Kingsway Announces Second Quarter 2014 Results

08 Aug, 2014, 09:00 ET from Kingsway Financial Services Inc.

TORONTO, Aug. 8, 2014 /PRNewswire/ - (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.



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