NON-U.S. GAAP FINANCIAL MEASURES
Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the U.S. GAAP presentation of net (loss) income, we show certain statutory reporting information and other non-U.S. GAAP financial measures that we believe are valuable in managing our business and drawing comparisons to our peers. These measures are operating loss (income), gross premiums written, net premiums written, and underwriting ratios.
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 Loss (Income)
Operating loss (income) 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 16, "Segmented Information" to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure is (loss) income from continuing operations before income tax (benefit) expense which, in addition to operating loss (income), includes net investment income, net realized 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, gain on buy-back of debt, 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, 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 operating loss to net (loss) income for the
three and nine months ended September 30, 2012 and 2011 is presented in Table 1
below:
Table 1 Segment Net (Loss) Income
For the three and nine months ended September 30 (in millions of dollars)
                         For the three months ended September 30,         For the nine months ended September 30,
                                 2012           2011       Change          2012            2011            Change
Segment operating (loss)
income
Insurance Underwriting          (16.8 )         (9.0 )       (7.8 )       (23.8 )         (28.3 )             4.5
Insurance Services                0.4            0.5         (0.1 )         2.9             1.9               1.0
Total segment operating
loss                            (16.4 )         (8.5 )       (7.9 )       (20.9 )         (26.4 )             5.5
Net investment income             0.8            1.0         (0.2 )         2.4             3.2              (0.8 )
Net realized gains                1.1            0.1          1.0           1.4             0.1               1.3
Other-than-temporary
impairment loss                     -              -            -          (0.5 )             -              (0.5 )
(Loss) gain on change in
fair value of debt               (3.2 )         17.2        (20.4 )        (9.9 )          25.8             (35.7 )
Other income and
expenses not allocated
to segments, net                 (2.1 )          0.7         (2.8 )        (6.4 )         (10.5 )             4.1
Interest expense                 (1.9 )         (1.9 )          -          (5.7 )          (5.6 )            (0.1 )
Gain on buy-back of debt          0.5              -          0.5           0.5             0.6              (0.1 )
Equity in net income
(loss) of investee                0.1            0.1            -          (2.1 )          (0.4 )            (1.7 )
(Loss) income from
continuing operations
before income tax
(benefit) expense               (21.1 )          8.7        (29.8 )       (41.2 )         (13.2 )           (28.0 )
Income tax (benefit)
expense                          (1.1 )          2.4         (3.5 )        (0.9 )           2.3              (3.2 )
(Loss) income from
continuing operations           (20.0 )          6.3        (26.3 )       (40.3 )         (15.5 )           (24.8 )
Loss on disposal of
discontinued operations,
net of taxes                        -              -            -             -            (1.3 )             1.3
Net (loss) income               (20.0 )          6.3        (26.3 )       (40.3 )         (16.8 )           (23.5 )


(Loss) Income from Continuing Operations, Net (Loss) Income and Diluted (Loss)
Income Per Share

Insurance Underwriting
For the three months ended September 30, 2012, Insurance Underwriting gross premiums written were $36.9 million compared to $33.2 million for the three months ended September 30, 2011, representing a 11.1% increase ($108.3 million year to date compared to $107.6 million prior year to date, representing a 0.7% increase). Net premiums written decreased 22.3% to $24.0 million for the three months ended September 30, 2012 compared with $30.9 million for the three months ended September 30, 2011 ($85.6 million year to date compared to $100.7 million prior year to date, representing a 15.0% decrease). Net premiums earned decreased 27.6% to $26.5 million for the three months ended September 30, 2012 compared with $36.6 million for the three months ended September 30, 2011 ($86.8 million year to date compared with $124.8 million prior year to date, representing a 30.4% decrease). The decrease in net premiums written and earned is primarily the result of quota share reinsurance agreements entered into by Mendota and Mendakota for the three months ended September 30, 2012 and Amigo for the nine months ended September 30, 2012.

The Insurance Underwriting operating loss increased to $16.8 million for the three months ended September 30, 2012 compared with $9.0 million for the three months ended September 30, 2011. The increase in operating loss for the three months ended September 30, 2012 is primarily attributed to the increase in unpaid loss and loss adjustment expenses, severance expense and lease abandonment expense described more fully below. The Insurance Underwriting operating loss decreased to $23.8 million year to date compared to $28.3 million prior year to date. The decrease is primarily attributed to a decrease in loss and loss adjustment expenses against a smaller volume of net premiums earned. The Insurance Underwriting loss ratio for the third quarter of 2012 was 125.8% compared to 93.7% for the third quarter of 2011 (90.8% for the nine months ended September 30, 2012 compared with 90.4% for the same period in 2011). The increase in the loss ratio for the three months ended September 30, 2012 is primarily due to the increase in unpaid loss and loss adjustment expenses of $11.4 million as a result of the Insurance Underwriting restructuring announced during the third quarter of 2012. This amount includes $9.4 million primarily to increase prior accident year unpaid loss and loss adjustment expenses on Amigo's commercial automobile and personal injury protection coverages and $2.0 million to increase prior accident year unpaid loss and loss adjustment expenses on Mendota and Mendakota's personal automobile physical damage, uninsured motorist and bodily injury coverages.
The Insurance Underwriting expense ratio was 44.6% in the third quarter of 2012 and 36.6% in the third quarter of 2011 (42.8% for the nine months ended September 30, 2012 compared with 38.2% for the same period in 2011). The increase in the expense ratio for the three months ended September 30, 2012 is primarily due to severance expense of $0.7 million and lease abandonment expense of $1.3 million recorded as a result of the Insurance Underwriting restructuring announced during the third quarter of 2012 and further discussed in Note 17, "Restructuring" to the unaudited consolidated interim financial statements. Further, the deterioration in the expense ratio is a derivative effect of the 27.6% decrease (30.4% 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 170.4% in the third quarter 2012 compared with 130.3% in the third quarter of 2011 (133.6% for the nine months ended September 30, 2012 compared with 128.6% 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 $1.9 million and $2.1 million for the three months ended September 30, 2012 and 2011, respectively ($5.4 million and $7.4 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 decreased 1.3% to $7.6 million for the three months ended September 30, 2012 compared with $7.7 million for the three months ended September 30, 2011 (an increase to $25.3 million year to date compared with $24.5 million prior year to date). The Insurance Services operating income decreased to $0.4 million for the three months ended September 30, 2012 compared with $0.5 million for the three months ended September 30, 2011 (an increase to $2.9 million year to date compared with $1.9 million prior year to date). The year to date increases are derived from higher revenues and operating income at ARS which are the result of ARS managing higher premium volumes for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.

Net Investment Income
Net investment income decreased to $0.8 million in the third quarter of 2012 ($2.4 million year to date) compared to $1.0 million in the third quarter of 2011 ($3.2 million prior year to date). The decrease is primarily a result of a decline in the Company's total investments, cash and cash equivalents which resulted from reduced volumes of business and acceleration of claim payments in Insurance Underwriting. 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 third quarter of 2012 of $1.1 million ($1.4 million year to date) compared to $0.1 million in the third quarter of 2011 ($0.1 million prior year to date). The net realized gains in 2012 resulted from the liquidation of equity investments and fixed maturities in Insurance Underwriting.
Other-Than-Temporary Impairment Loss
As a result of the above analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write-downs for other-than-temporary impairments related to other investments for the three months ended September 30, 2012 and September 30, 2011 (write-down for other-than-temporary impairment related to other investments of $0.5 million and zero for the nine months ended September 30, 2012 and September 30, 2011, respectively). There were no write-downs related to fixed maturities and equity investments for other-than-temporary impairments for the three and nine months ended September 30, 2012 and September 30, 2011.
(Loss) Gain on Change in Fair Value of Debt The loss on change in fair value of debt amounted to $3.2 million in the third quarter of 2012 compared to a gain of $17.2 million in the third quarter of 2011 (a loss of $9.9 million year to date compared to a gain of $25.8 million prior year to date). The loss for the three and nine months ended September 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 September 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 nine months ended September 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 $2.1 million in the third quarter of 2012 compared to a net income of $0.7 million in the third quarter of 2011 (net expense of $6.4 million year to date compared to net expense of $10.5 million prior year to date). The increase in net expense for the three months ended September 30, 2012 is primarily due to $3.0 million more of foreign exchange gains recorded in the third quarter of 2011 compared to the third quarter of 2012.
The decrease in net expense for the nine months ended September 30, 2012 is primarily due to $1.1 million more of professional fees, including outside legal and audit fees, recorded in 2011 than in 2012; $0.9 million more of write-off, depreciation, and amortization of computer hardware and software in 2011 than in 2012; $0.6 million more of salaries and benefits expense recorded in 2011 than in 2012 reflective of increased severance expense; and $2.4 million more of general and administrative expenses recorded in 2011 than 2012, offset by $1.0 million more of foreign exchange gains recorded in 2011 than in 2012. Interest Expense

Interest expense for the third quarter of 2012 was $1.9 million ($5.7 million year to date) compared to $1.9 million in the third quarter of 2011 ($5.6 million prior year to date).
Gain on Buy-Back of Debt

As more fully described in Note 5, "Discontinued Operations, Disposition and Reacquisition" to the unaudited consolidated interim financial statements, during the third quarter of 2012, Hamilton Risk Management Company purchased a note payable from a third-party with a carrying value of $2.2 million for $1.7 million, recording a gain of $0.5 million. During the third quarter of 2011, Kingsway 2007 General Partnership purchased for $0.2 million ($10.8 million prior year to date) and subsequently cancelled $0.2 million ($11.4 million prior year to date) par value of its senior unsecured debentures with a carrying value of $0.2 million ($11.4 million prior year to date), recording a gain of $0.0 million ($0.6 million prior year to date).

Equity in Net Income (Loss) of Investee
At September 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 September 30, 2012, we recorded income of $0.1 million from this investment (loss of $2.1 million year to date). For the three months ended September 30, 2011, the Company recorded income of $0.1 million from this investment (loss of $0.4 million prior year to date). See Note 7, "Investment in Investee," to the unaudited consolidated interim financial statements for further details.
Income Tax (Benefit) Expense

Income tax benefit on continuing operations for the third quarter of 2012 was $1.1 million (tax benefit of $0.9 million year to date) compared to income tax expense of $2.4 million in the third quarter of 2011 (tax expense of $2.3 million prior year to date). The decrease in income tax expense for the three and nine months ended September 30, 2012 is primarily attributable to a tax benefit recorded in 2012 for a 2011 tax return to provision adjustment and a valuation allowance tax expense adjustment recorded in 2011.

INVESTMENTS
Portfolio Composition
All of our investments in fixed maturities and equity investments are classified as available-for-sale and are reported at fair value. At September 30, 2012, we held cash and cash equivalents and investments with a carrying value of $156.2 million. As of September 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 carrying value of investments, including cash and cash equivalents, at the dates indicated.
TABLE 2 Carrying value of investments, including cash and cash equivalents
(in millions of dollars, except for percentages)

Type of investment             September 30, 2012     % of Total     December 31, 2011     % of Total
Fixed maturities:
U.S. government, government
agencies and authorities                     29.1           18.7 %                46.8           23.1 %
Canadian government                           3.9            2.5 %                 3.8            1.9 %
States municipalities and
political subdivisions                        7.4            4.7 %                 8.5            4.2 %
Mortgage-backed                               5.5            3.5 %                 6.2            3.0 %
Asset-backed securities and
collateralized mortgage
obligations                                   1.3            0.8 %                 6.4            3.2 %
Corporate                                    43.0           27.6 %                22.0           10.8 %
Total fixed maturities                       90.2           57.8 %                93.7           46.2 %
Equity investments                            2.4            1.5 %                 3.0            1.5 %
Limited liability
investments                                   2.4            1.5 %                 0.1              - %
. . .