U.S. Markets closed

Kingsway Announces Fourth Quarter and Year-End 2017 Results

TORONTO, Feb. 20, 2018 /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, 2017.  All amounts are in U.S. dollars unless indicated otherwise.

The Company reported net loss attributable to common shareholders of $4.6 million, or $0.20 per diluted share, in the fourth quarter of 2017.  Significant events during the fourth quarter included the following:

  • Insurance Underwriting segment incurred net unfavorable development related to accident years 2016 and prior.
  • Income tax benefit includes $19.0 million related to the Tax Cuts and Jobs Act.


Management Comments
Larry G. Swets, Jr., Chief Executive Officer, stated, "Although the 2016 and prior reserve development in the Insurance Underwriting segment is extremely disappointing, we are pleased with the continued improvement of the other segments of our business.  We made significant changes to the NSA business in 2017 that give us confidence that the business has turned the corner, but we remain mindful we won't be able to declare success until we are able to provide full year positive underwriting results in this business."

Mr. Swets continued, "The increase in our shareholders' equity resulting from the change in our deferred income tax liability highlights the value that can be created from investments like CMC Industries, Inc. and reminds us of the need to identify more such opportunities."

Operating Results
The Company reported net loss attributable to common shareholders of $4.6 million (including a non-cash loss of $2.7 million attributable to change in fair value of debt), or $0.20 per diluted share, in the fourth quarter of 2017, compared to net income attributable to common shareholders of $1.0 million (including a non-cash loss of $4.8 million attributable to change in fair value of debt), or $0.05 per diluted share, in the fourth quarter of 2016.  

For the year ended December 31, 2017, Kingsway reported net loss attributable to common shareholders of $15.8 million (including a non-cash loss of $8.5 million attributable to change in fair value of debt), or $0.73 per diluted share, compared to net income attributable to $0.2 million (including a non-cash loss of $3.7 million attributable to change in fair value of debt), or $0.01 per diluted share, in the prior year period. 

Following are highlights of Kingsway's fourth quarter 2017 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 $16.0 million for the fourth quarter of 2017 compared to operating loss of $2.6 million for the fourth quarter of 2016.
  • Adjusted operating loss was $13.1 million for the fourth quarter of 2017 compared to $1.1 million for the fourth quarter of 2016.
  • Book value decreased to $2.02 per share at December 31, 2017 from $2.65 per share at December 31, 2016. The Company also carries a valuation allowance, in the amount of $8.35 per share at December 31, 2017, against the deferred tax asset, primarily related to its loss carryforwards.


Investor Presentation
The Company also announced the availability of a new investor presentation starting today.  The presentation will be available via the "Investor Relations" section of Kingsway's website at http://kingsway-financial.com/investor-relations/.

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 subsidiaries primarily in the insurance, extended warranty, asset management and real estate industries and pursues non-control investments and other 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)








Three months ended December 31,

Years ended December 31,


2017

2016

2017

2016

Revenues:

(unaudited)


(unaudited)




Net premiums earned

$

31,447

$

33,419

$

130,443

$

127,608



Service fee and commission income

10,451

7,186

31,909

24,232



Rental income

3,361

3,010

13,384

5,436



Net investment income

1,392

6,175

2,669

8,244



Net realized gains

663

418

3,771

360



Other-than-temporary impairment loss

(316)

(157)

(316)

(157)



Other income

2,538

2,737

11,334

10,907

Total revenues

49,536

52,788

193,194

176,630

Operating expenses:







Loss and loss adjustment expenses

42,736

34,470

125,982

109,609



Commissions and premium taxes

6,229

6,933

25,006

24,562



Cost of services sold

1,989

1,269

6,535

4,193



General and administrative expenses

12,705

11,303

46,269

41,629



Leased real estate segment interest expense

1,558

1,580

6,264

2,899



Amortization of intangible assets

286

(139)

1,152

1,242



Contingent consideration benefit

(212)

(657)



Impairment of intangible assets

250

Total operating expenses

65,503

55,416

211,246

183,477

Operating loss

(15,967)

(2,628)

(18,052)

(6,847)

Other expenses (revenues), net:







Interest expense not allocated to segments

1,341

1,166

4,977

4,496



Foreign exchange losses, net

7

1

15

15



Loss on change in fair value of debt

2,718

4,845

8,487

3,721



Gain on deconsolidation of subsidiary

(5,643)



Equity in net (income) loss of investees

(772)

13

(2,115)

1,017

Total other expenses, net

3,294

6,025

11,364

3,606

Loss from continuing operations before income tax benefit

(19,261)

(8,653)

(29,416)

(10,453)

Income tax benefit

(19,311)

(9,827)

(17,761)

(9,720)

Income (loss) from continuing operations

50

1,174

(11,655)

(733)

Loss on liquidation of subsidiary, net of taxes

(494)

(494)

Gain on disposal of discontinued operations, net of taxes

131

1,017

1,255

Net (loss) income

(444)

1,305

(11,132)

522



Less: net income (loss) attributable to noncontrolling
interests in consolidated subsidiaries

4,053

71

4,337

(281)



Less: dividends on preferred stock, net of tax

137

192

350

565

Net (loss) income attributable to common shareholders

$

(4,634)

$

1,042

$

(15,819)

$

238

(Loss) earnings per share - continuing operations:






Basic:

$

(0.19)

$

0.04

$

(0.76)

$

(0.05)


Diluted:

$

(0.18)

$

0.04

$

(0.76)

$

(0.05)

(Loss) earnings per share - discontinued operations:






Basic:

$

(0.02)

$

0.01

$

0.02

$

0.06


Diluted:

$

(0.02)

$

0.01

$

0.02

$

0.06

(Loss) earnings per share – net (loss) income attributable to
common shareholders:






Basic:

$

(0.21)

$

0.05

$

(0.73)

$

0.01


Diluted:

$

(0.20)

$

0.05

$

(0.73)

$

0.01

Weighted-average shares outstanding (in '000s):






Basic:

21,708

20,633

21,547

20,003



23,265

22,430

21,547

20,003

 

Consolidated Balance Sheets
(in thousands, except share data)



December 31, 2017


December 31, 2016

Assets

(unaudited)



Investments:





Fixed maturities, at fair value (amortized cost of $53,746 and $62,136, respectively)

$

53,214


$

61,764


Equity investments, at fair value (cost of $9,146 and $19,099, respectively)

8,994


23,230


Limited liability investments

25,173


22,974


Limited liability investment, at fair value

10,314


10,700


Other investments, at cost which approximates fair value

3,721


9,368


Short-term investments, at cost which approximates fair value

151


401

Total investments

101,567


128,437

Cash and cash equivalents

44,286


36,475

Investment in investee

5,230


3,116

Accrued investment income

526


790

Premiums receivable, net of allowance for doubtful accounts of $115 and $115, respectively

27,855


31,564

Service fee receivable, net of allowance for doubtful accounts of $318 and $274, respectively

4,286


1,320

Other receivables, net of allowance for doubtful accounts of zero and $806, respectively

7,139


3,299

Deferred acquisition costs, net

13,045


13,609

Property and equipment, net of accumulated depreciation of $13,600 and $10,603, respectively

108,230


116,961

Goodwill

80,112


71,061

Intangible assets, net of accumulated amortization of $8,333 and $7,181, respectively

87,615


89,017

Other assets

4,709


5,372

Total Assets

$

484,600


$

501,021

Liabilities and Shareholders' Equity








Liabilities:




Unpaid loss and loss adjustment expenses:





Property and casualty

$

63,652


$

53,795


Vehicle service agreements


2,779



2,915

Total unpaid loss and loss adjustment expenses


66,431



56,710

Note payable

186,469


190,074

Bank loan

4,917


Subordinated debt, at fair value

52,105


43,619

Deferred income tax liability

30,331


48,720

Deferred service fees

39,741


35,822

Income taxes payable

2,644


2,051

Accrued expenses and other liabilities

15,966


20,587

Total Liabilities

435,290


437,759

Class A preferred stock, no par value; unlimited number authorized; 222,876 and 262,876 issued and
outstanding at December 31, 2017 and December 31, 2016, respectively; redemption amount of $5,572

5,461


6,427





Shareholders' Equity:




Common stock, no par value; unlimited number authorized; 21,708,190 and 21,458,190 issued and
outstanding at December 31, 2017 and December 31, 2016, respectively


Additional paid-in capital

356,020


353,882

Accumulated deficit

(313,486)


(297,668)

Accumulated other comprehensive loss

(3,852)


(208)

Shareholders' equity attributable to common shareholders

38,682


56,006

Noncontrolling interests in consolidated subsidiaries

5,167


829

Total Shareholders' Equity

43,849


56,835

Total Liabilities, Class A preferred stock and Shareholders' Equity

$

484,600


$

501,021

 

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, 2016 for a detailed description of this non-U.S. GAAP measure.

Adjusted Operating Loss

Adjusted operating loss 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 is comprised of segment operating loss as well as net investment income, net realized gains, other-than-temporary impairment loss, equity in net income (loss) of investees and merchant banking transaction expenses, net.  A reconciliation of segment operating loss and adjusted operating loss to net (loss) income for the three months and years ended December 31, 2017 and 2016 is presented below:




(in thousands)

Three months ended December 31,

Years ended December 31,


2017

2016

2017

2016

Segment operating loss

$

(14,382)

$

(7,228)

$

(13,550)

$

(7,069)

Net investment income

1,392

6,175

2,669

8,244

Net realized gains

663

418

3,771

360

Other-than-temporary impairment loss

(316)

(157)

(316)

(157)

Equity in net income (loss) of investees

772

(13)

2,115

(1,017)

Merchant banking transaction expenses, net

(1,233)

(280)

(2,195)

(825)

Adjusted operating loss

(13,104)

(1,085)

(7,506)

(464)

Equity in net (income) loss of investees

(772)

13

(2,115)

1,017

Corporate operating expenses and other (1)

(1,805)

(1,695)

(7,241)

(6,815)

Amortization of intangible assets

(286)

139

(1,152)

(1,242)

Contingent consideration benefit

212

657

Impairment of intangible assets

(250)

Operating loss

(15,967)

(2,628)

(18,052)

(6,847)

Equity in net income (loss) of investees

772

(13)

2,115

(1,017)

Interest expense not allocated to segments

(1,341)

(1,166)

(4,977)

(4,496)

Foreign exchange losses, net

(7)

(1)

(15)

(15)

Loss on change in fair value of debt

(2,718)

(4,845)

(8,487)

(3,721)

Gain on deconsolidation of subsidiary

5,643

Loss from continuing operations before income
tax benefit

(19,261)

(8,653)

(29,416)

(10,453)

Income tax benefit

19,311

9,827

17,761

9,720

Income (loss) from continuing operations

50

1,174

(11,655)

(733)

Loss on liquidation of subsidiary, net of taxes

(494)

(494)

Gain on disposal of discontinued operations, net of taxes

131

1,017

1,255

Net (loss) income

$

(444)

$

1,305

$

(11,132)

$

522


(1) Corporate operating expenses and other includes corporate operating expenses and stock-based compensation expense.

 

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 2016 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 2016 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/kingsway2016.