KFS Kingsway Financial Services Inc New

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Kingsway Financial Services Inc. (“Kingsway” or the “Corporation”) is a Canadian holding company with operating subsidiaries located in the United States. The Corporation owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries. Kingsway conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.

The Corporation previously conducted its business through a third reportable segment, Insurance Underwriting. Insurance Underwriting included the following subsidiaries of the Corporation: Mendota Insurance Company (“Mendota”), Mendakota Insurance Company (“Mendakota”), Mendakota Casualty Company (“MCC”), Kingsway Amigo Insurance Company (“Amigo”) and Kingsway Reinsurance Corporation (“Kingsway Re”). On July 16, 2018, the Corporation announced that it had entered into a definitive agreement to sell Mendota, Mendakota and MCC. On October 18, 2018, the Corporation announced that the sale was completed. As a result, Mendota, Mendakota and MCC have been classified as discontinued operations and the results of their operations are reported separately for all periods presented. As a consequence of classifying Mendota, Mendakota and MCC as discontinued operations, the remaining composition of the Insurance Underwriting segment no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented. The operating results of Amigo and Kingsway Re, previously included in the Insurance Underwriting segment, are now included in Other income and expenses not allocated to segments, net.

Extended Warranty includes the following subsidiaries of the Corporation: IWS Acquisition Corporation (“IWS”), Trinity Warranty Solutions LLC (“Trinity”) and Professional Warranty Service Corporation (“PWSC”). Throughout Management’s Discussion and Analysis (“MD&A”), the term “Extended Warranty” is used to refer to this segment. Prior to the second quarter of 2017, Extended Warranty was referred to as Insurance Services.

IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 23 states and the District of Columbia to their members.

Trinity sells heating, ventilation, air conditioning (“HVAC”), standby generator, commercial LED lighting and 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 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.

PWSC sells new home warranty products and provides administration services to home builders and homeowners across the United States. PWSC distributes its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.

Leased Real Estate includes the Corporation’s subsidiary, CMC Industries, Inc. (“CMC”). 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 of Texas (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 note payable in the consolidated balance sheets (the “Mortgage”). Throughout this MD&A, the term “Leased Real Estate” is used to refer to this segment.

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NON U.S.-GAAP FINANCIAL MEASURES

We present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the U.S. GAAP presentation of net (loss) income, we 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 19, “Segmented Information,” to the Quarterly Consolidated Financial Statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure is loss from continuing operations before income tax (benefit) expense that, in addition to segment operating income, includes net investment (loss) income, net realized losses, gain on change in fair value of equity investments, interest expense not allocated to segments, other income and expenses not allocated to segments, net, amortization of intangible assets, contingent consideration benefit, loss on change in fair value of debt, gain on disposal of subsidiary and equity in net (loss) income of investee. A reconciliation of segment operating income to loss from continuing operations before income tax (benefit) expense for the nine months ended September 30, 2018 and 2017 is presented in Table 2 of the “Results of Continuing Operations” section of Management’s Discussion and Analysis.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification 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 critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for unpaid loss and loss adjustment expenses; valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investment, at fair value; valuation of deferred income taxes; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; and fair value assumptions for subordinated debt obligations.

Provision for Unpaid Loss and Loss Adjustment Expenses

Overview

The Corporation records a provision for unpaid losses that have occurred as of a given evaluation date as well as for its estimated liability for loss adjustment expenses. The provision for unpaid losses includes a provision, commonly referred to as case reserves, for losses related to reported claims as well as a provision for losses related to claims incurred but not reported (“IBNR”). The provision for loss adjustment expenses represents the cost to investigate and settle claims.

The provision for unpaid loss and loss adjustment expenses does not represent an exact calculation of the liability but instead represents management’s best estimate at a given accounting date, utilizing actuarial and statistical procedures, of the undiscounted estimates of the ultimate net cost of all unpaid loss and loss adjustment expenses. Management continually reviews its estimates and adjusts its provision as new information becomes available. In establishing the provision for unpaid loss and loss adjustment expenses, the Corporation also takes into account estimated recoveries, reinsurance, salvage and subrogation.

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Any adjustments to the provision for unpaid loss and loss adjustment expenses are reflected in the consolidated statements of operations in the periods in which they become known, and the adjustments are accounted for as changes in estimates. Even after such adjustments, ultimate liability or recovery may exceed or be less than the revised provisions. An adjustment that increases the provision for unpaid loss and loss adjustment expenses is known as unfavorable development or a deficiency and will reduce net income while an adjustment that decreases the provision is known as favorable development or a redundancy and will increase net income.

Process for Establishing the Provision for Unpaid Loss and Loss Adjustment Expenses

The process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both reported and IBNR claims. As such, the process is inherently complex and imprecise and estimates are constantly refined. The process of establishing the provision for unpaid loss and loss adjustment expenses relies on the judgment and opinions of a large number of individuals, including the opinions of the Corporation’s external reserving actuaries.

Factors affecting the provision for unpaid loss and loss adjustment expenses include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the Corporation’s claims department personnel and independent adjusters retained to handle individual claims, the quality of the data used for projection purposes, existing claims management practices including claim-handling and settlement practices, the effect of inflationary trends on future loss settlement costs, court decisions, economic conditions and public attitudes.

The process for establishing the provision for loss and loss adjustment expenses begins with the collection and analysis of claim data. Data on individual reported claims, both current and historical, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics and evaluated by the Corporation’s external reserving actuaries in their analyses to estimate ultimate claim liabilities. Such data is occasionally supplemented with external data as available and when appropriate.

Our Corporation’s external reserving actuaries use the following generally accepted actuarial loss and loss adjustment expenses reserving methods in our analysis, for each coverage or segment that we analyze:

The methods above all calculate an estimate of total ultimate losses. Our provision for loss and loss adjustment expenses is calculated by subtracting total paid losses from our estimate of total ultimate losses. Our estimate for IBNR is calculated by subtracting case reserves from our provision for loss and loss adjustment expenses.

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Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumptions being meaningful for all coverages or segments. For example, Paid Loss Development does not make use of case reserves, and can be more stable when there are changes to the case reserving process. Frequency and Severity, by estimating the frequency separately from severity, can assist in understanding the underlying dynamics when either frequency or severity is changing substantially.

The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time; therefore, the actual choice of estimation method can change with each evaluation. The estimation methods chosen are those that are believed to produce the most reliable indication at a particular evaluation date.

We monitor the actual emergence of loss and loss adjustment expenses data and compare it to the expected emergence implied by our booked estimates. Differences in these are part of our considerations for whether it is appropriate to modify our assumptions for developing the estimated provision for unpaid loss and loss adjustment expenses.

We review the adequacy of the provision for unpaid loss and loss adjustment expenses quarterly. For our year-end analysis, we re-estimate the ultimate losses for each coverage and state, by accident year. This involves performing a complete update of the historical development factors used in our analysis, incorporating the experience of the most recent calendar year. On a quarterly basis, we perform a more limited review, which can entail, for example, a comparison of the expected losses to be paid during the quarter versus actual payments, or other similar comparisons to determine the extent to which a given segment is performing as expected. In some cases, a re-estimation (similar to the year-end analysis) may be determined to be useful as part of a quarterly analysis, and we may make adjustments to ultimate losses in response to the results of this analysis. We adjust carried unpaid loss and loss adjustment expenses as we learn additional information, and reflect these adjustments in the accounting periods in which they are determined.

A basic premise in most actuarial analyses is that past patterns demonstrated in the data will repeat themselves in the future, absent a material change in the associated risk factors. Significant structural changes to the available data, product mix or organization can materially impact the provision for loss and loss adjustment expenses. Our 2016 actuarial analysis included certain assumptions regarding improved claim-handling practices that we expected to result from new claim-handling initiatives being implemented by the new claim management team hired in the fall of 2016. These assumptions led us to anticipate a significant reduction in the required provision for loss and loss adjustment expenses at December 31, 2016. These improvements did not materialize as quickly as originally anticipated, in large part due to the disruptions to claim staffing during this period. As a result, the year-end 2017 actuarial analysis removed the explicit adjustments that were made in the 2016 actuarial analysis; otherwise, the 2017 analysis was substantially reliant on historical experience. The anticipated improvements in claim-handling practices are now emerging and are expected to be recognized in future actuarial analyses once sufficient empirical evidence exists to validate the data.

Informed judgment is applied throughout the process. This includes the application of various individual experiences and expertise to multiple sets of data and analyses. In addition to actuaries, experts involved with the reserving process also include underwriting and claims personnel and lawyers, as well as other company management. As a result, management may have to consider varying individual viewpoints when establishing the provision for unpaid loss and loss adjustment expenses.

Our estimate of the provision for unpaid loss and loss adjustment expenses is proposed each quarter by our external reserving actuaries and approved by an internal management team comprised of our chief executive officer, chief operating officer and chief financial officer; the management of our non-standard automobile insurance companies, including its president, vice president of claims and treasurer; and other selected executives. We begin the process each quarter by responding to detailed information requests submitted by our

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external reserving actuaries. Upon completion of their estimation analysis of the provision for unpaid loss and loss adjustment expenses, the results are discussed with the internal management team. As part of this discussion, the analyses supporting the actuarial estimates of IBNR by line of business and state for each of our non-standard automobile companies, including separate analyses for our voluntary runoff companies, are reviewed. The external reserving actuaries also present explanations supporting any changes to the underlying assumptions used to calculate the indicated estimates. A review of the resulting variance between the indicated provision for unpaid loss and loss adjustment expenses and the carried provision for unpaid loss and loss adjustment expenses takes place. The internal management team engages in a discussion with the external reserving actuaries and supplies supplemental information in support of assumptions it believes should be challenged. The external reserving actuaries review the supplemental information and return to the internal management team with their recommendation in regards to the provision for unpaid loss and loss adjustment expenses that should be booked to reflect their analytical assessment and view of estimation risk. After discussion of these analyses and all relevant risk factors, the internal management team determines whether the carried provision for unpaid loss and loss adjustment expenses requires adjustment.

Our external reserving actuaries also develop, as part of their annual actuarial report to the Company, an estimated range around the provision for unpaid loss and loss adjustment expenses recorded by the Company. At December 31, 2017, the Company recorded a $1.3 million provision for unpaid loss and loss adjustment expenses. The report of the Company’s external actuaries indicates that a carried provision for unpaid loss and loss adjustment expenses anywhere between $1.2 million and $1.7 million at December 31, 2017 would fall within their reasonable range of estimation. This range does not present a forecast of future redundancy or deficiency since actual development of future paid losses related to the current provision for unpaid loss and loss adjustment expenses may be affected by many variables. The provision for unpaid loss and loss adjustment expenses recorded at December 31, 2017 represents our best estimate of the ultimate amounts that will be paid.

To the extent that the ultimate paid losses are higher or lower than the provision for unpaid loss and loss adjustment expenses recorded by the Corporation, the differences would be recorded in the Corporation’s consolidated statements of operations in the accounting periods in which they are determined. There can be assurance that such differences would not be material.

Valuation of Fixed Maturities and Equity Investments

Our equity investments, including warrants, are recorded at fair value using quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets 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 are inactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data. We do not have any fixed maturities and equity investments in our portfolio that require us to use unobservable inputs. The Corporation engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our fixed maturities. 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 fixed maturities are valued using this technique. We have obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Corporation.

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 of operations. Premium and discount on investments are amortized and accredited using the interest method and charged or credited to net investment income.

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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 the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures, as applicable:

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 be limited to, the following:

As a result of the analysis performed by the Corporation to determine declines in market value that are other-than-temporary, there were no write downs for other-than-temporary impairments related to investments for the year ended December 31, 2017.

The Corporation recorded a write-down of $0.0 million for other-than-temporary impairment related to equity investments for the year ended December 31, 2016.

Valuation of Limited Liability Investment, at Fair Value

In connection with the deconsolidation of 1347 Investors LLC (“1347 Investors”) during the third quarter of 2016, the Corporation retained a minority investment in 1347 Investors. The Corporation has made an irrevocable election to account for this investment at fair value with changes in fair value reported in the consolidated statements of operations. The fair value of this investment is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs.

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 our provision for income taxes, we interpret tax legislation in a

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variety of jurisdictions and make assumptions about the expected timing of the reversal of deferred income tax assets 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 Corporation’s temporary 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 tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Corporation’s past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability 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 asset balances when significant negative evidence exists. Cumulative losses are the most compelling form of negative evidence considered by management in this determination. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of operations. As of December 31, 2017, the Corporation maintains a valuation allowance of $177.0 million, $170.6 million 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 the Corporation’s U.S. operations. Uncertainty over the Corporation’s ability to utilize these losses over the short-term has led the Corporation to record a valuation allowance.

Future events may result in the valuation allowance being adjusted, which could materially impact our financial position and results of operations. If sufficient positive evidence 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 the valuation allowance would be reversed in the period that such a conclusion was reached.

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 vehicle service agreements in-force, database, customer relationships, contract-based revenues and in-place lease. Intangible assets with definite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If circumstances require that a definite-lived intangible asset be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that definite-lived intangible asset to its carrying amount. If the 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 the carrying amount exceeds its fair value.

Indefinite-lived intangible assets consist of a tenant relationship and trade name. Intangible assets with an indefinite life are assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Corporation has the option to perform a qualitative 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 is more likely than not that the intangible asset is impaired, a fair value-based impairment test would be required. Management must make estimates and assumptions in determining the fair value of indefinite-lived intangible assets that may affect any resulting impairment write-down. This includes assumptions regarding future cash flows and future revenues from the related intangible assets or their reporting units. Management then compares the fair value of the indefinite-lived intangible assets to their respective carrying amounts. If the carrying amount of an intangible asset exceeds the fair value of that intangible asset, an impairment is recorded. No impairment charges were taken on intangible assets in 2017 or 2016. Additional information regarding our intangible assets is included in Note 11, “Intangible Assets,” to the Audited Consolidated Financial Statements and Note 9, “Intangible Assets,” to the Quarterly Consolidated Financial Statements.

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Goodwill Recoverability

Goodwill is assessed for impairment annually as of December 31, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The Corporation has the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If facts and circumstances indicate that it is more likely than not that the goodwill is impaired, a fair value-based impairment test would be required. The goodwill impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair values with the carrying values of the assets and liabilities of the reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment, if any, by determining an implied fair value of goodwill. The determination of the implied fair value of goodwill of a reporting unit requires management to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which is compared to its corresponding carrying value. For reporting units with a negative book value, qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment test. Additional information regarding our goodwill is included in Note 10, “Goodwill,” to the Audited Consolidated Financial Statements.

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. Acquisition costs, primarily commissions and agency expenses related to issuing vehicle service agreements, are deferred and charged against income ratably over the terms of the related vehicle service agreements. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset.

Derivative Financial Instruments

Derivative financial instruments include investments in warrants and performance shares issued to the Corporation under various performance share grant agreements. Refer to Note 6, “Investments,” to the Audited and Quarterly Consolidated Financial Statements, for further details regarding the performance shares. Warrants are classified as equity investments in the consolidated balance sheets.

We measure derivative financial instruments at fair value. Warrants are recorded at fair value using quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets exist. The performance shares, for which no active market exists, are required to be valued at fair value as determined in good faith by the Corporation. Such determination of fair value would require us to develop a model based upon relevant observable market inputs as well as significant unobservable inputs, including developing a sufficiently reliable estimate for an appropriate discount to reflect the illiquidity and unique structure of the security. The Corporation determined that its model for the performance shares was not sufficiently reliable. As a result, we have assigned a fair value of zero to the performance shares.

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 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.

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RESULTS OF CONTINUING OPERATIONS

A reconciliation of total segment operating income to net (loss) income for the years ended December 31, 2017 and 2016 is presented in Table 1 below:

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A reconciliation of total segment operating income to net loss for the nine months ended September 30, 2018 and 2017 is presented in Table 2 below:

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

For the year ended December 31, 2017, we incurred income from continuing operations of $2.6 million (loss of $0.10 per diluted share) compared to $3.5 million ($0.15 per diluted share) for the year ended December 31, 2016. The income from continuing operations for the year ended December 31, 2017 is primarily attributable to operating income in Extended Warranty and Leased Real Estate, net investment income, net realized gains, equity in net income of investees and income tax benefit, partially offset by interest expense not allocated to segments, other income and expenses not allocated to segments, net and loss on change in fair value of debt. The income from continuing operations for the year ended December 31, 2016 is primarily attributable to net investment income, gain on deconsolidation of subsidiary and income tax benefit, partially offset by interest expense not allocated to segments, other income and expenses not allocated to segments, net and loss on change in fair value of debt.

For the year ended December 31, 2017, we reported net loss of 11.1 million ($0.73 per diluted share) compared to net income of $0.5 million ($0.01 per diluted share) for the year ended December 31, 2016.

For the nine months ended September 30, 2018, we reported loss from continuing operations of $8.8 million compared to $12.7 million for the nine months ended September 30, 2017. The loss from continuing operations for the nine months ended September 30, 2018 is primarily due to interest expense not allocated to segments, other income and expenses not allocated to segments, net, amortization of intangible assets and loss on change in fair value of debt, partially offset by operating income in Extended Warranty and Leased Real Estate.

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The loss from continuing operations for the nine months ended September 30, 2017 is primarily due to interest expense not allocated to segments, other income and expenses not allocated to segments, net and loss on change in fair value of debt, partially offset by operating income in Extended Warranty and Leased Real Estate.

For the nine months ended September 30, 2018, we reported a net loss of $14.5 million compared to $10.7 million for the nine months ended September 30, 2017.

Extended Warranty

The Extended Warranty service fee and commission income increased 31.1% to $30.8 million for the year ended December 31, 2017 compared with $23.5 million for the year ended December 31, 2016. The Extended Warranty service fee and commission income increased 39.6% to $28.9 million for the nine months ended September 30, 2018 compared with $20.7 million for the nine months ended September 30, 2017. The increase in each period reflects increased service fee and commission income at both IWS and Trinity. IWS experienced increased sales of vehicle service agreements due to higher automobile sales and improved penetration of its credit union distribution channel. Trinity experienced increased sales to existing customers of both its maintenance support and warranty products. The increases are also reflective of the inclusion of PWSC following its acquisition effective October 12, 2017. PWSC service fee and commission income was $2.4 million from the date of acquisition through December 31, 2017. PWSC service fee and commission income was $5.4 million for the nine months ended September 30, 2018.

PWSC’s service fee and commission income for the nine months ended September 30, 2018 was impacted by the adoption of ASU 2014-09, which was effective January 1, 2018. As further discussed in Note 4, “Recently Issued Accounting Standards,” to the Quarterly Consolidated Financial Statements, the adoption of ASU 2014-09 will result in the Company recognizing homebuilder warranty service fees more slowly compared to the historic revenue recognition pattern utilized prior to the adoption of ASU 2014-09. As a result of the adoption of ASU 2014-09, service fee and commission income recorded by PWSC during the nine months ended September 30, 2018 was lower by $1.5 million compared to what would have been recognized prior to the adoption of ASU 2014-09.

The Extended Warranty operating income was $4.0 million for the year ended December 31, 2017 compared with $0.5 million for the year ended December 31, 2016. This increase in operating income is due to the inclusion of PWSC in 2017, as noted above, as well as improved revenues, partially offset by related increase in costs of services sold at Trinity and commission expense at IWS, for the year ended December 31, 2017 compared with the same period in 2016.

The Extended Warranty operating income was $3.6 million for the nine months ended September 30, 2018 compared with $2.1 million for the nine months ended September 30, 2017. The increase in operating income for the nine months September 30, 2018 is primarily due to the inclusion of PWSC in 2018 following its acquisition effective October 12, 2017. PWSC operating income was $0.9 million for the nine months ended September 30, 2018. The increase in operating income also reflects the improved revenues at both Trinity and IWS, partially offset by related increases in cost of services sold at Trinity and general and administrative expenses at both Trinity and IWS, for the nine months ended September 30, 2018, compared to the same period in 2017.

Leased Real Estate

Leased Real Estate rental income was $13.4 million for the year ended December 31, 2017 compared to $5.4 million for the year ended December 31, 2016. For the nine months ended September 30, 2018, Leased Real Estate rental income was $10.0 million compared to $10.0 million for the nine months ended September 30, 2017. The rental income is derived from CMC’s long-term triple net lease. The Corporation acquired 81% of CMC on July 14, 2016. The 2017 rental income is reflective of a lease amendment that was executed effective beginning in the first quarter of 2017 whereby the tenant will pay an aggregate $25.0 million of additional rental

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income through May 2034, the remaining term of the lease (the “Lease Amendment”). The Leased Real Estate operating income was $3.1 million for the year ended December 31, 2017 compared to $0.6 million for the year ended December 31, 2016. Leased Real Estate operating income includes interest expense of $6.3 million and $2.9 million for the years ended December 31, 2017 and 2016, respectively. The Leased Real Estate operating income was $2.0 million for the nine months ended September 30, 2018 compared with $2.3 million for the nine months ended September 30, 2017. The decrease in operating income for the nine months ended September 30, 2018 is due to increased legal expenses, compared to the same period in 2017. Leased Real Estate recorded legal expense of $0.4 million for the nine months ended September 30, 2018 compared with zero for the nine months ended September 30, 2017. Leased Real Estate operating income includes interest expense of $4.6 million and $4.7 million for the nine months ended September 30, 2018 and 2017, respectively. Leased Real Estate operating income for the nine months ended September 30, 2017 also reflects a non-recurring charge of $0.3 million for transaction expenses related to the execution of a lease amendment. See “Investments” section below for further discussion.

Net Investment Income

Net investment income decreased to $1.0 million in 2017 compared to $2.9 million in 2016. The decrease in 2017 is primarily explained by the difference between the $0.3 million net investment loss recorded during 2017 related to the Corporation’s limited liability investment, at fair value compared to the $1.3 million net investment income recorded during 2016 related to the Corporation’s limited liability investment, at fair value.

Net investment losses were $0.7 million for the nine months ended September 30, 2018 compared to net investment income of $0.1 million for the nine months ended September 30, 2017. The decrease for the nine months ended September 30, 2018 is primarily due to a $1.5 million decrease in fair value of the Company’s limited liability investment, at fair value recorded for the nine months ended September 30, 2018 compared to a $0.4 million decrease in fair value of the Company’s limited liability investment, at fair value recorded for the nine months ended September 30, 2017.

Net Realized (Losses) Gains

The Corporation incurred net realized gains of $0.3 million in 2017 compared to $0.1 million in 2016. The net realized gains in 2017 resulted primarily from the sale of an LLC investment. The net realized gains in 2016 resulted primarily from the liquidation of equity investments.

Net realized losses were $0.4 million for the nine months ended September 30, 2018 compared to $0.0 million for the nine months ended September 30, 2017. The net realized losses for the nine months ended September 30, 2018 resulted from the sale of a limited liability investment as one part of a broader set of arrangements with certain former officers of the Company. Refer to Note 21, “Related Party Transactions,” to the Quarterly Consolidated Financial Statements, for further discussion.

Gain on Change in Fair Value of Equity Investments

Gain on change in fair value of equity investments was $1.0 million for the nine months ended September 30, 2018 compared to zero for the nine months ended September 30, 2017. As further discussed in Note 4, “Recently Issued Accounting Standards,” to the Quarterly Consolidated Financial Statements, effective January 1, 2018, the Company adopted ASU 2016-01. As a result, all changes in the fair value of equity investments are now recognized in net income (loss). The gain on change in fair value of equity investments for the nine months ended September 30, 2018 includes realized gains of $1.5 million on equity investments sold and unrealized losses of $0.5 million on equity investments held as of September 30, 2018.

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Other-Than-Temporary Impairment Loss

As a result of the analysis performed by the Corporation to determine declines in market value that are other-than-temporary, there were no write downs for other-than-temporary impairments related to investments for the year ended December 31, 2017. The Corporation recorded a write-down of $0.0 million for other-than-temporary impairment related to equity investments for the year ended December 31, 2016.

Interest Expense not Allocated to Segments

Interest expense not allocated to segments for 2017 was $5.0 million compared to $4.5 million in 2016. The increase in 2017 is attributable to generally higher London interbank offered interest rates for three-month U.S. dollar deposits (“LIBOR”) during the year ended December 31, 2017 compared to the year ended December 31, 2016. The Corporation’s subordinated debt bears interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%.

Interest expense not allocated to segments was $4.5 million for the nine months ended September 30, 2018 compared to $3.6 million for the nine months ended September 30, 2017. The increase for the nine months ended September 30, 2018 is primarily attributable to generally higher LIBOR during the nine months ended September 30, 2018 compared to the same period in 2017. The Corporation’s subordinated debt bears interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. The increase is also reflective of the inclusion of interest expense on the Corporation’s bank loan incurred as part of its acquisition of PWSC effective October 12, 2017.

Other Income and Expenses not Allocated to Segments, Net

Other income and expenses not allocated to segments was a net expense of $10.1 million in 2017 compared to $6.1 million in 2016. The increase in net expense is primarily the result of more general and administrative expense for compensation, employee benefits and professional fees in 2017 as compared to 2016 and an increase in loss and loss adjustment expenses at Amigo in 2017 as compared to 2016, partially offset by a $0.7 million gain recorded during the third quarter of 2017 related to the termination of a financing lease, as further discussed in Note 16, “Finance Lease Obligation Liability,” to the Audited Consolidated Financial Statements.

Other income and expenses not allocated to segments, net was a net expense of $4.4 million for the nine months ended September 30, 2018 compared to net expense of $6.9 million for the nine months ended September 30, 2017. The following items were recorded as part of Other income and expenses not allocated to segments, net.

Total stock-based compensation, net of forfeitures, was a benefit of $1.9 million and expense of $0.9 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. During the third quarter of 2018, the Company modified the terms of grants of restricted common stock awards to certain former officers of the Company. Refer to Note 17, “Stock-Based Compensation,” to the Quarterly Consolidated Financial Statements, for further discussion of the restricted stock awards. The Company also record $0.4 million of payroll tax expense and $0.2 million of other expense during the third quarter of 2018 related to these arrangements with its former officers.

The Company recorded a $0.7 million gain for the nine months ended September 30, 2017 related to the termination of a financing lease, as further discussed in Note 12, “Finance Lease Obligation Liability,” to the Quarterly Consolidated Financial Statements.

The Company recorded other income of zero and $0.9 million related to the write-off of escheat liabilities for the nine months ended September 30, 2018.

Loss and loss adjustment expenses, net of commissions, at Amigo were an expense of $1.7 million and a benefit of $0.0 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. Amigo was

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previously included in the Insurance Underwriting segment along with Mendota, Mendakota and MCC. As a consequence of classifying Mendota, Mendakota and MCC as discontinued operations, the remaining composition of the Insurance Underwriting segment no longer meets the criteria of a reportable segment. As such, all segmented information has been restated to exclude the Insurance Underwriting segment for all periods presented. The operating results of Amigo previously included in the Insurance Underwriting segment are now included in Other income and expenses not allocated to segments, net.

Amortization of Intangible Assets

The Corporation’s intangible assets with definite useful lives are amortized over their estimated useful lives. Amortization of intangible assets was $1.2 million in 2017 compared to $1.2 million in 2016. Amortization of intangible assets was $1.9 million for the nine months ended September 30, 2018 compared to $0.9 million for the nine months ended September 30, 2017. The higher amortization expense for the nine months ended September 30, 2018 is related to amortization of intangible assets recorded in conjunction with the Company’s acquisition of PWSC on October 12, 2017. During the third quarter of 2018, the Company finalized its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWSC, which resulted in the Company recording (i) $0.8 million of amortization expense during the third quarter of 2018 for the period from the date of acquisition through June 30, 2018 and (ii) $0.3 million of amortization expense during the third quarter of 2018 for the period July 1, 2018 through September 30, 2018 related to the intangible assets identified. See Note 5, “Acquisitions, Disposal and Discontinued Operations,” to the Quarterly Consolidated Financial Statements for further details.

Contingent Consideration Benefit

Contingent consideration benefit was $0.2 million in 2017 compared to $0.7 million in 2016. Contingent consideration benefit was zero for the nine months ended September 30, 2018 compared to $0.2 million for the nine months ended September 30, 2017. The asset purchase agreements executed by the Corporation in 2012 and 2013 related to the acquisitions of IWS and Trinity, respectively, provided for additional payments to the former owners of IWS and Trinity contingent upon the achievement of certain targets over future reporting periods. Contingent consideration liabilities resulting from the acquisitions of IWS and Trinity were estimated at their respective acquisition dates using valuation models designed to estimate the probability of such contingent payments based on various assumptions. The valuation models assume certain achievement of targets, discount rates related to riskiness of the projections used and the time value of money to calculate the net present value of future consideration payments.

The benefit recorded for the year ended December 31, 2017 and for the nine months ended September 30, 2017 is attributable to the Corporation having executed an agreement with the former owner of Trinity. The parties to the Trinity agreement agreed to a fixed payment in exchange for extinguishing the rights to future contingent payments. The benefit recorded for the year ended December 31, 2016 is attributable to the Corporation having executed an agreement with the former owners of IWS. The parties to the IWS agreement agreed to a fixed payment and other consideration in exchange for extinguishing the rights to future contingent payments. At December 31, 2017 and 2016, the Corporation has total contingent liabilities of $0.0 million and $0.3 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets. See Note 26, “Fair Value of Financial Instruments,” to the Audited Consolidated Financial Statements, for further details.

Loss on Change in Fair Value of Debt

The loss on change in fair value of debt amounted to $8.5 million in 2017 compared to $3.7 million in 2016. Loss on change in fair value of debt amounted to $2.5 million for the nine months ended September 30, 2018 compared to $5.8 million for the nine months ended September 30, 2017. The loss for 2017 and 2016 and for the nine months ended September 30, 2018 and September 30, 2017 is due to an increase in the fair value of the subordinated debt. As further discussed in Note 4, “Recently Issued Accounting Standards,” to the Quarterly Consolidated Financial Statements, effective January 1, 2018, the Corporation adopted ASU 2016-01. As a

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result, the portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is now recognized in other comprehensive income (loss), whereas for 2017, the total change in fair value of subordinated debt was recorded in net income (loss). See “Debt” section below for further information.

Gain on Disposal of Subsidiary

On June 1, 2018, the Company disposed of its subsidiary, Itasca Real Estate Investors, LLC. As a result of the disposal, the Company recognized a gain of $0.0 million during the nine months ended September 30, 2018.

Gain on Deconsolidation of Subsidiary

Prior to the third quarter of 2016, the Corporation owned 61.0% of the outstanding units of 1347 Investors. Because the Corporation owned more than 50% of the outstanding units, the Corporation had been consolidating the financial statements of 1347 Investors. During the third quarter of 2016, the Corporation’s ownership percentage in 1347 Investors was reduced to 26.7%. As a result of this change in ownership, the Corporation recorded a non-cash gain on deconsolidation of 1347 Investors of $5.6 million during the third quarter of 2016. This gain results from removing the carrying value of the noncontrolling interest in 1347 Investors and the carrying value of the consolidated net assets of 1347 Investors, which the Corporation reported prior to the closing of the transaction, and recording the fair value of the Corporation’s 26.7% retained noncontrolling investment in 1347 Investors as of the transaction date. Refer to the “Investments” section below and Note 5, “Deconsolidation, Discontinued Operations and Liquidation,” to the Audited Consolidated Financial Statements, for further discussion.

Equity in Net Income (Loss) of Investees

Equity in net income of investees was $2.1 million in 2017 compared to equity in net loss of investees of $1.0 million in 2016. Equity in net income (loss) of investees between 2017 and 2016 represents the Corporation’s investments in Itasca Capital Ltd. and 1347 Capital Corp. Equity in net loss of investee was $0.6 million for the nine months ended September 30, 2018 compared to equity in net income of investee of $1.3 million for the nine months ended September 30, 2017. Equity in net (loss) income of investee for the nine months ended September 30, 2018 and September 30, 2017 represents the Corporation’s investment in Itasca Capital Ltd. See Note 7, “Investment in Investee,” to the Audited and Quarterly Consolidated Financial Statements, for further discussion.

Income Tax (Benefit) Expense

Income tax benefit for 2017 was $16.7 million compared to $9.7 million in 2016. The 2017 income tax benefit is primarily related to a release of deferred income tax liabilities and an adjustment to the deferred income tax valuation allowance resulting from the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, a permanent reduction in the U.S. federal corporate income tax rate to 21%.

The Corporation is subject to the provisions of Accounting Standards Codification 740-10, Income Taxes , which requires that the effect on deferred tax income assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. In December of 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include a provisional amount based on their reasonable estimate in their financial statements.

Pursuant to SAB 118, the Corporation recorded provisional amounts for the estimated income tax effects of the Tax Act on deferred income taxes. The Corporation recorded a $18.0 million decrease to income tax expense in the consolidated statements of operations for the year ended December 31, 2017, $17.9 million of which related to a decrease in the Corporation’s net deferred income tax liability as of December 31, 2017 because of the reduction in the corporate income tax rate.

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Although the $18.0 million tax benefit represents what the Corporation believes is a reasonable estimate of the impact of the income tax effects of the Tax Act on the Corporation’s Consolidated Financial Statements as of December 31, 2017, it should be considered provisional. Any adjustments to the Corporation’s provisional amounts will be reported as a component of the consolidated statements of operations during the reporting period in which any such adjustments are determined, all of which will be reported no later than the fourth quarter of 2018.

The 2016 income tax benefit is related to the partial release of the Corporation’s valuation allowance carried against its deferred income tax assets as a result of its acquisition of CMC.

Income tax expense was $0.3 million for the nine months ended September 30, 2018 compared to $1.6 million for the nine months ended September 30, 2017.

See Note 18, “Income Taxes,” to the Audited Consolidated Financial Statements, for additional detail of the income tax benefit recorded for the years ended December 31, 2017 and 2016, respectively. See Note 15, “Income Taxes,” to the Quarterly Consolidated Financial Statements, for additional detail of the income tax (benefit) expense recorded for the nine months ended September 30, 2018 and September 30, 2017.

INVESTMENTS

As a result of classifying Mendota, Mendakota and MCC as discontinued operations, the results of their operations are reported separately for all periods presented and their assets are presented as held for sale in the consolidated balance sheets at December 31, 2017 and December 31, 2016 as well as at September 30, 2018. All investment information in the section below has been restated to exclude Mendota, Mendakota and MCC for all periods presented.

Portfolio Composition

All of our investments in fixed maturities are classified as available-for-sale and are reported at fair value. All of our equity investments are reported at fair value. Prior to the adoption of ASU 2016-01, equity investments were considered available-for-sale. At September 30, 2018, we held cash and cash equivalents and investments with a carrying value of $48.8 million. Investments held by our insurance subsidiary, 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 rate fluctuations.

Tables 3 and 4 below summarizes the carrying value of investments, including cash and cash equivalents, at the dates indicated.

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TABLE 3 Carrying value of investments, including cash and cash equivalents

As of December 31 (in thousands of dollars, except for percentages)

TABLE 4 Carrying value of investments, including cash and cash equivalents

(in thousands of dollars, except for percentages)

Other-Than-Temporary Impairment

The Company performs a quarterly analysis of its investments classified as available-for-sale to determine if declines in market value are other-than-temporary. Prior to the adoption of ASU 2016-01, equity investments

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were considered available-for-sale and were included in the analysis of other-than-temporary impairments. Following the adoption of ASU 2016-01 beginning with the first quarter of 2018, the Company includes only its investments in fixed maturities in its quarterly analysis for other-than-temporary declines in market value. Further information regarding our detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within Note 6, “Investments,” to the Quarterly Consolidated Financial Statements.

As a result of the analysis performed by the Corporation to determine declines in market value that are other-than-temporary, there were no write downs for other-than-temporary impairments related to investments for the year ended December 31, 2017. The Corporation recorded write-downs of $0.0 million for other-than-temporary impairment related to equity investments for the year ended December 31, 2016. In addition, there were no write-downs for other-than-temporary impairments related to investments recorded for the nine months ended September 30, 2018 and September 30, 2017.

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 respective analyses 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 investment where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, we would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell a fixed maturity investment at a loss. Prior to the adoption of ASU 2016-01, the Company considered the ability and intent to hold an equity investment for a period of time sufficient to allow for anticipated recovery.

At December 31, 2017 and 2016, the gross unrealized losses for fixed maturities and equity investments amounted to $0.8 million and $0.2 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities. At September 30, 2018, the gross unrealized losses for fixed maturities amounted to $0.2 million, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each of September 30, 2018, December 31, 2017 and December 31, 2016, all unrealized losses on individual investments were considered temporary.

Limited Liability Investments

The Corporation owns investments in various limited liability companies (“LLCs”) and limited partnerships (“LPs”). The Corporation’s investments in these LLCs and LPs are accounted for under the equity method of accounting and reported as limited liability investments in the consolidated balance sheets. The most recently available financial statements of the LLCs and LPs are used in applying the equity method. The difference between the end of the reporting period of the LLCs and LPs and that of the Corporation is no more than three months. Tables 5 and 6 below present additional information pertaining to the limited liability investments at September 30, 2018, December 31, 2017 and 2016.

TABLE 5 Limited liability investments

As of December 31 (in thousands of dollars)

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TABLE 6 Limited liability investments

(in thousands of dollars)

Triple Net Lease Investments

Table 7 below presents total income from triple net lease investments included in the Corporation’s income from continuing operations for the years ended December 31, 2017 and 2016, Table 8 below presents total income from triple net lease investments included in the Corporation’s loss from continuing operations for the nine months ended September 30, 2018 and September 30, 2017.

TABLE 7 Income from triple net lease investments included in income from continuing operations

For the years ended December 31 (in thousands of dollars)

TABLE 8 Income from triple net lease investments included in loss from continuing operations

(in thousands of dollars)

Income from triple net lease limited liability investments in the tables above is recognized based on the Corporation’s share of the earnings of the limited liability entities and is included in net investment (loss) income in the Corporation’s consolidated statements of operations.

Income from CMC operations in Table 7 above is comprised of Leased Real Estate segment operating income of $3.1 million and $0.6 million, respectively, amortization of intangible assets of $0.1 million and $0.0 million, respectively and income tax expense of $0.5 million and $0.1 million, respectively. Income from CMC operations in Table 8 above is comprised of Leased Real Estate segment operating income of $2.0 million and $2.3 million, respectively, year to date and prior year to date, amortization of intangible assets of $0.0 million and $0.0 million, respectively, year to date and prior year to date and income tax expense of $0.2 million and $0.5 million, respectively, year to date and prior year to date.

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Non-recurring income tax benefit related to CMC in the tables above for the year ended December 31, 2017 relates to the decrease in CMC’s net deferred income tax liabilities as a result of the reduction in the corporate income tax rate due to the Tax Act. See Note 18, “Income Taxes,” to the Audited Consolidated Financial Statements and Note 15, “Income Taxes,” to the Quarterly Consolidated Financial Statements for further discussion regarding the Tax Act. Non-recurring income tax benefit related to CMC in the tables above for the year ended December 31, 2016 is related to the partial release of the Corporation’s valuation allowance carried against its deferred income tax assets as a result of the acquisition of CMC.

With respect to CMC, the Corporation expects to record income each year based upon the rental income recognized under its existing triple net lease agreement on the Real Property less operating expenses, which are comprised principally of interest on the Mortgage and depreciation and amortization of certain of the assets acquired. Over the next three years, the Corporation generally expects to recognize in its consolidated statements of operations income of approximately $2.8 to $3.1 million per year, before legal expenses, related to its ownership of CMC. Because of the Lease Amendment, CMC may be in a position to distribute to the Corporation some of the cash received from the additional rental income. Any material cash flow to the Corporation, however, remains likely to occur only upon the occurrence of one of the three events that would trigger payment of service fees. There can be no assurance as to the timing of the occurrence, or the resulting outcome, from one of these events. Refer to the “Liquidity and Capital Resources” section below for further discussion.

Limited Liability Investment, at Fair Value

The Corporation’s investment in 1347 Investors is accounted for at fair value and reported as limited liability investment, at fair value in the consolidated balance sheets. The Corporation owns 15.9% of the outstanding units of 1347 Investors as of September 30, 2018. As of December 31, 2017 and December 31, 2016, the carrying value of the Corporation’s limited liability investment, at fair value was $5.8 million and 6.1 million, respectively. As of September 30, 2018, the carrying value of the Corporation’s limited liability investment, at fair value was $4.5 million. Originally, the Corporation owned 61.0% of the outstanding units of 1347 Investors. Because the Corporation owned more than 50% of the outstanding units, 1347 Investors had been included in the consolidated financial statements of the Corporation. 1347 Investors had an investment in the common stock and private units of 1347 Capital Corp. which was reflected in investment in investee in the consolidated balance sheets. 1347 Capital Corp. was formed for the purpose of entering into a merger, share exchange, asset acquisition or other similar business combination with one or more businesses or entities.

On July 21, 2016, Limbach Holdings LLC announced the closing of its previously announced merger with 1347 Capital Corp. and was renamed Limbach Holdings, Inc. (“Limbach”). As a result of this transaction, the Corporation’s ownership percentage in 1347 Investors was reduced from 61.0% to 26.7%, leading the Corporation to record a $5.6 million gain during the third quarter of 2016 related to the deconsolidation of 1347 Investors. This gain resulted from removing the carrying value of the noncontrolling interest in 1347 Investors and the carrying value of the consolidated net assets of 1347 Investors, and recording the fair value at the time of the transaction of the Corporation’s 26.7% retained investment in 1347 Investors. At the time of the transaction, the noncontrolling interest representing 39.0% of 1347 Investors had been carried by the Corporation at $1.5 million.

As a result of recording a gain of $5.6 million in the consolidated statements of operations and a reduction to shareholders’ equity of $1.5 million from the removal of the noncontrolling interest in 1347 Investors, the Corporation reported a net increase in its shareholders’ equity of $4.1 million during the third quarter of 2016 related to the closing of the Limbach merger and the related deconsolidation of 1347 Investors. Following the transaction, the principal asset of 1347 Investors is its holdings of Limbach common shares.

During the fourth quarter of 2016, the Corporation made an irrevocable election to account for its remaining investment in 1347 Investors at fair value, with any changes in fair value to be reported in net investment income

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in the consolidated statements of operations. The fair value of this investment is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs. The Corporation recorded net investment loss of $0.3 million and net investment income of $1.3 million related to this investment for the years ended December 31, 2017 and 2016, respectively. The Corporation recorded net investment loss of $1.5 million for the nine months ended September 30, 2018 and $0.4 million for the nine months ended September 30, 2017.

PROPERTY AND CASUALTY UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES

As a result of classifying Mendota, Mendakota and MCC as discontinued operations, the results of their operations are reported separately for all periods presented and their liabilities are presented as held for sale in the consolidated balance sheets at September 30, 2018, December 31, 2017 and December 31, 2016. All property and casualty unpaid loss and loss adjustment expenses information in the section below has been restated to exclude Mendota, Mendakota and MCC for all periods presented.

Property and casualty unpaid loss and loss adjustment expenses represent the estimated liabilities for reported loss events, IBNR loss events and the related estimated loss adjustment expenses.

Tables 9 through 12 present distributions, by line of business, of the provision for property and casualty unpaid loss and loss adjustment expenses gross and net of external reinsurance, respectively.

TABLE 9 Provision for property and casualty unpaid loss and loss adjustment expenses – gross

TABLE 10 Provision for property and casualty unpaid loss and loss adjustment expenses - gross

(in thousands of dollars)

TABLE 11 Provision for property and casualty unpaid loss and loss adjustment expenses—net of reinsurance recoverable

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TABLE 12 Provision for property and casualty unpaid loss and loss adjustment expenses - net of reinsurance recoverable (in thousands of dollars)

Non-Standard Automobile

At December 31, 2017 and December 31, 2016, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our non-standard automobile business were $0.6 million and $1.1 million, respectively. The decrease is due to a decrease in unpaid loss and loss adjustment expenses at Amigo.

At September 30, 2018, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our non-standard automobile business was $0.8 million. The increase from December 31, 2017 is due to an increase in unpaid loss adjustment expenses at Amigo.

Commercial Automobile

At December 31, 2017 and December 31, 2016, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our commercial automobile business were $0.6 million and $0.9 million, respectively. The decrease is due to a decrease in unpaid loss and loss adjustment expenses at Amigo.

At September 30, 2018, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our commercial automobile business was $0.9 million. The increase from December 31, 2017 is due to an increase in unpaid loss adjustment expenses at Amigo.

Other

At December 31, 2017 and December 31, 2016, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our other business were $0.2 million and $0.2 million, respectively.

At September 30, 2018, the gross provisions for property and casualty unpaid loss and loss adjustment expenses for our other business was $0.6 million. The increase from December 31, 2017 is due to an increase in unpaid loss adjustment expenses at Amigo.

Information with respect to development of our provision for prior years’ property and casualty loss and loss adjustment expenses is presented in Tables 13 and 14.

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TABLE 13 Increase (decrease) in prior years’ provision for property and casualty loss and loss adjustment expenses by line of business and accident year

For the year ended December 31, 2017 (in thousands of dollars)

For the year ended December 31, 2016 (in thousands of dollars)

TABLE 14 Increase in prior years’ provision for property and casualty loss and loss adjustment expenses

(in thousands of dollars)

For the nine months ended September 30, 2018, the Company reported unfavorable development of $1.6 million compared with unfavorable development of $0.3 million prior year to date. The unfavorable development reported for the nine months ended September 30, 2018 and September 30, 2017 was related to an increase in property and casualty loss adjustment expenses due to the continuing voluntary run-off of Amigo.

See the “Critical Accounting Estimates and Assumptions” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information pertaining to the Company’s process of estimating the provision for unpaid loss and loss adjustment expenses.

DEBT

Note Payable

As part of the acquisition of CMC, the Corporation assumed the Mortgage and recorded the Mortgage at its estimated fair value of $191.7 million, which included 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 a fixed 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 as the amortization of the premium using the effective interest rate method.

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Bank Loan

On October 12, 2017, the Corporation borrowed a principal amount of $5.0 million from a bank to partially finance its acquisition of PWSC. The bank loan matures on October 12, 2022 and has a fixed interest rate of 5.0%. The bank loan is carried in the consolidated balance sheets at its unpaid principal balance.

Subordinated Debt

Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Corporation 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 bear interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. The Corporation 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 first quarter of 2011, the Corporation 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 indentures, which permit interest deferral. This action does not constitute a default under the Corporation’s Trust Preferred indentures or any of its other debt indentures. On November 6, 2015, the Corporation paid $22.1 million to its Trust Preferred trustees to be used by the trustees to pay the interest which the Corporation had been deferring since the first quarter of 2011.

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.

The Corporation’s subordinated debt is measured and reported at fair value. At December 31, 2017, the carrying value of the subordinated debt is $52.1 million. At September 30, 2018, the carrying value of the subordinated debt is $53.6 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 20, “Fair Value of Financial Instruments,” to the Quarterly Consolidated Financial Statements.

During the year ended December 31, 2017, the market observable swap rates changed, and the Corporation experienced a decrease in the credit spread assumption developed by the third party. During the nine months ended September 30, 2018, the market observable swap rates changed, and the Corporation 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 LIBOR swap rates has the effect of increasing the fair value of the Corporation’s subordinated debt while an increase in the risk-free swap rates has the effect of decreasing the fair value. The decrease in the credit spread assumption has the effect of increasing the fair value of the Corporation’s subordinated debt while an increase in the credit spread assumption has the effect of decreasing 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 2017, along with the passage of time, contributed to the $8.5 million increase in fair value of the Corporation’s subordinated debt between December 31, 2016 and December 31, 2017. This increase in fair value is reported as loss on change in fair value of debt in the Corporation’s consolidated statements of operations. The changes to the credit spread and swap rate variables during the nine months ended September 30, 2018, along with the passage of time, contributed to the $1.5 million increase in fair value of the Corporation’s subordinated debt between December 31, 2017 and September 30, 2018.

As further discussed in Note 4, “Recently Issued Accounting Standards,” to the Quarterly Consolidated Financial Statements, effective January 1, 2018, the Corporation adopted ASU 2016-01. As a result, the portion of the

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change in fair value of subordinated debt related to the instrument-specific credit risk is now recognized in other comprehensive income (loss), whereas for 2017, the total change in fair value of subordinated debt was recorded in net income (loss). Of the $1.5 million increase in fair value of the Corporation’s subordinated debt between December 31, 2017 and September 30, 2018, $1.0 million is reported as decrease in fair value of debt attributable to instrument-specific credit risk in the Corporation’s unaudited consolidated statements of comprehensive loss and $2.5 million is reported as loss on change in fair value of debt in the Corporation’s unaudited consolidated statements of operations.

Also as a result of the adoption of ASU 2016-01, a cumulative $40.5 million change in fair value of subordinated debt attributable to instrument-specific credit risk was reclassified from accumulated deficit to accumulated other comprehensive income (loss) as of January 1, 2018. As long as the Corporation repays its subordinated debt at maturity, it can be expected that this $40.5 million reclassification will reverse without being reported in the Corporation’s consolidated statements of operations. Though changes in the market observable swap rates will continue to introduce some volatility each quarter to the Corporation’s reported gain or loss on change in fair value of debt, changes in the credit spread assumption developed by the third party will no longer introduce volatility to the Corporation’s consolidated statements of operations. The fair value of the Corporation’s subordinated debt will eventually equal the principal value of the subordinated debt by the time of the 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 last of the Corporation’s outstanding trusts.

For a description of each of the Corporation’s six subsidiary trusts, see Note 11, “Debt,” to the Quarterly Consolidated Financial Statements.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4, “Recently Issued Accounting Standards,” to the Quarterly Consolidated Financial Statements, for discussion of certain accounting standards that may be applicable to the Corporation’s current and future consolidated financial statements.

reconciliation between the Company’s reported net loss of $14.5 million and the $3.9 million of net cash used in operating activities from continuing operations can be explained primarily by the $7.8 million loss on disposal of discontinued operations, $5.1 million of depreciation and amortization expense, the $2.5 million loss on change in fair value of debt and the increase in deferred service fees of $4.0 million, offset by $2.1 million of income from discontinued operations, $1.9 million of stock-based compensation benefit, the $2.5 million increase in service fee receivable, the $1.3 million increase in other receivables and the $1.0 million gain on change in fair value of equity investments.

During 2017, the net cash used in investing activities from continuing operations as reported on the consolidated statements of cash flows was $3.6 million. This use of cash was driven primarily by purchases of fixed maturities, equity investments and limited liability investments and net cash used for acquisition of business in excess of proceeds from sales and maturities of fixed maturities, equity investments, other investments and short-term investments, net disposals of property and equipment and the net proceeds from the sale of discontinued operations.

During the nine months ended September 30, 2018, the net cash provided by investing activities from continuing operations as reported on the unaudited consolidated statements of cash flows was $9.6 million. This source of cash was driven primarily by proceeds from sales and maturities of fixed maturities, equity investments, other investments and investee in excess of purchases of fixed maturities, equity investments and limited liability investments; proceeds from disposal of subsidiary; and the net proceeds from sale of discontinued operations.

During 2017, the net cash provided by financing activities from continuing operations as reported on the consolidated statements of cash flows was $2.2 million. During the nine months ended September 30, 2018, the net cash used in financing activities from continuing operations as reported on the unaudited consolidated statements of cash flows was $3.0 million. This use of cash is attributed to principal repayments of $2.2 million on the Mortgage and $0.8 million on the bank loan.

In summary, as reported on the consolidated statements of cash flows, the Corporation’s net decrease in cash and cash equivalents from continuing operations during 2017 was $11.2 million and the Corporation’s net increase in cash and cash equivalents from continuing operations during the nine months ended September 30, 2018 was $2.8 million. The absence of cash flows from discontinued operations, whether positive or negative, is not expected to adversely affect the Corporation’s future liquidity and capital resources given that the discontinued operations are comprised of insurance subsidiaries formerly reported as part of the Corporation’s Insurance Underwriting segment. Receipt of dividends from the Corporation’s insurance subsidiaries has not generally been considered a source of liquidity for the holding company. The insurance subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. At September 30, 2018 and December 31, 2017, the U.S. insurance subsidiaries of the Corporation were restricted from making any dividend payments to the holding company without regulatory approval pursuant to the domiciliary state insurance regulations.

The Corporation’s Extended Warranty subsidiaries fund their obligations primarily through service fee and commission income. The Corporation’s Leased Real Estate subsidiary funds its obligations through rental income. The Corporation’s insurance subsidiaries fund their obligations primarily through investment income and maturities in the investments portfolios.

The liquidity of the holding company is managed separately from its subsidiaries. Actions available to the holding company to raise liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities and certain excess cash flow from the Company’s Extended Warranty subsidiaries. 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.

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Receipt of dividends from the Extended Warranty subsidiaries is limited for the holding company at this time even though excess cash generated by Trinity’s operating results is freely available for distribution to the holding company. IWS is somewhat constrained from paying dividends, given the existence of a 10% minority owner of its common equity, and PWSC is constrained from paying dividends while the bank loan incurred to partially finance the acquisition of PWSC remains outstanding.

Receipt of dividends from the Leased Real Estate segment is not generally considered a source of liquidity for the holding company. Because of the Lease Amendment, CMC may be in a position to distribute to the Corporation some of the cash received from the additional rental income. Any material cash flow to the Corporation, however, to help the Corporation meet its holding company obligations remains likely to occur only upon the occurrence of one of the three events described in the next paragraph that would trigger payment of service fees. There can be no assurance as to the timing of the occurrence, or the resulting outcome, from one of these events.

Pursuant to the terms of the management services agreement entered into at the closing of the acquisition of CMC, an affiliate of the seller (the “Service Provider”) will provide certain services to CMC and its subsidiaries in exchange for service fees. Such services (collectively, the “Services”) will include (i) causing an affiliate of the Service Provider to guaranty certain obligations of the Property Owner (pursuant to an Indemnity and Guaranty Agreement between such affiliate and the holder of the Mortgage (the “Mortgagor”)), (ii) providing certain individuals to serve as members of the board of directors and/or certain executive officers of CMC and/or its subsidiaries and (iii) providing asset management services with respect to the Real Property. In exchange for the Services, the Property Owner will pay certain fees to the Service Provider. The payment of such service fees may be triggered by (i) a sale of the Real Property, (ii) a restructuring of the lease to which the Real Property is subject or (iii) a refinancing or restructuring of the Mortgage. The amount of the service fees will range from 40%-80% of the net proceeds generated by the event triggering the payment of the service fees (depending on the nature and timing of the triggering event). The Lease Amendment has not triggered the payment of service fees to the Service Provider.

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 $0.6 million and $14.9 million at December 31, 2017 and December 31, 2016, respectively. The holding company’s liquidity was $2.5 million at September 30, 2018. These amounts are reflected in the cash and cash equivalents of $23.6 million, $20.8 million, $32.0 million reported at September 30, 2018, December 31, 2017 and December 31, 2016, respectively, on the Corporation’s consolidated balance sheets. The cash and cash equivalents other than the holding company’s liquidity represent restricted and unrestricted cash held by Amigo, Kingsway Re and the Corporation’s Extended Warranty and Leased Real Estate subsidiaries and are not considered to be available to meet holding company obligations, which primarily consist of interest payments on subordinated debt; holding company operating expenses; transaction related expenses; investments; and any other extraordinary demands on the holding company. Specifically pursuant to the definitive agreement to sell Mendota, Mendakota and MCC (the “Acquired Companies”) that the Corporation completed on October 18, 2018, the Corporation has deployed the proceeds from the sale to acquire equity investments, limited liability investments, limited liability investment, at fair value and other investments owned by the Acquired Companies at the time of the closing and to fund $5.0 million into an escrow account to be used to satisfy potential indemnity obligations under the definitive agreement. See “Regulatory Capital” section below for further discussion.

The holding company’s liquidity of $2.5 million at September 30, 2018 represented approximately six months of regularly recurring operating expenses before any transaction related expenses, any new holding company investments or any other extraordinary demands on the holding company.

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. As a result of this action, the projected obligations of the holding company for the subsequent twelve-month period have been reduced by approximately

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$6.2 million based upon current LIBOR. The holding company’s liquidity of $2.5 million at September 30, 2018 represents only actual cash on hand and does not include cash that would be made available to the holding company from the sale of investments, particularly investments in publicly traded securities, owned by the holding company.

In addition, the holding company has access to some of the operating cash generated by the Extended Warranty subsidiaries. While these sources do not represent cash of the holding company at September 30, 2018, they do represent future sources of liquidity that make it probable that the holding company will be able to meet its obligations as they become due over the next 12 months.

While the Corporation believes it has sources of liquidity available to allow it to continue to meet its holding company obligations, there can be no assurance that such sources of liquidity will be available when needed.

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 casualty insurance 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, 2017, surplus as regards policyholders reported by Amigo exceeded the 200% threshold.

During the fourth quarter of 2012, the Corporation began taking steps to place all of Amigo into voluntary run-off. As of December 31, 2012, Amigo’s RBC was 157%. In April 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 in compliance with that plan. As of December 31, 2017, Amigo’s RBC was 5,206%.

Kingsway Re, our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimum capital levels. As of December 31, 2017, the capital maintained by Kingsway Reinsurance Corporation was in excess of the regulatory capital requirements in Barbados.

CONTRACTUAL OBLIGATIONS

Table 15 summarizes cash disbursements related to the Corporation’s contractual obligations projected by period, including debt maturities, interest payments on outstanding debt, the provision for unpaid loss and loss adjustment expenses and future minimum payments under operating leases. Interest payments in Table 15 related to the subordinated debt assume LIBOR remains constant throughout the projection period.

Our provision for unpaid loss and loss adjustment expenses does not have contractual payment dates. In Table 15 below, we have included a projection of when we expect our unpaid loss and loss adjustment expenses to be paid, based on historical payment patterns. The exact timing of the payment of unpaid loss and loss adjustment expenses cannot be predicted with certainty. We maintain an investments portfolio with varying maturities and a substantial amount in short-term investments to provide adequate cash flows for the projected payments in Table 15. The unpaid loss and loss adjustment expenses in Table 8 have not been reduced by amounts recoverable from reinsurers.

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TABLE 15 Cash payments related to contractual obligations projected by period

As of December 31, 2017 (in thousands of dollars)

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation has off-balance sheet arrangements related to a guarantee, which is further described in Note 22, “Commitments and Contingencies,” to the Quarterly Consolidated Financial Statements.

Table 16 below summarizes the fair value by contractual maturities of the fixed maturities portfolio, excluding cash and cash equivalents, at December 31, 2017 and 2016.

TABLE 16 Fair value of fixed maturities by contractual maturity date

As of December 31 (in thousands of dollars, except for percentages)