Kingsway Announces Second Quarter 2014 Results

TORONTO, Aug. 8, 2014 /CNW/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its operating results for the second quarter and six months ended June 30, 2014. All amounts are in U.S. dollars unless indicated otherwise.

Management Comments

Larry G. Swets, Jr., the Company's President and Chief Executive Officer, stated, "We are pleased to report another quarterly result which we believe demonstrates evidence that Kingsway has turned the corner as we discussed in our shareholder letter.  Our Insurance Underwriting segment again reported an underwriting profit, and our adjusted operating income continues to build a foundation for further value creation.  Specifically, we reported a $5.0 million realized gain during the quarter in our portfolio of passive securities.

Mr. Swets continued, "Also consistent with our merchant banking strategy, during the quarter we completed our previously announced initial public offering of 1347 Capital Corp., a special purpose acquisition company formed to enter into a business combination with another business.  This transaction is another example of how we intend to find ways to create value for our shareholders."

Operating Results

The Company reported net loss of $5.5 million for the second quarter of 2014 ($6.5 million year to date), compared to net loss of $9.7 million for the prior-year period ($27.0 million prior year to date).  The Company also reported adjusted operating income, a non-U.S. GAAP measure defined below, of $7.1 million for the second quarter of 2014 ($9.8 million year to date), compared to adjusted operating loss of $3.2 million for the prior-year period ($3.4 million prior year to date).  The Company looks at adjusted operating income (loss) as a way of assessing the profitability and progress of the subsidiaries in its Insurance Underwriting and Insurance Services segments as well as the performance of its portfolio of passive securities in its Insurance Underwriting segment.

Following are highlights of Kingsway's second quarter of 2014:

  • The Insurance Underwriting segment recorded operating income of $0.3 million for the second quarter of 2014 ($0.6 million year to date), compared to operating loss of $4.5 million in the prior-year period ($7.6 million prior year to date).

  • The Insurance Services segment recorded operating income of $1.2 million for the second quarter of 2014 ($3.1 million year to date), compared to operating income of $0.5 million in the prior-year period ($2.4 million prior year to date).

  • Net investment income of $0.3 million was recorded in the second quarter of 2014 ($0.8 million year to date), compared to $0.8 million in the prior-year period ($1.4 million prior year to date).

  • Net realized gains of $5.1 million were recorded in the second quarter of 2014 ($5.1 million year to date), compared to net realized gains of $0.0 million in the prior-year period (net realized losses of $1.4 million prior year to date).

  • Net loss of $12.4 million not allocated to any segment was recorded in the second quarter of 2014 ($16.1 million year to date), compared to net loss of $6.5 million in the prior-year period ($21.8 million prior year to date).  The 2014 result includes loss on change in fair value of debt of $7.8 million ($7.2 million year to date), compared to gain on change in fair value of debt of $2.3 million in the prior-year period (loss of $6.6 million prior year to date).   
                
  • Book value has increased to $2.32 per share at June 30, 2014 from $2.25 per share at December 31, 2013. The Company also carries a valuation allowance, in the amount of $17.43 per share at June 30, 2014, against the deferred tax asset, primarily related to its loss carryforwards.

For a detailed discussion of Kingsway's earnings for the second quarter and six months ended June 30, 2014, as well as other important information, please refer to the Company's Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on August 8, 2014.  Kingsway's Annual Letter to Shareholders may be accessed at the Company's website or directly at http://bit.ly/kfs2013.  

About the Company

Kingsway is a holding company functioning as a merchant bank with a focus on long-term value-creation.  The Company owns or controls stakes in several insurance industry assets and utilizes its subsidiaries, 1347 Advisors LLC and 1347 Capital LLC, to pursue opportunities acting as an advisor, an investor and a financier. The common shares of Kingsway are listed on the Toronto Stock Exchange and the New York Stock Exchange under the trading symbol "KFS."


Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)



Three months ended June 30,


Six months ended June 30,








2014



2013



2014



2013


Revenues:













Net premiums earned


$

28,755



$

28,297



$

60,675



$

56,365


Service fee and commission income


13,926



12,052



28,650



25,176


Net investment income


341



816



754



1,396


Net realized gains (losses)


5,091



32



5,130



(1,377)


Other-than-temporary impairment loss




(1,800)





(1,800)


Other income


2,467



2,174



4,538



4,392


Total revenues


50,580



41,571



99,747



84,152


Expenses:













Loss and loss adjustment expenses


21,794



24,615



42,855



46,446


Commissions and premium taxes


5,532



5,171



12,085



11,883


Cost of services sold


937



146



1,793



146


General and administrative expenses


17,625



19,988



36,149



39,592


Restructuring expense


(54)



147



(34)



927


Interest expense


1,364



1,927



2,797



3,760


Amortization of intangible assets


409



508



823



1,066


Contingent consideration expense


267



155



534



310


Impairment of asset held for sale


1,180



1,446



1,180



1,446


Total expenses


49,054



54,103



98,182



105,576


Income (loss) before (loss) gain on change in fair value
of debt, loss on disposal of subsidiary, loss on buy-back
of debt, equity in net income of investee and income tax
benefit


1,526



(12,532)



1,565



(21,424)


(Loss) gain on change in fair value of debt


(7,799)



2,338



(7,236)



(6,613)


Loss on disposal of subsidiary






(1,242)




Loss on buy-back of debt








(24)


Equity in net income of investee








255


Loss before income tax benefit


(6,273)



(10,194)



(6,913)



(27,806)


Income tax benefit


(799)



(525)



(433)



(801)


Net loss


(5,474)



(9,669)



(6,480)



(27,005)


Less: net (loss) income attributable to noncontrolling
interests in consolidated subsidiaries


(558)



617



95



712


Less: dividends on preferred stock


82





135




Net loss attributable to common shareholders


$

(4,998)



$

(10,286)



$

(6,710)



$

(27,717)


Loss per share – net loss attributable to common
shareholders:













Basic:


$

(0.30)



$

(0.78)



$

(0.41)



$

(2.11)


Diluted:


(0.30)



(0.78)



(0.41)



(2.11)


Weighted average shares outstanding (in '000s):













Basic:


16,430



13,149



16,430



13,149


Diluted:


16,430



13,149



16,430



13,149


 

 

Consolidated Balance Sheets
(in thousands, except per share data)



June 30, 2014



December 31, 2013



 (unaudited)





Assets








Investments:








Fixed maturities, at fair value (amortized cost of $51,196 and $53,455, respectively)


$

51,784




$

54,151


Equity investments, at fair value (cost of $12,356 and $3,554, respectively)


16,707




7,137


Limited liability investments


6,935




4,406


Other investments, at cost which approximates fair value


2,000




3,000


Short-term investments, at cost which approximates fair value


401




501


Total investments


77,827




69,195


Cash and cash equivalents


67,520




98,589


Accrued investment income


980




614


Premiums receivable, net of allowance for doubtful accounts of $1,889 and $2,123, respectively


30,044




32,035


Service fee receivable, net of allowance for doubtful accounts of $245 and $0, respectively


23,489




19,012


Other receivables, net of allowance for doubtful accounts of $1,061 and $1,062, respectively


9,450




4,097


Reinsurance recoverable


5,852




10,335


Prepaid reinsurance premiums


102




6,816


Deferred acquisition costs, net


12,625




12,392


Property and equipment, net of accumulated depreciation of $16,160 and $15,848, respectively


1,421




1,662


Goodwill


10,588




10,588


Intangible assets, net of accumulated amortization of $19,406 and $18,583, respectively


48,095




48,918


Other assets


3,909




4,039


Asset held for sale


5,167




6,347


Total Assets


$

297,069




$

324,639


Liabilities and Shareholders' Equity
















Liabilities:








Unpaid loss and loss adjustment expenses:








Property and casualty


$

72,658




$

84,534


Vehicle service agreements


3,052




3,128


Total unpaid loss and loss adjustment expenses


75,710




87,662


Unearned premiums


38,176




48,577


Reinsurance payable


96




1,033


LROC preferred units, at fair value


14,806




14,854


Senior unsecured debentures, at fair value





14,356


Subordinated debt, at fair value


35,754




28,471


Deferred income tax liability


4,738




4,173


Deferred service fees


50,277




48,788


Income taxes payable


246




2,984


Accrued expenses and other liabilities


39,143




36,821


Total Liabilities


$

258,946




$

287,719


Shareholders' Equity:








Class A preferred stock, no par value; unlimited number authorized; 262,876 and zero issued and
outstanding at June 30, 2014 and December 31, 2013, respectively


$

6,343




$












Common stock, no par value; unlimited number authorized; 16,429,761 and 16,429,761 issued and
outstanding at June 30, 2014 and December 31, 2013, respectively






Additional paid-in capital


325,631




324,803


Accumulated deficit


(305,636)




(298,930)


Accumulated other comprehensive income


10,366




9,601


Shareholders' equity attributable to common shareholders


36,704




35,474


Noncontrolling interests in consolidated subsidiaries


1,419




1,446


Total Shareholders' Equity


38,123




36,920


Total Liabilities and Shareholders' Equity


$

297,069




$

324,639


 

Non-U.S. GAAP Financial Measures

Operating Income (Loss)

Operating income (loss) represents one measure of the pretax profitability of Kingsway's segments and is derived by subtracting direct segment expenses from direct segment revenues.  Please refer to the section entitled "Non-U.S. GAAP Financial Measures" in the Management's Discussion and Analysis section of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 for a detailed description of this non-U.S. GAAP measure.

Adjusted Operating Income (Loss)

Adjusted operating income (loss) represents another measure used by the Company to assess the profitability of the Company's segments.  Adjusted operating income (loss) is computed by adding to operating income (loss) the net investment income, net realized gains and depreciation attributable to Kingsway's segments.  A reconciliation of operating income (loss) and adjusted operating income (loss) to net loss for the three and six months ended June 30, 2014 and 2013 is presented below:





(in thousands)

Three months ended June 30,


Six months ended June 30,



2014



2013



2014



2013


Segment operating income (loss)


1,480



(4,001)



3,651



(5,130)


Net investment income of segments


272



429



535



709


Net realized gains of segments


5,063



32



5,102



341


Depreciation of segments


256



366



511



722


Adjusted operating income (loss)


7,071



(3,174)



9,799



(3,358)


Net investment income not included in adjusted
operating income (loss)


69



387



219



687


Net realized gains (losses) not included in adjusted
operating income (loss)


28





28



(1,718)


Other-than-temporary impairment loss




(1,800)





(1,800)


Other income and expenses not allocated to
segments, net


(1,962)



(3,476)



(1,808)



(7,864)


Depreciation of segments


(256)



(366)



(511)



(722)


Stock based compensation expense, net of
forfeitures


(204)



(67)



(828)



(67)


Interest expense


(1,364)



(1,927)



(2,797)



(3,760)


Amortization of intangible assets


(409)



(508)



(823)



(1,066)


Contingent consideration expense


(267)



(155)



(534)



(310)


Impairment of asset held for sale


(1,180)



(1,446)



(1,180)



(1,446)


(Loss) gain on change in fair value of debt


(7,799)



2,338



(7,236)



(6,613)


Loss on disposal of subsidiary






(1,242)




Loss on buy-back of debt








(24)


Equity in net income of investee








255


Loss before income tax benefit


(6,273)



(10,194)



(6,913)



(27,806)


Income tax benefit


799



525



433



801


Net loss


(5,474)



(9,669)



(6,480)



(27,005)


 

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as "expects", "believes", "anticipates", "intends", "estimates", "seeks" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect Kingsway management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements.  For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward looking statements, please refer to the section entitled "Risk Factors" in the Company's 2013 Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.  Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise.

Additional Information

Additional information about Kingsway, including a copy of its 2013 Annual Report and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, can be accessed on the Canadian Securities Administrators' website at www.sedar.com, on the EDGAR section of the U.S. Securities and Exchange Commission's website at www.sec.gov or through the Company's website at www.kingsway-financial.com.

SOURCE Kingsway Financial Services Inc.