Following is a list of non-U.S. GAAP measures found throughout this report with their definitions, relationships to U.S. GAAP measures and explanations of their importance to our operations.
Operating Income (Loss)
Operating income (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 income (loss), includes net investment income, net realized (losses) gains on investments, other-than-temporary impairment loss, (loss) gain on change in fair value of debt, other income, general and administrative expenses, interest expense, amortization of other intangible assets, and equity in net income (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
and six months ended June 30, 2012 and 2011 is presented in Table 1 below:
Table 1 Segment Net Income (Loss)
For the three and six months ended June 30 (in millions of dollars)
                                 For the three months ended June 30,         For the six months ended June 30,
                                      2012          2011      Change         2012          2011         Change
Segment operating income (loss)
Insurance Underwriting                (3.9 )        (9.6 )       5.7         (7.1 )       (19.3 )         12.2
Insurance Services                     0.9           0.3         0.6          2.6           1.3            1.3
Total segment operating loss          (3.0 )        (9.3 )       6.3         (4.5 )       (18.0 )         13.5
Net investment income                  0.8           1.2        (0.4 )        1.6           2.3           (0.7 )
Net realized (losses) gains              -             -           -          0.3             -            0.3
Other-than-temporary impairment
loss                                  (0.5 )           -        (0.5 )       (0.5 )           -           (0.5 )
(Loss) gain on change in fair
value of debt                         (2.4 )        11.2       (13.6 )       (6.7 )         8.6          (15.3 )
Other income and expenses not
allocated to segments, net            (0.7 )        (5.8 )       5.1         (4.3 )       (11.2 )          6.9
Interest expense                      (1.9 )        (1.8 )      (0.1 )       (3.7 )        (3.7 )            -
Gain on buy-back of debt                 -           0.6        (0.6 )          -           0.6           (0.6 )
Equity in net income (loss) of
investees                              0.1          (0.5 )       0.6         (2.2 )        (0.5 )         (1.7 )
Loss from continuing operations
before income tax expense
(benefit)                             (7.6 )        (4.4 )      (3.2 )      (20.0 )       (21.9 )          1.9
Income tax expense (benefit)           0.1           0.3        (0.2 )        0.2          (0.1 )          0.3
Loss from continuing operations       (7.7 )        (4.7 )      (3.0 )      (20.2 )       (21.8 )          1.6
Loss on disposal of discontinued
operations, net of taxes                 -             -           -            -          (1.3 )          1.3
Net loss                              (7.7 )        (4.7 )      (3.0 )      (20.2 )       (23.1 )          2.9

Loss from Continuing Operations, Net Loss and Diluted Loss Per Share In the second quarter of 2012, we incurred a loss from continuing operations of $7.7 million ($0.59 per diluted share) compared to a loss of $4.7 million ($0.36 per diluted share) in the second quarter of 2011. For the six months ended June 30, 2012, we incurred a loss from continuing operations of $20.2 million
($1.54 per diluted share) compared to $21.8 million ($1.67 per diluted share)
for the same period in 2011. The loss from continuing operations for the three and six months ended June 30, 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 income (loss) of investees. The loss from continuing operations for the three and six months ended June 30, 2011 is due to Insurance Underwriting operating loss, interest expense and corporate general expenses, offset by gain on the change in fair value of debt. In the second quarter of 2012, we incurred a net loss of $7.7 million ($20.2 million year to date) compared to $4.7 million in the second quarter of 2011 ($23.1 million prior year to date). The diluted loss per share was $0.59 for the second quarter of 2012 ($1.54 year to date) compared to a diluted loss per share of $0.36 for the second quarter of 2011 ($1.77 prior year to date). Insurance Underwriting
For the three months ended June 30, 2012, Insurance Underwriting gross premiums written were $32.2 million compared to $32.0 million for the three months ended June 30, 2011, representing a 0.6% increase ($71.5 million year to date compared to $74.4 million prior year to date, representing a 3.9% decrease). Net premiums written decreased 6.4% to $27.7 million for the three months ended June 30, 2012 compared with $29.6 million for the three months ended June 30, 2011 ($61.6 million year to date

compared to $69.8 million prior year to date, representing a 11.7% decrease). Net premiums earned decreased 27.2% to $31.0 million for the three months ended June 30, 2012 compared with $42.6 million for the three months ended June 30, 2011 ($60.3 million year to date compared with $88.2 million prior year to date, representing a 31.6% decrease).

The decrease in net 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 six months ended June 30, 2012.
The Insurance Underwriting operating loss decreased to $3.9 million for the three months ended June 30, 2012 ($7.1 million year to date) compared with $9.6 million for the three months ended June 30, 2011 ($19.3 million prior year to date). 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 second quarter of 2012 was 77.5% compared to 86.9% for the second quarter of 2011 (76.3% for the six months ended June 30, 2012 compared with 89.1% for the same period in 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 40.6% in the second quarter of 2012 and 41.1% in the second quarter of 2011 (41.4% for the six months ended June 30, 2012 compared with 38.8% for the same period in 2011). This deterioration is a derivative effect of the 27.2% decrease (31.6% year to date) 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 118.1% in the second quarter 2012 compared with 128.0% in the second quarter of 2011 (117.7% for the six months ended June 30, 2012 compared with 127.9% for the same period in 2011), reflecting the dynamics which affected the loss and expense ratios. The Insurance Underwriting operating loss includes policy fee income of $1.7 million and $2.4 million for the three months ended June 30, 2012 and 2011. respectively ($3.5 million and $5.3 million year to date, 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 3.8% to $8.1 million for the three months ended June 30, 2012 ($17.6 million year to date) compared with $7.8 million for the three months ended June 30, 2011 ($16.8 million prior year to date). The Insurance Services operating income increased to $0.9 million for the three months ended June 30, 2012 ($2.6 million year to date) compared with $0.3 million for the three months ended June 30, 2011 ($1.3 million prior year to date). 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 and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011. Net Investment Income
Net investment income decreased to $0.8 million in the second quarter of 2012 ($1.6 million year to date) compared to $1.2 million in the second quarter of 2011 ($2.3 million prior year to date). The decrease is primarily a result of a decline in the Company's total investments, cash and cash equivalents of approximately 30.7% since June 30, 2011, which resulted from reduced volumes of business and acceleration of claim payments in Insurance. 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 second quarter of 2012 of zero ($0.3 million year to date) compared to zero in the second quarter of 2011 (zero prior year to date). The net realized gains in 2012 primarily resulted from the liquidation of fixed maturities in Insurance Underwriting. Other-Than-Temporary Impairment Loss
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, a write-down for other-than-temporary impairment related to other investments of $0.5 million and zero was recorded for the three months

ended June 30, 2012 and June 30, 2011, respectively ($0.5 million and zero for the six months ended June 30, 2012 and June 30, 2011, respectively). There were no write-downs related to fixed maturities and equity investments for other-than-temporary impairments for the three and six months ended June 30, 2012 and June 30, 2011.
(Loss) Gain on Change in Fair Value of Debt The loss on change in fair value of debt amounted to $2.4 million in the second quarter of 2012 compared to a gain of $11.2 million in the second quarter of 2011 (a loss of $6.7 million year to date compared to a gain of $8.6 million prior year to date). The loss for the three and six months ended June 30, 2012 is primarily due to an increase in the fair values of the Company's subordinated debt and LROC preferred units. The gain for the three months ended June 30, 2011 is primarily due to a decrease in the fair values of the Company's subordinated debt and LROC preferred units, while the gain for the six months ended June 30, 2011is primarily attributable to a decrease in the fair values of the Company's subordinated debt and LROC preferred units, offset by an increase in the fair values of the Company's senior unsecured debentures. Other Income and Expenses not Allocated to Segments, Net Other income and expenses not allocated to segments was a net expense of $0.7 million in the second quarter of 2012 compared to $5.8 million in the second quarter of 2011 ($4.3 million year to date compared to $11.2 million prior year to date) . The decrease for the three months ended June 30, 2012 is primarily due to $2.1 million more of foreign exchange losses; $0.9 million more of professional fees, including outside legal and audit fees; $0.4 million more of salaries and benefits expense, reflective of increased severance expense; and $1.4 million more of general and administrative expenses recorded in the second quarter of 2011 compared to the second quarter of 2012.
The decrease for the six months ended June 30, 2012 is primarily due to $2.1 million more of foreign exchange losses recorded in 2011 than in 2012; $0.8 million more of professional fees, including outside legal and audit fees, recorded in 2011 than in 2012; $0.8 million more of write-off, depreciation, and amortization of computer hardware and software in 2011 than in 2012; $0.8 million more of salaries and benefits expense recorded in 2011 than in 2012 reflective of increased severance expense; and $1.9 million more of general and administrative expenses recorded in 2011 than 2012. Interest Expense

Interest expense for the second quarter of 2012 was $1.9 million ($3.7 million year to date) compared to $1.8 million in the second quarter of 2011 ($3.7 million prior year to date). As more fully described in Note 11, "Debt" to the unaudited consolidated interim financial statements, in the first quarter of 2011, the Company exercised 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. The interest is compounded over the deferral period, resulting in an increase in interest expense for the three months ended June 30, 2012.
Gain on Buy-Back of Debt

No debt repurchases were made during the three and six months ended June 30, 2012. During the second quarter of 2011, Kingsway 2007 General Partnership purchased for $10.6 million and subsequently cancelled $11.2 million par value of its senior unsecured debentures with a carrying value of $11.2 million, recording a gain of $0.6 million ($0.6 million prior year to date). Equity in Net Income (Loss) of Investees At June 30, 2012, the Company has a 74.9% common equity interest in Atlas Financial Holdings, Inc., a financial services holding company. For the three months ended June 30, 2012, we recorded income of $0.1 million from this investment (loss of $2.2 million year to date). For the three months ended June 30, 2011, the Company recorded a loss of $0.5 million from this investment ($0.5 million prior year to date). 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 second quarter of 2012 was $0.1 million ($0.2 million year to date) compared to income tax expense of $0.3 million in the second quarter of 2011 (tax benefit of $0.1 million prior year to date). The decrease in income tax expense for the three months ended June 30, 2012 is primarily attributable to a valuation allowance tax expense adjustment recorded in 2011. The increase in income tax expense for the six months ended June 30, 2012 is primarily attributable to a lower income tax benefit recorded in 2012 than in 2011 related to the Company's Canadian operations and a 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 June 30, 2012, we held cash and cash equivalents and investments with a fair value of $169.6 million. As of June 30, 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 June 30, 2012 and December 31, 2011 (in millions of dollars, except for

percentages)
Type of investment          June 30, 2012       % of Total      December 31, 2011       % of Total
Fixed maturities:
U.S. government,
government agencies and
authorities                          35.2             20.8 %                 46.8             23.1 %
Canadian government                   3.8              2.2 %                  3.8              1.9 %
States municipalities
and political
subdivisions                          7.3              4.3 %                  8.5              4.2 %
Mortgage-backed                       8.5              5.0 %                  6.2              3.0 %
Asset-backed securities
and collateralized
mortgage obligations                  2.1              1.2 %                  6.4              3.2 %
Corporate                            46.1             27.2 %                 22.0             10.8 %
Total fixed maturities              103.0             60.7 %                 93.7             46.2 %
Equity investments                    3.2              1.9 %                  3.0              1.5 %
Other investments                       -                - %                  0.5              0.2 %
Short-term investments                0.3              0.2 %                 20.2             10.0 %
Total investments                   106.5             62.8 %                117.4             57.9 %
Cash and cash
equivalents                          63.1             37.2 %                 85.5             42.1 %
Total                               169.6            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 June 30, 2012 and
December 31, 2011.
TABLE 3 Fair value of fixed maturities by contractual maturity date
As at June 30, 2012 and December 31, 2011 (in millions of dollars)
                             June 30, 2012       % of Total       December 31, 2011       % of Total
Due in less than one
year                                  18.0             17.5 %                  43.8             46.7 %
Due in one through five
years                                 72.8             70.7 %                  35.7             38.1 %
Due after five through
ten years                              3.9              3.8 %                   4.4              4.7 %
Due after ten years                    8.3              8.0 %                   9.8             10.5 %
Total                                103.0            100.0 %                  93.7            100.0 %

At June 30, 2012, 88.2% 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