Kingsway Announces Second Quarter 2015 Results

TORONTO, July 29, 2015 /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, 2015.  All amounts are in U.S. dollars unless indicated otherwise.

Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, "We continued to harvest gains from prior investments during the first half of 2015.  The sale of ARS in April was truly a 'win-win,' as we were able to execute on our long-term value building strategy through a sale with continued potential upside for Kingsway in the form of future earnouts, while providing ARS with the platform it needed to achieve further growth.  We were able to utilize gains from this sale and the buy-back of the Management Services Agreement from 1347 Property Insurance Holdings, Inc. to further improve our capital position."

Mr. Swets continued, "The repayment of our KLROC debt represents another milestone in the turnaround of our Company, as we will save almost $2 million in cash debt service per year.  After having inherited $341.0 million of outstanding debt as of December 31, 2008, we now have only $90.5 million of remaining outstanding debt, in the form of trust preferred securities which do not begin to mature until 2032. 

"Kingsway is now a much simpler company.  We own two warranty businesses and a non-standard automobile insurance business.  We have a significant and growing portfolio of attractive passive investments.  Our sale of ARS provides new resources to continue our merchant banking activities.  Finally, we have legacy holding company operating expenses which we continue to manage more efficiently.  Those four activities basically represent your investment in Kingsway and how you should evaluate us.  We believe most of the extraordinary, legacy, non-cash accounting items, such as the loss on deconsolidation we are reporting this quarter, should now be behind us.  We are now looking actively at options to leverage our considerable deferred tax asset in seeking fundamentally strong investment opportunities with asymmetric risk / reward profiles.  We have never felt more confident about our future since your current management team joined the Company."

Operating Results
The Company reported net income attributable to common shareholders of $1.8 million, or $0.09 per diluted share, in the second quarter of 2015, compared to a net loss attributable to common shareholders of $5.0 million, or $0.30 per diluted share, in the second quarter of 2014. 

For the six months ended June 30, 2015, Kingsway reported net income attributable to common shareholders of $3.9 million, or $0.20 per diluted share, compared to a net loss attributable to common shareholders of $6.7 million, or $0.41 per diluted share, in the prior year period.

Following are highlights of Kingsway's second quarter 2015 results.  Operating (loss) 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 $2.5 million for the second quarter of 2015 compared to income of $1.3 million for the second quarter of 2014.
    • Insurance Underwriting segment operating loss was $0.5 million for the second quarter of 2015 compared to income of $0.3 million for the second quarter of 2014.
    • Insurance Services segment operating loss was $0.1 million for the second quarter of 2015 compared to $0.2 million for the second quarter of 2014.
    • Net investment income of $0.5 million was reported in the second quarter of 2015 compared to $0.3 million in the second quarter of 2014.
    • Net realized gains of $0.1 million were reported in the second quarter of 2015 compared to $5.1 million in the second quarter of 2014, which was primarily from the liquidation of investments in the Company's passive portfolio.
    • Other operating income and expense was a net expense of $2.5 million in the second quarter of 2015 compared to $4.2 million in the second quarter of 2014.
  • Adjusted operating loss was $0.1 million in the second quarter of 2015 compared with income of $5.5 million in the second quarter of 2014.
  • Book value increased to $2.46 per share at June 30, 2015 from $2.12 per share at December 31, 2014. The Company also carries a valuation allowance, in the amount of $14.42 per share at June 30, 2015, against the deferred tax asset, primarily related to its loss carryforwards.

The following events occurred during the second quarter of 2015:

  • On April 1, 2015, the Company closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. ("ARS"), to National General Holdings Corp. for $47 million in cash and potential future earnout payments. ARS is a managing general agent and third-party administrator licensed in twenty-two states with a primary focus on the assigned risk automobile market. As a result, ARS, previously disclosed as part of the Insurance Services segment, has been classified as a discontinued operation. The Company recorded a net gain on disposal of $11.3 million during the second quarter of 2015.

  • The Company repaid the C$15.8 million outstanding on its LROC preferred units due June 30, 2015.

  • During the second quarter, the Company's controlling interest in Kingsway Linked Return of Capital Trust ("KLROC Trust") was reduced to zero upon the Company's repayment of its C$15.8 million outstanding on its LROC preferred units due June 30, 2015. As a result, the Company recorded a non-cash loss on deconsolidation of subsidiary of $4.4 million. This reported loss results from removing the net assets and accumulated other comprehensive loss of KLROC Trust from the Company's Consolidated Balance Sheets. The deconsolidation reduced consolidated shareholders' equity by $2.8 million at June 30, 2015.

  • On April 30, 2015, the Company distributed its Annual Letter to Shareholders. 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/kfs2014.

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,




2015




2014




2015




2014

Revenues:

















Net premiums earned


$

30,200



$

28,755



$

59,230



$

60,675


Service fee and commission income


5,848



6,026



11,246



12,091


Net investment income


528



341



1,841



754


Net realized gains


53



5,091



53



5,130


Other-than-temporary impairment loss






(10)




Other income


2,514



2,286



10,871



4,560

Total revenues


39,143



42,499



83,231



83,210

Operating expenses:













Loss and loss adjustment expenses


24,187



21,794



46,140



42,855


Commissions and premium taxes


5,799



5,532



11,546



12,085


Cost of services sold


1,058



937



1,721



1,793


General and administrative expenses


10,175



11,066



21,751



22,990


Amortization of intangible assets


313



409



630



823


Contingent consideration expense


110



267



254



534


Impairment of asset held for sale




1,180





1,180

Total operating expenses


41,642



41,185



82,042



82,260

Operating (loss) income


(2,499)



1,314



1,189



950

Other expenses, net:













Interest expense


1,414



1,364



2,805



2,797


Foreign exchange losses (gains), net


760



(175)



1,152



41


Loss on change in fair value of debt


1,228



7,799



967



7,236


Loss on disposal of subsidiary








1,242


Loss on deconsolidation of subsidiary


4,420





4,420




Equity in net loss of investee


71





207



Total other expenses, net


7,893



8,988



9,551



11,316

Loss from continuing operations before income tax expense (benefit)


(10,392)



(7,674)



(8,362)



(10,366)

Income tax expense (benefit)


34



(1,059)



56



(999)

Loss from continuing operations


(10,426)



(6,615)



(8,418)



(9,367)

Income from discontinued operations, net of taxes




1,141



1,426



2,887

Gain on disposal of discontinued operations, net of taxes


11,259





11,259



Net income (loss)


833



(5,474)



4,267



(6,480)


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


(1,064)



(558)



160



95


Less: dividends on preferred stock


82



82



163



135


Net income (loss) attributable to common shareholders


$

1,815



$

(4,998)



$

3,944



$

(6,710)

Loss per share - continuing operations:

















Basic:


$

(0.48)



$

(0.37)



$

(0.44)



$

(0.58)


Diluted:


$

(0.48)



$

(0.37)



$

(0.44)



$

(0.58)

Earnings per share - discontinued operations:

















Basic:


$

0.57



$

0.07



$

0.64



$

0.18


Diluted:


$

0.57



$

0.07



$

0.64



$

0.18

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

















Basic:


$

0.09



$

(0.30)



$

0.20



$

(0.41)


Diluted:


$

0.09



$

(0.30)



$

0.20



$

(0.41)

Weighted average shares outstanding (in '000s):

















Basic:



19,710




16,430




19,710




16,430


Diluted:



19,710




16,430




19,710




16,430

Consolidated Balance Sheets

(in thousands, except per share data)










June 30, 2015


December 31, 2014




(unaudited)




Assets







Investments:








Fixed maturities, at fair value (amortized cost of $58,403 and $56,000, respectively)


$

58,733


$

56,195


Equity investments, at fair value (cost of $21,346 and $16,579, respectively)


24,446


19,618


Limited liability investments


12,688


7,294


Other investments, at cost which approximates fair value


3,527


3,576


Short-term investments, at cost which approximates fair value


400


400

Total investments


99,794


87,083

Cash and cash equivalents


86,175


71,234

Investment in investee


1,904


2,115

Accrued investment income


703


141

Premiums receivable, net of allowance for doubtful accounts of $258 and $1,889, respectively


29,792


28,885

Service fee receivable, net of allowance for doubtful accounts of $247 and $247, respectively


1,115


964

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


6,852


5,145

Reinsurance recoverable


1,505


3,652

Prepaid reinsurance premiums


91


8

Deferred acquisition costs, net


12,617


12,197

Income taxes recoverable


57


74

Property and equipment, net of accumulated depreciation of $12,261 and $15,751, respectively


5,795


5,975

Goodwill


10,078


10,078

Intangible assets, net of accumulated amortization of $5,395 and $4,765, respectively


15,350


15,980

Other assets


3,282


3,638

Assets held for sale



54,553

Total Assets


$

275,110


$

301,722

Liabilities and Shareholders' Equity














Liabilities:







Unpaid loss and loss adjustment expenses:








Property and casualty


$

58,219


$

63,895


Vehicle service agreements



2,975



2,975

Total unpaid loss and loss adjustment expenses



61,194



66,870

Unearned premiums



37,848



36,432

Reinsurance payable



557



525

LROC preferred units, at fair value





13,618

Subordinated debt, at fair value



42,324



40,659

Deferred income tax liability



2,880



2,837

Deferred service fees



34,696



35,096

Accrued expenses and other liabilities



40,728



35,836

Liabilities held for sale



21,653

Total Liabilities


220,227


253,526






Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at June 30, 2015 and December 31, 2014, respectively


6,377


6,330






Shareholders' Equity:





Common stock, no par value; unlimited number authorized; 19,709,706 and 19,709,706 issued and outstanding at June 30, 2015 and December 31, 2014, respectively



Additional paid-in capital


341,249


340,844

Accumulated deficit


(305,764)


(312,050)

Accumulated other comprehensive income


11,271


8,670

Shareholders' equity attributable to common shareholders


46,756


37,464

Noncontrolling interests in consolidated subsidiaries


1,750


4,402

Total Shareholders' Equity


48,506


41,866

Total Liabilities and Shareholders' Equity


$

275,110


$

301,722

Non-U.S. GAAP Financial Measures

Segment Operating (Loss) Income

Segment operating (loss) income 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, 2014 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) income as well as net investment income, net realized gains, other-than-temporary impairment loss, equity in net loss of investee and net revenues of 1347 Advisors.  A reconciliation of segment operating (loss) income and adjusted operating (loss) income to net income (loss) for the three and six months ended June 30, 2015 and 2014 is presented below:







(in thousands)


Three months ended June 30,



Six months ended June 30,




2015




2014




2015




2014

Segment operating income (loss)


$

(582)



$

78



$

(446)



$

197

Net investment income


528



341



1,841



754

Net realized gains


53



5,091



53



5,130

Other-than-temporary impairment loss






(10)



Equity in net loss from investee


(71)





(207)



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


(55)



3



5,939



3

Adjusted operating income (loss)


(127)



5,513



7,170



6,084

Corporate operating expenses and other (1)


(2,020)



(2,343)



(5,304)



(2,597)

Amortization of intangible assets


(313)



(409)



(630)



(823)

Contingent consideration expense


(110)



(267)



(254)



(534)

Impairment of asset held for sale




(1,180)





(1,180)

Interest expense


(1,414)



(1,364)



(2,805)



(2,797)

Foreign exchange gains (losses), net


(760)



175



(1,152)



(41)

Loss on change in fair value of debt


(1,228)



(7,799)



(967)



(7,236)

Loss on disposal of subsidiary








(1,242)

Loss on deconsolidation of subsidiary


(4,420)





(4,420)



Loss from continuing operations before income tax (expense) benefit


(10,392)



(7,674)



(8,362)



(10,366)

Income tax (expense) benefit


34



(1,059)



56



(999)

Loss from continuing operations


(10,426)



(6,615)



(8,418)



(9,367)

Income from discontinued operations, net of taxes




1,141



1,426



2,887

Gain on disposal of discontinued operations, net of taxes


11,259





11,259



Net income (loss)


$

833



$

(5,474)



$

4,267



$

(6,480)

(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 2014 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 2014 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

 

SOURCE Kingsway Financial Services Inc.

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

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