KINGSWAY FINANCIAL SERVICES INC - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - May 8, 2014

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KINGSWAY ANNOUNCES FIRST QUARTER 2014 RESULTS

Toronto, Ontario (May 8, 2014) - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. (“Kingsway” or the “Company”) today announced its operating results for the first quarter ended March 31, 2014. All amounts are in U.S. dollars unless indicated otherwise.

Management Comments
Larry G. Swets, Jr., the Company’s President and Chief Executive Officer, stated, “We are pleased to report a quarterly result that provides further evidence of turning the corner we discussed in the shareholder letter. During the quarter we eliminated our senior debt, raised capital and completed the IPO of our former wholly owned subsidiary, 1347 Property Insurance Holdings, Inc. As importantly, the improvement in the adjusted operating income of our segments provides the foundation for further value creation.”

Mr. Swets continued, “The turnaround in the Insurance Underwriting segment is an important milestone for the Company and reflects a significant amount of effort from the team dedicated to writing profitable premium. This stability will allow us to accelerate other merchant banking activity.”

Operating Results
The Company reported net loss of $1.0 million for the first quarter of 2014, compared to net loss of $17.3 million for the prior-year period. The Company also reported adjusted operating income, a non-U.S. GAAP measure defined below, of $2.7 million for the first quarter of 2014, compared to adjusted operating loss of $0.2 million for the prior-year period. The Company looks at adjusted operating income (loss) as a way of assessing the profitability and progress of the subsidiaries in its Insurance Underwriting and Insurance Services segments.
Following are highlights of Kingsway’s first quarter of 2014:
•
The Insurance Underwriting segment recorded operating income of $0.3 million for the first quarter of 2014, compared to operating loss of $3.0 million in the prior-year period.
•
The Insurance Services segment recorded operating income of $1.9 million for the first quarter of 2014, flat from $1.9 million in the prior-year period.
•
Net investment income of $0.4 million was recorded in the first quarter of 2014, compared to $0.6 million in the prior-year period.
•
Net realized gains of $0.0 million were recorded in the first quarter of 2014, compared to net realized losses of $1.4 million in the prior-year period.
•
Net loss of $3.6 million not allocated to any segment was recorded in the first quarter of 2014, compared to net loss of $15.4 million in the prior-year period. The 2014 result includes gain on change in fair value of debt of $0.6 million, compared to loss on change in fair value of debt of $9.0 million in the prior-year period.    
•
Book value has increased from $2.25 per share at December 31, 2013 to $2.69 per share at March 31, 2014. The Company also carries a valuation allowance, in the amount of $17.25 per share at March 31, 2014, against the deferred tax asset, primarily related to its loss carryforwards.

For a detailed discussion of Kingsway’s earnings for the first quarter ended March 31, 2014 as well as other important information, please refer to our Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission




on May 8, 2014. Our Annual Letter to Shareholders may be accessed at the Company’s website or directly at http://bit.ly/kfs2013.


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 March 31,
 
 
 
2014

 
2013

Revenues:
 
 
 
 
Net premiums earned
 
$
31,920

 
$
28,068

Service fee and commission income
 
14,724

 
13,124

Net investment income
 
413

 
580

Net realized gains (losses)
 
39

 
(1,409
)
Other income
 
2,071

 
2,218

Total revenues
 
49,167

 
42,581

Expenses:
 
 
 
 
Loss and loss adjustment expenses
 
21,061

 
21,831

Commissions and premium taxes
 
6,553

 
6,712

Cost of services sold
 
856

 
—

General and administrative expenses
 
18,524

 
19,604

Restructuring expense
 
20

 
780

Interest expense
 
1,433

 
1,833

Amortization of intangible assets
 
414

 
558

Contingent consideration expense
 
267

 
155

Total expenses
 
49,128

 
51,473

Income (loss) before gain (loss) on change in fair value of debt, loss on disposal of subsidiary, loss on buy-back of debt, equity in net income of investee and income tax expense (benefit)
 
39

 
(8,892
)
Gain (loss) on change in fair value of debt
 
563

 
(8,951
)
Loss on disposal of subsidiary
 
(1,242
)
 
—

Loss on buy-back of debt
 
—

 
(24
)
Equity in net income of investee
 
—

 
255

Loss before income tax expense (benefit)
 
(640
)
 
(17,612
)
Income tax expense (benefit)
 
366

 
(276
)
Net loss
 
(1,006
)
 
(17,336
)
Less: net income attributable to noncontrolling interests in consolidated subsidiaries
 
653

 
95

Less: dividends on preferred stock
 
53

 
—

Net loss attributable to common shareholders
 
$
(1,712
)
 
$
(17,431
)
Loss per share – net loss attributable to common shareholders:
 
 
 
 
Basic:
 
$
(0.10
)
 
$
(1.33
)
Diluted:
 
(0.10
)
 
(1.33
)
Weighted average shares outstanding (in ‘000s):
 
 
 
 
Basic:
 
16,430

 
13,149

Diluted:
 
16,430

 
13,149





Consolidated Balance Sheets
(in thousands, except per share data)
 
 
March 31, 2014

 
December 31, 2013

 
 
 (unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $50,778 and $53,455, respectively)
 
$
51,456

 
$
54,151

Equity investments, at fair value (cost of $5,103 and $3,554, respectively)
 
9,982

 
7,137

Limited liability investments
 
4,701

 
4,406

Other investments, at cost which approximates fair value
 
2,000

 
3,000

Short-term investments, at cost which approximates fair value
 
401

 
501

Total investments
 
68,540

—

69,195

Cash and cash equivalents
 
72,080

 
98,589

Investment in investee
 
7,661

 
—

Accrued investment income
 
1,096

 
614

Premiums receivable, net of allowance for doubtful accounts of $1,839 and $2,123, respectively
 
32,609

 
32,035

Service fee receivable, net of allowance for doubtful accounts of $245 and $0, respectively
 
22,622

 
19,012

Other receivables, net of allowance for doubtful accounts of $1,061 and $1,062, respectively
 
5,106

 
4,097

Reinsurance recoverable
 
7,569

 
10,335

Prepaid reinsurance premiums
 
148

 
6,816

Deferred acquisition costs, net
 
12,559

 
12,392

Property and equipment, net of accumulated depreciation of $15,894 and $15,848, respectively
 
1,671

 
1,662

Goodwill
 
10,588

 
10,588

Intangible assets, net of accumulated amortization of $18,997 and $18,583, respectively
 
48,504

 
48,918

Other assets
 
3,525

 
4,039

Asset held for sale
 
6,347

 
6,347

Total Assets
 
$
300,625

 
$
324,639

Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
Unpaid loss and loss adjustment expenses:
 
 
 
 
Property and casualty
 
$
77,285

 
$
84,534

Vehicle service agreements
 
3,128

 
3,128

Total unpaid loss and loss adjustment expenses
 
80,413

 
87,662

Unearned premiums
 
40,979

 
48,577

Reinsurance payable
 
145

 
1,033

LROC preferred units, at fair value
 
14,291

 
14,854

Senior unsecured debentures, at fair value
 
—

 
14,356

Subordinated debt, at fair value
 
28,471

 
28,471

Deferred income tax liability
 
4,456

 
4,173

Deferred service fees
 
49,262

 
48,788

Income taxes payable
 
921

 
2,984

Accrued expenses and other liabilities
 
37,538

 
36,821

Total Liabilities
 
$
256,476

 
$
287,719

Shareholders' Equity:
 
 
 
 
Class A preferred stock, no par value; unlimited number authorized; 262,876 and zero issued and outstanding at March 31, 2014 and December 31, 2013, respectively
 
$
6,402

 
$
—

Common stock, no par value; unlimited number authorized; 16,429,761 and 16,429,761 issued and outstanding at March 31, 2014 and December 31, 2013, respectively
 
—

 
—

Additional paid-in capital
 
325,427

 
324,803

Accumulated deficit
 
(300,640
)
 
(298,930
)
Accumulated other comprehensive income
 
10,973

 
9,601

Shareholders' equity attributable to common shareholders
 
42,162

 
35,474

Noncontrolling interests in consolidated subsidiaries
 
1,987

 
1,446

Total Shareholders' Equity
 
44,149

 
36,920

Total Liabilities and Shareholders' Equity
 
$
300,625

 
$
324,639





Non-U.S. GAAP Financial Measures
Operating Income (Loss)

Operating income (loss) represents one measure of the pretax profitability of our 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 for a detailed description of this non-U.S. GAAP measure.
Adjusted Operating Income (Loss)

Adjusted operating income (loss) represents another measure used by the Company to assess the profitability of our segments. Adjusted operating income (loss) is computed by adding to operating income (loss) the net investment income, net realized gains and depreciation attributable to our segments. A reconciliation of operating income (loss) and adjusted operating income (loss) to net loss for the three months ended March 31, 2014 and 2013 is presented below:

(in thousands)
Three months ended March 31,
 
 
 
2014

 
2013

Operating income (loss)
 
2,171

 
(1,129
)
Net investment income of segments
 
263

 
281

Net realized gains of segments
 
39

 
309

Depreciation of segments
 
255

 
356

Adjusted operating income (loss)
 
2,728

 
(183
)
Net investment income not included in adjusted operating income (loss)
 
151

 
299

Net realized gains (losses) not included in adjusted operating income (loss)
 
—

 
(1,718
)
Other income and expenses not allocated to segments, net
 
153

 
(4,388
)
Depreciation of segments
 
(255
)
 
(356
)
Stock based compensation expense, net of forfeitures
 
(624
)
 
—

Interest expense
 
(1,433
)
 
(1,833
)
Amortization of intangible assets
 
(414
)
 
(558
)
Contingent consideration expense
 
(267
)
 
(155
)
Gain (loss) on change in fair value of debt
 
563

 
(8,951
)
Loss on disposal of subsidiary
 
(1,242
)
 
—

Loss on buy-back of debt
 
—

 
(24
)
Equity in net income of investee
 
—

 
255

Loss before income tax (expense) benefit
 
(640
)
 
(17,612
)
Income tax (expense) benefit
 
(366
)
 
276

Net loss
 
(1,006
)
 
(17,336
)




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 the proposed private placement. 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 2013 Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014. 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 2013 Annual Report and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, 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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