EX-99.1 2 exhibit991thirdquarter2018.htm EXHIBIT 99.1 Exhibit
Exhibit 99.1

kfssymbola55.jpg KINGSWAY ANNOUNCES THIRD QUARTER 2018 RESULTS

Toronto, Ontario (November 8, 2018) - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. (“Kingsway” or the “Company”) today announced its operating results for the third quarter and nine months ended September 30, 2018. All amounts are in U.S. dollars unless indicated otherwise.

Operating Results
The Company reported loss from continuing operations of $3.6 million, or $0.18 per diluted share, in the third quarter of 2018, compared to loss from continuing operations of $3.0 million, or $0.14 per diluted share, in the third quarter of 2017.
  
The loss from continuing operations for the third quarter of 2018 reflects the following:

•
Operating income of $0.9 million
•
Interest expense not allocated to segments of $1.6 million
•
Amortization of intangible assets of $1.4 million
•
Loss on change in fair value of debt of $1.5 million

Following are highlights of Kingsway’s third quarter 2018 operating income. Operating income reflects the Company’s core operating activities, including its reportable segments, passive investment portfolio and corporate operating expenses.

•
Operating income was $0.9 million for the third quarter of 2018 compared to $0.8 million for the third quarter of 2017.
◦
Extended Warranty segment operating income was $0.4 million for the third quarter of 2018 compared to $0.8 million for the third quarter of 2017.
◦
Leased Real Estate segment operating income was $0.5 million for the third quarter of 2018 compared to $0.5 million for the third quarter of 2017.
◦
Net investment loss of $0.1 million was reported for the third quarter of 2018 compared to net investment income of $1.3 million for the third quarter of 2017.
◦
Gain on change in fair value of equity investments was $0.3 million for the third quarter of 2018 compared to zero for the third quarter of 2017.
◦
Other operating income and expense was a net expense of $0.2 million for the third quarter of 2018 compared to $1.8 million for the third quarter of 2017.
•
Book value decreased to $1.24 per share at September 30, 2018 from $2.02 per share at December 31, 2017. The Company also carries a valuation allowance, estimated to be approximately $8.28 per share at September 30, 2018, subject to final accounting following the close on October 18, 2018 of the previously announced sale of Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively “Mendota”), against the deferred tax asset, primarily related to its loss carryforwards.
 
The following non-recurring items contributed to Kingsway’s third quarter 2018 results.

CEO Transition
On September 5, 2018, the Company entered into a series of agreements related to the separation of its former CEO from the Company and the appointment of Mr. John T. Fitzgerald as President and Chief Executive Officer. As a result of this transition, (i) other income and expenses not allocated to segments included a stock-based compensation benefit of $2.5 million, which reflects the reversal of compensation expense previously recognized from March 28, 2014 through June 30, 2018 as a result of forfeitures of restricted stock grants by certain former officers of the Company; and $0.4 million of payroll tax expense and $0.2 million of other expense recorded by the Company related to these arrangements with its former officers; and (ii) net realized losses in the third quarter of 2018 included a realized loss of $0.4 million resulting from the sale of a limited liability investment to an investment group that includes the former officers.

Adoption of ASU 2014-09
The Company corrected its initial adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, as relates to revenue recognition for Professional Warranty Service Corporation (“PWSC”), which the Company acquired on October 12, 2017. During the third quarter of 2018, PWSC adopted a different methodology to allocate the transaction price it receives from the sale of its homebuilder warranty contracts. As a result, the Company recorded an adjustment during the third quarter of 2018 to decrease service fee and commission income by $1.0 million related to the correction of our prior accounting


Exhibit 99.1

for PWSC’s homebuilder warranty service fees during the six months ended June 30, 2018. The different methodology also resulted in service fee and commission income recorded by PWSC during the third quarter of 2018 being lower by an additional $0.5 million compared to what would have been recognized during the third quarter under PWSC’s previous revenue recognition model. This approach will result in PWSC recognizing homebuilder warranty service fees more slowly compared to the previously calculated revenue recognition pattern initially utilized during the six months ended June 30, 2018.

Finalizing PWSC Purchase Accounting
The Company finalized its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWSC, which resulted in the Company recording $0.8 million of amortization expense, related to the intangible assets identified in the fair value analysis, for the period from the date of acquisition through June 30, 2018 in addition to $0.3 million of amortization expense recorded for the period from July 1, 2018 through September 30, 2018.

Sale of Mendota
The Company closed on October 18, 2018 its previously announced sale of Mendota. Included in the Company’s net loss for the three months ended September 30, 2018 is income from discontinued operations, net of tax of $0.7 million and a loss on disposal of discontinued operations of $1.2 million. As a result of the Company’s sale of Mendota, its financial statements for the third quarter and nine months ended September 30, 2018 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 September 30, 2018 with its assets and liabilities being classified as held for sale. The results of Kingsway Amigo Insurance Company, which has been in runoff 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.

Change in Jurisdiction of Incorporation
During the third quarter of 2018, the Company announced it had filed a registration statement, which includes a management proxy circular, with the Securities and Exchange Commission (“SEC”) pursuant to which the Company proposes to change its jurisdiction of incorporation from the province of Ontario to the State of Delaware in the United States of America (the “Domestication”). Following SEC clearance of the Company’s registration statement, the Company will hold a special meeting of shareholders to seek shareholder approval for the change in its jurisdiction of incorporation.

The Company believes the Domestication will enable it to eliminate a number of potentially material income tax inefficiencies it believes it would inevitably encounter, particularly now that the Company has closed the sale of Mendota. The Company believes the Domestication will also reduce operating expenses and transactional inefficiencies that currently result from being subject to Canadian corporate laws despite having no operations in Canada.

Strategic Focus
As part of its CEO Transition, the Company has defined its strategy to focus intently on organic and inorganic growth of its Extended Warranty segment while simultaneously pursuing additional opportunities in its Leased Real Estate segment. The Company’s former Chief Executive Officer has been retained as a Senior Advisor to assist in structuring additional NOL utilization transactions in our Leased Real Estate segment and maximizing the value of the portfolio of equity, limited liability and other investments received as consideration for the sale of Mendota.

About the Company
Kingsway is a holding company that owns or controls subsidiaries primarily in the 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.”


Exhibit 99.1

Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
 
2018

 
2017

 
2018

 
2017

Revenues:
 
 
 
 
 
 
 
 
Service fee and commission income
 
$
9,104

 
$
7,670

 
$
28,938

 
$
20,738

Rental income
 
3,341

 
3,345

 
10,033

 
10,041

Net investment (loss) income
 
(84
)
 
1,289

 
(697
)
 
126

Net realized losses
 
(414
)
 
—

 
(405
)
 
(1
)
Gain on change in fair value of equity investments
 
337

 
—

 
951

 
—

Other income
 
15

 
692

 
1,323

 
1,261

Total revenues
 
12,299

 
12,996

 
40,143

 
32,165

Operating expenses:
 
 
 
 
 
 
 
 
Claims authorized on vehicle service agreements
 
1,442

 
1,387

 
4,206

 
4,066

Loss and loss adjustment expenses
 
(19
)
 
266

 
1,628

 
266

Commissions
 
971

 
525

 
2,843

 
2,154

Cost of services sold
 
2,033

 
1,951

 
5,749

 
4,546

General and administrative expenses
 
5,410

 
6,515

 
20,078

 
18,740

Leased real estate segment interest expense
 
1,540

 
1,563

 
4,638

 
4,706

Total operating expenses
 
11,377

 
12,207

 
39,142

 
34,478

Operating income (loss)
 
922

 
789

 
1,001

 
(2,313
)
Other expenses (revenues), net:
 
 
 
 
 
 
 
 
Interest expense not allocated to segments
 
1,571

 
1,261

 
4,476

 
3,636

Amortization of intangible assets
 
1,356

 
286

 
1,899

 
866

Contingent consideration benefit
 
—

 
—

 
—

 
(212
)
Loss on change in fair value of debt
 
1,450

 
1,178

 
2,511

 
5,769

Gain on disposal of subsidiary
 
—

 
—

 
(17
)
 
—

Equity in net loss (income) of investee
 
339

 
897

 
623

 
(1,343
)
Total other expenses, net
 
4,716

 
3,622

 
9,492

 
8,716

Loss from continuing operations before income tax (benefit) expense
 
(3,794
)
 
(2,833
)
 
(8,491
)
 
(11,029
)
Income tax (benefit) expense
 
(147
)
 
120

 
291

 
1,636

Loss from continuing operations
 
(3,647
)
 
(2,953
)
 
(8,782
)
 
(12,665
)
Income from discontinued operations, net of taxes
 
740

 
1,391

 
2,069

 
960

(Loss) gain on disposal of discontinued operations, net of taxes
 
(1,172
)
 
—

 
(7,800
)
 
1,017

Net loss
 
(4,079
)
 
(1,562
)
 
(14,513
)
 
(10,688
)
Less: net income attributable to noncontrolling interests in consolidated subsidiaries
 
110

 
79

 
353

 
284

Less: dividends on preferred stock, net of tax
 
132

 
(115
)
 
391

 
213

Net loss attributable to common shareholders
 
$
(4,321
)
 
$
(1,526
)
 
$
(15,257
)
 
$
(11,185
)
Loss per share - continuing operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.18
)
 
$
(0.14
)
 
$
(0.44
)
 
$
(0.61
)
Diluted:
 
$
(0.18
)
 
$
(0.14
)
 
$
(0.44
)
 
$
(0.61
)
(Loss) earnings per share - discontinued operations:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.02
)
 
$
0.06

 
$
(0.26
)
 
$
0.09

Diluted:
 
$
(0.02
)
 
$
0.06

 
$
(0.26
)
 
$
0.09

Loss per share – net loss attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic:
 
$
(0.20
)
 
$
(0.07
)
 
$
(0.70
)
 
$
(0.52
)
Diluted:
 
$
(0.20
)
 
$
(0.07
)
 
$
(0.70
)
 
$
(0.52
)
Weighted-average shares outstanding (in ‘000s):
 
 
 
 
 
 
 
 
Basic:
 
21,708

 
21,559

 
21,708

 
21,492

Diluted:
 
21,708

 
21,559

 
21,708

 
21,492



Exhibit 99.1

Consolidated Balance Sheets
(in thousands, except share data)
 
 
September 30, 2018

 
December 31, 2017

 
 
(unaudited)

 
 
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturities, at fair value (amortized cost of $11,316 and $14,707, respectively)
 
$
11,076

 
$
14,541

Equity investments, at fair value (cost of $2,038 and $4,854, respectively)
 
1,334

 
4,476

Limited liability investments
 
6,230

 
4,922

Limited liability investment, at fair value
 
4,529

 
5,771

Other investments, at cost which approximates fair value
 
1,917

 
2,321

Short-term investments, at cost which approximates fair value
 
151

 
151

Total investments
 
25,237

 
32,182

Cash and cash equivalents
 
23,591

 
20,774

Investment in investee
 
2,827

 
5,230

Accrued investment income
 
194

 
331

Service fee receivable, net of allowance for doubtful accounts of $331 and $318, respectively
 
6,747

 
4,286

Other receivables, net of allowance for doubtful accounts of zero and zero, respectively
 
7,877

 
6,536

Deferred acquisition costs, net
 
6,899

 
6,325

Property and equipment, net of accumulated depreciation of $14,875 and $11,683, respectively
 
104,196

 
108,008

Goodwill
 
73,928

 
80,112

Intangible assets, net of accumulated amortization of $10,232 and $8,333, respectively
 
84,359

 
80,062

Other assets
 
2,560

 
4,302

Assets held for sale
 
133,365

 
136,452

Total Assets
 
$
471,780

 
$
484,600

Liabilities and Shareholders' Equity
 
 
 
 
Liabilities:
 
 
 
 
Property and casualty unpaid loss and loss adjustment expenses
 
$
2,292

 
$
1,329

Note payable
 
183,561

 
186,469

Bank loan
 
4,167

 
4,917

Subordinated debt, at fair value
 
53,614

 
52,105

Net deferred income tax liabilities
 
28,472

 
28,745

Deferred service fees
 
46,275

 
42,257

Income taxes payable
 
2,501

 
2,644

Accrued expenses and other liabilities
 
11,492

 
10,924

Liabilities held for sale
 
107,076

 
105,900

Total Liabilities
 
439,450

 
435,290

 
 
 
 
 
Class A preferred stock, no par value; unlimited number authorized; 222,876 and 222,876 issued and outstanding at September 30, 2018 and December 31, 2017, respectively; redemption amount of $5,572
 
5,486

 
5,461

 
 
 
 
 
Shareholders' Equity:
 
 
 
 
Common stock, no par value; unlimited number authorized; 21,708,190 and 21,708,190 issued and outstanding at September 30, 2018 and December 31, 2017, respectively
 
—

 
—

Additional paid-in capital
 
354,141

 
356,021

Accumulated deficit
 
(369,771
)
 
(313,487
)
Accumulated other comprehensive income (loss)
 
36,961

 
(3,852
)
Shareholders' equity attributable to common shareholders
 
21,331

 
38,682

Noncontrolling interests in consolidated subsidiaries
 
5,513

 
5,167

Total Shareholders' Equity
 
26,844

 
43,849

Total Liabilities, Class A preferred stock and Shareholders' Equity
 
$
471,780

 
$
484,600



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 Quarterly Report on Form 10-Q for the period ended September 30, 2018. 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.