What changed in KINGSWAY FINANCIAL SERVICES INC's 10-K — 2022 vs 2023
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Paragraph-level year-over-year comparison of KINGSWAY FINANCIAL SERVICES INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.
+315 added−382 removedSource: 10-K (2024-03-05) vs 10-K (2023-03-08)
Top changes in KINGSWAY FINANCIAL SERVICES INC's 2023 10-K
315 paragraphs added · 382 removed · 219 edited across 7 sections
- Item 7. Management's Discussion & Analysis+194 / −235 · 125 edited
- Item 1. Business+61 / −81 · 45 edited
- Item 1A. Risk Factors+49 / −58 · 41 edited
- Item 5. Market for Registrant's Common Equity+8 / −5 · 5 edited
- Item 2. Properties+1 / −1 · 1 edited
Item 1. Business
Business — how the company describes what it does
45 edited+16 added−36 removed34 unchanged
Item 1. Business
Business — how the company describes what it does
45 edited+16 added−36 removed34 unchanged
2022 filing
2023 filing
Biggest changePWI also has a "white label" agreement with Norman & Company, Inc., that sells and administers a guaranteed asset protection product ("GAP"), under the Classic product name, in states in which Classic is approved. As discussed in Note 5, "Disposal and Discontinued Operations" to the Consolidated Financial Statements , the Company disposed of PWSC on July 29, 2022.
Biggest changePWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield ("AAS") in three states with a "white label" agreement. PWI also sells and administers a guaranteed asset protection product ("GAP"), under the Penn name, in states where Penn is approved.
As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts.
As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts.
During the fourth quarter, the Company began executing a plan to sell VA Lafayette, and as a result, VA Lafayette is reported as held for sale at December 31, 2022 . ● Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported separately for all periods presented.
During the fourth quarter of 2022, the Company began executing a plan to sell VA Lafayette, and as a result, VA Lafayette is reported as held for sale at December 31, 2022 and December 31, 2023 . ● Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported separately for all periods presented.
INVESTMENTS The Company manages its investments to support its liabilities, preserve capital, maintain adequate liquidity and maximize after-tax investment returns within acceptable risks: ● The fixed maturities portfolios are managed by a third-party firm and are comprised predominantly of high-quality fixed maturities with relatively short durations. ● Equity, limited liability and other investments are generally overseen by corporate. ● Limited liability investments, at fair value, investments in private companies and real estate investments are generally overseen by corporate, who engages third-party managers for certain holdings.
INVESTMENTS The Company manages its investments to support its liabilities, preserve capital, maintain adequate liquidity and maximize after-tax investment returns within acceptable risks: ● The fixed maturities portfolios are managed by a third-party firm and are comprised predominantly of high-quality fixed maturities with relatively short durations. ● Equity, limited liability and other investments are generally overseen by corporate. ● Limited liability investments, at fair value and investments in private companies are generally overseen by corporate, who engages third-party managers for certain holdings.
("CMC") and VA Lafayette, LLC ("VA Lafayette"): ● CMC owned, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property"), which is subject to a long-term triple net lease agreement. The Real Property is also subject to two mortgages.
("CMC") and VA Lafayette, LLC ("VA Lafayette"): ● CMC owned, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property"), which was subject to a long-term triple net lease agreement. The Real Property was also subject to two mortgages.
Financial information about Kingsway's reportable business segments for the years ended December 31, 2022 and December 31, 2021 is contained in the following sections of this 2022 Annual Report: (i ) Note 22, "Segmented Information," to the Consolidated Financial Statements; and (ii) "Results of Continuing Operations" section of MD&A.
Financial information about Kingsway's reportable business segments for the years ended December 31, 2023 and December 31, 2022 is contained in the following sections of this 2023 Annual Report: (i ) Note 22, "Segmented Information," to the Consolidated Financial Statements; and (ii) "Results of Continuing Operations" section of MD&A.
Across all states, PWI has an extensive menu of VSAs with terms starting at three months to ninety-six months and mileage bands up to 200,000 miles. Products range from basic Powertrain to the Exclusionary product ("Premier"). The average term of a VSA is twenty-two months.
Across all states, PWI has an extensive menu of VSAs with terms starting at three months to ninety-six months and mileage bands up to 200,000 miles. Products range from basic Powertrain to the Exclusionary product ("Premier"). The average term of a VSA is twenty-four to thirty-six months.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care Inc. ("Prime"). Penn and Prime distribute these products in 39 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
Geminus primarily sells and administers vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care Inc. ("Prime"). Penn and Prime distribute these products in 47 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
Certain, but not all, states regulate the sale of HVAC and equipment warranty contracts. Trinity is licensed as a service contract provider in those states where it is required. HUMAN CAPITAL MANAGEMENT At December 31, 2022, the Company employe d 471 per sonnel supporting its operations, all of which were full-time employees.
Certain, but not all, states regulate the sale of HVAC and equipment warranty contracts. Trinity is licensed as a service contract provider in those states where it is required. HUMAN CAPITAL MANAGEMENT At December 31, 2023, the Company employe d 397 per sonnel supporting its operations, all of which were full-time employees.
The Company currently has three full-t ime Searchers as of December 31, 2022. The Company intends to maintain this level – and potentially expand it – as business opportunities permit. PRICING AND PRODUCT MANAGEMENT Responsibility for pricing and product management rests with the Company's individual operating subsidiaries in Extended Warranty and Kingsway Search Xcelerator .
The Company currently has four full-t ime Searchers as of December 31, 2023. The Company intends to maintain this level – and potentially expand it – as business opportunities permit. PRICING AND PRODUCT MANAGEMENT Responsibility for pricing and product management rests with the Company's individual operating subsidiaries in Extended Warranty and Kingsway Search Xcelerator .
IWS, Geminus and PWI earn a commission when a consumer purchases a GAP certificate but do not take on any insurance risk. Home PWSC has two insured home warranty products: ● The primary product is designed for new home construction companies, and the warranty is issued to new home buyers.
IWS, Geminus and PWI earn a commission when a consumer purchases a GAP certificate but do not take on any insurance risk. Home PWSC had two insured home warranty products: ● The primary product was designed for new home construction companies, and the warranty was issued to new home buyers.
Marketing, Distribution and Competition CSuite actively markets its services via sponsorship of industry events and conferences typically targeted at private equity and related service providers. Ravix does not actively market its services through traditional channels.
Business Services CSuite actively markets its services via sponsorship of industry events and conferences typically targeted at private equity and related service providers. Ravix does not actively market its services through traditional channels.
As an example, our first Searcher, who was hired in May 2020, identified Ravix as a potential acquisition, which the Company closed on in October 2021. The CEO Accelerator focuses on identifying and acquiring privately-held businesses with enterprise values between $10 and $30 million where the owner/operator is looking to transition from day-to-day operating responsibilities.
As an example, our first Searcher, who was hired in May 2020, identified Ravix as a potential acquisition, which the Company closed on in October 2021. The CEO Accelerator focuses on identifying and acquiring privately-held businesses with EBITDA between $1 and $3 million where the owner/operator is looking to transition from day-to-day operating responsibilities.
For further descriptions of the Company's investments, see "Investments" and "Significant Accounting Policies and Critical Estimates" in MD&A a nd Note 7, "Investments," and Note 23, "Fair Value of Financial Instruments," t o the Consolidated Financial Statements. 9 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
For further descriptions of the Company's investments, see "Investments" and "Significant Accounting Policies and Critical Estimates" in MD&A a nd Note 7, "Investments," and Note 23, "Fair Value of Financial Instruments," t o the Consolidated Financial Statements.
Trinity claims on warranty products are managed by the insurance companies with which Trinity partners. Trinity may, at times, act as a third-party administrator of such claims; however, at no time does Trinity bear the loss of claims on warranty products.
Trinity claims on warranty products are managed by the insurance companies with which Trinity partners. Trinity may, at times, act as a third-party administrator of such claims; however, at no time does Trinity bear the loss of claims on warranty products. 6 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
None of our employees is subject to a collective bargaining agreement and we consider our relationship with our employees to be good. We believe the skills and experience of our employees are an essential driver of our business and important to our future prospects.
None of our employees is subject to a collective bargaining agreement and we consider our relationship with our employees to be good. 8 Table of Contents KINGSWAY FINANCIAL SERVICES INC. We believe the skills and experience of our employees are an essential driver of our business and important to our future prospects.
Secure Nursing Service LLC and Pegasus Acquirer LLC, subsidiaries of Kingsway, borrowed a total of $6.5 million, in the form of a term loan, and established a $1 million revolver (together, the “SNS Loan”) that was undrawn at close. The Loan has a variable interest rate equal to the Prime Rate plus 0.50%, with a floor of 5.00%.
DDI Acquisition, LLC and DDI, subsidiaries of Kingsway, borrowed a total of $5.6 million, in the form of a term loan, and established a $0.4 million revolver (together, the “DDI Loan”) that was undrawn at close. The DDI Loan has a variable interest rate equal to the Prime Rate plus 0.50%, with a floor of 5.00%.
Data solutions and claims groups within the individual operating subsidiaries track loss performance monthly to alert the operating subsidiaries' management teams to the potential need to adjust forms or rates. For Kingsway Search Xcelerator, an annual review of billing rates is performed and rates are adjusted to reflect prevailing marketing expectations.
Data solutions and claims groups within the individual operating subsidiaries track loss performance monthly to alert the operating subsidiaries' management teams to the potential need to adjust forms or rates. For the Kingsway Search Xcelerator companies, reviews of billing rates and product prices are performed regularly and rates can be adjusted to reflect prevailing marketing expectations.
PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise networks 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 ("AAS") in three states with a "white label" agreement.
The business models are supported by an internal sales and operations team. PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise networks of approved automobile and motorcycle dealer partners.
SNS offers its services across two different practices: ● Travel Staffing. Offers healthcare staffing services to address the short-term needs of hospitals – contracts have a guaranteed length, which is typically 13 weeks. ● Per Diem Staffing. Offers healthcare staffing services to meet the day-to-day needs of hospitals. 8 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Offers healthcare staffing services to address the short-term needs of hospitals – contracts have a guaranteed length, which is typically 13 weeks. ● Per Diem Staffing. Offers healthcare staffing services to meet the day-to-day needs of hospitals.
Focuses on managing clients through liquidations and assignment for the benefit of the creditors. SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily in California. Today, SNS is focused on providing temporary registered nurses to hospitals; however, SNS maintains contracts to provide allied healthcare professionals to hospitals.
Healthcare Services SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily in California. Today, SNS is focused on providing temporary registered nurses to hospitals; however, SNS maintains contracts to provide allied healthcare professionals to hospitals. SNS offers its services across two different practices: ● Travel Staffing.
("PWI") ● Professional Warranty Service Corporation ("PWSC"), up until its sale on July 29, 2022 ● Trinity Warranty Solutions LLC ("Trinity") IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unio ns in 25 states and the District of Columbia to their members , with customers in all 50 states .
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unio ns in 24 states and the District of Columbia to their members , with customers in all 50 states .
All of the dollar amounts in this 2022 Annual Report are expressed in U.S. dollars. GENERAL DEVELOPMENT OF BUSINESS Acquisition of CSuite Financial Partners, LLC On November 1, 2022, the Company acquired 100% of the outstanding equity interests of CSuite Financial Partners, LLC ("CSuite").
All of the dollar amounts in this 2023 Annual Report are expressed in U.S. dollars. GENERAL DEVELOPMENT OF BUSINESS Acquisition of Systems Products International, Inc. On September 7, 2023, the Company acquired 100% of the outstanding equity interests of Systems Products International, Inc. ("SPI").
KINGSWAY SEARCH XCELERATOR SEGMENT Kingsway Search Xcelerator includes the following subsidiaries of the Company (collectively, “ Kingsway Search Xcelerator ” ), and includes the Company’s unique CEO Accelerator program.
KINGSWAY SEARCH XCELERATOR SEGMENT Kingsway Search Xcelerator includes the following subsidiaries of the Company (collectively, “ Kingsway Search Xcelerator ” ), and includes the Company’s unique CEO Accelerator program. ● CSuite Financial Partners, LLC ("CSuite") ● DDI ● Ravix Group, Inc. ("Ravix") ● Secure Nursing Service Inc.
IWS focuses exclusively on the automotive finance market with its core VSA and related product offerings, while much of its competition in the credit union channel has a less targeted product approach. IWS' typical competitor takes a generalist approach to market by providing credit unions with a variety of different product offerings.
IWS distributes and markets its product s in 24 states and the District of Columbia. IWS focuses exclusively on the automotive finance market with its core VSA and related product offerings, while much of its competition in the credit union channel has a less targeted product approach.
No Kingsway Search Xcelerator customer or group of affiliated customers accounts for 10% or more of the Company's consolidated revenues, and no loss of a customer or group of affiliated customers would have a material adverse effect on the Company.
Marketing, Distribution and Competition No Extended Warranty customer or group of affiliated customers accounts for 10% or more of the Company's consolidated revenues, and no loss of a customer or group of affiliated customers would have a material adverse effect on the Company. Automotive IWS markets its products primarily through credit unions.
The distribution of PWI VSAs is supported by an internal sales team geographically located around the country and in close proximity to its dealer partners. PWI operates exclusively in the automotive finance market with its sole focus on VSAs. PWI does operate within a highly competitive environment where product pricing and product options are important.
PWI enters into an agreement with dealer partners that permits dealers to legally sell PWI products to its customers. The distribution of PWI VSAs is supported by an internal sales team geographically located around the country and in close proximity to its dealer partners. PWI operates exclusively in the automotive finance market with its sole focus on VSAs.
HVAC Trinity directly markets and distributes its warranty products to manufacturers, distributors and installers of HVAC, standby generator, commercial LED lighting and commercial refrigeration equipment. As a provider of equipment breakdown and maintenance support, Trinity directly markets and distributes its product through its clients, which are primarily companies that directly own and operate numerous locations across the United States.
As a provider of equipment breakdown and maintenance support, Trinity directly markets and distributes its products through its clients, which are primarily companies that directly own and operate numerous locations across the United States. Trinity operates in an environment with few market competitors.
Most of its competitors have a comprehensive menu of products and services to offer the independent and franchise dealers. PWI’s future strategy will drive additional competitiveness by adding new products to its existing menu of VSAs and GAP. PWI’s competitors are a blend of national and regional competitors implementing employee and agent-based sales models.
PWI does operate within a highly competitive environment where product pricing and product options are important. Most of its competitors have a comprehensive menu of products and services to offer the independent and franchise dealers. PWI’s strategy will drive additional competitiveness by adding new products to its existing menu of VSAs and GAP.
Penn and Prime distribute and market their products in 39 and 40 states, respectively. Penn and Prime focus exclusively on the automotive finance market with its core VSA and related product offerings, while much of its competition is non-employee based or agent centric.
Penn and Prime focus exclusively on the automotive finance market with its core VSA and related product offerings, while much of its competition is employee based or agent centric. Penn and Prime operate within a highly competitive environment where product pricing and options are important.
Instead, Ravix focuses primarily on venture-capital-funded startups and receives most of its new business as a result of business networking activities, referrals from service providers and former clients. SNS does not actively market its services through traditional channels. Instead, SNS relies on word-of-mouth to recruit nurses to help meet the demands of the hospitals.
Instead, Ravix focuses primarily on venture-capital-funded startups and receives most of its new business as a result of business networking activities, referrals from service providers and former clients.
Offers services oriented around day-to-day financial stewardship of its clients, such as bookkeeping, accounting, financial reporting and analysis and strategic finance. ● Technical Accounting. Provides specialized expertise in areas of technical accounting, such as initial public offerings, SEC reporting and international consolidation; ● Human Resources. Offers human resources, workforce management, and compliance support; and ● Advisory Services.
Provides specialized expertise in areas of technical accounting, such as initial public offerings, SEC reporting and international consolidation; ● Human Resources. Offers human resources, workforce management, and compliance support; and ● Advisory Services. Focuses on managing clients through liquidations and assignment for the benefit of the creditors.
Automotive IWS markets its products primarily through credit unions. IWS enters into an exclusive agreement with each credit union whereby the credit union receives a stipulated access fee for each vehicle service agreement issued to its members.
IWS enters into an exclusive agreement with each credit union whereby the credit union receives a stipulated access fee for each vehicle service agreement issued to its members. The credit unions are served by IWS employee representatives located throughout the United States in close geographical proximity to the credit unions they serve.
Trinity does not guaranty the performance underlying the warranty contracts it sells. Trinity also provides equipment breakdown and maintenance support services to companies across the United States. As a provider of such services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment.
Trinity does not guaranty the performance underlying the warranty contracts it sells. 5 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Trinity also provides equipment breakdown and maintenance support services to companies across the United States.
Most states utilize the approach of the Uniform Service Contract Act that was adopted by the National Association of Insurance Commissioners in the early 1990's.
REGULATORY ENVIRONMENT Extended Warranty Vehicle service agreements are regulated in all states in the United States, and IWS, Geminus and PWI are subject to these regulations. Most states utilize the approach of the Uniform Service Contract Act that was adopted by the National Association of Insurance Commissioners in the early 1990's.
Ravix provides outsourced finance and human resources consulting services to its clients on a fractional basis for both projects with definitive endpoints and ongoing engagements of indeterminate length for customers in several states . All services are delivered by employees who are located in the United States. Ravix offers its services across four different practices: ● Operational Accounting.
These offerings include project and interim staffing engagements, and contingent search services for permanent placements for its clients throughout the United States. Ravix provides outsourced finance and human resources consulting services to its clients on a fractional basis for both projects with definitive endpoints and ongoing engagements of indeterminate length for customers throughout 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. 5 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
PWSC sold home warranty products and provided administration services to homebuilders and homeowners across the United States. PWSC distributed its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.
Penn and Prime enter into dealer wholesale agreements that allow the dealer to resell Penn and Prime vehicle service agreements at a retail rate that varies by state as they earn potential commission on the remarketing. The dealer base is serviced by the Company's employees located throughout the United States in close geographical proximity to the dealers they serve.
Geminus goes to market through its subsidiaries, Penn and Prime, which market their products primarily through independent automotive dealerships and franchise automotive dealerships. Penn and Prime enter into dealer wholesale agreements that allow the dealer to resell Penn and Prime vehicle service agreements at a retail rate that varies by state as they earn potential commission on the remarketing.
They might be unable to deliver specialty expertise on par with IWS and may not give VSA products the attention they require for healthy profitability and strong risk management. Geminus goes to market through its subsidiaries, Penn and Prime, which market their products primarily through independent automotive dealerships and franchise automotive dealerships.
IWS' typical competitor takes a generalist approach to market by providing credit unions with a variety of different product offerings. They might be unable to deliver specialty expertise on par with IWS and may not give VSA products the attention they require for healthy profitability and strong risk management.
SNS places these healthcare professionals in both per diem assignments, and in short-term and long-term travel assignments in a variety of hospitals in southern California. SNS is included in the Kingsway Search Xcelerator segment. The Company acquired SNS for aggregate cash consideration of $11.5 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments.
DDI, base d in Wall, New Jersey, is a provider of fully managed outsourced cardiac telemetry services. DDI is included in the Kingsway Search Xcelerator segment. The Company acquired DDI for aggregate cash consideration of approximately $11.0 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments.
Penn and Prime's typical competitor’s approach to market is by working through non-employees or agents with a variety of different product offerings. Penn and Prime solely focuses on the suite of VSAs it offers, which allows the proper attention required for healthy profitability and risk management.
Penn and Prime solely focuses on the suite of VSAs it offers, which allows the proper attention required for healthy profitability and risk management. PWI markets, sells and administers VSAs to used car buyers in all fifty states, primarily through a network of approved automobile dealer partners.
The earnings of PWSC are included in the consolidated statements of operations and the segment disclosures through the disposal date. PWSC sells home warranty products and provides administration services to homebuilders and homeowners across the United States.
As discussed in Note 5, "Disposal and Discontinued Operations" to the Consolidated Financial Statements , the Company disposed of PWSC on July 29, 2022. The earnings of PWSC are included in the consolidated statements of operations and the segment disclosures through the disposal date.
The Company acquired CSuite for aggregate cash consideration of approximately $8.5 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments.
SPI, based in Miami, Florida, is a vertical market software company, created exclusively to serve the management needs of all types of shared-ownership properties. SPI is included in the Kingsway Search Xcelerator segment. The Company acquired SPI for aggregate cash consideration of $2.8 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments.
VA Lafayette owns the LA Real Property, which is also subject to th e LA Mortgage. EXTENDED WARRANTY SEGMENT Extended Warranty includes the following subsidiaries of the Company (collectively, "Extended Warranty"): ● IWS Acquisition Corporation ("IWS") ● Geminus Holding Company, Inc. ("Geminus") ● PWI Holdings, Inc.
The DDI Loan requires monthly interest payments. Monthly principal payments begin in December 2024, and the term loan matures on October 26, 2029. EXTENDED WARRANTY SEGMENT Extended Warranty includes the following subsidiaries of the Company (collectively, "Extended Warranty"): ● IWS Acquisition Corporation ("IWS") ● Geminus Holding Company, Inc. ("Geminus") ● PWI Holdings, Inc.
Further information is containe d in Note 4 , "Acquisitions ," to the Consolidated Financial Statements.
The closing purchase price was paid with cash on hand. Further information is containe d in Note 4 , "Acquisitions ," to the Consolidated Financial Statements. Acquisition of Digital Diagnostics Imaging, Inc. On October 26, 2023, the Company acquired 100% of the outstanding equity interests of Digital Diagnostics Imaging, Inc. ("DDI").
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CSuite, based in Manhattan Beach, California, is a national financial executive services firm providing financial management leadership to companies in every industry, regardless of size, throughout the United States. CSuite is included in the Kingsway Search Xcelerator segment.
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("PWI") ● Professional Warranty Service Corporation ("PWSC"), up until its sale on July 29, 2022 ● Trinity Warranty Solutions LLC ("Trinity") 4 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
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The Company will also pay additional contingent consideration, only to the extent earned, in an aggregate amount of up to $3.6 million, which is subject to certain conditions, including the successful achievement o f certain financial metrics for CSuite durin g the three-year period commencing on the first full calendar month following the acquisition date.
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The warranty coverage was provided nationwide by a single, A+ rated insurance carrier. ● The second insured warranty product was designed for existing homes and covered major systems and appliances. PWSC designed the product specifications, but the administration was conducted by an independent third party. PWSC also had an uninsured warranty administration services program.
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The closing purchase price was paid with cash on hand; however, subsequent to the CSuite acquisition, on November 16, 2022, the Company amended its October 1, 2021 loan agreement with Avidbank to borrow an additional $6.0 million in the form of a supplemental term loan (the "2022 Ravix Loan").
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This program enabled construction defects to be efficiently and amicably resolved by the homebuilder through mediation and mandatory binding arbitration to avoid costly litigation. HVAC Trinity sells HVAC, standby generator, commercial LED lighting and commercial refrigeration warranty products.
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The 2022 Ravix Loan has a variable interest rate equal to the Prime Rate plus 0.75%. The 2022 Ravix Loan requires monthly principal and interest payments and the term loan matures on November 16, 2028. Acquisition of Secure Nursing Service, Inc.
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As a provider of such 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.
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On November 18, 2022, the Company acquired substantially all of the assets and assumed certain specified liabilities of Secure Nursing Service, Inc. ("SNS"). SNS, based in Los Angeles, California, employs highly skilled, professional per diem and travel Registered Nurses, Licensed Vocational Nurses, Certified Nurse Assistants and Allied Healthcare Professionals with multiple years of acute care hospital experience.
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The dealer base is serviced by the Company's employees located throughout the United States in close geographical proximity to the dealers they serve. Penn and Prime distribute and market their products in 47 and 40 states, respectively.
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The SNS Loan requires monthly principal and interest payments, and the term loan matures on November 18, 2028. 4 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
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Many of its competitors have a comprehensive menu of products and services available to offer the independent and franchise dealers. Penn and Prime's typical competitor’s approach to market is by working through employees or agents with a variety of different product offerings.
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Disposal of Professional Warranty Service Corporation On July 29, 2022, Professional Warranty Services LLC ("PWS LLC"), a subsidiary of the Company entered into an Equity Purchase Agreement (the "PWSC Agreement") with Professional Warranty Service Corporation ("PWSC"), an 80% majority-owned, indirect subsidiary of the Company, Tyler Gordy, the president of PWSC and a 20% owner of PWSC ("Gordy") and PCF Insurance Services of the West, LLC ("Buyer"), pursuant to which PWS LLC and Gordy sold PWSC to Buyer.
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PWI’s competitors are a blend of national and regional competitors implementing employee and agent-based sales models. HVAC Trinity directly markets and distributes its warranty products to manufacturers, distributors and installers of HVAC, standby generator, commercial LED lighting and commercial refrigeration equipment.
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The purchase price paid by Buyer to PWS LLC and Gordy consisted of $51.2 million in base purchase price, subject to customary adjustments for net working capital, and non-compensation related transaction expenses of approximately $1.7 million.
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("SNS") ● SPI Kingsway Search Xcelerator's r evenue is derived from the provision of various services. Business Services CSuite is a professional services firm that provides experienced chief financial officer and other finance professionals to its clients through a variety of flexible offerings.
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To the extent the EBITDA of PWSC (as defined in the PWSC Agreement) for the one-year period following the sale transaction exceeds 103% of the EBITDA at the closing of the sale transaction (the "Closing EBITDA"), PWS LLC and Gordy will also be entitled to receive an earnout payment in an amount equal to five times the EBITDA in excess of 103% of Closing EBITDA.
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All services are delivered by employees who are located in the United States. Ravix offers its services across four different practices: ● Operational Accounting. Offers services oriented around day-to-day financial stewardship of its clients, such as bookkeeping, accounting, financial reporting and analysis and strategic finance. ● Technical Accounting.
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The Company does not have access to the information needed to reasonably estimate the potential earnout payment and accordingly any gain related to the earnout payment will be recorded in the period the consideration is determined to be realizable. Further information is containe d in Note 5, "Disposal and Discontinued Operations" to the Consolidated Financial Statements.
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DDI provides outsourced 24 hours a day and 7 days per week ("24/7") cardiac telemetry services for long-term acute care ("LTAC") and inpatient rehabilitation hospitals. Outsourcing cardiac monitoring is intended to allow hospitals to eliminate personnel callouts and human resources issues, remove distractions from onsite operations, and free up facility staff to assist directly with patient care.
Removed
Sale of CMC Real Property On December 22, 2022, TRT Leaseco, LLC (“TRT”), an indirect subsidiary of the Company, entered into a Purchase and Sale Agreement (the “Agreement”) with BNSF Dayton LLC ("Purchaser"), pursuant to which TRT agreed to sell to the Purchaser the Real Property. The Real Property was subject to two mortgages.
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DDI has been operating for over 10 years and currently has a presence in 42 states. DDI offers its services as follows: ● LTAC. DDI connects to the hospital’s existing installed telemetry system and outsources the telemetry department for the hospital 24/7. ● Inpatient R ehabilitation Hospitals.
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TRT is also the landlord under an existing railway lease over the Real Property. An affiliate of the Purchaser is the current tenant under the existing railway lease. Under the terms of the Agreement, at the closing on December 29, 2022, TRT assigned, and the Purchaser assumed, the rights and obligations of the landlord under the existing railway lease.
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DDI provides mobile monitors to the hospital which automatically connect to the hospital’s WiFi, and then conducts 24/7 monitoring for patients requiring the service. This is intended to allow inpatient rehabilitation hospitals to keep the patient on-site, reducing ambulatory costs and improving continuity of care.
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The purchase price paid by the Purchaser at the closing consisted of $44.5 million in cash plus the assumption of the unpaid principal balance as of the closing of the two mortgages of approximately $170.7 million, netting cash proceeds of $21.4 million to Kingsway after taxes, fees and distribution to the minority shareholder.
Added
Vertical Market Software SPI provides software products created exclusively to serve the management needs of all types of shared-ownership properties throughout the United States, Europe, Asia, Mexico and the Caribbean. Marketing, Distribution and Competition No Kingsway Search Xcelerator customer or group of affiliated customers accounts for 10% or m ore of the Company's consolidated revenues.
Removed
Further information is containe d in Note 5, "Disposal and Discontinued Operations" to the Consolidated Financial Statements. Asset Held for Sale During the fourth quarter of 2022, the Company's subsidiary VA Lafayette was classified as held for sale. Further information is containe d in Note 5 , "Disposal and Discontinued Operations " to the Consolidated Financial Statements.
Added
Healthcare Services SNS primarily relies on word-of-mouth to recruit nurses to help meet the demands of the hospitals and SNS actively market its services through third-party lead generation channels to better meet the hospitals’ clinician demand.
Removed
The warranty coverage is provided nationwide by a single, A+ rated insurance carrier. The warranty document is an agreement between the homebuilder and the purchaser of the home and includes specific tolerances related to covered defects and precise definitions of damages.
Added
DDI has primarily grown through word-of-mouth referrals and also actively markets its services through traditional channels and via sponsorship of industry events and conferences. 7 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Vertical Market Software SPI markets its services via industry trade shows and industry conferences.
Removed
Each damage category includes materials defect coverage for the first year, major systems coverage for the second year, and workmanship and structural coverage for years three through ten.
Added
Because the SPI product is a business to business software solution, SPI's target market is a subset of a larger travel market; therefore, competition is limited.
Removed
The warranty enables certain damages to be resolved by the homebuilder without admitting fault or negligence, and the warranty offers an efficient method to resolve buyer complaints and avoid costly litigation through mediation and mandatory binding arbitration. ● The second insured warranty product is designed for existing homes and covers major systems and appliances.
Removed
PWSC designs the product specifications, but the administration is conducted by an independent third party. PWSC is not a risk-taker on this product; instead, it leverages an independent, reputable insurance carrier. PWSC sells this product directly to consumers and through various other channels, such as credit unions, brokers, and property managers. PWSC also has an uninsured warranty administration services program.
Removed
The warranty document issued through this program is an agreement between the homebuilder and the purchaser of the home, and it includes performance standards established by the homebuilder and warrants conditions in the home that could constitute a construction defect throughout the warranty period.
… 17 more changes not shown on this page.
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
41 edited+8 added−17 removed84 unchanged
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
41 edited+8 added−17 removed84 unchanged
2022 filing
2023 filing
Biggest changeBecause of our substantial outstanding recourse debt: • our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing could be limited; • our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes and our ability to satisfy our obligations with respect to our debt may be impaired in the future; • a large portion of our cash flow must be dedicated to the payment of interest on our debt, thereby reducing the funds available to us for other purposes; • we are exposed to the risk of increased interest rates because our outstanding subordinated debt and our outstanding acquisition financing bear interest directly related to the London interbank offered interest rate ("LIBOR"), the Secured Overnight Financing Rate (“SOFR”) and the Prime Rate; • it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and acceleration of, such debt; • we may be more vulnerable to general adverse economic and industry conditions and may have reduced flexibility to deploy capital or otherwise respond to changes; • we may be at a competitive disadvantage compared to our competitors with proportionately less debt or with comparable debt on more favorable terms and, as a result, they may be better positioned to withstand economic downturns; • our ability to refinance debt may be limited or the associated costs to do so may increase; • our ability to transfer funds among our various subsidiaries and/or distribute such funds to the holding company are limited; • our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited; • we were unable to redeem outstanding shares of our redeemable preferred stock on the required date, which could lead to increased financing costs and/or costs associated with any disputes that might arise involving the holders of such preferred stock; and • we may be prevented from carrying out capital spending that is, among other things, necessary or important to our growth strategy and efforts to improve the operating results of our businesses.
Biggest changeBecause of our outstanding recourse debt and acquisition financing: • our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing could be limited; • our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes and our ability to satisfy our obligations with respect to our debt may be impaired in the future; • a portion of our cash flow must be dedicated to the payment of interest on our debt, thereby reducing the funds available to us for other purposes; • we are exposed to the risk of increased interest rates because our outstanding subordinated debt and our outstanding acquisition financing bear interest directly related to the Secured Overnight Financing Rate (“SOFR”) and the Prime Rate; • it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and acceleration of, such debt; • we may be more vulnerable to general adverse economic and industry conditions and may have reduced flexibility to deploy capital or otherwise respond to changes; • we may be at a competitive disadvantage compared to our competitors with proportionately less debt or with comparable debt on more favorable terms and, as a result, they may be better positioned to withstand economic downturns; • our ability to refinance debt may be limited or the associated costs to do so may increase; • our ability to transfer funds among our various subsidiaries and/or distribute such funds to the holding company are limited; • our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited; and • we may be prevented from carrying out capital spending that is, among other things, necessary or important to our growth strategy and efforts to improve the operating results of our businesses.
In addition, political and social turmoil may put further pressure on economic conditions in the United States and abroad. The global economy has been periodically impacted by the effects of global economic downturns (such as recently related to COVID-19). There can be no assurance that there will not be further such events or deterioration in the global economy.
In addition, political and social turmoil may put further pressure on economic conditions in the United States and abroad. The global economy has been periodically impacted by the effects of global economic downturns (such as those recently related to COVID-19). There can be no assurance that there will not be further such events or deterioration in the global economy.
While it is not possible to estimate the loss, or range of loss, if any, that would be incurred in connection with any of the various proceedings at this time, it is possible an individual action would result in a loss having a material adverse effect on our business, results of operations or financial condition.
While it is not possible to estimate the loss, or range of loss, if any, that would be incurred in connection with any of the various proceedings at this time, it is possible an individual action could result in a loss having a material adverse effect on our business, results of operations or financial condition.
Over the past several years we have restructured our operating insurance subsidiaries, including exiting states and lines of business, placing subsidiaries into voluntary run-off, terminating managing general agent relationships, hiring a new management team, selling Mendota and CMC and acquiring PWI, Ravix, CSuite and SNS with the objective of focusing on our Extended Warranty and Kingsway Search Xcelerator segments, creating a more effective and efficient operating structure and focusing on profitability.
Over the past several years, we have restructured our operating insurance subsidiaries, including exiting states and lines of business, placing subsidiaries into voluntary run-off, terminating managing general agent relationships, hiring a new management team, selling Mendota and CMC and acquiring PWI, Ravix, CSuite, SNS, SPI and DDI with the objective of focusing on our Extended Warranty and Kingsway Search Xcelerator segments, creating a more effective and efficient operating structure and focusing on profitability.
Change management may result in disruptions to the operations of the business or may cause employees to act in a manner that is inconsistent with our objectives. Any of these events could negatively affect our performance. We may not always achieve the expected cost savings and other benefits of our initiatives. 14 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Change management may result in disruptions to the operations of the business or may cause employees to act in a manner that is inconsistent with our objectives. Any of these events could negatively affect our performance. We may not always achieve the expected cost savings and other benefits of our initiatives. 12 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Investors are advised to consider these factors along with the other information included in this 2022 Annual Report and to consult any further disclosures Kingsway makes in its filings with the SEC.
Investors are advised to consider these factors along with the other information included in this 2023 Annual Report and to consult any further disclosures Kingsway makes in its filings with the SEC.
FINANCIAL RISK We have substantial outstanding recourse debt, which could adversely affect our ability to obtain financing in the future, react to changes in our business and satisfy our obligations.
FINANCIAL RISK We have outstanding recourse debt and acquisition financing , which could adversely affect our ability to obtain financing in the future, react to changes in our business and satisfy our obligations.
Given the low interest rate environment that exists for fixed maturities, a significant increase in investment yields or an impairment of investments that we own could have a material adverse effect on our business, results of operations or financial condition by reducing the fair value of the investments we own, particularly if we were forced to liquidate investments at a loss. 11 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Given the low interest rate environment that exists for fixed maturities, a significant increase in investment yields or an impairment of investments that we own could have a material adverse effect on our business, results of operations or financial condition by reducing the fair value of the investments we own, particularly if we were forced to liquidate investments at a loss.
From 2020 to 2022, the Company made reimbursement payments to Aegis totaling $1.0 million in connection with the Settlement Agreement. The timing and severity of our future payments pursuant to this Settlement Agreement are not reasonably determinable.
From 2020 to 2023, the Company made reimbursement payments to Aegis totaling $1.5 million in connection with the Settlement Agreement. The timing and severity of our future payments pursuant to this Settlement Agreement are not reasonably determinable.
As of December 31, 2022, our investments includ ed $37.6 million o f fixed maturities, at fair value. General economic conditions can adversely affect the markets for interest rate-sensitive instruments, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and, consequently, the fair value of fixed maturities.
As of December 31, 2023, our investments includ ed $36.5 million o f fixed maturities, at fair value. General economic conditions can adversely affect the markets for interest rate-sensitive instruments, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and, consequently, the fair value of fixed maturities.
In the event that these conditions recur or result in a prolonged economic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected. These market conditions may affect the Company's ability to access debt and equity capital markets. 12 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
In the event that these conditions recur or result in a prolonged economic downturn, our results of operations, financial position and/or liquidity could be materially and adversely affected. These market conditions may affect the Company's ability to access debt and equity capital markets.
Accordingly, a significant decline in new and used automobile sales could have a material adverse effect on our business, results of operations or financial condition. 15 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Our reliance on a limited number of warranty and maintenance support clients and customers could adversely affect our ability to maintain business.
Accordingly, a significant decline in new and used automobile sales could have a material adverse effect on our business, results of operations or financial condition. Our reliance on a limited number of warranty and maintenance support clients and customers could adversely affect our ability to maintain business.
The consequence of this limitation would be the potential loss of a significant future cash flow benefit because we would no longer be able to substantially offset future taxable income with U.S. NOLs. There can be no assurance that such ownership change will not occur in the future.
The consequence of this limitation would be the potential loss of a significant future cash flow benefit because we would no longer be able to substantially offset future taxable income with U.S. NOLs. There can be no assurance that such ownership change will not occur in the future. 11 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The value of collateral could fall below the levels required under these agreements putting the subsidiary or subsidiaries in breach of the agreements which could expose us to damages or otherwise adversely impact our business, financial condition, operating results or cash flows.
The value of collateral could fall below the levels required under these agreements putting the subsidiary or subsidiaries in breach of the agreements which could expose us to damages or otherwise adversely impact our business, financial condition, operating results or cash flows. 10 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The loss of the services of any of our key employees, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect our results of operations. 17 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Item 1B. Unresolved Staff Comments None.
The loss of the services of any of our key employees, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect our results of operations. Item 1B. Unresolved Staff Comments None.
Disruptions or security failures in our information technology systems could create liability for us and/or limit our ability to effectively monitor, operate and control our operations and adversely affect our reputation, business, financial condition, results of operation and cash flows. Our information technology systems facilitate our ability to monitor, operate and control our operations.
Disruptions or security failures in our information technology systems, including as a result of cybersecurity incidents, could create liability for us and/or limit our ability to effectively monitor, operate and control our operations and adversely affect our reputation, business, financial condition, results of operation and cash flows.
The covenants under our debt agreements could limit our ability to plan for or react to market conditions or to meet our capital needs. No assurances can be given that we will be able to maintain compliance with these covenants.
The covenants under our debt agreements could limit our ability to plan for or react to market conditions or to meet our capital needs. No assurances can be given that we will be able to maintain compliance with these covenants. 9 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
As a result, increases in LIBOR, SOFR and the Prime Rate would increase the cost of servicing our debt and could adversely affect our results of operations. Each one hundred basis point increase in LIBOR, SOFR or the Prime Rate would result in an approxi mately $1.4 million in crease in our annual interest expense.
As a result, increases in CME Term SOFR, SOFR and the Prime Rate would increase the cost of servicing our debt and could adversely affect our results of operations. Each one hundred basis point increase in CME Term SOFR, SOFR or the Prime Rate would result in an approx imately $0.4 million in crease in our annual interest expense.
As of December 31, 2022, our investments also included$0.2 million of equity investments, $1.0 million of limited liability investments, $17.1 million of limited liability investments, at fair value, $0.8 million of investments in private companies, at adjusted cost and other investments, at cost of $0.4 million. The se investments are less liquid than fixed maturities.
As of December 31, 2023, our investments also included$0.1 million of equity investments, $0.8 million of limited liability investments, $3.5 million of limited liability investments, at fair value and $0.9 million of investments in private companies, at adjusted cost . The se investments are less liquid than fixed maturities.
Also, almost all of our U.S. NOLs have expiration dates. There can be no assurance that, if and when we generate taxable income in the future from operations or the sale of assets or businesses, we will generate such taxable income before our U.S. NOLs expire. We have generated U.S. NOLs, but our ability to preserve and use these U.S.
There can be no assurance that, if and when we generate taxable income in the future from operations or the sale of assets or businesses, we will generate such taxable income before our U.S. NOLs expire. We have generated U.S. NOLs, but our ability to preserve and use these U.S. NOLs could be limited or impaired by future ownership changes.
There can be no assurance that an acquired company will generate taxable income and, if an acquired company does generate taxable income, there can be no assurance that the acquired company will be allowed to be included in our U.S. consolidated tax return group. 13 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
There can be no assurance that an acquired company will generate taxable income and, if an acquired company does generate taxable income, there can be no assurance that the acquired company will be allowed to be included in our U.S. consolidated tax return group.
To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy.
Adequate rates are necessary to generate revenues sufficient to pay expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy.
NOLs could be limited or impaired by future ownership changes. Our ability to utilize the U.S. NOLs after an "ownership change" is subject to the rules of Section 382 of the U.S. Internal Revenue Code of 1986, as amended ("Section 382").
Our ability to utilize the U.S. NOLs after an "ownership change" is subject to the rules of Section 382 of the U.S. Internal Revenue Code of 1986, as amended ("Section 382").
We are actively engaged in developing and implementing remediation plans as described in Item 9A, Controls and Procedures, of this 2022 Annual Report, but we can provide no assurance that additional material weaknesses in our internal control over financial reporting will not be identified in the future and that such material weaknesses, if identified, will not result in material misstatements in our consolidated financial statements.
Although we have remediated material weaknesses previously identified and are actively engaged in developing and implementing remediation plans as described Item 9A, Controls and Procedures, of this 2023 Annual Report, but we can provide no assurance that additional material weaknesses in our internal control over financial reporting will not be identified in the future and that such material weaknesses, if identified, will not result in material misstatements in our consolidated financial statements STRATEGIC RISK The achievement of our strategic objectives is highly dependent on effective change management.
If SNS' social and digital media strategy is not successful, SNS' ability to attract qualified nurses could be negatively impacted. Moreover, the competition for nurses remains high as many areas of the United States continue to experience a shortage of qualified nurses. 16 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
SNS relies on word-of-mouth referrals, as well as social and digital media to attract qualified nurses. If SNS' social and digital media strategy is not successful, SNS' ability to attract qualified nurses could be negatively impacted. Moreover, the competition for nurses remains high as many areas of the United States continue to experience a shortage of qualified nurses.
If SNS' insurance does not cover the claim or SNS is otherwise not able to maintain adequate insurance coverage, SNS may be exposed to substantial liabilities that would materially impact its business and financial performance. SNS ’ profitability could be adversely impacted if SNS is unable to adjust its nurse pay rates as the bill rates decline.
If SNS' insurance does not cover the claim or SNS is otherwise not able to maintain adequate insurance coverage, SNS may be exposed to substantial liabilities that would materially impact its business and financial performance.
If our disaster recovery plans do not work as anticipated, or if the third-party vendors to which we have outsourced certain information technology or other services fail to fulfill their obligations to us, our operations may be adversely affected. Any of these circumstances could adversely affect our reputation, business, financial condition, results of operation and cash flows.
If our disaster recovery plans do not work as anticipated, or if the third-party vendors to which we have outsourced certain information technology or other services fail to fulfill their obligations to us, our operations may be adversely affected.
We have generated net operating loss carryforwards for U.S. income tax purposes, but our ability to use these net operating losses could be limited by our inability to generate future taxable income. Our U.S. businesses have generated consolidated net operating loss carryforwards ("U.S. NOLs") for U.S. federal income tax purposes of approximately $644.2 million as o f December 31, 2022.
We have generated net operating loss carryforwards for U.S. income tax purposes, but our ability to use these net operating losses could be limited by our inability to generate future taxable income. Our U.S. businesses have generated consolidated net operating loss carryforwards ("U.S.
SNS relies on its ability to attract, develop, and retain nurses who possess the skills, experience and required licenses necessary to meet the specified requirements of the healthcare facilities. SNS competes for nurses with other temporary healthcare staffing companies. SNS relies on word-of-mouth referrals, as well as social and digital media to attract qualified nurses.
SNS may be unable to recruit and retain enough quality nurses to meet the demand. SNS relies on its ability to attract, develop, and retain nurses who possess the skills, experience and required licenses necessary to meet the specified requirements of the healthcare facilities. SNS competes for nurses with other temporary healthcare staffing companies.
Our outstanding recourse subordinate debt as of December 31, 2022 of $90.5 million principal value bears interest directly related to LIBOR (and will in the future bear interest related to SOFR) and our outstanding acquisition financing of $34.8 million related to the acquisitions of PWI, Ravix, CSuite and SNS bears interest directly related to either SOFR or the Prime Rate.
Our outstanding recourse subordinate debt as of December 31, 2023 of $15.0 million principal value bears interest directly related to CME Term SOFR and our outstanding acquisition financing of $31.3 million related to the acquisitions of PWI, Ravix, CSuite, SNS and DDI bears interest directly related to either SOFR or the Prime Rate.
These U.S. NOLs can be available to reduce income taxes that might otherwise be incurred on future U.S. taxable income and would have a positive effect on our cash flow. There can be no assurance that we will generate the taxable income in the future necessary to utilize these U.S. NOLs and realize the positive cash flow benefit.
There can be no assurance that we will generate the taxable income in the future necessary to utilize these U.S. NOLs and realize the positive cash flow benefit. Also, almost all of our U.S. NOLs have expiration dates.
In the future, it may be necessary to write-off charges and other costs or incur additional expenses in connection with our discontinued operations, which could have a material adverse effect on our business, results of operations or financial condition. Additionally, as of December 31, 2022, we classified VA Lafayette as an asset “held for sale”.
In the future, it may be necessary to write-off charges and other costs or incur additional expenses in connection with our discontinued operations, which could have a material adverse effect on our business, results of operations or financial condition. 13 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Changes or modifications to our information technology systems could cause disruption to our operations or cause challenges with respect to our compliance with laws, regulations or other applicable standards. For example, delays, higher than expected costs or unsuccessful implementation of new information technology systems could adversely affect our operations.
For example, delays, higher than expected costs or unsuccessful implementation of new information technology systems could adversely affect our operations.
We are party to a Settlement Agreement that may require us to make cash payments from time to time, which payments could materially adversely affect our business, results of operations or financial condition.
Moreover, events such as the closure of SVB and SB, in addition to other global macroeconomic conditions, may cause further turbulence and uncertainty in the capital markets. We are party to a Settlement Agreement that may require us to make cash payments from time to time, which payments could materially adversely affect our business, results of operations or financial condition.
SNS does not have control over the bill rate from hospitals and negotiates the pay rates with the nurses who work with the company. If the bill rates decline, SNS will need to renegotiate the pay rates with its nurses and successfully recruit new nurses at lower pay rates.
SNS ’ profitability could be adversely impacted if SNS is unable to adjust its nurse pay rates as the bill rates decline. SNS does not have control over the bill rate from hospitals and negotiates the pay rates with the nurses who work with the company.
As of as of December 31, 2022, we ha ve $34.8 million principal value of such acquisition financing outstanding.
As of as of December 31, 2023, we ha ve $31.3 million principal value of such acquisition financing outstanding; however, such acquisition financing is non-recourse to other Kingsway entities.
SNS' ability to recruit and retain nurses is contingent on SNS' ability to offer attractive assignments with competitive wages and benefits or payments. SNS may be unable to recruit and retain enough quality nurses to meet the demand.
If the bill rates decline, SNS will need to renegotiate the pay rates with its nurses and successfully recruit new nurses at lower pay rates. SNS' ability to recruit and retain nurses is contingent on SNS' ability to offer attractive assignments with competitive wages and benefits or payments.
Our success depends on our ability to price accurately the risks we underwrite. Our results of operation or financial condition depend on our ability to price accurately for a wide variety of risks. Adequate rates are necessary to generate revenues sufficient to pay expenses and to earn a profit.
Any of these circumstances could adversely affect our reputation, business, financial condition, results of operation and cash flows. 14 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Our success depends on our ability to price accurately the risks we underwrite. Our results of operation or financial condition depend on our ability to price accurately for a wide variety of risks.
As described in Item 9A, Controls and Procedures, of this 2022 Annual Report, in previous years we identified the existence of material weaknesses in internal control over financial reporting. We have one material weakness that has not yet been fully remediated.
As described in Item 9A, Controls and Procedures, of this 2023 Annual Report, we have identified the existence of material weaknesses in internal control over financial reporting related to the accounting for debt at fair value and the presentation of the repurchase of its subordinated debt in the statement of cash flows.
Additionally, we incurred indebtedness in connection with our acquisitions of PWI Holdings, Inc. and its various subsidiaries (collectively, "PWI") on December 1, 2020, Ravix Financial, Inc. ("Ravix") on October 1, 2021, CSuite Financial Partners, LLC ("CSuite") on November 1, 2022 and Secure Nursing Service Inc. ("SNS") on November 18, 2022.
("Ravix") on October 1, 2021, CSuite Financial Partners, LLC ("CSuite") on November 1, 2022, Secure Nursing Service Inc. ("SNS") on November 18, 2022 and Digital Diagnostics Inc. ("DDI") on October 26, 2023.
As of December 31, 2022, we had $90.5 million principal value of outstanding recourse subordinated debt in the form of trust preferred securities, with redemption dates beginning in December 2032, and which has deferred interest accrued of $25.5 million as of December 31, 2022.
As of December 31, 2023, we had $15.0 million principal value of outstanding recourse subordinated debt in the form of trust preferred securities, with a redemption date of May 2033. Additionally, we incurred indebtedness in connection with our acquisitions of PWI Holdings, Inc. and its various subsidiaries (collectively, "PWI") on December 1, 2020, Ravix Financial, Inc.
Removed
Pursuant to the indentures governing our outstanding trust preferred securities, we are permitted to defer interest payments for up to 20 quarters. During the third quarter of 2018, the Company gave notice to the trustees of its outstanding trust preferred securities of the Company’s intention to exercise its voluntary right to defer interest.
Added
Our cash, cash equivalents and investments could be adversely affected if the financial institutions in which we hold our cash, cash equivalents and investments fail. We maintain cash balances at third-party financial institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) insurance limit.
Removed
On March 2, 2023, we gave notice to the holders of five series of our trust preferred securities of our intention to exercise repurchase options no later than March 15, 2023. We will also pay interest accrued during the deferral period on the remaining series of trust preferred securities not subject to repurchase.
Added
The FDIC took control and was appointed receiver of Silicon Valley Bank (“SVB”) and New York Signature Bank (“SB”) on March 10, 2023 and March 12, 2023, respectively. We do not have any direct exposure to Silicon Valley Bank or New York Signature Bank.
Removed
After the repurchase is completed we will have $15 million of principal outstanding related to the remaining series of trust preferred securities. The Company is currently prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred.
Added
However, if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments could be threatened and may have a material adverse impact on our business, prospects, financial condition and results of operations.
Removed
We also gave notice of our intention to redeem all the outstanding shares of Class A Preferred Stock on March 15, 2023, following the repurchase and payment of accrued interest on our trust preferred securities. 10 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Added
NOLs") for U.S. federal income tax purposes of approximate ly $623.1 million as o f December 31, 2023. These U.S. NOLs can be available to reduce income taxes that might otherwise be incurred on future U.S. taxable income and would have a positive effect on our cash flow.
Removed
The expected discontinuation of LIBOR could adversely affect the cost of servicing our outstanding debt.
Added
In the past, we have identified the existence of material weaknesses in our internal control over financial reporting, which have since been remediated.
Removed
Our outstanding recourse subordinate debt, which has redemption dates ranging from December 4, 2032 through January 8, 2034, bear interest directly related to LIBOR and extend beyond June 2023, by which time the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced it intends to phase out U.S dollar LIBOR.
Added
Additionally, as of December 31, 2022 and December 31, 2023, we have classified VA Lafayette as an asset “held for sale”.
Removed
The transition from LIBOR to other benchmarks has been the subject of private sector and governmental activity. It is unclear if alternative rates or benchmarks, such as SOFR, will be widely adopted, and this uncertainty may impact the liquidity of the SOFR loan markets.
Added
We cannot ensure that our compliance controls, policies, and procedures will in every instance protect us from acts committed by our employees, agents, contractors, or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including, without limitation, healthcare, employment, foreign corrupt practices, trade restrictions and sanctions, environmental, competition, and privacy laws and regulations.
Removed
In addition, the transition from LIBOR could have a significant impact on the overall interest rate environment and on our borrowing costs.
Added
Our information technology systems facilitate our ability to monitor, operate and control our operations. Changes or modifications to our information technology systems could cause disruption to our operations or cause challenges with respect to our compliance with laws, regulations or other applicable standards.
Removed
The indentures governing the Company’s outstanding recourse debt and the loan and security agreement governing our outstanding acquisition financing provide alternative means of determining the Company’s interest expense on its outstanding debt, but at this time, the Company cannot yet reasonably estimate the expected impact of the discontinuation of LIBOR.
Removed
Failure to comply with the NYSE ’ s continued listing requirements and rules could result in the NYSE delisting our common stock, which could negatively affect our company, the price of our common stock and your ability to sell our common stock.
Removed
On April 17, 2020, the Company received a notice from NYSE that the Company was not in compliance with NYSE listing standard 802.01B because our average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and stockholders’ equity was less than $50.0 million.
Removed
In accordance with the NYSE listing requirements, we submitted a plan that demonstrated how we expected to return to compliance with NYSE listing standard 802.01B. On July 9, 2020, the NYSE notified us that our plan was accepted.
Removed
On January 18, 2021, NYSE notified us that we were again in compliance with NYSE listing standard 802.01B but that we were subject to continued monitoring and review for a period of 12 months.
Removed
While we remained in compliance during this 12-month period, we may in the future again fail to be in compliance with the NYSE listing standards and we may be subject to corrective action by NYSE, which may include suspension and delisting procedures.
Removed
If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting.
Removed
A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; decreasing the amount of news and analyst coverage of us; and limiting our ability to issue additional securities or obtain additional financing in the future.
Removed
In addition, delisting from the NYSE may negatively impact our reputation and, consequently, our business. STRATEGIC RISK The achievement of our strategic objectives is highly dependent on effective change management.
Item 2. Properties
Properties — owned and leased real estate
1 edited+0 added−0 removed2 unchanged
Item 2. Properties
Properties — owned and leased real estate
1 edited+0 added−0 removed2 unchanged
2022 filing
2023 filing
Biggest changeItem 2. Properties Leased Properties Extended Warranty leases facilities with an aggregate square footage of approximately 27,758 at five locations in three states. The latest expiration date of the existing leases is in February 2026. Kingsway Search Xcelerator leases facilities with an aggregate square footage of approxim ately 6,085 at three locations in one state.
Biggest changeItem 2. Properties Leased Properties Extended Warranty leases facilities with an aggregate square footage of approximately 28,035 at five l ocations in three states. The latest expiration date of the existing leases is in January 2029. Kingsway Search Xcelerator leases facilities with an aggregate square footage of approxim ately 6,499 at three locations in two states.
Item 3. Legal Proceedings
Legal Proceedings — active lawsuits and investigations
1 edited+0 added−0 removed2 unchanged
Item 3. Legal Proceedings
Legal Proceedings — active lawsuits and investigations
1 edited+0 added−0 removed2 unchanged
2022 filing
2023 filing
Biggest changeS ee Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements, for further information regarding the Company's legal proceedings.
Biggest changeS ee Note 25, "Commitments and Contingent Liabilities," to the Consolidated Financial Statements, for further information regarding the Company's legal proceedings. Item 4. Mine Safety Disclosures Not applicable. Part II
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
5 edited+3 added−0 removed2 unchanged
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
5 edited+3 added−0 removed2 unchanged
2022 filing
2023 filing
Biggest changeRecent Sales of Unregistered Securities During the year ended December 31, 2022, we did not have any unregistered sales of our equity securities. Issuer Purchases of Equity Securities During the year ended December 31, 2022, we did not have any repurchases of our equity securities.
Biggest changeRecent Sales of Unregistered Securities During the year ended December 31, 2023, we did not have any unregistered sales of our equity securities.
Securities Authorized for Issuance under Equity Compensation Plans The information required related to securities authorized for issuance under equity compensation plans is incorporated herein by reference to the Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.
Securities Authorized for Issuance under Equity Compensation Plans The information required related to securities authorized for issuance under equity compensation plans is incorporated herein by reference to the Proxy Statement for our 2023 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2023.
The number of shareholders of record includes one single shareholder, Cede & Co., for all of the shares held by our shareholders in individual brokerage accounts maintained at banks, brokers and institutions. Dividends The Company has not declared a dividend since the first quarter of 2009.
The number of shareholders of record includes one single shareholder, Cede & Co., for all of the shares held by our shareholders in individual brokerage accounts maintained at banks, brokers and institutions. 16 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Dividends The Company has not declared a dividend since the first quarter of 2009.
NYSE High - US$ Low - US$ 2022 Quarter 4 $ 8.08 $ 5.88 Quarter 3 7.81 5.69 Quarter 2 5.70 5.15 Quarter 1 5.60 5.08 2021 Quarter 4 $ 5.77 $ 5.04 Quarter 3 5.70 4.88 Quarter 2 5.24 4.46 Quarter 1 5.36 4.35 Shareholders of Record As of March 7, 2023 the closing sales price of our common shares as reported by the NYSE was $10.05 per share.
NYSE High - US$ Low - US$ 2023 Quarter 4 $ 8.61 $ 6.46 Quarter 3 9.01 7.55 Quarter 2 9.16 8.09 Quarter 1 10.27 7.85 2022 Quarter 4 $ 8.08 $ 5.88 Quarter 3 7.81 5.69 Quarter 2 5.70 5.15 Quarter 1 5.60 5.08 Shareholders of Record As of March 4, 2024 the closing sales price of our common shares as reported by the NYSE was $9.25 per share.
As of March 8, 2023 , we had 25,045,024 common shares issued and outstanding. As of March 8, 2023 , th ere were 9 shareholders of record of our common stock.
As of March 5, 2024 , we had 28,121,271 common shares issued and outstanding. As of March 5, 2024 , th ere we re 10 shareholders of r ecord of our common stock.
Added
Issuer Purchases of Equity Securities On March 21, 2023, the Company's Board of Directors approved a security repurchase program under which the Company is authorized to repurchase up to $10.0 million of its currently issued and outstanding securities through March 22, 202 4. See Note 20 ," Shareholders' Equity ," fo r further discussion of the share repurchase program.
Added
The following table provides information about our repurchases of our securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the quarter ended December 31, 2023.
Added
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) October 1 - 31, 2023 137,231 $ 7.27 137,231 $ 4,221 November 1 - 30, 2023 143,800 $ 7.45 143,800 $ 3,150 December 1- 31, 2023 42,000 $ 7.55 42,000 $ 2,833 Total 323,031 $ 7.38 323,031 During the quarter ended December 31, 2023, all repurchases of our securities were common stock.
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
125 edited+69 added−110 removed67 unchanged
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
125 edited+69 added−110 removed67 unchanged
2022 filing
2023 filing
Biggest changeRESULTS OF CONTINUING OPERATIONS A reconciliation of total segment operating income to net income for the years ended December 31, 2022 and December 31, 2021 is presented in Table 1 below: Table 1 Segment Operating Income for the Years Ended December 31, 2022 and December 31, 2021 For the years ended December 31 (in thousands of dollars) 2022 2021 Change Segment operating income (loss) Extended Warranty 9,879 12,636 (2,757) Kingsway Search Xcelerator 3,548 484 3,064 Total segment operating income 13,427 13,120 307 Net investment income 2,305 1,575 730 Net realized gains 1,209 1,809 (600) Loss on change in fair value of equity investments (26) (242) 216 (Loss) gain on change in fair value of limited liability investments, at fair value (1,754) 2,391 (4,145) Gain on change in fair value of real estate investments 1,488 — 1,488 Gain on change in fair value of derivative asset option contracts 16,730 — 16,730 Interest expense (8,092) (6,161) (1,931) Other revenue and expenses not allocated to segments, net (17,206) (11,395) (5,811) Amortization of intangible assets (6,133) (4,837) (1,296) Loss on change in fair value of debt (4,908) (3,201) (1,707) Gain on disposal of subsidiary 37,917 — 37,917 Gain on extinguishment of debt not allocated to segments — 311 (311) Income (loss) from continuing operations before income tax expense (benefit) 34,957 (6,630) 41,587 Income tax expense (benefit) 4,825 (3,916) 8,741 Income (loss) from continuing operations 30,132 (2,714) 32,846 (Loss) income from discontinued operations, net of taxes (12,805) 4,574 (17,379) Loss on disposal of discontinued operations, net of taxes (2,262) — (2,262) Net income 15,065 1,860 13,205 Segment Operating Income, Income (Loss) from Continuing Operations and Ne t I ncome For the year ended December 31, 2022, we reported segment operating income o f $13.4 million compared to $13.1 million for the year ended December 31, 2021.
Biggest changeRESULTS OF CONTINUING OPERATIONS A reconciliation of total segment operating income to net income for the years ended December 31, 2023 and December 31, 2022 is presented in Table 1 below: Table 1 Segment Operating Income for the Years Ended December 31, 2023 and December 31, 2022 For the years ended December 31 (in thousands of dollars) 2023 2022 Change Segment operating income Extended Warranty 6,983 9,879 (2,896 ) Kingsway Search Xcelerator 5,252 3,548 1,704 Total segment operating income 12,235 13,427 (1,192 ) Net investment income 1,804 2,305 (501 ) Net realized gains 761 1,209 (448 ) Net gain (loss) on equity investments 3,397 (26 ) 3,423 Gain (loss) on change in fair value of limited liability investments, at fair value 78 (1,754 ) 1,832 Net change in unrealized gain on private company investments 63 — 63 Gain on change in fair value of real estate investments — 1,488 (1,488 ) Impairment losses (229 ) — (229 ) (Loss) gain on change in fair value of derivative asset option contracts (1,366 ) 16,730 (18,096 ) Interest expense (6,250 ) (8,092 ) 1,842 Other revenue and expenses not allocated to segments, net (12,823 ) (17,206 ) 4,383 Amortization of intangible assets (5,909 ) (6,133 ) 224 Loss on change in fair value of debt (68 ) (4,908 ) 4,840 Gain on disposal of subsidiary 342 37,917 (37,575 ) Gain on extinguishment of debt 31,616 — 31,616 Income from continuing operations before income tax (benefit) expense 23,651 34,957 (11,306 ) Income tax (benefit) expense (1,899 ) 4,825 (6,724 ) Income from continuing operations 25,550 30,132 (4,582 ) Income (loss) from discontinued operations, net of taxes 450 (12,805 ) 13,255 Loss on disposal of discontinued operations, net of taxes (1,988 ) (2,262 ) 274 Net income 24,012 15,065 8,947 Segment Operating Income, Income from Continuing Operations and Ne t I ncome For the year ended December 31, 2023, we reported segment operating income o f $12.2 million compared to $13.4 million for the year ended December 31, 2022.
During the fourth quarter, the Company began executing a plan to sell VA Lafayette, and as a result, VA Lafayette is reported as held for sale at December 31, 2022. • Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported separately for all periods presented.
During the fourth quarter of 2022, the Company began executing a plan to sell VA Lafayette, and as a result, VA Lafayette is reported as held for sale at December 31, 2022 and December 31, 2023. • Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported separately for all periods presented.
Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the key inputs or changes in the assumed achievement or timing of any targets. Any changes in fair value are reported in the consolidated statements of operations as non-operating other (expense) revenue.
Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the key inputs or changes in the assumed achievement or timing of any targets. Any changes in fair value are reported in the consolidated statements of operations as non-operating other expense.
Liabilities for contingent consideration are measured and reported at fair value at the date of acquisition with subsequent changes in fair value reported in the consolidated statements of operations as non-operating other (expense) revenue. Determining the fair value of contingent consideration liabilities requires management to make assumptions and judgments.
Liabilities for contingent consideration are measured and reported at fair value at the date of acquisition with subsequent changes in fair value reported in the consolidated statements of operations as non-operating other expense. Determining the fair value of contingent consideration liabilities requires management to make assumptions and judgments.
Included are revenue and expenses associated with our various other investments that are accounted for on a consolidated basis, our insurance company that has been in run-off since 2012, and expenses associated with our corporate holding company.
Included are revenue and expenses associated with our various other investments that are accounted for on a consolidated basis, our former insurance company that has been in run-off since 2012, and expenses associated with our corporate holding company.
The net realized gains for 2022 and 2021 primarily relate to: • Net realized gains on sales of limited liability investments ; • Realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings") ; and • Distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as a result of prior distributions.
The net realized gains for 2023 and 2022 primarily relate to: • Net realized gains on sales of limited liability investments ; • Realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings") ; and • Distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as a result of prior distributions.
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 heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States.
PWSC distributed its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana. Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States.
Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. No impairment charges were recorded against goodwill in 2022 or 2021, as the estimated fair values of the reporting units exceeded their respective carrying values.
Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. No impairment charges were recorded against goodwill in 2023 or 2022, as the estimated fair values of the reporting units exceeded their respective carrying values.
Factors that could trigger a quantitative impairment review include, but are not limited to, significant under performance relative to historical or projected future operating results and significant negative industry or economic trends. As of November 30, 2022, the Company conducted its annual qualitative assessment.
Factors that could trigger a quantitative impairment review include, but are not limited to, significant under performance relative to historical or projected future operating results and significant negative industry or economic trends. As of November 30, 2023 , the Company conducted its annual qualitative assessment.
Refer t o Note 2 , " Summary of Significant Accounting Policies ," to the Consolidated Financial Statements for information about our revenue recognition accounting policies. Valuation of Fixed Maturities and Equity Investments Our equity investments, including warrants, are recorded at fair value with changes in fair value recognized in n et income.
Refer t o Note 2 , " Summary of Significant Accounting Policies ," to the Consolidated Financial Statements for information about our revenue recognition accounting policies. Valuation of Fixed Maturities and Equity Investments Our equity investments are recorded at fair value with changes in fair value recognized in n et income.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 39 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 47 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
Also, beginning in 2022, the holding company is permitted to receive a portion of the excess cash flow (as defined in the 2020 KWH Loan document) generated by the KWH Subs in the previous year. In 2022, the Company was entitled to 50% of the excess cash flow with the other 50% used to pay down the 2020 KWH Loan.
Also, beginning in 2022, the holding company is permitted to receive a portion of the excess cash flow (as defined in the 2020 KWH Loan document) generated by the KWH subsidiaries in the previous year. In 2022, the Company was entitled to 50% of the excess cash flow with the other 50% used to pay down the 2020 KWH Loan.
As part of the transaction, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims is $2.5 million.
As part of the transaction, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims was $2.5 million.
IWS sells a substantial amount of VSAs for new automobiles but, more importantly, its products are distributed through credit unions at the point of vehicle financing, which has been less impacted by the recent macro-economic conditions.
IWS sells a substantial amount of VSAs for new automobiles but, more importantly, its products are distributed through credit unions at the point of vehicle financing, which has been less impacted by the current macro-economic conditions.
Cash Flows from Continuing Operations During 2022 , the Company reported $2.6 million of net cash used in operating activities from continuing operations, primarily due to: • The sale of PWSC, which generated cash flows of $1.8 million through the date of the sale in 2022, compared to $2.8 million for 2021; • A $0.4 million reduction in cash flows from the remaining Extended Warranty companies; • Outflows at the holding company related to the TruPs repurchase option ($2.3 million); all of which were partially offset by; • Continued cost containment initiatives at the holding company regarding ongoing expenses; and • Increases in cash flows from the KSX companies, due to the inclusion of Ravix for the full twelve months in 2022 and the acquisitions of CSuite and SNS.
During 2022 , the Company reported $2.6 million of net cash used in operating activities from continuing operations, primarily due to: • The sale of PWSC, which generated cash flows of $1.8 million through the date of the sale in 2022; • A reduction in cash flows from the remaining Extended Warranty companies; • Outflows at the holding company related to the TruPs repurchase option ($2.3 million); all of which were partially offset by; • Continued cost containment initiatives at the holding company regarding ongoing expenses; and • Increases in cash flows from the KSX companies, due to the inclusion of Ravix for the full twelve months in 2022 and the acquisitions of CSuite and SNS.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis ("MD&A") of our financial condition and results of operations should be read together with the Consolidated Financial Statements included in Part II, Item 8 of this 2022 Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis ("MD&A") of our financial condition and results of operations should be read together with the Consolidated Financial Statements included in Part II, Item 8 of this 2023 Annual Report.
Accounting for Business Combinations and Asset Acquisitions The Company evaluates acquisitions in accordance with Accounting Standards Codification 805, Business Combinations ("ASC 805"), to determine if a transaction represents an acquisition of a business or an acquisition of assets. An acquisition of a business represents a business combination.
Accounting for Business Combinations The Company evaluates acquisitions in accordance with Accounting Standards Codification 805, Business Combinations ("ASC 805"), to determine if a transaction represents an acquisition of a business or an acquisition of assets. An acquisition of a business represents a business combination.
As a result of the newly provided information, the Company recorded a liability of $2.5 million during the third quarter of 2022, which is included in accrued expenses and other liabilities in the consolidated balance sheet at December 31, 2022 and loss on disposal of discontinued operations in the consolidated statement of operations for the year ended December 31, 2022.
As a result of the newly provided information, the Company recorded a liability of $2.5 million, which is included in accrued expenses and other liabilities in the consolidated balance sheet at December 31, 2022 and loss on disposal of discontinued operations in the consolidated statement of operations for the year ended December 31, 2022.
Holding Company Liquidity The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; and any other extraordinary demands on the holding company.
Holding Company Liquidity The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; stock repurchases; and any other extraordinary demands on the holding company.
The sale of PWSC did not represent a strategic shift that would have a major effect on the Company's operations or financial results; therefore, PWSC is not presented within discontinued operations. Se e Note 5, "Disposal and Discontinued Operations," to the Consolidated Financial Statements, for further discussion of the PWSC disposal.
The sale of PWSC did not represent a strategic shift that would have a major effect on the Company's operations or financial results; therefore, PWSC is not presented as a discontinued operation. Se e Note 5, "Disposal and Discontinued Operations," to the Consolidated Financial Statements, for further discussion of the PWSC disposal.
Revenue Recognition Service fee and commission revenue represents vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions and business services consulting revenue based on terms of various agreements with credit unions, consumers, businesses and homebuilders.
Revenue Recognition Service fee and commission revenue represents vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions, business services consulting revenue, healthcare services revenue and software license and support revenue based on terms of various agreements with credit unions, consumers, businesses and homebuilders.
Revenue from GAP commissions and homebuilder warranty service fees contain multiple distinct performance obligations that are accounted for separately. Judgment is required to determine the standalone selling price ("SASP") for each distinct performance obligation. Revenue is allocated to each performance obligation based on the relative SASP.
Revenue from GAP commissions, homebuilder warranty service fees and software license and support contain multiple distinct performance obligations that are accounted for separately. Judgment is required to determine the standalone selling price ("SASP") for each distinct performance obligation. Revenue is allocated to each performance obligation based on the relative SASP.
The following summarizes the impacts: Impact of Rate Change on Fair Value 2022 Result 2021 Result Libor: increase causes fair value to increase; decrease causes fair value to decrease Increase to fair value Increase to fair value Risk free rate: increase causes fair value to decrease; decrease causes fair value to increase Decrease to fair value Decrease to fair value The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt.
The following summarizes the impacts: Impact of Rate Change on Fair Value 2023 Result 2022 Result Libor/SOFR: increase causes fair value to increase; decrease causes fair value to decrease Increase to fair value Increase to fair value Risk free rate: increase causes fair value to decrease; decrease causes fair value to increase Increase to fair value Decrease to fair value The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt.
GAAP measure to total segment operatin g income is income (loss) from continuing operations before income tax expense (benefit) that, in addition to total segment operating income, includes net investment income, net realized gains, loss on change in fair value of equity investments, (loss) gain on change in fair value of limited liability investments, at fair value, gain on change in fair value of real estate investments, gain on change in fair value of derivative asset option contracts, interest expense, other revenue and expenses not allocated to segments, net, amortization of intangible assets, loss on change in fair value of debt, gain on disposal of subsidiary and gain on extinguishment of debt not allocated to segments.
GAAP measure to total segment operatin g income is income from continuing operations before income tax (benefit) expense that, in addition to total segment operating income, includes net investment income, net realized gains, net gain (loss) on equity investments, gain (loss) on change in fair value of limited liability investments, at fair value, net change in unrealized gain on private company investments, gain on change in fair value of real estate investments, impairment losses, (loss) gain on change in fair value of derivative asset option contracts, interest expense, other revenue and expenses not allocated to segments, net, amortization of intangible assets, loss on change in fair value of debt, gain on disposal of subsidiary and gain on extinguishment of debt.
The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
Management's Discussion and Analysis The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
Management's Discussion and Analysis During the third quarter of 2022, the buyer provided to the Company an analysis of the claims development that indicated that the Company's potential exposure with respect to the open claims was at the maximum obligation amount. Previous communications from the buyer noted no such development.
During the third quarter of 2022, the buyer provided to the Company an analysis of the claims development that indicated that the Company's potential exposure with respect to the open claims was at the maximum obligation amount. Previous communications from the buyer noted no such development.
Accordingly, it is reasonably possible that changes in the fair values of the Company’s investments reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the consolidated financial statements. Impairment Assessment of Investments The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates.
Accordingly, it is reasonably possible that changes in the fair values of the Company’s investments reported at fair value will occur in the near term and such changes could materially affect the amounts reported in the consolidated financial statements. Impairment Assessment of Investments The establishment of an impairment loss on an investment requires a number of judgments and estimates.
Customers either pay in full at the inception of a warranty contract, commission product sale, or when consulting services are billed, or on terms subject to the Company’s customary credit reviews. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers, which utilizes a five-step revenue recognition framework.
Customers either pay in full at the inception of a warranty contract or commission product sale, or when consulting, healthcare and software license and support services are billed, or on terms subject to the Company’s customary credit reviews. The Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers, which utilizes a five-step revenue recognition framework.
This source of cash was primarily attributed to: • Net cash proceeds received, net of cash disposed of from the sale of PWSC, of $35.2 million; • Net cash proceeds received from the sale of the CMC Real Property of $26.4 million; • Cash proceeds received from the sale of real estate investments of $12.2 million; • The acquisitions of CSuite and SNS in 2022, which totaled $13.7 million, net of cash acquired; and • Purchases of fixed maturities in excess of proceeds from limited liability investments and from sales and maturities of fixed maturities.
This source of cash was primarily attributed to: • Net cash proceeds received, net of cash disposed of from the sale of PWSC, of $35.2 million; • Net c ash proceeds received from the sale of the CMC Real Property of $26.4 million; • C ash proceeds received from the sale of real estate investments of $12.2 million; • The a cquisitions of CSuite and SNS in 2022, which totaled $13.7 million, net of cash acquired; and • Purchases of fixed maturities in excess of proceeds from limited liability investments and from sales and maturities of fixed maturities.
Kingsway Search Xcelerator The Kingsway Search Xcelerator revenue increased to $19.2 million for the year ended December 31, 2022 compared wit h $3.5 million for the year ended December 31, 2021. Kingsway Search Xcelerator operating income was $3.5 million for the year ended December 31, 2022 compared with $0.5 million for the year ended December 31, 2021.
Kingsway Search Xcelerator The Kingsway Search Xcelerator revenue increased to $35.0 million for the year ended December 31, 2023 compared wit h $19.2 million for the year ended December 31, 2022. Kingsway Search Xcelerator operating income was $5.3 million for the year ended December 31, 2023 compared with $3.5 million for the year ended December 31, 2022.
Management's Discussion and Analysis During 2022, the net cash used in financing activities from continuing operations was $5.6 million, p rimarily attributed to: • Principal repayments: on bank loans of $5.2 million, notes payable of $6.4 million, which relates to the repayment of the Flower Note; • Distributions to noncontrolling interest holders of $6.0 million; and • Net proceeds (reducing the use of cash) from bank loans of $12.7 million related to the 2022 Ravix Loan and the SNS Loan, and proceeds from the exercise of warrants of $0.5 million.
During 2022, the net cash used in financing activities from continuing operations was $5.6 million, primarily attributed to: • Principal repayments: on bank loans of $5.2 million, notes payable of $6.4 million, which relates to the repayment of the Flower Note; • Distributions to noncontrolling interest holders of $6.0 million; and • Net proceeds (reducing the use of cash) from bank loans of $12.7 million related to the 2022 Ravix Loan the SNS Loan, and proceeds from the exercise of warrants of $0.5 million.
The difference between the end of the reporting period of the limited liability investments and that of the Company is no more than three months. • Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net Lease and Argo Holdings.
The difference between the end of the reporting period of the limited liability investments and that of the Company is no more than three months. • Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net Lease (December 31, 2022 only) and Argo Holdings.
As of December 31, 2022, the capital maintained by Kingsway Re was in excess of the regulatory capital requirements in Barbados. 36 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
As of December 31, 2023, the capital maintained by Kingsway Re was in excess of the regulatory capital requirements in Barbados. 31 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The analysis includes some or all of the following procedures, as applicable: • the opinions of external investment and portfolio managers; • the financial condition and prospects of the investee; • recent operating trends and forecasted performance of the investee; • current market conditions in the geographic area or industry in which the investee operates; • changes in credit ratings; and • changes in the regulatory environment. 22 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The analysis includes some or all of the following procedures, as applicable: • the opinions of external investment and portfolio managers; • the financial condition and prospects of the investee; • recent operating trends and forecasted performance of the investee; • current market conditions in the geographic area or industry in which the investee operates; • changes in credit ratings; and • changes in the regulatory environment.
Under the qualitative approach, the impairment test consists of an assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired.
Management's Discussion and Analysis Under the qualitative approach, the impairment test consists of an assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired.
The relative percentage of expected costs plus a margin associated with these performance obligations is applied to the transaction price to determine the estimated SASP of the performance obligations, which the Company recognizes as earned as services are performed over the term of the contract period. 21 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The relative percentage of expected costs plus a margin associated with these performance obligations is applied to the transaction price to determine the estimated SASP of the performance obligations, which the Company recognizes as earned as services are performed over the term of the contract period.
Net Lease owns investments in limited liability companies that hold investment properties. The fair value of Net Lease's investments is based upon the net asset values of the underlying investments companies as a practical expedient to estimate fair value. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.
The fair value of Net Lease's investments was based upon the net asset values of the underlying investments companies as a practical expedient to estimate fair value. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.
Management's Discussion and Analysis Contingent Consideration The consideration for certain of the Company's acquisitions include future payments to the former owners that are contingent upon the achievement of certain targets over future reporting periods.
Contingent Consideration The consideration for certain of the Company's acquisitions include future payments to the former owners that are contingent upon the achievement of certain targets over future reporting periods.
In addition to the items described above impacti ng income (loss) fro m continuing operations, the net income includes: • A loss from discontinued operations, net of taxes of $12.8 million and income from discontinued operations, net of taxes of $4.6 million for the years ended December 31, 2022 and December 31, 2021 , respectively ; • A loss on disposal of discontinued operations, net of taxes of $2.3 million for the year ended December 31, 2022.
In addition to the items described above impacti ng income fro m continuing operations, the net income includes: • Income from discontinued operations, net of taxes of $0.5 million and loss from discontinued operations, net of taxes of $12.8 million for the years ended December 31, 2023 and December 31, 2022 , respectively ; and • A loss on disposal of discontinued operations, net of taxes of $2.0 million and $2.3 million for the years ended December 31, 2023 and December 31, 2022 , respectively .
A reconciliation of total segment operating income to income (loss) from continuing operations before income tax expense (benefit) fo r the years ended December 31, 2022 and December 31, 2021 is presented in Table 1 of the "Results of Continuing Operations" section of MD&A. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES The preparation of consolidated financial statements in conformity with U.S.
A reconciliation of total segment operating income to income from continuing operations before income tax (benefit) expense for the year s ended December 31, 2023 and December 31, 2022 is presented in Table 1 of the "Results of Continuing Operations" section of MD&A. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES The preparation of consolidated financial statements in conformity with U.S.
Of the $6.8 million increase in fair value of the Company’s subordinated debt between December 31, 2021 and December 31, 2022, $1.9 million is reported as an increase in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive income (loss) and $4.9 million is reported as loss on change in fair value of debt in the Company’s consolidated statements of operations.
Of the $1.9 million incre ase in fair value of the Company’s subordinated debt between December 31, 2022 and December 31, 2023, $1.8 million is reported as an increase in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive (loss) income and $0.1 million is reported as loss on change in fair value of debt in the Company’s consolidated statements of operations.
These investments do not have readily determinable fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments. • Real estate investments are reported at fair value, which consisted of Flowers. • Other investments include collateral loans and are reported at their unpaid principal balance. • Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value.
These investments do not have readily determinable fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments. • Other investments include collateral loans and are reported at their unpaid principal balance, net of an allowance for credit losses. • Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value.
To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of operations. As of December 31, 2022, the Company maintains a valuation allowan ce of $130.6 million, a ll of which relates to its U.S. deferred income taxes.
To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of operations. As of December 31, 2023, the Company maintains a valuation allowan ce of $129.4 million, all of which relates to its U.S. deferred income taxes.
SASP are not directly observable in the GAP and homebuilder warranty contracts for the separate performance obligations. As a result, the Company has applied the expected cost plus a margin approach to develop models to estimate the standalone selling price for each of its performance obligations in order to allocate the transaction price to the two separate performance obligations identified.
For the GAP and homebuilder warranty contracts, the Company has applied the expected cost plus a margin approach to develop models to estimate the SASP for each of its performance obligations in order to allocate the transaction price to the two separate performance obligations identified.
Therefore, changes in the underlying interest rates used would cause the fair value to be impacted, but only impacts the income statement (or comprehensive income/loss for the portion related to credit risk) and does not impact cash flows.
Therefore, changes in the underlying interest rates used would cause the fair value to be impacted, but only impacts the income statement (or comprehensive income/loss for the portion related to credit risk) and does not impact cash flows. 23 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The loss from discontinued operations is related to the operations of CMC and VA Lafayette and is primarily due to a final management fee of $16.4 million resulting from the sale of the CMC railyard.
For the year ended December 31, 2022, the loss from discontinued operations is related to the operations of CMC and VA Lafayette and is primarily due to a final management fee of $16.4 million resulting from the sale of the CMC railyard.
The Company may perform its impairment test for any indefinite-lived intangible asset through a qualitative assessment or elect to proceed directly to a quantitative impairment test, however, the Company may resume a qualitative assessment in any subsequent period if facts and circumstances permit.
The Company may perform its impairment test for any indefinite-lived intangible asset through a qualitative assessment or elect to proceed directly to a quantitative impairment test, however, the Company may resume a qualitative assessment in any subsequent period if facts and circumstances permit. 22 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
See Note 5 "Disposal and Discontinued Operations ," to the Consolidated Financial Statements, for further discussion. Extended Warranty The Extended Warranty service fee and commission revenue decreased 0.1% (or $0.9 million) to $74.0 million for the year ended December 31, 2022 compared with $74.9 million for the year ended December 31, 2021.
See Note 5 "Disposal and Discontinued Operations ," to the Consolidated Financial Statements, for further discussion. Extended Warranty The Extended Warranty service fee and commission revenue decreased 7.8% (or $5.8 million) to $68.2 million for the year ended December 31, 2023 compared with $74.0 million for the year ended December 31, 2022.
During 2022 , the net cash provided by investing activities from continuing operations was $58.1 million.
Management's Discussion and Analysis During 2022 , the net cash provided by investing activities from continuing operations was $58.1 million.
Interest payments on outstanding debt in Table 3 related to the subordinated debt, the 2020 KWH Loan, the 2021 Ravix Loan, the 2022 Ravix Loan and the SNS Loan assume the variable rates remain constant throughout the projection period. Also, interest payments on outstanding debt reflect the interest deferral described in the "Subordinated Debt" section above.
Interest payments on outstanding debt in Table 3 related to the subordinated debt, the 2020 KWH Loan, the 2021 Ravix Loan, the 2022 Ravix Loan, the SNS Loan and the DDI Loan assume the variable rates remain constant throughout the projection period.
In determining our provision for income taxes, we interpret tax legislation in a variety of jurisdictions and make assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of deferred income taxes.
In determining our provision for income taxes, we interpret tax legislation in a variety of jurisdictions and make assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of deferred income taxes. 21 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Gain on Change in Fair Value of Real Estate Investments Gain on change in fair value of real estate investments was $1.5 million in 2022 compared to zero in 2021. Real estate investments solely relates to investment real estate properties held by the Company’s consolidated subsidiary, Flower Portfolio 001, LLC ("Flower").
Gain on Change in Fair Value of Real Estate Investments Gain on change in fair value of real estate investments was $1.5 million in 2022. Real estate investments represented investment real estate properties held by the Company’s consolidated subsidiary, Flower Portfolio 001, LLC ("Flower").
T he loss o n disposal of discontinued operations includes the gain on disposal of CMC o f $0.2 million and a loss of $2.5 million related to a liability recorded at September 30, 2022 regarding the Company's obligation to indemnify a former subsidiary for open claims (the maximum liability under the indemnity is $2.5 million).
For the year ended December 31, 2022 , the loss o n disposal of discontinued operations includes the gain on disposal of CMC o f $0.2 million and a loss of $2.5 million related to a liability recorded during 2022 regarding the Company's obligation to indemnify a former subsidiary for open claims (the maximum liability under the indemnity is $2.5 million).
As part of the acquisition of Ravix on October 1, 2021, Ravix became a wholly owned subsidiary of Ravix Acquisition LLC ("Ravix LLC"), and together they borrowed from a bank a principal amount of $6.0 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of Ravix (together, the "2021 Ravix Loan").
Bank Loans As part of the acquisition of DDI on October 26, 2023, DDI became a wholly owned subsidiary of DDI Acquisition, LLC ("DDI LLC"), and together they borrowed from a bank a principal amount of $5.6 million in the form of a term loan, and established a $0.4 million revolver to finance the acquisition of DDI (together, the "DDI Loan").
For the year ended December 31, 2022, we reported net income of $15.1 million compared to $1.9 million for the year ended December 31, 2021.
For the year ended December 31, 2023, we reported net income of $24.0 million compared to $15.1 million for the year ended December 31, 2022.
In addition to the U.S. GAAP presentation of net income, we present segment operating income a s a non-U.S. GAAP financial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measure and its relationship to U.S. GAAP.
GAAP financial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measure and its relationship to U.S. GAAP.
The income from continuing operations for 2022 is primarily due to: • A gain on disposal of subsidiary of $37.9 million, r elated to the sale of PWSC; • A gain on change in fair value of derivative asset option contracts of $16.7 million , related to the trust preferred debt repurchase options; • A gain on change in fair value of real estate investments of $1.5 million; all of which were partially offset by • An increase in interest expense related to rising interest rates; • Other revenue and expenses not allocated to segments, net, which includes a $4.8 million increase in the fair value of previously-granted awards to PWSC employees that are accounted for on a fair value basis and $1.2 million increase in expense due to the increase in fair value of the Ravix contingent consideration; • Loss on change in fair value of debt, which increased by $1.7 million; • Loss on change in fair value of limited liability investments, at fair value which increased by $4.1 million (see below); and • Income tax expense which increased by $8.7 million.
The income from continuing operations for the year ended December 31, 2022 , is primarily due to: • A gain on disposal of subsidiary of $37.9 million, r elated to the sale of PWSC, a gain on change in fair value of derivative asset option contracts of $16.7 million , related to the trust preferred debt repurchase options, and a gain on change in fair value of real estate investments of $1.5 million; all of which were partially offset by • An increase in interest expense related to rising interest rates, other revenue and expenses not allocated to segments, net, which includes $6.1 million of expense related to previously-granted awards to PWSC employees that are accounted for on a fair value basis and $1.5 million of expense due to the increase in fair value of the Ravix contingent consideration; and • Loss on change in fair value of debt, loss on change in fair value of limited liability investments, at fair value and income tax expense which is primarily due to the state tax expense associated with the sale of PWSC on July 29, 2022, and the related increase in valuation allowance from the accelerated utilization of indefinite life interest expense carryforwards as a result of such sale .
As a result of the analysis performed, the Company recorded write downs for other-than-temporary impairment related to limited liability investments, at fair value of less than $0.1 million and $0.1 million for the years ended December 31, 2022 and December 31, 2021, 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.
Management's Discussion and Analysis The Company recorded impairment losses related to limited liability investments, at fair value of $0.1 million and less than $0.1 million for the years ended December 31, 2023 and December 31, 2022, respectively, which are included in gain (loss) on change in fair value of limited liability investments, at fair value in the consolidated statements of operations.
See Note 15 , "Income Taxes," t o the Consolidated Financial Statements, for additional detail of the income tax benefit recorded for the years ended December 31, 2022 and December 31, 2021, respectively.
Management's Discussion and Analysis See Note 15 , "Income Taxes," t o the Consolidated Financial Statements, for additional detail of the income tax (benefit ) expense rec orded for the years ended December 31, 2023 and December 31, 2022, respectively.
Fair Value Assumptions for Subsidiary Stock-Based Compensation Awards Three of the Company's subsidiaries, PWSC, Ravix and SNS, have made grants of restricted stock awards or restricted unit awards (together "Subsidiary Restricted Awards").
Management's Discussion and Analysis Fair Value Assumptions for Subsidiary Stock-Based Compensation Awards Certain of the Company's subsidiaries have made grants of restricted stock awards or restricted unit awards (together "Subsidiary Restricted Awards").
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, including the cash that may be required to redeem the Preferred Shares, repurchase its trust preferred securities and pay deferred interest on its trust preferred securities, for the next twelve months.
Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, for the next twelve months.
The Company also notes that it has an additional $10 million available from the second amendment to the 2020 KWH Loan (see Note 12 , " Debt ," and Note 26 , “ Subsequent Events ,” to the Consolidated Financial Statements), that i s available to be drawn.
The Company also notes that, as of the filing date, it has an additional $6.5 million available from the second amendment to the 2020 KWH Loan (see Note 12 , " Debt ," to the Consolidated Financial Statements), that i s available to be drawn.
Management's Discussion and Analysis As a result of the analysis performed to determine declines in market value that are other-than-temporary, the Company recorded write downs for other-than-temporary impairment related to limited liability investments, at fair value. See "Investments" s ection below an d Note 7, "Investments," to the Consolidated Financial Statements for further information.
As a result of the analysis performed, the Company recorded impairment losses related to limited liability investments and limited liability investments, at fair value. See "Investments" s ection below an d Note 7, "Investments," to the Consolidated Financial Statements for further information.
There were no payments made by the Company related to the open claims during the years ended December 31, 2022 and December 31, 2021. During the first quarter of 2023, the $2.0 million that had been previously deposited into an escrow account was released and remitted to the buyer to satisfy the Company's payment with respect to the open claims.
During the first quarter of 2023, the $2.0 million that had been previously deposited into an escrow account was released and remitted to the buyer to satisfy the Company's payment with respect to the open claims.
Throughout this 2022 Annual Report, the term "Extended Warranty" is used to refer to this segment. IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 25 sta tes and the District of Columbia to their members, with customers in all 50 states.
Management's Discussion and Analysis IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 24 sta tes and the District of Columbia to their members, with customers in all 50 states.
During the first quarter of 2022, there was a change in estimate of IWS' deferred revenue associated with vehicle service contract fees, which resulted in a reduction to IWS revenue of $1.2 million.
During the first quarter of 2022, there was a change in estimate of IWS’ deferred revenue associated with vehicle service contract fees, which resulted in a reduction to IWS revenue of $1.2 million. The Extended Warranty operating income was $7.0 million for the year ended December 31, 2023 compared with $9.9 million for the year ended December 31, 2022.
The total amount to be paid will be $56.5 million, which includes a credit for the $2.3 million that the Company previously paid at the time of entering into the repurchase agreements. As a result, the Company will have repurchased $75.5 million of principal and $21.2 million of deferred interest (valued as of December 31, 2022).
The total amount paid was $56.5 million, which included a credit for the $2.3 million that the Company previously paid at the time of entering into the repurchase agreements. As a result, the Company repurchased $75.5 million of principal and $23.0 million of deferred interest payable.
At December 31, 2022, we held cash and cash equivalents, restricted cash and investments with a carrying value of $134.2 million. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations. 30 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
At December 31, 2023, we held cash and cash equivalents, restricted cash and investments with a carrying value of $59.4 million. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations. Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated.
Additional information regarding our goodwill is included in Note 8, "Goodwill," to the Consolidated Financial Statements. 24 Table of Contents KINGSWAY FINANCIAL SERVICES INC. Management's Discussion and Analysis Deferred Contract Costs Deferred contract costs represent the deferral of incremental costs to obtain or fulfill a contract with a customer.
Additional information regarding our goodwill is included in Note 8, "Goodwill," to the Consolidated Financial Statements. Deferred Contract Costs Deferred contract costs represent the deferral of incremental costs to obtain or fulfill a contract with a customer. Incremental costs to obtain a contract with a customer primarily include sales commissions.
This use of cash was primarily attributed to: • Purchases of fixed maturities in excess of proceeds from sales and maturities of fixed maturities of $15.6 million; • The acquisitions of Ravix and RoeCo in 2021, which totaled $12.6 million, net of cash acquired; • Distributions received (reducing the use of cash) by Net Lease from two of its limited liability investment companies of $16.3 million; and • Proceeds received (reducing the use of cash) from the Company's limited liability investments. 34 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
This source of cash was primarily attributed to: • Distributions received by Net Lease from one of its limited liability investment companies of $13.3 million; • Proceeds from sales and maturities of fixed maturities and sales of equity securities in excess of purchases of fixed maturities; and • The acquisitions of SPI and DDI in 2023, which totaled $13.6 million, net of cash acquired. 30 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
The holding company cash amounts are reflected in the cash and cash equivalents o f $64.2 million and $10.1 million rep orted at December 31, 2022 and December 31, 2021, respectively, on the Company’s consolidated balance sheets. The significant increase is primarily due to the sale of PWSC and the sale of the CMC railyard in 2022.
The holding company cash amounts are reflected in the cash and cash equivalents o f $9.1 million and $64.2 million rep orted at December 31, 2023 and December 31, 2022, respectively, on the Company’s consolidated balance sheets.
The loss for the year ended December 31, 2022 represents decreases in fair value of $0.9 million related to Net Lease Investment Grade Portfolio LLC ("Net Lease") and $0.8 million related to Argo Holdings. The remaining property in Net Lease was sold in February 2023.
The loss for the year ended December 31, 2022 includes decreases in fair value of $0.9 million related to Net Lease and $0.8 million related to Argo Holdings. The final Net Lease property was sold in February 2023 and, as such, as of December 31, 2023 Argo Holdings was the only asset group left in this category.
Kingsway Search Xcelerator includes the Company's subsidiaries, CSuite Financial Partners, LLC ("CSuite"), Ravix Financial, Inc. ("Ravix") and Secure Nursing Service LLC ("SNS"). Throughout this 2022 Annual Report, the term "Kingsway Search Xcelerator" is used to refer to this segment. 20 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Kingsway Search Xcelerator includes the Company's subsidiaries, CSuite Financial Partners, LLC ("CSuite"), Ravix Group, Inc. ("Ravix"), Secure Nursing Service LLC ("SNS"), Systems Products International, Inc. ("SPI") and Digital Diagnostics Imaging, Inc. ("DDI"). Throughout this 2023 Annual Report, the term "Kingsway Search Xcelerator" is used to refer to this segment.
Compensation expense is adjusted when a change in the assessment of achievement of the specific performance condition is determined to be probable. Compensation expense is recognized on a straight-line basis for awards subject to market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been provided.
Compensation expense is recognized on a straight-line basis for awards subject to market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Forfeitures are recognized in the period that Subsidiary Restricted Awards are forfeited.
The 2022 and 2021 income tax expense (benefit) is primarily related to: • An income tax expense o f $1.0 million and an income tax benefit $0.4 million in 2022 and 2021, respectively, for the partial release of the Company’s deferred income tax valuation allowance associated with business interest expense with an indefinite life; • An income tax benefit of $0.2 million in 2022 for the partial release of the Company’s deferred tax valuation allowance related to the change in future income assumptions and $4.1 million in 2021 for the partial release of the Company’s deferred income tax valuation allowance related to its acquisitions of PWI and Ravix; • An income tax expense of $0.1 million an d $0.2 million in 2022 and 2021, respectively, relating to a change in indefinite life deferred income tax liabilities; and • An income tax expens e of $3.9 million a nd $0.4 million in 2022 and 2021, respectively, for state income taxes.
The 2023 and 2022 income tax (benefit) expense is primarily related to: • An income tax benefit of zero and an expense of $1.0 million in 2023 and 2022 , respectively, for the partial release of the Company’s deferred income tax valuation allowance associated with business interest expense with an indefinite life; • An income tax benefit of $2.1 million and $0.2 million in 2023 and 2022 , respectively, for the partial release of the Company’s deferred tax valuation allowance related to acquired deferred tax liabilities and change in future income assumptions, respectively; • An income tax expense of $0.2 million and $0.1 million in 2023 and 2022 , respectively, relating to a change in indefinite life deferred income tax liabilities; and • An income tax benefit of less than $0.1 million and an expense of $3.9 million in 2023 and 2022 , respectively, for state income taxes. 27 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
For a description of the market observable inputs and inputs developed by a third-party used in determining fair value of debt, se e Note 23, "Fair Value of Financial Instruments," to the Consolidated Financial Statements. 33 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
T he fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third-party. For a description of the market observable inputs and inputs developed by a third-party used in determining fair value of debt, se e Note 23, "Fair Value of Financial Instruments," to the Consolidated Financial Statements.
TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash As of December 31 (in thousands of dollars, except for percentages) Type of investment 2022 % of Total 2021 % of Total Fixed maturities: U.S. government, government agencies and authorities 15,080 11.2 % 16,223 16.9 % States, municipalities and political subdivisions 2,232 1.7 % 1,878 2.0 % Mortgage-backed 8,412 6.3 % 7,629 8.0 % Asset-backed 1,610 1.2 % 445 0.5 % Corporate 10,257 7.6 % 9,491 9.9 % Total fixed maturities 37,591 28.0 % 35,666 37.2 % Equity investments: Common stock 153 0.1 % 171 0.2 % Warrants — — % 8 0.0 % Total equity investments 153 0.1 % 179 0.2 % Limited liability investments 983 0.7 % 1,901 2.0 % Limited liability investments, at fair value 17,059 12.7 % 18,826 19.7 % Investments in private companies 790 0.6 % 790 0.8 % Real estate investments — — % 10,662 11.1 % Other investments 201 0.2 % 256 0.3 % Short-term investments 157 0.1 % 157 0.2 % Total investments 56,934 42.4 % 68,437 71.5 % Cash and cash equivalents 64,168 47.9 % 10,084 10.5 % Restricted cash 13,064 9.7 % 17,257 18.0 % Total 134,166 100.0 % 95,778 100.0 % Other-Than-Temporary Impairment The Company performs a quarterly analysis of its investments to determine if declines in market value are other-than-temporary.
TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash As of December 31 (in thousands of dollars, except for percentages) Type of investment 2023 % of Total 2022 % of Total Fixed maturities: U.S. government, government agencies and authorities 12,997 21.9 % 15,080 11.2 % States, municipalities and political subdivisions 2,783 4.7 % 2,232 1.7 % Mortgage-backed 9,253 15.6 % 8,412 6.3 % Asset-backed 1,210 2.0 % 1,610 1.2 % Corporate 10,230 17.2 % 10,257 7.6 % Total fixed maturities 36,473 61.4 % 37,591 28.0 % Equity investments 79 0.1 % 153 0.1 % Limited liability investments 812 1.4 % 983 0.7 % Limited liability investments, at fair value 3,496 5.9 % 17,059 12.7 % Investments in private companies 854 1.4 % 790 0.6 % Other investments 6 0.0 % 201 0.2 % Short-term investments 161 0.3 % 157 0.1 % Total investments 41,881 70.5 % 56,934 42.4 % Cash and cash equivalents 9,098 15.4 % 64,168 47.9 % Restricted cash 8,400 14.1 % 13,064 9.7 % Total 59,379 100.0 % 134,166 100.0 % Investment Impairment The Company performs a quarterly analysis of its investments to determine if declines in fair value may result in the recognition of impairment losses in net income.
PWI also has a "white label" agreement with Classic to sell a guaranteed asset protection product ("GAP") in states that Classic is approved in. PWSC sells home warranty products and provides administration services to homebuilders and homeowners across the United States.
PWI also sells and administers a guaranteed asset protection product ("GAP"), under the Penn name, in states where Penn is approved. PWSC sold home warranty products and provided administration services to homebuilders and homeowners across the United States.
The Company's subordinated debt bears interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%; • An increase of $0.3 million related to the 2021 Ravix Loan, which was effective October 1, 2021, and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 8.00%) ; • A n increase of $0.1 million related to the new $6.0 million 2022 Ravix Loan, which was effective November 16, 2022 and has an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 8.25%) ; • A n increase of $0.1 million related to the new $6.5 million SNS Loan, which was effective November 18, 2022 and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 8.00%) ; all of which were partially offset by • A decrease of $0.4 million, related to the 2020 KWH Loan, as a result of lower principal balance, as well as an increase in fair value of the interest rate swap related to the 2020 KWH bank loan; and • A decrease of $0.1 million related to notes payable at Net Lease.
The Flower debt was repaid in the third quarter of 2022; • A decrease of $0.2 million related to the 2021 Ravix Loan, which was effective October 1, 2021, and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 9.00%) • An increase of $0.8 million related to the $6.0 million 2022 Ravix Loan, which was effective November 16, 2022 and has an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 9.25%) ; • An increase of $0.6 million related to the 2020 KWH Loan, as a result of a decrease in fair value of the interest rate swap related to the 2020 KWH bank loan; • An increase of $0.5 million related to the $6.5 million SNS Loan, which was effective November 18, 2022 and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 9.00%); and • A n increase of $0.1 million related to the new $6.0 million DDI Loan, which was effective October 26, 2023 and has an annual interest rate equal to the Prime Rate plus 0.5%, or 5.00% (current rate of 9.00%).
Liability-classified awards, included in accrued expenses and other liabilities in the consolidated balance sheets, are measured and reported at fair value on the date of grant and are remeasured each reporting period. Th e Subsidiary Restricted Awards contain performance vesting and/or market vesting conditions. Performance vesting conditions are reviewed quarterly to assess the probability of achievement of the performance condition.
Certain of the Subsidiary Restricted Awards are classified as a liability because the awards are expected to settle in cash. Liability-classified awards, included in accrued expenses and other liabilities in the consolidated balance sheets, are measured and reported at fair value on the date of grant and are remeasured each reporting period.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk — interest-rate, FX, commodity exposure
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk — interest-rate, FX, commodity exposure
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2022 filing
2023 filing
Biggest changeItem 7A. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item. 38 Table of Contents KINGSWAY FINANCIAL SERVICES INC.
Biggest changeItem 7A. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item. 32 Table of Contents KINGSWAY FINANCIAL SERVICES INC.