Kingsway Announces Third Quarter 2016 Results

Kingsway Announces Third Quarter 2016 Results

PR Newswire

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.

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