# KINGSWAY Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [KINGSWAY Corp](/companies/kwy.md) (CIK 1072627)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 16:01 ET
- Period: 2023-09-30
- Accession: 0001437749-23-030641
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1072627/000143774923030641/kfs20230930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1072627/000143774923030641/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $24.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $77.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$208.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $1.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $5.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$102.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $810.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$675.0k | us-gaap:ProfitLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $25.5m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.97 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 26,239,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 25,941,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$9.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $802.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $20.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $198.0m | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $169.9m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $40.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $31.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 74,263 characters.

### FORWARD-LOOKING STATEMENTS

Management's Discussion and Analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “seeks” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect Kingsway management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see Kingsway’s securities filings, including its Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Annual Report"). The Company's securities filings can be accessed on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov, on the Canadian Securities Administrators’ website at www.sedar.com or through the Company’s website at www.kingsway-financial.com. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements because of new information, future events or otherwise.

### OVERVIEW

Kingsway is a Delaware holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty and business services industries. Kingsway conducts its business through two reportable segments: Extended Warranty and Kingsway Search Xcelerator.

Prior to the fourth quarter of 2022, the Company conducted its business through a third reportable segment, Leased Real Estate. Leased Real Estate included the following subsidiaries of the Company: CMC Industries, Inc. ("CMC") and VA Lafayette, LLC ("VA Lafayette").

- CMC owned, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property"), which is subject to a long-term triple net lease agreement. The Real Property is also subject to two mortgages. On December 22, 2022, the Company announced a definitive agreement for the sale of the Real Property, for gross cash proceeds of $44.5 million and the assumption of the mortgages. On December 29, 2022, the sale was completed.
- VA Lafayette 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 Louisiana (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 (the "LA Mortgage"). During the fourth quarter of 2022, the Company began executing a plan to sell VA Lafayette, and as a result, VA Lafayette is reported as held for sale at September 30, 2023 and December 31, 2022.
- Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported separately for all periods presented. See Note 5, "Acquisitions, Disposal and Discontinued Operations," to the unaudited consolidated interim financial statements for further discussion. All segmented information has been restated to exclude the Leased Real Estate segment for all periods presented.

Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Geminus Holding Company, Inc. ("Geminus"), PWI Holdings, Inc. ("PWI"), Professional Warranty Service Corporation ("PWSC") and Trinity Warranty Solutions LLC ("Trinity"). As discussed in Note 5, "Acquisitions, Disposal and Discontinued Operations," to the unaudited consolidated interim financial statements, the Company disposed of PWSC on July 29, 2022. The earnings of PWSC are included in the unaudited interim consolidated statements of operations and the segment disclosures through the disposal date. Throughout Management's Discussion and Analysis, the term "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 in25 states and the District of Columbia to their members, with customers in all fifty states.

Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 46 and 42 states, respectively, via independent used car dealerships and franchised car dealerships.

PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a white label agreement. PWI also has a "white label" agreement with Classic to sell a guaranteed asset protection product ("GAP") in states that Classic is approved in.

PWSC sold home warranty products and provided administration services to homebuilders and homeowners across the United States. PWSC distributed its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.

Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.

Kingsway Search Xcelerator includes the Company's subsidiaries, CSuite Financial Partners, LLC ("CSuite"), Ravix Financial, Inc. ("Ravix"), Secure Nursing Service LLC ("SNS") and Systems Products International, Inc. ("SPI"). Throughout Management's Discussion and Analysis, the term the term "Kingsway Search Xcelerator" is used to refer to this segment.

CSuite provides financial executive services, for project and interim-staffing engagements, and search services for full-time placements for customers throughout the United States.

Ravix provides outsourced financial services and human resources consulting for short or long duration engagements for customers in several states.

SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily in California.

SPI provides software products created exclusively to serve the management needs of all types of shared-ownership properties throughout the United States, Mexico and the Caribbean.

### NON-U.S. GAAP FINANCIAL MEASURE

Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. Our unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. In addition to the U.S. GAAP presentation of net (loss) income, we present segment operating income as a non-U.S. GAAP financial 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 measure and its relationship to U.S. GAAP.

### Segment Operating Income

Segment operating income represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses are presented in the unaudited consolidated statements of operations, but are not subtotaled by segment; however, this information is available in total and by segment in Note 20, "Segmented Information," to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure to total segment operating income is (loss) income from continuing operations before income tax (benefit) expense that, in addition to segment operating income, includes net investment income, net realized gains, net gain (loss) on equity investments, gain on change in fair value of limited liability investments, at fair value, net change in unrealized gain on private company investments, gain on change in fair value of real estate investments, impairment losses, gain (loss) on change in fair value of derivative asset option contracts, interest expense, other revenue and expenses not allocated to segments, net, amortization of intangible assets, loss on change in fair value of debt, gain on disposal of subsidiary and gain on extinguishment of debt. A reconciliation of total segment operating income to (loss) income from continuing operations before income tax (benefit) expense for the three and nine months ended September 30, 2023 and September 30, 2022 is presented below in Table 1 of the "Results of Continuing Operations" section of Management's Discussion and Analysis.

### SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

The preparation of unaudited consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined.

The 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 require the 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 critical accounting policies and judgments in the accompanying unaudited consolidated interim financial statements include revenue recognition; valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of deferred income taxes; accounting for business combinations and asset acquisitions; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred contract costs; fair value assumptions for subordinated debt obligations; fair value assumptions for subsidiary stock-based compensation awards; fair value assumptions for derivative financial instruments; and contingent consideration. 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.

The Company’s significant accounting policies and critical estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2022 Annual Report. There has been no material change subsequent to December 31, 2022 to the information previously disclosed in the 2022 Annual Report with respect to these significant accounting policies and critical estimates.

### RESULTS OF CONTINUING OPERATIONS

A reconciliation of total segment operating income to net (loss) income for the three and nine months ended September 30, 2023 and September 30, 2022 is presented in Table 1 below:

### Table 1 Segment Operating Income

(in thousands of dollars)

| Segment operating income: | For the three months ended September 30, 2023 | 2022 | Change | For the nine months ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Extended Warranty | $1,778 | $2,461 | $(683) | $4,602 | $7,120 | $(2,518) |
| Kingsway Search Xcelerator | 1,003 | 723 | 280 | 4,196 | 2,422 | 1,774 |
| Total segment operating income | 2,781 | 3,184 | (403) | 8,798 | 9,542 | (744) |
| Net investment income | 351 | 463 | (112) | 1,419 | 1,547 | (128) |
| Net realized gains | 206 | 797 | (591) | 539 | 1,035 | (496) |
| Net gain (loss) on equity investments | 592 | (5) | 597 | 3,374 | (53) | 3,427 |
| Gain on change in fair value of limited liability investments, at fair value | 320 | 195 | 125 | 194 | 368 | (174) |
| Net change in unrealized gain on private company investments | 63 | — | 63 | 63 | — | 63 |
| Gain on change in fair value of real estate investments | — | 1,488 | (1,488) | — | 1,488 | (1,488) |
| Impairment losses | (71) | — | (71) | (166) | — | (166) |
| Gain (loss) on change in fair value of derivative asset option contracts | — | 13,498 | (13,498) | (1,366) | 13,498 | (14,864) |
| Interest expense | (1,061) | (2,139) | 1,078 | (5,119) | (5,207) | 88 |
| Other revenue and expenses not allocated to segments, net | (2,833) | (7,242) | 4,409 | (9,279) | (13,488) | 4,209 |
| Amortization of intangible assets | (1,424) | (1,358) | (66) | (4,252) | (4,242) | (10) |
| Loss on change in fair value of debt | (165) | (1,794) | 1,629 | (195) | (4,992) | 4,797 |
| Gain on disposal of subsidiary | 342 | 37,917 | (37,575) | 342 | 37,917 | (37,575) |
| Gain on extinguishment of debt | — | — | — | 31,616 | — | 31,616 |
| (Loss) income from continuing operations before income tax (benefit) expense | (899) | 45,004 | (45,903) | 25,968 | 37,413 | (11,445) |
| Income tax (benefit) expense | (102) | 6,061 | (6,163) | 810 | 5,620 | (4,810) |
| (Loss) income from continuing operations | (797) | 38,943 | (39,740) | 25,158 | 31,793 | (6,635) |
| Income from discontinued operations, net of taxes | 122 | 830 | (708) | 339 | 3,111 | (2,772) |
| Loss on disposal of disposal of discontinued operations, net of taxes | — | (2,500) | 2,500 | — | (2,500) | 2,500 |
| Net (loss) income | $(675) | $37,273 | $(37,948) | $25,497 | $32,404 | $(6,907) |

### Segment Operating Income, (Loss) Income from Continuing Operations and Net (Loss) Income

In the third quarter of 2023, we reported segment operating income of $2.8 million, a decrease of $0.4 million from the same period in 2022 ($8.8 million year to date, a decrease of $0.7 million compared to prior year to date). The decrease for the three and nine months ended September 30, 2023 is primarily due to the following items:

- The disposal of PWSC as of July 29, 2022, which had segment operating loss of $0.1 million in the third quarter of 2022 (segment operating income of $1.0 million prior year to date); and
- Decreased operating income at the other Extended Warranty subsidiaries; which was partially offset by
- Increased operating income from Kingsway Search Xcelerator, primarily due to including CSuite and SNS for the third quarter and nine months of 2023 (both were acquired in November 2022). CSuite and SNS had combined operating income of $0.2 million and $1.5 million for the three and nine months ended September 30, 2023, respectively.

In the third quarter of 2023, we reported loss from continuing operations of $0.8 million compared to income from continuing operations of $38.9 million in the third quarter of 2022. The loss from continuing operations for the three months ended September 30, 2023is primarily due to:

- Interest expense; and
- Other revenue and expenses not allocated to segments, net; partially offset by
- Segment operating income.

The income from continuing operations for the three months ended September 30, 2022 is primarily due to a gain on disposal of subsidiary of $37.9 million, related to the sale of PWSC, a gain on change in fair value of derivative asset option contracts of $13.5 million, related to the trust preferred debt repurchase options, and segment operating income; all of which was partially offset by other revenue and expenses not allocated to segments, net. See Note 5, "Acquisitions, Disposal and Discontinued Operations" and Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further discussion of the PWSC disposal and trust preferred debt repurchase options.

For the nine months ended September 30, 2023, we reported income from continuing operations of $25.2 million compared to $31.8 million for the nine months ended September 30, 2022. The income from continuing operations for the nine months ended September 30, 2023 is primarily due to:

- A gain on extinguishment debt of $31.6 million, related to the repurchase of the trust preferred debt; and
- Gain on equity investments, which includes a gain of $3.3 million related to the Company's investment in Limbach Holdings, Inc. ("Limbach"); which was partially offset by
- Other revenue and expenses not allocated to segments, net, which includes a management fee expense of $1.8 million paid to the managers of Flower Portfolio 001, LLC ("Flower") and Net Lease Investment Grade Portfolio LLC ("Net Lease").

See Note 11, "Debt" and Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further discussion of the repurchase of the trust preferred debt and trust preferred debt repurchase options.

The income from continuing operations for the nine months ended September 30, 2022 is primarily due to gain on disposal of subsidiary of $37.9 million, related to the sale of PWSC, gain on change in fair value of derivative asset option contracts of $13.5 million, related to the trust preferred debt repurchase options, and segment operating income, that was partially offset by interest expense, other revenue and expenses not allocated to segments, net, which includes a $6.1 million of expense related to previously-granted awards to PWSC employees that are accounted for on a fair value basis and $1.5 million of expense due to the increase in fair value of the Ravix contingent consideration, loss on change in fair value of debt and income tax expense which is primarily due to the state tax expense associated with the sale of PWSC on July 29, 2022 and the related increase in valuation allowance from the accelerated utilization of indefinite life interest expense carryforwards as a result of such sale.

In the third quarter of 2023, we reported anet lossof $0.7 million compared to net income of $37.3 million in the third quarter of 2022 (net income of $25.5 million year to date compared to $32.4 million prior year to date). In addition to the items described above impacting (loss) income from continuing operations, the net (loss) income includes:

- Income from discontinued operations, net of taxes of $0.1 million and $0.8 million for the three months ended September 30, 2023 and September 30, 2022, respectively ($0.3 million and $3.1 million year to date and prior year to date, respectively); and
- A loss on disposal of discontinued operations, net of taxes of $2.5 million for the three and nine months ended September 30, 2022.

The income from discontinued operations is related to the operations of CMC, solely with respect to the three and nine months ended September 30, 2022, and VA Lafayette. The loss on disposal of discontinued operations is related to a liability recorded at September 30, 2022 regarding the Company's obligation to indemnify a former subsidiary for open claims. See Note 5, "Acquisitions, Disposal and Discontinued Operations," to the unaudited consolidated interim financial statements, for further discussion.

### Extended Warranty

The Extended Warranty service fee and commission revenue decreased 7.0% (or $1.3 million) to $17.3 million for the three months ended September 30, 2023 compared with $18.6 million for the three months ended September 30, 2022 ($51.0 million year to date compared to $56.3 million prior year to date). Our auto Extended Warranty companies continue to be impacted by payment pressures incurred by consumers as a result of a higher interest rate environment and continued higher-than-expected price of used automobiles. While the price of used automobiles has fallen since the beginning of 2023, the declines for the end consumer are not occurring as quickly as anticipated. Service fee and commission revenue was impacted by the following for the three and nine months ended September 30, 2023:

- A $0.7 million decrease at PWSC for the three months ended September 30, 2023 (a decrease of $4.9 million year to date), due to the sale of PWSC on July 29, 2022;
- A $0.5 million decrease at Trinity for the three months ended September 30, 2023 (a decrease of $2.1million year to date), primarily driven by decreases in its equipment breakdown and maintenance support services due to mild weather conditions, which results in fewer service calls, as well as long lead times on parts and installations;
- A $0.15 million decrease at Geminus for the three months ended September 30, 2023 (essentially flat year to date);
- A $0.1 million decrease at IWS for the three months ended September 30, 2023 (an increase of $1.1 million year to date). IWS sells a substantial amount of VSAs for new automobiles but, more importantly, its products are distributed through credit unions at the point of vehicle financing, which has been less impacted by the current macro-economic conditions. However, in 2023 IWS has been impacted by the loss of two customers (one due to acquisition, one due to change in management), which was partially offset by growth at new and existing customers, the latter usually due to credit unions getting competitive on interest rates. During the first quarter of 2022, there was a change in estimate of IWS’ deferred revenue associated with vehicle service contract fees, which resulted in a reduction to IWS revenue of $1.2 million; and
- A $0.1 million increase at PWI for the three months ended September 30, 2023 (an increase of $0.5 million year to date). In the second half of 2022, there was a restructuring of leadership at PWI that has resulted in a higher focus on salesforce production.

The Extended Warranty operating income was $1.8 million for the three months ended September 30, 2023 compared with $2.5 million for the three months ended September 30, 2022. ($4.6 million year to date compared to $7.1 million prior year to date). We saw an increase in claims paid at our auto Extended Warranty companies – both sequentially and year over year – primarily due to inflationary pressures on the cost of parts and labor. While the third quarter 2023 claims were up from the same period prior year, claims were lower than the second quarter of 2023, and the increase over prior year was less than the increase of second quarter 2023 over the second quarter of 2022.

Operating income was primarily impacted by the following:

- A $0.1 million increase at PWSC for the three months ended September 30, 2023 (a decrease of $0.9 million year to date), due to the sale of PWSC on July 29, 2022;
- A $0.3 million decrease at Trinity to $0.3 million for the three months ended September 30, 2023 (a decrease of $0.5 million year to date to $0.8 million), primarily due to a decrease in revenue that was partially offset by a decrease in cost of services sold;
- A $0.2 million decrease at Geminus to $0.1 million for the three months ended September 30, 2023 (a decrease of $0.5 million year to date to $0.4 million), due to an increase in commission expense and claims authorized on vehicle service agreements. General and administrative expenses were down slightly both quarter to date and year to date;
- A $0.2 million decrease at PWI to $0.4 million for the three months ended September 30, 2023 (a decrease of $0.5 million year to date to $1.1 million). The operating income for the three and nine months ended September 30, 2023 was impacted by higher claims expense and commission expense compared with the same periods in 2022, which more than offset the benefits from significantly lower general and administrative expenses; and
- A $0.2 million decrease at IWS to $0.9 million for the three months ended September 30, 2023 (a decrease of less than $0.1 million year to date to $2.3 million). The decrease for the quarter is primarily due to increased claims authorized on vehicle service agreements. General and administrative expenses were essentially flat quarter to date and down slightly year to date. During the first quarter of 2022, there was a change in estimate of IWS' deferred revenue and deferred contract costs associated with vehicle service contract fees, which resulted in a reduction to IWS operating income of $0.9 million for the nine months ended September 30, 2022.

### Kingsway Search Xcelerator

The Kingsway Search Xcelerator revenue increased to $7.5 million for the three months ended September 30, 2023 compared to $3.8 million for the three months ended September 30, 2022 ($26.4 million year to date compared to $12.1 million prior year to date). Kingsway Search Xcelerator operating income was $1.0 million for the three months ended September 30, 2023 compared to $0.7 million for the three months ended September 30, 2022 ($4.2 million year to date compared to $2.4 million prior year to date). The increase in revenue and operating income is primarily due to:

- Organic growth at Ravix. While revenue was down $0.4 million for the for the three months ended September 30, 2023 compared to the same period in 2022 (down $1.1 million year to date); gross margin and operating income increased $0.1 million for the three months ended September 30, 2023 ($0.3 million year to date); and
- The inclusion of CSuite and SNS for the three and nine months of 2023 following their acquisitions effective November 1, 2022 and November 18, 2022, respectively.

### Net Investment Income

Net investment income was $0.4 million in the third quarter of 2023 compared to $0.5 million in the third quarter of 2022 ($1.4 million year to date compared to $1.5 million prior year to date). The decrease in net investment income for the three months ended September 30, 2023 primarily relates to the decrease in investment income from real estate investments, partially offset by higher investment income from fixed maturities as a result of general changes in market conditions. The decrease in net investment income for the nine months ended September 30, 2023 primarily relates to the decrease in investment income from real estate investments and limited liability investments, partially offset by higher investment income from cash equivalents and fixed maturities as a result of general changes in market conditions.

### Net Realized Gains

Net realized gains were $0.2 million in the third quarter of 2023 compared to $0.8 million in the third quarter of 2022 ($0.5 million year to date compared to $1.0 million prior year to date). The net realized gains for the three months ended September 30, 2023 primarily relate to realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings"). The net realized gains for the nine months ended September 30, 2023 primarily relate to realized gains recognized by Argo Holdings and net realized gains on sales of limited liability investments. The net realized gains for the three and nine months ended September 30, 2022 primarily relate to realized gains recognized by Argo Holdings, net realized gains on sales of limited liability investments 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 a result of prior distributions.

### Net Gain (Loss) on Equity Investments

Gain on equity investments was $0.6 million in the third quarter of 2023 compared to a loss of less than $0.1 million in the third quarter of 2022 (gain of $3.4 million year to date compared to a loss of $0.1 million prior year to date). The gain for the three and nine months ended September 30, 2023 primarily relates to the Company's investment in Limbach. Prior to the second quarter of 2023, the Company held warrants in Limbach. During the first quarter of 2023, the underlying common stock price of Limbach increased, resulting in an increase in the fair value of the warrants held at March 31, 2023. During the second quarter of 2023, the Company completed a cashless exercise of its Limbach warrants. During the third quarter of 2023, the Company sold all of its shares of Limbach common stock.

### 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 $0.3 million in the third quarter of 2023 compared to $0.2 million in the third quarter of 2022 ($0.2 million year to date compared to $0.4 million prior year to date). The gain for the three months ended September 30, 2023 represents an increase in fair value related to Argo Holdings. The gain for the three months ended September 30, 2022 represents an increase in fair value of $0.4 million related to Net Lease, partially offset by a decrease in fair value of $0.2 million related to Argo Holdings.

The gain for the nine months ended September 30, 2023 represents an increase in fair value of $0.8 million related to Argo Holdings, partially offset by a decrease in fair value of $0.6 million related to Net Lease. The gain for the nine months ended September 30, 2022 represents an increase in fair value of 1.2 million related to Net Lease, partially offset by a decrease in fair value of $0.8 million related to Argo Holdings.

During the second quarter of 2023, the Company recorded the sale of Net Lease's final investment property. As a result of the sale, the Company's investment in Net Lease is zero at September 30, 2023.

### Gain on Change in Fair Value of Real Estate Investments

Gain on change in fair value of real estate investments was $1.5 million for the three and nine months ended September 30, 2022 . Real estate investments represented investment real estate properties held by the Company’s consolidated subsidiary, Flower. The Company consolidated the financial statements of Flower on a three-month lag. The increase in fair value was attributable to the sale of the real estate investment properties for $12.2 million, which closed on September 29, 2022. As a result of the three-month lag, the Company recorded the sale transaction in its fourth quarter 2022 financial statements.

### Gain (Loss) on Change in Fair Value of Derivative Asset Option Contracts

Gain on change in fair value of derivative asset option contracts was zero i n the third quarter of 2023 compared to $13.5 million in the third quarter of 2022 (a loss of $1.4 million year to date compared to a gain of $13.5 million prior year to date). The derivative contract relates to three trust preferred debt repurchase option agreements the Company entered into during the third quarter of 2022. The Company exercised the repurchase options during the first quarter of 2023. The gain for the three and nine months ended September 30, 2022 relates to the $11.4 million difference between the fair value of the option at date of inception (13.7 million) and the cash consideration paid ($2.3 million), as well as the subsequent change in fair value of $2.1 million as of September 30, 2022.

Refer to Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further information on the option agreements.

### Interest Expense

Interest expense for the third quarter of 2023 was $1.1 million compared to $2.1 million in the third quarter of 2022 ($5.1 million year to date compared to $5.2 million prior year to date). Interest expense was impacted by the following for the three and ninemonths ended September 30, 2023:

- A decrease of $1.5 million for the three months ended September 30, 2023 ($1.4 million year to date) on the Company’s subordinated debt. During the first quarter of 2023, the Company repurchased TruPs debt having a principal amount of $75.5 million. As a result, the interest expense for the third quarter of 2023 relates only to the one remaining TruPs debt instrument outstanding. The decrease for the year to date primarily resulted from the repurchase of the TruPs debt during the first quarter of 2023 (resulting in 2023 year to date interest expense including only the one remaining TruPs debt instrument outstanding during the second and third quarters of 2023), partially offset by generally higher London interbank offered interest rates ("LIBOR") for three-month U.S. dollar deposits during the nine months of 2023 compared to the same period in 2022. The Company's subordinated debt bore interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. Effective July 3, 2023, the index used for determining the interest rate for the remaining trust preferred debt instrument converted from LIBOR to CME Term SOFR;
- An increase of $0.1 million for the three months ended September 30, 2023 ($0.6 million year to date), related to the 2020 KWH Loan, as a result of a decrease in fair value of the interest rate swap related to the 2020 KWH bank loan;
- An increase of $0.1 million for the three months ended September 30, 2023 ($0.4 million year to date), related to the $6.5 million SNS Loan, which was effective November 18, 2022 and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 9.00%);
- An increase of $0.1 million for the three months ended September 30, 2023 ($0.4 million year to date), related to the $6.0 million 2022 Ravix Loan, which was effective November 16, 2022 and has an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 9.25%);
- An increase of less than $0.1 million for the three months ended September 30, 2023 ($0.1 million year to date) related to the 2021 Ravix Loan, which was effective October 1, 2021, and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 9.00%); and
- A decrease of $0.1 million for the three months ended September 30, 2023 ($0.2 million year to date) related to notes payable held by the Company’s consolidated subsidiary, Flower. The Flower debt was repaid in the third quarter of 2022.

See "Debt" section below for further details.

### Other Revenue and Expenses not Allocated to Segments, Net

Other revenue and expenses not allocated to segments, net was a net expense of $2.8 million in the third quarter of 2023 compared to $7.2 million in the third quarter of 2022 ($9.3 million year to date compared to $13.5 million prior year to date). Included are revenue and expenses associated with our various other investments that are accounted for on a consolidated basis, our former insurance company that has been in run-off since 2012, and expenses associated with our corporate holding company.

The decrease in net expense for the three months ended September 30, 2023 is primarily attributable to a decrease in stock-based compensation expense of $5.0 million related to previously-granted awards to PWSC employees (PWSC was sold in July 2022), partially offset by an increase in healthcare benefit expenses during the third quarter of 2023 compared to the same period in 2022.

The decrease in net expense for the nine months ended September 30, 2023 is primarily attributable to decreases in stock-based compensation expense of $6.1 million related to previously-granted awards to PWSC employees and expense related to the Ravix contingent consideration liability, partially offset by increases due to management fees paid to the managers of Flower and Net Lease, healthcare benefit expense and acquisition related expenses during the nine months ended September 30, 2023 compared to the same period in 2022.

### Loss on Change in Fair Value of Debt

Loss on change in fair value of debt was $0.2 million in the third quarter of 2023 compared to $1.8 million in the third quarter of 2022 ($0.2 million year to date compared to $5.0 million prior year to date). During the first quarter of 2023, the Company repurchased TruPs debt having a principal amount of $75.5 million. The change in fair value related to the repurchased TruPs debt was a gain of $0.3 million and the change in fair value related to the remaining TruPs debt instrument was a loss of $0.5 million during the nine months ended September 30, 2023.

The loss for three and nine months ended September 30, 2023 and September 30, 2022 reflects changes in the fair value of the subordinated debt resulting primarily from changes in interest rates used (not related to instrument-specific credit risk). The following summarizes the impacts:

| Impact of Rate Change on Fair Value | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Nine months ended September 30, 2023 | Nine months ended September 30, 2022 |
| --- | --- | --- | --- | --- |
|  | **Result** | **Result** | **Result** | **Result** |
| LIBOR: |  |  |  |  |
| increase causes fair value to increase; decrease causes fair value to decrease | Increase to fair value | Increase to fair value | Increase to fair value | Increase to fair value |
| Risk free rate: |  |  |  |  |
| increase causes fair value to decrease; decrease causes fair value to increase | Increase to fair value | Decrease to fair value | Decrease to fair value | Decrease to fair value |

See "Debt" section below for further information.

### Gain on Disposal of Subsidiary

On July 29, 2022, the Company sold its 80% majority-owned subsidiary, PWSC. As a result of the sale, the Company recognized a net gain on disposal of $37.9 million during the three and nine months ended September 30, 2022. During three and nine months ended September 30, 2023, the Company recorded an additional gain on disposal of PWSC of $0.3 million related to the working capital true-up and release of indemnity funds that were held in escrow. The sale of PWSC did not represent a strategic shift that will have a major effect on the Company's operations or financial results; therefore, PWSC is not presented as a discontinued operation.

See Note 5, "Acquisitions, Disposal and Discontinued Operations," to the unaudited consolidated interim financial statements, for further discussion of the PWSC disposal.

### Gain on Extinguishment of Debt

For the nine months ended September 30, 2023, gain on extinguishment of debt consists of a $31.6 million gain related to the repurchase of TruPs debt having a principal amount of $75.5 million. The gain on extinguishment of debt results from removing the fair value of the debt, trust preferred debt repurchase options, deferred interest payable and accumulated other comprehensive income related to the repurchased TruPs from the Company's consolidated balance sheet at the repurchase date. See Note 11 "Debt," to the unaudited consolidated interim financial statements, for further discussion.

### Income Tax (Benefit) Expense

Income tax benefit for the third quarter of 2023 was $0.1 million compared to an expense of $6.1 million in the third quarter of 2022 (expense of $0.8 million year to date compared to expense of $5.6 million prior year to date). For the three months ended September 30, 2023, the Company reported income tax benefit primarily due to the partial release of its valuation allowance related to deferred tax liabilities from acquisitions. For the nine months ended September 30, 2023, the Company reported income tax expense primarily due to state tax expense. For the three and nine months ended September 30, 2022, the Company reported income tax expense primarily due to the state tax expense associated with the sale of PWSC during the period and the related increase in valuation allowance from the accelerated utilization of indefinite life interest expense carryforwards as a result of such sale. See Note 14, "Income Taxes," to the unaudited consolidated interim financial statements, for additional detail of the income tax (benefit) expense recorded for the three and nine months ended September 30, 2023 and September 30, 2022.

### INVESTMENTS

### Portfolio Composition

See Note 2(d), "Summary of Significant Accounting Policies - Investments," to the consolidated financial statements in the 2022 Annual Report for an overview of how we account for our various investments.

At September 30, 2023, we held cash and cash equivalents, restricted cash and investments with a carrying value of $70.8 million. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.

Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated.

### TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash

(in thousands of dollars, except for percentages)

| Type of investment Fixed maturities: | September 30, 2023 | % of Total | December 31, 2022 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government, government agencies and authorities | 12,904 | 18.2% | 15,080 | 11.2% |
| States, municipalities and political subdivisions | 2,820 | 4.0% | 2,232 | 1.7% |
| Mortgage-backed | 8,631 | 12.2% | 8,412 | 6.3% |
| Asset-backed | 1,350 | 1.9% | 1,610 | 1.2% |
| Corporate | 10,110 | 14.3% | 10,257 | 7.6% |
| Total fixed maturities | 35,815 | 50.6% | 37,591 | 28.1% |
| Equity investments - common stock | 205 | 0.3% | 153 | 0.1% |
| Limited liability investments | 816 | 1.2% | 983 | 0.7% |
| Limited liability investments, at fair value | 3,599 | 5.1% | 17,059 | 12.7% |
| Investments in private companies | 854 | 1.2% | 790 | 0.6% |
| Other investments | 69 | 0.1% | 201 | 0.2% |
| Short-term investments | 160 | 0.2% | 157 | 0.1% |
| Total investments | 41,518 | 58.6% | 56,934 | 42.4% |
| Cash and cash equivalents | 20,183 | 28.5% | 64,168 | 47.9% |
| Restricted cash | 9,103 | 12.9% | 13,064 | 9.7% |
| Total | 70,804 | 100.0% | 134,166 | 100.0% |

### Investment Impairment

The Company's fixed maturities are subject to declines in fair value below amortized cost that may result in the recognition of impairment losses in net (loss) income. Factors considered in the determination of whether or not an impairment loss is recognized in net (loss) income include a current intention or need to sell the security or an indication that a credit loss exists.

Effective January 1, 2023, as a result of the adoption of ASU 2016-13, if the decline in fair value is due to credit factors and the Company does not expect to receive cash flows sufficient to support the entire amortized cost basis, the credit loss is reported in the consolidated statements of operations in the period that the declines are evaluated. Significant judgment is required in the determination of whether a credit loss has occurred for a security. The Company considers all available evidence when determining whether a security requires a credit allowance to be recorded, including the financial condition and expected near-term and long term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions, industry, sector or other specific factors and whether the Company expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company performs a quarterly analysis of its available-for-sale fixed maturity investments and other investments to determine if an impairment loss has occurred. As a result of the analysis performed, the Company recorded an impairment loss related to other investments of less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2023. There were no impairment losses recorded related to available-for-sale fixed maturity investments during the three and nine months ended September 30, 2023.

Prior to the adoption of ASU 2016-13, the Company performed a quarterly analysis of its available-for-sale fixed maturity investments and other investments to determine if declines in market value were other-than-temporary. See the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2022 Annual Report for further information regarding the Company's detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment. As a result of the analysis performed, there were no write downs for other-than-temporary impairment related to fixed maturity investments and other investments for the three and nine months ended September 30, 2022.

The Company recorded write downs for other-than-temporary impairment related to limited liability investments of $0.1 million and zero for the three months ended September 30, 2023 and September 30, 2022, respectively ($0.1 million and zero for the nine months ended September 30, 2023 and September 30, 2022, respectively), which are included in impairment losses in the consolidated statements of operations.

The Company recorded write downs for other-than-temporary impairment related to limited liability investments, at fair value of zero for the three months ended September 30, 2023 and September 30, 2022, respectively ($0.1 million and less than $0.1 million for the nine months ended September 30, 2023 and September 30, 2022, respectively), which are included in gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations.

At September 30, 2023 and December 31, 2022, the gross unrealized losses for fixed maturities amounted to $2.5 million and $2.5 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities.

### DEBT

See Note 11, "Debt," to the unaudited consolidated interim financial statements for further details to those provided below.

### Bank Loans

In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries at the time included IWS, Geminus and Trinity. As part of the acquisition of PWI on December 1, 2020, PWI became a wholly owned subsidiary of KWH, which borrowed a principal amount of $25.7 million from a bank to partially finance its acquisition of PWI and to fully repay the prior outstanding loan at KWH (the "2020 KWH Loan"). The 2020 KWH Loan had an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 2.75%. During the second quarter of 2022, the 2020 KWH Loan was amended to change the annual interest rate to be equal to the Secured Overnight Financing Rate ("SOFR"), having a floor of 0.75%, plus spreads ranging from 2.62% to 3.12%. At September 30, 2023, the interest rate was 8.20%. The 2020 KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The 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 of which are as defined in and calculated pursuant to the 2020 KWH Loan that, among other things, restrict KWH’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.

On February 28, 2023, KWH entered into a second amendment to the 2020 KWH Loan (the “KWH DDTL”) that provides for an additional delayed draw term loan in the principal amount of up to $10.0 million, with a maturity date of December 1, 2025. All or any portion of the KWH DDTL, subject to a $2 million minimum draw amount, may be requested at any time through February 27, 2024. The proceeds are evidenced by an intercompany loan and guarantee between KAI and KWH. Proceeds from certain assets dispositions, as defined, may be required to be used to repay outstanding draws under the DDTL. The principal amount shall be repaid in quarterly installments in an amount equal to 3.75% of the original amount of the drawn DDTL. The KWH DDTL also increases the senior cash flow leverage ratio maximum permissible for certain periods. The Company did not draw down on the KWH DDTL during the nine months ended September 30, 2023.

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 borrowed from 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 "2021 Ravix Loan"). The 2021 Ravix Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 9.00%) and is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The term loan matures on October 1, 2027.

Subsequent to the acquisition of CSuite on November 1, 2022, CSuite became a wholly owned subsidiary of Ravix LLC. As a result of the acquisition of CSuite, on November 16, 2022, the 2021 Ravix Loan was amended to (1) include CSuite as a borrower; (2) borrow an additional principal amount of $6.0 million in the form of a supplemental term loan (the "2022 Ravix Loan"); and (3) amend the maturity date and interest rate of the $1.0 million revolver (the "2022 Revolver"). The 2022 Ravix Loan matures on November 16, 2028 and has an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 9.25%) and is carried in the consolidated balance sheets at its unpaid principal balance. The 2022 Revolver matures on November 16, 2024 and has an annual interest rate equal to the Prime Rate plus 0.50%.

The 2021 Ravix Loan and 2022 Ravix Loan contain 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 calculated pursuant to the 2021 Ravix Loan and 2022 Ravix Loan that, among other things, restrict Ravix and CSuite’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 asset acquisition of SNS on November 18, 2022, the Company formed Secure Nursing Service LLC, who became a wholly owned subsidiary of Pegasus Acquirer Holdings LLC ("Pegasus LLC"), and together they borrowed from a bank a principal amount of $6.5 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of SNS (together, the "SNS Loan"). The SNS Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 9.00%) and is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly amortization of the debt discount and issuance costs using the effective interest rate method. The term loan matures on November 18, 2028 and revolver matures on November 18, 2023.

The SNS Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio and limits on annual capital expenditures, all of which are as defined in and calculated pursuant to the SNS Loan that, among other things, restrict SNS’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.

### Subordinated Debt

Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by Kingsway America Inc. to the trust in exchange for the proceeds from the private sale. The floating rate debentures bore interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. Effective July 3, 2023, the index used for determining the interest rate for the remaining trust preferred debt instrument converted from LIBOR to CME Term SOFR. The Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity.

On August 2, 2022, the Company entered into an agreement with a holder of four of the trust preferred debt instruments ("TruPs") that gave the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for a purchase price equal to 63% of the outstanding principal and deferred interest. Originally, the agreement called for a repurchase at 63%, which escalated to 63.75% once the September 26, 2022 agreement (described below) was signed. The Company agreed that any repurchase made would be for no less than 50% of the TruPs held by the holder.

Until the earlier of (i) the date that all four of the preferred debt instruments have been repurchased and (ii) the nine month anniversary of the agreement ("May Termination Date"), all interest on the four preferred debt instruments continued to accrue. However, with respect to TruPs that were repurchased prior to the May Termination Date, the amount of interest accrued during the term of the agreement was treated as an offset and reduced the repurchase price for such TruPs. The Company had no obligation to pay any such accrued interest with respect to any of the TruPs that are repurchased prior to the May Termination Date.

The Company paid approximately $2.0 million to the holder for this option and the Company had until the May Termination Date to execute the repurchases. Given the Company repurchased an amount equal to or greater than $30.0 million, the $2.0 million paid was applied to the repurchases.

On September 20, 2022, the Company entered into an additional agreement with the same party to the August 2, 2022 agreement that gave the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for 63.75% of the outstanding principal and deferred interest relating to a portion of a fifth TruPs held. The September 20, 2022 agreement is subject to the same terms and conditions as the August 2, 2022 and no additional consideration was paid.

On September 26, 2022, the Company entered into an agreement with a holder of a portion of one of the TruPs that gave the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for a purchase price equal to 63% of the outstanding principal and deferred interest.

Until the earlier of (i) the date that all of the preferred debt instrument has been repurchased and (ii) the May Termination Date, all interest on the preferred debt instrument continued to accrue. However, with respect to TruPs that were repurchased prior to the May Termination Date, the amount of interest accrued during the term of the agreement was treated as an offset and reduce the repurchase price for such TruPs. The Company had no obligation to pay any such accrued interest with respect to the TruPs that are repurchased prior to the May Termination Date.

The Company paid approximately $0.3 million to the holder for this option and the Company had until the May Termination Date to execute the repurchase. Given the Company repurchased the TruPs, the $0.3 million paid was applied to the repurchases.

In February 2023, the Company entered into amendments to the repurchase agreements described above that gave the Company an additional discount on the total repurchase price if the Company effected a 100% repurchase on or before March 15, 2023. On March 2, 2023, the Company gave notice to the holders that it intended to exercise its options to repurchase 100% of the principal. On March 22, 2023, the Company completed the repurchases using currently available funds from working capital to fund the repurchases. The total amount paid was $56.5 million, which included a credit for the $2.3 million that the Company previously paid at the time of entering into the repurchase agreements. As a result, the Company repurchased $75.5 million of principal and $23.0 million of deferred interest payable. The Company recognized a gain of $31.6 million, which is included in gain on extinguishment of debt in the unaudited consolidated statement of operations for the nine months ended September 30, 2023. The gain on extinguishment of debt results from removing the fair value of the debt, trust preferred debt repurchase options, deferred interest payable and accumulated other comprehensive income related to the repurchased TruPs from the Company's consolidated balance sheet at the repurchase date. At September 30, 2023, the Company had $15.0 million of principal outstanding related to the remaining trust preferred debt instrument.

During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. In order to execute the repurchases described above, on March 13, 2023, the Company paid $5.0 million to the remaining Trust Preferred trustee to be used by the trustee to pay the interest which the Company had been deferring since the third quarter of 2018. At September 30, 2023 and December 31, 2022, deferred interest payable of zero and $25.5 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheet.

The agreements governing our subordinated debt contain a number of covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make dividends and distributions, and make certain payments in respect of the Company’s outstanding securities.

The Company's subordinated debt is measured and reported at fair value. At September 30, 2023, the carrying value of the subordinated debt is $12.6 million. 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. For a description of the market observable inputs and inputs developed by a third party used in determining fair value of debt, see Note 21, "Fair Value of Financial Instruments," to the unaudited consolidated interim financial statements.

During the nine months ended September 30, 2023, the market observable swap rates changed, and the Company experienced an increase in the credit spread assumption developed by the third-party. Changes in the market observable swap rates affect the fair value model in different ways. An increase in the risk-free swap rates has the effect 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. The increase 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 assumption has 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 effect of increasing the fair value of debt. The changes to the credit spread and swap rate variables during the nine months ended September 30, 2023, along with the passage of time, contributed to a $0.9 million increase in fair value of the Company’s subordinated debt between December 31, 2022 and September 30, 2023.

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 fair value of debt, changes in the credit spread assumption developed by the third party does not introduce volatility to the Company’s consolidated statements of operations. The fair value of the Company’s subordinated debt will eventually equal the principal value totaling $15.0 million of the subordinated debt by the time of the stated redemption date of the remaining trust, which matures on May 22, 2033.

The $55.2 million decrease in the Company’s subordinated debt between December 31, 2022 and September 30, 2023 is attributed to the following:

- A decrease of $56.1 million as a result of the repurchase of trust preferred debt during the first quarter of 2023;
- A decrease of $0.3 million related to the change in fair value of the repurchased trust preferred debt instruments between December 31, 2022 and the repurchase dates; and
- An increase of $1.2 million related to the change in fair value of the remaining trust preferred debt instrument between December 31, 2022 and September 30, 2023.

Of the $0.9 millionincrease in fair value of the Company’s subordinated debt between December 31, 2022 and September 30, 2023, $0.7 million is reported as increase in fair value of debt attributable to instrument-specific credit risk in the Company's unaudited consolidated statements of comprehensive (loss) income and $0.2 million is reported as loss on change in fair value of debt in the Company’s unaudited consolidated statements of operations.

The unaudited consolidated statements of comprehensive (loss) income for the nine months ended September 30, 2023 also includes an increase of $27.2 million as a result of removing the accumulated other comprehensive income related to the repurchased TruPs from the Company's consolidated balance sheet at the repurchase date.

### RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4, "Recently Issued Accounting Standards," to the unaudited consolidated interim financial statements, for discussion of certain accounting standards that may be applicable to the Company's current and future consolidated financial statements.

### 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 of the Company and its subsidiaries have been met primarily by funds generated from operations, capital raising, disposal of subsidiaries, investment maturities and investment income, and 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 insurers who 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 the restricted accounts or we may be permitted to draw additional funds from the restricted accounts, dependent upon actuarial analyses performed by the insurers regarding sufficiency of funds to cover future expected claims. A substantial portion of the restricted trust accounts are invested in fixed maturities and other instruments 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 the holding company.

The Company's Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee and commission revenue.

### Cash Flows

During the nine months ended September 30, 2023, the Company reported $9.6 million of net cash used in operating activities from continuing operations, primarily due to outflows related to the payment of management fees to the managers of Net Lease and Flowers ($1.8 million), an indemnity payment to the buyer of Mendota related to loss and loss adjustment expenses ($2.0 million) and payment of deferred interest on the remaining trust preferred debt instrument ($5.0 million); partially offset by gain on equity investments and operating income from the Extended Warranty and Kingsway Search Xcelerator segments. During the nine months ended September 30, 2022, the Company reported $4.9 million of net cash provided by operating activities from continuing operations, primarily due to operating income from the segments.

During the nine months ended September 30, 2023, the net cash provided by investing activities from continuing operations was $16.7 million. This source of cash is primarily attributed to distributions received by Net Lease from one of its limited liability investment companies of $13.3 million, as well as proceeds from sales and maturities of fixed maturities and sales of equity securities in excess of purchases of fixed maturities and acquisition of business, net of cash acquired. During the nine months ended September 30, 2022, the net cash provided by investing activities from continuing operations was $33.6 million. This source of cash was primarily attributed to the net cash proceeds received, net of cash disposed of, from the sale of PWSC, of $35.2 million. This source of cash was partially offset by purchases of fixed maturities in excess of proceeds from limited liability investments and from sales and maturities of fixed maturities.

During the nine months ended September 30, 2023, the net cash used in financing activities from continuing operations was $55.1 million. This use of cash was primarily attributed to the repurchase of five of the TruPs for $56.5 million, principal repayment on bank loans of $6.1 million, distributions to noncontrolling interest holders of $4.0 million and cash paid for repurchase of warrants of $4.0 million, partially offset by cash proceeds from the exercise of warrants of $16.7 million. During the nine months ended September 30, 2022, the net cash used in financing activities from continuing operations was $6.6 million. This use of cash was attributed to principal repayment on bank loans of $5.0 million, principal repayments on the notes payable of $0.4 million and distributions to noncontrolling interest holders of $1.0 million.

### 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 company operating expenses; transaction-related expenses; investments; and any other extraordinary demands on the holding company.

Pursuant to satisfying the covenants under the 2020 KWH Loan, distributions to the holding company in an aggregate amount not to exceed $1.5 million in any 12-month period are permitted. Also, beginning in 2022, the holding 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 in the previous year. In 2022, the Company was entitled to 50% of the excess cash flow with the other 50% used to pay down the 2020 KWH Loan. The Company is entitled to receive 75% of the 2022 excess cash flow in 2023, or $3.3 million. During the first quarter of 2023, the Company paid down the KWH 2020 Loan by $1.1 million. During 2022, the Company received $1.7 million and in March 2022 paid down the KWH 2020 Loan by $1.7 million.

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):

| If leverage ratio is | Percent of excess cash flow 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% |

On October 1, 2021, the Company closed on the acquisition of Ravix. Related to the Ravix acquisition, the Company secured the 2021 Ravix Loan with Ravix and Ravix LLC as borrowers under the 2021 Ravix Loan. On November 1, 2022, the Company closed on the acquisition of CSuite. Related to the CSuite acquisition, the Company secured the 2022 Ravix Loan with CSuite, Ravix and Ravix LLC as borrowers under the 2022 Ravix Loan. Pursuant to the covenants under the 2021 Ravix Loan and the 2022 Ravix Loan, Ravix and CSuite are permitted to make distributions to the holding company so long as doing such would not cause non-compliance with the various covenants outlined within the 2021 Ravix Loan and 2022 Ravix Loan.

On November 18, 2022, the Company closed on the acquisition of SNS. Related to the SNS acquisition, the Company secured the SNS Loan with SNS and Pegasus LLC as borrowers under the SNS Loan. Pursuant to the covenants under the SNS Loan, SNS is not permitted to make distributions to the holding company without the consent of the lender.

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 any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims was $2.5 million. Per the purchase 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 Net Lease, 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 and the 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, the Company 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 with respect to the open claims.

During the third quarter of 2022, the buyer provided to the Company an analysis of the claims development that indicated that the Company's potential exposure with respect to the open claims was at the maximum obligation amount. Previous communications from the buyer noted no such development. As a result of the newly provided information, the Company recorded a liability of $2.5 million, which is included in accrued expenses and other liabilities in the consolidated balance sheet at December 31, 2022. During the first quarter of 2023, the $2.0 million that had been previously deposited into an escrow account was released and remitted to the buyer to satisfy the Company's payment with respect to the open claims.

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 $12.4 millionand $48.9 million at September 30, 2023 and December 31, 2022, 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 cash and cash equivalents of $20.2 million and $64.2 million reported at September 30, 2023 and December 31, 2022, respectively, on the Company’s consolidated balance sheets. The significant decrease is primarily due to the repurchase of the trust preferred debt during the first quarter of 2023.

The Company notes that it has an additional $10.0 million available from the second amendment to the 2020 KWH Loan (see Note 11, " Debt"), that is available to be drawn.

Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the developing macro-economic environment.

### Regulatory Capital

Kingsway Reinsurance Corporation ("Kingsway Re"), our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimum statutory capital of $125,000. Kingsway Re is currently operating with statutory capital near the regulatory minimum, requiring us to periodically contribute capital to fund operating expenses. Kingsway Re incurs operating expenses of approximately $0.1 million per year.

## Market risk

As filed, 228 characters.

We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item.

## Controls and procedures

As filed, 5,745 characters.

### 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 the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2023.

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the 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 the evaluation of our disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were not effective as a result of one unremediated material weakness in the Company's internal control over financial reporting that was discovered during the course of the 2018 external audit of the accounts, relating to the accounting for and disclosure of certain complex and nonrecurring transactions as it specifically pertains to the adoption and application of ASU 2014-09, *Revenue from Contracts with Customers.* Not all material weaknesses necessarily present the same risks from period to period as a result of differing events and transactions which have occurred or may occur in current and future periods.

### 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 a material 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 the controls over the application of accounting literature did not operate effectively with respect to the adoption and application of ASU 2014-09. This matter was discovered 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 of further material misstatements that may remain unidentified. As a result of such review, and notwithstanding the material weakness described above, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, believes that the unaudited consolidated financial statements contained in this Form 10-Q for the three and nine months ended September 30, 2023 and September 30, 2022 fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

### Remediation Process

In 2022, the Company directed its internal audit department to conduct a thorough review of the material revenue processes. The review is in its final stages, which has preliminarily indicated no material issues. The Company expects to use the final results of this review in 2023 to implement a remediation plan for this final material weakness.

The actions that the Company is taking are subject to ongoing senior management review as well as Audit Committee oversight. The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in its controls.

### Changes in Internal Control over Financial Reporting

On September 7, 2023, the Company acquired 100% of the outstanding equity interests of SPI. Since the date of this acquisition, the Company has been analyzing and evaluating procedures and controls to determine their effectiveness and to make them consistent with our disclosure controls and procedures. As permitted by the SEC, SPI has been excluded from the scope of our quarterly discussion of material changes in internal control over financial reporting below.

There have been no changes in the Company's internal control over financial reporting during the period beginning July 1, 2023, and ending September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, except with respect to SPI.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-030641. Last ingested by Listed: Nov 3, 2026, 21:55 ET. No prices; not investment advice.