Kingsway Financial Services Inc Annual Report 2021

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2021OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period from _____ to _____Commission File Number 001-15204 Kingsway Financial Services Inc.(Exact name of registrant as specified in its charter) Delaware 85-1792291 (State or other jurisdiction of incorporation ororganization) (I.R.S. Employer Identification No.) 150 E. Pierce RoadItasca, IL 60143 (Address of principal executive offices) (Zip Code) 1-847-871-6408(Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassTrading SymbolName of Each Exchange on Which RegisteredCommon Stock, no par valueKFSNew York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. Seedefinitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☒Smaller Reporting Company☒Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accountingstandards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting underSection 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of June 30, 2021, the aggregate market value of the registrant's voting common stock held by non-affiliates of registrant was $57,337,230 based upon the closing sale price of thecommon stock as reported by the New York Stock Exchange. Solely for purposes of this calculation, all executive officers and directors of the registrant are considered affiliates. The number of shares, including restricted common shares, of the Registrant's Common Stock outstanding as of February 28, 2022 was 24,135,368. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K is incorporated by reference to certain sections of the Proxy Statement for the 2021 Annual Meeting of Shareholders, which will be filed with the Securities andExchange Commission no later than 120 days after the end of our fiscal year ended December 31, 2021. Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Table Of ContentsCaution Regarding Forward-Looking Statements3PART I4Item 1. Business4Item 1A. Risk Factors11Item 1B. Unresolved Staff Comments20Item 2. Properties20Item 3. Legal Proceedings20Item 4. Mine Safety Disclosures20PART II21Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21Item 6. Reserved22Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations23Item 7A. Quantitative and Qualitative Disclosures About Market Risk43Item 8. Financial Statements and Supplementary Data44Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure102Item 9A. Controls and Procedures102Item 9B. Other Information104Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections104PART III105Item 10. Directors, Executive Officers, and Corporate Governance105Item 11. Executive Compensation105Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters105Item 13. Certain Relationships and Related Transactions, and Director Independence105Item 14. Principal Accounting Fees and Services105PART IV106Item 15. Exhibits, Financial Statement Schedules106Item 16. Form 10-K Summary111EXHIBIT INDEX112SIGNATURES116 2Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Caution Regarding Forward-Looking Statements This 2021 Annual Report on Form 10-K (the "2021 Annual Report"), including the accompanying consolidated financial statements of Kingsway Financial Services Inc.("Kingsway") and its subsidiaries (individually and collectively referred to herein as the "Company") and the notes thereto appearing in Item 8 herein (the"Consolidated Financial Statements"), Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 herein ("MD&A"),and the other Exhibits and Financial Statement Schedules filed as a part hereof or incorporated by reference herein may contain or incorporate by reference informationthat includes or is based on forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934. Forward-looking statements relate to future events or future performance and reflect Kingsway management's current beliefs, based on information currently available.The words "anticipate," "expect," "believe," "may," "should," "estimate," "project," "outlook," "forecast" and variations or similar words and expressions are used toidentify such forward looking information, but these words are not the exclusive means of identifying forward-looking statements. Specifically, statements about (i) theCompany's ability to preserve and use its net operating losses; (ii) the Company's expected liquidity; and (iii) the potential impact of volatile investment markets andother economic conditions on the Company's investment portfolio, among others, are forward-looking, and the Company may also make forward-looking statementsabout, among other things: •its results of operations and financial condition (including, among other things, net and operating income, investment income and performance, return on equityand expected current returns);•changes in industry trends and significant industry developments, especially as it relates to the service contract and homebuilding industries;•the impact of certain guarantees and indemnities made by the Company;•its ability to complete and integrate current or future acquisitions successfully;•its ability execute its strategic initiatives successfully; and•the potential impact of the uncertainties related to the COVID-19 pandemic on the short and long-term economic effects on the Company’s business. For a discussion of some of the factors that could cause actual results to differ, see Item 1A,"Risk Factors" and our disclosures under the heading "SignificantAccounting Policies and Critical Estimates" in MD&A in this 2021 Annual Report. Except as expressly required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise, that might arise subsequent to the date of this 2021 Annual Report. 3Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Part IItem 1. BUSINESS In this report, the terms "Kingsway," the "Company," "we," "us" or "our" mean Kingsway Financial Services Inc. and all entities included in our Consolidated FinancialStatements. Kingsway Financial Services Inc. was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Effective December 31, 2018, the Companychanged its jurisdiction of incorporation from the province of Ontario, Canada, to the State of Delaware. The Company's registered office is located at 150 E. Pierce Road,Itasca, Illinois 60143. The common shares of Kingsway are listed on the NYSE under the trading symbol "KFS." Kingsway is a holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty,business services, asset management and real estate industries. Kingsway conducts its business through three reportable segments - Extended Warranty, Leased RealEstate and Kingsway Search Xcelerator - that conduct their business and distribute their products and services in the United States. Financial information about Kingsway's reportable business segments for the years ended December 31, 2021 and December 31, 2020 is contained in the followingsections of this 2021 Annual Report: (i) Note 22, "Segmented Information," to the Consolidated Financial Statements; and (ii) "Results of Continuing Operations"section of MD&A. All of the dollar amounts in this 2021 Annual Report are expressed in U.S. dollars. GENERAL DEVELOPMENT OF BUSINESS Acquisition of Ravix Financial, Inc. On October 1, 2021, the Company acquired 100% of the outstanding equity interests of Ravix Financial, Inc. ("Ravix"). Ravix, based in San Jose, California, providesoutsourced financial services and human resources consulting for short or long duration engagements. Ravix is included in the Kingsway Search Xcelerator segment,which was created as a result of the Ravix acquisition. The Company acquired Ravix for aggregate cash consideration of approximately $10.9 million, less certain escrowed amounts for purposes of indemnification claims andworking capital adjustments. The Company will also pay additional contingent consideration, only to the extent earned, in an aggregate amount of up to $4.5 million,which is subject to certain conditions, including the successful achievement of gross profit for Ravix during the three-year period commencing on the first full calendarmonth following the acquisition date. Further information is contained in Note 4, "Acquisitions," to the Consolidated Financial Statements. The acquisition was financed with a combination of debt financing provided by Avidbank, and cash on hand. Ravix Acquisition LLC, a wholly-owned subsidiary of theCompany, together with Ravix, borrowed a total of $6.0 million, in the form of a term loan, and established a $1.0 million revolver (together, the "Ravix Loan") that wasundrawn at close. The Ravix Loan has a variable interest rate, with the initial annual interest rate equal to 3.75%. The Ravix Loan requires monthly principal and interestpayments and the term loan matures on October 1, 2027. Acquisition of RoeCo Lafayette, LLC On December 30, 2021, the Company acquired 100% of the outstanding membership interests of RoeCo Lafayette, LLC ("RoeCo") for cash consideration ofapproximately $2.4 million. RoeCo owns real property consisting of approximately 6.5 acres and a 29,224 square foot single-tenant medical office building located in theState of Lousiana (the "LA Real Property"). The LA Real Property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term lease. The LA Real Property is also subject to a mortgage in the principal amount of $13.5 million (the "RoeCo Mortgage") at the date of acquisition. RoeCo isincluded in the Leased Real Estate segment. Further information is contained in Note 4, "Acquisitions," to the Consolidated Financial Statements. EXTENDED WARRANTY SEGMENT Extended Warranty includes the following subsidiaries of the Company (collectively, "Extended Warranty"): ●IWS Acquisition Corporation ("IWS") ●Geminus Holding Company, Inc. ("Geminus") ●PWI Holdings, Inc. ("PWI") ●Professional Warranty Service Corporation ("PWSC") ●Trinity Warranty Solutions LLC ("Trinity") IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 25 states and theDistrict of Columbia to their members, with customers in all 50 states. Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") andPrime Auto Care Inc. ("Prime"). Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised cardealerships. PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise networks of approvedautomobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield("AAS") in three states with a "white label" agreement. PWI also has a "white label" agreement with Norman & Company, Inc., that sells and administers a guaranteedasset protection product ("GAP"), under the Classic product name, in states that Classic is approved in. PWSC sells home warranty products and provides administration services to homebuilders and homeowners across the United States. PWSC distributes its productsand services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana. 4Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and providesequipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administersproduct warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industriesthroughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinitydoes not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts asa single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdownservices by contracting with certain HVAC providers. Extended Warranty Products Automotive IWS, Geminus and PWI market and administer vehicle service agreements ("VSA"s) and related products for new and used automobiles throughout the United States.IWS and PWI also market and administer VSAs for motorcycles and ATV’s. A VSA is an agreement between the Company and the vehicle purchaser under which theCompany agrees to replace or repair, for a specific term, designated vehicle parts in the event of a mechanical breakdown. VSAs supplement, or are in lieu of,manufacturers' warranties and provide a variety of extended coverage options. The cost of the VSA is a function of the contract term, coverage limits and type ofvehicle. ●IWS serves as the administrator on all contracts it originates. VSA's range from one to seven years and/or 12,000 miles to 125,000 miles. The average term of aVSA is between four and five years. ●Geminus goes to market through its subsidiaries, Penn and Prime. Penn and Prime serve as the administrator on all contracts they originate and its VSAs rangefrom three months to sixty months and/or 3,000 miles to 165,000 miles. Penn offers a limited product line of vehicle service agreements with unlimited milesofferings that have an average term of twelve to twenty-four months. ●PWI serves as the contract administrator and originator in all states, except for Alaska, Florida and Washington. In those states, PWI partners with AmericanAuto Shield ("AAS") in a white label relationship where the VSAs are branded PWI, are originated and administered by AAS, with PWI generating fee incomeon every contract sold. Across all states, PWI has an extensive menu of VSAs with terms starting at three months to ninety-six months and mileage bands upto 200,000 miles. Products range from basic Powertrain to the Exclusionary product (Premier). The average term of a VSA is twenty-two months. In addition to marketing vehicle service agreements, IWS, Geminus and PWI also administer and broker a GAP product through their distribution channels. GAPgenerally covers a consumer's out-of-pocket amount, related to an automobile loan or lease, if the vehicle is stolen or damaged beyond repair. IWS, Geminus and PWIearn a commission when a consumer purchases a GAP certificate but do not take on any insurance risk. Home PWSC has two insured home warranty products: ●The primary product is designed for new home construction companies, and the warranty is issued to new home buyers. The warranty coverage is providednationwide by a single, A+ rated insurance carrier. The warranty document is an agreement between the homebuilder and the purchaser of the home and includesspecific tolerances related to covered defects and precise definitions of damages. Each damage category includes materials defect coverage for the first year,major systems coverage for the second year, and workmanship and structural coverage for years three through ten. The warranty enables certain damages to beresolved by the homebuilder without admitting fault or negligence, and the warranty offers an efficient method to resolve buyer complaints and avoid costlylitigation through mediation and mandatory binding arbitration. ●The second insured warranty product is designed for existing homes and covers major systems and appliances. PWSC designs the product specifications, but theadministration is conducted by an independent third party. PWSC is not a risk-taker on this product; instead, it leverages an independent, reputable insurancecarrier. PWSC sells this product directly to consumers and through various other channels, such as credit unions, brokers, and property managers. PWSC also has an uninsured warranty administration services program. The warranty document issued through this program is an agreement between the homebuilderand the purchaser of the home, and it includes performance standards established by the homebuilder and warrants conditions in the home that could constitute aconstruction defect throughout the warranty period. This program enables construction defects to be efficiently and amicably resolved by the homebuilder throughmediation and mandatory binding arbitration to avoid costly litigation. Claims are covered for a period of time as may be required by law, for an elected time-frame by thebuilder in a specific state, or per agreement with a general liability insurance carrier. The warranty document is designed to ensure all parties’ interests are aligned inorder to handle their claims relative to construction defects promptly and without attorney intervention. 5Table of ContentsKINGSWAY FINANCIAL SERVICES INC. HVAC Trinity sells HVAC, standby generator, commercial LED lighting and commercial refrigeration warranty products. As a seller of warranty products, Trinity markets andadministers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigerationindustries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warrantycontracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. Trinity also provides equipment breakdown and maintenance support services to companies across the United States. As a provider of such services, Trinity acts as asingle point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdownservices by contracting with certain HVAC providers. Marketing, Distribution and Competition No Extended Warranty customer or group of affiliated customers accounts for 10% or more of the Company's consolidated revenues, and no loss of a customer or groupof affiliated customers would have a material adverse effect on the Company. Automotive IWS markets its products primarily through credit unions. IWS enters into an exclusive agreement with each credit union whereby the credit union receives a stipulatedaccess fee for each vehicle service agreement issued to its members. The credit unions are served by IWS employee representatives located throughout the UnitedStates in close geographical proximity to the credit unions they serve. IWS distributes and markets its products in 25 states and the District of Columbia. IWS focuses exclusively on the automotive finance market with its core VSA and related product offerings, while much of its competition in the credit union channel hasa less targeted product approach. IWS' typical competitor takes a generalist approach to market by providing credit unions with a variety of different product offerings.They might be unable to deliver specialty expertise on par with IWS and may not give VSA products the attention they require for healthy profitability and strong riskmanagement. Geminus goes to market through its subsidiaries, Penn and Prime, which market their products primarily through independent automotive dealerships and franchiseautomotive dealerships. Penn and Prime enter into dealer wholesale agreements that allow the dealer to resell Penn and Prime vehicle service agreements at a retail ratethat varies by state as they earn potential commission on the remarketing. The dealer base is serviced by the Company's employees located throughout the UnitedStates in close geographical proximity to the dealers they serve. Penn and Prime distribute and market their products in 32 and 40 states, respectively. Penn and Prime focus exclusively on the automotive finance market with its core VSA and related product offerings, while much of its competition is non-employeebased or agent centric. Penn and Prime's typical competitor’s approach to market is by working through non-employees or agents with a variety of different productofferings. Penn and Prime solely focuses on the suite of VSAs it offers, which allows the proper attention required for healthy profitability and risk management. PWI markets, sells and administers VSAs to used car buyers in all fifty states, primarily through a network of approved automobile dealer partners. PWI enters into adealer agreement with dealer partners that permits dealers to legally sell PWI products to its customers. The distribution of PWI VSAs is supported by an internal salesteam geographically located around the country and in close proximity to its dealer partners. PWI operates exclusively in the automotive finance market with its sole focus on VSAs. PWI does operate within a highly competitive environment where productpricing and product options are important. Most of its competitors have a comprehensive menu of products and services to offer the independent and franchise dealers.PWI’s future strategy will drive additional competitiveness by adding new products to its existing menu of VSAs and GAP. PWI’s competitors are a blend of nationaland regional competitors implementing employee and agent-based sales models. Home PWSC markets its insured warranty products through a sales force directly to the homebuilder and its uninsured builder backed warranty products through a network ofconstruction general liability insurance carriers and domestic insurance brokers. Homebuilder prospects are developed through membership in local homebuilderassociations, attendance at homebuilder conventions, distribution of promotional products and direct mail efforts. For its uninsured homebuilder backed product, PWSCdedicates senior personnel to working with the construction general liability insurers and domestic insurance brokers to identify and assist in developing newopportunities and devotes marketing resources to sell its product. 6Table of ContentsKINGSWAY FINANCIAL SERVICES INC. For its insured warranty product, PWSC operates in an environment with several competitors. PWSC differentiates itself through its relationship with and backing by anA+ rated global insurance carrier; having over 20 years of experience in the field of new home warranty administration; its dispute resolution services; and its best inclass customer service. For its uninsured builder backed product, PWSC operates in an environment with very few competitors. The most significant featuresdifferentiating the builder backed product from its competition are an express warranty for all construction defects, the only warranty that is fully integrated with thegeneral liability policy in its definition and coverage of construction defects, and mutual agreement between the homebuilder and the home buyer that all claims beresolved through mediation or, if necessary, binding arbitration. HVAC Trinity directly markets and distributes its warranty products to manufacturers, distributors and installers of HVAC, standby generator, commercial LED lighting andcommercial refrigeration equipment. As a provider of equipment breakdown and maintenance support, Trinity directly markets and distributes its product through itsclients, which are primarily companies that directly own and operate numerous locations across the United States. Trinity operates in an environment with few market competitors. Trinity competes on two important facets: its belief that it provides superior customer service relative toits competitors and its ability, through the support of its insurance company partners, to provide warranty solutions to a wider range of HVAC, standby generator,commercial LED lighting and commercial refrigeration equipment customers than that of its competitors. Claims Management Claims management is the process by which Extended Warranty determines the validity and amount of a claim. The Company believes that claims management isfundamental to its operating results. The Company's goal is to settle claims fairly for the benefit of insureds in a manner that is consistent with the insurance policylanguage and the Company's regulatory and legal obligations. IWS, Geminus and PWI effectively and efficiently manage claims by utilizing in-house expertise and information systems. They employ an experienced claims staff, insome cases comprised of Automotive Service Excellence certified mechanics, knowledgeable in all aspects of vehicle repairs and potential claims. Additionally, eachowns a proprietary database of historical claims information that has been compiled over several years. Management analyzes this database to drive real-time pricingadjustments and strategic decision-making. Under PWSC’s warranty products, disputes typically arise when there is a difference between what the homeowner expects of the builder and what the builder believesare its legitimate warranty service responsibilities. PWSC employs an experienced claims staff who respond to all inquiries from homeowners and from requests bybuilders. Any inquiries or complaints received are submitted or communicated to the builder. PWSC will not make any determination as to the validity or resolution ofany complaint; however, PWSC will discuss alternatives or resolutions to disputes with all parties and can mediate or negotiate a fair solution to a dispute. This processensures that homebuilders can effectively manage new home construction risk and reduce the potential for substantial legal costs associated with litigation. PWSC may,at times, act as a third-party administrator for claims under the insured warranty product; however, at no time does PWSC bear the loss of claims on warranty products. Trinity claims on warranty products are managed by the insurance companies with which Trinity partners. Trinity may, at times, act as a third-party administrator of suchclaims; however, at no time does Trinity bear the loss of claims on warranty products. LEASED REAL ESTATE SEGMENT Leased Real Estate includes the Company's subsidiaries CMC Industries, Inc. ("CMC") and RoeCo. CMC owns, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State ofTexas (the "Real Property"), which is subject to a long-term triple net lease agreement with a single customer, BNSF Railway Company. Revenue from this singlecustomer represents more than 10% of the Company’s consolidated revenues. The Real Property is also subject to a mortgage, which is recorded as note payable in theconsolidated balance sheets (the "Mortgage"). RoeCo owns the LA Real Property, which is leased to the Department of Veteran Affairs pursuant to a long-term lease. The LA Real Property is also subject to theRoeCo Mortgage, which is recorded as note payable in the consolidated balance sheets. KINGSWAY SEARCH XCELERATOR SEGMENT Kingsway Search Xcelerator includes the Company's subsidiary, Ravix, and includes the Company’s unique CEO Accelerator program. Revenue is derived from theprovision of business services. Business Services Ravix provides outsourced finance and human resources consulting services to its clients on a fractional basis for both projects with definitive endpoints and ongoingengagements of indeterminate length for customers in 21 states and 5 countries. All services are delivered by employees who are located in the United States. Ravixoffers its services across four different practices: ●Operational Accounting. Offers services oriented around day-to-day financial stewardship of its clients, such as bookkeeping, accounting, financial reporting andanalysis and strategic finance. ●Technical Accounting. Provides specialized expertise in areas of technical accounting, such as initial public offerings, SEC reporting and internationalconsolidation; ●Human Resources. Offers human resources, workforce management, and compliance support; and ●Advisory Services. Focuses on managing clients through liquidations and assignment for the benefit of the creditors. 7Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Marketing, Distribution and Competition Ravix does not actively market its services through traditional channels. Instead, Ravix focuses primarily on venture-capital-funded startups and receives most of itsnew business as a result of business networking activities, referrals from service providers and former clients. CEO Accelerator The Company has developed a unique program, whereby it employs dedicated Operator-in-residence (or "Searcher") personnel whose sole function is to search for anappropriate business for Kingsway to acquire and then to ultimately run that business. As an example, our first Searcher, who was hired in May 2020, identified Ravix asa potential acquisition, which the Company closed on in October 2021. The CEO Accelerator focuses on identifying and acquiring privately-held businesses with enterprise values between $10 and $30 million where the owner/operator islooking to transition from day-to-day operating responsibilities. The CEO Accelerator utilizes the proven framework and characteristics of the Search Fund acquisitionmodel and targets industries and companies with pre-defined characteristics. The Company believes that having a dedicated Searcher(s) – whose background includes a mix of real-world work experience and a graduate degree (usually a master’sof business administration) – who is ready to transition into the role of CEO gives it a competitive advantage over traditional private equity firms and other potentialacquirors of businesses in the lower middle market. When a search ends with a successful acquisition, the Searcher transitions into an operational role as CEO of the acquired company and receives a financial incentive,in the form of various stock-based grants, in the acquired company. The awards have both time and performance vesting requirements, which aligns the incentives withthose of the overall Company. The Company currently has two full-time Searchers as of December 31, 2021. The Company intends to maintain this level – and potentially expand it – as businessopportunities permit. PRICING AND PRODUCT MANAGEMENT Responsibility for pricing and product management rests with the Company's individual operating subsidiaries in Extended Warranty and Kingsway Search Xcelerator.In Extended Warranty, teams typically comprised of pricing actuaries, product managers and business development managers work together by territory to developpolicy forms and language, rating structures, regulatory filings and new product ideas. Data solutions and claims groups within the individual operatingsubsidiaries track loss performance monthly to alert the operating subsidiaries' management teams to the potential need to adjust forms or rates. 8Table of ContentsKINGSWAY FINANCIAL SERVICES INC. INVESTMENTS The Company manages its investments to support its liabilities, preserve capital, maintain adequate liquidity and maximize after-tax investment returns within acceptablerisks: ●The fixed maturities portfolios are managed by a third-party firm and are comprised predominantly of high-quality fixed maturities with relatively short durations. ●Equity, limited liability and other investments are managed by a team of employees and advisors dedicated to the identification of investment opportunities thatoffer asymmetric risk/reward potential with a margin of safety supported by private market values. ●Limited liability investments, at fair value, investments in private companies and real estate investments are generally overseen by corporate, who engages third-party managers for certain holdings. The Investment Committee of the Board of Directors is responsible for monitoring the performance of the Company's investments and compliance with the Company'sinvestment policies and guidelines, which it reviews annually. Investments held by our insurance subsidiary, Kingsway Amigo Insurance Company ("Amigo"), mustcomply with domiciliary state regulations that prescribe the type, quality and concentration of investments. For further descriptions of the Company's investments, see "Investments" and "Significant Accounting Policies and Critical Estimates" in MD&A and Note 6,"Investments," and Note 23, "Fair Value of Financial Instruments," to the Consolidated Financial Statements. REGULATORY ENVIRONMENT Insurance The Company has one U.S. insurance subsidiary, Amigo, which is organized and domiciled under the insurance statutes of Florida and is in voluntary run-off. To thebest of the Company's knowledge, it is in compliance with the regulations discussed below. U.S. insurance companies are subject to the insurance holding company statutes in the jurisdictions in which they conduct business. These statutes require that eachU.S insurance company in a holding company system register with the insurance department of its state of domicile and furnish information concerning the operationsof companies in the holding company system that may materially affect the operations, management or financial condition of the insurers in the holding companydomiciled in that state. These statutes also generally provide that all transactions among members of a holding company system be done at arm’s length and be shownto be fair and reasonable to the regulated insurer. Transactions between insurance company subsidiaries and their parents and affiliates typically must be disclosed tothe state regulators, and any material or extraordinary transaction requires prior approval of the applicable state insurance regulator. A change of control of a domesticinsurer or of any controlling person requires the prior approval of the state insurance regulator. In general, any person who acquires 10% or more of the outstandingvoting securities of the insurer or its parent company is presumed to have acquired control of the domestic insurer. U.S. insurance companies are required under the guaranty fund laws of most states in which they transact business to pay assessments up to prescribed limits to fundpolicyholder losses or liabilities of insolvent insurance companies. U.S. insurance companies also are required to participate in various involuntary pools or assignedrisk pools. In most states, the involuntary pool participation is in proportion to the voluntary writings of related lines of business in such states. 9Table of ContentsKINGSWAY FINANCIAL SERVICES INC. U.S. insurance companies are required to report their financial condition and results of operation in accordance with statutory accounting principles prescribed orpermitted by state insurance regulators in conjunction with the National Association of Insurance Commissioners ("NAIC"). State insurance regulators also prescribethe form and content of statutory financial statements, perform periodic financial examinations of insurers, set minimum reserve and loss ratio requirements, establishstandards for the types and amounts of investments and require minimum capital and surplus levels. Such statutory capital and surplus requirements reflect risk-basedcapital ("RBC") standards promulgated by the NAIC. These RBC standards are intended to assess the level of risk inherent in an insurance company's business andconsider items such as asset risk, credit risk, underwriting risk and other business risks relevant to its operations. In accordance with RBC formulas, an insurancecompany's RBC requirements are calculated and compared to its total adjusted capital, as defined by the NAIC, to determine whether regulatory intervention iswarranted. In general, insurers reporting surplus as regards to policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 aresubject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2021, surplus as regards to policyholders reported by Amigoexceeded the 200% threshold. Refer to Note 26, "Regulatory Capital Requirements and Ratios," to the Consolidated Financial Statements for further discussion. The state insurance department that has jurisdiction over Amigo may conduct on-site visits and examinations, especially as to financial condition, ability to fulfillobligations to policyholders, market conduct, claims practices and compliance with other laws and applicable regulations. Typically, these examinations are conductedevery three to five years. In addition, if circumstances dictate, regulators are authorized to conduct special or target examinations of insurance companies to addressparticular concerns or issues. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action on the part ofthe company that is the subject of the examination or the assessment of fines or other penalties against that company. The Florida Office of Insurance Regulationcompleted in 2016 a financial examination of Amigo for the three-year period ending December 31, 2014 and completed in the first quarter of 2018 a financial examinationof Amigo for the two-year period ending December 31, 2016. No financial statement adjustments were required as a result of either examination. The Gramm-Leach-Bliley Act protects consumers from the unauthorized dissemination of certain personal information. The majority of states have implementedadditional regulations to address privacy issues. These laws and regulations apply to all financial institutions and require the Company to maintain appropriateprocedures for managing and protecting certain personal information of its customers and to fully disclose its privacy practices to its customers. The Company may alsobe exposed to future privacy laws and regulations, which could impose additional costs and adversely affect its results of operations or financial condition. Extended Warranty Vehicle service agreements are regulated in all states in the United States, and IWS, Geminus and PWI are subject to these regulations. Most states utilize the approachof the Uniform Service Contract Act that was adopted by the NAIC in the early 1990's. Under that approach, states regulate vehicle service contract companies byrequiring them annually to file documentation, together with a copy of the contract of insurance covering their liability under the service contracts, which complies withthe particular state's regulatory requirements. IWS, Geminus and PWI are in compliance with the regulations of each state where it sells vehicle service agreements. Certain, but not all, states regulate the sale of HVAC and equipment warranty contracts. Trinity is licensed as a service contract provider in those states where it isrequired. The insurance carrier providing the contractual liability coverage for the insured warranty product offered by PWSC is designated as a surplus lines carrier in all states. The offering of surplus lines insurance is regulated in all states. The insurance carrier has designated an agent within PWSC who is a licensed property and casualtybroker and a surplus lines broker in all states where such a license is required. PWSC is in compliance with the regulations of each state in which it offers its insuredwarranty products. In addition, New Jersey and Maryland require PWSC to file its warranty plan documents and other company information for periodic review andapproval to demonstrate compliance with new home warranty plan regulations promulgated by those jurisdictions. New Jersey requires such a filing every two years.Maryland requires a filing every year. PWSC is in compliance with the filing requirements of each state. HUMAN CAPITAL MANAGEMENT At December 31, 2021, the Company employed 279 personnel supporting its operations, all of which were full-time employees. None of our employees is subject to acollective bargaining agreement and we consider our relationship with our employees to be good. 10Table of ContentsKINGSWAY FINANCIAL SERVICES INC. We believe the skills and experience of our employees are an essential driver of our business and important to our future prospects. To attract qualified applicants andretain our employees, we offer our employees what we believe to be competitive salaries, comprehensive benefit packages, equity compensation awards, anddiscretionary bonuses based on a combination of seniority, individual performance and corporate performance. The principal purposes of these employee benefits are toattract, retain, reward and motivate our personnel and to provide long-term incentives that align the interests of employees with the interests of our stockholders. ACCESS TO REPORTS The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge through its website at www.kingsway-financial.com as soon asreasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC"). Item 1A. Risk Factors Most issuers, including Kingsway, are exposed to numerous risk factors that could cause actual results to differ materially from recent results or anticipated futureresults. The risks and uncertainties described below are those specific to the Company that we currently believe have the potential to be material, but they may not bethe only ones we face. If any of the following risks, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material,actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows could be materially and adversely affected.Investors are advised to consider these factors along with the other information included in this 2021 Annual Report and to consult any further disclosures Kingswaymakes in its filings with the SEC. FINANCIAL RISK We have substantial outstanding recourse debt, which could adversely affect our ability to obtain financing in the future, react to changes in our business and satisfyour obligations. As of December 31, 2021, we had $90.5 million principal value of outstanding recourse subordinated debt, in the form of trust preferred debt instruments, withredemption dates beginning in December 2032, and which has deferred interest accrued of $18.7 million as of December 31, 2021. Additionally, we incurred indebtedness in connection with our acquisitions of PWI Holdings, Inc. and its various subsidiaries (collectively, "PWI") on December 1, 2020and Ravix Financial, Inc. ("Ravix") on October 1, 2021. As of as of December 31, 2021, we have $27.2 million principal value of such acquisition financing outstanding. Because of our substantial outstanding recourse debt: •our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing could be limited;•our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes and ourability to satisfy our obligations with respect to our debt may be impaired in the future;•a large portion of our cash flow must be dedicated to the payment of interest on our debt, thereby reducing the funds available to us for other purposes;•we are exposed to the risk of increased interest rates because our outstanding subordinated debt and our outstanding acquisition financing bear interest directlyrelated to the London interbank offered interest rate ("LIBOR") or any equivalent replacement benchmark as defined in the underlying loan documents;•it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and acceleration of, such debt;•we may be more vulnerable to general adverse economic and industry conditions and may have reduced flexibility to deploy capital or otherwise respond tochanges;•we may be at a competitive disadvantage compared to our competitors with proportionately less debt or with comparable debt on more favorable terms and, as aresult, they may be better positioned to withstand economic downturns;•our ability to refinance debt may be limited or the associated costs to do so may increase;•our ability to transfer funds among our various subsidiaries and/or distribute such funds to the holding company are limited;•our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited;•we were unable to redeem outstanding shares of our redeemable preferred stock on the required date, which could lead to increased financing costs and/or costsassociated with any disputes that might arise involving the holders of such preferred stock; and•we may be prevented from carrying out capital spending that is, among other things, necessary or important to our growth strategy and efforts to improve theoperating results of our businesses. 11Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Increases in interest rates would increase the cost of servicing our outstanding recourse debt and could adversely affect our results of operation. Our outstanding recourse subordinate debt as of December 31, 2021 of $90.5 million principal value and our outstanding acquisition financing of $27.2 million related tothe acquisitions of PWI and Ravix bear interest directly related to LIBOR (and will in the future relate to one or more as-yet unidentified replacement benchmarks). As aresult, increases in LIBOR (or the applicable replacement benchmark) would increase the cost of servicing our debt and could adversely affect our results of operations.Each one hundred basis point increase in LIBOR (or the replacement benchmark) would result in an approximately $1.4 million increase in our annual interest expense. The expected discontinuation of LIBOR could adversely affect the cost of servicing our outstanding debt. Our outstanding recourse subordinate debt, which has redemption dates ranging from December 4, 2032 through January 8, 2034, and our outstanding acquisitionfinancing related to the acquisitions of PWI and Ravix, which have maturity dates of December 1, 2025 and October 1, 2027, respectively, bear interest directly related toLIBOR and extend beyond June 2023, by which time the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced it intends to phase outU.S dollar LIBOR. If LIBOR is phased out, the indentures governing the Company’s outstanding recourse debt and the loan and security agreement governing ouroutstanding acquisition financing provide alternative means of determining the Company’s interest expense on its outstanding debt. At this time, the Company cannotyet reasonably estimate the expected impact of a discontinuation of LIBOR. Our operations are restricted by the terms of our debt indentures, which could limit our ability to plan for or react to market conditions or meet our capital needs. Our debt indentures contain numerous covenants that limit our ability, among other things, to make particular types of restricted payments and pay dividends or redeemcapital stock. The covenants under our debt agreements could limit our ability to plan for or react to market conditions or to meet our capital needs. No assurances canbe given that we will be able to maintain compliance with these covenants. If we are not able to comply with the covenants and other requirements contained in the debt indentures, an event of default under the relevant debt instrument couldoccur, which could result in the acceleration of all obligations under such debt instruments. The Board of Directors closely monitors the debt and capital position and, from time to time, recommends capital initiatives based upon the circumstances of theCompany. The Real Property and LA Real Property are leased pursuant to long-term leases and the failure of the tenants to satisfy their obligations under the leases couldadversely affect the condition of the Real Property and/or the LA Real Property or the results of the Leased Real Estate segment. Because the Real Property and LA Real Property are leased pursuant to long-term leases, we depend on the tenants to pay all insurance, taxes, utilities, common areamaintenance charges, maintenance and repair expenses and to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising inconnection with such tenant's business, including any environmental liabilities. There can be no assurance that the tenants will have sufficient assets, income andaccess to financing to enable them to satisfy its payment obligations to us under the leases. The inability or unwillingness of the tenants to meet their rent obligationsor to satisfy their other obligations, including indemnification obligations, could materially adversely affect the business, financial position or results of operations ofour Leased Real Estate segment. Furthermore, the inability or unwillingness of the tenants to satisfy their other obligations under the lease, such as the payment ofinsurance, taxes and utilities, could materially and adversely affect the condition of the Real Property and the LA Real Property. Our lease agreements requires that the tenant maintain comprehensive liability and hazard insurance; however, there are certain types of losses (including losses arisingfrom environmental conditions or of a catastrophic nature, such as earthquakes, hurricanes and floods) that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in building codes and ordinances,environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property after such property has been damaged ordestroyed. In addition, if we experience a loss that is uninsured or that exceeds policy coverage limits, we could lose the capital invested in a property as well as theanticipated future cash flows from the property. While previous rent moratoriums in response to the COVID-19 pandemic have not materially impacted the Real Property or the LA Real Property, we cannot be sure thatfuture regulations with respect to evictions or rent payment moratoriums will not be enacted that could affect such properties. 12Table of ContentsKINGSWAY FINANCIAL SERVICES INC. We may not be able to realize our investment objectives, which could significantly reduce our earnings and liquidity. We depend on our investments for a substantial portion of our liquidity. As of December 31, 2021, our investments included $35.7 million of fixed maturities, at fair value.General economic conditions can adversely affect the markets for interest rate-sensitive instruments, including the extent and timing of investor participation in suchmarkets, the level and volatility of interest rates and, consequently, the fair value of fixed maturities. In addition, changing economic conditions can result in increaseddefaults by the issuers of investments that we own. Interest rates are highly sensitive to many factors, including monetary policies, domestic and international economicand political conditions and other factors beyond our control. Given the low interest rate environment that exists for fixed maturities, a significant increase in investmentyields or an impairment of investments that we own could have a material adverse effect on our business, results of operations or financial condition by reducing the fairvalue of the investments we own, particularly if we were forced to liquidate investments at a loss. The low interest rate environment for fixed maturities that has existedfor years also exposes us to reinvestment risk as these investments mature because the funds may be reinvested at rates lower than those of the maturing investments. As of December 31, 2021, our investments also included $0.2 million of equity investments, $1.9 million of limited liability investments, $18.8 million of limited liabilityinvestments, at fair value, $0.8 million of investments in private companies, at adjusted cost, $10.7 million of real estate investments, at fair value and other investments,at cost of $0.4 million. These investments are less liquid than fixed maturities. General economic conditions, stock market conditions and many other factors canadversely affect the fair value of the investments we own. If circumstances necessitated us disposing of our limited liability investments prematurely in order to generateliquidity for operating purposes, we would be exposed to realizing less than their carrying value. Our ability to achieve our investment objectives is affected by general economic conditions that are beyond our control and our own liquidity needs for operatingpurposes. We may not be able to realize our investment objectives, which could adversely affect our results of operations, financial condition and available cashresources. We will continue to be adversely impacted by the COVID-19 pandemic. We continue to take steps to assess the effects, and mitigate the adverse consequences to our businesses, of the COVID-19 pandemic; however, though the magnitudeof the impact continues to develop and change as new variants of COVID-19 emerge, our businesses have been and will continue to be adversely impacted by theoutbreak of COVID-19. In addition to adverse United States domestic and global macroeconomic effects, including the adverse impacts on various industries' supply chains, automobile salesand new home construction, which has decreased, and may continue to decrease, consumer demand for our products and services, reduce our ability to access capital,and otherwise adversely impact the operation of our businesses, the COVID-19 pandemic has caused, and will continue to cause, substantial disruption to ouremployees, distribution channels, investors, tenants, and customers through self-isolation, travel limitations, business restrictions, and other means, all of which hasresulted in declines in sales. These effects, individually or in the aggregate, will continue to adversely impact our businesses, financial condition, operating results andcash flows and such adverse impacts may be material. While certain restrictions and government mandates have been lifted or reduced, we cannot be sure whether they will be reinstated or whether we will need to complywith any new regulations, mandates or guidelines. Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negativelyimpact our sales and damage the company’s results of operations and its liquidity position, possibly to a significant degree. The duration of any such impacts cannot bepredicted. A difficult economy generally could materially adversely affect the credit, investment and financial markets which, in turn, could materially adversely affect ourbusiness, results of operations or financial condition. An adverse change in market conditions, including changes caused by the COVID-19 pandemic, leading to instability in the global credit markets presents additionalrisks and uncertainties for our business. Depending on market conditions going forward, we could incur substantial realized and unrealized losses in future periods,which could have an adverse effect on our results of operations or financial condition. Certain trust accounts for the benefit of related companies and third-parties havebeen established with collateral on deposit under the terms and conditions of the relevant trust agreements. The value of collateral could fall below the levels requiredunder these agreements putting the subsidiary or subsidiaries in breach of the agreements which could expose us to damages or otherwise adversely impact ourbusiness, financial condition, operating results or cash flows. 13Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Market volatility may also make it more difficult to value certain of our investments if trading becomes less frequent and the liquidity of such investment declines.Disruptions, uncertainty and volatility in the global credit markets may also adversely affect our ability to obtain financing for future acquisitions. If financing isavailable, it may only be available at an unattractive cost of capital, which would decrease our profitability or result in our inability to consummate such acquisitions.There can be no assurance that market conditions will not deteriorate in the future. Financial disruption or a prolonged economic downturn could materially and adversely affect our business. Worldwide financial markets have recently experienced periods of extraordinary disruption and volatility, which has been exacerbated by the COVID-19 pandemic,resulting in heightened credit risk, reduced valuation of investments and decreased economic activity. Moreover, many companies have experienced reduced liquidityand uncertainty as to their ability to raise capital during such periods of market disruption and volatility. In the event that these conditions recur or result in a prolongedeconomic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected. These market conditions may affect theCompany's ability to access debt and equity capital markets. We are party to a Settlement Agreement that may require us to make cash payments from time to time, which payments could materially adversely affect ourbusiness, results of operations or financial condition. 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 ofPennsylvania alleging, among other things, that we breached a contractual obligation to indemnify Aegis for certain customs bond losses incurred by Aegis under theindemnity and hold harmless agreements provided by us 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 subsequentlyinvoked its rights to indemnity under the indemnity and hold harmless agreements. Effective January 20, 2020, we entered into a Settlement Agreement with Aegis with respect to such litigation pursuant to which we agreed to pay Aegis a one-timesettlement 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 maximumreimbursement amount of $4.8 million. During the third and fourth quarters of 2020 and the third quarter of 2021, the Company made reimbursement payments to Aegistotaling $0.6 million in connection with the Settlement Agreement. The timing and severity of our future payments pursuant to this Settlement Agreement are notreasonably determinable. No assurances can be given, however, that we will not be required to perform under this Settlement Agreement in a manner that has a materialadverse effect on our business, results of operations or financial condition. We are required to indemnify the buyer of our non-standard automobile businesses, which could materially adversely affect our business, results of operations orfinancial condition. As part of the October 18, 2018 transaction to sell our non-standard automobile insurance companies Mendota Insurance Company, Mendakota Insurance Companyand Mendakota Casualty Company (collectively "Mendota"), we agreed to indemnify the buyer for any loss and loss adjustment expenses with respect to openclaims in excess of Mendota’s carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Companywith respect to the open claims is $2.5 million. Our potential exposure under the indemnity obligation with respect to the open claims is not reasonably determinable, and no liability has been recorded in ourConsolidated Financial Statements. No assurances can be given, however, that we will not be required to perform under the indemnity obligation for the open claims in amanner that has a material adverse effect on our business, results of operations or financial condition. 14Table of ContentsKINGSWAY FINANCIAL SERVICES INC. We have generated net operating loss carryforwards for U.S. income tax purposes, but our ability to use these net operating losses could be limited by our inability togenerate future taxable income. Our U.S. businesses have generated consolidated net operating loss carryforwards ("U.S. NOLs") for U.S. federal income tax purposes of approximately $824.4 million asof December 31, 2021. These U.S. NOLs can be available to reduce income taxes that might otherwise be incurred on future U.S. taxable income and would have apositive effect on our cash flow. Our operations, however, remain challenged, and there can be no assurance that we will generate the taxable income in the futurenecessary to utilize these U.S. NOLs and realize the positive cash flow benefit. Also, almost all of our U.S. NOLs have expiration dates. There can be no assurance that,if and when we generate taxable income in the future from operations or the sale of assets or businesses, we will generate such taxable income before our U.S. NOLsexpire. We have generated U.S. NOLs, but our ability to preserve and use these U.S. NOLs could be limited or impaired by future ownership changes. Our ability to utilize the U.S. NOLs after an "ownership change" is subject to the rules of Section 382 of the U.S. Internal Revenue Code of 1986, as amended ("Section382"). An ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, fivepercent (5%) or more of the value of our shares or are otherwise treated as five percent (5%) shareholders under Section 382 and the regulations promulgated thereunderincrease their aggregate percentage ownership of the value of our shares by more than fifty (50) percentage points over the lowest percentage of the value of the sharesowned by these shareholders over a three-year rolling period. An ownership change could also be triggered by other activities, including the sale of our shares that areowned by our five percent (5%) shareholders. In the event of an ownership change, Section 382 would impose an annual limitation on the amount of taxable income we may offset with U.S. NOLs. This annuallimitation is generally equal to the product of the value of our shares on the date of the ownership change multiplied by the long-term tax-exempt rate in effect on thedate of the ownership change. The long-term tax-exempt rate is published monthly by the Internal Revenue Service. Any unused Section 382 annual limitation may becarried over to later years until the applicable expiration date for the respective U.S. NOLs. In the event an ownership change as defined under Section 382 were to occur,our ability to utilize our U.S. NOLs would become substantially limited. The consequence of this limitation would be the potential loss of a significant future cash flowbenefit because we would no longer be able to substantially offset future taxable income with U.S. NOLs. There can be no assurance that such ownership change willnot occur in the future. Expiration of our tax benefit preservation plan could increase the probability that we will experience an ownership change as defined under Section 382. In order to reduce the likelihood that we would experience an ownership change without the approval of our Board of Directors, our shareholders ratified and approvedthe tax benefit preservation plan agreement (the "Plan"), dated as of September 28, 2010, between the Company and Computershare Investor Services Inc., as rightsagent, for the sole purpose of protecting the U.S. NOLs. The Plan expired on September 28, 2013. There can be no assurance that our Board of Directors will recommendto our shareholders that a similar tax benefit preservation plan be approved to replace the expired Plan; furthermore, there can be no assurance that our shareholderswould approve any new tax benefit preservation plan were our Board of Directors to present one for shareholder approval. The expiration of the Plan, without a new taxbenefit preservation plan, exposes us to certain changes in share ownership that we would not be able to prevent as we would have been able to prevent under the Plan.Such changes in share ownership could trigger an ownership change as defined under Section 382 resulting in restrictions on the use of NOLs in future periods, asdiscussed above. We will only be able to utilize our U.S. NOLs against the future taxable income generated by companies we acquire if we are able to include the acquired companies inour U.S. consolidated tax return group. We have in the past acquired companies and expect to do so in the future. Our ability to include acquired companies in our U.S. consolidated tax return group is subjectto the rules of Section 1504 of the U.S. Internal Revenue Code of 1986, as amended. If it were ever determined that an acquired company did not qualify to be included inour U.S. consolidated tax return group, such acquired company would be required to file a U.S. tax return separate and apart from our U.S. consolidated tax return group.In that instance, the acquired company would be required to pay U.S. income tax on its taxable income despite the existence of our U.S. NOLs, which would be a use ofcash at the acquired company; furthermore, were the income tax obligation of the acquired company in such instance to be greater than its available cash, we could beobligated to contribute cash to our subsidiary to meet its income tax obligation. There can be no assurance that an acquired company will generate taxable income and, ifan acquired company does generate taxable income, there can be no assurance that the acquired company will be allowed to be included in our U.S. consolidated taxreturn group. 15Table of ContentsKINGSWAY FINANCIAL SERVICES INC. COMPLIANCE RISK If we fail to comply with applicable insurance and securities laws or regulatory requirements, our business, results of operations, financial condition or cash flowcould be adversely affected. As a publicly traded holding company listed on the New York Stock Exchange, we are subject to numerous laws and regulations. These laws and regulations delegateregulatory, supervisory and administrative powers to federal, provincial or state regulators. In light of financial performance and a number of material transactions executed over the years, the Company has been asked to respond to questions from and provideinformation to regulatory bodies overseeing insurance and/or securities laws in Canada and the United States. The Company has cooperated in all respects with thesereviews and has responded to information requests on a timely basis. Any failure to comply with applicable laws or regulations or the mandates of applicable regulators could result in the imposition of fines or significant restrictions on ourability to do business, which could adversely affect our results of operations or financial condition. In addition, any changes in laws or regulations (or the interpretationor application thereof, including changes to applicable case law and legal precedent) could materially adversely affect our business, results of operations or financialcondition. It is not possible to predict the future effect of changing federal, state and provincial law or regulation (or the interpretation or application thereof) on ouroperations, and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws and regulations. Our business is subject to risks related to litigation. In connection with our operations in the ordinary course of business, at times we are named as defendants in various actions for damages and costs allegedly sustainedby the plaintiffs. While it is not possible to estimate the loss, or range of loss, if any, that would be incurred in connection with any of the various proceedings at thistime, it is possible an individual action would result in a loss having a material adverse effect on our business, results of operations or financial condition. Material weaknesses in our internal control over financial reporting could result in material misstatements in our consolidated financial statements. We are required to evaluate the effectiveness of the design and operation of our disclosure controls and procedures under the Securities Exchange Act of 1934. Asdescribed in Item 9A, Controls and Procedures, of this 2021 Annual Report, in previous years we identified the existence of material weaknesses in internal control overfinancial reporting. As discussed in Note 3, "Restatement of Previously Issued Financial Statements," to the 2018 Annual Report on Form 10-K for the year endedDecember 31, 2018, filed on February 27, 2020, we have restated our consolidated financial statements as of and for the year ended December 31, 2017. We are activelyengaged in developing and implementing remediation plans as described in Item 9A, Controls and Procedures, of this 2021 Annual Report, but we can provide noassurance that additional material weaknesses in our internal control over financial reporting will not be identified in the future and that such material weaknesses, ifidentified, will not result in material misstatements in our consolidated financial statements. Failure to comply with the NYSE’s continued listing requirements and rules could result in the NYSE delisting our common stock, which could negatively affect ourcompany, the price of our common stock and your ability to sell our common stock. On April 17, 2020, the Company received a notice from NYSE that the Company was not in compliance with NYSE listing standard 802.01B because our average globalmarket capitalization over a consecutive 30 trading-day period was less than $50.0 million and stockholders’ equity was less than $50.0 million. In accordance with theNYSE listing requirements, we submitted a plan that demonstrated how we expected to return to compliance with NYSE listing standard 802.01B. On July 9, 2020, theNYSE notified us that our plan was accepted. On January 18, 2021, NYSE notified us that we were again in compliance with NYSE listing standard 802.01B but that wewere subject to continued monitoring and review for a period of 12 months. While we remained in compliance during this 12-month period, we may in the future again failto be in compliance with the NYSE listing standards and we may be subject to corrective action by NYSE, which may include suspension and delisting procedures. If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negativelyimpact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our commonstock, which could negatively impact our ability to raise equity financing; decreasing the amount of news and analyst coverage of us; and limiting our ability to issueadditional securities or obtain additional financing in the future. In addition, delisting from the NYSE may negatively impact our reputation and, consequently, ourbusiness. 16Table of ContentsKINGSWAY FINANCIAL SERVICES INC. STRATEGIC RISK The achievement of our strategic objectives is highly dependent on effective change management. Over the past several years we have restructured our operating insurance subsidiaries, including exiting states and lines of business, placing subsidiaries into voluntaryrun-off, terminating managing general agent relationships, hiring a new management team, selling Mendota and acquiring PWI and Ravix, with the objective of focusingon our Extended Warranty segment, creating a more effective and efficient operating structure and focusing on profitability. These actions resulted in changes to ourstructure and business processes. While these changes are expected to bring us benefits in the form of a more agile and focused business, success is dependent onmanagement effectively realizing the intended benefits. Change management may result in disruptions to the operations of the business or may cause employees to actin a manner that is inconsistent with our objectives. Any of these events could negatively affect our performance. We may not always achieve the expected costsavings and other benefits of our initiatives. We may experience difficulty continuing to retain our holding company staff. There can be no assurance that our businesses will produce enough cash flow to adequately compensate and retain staff and to service our other holding companyobligations, particularly the interest expense burden of our remaining outstanding debt. The highly competitive environment in which we operate could have an adverse effect on our business, results of operations or financial condition. The vehicle service agreement market in which we compete is comprised of a few large companies, which market service agreements on a national basis and havesignificantly more financial, marketing and management resources than we do, as well as several other companies that are somewhat similar in size to our ExtendedWarranty companies. In addition, the homebuilder warranty market in which we operate is comprised of several competitors. There may also be other companies ofwhich we are not aware that may be planning to enter the vehicle service agreement and homebuilder warranty industries. Competitors in our market generally compete on coverages offered, claims handling, customer service, financial stability and, to a lesser extent, price. Larger competitorsof ours benefit from added advantages such as industry endorsements and preferred vendor status. We do not believe that it is in our best interest to compete solelyon price. Instead, we focus our marketing on the total value experience, with an emphasis on customer service. While we historically have been able to adjust ourproduct offering to remain competitive when competitors have focused on price, our business could be adversely affected by the loss of business to competitorsoffering vehicle service agreements and homebuilder warranties at lower prices. Engaging in acquisitions involves risks, and, if we are unable to effectively manage these risks, our business could be materially harmed. From time to time we engage in discussions concerning acquisition opportunities and, as a result of such discussions, may enter into acquisition transactions. Acquisitions entail numerous potential risks, including the following: •difficulties in the integration of the acquired business, including implementation of proper internal controls over financial reporting;•assumption of unknown material liabilities;•diversion of management's attention from other business concerns;•failure to achieve financial or operating objectives or other anticipated benefits or synergies and/or anticipated cost savings; and•potential loss of customers or key employees. We may not be able to integrate or operate successfully any business, operations, personnel, services or products that we may acquire in the future. OPERATIONAL RISK Our Extended Warranty subsidiaries' deferred service fees may be inadequate, which would result in a reduction in our net income and could adversely affect ourfinancial condition. Our Extended Warranty subsidiaries' deferred service fees do not represent an exact calculation but are estimates involving actuarial and statistical projections at a givenpoint in time of what we expect to be the remaining future revenue to be recognized in relation to our remaining future obligations to provide policy administration andclaim-handling services. The process for establishing deferred service fees reflects the uncertainties and significant judgmental factors inherent in estimating the lengthof time and the amount of work related to our future service obligations. If we amortize the deferred service fees too quickly, we could overstate current revenues, whichmay result in a future significant reversal of revenue and adversely affect future reported operating results. 17Table of ContentsKINGSWAY FINANCIAL SERVICES INC. As time passes and more information about the remaining service obligations becomes known, the estimates are appropriately adjusted upward or downward to reflectthis additional information. We cannot assure that we will not have unfavorable re-estimations in the future of our deferred service fees and that such unfavorable re-estimations will not have a material adverse effect on our business, results of operations or financial condition. In addition, we have in the past, and may in the future,acquire companies that record deferred service fees. We cannot assure that the deferred service fees of the companies that we acquire are or will be adequate. Extended Warranty's reliance on credit unions and dealers, as well as our overall reliance on automobile sales could adversely affect our ability to maintain business. The Extended Warranty business markets and distributes vehicle service agreements through a network of credit unions and dealers in the United States. We havecompetitors that offer similar products exclusively through credit unions and competitors that distribute similar products through dealers. Loss of all or a substantialportion of our existing relationships could have a material adverse effect on our business, results of operations or financial condition. Moreover, our vehicle serviceagreement businesses rely heavily on the sale of new and used vehicles to drive product sales. Accordingly, a significant decline in new and used automobile salescould have a material adverse effect on our business, results of operations or financial condition. Our reliance on homebuilders and new home sales could adversely affect our ability to maintain business. We market and distribute our core home warranty products through homebuilders throughout the United States. As a result, we rely heavily on these homebuilders togenerate new business. The builders are part of the new home construction industry, which is cyclical and closely correlated with large macro-economic factors, such asinterest and unemployment rates, wage growth, and government regulation. We bill certain builders at the end of the policy period, which could extend over more thanone year. During economic downturns, our customers build fewer homes and also reduce operating expenses by insourcing key functions, such as warrantyadministration; in turn, our revenue has the propensity to decline during these times. Loss of all or a substantial portion of our existing homebuilder relationships; asignificant decline in new home sales; or collection risk due to unbilled accounts receivable could have a material adverse effect on our business, results of operationsor financial condition. Our reliance on a limited number of warranty and maintenance support clients and customers could adversely affect our ability to maintain business. We market and distribute our warranty products and equipment breakdown and maintenance support services through a limited number of customers and clients acrossthe United States. Loss of all or a substantial portion of our existing customers and clients could have a material adverse effect on our business, results of operations orfinancial condition. Ravix's concentration in venture-capital-funded startups creates exposure to the venture capital funding cycles. Ravix focuses on venture-capital-funded companies, often in Silicon Valley, as its clients and receives a significant portion of its referrals from service providers focusedon servicing the same market. Accordingly, a major contraction of available venture capital funding into companies or industries that Ravix services could have amaterial adverse effect on our business, results of operations or financial condition.Disruptions or security failures in our information technology systems could create liability for us and/or limit our ability to effectively monitor, operate and controlour operations and adversely affect our reputation, business, financial condition, results of operation and cash flows.Our information technology systems facilitate our ability to monitor, operate and control our operations. Changes or modifications to our information technologysystems could cause disruption to our operations or cause challenges with respect to our compliance with laws, regulations or other applicable standards. For example,delays, higher than expected costs or unsuccessful implementation of new information technology systems could adversely affect our operations. In addition, anydisruption in or failure of our information technology systems to operate as expected could, depending on the magnitude of the problem, adversely affect our business,financial condition, results of operation and cash flows, including by limiting our capacity to monitor, operate and control our operations effectively. Failures of ourinformation technology systems could also lead to violations of privacy laws, regulations, trade guidelines or practices related to our customers and employees. If ourdisaster recovery plans do not work as anticipated, or if the third-party vendors to which we have outsourced certain information technology or other services fail tofulfill their obligations to us, our operations may be adversely affected. Any of these circumstances could adversely affect our reputation, business, financial condition,results of operation and cash flows. 18Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Our success depends on our ability to price accurately the risks we underwrite. Our results of operation or financial condition depend on our ability to price accurately for a wide variety of risks. Adequate rates are necessary to generate revenuessufficient to pay expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test andapply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonableaccuracy. Our ability to undertake these efforts successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, some ofwhich are outside our control, including: •the availability of reliable data and our ability to properly analyze available data;•the uncertainties that inherently characterize estimates and assumptions;•our selection and application of appropriate pricing techniques; and•changes in applicable legal liability standards and in the civil litigation system generally. Consequently, we could underprice risks, which would adversely affect our results, or we could overprice risks, which would reduce our sales volume andcompetitiveness. In either case, our results of operation could be materially and adversely affected. Our results of operation or financial condition could be adversely affected by the results of our voluntary run-off of our insurance subsidiary. The Company currently has Amigo operating in voluntary run-off. Our success at managing this run-off is highly dependent upon proper claim-handling, the outcomesof the remaining open claims and the availability of the necessary liquidity to pay claims when due. We are also dependent on the continuing availability of thenecessary liquidity to settle claims properly. See the "Liquidity and Capital Resources" section of MD&A for additional detail regarding the voluntary run-off of Amigo. HUMAN RESOURCES RISK Our business depends upon key employees, and if we are unable to retain the services of these key employees or to attract and retain additional qualified personnel,our business could be adversely affected. Our success at improving our performance will be dependent in part on our ability to retain the services of our existing key employees and to attract and retain additionalqualified personnel in the future. The loss of the services of any of our key employees, or the inability to identify, hire and retain other highly qualified personnel in thefuture, could adversely affect our results of operations. 19Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Item 1B. Unresolved Staff Comments None. Item 2. Properties Leased Properties Extended Warranty leases facilities with an aggregate square footage of approximately 44,757 at six locations in four states. The latest expiration date of the existingleases is in July 2026. Ravix, part of Kingsway Search Xcelerator, leases its facility that has an aggregate square footage of approximately 2,014 at one location in one state. The expiration dateof the existing lease is in February 2023. The Company leases a facility for its corporate office with an aggregate square footage of approximately 6,338 at one location in one state. The expiration date of theexisting lease is in January 2023. The properties described above are in good condition. We consider our office facilities suitable and adequate for our current levels of operations. Owned Properties Leased Real Estate owns the Real Property and the LA Real Property, which are both subject to long-term lease agreements. The Real Property includes rail car trackswhich provide rail car storage spaces and has 72 miles of double-ended rail track. The Real Property also contains a 5,760 square foot office building with an attachedobservation tower comprised of 1,150 square feet. The LA Real Property consists of approximately 6.5 acres and contains a 29,224 square foot single-tenant medicaloffice building. Investment Properties The Company owns six investment properties subject to long-term triple net lease agreements. These properties comprise 57,360 square feet leased to tenants in thedistribution and retail sectors. Item 3. Legal Proceedings In connection with its operations in the ordinary course of business, the Company and its subsidiaries are named as defendants in various actions for damages andcosts allegedly sustained by the plaintiffs. While it is not possible to estimate reasonably the loss, or range of loss, if any, that would be incurred in connection with anyof the various proceedings at this time, it is possible an individual action could result in a loss having a material adverse effect on the Company's business, results ofoperations or financial condition. See Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements, for further information regarding the Company's legal proceedings. Item 4. Mine Safety Disclosures Not applicable. 20Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common shares are listed on the New York Stock Exchange ("NYSE") under the trading symbol "KFS." The following table sets forth, for the calendar quarters indicated, the high and low sales price for our common shares as reported on the NYSE. NYSE High - US$ Low - US$ 2021 Quarter 4 $5.77 $5.04 Quarter 3 5.70 4.88 Quarter 2 5.24 4.46 Quarter 1 5.36 4.35 2020 Quarter 4 $4.72 $2.90 Quarter 3 3.10 2.17 Quarter 2 2.33 1.45 Quarter 1 2.29 1.59 Shareholders of Record As of February 25, 2022 the closing sales price of our common shares as reported by the NYSE was $5.10 per share. As of February 28, 2022, we had 24,135,368 common shares issued and outstanding. As of February 28, 2022, there were 11 shareholders of record of our common stock.The number of shareholders of record includes one single shareholder, Cede & Co., for all of the shares held by our shareholders in individual brokerage accountsmaintained at banks, brokers and institutions. Dividends The Company has not declared a dividend since the first quarter of 2009. The declaration and payment of dividends is subject to the discretion of our Board of Directorsafter taking into account many factors, including financial condition, results of operations, anticipated cash needs and other factors deemed relevant by our Board ofDirectors. For a discussion of our cash resources and needs, see the "Liquidity and Capital Resources" section of MD&A. Securities Authorized for Issuance under Equity Compensation Plans The information required related to securities authorized for issuance under equity compensation plans is incorporated herein by reference to the Proxy Statement forour 2021 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2021. Recent Sales of Unregistered Securities During the year ended December 31, 2021, we did not have any unregistered sales of our equity securities. Issuer Purchases of Equity Securities During the year ended December 31, 2021, we did not have any repurchases of our equity securities. 21Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Item 6. Reserved. 22Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis ("MD&A") of our financial condition and results of operations should be read together with the ConsolidatedFinancial Statements included in Part II, Item 8 of this 2021 Annual Report. OVERVIEW Kingsway is a Delaware holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extendedwarranty, business services, asset management and real estate industries. Kingsway conducts its business through the following three reportable segments: ExtendedWarranty, Leased Real Estate and Kingsway Search Xcelerator. Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Geminus Holding Company, Inc. ("Geminus"), PWIHoldings, Inc. ("PWI"), Professional Warranty Service Corporation ("PWSC") and Trinity Warranty Solutions LLC ("Trinity"). Throughout this 2021 Annual Report, theterm "Extended Warranty" is used to refer to this segment. IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 25 states and theDistrict of Columbia to their members, with customers in all 50 states. Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") andPrime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised cardealerships. PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approvedautomobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield inthree states with a white label agreement. PWI also has a "white label" agreement with Classic to sell a guaranteed asset protection product ("GAP") in states thatClassic is approved in. PWSC sells home warranty products and provides administration services to homebuilders and homeowners across the United States. PWSC distributes its productsand services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana. Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and providesequipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administersproduct warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industriesthroughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinitydoes not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts asa single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdownservices by contracting with certain HVAC providers. Leased Real Estate includes the Company's subsidiaries, CMC Industries, Inc. ("CMC") and Roeco Lafayette, LLC ("RoeCo"). Throughout this 2021 Annual Report, theterm "Leased Real Estate" is used to refer to this segment. CMC owns, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State ofTexas (the "Real Property"), which is subject to a long-term triple net lease agreement. The Real Property is also subject to a mortgage, which is recorded as notepayable in the consolidated balance sheets (the "Mortgage"). RoeCo owns real property consisting of approximately 6.5 acres and a 29,224 square foot single-tenant medical office building located in the State of Lousiana (the "LAReal Property"). The LA Real Property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term lease. The LA RealProperty is also subject to a mortgage, which is recorded as note payable in the consolidated balance sheet at December 31, 2021 (the "RoeCo Mortgage"). Kingsway Search Xcelerator includes the Company's subsidiary, Ravix Financial, Inc. ("Ravix"). Ravix provides outsourced financial services and human resourcesconsulting for short or long duration engagements for customers in 21 states and 5 countries. All services are delivered by employees who are located in the UnitedStates. Throughout this 2021 Annual Report, the term "Kingsway Search Xcelerator" is used to refer to this segment. 23Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Impact of COVID-19 The COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter inplace" and other governmental regulations; and many businesses continue to operate in a work-from-home mode. The near-term impacts of COVID-19 are primarily with respect to our Extended Warranty segment. Consumer spending was initially impacted, including a decline in thepurchase of new and used vehicles, and many businesses through which we distribute our products remained closed or were open but with capacity constraints. Morerecently, consumer spending has improved but supply-chain issues have caused a shortage of new automobiles which, in turn, has caused demand for usedautomobiles to increase. This dynamic has had both positive and negative impacts on the Company’s revenues. With respect to homeowner warranties, we saw aninitial reduction in new enrollments in our home warranty programs associated with the impact of COVID-19 on new home sales in the United States. 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 ofgoodwill, 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 debtcovenant 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 thecarrying value of its assets or liabilities as of the date of issuance of this 2021 Annual Report. Actual results may differ materially from the Company’s current estimatesas the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated. We continue to monitor the impact of the COVID-19pandemic closely. However, the extent to which the COVID-19 pandemic will impact our operations or financial results is uncertain. There remain many unknowns andthe Company continues to monitor the expected trends and related demand for its services and will continue to adjust its operations accordingly. NON U.S.-GAAP FINANCIAL MEASURE Throughout this 2021 Annual Report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financialinformation to evaluate our performance. In addition to the U.S. GAAP presentation of net income (loss), we present segment operating income as a non-U.S. GAAPfinancial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measureand its relationship to U.S. GAAP. Segment Operating Income (Loss) Segment operating income (loss) represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from directsegment revenues. Revenues and expenses presented in the consolidated statements of operations are not subtotaled by segment; however, this information isavailable in total and by segment in Note 22, "Segmented Information," to the Consolidated Financial Statements, regarding reportable segment information. The nearestcomparable U.S. GAAP measure to total segment operating income is loss from continuing operations before income tax benefit that, in addition to total segmentoperating income, includes net investment income, net realized gains, (loss) gain on change in fair value of equity investments, gain on change in fair value of limitedliability investments, at fair value, net change in unrealized loss on private company investments, other-than-temporary impairment loss, interest expense not allocatedto segments, other revenue and expenses not allocated to segments, net, amortization of intangible assets, (loss) gain on change in fair value of debt and gain (loss) onextinguishment of debt not allocated to segments. A reconciliation of total segment operating income to loss from continuing operations before income tax benefit forthe years ended December 31, 2021 and December 31, 2020 is presented in Table 1 of the "Results of Continuing Operations" section of MD&A. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reportedamounts and classification of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financialstatements 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 Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that requirethe Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Companyhas identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable,they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions. 24Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Valuation of Fixed Maturities and Equity Investments Our equity investments, including warrants, are recorded at fair value with changes in fair value recognized in net income (loss). Fair value for our equity investments aredetermined using quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no activemarkets exist. For fixed maturities, we use observable inputs such as quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that areinactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data. We do not have any fixedmaturities in our portfolio that require us to use unobservable inputs. The Company engages a third-party vendor who utilizes third-party pricing sources and primarilyemploys a market approach to determine the fair values of our fixed maturities. The market approach includes primarily obtaining prices from independent third-partypricing 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 economicevents, to ensure pricing is appropriate. All classes of our fixed maturities are valued using this technique. We have obtained an understanding of our third-partyvendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Company. Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to the consolidated statements ofoperations. Premium and discount on investments are amortized using the interest method and charged or credited to net investment income. Fixed maturities and equity investments are exposed to various risks, such as interest rate risk, credit risk and overall market volatility risk. Accordingly, it is reasonablypossible that changes in the fair values of the Company’s investments reported at fair value will occur in the near term and such changes could materially affect theamounts reported in the consolidated financial statements. Impairment Assessment of Investments The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. We perform a quarterly analysis of our investments classified as available-for-sale and our limited liability investments to determine if any declines in market value areother-than-temporary. The analysis for available-for-sale investments includes some or all of the following procedures, as applicable: •identifying all unrealized loss positions that have existed for at least six months;•identifying other circumstances management believes may affect the recoverability of the unrealized loss positions;•obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments based on their knowledge and experiencetogether with market-based valuation techniques;•reviewing the trading range of certain investments over the preceding calendar period;•assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit ratings from third-party rating agencies;•assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit rating based on the continuity of its debtservice record;•determining the necessary provision for declines in market value that are considered other-than-temporary based on the analyses performed; and•assessing the Company's ability and intent to hold these investments at least until any investment impairment is recovered. The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not belimited to, the following: •the opinions of professional investment managers could be incorrect;•the historical trading patterns of individual investments may not reflect future valuation trends;•the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts related to a company's financial situation;and•the debt service pattern of non-investment grade instruments may not reflect future debt service capabilities and may not reflect a company's unknown underlyingfinancial problems. We perform a quarterly analysis of our investments in private companies. The analysis includes some or all of the following procedures, as applicable: •the opinions of external investment and portfolio managers;•the financial condition and prospects of the investee;•recent operating trends and forecasted performance of the investee;•current market conditions in the geographic area or industry in which the investee operates;•changes in credit ratings; and•changes in the regulatory environment. 25Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis As a result of the analysis performed to determine declines in market value that are other-than-temporary, the Company recorded write downs for other-than-temporaryimpairment related to certain of its investments. See "Investments" section below and Note 6, "Investments," to the Consolidated Financial Statements for furtherinformation. Valuation of Limited Liability Investments, at Fair Value Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net Lease Investment Grade Portfolio LLC ("NetLease") and Argo Holdings Fund I, LLC ("Argo Holdings"). The Company accounts for these investments at fair value with changes in fair value reported in theconsolidated statements of operations. Net Lease owns investments in limited liability companies that hold investment properties. The fair value of Net Lease's investments is based upon the net asset valuesof the underlying investments companies as a practical expedient to estimate fair value. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies. Thefair 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 ofArgo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach. Refer to Note 23, "Fair Value of Financial Instruments," to the Consolidated Financial Statements for further information. Valuation of Real Estate Investments The fair value of real estate investments is subjective and involves a combination of the market and income valuation techniques. Under this approach, a market-basedcapitalization rate is derived from comparable transactions, adjusted for any unique characteristics of each asset, and applied to the asset under consideration. The caprates used during underwriting and subsequent valuations incorporate the consideration of risks of vacancy and collection loss, administrative costs of owning netleased assets and possible capital expenditures that could be determined a landlord expense. Valuation of Deferred Income Taxes The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in our consolidated financial statements. In determining ourprovision for income taxes, we interpret tax legislation in a variety of jurisdictions and make assumptions about the expected timing of the reversal of deferred income taxassets and liabilities and the valuation of deferred income taxes. The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company'stemporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income taxasset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affectingspecific deferred income tax asset balances, including the Company's historical and anticipated future performance, the reversal of deferred income tax liabilities, and theavailability of tax planning strategies. Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of a company's deferred income tax assetbalances when significant negative evidence exists. Cumulative losses are the most compelling form of negative evidence considered by management in thisdetermination. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidatedstatements of operations. As of December 31, 2021, the Company maintains a valuation allowance of $169.7 million, all of which relates to its U.S. deferred income taxes.The largest component of the U.S. deferred income tax asset balance relates to tax loss carryforwards that have arisen as a result of losses generated from theCompany's U.S. operations. Uncertainty over the Company's ability to utilize these losses over the short-term has led the Company to record a valuation allowance. Future events may result in the valuation allowance being adjusted, which could materially affect our financial position and results of operations. If sufficient positiveevidence were to arise in the future indicating that all or a portion of the deferred income tax assets would meet the more likely than not standard, all or a portion of thevaluation allowance would be reversed in the period that such a conclusion was reached. 26Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Accounting for Business Combinations and Asset Acquisitions The Company evaluates acquisitions in accordance with Accounting Standards Codification 805, Business Combinations ("ASC 805"), to determine if a transactionrepresents an acquisition of a business or an acquisition of assets. An acquisition of a business represents a business combination. The acquisition method of accounting is used to account for a business combination by assigning thepurchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excessof the purchase price over the amounts assigned is recorded as goodwill. We determine the fair value of such assets and liabilities, often in consultation with third-partyvaluation advisors. Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including the selection ofvaluation methodologies, estimates of future revenue, costs and cash flows, discount rates, royalty rates, and selection of comparable companies. The resulting fairvalues and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense. Acquired intangible assets withfinite lives are amortized over their estimated useful lives. Adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period. Acquisition costs related to a business combination are expensed as incurred. When an acquisition does not meet the definition of a business combination either because: (i) substantially all of the fair value of the gross assets acquired isconcentrated in a single identifiable asset, or group of similar identified assets, or (ii) the acquired entity does not have an input and a substantive process that togethersignificantly contribute to the ability to create outputs, the Company accounts for the acquisition as an asset acquisition. In an asset acquisition, goodwill is notrecognized. Any excess of the total purchase price plus transaction costs over the fair value of the net assets acquired is allocated on a relative fair value basis to theidentifiable net assets at the acquisition date. The net assets acquired in an asset acquisition of property generally include, but are not limited to: land, building,building and tenant improvements, and intangible assets or liabilities associated with above-market and below-market leases and in-place leases. The Company's methodology for determining fair value of the acquired tangible and intangible assets and liabilities includes estimating an "as-if vacant" fair value ofthe physical property, which includes land, building, and improvements. In addition, the Company determines the estimated fair value of identifiable intangible assetsand liabilities, considering the following categories: (i) value of in-place leases, and (ii) above and below-market value of in-place leases. The value of in-place leases isestimated based on the value associated with the costs avoided in originating leases compared to the acquired in-place leases as well as the value associated with lostrental and recovery revenue during the assumed lease-up period. The value of in-place leases is amortized on a straight-line basis over the remaining lease term and isincluded in amortization of intangible assets in the consolidated statements of operations. The fair value of the above-market or below-market component of an acquiredlease is based upon the present value (calculated using a market discount rate) of the difference between the contractual rents to be paid pursuant to the lease over itsremaining term and management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remainingterm of the lease. An identifiable intangible asset or liability is recorded if there is an above-market or below-market lease at an acquired property. The amounts recordedfor above-market leases are included in intangible assets on the consolidated balance sheets, and the amounts for below-market leases are included in accrued expensesand other liabilities on the consolidated balance sheets. These amounts are amortized on a straight-line basis as an adjustment to rental revenue over the remaining termof the applicable leases. Changes to these assumptions could result in a different pattern of recognition. If tenants do not remain in their lease through the expectedtermor exercise an assumed renewal option, there could be a material impact to earnings. Valuation and Impairment Assessment of Intangible Assets Intangible assets are recorded at their estimated fair values at the date of acquisition. Intangible assets with definite useful lives consist of database, customerrelationships, in-place lease and non-compete agreement. Intangible assets with definite useful lives are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If circumstances require that a definite-lived intangible asset betested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that definite-lived intangible asset to its carrying amount. Ifthe carrying amount of the definite-lived intangible asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that thecarrying amount exceeds its fair value. Indefinite-lived intangible assets consist of a tenant relationship and trade names. Intangible assets with indefinite lives are assessed for impairment annually as ofNovember 30, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Company has the option to perform aqualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If facts and circumstances indicate that it ismore likely than not that the intangible asset is impaired, then a fair value-based impairment test would be required. Management must make estimates and assumptionsin determining the fair value of indefinite-lived intangible assets that may affect any resulting impairment write-down. This includes assumptions regarding future cashflows and future revenues from the related intangible assets or their reporting units. Management then compares the fair value of the indefinite-lived intangible assets totheir respective carrying amounts. If the carrying amount of an intangible asset exceeds the fair values of that intangible asset, an impairment is recorded. No impairment charges were recorded against intangible assets in 2021 or 2020. Additional information regarding our intangible assets is included in Note 9, "IntangibleAssets," to the Consolidated Financial Statements. 27Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Goodwill Recoverability Goodwill is assessed for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying value may not be recoverable.In evaluating the recoverability of goodwill, the Company estimates the fair value of its reporting units and compares it to the carrying value. If the carrying value of thereporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to such excess. For Extended Warranty, the Company estimates the fair value using a valuation technique based on observed market capitalization multiples of earnings before interest,taxes, depreciation and amortization ("EBITDA") for a group of publicly traded insurance services and insurance brokerage companies, an approach that the Companyviews as a technique consistent with the objective of measuring fair value consistent with prior years’ assessments performed. 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 RealEstate, the Company views as a technique consistent with the objective of measuring fair value. The estimated fair value of Leased Real Estate is highly sensitive todiscount 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. The Company performed aStep 1 impairment assessment for Leased Real Estate at June 30, 2021, due to the sensitivity of interest rates in determining fair value and the impact that the additionalborrowing may have on the determination of fair value. The results of this assessment indicated the fair value exceeded carrying value for Leased Real Estate. However,if there were sustained increases in the underlying interest rates used in our analysis then the fair value could be reduced to a level that could indicate impairment. Estimating the fair value of reporting units requires the use of significant judgments that are based on a number of factors including actual operating results, internalforecasts, market observable pricing multiples of similar businesses and comparable transactions and determining the appropriate discount rate and long-term growthrate assumptions. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It isreasonably possible that the judgments and estimates described above could change in future periods. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertaintyinvolved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact oneither the fair value of the reporting units, the amount of the goodwill impairment charge, or both.No impairment charges were recorded against goodwill in 2021 or 2020, as the estimated fair values of the reporting units exceeded their respective carrying values.Additional information regarding our goodwill is included in Note 8, "Goodwill," to the Consolidated Financial Statements. 28Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Deferred Acquisition Costs Deferred acquisition costs represent the deferral of expenses that we incur related to successful efforts to acquire new business or renew existing business. Acquisitioncosts, which are incremental costs to obtain or fulfill a contract with a customer and primarily include commissions and expenses incurred directly related to theacquisition of vehicle service agreements, are deferred and amortized over the expected customer relationship period consistent with the pattern in which the relatedrevenues are earned. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. Fair Value Assumptions for Subordinated Debt Obligations Our 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 observableinputs and inputs developed by a third-party. These inputs include credit spread assumptions developed by a third-party and market observable swap rates. Thefollowing summarizes the impacts: Impact of Rate Change on Fair Value 2021 Result 2020 Result Libor: increase causes fair value to increase; decrease causes fair value to decrease Increase to fair value Decrease to fair value Risk free rate: increase causes fair value to decrease; decrease causes fair value to increase Decrease to fair value Increase to fair value The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt. Therefore, changes in the underlying interest rates used would cause the fair value to be impacted. However, such impact only impacts the income statement (orcomprehensive income/loss for the portion related to credit risk) and does not impact cash flows. Fair Value Assumptions for Subsidiary Stock-Based Compensation Awards Two of the Company's subsidiaries, PWSC and Ravix, have made grants of restricted stock awards or restricted unit awards (together "Subsidiary Restricted Awards").The Subsidiary Restricted Awards are measured at fair value on the date of grant and recognized as compensation expense on a straight-line basis over the requisiteservice 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 forliability-classified awards. Certain of the Subsidiary Restricted Awards are classified as a liability, either because they contain a noncontingent put option that isexercisable less than six months after the vesting of certain shares or because the awards are expected to settle in cash. Liability-classified awards, included in accruedexpenses and other liabilities in the consolidated balance sheets, are measured and reported at fair value on the date of grant and are remeasured each reporting period.The Subsidiary Restricted Awards contain performance conditions that are reviewed quarterly to assess the probability of achievement of the performance condition. Compensation expense is adjusted when a change in the assessment of achievement of the specific performance condition is determined to be probable. Forfeitures arerecognized in the period that Subsidiary Restricted Awards are forfeited. The determination of fair value of the Subsidiary Restricted Awards is subjective and involves significant estimates and assumptions of whether the awards will achieveperformance thresholds. The fair value of the Subsidiary Restricted Awards is estimated using either an internal valuation model without relevant observable marketinputs or the Black-Scholes option pricing model. The significant inputs used in the internal valuation model includes a valuation multiple applied to trailing twelvemonth earnings before interest, tax, depreciation and amortization. The determination of the grant date fair value using the Black-Scholes option-pricing model isaffected by subjective assumptions, including the expected term of the awards, expected volatility over the expected term of the awards, expected dividend yield, andrisk-free interest rates. The assumptions used in the Company’s Black-Scholes option-pricing model require significant judgment and represent management’s bestestimates. Contingent Consideration The consideration for certain of the Company's acquisitions include future payments to the former owners that are contingent upon the achievement of certain targetsover future reporting periods. Liabilities for contingent consideration are measured and reported at fair value at the date of acquisition with subsequent changes in fairvalue reported in the consolidated statements of operations as other (expense) income. Determining the fair value of contingent consideration liabilities requires management to make assumptions and judgments. The fair value of Company’s contingentconsideration liability is estimated by applying the Monte Carlo simulation method to forecast achievement of gross profit. These fair value measurements are based onsignificant inputs not observable in the market. Key inputs in the valuation include forecasted gross profit, gross profit volatility, discount rate and discountterm. Management must use judgment in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Changes inassumptions could have a material impact on the amount of contingent consideration benefit or expense reported in the consolidated statements of operations and havean impact on the payout of contingent consideration liabilities. Contingent consideration liabilities are revalued each reporting period. Changes in the fair value ofcontingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the key inputs or changes in the assumed achievement ortiming of any targets. Any changes in fair value are reported in the consolidated statements of operations as other (expense) income. Additional information regardingour contingent consideration liabilities is included in Note 23, "Fair Value of Financial Instruments," to the Consolidated Financial Statements. 29Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Revenue Recognition Service fee and commission revenue represents vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance supportservice fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions and business services consulting revenue based onterms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warrantycontract, commission product sale or when consulting services are billed, or on terms subject to the Company’s customary credit reviews. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers, which utilizes a five-step revenue recognitionframework. The Company identifies the contract with its customers and then identifies the performance obligations in the contracts. The transaction price is determinedbased on the amount we expect to be entitled to in exchange for providing the promised services to the customer. The transaction price is allocated to each distinctperformance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied. Certain of the Company’s contracts with customers include obligations to provide multiple services to a customer. Determining whether services are considered distinctperformance obligations that should be accounted for separately from one another requires judgment. Revenue from GAP commissions and homebuilder warrantyservice fees contain multiple distinct performance obligations that are accounted for separately. Judgment is required to determine the standalone selling price ("SASP") for each distinct performance obligation. Revenue is allocated to each performance obligationbased on the relative SASP. SASP are not directly observable in the GAP and homebuilder warranty contracts for the separate performance obligations. As a result, theCompany has applied the expected cost plus a margin approach to develop models to estimate the standalone selling price for each of its performance obligations inorder to allocate the transaction price to the two separate performance obligations identified. In these models, the Company makes judgments about which of its actualcosts are associated with each of the performance obligations. The relative percentage of expected costs plus a margin associated with these performance obligations isapplied to the transaction price to determine the estimated SASP of the performance obligations, which the Company recognizes as earned as services are performedover the term of the contract period. 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 priorto 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 priorto 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 thevehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included inaccrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration currentobservable refund trends in estimating the expected amount of future customer refunds to be paid at each reporting period. Refer to Note 2, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements for information about our revenue recognition accountingpolicies. 30Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis RESULTS OF CONTINUING OPERATIONS A reconciliation of total segment operating income to net income (loss) for the years ended December 31, 2021 and December 31, 2020 is presented in Table 1 below: Table 1 Segment Operating Income for the Years Ended December 31, 2021 and December 31, 2020For the years ended December 31 (in thousands of dollars) 2021 2020 ChangeSegment operating income (loss) Extended Warranty 12,636 6,604 6,032Leased Real Estate 909 (504) 1,413Kingsway Search Xcelerator 484 — 484Total segment operating income 14,029 6,100 7,929Net investment income 1,575 2,625 (1,050)Net realized gains 1,809 580 1,229(Loss) gain on change in fair value of equity investments (242) 1,267 (1,509)Gain on change in fair value of limited liability investments, at fair value 2,391 4,046 (1,655)Net change in unrealized loss on private company investments — (744) 744Other-than-temporary impairment loss — (117) 117Interest expense not allocated to segments (6,161) (7,719) 1,558Other revenue and expenses not allocated to segments, net (11,395) (10,606) (789)Amortization of intangible assets (4,900) (2,291) (2,609)(Loss) gain on change in fair value of debt (3,201) 1,173 (4,374)Gain (loss) on extinguishment of debt not allocated to segments 311 (851) 1,162Loss from continuing operations before income tax benefit (5,784) (6,537) 753Income tax benefit (7,644) (1,115) (6,529)Income (loss) from continuing operations 1,860 (5,422) 7,282Gain on disposal of discontinued operations, net of taxes — 6 (6)Net income (loss) 1,860 (5,416) 7,276 Income (Loss) from Continuing Operations and Net Income (Loss) During the third quarter of 2021, the Company completed its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWI, which resulted inPWI recording a $3.6 million reduction to deferred service fees that will be amortized over time. As a result, PWI recorded a $1.9 million non-cash, current periodcumulative reduction to service fee and commission revenue during the three months ended September 30, 2021. Of this amount, $1.4 million relates to the period fromacquisition through June 30, 2021 and $0.4 million relates to the period from July 1, 2021 through September 30, 2021. For the year ended December 31, 2021, we reported income from continuing operations of $1.9 million compared to a loss from continuing operations of $5.4 million forthe year ended December 31, 2020, which is primarily attributable to the items explained in the following paragraphs. Net income (loss) was the same as income (loss)from continuing operations for the year ended December 31, 2021 and was materially the same for the year ended December 31, 2020. Extended Warranty The Extended Warranty service fee and commission revenue increased 57.4% (or $27.3 million) to $74.9 million for the year ended December 31, 2021 compared with $47.6million for the year ended December 31, 2020. The 2021 service fee and commission revenue of $74.9 million includes a $1.9 million non-cash, cumulative reduction toservice fee and commission revenue in the three months ended September 30, 2021 relating to the decrease in PWI acquired deferred service fees as a result of finalizingthe purchase accounting. Service fee and commission revenue was impacted by the following in 2021: •A $25.8 million increase due to the inclusion of PWI in 2021 following its acquisition effective December 1, 2020, which includes a $1.9 million non-cash,cumulative reduction to service fee and commission revenue in the three months ended September 30, 2021 relating to the decrease in PWI acquired deferredservice fees as a result of finalizing the purchase accounting. However, the continued COVID-19 pandemic has caused supply-chain issues in the automotiveindustry, resulting in significant increases in the prices of used automobiles (PWI’s primary market), making it difficult for smaller automobile dealers to obtaininventory and, therefore, putting downward pressure on PWI’s revenue; •A $2.1 million increase at Trinity driven by increased revenues ($1.4 million) in its equipment breakdown and maintenance support services primarily due to thenegative impacts of the COVID-19 pandemic on 2020 revenues; and increased sales ($0.7 million) of extended warranty services product as a result of marketingefforts; •A $0.6 million increase at PWSC, driven by a strong housing market; •A $0.4 million increase at IWS. While IWS’ market is also impacted by similar macro-economic conditions brought on by the continued COVID-19 pandemic asexplained above for PWI, IWS has more product diversity in that it also sells a substantial amount of VSAs for new automobiles but, more importantly, itsproducts are distributed through credit unions at the point of vehicle financing, which has been less impacted by the recent macro-economic conditions; and •A $1.6 million decrease at Geminus, which is being impacted by similar macro-economic conditions brought on by the continued COVID-19 pandemic asexplained above for PWI. 31Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis The Extended Warranty operating income was $12.6 million for the year ended December 31, 2021 compared with $6.6 million for the year ended December 31, 2020. Theincrease in operating income is primarily due to the following: •Inclusion of Paycheck Protection Program ("PPP") loan forgiveness related to Extended Warranty companies of $2.2 million for 2021, compared with $0.4 millionfor 2020; •A $1.1 million increase due to the inclusion of PWI in 2021 following its acquisition effective December 1, 2020. Current year results include a $1.9 million non-cash, cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing thepurchase accounting during 2021; •A $1.8 million increase at IWS primarily due to the increase in revenue explained above, as well as a decrease in claims authorized on vehicle serviceagreements (fewer claims in 2021 partially offset by higher cost per claim) and lower general and administrative expenses as the company continues to containcosts at pre-COVID levels; •A $0.4 million increase at PWSC, primarily due to increased revenue and holding operating costs in-check; •A $0.1 million increase at Geminus due to a decrease in claims authorized on vehicle service agreements (fewer claims in 2021) and lower general andadministrative expenses as the company continues to contain costs at pre-COVID levels, both of which were essentially offset by a decrease in revenue; and •A $0.8 million increase at Trinity driven by increased revenues, partially offset by a related increase in cost of services sold (primarily for equipment breakdownand maintenance support services), compared to 2020. Leased Real Estate Leased Real Estate rental revenue was $13.4 million for each of the years ended December 31, 2021 and December 31, 2020. The rental revenue is derived from CMC'slong-term triple net lease. Leased Real Estate operating income was $0.9 million for the year ended December 31, 2021 compared to operating loss of $0.5 million for the year ended December 31,2020. Leased Real Estate operating income (loss) includes interest expense of $6.2 million and $6.0 million for the years ended December 31, 2021 and December 31, 2020,respectively. The operating income for the year ended December 31, 2021 was impacted by: •A $2.9 million expense recorded during the second quarter of 2021 to write-off an indemnification receivable (which is exactly offset by a tax benefit of $2.9million in net income); •Management expense of $0.7 million for the year ended December 31, 2021 as a result of the March settlement agreement; and •A $0.6 million benefit recorded in 2021 related to the finalization of management fees and legal expenses associated with the settlement of CMC litigation. The operating loss for the year ended December 31, 2020 was impacted by a $2.6 million management fee expense recorded pursuant to the CMC litigation settlementand $1.3 million of litigation expenses. See Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements, for further information on the CMC litigation settlement. Kingsway Search Xcelerator The Kingsway Search Xcelerator revenue was $3.5 million for the year ended December 31, 2021 and is derived from the Company's subsidiary, Ravix, that was acquiredon October 1, 2021. Kingsway Search Xcelerator operating income was $0.5 million for the year ended December 31, 2021. Net Investment Income Net investment income was $1.6 million in 2021 compared to $2.6 million in 2020. The decrease in 2021 is primarily due to lower investment income from: •Limited liability investments, at fair value. This consists of Argo Holdings and Net Lease. Argo Holdings is not expected to generate a substantial portion ofinvestment income annually. The Net Lease decrease is due to (1) the sale of two underlying properties over the past year and (2) interest income no longerbeing reported separately by Net Lease due to a change associated with the sale of the two properties; and •Fixed maturities held within investments by Extended Warranty. The decrease is a result of general changes in market conditions. Net Realized Gains The Company recorded net realized gains of $1.8 million in 2021 compared to $0.6 million in 2020. The net realized gains for 2021 primarily relate to: •The sale of two limited liability investments during the fourth quarter of 2021; •Realized gains recognized by Argo Holdings; and •Distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as aresult of prior distributions. The net realized gains for 2020 primarily relate to realized gains recognized by Argo Holdings. 32Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis (Loss) Gain on Change in Fair Value of Equity Investments Loss on change in fair value of equity investments was $0.2 million in 2021 compared to a gain of $1.3 million in 2020. Significant drivers include: •Unrealized losses of $0.3 million and $0.2 million on equity investments held during the years ended December 31, 2021 and December 31, 2020, respectively;and •Net realized gains of less than $0.1 million and $1.5 million on equity investments sold during the years ended December 31, 2021 and December 31, 2020,respectively. The net realized gains for the year ended December 31, 2020 relate primarily to the sale of the Company's shares of Limbach Holdings, Inc.("Limbach") common stock. During the third quarter of 2020, the Company sold all of its shares of Limbach common stock for cash proceeds totaling $3.2million. Gain on Change in Fair Value of Limited Liability Investments, at Fair Value Gain on change in fair value of limited liability investments, at fair value was $2.4 million in 2021 compared to $4.0 million in 2020. The gain for the year ended December31, 2021 represents increases in fair value of $1.6 million related to Net Lease, due to net cash proceeds received in excess of the carrying value from the sale of one ofthe properties and a resulting reduction in debt at one of the underlying LLC's, as well as an increase in fair value of $0.8 million related to Argo Holdings. The gain for the year ended December 31, 2020 includes an increase in fair value of $4.9 million related to Net Lease, due to the sale of one of the Net Lease investmentproperties, partially offset by a decrease in fair value of $0.8 million related to Argo Holdings. Net Change in Unrealized Loss on Private Company Investments Net change in unrealized loss on private company investments was zero in 2021 compared to $0.7 million in 2020. For 2021 and 2020, the Company did not record anyadjustments to the fair value of its investments in private companies for observable price changes. As part of the Company's quarterly impairment analysis of itsinvestments in private companies, the Company determined it should write down two of its investments for other-than-temporary impairment of $0.7 million for theyear ended December 31, 2020, as a result of the impacts of COVID-19 on the investments' underlying business. Interest Expense not Allocated to Segments Interest expense not allocated to segments for 2021 was $6.2 million compared to $7.7 million in 2020. The decrease in 2021 is primarily attributable to: •$0.2 million lower interest expense related to the Company's bank loan used to acquire PWI in December 2020. As part of that transaction, the Companyborrowed a principal amount of $25.7 million from a bank to partially finance the acquisition of PWI and to fully repay the prior outstanding loan at KWH(which had an original loan amount of $10.0 million). The new loan has an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 3.00% (current rateof 3.75%), while the previous loan had an annual interest rate equal to LIBOR, having a floor of 2.00%, plus 9.25% (rate prior to payoff of 11.25%); •$0.5 million lower interest expense on the Company’s subordinated debt, which resulted from generally lower London interbank offered interest rates for three-month U.S. dollar deposits ("LIBOR") during 2021 compared to 2020. The Company's subordinated debt bears interest at the rate of LIBOR, plus spreadsranging from 3.85% to 4.20%; and •An increase of $0.1 million that partially offset the above decreases, related to a new $6.0 million bank loan as part of the acquisition of Ravix on October 1,2021, that has an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 3.00% (current rate of 3.75%).See "Debt" section below for further details. Other Revenue and Expenses not Allocated to Segments, Net Other revenue and expenses not allocated to segments was a net expense of $11.4 million in 2021 compared to $10.6 million in 2020. The increase in net expense for 2021 is primarily attributable higher expense related to restricted stock awards due to new grants to officers of the Company, as well as anincrease in fair value of previously-granted awards to a subsidiary President that are accounted for on a fair value basis. This increase was partially offset by: •$1.3 million in expense recorded in 2020 to settle outstanding litigation between the Company and Aegis Security Insurance Company ("Aegis"); •A decrease in audit professional services fees incurred during 2021 compared to the same period in 2020, as the Company is now current in its required financialfilings; and •Continued cost reduction initiatives with respect to the holding company’s ongoing expense base. See Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements, for further discussion related to Aegis. Amortization of Intangible AssetsAmortization of intangible assets was $4.9 million in 2021 compared to $2.3 million in 2020. The higher amortization expense for 2021 is related to amortization ofintangible assets recorded in conjunction with the Company's acquisitions of PWI effective December 1, 2020 and Ravix effective October 1, 2021. During 2021, theCompany finalized its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWI, which resulted in the Company recording $2.6 million ofamortization expense during 2021 related to the intangible assets identified. In addition, during the fourth quarter of 2021, the Company completed a preliminaryevaluation of the assets acquired and liabilities assumed in its acquisition of Ravix, which resulted in the Company recording $0.4 million of amortization expense during2021 related to the intangible assets identified. See Note 4, "Acquisitions," to the Consolidated Financial Statements for further details on the Company’s acquisition of PWI. 33Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis (Loss) Gain on Change in Fair Value of Debt The loss on change in fair value of debt amounted to $3.2 million in 2021 compared to a gain on change in fair value of debt of $1.2 million in 2020. The loss for 2021reflects an increase in the fair value of the subordinated debt resulting primarily from changes in interest rates used (not related to instrument-specific credit risk). Thefollowing summarizes the impacts: Impact of Rate Change on Fair Value 2021 Result 2020 ResultLibor: increase causes fair value to increase; decrease causes fair value to decrease Increase to fair value Decrease to fair valueRisk free rate: increase causes fair value to decrease; decrease causes fair value to increase Decrease to fair value Increase to fair value See "Debt" section below for further information. 34Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Gain (Loss) on Extinguishment of Debt not Allocated to Segments During 2021, gain on extinguishment of debt not allocated to segments consists of a $0.3 million gain (recorded in the first quarter) on forgiveness of the balance of theholding company's loan obtained through the PPP of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. During 2020, loss on extinguishment of debt not allocated to segments consists of a $0.9 million loss on the extinguishment of the 2019 KWH Loan, which includes thewrite-off of unamortized debt issuance costs and discount of $0.6 million and early termination fees paid to the lender of $0.2 million. See Note 12, "Debt," to the Consolidated Financial Statements, for further discussion. Income Tax Benefit Income tax benefit for 2021 was $7.6 million compared to $1.1 million in 2020. The 2021 and 2020 income tax benefit is primarily related to: •An income tax benefit of $1.9 million and $1.3 million in 2021 and 2020, respectively, for the partial release of the Company’s deferred income tax valuationallowance associated with business interest expense with an indefinite life; •An income tax expense of $0.5 million in 2021 and an income tax benefit of $0.5 million in 2020 attributable to the Company’s deferred income tax valuationallowance related to its acquisition of CMC; •An income tax benefit of $4.1 million in 2021 for the partial release of the Company’s deferred income tax valuation allowance related to its acquisitions of PWIand Ravix; •An income tax benefit of $2.8 million in 2021 and an income tax expense of $0.2 million in 2020 relating to a change in unrecognized tax benefits; •An income tax expense of $0.2 million and $0.2 million in 2021 and 2020, respectively, relating to a change in indefinite life deferred income tax liabilities; and •An income tax expense of $0.5 million and 0.3 million in 2021 and 2020, respectively, for state income taxes. See Note 15, "Income Taxes," to the Consolidated Financial Statements, for additional detail of the income tax benefit recorded for the years ended December 31, 2021and December 31, 2020, respectively. INVESTMENTS PWI, which was acquired by the Company in December 2020, began investing a substantial portion of its restricted cash during 2021. Previously, PWI had not held asubstantial amount of investments. Portfolio Composition The following is an overview of how we account for our various investments: •Investments in fixed maturities are classified as available-for-sale and are reported at fair value. •Equity investments are reported at fair value. •Limited liability investments are accounted for under the equity method of accounting. The most recently available financial statements of the limited liabilityinvestments are used in applying the equity method. The difference between the end of the reporting period of the limited liability investments and that of theCompany is no more than three months. •Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net Lease and Argo Holdings. Thedifference 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 liabilitycompanies in which the Company’s interests are deemed minor. These investments do not have readily determinable fair values and, therefore, are reported atcost, adjusted for observable price changes and impairments. •Real estate investments are reported at fair value. •Other investments include collateral loans and are reported at their unpaid principal balance. •Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fairvalue. 35Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis At December 31, 2021, we held cash and cash equivalents, restricted cash and investments with a carrying value of $98.3 million. Investments held by our insurance subsidiary, Kingsway Amigo Insurance Company ("Amigo"), must comply with 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 ratefluctuations. Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated. TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cashAs of December 31 (in thousands of dollars, except for percentages) Type of investment 2021 % of Total 2020 % of Total Fixed maturities: U.S. government, government agencies and authorities 16,223 16.5% 10,104 8.8%States, municipalities and political subdivisions 1,878 1.9% 1,454 1.3%Mortgage-backed 7,629 7.8% 5,394 4.7%Asset-backed 445 0.5% — —%Corporate 9,491 9.7% 3,764 3.3%Total fixed maturities 35,666 36.4% 20,716 18.1%Equity investments: Common stock 171 0.2% 155 0.1%Warrants 8 0.0% 289 0.3%Total equity investments 179 0.2% 444 0.4%Limited liability investments 1,901 1.9% 3,692 3.2%Limited liability investments, at fair value 18,826 19.1% 32,811 28.7%Investments in private companies 790 0.8% 790 0.7%Real estate investments 10,662 10.8% 10,662 9.3%Other investments 256 0.3% 294 0.2%Short-term investments 157 0.1% 157 0.1%Total investments 68,437 69.6% 69,566 60.7%Cash and cash equivalents 12,642 12.9% 14,374 12.6%Restricted cash 17,257 17.5% 30,571 26.7%Total 98,336 100.0% 114,511 100.0% Other-Than-Temporary Impairment The Company performs a quarterly analysis of its investments to determine if declines in market value are other-than-temporary. Further information regarding ourdetailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within the "Significant Accounting Policiesand Critical Estimates" section of MD&A. As a result of the analysis performed, the Company recorded the following write downs for other-than-temporary impairment: •Other investments: zero and $0.1 million for the years ended December 31, 2021 and December 31, 2020, respectively. •Limited liability investments, at fair value: $0.1 million for the years ended December 31, 2021 and December 31, 2020, which are included in gain on change infair value of limited liability investments, at fair value in the consolidated statements of operations. •Investments in private companies: zero and $0.7 million for the years ended December 31, 2021 and December 31, 2020, respectively, which are included in netchange in unrealized loss on private company investments in the consolidated statements of operations. There were no write-downs recorded for other-than-temporary impairments related to available-for sale investments or limited liability investments for the years endedDecember 31, 2021 and December 31, 2020. 36Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis The length of time a fixed maturity investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respectiveanalyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In the case of a fixed maturity investmentwhere 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 unrealizedloss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, theCompany may elect to sell a fixed maturity investment at a loss. At December 31, 2021 and December 31, 2020, the gross unrealized losses for fixed maturities amounted to $0.3 million and less than $0.1 million, and there were nounrealized losses attributable to non-investment grade fixed maturities. At each of December 31, 2021 and December 31, 2020, all unrealized losses on individualinvestments were considered temporary. 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 materialdecreases in the underlying investment values. Such decreases may be considered temporary or could be deemed to be other-than-temporary, and management may berequired to record write-downs of the related investments in future reporting periods. DEBT See Note 12, "Debt," to the Consolidated Financial Statements for further details to those provided below. Bank Loans On October 12, 2017, the Company borrowed a principal amount of $5.0 million from a bank to partially finance its acquisition of PWSC (the "PWSC Loan"). The PWSCLoan was scheduled to mature on October 12, 2022; however, the principal was fully repaid on January 30, 2020. In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries at the time included IWS, Geminus and Trinity. On March 1, 2019, KWHborrowed a principal amount of $10.0 million from a bank to finance its acquisition of Geminus (the "2019 KWH Loan"). The 2019 KWH Loan had an annual interest rateequal to LIBOR, having a floor of 2.00%, plus 9.25%. The 2019 KWH Loan was scheduled to mature on March 1, 2024; however, the principal was fully repaid onDecember 1, 2020. 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 abank to finance its acquisition of PWI and to fully repay the 2019 KWH Loan (the "2020 KWH Loan"). The 2020 KWH Loan has an annual interest rate equal to LIBOR,having a floor of 0.75%, plus 3.00% (current rate of 3.75%) and is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-downof principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The 2020 KWH Loan matures on December 1,2025. 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 ofwhich 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 Ravix on October 1, 2021, Ravix became a wholly owned subsidiary of Ravix Acquisition LLC ("Ravix LLC"), and together they borrowedfrom a bank a principal amount of $6.0 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of Ravix (together, the "RavixLoan"). The Ravix Loan has an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 3.00% (current rate of 3.75%) and is carried in the consolidated balancesheet at December 31, 2021 at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costsusing the effective interest rate method. The revolver matures on October 1, 2023 and the term loan matures on October 1, 2017. The Ravix Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio, all of which are as defined in and calculatedpursuant to the Ravix Loan that, among other things, restrict Ravix’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage inmergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets. 37Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Notes Payable As part of its acquisition of CMC in July 2016, the Company assumed the Mortgage and recorded the Mortgage at its estimated fair value of $191.7 million, whichincluded 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 afixed 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 asthe amortization of the premium using the effective interest rate method. On June 2, 2021, TRT Leaseco ("TRT"), a subsidiary of CMC, entered into an amendment to the Mortgage to borrow an additional $15.0 million, which is recorded asnote payable in the consolidated balance sheets ("the Additional Mortgage"). The net proceeds from the Additional Mortgage were used to advance increased rentalpayments to the parties that had entered into a legal settlement agreement reached during the first quarter of 2021, including the Company, which received $2.7 million. The Additional Mortgage matures on May 15, 2034 and has a fixed interest rate of 3.20%. The Additional Mortgage is carried in the consolidated balance sheet atDecember 31, 2021 at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using theeffective interest rate method. See Note 25(a), "Commitments and Contingent Liabilities - Legal proceedings," to the Consolidated Financial Statements for furtherdiscussion of the CMC litigation settlement agreement. As part of its acquisition of RoeCo on December 30, 2021, the Company assumed the LA Mortgage, which is comprised of a senior amortizing note, a senior interestonly note and a junior note. The Company recorded the LA Mortgage at its aggregate unpaid principal amount of $13.5 million as of the date of acquisition plus apremium of $3.5 million. The senior amortizing note matures on September 14, 2036 and has a fixed interest rate of 3.75%. The senior interest only note matures onOctober 14, 2036 and has a fixed interest rate of 5.682%. The junior note matures on September 16, 2036 and has a fixed interest rate of 7.0%, of which a fixed amount ispayable semi-annually and the remainder is added to the principal balance of the junior note. The LA Mortgage is carried in the consolidated balance sheet at December31, 2021 at its aggregate unpaid principal balance. On January 5, 2015, Flower Portfolio 001, LLC assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties ("the Flower Note").The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The Flower Note is carried in the consolidated balance sheets at its unpaidprincipal balance. On October 15, 2015, Net Lease Investment assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties ("the Net LeaseNote"). The Net Lease Note matured on November 1, 2020 and had a fixed interest rate of 10.25%. The Net Lease Note is carried in the consolidated balance sheet atDecember 31, 2020 at its unpaid principal balance. In conjunction with the maturity of the Net Lease Note on November 1, 2020, Net Lease explored alternatives tomaximize 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 theremaining properties and the existing financing was repaid. Each of these transactions closed on October 30, 2020, however because the Company reports Net Lease ona three-month lag, the consolidated balance sheet at December 31, 2020 continues to report the $9.0 million mezzanine debt. In April 2020, certain subsidiaries of the Company received loan proceeds under the PPP, totaling $2.9 million with a stated annual interest rate of 1.00%. The PPP,established as part of the CARES Act and administered by the U.S. Small Business Administration (the "SBA"), provides for loans to qualifying businesses for amountsup 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 aslong as the borrower uses the loan proceeds for eligible purposes, including payroll, costs, rent and utilities, during the twenty-four week period following theborrower’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 itsemployee headcount below its average employee headcount during a benchmark period or significantly reduces salaries for certain employees during the coveredperiod. 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 thatexceed $2.0 million. If we were to be audited and receive an adverse outcome in such an audit, we could be required to return the full amount of the PPP Loan and maypotentially 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, which included principal and interest of $0.4 million. In January2021 and March 2021, the SBA provided the Company with notices of forgiveness of the full amount of the remaining four loans. The forgiveness in the first quarter of2021 included total principal and interest of $2.5 million. The carrying value of the PPP at December 31, 2020 represents its unpaid principal balance. 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 separateprivate transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by Kingsway America Inc. to thetrust 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%. TheCompany has the right to call each of these securities at par value any time after five years from their issuance until their maturity. 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 upto 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a defaultunder the Company's Trust Preferred indentures or any of its other debt indentures. At December 31, 2021 and December 31, 2020, deferred interest payable of$18.7 million and $14.1 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets. The agreements governing our subordinated debt contain a number of covenants that, among other things, restrict the Company’s ability to incur additionalindebtedness, make dividends and distributions, and make certain payments in respect of the Company’s outstanding securities. The Company's subordinated debt is measured and reported at fair value. At December 31, 2021, the carrying value of the subordinated debt is $61.0 million. The fairvalue of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third-party. For a description of themarket observable inputs and inputs developed by a third-party used in determining fair value of debt, see Note 23, "Fair Value of Financial Instruments," to theConsolidated Financial Statements. 38Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis During the year ended December 31, 2021, the market observable swap rates changed, and the Company experienced a decrease in the credit spread assumptiondeveloped by the third-party. Changes in the market observable swap rates affect the fair value model in different ways. An increase in the LIBOR swap rates has theeffect of increasing the fair value of the Company's subordinated debt while an increase in the risk-free swap rates has the effect of decreasing the fair value. Theincrease in the credit spread assumption has the effect of decreasing the fair value of the Company's subordinated debt while a decrease in the credit spread assumptionhas the effect of increasing the fair value. The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effectof increasing the fair value of debt. The changes to the credit spread and swap rate variables during 2021, along with the passage of time, contributed to the $10.0 millionincrease in fair value of the Company’s subordinated debt between December 31, 2020 and December 31, 2021. Of the $10.0 million increase in fair value of the Company’s subordinated debt between December 31, 2020 and December 31, 2021, $6.8 million is reported as an increasein fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive loss and $3.2 million is reported as loss onchange in fair value of debt in the Company’s consolidated statements of operations. Though changes in the market observable swap rates will continue to introduce some volatility each quarter to the Company’s reported gain or loss on change in fairvalue of debt, changes in the credit spread assumption developed by the third party does not introduce volatility to the Company’s consolidated statements ofoperations. The fair value of the Company’s subordinated debt will eventually equal the principal value, totaling $90.5 million, of the subordinated debt by the time ofthe stated redemption date of each trust, beginning with the trust maturing on December 4, 2032 and continuing through January 8, 2034, the redemption date of the lastof the Company’s outstanding trusts. LIQUIDITY AND CAPITAL RESOURCES The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements ofthe Company and its subsidiaries have historically been met primarily by funds generated from operations, capital raising, disposal of discontinued operations,investment maturities investment income, other returns received on investments and from the sale of investments. A significant portion of the cash provided by our Extended Warranty companies is required to be placed into restricted trust accounts, as determined by the insurerswho back-up our service contracts, in order to fund future expected claims. On a periodic basis (quarterly or annually), we may be required to contribute more into therestricted accounts or we may be permitted to draw additional funds from the restricted accounts, dependent upon actuarial analyses performed by the insurersregarding sufficiency of funds to cover future expected claims. A substantial portion of the restricted trust accounts are invested in fixed maturities and otherinstruments that have durations similar to the expected future claim projections. Cash provided from these sources is used primarily for warranty expenses, business service expenses, debt servicing, acquisitions and operating expenses of theholding company. The Company's Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee and commission revenue. TheCompany's Leased Real Estate subsidiaries fund their obligations through rental revenue. Cash Flows During 2021, the Company reported $5.9 million of net cash used in operating activities, primarily due to: •A $10.6 million cash outflow related to prepaid management fees recorded during the second quarter of 2021. The $10.6 million was only paid because of the grossproceeds received under the Additional Mortgage (shown as a cash inflow from financing activities), of which the Company retained $2.7 million; •A $3.1 million change in other assets and liabilities, net, which is primarily due to a decrease in income taxes payable; and •Cash inflows generated by the Extended Warranty segment (which includes PWI for twelve months in 2021) and cost containment initiatives at the holdingcompany. To clarify, the gross proceeds received under the Additional Mortgage and associated cash outflows (to the Company and a third party) had essentially no impact onthe Company’s overall net cash flows. However, the outflow to the third party is a reduction to operating cash flows while the gross proceeds are shown as a cashinflow from financing activities, as required by U.S. GAAP. During 2021, the net cash used in investing activities was $8.6 million. This use of cash was primarily attributed to: • Purchases of fixed maturities in excess of proceeds from sales and maturities of fixed maturities of $15.6 million; •The acquisitions of Ravix and RoeCo in 2021, which totaled $12.2 million, net of cash acquired; •Distributions received (reducing the use of cash) by Net Lease from two of its limited liability investment companies of $16.3 million; and •Proceeds received (reducing the use of cash) from the Company's limited liability investments. During 2021, the net cash provided by used in financing activities was $0.5 million, primarily attributed to: •Principal repayments: on bank loans of $4.9 million, notes payable of $14.0 million, of which $9.0 million relates to the repayment of Net Lease's $9.0 millionmezzanine loan and $5.0 million relating to principal paydowns on the Mortgage, Additional Mortgage and the Flower Note; •Distributions to noncontrolling interest holders of $2.4 million; and •Net proceeds (reducing the use of cash) from notes payable of $13.3 million related to the Additional Mortgage, net proceeds from bank loans of $6.2 million relatedto the Ravix Loan and proceeds from the exercise of warrants of $1.8 million. 39Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis Holding Company Liquidity The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding companyoperating 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 ofdebt or equity securities; exercise of warrants; distributions from the Company’s Extended Warranty and Kingsway Search Xcelerator subsidiaries, as further describedbelow; 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 subsidiarytrusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018. Receipt of dividends from the Company's insurance subsidiaries is currently not considered a source of liquidity for the holding company. The insurance subsidiarieshave required regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. At December 31, 2021, Amigo was restrictedfrom making any dividend payments to the holding company without regulatory approval pursuant to domiciliary state insurance regulations. On December 1, 2020, the Company closed on the acquisition of PWI, a full-service provider of vehicle service agreements. Related to the PWI acquisition, the Companysecured the 2020 KWH Loan with IWS, Trinity, Geminus and PWI (the "KWH Subs") as borrowers under the 2020 KWH Loan. Pursuant to satisfying the covenantsunder the 2020 KWH Loan, the KWH Subs were permitted to make distributions to the holding company in an aggregate amount not to exceed $1.5 million in any 12-month period (which is the same amount as under the predecessor loan). Beginning in 2022, the Company is permitted to receive a portion of the excess cash flow (as defined in the 2020 KWH Loan document) generated by the KWH Subs inthe previous year. Based on current covenants, the Company would be entitled to 50% of the excess cash flow with the other 50% used to pay down the 2020 KWHLoan. The Company is currently finalizing the excess cash flow calculation for the year ended December 31, 2021, but is expected to receive between $1.0 and $1.5million (with an equivalent amount expected to pay down the KWH 2020 Loan). The amount of excess cash flow the Company is entitled to retain is dependent upon the leverage ratio (as defined in the 2020 KWH Loan document): Percent of excess cash flow If leverage ratio is retained by the Company Greater than 1.75:1.00 50% Less than 1.75:1.00 but greater than 0.75:1.00 75% Less than 0.75:1.0 100% Separately, pursuant to covenants under the PWSC Loan secured to partially finance the acquisition of PWSC on October 12, 2017, PWSC was not permitted to makedistributions to the holding company without the consent of the lender. The PWSC Loan was scheduled to mature on October 12, 2022; however, the remaining principaltotaling $0.3 million was fully repaid on January 30, 2020 and, as such, PWSC is no longer subject to such restrictions. On October 1, 2021, the Company closed on the acquisition of Ravix. Related to the PWI acquisition, the Company secured the Ravix Loan with Ravix and Ravix LLC asborrowers under the Ravix Loan. Pursuant to the covenants under the Ravix Loan, Ravix is permitted to make distributions to the holding company so long as doingsuch would not cause non-compliance with the various covenants outlined within the Ravix Loan. Historically, dividends from the Leased Real Estate segment were not generally considered a source of liquidity for the holding company. However, as more fullydescribed in Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements, the holding company is now permitted to receive 20% of theproceeds from the increased rental payments resulting from an earlier amendment to the CMC lease (or any borrowings against such increased rental payments). In thesecond quarter of 2021, the holding company received a dividend of $2.7 million from the net proceeds from the Additional Mortgage. Refer to Note 12, "Debt," to theConsolidated Financial Statements, for further information about this borrowing. In conjunction with the Additional Mortgage, TRT paid a guarantee fee of $1.1 millionto a third-party during the second quarter of 2021, who is serving as a guarantor or indemnitor with respect to certain obligations between TRT and the holder of theAdditional Mortgage. Refer to Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements for further discussion of this off-balancesheet guarantee. On October 18, 2018, the Company completed the previously announced sale of its non-standard automobile insurance companies Mendota Insurance Company,Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"). As part of the transaction, the Company will indemnify the buyer for anyloss 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 theopen claims. The maximum obligation to the Company with respect to the open claims is $2.5 million. Per the purchase agreement, a security interest on the Company’sequity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from Net Lease, was to be collateral for the Company’s payment ofobligations with respect to the open claims. During the third quarter of 2021, the purchasers of Mendota and the Company agreed to release the Company's equityinterest in Net Lease as collateral and allow Net Lease to make distributions to the Company. In exchange, the Company agreed to deposit $2.0 million into an escrowaccount and advance $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation with respect to the open claims. Refer to Note 25,"Commitments and Contingent Liabilities," to the Consolidated Financial Statements for further discussion of this off-balance sheet guarantee. The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc., was $2.2 million(approximately five months of recurring operating cash outflows) and $1.1 million at December 31, 2021 and December 31, 2020, respectively, which excludes futureactions available to the holding company that could be taken to generate liquidity. The holding company cash amounts are reflected in the cash and cash equivalents of$12.6 million and $14.4 million reported at December 31, 2021 and December 31, 2020, respectively, on the Company’s consolidated balance sheets. The holding company’s liquidity at December 31, 2021 represents only actual cash on hand and does not include cash that would be made available to the holdingcompany from the sale of investments owned by the holding company. In addition, the holding company has access to some of the operating cash generated by theExtended Warranty and Kingsway Search Xcelerator subsidiaries as described above. While these sources do not represent cash of the holding company, they dorepresent future sources of liquidity. 40Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis As of December 31, 2021, there are 169,733 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. The outstandingPreferred Shares were required to be redeemed by the Company on April 1, 2021 ("Redemption Date") if the Company had 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 thedeferral which totaled $18.7 million at December 31, 2021, the Company is prohibited from redeeming any shares of its capital stock while payment of interest on the trustpreferred securities is being deferred. If the Company was required to pay either the Preferred Shares redemption value or both the deferred interest on the trustpreferred securities and redeem all the Preferred Shares currently outstanding, then the Company has determined that it does not have sufficient legally available fundsto do so. However, the Company is prohibited from doing so under Delaware law and, as such, (a) the interest on the trust preferred securities remains on deferral aspermitted under the indentures and (b) in accordance with Delaware law the Preferred Shares were not redeemed on the Redemption Date and instead remainoutstanding with a redemption value of $6.5 million as of December 31, 2021, continue to be convertible at the discretion of the holder, and will accrue dividends untilsuch time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. The Company continuesto operate in the ordinary course. The Company notes there are several variables to consider in such a situation, and management continues to explore the following opportunities: negotiating with theholders of the Preferred Shares with respect to the key provisions, raising additional funds through capital market transactions, as well as the Company’s strategy ofworking 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 operationsare expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, excluding the cash that may be required to redeem thePreferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected byvarious risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic. Regulatory Capital In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualtyinsurance 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, 2021, surplus asregards 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%. InApril 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 incompliance with that plan. As of December 31, 2021, Amigo's RBC was 8,417%. Kingsway Reinsurance Corporation ("Kingsway Re"), our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimumstatutory capital of $125,000. Kingsway Re is currently operating with statutory capital near the regulatory minimum, requiring us to periodically contribute capital tofund operating expenses. Kingsway Re incurs operating expenses of approximately $0.1 million per year. As of December 31, 2021, the capital maintained by KingswayRe was in excess of the regulatory capital requirements in Barbados. New York Stock Exchange Listing Standards On April 17, 2020, the Company received notification from the New York Stock Exchange ("NYSE") of the Company's noncompliance with certain NYSE standards forcontinued listing of its common shares. Specifically, Kingsway was below the NYSE's continued listing criteria because its average total market capitalization over a 30consecutive trading day period was less than $50.0 million at the same time that reported shareholders' equity was below $50.0 million. Under the NYSE's continuedlisting criteria, a NYSE-listed company must maintain average market capitalization of not less than $50.0 million over a 30 consecutive trading day period or reportedshareholders' equity of not less than $50.0 million. In accordance with the NYSE listing requirements, the Company submitted a business plan to the NYSE on June 1, 2020 that demonstrated how we expected to return tocompliance with NYSE listing standard. On July 9, 2020, the NYSE notified the Company that the plan was accepted. 41Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Management's Discussion and Analysis On January 18, 2021, the Company received notification from the NYSE that the Company is again in compliance with NYSE's continued listing standards, but that theCompany was subject to continued monitoring and review for a period of 12 months. The Company remained in compliance during this 12-month period. CONTRACTUAL OBLIGATIONS Table 3 summarizes cash disbursements related to the Company's contractual obligations projected by period, including debt maturities, interest payments onoutstanding debt and future minimum payments under operating leases. Interest payments on outstanding debt in Table 3 related to the subordinated debt, the 2020KWH Loan and the Ravix Loan assume LIBOR remains constant throughout the projection period. Also, interest payments on outstanding debt reflect the interestdeferral described in the "Subordinated Debt" section above. TABLE 3 Cash payments related to contractual obligations projected by period As of December 31, 2021 (in thousands of dollars) 2022 2023 2024 2025 2026 Thereafter Total Bank loans 4,305 4,455 4,655 11,271 1,250 1,250 27,186 Notes payable 6,499 7,047 7,623 8,229 8,729 158,260 196,387 Subordinated debt — — — — — 90,500 90,500 Interest payments on outstanding debt 8,805 36,601 11,875 11,365 10,638 63,072 142,356 Future minimum lease payments 908 628 554 382 165 — 2,637 Total 20,517 48,731 24,707 31,247 20,782 313,082 459,066 Table 3 above does not reflect amounts that may be paid for the redemption of the 169,733 shares of Preferred Shares outstanding at December 31, 2021. Each PreferredShare 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 the Redemption Date. On andafter 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 butunpaid dividends thereon, whether or not declared, up to and including the Redemption Date. The total redemption amount of the Preferred Shares if the PreferredShares are not converted is $6.5 million as of December 31, 2021. As discussed in the "Cash Flows" section above, in accordance with Delaware law, the PreferredShares were not redeemed on the Redemption Date and instead remain outstanding, continue to be convertible at the discretion of the holder, and will accrue dividendsuntil such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. The timing andamount of cash, if any, to be paid by the Company will be based upon the extent, if at all, that the Company exercises its right to redeem any Preferred Shares prior to theRedemption Date or the holders of the Preferred Shares exercise their option to convert any of the Preferred Shares to common shares. Refer to Note 19, "Redeemable Class A Preferred Stock," to the Consolidated Financial Statements for further information regarding the Preferred Shares. 42Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are not required to make disclosures underthis Item. 43Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Item 8. Financial Statements and Supplementary Data. Index to the Consolidated Financial Statements of Kingsway Financial Services Inc. Report of Independent Registered Public Accounting Firm (PCAOB ID 166)45Consolidated Balance Sheets at December 31, 2021 and 202047Consolidated Statements of Operations for the Years Ended December 31, 2021 and 202048Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2021 and 202049Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2021 and 202050Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 202051Notes to the Consolidated Financial Statements51Note 1 -Business53Note 2-Summary of Significant Accounting Policies53Note 3-Recently Issued Accounting Standards61Note 4-Acquisitions62Note 5-Variable Interest Entities66Note 6-Investments68Note 7-Deferred Acquisition Costs72Note 8-Goodwill72Note 9-Intangible Assets73Note 10-Property and Equipment74Note 11-Derivatives75Note 12-Debt76Note 13-Leases79Note 14-Revenue from Contracts with Customers80Note 15-Income Taxes81Note 16-Loss from Continuing Operations Per Share84Note 17-Stock-Based Compensation85Note 18-Employee Benefit Plan87Note 19-Redeemable Class A Preferred Stock88Note 20-Shareholders' Equity88Note 21-Accumulated Other Comprehensive Income89Note 22-Segmented Information90Note 23-Fair Value of Financial Instruments92Note 24-Related Parties99Note 25-Commitments and Contingent Liabilities100Note 26-Regulatory Capital Requirements and Ratios101Note 27-Statutory Information and Policies101 44Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Kingsway Financial Services Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Kingsway Financial Services Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements ofoperations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes andschedules (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, thefinancial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year periodended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based onour audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financialreporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express nosuch opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overallpresentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to becommunicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken asa whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures towhich it relates. Critical Audit Matter Description The Company's revenue from contracts with customers (ASC 606) relates to extended warranty service fee and commission income, which is comprised of multiplerevenue streams including: vehicle service agreement fees, guaranteed asset protection commissions, maintenance support service fees, warranty productcommissions, homebuilder warranty service fees, and homebuilder warranty commissions. Many of the Company's contracts include revenue which is generated fromcontracts with multiple performance obligations. Accordingly, the application of revenue recognition policies requires the Company to exercise significant judgementin the following areas: ●Determination of whether individual services are promises which are considered distinct performance obligations. ●Assessing whether the Company is a principal or an agent in providing services to the ultimate customer in the contract. ●Assessing variable consideration attributable to each contract and the related estimates of variable consideration, which are significant in vehicle servicecontracts, based on refund rights provided to the customer under vehicle service contracts and related business practices. ●Assessing the transaction price including the impact of various dealer and partner incentive and rebate programs which are considered contractacquisition costs. ●Determining stand-alone selling prices for each distinct service and allocation to each individual performance obligation on a relative selling price basis. ●Determining the timing of when revenue is recognized for separate performance obligations and whether the performance is deemed to occur over time orat a point in time. ●For performance obligations satisfied over time, the selection of an appropriate methodology which best depicts the transfer of services to the customerunder the contract. For these reasons, we identified revenue recognition as a critical audit matter. 45Table of ContentsKINGSWAY FINANCIAL SERVICES INC. How the Critical Audit Matter was Addressed in the Audit The primary procedures we performed to address this critical audit matter included the following, among other procedures: ●We obtained an understanding of the processes and internal controls related to each significant revenue generating activity within scope of ASC 606. ●We evaluated the Company's application of the portfolio approach to individual groups of contracts to ensure the application was in compliance withASC 606. ●We tested the determination of individual performance obligations identified by management to ensure distinct performance obligations identified wereconsistent with the underlying contracts. We also tested whether all distinct performance obligations within each contract were complete and reflected allmaterial promises which are capable of being distinct. ●We evaluated and tested the key judgements applied by management, including: oAssessing whether the Company is deemed to be the principal or an agent in delivering services to the customer. We evaluated the key factorsto determine whether the Company is responsible for fulfillment of each significant service provided to the customer. oEstimating variable consideration, primarily related to refund liabilities on vehicle service contracts, based on historical patterns and futureexpectations of customer refund requests. We tested the estimated amount of expected refunds including management’s assessment of refundrates on each significant type of warranty contract to assess the overall reasonableness of the refund liabilities. oDetermining whether certain incentive payments to dealers and partners were considered customer acquisition costs and should be included inthe determination of the overall transaction price by examining the underlying program agreements and related business practices followed bythe Company. oEstimating stand-alone selling prices when multiple performance obligations exist within a contract, based on management’s internal estimatesof cost plus an appropriate margin to support expected selling prices. We tested the related costs expected to be incurred in satisfying thedelivery of services at contract commencement and those expected to be incurred over the life of the contract which are primarily associatedwith contract administration services. We also tested the relative selling price allocation of the contract price to each separate performanceobligation. oApplication of over time recognition patterns, including management’s estimates related to claims emergence patterns for each separate groupof contracts which possess similar characteristics that faithfully represent the transfer of services to the customer. We tested contracts at thewarranty company subsidiaries to determine the accuracy and consistency of claim emergence patterns. /s/ Plante & Moran PLLCWe have served as the Company’s auditor since 2020.Denver, COFebruary 28, 2022 46Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Consolidated Balance Sheets(in thousands, except share data) December 31, 2021 December 31, 2020 Assets Investments: Fixed maturities, at fair value (amortized cost of $35,889 and $20,488, respectively) $35,666 $20,716 Equity investments, at fair value (cost of $1,147 and $1,157, respectively) 179 444 Limited liability investments 1,901 3,692 Limited liability investments, at fair value 18,826 32,811 Investments in private companies, at adjusted cost 790 790 Real estate investments, at fair value (cost of $10,225 and $10,225, respectively) 10,662 10,662 Other investments, at cost which approximates fair value 256 294 Short-term investments, at cost which approximates fair value 157 157 Total investments 68,437 69,566 Cash and cash equivalents 12,642 14,374 Restricted cash 17,257 30,571 Accrued investment income 1,013 757 Service fee receivable, net of allowance for doubtful accounts of $241 and $478, respectively 6,656 4,834 Other receivables, net of allowance for doubtful accounts of $5 and $201, respectively 13,898 15,417 Deferred acquisition costs, net 10,930 8,835 Property and equipment, net of accumulated depreciation of $24,224 and $24,441, respectively 108,587 95,015 Right-of-use asset 2,248 2,960 Goodwill 110,247 121,130 Intangible assets, net of accumulated amortization of $20,333 and $15,433, respectively 108,230 84,133 Other assets 15,489 4,882 Total Assets $475,634 $452,474 Liabilities and Shareholders' Equity Liabilities: Accrued expenses and other liabilities $47,622 $43,951 Income taxes payable 294 2,859 Deferred service fees 89,217 87,945 Bank loans 26,717 25,303 Notes payable 205,025 192,057 Subordinated debt, at fair value 60,973 50,928 Lease liability 2,479 3,213 Net deferred income tax liabilities 28,553 27,555 Total Liabilities 460,880 433,811 Redeemable Class A preferred stock, no par value; 1,000,000 and 1,000,000 authorized at December 31, 2021 andDecember 31, 2020, respectively; 169,733 and 182,876 issued and outstanding at December 31, 2021 and December 31,2020, respectively; redemption amount of $6,497 and $6,658 at December 31, 2021 and December 31, 2020, respectively 6,497 6,504 Shareholders' Equity: Common stock, no par value; 50,000,000 and 50,000,000 authorized at December 31, 2021 and December 31, 2020,respectively; 22,882,614 and 22,211,069 issued and outstanding at December 31, 2021 and December 31, 2020,respectively — — Additional paid-in capital 359,138 355,242 Treasury stock, at cost; 247,450 and 247,450 outstanding at December 31, 2021 and December 31, 2020, respectively (492) (492)Accumulated deficit (395,149) (394,807)Accumulated other comprehensive income 30,779 38,059 Shareholders' equity attributable to common shareholders (5,724) (1,998)Noncontrolling interests in consolidated subsidiaries 13,981 14,157 Total Shareholders' Equity 8,257 12,159 Total Liabilities, Class A preferred stock and Shareholders' Equity $475,634 $452,474 See accompanying notes to Consolidated Financial Statements. 47Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Consolidated Statements of Operations(in thousands, except per share data) Years ended December 31, 2021 2020 Revenues: Service fee and commission revenue $78,401 $47,607 Rental revenue 13,365 13,365 Total revenues 91,766 60,972 Operating expenses: Claims authorized on vehicle service agreements 19,536 9,922 Commissions 7,042 5,530 Cost of services sold 7,052 2,692 General and administrative expenses 48,733 42,099 Leased real estate segment interest expense 6,164 5,950 Total operating expenses 88,527 66,193 Operating income (loss) 3,239 (5,221)Other revenues (expenses), net: Net investment income 1,575 2,625 Net realized gains 1,809 580 (Loss) gain on change in fair value of equity investments (242) 1,267 Gain on change in fair value of limited liability investments, at fair value 2,391 4,046 Net change in unrealized loss on private company investments — (744)Other-than-temporary impairment loss — (117)Non-operating other (expense) revenue (2,788) 332 Interest expense not allocated to segments (6,161) (7,719)Amortization of intangible assets (4,900) (2,291)(Loss) gain on change in fair value of debt (3,201) 1,173 Gain (loss) on extinguishment of debt, net 2,494 (468)Total other expenses, net (9,023) (1,316)Loss from continuing operations before income tax benefit (5,784) (6,537)Income tax benefit (7,644) (1,115)Income (loss) from continuing operations 1,860 (5,422)Gain on disposal of discontinued operations, net of taxes — 6 Net income (loss) 1,860 (5,416)Less: Net income attributable to noncontrolling interests in consolidated subsidiaries 2,202 1,309 Less: Dividends on preferred stock 494 1,066 Net loss attributable to common shareholders $(836) $(7,791)Loss per share - continuing operations: Basic: $(0.04) $(0.35)Diluted: $(0.04) $(0.35)Earnings per share - discontinued operations: Basic: $— $— Diluted: $— $— Loss per share – net loss attributable to common shareholders: Basic: $(0.04) $(0.35)Diluted: $(0.04) $(0.35)Weighted average shares outstanding (in ‘000s): Basic: 22,537 22,176 Diluted: 22,537 22,176 See accompanying notes to Consolidated Financial Statements. 48Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Consolidated Statements of Comprehensive Loss(in thousands) Years ended December 31, 2021 2020 Net income (loss) $1,860 $(5,416)Other comprehensive (loss) income, net of taxes(1): Unrealized (losses) gains on available-for-sale investments: Unrealized (losses) gains arising during the period (478) 104 Reclassification adjustment for amounts included in net income (loss) 27 64 Change in fair value of debt attributable to instrument-specific credit risk (6,844) 2,555 Other comprehensive (loss) income (7,295) 2,723 Comprehensive loss $(5,435) $(2,693)Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries 2,187 1,320 Comprehensive loss attributable to common shareholders $(7,622) $(4,013)(1) Net of income tax benefit of $0 and $0 in 2021 and 2020, respectively See accompanying notes to Consolidated Financial Statements. 49Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Consolidated Statements of Shareholders' Equity(in thousands, except share data) Shareholders' Accumulated Equity Noncontrolling Additional Other Attributable to Interests in Total Paid-in Treasury Accumulated Comprehensive Common Consolidated Shareholders' Common Stock Capital Stock Deficit Income (Loss) Shareholders Subsidiaries Equity Shares Amount 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 ofshare settlements for tax withholdings 94,110 — — — — — — — — Conversion of redeemable Class A preferredstock 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 interestholders — — — — — — — (243) (243)Other comprehensive income — — — — — 2,712 2,712 11 2,723 Stock-based compensation, net offorfeitures — — 826 — — — 826 — 826 Balance, December 31, 2020 22,211,069 $— $355,242 $(492) $(394,807) $38,059 (1,998) $14,157 $12,159 Vesting of restricted stock awards, net ofshare settlements for tax withholdings 239,402 — — — — — — — — Conversion of redeemable Class A preferredstock to common stock 82,143 — 500 — — — 500 — 500 Exercise of Series B warrants 350,000 — 1,750 — — — 1,750 — 1,750 Net (loss) income — — — — (342) — (342) 2,202 1,860 Preferred stock dividends — — (494) — — — (494) — (494)Distributions to noncontrolling interestholders — — — — — — — (2,363) (2,363)Other comprehensive loss — — — — — (7,280) (7,280) (15) (7,295)Stock-based compensation — — 2,140 — — — 2,140 — 2,140 Balance, December 31, 2021 22,882,614 $— $359,138 $(492) $(395,149) $30,779 $(5,724) $13,981 $8,257 See accompanying notes to Consolidated Financial Statements. 50Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Consolidated Statements of Cash Flows(in thousands) Years ended December 31, 2021 2020 Cash provided by (used in): Operating activities: Net income (loss) $1,860 $(5,416)Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Gain on disposal of discontinued operations, net of taxes — (6)Equity in net income of limited liability investments (27) (30)Depreciation and amortization expense 8,627 6,728 Stock-based compensation expense, net of forfeitures 3,598 1,351 Net realized gains (1,809) (580)Loss (gain) on change in fair value of equity investments 242 (1,267)Gain on change in fair value of limited liability investments, at fair value (2,391) (4,046)Net change in unrealized loss on private company investments — 744 Loss (gain) on change in fair value of debt 3,201 (1,173)Loss on change in fair value of derivatives 14 — Loss on change in fair value of contingent consideration 263 — Deferred income taxes, adjusted for Ravix, Roeco and PWI liabilities assumed 741 (1,001)Other-than-temporary impairment loss — 117 Amortization of fixed maturities premiums and discounts 230 140 Amortization of notes payable premium, discounts and debt issue costs (787) (888)(Gain) loss on extinguishment of debt, net (2,494) 468 Changes in operating assets and liabilities: Service fee receivable, net, adjusted for Ravix and PWI assets acquired (791) 1,186 Other receivables, net, adjusted for Ravix, RoeCo and PWI assets acquired 1,669 183 Deferred acquisition costs, net (2,095) (231)Other assets, adjusted for Ravix, RoeCo and PWI assets acquired (10,474) 1,507 Deferred service fees, adjusted for PWI liabilities assumed (2,354) (2,333)Other, net, adjusted for Ravix, RoeCo and PWI assets acquired and liabilities assumed (3,131) 6,219 Net cash (used in) provided by operating activities (5,908) 1,672 Investing activities: Proceeds from sales and maturities of fixed maturities 6,251 14,168 Proceeds from sales of equity investments 23 3,249 Purchases of fixed maturities (21,868) (12,560)Net proceeds from limited liability investments 2,664 179 Net proceeds from limited liability investments, at fair value 17,006 787 Net proceeds from investments in private companies 391 719 Net proceeds from other investments 38 390 Net purchases of short-term investments — (4)Acquisition of businesses, net of cash acquired (10,003) (2,706)Acquisition of assets, net of cash acquired (2,270) — Net purchases of property and equipment (830) (213)Net cash (used in) provided by investing activities (8,598) 4,009 Financing activities: Proceeds from exercise of warrants 1,750 — Distributions to noncontrolling interest holders (2,363) — Contributions from noncontolling interest holders — (243)Taxes paid related to net share settlements of restricted stock awards (499) (83)Principal proceeds from bank loans, net of debt issuance costs of $160 and $403 in 2021 and 2020, respectively 6,240 25,297 Principal payments on bank loans (4,914) (10,062)Principal proceeds from notes payable, net of debt issuance costs of $1,685 in 2021 13,270 2,858 Principal payments on notes payable (14,024) (4,164)Net cash (used in) provided by financing activities (540) 13,603 Net (decrease) increase in cash and cash equivalents and restricted cash (15,046) 19,284 Cash and cash equivalents and restricted cash at beginning of period 44,945 25,661 Cash and cash equivalents and restricted cash at end of period $29,899 $44,945 51Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Years ended December 31, 2021 2020 Supplemental disclosures of cash flows information: Cash paid during the year for: Interest $7,760 $7,816 Income taxes $187 $81 Non-cash investing and financing activities: Contingent consideration for acquisition of business $2,195 $— Notes payable assumed in asset acquisition $13,463 $— Conversion of redeemable Class A preferred stock to common stock $500 $1,381 Accrued dividends on Class A preferred stock issued $340 $343 See accompanying notes to Consolidated Financial Statements. 52Table of ContentsKINGSWAY 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. EffectiveDecember 31, 2018, the Company changed its jurisdiction of incorporation from the province of Ontario, Canada, to the State of Delaware. Kingsway is a holdingcompany with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty, business services,asset management and real estate industries. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)Principles of consolidation: The accompanying information in the 2021 Annual Report has been prepared in accordance with accounting principles generally accepted in the United States ofAmerica ("U.S. GAAP"). The accompanying consolidated financial statements include the accounts of Kingsway and its majority owned and controlled subsidiaries. All significantintercompany 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 avariable 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 characteristicsof a controlling financial interest, such as the power to direct activities that most significantly impact the legal entity’s economic performance; the obligation to absorbthe 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 thepower 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 theirobligations 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 theactivities of the legal entity are conducted on behalf of an investor with disproportionately few voting rights. When evaluating whether an investment lackscharacteristics of a controlling financial interest, the Company considers limited liability companies and limited partnerships to lack the power of a controlling financialinterest 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 rightsthrough 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 rightsover 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 entityholding 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 ofthe 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 primarybeneficiary, 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 theCompany 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 theunconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income. Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no impact on previously reported net income (loss)or total shareholders' equity. Subsidiaries The Company's consolidated financial statements include the assets, liabilities, shareholders' equity, revenues, expenses and cash flows of the holding company and itssubsidiaries 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% ofthe 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 thedate control ceased, and any difference between the fair value of the consideration received and the carrying value of a subsidiary that has been disposed is recognizedin the consolidated statements of operations. All intercompany balances and transactions are eliminated in full. 53Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements The consolidated financial statements are prepared as of December 31, 2021 based on individual company financial statements at the same date, or in the case of certainlimited liability companies that are consolidated, on a three-month lag basis. Accounting policies of subsidiaries have been aligned where necessary to ensureconsistency 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 ("NetLease") 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 thevoting rights and economic interests in a subsidiary. A noncontrolling interest is initially recognized at the proportionate share of the identifiable net assets of thesubsidiary at the acquisition date and is subsequently adjusted for the noncontrolling interest's share of the acquiree's net income (loss) and changes in capital. Theeffects 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 reportedamounts and classification of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financialstatements 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, valuation of fixed maturitiesand equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of real estate investments; valuation ofdeferred income taxes; accounting for business combinations and asset acquisitions; 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; contingentconsideration and revenue recognition. (c)Business combinations and asset acquisitions: The Company evaluates acquisitions in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"), to determine if atransaction represents an acquisition of a business or an acquisition of assets. The results of acquired subsidiaries are included in the consolidated statements ofoperations from the date of acquisition. An acquisition of a business represents a business combination. The acquisition method of accounting is used to account for a business combination. The cost of anacquired business is measured as the fair value of the assets received, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiableassets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespectiveof the extent of any noncontrolling interest. The excess of the cost of an acquired business over the fair value of the Company's share of the identifiable net assetsacquired is recorded as goodwill. If the cost of acquired business is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized inthe consolidated statements of operations. Noncontrolling interests in the net assets of consolidated entities are reported separately in shareholders' equity and initiallymeasured at fair value. Acquisition costs related to a business combination are expensed as incurred. When an acquisition does not meet the definition of a business combination either because: (i) substantially all of the fair value of the gross assets acquired isconcentrated in a single identifiable asset, or group of similar identified assets, or (ii) the acquired entity does not have an input and a substantive process that togethersignificantly contribute to the ability to create outputs, the Company accounts for the acquisition as an asset acquisition. In an asset acquisition, goodwill is notrecognized. Any excess of the total purchase price plus transaction costs over the fair value of the net assets acquired is allocated on a relative fair value basis to theidentifiable net assets at the acquisition date. 54Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements (d)Investments: Investments in fixed maturities are classified as available-for-sale and reported at fair value. Unrealized gains and losses are included in accumulated othercomprehensive income, net of tax, until sold or until an other-than-temporary impairment is recognized, at which point cumulative unrealized gains or losses arereclassified 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 income (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. Thedifference 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 limitedliability 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 threemonths. Investments in private companies consist of convertible preferred stocks and notes in privately owned companies and investments in limited liability companies inwhich the Company’s interests are deemed minor. These investments do not have readily determinable fair values and, therefore, are reported at cost, adjusted forobservable 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 theconsolidated statements of operations if the fair value of an instrument falls below its cost/amortized cost and the decline is considered other-than-temporary. Factorsconsidered 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 conditionand 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. (e)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. (f)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 cashheld for the payment of vehicle service agreement claims under the terms of certain contractual agreements, funds held in escrow, statutory deposits and amountspledged to third-parties as deposits or to collateralize liabilities. (g)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 currenteconomic conditions. 55Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements (h)Deferred acquisition costs, net: Deferred acquisition costs represent the deferral of expenses the Company's incurs related to successful efforts to acquire new business or renew existing business.Acquisition costs, which are incremental costs to obtain or fulfill a contract with a customer and primarily include commissions and expenses incurred directly related tothe acquisition of vehicle service agreements, are deferred and amortized over the expected customer relationship period consistent with the pattern in which the relatedrevenues are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included indetermining the realizable value of the deferred acquisition costs. (i)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-linemethod over the estimated useful lives of such assets. Repairs and maintenance are recognized in operations during the period incurred. Land is not depreciated. TheCompany estimates useful life to be forty to forty-five years for buildings; seven to fifty years for site and tenant improvements; five to ten years for leaseholdimprovements; three to ten years for furniture and equipment; and three to five years for computer hardware. (j)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 isdetermined 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 isconsidered to be goodwill. Goodwill is tested for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying value may not be recoverable, toensure 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 ofoperations 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 arerecorded 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 itsestimated 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 allowfor 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 November 30, or more frequently if events orcircumstances 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 carryingvalue over fair value is charged to the consolidated statements of operations in the period in which the impairment is determined. (k)Derivatives: During the second quarter of 2021, the Company entered into a pay fixed, receive variable interest rate swap contract to reduce its exposure to changes in interest rates. The interest rate swap contract is measured and reported at fair value and is included in accrued expenses and other liabilities in the consolidated balance sheets. TheCompany has not elected hedge accounting for the interest rate swap, therefore changes in fair value are recorded in current period earnings and are included in interestexpense not allocated to segments in the consolidated statement of operations. (l)Debt: Bank loans and notes payable are reported in the consolidated balance sheets at par value adjusted for unamortized discount or premium and unamortized issuancecosts. Discounts, premiums, and costs directly related to the issuance of debt are capitalized and amortized through the maturity date of the debt using the effectiveinterest rate method and are recorded in interest expense not allocated to segments in the consolidated statements of operations. Gains and losses on theextinguishment of debt are recorded in gain (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 marketobservable 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 (loss) income. 56Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements (m)Contingent consideration: The consideration for certain of the Company's acquisitions include future payments to former owners that are contingent upon the achievement of certain targets overfuture reporting periods. Liabilities for contingent consideration are measured and reported at fair value at the date of acquisition and are included in accrued expensesand other liabilities in the consolidated balance sheets. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs,including adjustments to the discount rates or changes in the assumed achievement or timing of any targets. These fair value measurements are based on significantinputs not observable in the market. Changes in assumptions could have an impact on the payout of contingent consideration liabilities. Changes in fair value arereported in the consolidated statements of operations as other (expense) income. (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) thedifferences 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 areexpected 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 ofenactment. 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 anyportion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amountsestimated 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 theincome tax accounting guidance. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax benefit. (o)Leases: 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 leasewhen 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 Companydirects 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 andrecognized 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 leasecommencement date in determining the present value of future payments for those leases. The Company includes options to extend or terminate the lease in themeasurement 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 isrecognized on a straight-line basis over the lease term. The Company determines lease classification at the commencement date. Leases not classified as sales-type (lessor) or financing leases (lessor and lessee) are classifiedas operating leases. The primary accounting criteria the Company uses that results in operating lease classification are: (a) the lease does not transfer ownership of theunderlying 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 theunderlying 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 residualvalue 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 twelvemonths 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 theperiod 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 anddeterminable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental income recognized in excess of amountscontractually 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. Above-market leaseassets and below-market lease liabilities recorded in connection with acquisitions are amortized on a straight-line basis over the remaining terms of the applicable leases,as determined at the acquisition date. Above-market lease assets are included in intangible assets on the consolidated balance sheets and below-market lease liabilitiesare included in accrued expenses and other liabilities in the consolidated balance sheets. Amortization of above-market and below-market lease liabilities is included asan 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 supportservice fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions and business services consulting revenue based onterms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warrantycontract, commission product sale or when consulting services are billed, or on terms subject to the Company’s customary credit reviews. 57Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration ofthose 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 estimatedamount of expected future claims under the vehicle service agreement contracts and records an additional accrual if the deferred service fees balance is less thanexpected 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 priorto 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 priorto 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 thevehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included inaccrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration currentobservable 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 underwritesand 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 GAPcontract contains two separate performance obligations - sale of a GAP contract and GAP claims administration. The first performance obligation is related to the sale ofa 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. Theamount 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 servicesare 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 commercial refrigeration equipment. The Company acts as an agent on behalf of the third-party insurance companiesthat underwrite and guaranty these warranty contracts. The Company does not guaranty the performance underlying the warranty contracts it sells. Warranty productcommissions 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 feeas 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 thewarranty administrative system and delivering the warranty product. Other warranty services include answering builder or homeowner questions regarding the homewarranty 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 hasapplied 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 allocatethe 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 withenrolling 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 otherwarranty services performance obligation, the Company makes judgments about which of its actual costs are associated with activities, such as answering builder orhomeowner questions regarding the home warranty and dispute resolution services, which are performed over the life of the warranty coverage period. The relativepercentage of expected costs plus a margin associated with the warranty administrative services performance obligation is applied to the transaction price to determinethe estimated standalone selling price of the warranty administrative services performance obligation, which the Company recognizes as earned at the time the home isenrolled and the warranty product is delivered. The relative percentage of expected costs plus a margin associated with the other warranty services performanceobligation is applied to the transaction price to determine the estimated standalone selling price of the other warranty services performance obligation, which theCompany recognizes as earned as services are performed over the warranty coverage period. 58Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements For the other warranty services performance obligation, the Company applies an input method of measurement, based on the expected costs plus a margin of providingservices, to determine the transfer of its services over the warranty coverage period. The Company uses historical data regarding the number of calls it receives andactivities performed, in addition to the number of homes enrolled, to estimate the number of complaints and dispute resolution requests to be received by year untilcoverage expires, which allows the Company to develop a revenue recognition pattern that it believes provides a faithful depiction of the transfer of services over timefor 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 oftheir 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 alsoearns fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which are earned when the claims are closed. Kingsway Search Xcelerator consulting revenue includes the revenue from providing outsourced finance and human resources consulting services. The Companyinvoices for business services consulting revenue based on contracted rates. Revenue is earned as services are provided. (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 overthe 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 toa liability for liability-classified awards. Liability-classified awards, included in accrued expenses and other liabilities in the consolidated balance sheets, are measuredand reported at fair value on the date of grant and are remeasured each reporting period. Compensation expense related to the change in fair value for liability-classifiedawards is reported in the consolidated statements of operations as general and administrative expenses. For awards with a graded vesting schedule, expense isrecognized 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 isforfeited. (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, subordinateddebt, warrant liability, stock-based compensation liabilities, derivative contracts and contingent consideration are estimated using a fair value hierarchy to categorize theinputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal balance. The carrying amounts reported in the consolidatedbalance sheets approximate fair values for cash and cash equivalents, restricted cash, short-term investments and certain other assets and other liabilities because oftheir short-term nature. (s)Holding company liquidity: The Company's Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee and commission revenue. TheCompany's Leased Real Estate subsidiaries fund their obligations through rental revenue. The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding companyoperating expenses; transaction-related expenses; investments; certain debt and associated interest; 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 ofdebt or equity securities; distributions from the Company’s Extended Warranty subsidiaries, subject to certain restrictions; and giving notice to its Trust Preferredtrustees 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. Receipt of dividends from the Company's insurance subsidiaries is currently not considered a source of liquidity for the holding company. The insurance subsidiarieshave required regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. At December 31, 2021, Kingsway AmigoInsurance Company ("Amigo") was restricted from making any dividend payments to the holding company without regulatory approval pursuant to domiciliary stateinsurance regulations. Historically, dividends from the Leased Real Estate segment were not generally considered a source of liquidity for the holding company, except upon the occurrence ofcertain events that would trigger payment of service fees. However, as more fully described in Note 25, "Commitments and Contingent Liabilities," the holding companyis now permitted to receive 20% of the proceeds from the increased rental payments resulting from an earlier amendment to the lease (or any borrowings against suchincreased rental payments). In the second quarter of 2021, the Leased Real Estate segment completed a borrowing against the increased rental payments and, as aresult, the holding company received a dividend of $2.7 million. Refer to Note 12, "Debt," for further information about this borrowing. 59Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements 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 $2.2million (approximately five months of recurring operating cash outflows) and $1.1 million at December 31, 2021 and December 31, 2020, respectively,which excludes future actions available to the holding company that could be taken to generate liquidity. The holding company cash amounts are reflected in the cashand cash equivalents of $12.6 million and $14.4 million reported at December 31, 2021 and December 31, 2020, respectively, on the Company’s consolidated balancesheets. As of December 31, 2021, there are 169,733 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. The outstandingPreferred Shares were required to be redeemed by the Company on April 1, 2021 ("Redemption Date") at a redemption value of $6.5 million, if the Company had sufficientlegally available funds to do so. Additionally, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferredsecurities") and, because of the deferral which totaled $18.7 million at December 31, 2021, the Company is prohibited from redeeming any shares of its capital stock whilepayment of interest on the trust preferred securities is being deferred. If the Company was required to pay either the Preferred Shares redemption value or both thedeferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company has determined that it does not havesufficient legally available funds to do so. However, the Company is prohibited from doing so under Delaware law and, as such, (a) the interest on the trust preferredsecurities remains on deferral as permitted under the indentures and (b) in accordance with Delaware law the Preferred Shares were not redeemed on the RedemptionDate and instead remain outstanding with a redemption value of $6.5 million, as of December 31, 2021, continue to be convertible at the discretion of the holder, and willaccrue 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.The Company continues to operate in the ordinary course. The Company notes there are several variables to consider in such a situation, and management continues to explore the following opportunities: negotiating with theholders of the Preferred Shares with respect to key provisions, raising additional funds through capital market transactions, as well as the Company’s strategy ofworking 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 operationsare expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, excluding the cash that may be required to redeem thePreferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected byvarious risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic. (t)COVID-19: The COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter inplace" and other governmental regulations; and many businesses continue to operate in a work-from-home mode. The near-term impacts of COVID-19 are primarily with respect to the Company’s Extended Warranty segment. Consumer spending was initially impacted, including adecline in the purchase of new and used vehicles, and many businesses through which the Company distributes its products remained closed or were open but withcapacity restraints. More recently, consumer spending has improved but supply-chain issues have caused a shortage of new automobiles which, in turn, has causeddemand for used automobiles to increase. This dynamic has had both positive and negative impacts on the Company’s revenues. With respect to homeownerwarranties, the Company experienced an initial reduction in new enrollments in its home warranty programs associated with the impact of COVID-19 on new home salesin the United States. The Company could experience other potential impacts as a result of the COVID-19 pandemic, including, but not limited to, potential impairment charges to the carryingamounts 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'sdebt 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 revisionof the carrying value of its assets or liabilities as of the date of issuance of this 2021 Annual Report. Actual results may differ materially from the Company’s currentestimates as the scope of the COVID-19 pandemic evolves or if the duration of business disruptions is longer than initially anticipated. 60Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS (a)Adoption of New Accounting Standards: Effective January 1, 2021, the Company adopted Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for IncomeTaxes. ASU 2019-12 is intended to simplify accounting for income taxes by eliminating certain exceptions to the guidance in ASC Topic 740, Income Taxes, related to theapproach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basisdifferences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting fortransactions that result in a step-up in the tax basis of goodwill. Further, ASU 2019-12 clarifies that single-member limited liability companies and similar disregardedentities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but theycould elect to do so. The adoption of ASU 2019-12 did not have a material effect on the Company’s consolidated financial statements. Effective January 1, 2021, the Company adopted 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 betweenaccounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC815). The adoption of ASU 2020-01 didnot have an impact on the Company's consolidated financial statements. Effective October 1, 2021, the Company early adopted ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities fromContracts with Customers ("ASU 2021-08"). ASU 2021-08 requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in abusiness combination in accordance with ASU 2014-09, Revenue from Contracts with Customers ("Topic 606"). Under the new guidance, at the acquisition date, anacquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirerrecognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financialstatements. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets andcontract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. The Company will apply this guidance prospectively to allbusiness combinations that occur on or after October 1, 2021. The adoption of ASU 2021-08 did not have an impact on the Company's consolidated financial statements. (b)Accounting Standards Not Yet Adopted: 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 receivablesas well as financial instruments measured at amortized cost. ASU 2016-13 will require a financial asset measured at amortized cost, including reinsurance balancesrecoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income (loss). Credit lossesrelating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of theallowance 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 forcertain major new accounting standards to give implementation relief to certain types of entities. Specifically, per ASU 2019-10 the Company would adopt ASU 2016-13beginning January 1, 2023, as the Company is a smaller reporting company. The Company is currently evaluating ASU 2016-13 to determine the potential impact thatadopting this standard will have on its consolidated financial statements. 61Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—StockCompensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications orExchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) ("ASU 2021-04"). ASU 2021-04 clarifies andreduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remainequity classified after modification or exchange. ASU 2021-04 provides guidance that will clarify whether an issuer should account for a modification or an exchange of afreestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the relatedearnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The new guidance is effective for annual and interim periodsbeginning after December 15, 2021, and early adoption is permitted, including adoption in an interim period. The Company notes that ASU 2021-04 only applies tomodifications or exchanges of freestanding equity-classified written call options, which historically the Company has not done. In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), andFinancial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments toFinancial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosuresabout Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants ("ASU 2021-06"). ASU2021-06 amends the SEC sections of the Codification related to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired andDisposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The new guidance is effective upon its additionto the FASB codification. The Company is assessing the impact of ASU 2021-06 and its impact on its disclosure. NOTE 4 ACQUISITIONS (a)Business Combinations During the years ended December 31, 2021 and December 31, 2020, the Company incurred acquisition expenses related to business combinations of $0.4 million and$0.4 million, respectively, which are included in general and administrative expenses in the consolidated statements of operations. 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 pricewas subject to a working capital true-up that was finalized during the first quarter of 2021 of $0.1 million. PWI Holdings, Inc., through its subsidiaries PreferredWarranties, 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 22,"Segmented Information," PWI is included in the Extended Warranty segment. This acquisition allows the Company to grow its portfolio of warranty companies andfurther 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 provisionally allocated to theassets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and were subject to adjustment during a measurement periodsubsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP. During the third quarter of 2021, the Company finalized its fair value analysisof the assets acquired and liabilities assumed with the assistance of a third-party. The Company records measurement period adjustments in the period in which the adjustments occur. During the third quarter of 2021, the Company recorded acumulative net measurement period adjustment that decreased goodwill by $18.8 million compared to the amount recorded at December 31, 2020. The measurementperiod adjustments reflect changes in the estimated fair values of certain assets and liabilities, and the working capital true-up, as follows: •$19.6 million of separately identifiable intangible assets were recognized resulting from acquired customer relationships ($15.0 million) and trade name($4.6 million); •A $3.6 million decrease to deferred service fees; •Deferred income tax liabilities of $4.2 million were recognized, primarily related to the measurement period adjustments for intangible assets and deferred servicefees; •An increase to accrued expenses and other liabilities of $0.1 million; and •An increase to the final purchase price of $0.1 million related to the working capital true-up. The measurement period adjustment related to the customer relationships intangible asset also resulted in an increase in amortization expense and accumulatedamortization of $1.9 million that was recorded during the third quarter of 2021, of which: •$0.6 million relates to the three months ended September 30, 2021; •$0.6 million relates to the three months ended June 30, 2021; •$0.6 million relates to the three months ended March 31, 2021; and •$0.1 million relates to the year ended December 31, 2020. The measurement period adjustment related to deferred service fees also resulted in a decrease service fee and commission revenue of $1.9 million that was recordedduring the third quarter of 2021, of which: •$0.4 million relates to the three months ended September 30, 2021; •$0.5 million relates to the three months ended June 30, 2021; •$0.7 million relates to the three months ended March 31, 2021; and •$0.3 million relates to the year ended December 31, 2020. 62Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements The Company notes that had ASU 2021-08 (see Note 3, "Recently Issued Accounting Standards") been applicable to the PWI acquisition, the Company would not haverecorded the $3.6 million reduction to deferred service fees and would not have recorded the $1.9 million reduction to service fee and commission revenue during thethird quarter of 2021. Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition. The goodwill of $20.2 million represents the premium paidover 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 assembledworkforce. The goodwill is not deductible for tax purposes. The following table summarizes the finalized allocation recorded during the third quarter of 2021 of the PWI assets acquired and liabilities assumed at the date ofacquisition: (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 20,238 Intangible asset subject to amortization - customer relationships 15,000 Intangible asset subject to amortization - trade name 4,550 Other assets 1,321 Total assets $67,473 Accrued expenses and other liabilities $8,165 Lease liability 255 Net deferred income tax liabilities 4,229 Deferred service fees 30,400 Total liabilities $43,049 Purchase price $24,424 63Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Ravix Financial, Inc. On October 1, 2021, the Company acquired 100% of the outstanding equity interests of Ravix Financial, Inc. ("Ravix"). Ravix, based in San Jose, California, providesoutsourced financial services and human resources consulting for short or long duration engagements. As further discussed in Note 22, "Segmented Information,"Ravix is included in the Kingsway Seach Xcelerator segment, which was created as a result of the Ravix acquisition. This acquisition was the Company’s firstacquisition under its novel CEO Accelerator program and further expands the Company’s portfolio of businesses with recurring revenue and low capital intensity. The Company acquired Ravix for aggregate cash consideration of approximately $10.9 million, less certain escrowed amounts for purposes of indemnification claims. The final purchase price is subject to a working capital true-up of $0.1 million that will be settled during the first quarter of 2022. The Company will also pay additionalcontingent consideration, only to the extent earned, in an aggregate amount of up to $4.5 million, which is subject to certain conditions, including the successfulachievement of gross profit for Ravix during the three-year period commencing on the first full calendar month following the acquisition date. This acquisition was accounted for as a business combination using the acquisition method of accounting. The purchase price was provisionally allocated to theassets acquired and liabilities assumed based on their estimated fair values at the date of acquisition and are subject to adjustment during a measurement periodsubsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP. The Company expects to complete its purchase price allocation in early2022. These estimates, allocations and calculations are subject to change as we obtain further information; therefore, the final fair values of the assets acquired andliabilities assumed could change from the estimates included in these consolidated financial statements. Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition. The goodwill of $7.9 million represents the premium paidover the fair value of the net tangible and intangible assets acquired, which the Company paid to grow its portfolio of companies and acquire an assembledworkforce. The goodwill is not deductible for tax purposes. The estimated fair value of the contingent consideration obligation at the acquisition date of $2.2 million wasdetermined using a Monte Carlo simulation based on forecasted future results, and is recorded in accrued expenses and other liabilities on the consolidated balancesheets. See Note 23, "Fair Value of Financial Instruments," for further discussion related to the contingent consideration. The following table summarizes the purchase price of Ravix: (in thousands) Purchase price: October 1, 2021 Cash paid at closing $10,930 Working capital adjustment 83 Contingent consideration 2,195 Total purchase price $13,208 The following table summarizes the preliminary estimated allocation of the Ravix assets acquired and liabilities assumed at the date of acquisition: (in thousands) October 1, 2021Cash and cash equivalents$225Restricted cash 752Service fee receivable 1,031Other receivables 17Right-of-use asset 116Goodwill 7,905Intangible asset subject to amortization - customer relationships 4,000Intangible asset not subject to amortization - trade name 2,500Other assets 133Total assets$16,679 Accrued expenses and other liabilities$1,546Income taxes payable 13Lease liability 116Net deferred income tax liabilities 1,796Total liabilities$3,471 Purchase price$13,208 The consolidated statements of operations include the earnings of Ravix from the date of acquisition. From the date of acquisition through December 31, 2021,Ravix earned revenue of $3.5 million and net loss of $0.2 million. 64Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Unaudited Pro Forma Summary The following unaudited pro forma summary presents the Company's consolidated financial statements for the year ended December 31, 2021 and December 31, 2020 asif Ravix and PWI 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 notpurport 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 projectour 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 tothe acquisition of Ravix, interest expense and the amortization of debt issuance costs and discount associated with the related financing obtained in connection with theRavix and PWI acquisitions (see Note 12, "Debt"), tax related adjustments and acquisition-related expenses. Purchase accounting adjustments related to theacquisition of PWI were not included in the pro forma information below for the year ended December 31, 2020 since the fair value analysis of the assets acquired andliabilities assumed was not finalized until the third quarter of 2021. (in thousands, except per share data) Years ended December 31, 2021 2020Revenues $ 101,662 $ 100,458Loss from continuing operations attributable to common shareholders $ (770) $ (3,554)Basic loss per share - continuing operations $ (0.03) $ (0.16)Diluted loss per share - continuing operations $ (0.03) $ (0.16) (b)Asset Acquisition RoeCo Lafayette, LLC On December 30, 2021, the Company acquired 100% of the outstanding membership interests of RoeCo Lafayette, LLC ("RoeCo") from a current holder of theCompany’s Preferred Shares, for cash consideration of approximately $2.4 million. Refer to Note 24, "Related Parties," for further disclosure. RoeCo owns real propertyconsisting of approximately 6.5 acres and a 29,224 square foot single-tenant medical office building located in the State of Louisiana (the "LA Real Property"). The LAReal Property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term lease. The LA Real Property is also subject to amortgage in the principal amount of $13.5 million (the "RoeCo Mortgage") at the date of acquisition plus a premium of $3.5 million. As further discussed in Note 22,"Segmented Information" RoeCo is included in the Leased Real Estate segment.This transaction was accounted for as an asset acquisition as substantially all the fair value of the gross assets acquired is concentrated in a single asset comprised ofland, building and improvements. The total purchase price, including the transaction costs, has been allocated to the individual net assets acquired based on theirrelative fair values. In connection with the acquisition, the Company recorded an above-market lease intangible asset of $0.8 million and in-place and other leaseintangible assets of $2.1 million. Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition. The following table summarizes the allocation of the purchase price to the net assets of RoeCo at the date of acquisition: (in thousands) Purchase price: December 30, 2021 Cash $2,386 Acquisition costs 249 Liabilities assumed 16,983 Total purchase price $19,618 Fair value of net assets acquired: December 30, 2021 Cash and cash equivalents $365 Other receivables 133 Property and equipment, net 16,466 Intangible asset subject to amortization - Above-market lease 835 Intangible asset subject to amortization - In-place and other lease assets 2,114 Accrued expenses and other liabilities (50)Net deferred income tax liabilities (245)Total fair value of net assets acquired $19,618 Since RoeCo was acquired on December 30, 2021, the consolidated statement of operations does not include any revenue or earnings of RoeCo, as such items areimmaterial. 65Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 5 VARIABLE INTEREST ENTITIES (a)Consolidated VIEs Argo Holdings Fund I, LLC The Company held a 43.4% investment in Argo Holdings at December 31, 2021 and December 31, 2020. Argo Holdings makes investments, primarily in established lowermiddle 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 characteristicsof a controlling financial interest. The Company holds a variable interest in Argo Holdings due to its right to absorb significant economics in Argo Holdings andthrough its controlling interest in Argo Management, through which the Company holds the power to direct the significant activities of Argo Holdings. As such, theCompany was the primary beneficiary of Argo Holdings and consolidated Argo Holdings at December 31, 2021 and December 31, 2020. Net Lease Investment Grade Portfolio, LLC The Company held a 71.0% investment in Net Lease at December 31, 2021 and December 31, 2020. Net Lease holds one commercial property under a triple net lease as ofDecember 31, 2021 (three commercials properties held as of December 31, 2020). The current property is encumbered by a mortgage loan. Net Lease is considered to be aVIE 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 toabsorb 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 significantactivities of Net Lease. As such, the Company is the primary beneficiary of Net Lease and consolidated Net Lease at December 31, 2021 and December 31, 2020. 66Table of ContentsKINGSWAY 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, 2021 and December 31, 2020: (in thousands) December 31, 2021 2020 Assets Limited liability investments, at fair value $18,826 $32,811 Cash and cash equivalents 944 538 Accrued investment income 716 454 Total Assets 20,486 33,803 Liabilities Accrued expenses and other liabilities 250 352 Notes payable — 9,000 Total Liabilities $250 $9,352 No arrangements exist requiring the Company to provide additional funding to the consolidated VIEs in excess of the Company’s unfunded commitments to itsconsolidated VIEs. At December 31, 2021 and December 31, 2020, the Company had no unfunded commitments. There are no restrictions on assets consolidated bythese 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 primarybeneficiary 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 holdsvariable interests, that are considered VIEs due to the legal entities holding insufficient equity; the holders of equity at risk in the legal entities lacking controllingfinancial 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 theequity method are limited to the Company’s initial investments. At December 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020: (in thousands) December 31, 2021 2020 Maximum Loss Maximum Loss Carrying Value Exposure Carrying Value Exposure Investments in non-consolidated VIEs $1,514 $1,514 $2,940 $2,940 The following table summarizes the Company’s non-consolidated VIEs by category at December 31, 2021 and December 31, 2020: (in thousands) December 31, 2021 2020 Carrying Carrying Value Percent of total Value Percent of total Investments in non-consolidated VIEs: Real estate related $628 41.5% $1,610 54.8%Non-real estate related 886 58.5% 1,330 45.2%Total investments in non-consolidated VIEs $1,514 100.0% $2,940 100.0% 67Table of ContentsKINGSWAY 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, 2021 and December 31, 2020. Forcertain 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 assetvalues of these equity method investees are recorded in net investment income. The difference between the end of the reporting period of an equity method investeeand that of the Company is typically no more than three months. (in thousands) December 31, 2021 2020 Assets $283,432 $325,215 Liabilities $299,340 $307,464 Equity $(15,908) $17,751 (in thousands) December 31, 2021 2020 Net income $18,647 $27,419 NOTE 6 INVESTMENTS PWI, which was acquired by the Company in December 2020, began investing a substantial portion of its restricted cash during 2021. Previously, PWI had not held asubstantial amount of investments. The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at December 31, 2021 and December 31,2020 are summarized in the tables shown below: (in thousands) December 31, 2021 Gross Gross Amortized Unrealized Unrealized Estimated Fair Cost Gains Losses Value Fixed maturities: U.S. government, government agencies and authorities $16,276 $31 $84 $16,223 States, municipalities and political subdivisions 1,880 3 5 1,878 Mortgage-backed 7,679 18 68 7,629 Asset-backed 449 — 4 445 Corporate 9,605 15 129 9,491 Total fixed maturities $35,889 $67 $290 $35,666 (in thousands) December 31, 2020 Gross Gross Amortized Unrealized Unrealized Estimated Fair Cost Gains Losses 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 68Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements The table below summarizes the Company's fixed maturities at December 31, 2021 by contractual maturity periods. Actual results may differ as issuers may have the rightto call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations. (in thousands) December 31, 2021 Estimated Fair Amortized Cost Value Due in one year or less $8,424 $8,450 Due after one year through five years 22,371 22,174 Due after five years through ten years 1,831 1,823 Due after ten years 3,263 3,219 Total $35,889 $35,666 The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized loss positions as of December 31,2021 and December 31, 2020. 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, 2021 Less than 12 Months Greater than 12 Months Total Estimated Unrealized Estimated Unrealized Estimated Unrealized Fair Value Loss Fair Value Loss Fair Value Loss Fixed maturities: U.S. government, government agencies andauthorities $12,077 $84 $— $— $12,077 $84 States, municipalities and politicalsubdivisions 846 5 — — 846 5 Mortgage-backed 5,388 68 — — 5,388 68 Asset-backed 445 4 — — 445 4 Corporate 7,542 129 — — 7,542 129 Total fixed maturities $26,298 $290 $— $— $26,298 $290 (in thousands) December 31, 2020 Less than 12 Months Greater than 12 Months Total Estimated Unrealized Estimated Unrealized Estimated Unrealized Fair Value Loss Fair Value Loss Fair Value Loss Fixed maturities: U.S. government, government agencies andauthorities $511 $— $— $— $511 $— Mortgage-backed 834 6 — — 834 6 Total fixed maturities $1,345 $6 $— $— $1,345 $6 There are approximately 138 and 5 individual available-for-sale investments that were in unrealized loss positions as of December 31, 2021 and December 31, 2020,respectively. The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysisof the individual investments to determine if declines in market value are other-than-temporary. Refer to "Significant Accounting Policies and Critical Estimates" sectionof 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. 69Table of ContentsKINGSWAY 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 zero and $0.1 million for the years ended December 31, 2021 and December 31, 2020, respectively. There wereno write-downs recorded for other-than-temporary impairments related to available-for sale investments or limited liability investments for the years ended December 31,2021 and December 31, 2020. The Company has reviewed currently available information regarding investments with estimated fair values less than their carrying amounts and believes theseunrealized losses are not other-than-temporary and are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Companydoes 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, 2021 and December 31, 2020, the carrying value of limited liability investments totaled $1.9 million and $3.7 million, respectively. At December 31,2021, the Company has no unfunded commitments related to limited liability investments. The decrease in the carrying value is primarily attributable to the sale of threelimited liability company investments during 2021. Limited liability investments, at fair value represents the underlying investments of Net Lease and Argo Holdings. As of December 31, 2021 and December 31, 2020, thecarrying value of the Company's limited liability investments, at fair value was $18.8 million and $32.8 million, respectively. The decrease in the carrying value is primarilyattributable to the sale of two of Net Lease's investment properties during 2021, as further discussed below. The Company recorded impairments related to limitedliability investments, at fair value of $0.1 million and $0.1 million for the years ended December 31, 2021 and December 31, 2020, respectively, which are included in gainon change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At December 31, 2021, the Company has no unfundedcommitments related to limited liability investments, at fair value.The Company consolidates the financial statements of Net Lease on a three-month lag. Net Lease owns investments in limited liability companies that hold investmentproperties. During 2021, one of Net Lease’s limited liability companies sold their investment property for $14.3 million. A portion of the proceeds from the sale weredistributed to Net Lease. As a result of the distribution, Net Lease recorded a gain of $0.8 million related to its investment in the limited liability company, with anoffsetting change in unrealized gain of $0.8 million, which collectively are included in net investment income in the consolidated statement of operations for the yearended December 31, 2021. During the fourth quarter of 2020, one of Net Lease's limited liability companies sold their investment property. As a result of the three-monthlag, the Company recorded this transaction in its first quarter 2021 financial statements. A portion of the proceeds from the sale were distributed to Net Lease who usedthem primarily to repay their $9.0 million mezzanine loan. As a result of the distribution, Net Lease recorded a gain of $1.2 million related to its investment in the limitedliability company, with an offsetting change in unrealized gain of $1.2 million, which collectively are included in net investment income in the consolidated statement ofoperations for the for the year ended December 31, 2021.As of December 31, 2021 and December 31, 2020, the carrying value of the Company's investments in private companies totaled $0.8 million. For the years endedDecember 31, 2021 and December 31, 2020, the Company did not record any adjustments to the fair value of its investments in private companies for observable pricechanges.The Company performs a quarterly impairment analysis of its investments in private companies. As a result of the analysis performed, the Company recordedimpairments related to investments in private companies of zero and $0.7 million for the years ended December 31, 2021 and December 31, 2020, respectively, which areincluded in net change in unrealized loss on private company investments in the consolidated statements of operations. The impairments recorded for the year endedDecember 31, 2020 are a result of the impact of the COVID-19 pandemic 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 theconsolidated balance sheets prior to December 31, 2020. During the third and fourth quarters of 2020, the Company agreed to accept partial payment from the Debtorsas 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 netrealized 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, 2021 andDecember 31, 2020. 70Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Net investment income for the years ended December 31, 2021 and December 31, 2020, respectively, is comprised as follows: (in thousands) Years ended December 31, 2021 2020 Investment income Interest from fixed maturities $242 $310 Dividends 125 153 Income from limited liability investments 27 30 Income from limited liability investments, at fair value 106 937 Income from real estate investments 800 800 Other 364 461 Gross investment income 1,664 2,691 Investment expenses (89) (66)Net investment income $1,575 $2,625 Gross realized gains and losses on available-for-sale investments, limited liability investments, limited liability investments, at fair value and investments in privatecompanies for the years ended December 31, 2021 and December 31, 2020 is comprised as follows: (in thousands) Years ended December 31, 2021 2020 Gross realized gains $1,917 $806 Gross realized losses (108) (226)Net realized gains $1,809 $580 (Loss) gain on change in fair value of equity investments for the years ended December 31, 2021 and December 31, 2020 is comprised as follows: (in thousands) Years ended December 31, 2021 2020 Net gain recognized on equity investments sold during the period $13 $1,506 Change in unrealized losses on equity investments held at end of the period (255) (239)(Loss) gain on change in fair value of equity investments $(242) $1,267 Impact of the COVID-19 Pandemic 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 materialdecreases in the underlying investment values. Such decreases may be considered temporary or could be deemed to be other-than-temporary, and management may berequired to record write-downs of the related investments in future reporting periods. 71Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 7 DEFERRED ACQUISITION COSTS The components of deferred acquisition costs and the related amortization expense for the years ended December 31, 2021 and December 31, 2020 are comprised asfollows: (in thousands) Years ended December 31, 2021 2020 Balance at January 1, net $8,835 $8,604 Additions 8,702 4,896 Amortization (6,607) (4,665)Balance at December 31, net $10,930 $8,835 There were no impairment losses recorded in 2021 or 2020 related to deferred acquisition costs. NOTE 8 GOODWILL The following table summarizes goodwill activity for the years ended December 31, 2021 and December 31, 2020: (in thousands) ExtendedWarranty Leased RealEstate KingswaySearchXcelerator Corporate Total Balance, December 31, 2019 $20,389 $60,983 $— $732 $82,104 Acquisition 39,026 — — — 39,026 Balance, December 31, 2020 59,415 60,983 — 732 121,130 Acquisition — — 7,905 — 7,905 Measurement period adjustment (18,788) — — — (18,788)Balance, December 31, 2021 $40,627 $60,983 $7,905 $732 $110,247 As further discussed in Note 4, "Acquisitions," during 2021, the Company recorded goodwill of $7.9 million related to the acquisition of Ravix on October 1, 2021. Thegoodwill related to this acquisition is provisional and subject to adjustment during the measurement period. The Company expects to complete its purchase priceallocation in early 2022. The estimates, allocations and calculations recorded at December 31, 2021 are subject to change as we obtain further information; therefore, thefinal fair values of the assets acquired and liabilities assumed may not agree with the estimates included in these consolidated financial statements. In 2020, the Company recorded goodwill of $39.0 million related to the acquisition of PWI on December 1, 2020 which was provisional and subject to adjustment duringthe measurement period. As further discussed in Note 4, "Acquisitions," during the third quarter of 2021, the Company recorded a cumulative net measurement periodadjustment, related to the acquisition of PWI, that decreased goodwill by $18.8 million. 72Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Goodwill is assessed for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying value may not be recoverable.The Company tested goodwill for recoverability at November 30, 2021 and December 31, 2020. Based on the assessment performed, no goodwill impairments wererecognized in 2021 and 2020. 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 RealEstate, the Company views as a technique consistent with the objective of measuring fair value. The estimated fair value of Leased Real Estate is highly sensitive todiscount 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. The Company performed aStep 1 impairment assessment for Leased Real Estate at June 30, 2021, due to the sensitivity of interest rates in determining fair value and the impact that the additionalborrowing may have on the determination of fair value. The results of this assessment indicated the fair value exceeded carrying value for Leased Real Estate. However,if there were sustained increases in the underlying interest rates used in our analysis then the fair value could be reduced to a level that could indicate impairment. SeeNote 12, "Debt," for further information regarding the additional borrowing. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertaintyinvolved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact oneither the fair value of the reporting units, the amount of the goodwill impairment charge, or both. NOTE 9 INTANGIBLE ASSETS Intangible assets at December 31, 2021 and December 31, 2020 are comprised as follows: (in thousands) December 31, 2021 Gross Carrying Accumulated Net Carrying Value Amortization Value Intangible assets subject to amortization Database $4,918 $4,488 $430 Vehicle service agreements in-force 3,680 3,680 — Customer relationships 31,645 11,598 20,047 In-place and other lease assets 3,238 343 2,895 Above-market lease 835 — 835 Non-compete 266 224 42 Intangible assets not subject to amortization Tenant relationship 73,667 — 73,667 Trade names 10,314 — 10,314 Total $128,563 $20,333 $108,230 (in thousands) December 31, 2020 Gross Carrying Accumulated Net Carrying Value Amortization 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 As further discussed in Note 4, "Acquisitions," during the third quarter of 2021, the Company completed and finalized its fair value analysis of the assets acquired andliabilities assumed related to the Company's acquisition of PWI on December 1, 2020. As a result, during the third quarter of 2021, the Company recorded $19.6 million ofseparately identifiable intangible assets, related to acquired customer relationships and trade name, as part of the acquisition of PWI. The customer relationshipsintangible asset of $15.0 million is being amortized over nine years based on the pattern in which the economic benefits of the intangible asset are expected to beconsumed. The trade name intangible asset of $4.6 million is deemed to have an indefinite useful life and is not amortized. As further discussed in Note 4, "Acquisitions," during the fourth quarter of 2021, the Company recorded $6.5 million of separately identifiable intangible assets, relatedto acquired customer relationships and trade name, as part of the acquisition of Ravix on October 1, 2021. The customer relationships intangible asset of $4.0 million isbeing amortized over seven years based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. The trade name intangibleasset of $2.5 million is deemed to have indefinite useful life and is not amortized. The intangible assets related to this acquisition are provisional and subject toadjustment during the measurement period. The Company expects to complete its purchase price allocation in early 2022. The estimates, allocations and calculationsrecorded at December 31, 2021 are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed maynot agree with the estimates included in these consolidated financial statements. 73Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements As further discussed in Note 4, "Acquisitions," during the fourth quarter of 2021, the Company recorded $2.9 million of separately identifiable intangible assets, relatedto above-market lease and in-place and other lease assets, as part of the acquisition of RoeCo on December 30, 2021. The above-market lease intangible asset of$0.8 million resulted from the terms of the acquired operating lease contract being favorable relative to market terms of comparable leases on the date of acquisition. Thein-place and other lease intangible assets of $2.1 million are estimated based on the costs avoided in originating leases comparable to the acquired in-place lease as wellas the value associated with lost rental revenue during the assumed lease-up period. The above-market and in-place and other lease assets are amortized on a straight-line basis over the remaining lease term, which expires in September 2036. 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 areexpected to be consumed or using the straight-line method over their estimated useful lives, which range from 5 to 18 years. Amortization of intangible assets was $4.9million and $2.3 million for the years ended December 31, 2021 and December 31, 2020, respectively. The estimated aggregate future amortization expense of all intangibleassets is $5.8 million for 2022, $4.4 million for 2023, $3.4 million for 2024, $2.6 million for 2025 and $1.9 million for 2026. The measurement period adjustment recorded during the third quarter of 2021 related to the PWI customer relationships intangible asset resulted in an increase inamortization expense of $1.9 million that was recorded during the third quarter of 2021. Refer to Note 4, "Acquisitions," for further detail. The tenant relationship and trade names intangible assets have indefinite useful lives and are not amortized. All intangible assets with indefinite useful lives arereviewed annually by the Company for impairment. No impairment charges were taken on intangible assets in 2021 or 2020. NOTE 10 PROPERTY AND EQUIPMENT Property and equipment at December 31, 2021 and December 31, 2020 are comprised as follows: (in thousands) December 31, 2021 Total Property and Equipment Accumulated Cost Depreciation Carrying Value Land $25,623 $— $25,623 Site and tenant improvements 92,047 21,910 70,137 Buildings 11,805 79 11,726 Leasehold improvements 286 163 123 Furniture and equipment 562 442 120 Computer hardware 2,488 1,630 858 Total $132,811 $24,224 $108,587 (in thousands) December 31, 2020 Total Property and Equipment Accumulated Cost 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 During the fourth quarter of 2021, the Company recorded land of $4.5 million, site and tenant improvements of $0.7 million and building of $11.2 million as part of theacquisition of RoeCo on December 30, 2021. For the years ended December 31, 2021 and December 31, 2020, depreciation expense on property and equipment of $3.7 million and $4.4 million, respectively, is includedin general and administrative expenses in the consolidated statements of operations. 74Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 11 DERIVATIVES On April 1, 2021, the Company entered into an interest rate swap agreement with CIBC Bank USA to convert the variable London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR") interest rate on a portion of its 2020 KWH Loan (as defined below in Note 12, "Debt") to a fixed interest rate of 1.18%. Theinterest rate swap had an initial notional amount of $11.9 million and matures on February 29, 2024. The purpose of this interest rate swap, which is not designated as a cash flow hedge, is to reduce the Company's exposure to variability in cash flows from interestpayments attributable to fluctuations in the variable interest rate associated with the 2020 KWH Loan. The Company has not elected hedge accounting for the interestrate swap. The interest rate swap is recorded in the consolidated balance sheet at fair value with changes in fair value recorded in the consolidated statement ofoperations. The notional amount of the interest rate swap contract is $10.5 million at December 31, 2021. At December 31, 2021, the fair value of the interest rate swap contract was aliability of less than $0.1 million, which is included in accrued expenses and other liabilities in the consolidated balance sheet. During the year ended December 31, 2021,the Company recognized a loss of less than $0.1 million related to the change in fair value of the interest rate swap, which is included in interest expense not allocated tosegments in the consolidated statement of operations and within cash flows from operating activities in the consolidated statement of cash flows. Net cash payments ofless than $0.1 million were made during the year ended December 31, 2021, to settle a portion of the liabilities related to the interest rate swap agreement. Thesepayments are reflected as cash outflows in the consolidated statements of cash flows within net cash used in operating activities. 75Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 12 DEBT Debt consists of the following instruments at December 31, 2021 and December 31, 2020: (in thousands) December 31, 2021 December 31, 2020 Principal Carrying Value Fair Value Principal Carrying Value Fair Value Bank loans: Ravix Loan $6,000 $5,847 $5,936 $— $— $— 2020 KWH Loan 21,186 20,870 20,815 25,700 25,303 25,893 Total bank loans 27,186 26,717 26,751 25,700 25,303 25,893 Notes payable: Mortgage 161,998 168,730 182,128 166,106 173,696 194,158 Additional Mortgage 14,514 12,901 15,104 — — — LA Mortgage 13,463 16,983 16,437 — — — Flower Note 6,411 6,411 7,101 6,885 6,885 7,863 Net Lease Note — — — 9,000 9,000 9,054 PPP — — — 2,476 2,476 2,476 Total notes payable 196,386 205,025 220,770 184,467 192,057 213,551 Subordinated debt 90,500 60,973 60,973 90,500 50,928 50,928 Total $314,072 $292,715 $308,494 $300,667 $268,288 $290,372 Subordinated debt mentioned above consists of the following trust preferred debt instruments: Principal Issuer (in thousands) Issue dateInterestRedemption dateKingsway CT Statutory Trust I $15,000 12/4/2002annual interest rate equal to LIBOR, plus 4.00% payable quarterly12/4/2032Kingsway CT Statutory Trust II $17,500 5/15/2003annual interest rate equal to LIBOR, plus 4.10% payable quarterly5/15/2033Kingsway CT Statutory Trust III $20,000 10/29/2003annual interest rate equal to LIBOR, plus 3.95% payable quarterly10/29/2033Kingsway DE Statutory Trust III $15,000 5/22/2003annual interest rate equal to LIBOR, plus 4.20% payable quarterly5/22/2033Kingsway DE Statutory Trust IV $10,000 9/30/2003annual interest rate equal to LIBOR, plus 3.85% payable quarterly9/30/2033Kingsway DE Statutory Trust VI $13,000 12/16/2003annual interest rate equal to LIBOR, plus 4.00% payable quarterly1/8/2034 (a)Bank loans: Ravix As part of the acquisition of Ravix on October 1, 2021, Ravix became a wholly owned subsidiary of Ravix Acquisition LLC ("Ravix LLC"), and together they borrowedfrom a bank a principal amount of $6.0 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of Ravix (together, the "RavixLoan"). The Ravix Loan has an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 3.00%. At December 31, 2021, the interest rate was 3.75%. The revolvermatures on October 1, 2023 and the term loan matures on October 1, 2017. During the fourth quarter of 2021, Ravix borrowed under the revolver. The carrying value atDecember 31, 2021 includes $5.7 million related to the term loan and $0.1 million related to revolver. The Company also recorded as a discount to the carrying value of the Ravix Loan issuance costs of $0.2 million specifically related to the Ravix Loan. The Ravix Loan iscarried in the consolidated balance sheet at December 31, 2021 at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of thedebt discount and issuance costs using the effective interest rate method. The fair value of the Ravix Loan disclosed in the table above is derived from quoted marketprices of B and BB minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. The Ravix Loan is secured by certainof the equity interests and assets of Ravix. The Ravix Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio, all of which are as defined in and calculatedpursuant to the Ravix Loan that, among other things, restrict Ravix’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage inmergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets. KWHIn 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose original subsidiaries included IWS Acquisition Corporation ("IWS"), GeminusHoldings Company, Inc. ("Geminus") and Trinity Warranty Solutions LLC ("Trinity"). As part of the acquisition of PWI on December 1, 2020, PWI became a whollyowned 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 creditfacility (the "2020 KWH Loan"). The proceeds from the 2020 KWH Loan were used to partially fund the acquisition of PWI and to fully repay the prior outstanding loanat KWH, which occurred on December 1, 2020.The 2020 KWH Loan has an annual interest rate equal to LIBOR having a floor of 0.75%, plus 3.00%. At December 31, 2021, the interest rate was 3.75%. The 2020 KWHLoan 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 specificallyrelated to the 2020 KWH Loan. The 2020 KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down ofprincipal 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 inthe 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 valuehierarchy. The 2020 KWH Loan is secured by certain of the equity interests and assets of KWH and its subsidiaries. 76Table of ContentsKINGSWAY 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 ofwhich 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. (b)Notes payable: CMC Industries 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 consolidatedbalance sheets ("the Mortgage"). The Mortgage was recorded at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 millionas 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 theconsolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the premium using the effectiveinterest 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 maturitiesand is categorized within Level 2 of the fair value hierarchy. On June 2, 2021, TRT Leaseco ("TRT"), a subsidiary of CMC, entered into an amendment to the Mortgage to borrow an additional $15.0 million, which is recorded asnote payable in the consolidated balance sheets ("the Additional Mortgage"). The net proceeds from the Additional Mortgage were used to advance increased rentalpayments to the parties that had entered into a legal settlement agreement reached during the first quarter of 2021, including the Company which received $2.7 million. See Note 25(a), "Commitments and Contingent Liabilities - Legal proceedings," for further discussion of the CMC litigation settlement agreement. In the consolidatedstatement of cash flows for the year ended December 31, 2021, the additional borrowing of $15.0 million is shown as a cash inflow in the net cash provided by financingactivities and the prepayment of the management fee, net of amortization, of $10.2 million is shown as an outflow in the net cash used in operating activities. The Additional Mortgage matures on May 15, 2034 and has a fixed interest rate of 3.20%. The Company recorded as a discount to the carrying value of the AdditionalMortgage issuance costs of $1.7 million specifically related to the Additional Mortgage. The Additional Mortgage is carried in the consolidated balance sheets at itsamortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest ratemethod. The fair value of the Additional Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturitiesand is categorized within Level 2 of the fair value hierarchy. Both the Mortgage and the Additional Mortgage are nonrecourse indebtedness with respect to CMC and its subsidiaries, and the Mortgage and Additional Mortgageare not, nor will it be, guaranteed by Kingsway or its affiliates. The Mortgage and Additional Mortgage are collateralized by a parcel of real property consisting ofapproximately 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 withan unrelated third-party. RoeCo As part of its acquisition of RoeCo on December 30, 2021, the Company assumed the LA Mortgage, which is comprised of a senior amortizing note, a senior interestonly note and a junior note. The LA Mortgage is nonrecourse indebtedness with respect to the assets of RoeCo, and the LA Mortgage is not, nor will it be, guaranteedby Kingsway or its affiliates unless RoeCo acts in bad-faith or commits intentional acts with respect to the LA Mortgage. Refer to Note 25, "Commitments andContingent Liabilities," for further disclosure. The LA Mortgage is collateralized by a parcel of real property and a single tenant building located in the state ofLouisiana (the "LA Real Property") and the assignment of a lease and rent related to a long-term lease agreement with an unrelated third-party. The Company recordedthe LA Mortgage at its aggregate unpaid principal amount of $13.5 million as of the date of acquisition plus a premium of $3.5 million. The senior amortizing note,which has unpaid principal of $6.6 million at December 31, 2021, matures on September 14, 2036 and has a fixed interest rate of 3.75%. The senior interest onlynote, which has unpaid principal of $5.0 million at December 31, 2021, matures on October 14, 2036 and has a fixed interest rate of 5.682%. The junior note, which hasunpaid principal of $1.9 million at December 31, 2021, matures on September 16, 2036 and has a fixed interest rate of 7.0%, of which a fixed amount is payable semi-annually and the remainder is added to the principal balance of the junior note. The LA Mortgage is carried in the consolidated balance sheet at December 31, 2021 at itsaggregate unpaid principal balance. The fair value of the LA Mortgage disclosed in the table above is derived from quoted market prices of bonds backed by loans tohospitals and guaranteed by the U.S. Government and A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. Flower 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 inthe consolidated balance sheets ("the Flower Note"). The Flower Note requires monthly payments of principal and interest and is secured by certain investments ofFlower. 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, 2021 of $6.4 millionrepresents 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 industrialbonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. 77Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Net Lease 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 notepayable in the consolidated balance sheet at December 31, 2020 ("the Net Lease Note"). The Net Lease Note required monthly payments of interest and was secured bycertain 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 aresult of this process, Net Lease elected to sell one of its three investment real estate properties while refinancing the remaining properties and the existing financingwas repaid. Each of these transactions closed on October 30, 2020; however, because the Company reports Net Lease on a three-month lag, the consolidated balancesheet at December 31, 2020 continued to report the $9.0 million mezzanine debt, which represents its unpaid principal balance. The fair value of the Net Lease Notedisclosed 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 thefair value hierarchy. Paycheck Protection Program In April 2020, certain subsidiaries of the Company received loan proceeds under the Paycheck Protection Program ("PPP"), totaling $2.9 million with a stated annualinterest 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 BusinessAdministration (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 ofthe PPP) of the qualifying business. The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, includingpayroll, costs, rent and utilities, during the twenty-four week period following the borrower’s receipt of the loan and maintains its payroll levels and employeeheadcount. The amount of loan forgiveness will be reduced if the borrower reduces its employee headcount below its average employee headcount during a benchmarkperiod 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 thatexceed $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 Loanand 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. In January 2021 and March 2021, the SBA provided the Company with notices of forgiveness of the full amount of the remaining four loans. Theforgiveness in the first quarter of 2021 included total principal and interest of $2.5 million. The loan forgiveness is included in gain (loss) on extinguishment of debt, netin the consolidated statements of operations for the years ended December 31, 2021 and December 31, 2020. The carrying value of the PPP at December 31, 2020 of $2.5million 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 separateprivate transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by KAI to the trust in exchangefor 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 theright 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 23, "Fair Value of Financial Instruments," for further discussion of thesubordinated debt. The portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is recognized in other comprehensive (loss)income. Of the $10.0 million increase in fair value of the Company’s subordinated debt between December 31, 2020 and December 31, 2021, $6.8 million is reported asincrease in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive loss and $3.2 million is reportedas loss on change in fair value of debt in the Company’s consolidated statements of operations. Of the $3.7 million decrease in fair value of the Company’s subordinateddebt 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 theCompany'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 statementsof 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 upto 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a defaultunder the Company's Trust Preferred indentures or any of its other debt indentures. At December 31, 2021 and December 31, 2020, deferred interest payable of$18.7 million and $14.1 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets. 78Table of ContentsKINGSWAY 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 additionalindebtedness, make dividends and distributions, and make certain payments in respect of the Company’s outstanding securities. NOTE 13 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 operatingexpenses and taxes. The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred. The Companyincludes 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, 2021 were $1.0 million and $0.1 million,respectively. The annual maturities of lease liabilities as of December 31, 2021 were as follows: (in thousands) Lease Commitments 2022 $982 2023 638 2024 550 2025 381 2026 165 2027 and thereafter — Total undiscounted lease payments 2,716 Imputed interest 237 Total lease liabilities $2,479 The weighted-average remaining lease term for operating leases was 3.68 years as of December 31, 2021. The weighted average discount rate of operating leases was5.14% as of December 31, 2021. Cash paid for amounts included in the measurement of lease liabilities was $1.0 million and $0.7 million for the years ended December 31,2021 and December 31, 2020, respectively. Supplemental non-cash information related to leases for the year ended December 31, 2021 includes right-of-use assets of $0.1 million acquired in exchange for $0.1million of lease obligations. (b)Lessor leases: The Company owns the Real Property that is subject to a long-term triple net lease agreement with an unrelated third-party. The lease provides for future rentescalations and renewal options. The initial lease term ends in May 2034. The lessee bears the cost of maintenance and property taxes. Rental income from operatingleases 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 leasewhen collectability is reasonably assured. Rental revenue includes amortization of below-market lease liabilities related to the Real Property of $0.1 million and $0.1million for the years ended December 31, 2021 and December 31, 2020, respectively. The estimated aggregate future amortization of below-market lease liabilities is $0.1million for 2022, $0.1 million for 2023, $0.1 million for 2024, $0.1 million for 2025 and $0.1 million for 2026. Realization of the residual values of the assets under lease isdependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assetsare included in property and equipment in the consolidated balance sheets. Refer to Note 10, "Property and Equipment". The Company acquired the LA Property on December 30, 2021. The LA Real Property is subject to a long-term lease agreement with an unrelated third-party. The leaseprovides for future rent decreases. The initial lease term ends in March 2035. The lessee bears the cost of maintenance and property taxes. Rental income from operatingleases 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 leasewhen collectability is reasonably assured. Rental revenue does not include any amortization of above-market lease asset related to the LA Property for the year endedDecember 31, 2021 due to RoeCo being acquired on December 30, 2021. The estimated aggregate future amortization of above-market lease asset is $0.1 million for 2022,$0.1 million for 2023, $0.1 million for 2024, $0.1 million for 2025 and $0.1 million for 2026. Realization of the residual values of the assets under lease is dependent on thefuture ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included inproperty and equipment in the consolidated balance sheets. Refer to Note 10, "Property and Equipment". Lease revenue related to operating leases was $13.4 million for each of the years ended December 31, 2021 and December 31, 2020. 79Table of ContentsKINGSWAY 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, 2021 December 31, 2020 Land $25,623 $21,120 Site and tenant improvements 92,047 91,308 Buildings 11,805 580 Gross property and equipment leased 129,475 113,008 Accumulation depreciation (21,989) (18,493)Net property and equipment leased $107,486 $94,515 As of December 31, 2021, 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) 2022 $13,912 2023 14,190 2024 14,475 2025 14,766 2026 14,883 Thereafter 119,590 NOTE 14 REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue from contracts with customers relates to the Extended Warranty and Kingsway Search Xcelerator segments and includes: vehicle service agreement fees, GAPcommissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions and businessservices consulting revenue. Revenue is based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay infull at the inception of a warranty contract, commission product sale, or when consulting services are billed, or on terms subject to the Company’s customary creditreviews. The following table disaggregates revenues from contracts with customers by revenue type: (in thousands) Years ended December 31, 2021 2020 Vehicle service agreement fees and GAP commissionsIWS, Geminus and PWI $57,756 $33,137 Maintenance support service feesTrinity 4,871 3,457 Warranty product commissionsTrinity 4,317 3,622 Homebuilder warranty service feesPWSC 7,099 6,290 Homebuilder warranty commissionsPWSC 876 1,101 Business services consulting feesRavix 3,482 — Service fee and commission revenue $78,401 $47,607 Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at December 31, 2021 and December 31,2020 were $6.7 million and $4.8 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 $89.2 million and $87.9 million at December 31, 2021 and December 31, 2020, respectively. The increase in deferred service fees during the yearended December 31, 2021 is primarily due to additions to deferred service fees in excess of deferred service fees recognized during the year ended December 31, 2021,that was partially offset by the adjustment recorded in the third quarter of 2021 of $3.6 million to reduce PWI’s acquisition date deferred revenue to fair value. The Company expects to recognize within one year as service fee and commission revenue approximately 49.1% of the deferred service fees as of December 31, 2021.Approximately $44.2 million and $23.5 million of service fee and commission revenue recognized during the years ended December 31, 2021 and December 31, 2020 wasincluded in deferred service fees as of December 31, 2020 and December 31, 2019, respectively. 80Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 15 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 taxesamong 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 aseparate 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, 2021 2020 Current income tax (benefit) expense $(2,372) $345 Deferred income tax benefit (5,272) (1,460)Income tax benefit $(7,644) $(1,115) 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 beforeincome tax benefit. The following table summarizes the differences: (in thousands) Years ended December 31, 2021 2020 Income tax benefit at U.S. statutory income tax rate $(1,215) $(1,373)Valuation allowance (4,822) (322)Indefinite life intangibles 215 215 Change in unrecognized tax benefits (2,811) 244 Non-deductible compensation 649 220 Investment income (253) (269)State income tax 372 192 Indemnification receivable 590 (51)Non-taxable income (524) (80)Other 155 109 Income tax benefit for continuing operations $(7,644) $(1,115) 81Table of ContentsKINGSWAY 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, 2021 2020 Deferred income tax assets: Losses carried forward $181,096 $184,130 Unpaid loss and loss adjustment expenses and unearned premiums 3,864 3,911 Intangible assets 1,050 1,705 Debt issuance costs 789 835 Investments 1,198 145 Deferred rent 586 624 Deferred revenue 1,603 1,350 Management fees — 550 Compensation 520 265 Other 131 660 Valuation allowance (169,678) (173,202)Deferred income tax assets $21,159 $20,973 Deferred income tax liabilities: Indefinite life intangibles $(19,179) $(17,483)Depreciation and amortization (14,485) (14,632)Fair value of debt (4,048) (6,716)Land (4,482) (4,435)Intangible assets (3,698) (452)Deferred revenue (1,443) (1,239)Investments (35) (1,716)Deferred acquisition costs (2,295) (1,855)Other (47) — Deferred income tax liabilities $(49,712) $(48,528)Net deferred income tax liabilities $(28,553) $(27,555) The Company maintains a valuation allowance for its gross deferred income tax assets of $169.7 million (U.S. operations - $169.7 million; Other - less than $0.1 million)and $173.2 million (U.S. operations - $173.2 million; Other - less than $0.1 million) at December 31, 2021 and December 31, 2020, respectively. The Company's businesseshave generated substantial operating losses in prior years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxableincome; however, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. Thisuncertainty has caused management to place a full valuation allowance on its December 31, 2021 and December 31, 2020 net deferred income tax assets, excluding thedeferred income tax asset and liability amounts set forth in the paragraph below. In 2021, the Company (i) released into income $2.0 million of its valuation allowance associated with business interest expense carryforwards with an indefinitelife; (ii) released into income $3.3 million and $0.8 million of its valuation allowance, as a result of its acquisitions of PWI and Ravix, respectively, due to net deferredincome tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available; and (iii) charged to expense $0.5million for an increase in its valuation allowance, as a result of its acquisition of CMC, due to net deferred income tax liabilities that are not expected to reverse during theperiod in which the Company will have deferred income tax assets available. In 2020, the Company released into income $1.3 million of its valuation allowance associated with business interest expense carryforwards with an indefinite life and alsoreleased 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 reverseduring the period in which the Company will have deferred income tax assets available. The Company carries net deferred income tax liabilities of $28.6 million and $27.6 million at December 31, 2021 and December 31, 2020, respectively, that consists of: •$8.2 million and $7.6 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KFSI Tax Group's consolidatedU.S. net operating loss carryforwards; •$23.8 million and $21.9 million of deferred income tax liabilities related to land and indefinite life intangible assets; •$3.3 million and $1.3 million of deferred income tax assets associated with business interest expense carryforwards with an indefinite life; •$0.5 million and $0.6 million of deferred state income tax assets; and •$0.4 million and zero of deferred state income tax liabilities. 82Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements 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 December31, 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 $824.4 million, are as follows: Net operating loss Year of net operating loss Expiration date (in thousands) 2007 2027 $35,890 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 In addition, not reflected in the table above, are net operating loss carryforwards of (i) $10.1 million relating to losses generated in separate U.S. tax return years, whichlosses will expire over various years through 2037 and (ii) $0.5 million relating to operations in Barbados, which losses will expire over various years through 2028. A reconciliation of the beginning and ending unrecognized tax benefits, exclusive of interest and penalties, is as follows: (in thousands) December 31, 2021 2020 Unrecognized tax benefits - beginning of year $1,381 $1,381 Gross additions — — Gross reductions — — Impact due to expiration of statute of limitations (1,316) — Unrecognized tax benefits - end of year $65 $1,381 The amount of unrecognized tax benefits that, if recognized as of December 31, 2021 and December 31, 2020 would affect the Company's effective tax rate, was abenefit of $2.8 million and an expense of $0.2 million, respectively. During the year ended December 31, 2021, the Company recorded an income tax benefit of $2.8 million for the release of a liability for unrecognized tax benefits (includinginterest and penalties) that had been included in income taxes payable in the consolidated balance sheets. The Company carried a liability for unrecognized tax benefitsof $0.1 million and $1.4 million as of December 31, 2021 and December 31, 2020, respectively, 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, 2021 andDecember 31, 2020, the Company recognized a benefit of $1.5 million and an expense of $0.2 million, respectively, for interest and penalties. At December 31, 2021 andDecember 31, 2020, the Company carried an accrual for the payment of interest and penalties of $0.1 million and $1.6 million respectively, that is included in income taxespayable in the consolidated balance sheets. The federal income tax returns of the Company's U.S. operations for the years through 2017 are closed for Internal Revenue Service ("IRS") examination. The Company'sfederal 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 operationsfor the years through 2016 are closed for Canada Revenue Agency ("CRA") examination. The Company's Canadian federal income tax returns are not currently underexamination by the CRA for any open tax years. 83Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 16 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 theyears ended December 31, 2021 and December 31, 2020: (in thousands, except per share data) Years ended December 31, 2021 2020 Numerator: Income (loss) from continuing operations $1,860 $(5,422)Less: net income attributable to noncontrolling interests (2,202) (1,309)Less: dividends on preferred stock, net of tax (494) (1,066)Loss from continuing operations attributable to common shareholders $(836) $(7,797)Denominator: Weighted average basic shares Weighted average common shares outstanding 22,537 22,176 Weighted average diluted shares Weighted average common shares outstanding 22,537 22,176 Effect of potentially dilutive securities (a) — — Total weighted average diluted shares 22,537 22,176 Basic loss from continuing operations per share $(0.04) $(0.35)Diluted loss from continuing operations per share $(0.04) $(0.35) (a)Potentially dilutive securities consist of unvested restricted stock awards, warrants and convertible preferred stock. Because the Company is reporting a loss from continuingoperations attributable to common shareholders for the years ended December 31, 2021 and December 31, 2020, all potentially dilutive securities outstanding were excludedfrom 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 iscalculated 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 theywould have had an antidilutive effect on the loss from continuing operations per share: (in thousands) Years ended December 31, 2021 2020 Unvested restricted stock awards 1,252,754 500,000 Warrants 4,573,765 4,923,765 Convertible preferred stock 1,060,831 1,142,975 Total 6,887,350 6,566,740 84Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 17 STOCK-BASED COMPENSATION 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 2013Equity Incentive Plan (the "2013 Plan") with respect to the granting of future equity awards. The 2020 Plan permits the grant of Nonqualified Stock Options, IncentiveStock Options, Stock Appreciation Rights, Restricted Shares, Restricted Stock Units, Performance Share Awards, Dividend Equivalent Rights, Other Stock-BasedAwards 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 toadjustment in the event of certain corporate transactions. (a)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 StockAwards"). On February 28, 2020, the Company executed an Employment Separation Agreement and Release ("2020 Separation Agreement") with a former officer. Underthe 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 toaccount for forfeitures when they occur. As a result, the Company reversed during the first quarter of 2020 $0.2 million of compensation expense previously recognizedfrom March 28, 2014 through February 28, 2020. The former officer's remaining 135,787 shares of the original 2014 Restricted Stock Awards became fully vested onFebruary 28, 2020. There are no 2014 Restricted Stock Awards outstanding at December 31, 2021 and December 31, 2020. 85Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements 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 Awardshall 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 2018Restricted 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 wasdetermined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2018 Restricted StockAward at December 31, 2021 was $0.8 million. Under the 2020 Plan, the Company granted 1,092,754 restricted common stock awards to certain officers of the Company during 2021 (the "2021 Restricted StockAwards"). The 2021 Restricted Stock Awards vest according to a graded vesting schedule and shall become fully vested subject to the officers' continued employmentthrough the applicable vesting dates. The 2021 Restricted Stock Awards are amortized on a straight-line basis over the requisite service periods. The grant-date fairvalues of the 2021 Restricted Stock Awards were determined using the closing price of Kingsway common stock on the date of grant. During the year ended December31, 2021, 340,000 shares of the 2021 Restricted Stock Awards became fully vested. Total unamortized compensation expense related to unvested 2021 Restricted StockAwards at December 31, 2021 was $3.3 million. The following table summarizes the activity related to unvested 2021 Restricted Stock Awards and 2018 Restricted Stock Award (collectively "Restricted Stock Awards")during the year ended December 31, 2021: Weighted-Average Number of Restricted Grant Date Fair Value Stock Awards (per Share) Unvested at December 31, 2020 500,000 $5.73 Granted 1,092,754 4.66 Vested (239,402) 4.64 Cancelled for Tax Withholding (100,598) 4.64 Unvested at December 31, 2021 1,252,754 $5.09 The unvested balance at December 31, 2021 in the table above is comprised of 752,754 shares of the 2021 Restricted Stock Awards and 500,000 shares of the 2018Restricted Stock Award. (b)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 2018PWSC 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 vestingterms 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 2020PWSC RSA contains both a service and a performance condition that affects vesting. 86Table of ContentsKINGSWAY 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 theinternal 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. SeeNote 23, "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 theput 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 includedin 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 2020PWSC RSA is re-evaluated each reporting period. At December 31, 2021, both the service condition and performance condition of the Modified PWSC RSA were probable of vesting. At December 31, 2021 andDecember 31, 2020, there were 437.5 and 625.0 unvested shares, respectively, of the Modified PWSC RSA with a weighted-average grant date fair value of $1,672 pershare. During the year ended December 31, 2021,187.50 shares of the Modified RSA vested. Total unamortized compensation expense related to unvested equity-classified portion of the Modified PWSC RSA at December 31, 2021 was less than $0.1 million. At December 31, 2021, both the service condition and performance condition of the 2020 PWSC RSA were probable of vesting. At December 31, 2021 and December 31,2020, there were 109.38 and 156.25 unvested shares, respectively, of the 2020 PWSC RSA with a weighted-average grant date fair value of $1,672 per share. During theyear ended December 31, 2021, 46.88 shares of the 2020 PWSC RSA vested. Total unamortized compensation expense related to unvested equity-classified portion of the2020 PWSC RSA at December 31, 2021 was zero. (c)Restricted Common Unit Awards of Ravix Ravix LLC granted 199,000 restricted Class B common unit awards to an officer of Ravix pursuant to an agreement dated October 1, 2021 ("2021 Ravix RUA"). The2021 Ravix RUA contains both a service and a performance condition that affects vesting. On October 1, 2021, 83,333 shares, representing one half of the service condition for the 2021 Ravix RUA, became fully vested. The remainder of the service conditionvests according to a graded vesting schedule and shall become fully vested on October 1, 2025 subject to the officer's continued employment through the applicablevesting dates. The performance condition vests on October 1, 2025 and is based on the internal rate of return of Ravix. The grant-date fair value of the 2021 Ravix RUAwas estimated using the Black-Scholes option pricing model, using the following assumptions: expected term of four years, expected volatility of 75%, expected dividendyield of zero, and risk-free interest rate of 0.93%. At December 31, 2021, both the service condition and performance condition of the 2021 Ravix RUA were probable of vesting. At December 31, 2021, there were 115,667unvested shares of the 2021 Ravix RUA with a weighted-average grant date fair value of $3.08 per share. Total unamortized compensation expense related to unvested2021 Ravix RUA at December 31, 2021 was $0.2 million. Total stock-based compensation expense, inclusive of Restricted Stock Awards, Restricted Stock Awards of PWSC and Restricted Unit Awards of Ravix describedabove, net of forfeitures, was $3.6 million and $1.4 million for the years ended December 31, 2021 and December 31, 2020, respectively. (d)Employee Share Purchase Plan The Company has an employee share purchase plan ("ESPP Plan") whereby qualifying employees can choose each year to have up to 5% of their annual base earningswithheld to purchase the Company's common shares. After one year of employment, the Company matches 100% of the employee contribution amount, and thecontributions vest immediately. All contributions are used by the plan administrator to purchase common shares in the open market. The Company's contribution isexpensed as paid and for the years ended December 31, 2021 and December 31, 2020 totaled $0.2 million and $0.1 million, respectively. NOTE 18 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 upto 60% of their annual earnings subject to an overall limitation of $19,500 in both 2021 and 2020, respectively. The Company matches an amount equal to 50% of eachparticipant'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 theyears ended December 31, 2021 and December 31, 2020 totaled $0.4 million and $0.2 million, respectively. All Company obligations to the plans were fully funded as ofDecember 31, 2021. 87Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 19 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 classA preferred shares. The Company's Board of Directors have the ability to fix the designation, rights, privileges, restrictions and conditions attaching to the shares ofeach series of preferred shares. The preferred shares have priority over the common shares. There were 169,733 and 182,876 shares of Preferred Shares outstanding at December 31, 2021 and December 31, 2020, respectively. Each Preferred Share is convertibleinto 6.25 common shares at a conversion price of $4.00 per common share any time at the option of the holder prior to the redemption date. During 2021 and 2020, 13,143and 40,000 Preferred Shares, respectively, were converted into 82,143 and 250,000 common shares, respectively, at the conversion price of $4.00 per common share, or$0.3 million and $1.0 million, respectively, at the option of the holders. As of December 31, 2021, the maximum number of common shares issuable upon conversion of thePreferred Shares is 1,060,831 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 $1.25per 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 30consecutive 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 outstandingPreferred 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 specifiedfor redemption. The Company will redeem any Preferred Shares not previously converted into common shares, and which remain outstanding on the redemption date,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. As discussed in "Note 2(s), "Summary of Significant Accounting Policies - Holding company liquidity," the outstanding Preferred Shares were required to be redeemedby the Company on April 1, 2021 ("Redemption Date") if the Company had sufficient legally available funds to do so. Additionally, the Company has exercised its rightto defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, because of the deferral, the Company is prohibited from redeemingany shares of its capital stock while payment of interest on the trust preferred securities is being deferred. If the Company was required to pay either the PreferredShares redemption value or both the deferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company hasdetermined that it does not have sufficient legally available funds to do so. However, the Company is prohibited from doing so under Delaware law and, as such, (a) theinterest on the trust preferred securities remains on deferral as permitted under the indentures and (b) in accordance with Delaware law, the Preferred Shares were notredeemed on the Redemption Date and instead remain outstanding with a redemption value of $6.5 million as of December 31, 2021. None of the terms of the PreferredShares have changed after the Redemption Date. The Preferred Shares continue to be convertible into common shares at the discretion of the holder, and will accruedividends until such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. The Company accrues dividends through additional paid-in-capital at the stated coupon. At December 31, 2021 and December 31, 2020, accrued dividends of$2.3 million and $2.1 million were included in Class A preferred stock in the consolidated balance sheets. The redemption amount of the Preferred Shares was $6.5 millionand $6.7 million at December 31, 2021 and December 31, 2020, respectively. In accordance with FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, redemption features notsolely 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 hasthe option to convert the Preferred Shares at any time; however, if not converted, they are required to be redeemed when the Company has sufficient legally availablefunds and is not otherwise prohibited from doing so. As such, the Preferred Shares are presented in temporary or mezzanine equity on the consolidated balance sheets. NOTE 20 SHAREHOLDERS' EQUITY The Company is authorized to issue 50,000,000 shares of zero par value common stock. There were 22,882,614 and 22,211,069 shares of common stock outstanding atDecember 31, 2021 and December 31, 2020, respectively. There were no dividends declared during the years ended December 31, 2021 and December 31, 2020. As described in Note 19, "Redeemable Class A Preferred Stock", during 2021 and 2020, 13,143 and 40,000 Preferred Shares, respectively, were converted into 82,143 and250,000 common shares, respectively. As a result, $0.3 million and $1.0 million was reclassified from redeemable Class A preferred stock to additional paid-in capital onthe consolidated balance sheets at December 31, 2021 and December 31, 2020, respectively. 88Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements There were 247,450 shares of treasury stock outstanding at December 31, 2021 and December 31, 2020. The Company records treasury stock at cost. The Company has warrants outstanding, recorded in shareholders' equity, that will entitle each subscriber to purchase one common share of Kingsway for each warrant.During 2021, warrants to purchase 350,000 shares of common stock were exercised, resulting in cash proceeds of $1.8 million. The following table summarizesinformation about warrants outstanding at December 31, 2021: December 31, 2021 RemainingContractual Number Exercise Price Date of IssueExpiry Date Life (in years) Outstanding $5.00 16-Sep-1315-Sep-23 1.71 2,930,790 $5.00 3-Feb-1415-Sep-23 1.71 1,642,975 Total: 1.71 4,573,765 NOTE 21 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, 2021 andDecember 31, 2020 as it relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets. (in thousands) Change in Fair Value of Unrealized Debt Gains Attributable Total (Losses) on Foreign to Accumulated Available- Currency Instrument- Other for-Sale Translation Specific Comprehensive Investments Adjustments Credit Risk Income (Loss) 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 Other comprehensive loss arising during the period (463) — (6,844) (7,307)Amounts reclassified from accumulated other comprehensive income 27 — — 27 Net current-period other comprehensive loss (436) — (6,844) (7,280)Balance, December 31, 2021 $(220) $(3,286) $34,285 $30,779 89Table of ContentsKINGSWAY 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 (loss) income, net of tax, only for the yearsended December 31, 2021 and December 31, 2020 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 endedDecember 31, 2021 and December 31, 2020: (in thousands) Years ended December 31, 2021 2020 Reclassification of accumulated other comprehensive income from unrealized gains (losses) on available-for-saleinvestments to: Net realized gains $(27) $(64)Other-than-temporary impairment loss — — Loss from continuing operations before income tax benefit (27) (64)Income tax benefit — — Income (loss) from continuing operations (27) (64)Net income (loss) $(27) $(64) NOTE 22 SEGMENTED INFORMATION The Company reports segment information based on the "management" approach. The management approach designates the internal reporting used by management formaking decisions and assessing performance as a source of the Company’s reportable operating segments. The Company conducts its business through the followingthree reportable segments - Extended Warranty, Leased Real Estate and Kingsway Search Xcelerator. 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 25 states and theDistrict of Columbia to their members, with customers in all 50 states. Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, Penn and Prime. Penn and Prime distributethese 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 approvedautomobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield inthree states with a "white label" agreement. PWI also has a "white label" agreement with a third-party that sells and administers a GAP product in certain states. PWSC sells home warranty products and provides administration services to homebuilders and homeowners across the United States. PWSC distributes its productsand 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 commercial refrigeration warranty products and provides equipment breakdown and maintenancesupport services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain newand used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as anagent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlyingthe 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 bothcertain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVACproviders. 90Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Leased Real Estate Segment Leased Real Estate includes the Company's subsidiaries, CMC and RoeCo. 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, 2021,revenue of $13.4 million from this single customer represents more than 10% of the Company’s consolidated revenues. The Real Property is also subject to theMortgage. When assessing and measuring the operational and financial performance of the Leased Real Estate segment, interest expense related to the Mortgage isincluded in Leased Real Estate's segment operating income. RoeCo owns the LA Real Property that is leased to a third-party pursuant to a long-term lease with a single customer. The LA Real Property is also subject to the LAMortgage. The Company acquired RoeCo on December 30, 2021, therefore the Leased Real Estate segment operating income does not include any financial resultsrelated to RoeCo for the year ended December 31, 2021. Kingsway Search Xcelerator SegmentKingsway Search Xcelerator includes the Company's subsidiary, Ravix. Ravix provides outsourced financial services and human resources consulting for short or longduration engagements for customers in 21 states and 5 countries. All services are delivered by employees who are located in the United States.Revenues and Operating Income by Reportable SegmentResults for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in thepreparation of the consolidated financial statements. The following tables provide financial data used by management. Segment assets are not allocated for managementuse and, therefore, are not included in the segment disclosures below. Revenues by reportable segment reconciled to consolidated revenues for the years ended December 31, 2021 and December 31, 2020 were: (in thousands) Years ended December 31, 2021 2020 Revenues: Extended Warranty: Service fee and commission revenue $74,919 $47,607 Total Extended Warranty 74,919 47,607 Leased Real Estate: Rental revenue 13,365 13,365 Total Leased Real Estate 13,365 13,365 Kingsway Search Xcelerator: Service fee and commission revenue 3,482 — Total Kingsway Search Xcelerator 3,482 — Total revenues $91,766 $60,972 91Table of ContentsKINGSWAY 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 segmentoperating income reconciled to the consolidated income (loss) from continuing operations for the years ended December 31, 2021 and December 31, 2020 were: (in thousands) Years ended December 31, 2021 2020 Segment operating income (loss) Extended Warranty (a) $12,636 $6,604 Leased Real Estate (b) 909 (504)Kingsway Search Xcelerator 484 — Total segment operating income 14,029 6,100 Net investment income 1,575 2,625 Net realized gains 1,809 580 (Loss) gain on change in fair value of equity investments (242) 1,267 Gain on change in fair value of limited liability investments, at fair value 2,391 4,046 Net change in unrealized loss on private company investments — (744)Other-than-temporary impairment loss — (117)Interest expense not allocated to segments (6,161) (7,719)Other revenue and expenses not allocated to segments, net (11,395) (10,606)Amortization of intangible assets (4,900) (2,291)(Loss) gain on change in fair value of debt (3,201) 1,173 Gain (loss) on extinguishment of debt not allocated to segments 311 (851)Loss from continuing operations before income tax benefit (5,784) (6,537)Income tax benefit (7,644) (1,115)Income (loss) from continuing operations $1,860 $(5,422) (a)For the years ended December 31, 2021 and December 31, 2020, Extended Warranty segment operating income includes gain on extinguishment of debt of $2.2million and $0.4 million, respectively, related to PPP loan forgiveness directly associated with the respective warranty businesses. The gain of $0.4 million forthe year ended December 31, 2020 was reclassified to segment operating income from gain (loss) on extinguishment of debt not allocated to segments to beconsistent with current year presentation. Extended Warranty segment operating income before the gain on extinguishment of debt totaled $10.5 million and$6.2 million for the years ended December 31, 2021 and December 31, 2020, respectively. See Note 12, "Debt," for further discussion. (b)For the year ended December 31, 2021, includes $2.9 million expense due to the release of an indemnification receivable, which is exactly offset in net income(loss) (not shown here) by an income tax benefit of $2.9 million for the release of a liability that had been included in income taxes payable in the consolidatedbalance sheets. NOTE 23 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 measurementdate. 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 orinactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market pricesare not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. Thesevaluation 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 usingquoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactivemarkets 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 intime 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 reflectincreases 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 arecovery 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 usedin 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. 92Table of ContentsKINGSWAY 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, limitedliability investments, at fair value, real estate investments, subordinated debt, warrant liability and stock-based compensation liabilities, derivative contracts (interestrate swap) and contingent consideration 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-partyevidence. 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 uponquoted 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 thesignificant 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 fixedmaturities. 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 fixedmaturities are valued using this technique. The Company has obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair valuesobtained 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 maturitiesincluded 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 similarsecurities, 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 similarsecurities, 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 ininactive 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 modelsbased 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 Leaseowns investments in limited liability companies that hold investment properties. Argo Holdings makes investments in limited liability companies and limited partnershipsthat 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 apractical expedient to estimate fair value. The Company applies the net asset value practical expedient to Net Lease's limited liability investments on aninvestment-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 ofthe investment. Investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair valuehierarchy. •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. Thefair value of Argo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach includingvaluation multiples applied to corresponding performance metrics, such as earnings before interest, tax, depreciation and amortization; revenue; or netearnings. 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. 93Table of ContentsKINGSWAY 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 owningnet 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 ofthe fair value hierarchy. Warrant liability - The Company issued the KWH Warrants on March 1, 2019. On December 1, 2020, the Company repurchased the KWH Warrants. The KWHWarrants were measured and reported at fair value. The fair value of the warrant liability was estimated using an internal model without relevant observable marketinputs. The significant inputs used in the model include an enterprise value multiple applied to earnings before interest, tax, depreciation and amortization. The impliedenterprise value was reduced by the remaining debt associated with the 2019 KWH Loan to determine an implied equity value. The liability classified warrantswere categorized in Level 3 of the fair value hierarchy. Stock-based compensation liabilities - As described in Note 17, "Stock-Based Compensation," certain of the restricted stock awards granted by PWSC are classified asa 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. Thesignificant 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. 94Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements Derivative contracts - As described in Note 11, "Derivatives," the Company entered into an interest rate swap agreement effective April 1, 2021 to convert the variableinterest rate on a portion of the 2020 KWH Loan to a fixed interest rate. The interest rate swap contract is measured and reported at fair value and is included in accruedexpenses and other liabilities in the consolidated balance sheets. The fair value of the interest rate swap contract is estimated using inputs which the Company obtainsfrom the counterparty and is determined using a discounted cash flow analysis on the expected cash flows of the derivative. The discounted cash flow valuationtechnique reflects the contractual term of the derivative contract, including the period to maturity, and uses observable market based inputs, including quoted mid-market prices or third-party consensus pricing, interest rate curves and implied volatilities. The interest rate swap contract is categorized in Level 2 of the fair valuehierarchy. Contingent consideration - The consideration for Company's acquisition of Ravix includes future payments to the former owners that are contingent upon theachievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and reported at fair value and are included in accruedexpenses and other liabilities in the consolidated balance sheets. The fair value of the Company's contingent consideration liability is estimated by applying the MonteCarlo simulation method to forecast achievement of gross profit which may result in up to $4.5 million in total payments to the former owners of Ravix throughOctober 2024. Key inputs in the valuation include forecasted gross profit, gross profit volatility, discount rate and discount term. Contingent consideration liabilitiesare revalued each reporting period. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, includingadjustments to the discount rates or changes in the assumed achievement or timing of any targets. Any changes in fair value are reported in the consolidatedstatements of operations as other (expense) income. The contingent consideration liability is categorized in Level 3 of the fair value hierarchy. 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, 2021and December 31, 2020 are as follows. Certain investments in limited liability companies that are measured at fair value using the net asset value practical expedient arenot 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 amountspresented in the consolidated balance sheets: (in thousands) December 31, 2021 Fair Value Measurements at the End of the Reporting Period Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Measured at Assets Inputs Inputs Net Asset Total (Level 1) (Level 2) (Level 3) Value Recurring fair value measurements Assets: Fixed maturities: U.S. government, government agencies and authorities $16,223 $— $16,223 $— $— States, municipalities and political subdivisions 1,878 — 1,878 — — Mortgage-backed 7,629 — 7,629 — — Asset-backed 445 — 445 — — Corporate 9,491 — 9,491 — — Total fixed maturities 35,666 — 35,666 — — Equity investments: Common stock 171 171 — — — Warrants 8 — 8 — — Total equity investments 179 171 8 — — Limited liability investments, at fair value 18,826 — — 4,022 14,804 Real estate investments 10,662 — — 10,662 — Total assets $65,333 $171 $35,674 $14,684 $14,804 Liabilities: Subordinated debt $60,973 $— $60,973 $— $— Contingent consideration 2,458 — — 2,458 — Stock-based compensation liabilities 1,402 — — 1,402 — Derivative contract - interest rate swap 14 — 14 — — Total liabilities $64,847 $— $60,987 $3,860 $— 95Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements (in thousands) December 31, 2020 Fair Value Measurements at the End of the Reporting Period Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Measured Assets Inputs Inputs at Net Total (Level 1) (Level 2) (Level 3) 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 — Total assets $64,633 $172 $20,988 $13,925 $29,548 Liabilities: Subordinated debt $50,928 $— $50,928 $— $— Stock-based compensation liabilities 443 — — 443 — Total liabilities $51,371 $— $50,928 $443 $— 96Table of ContentsKINGSWAY 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, 2021 and December 31, 2020: (in thousands) Years ended December 31, 2021 2020 Assets: Limited liability investments, at fair value: Beginning balance $3,263 $4,392 Purchases — 21 Distributions received (658) (808)Realized gains included in net income (loss) 631 474 Change in fair value of limited liability investments, at fair value included in net income (loss) 786 (816)Ending balance $4,022 $3,263 Unrealized lossses (gains) on limited liability investments, at fair value held at end of period: Included in net income (loss) $786 $(816)Included in other comprehensive (loss) income $— $— Real estate investments: Beginning balance $10,662 $10,662 Change in fair value of real estate investments included in net income (loss) — — Ending balance $10,662 $10,662 Unrealized gains recognized on real estate investments held at end of period: Included in net income (loss) — — Included in other comprehensive (loss) income — — Ending balance - assets $14,684 $13,925 Liabilities: Contingent consideration: Beginning balance $— $— Issuance of contingent consideration in connection with acquisition 2,195 — Change in fair value of contingent consideration included in net income (loss) 263 — Ending balance $2,458 $— Unrealized losses recognized on contingent consideration liability held at end of period: Included in net income (loss) $263 $— Included in other comprehensive (loss) income $— $— Warrant liability: Beginning balance $— $249 Termination of warrants — (336)Change in fair value of warrant liability included in net loss — 87 Ending balance $— $— Unrealized losses recognized on warrant liability held at end of period: Included in net income (loss) $— $87 Included in other comprehensive (loss) income $— $— Stock-based compensation liabilities: Beginning balance $443 $— Issuance of stock-based compensation awards — 443 Change in fair value of stock-based compensation liabilities included in net income (loss) 959 — Ending balance $1,402 $443 Unrealized losses recognized on stock-based compensation liabilities held at end of period: Included in net income (loss) $959 $— Included in other comprehensive (loss) income $— $— Ending balance - liabilities $3,860 $443 97Table of ContentsKINGSWAY 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 arecategorized as Level 3 at December 31, 2021: Categories Fair Value Valuation TechniquesUnobservable Inputs Input Value(s) Limited liability investments, at fair value $4,022 Market approachValuation multiples 1.0x - 8.0x Real estate investments $10,662 Market and income approachCap rates 7.5%Contingent consideration $2,458 Option-based income approachDiscount rate 4.0% Risk-free rate 0.49% Expected volatility 15.0%Stock-based compensation liabilities $1,402 Market approachValuation 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 arecategorized as Level 3 at December 31, 2020: Categories Fair Value Valuation TechniquesUnobservable Inputs Input Value(s) Limited liability investments, at fair value $3,263 Market approachValuation multiples 3.1x - 8.0x Real estate investments $10,662 Market and income approachCap rates 7.5%Stock-based compensation liabilities $443 Market approachValuation 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, 2021: Fair Value Redemption Category (in thousands) Unfunded Commitments Redemption Frequency Notice Period Limited liability investments, at fair value $14,804 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, 2020: Fair Value Redemption Category (in thousands) Unfunded Commitments Redemption Frequency Notice Period Limited liability investments, at fair value $29,548 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 fairvalue as a result of an impairment. For the years ended December 31, 2021 and December 31, 2020, the Company did not record any adjustments to the fair value of itsinvestments in private companies for observable price changes. The Company recorded impairments related to investments in private companies of zero and $0.7 millionfor the years ended December 31, 2021 and December 31, 2020, respectively, which are included in net change in unrealized loss on private company investments in theconsolidated statements of operations. The impairments recorded for the year ended December 31, 2020 are a result of the impact of the COVID-19 pandemic on theinvestments' underlying business. To determine the fair value of investments in these private companies, the Company considered rounds of financing and third-partytransactions, discounted cash flow analyses and market-based information, including comparable transactions, trading multiples and changes in market outlook, amongother factors. The Company has classified the fair value measurements of these investments in private companies as Level 3 because they involve significantunobservable inputs. 98Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements As further discussed in Note 4, "Acquisitions," the Company acquired PWI on December 1, 2020 and finalized the related purchase price allocation during the thirdquarter of 2021. The fair values of intangible assets and deferred service fees associated with the acquisition of PWI were determined to be Level 3 under the fair valuehierarchy. 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 TechniquesUnobservable Inputs Input Value(s) Customer relationships $15,000 Multi-period excess earningsGrowth rate 3.0% Attrition rate 12.3% Discount rate 29.5%Trade name $4,550 Relief from royaltyRoyalty rate 4.0% Discount rate 29.5%Deferred service fees $3,626 Cost build-upNormal profit margin 17.8%-21.1% Discount rate 2.5% As further discussed in Note 4, "Acquisitions," the Company acquired Ravix on October 1, 2021 and provisionally allocated the purchase price to the assets acquiredand liabilities assumed. The fair values of intangible assets associated with the acquisition of Ravix were determined to be Level 3 under the fair value hierarchy.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 $ 4,000 Multi-period excess earnings Growth rate 3.0% Attrition rate 15.0% Discount rate 21.0%Trade name $ 2,500 Relief from royalty Royalty rate 3.0% Discount rate 21.0% NOTE 24 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 orreceived as established and agreed by the parties. Except where disclosed elsewhere in these consolidated financial statements, the following is a summary of relatedparty 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, 2021and December 31, 2020, each of the Company, John T. Fitzgerald ("Fitzgerald"), the Company's Chief Executive Officer and President, and certain of Fitzgerald’simmediate 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 requesthis/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 requestfor funds being referred to as a "Capital Call"). Argo Holdings made no Capital Calls during the years ended December 31, 2021 and December 31, 2020. (b)RoeCo On December 30 2021, the Company closed on an agreement to acquire 100% of the membership interests in RoeCo from a current holder of the Company’s PreferredShares (refer to Note 4, "Acquisitions", for further detail). The Company determined the acquisition was an arms-length transaction based upon the purchase price paidcompared to the pricing of similar third-party transactions. 99Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements NOTE 25 COMMITMENTS AND CONTINGENT LIABILITIES (a)Legal proceedings: CMC Industries In April 2018, TRT, 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 NewYork relating to CMC and its subsidiaries. Kingsway indirectly, through its indirect, wholly-owned subsidiary, CMC Acquisition, LLC ("CMCA"), owns 81% of CMC. TRT (an indirect, wholly-owned subsidiary of CMC) entered into a Management Services Agreement (the "MSA") with DGI-BNSF Corp. ("DGI") (an affiliate of CRICTRT 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 toTRT 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 and various other entities affiliated with each of them entered into a settlement agreement with respect to such litigation and certain othermatters ("CMC Settlement Agreement"). Pursuant to the CMC Settlement Agreement, the parties agreed that proceeds from increased rental payments due to an earlieramendment 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 theMSA 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 netproceeds from an eventual sale or renewal of the lease of the Real Property (after repayment of outstanding indebtedness and various other fees and expenses) wouldbe 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 itsownership 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 amanagement 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 of itsownership 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 adistribution 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 SettlementAgreement, 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 andadministrative expenses in its consolidated statement of operations for the year ended December 31, 2020. On June 2, 2021, TRT borrowed $15.0 million under the Additional Mortgage. The Company distributed $10.6 million to DGI during the second quarter of 2021 as aprepaid management fee, representing 80% of the net proceeds from the Additional Mortgage, and $2.7 million (20%) to CMCA as a priority distribution on itsownership of CMC. Aegis 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 ofPennsylvania alleging, among other things, that the Company breached a contractual obligation to indemnify Aegis for certain customs bond losses incurred by Aegisunder 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 andAegis subsequently invoked its rights to indemnity under the indemnity and hold harmless agreements. Effective January 20, 2020, Aegis and the Company entered intoa 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, which theCompany reported in its consolidated statement of operations during the first quarter of 2020, and to reimburse Aegis for 60% of future losses that Aegis may sustain inconnection with such customs bonds, up to a maximum reimbursement amount of $4.8 million. During the third and fourth quarters of 2020, the Company madereimbursement payments to Aegis of $0.5 million in connection with the Settlement Agreement. The Company reported the payments to Aegis in general andadministrative expenses in its consolidated statement of operations for the year ended December 31, 2020. During the third quarter of 2021, the Company made areimbursement payment to Aegis of $0.1 million in connection with the Settlement Agreement, which is included in general and administrative expenses in itsconsolidated statement of operations for the year ended December 31, 2021. The Company’s potential exposure under these agreements was not reasonablydeterminable at December 31, 2021, and no liability has been recorded in the in the consolidated financial statements at December 31, 2021. (b)Guarantees: Mendota As part of the October 18, 2018 transaction to sell Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively"Mendota"), the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid lossand loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims is $2.5 million. Per thepurchase agreement, a security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from NetLease, was to be collateral for the Company’s payment of obligations with respect to the open claims. During the third quarter of 2021, the purchasers of Mendota andthe Company agreed to release the Company's equity interest in Net Lease as collateral and allow Net Lease to make distributions to the Company. In exchange, theCompany agreed to deposit $2.0 million into an escrow account and advance $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation withrespect to the open claims. There were no payments made related to the open claims during the years ended December 31, 2021 and December 31, 2020. The Company'spotential exposure under these agreements was not reasonably determinable at December 31, 2021, and no liability has been recorded in the consolidated financialstatements at December 31, 2021. CMC Industries In conjunction with the Additional Mortgage, TRT paid a guarantee fee of $1.1 million to a third-party during the second quarter of 2021, who is serving as a guarantoror indemnitor with respect to certain obligations between TRT and the holder of the Additional Mortgage. The guarantee fee was recorded as a debt issuance costrelated to the Additional Mortgage. 100Table of ContentsKINGSWAY FINANCIAL SERVICES INC.Notes to Consolidated Financial Statements RoeCo The LA Mortgage is nonrecourse indebtedness with respect to the assets of RoeCo, and the LA Mortgage is not, nor will it be, guaranteed by Kingsway or its affiliatesunless RoeCo acts in bad-faith or commits intentional acts with respect to the LA Mortgage. The LA Mortgage is secured in part by a guaranty of recourse liabilities,whereby KAI, as guarantor, would become liable for the recourse liabilities if RoeCo, as borrower, violates certain terms of the loan agreement. Under the guarantee, thelender can recover losses from the guarantor for certain bad-faith or other intentional acts of the borrower, such as rents retained by the borrower in violation of the loandocuments, fraud or intentional misrepresentation, changes to the lease without the lender's consent, willful misconduct, criminal acts and environmental lossessustained by lender. In addition, the guarantee provides that the LA Mortgage will be the full personal recourse obligation of the guarantor, for certain actions, such asprohibited transfers of the collateral or bankruptcy of the borrower. (c)Collateral pledged and restricted cash: Short-term investments with an estimated fair value of $0.2 million at December 31, 2021 and December 31, 2020, were on deposit with state regulatory authorities. The Company also has restricted cash of $17.3 million and $30.6 million at December 31, 2021 and December 31, 2020, respectively. Included in restricted cash are: •$12.6 million and $27.7 million at December 31, 2021 and December 31, 2020, respectively, held as deposits by IWS, Geminus, PWI, PWSC and Ravix. PWI,which was acquired by the Company in December 2020, began investing a substantial portion of its restricted cash during 2021; •$1.9 million at December 31, 2021 and December 31, 2020, on deposit with state regulatory authorities; and •$2.8 million and $1.0 million at December 31, 2021 and December 31, 2020, respectively, pledged to third-parties as deposits or to collateralize liabilities. Collateralpledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company's standardrisk management controls. NOTE 26 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 casualtyinsurance 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, 2021, surplus asregards 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%. InApril 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 incompliance with that plan. As of December 31, 2021, Amigo's RBC was 8,417%. Kingsway Reinsurance Corporation ("Kingsway Re"), which is domiciled in Barbados, is required by the regulator in Barbados to maintain minimum capital levels. As ofDecember 31, 2021, the capital maintained by Kingsway Re was in excess of the regulatory capital requirements in Barbados. NOTE 27 STATUTORY INFORMATION AND POLICIES The Company's insurance subsidiary, Amigo, prepares statutory basis financial statements in accordance with accounting practices prescribed or permitted by theFlorida Office of Insurance Regulation. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a varietyof publications of the NAIC. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed. Such practices may differ from stateto 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 convertingfrom 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 deferredtax assets and liabilities in net loss. Statutory capital and surplus and statutory net loss for Amigo are: (in thousands) December 31, 2021 2020 Net loss, statutory basis $(22) $(138)Capital and surplus, statutory basis $1,965 $1,987 Amigo is required to hold minimum levels of statutory capital and surplus to satisfy regulatory requirements. The minimum statutory capital and surplus, or companyaction level RBC, necessary to satisfy regulatory requirements for Amigo was less than $0.1 million at December 31, 2021. Company action level RBC is the level at whichan 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 toshareholders 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'sstatutory 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 aninsurance company's unassigned funds. At December 31, 2021, Amigo was restricted from making any dividend payments to the holding company without regulatory approval. 101Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")as of December 31, 2021. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under theExchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulatedand communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regardingrequired disclosures. In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls andprocedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls andprocedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. In addition, the design of disclosurecontrols and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefitsof possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions aboutthe likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, the Company's disclosurecontrols and procedures are not effective as a result of one unremediated material weakness in the Company's internal control over financial reporting that wasdiscovered during the course of the 2018 external audit of the accounts, relating to the accounting for and disclosure of certain complex and nonrecurring transactionsas it specifically pertains to the adoption and application of ASU 2014-09. Not all material weaknesses necessarily present the same risks from period to period as aresult of differing events and transactions which have occurred or may occur in current and future periods. Management's Report on Internal Control over Financial Reporting The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act. The Company's management evaluated the effectiveness of its internal control over financial reporting based on the framework in InternalControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, theCompany’s management has concluded that, as of December 31, 2021, our internal controls over financial reporting are not effective because of the existence of oneunremediated material weakness in internal control over financial reporting, that was discovered during the course of the 2018 external audit of the accounts, relating tothe accounting for and disclosure of certain complex and nonrecurring transactions as it specifically pertains to the adoption and application of ASU 2014-09. 102Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Material Weaknesses in Internal Control over Financial Reporting A material weakness is defined as a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that amaterial misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. With respect to the inadequate design accounting for and operation of internal disclosure of certain complex and nonrecurring transactions, the execution of thecontrols over the application of accounting literature did not operate effectively with respect to the adoption and application of ASU 2014-09. This matter wasdiscovered during the course of the 2018 external audit of the accounts and was reviewed with the Company's Audit Committee. As a result of this material weakness, the Company’s management directed a comprehensive review of its consolidated financial statements to assess the possibility offurther material misstatements that may remain unidentified. As a result of such review, and notwithstanding the material weakness described above, the Company’smanagement, including the Company’s Chief Executive Officer and Chief Financial Officer, believes that the audited consolidated financial statements contained in this2021 Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented inconformity with U.S. GAAP. Remediation Process The Company has been evaluating the material weakness and is in process of executing its plan to strengthen the effectiveness of the design and operation of itsinternal control environment. The remediation plan includes implementing additional review procedures with respect to its accounting under ASC 606, executing athorough review of all revenue streams, and educating key financial personnel to ensure the Company’s accounting will continue to be in accordance with that standardon a go-forward basis. The actions that the Company is taking are subject to ongoing senior management review as well as Audit Committee oversight. The Company is committed tomaintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in its controls. Remediation of 2018 and 2019 Material Weaknesses As previously reported in our Annual Report on Form 10-K for the years ended December 31, 2018, 2019 and 2020, the Company identified and reported several materialweaknesses in internal control over financial reporting. Management believes only the following material weakness remained unremediated as of the issuance ofthis 2021 Annual Report: the accounting for and disclosure of certain complex and nonrecurring transactions as it specifically pertains to the adoption and application ofASU 2014-09. The Company has enhanced and revised the design of its internal control over financial reporting, including introducing additional controls, review proceduresand formalizing certain documentation processes. As a result of these enhancements, the Company believes that the previously identified material weaknesses (with theexception of the accounting for and disclosure of certain complex and nonrecurring transactions as it specifically pertains to the adoption and application of ASU 2014-09) have now been remediated. 103Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Changes in Internal Control over Financial Reporting On October 1, 2021, the Company acquired 100% of the outstanding equity interests of Ravix and on December 30, 2021, the Company acquired 100% of the outstandingmembership interests of RoeCo. Since the dates of these acquisitions, the Company has been analyzing and evaluating procedures and controls to determine theireffectiveness and to make them consistent with our disclosure controls and procedures. As permitted by the SEC, Ravix and RoeCo have been excluded from the scopeof our quarterly discussion of material changes in internal control over financial reporting below. Other than processes and controls that have been put in place as a result of our remediation of certain material weaknesses in internal control over financial reporting,there have been no changes in the Company's internal control over financial reporting during the period beginning October 1, 2021, and ending December 31, 2021, thathave materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, except with respect to Ravix and RoeCo. Item 9B. Other Information None Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not Applicable 104Table of ContentsKINGSWAY FINANCIAL SERVICES INC. PART III. Item 10. Directors, Executive Officers, and Corporate Governance The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed withthe SEC no later than 120 days after the end of our fiscal year ended December 31, 2021. We have adopted a Code of Business Conduct and Ethics that is applicable to all employees, including our chief executive officer, chief financial officer and other seniorfinancial personnel, as well as our directors. A copy of the Code of Business Conduct and Ethics is posted in the "Corporate Governance" section of our website atwww.kingsway-financial.com. Any future amendments to the Code of Business Conduct and Ethics and any grant of waiver from a provision of the code requiringdisclosure under applicable SEC rules will be disclosed in the "Corporate Governance" section of our website. Item 11. Executive Compensation The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed withthe SEC no later than 120 days after the end of our fiscal year ended December 31, 2021. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed withthe SEC no later than 120 days after the end of our fiscal year ended December 31, 2021. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed withthe SEC no later than 120 days after the end of our fiscal year ended December 31, 2021. Item 14. Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed withthe SEC no later than 120 days after the end of our fiscal year ended December 31, 2021. 105Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Part IV Item 15. Exhibits, Financial Statement Schedules (a) Documents filed as part of this Report (1) Financial Statements. We have filed the following documents, which are included in Part II, Item 8 of this 2021 Annual Report on Form 10-K. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements (2) Financial Statement Schedules. The following financial statement schedules are filed as a part hereof along with the related reports of the IndependentRegistered Public Accounting Firm included in Part II, Item 8. Schedules not listed here have been omitted because they are not applicable or the requiredinformation is included in the Consolidated Financial Statements. Schedule I Condensed Financial Information of the Registrant (Parent Company) (3) Exhibits. The exhibits listed in the accompanying "Index to Exhibits" that follow the signature pages of this report are filed or incorporated by reference aspart of this Form 10-K. (b) Exhibits. Included in Item 15(a)(3) above (c) Financial Statement Schedules. Included in Item 15(a)(2) above 106Table of ContentsKINGSWAY FINANCIAL SERVICES INC. SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company) Parent Company Balance Sheets (in thousands) December 31, 2021 December 31, 2020 Assets Investments in subsidiaries $1,944 $6,155 Cash and cash equivalents 56 186 Other assets 447 428 Total Assets $2,447 $6,769 Liabilities and Shareholders' Equity Liabilities: Accrued expenses and other liabilities $1,674 $2,263 Total Liabilities 1,674 2,263 Redeemable Class A preferred stock 6,497 6,504 Shareholders' Equity: Common stock — — Additional paid-in capital 359,138 355,242 Treasury stock, at cost (492) (492)Accumulated deficit (395,149) (394,807)Accumulated other comprehensive income 30,779 38,059 Shareholders' equity attributable to common shareholders (5,724) (1,998)Total Liabilities, Class A preferred stock and Shareholders' Equity $2,447 $6,769 See accompanying report of independent registered accounting firm. 107Table of ContentsKINGSWAY FINANCIAL SERVICES INC. SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company) Parent Company Statements of Operations (in thousands) Years ended December 31, 2021 2020 Other revenue (expenses), net: General and administrative expenses $(3,287) $(1,735)Non-operating other expense (2) (3)Total other expenses, net (3,289) (1,738)Loss from continuing operations before income tax benefit and equity in loss of subsidiaries (3,289) (1,738)Income tax benefit (340) (214)Equity in income (loss) of subsidiaries 4,809 (3,892)Net income (loss) $1,860 $(5,416) See accompanying report of independent registered accounting firm. 108Table of ContentsKINGSWAY FINANCIAL SERVICES INC. SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company) Parent Company Statements of Comprehensive Loss (in thousands) Years ended December 31, 2021 2020 Net income (loss) $1,860 $(5,416)Other comprehensive, net of taxes(1): Unrealized losses on available-for-sale investments: Unrealized losses arising during the period — — Reclassification adjustment for amounts included in net loss — — Other comprehensive loss - parent only — — Equity in other comprehensive (loss) income of subsidiaries (7,295) 2,723 Other comprehensive (loss) income (7,295) 2,723 Comprehensive loss $(5,435) $(2,693)(1) Net of income tax benefit of $0 and $0 in 2021 and 2020, respectively See accompanying report of independent registered accounting firm. 109Table of ContentsKINGSWAY FINANCIAL SERVICES INC. SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company) Parent Company Statements of Cash Flows (in thousands) Years ended December 31, 2021 2020 Cash provided by (used in): Operating activities: Net income (loss) $1,860 $(5,416)Adjustments to reconcile net income (loss) to net cash used in operating activities: Equity in net (income) loss of subsidiaries (4,809) 3,892 Stock-based compensation expense, net of forfeitures 1,620 219 Other, net (551) 855 Net cash used in operating activities (1,880) (450)Investing activities: Net cash from investing activities — — Financing activities: Proceeds from exercise of warrants 1,750 — Net cash provided by financing activities 1,750 — Net decrease in cash and cash equivalents (130) (450)Cash and cash equivalents at beginning of period 186 636 Cash and cash equivalents at end of period $56 $186 See accompanying report of independent registered accounting firm. 110Table of ContentsKINGSWAY FINANCIAL SERVICES INC. Item 16. Form 10-K Summary None. 111Table of ContentsKINGSWAY FINANCIAL SERVICES INC. EXHIBIT INDEX ExhibitDescription2.1Stock Purchase Agreement, dated April 1, 2015, by and between National General Holdings Corp., as Buyer, and Kingsway America Inc. and MendotaInsurance Company, as Sellers (included as Exhibit 2.1 to the Form 8-K, filed April 7, 2015, and incorporated herein by reference). 2.2Stock Purchase Agreement, dated as of May 17, 2016 by and among CMC Acquisition, LLC, CRIC TRT Acquisition LLC and BNSF-Delpres InvestmentsLtd. (included as Exhibit 2.1 to the Form 8-K, filed July 20, 2016, and incorporated herein by reference). 2.3Amendment to Stock Purchase Agreement, dated as of June 17, 2016, by and among CMC Acquisition, LLC, CRIC TRT Acquisition LLC, and BNSF-Delpres Investments Ltd. (included as Exhibit 2.1 to the Form 8-K, filed June 17, 2016, and incorporated herein by reference). 2.4Stock Purchase Agreement By and Among Premier Holdings, LLC, Advantage Auto MGA, LLC, Mendota Insurance Company, Kingsway America Inc.and Kingsway Financial Services Inc., Dated as of July 16, 2018 (included as Exhibit 2.1 to the Form 8-K, filed July 20, 2018, and incorporated herein byreference). 2.5Stock Purchase Agreement, dated as of October 12, 2020, by and among Kingsway Warranty Holdings LLC,Kingsway America Inc., PWI Holdings, Inc.,and ADESA Dealer Services, LLC (included as Exhibit 2.1 to Form 8-K, filed October 13, 2020, and incorporated herein by reference). 3.1Certificate of Incorporation of Kingsway Financial Services Inc. (included as Exhibit 3.1 to the Form 8-K, filed December 31, 2018, and incorporated hereinby reference). 3.2By-laws of Kingsway Financial Services Inc. (included as Exhibit 3.2 to the Form 8-K, filed December 31, 2018, and incorporated herein by reference). 4.1Indenture dated December 4, 2002 between Kingsway America Inc. and State Street Bank and Trust Company of Connecticut, NationalAssociation (included as Exhibit 4.3 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference). 4.2Indenture dated May 15, 2003 between Kingsway America Inc. and U.S. Bank National Association (included as Exhibit 4.4 to the Form 10-K, filed March30, 2012, and incorporated herein by reference). 4.3Indenture dated October 29, 2003 between Kingsway America Inc. and U.S. Bank National Association (included as Exhibit 4.5 to the Form 10-K, filedMarch 30, 2012, and incorporated herein by reference). 4.4Indenture dated May 22, 2003 between Kingsway America Inc., Kingsway Financial Services Inc., and Wilmington Trust Company (included as Exhibit 4.6to the Form 10-K, filed March 30, 2012, and incorporated herein by reference). 4.5Junior Subordinated Indenture dated September 30, 2003 between Kingsway America Inc. and J.P Morgan Chase Bank (included as Exhibit 4.7 to the Form10-K, filed March 30, 2012, and incorporated herein by reference). 4.6Indenture dated December 16, 2003 between Kingsway America Inc., Kingsway Financial Services Inc., and Wilmington Trust Company (included asExhibit 4.8 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference). 4.7Amended and Restated Common Stock Series B Warrant Agreement, dated July 8, 2014 (included as Exhibit 4.1 to the Form 8-K, filed July 10, 2014, andincorporated herein by reference). 4.8Form of Stock Certificate (included as Exhibit 4.1 to the Form 8-K, filed December 31, 2018, and incorporated herein by reference). 4.9Second Amended and Restated Kingsway Financial Services Inc. Common Stock Series B Warrant Agreement (included as Exhibit 4.7 to the Form 10-Q,filed August 5, 2021, and incorporated herein by reference). 10.1Kingsway Financial Services Inc. 2013 Equity Incentive Plan (included as Schedule B to the Definitive Proxy Statement on Schedule 14A filed with theSEC on April 11, 2013, and incorporated herein by reference). * 112Table of ContentsKINGSWAY FINANCIAL SERVICES INC. 10.2Form of Subscription Agreement (included as Exhibit 10.1 to the Form 8-K, filed December 27, 2013, and incorporated herein by reference). 10.3Registration Rights Agreement, dated February 3, 2014, by and among the Company and the other parties signatory thereto (included as Exhibit 10.2 tothe Form 8-K, filed February 4, 2014, and incorporated herein by reference). 10.4Kingsway America Inc. Employee Share Purchase Plan (included as Schedule B to the Definitive Proxy Statement on Schedule 14A filed with the SEC onApril 30, 2014 and incorporated herein by reference). * 10.5Agreement to Buyout and Release dated February 24, 2015 between 1347 Advisors LLC and 1347 Property Insurance Holdings, Inc. (included as Exhibit10.1 to the Form 8-K, filed February 27, 2015, and incorporated herein by reference). 10.6Stockholders’ Agreement, dated as of July 14, 2016, by and between CMC Industries, Inc., CMC Acquisition LLC and CRIC TRT AcquisitionLLC (included as Exhibit 10.1 to Form 8-K, filed July 20, 2016, and incorporated herein by reference). 10.7Management Services Agreement, dated as of July 14, 2016, by and between TRT LeaseCo, LLC and DGI-BNSF Corp. (included as Exhibit 10.2 to Form 8-K, filed July 20, 2016, and incorporated herein by reference). 10.8TRT LeaseCo, LLC 4.07% Senior Secured Note, Due May 15, 2034 (included as Exhibit 10.3 to Form 10-Q, filed August 4, 2016, and incorporated herein byreference). 10.9Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing Statement, dated as of March 12, 2015, from TRT LeaseCo, LLC toMalcolm Morris, as Deed of Trust Trustee for the benefit of Wells Fargo Bank Northwest, N.A., as trustee (included as Exhibit 10.4 to Form 10-Q, filedAugust 4, 2016, and incorporated herein by reference). 10.10Lease between TRT LeaseCo, LLC, as Landlord, and BNSF Railway Company (f/k/a The Burlington Northern and Santa Fe Railway Company), as Tenant,dated as of June 1, 2014 (included as Exhibit 10.5 to Form 10-Q, filed August 4, 2016, and incorporated herein by reference). 10.11Registration Rights Agreement, dated as of November 16, 2016 by and among the Company, GrizzlyRock Institutional Value Partners, LP and W.H.I.Growth Fund Q.P., L.P. (included as Exhibit 10.4 to Form 8-K, filed November 16, 2016, and incorporated herein by reference). 10.12Registration Rights Agreement, dated as of November 16, 2016 by and between the Company and Yorkmont Capital Partners, LP. (included as Exhibit 10.5to Form 8-K, filed November 16, 2016, and incorporated herein by reference). 10.13Right of First Offer Agreement, dated as of November 16, 2016 by and between the Company and GrizzlyRock Institutional Value Partners, LP. (included asExhibit 10.6 to Form 8-K, filed November 16, 2016, and incorporated herein by reference). 10.14Right of First Offer Agreement, dated as of November 16, 2016 by and between the Company and W.H.I. Growth Fund Q.P., L.P. (included as Exhibit 10.7to Form 8-K, filed November 16, 2016, and incorporated herein by reference). 10.15Amendment No. 1 to the Kingsway Financial Services Inc. 2013 Equity Incentive Plan (included as Exhibit 10.1 to Form 10-Q, filed August 8, 2018, andincorporated herein by reference). 10.16Offer Letter, dated September 5, 2018, between the Company and John T. Fitzgerald (included as Exhibit 10.2 to Form 8-K, filed September 10, 2018, andincorporated herein by reference). 10.17Severance Agreement, dated September 5, 2018, between the Company and John T. Fitzgerald (included as Exhibit 10.3 to Form 8-K, filed September 10,2018, and incorporated herein by reference). 113Table of ContentsKINGSWAY FINANCIAL SERVICES INC. 10.18Restricted Stock Agreement, dated September 5, 2018, between the Company and John T. Fitzgerald (included as Exhibit 10.4 to Form 8-K, filed September10, 2018, and incorporated herein by reference). 10.19Form of Indemnification Agreement for Directors and Officers (included as Exhibit 10.5 to Form 8-K, filed September 10, 2018, and incorporated herein byreference). 10.20Letter Agreement, dated May 30, 2018, between the Company and Larry Swets (included as Exhibit 10.9 to Form 10-Q, Filed November 9, 2018, andincorporated herein by reference). 10.21Employment Separation Agreement and Release, dated January 31, 2019, between Kingsway America Inc. and Hassan R. Baqar (included as Exhibit 10.1to Form 8-K, filed February 14, 2019, and incorporated herein byreference). 10.22Advisor Agreement, dated January 31, 2019, between Kingsway America Inc. and Sequoia Financial LLC (included as Exhibit 10.2 to Form 8-K, filedFebruary 14, 2019, and incorporated herein by reference). 10.23Employment Offer Letter, dated as of October 23, 2019, by and between Kent A. Hansen and Kingsway America Inc.(included as Exhibit 10.2 to Form 8-K,filed February 28, 2020, and incorporated herein by reference). 10.24Employment Separation Agreement and Release, dated as of February 28, 2020, by and between Kingsway America Inc. and William A. Hickey,Jr. (included as Exhibit 10.3 to Form 8-K, filed February 28, 2020, and incorporated herein by reference). 10.25Consulting Agreement, dated as of February 28, 2020, by and between Kingsway America Inc. and William A. Hickey, Jr. (included as Exhibit 10.4 to Form8-K, filed February 28, 2020, and incorporated herein by reference). 10.26Kingsway Financial Services Inc. 2020 Equity Incentive Plan (included as Schedule A to the Definitive Proxy Statement on Schedule 14A filed with theSEC on August 20, 2020, and incorporated herein by reference). * 10.27Loan and Security Agreement, dated as of December 1, 2020, among Kingsway Warranty Holdings LLC, Trinity Warranty Solutions LLC, GeminusHolding Company, Inc., IWS Acquisition Corporation and PWI Holdings, Inc., as Borrowers, the other Loan Parties party thereto, and CIBC Bank USA,as Lender and as Issuing Lender (included as Exhibit 10.1 to Form 8-K, filed December 2, 2020, and incorporated herein by reference). 10.28Letter Agreement, effective as of December 31, 2020, by and among Kingsway Warranty Holdings LLC, Trinity Warranty Solutions LLC, Geminus HoldingCompany, Inc., IWS Acquisition Corporation, and PWI Holdings, Inc., as Borrowers, the other Loan Parties party thereto, and CIBC Bank USA, asLender. 10.29Form of Restricted Stock Agreement. * 10.30Employment Separation Agreement and Release, by and between Kingsway America, Inc. and Paul R. Hogan, dated as of March 31, 2021 (included asExhibit 10.1 to Form 8-K, filed April 2, 2021, and incorporated herein by reference). 10.31Stock Purchase Agreement by and among, Ravix Acquisition, LLC, The Shareholders of Ravix Financial, Inc., Ravix Financial, Inc., Kingsway America,Inc. (solely with respect to Section 9.21), and Dan Saccani, as the Seller Representative, dated October 1, 2021 (included as Exhibit 10.1 to Form 8-K, filedOctober 4, 2021, and incorporated herein by reference). 14 Kingsway Financial Services Inc. Code of Business Conduct & Ethics Inc. Code of Business Conduct & Ethics (included as Exhibit 14 to form 10-K, FiledMarch 16, 2018, and incorporated herein by reference. 21Subsidiaries of Kingsway Financial Services Inc. 23.1Consent of Plante & Moran, PLLC 114Table of ContentsKINGSWAY FINANCIAL SERVICES INC. 31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act 31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act 32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INSInline XBRL Instance Document 101.SCHInline XBRL Taxonomy Extension Schema 101.CALInline XBRL Taxonomy Extension Calculation Linkbase 101.DEFInline XBRL Taxonomy Extension Definition Linkbase 101.LABInline XBRL Taxonomy Extension Label Linkbase 101.PREInline XBRL Taxonomy Extension Presentation Linkbase 104Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) * Management contract or compensatory plan or arrangement. 115Table of ContentsKINGSWAY FINANCIAL SERVICES INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. KINGSWAY FINANCIAL SERVICES INC. Date:February 28, 2022By:/s/ John T. Fitzgerald Name:John T. Fitzgerald Name:John T. Fitzgerald Title:Chief Executive Officer, President and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated. /s/ John T. FitzgeraldJohn T. FitzgeraldChief Executive Officer, President and DirectorFebruary 28, 2022 /s/ Kent A. HansenKent A. HansenChief Financial Officer and Executive Vice President(principal financial officer and principal accounting officer)February 28, 2022 /s/ Terence KavanaghTerence KavanaghChairman of the Board and DirectorFebruary 28, 2022 /s/ Gregory HannonGregory HannonDirectorFebruary 28, 2022 /s/ Doug LevineDoug LevineDirectorFebruary 28, 2022 /s/ Corissa PorcelliCorissa PorcelliDirectorFebruary 28, 2022 /s/ Joseph StilwellJoseph StilwellDirectorFebruary 28, 2022 116Exhibit 21 Subsidiaries of Kingsway Financial Services Inc. SubsidiariesJurisdiction of Incorporation/Organization Kingsway America II Inc.Delaware1347 Advisors LLCDelawareArgo Holdings Fund I, LLCDelawareArgo Management Group, LLCDelawareCMC Acquisition LLCDelawareCMC Industries Inc.TexasTexas Rail Terminal LLCDelawareTRT Leaseco, LLCDelawareFlower Portfolio 001, LLCDelawareKingsway America Inc.DelawareKingsway Amigo Insurance CompanyFloridaKingsway General Insurance CompanyOntarioKingsway LGIC Holdings, LLCDelawareKingsway Reinsurance CorporationBarbadosKingsway Warranty Holdings LLCDelawareGeminus Holding Company, Inc.DelawarePrime Auto Care Inc.DelawareThe Penn Warranty CorporationPennsylvaniaGeminus Reinsurance Company, LTD.Turks and CaicosIWS Acquisition CorporationFloridaPWI Holdings, Inc.PennsylvaniaPreferred Warranties, Inc.PennsylvaniaPreferred Warranties of Florida, Inc.FloridaPreferred Nationwide Reinsurance Company, Ltd.Turks and CaicosSuperior Warranties, Inc.PennsylvaniaTrinity Warranty Solutions LLCDelawareNet Lease Investment Grade Portfolio LLCDelawareProfessional Warranty Services LLCDelawareProfessional Warranty Service CorporationVirginiaRavix Acquisition LLCDelawareRavix Financial, Inc.DelawareRoeco Lafayette, LLCDelawareSearch Fund Inc.Delaware Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Kingsway Financial Services Inc.’s Registration Statements on Form S-8 (File Nos. 333-249266, 333-228286, 333-196633and 333-194108) of our report dated February 28, 2022, relating to the December 31, 2021 and 2020 consolidated financial statements which appears in KingswayFinancial Services Inc.’s Form 10-K for the year ended December 31, 2021. /s/ Plante & Moran PLLC February 28, 2022Denver, CO EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, John T. Fitzgerald, certify that: 1. I have reviewed this report on Form 10-K of Kingsway Financial Services Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (theregistrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internalcontrol over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant'sauditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverselyaffect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financialreporting. Date: February 28, 2022 By /s/ John T. Fitzgerald John T. Fitzgerald, President and Chief Executive Officer (Principal Executive Officer) EXHIBIT 31.2 CERTIFICATION Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Kent A. Hansen, certify that: 1. I have reviewed this Form 10-K of Kingsway Financial Services Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (theregistrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internalcontrol over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant'sauditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financialreporting. Date: February 28, 2022 By /s/ Kent A. Hansen Kent A. Hansen, Chief Financial Officer and Executive Vice President (Principal Financial Officer) EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Kingsway Financial Services Inc. (the “Company”) for the year ended December 31, 2021 as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), the undersigned John T. Fitzgerald, the President and Chief Executive Officer and PrincipalExecutive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, tothe best of the undersigned's knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 28, 2022 By /s/ John T. Fitzgerald John T. Fitzgerald, President and Chief Executive Officer (Principal Executive Officer) EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Kingsway Financial Services Inc. (the “Company”) for the year ended December 31, 2021 as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), the undersigned Kent A. Hansen, the Chief Financial Officer and Principal Financial Officer ofthe Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of theundersigned's knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 28, 2022 By /s/ Kent A. Hansen Kent A. Hansen, Chief Financial Officer and Executive Vice President (Principal Financial Officer)

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