SYS-CON MEDIA Authors: Elizabeth White, Pat Romanski, Carmen Gonzalez, Liz McMillan, Kevin Jackson

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Kingsway Reports Third Quarter Results

TORONTO, Nov. 9, 2012 /PRNewswire/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its financial results for the third quarter and nine months ended September 30, 2012. All amounts are in U.S. dollars unless indicated otherwise.

The Company reported a third quarter net loss of $20.0 million ($40.3 million year to date), or a loss of $1.52 ($3.07 year to date) per diluted share.  The book value has decreased from $8.90 per share at December 31, 2011 to $5.88 per share at September 30, 2012. The Company also carries a valuation allowance, in the amount of $20.48 per share at September 30, 2012, against the deferred tax asset, primarily related to its loss carryforwards.  All per share amounts have been adjusted for all periods to reflect the share consolidation implemented as of July 3, 2012, whereby every four of the Company's common shares that were issued and outstanding were automatically combined into one issued and outstanding common share, without any change in the par value of such shares.

The following are the highlights of the third quarter of 2012:

Operational results

  • Net operating loss of $16.8 million was recorded in the Insurance Underwriting segment for the third quarter ($23.8 million year to date).  This third quarter 2012 result reflects $13.4 million of charges, including $11.4 million added to the Company's provision for unpaid loss and loss adjustment expenses; $1.3 million for abandoned leases; and $0.7 million of the total $2.0 million estimated for severance expense, described in the Company's September 17, 2012 press release.
  • Net operating income of $0.4 million was recorded in the Insurance Services segment for the third quarter ($2.9 million year to date).
  • Net investment income and realized gains of $1.9 million were recorded for the third quarter ($3.8 million year to date).
  • The Company recorded no other-than-temporary impairment loss for the third quarter ($0.5 million year to date).
  • Net loss of $5.5 million not allocated to any segment was recorded in the third quarter ($22.7 million year to date). This includes loss on change in fair value of debt of $3.2 million ($9.9 million year to date); equity in net income of investee of $0.1 million (loss of $2.1 million year to date); and interest expense of $1.1 million ($3.3 million year to date) related to the Company's subordinated debt and currently being deferred.  None of these three items impacted the Company's cash flows during the third quarter and nine months ended September 30, 2012.

On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments.  As part of the restructuring, the Company intends to streamline its non-standard property and casualty insurance business operations. Specific to Insurance Underwriting, during the third quarter the Company began taking actions to significantly reduce the amount of commercial lines business written at Kingsway Amigo Insurance Company ("Amigo") and to update Amigo's personal lines product offering.  As part of the restructuring, the Company will reduce staffing levels to be consistent with decreased premium volume at its Amigo business.

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,
    2012   2011   2012   2011
Revenue:                
  Net premiums earned   $ 26,501     $ 36,614     $ 86,753     $ 124,825  
  Service fee and commission income   7,648     7,687     25,315     24,465  
  Net investment income   782     999     2,414     3,228  
  Net realized gains   1,109     104     1,359     102  
  Other-than-temporary impairment loss           (488 )    
  (Loss) gain on change in fair value of debt   (3,177 )   17,189     (9,926 )   25,821  
  Other income   1,940     5,587     5,767     8,809  
Total revenues   34,803     68,180     111,194     187,250  
Expenses:                
  Loss and loss adjustment expenses   33,348     34,304     78,739     112,895  
   Commissions and premiums taxes   2,458     5,421     11,624     19,707  
   General and administrative expenses   16,819     17,986     52,774     62,367  
  Restructuring expense   1,972         1,972      
  Interest expense   1,887     1,874     5,652     5,610  
  Amortization of other intangible assets       18         54  
Total expenses   56,484     59,603     150,761     200,633  
(Loss) income before gain on buy-back of debt,
equity in net income (loss) of investee and income
tax (benefit) expense
  (21,681 )   8,577     (39,567 )   (13,383 )
Gain on buy-back of debt   500     3     500     556  
Equity in net income (loss) of investee   93     145     (2,085 )   (384 )
(Loss) income from continuing operations before income tax (benefit) expense   (21,088 )   8,725     (41,152 )   (13,211 )
Income tax (benefit) expense   (1,054 )   2,433     (879 )   2,292  
(Loss) income from continuing operations   (20,034 )   6,292     (40,273 )   (15,503 )
Loss on disposal of discontinued operations, net of
taxes
              (1,293 )
Net (loss) income   (20,034 )   6,292     (40,273 )   (16,796 )
  Less: net loss attributable to noncontrolling
interests in consolidated subsidiaries
  (1,165 )   (960 )   (1,888 )   (3,684 )
  Net (loss) income attributable to common
shareholders
  $ (18,869 )   $ 7,252     $ (38,385 )   $ (13,112 )
(Loss) income per share -  continuing operations:                
  Basic:   $ (1.52 )   $ 0.48     $ (3.07 )   $ (1.19 )
Diluted:   (1.52 )   0.48     (3.07 )   (1.19 )
(Loss) income per share - net (loss) income:                
  Basic:   $ (1.52 )   $ 0.48     $ (3.07 )   $ (1.28 )
Diluted:   (1.52 )   0.48     (3.07 )   (1.28 )
Weighted average shares outstanding (in '000s):                
  Basic:   13,149     13,086     13,133     13,071  
  Diluted:   13,149     13,086     13,133     13,071  

(Loss) Income from Continuing Operations, Net (Loss) Income and Diluted (Loss) Income Per Share

In the third quarter of 2012, we incurred a loss from continuing operations of $20.0 million ($1.52 per diluted share) compared to income of $6.3 million (income of $0.48 per diluted share) in the third quarter of 2011.  For the nine months ended September 30, 2012, we incurred a loss from continuing operations of $40.3 million ($3.07 per diluted share) compared to $15.5 million ($1.19 per diluted share) for the same period in 2011.  The loss from continuing operations for the three and nine months ended September 30, 2012 is attributable to operating losses in Insurance Underwriting, corporate general expenses, interest expense and loss on the change in fair value of debt.  The income from continuing operations for the three months ended September 30, 2011 is due to gain on the change in fair value of debt, offset by Insurance Underwriting operating losses, corporate general expenses and interest expense. The loss from continuing operations for the nine months ended September 30, 2011 is due to operating losses in Insurance Underwriting, corporate general expenses and interest expense, offset by gain on the change in fair value of debt.

In the third quarter of 2012, we incurred a net loss of $20.0 million ($40.3 million year to date) compared to income of $6.3 million in the third quarter of 2011 (loss of $16.8 million prior year to date). The diluted loss per share was $1.52 for the third quarter of 2012 ($3.07 year to date) compared to a diluted income per share of $0.48 for the third quarter of 2011 (loss of $1.28 prior year to date).

Loss on Disposal of Discontinued Operations

For the third quarter and nine months ended September 30, 2012, the Company reported no loss on disposal of discontinued operations, compared to a loss of zero and $1.3 million for the three and nine months ended September 30, 2011, respectively.

Net (Loss) Income and (Loss) Income Per Share - Net (Loss) Income

In the third quarter of 2012, the Company reported net loss of $20.0 million ($40.3 million year to date) compared to net income of $6.3 million in the third quarter of 2011 (net loss of $16.8 million prior year to date). Diluted loss per share was $1.52 for the quarter ($3.07 year to date) compared to diluted income per share of $0.48 for the third quarter of 2011 (diluted loss per share of $1.28 prior year to date).


Consolidated Balance Sheets
(in thousands, except per share data)

                 
    September 30, 2012   December 31, 2011
    (unaudited)    
ASSETS        
Investments:        
  Fixed maturities, at fair value (amortized cost of $88,054 and $91,344, respectively)   $ 90,168     $ 93,651  
     Equity investments, at fair value (cost of $2,303 and $2,689, respectively)   2,350     2,960  
  Limited liability investments   2,413     97  
  Other investments, at cost which approximates fair value       488  
  Short-term investments, at cost which approximates fair value   335     20,334  
Total investments   95,266     117,530  
Investment in investee   47,173     48,592  
Cash and cash equivalents   60,871     85,486  
Accrued investment income   2,999     1,999  
Premiums receivable, net of allowance for doubtful accounts of 3,665 and 3,653, respectively   33,922     28,732  
Service fee receivable   15,683     12,947  
Other receivables, net of allowance for doubtful accounts of $806 and $806, respectively   5,579     6,322  
Reinsurance recoverable   10,472     697  
Prepaid reinsurance premiums   7,891     2,024  
Deferred policy acquisition costs, net   8,039     8,116  
Income taxes recoverable       8,134  
Property and equipment, net of accumulated depreciation of $19,331 and $27,736   3,323     13,040  
Goodwill   510     510  
Intangible assets   39,121     39,121  
Other assets   1,923     831  
Asset held for sale   8,737      
TOTAL ASSETS   $ 341,509     $ 374,081  
LIABILITIES AND EQUITY        
         
LIABILITIES        
Unpaid loss and loss adjustment expenses   $ 104,953     $ 120,258  
Unearned premiums   44,070     39,423  
Reinsurance payable   9,107     1,913  
LROC preferred units   13,987     8,845  
Senior unsecured debentures   22,921     28,337  
Subordinated debt   24,942     16,432  
Deferred income tax liability   2,772     2,653  
Notes payable       2,418  
Deferred revenue   14,031     11,128  
Accrued expenses and other liabilities   27,432     26,269  
TOTAL LIABILITIES   $ 264,215     $ 257,676  
EQUITY        
Common stock, no par value; unlimited number authorized; 13,148,971 and 13,086,471
issued and outstanding at September 30, 2012 and December 31, 2011, respectively
  $ 296,621     $ 296,489  
Additional paid-in capital   15,631     15,403  
Accumulated deficit   (248,369 )   (201,208 )
Accumulated other comprehensive income   13,752     12,749  
Shareholders' equity attributable to common shareholders   77,635     123,433  
Noncontrolling interests in consolidated subsidiaries   (341 )   (7,028 )
TOTAL EQUITY   77,294     116,405  
TOTAL LIABILITIES AND EQUITY   $ 341,509     $ 374,081  

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, including, without limitation, our potential inability to complete current or future acquisitions successfully, our inability to successfully implement our restructuring activities, and our inability to adequately estimate and provide for an appropriate level of reserving at our insurance company subsidiaries. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward looking statements, see Kingsway's securities filings, including its Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Annual Report") and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.  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.

Non-U.S. GAAP Financial Measures

This press release contains certain non-U.S. GAAP financial measures. Please refer to the section entitled "Non-U.S. GAAP Financial Measures" in the Management's Discussion and Analysis section of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. 

Additional Information

Additional information about Kingsway, including a copy of its 2011 Annual Report and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, 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.

SOURCE Kingsway Financial Services Inc.

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