|
|
|
|
$
|
89,121
|
|
|
$
|
93,431
|
|
|
Loss from continuing operations attributable to common shareholders
|
|
|
|
|
|
$
|
(3,999)
|
|
|
$
|
(6,718)
|
|
|
Basic loss per share - continuing operations
|
|
|
|
|
|
$
|
(0.18)
|
|
|
$
|
(0.31)
|
|
|
Diluted loss per share - continuing operations
|
|
|
|
|
|
$
|
(0.18)
|
|
|
$
|
(0.31)
|
|
During the years ended December 31, 2020 and December 31, 2019, the Company incurred acquisition-related expenses of $0.4 million and $0.5 million, respectively, which are included in general and administrative expenses in the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
NOTE 5 DISCONTINUED OPERATIONS
Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company:
On July 16, 2018, the Company announced it had entered into a definitive agreement to sell its non-standard automobile insurance companies Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"). On October 18, 2018, the Company completed the previously announced sale of Mendota. The Company recognized a gain on disposal of Mendota of less than $0.1 million for the year ended December 31, 2020 and a loss on disposal of $1.5 million for the year ended December 31, 2019.
The final aggregate purchase price of $28.6 million was redeployed primarily to acquire equity investments, limited liability investments, limited liability investment, at fair value and other investments, which were owned by Mendota at the time of the closing, and to fund $5.0 million into an escrow account to be used to satisfy potential indemnity obligations under the definitive stock purchase agreement. As part of the transaction, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims and certain specified claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018. The maximum obligation to the Company with respect to the open claims is $2.5 million. A security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from Net Lease, is collateral for the Company’s payment of obligations with respect to the open claims.
There was no maximum obligation to the Company with respect to the specified claims. During the first quarter of 2019, Mendota settled one of the two specified claims for $0.5 million, resulting in no loss to the Company. During the fourth quarter of 2019, Mendota notified the Company that Mendota had entered into an agreement to settle the remaining specified claim for $1.6 million. Net of expenses, the Company recorded a gain of less than $0.1 million for the year ended December 31, 2020 and a loss of $1.5 million for the year ended December 31, 2019, related to the settlement of the remaining specified claims, which is reported as gain (loss) on disposal of discontinued operations in the consolidated statements of operations. The $1.6 million settlement was funded from the $5.0 million escrow account, and the $3.4 million remaining in the escrow account was released to the Company during the first quarter of 2020 consistent with the terms of the escrow agreement.
NOTE 6 VARIABLE INTEREST ENTITIES
(a) Consolidated VIEs
Argo Holdings Fund I, LLC:
The Company held a 43.4% investment in Argo Holdings at December 31, 2020 and December 31, 2019. 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 Group, LLC ("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, 2020 and December 31, 2019.
Net Lease Investment Grade Portfolio, LLC:
The Company held a 71.0% investment in Net Lease at December 31, 2020 and December 31, 2019. Net Lease holds three commercial properties under triple net leases. The properties are encumbered by mortgage loans. Net Lease 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 Net Lease due to its right to absorb significant economics in Net Lease and to control the management decisions of Net Lease, which allows the Company to hold the power to direct the significant activities of Net Lease. As such, the Company is the primary beneficiary of Net Lease and consolidated Net Lease at December 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table summarizes the assets and liabilities related to VIEs consolidated by the Company at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Assets
|
|
|
|
|
|
Limited liability investments, at fair value
|
|
$
|
32,811
|
|
|
$
|
29,078
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
538
|
|
|
311
|
|
|
Accrued investment income
|
|
454
|
|
|
244
|
|
|
|
|
|
|
|
|
Total Assets
|
|
33,803
|
|
|
29,633
|
|
|
Liabilities
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
352
|
|
|
347
|
|
|
Notes payable
|
|
9,000
|
|
|
9,000
|
|
|
Total Liabilities
|
|
$
|
9,352
|
|
|
$
|
9,347
|
|
No arrangements exist requiring the Company to provide additional funding to the consolidated VIEs in excess of the Company’s unfunded commitments to its consolidated VIEs. At December 31, 2020 and December 31, 2019, the Company had no unfunded commitments. There are no restrictions on assets consolidated by these VIEs. There are no structured settlements of liabilities consolidated by these VIEs. Creditors have no recourse to the general credit of the Company as the primary beneficiary of these VIEs.
(b) Non-Consolidated VIEs
The Company’s investments include certain non-consolidated investments, primarily in limited liability companies and limited partnerships in which the Company holds variable interests, that are considered VIEs due to the legal entities holding insufficient equity; the holders of equity at risk in the legal entities lacking controlling financial interests; and/or the holders of equity at risk having non-proportional voting rights.
The Company’s risk of loss associated with its non-consolidated VIEs is limited and depends on the investment. Limited liability investments accounted for under the equity method are limited to the Company’s initial investments. At December 31, 2020 and December 31, 2019, the Company had no unfunded commitments to its non-consolidated VIEs.
The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
Carrying Value
|
|
Maximum Loss Exposure
|
|
Carrying Value
|
|
Maximum Loss Exposure
|
|
Investments in non-consolidated VIEs
|
|
$
|
2,940
|
|
|
$
|
2,940
|
|
|
$
|
3,116
|
|
|
$
|
3,116
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Company’s non-consolidated VIEs by category at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
Carrying Value
|
|
Percent of total
|
|
Carrying Value
|
|
Percent of total
|
|
Investments in non-consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
Real estate related
|
|
$
|
1,610
|
|
|
54.8
|
%
|
|
$
|
1,654
|
|
|
53.1
|
%
|
|
Non-real estate related
|
|
1,330
|
|
|
45.2
|
%
|
|
1,462
|
|
|
46.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in non-consolidated VIEs
|
|
$
|
2,940
|
|
|
100.0
|
%
|
|
$
|
3,116
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table presents aggregated summarized financial information of the Company’s non-consolidated VIEs at December 31, 2020 and December 31, 2019. For certain of the non-consolidated VIEs, the financial information is presented on a lag basis, consistent with how the changes in the Company’s share of the net asset values of these equity method investees are recorded in net investment income. The difference between the end of the reporting period of an equity method investee and that of the Company is typically no more than three months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Assets
|
|
$
|
325,215
|
|
|
$
|
379,994
|
|
|
Liabilities
|
|
$
|
307,464
|
|
|
$
|
354,468
|
|
|
Equity
|
|
$
|
23,930
|
|
|
$
|
25,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Net income
|
|
$
|
27,419
|
|
|
$
|
5,027
|
|
NOTE 7 INVESTMENTS
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at December 31, 2020 and December 31, 2019 are summarized in the tables shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government, government agencies and authorities
|
|
$
|
9,999
|
|
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
10,104
|
|
|
States, municipalities and political subdivisions
|
|
1,447
|
|
|
7
|
|
|
—
|
|
|
1,454
|
|
|
Mortgage-backed
|
|
5,334
|
|
|
66
|
|
|
6
|
|
|
5,394
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
3,708
|
|
|
56
|
|
|
—
|
|
|
3,764
|
|
|
Total fixed maturities
|
|
$
|
20,488
|
|
|
$
|
234
|
|
|
$
|
6
|
|
|
$
|
20,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2019
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government, government agencies and authorities
|
|
$
|
13,246
|
|
|
$
|
74
|
|
|
$
|
4
|
|
|
$
|
13,316
|
|
|
States, municipalities and political subdivisions
|
|
601
|
|
|
—
|
|
|
1
|
|
|
600
|
|
|
Mortgage-backed
|
|
2,951
|
|
|
2
|
|
|
14
|
|
|
2,939
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
5,338
|
|
|
8
|
|
|
6
|
|
|
5,340
|
|
|
Total fixed maturities
|
|
$
|
22,136
|
|
|
$
|
84
|
|
|
$
|
25
|
|
|
$
|
22,195
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The table below summarizes the Company's fixed maturities at December 31, 2020 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
|
|
Amortized Cost
|
|
Estimated Fair Value
|
|
Due in one year or less
|
|
$
|
4,192
|
|
|
$
|
4,218
|
|
|
Due after one year through five years
|
|
14,736
|
|
|
14,921
|
|
|
Due after five years through ten years
|
|
346
|
|
|
358
|
|
|
Due after ten years
|
|
1,214
|
|
|
1,219
|
|
|
Total
|
|
$
|
20,488
|
|
|
$
|
20,716
|
|
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, 2020 and December 31, 2019. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Less than 12 Months
|
|
Greater than 12 Months
|
|
Total
|
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government, government agencies and authorities
|
$
|
511
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
511
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
834
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
834
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
$
|
1,345
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,345
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Less than 12 Months
|
|
Greater than 12 Months
|
|
Total
|
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Estimated Fair Value
|
|
Unrealized Loss
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government, government agencies and authorities
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
1,002
|
|
|
$
|
4
|
|
|
$
|
1,307
|
|
|
$
|
4
|
|
|
States, municipalities and political subdivisions
|
—
|
|
|
—
|
|
|
453
|
|
|
1
|
|
|
453
|
|
|
1
|
|
|
Mortgage-backed
|
1,063
|
|
|
1
|
|
|
1,271
|
|
|
13
|
|
|
2,334
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
2,495
|
|
|
4
|
|
|
526
|
|
|
2
|
|
|
3,021
|
|
|
6
|
|
|
Total fixed maturities
|
$
|
3,863
|
|
|
$
|
5
|
|
|
$
|
3,252
|
|
|
$
|
20
|
|
|
$
|
7,115
|
|
|
$
|
25
|
|
There are approximately five and 48 individual available-for-sale investments that were in unrealized loss positions as of December 31, 2020 and December 31, 2019, respectively.
The establishment of an other-than-temporary impairment on an available-for-sale investment or limited liability investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. Refer to "Significant Accounting Policies and Critical Estimates" section of Management's Discussion & Analysis for further information regarding the Company's detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
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:
•Other investments of $0.1 million and zero for the years ended December 31, 2020 and December 31, 2019, respectively; and
•Limited liability investments of zero and $0.1 million for the years ended December 31, 2020 and December 31, 2019, respectively.
The Company has reviewed currently available information regarding investments with estimated fair values less than their carrying amounts and believes these unrealized losses are not other-than-temporary and are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell those investments, and it is not likely it will be required to sell those investments before recovery of its amortized cost.
The Company does not have any exposure to subprime mortgage-backed investments.
As of December 31, 2020 and December 31, 2019, the carrying value of limited liability investments totaled $3.7 million and $3.8 million, respectively. At December 31, 2020, the Company has no unfunded commitments related to limited liability investments.
Limited liability investments, at fair value represents the underlying investments of Net Lease and Argo Holdings. Prior to the fourth quarter of 2019, limited liability investments, at fair value included the Company's investment in 1347 Investors LLC ("1347 Investors").
The fair value of the Company's investment in 1347 Investors was calculated based on a model that distributed the net equity of 1347 Investors to all classes of membership interests. The model used quoted market prices and significant market observable inputs. The most significant input to the model was the observed stock price of Limbach Holdings, Inc. ("Limbach") common stock. During the fourth quarter of 2019, the Company’s investment in 1347 Investors was dissolved, which resulted in the Company holding shares of Limbach common stock directly. During the third quarter of 2020, the Company sold all of its shares of Limbach common stock for cash proceeds totaling $3.2 million, resulting in the Company recording a realized gain of $1.5 million for the year ended December 31, 2020.
The Company consolidates the financial statements of Net Lease on a three-month lag. Net Lease reported an increase in the fair value of its underlying investments of $2.4 million during their third quarter of 2020. As a result of the three-month lag, the Company reported this as a gain on change in fair value of limited liability investments, at fair value during the fourth quarter of 2020. The increase in fair value is primarily attributable to the sale of one of the three Net Lease investment properties for $40.1 million, which closed on October 30, 2020. Given the proximity of the sale to September 30, 2020, the Company believes that the ultimate selling price is the best indication of value as of September 30, 2020.
As of December 31, 2020 and December 31, 2019, the carrying value of the Company's limited liability investments, at fair value was $32.8 million and $29.1 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, 2020 and December 31, 2019, respectively, which are included in gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At December 31, 2020, the Company has no unfunded commitments related to limited liability investments, at fair value.
As of December 31, 2020 and December 31, 2019, the carrying value of the Company's investments in private companies totaled $0.8 million and $2.0 million, respectively. For the years ended December 31, 2020 and December 31, 2019, the Company recorded adjustments of zero and $0.2 million, respectively, to decrease the fair value of certain investments in private companies for observable price changes, which are included in net change in unrealized loss on private company investments in the consolidated statements of operations.
The Company performs a quarterly impairment analysis of its investments in private companies. As a result of the analysis performed, the Company recorded impairments related to investments in private companies of $0.7 million and $0.2 million for the years ended December 31, 2020 and December 31, 2019, respectively, which are included in net change in unrealized loss on private company investments in the consolidated statements of operations. The impairments recorded for the year ended December 31, 2020 are a result of the impact of COVID-19 on the investments' underlying business.
The Company previously had issued promissory notes (the "Notes") to five former employees (the "Debtors"), which were recorded as other investments in the consolidated balance sheets. During the third and fourth quarters of 2020, the Company
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
agreed to accept partial payment from the Debtors as full satisfaction of the Debtors' obligations under the Notes and recognized a loss of $0.2 million for the year ended December 31, 2020, which is included in net realized gains in the consolidated statements of operations. During the year ended December 31, 2020, the Company recorded a write-down of $0.1 million for other-than-temporary impairment related to the Notes for one of the Debtors. The remaining principal amount outstanding on the Notes was zero as of December 31, 2020.
Net investment income for the years ended December 31, 2020 and December 31, 2019, respectively, is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Investment income
|
|
|
|
|
|
Interest from fixed maturities
|
|
$
|
310
|
|
|
$
|
484
|
|
|
Dividends
|
|
153
|
|
|
263
|
|
|
Income from limited liability investments
|
|
30
|
|
|
36
|
|
|
Income from limited liability investments, at fair value
|
|
937
|
|
|
885
|
|
|
|
|
|
|
|
|
Income from real estate investments
|
|
800
|
|
|
800
|
|
|
Other
|
|
461
|
|
|
506
|
|
|
Gross investment income
|
|
2,691
|
|
|
2,974
|
|
|
Investment expenses
|
|
(66)
|
|
|
(69)
|
|
|
Net investment income
|
|
$
|
2,625
|
|
|
$
|
2,905
|
|
Gross realized gains and losses on available-for-sale investments, limited liability investments, limited liability investments, at fair value and investments in private companies for the years ended December 31, 2020 and December 31, 2019 is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Gross realized gains
|
|
$
|
806
|
|
|
$
|
1,399
|
|
|
Gross realized losses
|
|
(226)
|
|
|
(603)
|
|
|
Net realized gains
|
|
$
|
580
|
|
|
$
|
796
|
|
Gain on change in fair value of equity investments for the years ended December 31, 2020 and December 31, 2019 is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Net gain (losses) recognized on equity investments sold during the period
|
|
|
|
|
|
$
|
1,506
|
|
|
$
|
(156)
|
|
|
Change in unrealized (losses) gains on equity investments held at end of the period
|
|
|
|
|
|
(239)
|
|
|
717
|
|
|
Gain on change in fair value of equity investments
|
|
|
|
|
|
$
|
1,267
|
|
|
$
|
561
|
|
Impact of COVID-19 on Investments
The Company continues to assess the impact that the COVID-19 pandemic may have on the value of its various investments, which could result in future material decreases in the underlying investment values. Such decreases may be considered temporary or could be deemed to be other-than-temporary, and management may be required to record write-downs of the related investments in future reporting periods.
NOTE 8 INVESTMENT IN INVESTEE
The Company formerly held an investment in the common stock of Itasca Capital Ltd. ("ICL") that was recorded as investment in investee in the consolidated balance sheets prior to December 31, 2019.
During the fourth quarter of 2019, the Company sold its investment in the common stock of ICL in two separate transactions:
•On October 9, 2019, the Company executed an agreement to sell 1,974,113 shares of ICL common stock, at a price of C$0.35 per share, for cash proceeds totaling C$0.7 million. The Company recognized a gain of $0.1 million on this
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
transaction, which is included in equity in net income of investee in the consolidated statements of operations. As a result of this transaction, the Company's ownership percentage in ICL was reduced to 13.8%. As a result of this change in ownership, the Company determined that its investment in the common stock of ICL no longer qualified for the equity method of accounting and reclassified this investment to equity investments.
•On October 31, 2019, the Company executed an agreement with its former Chief Executive Officer to sell its remaining 3,011,447 shares of ICL common stock, at a price of C$0.35 per share, for consideration totaling C$1.1 million, comprised of cash proceeds of C$0.2 million and 247,450 shares of the Company’s common stock. The Company recognized a loss of less than $0.1 million on this transaction, which is included in gain on change in fair value of equity investments in the consolidated statements of operations. See Note 26(b), "Related Parties," for more information.
The Company reported equity in net income of investee of $0.2 million for the year ended December 31, 2019, which includes the $0.1 million gain on sale and $0.1 million of equity in net income of investee.
NOTE 9 DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist primarily of commissions and agency expenses incurred related to successful efforts to acquire vehicle service agreements and are amortized over the period in which the related revenues are earned.
The components of deferred acquisition costs and the related amortization expense for the years ended December 31, 2020 and December 31, 2019 are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Balance at January 1, net
|
|
$
|
8,604
|
|
|
$
|
6,904
|
|
|
Additions
|
|
4,896
|
|
|
5,854
|
|
|
Amortization
|
|
(4,665)
|
|
|
(4,154)
|
|
|
Balance at December 31, net
|
|
$
|
8,835
|
|
|
$
|
8,604
|
|
NOTE 10 GOODWILL
The following table summarizes goodwill activity for the years ended December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Extended Warranty
|
|
Leased Real Estate
|
|
Corporate
|
|
Total
|
|
Balance, December 31, 2018
|
|
$
|
12,944
|
|
|
$
|
60,983
|
|
|
$
|
732
|
|
|
$
|
74,659
|
|
|
Acquisition
|
|
7,445
|
|
|
—
|
|
|
—
|
|
|
7,445
|
|
|
Balance, December 31, 2019
|
|
20,389
|
|
20389
|
60,983
|
|
|
732
|
|
|
82,104
|
|
|
Acquisition
|
|
39,026
|
|
|
—
|
|
|
—
|
|
|
39,026
|
|
|
Balance, December 31, 2020
|
|
$
|
59,415
|
|
|
$
|
60,983
|
|
|
$
|
732
|
|
|
$
|
121,130
|
|
As further discussed in Note 4, "Acquisitions," the Company recorded goodwill of $39.0 million related to the acquisition of PWI on December 1, 2020 which is provisional and subject to adjustment. The Company intends to finalize during 2021 its fair value analysis of the assets acquired and liabilities assumed as part of the acquisition of PWI. The estimates, allocations and calculations recorded at December 31, 2020 are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed may not agree with the estimates included in these consolidated financial statements. Based upon historical acquisitions and a preliminary analysis of PWI, the Company would expect to record intangible assets relating to customer relationships and trade names, as well as to record a reduction in deferred service fees. Any such adjustments would be made against the preliminary goodwill amount shown in the table below.
As further discussed in Note 4, "Acquisitions," the Company recorded goodwill of $7.4 million related to the acquisition of Geminus on March 1, 2019.
Goodwill is assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Company tested goodwill for recoverability at December 31, 2020 and December 31, 2019. Based on the assessment performed, no goodwill impairments were recognized in 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.
For Leased Real Estate, the Company models a hypothetical sale of the underlying asset in order to arrive at fair value, which, due to the unique nature of Leased Real Estate, the Company views as a technique consistent with the objective of measuring fair value. The Company believes that its estimates of future cash flows and discount rates are reasonable; however, the amount by which the fair value exceeds the carrying value of the reporting unit has declined significantly primarily as a result of the CMC settlement agreement discussed in Note 27, "Commitments and Contingent Liabilities". The estimated fair value of Leased Real Estate is highly sensitive to discount rates applied and changes in the underlying assumptions in the future could differ materially due to the inherent uncertainty in making such estimates. Additionally, estimates regarding future sales proceeds and timing of such proceeds could also have a significant impact on the fair value.
NOTE 11 INTANGIBLE ASSETS
Intangible assets at December 31, 2020 and December 31, 2019 are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
December 31, 2020
|
|
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
Database
|
|
$
|
4,918
|
|
|
$
|
3,997
|
|
|
$
|
921
|
|
|
Vehicle service agreements in-force
|
|
3,680
|
|
|
3,680
|
|
|
—
|
|
|
Customer relationships
|
|
12,646
|
|
|
7,305
|
|
|
5,341
|
|
|
In-place lease
|
|
1,125
|
|
|
281
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
Non-compete
|
|
266
|
|
|
170
|
|
|
96
|
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
Tenant relationship
|
|
73,667
|
|
|
—
|
|
|
73,667
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
3,264
|
|
|
—
|
|
|
3,264
|
|
|
Total
|
|
$
|
99,566
|
|
|
$
|
15,433
|
|
|
$
|
84,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
December 31, 2019
|
|
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
Database
|
|
$
|
4,918
|
|
|
$
|
3,505
|
|
|
$
|
1,413
|
|
|
Vehicle service agreements in-force
|
|
3,680
|
|
|
3,680
|
|
|
—
|
|
|
Customer relationships
|
|
12,646
|
|
|
5,622
|
|
|
7,024
|
|
|
In-place lease
|
|
1,125
|
|
|
218
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
Non-compete
|
|
266
|
|
|
117
|
|
|
149
|
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
Tenant relationship
|
|
73,667
|
|
|
—
|
|
|
73,667
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
3,264
|
|
|
—
|
|
|
1,290
|
|
|
Total
|
|
$
|
99,566
|
|
|
$
|
13,142
|
|
|
$
|
86,424
|
|
As further discussed in Note 4, "Acquisitions," during the first quarter of 2019, the Company recorded $5.7 million of separately identifiable intangible assets, related to acquired customer relationships and trade names, as part of the acquisition of Geminus. The customer relationships intangible asset of $3.7 million is being amortized over ten years based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. The trade name intangible assets of $2.0 million are deemed to have indefinite useful lives and are not amortized.
The Company's other intangible assets with definite useful lives are amortized either based on the patterns in which the economic benefits of the intangible assets are expected to be consumed or using the straight-line method over their estimated
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
useful lives, which range from 5 to 18 years. Amortization of intangible assets was $2.3 million and $2.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. The estimated aggregate future amortization expense of all intangible assets is $2.0 million for 2021, $1.6 million for 2022, $0.9 million for 2023, $0.7 million for 2024 and $0.5 million for 2025.
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 2020 or 2019.
As further discussed in Note 4, "Acquisitions," the Company acquired PWI on December 1, 2020 and intends to finalize the fair value analysis of the assets acquired and liabilities assumed during 2021. Based upon historical acquisitions and a preliminary analysis of PWI, the Company would expect to record intangible assets relating to customer relationships and trade names.
NOTE 12 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2020 and December 31, 2019 are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
December 31, 2020
|
|
|
|
Total Property and Equipment
|
|
|
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Carrying Value
|
|
|
|
|
|
|
|
Land
|
|
$
|
21,120
|
|
|
$
|
—
|
|
|
$
|
21,120
|
|
|
|
|
|
|
|
|
Site improvements
|
|
91,308
|
|
|
18,428
|
|
|
72,880
|
|
|
|
|
|
|
|
|
Buildings
|
|
580
|
|
|
65
|
|
|
515
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
296
|
|
|
125
|
|
|
171
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
1,223
|
|
|
1,074
|
|
|
149
|
|
|
|
|
|
|
|
|
Computer hardware
|
|
4,929
|
|
|
4,749
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,456
|
|
|
$
|
24,441
|
|
|
$
|
95,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
December 31, 2019
|
|
|
|
Total Property and Equipment
|
|
|
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Carrying Value
|
|
|
|
|
|
|
|
Land
|
|
$
|
21,120
|
|
|
$
|
—
|
|
|
$
|
21,120
|
|
|
|
|
|
|
|
|
Site improvements
|
|
91,308
|
|
|
14,295
|
|
|
77,013
|
|
|
|
|
|
|
|
|
Buildings
|
|
580
|
|
|
50
|
|
|
530
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
156
|
|
|
109
|
|
|
47
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
1,121
|
|
|
1,010
|
|
|
111
|
|
|
|
|
|
|
|
|
Computer hardware
|
|
5,282
|
|
|
5,039
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,567
|
|
|
$
|
20,503
|
|
|
$
|
99,064
|
|
|
|
|
|
|
|
For each of the years ended December 31, 2020 and December 31, 2019, depreciation expense on property and equipment of $4.4 million is included in general and administrative expenses in the consolidated statements of operations.
NOTE 13 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
The process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both reported and incurred but not reported claims. The Company's evaluation of the adequacy of unpaid loss and loss adjustment expenses includes a re-estimation of the liability for unpaid loss and loss adjustment expenses relating to each preceding financial year compared to the liability that was previously established.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The results of this comparison and the changes in the provision for unpaid loss and loss adjustment expenses as of December 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Balance at beginning of period, gross
|
|
$
|
1,774
|
|
|
$
|
2,073
|
|
|
Less reinsurance recoverable related to unpaid loss and loss adjustment expenses
|
|
—
|
|
|
—
|
|
|
Balance at beginning of period, net
|
|
1,774
|
|
|
2,073
|
|
|
Incurred related to:
|
|
|
|
|
|
Current year
|
|
—
|
|
|
—
|
|
|
Prior years
|
|
149
|
|
|
711
|
|
|
Paid related to:
|
|
|
|
|
|
Current year
|
|
—
|
|
|
—
|
|
|
Prior years
|
|
(474)
|
|
|
(1,010)
|
|
|
Balance at end of period, net
|
|
1,449
|
|
|
1,774
|
|
|
Plus reinsurance recoverable related to unpaid loss and loss adjustment expenses
|
|
—
|
|
|
—
|
|
|
Balance at end of period, gross
|
|
$
|
1,449
|
|
|
$
|
1,774
|
|
The Company reported unfavorable development on unpaid loss and loss adjustment expenses of $0.1 million and $0.7 million in 2020 and 2019, respectively, related to an increase in loss adjustment expenses at Amigo. During the second quarter of 2019, the Company agreed to settle three related open Amigo claims for an amount in excess of the provision for unpaid loss and loss adjustment expenses carried by the Company for these three open claims. During the year ended December 31, 2019, the Company incurred a loss of approximately $0.8 million related to the settlement of these claims. Original estimates are increased or decreased as additional information becomes known regarding individual claims.
The following tables contain information about incurred and paid loss and loss adjustment expenses development as of and for the year December 31, 2020, 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, 2011 through 2019, and the average annual percentage payout of incurred claims by age as of December 31, 2020, is presented as supplementary information.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-standard automobile insurance - Private passenger auto liability
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
As of December 31, 2020
|
|
Accident Year
|
|
2011 Unaudited
|
2012 Unaudited
|
2013 Unaudited
|
2014 Unaudited
|
2015 Unaudited
|
2016 Unaudited
|
2017 Unaudited
|
2018 Unaudited
|
2019 Unaudited
|
2020
|
|
Total of IBNR Plus Expected Development on Reported Losses
|
|
Cumulative Number of Reported Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
29,034
|
|
29,458
|
|
28,744
|
|
28,094
|
|
27,865
|
|
27,613
|
|
27,597
|
|
27,851
|
|
27,830
|
|
27,942
|
|
|
93
|
|
|
—
|
|
|
2012
|
|
|
13,736
|
|
13,536
|
|
13,273
|
|
12,926
|
|
12,815
|
|
12,720
|
|
13,037
|
|
13,101
|
|
13,016
|
|
|
128
|
|
|
—
|
|
|
2013
|
|
|
|
6,456
|
|
6,434
|
|
5,474
|
|
4,488
|
|
4,617
|
|
4,654
|
|
4,645
|
|
4,616
|
|
|
15
|
|
|
—
|
|
|
2014
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2015
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
3
|
|
|
—
|
|
|
—
|
|
|
2016
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2017
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2018
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
45,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-standard automobile insurance - Private passenger auto liability
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
For the Years Ended December 31,
|
|
Accident Year
|
|
2011 Unaudited
|
2012 Unaudited
|
2013 Unaudited
|
2014 Unaudited
|
2015 Unaudited
|
2016 Unaudited
|
2017 Unaudited
|
2018 Unaudited
|
2019 Unaudited
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
18,456
|
|
25,296
|
|
26,599
|
|
27,023
|
|
27,378
|
|
27,431
|
|
27,479
|
|
27,677
|
|
27,732
|
|
27,848
|
|
|
2012
|
|
|
7,060
|
|
11,724
|
|
12,284
|
|
12,530
|
|
12,618
|
|
12,635
|
|
12,738
|
|
12,813
|
|
12,889
|
|
|
2013
|
|
|
|
3,575
|
|
4,277
|
|
4,437
|
|
4,496
|
|
4,562
|
|
4,571
|
|
4,598
|
|
4,601
|
|
|
2014
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2015
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3
|
|
3
|
|
|
2016
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2017
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2018
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
45,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for non-standard automobile-private passenger auto liability unpaid loss and allocated loss adjustment expenses prior to 2011, net of reinsurance
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities for non-standard automobile-private passenger auto liability unpaid loss and allocated loss adjustment expenses, net of reinsurance
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-standard automobile insurance - Auto physical damage
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
As of December 31, 2020
|
|
Accident Year
|
|
2011 Unaudited
|
2012 Unaudited
|
2013 Unaudited
|
2014 Unaudited
|
2015 Unaudited
|
2016 Unaudited
|
2017 Unaudited
|
2018 Unaudited
|
2019 Unaudited
|
2020
|
|
Total of IBNR Plus Expected Development on Reported Losses
|
|
Cumulative Number of Reported Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
4,366
|
|
3,247
|
|
3,241
|
|
3,263
|
|
3,262
|
|
3,260
|
|
3,269
|
|
3,261
|
|
3,261
|
|
3,261
|
|
|
—
|
|
|
—
|
|
|
2012
|
|
|
1,755
|
|
1,920
|
|
1,990
|
|
2,015
|
|
2,007
|
|
2,018
|
|
1,908
|
|
1,908
|
|
1,908
|
|
|
—
|
|
|
—
|
|
|
2013
|
|
|
|
1,085
|
|
996
|
|
1,001
|
|
999
|
|
1,003
|
|
988
|
|
988
|
|
988
|
|
|
—
|
|
|
—
|
|
|
2014
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2015
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2016
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2017
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2018
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
6,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-standard automobile insurance - Auto physical damage
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
For the Years Ended December 31,
|
|
Accident Year
|
|
2011 Unaudited
|
2012 Unaudited
|
2013 Unaudited
|
2014 Unaudited
|
2015 Unaudited
|
2016 Unaudited
|
2017 Unaudited
|
2018 Unaudited
|
2019 Unaudited
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2,971
|
|
3,268
|
|
3,270
|
|
3,270
|
|
3,266
|
|
3,267
|
|
3,269
|
|
3,261
|
|
3,261
|
|
3,261
|
|
|
2012
|
|
|
1,783
|
|
1,951
|
|
2,006
|
|
2,016
|
|
2,017
|
|
2,018
|
|
1,908
|
|
1,908
|
|
1,908
|
|
|
2013
|
|
|
|
1,050
|
|
1,015
|
|
1,001
|
|
1,002
|
|
1,002
|
|
988
|
|
988
|
|
988
|
|
|
2014
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2015
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2016
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2017
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2018
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
6,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for non-standard automobile-auto physical damage unpaid loss and allocated loss adjustment expenses prior to 2011, net of reinsurance
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities for non-standard automobile-auto physical damage unpaid loss and allocated loss adjustment expenses, net of reinsurance
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
As of December 31, 2020
|
|
Accident Year
|
|
2011 Unaudited
|
2012 Unaudited
|
2013 Unaudited
|
2014 Unaudited
|
2015 Unaudited
|
2016 Unaudited
|
2017 Unaudited
|
2018 Unaudited
|
2019 Unaudited
|
2020
|
|
Total of IBNR Plus Expected Development on Reported Losses
|
|
Cumulative Number of Reported Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
8,521
|
|
9,784
|
|
8,990
|
|
8,752
|
|
8,791
|
|
8,812
|
|
8,816
|
|
8,901
|
|
8,767
|
|
8,767
|
|
|
—
|
|
|
—
|
|
|
2012
|
|
|
9,503
|
|
7,759
|
|
7,548
|
|
7,349
|
|
7,562
|
|
7,766
|
|
8,078
|
|
8,128
|
|
8,281
|
|
|
82
|
|
|
—
|
|
|
2013
|
|
|
|
597
|
|
477
|
|
489
|
|
350
|
|
364
|
|
316
|
|
284
|
|
284
|
|
|
—
|
|
|
—
|
|
|
2014
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2015
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2016
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2017
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2018
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
17,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
For the Years Ended December 31,
|
|
Accident Year
|
|
2011 Unaudited
|
2012 Unaudited
|
2013 Unaudited
|
2014 Unaudited
|
2015 Unaudited
|
2016 Unaudited
|
2017 Unaudited
|
2018 Unaudited
|
2019 Unaudited
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
5,005
|
|
7,926
|
|
8,326
|
|
8,533
|
|
8,638
|
|
8,747
|
|
8,765
|
|
8,767
|
|
8,767
|
|
8,767
|
|
|
2012
|
|
|
5,034
|
|
6,607
|
|
7,028
|
|
7,150
|
|
7,457
|
|
7,681
|
|
7,943
|
|
8,066
|
|
8,200
|
|
|
2013
|
|
|
|
299
|
|
352
|
|
358
|
|
358
|
|
358
|
|
284
|
|
284
|
|
284
|
|
|
2014
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2015
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2016
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2017
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
2018
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
—
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
—
|
|
—
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
17,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for commercial automobile unpaid loss and allocated loss adjustment expenses prior to 2011, net of reinsurance
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities for commercial automobile unpaid loss and allocated loss adjustment expenses, net of reinsurance
|
86
|
|
The following table reconciles the unpaid loss and allocated loss adjustment expenses, net of reinsurance presented in the tables above to the unpaid loss and loss adjustment expenses reported in the consolidated balance sheets at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Liabilities for loss and allocated loss adjustment expenses, net of reinsurance
|
|
|
|
|
|
Non-standard automobile - private passenger auto liability
|
|
237
|
|
|
462
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
86
|
|
|
73
|
|
|
Other short-duration insurance lines
|
|
1,122
|
|
|
1,225
|
|
|
Liabilities for unpaid loss and allocated loss adjustment expenses, net of reinsurance
|
|
1,445
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverable on unpaid loss and loss adjustment expenses
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Unallocated loss adjustment expenses
|
|
4
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross liability for unpaid loss and loss adjustment expenses
|
|
1,449
|
|
|
1,774
|
|
The following is supplementary information about average historical incurred loss duration as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited)
|
|
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
|
Year 8
|
Year 9
|
Year 10
|
|
Non-standard automobile -private passenger auto liability
|
|
85.7
|
%
|
13.0
|
%
|
1.2
|
%
|
0.1
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
64.4
|
%
|
29.9
|
%
|
5.7
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
NOTE 14 DEBT
Debt consists of the following instruments at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
Principal
|
|
Carrying Value
|
|
Fair Value
|
|
Principal
|
|
Carrying Value
|
|
Fair Value
|
|
Bank loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PWSC Loan
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
437
|
|
|
$
|
437
|
|
|
$
|
435
|
|
|
2020 KWH Loan
|
|
25,700
|
|
|
25,303
|
|
|
25,893
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2019 KWH Loan
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,625
|
|
|
8,803
|
|
|
11,820
|
|
|
Total bank loans
|
|
25,700
|
|
|
25,303
|
|
|
25,893
|
|
|
10,062
|
|
|
9,240
|
|
|
12,255
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
166,106
|
|
|
173,696
|
|
|
194,158
|
|
|
169,818
|
|
|
178,297
|
|
|
182,265
|
|
|
Flower Note
|
|
6,885
|
|
|
6,885
|
|
|
7,863
|
|
|
7,337
|
|
|
7,337
|
|
|
8,071
|
|
|
Net Lease Note
|
|
9,000
|
|
|
9,000
|
|
|
9,054
|
|
|
9,000
|
|
|
9,000
|
|
|
9,396
|
|
|
PPP
|
|
2,476
|
|
|
2,476
|
|
|
2,476
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total notes payable
|
|
184,467
|
|
|
192,057
|
|
|
213,551
|
|
|
186,155
|
|
|
194,634
|
|
|
199,732
|
|
|
Subordinated debt
|
|
90,500
|
|
|
50,928
|
|
|
50,928
|
|
|
90,500
|
|
|
54,655
|
|
|
54,655
|
|
|
Total
|
|
$
|
300,667
|
|
|
$
|
268,288
|
|
|
$
|
290,372
|
|
|
$
|
286,717
|
|
|
$
|
258,529
|
|
|
$
|
266,642
|
|
Subordinated debt mentioned above consists of the following trust preferred debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
Principal
(in thousands)
|
Issue date
|
Interest
|
Redemption date
|
|
Kingsway CT Statutory Trust I
|
$
|
15,000
|
|
12/4/2002
|
annual interest rate equal to LIBOR, plus 4.00% payable quarterly
|
12/4/2032
|
|
Kingsway CT Statutory Trust II
|
$
|
17,500
|
|
5/15/2003
|
annual interest rate equal to LIBOR, plus 4.10% payable quarterly
|
5/15/2033
|
|
Kingsway CT Statutory Trust III
|
$
|
20,000
|
|
10/29/2003
|
annual interest rate equal to LIBOR, plus 3.95% payable quarterly
|
10/29/2033
|
|
Kingsway DE Statutory Trust III
|
$
|
15,000
|
|
5/22/2003
|
annual interest rate equal to LIBOR, plus 4.20% payable quarterly
|
5/22/2033
|
|
Kingsway DE Statutory Trust IV
|
$
|
10,000
|
|
9/30/2003
|
annual interest rate equal to LIBOR, plus 3.85% payable quarterly
|
9/30/2033
|
|
Kingsway DE Statutory Trust VI
|
$
|
13,000
|
|
12/16/2003
|
annual interest rate equal to LIBOR, plus 4.00% payable quarterly
|
1/8/2034
|
(a) Bank loans:
In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries include IWS Acquisition Corporation ("IWS"), Geminus and Trinity Warranty Solutions LLC ("Trinity"). As part of the acquisition of PWI on December 1, 2020, PWI became a wholly owned subsidiary of KWH, which borrowed a principal amount of $25.7 million from a bank, consisting of a $24.7 million term loan and a $1.0 million revolving credit facility (the "2020 KWH Loan"). The proceeds from the 2020 KWH Loan were used to partially fund the acquisition of PWI and to repay the KWH Loan, discussed below, in full. The 2020 KWH Loan has an annual interest rate equal to the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR") having a floor of 0.75%, plus 3.00%. At December 31, 2020, the interest rate was 3.75%. The 2020 KWH Loan matures on December 1, 2025. The Company also recorded as a discount to the carrying value of the 2020 KWH Loan issuance costs of $0.4 million specifically related to the 2020 KWH Loan. The 2020 KWH Loan is carried in the consolidated balance sheet at December 31, 2020 at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The fair value of the 2020 KWH Loan disclosed in the table above is derived from quoted market prices of B and BB minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. The 2020 KWH Loan is secured by certain of the equity interests and assets of KWH and its subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The 2020 KWH Loan contains a number of covenants, including, but not limited to, a leverage ratio, a fixed charge ratio and limits on annual capital expenditures, all of which are as defined in and calculated pursuant to the 2020 KWH Loan that, among other things, restrict KWH’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.
As part of the acquisition of Geminus on March 1, 2019, KWH borrowed a principal amount of $10.0 million from a bank at an annual interest rate equal to LIBOR having a floor of 2.00%, plus 9.25% (the "2019 KWH Loan"), using most of the proceeds to acquire Geminus. At December 31, 2019, the interest rate was 11.25%. As part of the 2019 KWH Loan, KWH also issued warrants (the "KWH Warrants") to the lender exercisable to purchase an aggregate 1.25% membership interest in KWH. The Company allocated $0.4 million of the 2019 KWH Loan proceeds to a liability, recorded as part of accrued expenses and other liabilities in the consolidated balance sheets, to reflect the estimated fair value of the KWH Warrants, as the warrants contain a put right exercisable by the holder. Changes in the estimated fair value of the KWH Warrants are recorded in the consolidated statements of operations. The Company also recorded as a discount to the carrying value of the 2019 KWH Loan issuance costs of $1.0 million specifically related to the 2019 KWH Loan. The 2019 KWH Loan is carried in the consolidated balance sheet at December 31, 2019 at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The fair value of the 2019 KWH Loan disclosed in the table above is derived from quoted market prices of B and BB minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. The 2019 KWH Loan was secured by certain of the equity interests and assets of KWH and its subsidiaries.
The 2019 KWH Loan was scheduled to mature on March 1, 2024; however the remaining principal was fully repaid on December 1, 2020. The Company incurred $0.9 million of costs related to the extinguishment of the 2019 KWH Loan, including the write-off of unamortized debt issuance costs, discount and early termination fees paid to the lender, which are recorded as loss on extinguishment of debt, net in the consolidated statement of operations for the year ended December 31, 2020. On December 1, 2020, the Company also repurchased the KWH Warrants for cash consideration of $0.3 million, which was equal to the fair value of the warrant liability.
As part of the acquisition of Professional Warranty Service Corporation ("PWSC") on October 12, 2017, the Company borrowed a principal amount of $5.0 million from a bank at a fixed interest rate of 5.0% (the "PWSC Loan"). The carrying value of the PWSC Loan represents its unpaid principal balance. The fair value of the PWSC Loan disclosed in the table above is derived from quoted market prices of B and B minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. The PWSC Loan was scheduled to mature on October 12, 2022; however, the remaining principal was fully repaid on January 30, 2020.
(b) Notes payable:
As part of the acquisition of CMC Industries, Inc. ("CMC") in July 2016, the Company assumed a mortgage, which is recorded as note payable in the consolidated balance sheets ("the Mortgage"). The Mortgage is nonrecourse indebtedness with respect to CMC and its subsidiaries, and the Mortgage is not, nor will it be, guaranteed by Kingsway or its affiliates. The Mortgage is collateralized by a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") and the assignment of leases and rents related to a long-term triple net lease agreement with an unrelated third-party. The Mortgage, which is recorded as note payable in the consolidated balance sheets, was recorded 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. The fair value of the Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.
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, 2020 of $6.9 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 BBB rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
On October 15, 2015, Net Lease assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Net Lease Note"). The Net Lease Note requires monthly payments of interest and is secured by certain investments of Net Lease. The Net Lease Note matured on November 1, 2020 and had a fixed interest rate of 10.25%. In conjunction with the maturity of the Net Lease Note on November 1, 2020, Net Lease explored alternatives to maximize the value of its investment portfolio. As a result of this process, Net Lease elected to sell one of its three investment real estate properties while refinancing the remaining properties. The existing financing was replaced with three year non-recourse debt maturing November 1, 2023 with a fixed interest rate of 4.35%. Each of these transactions closed on October 30, 2020, however because the Company reports Net Lease on a three-month lag, the consolidated balance sheet at December 31, 2020 continues to report the $9.0 million mezzanine debt, which represents its unpaid principal balance. The fair value of the Net Lease Note disclosed in the table above is derived from quoted market prices of B and B minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.
In April 2020, certain subsidiaries of the Company received loan proceeds under the Paycheck Protection Program ("PPP"), totaling $2.9 million with a stated annual interest rate of 1.00%. The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security Act and administered by the U.S. Small Business Administration (the "SBA"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll costs (as defined for purposes of the PPP) of the qualifying business. The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, costs, rent and utilities, during the twenty-four week period following the borrower’s receipt of the loan and maintains its payroll levels and employee headcount. The amount of loan forgiveness will be reduced if the borrower reduces its employee headcount below its average employee headcount during a benchmark period or significantly reduces salaries for certain employees during the covered period.
The Company used the entire loan amount for qualifying expenses. The U.S. Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2.0 million. If the Company were to be audited and receive an adverse outcome in such an audit, it could be required to return the full amount of the PPP Loan and may potentially be subject to civil and criminal fines and penalties.
On December 21, 2020 the SBA approved the forgiveness of the full amount of one of the five PPP loans. The forgiveness included principal and interest of $0.4 million, which is included in loss on extinguishment of debt, net in the consolidated statements of operations for the year ended December 31, 2020. In January 2021, the SBA provided the Company with notices of forgiveness of the full amount of two of the remaining four loans. The forgiveness included total principal and interest of $1.4 million. The carrying value of the PPP at December 31, 2020 of $2.5 million represents its unpaid principal balance.
(c) Subordinated debt:
Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third-parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by KAI to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of 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 subordinated debt is carried in the consolidated balance sheets at fair value. See Note 25, "Fair Value of Financial Instruments," for further discussion of the subordinated debt. 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). Of the $3.7 million decrease in fair value of the Company’s subordinated debt between December 31, 2019 and December 31, 2020, $2.6 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 $1.2 million is reported as gain on change in fair value of debt in the Company’s consolidated statements of operations. Of the $4.6 million increase in fair value of the Company’s subordinated debt between December 31, 2018 and December 31, 2019, $5.7 million is reported as increase in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive loss, partially offset by $1.1 million reported as gain on change in fair value of debt in the Company’s consolidated statements of operations.
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. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. At December 31, 2020 and December 31, 2019, deferred interest payable of $14.1 million and $8.9 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The agreements governing the subordinated debt contain a number of covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make dividends and distributions, and make certain payments in respect of the Company’s outstanding securities.
NOTE 15 LEASES
(a) Lessee leases:
The Company has operating leases for office space that include fixed base rent payments, as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred. The Company includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. There are no residual value guarantees.
Operating lease costs and variable lease costs included in selling and administrative costs for the year ended December 31, 2020 were $0.9 million and less than $0.1 million, respectively.
The annual maturities of lease liabilities as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Lease Commitments
|
|
2021
|
|
$
|
979
|
|
|
2022
|
|
899
|
|
|
2023
|
|
624
|
|
|
2024
|
|
550
|
|
|
2025
|
|
381
|
|
|
2026 and thereafter
|
|
165
|
|
|
Total undiscounted lease payments
|
|
3,598
|
|
|
Imputed interest
|
|
385
|
|
|
Total lease liabilities
|
|
$
|
3,213
|
|
The weighted-average remaining lease term for operating leases was 4.52 years as of December 31, 2020. The weighted average discount rate of operating leases was 5.28% as of December 31, 2020. Cash paid for amounts included in the measurement of lease liabilities was $0.7 million and $1.0 million for the years ended December 31, 2020 and December 31, 2019.
Supplemental non-cash information related to leases for the year ended December 31, 2020 includes right-of-use assets of $0.3 million acquired in exchange for $0.3 million of lease obligations.
(b) Lessor leases:
The Company owns the Real Propert 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 revenue includes amortization of below market lease liabilities of $0.1 million and $0.1 million for the years ended December 31, 2020 and December 31, 2019, respectively. The estimated aggregate future amortization of below market lease liabilities is $0.1 million for 2021, $0.1 million for 2022, $0.1 million for 2023, $0.1 million for 2024 and $0.1 million for 2025. Realization of the residual values of the assets under lease is dependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included in property and equipment in the consolidated balance sheets. Refer to Note 12, "Property and Equipment".
Lease revenue related to operating leases was $13.4 million for each of the years ended December 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table provides the net book value of operating lease property included in property and equipment in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Land
|
|
$
|
21,120
|
|
|
$21,120
|
|
|
Site improvements
|
|
91,308
|
|
|
91,308
|
|
|
Buildings
|
|
580
|
|
|
580
|
|
|
Gross property and equipment leased
|
|
$
|
113,008
|
|
|
$
|
113,008
|
|
|
Accumulation depreciation
|
|
(18,493)
|
|
|
(14,345)
|
|
|
Net property and equipment leased
|
|
$
|
94,515
|
|
|
$
|
98,663
|
|
As of December 31, 2020, future undiscounted cash flows to be received in each of the next five years and thereafter, on non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
2021
|
|
$
|
12,099
|
|
|
2022
|
|
12,371
|
|
|
2023
|
|
12,649
|
|
|
2024
|
|
12,934
|
|
|
2025
|
|
13,225
|
|
|
Thereafter
|
|
123,738
|
|
NOTE 16 REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers relates to Extended Warranty segment service fee and commission revenue. Service fee and commission revenue 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. Customers either pay in full at the inception of a warranty contract or commission product sale, or on terms subject to the Company’s customary credit reviews.
The following table disaggregates revenues from contracts with customers by revenue type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Vehicle service agreement fees and GAP commissions - IWS, Geminus and PWI
|
|
$
|
33,137
|
|
|
$
|
29,097
|
|
|
|
|
|
|
|
|
Maintenance support service fees - Trinity
|
|
3,457
|
|
|
6,997
|
|
|
Warranty product commissions - Trinity
|
|
3,622
|
|
|
2,963
|
|
|
Homebuilder warranty service fees - PWSC
|
|
6,290
|
|
|
6,058
|
|
|
Homebuilder warranty commissions - PWSC
|
|
1,101
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee and commission revenue
|
|
$
|
47,607
|
|
|
$
|
46,111
|
|
Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at December 31, 2020 and December 31, 2019 were $3.9 million and $3.4 million, respectively.
The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. Deferred service fees were $87.9 million and $56.3 million at December 31, 2020 and December 31, 2019, respectively. The increase in deferred service fees during the year ended December 31, 2020 is primarily due to the deferred service fees acquired related to the acquisition of PWI of $34.0 million which was recorded at a provisional amount subject to finalization of the Company’s purchase price allocation, as further discussed in Note 4, "Acquisitions".
The Company expects to recognize within one year as service fee and commission revenue approximately 51.7% of the deferred service fees as of December 31, 2020. Approximately $23.5 million and $14.5 million of service fee and commission
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
revenue recognized during the years ended December 31, 2020 and December 31, 2019 was included in deferred service fees as of December 31, 2019 and December 31, 2018, respectively.
NOTE 17 INCOME TAXES
The Company and all of its eligible U.S. subsidiaries file a U.S. consolidated federal income tax return ("KFSI Tax Group"). The method of allocating federal income taxes among the companies in the KFSI Tax Group is subject to written agreement, approved by each company's Board of Directors. The allocation is made primarily on a separate return basis, with current credit for any net operating losses or other items utilized in the consolidated federal income tax return. The Company’s non-U.S. subsidiaries file separate foreign income tax returns.
Income tax benefit consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Current income tax expense
|
|
$
|
345
|
|
|
$
|
423
|
|
|
Deferred income tax benefit
|
|
(1,460)
|
|
|
(786)
|
|
|
Income tax benefit
|
|
$
|
(1,115)
|
|
|
$
|
(363)
|
|
Income tax benefit varies from the amount that would result by applying the applicable U.S. corporate income tax rate of 21% to loss from continuing operations before income tax benefit. The following table summarizes the differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31
|
|
|
|
2020
|
|
2019
|
|
Income tax benefit at U.S. statutory income tax rate
|
|
$
|
(1,373)
|
|
|
$
|
(658)
|
|
|
Tax Cuts and Jobs Act adjustment
|
|
—
|
|
|
(156)
|
|
|
Valuation allowance
|
|
(322)
|
|
|
1
|
|
|
Indefinite life intangibles
|
|
215
|
|
|
194
|
|
|
Change in unrecognized tax benefits
|
|
244
|
|
|
276
|
|
|
Compensation
|
|
220
|
|
|
208
|
|
|
Investment income
|
|
(269)
|
|
|
(218)
|
|
|
State income tax
|
|
192
|
|
|
135
|
|
|
|
|
|
|
|
|
Other
|
|
(22)
|
|
|
(145)
|
|
|
Income tax benefit for continuing operations
|
|
$
|
(1,115)
|
|
|
$
|
(363)
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
Losses carried forward
|
|
$
|
184,130
|
|
|
$
|
181,427
|
|
|
Unpaid loss and loss adjustment expenses and unearned premiums
|
|
3,911
|
|
|
2,331
|
|
|
Intangible assets
|
|
1,705
|
|
|
2,515
|
|
|
Debt issuance costs
|
|
835
|
|
|
966
|
|
|
Investments
|
|
145
|
|
|
748
|
|
|
Deferred rent
|
|
624
|
|
|
664
|
|
|
Deferred revenue
|
|
1,350
|
|
|
1,135
|
|
|
Management fees
|
|
550
|
|
|
—
|
|
|
Compensation
|
|
265
|
|
|
187
|
|
|
Other
|
|
660
|
|
|
833
|
|
|
Valuation allowance
|
|
(173,202)
|
|
|
(173,411)
|
|
|
Deferred income tax assets
|
|
$
|
20,973
|
|
|
$
|
17,395
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
Indefinite life intangibles
|
|
$
|
(17,483)
|
|
|
$
|
(17,269)
|
|
|
Depreciation and amortization
|
|
(14,632)
|
|
|
(15,299)
|
|
|
Fair value of debt
|
|
(6,716)
|
|
|
(5,747)
|
|
|
Land
|
|
(4,435)
|
|
|
(4,435)
|
|
|
Intangible assets
|
|
(452)
|
|
|
(620)
|
|
|
Deferred revenue
|
|
(1,239)
|
|
|
(262)
|
|
|
Investments
|
|
(1,716)
|
|
|
(971)
|
|
|
Deferred acquisition costs
|
|
(1,855)
|
|
|
(1,807)
|
|
|
Deferred income tax liabilities
|
|
$
|
(48,528)
|
|
|
$
|
(46,410)
|
|
|
Net deferred income tax liabilities
|
|
$
|
(27,555)
|
|
|
$
|
(29,015)
|
|
The Company maintains a valuation allowance for its gross deferred income tax assets of $173.2 million (U.S. operations - $173.2 million; Other - less than $0.1 million) and $173.4 million (U.S. operations - $173.4 million; Other - less than $0.1 million) at December 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019 net deferred income tax assets, excluding the deferred income tax asset and liability amounts set forth in the paragraph below.
In 2020, the Company released into income $1.3 million of its valuation allowance associated with business interest expense carryforwards with an indefinite life. In 2020, the Company also released into income $0.5 million 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. In 2019, the Company released into income $0.8 million of its valuation allowance, as a result of its acquisition of Geminus, 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 Company carries net deferred income tax liabilities of $27.6 million and $29.0 million at December 31, 2020 and December 31, 2019, respectively, that consists of:
•$7.6 million and $8.0 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KFSI Tax Group's consolidated U.S. net operating loss carryforwards;
•$21.9 million and $21.7 million of deferred income tax liabilities related to land and indefinite life intangible assets;
•$1.3 million and zero of deferred income tax assets associated with business interest expense carryforwards with an indefinite life;
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
•$0.6 million and $0.6 million of deferred state income tax assets; and
•Zero and $0.1 million of deferred income tax assets relating to alternative minimum tax credits.
The Tax Cuts and Jobs Act (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.
Amounts, originating dates and expiration dates of the KFSI Tax Group's consolidated U.S. net operating loss carryforwards, totaling $845.5 million, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of net operating loss
|
|
Expiration date
|
|
Net operating loss
(in thousands)
|
|
|
|
|
|
|
|
2007
|
|
2027
|
|
54,652
|
|
|
2008
|
|
2028
|
|
53,895
|
|
|
2009
|
|
2029
|
|
496,889
|
|
|
2010
|
|
2030
|
|
92,058
|
|
|
2011
|
|
2031
|
|
39,865
|
|
|
2012
|
|
2032
|
|
30,884
|
|
|
2013
|
|
2033
|
|
30,779
|
|
|
2014
|
|
2034
|
|
7,245
|
|
|
2016
|
|
2036
|
|
16,006
|
|
|
2017
|
|
2037
|
|
20,848
|
|
|
2020
|
|
2040
|
|
341
|
|
|
2020
|
|
Indefinite
|
|
2,047
|
|
In addition, not reflected in the table above, are net operating loss carryforwards of (i) $10.6 million relating to losses generated in separate U.S. tax return years, which losses will expire over various years through 2037 and (ii) $1.5 million relating to operations in Barbados, which losses will expire over various years through 2029.
A reconciliation of the beginning and ending unrecognized tax benefits, exclusive of interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Unrecognized tax benefits - beginning of year
|
|
$
|
1,381
|
|
|
$
|
1,381
|
|
|
|
|
|
|
|
|
Gross additions
|
|
—
|
|
|
—
|
|
|
Gross reductions
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Impact due to expiration of statute of limitations
|
|
—
|
|
|
—
|
|
|
Unrecognized tax benefits - end of year
|
|
$
|
1,381
|
|
|
$
|
1,381
|
|
The amount of unrecognized tax benefits that, if recognized as of December 31, 2020 and December 31, 2019 would affect the Company's effective tax rate, was an expense of $0.2 million and $0.3 million, respectively.
The Company carried a liability for unrecognized tax benefits of $1.4 million as of December 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, the Company recognized an expense for interest and penalties of $0.2 million and $0.3 million, respectively. At December 31, 2020 and December 31, 2019, the Company carried an accrual for the payment of interest and penalties of $1.6 million and $1.3 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 2016 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 2015 are closed
|
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|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
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.
NOTE 18 LOSS FROM CONTINUING OPERATIONS PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted loss from continuing operations per share computation for the years ended December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Numerator:
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(5,422)
|
|
|
$
|
(2,769)
|
|
|
Less: net income attributable to noncontrolling interests
|
|
(1,309)
|
|
|
(1,573)
|
|
|
Less: dividends on preferred stock, net of tax
|
|
(1,066)
|
|
|
(1,019)
|
|
|
Loss from continuing operations attributable to common shareholders
|
|
$
|
(7,797)
|
|
|
$
|
(5,361)
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average basic shares
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
22,176
|
|
|
21,860
|
|
|
Weighted average diluted shares
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
22,176
|
|
|
21,860
|
|
|
Effect of potentially dilutive securities (a)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average diluted shares
|
|
22,176
|
|
|
21,860
|
|
|
Basic loss from continuing operations per share
|
|
$
|
(0.35)
|
|
|
$
|
(0.25)
|
|
|
Diluted loss from continuing operations per share
|
|
$
|
(0.35)
|
|
|
$
|
(0.25)
|
|
(a)Potentially dilutive securities consist of stock options, unvested restricted stock awards, warrants and convertible preferred stock. Because the Company is reporting a loss from continuing operations attributable to common shareholders for the years ended December 31, 2020 and December 31, 2019, all potentially dilutive securities outstanding were excluded from the calculation of diluted loss from continuing operations per share since their inclusion would have been anti-dilutive.
Basic loss from continuing operations per share is calculated using weighted-average common shares outstanding. Diluted loss from continuing operations per share is calculated using weighted-average diluted shares. Weighted-average diluted shares is calculated by adding the effect of potentially dilutive securities to weighted-average common shares outstanding.
The following weighted-average potentially dilutive securities are not included in the diluted loss from continuing operations per share calculations above because they would have had an antidilutive effect on the loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Stock options
|
|
—
|
|
|
40,000
|
|
|
Unvested restricted stock awards
|
|
500,000
|
|
|
729,500
|
|
|
Warrants
|
|
4,923,765
|
|
|
4,923,765
|
|
|
Convertible preferred stock
|
|
1,142,975
|
|
|
1,392,975
|
|
|
Total
|
|
6,566,740
|
|
|
7,086,240
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
NOTE 19 STOCK-BASED COMPENSATION
(a) Stock Options
On September 21, 2020, the Company's shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). The 2020 Plan replaced the Company's previous 2013 Equity Incentive Plan (the "2013 Plan") with respect to the granting of future equity awards. The 2020 Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Shares, Restricted Stock Units, Performance Share Awards, Dividend Equivalent Rights, Other Stock-Based Awards and Cash-Based Awards (collectively "Awards"). Under the 2020 Plan, an aggregate of 1.6 million common shares will be available for all Awards, subject to adjustment in the event of certain corporate transactions. No Awards were granted during the year ended December 31, 2020.
On May 13, 2013, the Company's shareholders approved the 2013 Plan. Under the 2013 Plan, the Company reserved for issuance to key employees selected by the Company stock options ("2013 Stock Options") to purchase up to an additional 300,000 common shares. There are no 2013 Stock Options remaining for future grants. The 2013 Stock Options were fully vested and exercisable at the date of grant and were exercisable for a period of four years.
The following table summarizes the 2013 Stock Option activity during the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options Outstanding
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
40,000
|
|
|
$
|
4.67
|
|
|
0.3
|
|
$
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(40,000)
|
|
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
|
Exercisable at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
The aggregate intrinsic value of stock options outstanding and exercisable is the difference between the 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.
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, 2020 and December 31, 2019.
(b) Restricted Stock Awards of the Company
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 were 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. There are no 2014 Restricted Stock Awards outstanding at December 31, 2020.
On September 5, 2018, the Company executed an Amended and Restated Restricted Stock Award Agreement ("Amended RSA Agreement") with its former Chief Executive Officer. Pursuant to the terms of the Amended RSA Agreement, the Company granted to the former Chief Executive Officer a modified award of 350,000 shares of restricted common stock (the "2018 Modified Restricted Stock Award"). The Company deemed the 2018 Modified Restricted Stock Award to be taxable to the former Chief Executive Officer on the modification date. As a result, the Company cancelled 102,550 of the 350,000 shares of the 2018 Modified Restricted Stock Award to satisfy the tax withholding obligation. The remaining 247,450 shares of the 2018 Modified Restricted Stock Award shall become fully vested after the satisfaction of certain performance conditions, as defined in the Amended RSA Agreement. On September 30, 2019, the Company deemed that the performance conditions described in the Amended RSA Agreement were met. On October 31, 2019, the Company executed an agreement to acquire the remaining 247,450 shares of the 2018 Modified Restricted Stock Award as partial consideration in exchange for selling its remaining investment in the common stock of ICL. See Note 26, "Related Parties," for further discussion.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
During the fourth quarter of 2019, the Company recorded $0.6 million of compensation expense equal to the fair value of the remaining 247,450 fully vested shares of the 2018 Modified Restricted Stock Award. The grant-date fair value of the 2018 Modified Restricted Stock Award was determined using the closing price of Kingsway common stock on the modification date.
On January 31, 2019, the Company executed an Employee Separation Agreement and Release ("2019 Separation Agreement") with a former officer. The Separation Agreement modified the vesting terms related to 115,500 shares of the original 2014 Restricted Stock Awards ("2014 Modified Restricted Stock Award"), such that they became fully vested on January 31, 2019.
The Company also recorded during the first quarter of 2019 $0.1 million of compensation expense equal to the fair value of the remaining 79,231 fully vested shares of the 2014 Modified Restricted Stock Award. The grant-date fair value of the 2014 Modified Restricted Stock Award was determined using the closing price of Kingsway common stock on the grant date.
On February 28, 2020, the Company executed an Employment Separation Agreement and Release ("2020 Separation Agreement") with a former officer. Under the terms of the 2020 Separation Agreement, the former officer forfeited 93,713 shares of the 2014 Restricted Stock Awards. The Company’s accounting policy is to account for forfeitures when they occur. As a result, the Company reversed during the first quarter of 2020 $0.2 million of compensation expense previously recognized from March 28, 2014 through February 28, 2020. The former officer's remaining 135,787 shares of the original 2014 Restricted Stock Awards ("2020 Modified Restricted Stock Award") became partially vested on February 28, 2020.
On September 5, 2018, the Company granted 500,000 restricted common stock awards to an officer (the "2018 Restricted Stock Award"). The 2018 Restricted Stock Award shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officer's continued employment through the vesting date. The 2018 Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The grant-date fair value of the 2018 Restricted Stock Award was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2018 Restricted Stock Award at December 31, 2020 was $1.2 million.
The following table summarizes the activity related to unvested 2014 Restricted Stock Awards, 2020 Modified Restricted Stock Award and 2018 Restricted Stock Award (collectively "Restricted Stock Awards") during the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Awards
|
|
Weighted-Average Grant Date Fair Value (per Share)
|
|
Unvested at December 31, 2019
|
|
729,500
|
|
|
$
|
5.23
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
Vested
|
|
(94,110)
|
|
|
4.14
|
|
|
Cancelled for Tax Withholding
|
|
(41,677)
|
|
|
4.14
|
|
|
Forfeited
|
|
(93,713)
|
|
|
4.14
|
|
|
Unvested at December 31, 2020
|
|
500,000
|
|
|
$
|
5.73
|
|
The unvested balance at December 31, 2020 in the table above is comprised of 500,000 shares of the 2018 Restricted Stock Award.
(c) Restricted Stock Awards of PWSC
PWSC granted 1,000 restricted Class B common stock awards ("2018 PWSC RSA") to an officer of PWSC pursuant to an agreement dated September 7, 2018. The 2018 PWSC RSA contains both a service and a performance condition that affects vesting. On December 18, 2020, the 2018 PWSC RSA was amended to modify the vesting terms related to the service and performance condition ("Modified PWSC RSA").
PWSC granted 250 restricted Class B common stock awards to an officer of PWSC pursuant to an agreement dated December 18, 2020 ("2020 PWSC RSA"). The 2020 PWSC RSA contains both a service and a performance condition that affects vesting.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The service condition for the Modified PWSC RSA and the 2020 PWSC RSA vest 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 performance condition vests on February 20, 2022 and is based on the internal rate of return of PWSC. The grant-date fair value of the Modified PWSC RSA and the 2020 PWSC RSA were estimated using an internal valuation model. See Note 25, "Fair Value of Financial Instruments," for further discussion related to the valuation of the Modified PWSC RSA and the 2020 PWSC RSA.
The Modified PWSC RSA and the 2020 PWSC RSA include a noncontingent put option that is exercisable between February 20, 2022 and February 20, 2023. Since the put option is exercisable less than six months after the vesting of certain shares, the compensation expense related to these shares is classified as a liability and included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of the liability classified portion of the Modified PWSC RSA and the 2020 PWSC RSA will be re-evaluated each reporting period.
Both the service condition and performance condition of the Modified PWSC RSA were probable of vesting both immediately before and after the modification. As a result, the Company recognized compensation expense for the Modified PWSC RSA equal to the grant date fair value plus incremental fair value conveyed on the modification date. During the fourth quarter of 2020, the Company recorded additional compensation expense of $0.8 million related to the Modified PWSC RSA, of which $0.4 million is equity classified and $0.4 million is liability classified at December 31, 2020. At December 31, 2020, there were 625 unvested shares of the Modified PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to unvested equity-classified portion of the Modified PWSC RSA at December 31, 2020 was $0.6 million.
At December 31, 2020, both the service condition and performance condition of the 2020 PWSC RSA were probable of vesting. As a result, the Company recognized compensation expense for the 2020 PWSC RSA equal to the grant date fair value of $0.2 million during the fourth quarter of 2020, of which $0.1 million is equity classified and less than $0.1 million is liability classified at December 31, 2020. At December 31, 2020, there were 172 unvested shares of the 2020 PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to unvested equity-classified portion of the 2020 PWSC RSA at December 31, 2020 was less than $0.1 million.
Total stock-based compensation expense, inclusive of 2013 Stock Options, Restricted Stock Awards and Restricted Stock Awards of PWSC described above, net of forfeitures, was $0.8 million and $1.2 million for the years ended December 31, 2020 and December 31, 2019, respectively.
(d) Employee Share Purchase Plan
The Company has an employee share purchase plan ("ESPP Plan") whereby qualifying employees could choose each year to have up to 5% of their annual base earnings withheld to purchase the Company's common shares. 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, 2020 and December 31, 2019 totaled $0.1 million and $0.1 million, respectively.
NOTE 20 EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan in the United States for all of its qualified employees. Qualifying employees can choose to voluntarily contribute up to 60% of their annual earnings subject to an overall limitation of $19,500 and $19,000 in 2020 and 2019, respectively. The Company matches an amount equal to 50% of each participant's contribution, limited to the lesser of contributions up to 5% of a participant's earnings or $7,250.
The contributions for the plan vest based on years of service with 100% vesting after five years of service. The Company's contribution is expensed as paid and for the years ended December 31, 2020 and December 31, 2019 totaled $0.2 million and $0.2 million, respectively. All Company obligations to the plans were fully funded as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
NOTE 21 REDEEMABLE CLASS A PREFERRED STOCK
On May 13, 2013, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to create an unlimited number of zero par value class A preferred shares. The Company's Board of Directors 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 have priority over the common shares.
There were 182,876 and 222,876 shares of Preferred Shares outstanding at December 31, 2020 and December 31, 2019, respectively. 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. During the first quarter of 2020, 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 holder. As of December 31, 2020, the maximum number of common shares issuable upon conversion of the Preferred Shares is 1,142,975 common shares.
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. See also "(s) Holding company liquidity" to Note 2, "Summary of Significant Accounting Policies," for further discussion regarding any April 1, 2021 redemptions.
At December 31, 2020 and December 31, 2019, accrued dividends of $2.1 million and $2.1 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 $6.7 million and $7.7 million at December 31, 2020 and December 31, 2019, respectively.
In accordance with FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, redemption features not solely within the control of the issuer are required to be presented outside of permanent equity on the consolidated balance sheets. As described above, the holder has the option to convert the Preferred Shares at any time; however, if not converted, they are required to be redeemed on April 1, 2021. As such, the Preferred Shares are presented in temporary or mezzanine equity on the consolidated balance sheets and will be accreted, using the interest method, up to the stated redemption value of $4.6 million, through additional paid-in capital as a deemed dividend, from the date of issuance through the April 1, 2021 redemption date. The Company also accrues dividends through additional paid-in-capital at the stated coupon, which the Company expects will total $2.2 million as of the April 1, 2021 redemption date. As a result, the total redemption amount of the Preferred Shares as of the redemption date if the Preferred Shares are not converted is expected to be $6.7 million.
NOTE 22 SHAREHOLDERS' EQUITY
The Company is authorized to issue 50,000,000 shares of zero par value common stock. There were 22,211,069 and 21,866,959 shares of common stock outstanding at December 31, 2020 and December 31, 2019, respectively.
There were no dividends declared during the years ended December 31, 2020 and December 31, 2019.
As described in Note 21, "Redeemable Class A Preferred Stock", during 2020, 40,000 Preferred Shares were converted into 250,000 common shares. As a result, $1.0 million was reclassified from redeemable Class A preferred stock to additional paid-in capital on the consolidated balance sheet at December 31, 2020.
As further described in Note 26, "Related Parties," on October 31, 2019, the Company executed an agreement to acquire the remaining 247,450 shares of the 2018 Modified Restricted Stock Award as partial consideration in exchange for selling its remaining investment in the common stock of ICL. The Company records treasury stock at cost. There were 247,450 shares of treasury stock outstanding at December 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The Company has warrants outstanding, recorded in shareholders' equity, that will entitle each subscriber to purchase one common share of Kingsway for each warrant. The following table summarizes information about warrants outstanding at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Exercise Price
|
|
Date of Issue
|
|
Expiry Date
|
|
Remaining Contractual Life (in years)
|
|
Number Outstanding
|
|
$
|
5.00
|
|
|
16-Sep-13
|
|
15-Sep-23
|
|
2.71
|
|
3,280,790
|
|
|
$
|
5.00
|
|
|
3-Feb-14
|
|
15-Sep-23
|
|
2.71
|
|
1,642,975
|
|
|
|
|
|
|
Total:
|
|
2.71
|
|
4,923,765
|
|
NOTE 23 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the change in the balance of each component of accumulated other comprehensive income, net of tax, for the years ended December 31, 2020 and December 31, 2019 as it relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Available-for-Sale Investments
|
|
Foreign Currency Translation Adjustments
|
|
Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk
|
|
Equity in Other Comprehensive Loss of Limited Liability Investment
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
Balance, December 31, 2018
|
|
$
|
(160)
|
|
|
$
|
(3,286)
|
|
|
$
|
44,259
|
|
|
$
|
(45)
|
|
|
$
|
40,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) arising during the period
|
|
247
|
|
|
—
|
|
|
(5,685)
|
|
|
—
|
|
|
(5,438)
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
(28)
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
219
|
|
|
—
|
|
|
(5,685)
|
|
|
45
|
|
|
(5,421)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
59
|
|
|
$
|
(3,286)
|
|
|
38,574
|
|
|
$
|
—
|
|
|
$
|
35,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income arising during the period
|
|
93
|
|
|
—
|
|
|
2,555
|
|
|
—
|
|
|
2,648
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
64
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
|
Net current-period other comprehensive income
|
|
157
|
|
|
—
|
|
|
2,555
|
|
|
—
|
|
|
2,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
$
|
216
|
|
|
$
|
(3,286)
|
|
|
$
|
41,129
|
|
|
$
|
—
|
|
|
$
|
38,059
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
It should be noted that the consolidated statements of comprehensive loss present the components of other comprehensive income (loss), net of tax, only for the years ended December 31, 2020 and December 31, 2019 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, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Reclassification of accumulated other comprehensive income from unrealized gains (losses) on available-for-sale investments to:
|
|
|
|
|
|
Net realized gains
|
|
$
|
(64)
|
|
|
$
|
(17)
|
|
|
Other-than-temporary impairment loss
|
|
—
|
|
|
—
|
|
|
Loss from continuing operations before income tax benefit
|
|
(64)
|
|
|
(17)
|
|
|
Income tax benefit
|
|
—
|
|
|
—
|
|
|
Loss from continuing operations
|
|
(64)
|
|
|
(17)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(64)
|
|
|
$
|
(17)
|
|
NOTE 24 SEGMENTED INFORMATION
The Company conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
Extended Warranty Segment
Extended Warranty includes the following subsidiaries of the Company: IWS, Geminus, PWI, PWSC and Trinity (collectively, "Extended Warranty").
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 26 states and the District of Columbia to their members.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, Penn and Prime. Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a "white label" agreement.
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.
Trinity sells HVAC, standby generator, commercial LED lighting and refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.
Leased Real Estate Segment
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, 2020, revenue of $13.4 millionfrom 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.
Revenues and Operating Income by Reportable Segment
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the consolidated financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.
Revenues by reportable segment reconciled to consolidated revenues for the years ended December 31, 2020 and December 31, 2019 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
Extended Warranty:
|
|
|
|
|
|
Service fee and commission revenue
|
|
$
|
47,607
|
|
|
$
|
46,111
|
|
|
Other revenue
|
|
146
|
|
|
195
|
|
|
Total Extended Warranty
|
|
47,753
|
|
|
46,306
|
|
|
Leased Real Estate:
|
|
|
|
|
|
Rental revenue
|
|
13,365
|
|
|
13,365
|
|
|
Other revenue
|
|
244
|
|
|
277
|
|
|
Total Leased Real Estate
|
|
13,609
|
|
|
13,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
61,362
|
|
|
$
|
59,948
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The operating income (loss) 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 from continuing operations for the years ended December 31, 2020 and December 31, 2019 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Segment operating income (loss)
|
|
|
|
|
|
Extended Warranty
|
|
$
|
6,221
|
|
|
$
|
4,611
|
|
|
Leased Real Estate
|
|
(504)
|
|
|
2,761
|
|
|
Total segment operating income
|
|
5,717
|
|
|
7,372
|
|
|
Net investment income
|
|
2,625
|
|
|
2,905
|
|
|
Net realized gains
|
|
580
|
|
|
796
|
|
|
Gain on change in fair value of equity investments
|
|
1,267
|
|
|
561
|
|
|
Gain on change in fair value of limited liability investments, at fair value
|
|
4,046
|
|
|
4,475
|
|
|
Net change in unrealized loss on private company investments
|
|
(744)
|
|
|
(324)
|
|
|
Other-than-temporary impairment loss
|
|
(117)
|
|
|
(75)
|
|
|
Interest expense not allocated to segments
|
|
(7,719)
|
|
|
(8,991)
|
|
|
Other revenue and expenses not allocated to segments, net
|
|
(10,606)
|
|
|
(8,524)
|
|
|
Amortization of intangible assets
|
|
(2,291)
|
|
|
(2,548)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on change in fair value of debt
|
|
1,173
|
|
|
1,052
|
|
|
Loss on extinguishment of debt, net
|
|
(468)
|
|
|
—
|
|
|
Equity in net income of investee
|
|
—
|
|
|
169
|
|
|
Loss from continuing operations before income tax benefit
|
|
(6,537)
|
|
|
(3,132)
|
|
|
Income tax benefit
|
|
(1,115)
|
|
|
(363)
|
|
|
Loss from continuing operations
|
|
$
|
(5,422)
|
|
|
$
|
(2,769)
|
|
NOTE 25 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company 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:
•Level 1 – Quoted prices for identical instruments in active markets.
•Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
•Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The Company classifies its investments in fixed maturities as available-for-sale and reports these investments at fair value. The Company's equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, warrant liability and stock-based compensation liabilities are measured and reported at fair value.
Fixed maturities - Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence. All classes of the Company’s fixed maturities, primarily consisting of investments in US. Treasury bills and government bonds; obligations of states, municipalities and political subdivisions; mortgage-backed securities; and corporate securities, are classified as Level 2. Level 2 is applied to valuations based upon 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.
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. The Company has 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.
The following is a description of the significant inputs, by asset class, used by the third-party pricing services to determine the fair values of our fixed maturities included in Level 2:
•U.S. government, government agencies and authorities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets and maturity.
•States, municipalities and political subdivisions are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, new issuances and credit spreads.
•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.
•Corporate securities are generally priced using the market approach using pricing vendors. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, issuer rating, benchmark yields, maturity and credit spreads.
Equity investments - Fair values of equity investments, including warrants, reflect quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets exist.
Limited liability investments, at fair value - Limited liability investments, at fair value include the underlying investments of Net Lease and Argo Holdings. 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 fair value of Net Lease's investments in limited liability companies is based upon the net asset values of the underlying investments in companies as a practical expedient to estimate fair value. The Company applies the net asset value practical expedient to Net Lease's limited liability investments on an investment-by-investment basis unless it is probable that the Company will sell a portion of an investment at an amount different from the net asset value of the investment. Investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy.
•The fair value of Argo Holdings' limited liability investments that hold investments in search funds is based on the initial investment in the search funds. The fair value of Argo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach including valuation multiples applied to corresponding performance metrics, such as earnings before interest, tax, depreciation and amortization; revenue; or net earnings. The selected valuation multiples were estimated using multiples provided by the investees and review of those multiples in light of investor updates, performance reports, financial statements and other relevant information. These investments are categorized in Level 3 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
Real estate investments - The fair value of real estate investments involves a combination of the market and income valuation techniques. Under this approach, a market-based capitalization rate is derived from comparable transactions, adjusted for any unique characteristics of each asset, and applied to the asset under consideration. The cap rates used during underwriting and subsequent valuation incorporate the consideration of risks of vacancy and collection loss, administrative costs of owning net leased assets and possible capital expenditures that could be determined a landlord expense. These investments are categorized in Level 3 of the fair value hierarchy.
Subordinated debt - 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. The subordinated debt is categorized in Level 2 of the fair value hierarchy.
Warrant liability - As described in Note 14, "Debt," the Company issued the KWH Warrants on March 1, 2019. On December 1, 2020, the Company repurchased the KWH Warrants. The KWH Warrants are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets at December 31, 2019. The fair value of the warrant liability was estimated using an internal model without relevant observable market inputs. The significant inputs used in the model include an enterprise value multiple applied to earnings before interest, tax, depreciation and amortization. The implied enterprise value is reduced by the remaining debt associated with the 2019 KWH Loan to determine an implied equity value. The liability classified warrants are categorized in Level 3 of the fair value hierarchy.
Stock-based compensation liabilities - As described in Note 19, "Stock-Based Compensation," certain of the restricted stock awards granted by PWSC are classified as a liability. Liability-classified awards are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of the restricted stock awards granted by PWSC are estimated using an internal valuation model without relevant observable market inputs. The significant inputs used in the model include a valuation multiple applied to trailing twelve month earnings before interest, tax, depreciation and amortization. Liability-classified restricted stock awards are categorized in Level 3 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2020 and December 31, 2019 are as follows. Certain investments in limited liability companies that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following tables to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Fair Value Measurements at the End of the Reporting Period Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Measured at Net Asset Value
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government, government agencies and authorities
|
|
$
|
10,104
|
|
|
$
|
—
|
|
|
$
|
10,104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
States, municipalities and political subdivisions
|
|
1,454
|
|
|
—
|
|
|
1,454
|
|
|
—
|
|
|
—
|
|
|
Mortgage-backed
|
|
5,394
|
|
|
—
|
|
|
5,394
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
3,764
|
|
|
—
|
|
|
3,764
|
|
|
—
|
|
|
—
|
|
|
Total fixed maturities
|
|
20,716
|
|
|
—
|
|
|
20,716
|
|
|
—
|
|
|
—
|
|
|
Equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
155
|
|
|
155
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Warrants
|
|
289
|
|
|
17
|
|
|
272
|
|
|
—
|
|
|
—
|
|
|
Total equity investments
|
|
444
|
|
|
172
|
|
|
272
|
|
|
—
|
|
|
—
|
|
|
Limited liability investments, at fair value
|
|
32,811
|
|
|
—
|
|
|
—
|
|
|
3,263
|
|
|
29,548
|
|
|
Real estate investments
|
|
10,662
|
|
|
—
|
|
|
—
|
|
|
10,662
|
|
|
—
|
|
|
Other investments
|
|
294
|
|
|
—
|
|
|
294
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
|
157
|
|
|
—
|
|
|
157
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
|
$
|
65,084
|
|
|
$
|
172
|
|
|
$
|
21,439
|
|
|
$
|
13,925
|
|
|
$
|
29,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
50,928
|
|
|
$
|
—
|
|
|
$
|
50,928
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Warrant liability
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation liabilities
|
|
443
|
|
|
—
|
|
|
—
|
|
|
443
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
51,371
|
|
|
$
|
—
|
|
|
$
|
50,928
|
|
|
$
|
443
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Fair Value Measurements at the End of the Reporting Period Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Measured at Net Asset Value
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government, government agencies and authorities
|
|
$
|
13,316
|
|
|
$
|
—
|
|
|
$
|
13,316
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
States, municipalities and political subdivisions
|
|
600
|
|
|
—
|
|
|
600
|
|
|
—
|
|
|
—
|
|
|
Mortgage-backed
|
|
2,939
|
|
|
—
|
|
|
2,939
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
5,340
|
|
|
—
|
|
|
5,340
|
|
|
—
|
|
|
—
|
|
|
Total fixed maturities
|
|
22,195
|
|
|
—
|
|
|
22,195
|
|
|
—
|
|
|
—
|
|
|
Equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
2,406
|
|
|
2,406
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Warrants
|
|
15
|
|
|
5
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
Total equity investments
|
|
2,421
|
|
|
2,411
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
Limited liability investments, at fair value
|
|
29,078
|
|
|
—
|
|
|
—
|
|
|
4,392
|
|
|
24,686
|
|
|
Real estate investments
|
|
10,662
|
|
|
—
|
|
|
—
|
|
|
10,662
|
|
|
—
|
|
|
Other investments
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
—
|
|
|
—
|
|
|
Short-term investments
|
|
155
|
|
|
—
|
|
|
155
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
|
$
|
65,520
|
|
|
$
|
2,411
|
|
|
$
|
23,369
|
|
|
$
|
15,054
|
|
|
$
|
24,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
54,655
|
|
|
$
|
—
|
|
|
$
|
54,655
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Warranty liability
|
|
249
|
|
|
—
|
|
|
—
|
|
|
249
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
54,904
|
|
|
$
|
—
|
|
|
$
|
54,655
|
|
|
$
|
249
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the years ended December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Assets:
|
|
|
|
|
|
Limited liability investments, at fair value:
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,392
|
|
|
$
|
4,124
|
|
|
Purchases
|
|
21
|
|
|
1,403
|
|
|
Distributions received
|
|
(808)
|
|
|
(1,284)
|
|
|
Realized gains included in net loss
|
|
474
|
|
|
825
|
|
|
Change in fair value of limited liability investments, at fair value included in net loss
|
|
(816)
|
|
|
(676)
|
|
|
Ending balance
|
|
$
|
3,263
|
|
|
$
|
4,392
|
|
|
Unrealized losses on limited liability investments, at fair value held at end of period:
|
|
|
|
|
|
Included in net loss
|
|
$
|
(816)
|
|
|
$
|
(676)
|
|
|
Included in other comprehensive income (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate investments:
|
|
|
|
|
|
Beginning balance
|
|
$
|
10,662
|
|
|
$
|
10,662
|
|
|
Change in fair value of real estate investments included in net loss
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
$
|
10,662
|
|
|
$
|
10,662
|
|
|
Unrealized gains recognized on real estate investments held at end of period:
|
|
|
|
|
|
Included in net loss
|
|
—
|
|
|
—
|
|
|
Included in other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
Ending balance - assets
|
|
$
|
13,925
|
|
|
$
|
15,054
|
|
|
Liabilities:
|
|
|
|
|
|
Warrant liability:
|
|
|
|
|
|
Beginning balance
|
|
$
|
249
|
|
|
$
|
—
|
|
|
Issuance of warrants
|
|
—
|
|
|
361
|
|
|
Termination of warrants
|
|
(336)
|
|
|
—
|
|
|
Change in fair value of warrant liability included in net loss
|
|
87
|
|
|
(112)
|
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
249
|
|
|
Unrealized losses (gains) recognized on warrant liability held at end of period:
|
|
|
|
|
|
Included in net loss
|
|
$
|
87
|
|
|
$
|
(112)
|
|
|
Included in other comprehensive income (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Stock-based compensation liabilities:
|
|
|
|
|
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Issuance of stock-based compensation awards
|
|
443
|
|
|
—
|
|
|
Change in fair value of stock-based compensation liabilities included in net loss
|
|
—
|
|
|
—
|
|
|
Ending balance
|
|
$
|
443
|
|
|
$
|
—
|
|
|
Unrealized gains recognized on stock-based compensation liabilities held at end of period:
|
|
|
|
|
|
Included in net loss
|
|
—
|
|
|
—
|
|
|
Included in other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
Ending balance - liabilities
|
|
$
|
443
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
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, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Categories
|
|
Fair Value
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Input Value(s)
|
|
Limited liability investments, at fair value
|
|
$
|
3,263
|
|
|
Market approach
|
|
Valuation multiples
|
|
3.1x-8.0x
|
|
Real estate investments
|
|
$
|
10,662
|
|
|
Market and income approach
|
|
Cap rates
|
|
7.5
|
%
|
|
Stock-based compensation liabilities
|
|
$
|
443
|
|
|
Market approach
|
|
Valuation multiple
|
|
6.0x
|
|
|
|
|
|
|
|
|
|
|
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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Categories
|
|
Fair Value
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Input Value(s)
|
|
Limited liability investments, at fair value
|
|
$
|
4,392
|
|
|
Market approach
|
|
Valuation multiples
|
|
3.1x-7.0x
|
|
Real estate investments
|
|
$
|
10,662
|
|
|
Market and income approach
|
|
Cap rates
|
|
7.5
|
%
|
|
Warranty liability
|
|
$
|
249
|
|
|
Market approach
|
|
Valuation multiple
|
|
6.0x
|
Investments Measured Using the Net Asset Value per Share Practical Expedient
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Fair Value (in thousands)
|
|
Unfunded Commitments
|
|
Redemption Frequency
|
|
Redemption Notice Period
|
|
Limited liability investments, at fair value
|
|
$
|
29,548
|
|
|
n/a
|
|
n/a
|
|
n/a
|
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Fair Value (in thousands)
|
|
Unfunded Commitments
|
|
Redemption Frequency
|
|
Redemption Notice Period
|
|
Limited liability investments, at fair value
|
|
$
|
24,686
|
|
|
n/a
|
|
n/a
|
|
n/a
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are adjusted for observable price changes or written down to fair value as a result of an impairment. For the years ended December 31, 2020 and December 31, 2019, the Company recorded adjustments to decrease the fair value of an certain investments in private companies for observable price changes of zero and $0.2 million, respectively, which are included in net change in unrealized loss on private company investments in the consolidated statements of operations. The Company recorded impairments related to investments in private companies of $0.7 million and $0.2 million for the years ended December 31, 2020 and December 31, 2019, respectively, which are included in net change in unrealized loss on private company investments in the consolidated statements of operations. The impairments recorded for the year ended December 31, 2020 are a result of the impact of COVID-19 on the investments' underlying business. To determine the fair value of investments in these private companies, the Company considered rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable transactions, trading multiples and changes in market outlook, among other factors. The Company has classified the fair value measurements of these investments in private companies as Level 3 because they involve significant unobservable inputs.
As further discussed in Note 4, "Acquisitions," the Company acquired Geminus on March 1, 2019. The fair values of intangible assets and deferred service fees associated with the acquisition of Geminus were determined to be Level 3 under the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for these Level 3 measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Categories
|
|
Fair Value
|
|
Valuation Techniques
|
|
Unobservable Inputs
|
|
Input Value(s)
|
|
Customer relationships
|
|
$
|
3,732
|
|
|
Multi-period excess earnings
|
|
Growth rate
|
|
3.0
|
%
|
|
|
|
|
|
|
|
Attrition rate
|
|
20.0
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
13.0
|
%
|
|
Trade names
|
|
$
|
1,974
|
|
|
Relief from royalty
|
|
Royalty rate
|
|
0.25% - 2.0%
|
|
|
|
|
|
|
|
Discount rate
|
|
13.0
|
%
|
|
Deferred service fees - Penn
|
|
$
|
8,734
|
|
|
Bottom-up
|
|
Normal profit margin
|
|
15.5
|
%
|
|
|
|
|
|
|
|
Total direct costs
|
|
70.3
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
5.0
|
%
|
|
Deferred service fees - Prime
|
|
$
|
1,830
|
|
|
Bottom-up
|
|
Normal profit margin
|
|
8.5
|
%
|
|
|
|
|
|
|
|
Total direct costs
|
|
69.8
|
%
|
|
|
|
|
|
|
|
Discount rate
|
|
5.0
|
%
|
NOTE 26 RELATED PARTIES
Related party transactions, including services provided to or received by the Company's subsidiaries, are measured in part by the amount of consideration paid or received as established and agreed by the parties. Except where disclosed elsewhere in these consolidated financial statements, the following is a summary of related party relationships and transactions.
(a) Argo Management Group, LLC
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, 2020 and December 31, 2019, 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 2019, the Company funded approximately $0.6 million in response to Capital Calls. During 2019, 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. Argo Holdings made no Capital Calls during the year ended December 31, 2020.
(b) Itasca Capital Ltd.
The Company formerly held an investment in the common stock of ICL, a publicly traded Canadian corporation, that was recorded as investment in investee in the consolidated balance sheets. During the fourth quarter of 2019, the Company sold its remaining investment in the common stock of ICL. The Company owned zero common shares of ICL at December 31, 2020 and December 31, 2019.
Fitzgerald served as a member of the ICL Board of Directors from June 9, 2016 through December 11, 2019. 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.
On October 9, 2019, the Company executed an agreement to sell 1,974,113 shares of ICL common stock, at a price of C$0.35 per share, to a third party for cash proceeds totaling C$0.7 million. On October 31, 2019, the Company executed an agreement to sell 3,011,447 shares of ICL common stock, at a price of C$0.35 per share, to Larry G. Swets, Jr. ("Swets") for consideration
|
|
|
|
|
|
|
|
|
|
|
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
|
totaling C$1.1 million, comprised of cash proceeds of C$0.2 million and 247,450 shares of the Company’s common stock. Both transactions closed during the fourth quarter of 2019.
The 247,450 shares of the Company’s common stock were awarded to Swets pursuant to the Amended RSA Agreement executed on September 5, 2018 related to Swets’ departure from the Company. Refer to Note 19, "Stock-Based Compensation," for further information.
Swets 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.
(c) Limited liability investments
The Company’s investments include investments in limited liability companies in which an officer or former officer of the Company is named as a Manager or is authorized to act on behalf of the Manager under the respective operating agreement.
1347 Investors LLC:
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, a publicly traded company. The Company owned zero of the membership units at December 31, 2020 and December 31, 2019. The Company's investment in 1347 Investors prior to liquidation in the fourth quarter of 2019 was 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 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 was calculated based on a model that distributed the net equity of 1347 Investors to all classes of membership interests. The model used quoted market prices and significant market observable inputs. The most significant input to the model was the observed stock price of Limbach common stock.
ICL owned 100.0% of the membership units at December 31, 2020 and December 31, 2019 and Fitzgerald served as a member of the ICL Board of Directors from June 9, 2016 through December 11, 2019.
Pursuant to a Distribution and Redemption Agreement, dated as of September 30, 2019, by and among 1347 Investors and its members, the Company received distributions on November 19, 2019 of cash proceeds of $0.6 million, 594,750 shares of Limbach common stock and 400,000 warrants, exercisable at $15 and expiring July 20, 2023, on Limbach common shares. As a result of this distribution, the Company no longer owns membership units in 1347 Investors.
NOTE 27 COMMITMENTS AND CONTINGENT LIABILITIES
(a) Legal proceedings:
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, through its indirect, wholly-owned subsidiary, CMC Acquisition, LLC ("CMCA"), 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 CRIC TRT Acquisition, LLC ("CRIC"), 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 alleged that DGI was owed certain fees under the MSA that had not been paid.
In March 2021, DGI, TRT LeaseCo and various other entities affiliated with each of them entered into a settlement agreement with respect to such litigation and certain other matters ("CMC Settlement Agreement"). Pursuant to the CMC Settlement Agreement, the parties agreed that proceeds from increased rental payments due to an earlier amendment to the lease of the Real Property (or any borrowings against such increased rental payments) would be split 80% to DGI as a management fee under the MSA and 20% to CMCA as a priority distribution on its ownership of CMC, after CMCA received a priority payment of $1.5 million. The parties also agreed that net proceeds from an eventual sale or renewal of the lease of the Real Property (after repayment of outstanding indebtedness and various other fees and expenses) would be split as follows:
(a) if such net proceeds are equal to or greater than $72 million, (i) CMCA would receive the first $40 million as a distribution of a preferred return on its ownership of CMC, (ii) CRIC would receive the next $9.4 million as a distribution on its ownership of CMC, (iii) DGI would receive the next $30.6 million as a management fee under the MSA, and (iv) the remainder of such net proceeds (if any) would be split 48.6% to CMCA as a distribution in respect
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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of its ownership of CMC, 40% to DGI in the form of a management fee under the MSA, and 11.4% to CRIC s a distributions in respect of its ownership of CMC; or
(b) if such net proceeds are less than $72 million, (i) 55% to CMCA as a distribution of a preferred return on its ownership of CMC, (ii) 12.9% to CRIC as a distribution on its ownership of CMC, and (iii) 32.1% to DGI in the form of a management fee to DGI under the MSA. In connection with the CMC Settlement Agreement, the Company recorded a liability of $2.6 million for the 80% management fee due to DGI at December 31, 2020, which is included in general and administrative expenses in its consolidated statement of operations for the year ended December 31, 2020.
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. During the third and fourth quarters of 2020, the Company made reimbursement payments to Aegis of $0.5 million in connection with the Settlement Agreement. The Company reported the payments to Aegis in general and administrative expenses in its consolidated statement of operations for the year ended December 31, 2020. The Company’s potential exposure under these agreements was not reasonably determinable at December 31, 2020, and no liability has been recorded in the consolidated financial statements at December 31, 2020.
(b) Guarantee:
As further discussed in Note 5, "Discontinued Operations," as part of the transaction to sell Mendota, the Company will indemnify the buyer for loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The Company's potential exposure under these agreements was not reasonably determinable at December 31, 2020, and no liability has been recorded in the consolidated financial statements at December 31, 2020.
(c) Commitments:
The Company has entered into subscription agreements to commit up to $2.6 million of capital to allow for participation in limited liability investments. At December 31, 2020, the unfunded commitment was zero.
(d) Collateral pledged and restricted cash:
Short-term investments with an estimated fair value of $0.2 million at December 31, 2020 and December 31, 2019, were on deposit with state regulatory authorities.
The Company also has restricted cash of $30.6 million and $12.2 million at December 31, 2020 and December 31, 2019, respectively. Included in restricted cash are:
•zero and $1.1 million at December 31, 2020 and December 31, 2019, respectively, held in escrow as part of the transaction to sell Mendota;
•$27.7 million and $8.6 million at December 31, 2020 and December 31, 2019, respectively, held as deposits by IWS, PWSC, Geminus and PWI;
•$1.9 million at December 31, 2020 and December 31, 2019, on deposit with state regulatory authorities; and
•$1.0 million and $0.6 million at December 31, 2020 and December 31, 2019, respectively, pledged to third-parties as deposits or to collateralize liabilities. 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.
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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NOTE 28 REGULATORY CAPITAL REQUIREMENTS AND RATIOS
In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualty insurance companies that may not be adequately capitalized. In general, insurers reporting surplus as regards policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 are subject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2020, 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, 2020, Amigo's RBC was 1,045%.
Kingsway Re, which is domiciled in Barbados, is required by the regulator in Barbados to maintain minimum capital levels. As of December 31, 2020, the capital maintained by Kingsway Re was in excess of the regulatory capital requirements in Barbados.
NOTE 29 STATUTORY INFORMATION AND POLICIES
The Company's insurance subsidiary, Amigo, prepares statutory basis financial statements in accordance with accounting practices prescribed or permitted by the Florida Office of Insurance Regulation. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed. Such practices may differ from state to state; may differ from company to company within a state; and may change in the future.
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 and the inclusion of changes in deferred tax assets and liabilities in net loss.
Statutory capital and surplus and statutory net loss for Amigo are:
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(in thousands)
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December 31,
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2020
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2019
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Net loss, statutory basis
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$
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(138)
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$
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(536)
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Capital and surplus, statutory basis
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$
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1,987
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$
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2,143
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Amigo is required to hold minimum levels of statutory capital and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus, or company action level RBC, necessary to satisfy regulatory requirements for Amigo was $0.4 million at December 31, 2020. Company action level RBC is the level at which an insurance company is required to file a corrective action plan with its regulators and is equal to 200% of the authorized control level RBC.
Dividends paid by Amigo are restricted by regulatory requirements of the Florida Office of Insurance Regulation. The maximum amount of dividends that can be paid to shareholders by insurance companies domiciled in the state of Florida without prior regulatory approval is generally limited to the greater of (i) 10% of a company's statutory capital and surplus at the end of the previous year or (ii) 100% of the company's net income for the previous year and is generally required to be paid out of an insurance company's unassigned funds.
At December 31, 2020, Amigo was restricted from making any dividend payments to the holding company without regulatory approval.
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KINGSWAY FINANCIAL SERVICES INC.
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