Kingsway

Overview

Kingsway, whose Common Shares trade on the TSX and NYSE (with a closing price on July 16, 2013 of U.S.$3.67 per share), and which has 13.15M common shares outstanding, intends to raise gross proceeds of U.S.$13.1M by issuing transferable Subscription Rights to all its Common Shareholders - entitling them to subscribe for 3.29 Units, at a subscription price of U.S.$4.00 per Unit. Each Unit consists of one common share, one Series A Warrant and one Series B Warrant. In order to preserve U.S.$827M of NOLs, there are potential restrictions on the number of Common Shares which may be acquired.

Subscription Rights

Common Shareholders receive one Subscription Right for each Common Share held on the record date (August 9, 2013). Four Subscription Rights entitle Shareholders to purchase one Unit, at a purchase price of U.S.$4.00, consisting of one Common Share, one Series A Warrant and one Series B Warrant. The Subscription Rights expire on September 6, 2013 and are transferable (with trading to occur on the TSX). To the extent that the basic subscription privileges are not exercised, holders may exercise an over-subscription privilege (subject to allotment and to a maximum of five Units for each one Unit purchased by the holder under the basic subscription privilege.)

Series A Warrants

The term is seven years and the exercise price per Common Share is the greater of U.S.$4.50 and 120% of the 20-trading-day VWAP prior to issuance. Redeemable by Kingsway at U.S.$0.25 per warrant once the closing price of common shares exceeds U.S.$6.00 for 20 consecutive trading days. Conditionally listed on the TSX.

Series B Warrants

The term is 10 years and the exercise price per Common Share is the greater of U.S.$5.00 and 120% of the 20-trading-day VWAP prior to issuance. Non-redeemable. Conditionally listed on the TSX.

Allocation

Based on financial advice, Kingsway believes that the aggregate fair value of one Series A Warrant and one Series B Warrant is at least U.S.$0.41.

U.S./ineligible holders

Subscription Rights are also being offered to U.S. residents in a separate process involving the filing of a registration statement with the SEC. Other shareholders who reside outside Canada will not be able to exercise their Subscription Rights except where Kingsway determines that this would comply with securities and other laws.

U.S. NOLs and s. 382

As at March 31, 2013, Kingsway had net U.S. operating loss carryforwards totaling approximately US$827.4 million. Code s. 382 generally restricts the use of NOL carryforwards after an "ownership change." An ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of Kingsway Common Shares or are otherwise treated as 5% shareholders under s. 382 increase their aggregate percentage ownership of Kingsway stock by more than 50% over the lowest percentage of the stock owned by these shareholders over a three-year rolling period.

Plan for U.S. NOL preservation

On September 28, 2010, Kingsway put in place a plan under which: upon (i) any person becoming an owner of 5% or more of the outstanding Common Shares or (ii) an existing greater than 5% Shareholder acquiring additional Common Shares (each a "5% Shareholder"), without express approval of the Board, Kingsway will issue rights to purchase additional Common Shares to Shareholders holding Common Shares as of the closing of such transaction (other than such 5% Shareholder), generally resulting in substantial dilution to such 5% Shareholder. See Plan of Kingsway Financial for Restricting Share Ownership Changes. If the total of Common Shares currently beneficially owned together with Common Shares expected to be received by exercising Subscription Rights (including on exercising Subscription Rights acquired by others) is greater than 650,000, the Common Shareholder may need to request Board exemption.

Canadian tax consequences

No amount will be required to be included in income as a consequence of acquiring Subscription Rights, their cost will be nil and no gain or loss will be realized on exercise. The aggregate cost of Common Shares, Series A Warrants and Series B Warrants will the aggregate exercise price plus the adjusted cost base of the Subscription Rights, with the allocation amongst the three acquired securities required to be reasonable.

The exercise of Warrants will not constitute a disposition, and the Common Shares acquired will have a cost equal to the exercise price plus the adjusted cost based of the exercised Warrants.

U.S. tax consequences

No taxable income should be recognized upon receipt of Subscription Rights (rather than dividend income being recognized to the extent of current or accumulated E&P), and no gain or loss will be recognized on exercise of Subscription Rights or Warrants.

Kingsway is not believed to be a PFIC.