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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended
March 31, 2021
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____ to _____
Commission File Number: 001-15204
Kingsway Financial Services Inc.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
85-1792291 (I.R.S. Employer
Identification No.)
150 E. Pierce Road, Itasca, IL 60143
(Address of principal executive offices and zip code)
1-847-871-6408
(Registrant's telephone number, including area code)
_________________________

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o

Smaller Reporting Company x
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares, including restricted common shares, outstanding of the registrant's common stock as of May 13, 2021 was 23,705,631.


KINGSWAY FINANCIAL SERVICES INC.
Table Of Contents
PART I - FINANCIAL INFORMATION
3
ITEM 1. FINANCIAL STATEMENTS
3
Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020
3
Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (unaudited)
4
Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)
5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES

















2

KINGSWAY FINANCIAL SERVICES INC.


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands, except share data)
March 31, 2021 December 31, 2020
(unaudited)
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $19,699 and $20,488, respectively) $ 19,864  $ 20,716 
Equity investments, at fair value (cost of $1,147 and $1,157, respectively) 270  444 
Limited liability investments
3,683  3,692 
Limited liability investments, at fair value
19,654  32,811 
Investments in private companies, at adjusted cost
790  790 
Real estate investments, at fair value (cost of $10,225 and $10,225, respectively)
10,662  10,662 
Other investments, at cost which approximates fair value
299  294 
Short-term investments, at cost which approximates fair value 157  157 
Total investments
55,379  69,566 
Cash and cash equivalents
15,489  14,374 
Restricted cash
29,542  30,571 
Accrued investment income
800  757 
Service fee receivable, net of allowance for doubtful accounts of $289 and $478, respectively 4,963  3,928 
Other receivables, net of allowance for doubtful accounts of $201 and $201, respectively 18,187  16,323 
Deferred acquisition costs, net 8,843  8,835 
Property and equipment, net of accumulated depreciation of $25,492 and $24,441, respectively 94,192  95,015 
Right-of-use asset 2,760  2,960 
Goodwill 121,286  121,130 
Intangible assets, net of accumulated amortization of $15,930 and $15,433, respectively 83,636  84,133 
Other assets
4,744  4,882 
Total Assets $ 439,821  $ 452,474 
Liabilities and Shareholders' Equity
Liabilities:
Accrued expenses and other liabilities
$ 42,716  $ 42,502 
Income taxes payable
3,143  2,859 
Deferred service fees
86,871  87,945 
Unpaid loss and loss adjustment expenses
1,414  1,449 
Bank loan 24,089  25,303 
Notes payable
179,271  192,057 
Subordinated debt, at fair value
53,668  50,928 
Lease liability
3,008  3,213 
Net deferred income tax liabilities
27,037  27,555 
Total Liabilities 421,217  433,811 
Redeemable Class A preferred stock, no par value; 1,000,000 and 1,000,000 authorized at March 31, 2021 and December 31, 2020, respectively; 182,876 and 182,876 issued and outstanding at March 31, 2021 and December 31, 2020, respectively; redemption amount of $6,742 and $6,658 at March 31, 2021 and December 31, 2020, respectively 6,742  6,504 
Shareholders' Equity:
Common stock, no par value; 50,000,000 and 50,000,000 authorized at March 31, 2021 and December 31, 2020, respectively; 22,365,631 and 22,211,069 issued and outstanding at March 31, 2021 and December 31, 2020, respectively —  — 
Additional paid-in capital 355,999  355,242 
Treasury stock, at cost; 247,450 and 247,450 outstanding at March 31, 2021 and December 31, 2020, respectively (492) (492)
Accumulated deficit (394,167) (394,807)
Accumulated other comprehensive income 36,279  38,059 
Shareholders' equity attributable to common shareholders (2,381) (1,998)
Noncontrolling interests in consolidated subsidiaries 14,243  14,157 
Total Shareholders' Equity 11,862  12,159 
Total Liabilities, Class A preferred stock and Shareholders' Equity $ 439,821  $ 452,474 

See accompanying notes to unaudited consolidated financial statements.
3

KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three months ended March 31,
2021 2020
Revenues:
Service fee and commission revenue $ 18,574  $ 11,186 
Rental revenue 3,341  3,341 
Other revenue 105  142 
Total revenues 22,020  14,669 
Operating expenses:
Claims authorized on vehicle service agreements 4,667  2,380 
Loss and loss adjustment expenses
13 
Commissions
1,504  1,303 
Cost of services sold
980  403 
General and administrative expenses
12,466  10,693 
Leased real estate segment interest expense
1,468  1,499 
Total operating expenses 21,093  16,291 
Operating income (loss) 927  (1,622)
Other revenues (expenses), net:
Net investment income
421  719 
Net realized gains 51  208 
Loss on change in fair value of equity investments (151) (597)
(Loss) gain on change in fair value of limited liability investments, at fair value (202) 1,899 
Net change in unrealized loss on private company investments
—  (670)
Other-than-temporary impairment loss
—  (117)
Non-operating other revenue 39 
Interest expense not allocated to segments
(1,552) (2,153)
Amortization of intangible assets
(497) (574)
(Loss) gain on change in fair value of debt
(1,019) 2,645 
Gain on extinguishment of debt 2,494  — 
Total other (expenses) revenues, net (453) 1,399 
Income (loss) before income tax (benefit) expense 474  (223)
Income tax (benefit) expense (425) 170 
Net income (loss) 899  (393)
Less: net income attributable to noncontrolling interests in consolidated subsidiaries 259  721 
Less: dividends on preferred stock 238  377 
Net income (loss) attributable to common shareholders $ 402  $ (1,491)
Earnings (loss) per share – net income (loss) attributable to common shareholders:
Basic: $ 0.02  $ (0.07)
Diluted:
$ 0.02  $ (0.07)
Weighted-average shares outstanding (in ‘000s):
Basic: 22,218  22,069 
Diluted: 22,219  22,069 

See accompanying notes to unaudited consolidated financial statements.
4

KINGSWAY FINANCIAL SERVICES INC.

Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
(Unaudited)
Three months ended March 31,
2021 2020
Net income (loss) $ 899  $ (393)
Other comprehensive (loss) income, net of taxes(1):
Unrealized (losses) gains on available-for-sale investments:
Unrealized (losses) gains arising during the period
(75) 55 
Reclassification adjustment for amounts included in net income (loss) 12  61 
Change in fair value of debt attributable to instrument-specific credit risk (1,721) 11,623 
Other comprehensive (loss) income (1,784) 11,739 
Comprehensive (loss) income (885) 11,346 
Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries 256  729 
Comprehensive (loss) income attributable to common shareholders $ (1,141) $ 10,617 
(1) Net of income tax (benefit) expense of $0 and $0 for the three months ended March 31, 2021 and March 31, 2020, respectively.

See accompanying notes to unaudited consolidated financial statements
5

KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Shareholders' Equity
(in thousands, except share data)

Three Months Ended March 31, 2021
Common Stock Additional Paid-in Capital Treasury Stock Accumulated Deficit Accumulated Other Comprehensive Income Shareholders' Equity Attributable to Common Shareholders Noncontrolling Interests in Consolidated Subsidiaries Total Shareholders' Equity
Shares Amount
Balance, December 31, 2020 22,211,069  $ —  $ 355,242  $ (492) $ (394,807) $ 38,059  $ (1,998) $ 14,157  $ 12,159 
Vesting of restricted stock awards, net of share settlements for tax withholdings 154,562  —  —  —  —  —  —  —  — 
Net income —  —  —  —  640  —  640  259  899 
Preferred stock dividends —  —  (238) —  —  —  (238) —  (238)
Distributions to noncontrolling interest holders —  —  —  —  —  —  —  (169) (169)
Other comprehensive loss —  —  —  —  —  (1,780) (1,780) (4) (1,784)
Stock-based compensation, net of forfeitures —  —  995  —  —  —  995  —  995 
Balance, March 31, 2021 22,365,631  $ —  $ 355,999  $ (492) $ (394,167) $ 36,279  $ (2,381) $ 14,243  $ 11,862 

Three Months Ended March 31, 2020
Common Stock Additional Paid-in Capital Treasury Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Shareholders' Equity Attributable to Common Shareholders Noncontrolling Interests in Consolidated Subsidiaries Total Shareholders' Equity
Shares Amount
Balance, December 31, 2019 21,866,959  $ —  $ 354,101  $ (492) $ (388,082) $ 35,347  $ 874  $ 13,080  $ 13,954 
Vesting of restricted stock awards, net of share settlements for tax withholdings 94,110  —  —  —  —  —  —  —  — 
Conversion of redeemable Class A preferred stock to common stock 250,000  —  1,381  —  —  —  1,381  —  1,381 
Net (loss) income —  —  —  —  (1,114) —  (1,114) 721  (393)
Preferred stock dividends —  —  (377) —  —  —  (377) —  (377)
Distributions to noncontrolling interest holders —  —  —  —  —  —  —  (43) (43)
Other comprehensive income —  —  —  —  —  11,731  11,731  11,739 
Stock-based compensation, net of forfeitures —  —  (38) —  —  —  (38) —  (38)
Balance, March 31, 2020 22,211,069  $ —  $ 355,067  $ (492) $ (389,196) $ 47,078  $ 12,457  $ 13,766  $ 26,223 

See accompanying notes to unaudited consolidated financial statements
6

KINGSWAY FINANCIAL SERVICES INC.

Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended March 31,
2021 2020
Cash provided by (used in):
Operating activities:
Net income (loss) $ 899  $ (393)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Equity in net loss (income) of limited liability investments (23)
Depreciation and amortization expense 1,548  1,667 
Stock-based compensation expense (benefit), net of forfeitures 1,699  (38)
Net realized gains (51) (208)
Loss on change in fair value of equity investments 151  597 
Loss (gain) on change in fair value of limited liability investments, at fair value 202  (1,899)
Net change in unrealized loss on private company investments —  670 
Loss (gain) on change in fair value of debt 1,019  (2,645)
Deferred income taxes (518) 131 
Other-than-temporary impairment loss —  117 
Amortization of fixed maturities premiums and discounts 44  31 
Amortization of note payable premium (218) (225)
Gain on extinguishment of debt (2,494) — 
Changes in operating assets and liabilities:
Service fee receivable, net (1,035) 138 
Other receivables, net, (1,864) 2,274 
Deferred acquisition costs, net (8) (140)
Unpaid loss and loss adjustment expenses (35) (83)
Deferred service fees (1,074) (33)
Other, net (143) 675 
Net cash (used in) provided by operating activities (1,869) 613 
Investing activities:
Proceeds from sales and maturities of fixed maturities 1,970  8,646 
Proceeds from sales of equity investments 23  — 
Purchases of fixed maturities (1,214) (1,549)
Net proceeds from limited liability investments —  87 
Net proceeds from limited liability investments, at fair value 12,977  77 
Net proceeds from investments in private companies 17  60 
Net (purchases of) proceeds from other investments (5) 52 
Net purchases of from short-term investments —  (1)
Acquisition of business, net of cash acquired (50) — 
Net purchases of property and equipment (228) (40)
Net cash provided by investing activities 13,490  7,332 
Financing activities:
Distributions to noncontrolling interest holders (169) (43)
Taxes paid related to net share settlements of restricted stock awards (38) (83)
Principal payments on bank loan (1,235) (562)
Principal payments on notes payable (10,093) (991)
Net cash used in financing activities (11,535) (1,679)
Net increase in cash and cash equivalents and restricted cash 86  6,266 
Cash and cash equivalents and restricted cash at beginning of period 44,945  25,661 
Cash and cash equivalents and restricted cash at end of period $ 45,031  $ 31,927 

See accompanying notes to unaudited consolidated financial statements.
7

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021







NOTE 1 BUSINESS
Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Effective December 31, 2018, the Company changed its jurisdiction of incorporation from the province of Ontario, Canada, to the State of Delaware. Kingsway is a holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries.

NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year.
The accompanying unaudited consolidated interim financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included within our Annual Report on Form 10-K ("2020 Annual Report") for the year ended December 31, 2020.
The unaudited consolidated interim financial statements include the accounts of the Company and its subsidiaries, as well as certain variable interest entities as further described in Note 6, "Variable Interest Entities," to the consolidated financial statements in the 2020 Annual Report. All material intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined.
The critical accounting estimates and assumptions in the accompanying unaudited consolidated interim financial statements include the provision for unpaid loss and loss adjustment expenses; valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; valuation of mandatorily redeemable preferred stock; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for subordinated debt obligations; fair value assumptions for stock-based compensation liabilities; and revenue recognition.
The fair values of the Company's investments in fixed maturities and equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, warrant liability and stock-based compensation liabilities are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal balance. The carrying amounts reported in the consolidated balance sheets approximate fair values for cash and cash equivalents, restricted cash, short-term investments and certain other assets and other liabilities because of their short-term nature.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as set forth below there have been no material changes to our significant accounting policies as reported in our 2020 Annual Report.
8

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. The near-term impacts of COVID-19 are primarily with respect to the Company’s Extended Warranty segment. As consumer spending has been impacted, including a decline in the purchase of new and used vehicles, and many businesses through which the Company distributes its products either remain closed or are open but with capacity constraints, the Company has seen cash flows being affected by a reduction in new warranty sales for vehicle service agreements. With respect to homeowner warranties, the Company experienced an initial reduction in new enrollments in its home warranty programs associated with the impact of COVID-19 on new home sales in the United States. There remain many unknowns and the Company continues to monitor the expected trends and related demand for its services and has and will continue to adjust its operations accordingly.
The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, potential impairment charges to the carrying amounts of goodwill, indefinite-lived intangibles and long-lived assets, the loss in value of investments, as well as the potential for adverse impacts on the Company's debt covenant financial ratios. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated.
Holding Company Liquidity
The Company's Extended Warranty subsidiaries fund their obligations primarily through service fee and commission revenue. The Company's Leased Real Estate subsidiary funds its obligations through rental income. The Company's insurance subsidiaries fund their obligations primarily through available cash and cash equivalents.
The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; certain debt and associated interest; and any other extraordinary demands on the holding company.
Actions available to the holding company to increase liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; distributions from the Company’s Extended Warranty subsidiaries, subject to certain restrictions; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.
Historically, dividends from the Leased Real Estate segment are not generally considered a source of liquidity for the holding company, except upon the occurrence of certain events that would trigger payment of service fees. However, as more fully described in Note 20, "Commitments and Contingencies," the holding company is now permitted to receive 20% of the proceeds from the increased rental payments resulting from an earlier amendment to the lease (or any borrowings against such increased rental payments).
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 $3.8 million (approximately eight months of operating cash outflows) and $1.1 million at March 31, 2021 and December 31, 2020, respectively. The amount as of March 31, 2021 excludes future actions available to the holding company that could be taken to increase liquidity. The holding company cash amounts are reflected in the cash and cash equivalents of $15.5 million and $14.4 million reported at March 31, 2021 and December 31, 2020, respectively, on the Company’s consolidated balance sheets. The cash and cash equivalents and restricted cash other than the holding company’s liquidity represent restricted and unrestricted cash held by Kingsway Amigo Insurance Company ("Amigo"), Kingsway Reinsurance Corporation and the Company’s Extended Warranty and Leased Real Estate segments.
As of March 31, 2021, there are 182,876 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. The outstanding Preferred Shares are required to be redeemed by the Company on April 1, 2021 ("Redemption Date") at a redemption value of $6.7 million, if the Company has sufficient legally available funds to do so. Additionally, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities")
9

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






and, because of the deferral which totaled $15.2 million at March 31, 2021, the Company is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred. If the Company was required to pay either the Preferred Shares redemption value or both the deferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company currently projects that it would not have sufficient legally available funds to do so. However, the Company would be prohibited from doing so under Delaware law and, as such, (a) the interest which totaled $15.2 million on March 31, 2021 on the trust preferred securities would remain on deferral as permitted under the indentures and (b) in accordance with Delaware law the Preferred Shares would not be redeemed on the Redemption Date (with a redemption value of $6.7 million) and would instead remain outstanding and continue to accrue dividends until such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. In such a situation, the Company would continue to operate in the ordinary course.
The Company notes there are several variables to consider in such a situation, and management is currently exploring the following opportunities: negotiating with the holders of the Preferred Shares with respect to the Redemption Date and/or other key provisions, raising additional funds through capital market transactions, as well as the Company’s continued strategy of working to monetize its non-core investments while attempting to maximize the tradeoff between liquidity and value received.
Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, excluding the cash that may be required to redeem the Preferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
(a)    Adoption of New Accounting Standards:
Effective January 1, 2021, the Company adopted Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes by eliminating certain exceptions to the guidance in ASC Topic 740, Income Taxes, related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Further, ASU 2019-12 clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. The adoption of ASU 2019-12 did not have a material effect on the Company’s consolidated financial statements.
Effective January 1, 2021, the Company adopted ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC815). The adoption of ASU 2020-01 did not have an impact on the Company's consolidated financial statements.
(b)    Accounting Standards Not Yet Adopted:
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss model used to measure impairment losses with an expected loss model for trade, reinsurance, and other receivables as well as financial instruments measured at amortized cost. ASU 2016-13 will require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income (loss). Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale investments is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through irreversible write-downs. On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, per ASU 2019-10 the Company would adopt ASU 2016-13 beginning January 1, 2023, as the Company is a
10

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






smaller reporting company. The Company is currently evaluating ASU 2016-13 to determine the potential impact that adopting this standard will have on its consolidated financial statements.
NOTE 5 ACQUISITION
On December 1, 2020, the Company acquired 100% of the outstanding shares of PWI Holdings, Inc. for cash consideration of $24.4 million. The final purchase price was subject to a working capital true-up that was finalized during the first quarter of 2021 of $0.1 million. PWI Holdings, Inc., through its subsidiaries Preferred Warranties, Inc., Superior Warranties, Inc., Preferred Warranties of Florida, Inc., and Preferred Nationwide Reinsurance Company, Ltd. (collectively, "PWI"), markets, sells and administers vehicle service agreements in all fifty states, primarily through a network of automobile dealer partners. As further discussed in Note 17, "Segmented Information," PWI is included in the Extended Warranty segment. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.
The Company has not completed its purchase price allocation associated with the acquisition of PWI due to the timing of the acquisition occurring in December and intends to finalize during 2021 its purchase price allocation fair value analysis of the assets acquired and liabilities assumed. The assets acquired and liabilities assumed are recorded in the consolidated financial statements at their estimated fair values before recognition of any identifiable intangible assets or other fair value adjustments with the excess purchase price all being provisionally allocated to goodwill. These estimates, allocations and calculations are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed are expected to change from the estimates included in these consolidated financial statements. Based upon historical acquisitions and a preliminary analysis of PWI, the Company would expect to record intangible assets relating to customer relationships and trade names, as well as to record a net deferred income tax liability and a reduction in deferred service fees. Other adjustments may be necessary as a result of finalizing the purchase price allocation. Any such adjustments would be made against the preliminary goodwill amount shown in the table below. The goodwill is not deductible for tax purposes. To the extent PWI records a net deferred income tax liability, the Company may be able to release a portion of its deferred income tax valuation allowance in the consolidated statements of operations.
The following table summarizes the estimated allocation of the PWI assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
December 1, 2020
Cash and cash equivalents $ 90 
Restricted cash 21,578 
Service fee receivable 1,459 
Other receivables 2,748 
Income taxes recoverable 60 
Property and equipment, net 175 
Right-of-use asset 254 
Goodwill 39,182 
Other assets 1,321 
Total assets $ 66,867 
Accrued expenses and other liabilities $ 8,162 
Lease liability 255 
Deferred service fees 34,026 
Total liabilities $ 42,443 
Purchase price $ 24,424 

11

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






NOTE 6 INVESTMENTS

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at March 31, 2021 and December 31, 2020 are summarized in the tables shown below:
(in thousands) March 31, 2021
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses
Estimated  Fair Value
Fixed maturities:        
U.S. government, government agencies and authorities
$ 10,547  $ 84  $ $ 10,624 
States, municipalities and political subdivisions
1,296  —  1,302 
Mortgage-backed
4,709  50  4,753 
Corporate
3,147  38  —  3,185 
Total fixed maturities $ 19,699  $ 178  $ 13  $ 19,864 

(in thousands) December 31, 2020
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses
Estimated  Fair Value
Fixed maturities:        
U.S. government, government agencies and authorities
$ 9,999  $ 105  $ —  $ 10,104 
States, municipalities and political subdivisions
1,447  —  1,454 
Mortgage-backed
5,334  66  5,394 
Corporate
3,708  56  —  3,764 
Total fixed maturities $ 20,488  $ 234  $ $ 20,716 

The table below summarizes the Company's fixed maturities at March 31, 2021 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
(in thousands) March 31, 2021
Amortized Cost Estimated Fair Value
Due in one year or less $ 4,260  $ 4,287 
Due after one year through five years 14,022  14,153 
Due after five years through ten years 319  328 
Due after ten years 1,098  1,096 
Total $ 19,699  $ 19,864 

12

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized loss positions as of March 31, 2021 and December 31, 2020. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
(in thousands) March 31, 2021
Less than 12 Months Greater than 12 Months Total
Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss
Fixed maturities:
U.S. government, government agencies and authorities
$ 4,542  $ $ —  $ —  $ 4,542  $
States, municipalities and political subdivisions
200  —  —  —  200  — 
Mortgage-backed
809  —  —  809 
Corporate
208  —  —  —  208  — 
Total fixed maturities $ 5,759  $ 13  $ —  $ —  $ 5,759  $ 13 

(in thousands) December 31, 2020
Less than 12 Months Greater than 12 Months Total
Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss
Fixed maturities:
U.S. government, government agencies and authorities
$ 511  $ —  $ —  $ —  $ 511  $ — 
Mortgage-backed
834  —  —  834 
Total fixed maturities $ 1,345  $ $ —  $ —  $ 1,345  $
There are approximately sixteen and five individual available-for-sale investments that were in unrealized loss positions as of March 31, 2021 and December 31, 2020, respectively. 
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. See the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2020 Annual Report for further information regarding the Company's detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment.
As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company recorded write-downs for other-than-temporary impairment related to other investments of zero and $0.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
The Company has reviewed currently available information regarding investments with estimated fair values less than their carrying amounts and believes these unrealized losses are not other-than-temporary and are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell those investments, and it is not likely it will be required to sell those investments before recovery of its amortized cost.
The Company does not have any exposure to subprime mortgage-backed investments.
Limited liability investments include investments in limited liability companies and limited partnerships. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. The most recently available financial statements are used in applying the equity method. The difference between the end of the reporting period of the limited liability entities and that of the Company is no more than three months. As of March 31, 2021 and December 31, 2020, the carrying value of limited liability investments totaled $3.7 million. Income or loss from limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities and is included in net investment income in the consolidated statements of operations. At March 31, 2021, the Company has no unfunded commitments related to limited liability investments.
13

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






Limited liability investments, at fair value represents the underlying investments of the Company’s consolidated entities Net Lease Investment Grade Portfolio LLC ("Net Lease") and Argo Holdings Fund I, LLC ("Argo Holdings"). As of March 31, 2021 and December 31, 2020, the carrying value of the Company's limited liability investments, at fair value was $19.7 million and $32.8 million, respectively. The Company recorded impairments related to limited liability investments, at fair value of less than $0.1 million and zero for the three months ended March 31, 2021 and March 31, 2020, respectively, which are included in (loss) gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At March 31, 2021, the Company has no unfunded commitments to fund limited liability investments, at fair value.
The Company consolidates the financial statements of Net Lease on a three-month lag. Net Lease owns investments in limited liability companies that hold investment properties. During the fourth quarter of 2020, one of Net Lease's limited liability companies sold their investment property. A portion of the proceeds from the sale were distributed to Net Lease who used them primarily to repay their $9.0 million mezzanine loan. As a result of the distribution, Net Lease recorded a gain of $1.2 million related to its investment in the limited liability company, with an offsetting change in unrealized gain of $1.2 million, which collectively are included in net investment income in the consolidated statement of operations for the three months ended March 31, 2021.
Investments in private companies consist of convertible preferred stocks and notes in privately owned companies and investments in limited liability companies in which the Company’s interests are deemed minor. The Company's investments in private companies do not have readily determinable fair values. The Company has elected to record investments in private companies at cost, adjusted for observable price changes and impairments. As of March 31, 2021 and December 31, 2020, the carrying value of the Company's investments in private companies totaled $0.8 million. For the three months ended March 31, 2021 and March 31, 2020, the Company did not record any adjustments to the fair value of its investments in private companies for observable price changes.
The Company performs a quarterly impairment analysis of its investments in private companies. As a result of the analysis performed, the Company recorded impairments related to investments in private companies of zero and $0.7 million for the three months ended March 31, 2021 and March 31, 2020, respectively, which are included in net change in unrealized loss on private company investments in the consolidated statements of operations. The impairment recorded for the three months ended March 31, 2020 is a result of the impact of COVID-19 on the investment's underlying business.
The Company previously had issued promissory notes (the "Notes") to five former employees (the "Debtors"), which were recorded as other investments in the consolidated balance sheets. During the third and fourth quarters of 2020, the Company agreed to accept partial payment from the Debtors as full satisfaction of the Debtors' obligations under the Notes and recognized a loss of $0.2 million for the year ended December 31, 2020. During the three months ended March 31, 2020, the Company recorded a write-down of $0.1 million for other-than-temporary impairment related to the Notes for one of the Debtors. The remaining principal amount outstanding on the Notes was zero as of March 31, 2021 and December 31, 2020.
14

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






Net investment income for the three months ended March 31, 2021 and March 31, 2020 is comprised as follows:
(in thousands) Three months ended March 31,
2021 2020
Investment income:
  Interest from fixed maturities $ 51  $ 102 
Dividends
32  45 
(Loss) income from limited liability investments (9) 23 
Income from limited liability investments, at fair value
81  234 
Income from real estate investments
200  200 
Other
90  127 
Gross investment income 445  731 
Investment expenses (24) (12)
Net investment income
$ 421  $ 719 
Gross realized gains and losses on available-for-sale investments, limited liability investments, at fair value and investments in private companies for the three months ended March 31, 2021 and March 31, 2020 are comprised as follows:
(in thousands) Three months ended March 31,
2021 2020
Gross realized gains $ 51  $ 208 
Gross realized losses —  — 
Net realized gains $ 51  $ 208 
Loss on change in fair value of equity investments for the three months ended March 31, 2021 and March 31, 2020 is comprised as follows:
(in thousands) Three months ended March 31,
2021 2020
Net gains recognized on equity investments sold during the period $ 13  $ — 
Change in unrealized losses on equity investments held at end of the period (164) (597)
Loss on change in fair value of equity investments $ (151) $ (597)
Impact of COVID-19 on Investments
The Company continues to assess the impact that the COVID-19 pandemic may have on the value of its various investments, which could result in future material decreases in the underlying investment values. Such decreases may be considered temporary or could be deemed to be other-than-temporary, and management may be required to record write-downs of the related investments in future reporting periods.

NOTE 7 DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist primarily of commissions and agency expenses incurred directly related to the acquisition of vehicle service agreements and are amortized over the period in which the related revenues are earned.
The components of deferred acquisition costs and the related amortization expense for the three months ended March 31, 2021 and March 31, 2020 are comprised as follows:
(in thousands) Three months ended March 31,
2021 2020
Beginning balance, net $ 8,835  $ 8,604 
Additions 1,351  1,096 
Amortization (1,343) (956)
Balance at March 31, net $ 8,843  $ 8,744 
15

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






NOTE 8 INTANGIBLE ASSETS
Intangible assets at March 31, 2021 and December 31, 2020 are comprised as follows:
(in thousands) March 31, 2021
  Gross Carrying Value Accumulated Amortization Net Carrying Value
Intangible assets subject to amortization:
Database
$ 4,918  $ 4,120  $ 798 
Vehicle service agreements in-force
3,680  3,680  — 
Customer relationships
12,646  7,650  4,996 
In-place lease
1,125  297  828 
Non-compete
266  183  83 
Intangible assets not subject to amortization:
Tenant relationship
73,667  —  73,667 
Trade names
3,264  —  3,264 
Total $ 99,566  $ 15,930  $ 83,636 

(in thousands) December 31, 2020
  Gross Carrying Value Accumulated Amortization Net Carrying Value
Intangible assets subject to amortization:
Database
$ 4,918  $ 3,997  $ 921 
Vehicle service agreements in-force
3,680  3,680  — 
Customer relationships
12,646  7,305  5,341 
In-place lease
1,125  281  844 
Non-compete 266  170  96 
Intangible assets not subject to amortization:
Tenant relationship
73,667  —  73,667 
Trade names
3,264  —  3,264 
Total $ 99,566  $ 15,433  $ 84,133 
The Company's intangible assets with definite useful lives are amortized either based on the patterns in which the economic benefits of the intangible assets are expected to be consumed or using the straight-line method over their estimated useful lives, which range from 5 to 18 years. Amortization of intangible assets was $0.5 million and $0.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
The tenant relationship and trade names intangible assets have indefinite useful lives and are not amortized. No impairment charges were recorded during the three months ended March 31, 2021 and March 31, 2020.
As further discussed in Note 5, "Acquisition," the Company acquired PWI on December 1, 2020 and intends to finalize the fair value analysis of the assets acquired and liabilities assumed during 2021. Based upon historical acquisitions and a preliminary analysis of PWI, the Company would expect to record intangible assets relating to customer relationships and trade names.
16

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






NOTE 9 PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2021 and December 31, 2020 are comprised as follows:
(in thousands) March 31, 2021
  Cost Accumulated Depreciation Carrying Value
Land $ 21,120  $ —  $ 21,120 
Site improvements 91,308  19,461  71,847 
Buildings 580  68  512 
Leasehold improvements 296  138  158 
Furniture and equipment 1,149  1,003  146 
Computer hardware 5,231  4,822  409 
Total $ 119,684  $ 25,492  $ 94,192 

(in thousands) December 31, 2020
  Cost Accumulated Depreciation Carrying Value
Land $ 21,120  $ —  $ 21,120 
Site improvements 91,308  18,428  72,880 
Buildings 580  65  515 
Leasehold improvements 296  125  171 
Furniture and equipment 1,223  1,074  149 
Computer hardware 4,929  4,749  180 
Total $ 119,456  $ 24,441  $ 95,015 

NOTE 10 DEBT
Debt consists of the following instruments at March 31, 2021 and December 31, 2020:
(in thousands) March 31, 2021 December 31, 2020
Principal Carrying Value Fair Value Principal Carrying Value Fair Value
Bank loan:
2020 KWH Loan $ 24,465  $ 24,089  $ 24,707  $ 25,700  $ 25,303  $ 25,893 
Total bank loan 24,465  24,089  24,707  25,700  25,303  25,893 
Notes payable:
Mortgage 165,130  172,502  180,767  166,106  173,696  194,158 
Flower Note 6,769  6,769  7,368  6,885  6,885  7,863 
Net Lease Note —  —  —  9,000  9,000  9,054 
PPP —  —  —  2,476  2,476  2,476 
Total notes payable 171,899  179,271  188,135  184,467  192,057  213,551 
Subordinated debt 90,500  53,668  53,668  90,500  50,928  50,928 
Total $ 286,864  $ 257,028  $ 266,510  $ 300,667  $ 268,288  $ 290,372 

17

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






Subordinated debt mentioned above consists of the following trust preferred debt instruments:
Issuer Principal (in thousands) Issue date Interest Redemption date
Kingsway CT Statutory Trust I $ 15,000  12/4/2002 annual interest rate equal to LIBOR, plus 4.00% payable quarterly 12/4/2032
Kingsway CT Statutory Trust II $ 17,500  5/15/2003 annual interest rate equal to LIBOR, plus 4.10% payable quarterly 5/15/2033
Kingsway CT Statutory Trust III $ 20,000  10/29/2003 annual interest rate equal to LIBOR, plus 3.95% payable quarterly 10/29/2033
Kingsway DE Statutory Trust III $ 15,000  5/22/2003 annual interest rate equal to LIBOR, plus 4.20% payable quarterly 5/22/2033
Kingsway DE Statutory Trust IV $ 10,000  9/30/2003 annual interest rate equal to LIBOR, plus 3.85% payable quarterly 9/30/2033
Kingsway DE Statutory Trust VI $ 13,000  12/16/2003 annual interest rate equal to LIBOR, plus 4.00% payable quarterly 1/8/2034

(a)          Bank loan:
In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries include IWS Acquisition Corporation ("IWS"), Geminus Holdings Company, Inc. ("Geminus") and Trinity Warranty Solutions LLC ("Trinity"). As part of the acquisition of PWI on December 1, 2020, PWI became a wholly owned subsidiary of KWH, which borrowed a principal amount of $25.7 million from a bank, consisting of a $24.7 million term loan and a $1.0 million revolving credit facility (the "2020 KWH Loan"). The proceeds from the 2020 KWH Loan were used to partially fund the acquisition of PWI and to fully repay the prior outstanding loan at KWH, which occurred on December 1, 2020. The 2020 KWH Loan has an annual interest rate equal to the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR") having a floor of 0.75%, plus 3.00%. At March 31, 2021, the interest rate was 3.75%. The 2020 KWH Loan matures on December 1, 2025. The Company also recorded as a discount to the carrying value of the 2020 KWH Loan issuance costs of $0.4 million specifically related to the 2020 KWH Loan. The 2020 KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The fair value of the 2020 KWH Loan disclosed in the table above is derived from quoted market prices of B and BB minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. The 2020 KWH Loan is secured by certain of the equity interests and assets of KWH and its subsidiaries.
The 2020 KWH Loan contains a number of covenants, including, but not limited to, a leverage ratio, a fixed charge ratio and limits on annual capital expenditures, all of which are as defined in and calculated pursuant to the 2020 KWH Loan that, among other things, restrict KWH’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.
(b)          Notes payable:
As part of the acquisition of CMC Industries, Inc. ("CMC") in July 2016, the Company assumed a mortgage, which is recorded as note payable in the consolidated balance sheets ("the Mortgage"). The Mortgage is nonrecourse indebtedness with respect to CMC and its subsidiaries, and the Mortgage is not, nor will it be, guaranteed by Kingsway or its affiliates. The Mortgage is collateralized by a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") and the assignment of leases and rents related to a long-term triple net lease agreement with an unrelated third-party. The Mortgage, which is recorded as note payable in the consolidated balance sheets, was recorded 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. The fair value of the Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.
On January 5, 2015, Flower Portfolio 001, LLC ("Flower") assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Flower Note"). The Flower Note requires monthly payments of principal and interest and is secured by certain investments of Flower. The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The carrying value of the Flower Note at March 31, 2021 of $6.8 million represents its unpaid principal balance. The fair value of the Flower Note disclosed in the table
18

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






above is derived from quoted market prices of A and BBB plus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.
On October 15, 2015, Net Lease assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Net Lease Note"). The Net Lease Note required monthly payments of interest and was secured by certain investments of Net Lease. The Net Lease Note matured on November 1, 2020 and had a fixed interest rate of 10.25%. In conjunction with the maturity of the Net Lease Note on November 1, 2020, Net Lease explored alternatives to maximize the value of its investment portfolio. As a result of this process, Net Lease elected to sell one of its three investment real estate properties while refinancing the remaining properties and the existing financing was repaid. Each of these transactions closed on October 30, 2020, however because the Company reports Net Lease on a three-month lag, the consolidated balance sheet at December 31, 2020 continues to report the $9.0 million mezzanine debt, which represents its unpaid principal balance. The fair value of the Net Lease Note disclosed in the table above is derived from quoted market prices of B and B minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.
In April 2020, certain subsidiaries of the Company received loan proceeds under the Paycheck Protection Program ("PPP"), totaling $2.9 million with a stated annual interest rate of 1.00%. The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security Act and administered by the U.S. Small Business Administration (the "SBA"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll costs (as defined for purposes of the PPP) of the qualifying business. The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, costs, rent and utilities, during the twenty-four week period following the borrower’s receipt of the loan and maintains its payroll levels and employee headcount. The amount of loan forgiveness will be reduced if the borrower reduces its employee headcount below its average employee headcount during a benchmark period or significantly reduces salaries for certain employees during the covered period.
The Company used the entire loan amount for qualifying expenses. The U.S. Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2.0 million. If the Company were to be audited and receive an adverse outcome in such an audit, it could be required to return the full amount of the PPP Loan and may potentially be subject to civil and criminal fines and penalties.
On December 21, 2020 the SBA approved the forgiveness of the full amount of one of the five PPP loans, which included principal and interest of $0.4 million. In January 2021 and March 2021, the SBA provided the Company with notices of forgiveness of the full amount of the remaining four loans. The forgiveness in the first quarter of 2021 included total principal and interest of $2.5 million. The carrying value of the PPP at December 31, 2020 of $2.5 million represents its unpaid principal balance.
(c)          Subordinated debt:
Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third-parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by KAI 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 Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity.
The subordinated debt is carried in the consolidated balance sheets at fair value. See Note 18, "Fair Value of Financial Instruments," for further discussion of the subordinated debt. The portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is recognized in other comprehensive (loss) income. Of the $2.7 million increase in fair value of the Company’s subordinated debt between December 31, 2020 and March 31, 2021, $1.7 million is reported as increase in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive (loss) income and $1.0 million reported as loss on change in fair value of debt in the Company’s consolidated statements of operations.
During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for 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. At March 31, 2021 and December 31, 2020, deferred interest payable of $15.2 million and $14.1 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets.
19

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






The agreements governing the subordinated debt contain a number of covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make dividends and distributions, and make certain payments in respect of the Company’s outstanding securities.
Pursuant to indentures governing the Company’s subordinated debt, the Company is obligated to deliver audited financial statements for certain of its subsidiaries as of and for the year ended December 31, 2020. The Company has been unable to meet this obligation, the failure of which could be declared an event of default under the respective indentures. As of the date of the filing of this report on Form 10-Q for the three months ended March 31, 2021, none of the trustees responsible for administering any of our outstanding debt has declared an event of default, if required by the applicable indenture, notified us of an intent to accelerate any portion of the outstanding debt or charge default interest thereon, or pursued any other remedies available to it. Were any of these trustees to declare an event of default, the Company would have a period of time to cure the default. The Company expects to be in a position to deliver to the trustees the requisite audited financial statements for certain of its subsidiaries as of and for the year ended December 31, 2020, shortly after the filing of the Form 10-Q for the three months ended March 31, 2021.
NOTE 11 LEASES
(a)          Lessee leases:
The Company has operating leases for office space that include fixed base rent payments, as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred. The Company includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. There are no residual value guarantees.
Operating lease costs and variable lease costs included in general and administrative expenses for the three months ended March 31, 2021 were $0.3 million and less than $0.1 million, respectively.
The annual maturities of lease liabilities as of March 31, 2021 were as follows:
(in thousands) Lease Commitments
2021 $ 737 
2022 899 
2023 624 
2024 550 
2025 381 
2026 and thereafter 165 
Total undiscounted lease payments 3,356 
Imputed interest 348 
Total lease liabilities $ 3,008 
The weighted-average remaining lease term for our operating leases was 4.33 years as of March 31, 2021. The weighted average discount rate of our operating leases was 5.28% as of March 31, 2021. Cash paid for amounts included in the measurement of lease liabilities was $0.2 million and $0.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
(b)          Lessor leases:
The Company owns the Real Property that is subject to a long-term triple net lease agreement with an unrelated third-party. The lease provides for future rent escalations and renewal options. The initial lease term ends in May 2034. The lessee bears the cost of maintenance and property taxes. Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental revenue includes a de minimus amount of amortization of below market lease liabilities for the three months ended March 31, 2021 and March 31, 2020. The estimated aggregate future amortization of below market lease liabilities is $0.1 million for 2021, $0.1 million for 2022, $0.1 million for 2023, $0.1 million for 2024 and $0.1 million for 2025. Realization of the residual values of the assets under lease is dependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included in property and equipment in the consolidated balance sheets. Refer to Note 9, "Property and Equipment".
Lease revenue related to operating leases was $3.3 million for each of the three months ended March 31, 2021 and March 31, 2020.
20

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






The following table provides the net book value of operating lease property included in property and equipment in the consolidated balance sheets at March 31, 2021 and December 31, 2020:
(in thousands) March 31, 2021 December 31, 2020
 
Land $ 21,120  $21,120 
Site improvements 91,308  91,308 
Buildings 580  580 
Gross property and equipment leased 113,008  113,008 
Accumulation depreciation (19,529) (18,493)
Net property and equipment leased $ 93,479  $ 94,515 

As of March 31, 2021, future undiscounted cash flows to be received in each of the next five years and thereafter, on non-cancelable operating leases are as follows:
(in thousands)
2021 $ 9,113 
2022 12,371 
2023 12,649 
2024 12,934 
2025 13,225 
Thereafter 123,738 
NOTE 12 REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers relates to Extended Warranty segment service fee and commission revenue. Service fee and commission revenue represents vehicle service agreement fees, GAP commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warranty contract or commission product sale, or on terms subject to the Company’s customary credit reviews.
The following table disaggregates revenues from contracts with customers by revenue type:
(in thousands) Three months ended March 31,
2021 2020
Vehicle service agreement fees and GAP commissions - IWS, Geminus and PWI $ 14,674  $ 7,976 
Maintenance support service fees - Trinity 1,050  554 
Warranty product commissions - Trinity 929  861 
Homebuilder warranty service fees - PWSC 1,725  1,437 
Homebuilder warranty commissions - PWSC 196  358 
Service fee and commission revenue $ 18,574  $ 11,186 

Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement fees are earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied. Vehicle service agreement fees are initially recorded as deferred service fees. The Company compares the remaining deferred service fees balance to the estimated amount of expected future claims under the vehicle service agreement contracts and records an additional accrual if the deferred service fees balance is less than expected future claims costs.
21

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






In certain jurisdictions the Company is required to refund to a customer a pro-rata share of the vehicle service agreement fees if a customer cancels the agreement prior to the end of the term. Depending on the jurisdiction, the Company may be entitled to deduct from the refund a cancellation fee and/or amounts for claims incurred prior to cancellation. While refunds vary depending on the term and type of product offered, historically refunds have averaged 6% to 13% of the original amount of the vehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included in accrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration current observable refund trends in estimating the expected amount of future customer refunds to be paid at each reporting period.
GAP commissions include commissions from the sale of GAP products. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these GAP contracts. The Company receives a single commission fee as its transaction price at the time it sells a GAP contract to a customer. Each GAP contract contains two separate performance obligations - sale of a GAP contract and GAP claims administration. The first performance obligation is related to the sale of a GAP contract and is satisfied upon closing the sale. The second performance obligation is related to the administration of claims during the GAP contract period. The amount of revenue the Company recognizes is based the costs to provide services during the GAP contract period, including an appropriate estimate of profit margin.
Maintenance support service fees include the service fees collected to administer equipment breakdown and maintenance support services and are earned as services are rendered.
Warranty product commissions include the commissions from the sale of warranty contracts for certain new and used heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration equipment. The Company acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. The Company does not guaranty the performance underlying the warranty contracts it sells. Warranty product commissions are earned at the time of the warranty product sales.
Homebuilder warranty service fees include fees collected from the sale of warranties issued by new homebuilders. The Company receives a single warranty service fee as its transaction price at the time it enters into a written contract with each of its builder customers. Each contract contains two separate performance obligations - warranty administrative services and other warranty services. Warranty administrative services include enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product, and is earned at the time the home is enrolled and the warranty product is delivered. Other warranty services include answering builder or homeowner questions regarding the home warranty and dispute resolution services, and is earned as services are performed over the warranty coverage period.
Homebuilder warranty commissions include commissions from the sale of warranty contracts for those builders who have requested and receive insurance backing of their warranty obligations. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions are earned on the certification date, which is typically the date of the closing of the sale of the home to the buyer. The Company also earns fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which are earned when the claims are closed.
The Company's revenue recognition policies are further described in Note 2(p), "Summary of Significant Accounting Policies - Revenue recognition," to the consolidated financial statements in the 2020 Annual Report.
Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at March 31, 2021 and December 31, 2020 were $5.0 million and $3.9 million, respectively.
The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. Deferred service fees were $86.9 million and $87.9 million at March 31, 2021 and December 31, 2020, respectively. The decrease in deferred service fees between December 31, 2020 and March 31, 2021 is primarily due to the recognition of deferred service fees in excess of additions to deferred service fees during the three months ended March 31, 2021.
The Company expects to recognize within one year as service fee and commission revenue approximately 49.7% of the deferred service fees as of March 31, 2021. Approximately $12.2 million and $5.5 million of service fee and commission revenue recognized during the three months ended March 31, 2021 and March 31, 2020 was included in deferred service fees as of December 31, 2020 and December 31, 2019, respectively.
22

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






NOTE 13 INCOME TAXES
Income tax (benefit) expense for the three months ended March 31, 2021 and March 31, 2020 varies from the amount that would result by applying the applicable U.S. federal corporate income tax rate of 21% to income (loss) before income tax (benefit) expense. The following table summarizes the differences:
(in thousands) Three months ended March 31,
2021 2020
Income tax (benefit) expense at United States statutory income tax rate $ 100  $ (47)
Valuation allowance (299) 241 
Non-deductible compensation 138  (43)
Non-taxable income (524) — 
Investment income 17  (128)
State income tax 53  38 
Change in unrecognized tax benefits(1)
38  68 
Indefinite life intangibles 54  54 
Other (2) (13)
Income tax (benefit) expense $ (425) $ 170 
(1) Includes interest and penalty expense related to unrecognized tax benefits.
The Company maintains a valuation allowance for its gross deferred tax assets at March 31, 2021 and December 31, 2020. The Company's operations have generated substantial operating losses in prior years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income; however, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its March 31, 2021 and December 31, 2020 net deferred tax asset, excluding the deferred income tax asset and liability amounts set forth in the paragraph below. For the three months ended March 31, 2021 and March 31, 2020, the Company released into income $0.6 million and zero, respectively, of its valuation allowance associated with business interest expense carryforwards with an indefinite life.
The Company carries net deferred income tax liabilities of $27.0 million and $27.6 million at March 31, 2021 and December 31, 2020, respectively, that consists of:
$7.6 million and $7.6 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KFSI Tax Group's consolidated U.S. net operating loss carryforwards;
$21.9 million and $21.9 million of deferred income tax liabilities related to land and indefinite lived intangible assets;
$1.9 million and $1.3 million of deferred income tax assets associated with business interest expense carryforwards with an indefinite life; and
$0.6 million and $0.6 million of deferred state income tax assets.
As of March 31, 2021 and December 31, 2020, the Company carried a liability for unrecognized tax benefits of $1.4 million which is included in income taxes payable in the consolidated balance sheets. The Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense. The Company recorded income tax expense of less than $0.1 million and $0.1 million related to interest and penalty accruals for the three months ended March 31, 2021 and March 31, 2020, respectively. At March 31, 2021 and December 31, 2020, the Company carried an accrual for the payment of interest and penalties of $1.6 million and $1.6 million, respectively, included in income taxes payable in the consolidated balance sheets.
23

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






NOTE 14 EARNINGS (LOSS) PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings (loss) per share computation for the three months ended March 31, 2021 and March 31, 2020:
(in thousands, except per share data) Three months ended March 31,
  2021 2020
Numerator:
Net income (loss) $ 899  $ (393)
Less: net income attributable to noncontrolling interests
(259) (721)
Less: dividends on preferred stock
(238) (377)
Net income (loss) attributable to common shareholders used in calculating basic earnings (loss) per share $ 402  $ (1,491)
Adjustment for proportionate interest in PWSC's earnings attributable to common stock (30) — 
Net income (loss) attributable to common shareholders used in calculating diluted earnings (loss) per share $ 372  $ (1,491)
Denominator:
Weighted average basic shares
       Weighted average common shares outstanding
22,218  22,069 
Weighted average diluted shares
Weighted average common shares outstanding
22,218  22,069 
        Effect of potentially dilutive securities (a) —  — 
Stock options
—  — 
Unvested restricted stock awards
— 
Warrants
—  — 
Convertible preferred stock
—  — 
Total weighted average diluted shares
22,219  22,069 
Basic earnings (loss) per share $ 0.02  $ (0.07)
Diluted earnings (loss) per share $ 0.02  $ (0.07)
(a)Potentially dilutive securities consist of stock options, unvested restricted stock awards, warrants and convertible preferred stock. Because the Company is reporting a net loss attributable to common shareholders for the three months ended March 31, 2020, all potentially dilutive securities outstanding were excluded from the calculation of diluted loss per share since their inclusion would have been anti-dilutive.
Basic earnings (loss) per share is calculated using weighted-average common shares outstanding. Diluted earnings (loss) per share is calculated using weighted-average diluted shares. Weighted-average diluted shares is calculated by adding the effect of potentially dilutive securities to weighted-average common shares outstanding.
The following weighted-average potentially dilutive securities are not included in the diluted earnings (loss) per share calculations above because they would have had an antidilutive effect on the earnings (loss) per share:
Three months ended March 31,
2021 2020
Stock options —  40,000 
Unvested restricted stock awards 1,338,425  500,000 
Warrants 4,923,765  4,923,765 
Convertible preferred stock 1,142,975  1,142,975 
Total $ 7,405,165  $ 6,606,740 

24

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






NOTE 15 STOCK-BASED COMPENSATION
(a)     Restricted Stock Awards
Under the 2013 Equity Incentive Plan, the Company made grants of restricted common stock awards to certain officers of the Company on March 28, 2014 (the "2014 Restricted Stock Awards"). There are no 2014 Restricted Stock Awards outstanding at March 31, 2021. On February 28, 2020, the Company executed an Employment Separation Agreement and Release ("2020 Separation Agreement") with a former officer. Under the terms of the 2020 Separation Agreement, the former officer forfeited 93,713 shares of the 2014 Restricted Stock Awards. The Company’s accounting policy is to account for forfeitures when they occur. As a result, the Company reversed during the first quarter of 2020 $0.2 million of compensation expense previously recognized from March 28, 2014 through February 28, 2020. The former officer's remaining 135,787 shares of the original 2014 Restricted Stock Awards became partially vested on February 28, 2020.
On September 5, 2018, the Company granted 500,000 restricted common stock awards to an officer (the "2018 Restricted Stock Award"). The 2018 Restricted Stock Award shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officer's continued employment through the vesting date. The 2018 Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The grant-date fair value of the 2018 Restricted Stock Award was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2018 Restricted Stock Award at March 31, 2021 was $1.1 million.
Under the 2020 Equity Incentive Plan, the Company granted 1,060,000 restricted common stock awards to certain officers of the Company during the first quarter of 2021 (the "2021 Restricted Stock Awards"). The 2021 Restricted Stock Awards vest according to a graded vesting schedule and shall become fully vested subject to the officers' continued employment through the applicable vesting dates. The 2021 Restricted Stock Awards are amortized on a straight-line basis over the requisite service periods. The grant-date fair values of the 2021 Restricted Stock Awards were determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2021 Restricted Stock Awards at March 31, 2021 was $3.9 million.
The following table summarizes the activity related to unvested 2021 Restricted Stock Awards and 2018 Restricted Stock Award (collectively "Restricted Stock Awards") for the three months ended March 31, 2021:
Number of Restricted Stock Awards Weighted-Average Grant Date Fair Value (per Share)
Unvested at December 31, 2020 500,000  $ 5.73 
Granted
1,060,000  4.64 
Vested
(154,562) 4.64 
Cancelled for Tax Withholding
(65,438) 4.64 
Unvested at March 31, 2021 1,340,000  $ 5.05 
The unvested balance at March 31, 2021 in the table above is comprised of 840,000 shares of the 2021 Restricted Stock Awards and 500,000 shares of the 2018 Restricted Stock Award.
(b)     Restricted Stock Awards of PWSC
The Company's subsidiary, Professional Warranty Service Corporation ("PWSC"), granted 1,000 restricted Class B common stock awards ("2018 PWSC RSA") to an officer of PWSC pursuant to an agreement dated September 7, 2018. The 2018 PWSC RSA contains both a service and a performance condition that affects vesting. On December 18, 2020, the 2018 PWSC RSA was amended to modify the vesting terms related to the service and performance condition ("Modified PWSC RSA").
PWSC granted 250 restricted Class B common stock awards to an officer of PWSC pursuant to an agreement dated December 18, 2020 ("2020 PWSC RSA"). The 2020 PWSC RSA contains both a service and a performance condition that affects vesting.
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






The service condition for the Modified PWSC RSA and the 2020 PWSC RSA vest according to a graded vesting schedule and shall become fully vested on February 20, 2022 subject to the officer's continued employment through the applicable vesting dates. The performance condition vests on February 20, 2022 and is based on the internal rate of return of PWSC. The grant-date fair value of the Modified PWSC RSA and the 2020 PWSC RSA were estimated using an internal valuation model. See Note 18, "Fair Value of Financial Instruments," for further discussion related to the valuation of the Modified PWSC RSA and the 2020 PWSC RSA.
The Modified PWSC RSA and the 2020 PWSC RSA include a noncontingent put option that is exercisable between February 20, 2022 and February 20, 2023. Since the put option is exercisable less than six months after the vesting of certain shares, the compensation expense related to these shares is classified as a liability and included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of the liability classified portion of the Modified PWSC RSA and the 2020 PWSC RSA is re-evaluated each reporting period.
At March 31, 2021, both the service condition and performance condition of the Modified PWSC RSA were probable of vesting. At March 31, 2021, there were 437.5 unvested shares of the Modified PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to unvested equity-classified portion of the Modified PWSC RSA at March 31, 2021 was $0.1 million.
At March 31, 2021, both the service condition and performance condition of the 2020 PWSC RSA were probable of vesting. At March 31, 2021, there were 109.38 unvested shares of the 2020 PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to unvested equity-classified portion of the 2020 PWSC RSA at March 31, 2021 was zero.
Total stock-based compensation, inclusive of Restricted Stock Awards and Restricted Stock Awards of PWSC described above, net of forfeitures, was an expense of $1.7 million and a benefit of less than $0.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below detail the change in the balance of each component of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2021 and March 31, 2020 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets.
(in thousands) Three months ended March 31, 2021
Unrealized Gains (Losses) on Available-for-Sale Investments Foreign Currency Translation Adjustments Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk Total Accumulated Other Comprehensive Income
Balance at January 1, 2021 $ 216  $ (3,286) $ 41,129  $ 38,059 
Other comprehensive loss arising during the period (71) —  (1,721) (1,792)
Amounts reclassified from accumulated other comprehensive income 12  —  —  12 
Net current-period other comprehensive loss (59) —  (1,721) (1,780)
Balance at March 31, 2021 $ 157  $ (3,286) $ 39,408  $ 36,279 
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






(in thousands) Three months ended March 31, 2020
Unrealized Gains (Losses) on Available-for-Sale Investments Foreign Currency Translation Adjustments Change in Fair Value of Debt Attributable to Instrument-Specific Credit Risk Total Accumulated Other Comprehensive Income
Balance at January 1, 2020 $ 59  $ (3,286) $ 38,574  $ 35,347 
Other comprehensive income arising during the period 47  —  11,623  11,670 
Amounts reclassified from accumulated other comprehensive income 61  —  —  61 
Net current-period other comprehensive income 108  —  11,623  11,731 
Balance at March 31, 2020 $ 167  $ (3,286) $ 50,197  $ 47,078 
It should be noted that the unaudited consolidated statements of comprehensive (loss) income present the components of other comprehensive (loss) income, net of tax, only for the three months ended March 31, 2021 and March 31, 2020 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
Components of accumulated other comprehensive income were reclassified to the following lines of the unaudited consolidated statements of operations for the three months ended March 31, 2021 and March 31, 2020:
(in thousands) Three months ended March 31,
   2021 2020
Reclassification of accumulated other comprehensive income from unrealized gains (losses) on available-for-sale investments to:
Net realized gains $ (12) $ (61)
Other-than-temporary impairment loss —  — 
Income (loss) before income tax (benefit) expense (12) (61)
Income tax (benefit) expense —  — 
Net income (loss) $ (12) $ (61)
NOTE 17 SEGMENTED INFORMATION
The Company conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
Extended Warranty Segment
Extended Warranty includes the following subsidiaries of the Company: IWS, Geminus, PWI, PWSC and Trinity (collectively, "Extended Warranty").
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 26 states and the District of Columbia to their members.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, Penn and Prime. Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
27

KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a "white label" agreement.
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.
Trinity sells 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.

Leased Real Estate Segment
Leased Real Estate includes the Company's subsidiary, CMC. CMC owns the Real Property that is leased to a third party pursuant to a long-term triple net lease. The Real Property is also subject to the Mortgage. When assessing and measuring the operational and financial performance of the Leased Real Estate segment, interest expense related to the Mortgage is included in Leased Real Estate's segment operating income.

Revenues and Operating Income by Reportable Segment
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the unaudited consolidated interim financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.
Revenues by reportable segment reconciled to consolidated revenues for the three months ended March 31, 2021 and March 31, 2020 were:
(in thousands) Three months ended March 31,
2021 2020
Revenues:
Extended Warranty:
Service fee and commission revenue $ 18,574  $ 11,186 
Other revenue 67  74 
Total Extended Warranty 18,641  11,260 
Leased Real Estate:
Rental revenue 3,341  3,341 
Other revenue 38  68 
Total Leased Real Estate 3,379  3,409 
Total revenues $ 22,020  $ 14,669 
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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






The operating income by reportable segment in the following table is before income taxes and includes revenues and direct segment costs. Total segment operating income reconciled to the consolidated net income (loss) for the three months ended March 31, 2021 and March 31, 2020 were:
(in thousands) Three months ended March 31,
2021 2020
Segment operating income:
Extended Warranty (a) $ 5,310  $ 850 
Leased Real Estate
1,293  597 
Total segment operating income 6,603  1,447 
Net investment income
421  719 
Net realized gains 51  208 
Loss on change in fair value of equity investments (151) (597)
(Loss) gain on change in fair value of limited liability investments, at fair value (202) 1,899 
Net change in unrealized loss on private company investments —  (670)
Other-than-temporary impairment loss
—  (117)
Interest expense not allocated to segments (1,552) (2,153)
Other revenue and expenses not allocated to segments, net (3,491) (3,030)
Amortization of intangible assets (497) (574)
(Loss) gain on change in fair value of debt (1,019) 2,645 
Gain on extinguishment of debt not allocated to segments 311  — 
Income (loss) before income tax (benefit) expense 474  (223)
Income tax (benefit) expense (425) 170 
Net income (loss) $ 899  $ (393)
(a)     For the three months ended March 31, 2021, Extended Warranty segment operating income includes gain on extinguishment of debt of $2.2 million, related to PPP loan forgiveness directly associated with the respective warranty businesses. Extended Warranty segment operating income before the gain on extinguishment of debt totaled $3.1 million. See Note 10, "Debt," for further discussion.
NOTE 18 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.

The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1:

Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

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KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements (Unaudited) March 31, 2021






The Company classifies its investments in fixed maturities as available-for-sale and reports these investments at fair value. The Company's equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, warrant liability and stock-based compensation liabilities are measured and reported at fair value.
Fixed maturities - Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third party evidence. All classes of the Company’s fixed maturities, primarily consisting of investments in US. Treasury bills and government bonds; obligations of states, municipalities and political subdivisions; mortgage-backed securities; and corporate securities, are classified as Level 2. Level 2 is applied to valuations based upon 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.
The Company engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our 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. The Company has 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 Company.

The following is a description of the significant inputs, by asset class, used by the third-party pricing services to determine the fair values of our fixed maturities included in Level 2: