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KINGSWAY FINANCIAL SERVICES INC.

45 Saint Clair Avenue West, Suite 400, Toronto, Ontario M4V1K9  (416) 848-1171  Fax: (416) 850-5439

May 23, 2018

Mr. Mark Brunhofer

Mr. Jim Rosenberg

Division of Corporation Finance

Office of Healthcare & Insurance

Securities and Exchange Commission

Washington, D.C. 20549

Re:    Kingsway Financial Services Inc.

Form 10-K for Fiscal Year Ended December 31, 2017

Filed March 16, 2018

Form 8-K Dated February 20, 2018

Filed February 20, 2018

File No. 001-15204

Dear Mr. Brunhofer and Mr. Rosenberg:

Kingsway Financial Services Inc. (the “Company”) has received and reviewed your letter dated April 25, 2018, regarding the Commission’s review of the above mentioned filings and submits its response below.  The Company also attaches to this response a copy of its press release dated May 10, 2018, announcing the execution of a letter of intent to sell the Company’s non-standard automobile business, which is the subject of the Commission’s comments #1, 4, 5 and, indirectly, 8, given that almost 80% of the Company’s fixed maturities are owned by the Company subsidiaries that are intended to be sold.  As stated in the press release, the Company expects the sale of its non-standard automobile business to close during the third quarter of 2018.

Form 10-K for the Fiscal Year Ended December 31, 2017

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Estimates and Assumptions

Provision for Unpaid Loss and Loss Adjustment Expenses, page 33

Comment:

1.

 We acknowledge your statement that a significant degree of judgment is required to determine your provision for unpaid loss and loss adjustment expenses. We believe your disclosures regarding your estimation process could be improved to better explain the judgments and uncertainties surrounding this estimate and the potential impact on your financial statements. We believe in order to meet the principal objectives of Management's Discussion and Analysis (MD&A) this disclosure should enable the investor to understand:

•

 management’s method for establishing the estimate;

•

 whether and, if so, to what extent and why you have adjusted your assumptions used to determine the estimate from the assumptions used in the immediately preceding period; and

•

 the potential variability in the most recent estimate and the impact this variability may have on reported results, financial condition and liquidity.

Please keep these points in mind in providing us your responses to the bullets listed below. Please provide us proposed revised disclosure to be included in future periodic reports that:

•

 Describes the methods you used to determine your reserve for loss and loss adjustment expense. Ensure that this description:

◦

 Identifies the unique development characteristics of each material line of business or coverage.

◦

 Explains how and when you use different methods. For example we understand that differing methods may be used to estimate initial losses and to estimate losses for mature accident years.

◦

 Describes the method you use to calculate the incurred but not reported (IBNR) reserve for each material line of business. For example, we understand that some companies may calculate this reserve by estimating the ultimate unpaid liability first and then reducing that amount by cumulative paid claims and by case reserves, but there may be other methods as well.

◦

 Describes the extent of your procedures for determining the reserve for loss and loss adjustment expense on both an annual and interim reporting basis.

•

 Identifies and describes those key assumptions that materially affect the estimate of the reserve for loss and loss adjustment expenses. In addition please disclose the following:

◦

 For each of your key assumptions quantify and explain what caused them to change from the assumptions used in the immediately preceding period.

◦

 Explicitly identify and discuss key assumptions as of December 31, 2017 that are premised on future emergence that are inconsistent with historical loss reserve development patterns and explain why these assumptions are now appropriate given the inconsistency identified.

•

 Shows investors the potential variability in the most recent estimate of your loss reserve, quantifies and presents preferably in a tabular format the impact that reasonably likely changes in the key assumptions identified may have on reported results, financial position and liquidity. Explain why you believe the scenarios quantified are reasonably likely. See Release No. 33-8350; particularly Section V.

Company’s Response:

The Company proposes revised disclosure below to be included in future periodic reports.  We would appreciate your thoughts regarding revised disclosure in the context of our May 10, 2018 press release, made public subsequent to the date of your letter, of our having executed a letter of intent to sell our non-standard automobile business.  As stated in the press release, the Company expects the sale of its non-standard automobile business to close during the third quarter of 2018.

The Company notes that it has previously split its Form 10-K disclosure related to Unpaid Loss and Loss Adjustment Expenses between Part I Item 1. Business and Item 7. MD&A.  As part of its proposed revised disclosure, the Company’s proposes to move much of the current disclosure from Item 1. to become part of an expanded disclosure in Item 7.  This not only will make it easier for the reader of the Annual Report to see all of the relevant disclosure related to Unpaid Loss and Loss Adjustment Expenses in one location, but some of this disclosure may be more appropriately presented as part of the Critical Accounting Estimates and Assumptions disclosure in Item 7. than the general business overview in Item 1.

The Company proposes the following revised disclosure as part of its Critical Accounting Estimates and Assumptions to be included in future periodic reports:

Overview

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

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

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

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

The process for establishing the provision for unpaid loss and loss adjustment expenses reflects the uncertainties and significant judgmental factors inherent in predicting future results of both reported and IBNR claims.  As such, the process is inherently complex and imprecise and estimates are constantly refined.  The process of establishing the provision for unpaid loss and loss

adjustment expenses relies on the judgment and opinions of a large number of individuals, including the opinions of the Company's external reserving actuaries.

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

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

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

•

 Paid Loss Development - we use historical loss and loss adjustment expense payments over discrete periods of time to estimate future loss and loss adjustment expense payments.  Paid development methods assume that the patterns of paid loss and loss adjustment expenses that occurred in past periods will be similar to loss and loss adjustment expense payment patterns that will occur in future periods.

•

 Incurred Loss Development - we use historical case incurred loss and loss adjustment expenses (the sum of cumulative loss and loss adjustment expense payments plus outstanding unpaid case losses) over discrete periods of time to estimate future loss and loss adjustment expenses.  Incurred development methods assume that the case loss and loss adjustment expenses reserving practices are consistently applied over time.

•

 Frequency and Severity - we use historical claim count development over discrete periods of time to estimate future claim counts.  We divide projected ultimate claim counts by an exposure base (earned premiums or exposures), select expected claim frequencies from the results, and adjust them for trends based on internal and external information.  Concurrently, we divide projected ultimate losses by the projected ultimate claim counts to select expected loss severities.  We use internal and external information to trend the severities and combine them with the trended, projected frequencies to develop ultimate loss projections.

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

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

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

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

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

unpaid loss and loss adjustment expenses as we learn additional information, and reflect these adjustments in the accounting periods in which they are determined.

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

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

Our estimate of the provision for unpaid loss and loss adjustment expenses is proposed each quarter by our external reserving actuaries and approved by an internal management team comprised of our chief executive offic