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08.03.2017 14:00:00
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Kingsway Announces Fourth Quarter and Year-End 2016 Results
TORONTO, March 8, 2017 /PRNewswire/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its operating results for the fourth quarter and year ended December 31, 2016. All amounts are in U.S. dollars unless indicated otherwise.
The Company reported net loss attributable to common shareholders of $8.8 million, or $0.43 per diluted share, in the fourth quarter of 2016. Significant events during the quarter included the following:
- Insurance Underwriting segment incurred net unfavorable development of $7.6 million related to accident years 2015 and prior.
- The increase in the fair value of the Company's trust preferred debt resulted in a $4.8 million loss.
- Net investment income of $6.2 million included $4.7 million of income related to the Company's investment in 1347 Investors LLC, which owns securities in Limbach Holdings, Inc.
- Completion of the fair value analysis related to the Company's acquisition of CMC resulted in $0.3 million of net income.
Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, "Our fourth quarter earnings were affected meaningfully by the four significant events noted above. One of those events related to historical performance in our non-standard automobile business unit. We announced in July that Steve Harrison had joined our insurance management team as an executive vice president. In August, we promoted Steve to President of our insurance operations. Throughout the year, Steve and his team have launched a number of initiatives intended to improve the operating performance of our insurance operations, particularly with respect to strengthening the management of our Claim Department. We have been aggressively increasing premium rates throughout the second half of 2016 and into 2017 and are actively pursuing initiatives related to increasing policy fee income, reducing bad debt expense, outsourcing the first notice of loss function, outsourcing much of the salvage and subrogation function and entering into an agreement with an outside vendor to migrate to a new policy administration and claim-handling operating platform sometime in 2017. While we are not happy to have to report adverse development on old accident years, we are optimistic about the direction Steve is taking the insurance operations and the potential positive impact to our segment operating income from the implementation of these initiatives. During the quarter, we recorded unfavorable development of approximately $9.1 million related to accident years 2015 and prior in our continuing operations while we recorded favorable development of approximately $1.5 million related to our continuing run-offs of Kingsway Amigo Insurance Company and Mendakota Casualty Company."
Mr. Swets continued, "We also reported a loss of $4.8 million during the quarter related to the increase in the fair value of our $90.5 million principal value of trust preferred debt, maturing from 2032 through 2034, as a result of increases in LIBOR and changes in the estimate of Kingsway's implied credit spread as developed by a third party.
"We are pleased to report another significant gain, related to our investment in 1347 Investors LLC, as a result of the previously announced business combination between 1347 Capital Corp. and Limbach Holdings LLC. We reported $6.2 million of net investment income during the quarter, $4.7 million of which relates to our investment exposure to Limbach by virtue of our interest in 1347 Investors. We are extremely satisfied with this investment which we initiated in July of 2014. Since the combination between 1347 Capital Corp. and Limbach closed this past July, Kingsway has recorded an $8.8 million increase in its shareholders' equity as a result of this investment."
Mr. Swets concluded, "We have completed the fair value analysis of our acquisition of CMC for purposes of recording the assets and liabilities acquired. The completion of the CMC exercise has resulted in some reallocation of previously reported results between Leased Real Estate segment operating earnings and amortization expense, which is reported separately from segment results. As a result, we are reporting a loss of $0.1 million during the fourth quarter for the Leased Real Estate segment, which includes CMC, but we are separately reversing $0.4 million of amortization expense previously recorded during the third quarter. As a result, CMC contributed $0.3 million to our net income during the fourth quarter and $0.6 million to our net income since the time of the acquisition in July. CMC represents an opportunity to create long-term value over the next 17 years. We encourage you to read our 2016 Form 10-K once it is filed for more information about each of these events."
Operating Results
The Company reported net loss attributable to common shareholders of $8.8 million, or $0.43 per diluted share, in the fourth quarter of 2016, compared to net loss attributable to common shareholders of $2.3 million, or $0.12 per diluted share, in the fourth quarter of 2015.
For the year ended December 31, 2016, Kingsway reported net loss attributable to common shareholders of $9.5 million, or $0.48 per diluted share, compared to net income attributable to common shareholders of $0.8 million, or $0.04 per diluted share, in the prior year period.
Following are highlights of Kingsway's fourth quarter 2016 results. Operating loss reflects the Company's core operating activities, including its reportable segments, passive investment portfolio, merchant banking activities and corporate operating expenses.
- Operating loss was $2.6 million for the fourth quarter of 2016 compared to operating loss of $0.9 million for the fourth quarter of 2015.
- Insurance Underwriting segment operating loss was $8.0 million for the fourth quarter of 2016 compared to $0.8 million for the fourth quarter of 2015.
- Insurance Services segment operating income was $0.9 million for the fourth quarter of 2016 compared to segment operating loss of $0.2 million for the fourth quarter of 2015.
- Operating loss attributable to the Leased Real Estate segment was $0.1 million for the fourth quarter of 2016 compared to zero for the fourth quarter of 2015.
- Net investment income of $6.2 million was reported for the fourth quarter of 2016 compared to $0.3 million for the fourth quarter of 2015.
- Net realized gains of $0.4 million were reported for the fourth quarter of 2016 compared to $1.1 million for the fourth quarter of 2015.
- Other operating income and expense was a net expense of $2.0 million for the fourth quarter of 2016 compared to $1.3 million for the fourth quarter of 2015.
- Adjusted operating loss was $1.1 million for the fourth quarter of 2016 compared to $0.2 million for the fourth quarter of 2015.
- Book value decreased to $2.19 per share at December 31, 2016 from $2.22 per share at December 31, 2015, and increased from $2.15 per share at September 30, 2016. The Company also carries a valuation allowance, in the amount of $10.95 per share at December 31, 2016, against the deferred tax asset, primarily related to its loss carryforwards.
Management Change
Kingsway is also taking this opportunity to announce that John T. Fitzgerald, currently Executive Vice President, will become President and Chief Operating Officer. Larry G. Swets, Jr., currently Kingsway's President and Chief Executive Officer, will remain as the Company's Chief Executive Officer. Mr. Swets stated, "We have been impressed with JT since he joined us last April. We are pleased with the turnaround of the Insurance Services segment, which reported segment operating income for the second consecutive quarter since we announced in July that we had restructured the segment with the appointment of JT to lead our Company's warranty businesses. We expect continued evidence of profitable growth from this segment during 2017. Recently, JT has also assumed responsibility for supervising our non-standard automobile business unit. It gives me great pleasure to recognize JT's contributions to our Company with this promotion."
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 | |||||||||||||
Three months ended December 31, | Years ended December 31, | ||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||
Revenues: | (unaudited) | (unaudited) | |||||||||||
Net premiums earned | $ | 33,419 | $ | 29,006 | $ | 127,608 | $ | 117,433 | |||||
Service fee and commission income | 7,186 | 5,536 | 24,232 | 22,966 | |||||||||
Rental income | 2,993 | — | 5,419 | — | |||||||||
Net investment income | 6,164 | 286 | 8,200 | 2,918 | |||||||||
Net realized gains | 418 | 1,061 | 360 | 1,197 | |||||||||
Other-than-temporary impairment loss | (157) | — | (157) | (10) | |||||||||
Other income | 2,765 | 2,288 | 10,968 | 15,462 | |||||||||
Total revenues | 52,788 | 38,177 | 176,630 | 159,966 | |||||||||
Operating expenses: | |||||||||||||
Loss and loss adjustment expenses | 34,470 | 23,758 | 109,609 | 92,812 | |||||||||
Commissions and premium taxes | 6,933 | 5,574 | 24,562 | 22,773 | |||||||||
Cost of services sold | 1,269 | 915 | 4,193 | 4,044 | |||||||||
General and administrative expenses | 11,303 | 10,012 | 41,629 | 41,760 | |||||||||
Leased real estate segment interest expense | 1,579 | — | 2,899 | — | |||||||||
Amortization of intangible assets | (139) | 307 | 1,242 | 1,244 | |||||||||
Contingent consideration benefit | — | (1,503) | (657) | (1,139) | |||||||||
Total operating expenses | 55,415 | 39,063 | 183,477 | 161,494 | |||||||||
Operating loss | (2,627) | (886) | (6,847) | (1,528) | |||||||||
Other (revenues) expenses, net: | |||||||||||||
Interest expense not allocated to segments | 1,167 | 1,225 | 4,496 | 5,278 | |||||||||
Foreign exchange losses, net | 1 | 5 | 15 | 1,215 | |||||||||
Loss (gain) on change in fair value of debt | 4,845 | 33 | 3,721 | (1,458) | |||||||||
(Gain) loss on deconsolidation of subsidiaries | — | — | (5,643) | 4,420 | |||||||||
Equity in net loss (income) of investees | 13 | (60) | 1,017 | 339 | |||||||||
Total other expenses, net | 6,026 | 1,203 | 3,606 | 9,794 | |||||||||
Loss from continuing operations before income tax expense | (8,653) | (2,089) | (10,453) | (11,322) | |||||||||
Income tax expense | 88 | 14 | 195 | 93 | |||||||||
Loss from continuing operations | (8,741) | (2,103) | (10,648) | (11,415) | |||||||||
(Loss) income from discontinued operations, net of taxes | — | (9) | — | 1,417 | |||||||||
Gain on disposal of discontinued operations, net of taxes | 131 | 8 | 1,255 | 11,267 | |||||||||
Net (loss) income | (8,610) | (2,104) | (9,393) | 1,269 | |||||||||
Less: net income (loss) attributable to noncontrolling interests in consolidated subsidiaries | 71 | 88 | (281) | 162 | |||||||||
Less: dividends on preferred stock | 124 | 83 | 398 | 329 | |||||||||
Net (loss) income attributable to common shareholders | $ | (8,805) | $ | (2,275) | $ | (9,510) | $ | 778 | |||||
Loss per share - continuing operations: | |||||||||||||
Basic: | $ | (0.43) | $ | (0.12) | $ | (0.54) | $ | (0.60) | |||||
Diluted: | $ | (0.43) | $ | (0.12) | $ | (0.54) | $ | (0.60) | |||||
Earnings per share - discontinued operations: | |||||||||||||
Basic: | $ | 0.01 | $ | — | $ | 0.06 | $ | 0.64 | |||||
Diluted: | $ | 0.01 | $ | — | $ | 0.06 | $ | 0.64 | |||||
(Loss) earnings per share – net (loss) income attributable to common shareholders: | |||||||||||||
Basic: | $ | (0.43) | $ | (0.12) | $ | (0.48) | $ | 0.04 | |||||
Diluted: | $ | (0.43) | $ | (0.12) | $ | (0.48) | $ | 0.04 | |||||
Weighted average shares outstanding (in '000s): | |||||||||||||
Basic: | 20,633 | 19,710 | 20,003 | 19,710 | |||||||||
Diluted: | 20,633 | 19,710 | 20,003 | 19,710 | |||||||||
Consolidated Balance Sheets | ||||||
December 31, 2016 | December 31, 2015 | |||||
Assets | ||||||
Investments: | ||||||
Fixed maturities, at fair value (amortized cost of $62,136 and $55,606, respectively) | $ | 61,764 | $ | 55,559 | ||
Equity investments, at fair value (cost of $19,099 and $26,428, respectively) | 23,230 | 27,559 | ||||
Limited liability investments | 22,974 | 20,141 | ||||
Limited liability investment, at fair value | 10,700 | — | ||||
Other investments, at cost which approximates fair value | 7,975 | 4,077 | ||||
Short-term investments, at cost which approximates fair value | 401 | 400 | ||||
Total investments | 127,044 | 107,736 | ||||
Cash and cash equivalents | 36,475 | 51,701 | ||||
Investments in investees | 3,116 | 1,772 | ||||
Accrued investment income | 790 | 594 | ||||
Premiums receivable, net of allowance for doubtful accounts of $115 and $165, respectively | 31,564 | 27,090 | ||||
Service fee receivable, net of allowance for doubtful accounts of $274 and $276, respectively | 1,320 | 911 | ||||
Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively | 4,692 | 3,789 | ||||
Reinsurance recoverable | 784 | 1,422 | ||||
Deferred acquisition costs, net | 13,609 | 12,143 | ||||
Income taxes recoverable | — | 61 | ||||
Property and equipment, net of accumulated depreciation of $10,603 and $12,537, respectively | 116,961 | 5,577 | ||||
Goodwill | 19,424 | 10,078 | ||||
Intangible assets, net of accumulated amortization of $7,181 and $6,009, respectively | 89,017 | 14,736 | ||||
Other assets | 4,588 | 3,412 | ||||
Total Assets | $ | 449,384 | $ | 241,022 | ||
Liabilities and Shareholders' Equity | ||||||
Liabilities: | ||||||
Unpaid loss and loss adjustment expenses: | ||||||
Property and casualty | $ | 53,795 | $ | 55,471 | ||
Vehicle service agreements | 2,915 | 2,975 | ||||
Total unpaid loss and loss adjustment expenses | 56,710 | 58,446 | ||||
Unearned premiums | 40,176 | 35,234 | ||||
Reinsurance payable | 100 | 145 | ||||
Note payable | 190,074 | — | ||||
Subordinated debt, at fair value | 43,619 | 39,898 | ||||
Deferred income tax liability | 6,998 | 2,924 | ||||
Deferred service fees | 35,822 | 34,319 | ||||
Income taxes payable | 2,051 | — | ||||
Accrued expenses and other liabilities | 20,487 | 19,959 | ||||
Total Liabilities | 396,037 | 190,925 | ||||
Class A preferred stock, no par value; unlimited number authorized; 262,876 and 262,876 issued and outstanding at December 31, 2016 and December 31, 2015, respectively; redemption amount of $6,572 | 6,427 | 6,394 | ||||
Shareholders' Equity: | ||||||
Common stock, no par value; unlimited number authorized; 21,458,190 and 19,709,706 issued and outstanding at December 31, 2016 and December 31, 2015, respectively | — | — | ||||
Additional paid-in capital | 353,882 | 341,646 | ||||
Accumulated deficit | (307,583) | (297,209) | ||||
Accumulated other comprehensive loss | (208) | (2,486) | ||||
Shareholders' equity attributable to common shareholders | 46,091 | 41,951 | ||||
Noncontrolling interests in consolidated subsidiaries | 829 | 1,752 | ||||
Total Shareholders' Equity | 46,920 | 43,703 | ||||
Total Liabilities and Shareholders' Equity | $ | 449,384 | $ | 241,022 | ||
Non-U.S. GAAP Financial Measures
Segment Operating Loss
Segment operating 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 (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 as well as net investment income, net realized gains, other-than-temporary impairment loss, equity in net (loss) income of investees and net revenues of 1347 Advisors. A reconciliation of segment operating loss and adjusted operating (loss) income to net (loss) income for the three months and years ended December 31, 2016 and 2015 is presented below:
(in thousands) | Three months ended December 31, | Years ended December 31, | |||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Segment operating loss | $ | (7,228) | $ | (928) | $ | (7,069) | $ | (1,775) | |||||||
Net investment income | 6,164 | 286 | 8,200 | 2,918 | |||||||||||
Net realized gains | 418 | 1,061 | 360 | 1,197 | |||||||||||
Other-than-temporary impairment loss | (157) | — | (157) | (10) | |||||||||||
Equity in net (loss) income of investees | (13) | 60 | (1,017) | (339) | |||||||||||
Revenues of 1347 Advisors, net of related outside professional and advisory expenses | (280) | (639) | (825) | 5,167 | |||||||||||
Adjusted operating (loss) income | (1,096) | (160) | (508) | 7,158 | |||||||||||
Equity in net loss (income) of investees | 13 | (60) | 1,017 | 339 | |||||||||||
Corporate operating expenses and other (1) | (1,683) | (1,862) | (6,771) | (8,920) | |||||||||||
Amortization of intangible assets | 139 | (307) | (1,242) | (1,244) | |||||||||||
Contingent consideration benefit | — | 1,503 | 657 | 1,139 | |||||||||||
Operating loss | (2,627) | (886) | (6,847) | (1,528) | |||||||||||
Equity in net (loss) income of investees | (13) | 60 | (1,017) | (339) | |||||||||||
Interest expense not allocated to segments | (1,167) | (1,225) | (4,496) | (5,278) | |||||||||||
Foreign exchange losses, net | (1) | (5) | (15) | (1,215) | |||||||||||
(Loss) gain on change in fair value of debt | (4,845) | (33) | (3,721) | 1,458 | |||||||||||
Gain (loss) on deconsolidation of subsidiary | — | — | 5,643 | (4,420) | |||||||||||
Loss from continuing operations before income tax expense | (8,653) | (2,089) | (10,453) | (11,322) | |||||||||||
Income tax expense | (88) | (14) | (195) | (93) | |||||||||||
Loss from continuing operations | (8,741) | (2,103) | (10,648) | (11,415) | |||||||||||
(Loss) income from discontinued operations, net of taxes |
— | (9) | — | 1,417 | |||||||||||
Gain on disposal of discontinued operations, net of taxes | 131 | 8 | 1,255 | 11,267 | |||||||||||
Net (loss) income | $ | (8,610) | $ | (2,104) | $ | (9,393) | $ | 1,269 | |||||||
(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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