FG FINANCIAL GROUP, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated
financial statements and related notes and information included elsewhere in
this annual report on Form 10-K. You should review the "Risk Factors" section of
this annual report for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
Some of the information contained in this discussion and analysis and set forth
elsewhere in this annual report on Form 10-K includes forward-looking statements
that involve risks and uncertainties.

Unless context denotes otherwise, the terms "Company," "FGF," "we," "us," and
"our," refer to FG Financial Group, Inc., and its subsidiaries.

Overview



FG Financial Group, Inc. ("FGF", the "Company", "we", or "us") is a reinsurance
and investment management holding company. We focus on opportunistic
collateralized and loss-capped reinsurance, while allocating capital in
partnership with Fundamental Global® to SPAC and SPAC sponsor-related
businesses. The Company's principal business operations are conducted through
its subsidiaries and affiliates. The Company also provides investment management
services. From our inception in October 2012 through December 2019, we operated
as an insurance holding company, writing property and casualty insurance
throughout the states of Louisiana, Florida, and Texas. On December 2, 2019, we
sold our three former insurance subsidiaries, and embarked upon our current
strategy focused on reinsurance and asset management.



As of December 31, 2021, Fundamental Global GP, LLC, a privately owned
investment management company, and its affiliates, or "FG," beneficially owned
approximately 56% of our common stock. D. Kyle Cerminara, Chairman of our Board
of Directors, serves as Chief Executive Officer, Co-Founder and Partner of

FG.



Sale of Insurance Business

On December 2, 2019, we completed the sale of our insurance subsidiaries to
FedNat Holding Company for a combination of cash and FedNat common stock. For
more information on the Asset Sale and the Company's future plans, see "Item 1.
Business."



Coronavirus Impact

Given the ongoing and dynamic nature of the circumstances, it is difficult to
predict the full impact of the COVID-19 pandemic on our business. Adverse events
such as health-related concerns about working in our offices, the inability to
travel and other matters affecting the general work environment have negatively
impacted and could continue to harm our business and our business strategy. The
extent to which our operations and investments may continue to be impacted by
the COVID-19 pandemic will depend largely on future developments, which are
highly uncertain and cannot be accurately predicted, including new developments
concerning the severity of the pandemic and actions by government authorities to
contain the pandemic or treat its impact. Furthermore, the impacts of a
potential worsening of global economic conditions and the continued disruptions
to and volatility in the financial markets remain unknown. In the event of a
major disruption caused by the pandemic, we may lose the services of our
employees, experience system interruptions or face challenges accessing the
capital or credit markets, which could lead to diminishment of our business
operations. Any of the foregoing could harm our business and delay the
implementation of our business strategy.



16






                            FG FINANCIAL GROUP, INC.

Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with
generally accepted accounting principles that involve a significant level of
estimation uncertainty and have had or are reasonably likely to have a material
impact on our financial condition or results of operations. Actual results may
differ materially from these estimates. The business and economic uncertainty
resulting from the coronavirus (COVID-19) pandemic has made such estimates and
assumptions difficult to calculate. Set forth below is qualitative and
quantitative information necessary to understand the estimation uncertainty and
the impact the critical accounting estimate has had or is reasonably likely to
have on financial condition or results of operations, to the extent the
information is material and reasonably available.

Investments in Equity Securities

Investments in equity securities are carried at fair value with subsequent
changes in fair value recorded to the Consolidated Statements of Operations as a
component of net investment income.

Other Investments

Other investments consist, in part, of equity investments made in privately held
companies accounted for under the equity method. We utilize the equity method to
account for investments when we possess the ability to exercise significant
influence, but not control, over the operating and financial policies of the
investee. The ability to exercise significant influence is presumed when the
investor possesses more than 20% of the voting interests of the investee. This
presumption may be overcome based on specific facts and circumstances that
demonstrate that the ability to exercise significant influence is restricted. We
apply the equity method to investments in common stock and to other investments
when such other investments possess substantially identical subordinated
interests to common stock.



In applying the equity method, we record the investment at cost and subsequently
increase or decrease the carrying amount of the investment by our proportionate
share of the net earnings or losses and other comprehensive income of the
investee. We record dividends or other equity distributions as reductions in the
carrying value of the investment. Should net losses of the investee reduce the
carrying amount of the investment to zero, additional net losses may be recorded
if other investments in the investee are at-risk, even if we have not committed
to provide financial support to the investee. Such additional equity method
losses, if any, are based upon the change in our claim on the investee's book
value.



As of December 31, 2020, other investments also consisted of private placement
securities reported at fair value and characterized under Level 3 of the fair
value hierarchy as promulgated by the Financial Accounting and Standards Board.



Other investments also consist of equity we have purchased in a limited
partnership and a limited liability company for which there does not exist a
readily determinable fair value. The Company accounts for these investments at
their cost, minus impairment, if any, plus or minus changes resulting from
observable price changes in orderly transactions for identical or similar
investment of the same issuer. Any profit distributions the Company receives on
these investments are included in net investment income.



17






                            FG FINANCIAL GROUP, INC.

Consolidation of Variable Interest Entities

The determination of whether or not to consolidate a variable interest entity
under GAAP requires a significant amount of judgment concerning the degree of
control over an entity by its holders of variable interests. To make these
judgments, management has conducted an analysis, on a case-by-case basis, of
whether we are the primary beneficiary and are therefore required to consolidate
the entity. Upon the occurrence of certain events, such as modifications to
organizational documents and investment management agreements, management will
reconsider its conclusion regarding the status of an entity as a variable
interest entity.

Valuation of Net Deferred Income Taxes

The provision for income taxes is calculated based on the expected tax treatment
of transactions recorded in the Company's consolidated financial statements. In
determining its provision for income taxes, the Company interprets tax
legislation in a variety of jurisdictions and makes assumptions about the
expected timing of the reversal of deferred income tax assets and liabilities
and the valuation of net deferred income taxes.



The ultimate realization of the deferred income tax asset balance is dependent
upon the generation of future taxable income during the periods in which the
Company's temporary differences reverse and become deductible. A valuation
allowance is established when it is more likely than not that all or a portion
of the deferred income tax asset balance will not be realized. In determining
whether a valuation allowance is needed, management considers all available
positive and negative evidence affecting specific deferred income tax asset
balances, including the Company's past and anticipated future performance, the
reversal of deferred income tax liabilities, and the availability of tax
planning strategies. 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 income and comprehensive income.

Premium Revenue Recognition

The Company participates in a quota-share contract under a Funds at Lloyds
("FAL") transaction and estimates the ultimate premiums for the contract period.
These estimates are based on information received from the ceding companies,
whereby premiums are recorded as written in the same periods in which the
underlying insurance contracts are written and are based on cession statements
from cedents. These statements are received quarterly, in arrears and thus for
any reporting lag, premiums written are estimated based on the portion of the
ultimate estimated premiums relating to the risks underwritten during the lag
period.



Premium estimates are reviewed by management periodically. Such review includes
a comparison of actual reported premiums to expected ultimate premiums. Based on
management's review, the appropriateness of the premium estimates is evaluated,
and any adjustments to these estimates are recorded in the period in which they
are determined. Changes in premium estimates, including premiums receivable, are
not unusual and may result in significant adjustments in any period. A
significant portion of amounts included in the caption "Reinsurance balances
receivable" in the Company's consolidated balance sheets represent estimated
premiums written, net of commissions, brokerage, and loss and loss adjustment
expense, and are not currently due based on the terms of the underlying
contracts.



Premiums written are generally recognized as earned over the contract period in
proportion to the risk covered. Additional premiums due on a contract that has
no remaining coverage period are earned in full when written. Unearned premiums
represent the unexpired portion of reinsurance provided.



Policy Acquisition Costs

Policy acquisition costs are costs that vary with, and are directly related to,
the successful production of new and renewal business, and consist principally
of commissions, taxes, and brokerage expenses. If the sum of a contract's
expected losses and loss expenses and deferred acquisition costs exceeds
associated unearned premiums and expected investment income, a premium
deficiency is determined to exist. In this event, deferred acquisition costs are
written off to the extent necessary to eliminate the premium deficiency. If the
premium deficiency exceeds deferred acquisition costs, then a liability is
accrued for the excess deficiency. There were no premium deficiency adjustments
recognized during the periods presented herein.



18






                            FG FINANCIAL GROUP, INC.

Loss and Loss Adjustment Expense Reserves

Loss and loss adjustment expense reserve estimates are based on estimates
derived from reports received from ceding companies. These estimates are
periodically reviewed by the Company's management and adjusted as necessary.
Since reserves are estimates, the final settlement of losses may vary from the
reserves established and any adjustments to the estimates, which may be
material, are recorded in the period they are determined.



Loss estimates may also be based upon actuarial and statistical projections, an
assessment of currently available data, predictions of future developments,
estimates of future trends and other factors. The final settlement of losses may
vary, perhaps materially, from the reserves recorded. All adjustments to the
estimates are recorded in the period in which they are determined. U.S. GAAP
does not permit establishing loss reserves, which include case reserves and IBNR
loss reserves, until the occurrence of an event which may give rise to a claim.
As a result, only loss reserves applicable to losses incurred up to the
reporting date are established, with no allowance for the establishment of loss
reserves to account for expected future loss events.



Generally, the Company obtains regular updates of premium and loss related
information for the current and historical periods, which are utilized to update
the initial expected loss ratio. We also experience lag between (i) claims being
reported by the underlying insured to the Company's cedent and (ii) claims being
reported by the Company's cedent to the Company. This lag may impact the
Company's loss reserve estimates. Client reports have pre-determined due dates
(for example, thirty days after each month end). As a result, the lag depends in
part upon the terms of the specific contract. The timing of the reporting
requirements is designed so that the Company receives premium and loss
information as soon as practicable once the client has closed its books.
Accordingly, there should be a short lag in such reporting. Additionally, most
of the contracts that have the potential for large single event losses have
provisions that such loss notifications are provided to the Company immediately
upon the occurrence of an event.

Stock-Based Compensation Expense

The Company uses the fair-value method of accounting for stock-based
compensation awards granted. The Company has determined the fair value of its
outstanding stock options on their grant date using the Black-Scholes option
pricing model along with multiple Monte Carlo simulations to determine a derived
service period as the options vest based upon meeting certain performance
conditions. The Company determines the fair value of restricted stock units
("RSUs") on their grant date using the fair value of the Company's common stock
on the date the RSUs were issued (for those RSU which vest solely based upon the
passage of time), as well as using multiple Monte Carlo simulations for those
RSUs with market-based vesting conditions. The fair value of these awards is
recorded as compensation expense over the requisite service period, which is
generally the expected period over which the awards will vest, with a
corresponding increase to additional paid-in capital. When the stock options are
exercised, or correspondingly, when the RSUs vest, the amount of proceeds
together with the amount recorded in additional paid-in capital is recorded

in
shareholders' equity.

Recent Accounting Pronouncements

See Item 8, Note 3 - Recently Adopted and Issued Accounting Standards in the
Notes to the Consolidated Financial Statements for a discussion of recent
accounting pronouncements and their effect, if any, on the Company.

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                            FG FINANCIAL GROUP, INC.

Analysis of Financial Condition

As of December 31, 2021 compared to December 31, 2020

Investments

The table below summarizes, by type, the Company's investments held at fair
value as of December 31, 2021 and 2020.

($ in thousands)
                                                    Gross              Gross
                                                  Unrealized         Unrealized
As of December 31, 2021         Cost Basis          Gains              Losses          Carrying Amount
FedNat common stock            $     14,495     $            -     $       13,074     $           1,421
Total investments              $     14,495     $            -     $       13,074     $           1,421




                                                    Gross            Gross
                                                  Unrealized       Unrealized       Carrying
As of December 31, 2020          Cost Basis         Gains            Losses          Amount
FedNat common stock            $     20,751     $          -     $     12,209     $     8,542
Private placements                    4,012                -                -           4,012
Total investments              $     24,763     $          -     $     12,209     $    12,554




FedNat Common Stock



As of December 31, 2021, the Company held 1,007,871 shares of FedNat Holding
Company common stock (Nasdaq: FNHC). Of the total 1,773,102 shares of FedNat
common stock which the Company had received as consideration for the Asset Sale,
the Company has disposed of 765,231 shares. The first transaction occurred on
September 15, 2020, whereby the Company sold 330,231 shares of FedNat common
stock to the Hale Parties as further discussed in Note 9 - Related Party
Transactions. Additionally, during the fourth quarter 2021, the Company sold an
additional 435,000 shares of FedNat common stock on the open market. Pursuant to
the Standstill Agreement entered into between the Company and FedNat at the
closing of the Asset Sale, the Company is restricted as to the number of FedNat
shares it can dispose of.



Private Placements



Private placements listed in the table above consist of the $4.0 million
invested in FG New America Investors, LLC (the "Sponsor") as part of a total
$8.6 million of risk capital used to launch FG New America Acquisition Corp
("FGNA"), a special purpose acquisition company, which consummated its initial
public offering on October 2, 2020. On July 20, 2021, FGNA completed its
definitive business combination with Opportunity Financial, LLC and began
operating as OppFi Inc. ("OppFi"), with OppFi's common stock trading on the NYSE
under the ticker symbol "OPFI". The Sponsor interests currently represent
beneficial ownership of approximately 0.86 million common shares of OPFI as well
as approximately 0.36 million warrants to purchase common shares of OPFI at a
price of $11.50 per share. We are restricted from selling our OPFI common shares
until the earlier of i) July 20, 2022; or ii) the date upon which the closing
price of OPFI stock is greater than or equal to $12.00 per share for any 20
trading days within a 30-trading day window.



Deconsolidation of Subsidiary

The investment into the Sponsor was made by FG Special Situations Fund, LP (the
"Fund"), a Delaware limited partnership in which the Company had initially
invested in through its general partner. At the time of the Company's initial
investment into the Fund, in September 2020, the Company had determined that its
investment represented an investment in a variable interest entity ("VIE"), in
which the Company was the primary beneficiary, and, as such, had consolidated
the financial results of the Fund through November 30, 2021. At each reporting
date, the Company evaluates whether it remains the primary beneficiary and
continuously reconsiders that conclusion. On December 1, 2021, the Company's
investment became that of a limited partner, and it no longer had the power to
govern the financial and operating policies of the Fund and accordingly
derecognized the related assets, liabilities, and noncontrolling interests of
the Fund as of that date. The Company did not receive any consideration in the
deconsolidation of the Fund, nor did it record any gain, or loss upon
deconsolidation. The assets and liabilities of the Fund, over which the Company
lost control are as follows:



As of December 1, 2021 (in thousands)
Cash and cash equivalents               $    100
Investments in private placements         15,734
Investments in public SPACs                   22
Other assets                                  18
Other liabilities                            (34 )
Net assets deconsolidated               $ 15,840




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                            FG FINANCIAL GROUP, INC.

While the Company's investments in the Fund are no longer consolidated, the
Company has retained all of the investments held at the Fund, including its
beneficial ownership of approximately 0.86 million common shares of OPFI and
approximately 0.36 million warrants to purchase common shares of OPFI at $11.50
per share. Effective December 1, 2021, the Company began accounting for its
investment in the Fund via the equity method of accounting.



Equity Method Investments



Equity method investments included our investment of $4.0 million in FGI
Metrolina Property Income Fund, LP ("Metrolina"), which invested in real estate
through a real estate investment trust that was wholly owned by Metrolina. We
have recorded equity method earnings from our investment in Metrolina of
approximately $326,000 and $186,000 for the years ended December 31, 2021 and
2020, respectively. In the third quarter 2021, Metrolina indicated that it would
be liquidating and returning investor capital. Accordingly, in the fourth
quarter 2021, we received approximately $5.0 million in cash from Metrolina,
representing our initial investment of $4.0 million plus approximately $1.0
million in distributed earnings. As a result, our investment in Metrolina was
fully liquidated as of December 31, 2021.



Equity method investments also include our investment in FG SPAC Partners, LP
("FGSP"). We formed FGSP in January 2021, to co-sponsor newly formed SPACs with
their founders or partners. The Company is the sole managing member of the
general partner of FGSP and holds an approximate 46% limited partner interest in
FGSP. Subsequently, FGSP bought founders shares in Aldel Financial, Inc.
("Aldel") as well as warrants to purchase Aldel Class A common stock, at an
exercise price of $15.00 per share (the "OTM Warrants"). On December 2, 2021,
Aldel completed its business combination with Hagerty, an auto and marine
insurance carrier, and began operating as Hagerty, Inc., trading on the NYSE
under the ticker "HGTY." As of December 31, 2021, FGSP had beneficial ownership
of 500,000 HGTY common shares and warrants to purchase 650,000 HGTY common
shares, at an exercise price of $15.00 per share. Through our 46% limited
partner interest in FGSP, the Company has beneficial ownership of approximately
230,000 HGTY common shares and approximately 300,000 warrants. We have recorded
equity method earnings from our investment in FGSP of approximately $3.78
million for the year ended December 31, 2021. The carrying value of our
investment in FGSP as of December 31, 2021 was approximately $3.85 million,
representing $3.78 million in undistributed earnings.



Certain investments held by our equity method investees are valued using
Monte-Carlo simulation and option pricing models. Inherent in Monte-Carlo
simulation and option pricing models are assumptions related to expected
volatility and discount for lack of marketability of the underlying investment.
Our investees estimate the volatility of these investments based on the
historical performance of various broad market indices blended with various peer
companies which they consider as having similar characteristics to the
underlying investment.



As previously discussed under the heading "Deconsolidation of Subsidiary,"
equity method investments also include our investment in the Fund, as of
December 31, 2021. We had consolidated the Fund as a variable interest entity;
however, effective December 1, 2021, we began accounting for this investment
under the equity method of accounting. For the year ended December 31, 2021, we
recognized approximately $3.0 in pretax income through our investment in the
Fund, which consists of consolidated pretax income in the amount of
approximately $3.7 million, for the period of January 1, 2021, through November
30, 2021, and equity method losses of approximately $0.7 million for the month
of December 2021. As of December 31, 2021, the carrying value of our Fund
investment was approximately $9.7 million, including $3.0 million in
undistributed earnings.



Through the Fund, the Company has invested $1.0 million in the risk capital of
Aldel Investors, LLC, the sponsor of Hagerty, Inc. This investment represents
the beneficial ownership of approximately 286,000 HGTY common shares.
Altogether, the Company's investment in Hagerty, Inc., through both FGSP and the
Fund, represents beneficial interests of approximately 516,000 HGTY common
shares and approximately 300,000 warrants to purchase HGTY common shares at an
exercise price of $15.00 per share.

Investments without Readily Determinable Fair Value

In addition to our equity method investments, other investments, as listed on
our balance sheet, consist of equity we have purchased in a limited partnership
and a limited liability company for which there do not exist readily
determinable fair values. The Company accounts for these investments at their
cost, minus impairment, if any, plus or minus changes resulting from observable
price changes in orderly transactions for identical or similar investments of
the same issuer. Any profit distributions the Company receives on these
investments are included in net investment income. The Company's total
investment in these two entities was approximately $483,000 as of December 31,
2021. For the years ended December 31, 2021, and 2020, the Company has received
profit distributions of $101,000 and $80,000 on these investments, respectively,
which has been included in income. Furthermore, both investments began returning
capital to investors beginning in 2020. As of December 31, 2021, the Company has
received approximately 38% of its initial $776,000 investment in these entities.



21






                            FG FINANCIAL GROUP, INC.

Funds Deposited with Reinsured Companies

On November 12, 2020, FGRe, our Cayman Islands-based reinsurance subsidiary,
initially funded a trust account at Lloyd's with approximately $2.4 million in
cash, to collateralize its obligations under a quota-share agreement with a
Funds at Lloyds syndicate. The initial contract covered our quota-share
percentage of all risks written by the syndicate for the 2021 calendar year. On
November 30, 2021, we entered into an agreement with the same syndicate,
slightly increasing our quota-share percentage of the risks the syndicate writes
for the 2022 calendar year. This resulted in FGRe's posting an additional $1.3
million in cash collateral to the account. We have also posted cash collateral
in the approximate amount of $0.7 million, to support our automotive insurance
quota-share agreement entered into on April 1, 2021. As of December 31, 2021,
the total cash collateral posted to support all of our reinsurance treaties

was
approximately $4.4 million.

Current Income Taxes Recoverable

Current income taxes recoverable were $0 as of December 31, 2021, compared to
approximately $1.7 million as of December 31, 2020, representing the estimate of
both the Company's state and federal income taxes receivable as of each date. In
the third quarter of 2021, we received a refund on our federal taxes in the
amount of approximately $1.5 million associated with a carryback refund request
filed for our 2018, 2017 and 2014 tax years.

Reinsurance Balances Receivable

Reinsurance balances receivable were $3.9 million as of December 31, 2021,
compared to $0 as of December 31, 2020, representing net amounts due to the
Company under our quota-share agreements. As the Company estimates the ultimate
premiums, loss expenses and other costs associated with some of these contracts,
based on information received by us from the ceding companies, a significant
portion of this balance is based on estimates and, ultimately, may not be
collected by the Company.



Net Deferred Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes, as compared to the amounts used for income tax purposes. The Company's
gross deferred tax assets and liabilities are $6.2 million and $0.5 million as
of December 31, 2021. The Company has recorded a valuation allowance against its
deferred tax assets of $5.7 million, as of December 31, 2021, due to the
uncertain nature surrounding our ability to realize these tax benefits in the
future. Significant components of the Company's net deferred taxes are as
follows:



($ in thousands)                                          As of December 31,
                                                           2021          2020
Deferred income tax assets:
Net operating loss carryforward                         $    3,010     $  

1,143

Loss and loss adjustment expense reserve                        25         

  -
Unearned premium reserves                                      152            -
Capital loss carryforward                                    1,114            -
Share-based compensation                                       253          216
Investments                                                  1,692        2,570
Other                                                            3            5
Deferred income tax assets                              $    6,249     $  3,934
Less: Valuation allowance                                   (5,715 )     (3,934 )

Deferred income tax assets net of valuation allowance   $      534     $   

-

Deferred income tax liabilities:
Investments                                             $      369     $   

-

Deferred policy acquisition costs                              165         

-

Deferred income tax liabilities                         $      534     $   

-

Net deferred income tax asset (liability)               $        -     $   

  -




As of December 31, 2021, the Company had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $14.3 million, which
will be available to offset future taxable income. Approximately $0.5 million
will expire on December 31, 2039, $0.1 million will expire on December 31, 2040,
and $1.6 million of the Company's NOLs will expire on December 31, 2041. The
remaining $12.1 million of the Company's NOLs do not expire under current tax
law. Additionally, the Company has approximately $5.3 million of capital loss
carryforward that can only be used to offset capital gains and which will expire
in December 2026 if not used prior.



22






                            FG FINANCIAL GROUP, INC.

Loss and Loss Adjustment Expense Reserves

A significant degree of judgment is required to determine amounts recorded in
the consolidated financial statements for the provision for loss and loss
adjustment expense ("LAE") reserves. The process for establishing this provision
reflects the uncertainties and significant judgmental factors inherent in
predicting future results of both known and unknown loss events. The process of
establishing the provision for loss and LAE reserves relies on the judgment and
opinions of many individuals, including the opinions of the Company's
management, as well as the management of ceding companies and their actuaries.



The COVID-19 pandemic is unprecedented, and the Company does not have previous
loss experience on which to base the associated estimate for loss and loss
adjustment expenses. In estimating losses, the Company may assess any of the
following:

? a review of in-force treaties that may provide coverage and incur losses;

? general forecasts, catastrophe and scenario modelling analyses and results

shared by cedents;

? reviews of industry insured loss estimates and market share analyses; and

? management's judgment.

Assumptions which served as the basis for the Company's estimates of reserves
for the COVID-19 pandemic losses and loss adjustment expenses include:

? the scope of coverage provided by the underlying policies, particularly those

that provide for business interruption coverage;

? the regulatory, legislative, and judicial actions that could influence contract

interpretations across the insurance industry;

? the extent of economic contraction caused by the COVID-19 pandemic and

associated actions; and

? the ability of the cedents and insured to mitigate some or all of their losses.

Under the terms of certain of our quota-share agreements, and due to the nature
of claims and premium reporting, a lag exists between (i) claims being reported
by the underlying insured to the Company's cedent and (ii) claims being reported
by the Company's cedent to the Company. This lag may impact the Company's loss
reserve estimates. The reports we receive from our cedents have pre-determined
due dates. In the case of the Company's FAL contract, fourth quarter 2021
premium and loss information will not be made available to the Company until
subsequent to the filing of this annual report. Thus, our fourth quarter
results, including the loss and loss adjustment expense reserves presented
herein, have been based upon a combination of first, second, and third quarter
actual results as well as full-year forecasts reported to us by the ceding
companies, which we used to approximate fourth quarter results. The Company
obtains regular updates of premium and loss related information for the current
and historical periods, which we use to update the initial expected loss ratios
on our reinsurance contracts.



23






                            FG FINANCIAL GROUP, INC.

While the Company believes its estimate of loss and loss adjustment expense
reserves are adequate as of December 31, 2021, based on available information,
actual losses may ultimately differ materially from the Company's current
estimates. The Company will continue to monitor the appropriateness of its
assumptions as new information is provided.

A summary of changes in outstanding loss and loss adjustment expense reserves
for the year ended December 31, 2021, is as follows and includes reserves
related to both our FAL contract, as well as our automotive insurance
quota-share agreement which became effective April 1, 2021. There was no
activity with respect to loss and loss adjustment expense reserves for the for
the year ended December 31, 2020.



(in thousands)                                                            2021

Balance, January 1, gross of reinsurance                                $  

-

Less reinsurance recoverable on loss and LAE expense reserves              

-

Balance, January 1, net of reinsurance                                     

   -
Incurred related to:
Current year                                                               4,338
Prior years                                                                    -
Paid related to:
Current year                                                              (2,205 )
Prior years                                                                    -

Balance, December 31, net of reinsurance                                  

2,133

Plus reinsurance recoverable related to loss and LAE expense reserves

-

Balance, December 31, gross of reinsurance                              $ 

2,133

Off Balance Sheet Arrangements

None.



Shareholders' Equity



Share Repurchase Transaction

On September 15, 2020, the Company repurchased all of the 1,130,152 shares of
the Company's common stock, owned by Hale Partnership Capital Management, LLC
and certain of its affiliates (collectively, the "Hale Parties"), for an
aggregate of approximately $2.8 million in cash and 330,231 shares of FedNat
common stock having an estimated fair value of approximately $2.7 million, which
included reimbursement of certain expenses incurred by the Hale Parties. Prior
to the transaction, the Hale Parties owned more than 18% of the Company's
outstanding common stock.



As the total consideration paid in the transaction exceeded the fair value of
the treasury shares repurchased by the Company, the Company recorded a charge of
approximately $0.2 million to general and administrative expense for the year
ended December 31, 2020, representing the estimated fair value of the rights
conveyed to the Company pursuant to the standstill provisions in the repurchase
agreement. The fair value of the 1,130,152 shares of Company common stock, or
approximately $5.2 million, was recorded to treasury stock.

8.00% Cumulative Preferred Stock, Series A

On May 21, 2021, we completed the underwritten public offering of an additional
194,580 shares of our preferred stock designated as 8.00% Cumulative Preferred
Stock, Series A, par value $25.00 per share (the "Series A Preferred Stock"),
for net proceeds of approximately $4.2 million, bringing the total number of
Series A Preferred Stock shares outstanding to 894,580 as of December 31, 2021.



Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly on the 15th day of March, June,
September and December of each year, when, as and if declared by our Board of
Directors. Dividends are payable out of amounts legally available therefor at a
rate equal to 8.00% per annum per $25.00 of stated liquidation preference per
share, or $2.00 per share of Series A Preferred Stock per year. Our Board of
Directors declared the first quarter 2022 dividend on the shares of Series A
Preferred Stock on February 10, 2022. The Series A Preferred Stock shares trade
on the Nasdaq Stock Market under the symbol "FGFPP".



24






                            FG FINANCIAL GROUP, INC.



Common Stock



In the 2021 fourth quarter, we sold, a total of 750,000 shares of our common
stock, at a price of $4.00 per share, for net proceeds to us of approximately
$2.5 million. Also in the fourth quarter, the Company completed a rights
offering to holders of its common stock. Pursuant to the rights offering,
691,735 shares were subscribed for, for net proceeds of approximately $2.7
million. The Company intends to use the net proceeds from the issuance of its
common shares for working capital and other general corporate purposes.

Retirement of Treasury Stock

On August 19, 2021, the Board approved the retirement of all 1,281,511 common
stock treasury shares owned by the Company. Accordingly, these shares have been
classified as authorized, but unissued shares on the Company's balance sheet, as
of December 31, 2021.

Change in Shareholders' Equity

The table below presents the primary components of changes to total
shareholders' equity for the years ended December 31, 2021 and 2020.

                                  Preferred                                                       Total
                                   Shares          Common Shares                              Shareholders'

($ in thousands)                 Outstanding        Outstanding        Treasury Shares           Equity
Balance, January 1, 2020               700,000          6,065,948               151,359     $          62,915

Dividends declared on Series
A Preferred Stock ($2.00 per
share)                                       -                  -                     -                (1,400 )
Stock compensation expense                   -             52,514                     -                   311
Share Repurchase Transaction                 -         (1,130,152 )           1,130,152                (5,176 )
Net loss                                     -                  -                     -               (22,457 )
Balance, December 31, 2020             700,000          4,988,310          

1,281,511 $ 34,193

Retirement of Treasury Stock                 -                  -          

 (1,281,511 )                   -
Series A Preferred Share
issuance                               194,580                  -                     -                 4,217
Common stock issuance                        -          1,441,735                     -                 5,246
Stock compensation expense                   -             67,160                     -                   559
Dividends declared on Series
A Preferred Stock ($2.00 per
share)                                       -                  -                     -                (1,692 )
Net loss                                     -                  -                     -                (8,514 )
Balance, December 31, 2021             894,580          6,497,205          

          -     $          34,009




Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net Premiums Earned



Net premiums earned represent actual premiums earned on our quota-share
agreements as well as estimated premiums earned on our FAL agreement for the
fourth quarter 2021 and is approximately $4.9 million for the year ended
December 31, 2021. Our FAL estimates are based on information received from the
ceding companies, whereby premiums are recorded, as written, in the same periods
in which the underlying insurance contracts are written and are based on cession
statements from cedents. These statements are received quarterly, in arrears;
so, for any reporting lag, premiums written are estimated based on the portion
of the ultimate estimated premiums relating to the risks underwritten during the
lag period. As our quota-share agreements became effective in 2021, we had no
corresponding net earned premiums for the year ended December 31, 2020.



25






                            FG FINANCIAL GROUP, INC.


Net Investment Income



Net investment income (loss) for the years ended December 31, 2021 and 2020 is
as follows:



(in thousands)                                                Year Ended December 31,
                                                               2021              2020
Investment income (loss):

Unrealized holding loss on FedNat common stock             $       (865 )     $   (16,196 )
Unrealized holding gain on private placement investments          5,267                 -
Realized loss on FedNat common stock                             (5,452 )          (2,110 )
Dividend income from FedNat common stock                              -    

          609
Equity method earnings                                            3,448               265
Other                                                               147               172
Net investment income (loss)                               $      2,545       $   (17,260 )




Other Income



Other income was $186,000, compared to $104,000, for the years ended December
31, 2021, and 2020, respectively, and is comprised of fees earned under the
investment advisory and transition services agreements between the Company and
FedNat. Also included in other income for current year is approximately $86,000
in service fee revenue we have earned under our new SPAC Platform, whereby we
have provided certain accounting, regulatory, strategic advisory, and other
administrative services to Aldel, prior to its business combination transaction
with Hagerty.

Net Losses and Loss Adjustment Expenses

Net losses and loss adjustment expenses ("LAE") for the year ended December 31,
2021, represent charges associated with the establishment of loss and LAE
reserves under our quota-share reinsurance agreements. Also included in this
figure are loss and LAE payments in the approximate amount of $2.2 million. As
discussed under the heading "Loss and Loss Adjustment Expense Reserves", a
portion of this charge represents an estimate based upon a full calendar year
forecast of results provided to us by the ceding companies under our FAL
arrangement.

General and Administrative Expenses

General and administrative expenses increased by $3.2 million for the years
ended December 31, 2021, as compared to 2020. The increase was primarily due to
underwriting expenses allocated to us pursuant to our two quota-share
reinsurance contracts, which accounted for approximately $0.6 million of the
increase, as our reinsurance agreements became effective in 2021. Also included
in general and administrative expenses are payments to Fundamental Global
Management, LLC ("FGM"), pursuant to a shared services agreement entered into on
March 31, 2020. Under the agreement, FGM provides the Company with certain
services related to the day-to-day management of the Company, including
assisting with regulatory compliance, evaluating the Company's financial and
operational performance, providing a management team to supplement the executive
officers of the Company, and such other services consistent with those
customarily performed by executive officers and employees of a public company.
In exchange for these services, the Company pays FGM a fee of approximately
$456,000 per quarter, plus reimbursement of expenses incurred by FGM in
connection with the performance of the services, subject to certain limitations
approved by the Company's Board of Directors or Compensation Committee, from
time to time. The Company paid $1.9 million and $1.4 million to FGM under the
agreement, for the years ended December 31, 2021 and 2020, respectively. FGM is
an affiliate of FG, the Company's largest shareholder.



Personnel costs have also increased as our employee count has increased from
three to nine when comparing twelve-month periods. Employee salaries and
benefits including associated payroll taxes account for approximately $1.5
million of the increase to general and administrative expenses when comparing
twelve-month periods.



26






                            FG FINANCIAL GROUP, INC.

Income Tax Expense (Benefit)

Our actual effective tax rate varies from the statutory federal income tax rates
as shown in the following table.

($ in thousands)                                 Year Ended December 31,
                                          2021                             2020
                                 Amount             %             Amount             %

Provision for taxes at U.S.
statutory marginal income
tax rate of 21%                $    (1,540 )          21.0 %    $    (4,856 )          21.0 %
Valuation allowance for
deferred tax assets deemed
unrealizable                         1,782           (24.3 )%         3,934           (17.0 )%
Rate differential due to
CARES Act                                -               - %           (214 )           0.9 %
Non-deductible expenses
associated with the Share
Repurchase Transaction                   -               - %            516             2.2 %
Net operating loss carryback             -               - %              -

              - %
State income tax (net of
federal benefit)                      (114 )           1.6 %              -               - %
Minority Interest                     (279 )           3.8 %
Other                                    6            (0.1 )%           (45 )           0.2 %
Income tax benefit             $      (145 )           2.0 %    $      (665 )           2.9 %

Income tax benefit - from
continuing operations          $         -               - %    $      (665 )           2.9 %
Income tax benefit - from
discontinued operations        $      (145 )           2.0 %    $         -               - %




Due to the sale of our former insurance business, these operations have been
classified as discontinued operations in the Company's financial statements
presented herein. For the year ended December 31, 2021, we recognized a gain
from the sale of these operations of approximately $145,000, related to a final
true-up and settlement for income taxes due to the Company under the sale
agreement.



As a result of the passage of the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act"), the Company recorded a credit of $214,000 against its
income tax expense for the year ended December 31, 2020, due to a provision in
the CARES Act that allows for the five-year carryback of net operating losses.
Prior to the passage of the CARES Act, these net operating losses were only
available to offset future taxable income generated by the Company.



We have also recorded charges of $1,782 and $3,934 for the years ended December
31, 2021 and 2020, respectively, as a valuation allowance against all of our net
deferred tax assets, due to uncertainty regarding our ability to realize these
tax benefits in the future, reducing the net deferred income tax asset to $0, as
of December 31, 2021.



Net Loss

Information regarding our net loss and loss per share for the years ended
December 31, 2021 and 2020 is as shown in the following table:

($ in thousands)                                          Year Ended December 31,
                                                           2021              2020
Basic and diluted:

Net loss from continuing operations                   $       (7,333 )   $     (22,457 )
Income attributable to noncontrolling interest                (1,326 )     

-

Dividends declared on Series A Preferred Shares               (1,692 )          (1,400 )
Loss attributable to FG Financial Group, Inc.
common shareholders                                          (10,351 )         (23,857 )
Weighted average common shares                             5,212,772       

5,746,259

Loss per common share from continuing operations $ (1.99 ) $

(4.15 )

Gain on sale of former insurance business             $         (145 )   $ 

-

Weighted average common shares outstanding                 5,212,772       

-

Income per common share from discontinued
operations                                            $         0.03     $ 

-

Loss per share attributable to common shareholders $ (1.96 ) $

     (4.15 )




27






                            FG FINANCIAL GROUP, INC.

Liquidity and Capital Resources

The purpose of liquidity management is to ensure that there is sufficient cash
to meet all financial commitments and obligations as they fall due. The
liquidity requirements of the Company and its subsidiaries have been met
primarily from the cash proceeds of the Asset Sale, by funds generated from
operations, and from the proceeds from the sales of our common and preferred
stock. Cash provided from these sources has historically been used for loss and
loss adjustment expense payments, as well as other operating expenses.

For the year ended December 31, 2021, the Company sold common and preferred
stock to the public, for total net proceeds of $9.4 million. Additional
information regarding the public offering of our common stock and Series A
Preferred Stock can be found under the heading "Shareholders' Equity."

Cash Flows

The following table summarizes the Company's consolidated cash flows for the
years ended December 31, 2021 and 2020.

($ in thousands)                                     Year ended December 31,
Summary of Cash Flows                                  2021             2020

Cash and cash equivalents - beginning of period $ 12,132 $ 28,509

Net cash used by operating activities                   (14,406 )       (11,283 )
Net cash provided (used) by investing activities          5,898          (1,156 )
Net cash provided (used) by financing activities         11,918          (3,938 )
Net decrease in cash and cash equivalents                 3,410         

(16,377 )

Cash and cash equivalents - end of period $ 15,542 $ 12,132

For the year ended December 31, 2021, the Company's net cash used by operating
activities was approximately $14.4 million, the major drivers of which were

as
follows:

? Our net loss of approximately $7.2 million for the year.

? Approximately $7.8 million for a non-cash charge related to the unrealized

holding gains on our various investments, offset by $5.5 million in realized

loss on sale associated with our shares of FedNat common stock.

? A cash outflow of approximately $2.0 million representing cash placed in trust

as collateral, pursuant to our quota-share agreements.

? A cash outflow of approximately $6.5 million for our investment in our SPAC

sponsorships through the Fund. As this investment was made by our former

investment company subsidiary, we are required to show these cash outflows as

    operating activities.

For the year ended December 31, 2021, the Company's net cash provided by
financing activities consist primarily of proceeds of approximately $5.9 million
from the sale of a portion of our FedNat shares as well as the complete
liquidation of our Metrolina investment.

For the year ended December 31, 2021, the Company's net cash used by financing
activities consist of:

  ? The payments of dividends in the amount of $1.7 million on our Series A
    Preferred Shares.

? Net proceeds from the issuance of our Series A Preferred Shares in the amount

    of approximately $4.2 million.
  ? Net proceeds from the issuance of our common stock in the amount of
    approximately $5.2 million.




For the year ended December 31, 2020, the Company's net cash used by operating
activities was approximately $11.3 million. The major drivers of which were

as
follows:

? Our net loss of approximately $22.5 million for the year, offset by

approximately $16.0 million for a non-cash charge related to the unrealized

losses associated with our shares of FedNat common stock.

? A cash outflow of approximately $2.4 million representing cash placed in trust

as collateral, pursuant to our Funds at Lloyd's quota-share agreement,

effective January 1, 2021.

? A cash outflow of approximately $4.0 million for our investment in the Class A

and Class A-1 interests in the Sponsor of FGNA. As this investment was made by

our former investment company subsidiary, we are required to show these cash

    outflows as operating activities.

For the year ended December 31, 2020, the Company's net cash used by financing
activities consist of:

    ?   Payments of dividends in the amount of $1.4 million on our Series A
        Preferred Shares.

? The payment of $2.5 million in cash to the Hale Parties in connection

with the repurchase transaction.