Attached files
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| 8-K - 8-K - KINGSWAY FINANCIAL SERVICES INC | a8k2-16x2016.htm |
| EX-99.3 - EXHIBIT 99.3 - KINGSWAY FINANCIAL SERVICES INC | exhibit9938k2-16x2016.htm |
| EX-99.2 - EXHIBIT 99.2 - KINGSWAY FINANCIAL SERVICES INC | exhibit9928k2-16x2016.htm |
KINGSWAY ANNOUNCES SECOND QUARTER 2015 RESULTS Toronto, Ontario (July 29, 2015) - (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, 2015. All amounts are in U.S. dollars unless indicated otherwise.
Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, “We continued to harvest gains from prior investments during the first half of 2015. The sale of ARS in April was truly a ‘win-win,’ as we were able to execute on our long-term value building strategy through a sale with continued potential upside for Kingsway in the form of future earnouts, while providing ARS with the platform it needed to achieve further growth. We were able to utilize gains from this sale and the buy-back of the Management Services Agreement from 1347 Property Insurance Holdings, Inc. to further improve our capital position.”
Mr. Swets continued, “The repayment of our KLROC debt represents another milestone in the turnaround of our Company, as we will save almost $2 million in cash debt service per year. After having inherited $341.0 million of outstanding debt as of December 31, 2008, we now have only $90.5 million of remaining outstanding debt, in the form of trust preferred securities which do not begin to mature until 2032.
“Kingsway is now a much simpler company. We own two warranty businesses and a non-standard automobile insurance business. We have a significant and growing portfolio of attractive passive investments. Our sale of ARS provides new resources to continue our merchant banking activities. Finally, we have legacy holding company operating expenses which we continue to manage more efficiently. Those four activities basically represent your investment in Kingsway and how you should evaluate us. We believe most of the extraordinary, legacy, non-cash accounting items, such as the loss on deconsolidation we are reporting this quarter, should now be behind us. We are now looking actively at options to leverage our considerable deferred tax asset in seeking fundamentally strong investment opportunities with asymmetric risk / reward profiles. We have never felt more confident about our future since your current management team joined the Company.”
Operating Results
The Company reported net income attributable to common shareholders of $1.8 million, or $0.09 per diluted share, in the second quarter of 2015, compared to a net loss attributable to common shareholders of $5.0 million, or $0.30 per diluted share, in the second quarter of 2014.
For the six months ended June 30, 2015, Kingsway reported net income attributable to common shareholders of $3.9 million, or $0.20 per diluted share, compared to a net loss attributable to common shareholders of $6.7 million, or $0.41 per diluted share, in the prior year period.
Following are highlights of Kingsway’s second quarter 2015 results. Operating (loss) income reflects the Company’s core operating activities, including its reportable segments, passive investment portfolio, merchant banking activities and corporate operating expenses.
• | Operating loss was $2.5 million for the second quarter of 2015 compared to income of $1.3 million for the second quarter of 2014. |
◦ | Insurance Underwriting segment operating loss was $0.5 million for the second quarter of 2015 compared to income of $0.3 million for the second quarter of 2014. |
◦ | Insurance Services segment operating loss was $0.1 million for the second quarter of 2015 compared to $0.2 million for the second quarter of 2014. |
◦ | Net investment income of $0.5 million was reported in the second quarter of 2015 compared to $0.3 million in the second quarter of 2014. |
◦ | Net realized gains of $0.1 million were reported in the second quarter of 2015 compared to $5.1 million in the second quarter of 2014, which was primarily from the liquidation of investments in the Company’s passive portfolio. |
◦ | Other operating income and expense was a net expense of $2.5 million in the second quarter of 2015 compared to $4.2 million in the second quarter of 2014. |
• | Adjusted operating loss was $0.1 million in the second quarter of 2015 compared with income of $5.5 million in the second quarter of 2014. |
• | Book value increased to $2.46 per share at June 30, 2015 from $2.12 per share at December 31, 2014. The Company also carries a valuation allowance, in the amount of $14.42 per share at June 30, 2015, against the deferred tax asset, primarily related to its loss carryforwards. |
The following events occurred during the second quarter of 2015:
• | On April 1, 2015, the Company closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. (“ARS”), to National General Holdings Corp. for $47 million in cash and potential future earnout payments. ARS is a managing general agent and third-party administrator licensed in twenty-two states with a primary focus on the assigned risk automobile market. As a result, ARS, previously disclosed as part of the Insurance Services segment, has been classified as a discontinued operation. The Company recorded a net gain on disposal of $11.3 million during the second quarter of 2015. |
• | The Company repaid the C$15.8 million outstanding on its LROC preferred units due June 30, 2015. |
• | During the second quarter, the Company’s controlling interest in Kingsway Linked Return of Capital Trust (“KLROC Trust”) was reduced to zero upon the Company’s repayment of its C$15.8 million outstanding on its LROC preferred units due June 30, 2015. As a result, the Company recorded a non-cash loss on deconsolidation of subsidiary of $4.4 million. This reported loss results from removing the net assets and accumulated other comprehensive loss of KLROC Trust from the Company’s Consolidated Balance Sheets. The deconsolidation reduced consolidated shareholders’ equity by $2.8 million at June 30, 2015. |
• | On April 30, 2015, the Company distributed its Annual Letter to Shareholders. 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/kfs2014. |
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, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: | ||||||||||||||||
Net premiums earned | $ | 30,200 | $ | 28,755 | $ | 59,230 | $ | 60,675 | ||||||||
Service fee and commission income | 5,848 | 6,026 | 11,246 | 12,091 | ||||||||||||
Net investment income | 528 | 341 | 1,841 | 754 | ||||||||||||
Net realized gains | 53 | 5,091 | 53 | 5,130 | ||||||||||||
Other-than-temporary impairment loss | — | — | (10 | ) | — | |||||||||||
Other income | 2,514 | 2,286 | 10,871 | 4,560 | ||||||||||||
Total revenues | 39,143 | 42,499 | 83,231 | 83,210 | ||||||||||||
Operating expenses: | ||||||||||||||||
Loss and loss adjustment expenses | 24,187 | 21,794 | 46,140 | 42,855 | ||||||||||||
Commissions and premium taxes | 5,799 | 5,532 | 11,546 | 12,085 | ||||||||||||
Cost of services sold | 1,058 | 937 | 1,721 | 1,793 | ||||||||||||
General and administrative expenses | 10,175 | 11,066 | 21,751 | 22,990 | ||||||||||||
Amortization of intangible assets | 313 | 409 | 630 | 823 | ||||||||||||
Contingent consideration expense | 110 | 267 | 254 | 534 | ||||||||||||
Impairment of asset held for sale | — | 1,180 | — | 1,180 | ||||||||||||
Total operating expenses | 41,642 | 41,185 | 82,042 | 82,260 | ||||||||||||
Operating (loss) income | (2,499 | ) | 1,314 | 1,189 | 950 | |||||||||||
Other expenses, net: | ||||||||||||||||
Interest expense | 1,414 | 1,364 | 2,805 | 2,797 | ||||||||||||
Foreign exchange losses (gains), net | 760 | (175 | ) | 1,152 | 41 | |||||||||||
Loss on change in fair value of debt | 1,228 | 7,799 | 967 | 7,236 | ||||||||||||
Loss on disposal of subsidiary | — | — | — | 1,242 | ||||||||||||
Loss on deconsolidation of subsidiary | 4,420 | — | 4,420 | — | ||||||||||||
Equity in net loss of investee | 71 | — | 207 | — | ||||||||||||
Total other expenses, net | 7,893 | 8,988 | 9,551 | 11,316 | ||||||||||||
Loss from continuing operations before income tax expense (benefit) | (10,392 | ) | (7,674 | ) | (8,362 | ) | (10,366 | ) | ||||||||
Income tax expense (benefit) | 34 | (1,059 | ) | 56 | (999 | ) | ||||||||||
Loss from continuing operations | (10,426 | ) | (6,615 | ) | (8,418 | ) | (9,367 | ) | ||||||||
Income from discontinued operations, net of taxes | — | 1,141 | 1,426 | 2,887 | ||||||||||||
Gain on disposal of discontinued operations, net of taxes | 11,259 | — | 11,259 | — | ||||||||||||
Net income (loss) | 833 | (5,474 | ) | 4,267 | (6,480 | ) | ||||||||||
Less: net (loss) income attributable to noncontrolling interests in consolidated subsidiaries | (1,064 | ) | (558 | ) | 160 | 95 | ||||||||||
Less: dividends on preferred stock | 82 | 82 | 163 | 135 | ||||||||||||
Net income (loss) attributable to common shareholders | $ | 1,815 | $ | (4,998 | ) | $ | 3,944 | $ | (6,710 | ) | ||||||
Loss per share - continuing operations: | ||||||||||||||||
Basic: | $ | (0.48 | ) | $ | (0.37 | ) | $ | (0.44 | ) | $ | (0.58 | ) | ||||
Diluted: | $ | (0.48 | ) | $ | (0.37 | ) | $ | (0.44 | ) | $ | (0.58 | ) | ||||
Earnings per share - discontinued operations: | ||||||||||||||||
Basic: | $ | 0.57 | $ | 0.07 | $ | 0.64 | $ | 0.18 | ||||||||
Diluted: | $ | 0.57 | $ | 0.07 | $ | 0.64 | $ | 0.18 | ||||||||
Earnings (loss) per share – net income (loss) attributable to common shareholders: | ||||||||||||||||
Basic: | $ | 0.09 | $ | (0.30 | ) | $ | 0.20 | $ | (0.41 | ) | ||||||
Diluted: | $ | 0.09 | $ | (0.30 | ) | $ | 0.20 | $ | (0.41 | ) | ||||||
Weighted average shares outstanding (in ‘000s): | ||||||||||||||||
Basic: | 19,710 | 16,430 | 19,710 | 16,430 | ||||||||||||
Diluted: | 19,710 | 16,430 | 19,710 | 16,430 | ||||||||||||
Consolidated Balance Sheets
(in thousands, except per share data)
June 30, 2015 | December 31, 2014 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturities, at fair value (amortized cost of $58,403 and $56,000, respectively) | $ | 58,733 | $ | 56,195 | ||||
Equity investments, at fair value (cost of $21,346 and $16,579, respectively) | 24,446 | 19,618 | ||||||
Limited liability investments | 12,688 | 7,294 | ||||||
Other investments, at cost which approximates fair value | 3,527 | 3,576 | ||||||
Short-term investments, at cost which approximates fair value | 400 | 400 | ||||||
Total investments | 99,794 | 87,083 | ||||||
Cash and cash equivalents | 86,175 | 71,234 | ||||||
Investment in investee | 1,904 | 2,115 | ||||||
Accrued investment income | 703 | 141 | ||||||
Premiums receivable, net of allowance for doubtful accounts of $258 and $1,889, respectively | 29,792 | 28,885 | ||||||
Service fee receivable, net of allowance for doubtful accounts of $247 and $247, respectively | 1,115 | 964 | ||||||
Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively | 6,852 | 5,145 | ||||||
Reinsurance recoverable | 1,505 | 3,652 | ||||||
Prepaid reinsurance premiums | 91 | 8 | ||||||
Deferred acquisition costs, net | 12,617 | 12,197 | ||||||
Income taxes recoverable | 57 | 74 | ||||||
Property and equipment, net of accumulated depreciation of $12,261 and $15,751, respectively | 5,795 | 5,975 | ||||||
Goodwill | 10,078 | 10,078 | ||||||
Intangible assets, net of accumulated amortization of $5,395 and $4,765, respectively | 15,350 | 15,980 | ||||||
Other assets | 3,282 | 3,638 | ||||||
Assets held for sale | — | 54,553 | ||||||
Total Assets | $ | 275,110 | $ | 301,722 | ||||
Liabilities and Shareholders' Equity | ||||||||
Liabilities: | ||||||||
Unpaid loss and loss adjustment expenses: | ||||||||
Property and casualty | $ | 58,219 | $ | 63,895 | ||||
Vehicle service agreements | 2,975 | 2,975 | ||||||
Total unpaid loss and loss adjustment expenses | 61,194 | 66,870 | ||||||
Unearned premiums | 37,848 | 36,432 | ||||||
Reinsurance payable | 557 | 525 | ||||||
LROC preferred units, at fair value | — | 13,618 | ||||||
Subordinated debt, at fair value | 42,324 | 40,659 | ||||||
Deferred income tax liability | 2,880 | 2,837 | ||||||
Deferred service fees | 34,696 | 35,096 | ||||||
Accrued expenses and other liabilities | 40,728 | 35,836 | ||||||
Liabilities held for sale | — | 21,653 | ||||||
Total Liabilities | 220,227 | 253,526 | ||||||
Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at June 30, 2015 and December 31, 2014, respectively | 6,377 | 6,330 | ||||||
Shareholders' Equity: | ||||||||
Common stock, no par value; unlimited number authorized; 19,709,706 and 19,709,706 issued and outstanding at June 30, 2015 and December 31, 2014, respectively | — | — | ||||||
Additional paid-in capital | 341,249 | 340,844 | ||||||
Accumulated deficit | (305,764 | ) | (312,050 | ) | ||||
Accumulated other comprehensive income | 11,271 | 8,670 | ||||||
Shareholders' equity attributable to common shareholders | 46,756 | 37,464 | ||||||
Noncontrolling interests in consolidated subsidiaries | 1,750 | 4,402 | ||||||
Total Shareholders' Equity | 48,506 | 41,866 | ||||||
Total Liabilities and Shareholders' Equity | $ | 275,110 | $ | 301,722 | ||||
Non-U.S. GAAP Financial Measures
Segment Operating (Loss) Income
Segment operating (loss) income 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, 2014 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) income as well as net investment income, net realized gains, other-than-temporary impairment loss, equity in net loss of investee and net revenues of 1347 Advisors. A reconciliation of segment operating (loss) income and adjusted operating (loss) income to net income (loss) for the three and six months ended June 30, 2015 and 2014 is presented below:
(in thousands) | Three months ended June 30. | Six months ended June 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Segment operating income (loss) | $ | (582 | ) | $ | 78 | $ | (446 | ) | $ | 197 | |||||
Net investment income | 528 | 341 | 1,841 | 754 | |||||||||||
Net realized gains | 53 | 5,091 | 53 | 5,130 | |||||||||||
Other-than-temporary impairment loss | — | — | (10 | ) | — | ||||||||||
Equity in net loss from investee | (71 | ) | — | (207 | ) | — | |||||||||
Revenues of 1347 Advisors, net of related outside professional and advisory expenses | (55 | ) | 3 | 5,939 | 3 | ||||||||||
Adjusted operating income (loss) | (127 | ) | 5,513 | 7,170 | 6,084 | ||||||||||
Corporate operating expenses and other (1) | (2,020 | ) | (2,343 | ) | (5,304 | ) | (2,597 | ) | |||||||
Amortization of intangible assets | (313 | ) | (409 | ) | (630 | ) | (823 | ) | |||||||
Contingent consideration expense | (110 | ) | (267 | ) | (254 | ) | (534 | ) | |||||||
Impairment of asset held for sale | — | (1,180 | ) | — | (1,180 | ) | |||||||||
Interest expense | (1,414 | ) | (1,364 | ) | (2,805 | ) | (2,797 | ) | |||||||
Foreign exchange gains (losses), net | (760 | ) | 175 | (1,152 | ) | (41 | ) | ||||||||
Loss on change in fair value of debt | (1,228 | ) | (7,799 | ) | (967 | ) | (7,236 | ) | |||||||
Loss on disposal of subsidiary | — | — | — | (1,242 | ) | ||||||||||
Loss on deconsolidation of subsidiary | (4,420 | ) | — | (4,420 | ) | — | |||||||||
Loss from continuing operations before income tax (expense) benefit | (10,392 | ) | (7,674 | ) | (8,362 | ) | (10,366 | ) | |||||||
Income tax (expense) benefit | 34 | (1,059 | ) | 56 | (999 | ) | |||||||||
Loss from continuing operations | (10,426 | ) | (6,615 | ) | (8,418 | ) | (9,367 | ) | |||||||
Income from discontinued operations, net of taxes | — | 1,141 | 1,426 | 2,887 | |||||||||||
Gain on disposal of discontinued operations, net of taxes | 11,259 | — | 11,259 | — | |||||||||||
Net income (loss) | $ | 833 | $ | (5,474 | ) | $ | 4,267 | $ | (6,480 | ) | |||||
(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 2014 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 2014 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.