Kingsway Announces Second Quarter 2016 Results

TORONTO, July 22, 2016 /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, 2016.  All amounts are in U.S. dollars unless indicated otherwise.

Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, "Kingsway continued to move forward on a number of growth initiatives throughout the first half of 2016 that are consistent with our long-term strategy of creating value through strategic investments, acquisitions and financings.  In the second quarter, we announced, and this week successfully closed, the acquisition of CMC Industries, Inc., which we view as the beginning of building a portfolio of real estate with strong tenants that will allow the Company to deploy its balance sheet and deferred tax assets at minimal risk.  We also restructured our existing Insurance Services segment with the acquisition of Argo Management Group and appointment of John T. ("JT") Fitzgerald.  JT is leading the Company's warranty businesses, where we are beginning to ramp up our expansion efforts and expect to see profitable growth."

Mr. Swets continued, "We also were very pleased to close this week 1347 Capital Corp.'s business combination with Limbach Holdings LLC, a commercial mechanical engineering and construction contractor.  Limbach is run by a strong management team led by CEO Charlie Bacon and has outperformed its peers in the non-residential construction market.  The process through which Limbach came public was challenging, but we were pleased to work through a solution that provides the necessary capital for the company to grow while retaining substantial upside potential for Kingsway and its shareholders.  We look forward to working closely with Charlie and his team in the coming years." 

Company Appoints Steve Harrison as Executive Vice President of its Insurance Management Team
Mr. Swets concluded, "We have continued to evaluate how to better take advantage of our traditional insurance business and were fortunate to have Steve Harrison join our insurance management team as Executive Vice President to help manage this operation.  He has successfully run profitable insurance businesses for over four decades and shares our view that the Company can achieve considerable improvements in its underwriting results."

Mr. Harrison has over 42 years of experience in the insurance industry.  Among his previous experiences, Mr. Harrison was the President and co-founder of USAuto Insurance Company, Inc. in 1995, which merged and went public in 2004 as First Acceptance Corporation (FAC).  Prior to that, he was the President of Harrison Brothers Insurance Agency, Inc., writing all lines of insurance from 1974 to 1995.  Mr. Harrison was the recipient of the 2007 Ernst & Young Entrepreneur of the Year Award.

Operating Results
The Company reported net loss attributable to common shareholders of $0.6 million, or $0.03 per diluted share, in the second quarter of 2016, compared to net income attributable to common shareholders of $1.8 million, or $0.09 per diluted share, in the second quarter of 2015. 

For the six months ended June 30, 2016, Kingsway reported net loss attributable to common shareholders of $2.1 million, or $0.11 per diluted share, compared to a net income attributable to common shareholders of $3.9 million, or $0.20 per diluted share, in the prior year period.

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

  • Operating loss was $1.1 million for the second quarter of 2016 compared to $2.5 million for the second quarter of 2015.
    • Insurance Underwriting segment operating income was $0.2 million for the second quarter of 2016 compared to operating loss of $0.5 million for the second quarter of 2015. 
    • Insurance Services segment operating loss was $0.8 million for the second quarter of 2016 compared to $0.1 million for the second quarter of 2015. 
    • Net investment income of $1.1 million was reported in the second quarter of 2016 compared to $0.5 million in the second quarter of 2015.
    • Net realized gains of $0.1 million were reported in the second quarter of 2016 compared to $0.1 million in the second quarter of 2015.
    • Other operating income and expense was a net expense of $1.7 million in the second quarter of 2016 compared to $2.5 million in the second quarter of 2015.
  • Adjusted operating loss was $0.6 million in the second quarter of 2016 compared to $0.1 million in the second quarter of 2015.
  • Book value decreased to $2.14 per share at June 30, 2016 from $2.22 per share at December 31, 2015. The Company also carries a valuation allowance, in the amount of $14.32 per share at June 30, 2016, against the deferred tax asset, primarily related to its loss carryforwards.

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,



2016

2015

2016

2015

Revenues:







Net premiums earned


$

31,813

$

30,200

$

61,240

$

59,230


Service fee and commission income


5,394

5,848

10,716

11,246


Net investment income


1,072

528

1,000

1,841


Net realized gains (losses)


67

53

(104)

53


Other-than-temporary impairment loss


(10)


Other income


2,791

2,514

5,165

10,871

Total revenues


41,137

39,143

78,017

83,231

Operating expenses:







Loss and loss adjustment expenses


24,838

24,187

48,335

46,140


Commissions and premium taxes


6,103

5,799

11,701

11,546


Cost of services sold


770

1,058

1,543

1,721


General and administrative expenses


10,826

10,175

20,377

21,751


Amortization of intangible assets


307

313

602

630


Contingent consideration (benefit) expense


(657)

110

(657)

254

Total operating expenses


42,187

41,642

81,901

82,042

Operating (loss) income


(1,050)

(2,499)

(3,884)

1,189

Other expenses (revenues), net:







Interest expense


1,108

1,414

2,201

2,805


Foreign exchange losses, net


9

760

10

1,152


(Gain) loss on change in fair value of debt


(1,068)

1,228

(3,596)

967


Loss on deconsolidation of subsidiary


4,420

4,420


Equity in net loss of investee


874

71

943

207

Total other expenses (revenues), net


923

7,893

(442)

9,551

Loss from continuing operations before income tax expense


(1,973)

(10,392)

(3,442)

(8,362)

Income tax expense


26

34

52

56

Loss from continuing operations


(1,999)

(10,426)

(3,494)

(8,418)

Income from discontinued operations, net of taxes


1,426

Gain on disposal of discontinued operations, net of taxes


1,124

11,259

1,124

11,259

Net (loss) income


(875)

833

(2,370)

4,267


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


(361)

(1,064)

(400)

160


Less: dividends on preferred stock


82

82

164

163


Net (loss) income attributable to common shareholders


$

(596)

$

1,815

$

(2,134)

$

3,944

Loss per share - continuing operations:







Basic:


$

(0.09)

$

(0.48)

$

(0.16)

$

(0.44)


Diluted:


$

(0.09)

$

(0.48)

$

(0.16)

$

(0.44)

Earnings per share - discontinued operations:







Basic:


$

0.06

$

0.57

$

0.06

$

0.64


Diluted:


$

0.06

$

0.57

$

0.06

$

0.64

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







Basic:


$

(0.03)

$

0.09

$

(0.11)

$

0.20


Diluted:


$

(0.03)

$

0.09

$

(0.11)

$

0.20

Weighted average shares outstanding (in '000s):







Basic:


19,818

19,710

19,764

19,710


Diluted:


19,818

19,710

19,764

19,710

 

 

Consolidated Balance Sheets

(in thousands, except per share data)






June 30, 2016


December 31, 2015


(unaudited)



Assets




Investments:







Fixed maturities, at fair value (amortized cost of $62,397 and $55,606, respectively)

$

63,003


$

55,559


Equity investments, at fair value (cost of $24,264 and $26,428, respectively)

24,698


27,559


Limited liability investments

21,768


20,141


Other investments, at cost which approximates fair value

5,435


4,077


Short-term investments, at cost which approximates fair value

670


400

Total investments

115,574


107,736

Cash and cash equivalents

39,887


51,701

Investment in investee

828


1,772

Accrued investment income

496


594

Premiums receivable, net of allowance for doubtful accounts of $135 and $165, respectively

31,915


27,090

Service fee receivable, net of allowance for doubtful accounts of $288 and $276, respectively

950


911

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

3,107


3,789

Reinsurance recoverable

959


1,422

Prepaid reinsurance premiums

91


7

Deferred acquisition costs, net

13,824


12,143

Income taxes recoverable

66


61

Property and equipment, net of accumulated depreciation of $12,632 and $12,537, respectively

5,373


5,577

Goodwill

10,078


10,078

Intangible assets, net of accumulated amortization of $6,611 and $6,009, respectively

14,865


14,736

Other assets

3,124


3,405

Total Assets

$

241,137


$

241,022

Liabilities and Shareholders' Equity








Liabilities:




Unpaid loss and loss adjustment expenses:







Property and casualty

$

52,195


$

55,471


Vehicle service agreements

2,975


2,975

Total unpaid loss and loss adjustment expenses

55,170


58,446

Unearned premiums

41,122


35,234

Reinsurance payable

284


145

Subordinated debt, at fair value

36,302


39,898

Deferred income tax liability

2,968


2,924

Deferred service fees

35,999


34,319

Accrued expenses and other liabilities

20,456


19,959

Total Liabilities

192,301


190,925





Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and
outstanding at June 30, 2016 and December 31, 2015, respectively; redemption amount of $6,572

6,411


6,394





Shareholders' Equity:




Common stock, no par value; unlimited number authorized; 19,842,806 and 19,709,706 issued and
outstanding at June 30, 2016 and December 31, 2015, respectively


Additional paid-in capital

342,864


341,646

Accumulated deficit

(311,292)


(308,995)

Accumulated other comprehensive income

9,500


9,300

Shareholders' equity attributable to common shareholders

41,072


41,951

Noncontrolling interests in consolidated subsidiaries

1,353


1,752

Total Shareholders' Equity

42,425


43,703

Total Liabilities and Shareholders' Equity

$

241,137


$

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 (losses), other-than-temporary impairment loss, equity in net loss of investee and net revenues of 1347 Advisors.  A reconciliation of segment operating loss and adjusted operating (loss) income to net (loss) income for the three and six months ended June 30, 2016 and 2015 is presented below:





(in thousands)


Three months ended June 30,

Six months ended June 30,



2016

2015

2016

2015

Segment operating loss


$

(599)

$

(582)

$

(994)

$

(446)

Net investment income


1,072

528

1,000

1,841

Net realized gains (losses)


67

53

(104)

53

Other-than-temporary impairment loss


(10)

Equity in net loss from investee


(874)

(71)

(943)

(207)

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


(281)

(55)

(345)

5,939

Adjusted operating (loss) income


(615)

(127)

(1,386)

7,170

Corporate operating expenses and other (1)


(1,659)

(2,020)

(3,496)

(5,304)

Amortization of intangible assets


(307)

(313)

(602)

(630)

Contingent consideration benefit (expense)


657

(110)

657

(254)

Interest expense


(1,108)

(1,414)

(2,201)

(2,805)

Foreign exchange losses, net


(9)

(760)

(10)

(1,152)

Gain (loss) on change in fair value of debt


1,068

(1,228)

3,596

(967)

Loss on deconsolidation of subsidiary


(4,420)

(4,420)

Loss from continuing operations before income tax expense


(1,973)

(10,392)

(3,442)

(8,362)

Income tax expense


(26)

(34)

(52)

(56)

Loss from continuing operations


(1,999)

(10,426)

(3,494)

(8,418)

Income from discontinued operations, net of taxes


1,426

Gain on disposal of discontinued operations, net of taxes


1,124

11,259

1,124

11,259

Net (loss) income


$

(875)

$

833

$

(2,370)

$

4,267

(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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