Kingsway Announces Second Quarter 2018 Results

PR Newswire

TORONTO, Aug. 1, 2018

TORONTO, Aug. 1, 2018 /PRNewswire/ - KFSKFS Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its operating results for the second quarter and six months ended June 30, 2018. All amounts are in U.S. dollars unless indicated otherwise.

As a result of the Company's announcement on July 16, 2018 that it has executed a definitive agreement to sell Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"), its second quarter financial statements reflect an estimated loss on disposal as well as the classification of Mendota, previously disclosed as part of the Insurance Underwriting segment, as a discontinued operation at June 30, 2018 with its assets and liabilities being classified as held for sale. The results of Kingsway Amigo Insurance Company, which has been in run off for five years, will continue to be reported as part of continuing operations; however, the Company will no longer report a separate Insurance Underwriting segment.

Management Comments
Larry G. Swets, Jr., Chief Executive Officer, stated, "The sale of Mendota represents the end of an era for Kingsway and its long history of owning property-casualty insurance companies in both the United States and Canada. Upon the closing, the sales proceeds will be redeployed to acquire limited liability investments and other investments owned by Mendota. At that point, Kingsway will focus its efforts on growing its extended warranty segment and managing its investment portfolio."

Operating Results
The Company reported net loss attributable to common shareholders of $8.6 million (including a non-cash loss of $0.1 million attributable to change in fair value of debt), or $0.40 per diluted share, in the second quarter of 2018, compared to net loss attributable to common shareholders of $7.9 million (including a non-cash loss of $2.7 million attributable to change in fair value of debt), or $0.37 per diluted share, in the second quarter of 2017.

For the six months ended June 30, 2018, Kingsway reported net loss attributable to common shareholders of $10.9 million (including a non-cash loss of $1.1 million attributable to change in fair value of debt), or $0.50 per diluted share, compared to $9.7 million (including a non-cash gain of $4.6 million attributable to change in fair value of debt), or $0.45 per diluted share, in the prior year period.

Included in the Company's operating results for the three and six months ended June 30, 2018 is an $8.0 million loss on disposal of Mendota at June 30, 2018. The aggregate reporting during the second quarter for all results related to our non-standard automobile businesses, inclusive of the continuing operations of Kingsway Amigo Insurance Company, the discontinued operations of Mendota and the loss on disposal of Mendota, is a loss of $8.4 million.

Following are highlights of Kingsway's second quarter 2018 results. Operating loss reflects the Company's core operating activities, including its reportable segments, passive investment portfolio and corporate operating expenses.

Operating loss was $0.2 million for the second quarter of 2018 compared to $2.7 million for the second quarter of 2017.

Extended Warranty segment operating income was $1.7 million for the second quarter of 2018 compared to $0.7 million for the second quarter of 2017.
Leased Real Estate segment operating income was $0.6 million for the second quarter of 2018 compared to $0.9 million for the second quarter of 2017.
Net investment income of $0.0 million was reported for the second quarter of 2018 compared to net investment loss $1.3 million for the second quarter of 2017.
Loss on change in fair value of equity investments was $0.2 million for the second quarter of 2018 compared to zero for the second quarter of 2017.
Other operating income and expense was a net expense of $2.3 million for the second quarter of 2018 compared to $3.0 million for the second quarter of 2017.

Book value decreased to $1.54 per share at June 30, 2018 from $2.02 per share at December 31, 2017. The Company also carries a valuation allowance, estimated to be approximately $8.23 per share at June 30, 2018, subject to final accounting upon the close of the previously announced sale of Mendota, against the deferred tax asset, primarily related to its loss carryforwards.

About the Company
Kingsway is a holding company that owns or controls subsidiaries primarily in the insurance, extended warranty, asset management and real estate industries. 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,
			2018		2017		2018		2017
Revenues:
		Service fee and commission income	$	9,479	$	6,584	$	19,670	$	12,946
		Rental income	3,341		3,341		6,682		6,682
		Net investment income (loss)	18		(1,347)		(613)		(1,163)
		Net realized (losses) gains	(1)		(1)		9		(1)
		(Loss) gain on change in fair value of equity investments	(248)		—		614		—
		Other income	1,081		242		1,308		569
Total revenues			13,670		8,819		27,670		19,033
Operating expenses:
		Loss and loss adjustment expenses	2,625		1,338		4,247		2,557
		Commissions	932		811		1,817		1,579
		Cost of services sold	1,464		1,291		3,716		2,595
		General and administrative expenses	7,305		6,508		14,702		12,245
		Leased real estate segment interest expense	1,546		1,569		3,098		3,143
Total operating expenses			13,872		11,517		27,580		22,119
Operating (loss) income			(202)		(2,698)		90		(3,086)
Other expenses (revenues), net:
		Interest expense not allocated to segments	1,519		1,216		2,905		2,375
		Amortization of intangible assets	271		289		543		580
		Contingent consideration benefit	—		(212)		—		(212)
		Loss on change in fair value of debt	142		2,702		1,061		4,591
		Equity in net loss (income) of investee	385		145		284		(2,240)
Total other expenses, net			2,317		4,140		4,793		5,094
Loss from continuing operations before income tax expense			(2,519)		(6,838)		(4,703)		(8,180)
Income tax expense			187		1,251		438		1,516
Loss from continuing operations			(2,706)		(8,089)		(5,141)		(9,696)
Income (loss) from discontinued operations, net of taxes			911		(570)		1,318		(447)
(Loss) gain on disposal of discontinued operations, net of taxes			(6,611)		1,017		(6,611)		1,017
Net loss			(8,406)		(7,642)		(10,434)		(9,126)
		Less: net income attributable to noncontrolling interests in consolidated subsidiaries	108		100		243		205
		Less: dividends on preferred stock, net of tax	130		154		259		328
		Net loss attributable to common shareholders	$	(8,644)	$	(7,896)	$	(10,936)	$	(9,659)
Loss per share - continuing operations:
	Basic:		$	(0.14)	$	(0.39)	$	(0.26)	$	(0.48)
	Diluted:		$	(0.14)	$	(0.39)	$	(0.26)	$	(0.48)
(Loss) earnings per share - discontinued operations:
	Basic:		$	(0.26)	$	0.02	$	(0.24)	$	0.03
	Diluted:		$	(0.26)	$	0.02	$	(0.24)	$	0.03
Loss per share – net loss attributable to common shareholders:
	Basic:		$	(0.40)	$	(0.37)	$	(0.50)	$	(0.45)
	Diluted:		$	(0.40)	$	(0.37)	$	(0.50)	$	(0.45)
Weighted-average shares outstanding (in '000s):
	Basic:		21,708		21,458		21,708		21,458
	Diluted:		21,708		21,458		21,708		21,458

Consolidated Balance Sheets
(in thousands, except share data)

		June 30, 2018		December 31, 2017
		(unaudited)
Assets
Investments:
	Fixed maturities, at fair value (amortized cost of $11,605 and $14,707, respectively)	$	11,361	$	14,541
	Equity investments, at fair value (cost of $2,325 and $4,854, respectively)	2,189		4,476
	Limited liability investments	5,217		4,922
	Limited liability investment, at fair value	4,869		5,771
	Other investments, at cost which approximates fair value	1,916		2,321
	Short-term investments, at cost which approximates fair value	151		151
Total investments		25,703		32,182
Cash and cash equivalents		24,713		20,781
Investment in investee		4,947		5,230
Accrued investment income		161		331
Service fee receivable, net of allowance for doubtful accounts of $315 and $318, respectively		5,173		4,286
Other receivables, net of allowance for doubtful accounts of zero and zero, respectively		7,907		6,536
Deferred acquisition costs, net		6,662		6,325
Property and equipment, net of accumulated depreciation of $13,794 and $11,633, respectively		105,246		107,327
Goodwill		80,112		80,112
Intangible assets, net of accumulated amortization of $8,876 and $8,333, respectively		79,519		80,062
Other assets		3,592		4,302
Assets held for sale		138,804		137,126
Total Assets		$	482,539	$	484,600
Liabilities and Shareholders' Equity
Liabilities:
Unpaid loss and loss adjustment expenses:
	Property and casualty	$	2,594	$	1,329
	Vehicle service agreements	2,615		2,779
Total unpaid loss and loss adjustment expenses		5,209		4,108
Note payable		184,567		186,469
Bank loan		4,417		4,917
Subordinated debt, at fair value		52,822		52,105
Net deferred income tax liabilities		28,796		28,745
Deferred service fees		41,221		39,741
Income taxes payable		2,801		2,644
Accrued expenses and other liabilities		10,946		10,612
Liabilities held for sale		112,866		105,949
Total Liabilities		443,645		435,290

Class A preferred stock, no par value; unlimited number authorized; 222,876 and 222,876 issued and outstanding at June 30, 2018 and December 31, 2017, respectively; redemption amount of $5,572		5,477		5,461

Shareholders' Equity:
Common stock, no par value; unlimited number authorized; 21,708,190 and 21,708,190 issued and outstanding at June 30, 2018 and December 31, 2017, respectively		—		—
Additional paid-in capital		356,609		356,021
Accumulated deficit		(364,917)		(313,487)
Accumulated other comprehensive income (loss)		36,322		(3,852)
Shareholders' equity attributable to common shareholders		28,014		38,682
Noncontrolling interests in consolidated subsidiaries		5,403		5,167
Total Shareholders' Equity		33,417		43,849
Total Liabilities, Class A preferred stock and Shareholders' Equity		$	482,539	$	484,600

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 and include statements relating to the proposed sale of our insurance subsidiaries. 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 the failure to consummate the proposed sale of our insurance subsidiaries, the failure to obtain necessary regulatory approvals and the diversion of management time on transaction-related matters. 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 2017 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 2017 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.

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SOURCE Kingsway Financial Services Inc.

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