Kingsway Announces Third Quarter 2016 Results

News provided by

Oct 21, 2016, 08:00 ET

TORONTO, Oct. 21, 2016 /PRNewswire/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its operating results for the third quarter and nine months ended September 30, 2016. All amounts are in U.S. dollars unless indicated otherwise.

Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, "We were pleased to report a solid and profitable quarter, highlighted by a gain on our business combination between 1347 Capital Corp. and Limbach Holdings, LLC. We were also pleased to close our previously announced acquisition of CMC Industries, Inc., which enables us to deploy capital while utilizing our deferred tax asset in a way that will build long-term economic value for our shareholders."

Operating Results
The Company reported net income attributable to common shareholders of $1.4 million, or $0.06 per diluted share, in the third quarter of 2016, compared to net loss attributable to common shareholders of $0.9 million, or $0.05 per diluted share, in the third quarter of 2015.

For the nine months ended September 30, 2016, Kingsway reported net loss attributable to common shareholders of $0.7 million, or $0.04 per diluted share, compared to net income attributable to common shareholders of $3.1 million, or $0.15 per diluted share, in the prior year period.

Following are highlights of Kingsway's third quarter 2016 results. Operating income (loss) reflects the Company's core operating activities, including its reportable segments, passive investment portfolio, merchant banking activities and corporate operating expenses. Operating income (loss) excludes interest expense allocated to the Company's segments.

Operating income was $1.0 million for the third quarter of 2016 compared to operating loss of $1.8 million for the third quarter of 2015.
- Insurance Underwriting segment operating loss was $0.1 million for the third quarter of 2016 compared to $0.2 million for the third quarter of 2015.
- Insurance Services segment operating income was $0.6 million for the third quarter of 2016 compared to segment operating loss of $0.2 million for the third quarter of 2015.
- Operating income attributable to the Leased Real Estate segment was $2.1 million for the third quarter of 2016 compared to zero for the third quarter of 2015. Net of interest expense allocated to the segment, the Leased Real Estate segment operating income was $0.7 million for the third quarter of 2016 compared to zero for the third quarter of 2015. The Leased Real Estate segment includes CMC Industries, Inc.
- Net investment income of $1.0 million was reported for the third quarter of 2016 compared to $0.8 million for the third quarter of 2015.
- Net realized gains of $0.0 million were reported for the third quarter of 2016 compared to $0.1 million for the third quarter of 2015.
- Other operating income and expense was a net expense of $2.6 million for the third quarter of 2016 compared to $2.3 million for the third quarter of 2015.
Adjusted operating income was $2.0 million for the third quarter of 2016 compared to $0.1 million for the third quarter of 2015.
Book value decreased to $2.15 per share at September 30, 2016 from $2.22 per share at December 31, 2015, and increased from $2.14 per share at June 30, 2016. The Company also carries a valuation allowance, in the amount of $11.50 per share at September 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 September 30,					Nine months ended September 30,
		2016		2015		2016		2015
Revenues:
	Net premiums earned	$	32,949	$	29,197	$	94,189	$	88,427
	Service fee and commission income	6,330		6,184		17,046		17,430
	Rental income	2,426		—		2,426		—
	Net investment income	1,036		791		2,036		2,632
	Net realized gains (losses)	46		83		(58)		136
	Other-than-temporary impairment loss	—		—		—		(10)
	Other income	3,038		2,303		8,203		13,174
Total revenues		45,825		38,558		123,842		121,789
Operating expenses:
	Loss and loss adjustment expenses	26,804		22,914		75,139		69,054
	Commissions and premium taxes	5,928		5,653		17,629		17,199
	Cost of services sold	1,381		1,408		2,924		3,129
	General and administrative expenses	9,949		9,997		30,326		31,748
	Amortization of intangible assets	779		307		1,381		937
	Contingent consideration (benefit) expense	—		110		(657)		364
Total operating expenses		44,841		40,389		126,742		122,431
Operating income (loss)		984		(1,831)		(2,900)		(642)
Other (revenues) expenses, net:
	Interest expense	2,448		1,248		4,649		4,053
	Foreign exchange losses, net	4		58		14		1,210
	Loss (gain) on change in fair value of debt	2,472		(2,458)		(1,124)		(1,491)
	(Gain) loss on deconsolidation of subsidiary	(5,643)		—		(5,643)		4,420
	Equity in net loss of investees	61		192		1,004		399
Total other (revenues) expenses, net		(658)		(960)		(1,100)		8,591
Income (loss) from continuing operations before income tax expense		1,642		(871)		(1,800)		(9,233)
Income tax expense		55		23		107		79
Income (loss) from continuing operations		1,587		(894)		(1,907)		(9,312)
Income from discontinued operations, net of taxes		—		—		—		1,426
Gain on disposal of discontinued operations, net of taxes		—		—		1,124		11,259
Net income (loss)		1,587		(894)		(783)		3,373
	Less: net income (loss) attributable to noncontrolling interests in consolidated subsidiaries	48		(86)		(352)		74
	Less: dividends on preferred stock	110		83		274		246
	Net income (loss) attributable to common shareholders	$	1,429	$	(891)	$	(705)	$	3,053
Earnings (loss) per share - continuing operations:
	Basic:	$	0.07	$	(0.05)	$	(0.09)	$	(0.49)
	Diluted:	$	0.06	$	(0.05)	$	(0.09)	$	(0.49)
Earnings per share - discontinued operations:
	Basic:	$	—	$	—	$	0.06	$	0.64
	Diluted:	$	—	$	—	$	0.06	$	0.64
Earnings (loss) per share – net income (loss) attributable to common shareholders:
	Basic:	$	0.07	$	(0.05)	$	(0.04)	$	0.15
	Diluted:	$	0.06	$	(0.05)	$	(0.04)	$	0.15
Weighted average shares outstanding (in '000s):
	Basic:	19,843		19,710		19,791		19,710
	Diluted:	22,958		19,710		19,791		19,710


		September 30, 2016		December 31, 2015
		(unaudited)
Assets
Investments:
	Fixed maturities, at fair value (amortized cost of $60,934 and $55,606, respectively)	$	61,326	$	55,559
	Equity investments, at fair value (cost of $21,145 and $26,428, respectively)	21,518		27,559
	Limited liability investments	29,091		20,141
	Other investments, at cost which approximates fair value	7,251		4,077
	Short-term investments, at cost which approximates fair value	670		400
Total investments		119,856		107,736
Cash and cash equivalents		30,705		51,701
Investments in investees		3,129		1,772
Accrued investment income		535		594
Premiums receivable, net of allowance for doubtful accounts of $135 and $165, respectively		33,570		27,090
Service fee receivable, net of allowance for doubtful accounts of $295 and $276, respectively		1,278		911
Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively		4,979		3,789
Reinsurance recoverable		830		1,422
Prepaid reinsurance premiums		49		7
Deferred acquisition costs, net		14,553		12,143
Income taxes recoverable		—		61
Property and equipment, net of accumulated depreciation of $9,613 and $12,537, respectively		91,239		5,577
Goodwill		10,078		10,078
Intangible assets, net of accumulated amortization of $7,320 and $6,009, respectively		123,178		14,736
Other assets		4,823		3,405
Total Assets		$	438,802	$	241,022
Liabilities and Shareholders' Equity
Liabilities:
Unpaid loss and loss adjustment expenses:
	Property and casualty	$	48,991	$	55,471
	Vehicle service agreements	3,055		2,975
Total unpaid loss and loss adjustment expenses		52,046		58,446
Unearned premiums		42,650		35,234
Reinsurance payable		241		145
Note payable		190,931		—
Subordinated debt, at fair value		38,774		39,898
Deferred income tax liability		6,086		2,924
Deferred service fees		36,641		34,319
Income taxes payable		2,031		—
Accrued expenses and other liabilities		20,411		19,959
Total Liabilities		389,811		190,925
Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at September 30, 2016 and December 31, 2015, respectively; redemption amount of $6,572		6,419		6,394
Shareholders' Equity:
Common stock, no par value; unlimited number authorized; 19,842,806 and 19,709,706 issued and outstanding at September 30, 2016 and December 31, 2015, respectively		—		—
Additional paid-in capital		343,106		341,646
Accumulated deficit		(310,493)		(308,995)
Accumulated other comprehensive income		9,195		9,300
Shareholders' equity attributable to common shareholders		41,808		41,951
Noncontrolling interests in consolidated subsidiaries		764		1,752
Total Shareholders' Equity		42,572		43,703
Total Liabilities and Shareholders' Equity		$	438,802	$	241,022

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, 2015 for a detailed description of this non-U.S. GAAP measure.

Adjusted Operating Income

Adjusted operating 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 income is comprised of segment operating income (loss) as well as net investment income, net realized gains (losses), other-than-temporary impairment loss, equity in net loss of investees and net revenues of 1347 Advisors. A reconciliation of segment operating income (loss) and adjusted operating income to net income (loss) for the three and nine months ended September 30, 2016 and 2015 is presented below:


(in thousands)	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Segment operating income (loss)	$	1,153	$	(401)	$	159	$	(847)
Net investment income	1,036		791		2,036		2,632
Net realized gains (losses)	46		83		(58)		136
Other-than-temporary impairment loss	—		—		—		(10)
Equity in net loss of investees	(61)		(192)		(1,004)		(399)
Revenues of 1347 Advisors, net of related outside professional and advisory expenses	(219)		(133)		(564)		5,806
Adjusted operating income	1,955		148		569		7,318
Corporate operating expenses and other ⁽¹⁾	(1,572)		(1,754)		(5,068)		(7,058)
Amortization of intangible assets	(779)		(307)		(1,381)		(937)
Contingent consideration benefit (expense)	—		(110)		657		(364)
Interest expense not allocated to segments	(1,129)		(1,248)		(3,330)		(4,053)
Foreign exchange losses, net	(4)		(58)		(14)		(1,210)
(Loss) gain on change in fair value of debt	(2,472)		2,458		1,124		1,491
Gain (loss) on deconsolidation of subsidiary	5,643		—		5,643		(4,420)
Income (loss) from continuing operations before income tax expense	1,642		(871)		(1,800)		(9,233)
Income tax expense	(55)		(23)		(107)		(79)
Income (loss) from continuing operations	1,587		(894)		(1,907)		(9,312)
Income from discontinued operations, net of taxes	—		—		—		1,426
Gain on disposal of discontinued operations, net of taxes	—		—		1,124		11,259
Net income (loss)	$	1,587	$	(894)	$	(783)	$	3,373

(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.