Kingsway Reports Fourth Quarter and Year-End Results

TORONTO, March 22, 2013 /PRNewswire/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its financial results for the fourth quarter and year ended December 31, 2012. All amounts are in U.S. dollars unless indicated otherwise.

The Company reported a net loss of $13.0 million, or a loss of $0.99 per diluted share, for the fourth quarter and a net loss of $53.3 million, or a loss of $4.05 per diluted share, for the year.  The book value has decreased from $8.90 per share at December 31, 2011 to $4.97 per share at December 31, 2012. The Company also carries a valuation allowance, in the amount of $20.20 per share at December 31, 2012, against the deferred tax asset, primarily related to its loss carryforwards.  All per share amounts have been adjusted for all periods to reflect the share consolidation implemented as of July 3, 2012, whereby every four of the Company's common shares that were issued and outstanding were automatically combined into one issued and outstanding common share, without any change in the par value of such shares.

The following are the highlights of the fourth quarter of 2012:

Operational results

  • Net operating loss of $5.7 million was recorded in the Insurance Underwriting segment for the fourth quarter ($29.5 million year to date).

  • Net operating income of $0.6 million was recorded in the Insurance Services segment for the fourth quarter ($3.5 million year to date).

  • Net investment income and realized gains of $0.5 million were recorded for the fourth quarter ($4.3 million year to date).

  • Other-than-temporary impairment loss of $2.2 million was recorded for the fourth quarter ($2.7 million year to date).

  • Net loss of $6.2 million not allocated to any segment was recorded in the fourth quarter ($28.9 million year to date). This includes gain on change in fair value of debt of $0.7 million (loss of $9.2 million year to date); equity in net income of investee of $1.1 million (loss of $1.0 million year to date); and interest expense of $1.2 million ($4.5 million year to date) related to the Company's subordinated debt and currently being deferred.  None of these three items impacted the Company's cash flows during the fourth quarter and year ended December 31, 2012.

On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments.  As part of the restructuring, the Company intends to streamline its non-standard automobile property and casualty insurance business operations. Specific to Insurance Underwriting, during the fourth quarter of 2012, the Company began taking steps to place all of Kingsway Amigo Insurance Company, one of the Company's property and casualty insurance subsidiaries, into voluntary run-off.  On November 19, 2012, the Florida Office of Insurance Regulation ("OIR") approved Amigo's plan to withdraw from the business of offering commercial lines insurance in Florida.  On January 30, 2013, the OIR approved Amigo's plan to withdraw from the business of offering personal lines insurance in Florida.  Kingsway has commenced discussions with the OIR to outline plans for Amigo's run-off.  Any comprehensive run-off plan would be subject to OIR approval.

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)

       
    Years ended December 31,
    2012   2011
Revenue:        
  Net premiums earned   $ 114,937     $ 156,382  
  Service fee and commission income   35,491     31,607  
  Net investment income   3,179     4,083  
  Net realized gains   1,084     1,095  
  Other-than-temporary impairment loss   (2,703)      
  (Loss) gain on change in fair value of debt   (9,234)     25,876  
  Other income   7,617     9,504  
Total revenues   150,371     228,547  
Expenses:        
  Loss and loss adjustment expenses   100,184     143,145  
  Commissions and premium taxes   15,422     24,305  
  General and administrative expenses   73,931     77,936  
  Restructuring expense   1,980      
  Interest expense   7,638     7,478  
  Amortization of intangible assets   959     73  
  Goodwill impairment       2,830  
Total expenses   200,114     255,767  
Loss before gain on buy-back of debt, equity in net (loss) income of investee and income tax expense (benefit)   (49,743)     (27,220)  
Gain on buy-back of debt   500     556  
Equity in net (loss) income of investee   (1,018)     417  
Loss from continuing operations before income tax expense (benefit)   (50,261)     (26,247)  
Income tax expense (benefit)   3,017     (169)  
Loss from continuing operations   (53,278)     (26,078)  
Loss on disposal of discontinued operations, net of taxes       (1,293)  
Net loss   $ (53,278)     $ (27,371)  
  Less: net loss attributable to noncontrolling interests in consolidated subsidiaries   (1,195)     (7,233)  
  Net loss attributable to common shareholders   $ (52,083)     $ (20,138)  
Loss per share -  continuing operations:        
  Basic:   $ (4.05)     $ (1.99)  
  Diluted:   $ (4.05)     $ (1.99)  
Loss per share - net loss:        
  Basic:   $ (4.05)     $ (2.09)  
  Diluted:   $ (4.05)     $ (2.09)  
Weighted average shares outstanding (in '000s):        
  Basic:   13,149     13,086  
  Diluted:   13,149     13,086  

Loss from Continuing Operations and Diluted Loss Per Share

In the fourth quarter of 2012, the Company reported a loss from continuing operations of $13.0 million ($0.99 per diluted share) compared to $10.6 million ($0.81 per diluted share) in the fourth quarter of 2011.  For the year ended December 31, 2012, the Company reported a loss from continuing operations of $53.3 million ($4.05 per diluted share) compared to $26.1 million ($1.99 per diluted share) for the same period in 2011.  The loss from continuing operations for the three months and year ended December 31, 2012 is attributable to operating losses in Insurance Underwriting, corporate general expenses, interest expense and, specific to the year ended December 31, 2012, loss on the change in fair value of debt. The loss from continuing operations for the three months and year ended December 31, 2011 is due to operating losses in Insurance Underwriting, corporate general expenses and interest expense, offset by gain on the change in fair value of debt.

Loss on Disposal of Discontinued Operations

For the fourth quarter and year ended December 31, 2012, the Company reported no loss on disposal of discontinued operations, compared to a loss of zero and $1.3 million for the fourth quarter and year ended December 31, 2011, respectively.

Net Loss and Loss Per Share - Net Loss

In the fourth quarter of 2012, the Company reported a net loss of $13.0 million ($0.99 per diluted share) compared to $10.6 million ($0.81 per diluted share) in the fourth quarter of 2011. For the year ended December 31, 2012, the Company reported a net loss of $53.3 million ($4.05 per diluted share) compared to $27.4 million ($2.09 per diluted share) for the year ended December 31, 2011.

Consolidated Balance Sheets
(in thousands, except per share data)

           
    December 31,2012   December 31,2011
         
ASSETS        
Investments:        
  Fixed maturities, at fair value (amortized cost of $77,858 and $91,344, respectively)   $ 79,534   $  93,651
  Equity investments, at fair value (cost of $2,305 and $2,689, respectively)   3,548   2,960
  Limited liability investments   2,333   97
  Other investments, at cost which approximates fair value   2,000   488
  Short-term investments, at cost which approximates fair value   585   20,334
Total investments   88,000   117,530
Cash and cash equivalents   80,813   85,486
Investment in investee   41,733   48,592
Accrued investment income   2,263   1,999
Premiums receivable, net of allowance for doubtful accounts of $4,040 and $3,653, respectively   35,598   28,732
Service fee receivable   15,173   12,947
Other receivables, net of allowance for doubtful accounts of $1,002 and $806, respectively   4,750   6,322
Reinsurance recoverable   8,557   697
Prepaid reinsurance premiums   7,316   2,024
Deferred acquisition costs, net   14,102   8,116
Income taxes recoverable     8,134
Property and equipment, net of accumulated depreciation of $22,887 and $27,736, respectively   2,709   13,040
Goodwill   8,421   510
Intangible assets, net of amortization of $19,263 and $18,304, respectively   50,583   39,121
Other assets   4,045   831
Asset held for sale   8,737  
TOTAL ASSETS   $ 372,800   $ 374,081
LIABILITIES AND EQUITY        
         
LIABILITIES        
Unpaid loss and loss adjustment expenses:        
  Property and casualty   $ 103,116   $ 120,258
  Vehicle service agreements   3,448  
Total unpaid loss and loss adjustment expenses   106,564   120,258
Unearned premiums   45,047   39,423
Reinsurance payable   4,956   1,913
LROC preferred units   13,655   8,845
Senior unsecured debentures   23,730   28,337
Subordinated debt   23,774   16,432
Deferred income tax liability   3,054   2,653
Notes payable     2,418
Deferred service fees   48,987   11,128
Income taxes payable   2,879  
Accrued expenses and other liabilities   34,740   26,269
TOTAL LIABILITIES   $ 307,386   $ 257,676
EQUITY        
Common stock, no par value; unlimited number authorized; 13,148,971 and
13,086,471 issued and outstanding at December 31, 2012 and December 31, 2011, respectively
  $ 296,621   $ 296,489
Additional paid-in capital   15,757   15,403
Accumulated deficit   (262,069)   (201,208)
Accumulated other comprehensive income   14,762   12,749
Shareholders' equity attributable to common shareholders   65,071   123,433
Noncontrolling interests in consolidated subsidiaries   343   (7,028)
TOTAL EQUITY   65,414   116,405
TOTAL LIABILITIES AND EQUITY   $ 372,800   $ 374,081

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, including, without limitation, our potential inability to complete current or future acquisitions successfully, our inability to successfully implement our restructuring activities, and our inability to adequately estimate and provide for an appropriate level of reserving at our insurance company subsidiaries. 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 2012 Annual Report.  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.

Non-U.S. GAAP Financial Measures

This press release contains certain non-U.S. GAAP financial measures. Please refer to the section entitled "Non-U.S. GAAP Financial Measures" in the Management's Discussion and Analysis section of the Company's 2012 Annual Report.

SOURCE Kingsway Financial Services Inc.



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