Kingsway Announces Second Quarter 2017 Results

TORONTO, Aug. 7, 2017 /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, 2017.  All amounts are in U.S. dollars unless indicated otherwise.

Management Comments
Larry G. Swets, Jr., Chief Executive Officer, stated, "Our segment operating income continued to improve.  The Extended Warranty segment recorded another quarter of improved results, which it has consistently demonstrated during the past year.  Our Leased Real Estate segment contributed another steady quarter of earnings.  And, in the Insurance Underwriting segment, we continue to make progress on the implementation of multiple initiatives under our new insurance management team. 

"On the other hand, our results this quarter were negatively affected by several non-cash items.  We recorded a $2.7 million loss on change in the fair value of our subordinated debt, primarily driven by a reduction in the assumed credit spread used in our valuation model.  We recorded a $2.1 million fair value loss for our investment in 1347 Investors LLC, which reflects a mark to market in the Limbach common shares held by 1347 Investors.  Our net investment income reflected a $1.0 million loss related to the one-time impairment of an investment held by one of our limited liability company investments.  And, we recorded $1.0 million of income tax expense related to contingent consideration benefits arising from our prior business combinations with IWS and Trinity."

Operating Results
The Company reported net loss attributable to common shareholders of $7.9 million (including a non-cash loss of $2.7 million attributable to change in fair value of debt), or $0.37 per diluted share, in the second quarter of 2017, compared to net loss attributable to common shareholders of $0.6 million (including a non-cash gain of $1.1 million attributable to change in fair value of debt), or $0.03 per diluted share, in the second quarter of 2016.  

Following are highlights of Kingsway's second quarter 2017 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 $3.3 million for the second quarter of 2017 compared to $1.1 million for the second quarter of 2016.
    • Insurance Underwriting segment operating loss was $0.4 million, inclusive of $0.8 million of unfavorable development for property and casualty loss and loss adjustment expenses from prior accident years, for the second quarter of 2017 compared to segment operating income of $0.2 million, inclusive of $0.0 million of favorable development for property and casualty loss and loss adjustment expenses from prior accident years, for the second quarter of 2016.
    • Extended Warranty segment (formerly Insurance Services segment) operating income was $0.7 million for the second quarter of 2017 compared to segment operating loss of $0.8 million for the second quarter of 2016.
    • Operating income attributable to the Leased Real Estate segment was $0.9 million for the second quarter of 2017 compared to zero for the second quarter of 2016.
    • Net investment loss of $2.4 million was reported for the second quarter of 2017 compared to net investment income of $1.1 million for the second quarter of 2016.
    • Net realized gains of $0.7 million were reported for the second quarter of 2017 compared to $0.1 million for the second quarter of 2016.
    • Other operating income and expense was a net expense of $2.8 million, inclusive of $0.9 million of compensation expense related to 2016 activities, for the second quarter of 2017 compared to $1.7 million for the second quarter of 2016.
  • Adjusted operating loss was $0.8 million for the second quarter of 2017 compared to $0.5 million for the second quarter of 2016.
  • Book value decreased to $2.17 per share at June 30, 2017 from $2.65 per share at December 31, 2016. The Company also carries a valuation allowance, in the amount of $13.08 per share at June 30, 2017, 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 subsidiaries primarily in the insurance, extended warranty, asset management and real estate industries and pursues non-control investments and other 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,


2017


2016


2017


2016

Revenues:









Net premiums earned

$

33,518


$

31,813


$

66,440


$

61,240


Service fee and commission income

6,873


5,394


13,435


10,716


Rental income

3,341



6,682



Net investment (loss) income

(2,366)


1,072


(1,663)


1,000


Net realized gains (losses)

734


67


1,132


(104)


Other income

2,815


2,791


5,630


5,165

Total revenues

44,915


41,137


91,656


78,017

Operating expenses:









Loss and loss adjustment expenses

27,468


24,838


53,878


48,335


Commissions and premium taxes

6,475


6,103


12,753


11,701


Cost of services sold

1,291


770


2,595


1,543


General and administrative expenses

11,380


10,826


22,652


20,377


Leased real estate segment interest expense

1,569



3,143



Amortization of intangible assets

289


307


580


602


Contingent consideration benefit

(212)


(657)


(212)


(657)


Impairment of intangible assets



250


Total operating expenses

48,260


42,187


95,639


81,901

Operating loss

(3,345)


(1,050)


(3,983)


(3,884)

Other expenses (revenues), net:









Interest expense not allocated to segments

1,216


1,108


2,375


2,201


Foreign exchange losses, net


9


4


10


Loss (gain) on change in fair value of debt

2,702


(1,068)


4,591


(3,596)


Equity in net loss (income) of investees

145


874


(2,240)


943

Total other expenses (revenues), net

4,063


923


4,730


(442)

Loss from continuing operations before income tax expense

(7,408)


(1,973)


(8,713)


(3,442)

Income tax expense

1,251


26


1,430


52

Loss from continuing operations

(8,659)


(1,999)


(10,143)


(3,494)

Gain on disposal of discontinued operations, net of taxes

1,017


1,124


1,017


1,124

Net loss

(7,642)


(875)


(9,126)


(2,370)


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

100


(361)


205


(400)


Less: dividends on preferred stock

123


82


244


164


Net loss attributable to common shareholders

$

(7,865)


$

(596)


$

(9,575)


$

(2,134)

Loss per share - continuing operations:









Basic:

$

(0.41)


$

(0.09)


$

(0.49)


$

(0.16)


Diluted:

$

(0.41)


$

(0.09)


$

(0.49)


$

(0.16)

Earnings per share - discontinued operations:









Basic:

$

0.05


$

0.06


$

0.05


$

0.06


Diluted:

$

0.05


$

0.06


$

0.05


$

0.06

Loss per share – net loss attributable to common shareholders:









Basic:

$

(0.37)


$

(0.03)


$

(0.45)


$

(0.11)


Diluted:

$

(0.37)


$

(0.03)


$

(0.45)


$

(0.11)

Weighted-average shares outstanding (in '000s):









Basic:

21,458


19,818


21,458


19,764


Diluted:

21,458


19,818


21,458


19,764

 

Consolidated Balance Sheets

(in thousands, except share data)





June 30, 2017

December 31, 2016


(unaudited)


Assets



Investments:






Fixed maturities, at fair value (amortized cost of $57,172 and $62,136, respectively)

$

56,965

$

61,764


Equity investments, at fair value (cost of $16,699 and $19,099, respectively)

19,441

23,230


Limited liability investments

25,533

22,974


Limited liability investment, at fair value

8,220

10,700


Other investments, at cost which approximates fair value

7,550

7,975


Short-term investments, at cost which approximates fair value

151


401

Total investments

117,860

127,044

Cash and cash equivalents

33,776

36,475

Investment in investee

5,355

3,116

Accrued investment income

893

790

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

30,113

31,564

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

1,408

1,320

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

6,765

4,692

Reinsurance recoverable

569

784

Deferred acquisition costs, net

13,709

13,609

Property and equipment, net of accumulated depreciation of $12,894 and $10,603, respectively

114,809

116,961

Goodwill

71,061

71,061

Intangible assets, net of accumulated amortization of $7,761 and $7,181, respectively

88,187

89,017

Other assets

4,539

4,588

Total Assets

$

489,044

$

501,021

Liabilities and Shareholders' Equity



Liabilities:



Unpaid loss and loss adjustment expenses:




Property and casualty

$

45,874

$

53,795


Vehicle service agreements


2,794


2,915

Total unpaid loss and loss adjustment expenses


48,668


56,710

Unearned premiums


40,770


40,176

Reinsurance payable


87


100

Note payable


188,328


190,074

Subordinated debt, at fair value


48,210


43,619

Deferred income tax liability


49,726


48,720

Deferred service fees


37,883


35,822

Income taxes payable


2,352


2,051

Accrued expenses and other liabilities


19,912


20,487

Total Liabilities

435,936

437,759




Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and
outstanding at June 30, 2017 and December 31, 2016, respectively; redemption amount of $6,572

6,444

6,427




Shareholders' Equity:



Common stock, no par value; unlimited number authorized; 21,458,190 and 21,458,190 issued and
outstanding at June 30, 2017 and December 31, 2016, respectively

Additional paid-in capital

354,422

353,882

Accumulated deficit

(307,328)

(297,668)

Accumulated other comprehensive loss

(1,467)

(208)

Shareholders' equity attributable to common shareholders

45,627

56,006

Noncontrolling interests in consolidated subsidiaries

1,037

829

Total Shareholders' Equity

46,664

56,835

Total Liabilities, Class A preferred stock and Shareholders' Equity

$

489,044

$

501,021

 

Non-U.S. GAAP Financial Measures

Segment Operating Income (Loss)

Segment 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 Annual Report on Form 10-K for the year ended December 31, 2016 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 income (loss) as well as net investment (loss) income, net realized gains (losses), equity in net (loss) income of investees and merchant banking transaction expenses, net.  A reconciliation of segment operating income (loss) and adjusted operating (loss) income to net loss for the three and six months ended June 30, 2017 and 2016 is presented below:




(in thousands)

Three months ended June 30,

Six months ended June 30,


2017

2016

2017

2016

Segment operating income (loss)

$

1,140

$

(599)

$

1,902

$

(994)

Net investment (loss) income

(2,366)

1,072

(1,663)

1,000

Net realized gains (losses)

734

67

1,132

(104)

Equity in net (loss) income of investees

(145)

(874)

2,240

(943)

Merchant banking transactions expenses, net

(199)

(202)

(361)

(266)

Adjusted operating (loss) income

(836)

(536)

3,250

(1,307)

Equity in net loss (income) of investees

145

874

(2,240)

943

Corporate operating expenses and other (1)

(2,577)

(1,738)

(4,375)

(3,575)

Amortization of intangible assets

(289)

(307)

(580)

(602)

Contingent consideration benefit

212

657

212

657

Impairment of intangible assets

(250)

Operating loss

(3,345)

(1,050)

(3,983)

(3,884)

Equity in net (loss) income of investees

(145)

(874)

2,240

(943)

Interest expense not allocated to segments

(1,216)

(1,108)

(2,375)

(2,201)

Foreign exchange losses, net

(9)

(4)

(10)

(Loss) gain on change in fair value of debt

(2,702)

1,068

(4,591)

3,596

Loss before income tax expense

(7,408)

(1,973)

(8,713)

(3,442)

Income tax expense

(1,251)

(26)

(1,430)

(52)

Loss from continuing operations

(8,659)

(1,999)

(10,143)

(3,494)

Gain on disposal of discontinued operations, net of taxes

1,017

1,124

1,017

1,124

Net loss

$

(7,642)

$

(875)

$

(9,126)

$

(2,370)

(1)

Corporate operating expenses and other includes corporate operating expenses and stock-based compensation expense.

 

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 2016 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 2016 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/kingsway2016.

SOURCE Kingsway Financial Services Inc.

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

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