Operating Loss
Operating loss represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses are presented in the consolidated statements of operations but are not subtotaled by segment. However, this information is available in total and by segment in Note 15, "Segmented Information" to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure is loss from continuing operations before income tax expense (benefit) which, in addition to operating loss, includes net investment income, net realized gains on investments, loss on change in fair value of debt, other income, general and administrative expenses, interest expense, amortization of other intangible assets, and equity in net loss of investee. Gross Premiums Written
While net premiums earned is the related U.S. GAAP measure used in the consolidated statements of operations, gross premiums written is the component of net premiums earned that measures insurance business produced before the impact of ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. We use this measure as an overall gauge of gross business volume in Insurance Underwriting. Net Premiums Written
While net premiums earned is the related U.S. GAAP measure used in the consolidated statements of operations, net premiums written is the component of net premiums earned that measures the difference between gross premiums written and the impact of ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. We use this measure as an indication of retained or net business volume in Insurance Underwriting. Underwriting Ratios
Kingsway, like many insurance companies, analyzes performance based on underwriting ratios such as combined, expense and loss ratios. The loss ratio is derived by dividing the amount of net loss and loss adjustment expenses incurred by net premiums earned. The expense ratio is derived by dividing the sum of commissions and premium taxes and general and administrative expenses by net premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss. Critical Accounting Estimates and Assumptions The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. 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 unaudited consolidated interim financial statements include the provision for unpaid loss and loss adjustment expenses, valuation of fixed maturities and equity investments, valuation of deferred tax assets, valuation of other intangible assets and goodwill recoverability, deferred policy acquisition costs, and fair value assumptions for debt obligations.
The Company's critical accounting estimates and assumptions are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2011 Annual Report. There has been no material change subsequent to December 31, 2011 to the information previously disclosed in the 2011 Annual Report with respect to these critical accounting estimates and assumptions.

RESULTS OF CONTINUING OPERATIONS
A reconciliation of total segment net operating loss to net loss for the three
months ended March 31, 2012 and 2011 is presented in Table 1 below:
Table 1 Segment Net Income (Loss)
For the three months ended March 31 (in millions of dollars)
                                                      2012        2011      Change
Segment operating income (loss)
Insurance Underwriting                                (3.2 )      (9.7 )       6.5
Insurance Services                                     1.7         1.0         0.7
Total segment operating loss                          (1.5 )      (8.7 )       7.2
Net investment income                                  0.8         1.1        (0.3 )
Net realized gains                                     0.3           -         0.3
Loss on change in fair value of debt                  (4.3 )      (2.6 )      (1.7 )
Other income and expenses not allocated to
segments, net                                         (3.6 )      (5.3 )       1.7
Interest expense                                      (1.8 )      (1.9 )       0.1
Equity in net loss of investees                       (2.3 )         -        (2.3 )
Loss from continuing operations before income
tax expense (benefit)                                (12.4 )     (17.4 )       5.0
Income tax expense (benefit)                           0.1        (0.4 )       0.5
Loss from continuing operations                      (12.5 )     (17.0 )       4.5
Loss on disposal of discontinued operations, net
of taxes                                                 -        (1.3 )       1.3
Net loss                                             (12.5 )     (18.3 )       5.8

Loss from Continuing Operations, Net Loss and Diluted Loss Per Share In the first quarter of 2012, we incurred a loss from continuing operations of $12.5 million ($0.24 per diluted share) compared to a loss of $17.0 million ($0.33 per diluted share) in the first quarter of 2011. The loss from continuing operations in 2012 is attributable to operating losses in Insurance Underwriting, corporate general expenses, interest expense, loss on the change in fair value of debt and equity in net loss of investees. The loss in 2011 is due to Insurance Underwriting operating loss, loss on the change in fair value of debt, interest expense and corporate general expenses.
In the first quarter of 2012, we incurred a net loss of $12.5 million compared to $18.3 million in the first quarter of 2011. The diluted loss per share was $0.24 for the first quarter of 2012 compared to a diluted loss per share of $0.35 for the first quarter of 2011.
Insurance Underwriting
For the three months ended March 31, 2012, Insurance Underwriting gross premiums written were $39.3 million compared to $42.4 million for the three months ended March 31, 2011, representing a 7.3% decrease. Net premiums written decreased 15.7% to $33.9 million for the three months ended March 31, 2012 compared with $40.2 million for the three months ended March 31, 2011. Net premiums earned decreased 35.7% to $29.3 million for the three months ended March 31, 2012 compared with $45.6 million for the three months ended March 31, 2011.

The decrease in premiums written and earned is due to significant reductions in premium volumes in the non-standard automobile line of business. Insurance Underwriting has withdrawn from a number of states, increased its rate adequacy in the states where it continues to actively produce business and discontinued unprofitable programs and unaffiliated managing general agent relationships. Furthermore, net premiums written declined by a greater percent than gross premiums written due to a quota share reinsurance arrangement entered into by Amigo for the three months ended March 31, 2012.
The Insurance Underwriting operating loss decreased to $3.2 million for the three months ended March 31, 2012 compared with $9.7 million for the three months ended March 31, 2011. The decrease is primarily attributed to a decrease in loss and loss adjustment expenses, as reflected in the loss ratio, against a smaller volume of net premiums earned. The Insurance Underwriting loss ratio for the first quarter of 2012 was 75.0% compared to 91.1% for the first quarter of 2011. The decrease in the loss ratio

reflects the Company's efforts throughout 2011 to improve rate adequacy in the states where it continues to actively produce business; the benefits of having discontinued certain unprofitable programs; and improved outcomes as a result of process initiatives launched in the Company's claims departments.
The Insurance Underwriting expense ratio was 42.2% in the first quarter of 2012 and 36.6% in the first quarter of 2011. This deterioration is a derivative effect of the 35.7% decrease in net premiums earned cited above which has made it more difficult for Insurance Underwriting to cover its fixed overhead expenses. In response to the shrinkage in its volume of business, Insurance Underwriting has been taking steps to reduce its fixed overhead expenses. The Insurance Underwriting combined ratio was 117.2% in the first quarter 2012 compared with 127.7% in the first quarter of 2011, reflecting the dynamics which affected the loss and expense ratios.
The Insurance Underwriting operating loss includes policy fee income of $1.8 million and $2.9 million for the three months ended March 31, 2012 and 2011, respectively; however, when calculating expense and combined ratios under U.S. GAAP, policy fee income is excluded.
Insurance Services
The Insurance Services service fee and commission income increased 5.6% to $9.5 million for the three months ended March 31, 2012 compared with $9.0 million for the three months ended March 31, 2011. The Insurance Services operating income increased to $1.7 million for the three months ended March 31, 2012 compared with $1.0 million for the three months ended March 31, 2011. These increases are derived from higher revenues and operating income at ARS which are the result of ARS managing higher premium volumes for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. Net Investment Income
Net investment income decreased to $0.8 million in the first quarter of 2012 compared to $1.1 million in the first quarter of 2011. The decrease is primarily a result of a decline in the Company's total investments, cash and cash equivalents of approximately 32.8% since March 31, 2011 as a result of reduced volumes of business and acceleration of claim payments in Insurance Underwriting as well as corporate debt buy-backs and other corporate initiatives. Additionally, yields on fixed maturities remain at historically low levels such that reinvestment of maturing investments occurs at yields lower than the yields on the maturing investments.
Net Realized Gains
The Company incurred net realized gains in the first quarter of 2012 of $0.3 million compared to zero in the first quarter of 2011. The net realized gains in 2012 primarily resulted from the liquidation of fixed maturities in Insurance Underwriting. There were no impairments recorded during the first quarters of 2012 and 2011 for other-than-temporarily impaired investments. Loss on Change in Fair Value of Debt
The loss on change in fair value of debt amounted to $4.3 million in the first quarter of 2012 compared to $2.6 million in the first quarter of 2011. The 2012 loss is primarily due to an increase in the fair values of the Company's subordinated debt and LROC preferred units, while the 2011 loss is primarily attributable to an increase in the fair values of the Company's senior unsecured debentures.
Other Income and Expenses not Allocated to Segments Other income and expenses not allocated to segments were $3.6 million in the first quarter of 2012 compared to $5.3 million in the first quarter of 2011. The decrease is primarily due to $0.8 million more of write-off, depreciation, and amortization of computer hardware and software in 2011 than in 2012 and $0.4 million more of salaries and benefits expense recorded in 2011 than in 2012 reflective of increased severance expense. Interest Expense

Interest expense for the first quarter of 2012 was $1.8 million compared to $1.9 million in the first quarter of 2011. The decrease is due to the repurchase of debt during 2011.
Equity in Net Loss of Investees
At March 31, 2012, the Company has a 74.9% common equity interest in Atlas Financial Holdings, Inc., a financial services holding company. In 2012, we recorded $2.3 million of loss from this investment. During 2011, the Company had no equity in

net loss from investees. See Note 7, "Investment in Investees" to the unaudited consolidated interim financial statements for further details. Income Tax Expense (Benefit)

Income tax expense on continuing operations for the first quarter of 2012 was $0.1 million compared to income tax benefit of $0.4 million in the first quarter of 2011. The increase in income tax expense is primarily attributable to a $0.2 million lower income tax benefit recorded in 2012 than in 2011 related to the Company's Canadian operations and a $0.2 million Canadian withholding tax refund recorded in 2011.
INVESTMENTS
Portfolio Composition
All of our investments are classified as available-for-sale and are reported at fair value. At March 31, 2012, we held cash and cash equivalents and investments with a fair value of $184.8 million. As of March 31, 2012, we held an investments portfolio comprised primarily of fixed maturities issued by the U.S. Government, government agencies and high quality corporate issuers. Investments held by our insurance subsidiaries must comply with applicable domiciliary state regulations that prescribe the type, quality and concentration of investments. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.
Table 2 below summarizes the fair value of investments, including cash and cash equivalents, at the dates indicated.
TABLE 2 Fair value of investments, including cash and cash equivalents As at March 31, 2012 and December 31, 2011 (in millions of dollars, except for

percentages)
Type of investment          March 31, 2012       % of Total      December 31, 2011       % of Total
Fixed maturities:
U.S. government,
government agencies and
authorities                           36.3             19.6 %                 46.8             23.1 %
Canadian government                    3.8              2.1 %                  3.8              1.9 %
States municipalities
and political
subdivisions                           7.3              4.0 %                  8.5              4.2 %
Mortgage-backed                        5.9              3.2 %                  6.2              3.0 %
Asset-backed securities
and collateralized
mortgage obligations                   6.0              3.2 %                  6.4              3.2 %
Corporate                             45.7             24.7 %                 22.0             10.8 %
Total fixed maturities               105.0             56.8 %                 93.7             46.2 %
Equity investments                     3.3              1.8 %                  3.0              1.5 %
Other investments                      0.5              0.3 %                  0.5              0.2 %
Short-term investments                 3.4              1.8 %                 20.2             10.0 %
Total investments                    112.2             60.7 %                117.4             57.9 %
Cash and cash
equivalents                           72.6             39.3 %                 85.5             42.1 %
Total                                184.8            100.0 %                202.9            100.0 %

Liquidity and Cash Flow Risk
Table 3 below summarizes the fair value by contractual maturities of the fixed
maturities portfolio, excluding cash and cash equivalents at March 31, 2012 and
December 31, 2011.
TABLE 3 Fair value of fixed maturities by contractual maturity date
As at March 31, 2012 and December 31, 2011 (in millions of dollars)
                             March 31, 2012       % of Total       December 31, 2011       % of Total
Due in less than one
year                                   26.6             25.3 %                  43.8             46.7 %
Due in one through five
years                                  65.2             62.1 %                  35.7             38.1 %
Due after five through
ten years                               3.9              3.7 %                   4.4              4.7 %
Due after ten years                     9.3              8.9 %                   9.8             10.5 %
Total                                 105.0            100.0 %                  93.7            100.0 %

At March 31, 2012, 87.4% of fixed maturities, including treasury bills, government bonds and corporate bonds, had contractual maturities of five years or less. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. The Company holds cash and high-grade short-term assets which, along with fixed maturities, management believes are sufficient in amount for the payment of unpaid loss and loss adjustment expenses and other corporate obligations on a timely basis. In the event that additional cash is required to meet obligations to our policyholders, we believe that the high quality, liquid investments in the portfolios provide us with sufficient liquidity.
Market Risk
Market risk is the risk that we will incur losses due to adverse changes in interest or currency exchange rates and equity prices. Given our U.S. operations typically invest in U.S. dollar denominated instruments and our relatively insignificant investment in equity instruments, our primary market risk exposures in the investments portfolio are to changes in interest rates. Because the investments portfolio is comprised of primarily fixed maturity instruments that are usually held to maturity, periodic changes in interest rate levels generally impact our financial results to the extent that the investments are recorded at market value and reinvestment yields are different than the original yields on maturing instruments. During periods of rising interest rates, the market value of the existing fixed maturities will generally decrease and realized gains on fixed maturities will likely be reduced. The reverse is true during periods of declining interest rates. Credit Risk
Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation. Credit risk arises from our positions in term deposits, corporate debt instruments and government bonds.
The Investment and Capital Committee of the Board of Directors is responsible for the oversight of key investment policies and limits. These policies and limits are subject to annual review and approval by the Investment and Capital Committee. The Investment and Capital Committee is also responsible for ensuring that these policies are implemented and that procedures are in place to manage and control credit risk.
Table 4 below summarizes the composition of the fair value of fixed maturities and short-term investments, excluding cash and cash equivalents, at March 31, 2012 and December 31, 2011, by rating as assigned by Standard and Poor's ("S&P") or Moody's Investors Service ("Moody's"). Fixed maturities consist of predominantly high-quality instruments in corporate and government bonds with approximately 90.9% of those investments rated 'A' or better at March 31, 2012. The 'not rated' category consists primarily of investments in money market and short-term instruments.

 KINGSWAY FINANCIAL SERVICES INC.




TABLE 4 Credit ratings of fixed maturities and short-term investments
As at March 31, 2012 and December 31, 2011
Rating (S&P/Moody's)            March 31, 2012   December 31, 2011
AAA/Aaa                                   56.7 %              76.1 %
AA/Aa                                     14.9                11.8
A/A                                       19.3                11.1
Percentage rated A/A2 or better           90.9 %              99.0 %
BBB/Baa                                    8.8                 0.7
CCC/Caa or lower, or not rated             0.3                 0.3
Total                                    100.0 %             100.0 %

Other-Than-Temporary Impairment
The Company did not incur impairment losses during the first three months of 2012 or 2011 on investments for which a decline in market value was deemed to be other-than-temporary. Management performs a quarterly analysis of our investments portfolio to determine if declines in market value are other-than-temporary. Further information regarding our detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within the "Critical Accounting Estimates and Assumptions" section of Management's Discussion and Analysis.
The length of time an individual investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In the case of an individual investment with a maturity date where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, we would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell investments at a loss.
At March 31, 2012, the gross unrealized losses amounted to $0.2 million, and there were no unrealized losses attributable to non-investment grade fixed maturities.
At each of March 31, 2012 and December 31, 2011, all unrealized losses on individual investments were considered temporary. Fixed maturities in unrealized loss positions continued to pay interest and were not subject to material changes in their respective debt ratings. We concluded that default risk did not exist at the time and, therefore, the declines in value were considered temporary. As we have the capacity to hold these investments to maturity, no impairment provision was considered necessary.

UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Unpaid loss and loss adjustment expenses represent the estimated liabilities for
reported loss events, incurred but not reported ("IBNR") loss events and the
related estimated loss adjustment expenses.
. . .