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8-K - 8-K - KINGSWAY FINANCIAL SERVICES INCa8k3-13x17.htm
Exhibit 99.1

kfssymbola28.jpg    
CORRECTING AND REPLACING - KINGSWAY ANNOUNCES FOURTH QUARTER AND YEAR-END 2016 RESULTS


Toronto, Ontario (March 13, 2017) - (TSX: KFS, NYSE: KFS) In a release issued under the same headline on March 8, 2017, the Company failed to include in its net income attributable to shareholders $9.9 million of income tax benefit as a result of its acquisition of CMC Industries, Inc.

The corrected release follows:

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 income attributable to common shareholders of $1.1 million, or $0.05 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.
Income tax benefit includes $9.9 million, which reflects the partial release into income of the Company’s valuation allowance that it carries against its deferred income tax assets, as a result of its acquisition of CMC.

Management Comments
Larry G. Swets, Jr., President and Chief Executive Officer, stated, “Our fourth quarter earnings were affected meaningfully by the five 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.



Exhibit 99.1


“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 our reporting a large income tax benefit as well as 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; we are separately reversing $0.4 million of amortization expense previously recorded during the third quarter; and we are reporting $9.9 million of income tax benefit related to the partial release of the valuation allowance we carry against our deferred income tax assets. As a result, CMC contributed $10.2 million to our net income during the fourth quarter and $10.4 million to our net income since the time of the acquisition in July. We feel that this income recognition reflects only a part of the long-term value we have an opportunity to create over the next 17 years from our acquisition of CMC. 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 income attributable to common shareholders of $1.1 million, or $0.05 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 income attributable to common shareholders of $0.4 million, or $0.02 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 income 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 increased to $2.65 per share at December 31, 2016 from $2.22 per share at December 31, 2015, and from $2.15 per share at September 30, 2016. The Company also carries a valuation allowance, in the amount of $12.89 per share at December 31, 2016, against the deferred tax asset, primarily related to its loss carryforwards.




Exhibit 99.1

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.”


    




Exhibit 99.1

Consolidated Statements of Operations
(in thousands, except per share data)
 
 
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 (benefit) expense
 
(8,653
)
 
 
(2,089
)
 
 
(10,453
)
 
 
(11,322
)
 
Income tax (benefit) expense
 
(9,827
)
 
 
14
 
 
 
(9,720
)
 
 
93
 
 
Income (loss) from continuing operations
 
1,174
 
 
 
(2,103
)
 
 
(733
)
 
 
(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 income (loss)
 
1,305
 
 
 
(2,104
)
)
 
522
 
 
 
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 income (loss) attributable to common shareholders
 
$
1,110

 
 
$
(2,275
)
 
 
$
405

 
 
$
778

 
Earnings (loss) per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
0.05

 
 
$
(0.12
)
 
 
$
(0.04
)
 
 
$
(0.60
)
 
Diluted:
 
$
0.04

 
 
$
(0.12
)
 
 
$
(0.04
)
 
 
$
(0.60
)
 
Earnings per share - discontinued operations:
 
 
 
 
 
 
 
 
Basic:
 
$
0.01

 
 
$

 
 
$
0.06

 
 
$
0.64

 
Diluted:
 
$
0.01

 
 
$

 
 
$
0.06

 
 
$
0.64

 
Earnings (loss) per share - net income (loss) attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
0.05

 
 
$
(0.12
)
 
 
$
0.02

 
 
$
0.04

 
Diluted:
 
$
0.05

 
 
$
(0.12
)
 
 
$
0.02

 
 
$
0.04

 
Weighted average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
20,633
 
 
 
19,710
 
 
 
20,003
 
 
 
19,710
 
 
Diluted:
 
22,430
 
 
 
19,710
 
 
 
20,003
 
 
 
19,710
 
 



Exhibit 99.1


Consolidated Balance Sheets
(in thousands, except share data)

 
 
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
 
71,061
 
 
 
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
 
$
501,021

 
 
$
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
 
48,720
 
 
 
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
 
437,759
 
 
 
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
 
(297,668
)
 
 
(297,209
)
 
Accumulated other comprehensive loss
 
(208
)
 
 
(2,486
)
 
Shareholders' equity attributable to common shareholders
 
56,006
 
 
 
41,951
 
 
Noncontrolling interests in consolidated subsidiaries
 
829
 
 
 
1,752
 
 
Total Shareholders' Equity
 
56,835
 
 
 
43,703
 
 
Total Liabilities and Shareholders' Equity
 
$
501,021

 
 
$
241,022

 





Exhibit 99.1

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 income (loss) 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 benefit (expense)
 
(8,653
)
 
(2,089
)
 
(10,453
)
 
(11,322
)
 
Income tax benefit (expense)
 
9,827
 
 
(14
)
 
9,720
 
 
(93
)
 
Income (loss) from continuing operations
 
1,174
 
 
(2,103
)
 
(733
)
 
(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 income (loss)
 
$
1,305

 
$
(2,104
)
 
$
522

 
$
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.




Exhibit 99.1

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.