Correcting and Replacing - Kingsway Announces Fourth Quarter and Year-End 2016 Results

TORONTO, March 13, 2017 /CNW/ - (TSX: KFS, NYSE: KFS) In a release issued under the same headline on March 8, 2017, the Company failed to include in its net income attributable to shareholders $9.9 million of income tax benefit as a result of its acquisition of CMC Industries, Inc.

The corrected release follows:

Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its operating results for the fourth quarter and year ended December 31, 2016.  All amounts are in U.S. dollars unless indicated otherwise.

The Company reported net income attributable to common shareholders of $1.1 million, or $0.05 per diluted share, in the fourth quarter of 2016.  Significant events during the quarter included the following:

  • Insurance Underwriting segment incurred net unfavorable development of $7.6 million related to accident years 2015 and prior.
  • The increase in the fair value of the Company's trust preferred debt resulted in a $4.8 million loss.
  • Net investment income of $6.2 million included $4.7 million of income related to the Company's investment in 1347 Investors LLC, which owns securities in Limbach Holdings, Inc.
  • Completion of the fair value analysis related to the Company's acquisition of CMC resulted in $0.3 million of net income.
  • Income tax benefit includes $9.9 million, which reflects the partial release into income of the Company's valuation allowance that it carries against its deferred income tax assets, as a result of its acquisition of CMC.

 

Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, "Our fourth quarter earnings were affected meaningfully by the five significant events noted above.  One of those events related to historical performance in our non-standard automobile business unit.  We announced in July that Steve Harrison had joined our insurance management team as an executive vice president.  In August, we promoted Steve to President of our insurance operations.  Throughout the year, Steve and his team have launched a number of initiatives intended to improve the operating performance of our insurance operations, particularly with respect to strengthening the management of our Claim Department.  We have been aggressively increasing premium rates throughout the second half of 2016 and into 2017 and are actively pursuing initiatives related to increasing policy fee income, reducing bad debt expense, outsourcing the first notice of loss function, outsourcing much of the salvage and subrogation function and entering into an agreement with an outside vendor to migrate to a new policy administration and claim-handling operating platform sometime in 2017.  While we are not happy to have to report adverse development on old accident years, we are optimistic about the direction Steve is taking the insurance operations and the potential positive impact to our segment operating income from the implementation of these initiatives.  During the quarter, we recorded unfavorable development of approximately $9.1 million related to accident years 2015 and prior in our continuing operations while we recorded favorable development of approximately $1.5 million related to our continuing run-offs of Kingsway Amigo Insurance Company and Mendakota Casualty Company."

Mr. Swets continued, "We also reported a loss of $4.8 million during the quarter related to the increase in the fair value of our $90.5 million principal value of trust preferred debt, maturing from 2032 through 2034, as a result of increases in LIBOR and changes in the estimate of Kingsway's implied credit spread as developed by a third party.

"We are pleased to report another significant gain, related to our investment in 1347 Investors LLC, as a result of the previously announced business combination between 1347 Capital Corp. and Limbach Holdings LLC.  We reported $6.2 million of net investment income during the quarter, $4.7 million of which relates to our investment exposure to Limbach by virtue of our interest in 1347 Investors.  We are extremely satisfied with this investment which we initiated in July of 2014.  Since the combination between 1347 Capital Corp. and Limbach closed this past July, Kingsway has recorded an $8.8 million increase in its shareholders' equity as a result of this investment."

Mr. Swets concluded, "We have completed the fair value analysis of our acquisition of CMC for purposes of recording the assets and liabilities acquired.  The completion of the CMC exercise has resulted in our reporting a large income tax benefit as well as some reallocation of previously reported results between Leased Real Estate segment operating earnings and amortization expense, which is reported separately from segment results.  As a result, we are reporting a loss of $0.1 million during the fourth quarter for the Leased Real Estate segment, which includes CMC; we are separately reversing $0.4 million of amortization expense previously recorded during the third quarter; and we are reporting $9.9 million of income tax benefit related to the partial release of the valuation allowance we carry against our deferred income tax assets.  As a result, CMC contributed $10.2 million to our net income during the fourth quarter and $10.4 million to our net income since the time of the acquisition in July.  We feel that this income recognition reflects only a part of the long-term value we have an opportunity to create over the next 17 years from our acquisition of CMC.  We encourage you to read our 2016 Form 10-K once it is filed for more information about each of these events."

Operating Results
The Company reported net income attributable to common shareholders of $1.1 million, or $0.05 per diluted share, in the fourth quarter of 2016, compared to net loss attributable to common shareholders of $2.3 million, or $0.12 per diluted share, in the fourth quarter of 2015. 

For the year ended December 31, 2016, Kingsway reported net income attributable to common shareholders of $0.4 million, or $0.02 per diluted share, compared to net income attributable to common shareholders of $0.8 million, or $0.04 per diluted share, in the prior year period.

Following are highlights of Kingsway's fourth quarter 2016 results.  Operating income reflects the Company's core operating activities, including its reportable segments, passive investment portfolio, merchant banking activities and corporate operating expenses. 

  • Operating loss was $2.6 million for the fourth quarter of 2016 compared to operating loss of $0.9 million for the fourth quarter of 2015.
    • Insurance Underwriting segment operating loss was $8.0 million for the fourth quarter of 2016 compared to $0.8 million for the fourth quarter of 2015.
    • Insurance Services segment operating income was $0.9 million for the fourth quarter of 2016 compared to segment operating loss of $0.2 million for the fourth quarter of 2015.
    • Operating loss attributable to the Leased Real Estate segment was $0.1 million for the fourth quarter of 2016 compared to zero for the fourth quarter of 2015.
    • Net investment income of $6.2 million was reported for the fourth quarter of 2016 compared to $0.3 million for the fourth quarter of 2015.
    • Net realized gains of $0.4 million were reported for the fourth quarter of 2016 compared to $1.1 million for the fourth quarter of 2015.
    • Other operating income and expense was a net expense of $2.0 million for the fourth quarter of 2016 compared to $1.3 million for the fourth quarter of 2015.
  • Adjusted operating loss was $1.1 million for the fourth quarter of 2016 compared to $0.2 million for the fourth quarter of 2015.
  • Book value increased to $2.65 per share at December 31, 2016 from $2.22 per share at December 31, 2015, and from $2.15 per share at September 30, 2016. The Company also carries a valuation allowance, in the amount of $12.89 per share at December 31, 2016, against the deferred tax asset, primarily related to its loss carryforwards.

 

Management Change
Kingsway is also taking this opportunity to announce that John T. Fitzgerald, currently Executive Vice President, will become President and Chief Operating Officer.  Larry G. Swets, Jr., currently Kingsway's President and Chief Executive Officer, will remain as the Company's Chief Executive Officer.  Mr. Swets stated, "We have been impressed with JT since he joined us last April.  We are pleased with the turnaround of the Insurance Services segment, which reported segment operating income for the second consecutive quarter since we announced in July that we had restructured the segment with the appointment of JT to lead our Company's warranty businesses.  We expect continued evidence of profitable growth from this segment during 2017.  Recently, JT has also assumed responsibility for supervising our non-standard automobile business unit.  It gives me great pleasure to recognize JT's contributions to our Company with this promotion."

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)



Three months ended December 31,

Years ended December 31,


2016

2015

2016

2015

Revenues:

(unaudited)


(unaudited)



Net premiums earned

$

33,419

$

29,006

$

127,608

$

117,433


Service fee and commission income

7,186

5,536

24,232

22,966


Rental income

2,993

5,419


Net investment income

6,164

286

8,200

2,918


Net realized gains

418

1,061

360

1,197


Other-than-temporary impairment loss

(157)

(157)

(10)


Other income

2,765

2,288

10,968

15,462

Total revenues

52,788

38,177

176,630

159,966

Operating expenses:






Loss and loss adjustment expenses

34,470

23,758

109,609

92,812


Commissions and premium taxes

6,933

5,574

24,562

22,773


Cost of services sold

1,269

915

4,193

4,044


General and administrative expenses

11,303

10,012

41,629

41,760


Leased real estate segment interest expense

1,579

2,899


Amortization of intangible assets

(139)

307

1,242

1,244


Contingent consideration benefit

(1,503)

(657)

(1,139)

Total operating expenses

55,415

39,063

183,477

161,494

Operating loss

(2,627)

(886)

(6,847)

(1,528)

Other (revenues) expenses, net:






Interest expense not allocated to segments

1,167

1,225

4,496

5,278


Foreign exchange losses, net

1

5

15

1,215


Loss (gain) on change in fair value of debt

4,845

33

3,721

(1,458)


(Gain) loss on deconsolidation of subsidiaries

(5,643)

4,420


Equity in net loss (income) of investees

13

(60)

1,017

339

Total other expenses, net

6,026

1,203

3,606

9,794

Loss from continuing operations before income tax (benefit) expense

(8,653)

(2,089)

(10,453)

(11,322)

Income tax (benefit) expense

(9,827)

14

(9,720)

93

Income (loss) from continuing operations

1,174

(2,103)

(733)

(11,415)

(Loss) income from discontinued operations, net of taxes

(9)

1,417

Gain on disposal of discontinued operations, net of taxes

131

8

1,255

11,267

Net income (loss)

1,305

(2,104)

522

1,269


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

71

88

(281)

162


Less: dividends on preferred stock

124

83

398

329


Net income (loss) attributable to common shareholders

$

1,110

$

(2,275)

$

405

$

778

Earnings (loss) per share - continuing operations:






Basic:

$

0.05

$

(0.12)

$

(0.04)

$

(0.60)


Diluted:

$

0.04

$

(0.12)

$

(0.04)

$

(0.60)

Earnings per share - discontinued operations:






Basic:

$

0.01

$

$

0.06

$

0.64


Diluted:

$

0.01

$

$

0.06

$

0.64

Earnings (loss) per share – net income (loss) attributable to common shareholders:






Basic:

$

0.05

$

(0.12)

$

0.02

$

0.04


Diluted:

$

0.05

$

(0.12)

$

0.02

$

0.04

Weighted average shares outstanding (in '000s):






Basic:

20,633

19,710

20,003

19,710


Diluted:

22,430

19,710

20,003

19,710

 

 

Consolidated Balance Sheets

(in thousands, except share data)



December 31, 2016


December 31, 2015





Assets




Investments:





Fixed maturities, at fair value (amortized cost of $62,136 and $55,606, respectively)

$

61,764


$

55,559


Equity investments, at fair value (cost of $19,099 and $26,428, respectively)

23,230


27,559


Limited liability investments

22,974


20,141


Limited liability investment, at fair value

10,700



Other investments, at cost which approximates fair value

7,975


4,077


Short-term investments, at cost which approximates fair value

401


400

Total investments

127,044


107,736

Cash and cash equivalents

36,475


51,701

Investments in investees

3,116


1,772

Accrued investment income

790


594

Premiums receivable, net of allowance for doubtful accounts of $115 and $165, respectively

31,564


27,090

Service fee receivable, net of allowance for doubtful accounts of $274 and $276, respectively

1,320


911

Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively

4,692


3,789

Reinsurance recoverable

784


1,422

Deferred acquisition costs, net

13,609


12,143

Income taxes recoverable


61

Property and equipment, net of accumulated depreciation of $10,603 and $12,537, respectively

116,961


5,577

Goodwill

71,061


10,078

Intangible assets, net of accumulated amortization of $7,181 and $6,009, respectively

89,017


14,736

Other assets

4,588


3,412

Total Assets

$

501,021


$

241,022

Liabilities and Shareholders' Equity








Liabilities:




Unpaid loss and loss adjustment expenses:





Property and casualty

$

53,795


$

55,471


Vehicle service agreements

2,915


2,975

Total unpaid loss and loss adjustment expenses

56,710


58,446

Unearned premiums

40,176


35,234

Reinsurance payable

100


145

Note payable

190,074


Subordinated debt, at fair value

43,619


39,898

Deferred income tax liability

48,720


2,924

Deferred service fees

35,822


34,319

Income taxes payable

2,051


Accrued expenses and other liabilities

20,487


19,959

Total Liabilities

437,759


190,925





Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at December 31, 2016 and December 31, 2015, respectively; redemption amount of $6,572

6,427


6,394





Shareholders' Equity:




Common stock, no par value; unlimited number authorized; 21,458,190 and 19,709,706 issued and outstanding at December 31, 2016 and December 31, 2015, respectively


Additional paid-in capital

353,882


341,646

Accumulated deficit

(297,668)


(297,209)

Accumulated other comprehensive loss

(208)


(2,486)

Shareholders' equity attributable to common shareholders

56,006


41,951

Noncontrolling interests in consolidated subsidiaries

829


1,752

Total Shareholders' Equity

56,835


43,703

Total Liabilities and Shareholders' Equity

$

501,021


$

241,022

 

Non-U.S. GAAP Financial Measures
Segment Operating Loss

Segment operating 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 Annual Report on Form 10-K for the year ended December 31, 2015 for a detailed description of this non-U.S. GAAP measure.

Adjusted Operating (Loss) Income

Adjusted operating (loss) income represents another measure used by the Company to assess the profitability of the Company's segments, its passive investment portfolio and its merchant banking activities.  Adjusted operating (loss) income is comprised of segment operating loss as well as net investment income, net realized gains, other-than-temporary impairment loss, equity in net (loss) income of investees and net revenues of 1347 Advisors.  A reconciliation of segment operating loss and adjusted operating (loss) income to net income (loss) for the three months and years ended December 31, 2016 and 2015 is presented below:




(in thousands)

Three months ended December 31,

Years ended December 31,


2016

2015

2016

2015

Segment operating loss

$

(7,228)

$

(928)

$

(7,069)

$

(1,775)

Net investment income

6,164

286

8,200

2,918

Net realized gains

418

1,061

360

1,197

Other-than-temporary impairment loss

(157)

(157)

(10)

Equity in net (loss) income of investees

(13)

60

(1,017)

(339)

Revenues of 1347 Advisors, net of related outside professional and advisory expenses

(280)

(639)

(825)

5,167

Adjusted operating (loss) income

(1,096)

(160)

(508)

7,158

Equity in net loss (income) of investees

13

(60)

1,017

339

Corporate operating expenses and other (1)

(1,683)

(1,862)

(6,771)

(8,920)

Amortization of intangible assets

139

(307)

(1,242)

(1,244)

Contingent consideration benefit

1,503

657

1,139

Operating loss

(2,627)

(886)

(6,847)

(1,528)

Equity in net (loss) income of investees

(13)

60

(1,017)

(339)

Interest expense not allocated to segments

(1,167)

(1,225)

(4,496)

(5,278)

Foreign exchange losses, net

(1)

(5)

(15)

(1,215)

(Loss) gain on change in fair value of debt

(4,845)

(33)

(3,721)

1,458

Gain (loss) on deconsolidation of subsidiary

5,643

(4,420)

Loss from continuing operations before income tax benefit (expense)

(8,653)

(2,089)

(10,453)

(11,322)

Income tax benefit (expense)

9,827

(14)

9,720

(93)

Income (loss) from continuing operations

1,174

(2,103)

(733)

(11,415)

(Loss) income from discontinued operations, net of taxes

(9)

1,417

Gain on disposal of discontinued operations, net of taxes

131

8

1,255

11,267

Net income (loss)

$

1,305

$

(2,104)

$

522

$

1,269

 

(1)

Corporate operating expenses and other includes corporate operating expenses, stock-based compensation expense and non-cash expenses related to the consolidation of KLROC Trust.

 

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 2015 Annual Report on Form 10-K.  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 2015 Annual Report and filings on Forms 10-Q and 8-K, 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

For a current review of the Company and a discussion of its plan to create and sustain long-term shareholder value, management invites you to review its Annual Letter to Shareholders, which may be accessed at the Company's website or directly at http://bit.ly/kfs2015.

SOURCE Kingsway Financial Services Inc.

RELATED LINKS
http://www.kingsway-financial.com

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