TORONTO, May 7 /PRNewswire-FirstCall/ -- Kingsway Financial Services Inc. today announced its financial results in U.S. dollars for the first quarter ended March 31, 2008. The Company reported a net loss of $34.4 million or $0.62 diluted per share on a 3.4% year-over-year increase in total revenue to $474.5 million. Investment income increased 18% to $37.4 million.
The net loss was primarily attributable to a further $52.8 million reserve increase for estimated net unfavourable reserve developments for prior accident years at its Lincoln General ("Lincoln") subsidiary and a $12.2 million reserve increase at its Kingsway General subsidiary. As a result of the reserve development at Lincoln, a further $8 million of valuation allowance was recorded against the future income tax asset for operating losses in the U.S. Details of the results for the first quarter are included in the Management's Discussion and Analysis and Consolidated Financial Statements which are attached.
"Our results for the first quarter of 2008 are unacceptable and we are working expeditiously to deal with problem areas and return to profitability as soon as possible," said Shaun Jackson, President and Chief Executive Officer. "Only by establishing more conservative reserving practices throughout the organization can we more quickly identify and remedy underperforming business. The additional reserves related primarily to Lincoln General's trucking policies written for the 2007 accident year. The results were also negatively impacted by exceptionally bad winter weather in certain of our operating regions."
"We continue to eliminate and reprice business at Lincoln and this has led to a change in its mix of business, in particular moving us away from the highly competitive commercial lines in the U.S. These reductions are being offset by increased premium levels from non-standard automobile through our Mendota subsidiary acquired in April 2007."
Mr. Jackson continued, "I have been working closely with our executive team and Board to address performance issues that are affecting our results. We continue to be well capitalized and have preserved a strong securities portfolio which has weathered the recent market volatility relatively well. Over the next few quarters we will be carefully reviewing those aspects of our operations that are not performing satisfactorily and will take decisive actions where required to improve profitability."
The property and casualty insurance markets in Canada and the U.S. remain highly competitive, with the industry experiencing continued soft pricing, and slow premium growth, while having increased levels of capital and surplus. We expect that industry combined ratios will continue to deteriorate throughout 2008 which, coupled with weak equity markets and potential impairments of assets, we believe will lead to firmer pricing in many of the markets before the end of 2008.
Kingsway will continue to execute a strategy which requires that its operating subsidiaries price their insurance products to achieve underwriting profitability. Over the last two years, this pricing discipline has reduced premium volumes, particularly in the U.S. commercial automobile business. However, we are now well positioned to benefit both from the earnings from our substantial securities portfolio and from any improvements in pricing. The Company has consistently reserved its estimate of gross provision for unpaid claims at or above the independent appointed actuary's point estimate and will continue to do so.
Normal Course Issuer Bid
During the quarter, the Company repurchased 368,200 common shares under the normal course issuer bid for a total purchase price of $4.4 million at an average price of $11.87 (Cdn$11.93).
Dividend
The Board of Directors has declared a quarterly dividend of C$0.075 per common share, payable on June 30, 2008 to shareholders of record on June 16, 2008.
Conference Call and Webcast
You are invited to participate in our quarterly results conference call that will take place on May 7, 2008 at 5:00 p.m. EDT. To access please dial 1-800-732-0232 about 5 minutes before the start of the call. An audio webcast will also be broadcast live and can be accessed through our website at http://www.kingsway-financial.com/ or directly at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2231460
The Company's Annual Meeting ("AGM") will be held tomorrow Thursday May 8, 2008 at 11:00am (EDT) at The Design Exchange, 234 Bay Street, Toronto, Ontario. A live webcast can be accessed at through our website at http://www.kingsway-financial.com/ or directly at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2241800.
About the Company
Kingsway Financial Services Inc. "Kingsway" is one of the largest non-standard automobile insurers and truck insurers in North America based on A.M. Best data that we have compiled. Kingsway's primary business is the insuring of automobile risks for drivers who do not meet the criteria for coverage by standard automobile insurers and trucking insurance. The Company currently operates through thirteen wholly-owned insurance subsidiaries in Canada and the U.S. Canadian subsidiaries include Kingsway General Insurance Company, York Fire & Casualty Insurance Company and Jevco Insurance Company. U.S. subsidiaries include Universal Casualty Company, American Service Insurance Company, Southern United Fire Insurance Company, Lincoln General Insurance Company, U.S. Security Insurance Company, American Country Insurance Company, Zephyr Insurance Company, Mendota Insurance Company, Mendakota Insurance Company and Avalon Risk Management, Inc. The Company also operates reinsurance subsidiaries in Barbados and Bermuda.
The common shares of Kingsway Financial Services Inc. are listed on the Toronto Stock Exchange and the New York Stock Exchange, under the trading symbol "KFS"
Financial Summary and Highlights:
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3 months to March 31:
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(in millions of dollars except per
share amounts) 2008 2007 Change
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Gross premiums written $ 457.1 $ 479.4 (5%)
Underwriting loss (69.1) (20.7) 234%
Investment income 37.4 31.6 18%
Net realized gains (loss) (5.5) 9.1 (160%)
Operating earnings (loss) (29.6) 11.9 (349%)
Net income (loss) (34.4) 19.6 (276%)
Diluted earnings (loss) per share (0.62) 0.35 (277%)
Book value per share 16.18 16.90 (4%)
Combined ratio 115.6% 105.0% 10.6%
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- Gross premiums written decreased 5% to $457.1 million in the quarter
compared to $479.4 million in Q1 last year. Excluding the impact of
Mendota which was acquired in the second quarter of last year, gross
premiums written would have decreased 13% compared to the same
quarter last year.
- For the quarter the Company reported a net loss of $34.4 million
compared to net income of $19.6 million in Q1 last year
- For the quarter the Company reported an operating loss of
$29.6 million compared to operating income of $11.9 million in Q1
last year
- Diluted loss per share was $0.62 for the quarter compared to earnings
of $0.35 per share for Q1 last year.
- The combined ratio was 115.6% in the quarter compared to 105.0% same
quarter last year, with Canadian operations reporting a combined
ratio of 112.6% and U.S. operations a combined ratio of 116.9%.
- Estimated net unfavourable reserve development was $58.8 million in
the quarter, which increase the combined ratio by 13.3%. The
consolidated impact of this development on an after tax basis was
$0.97 per share for the quarter. The impact on income of the Lincoln
reserve increases on an after tax basis was $0.87 per share in the
quarter.
- Investment income, excluding net realized gains (losses), increased
by 18% to $37.4 million compared to $31.6 million for the same
quarter of 2007. Included in net realized losses were adjustments to
the carrying values of securities for declines in market value
considered other than temporary of $9.0 million (or $0.16 per share
for the quarter).
- The fair value of the securities portfolio per share decreased by
3% since the beginning of the year to $61.02.
- As a result of the loss before taxes, a further $8 million of
valuation allowance (or $0.14 per share for the quarter) was recorded
against the future income tax asset for operating losses in the U.S.
that do not expire for up to 20 years.
- As at March 31, 2008 the securities portfolio did not include any
collateralized debt obligations nor any direct exposure to any asset
backed commercial paper. The securities portfolio has an exposure of
approximately $3.1 million to the sub-prime mortgage market in the
U.S. through home equity loan asset backed securities.
Kingsway Financial Services Inc.
Management's Discussion and Analysis
For the three months ended March 31, 2008 and 2007
(U.S. dollars)
The following management's discussion and analysis (MD&A) should be read in conjunction with the Company's unaudited interim consolidated financial statements for the first quarter of fiscal 2008 and 2007; with the MD&A set out on pages 12 to 57 in the Company's 2007 Annual Report, including the section on risk factors; and with the notes to the interim consolidated financial statements for the first quarter of fiscal 2008 and the notes to the audited consolidated financial statements for fiscal 2007 set out on pages 68 to 85 of the Company's 2007 Annual Report.
The Company's financial results are reported in U.S. dollars. Unless otherwise indicated, all amounts are in U.S. dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP).
Non-GAAP Financial Measures
The Company uses both GAAP and certain non-GAAP financial measures to assess performance. Securities regulators require that companies caution readers about non-GAAP financial measures that do not have a standardized meaning under GAAP and are unlikely to be comparable to similar measures used by other companies. Kingsway, like many insurance companies, analyzes performance based on underwriting ratios such as combined, expense and loss ratios. These terms are defined in the glossary of terms section beginning on page 87 of the 2007 Annual Report. Although there is not a property and casualty industry defined standard that is consistently applied in calculating these ratios, Kingsway has historically included costs such as corporate office expenses and excluded premium finance revenues whereas other public companies have done otherwise in the calculation of their expense and combined ratios. Readers are therefore cautioned when comparing Kingsway's combined ratios to those of other public companies as they may not have been calculated on a comparable basis.
The Company also uses securities portfolio per share information which is calculated based on the fair value of the securities portfolio divided by the number of issued and outstanding common shares. The Company uses operating earnings which are calculated as net income excluding after-tax net realized gains and losses on securities to assess the profitability of its operations. A reconciliation of net income to operating earnings is presented in the section titled 'Operating Earnings'.
Premiums
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(in millions of dollars) 3 Months to March 31:
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2008 2007 Change
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Gross premiums written
Canada $ 119.7 $ 116.1 3%
U.S. 337.4 363.3 (7%)
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Total $ 457.1 $ 479.4 (5%)
Net premiums written
Canada $ 114.0 $ 109.8 4%
U.S. 309.6 334.3 (7%)
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Total $ 423.6 $ 444.1 (5%)
Net premiums earned
Canada $ 131.6 $ 117.7 12%
U.S. 311.0 300.5 4%
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Total $ 442.6 $ 418.2 6%
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The U.S. operations reported a 7% decrease in premiums written during the quarter including the April 1, 2007 acquisition of Mendota Insurance Company ("Mendota"), and a 19% decrease excluding the impact of Mendota which reported gross premiums written of $42.1 million in the first quarter 2008. Lincoln General's premium volume declined 32% in the quarter compared to Q1 2007 due to the impact of terminations of unprofitable programs and the soft market conditions for commercial automobile business in the U.S.
As a result of the strengthening Canadian dollar, gross premiums in U.S. dollars for the Canadian operations increased 3% in the quarter compared to the first quarter of last year. In Canadian dollars, gross premiums written from Canadian operations declined by 12% for the quarter compared to last year. Canadian operations experienced a decline of 25% in gross premiums written in the trucking line of business as fleet operators have been reducing their cross-border operations due to the slowing U.S. economy.
U.S. operations represented 74% of gross premiums written in the quarter compared with 76% in the same quarter last year. Non-standard automobile, trucking, and commercial automobile premiums represented 40%, 16% and 18%, respectively, of gross premiums written for the quarter compared with 31%, 22% and 21% for Q1 2007. Mendota writes primarily non-standard automobile insurance which primarily accounts for the increase in the percentage of non-standard automobile.
Investment Income
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(in millions of dollars) 3 Months to March 31:
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2008 2007 Change
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Investment income $ 37.4 $ 31.6 18%
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Investment income has increased in the first quarter compared to the same period last year due to an increase in the portfolio size as a result of the acquisition of Mendota. Also contributing to the increase is the impact of a higher cost based yield as maturing securities are reinvested in a higher interest rate environment as well as the impact of the stronger Canadian dollar on the investment income from Canadian operations reported in US dollars. The cost based yield on the fixed income portfolio increased to 4.7% compared to 4.5% for the first quarter of last year. The cost based yield represents the total interest income before expenses divided by the average amortized cost base of fixed income securities held in the portfolio during the period.
Net Realized Gains
The table below presents a summary of the net realized gains (losses) for the current quarter and year to date with comparative figures:
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(in millions of dollars) 3 Months to March 31:
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2008 2007 Change
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Fixed income $ 2.8 $ 0.1 2,700%
Equities 0.7 7.6 (91%)
Capital assets - 5.4 (100%)
Impairments (9.0) (4.0) 125%
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Total $ (5.5) $ 9.1 (160%)
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For the three months ended March 31, 2008, sales from the securities portfolio and the write-down of securities that are considered to be other than temporarily impaired resulted in a net realized loss of $5.5 million compared to a net realized gain of $9.1 million for the three months ended March 31, 2007. The challenging fixed income and equity markets which began in the third quarter of 2007 have continued into 2008 resulting in the write-down of $9.0 million of securities in the first quarter of 2008 compared to $4.0 million in the first quarter of 2007. The net realized gain in the first quarter of 2007 includes a $5.4 million gain on the sale of the Company's former head office building.
Underwriting Results
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(in millions of dollars) 3 Months to March 31:
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2008 2007 Change
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Underwriting profit (loss)
Canada $ (16.6) $ 5.9 (381%)
U.S. (52.5) (26.6) 97%
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Total $ (69.1) $ (20.7) 234%
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Combined ratio
Canada 112.6% 95.0% 18%
U.S. 116.9% 108.9% 8%
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Total 115.6% 105.0% 11%
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Expense ratio
Canada 37.9% 35.9% 2%
U.S. 29.7% 26.9% 3%
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Total 32.1% 29.4% 3%
-------------------------------------
-------------------------------------
Loss ratio
Canada 74.7% 59.1% 16%
U.S. 87.2% 82.0% 5%
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Total 83.5% 75.6% 8%
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-------------------------------------
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The Canadian operations experienced estimated net unfavourable reserve development of $10.7 million (or 8.1% to the Canadian operations combined ratio) compared to favourable reserve development of $5.5 million in Q1 2007. The loss ratio in the quarter was 74.7% compared to 59.1% in Q1 2007. Weather related incidents added approximately $3.3 million (2.5% to the Canadian operations combined ratio) to the Canadian operations incurred losses in the quarter.
The U.S. operations loss ratio continued to be impacted this quarter by estimated unfavourable reserve development of $48.1 million ($44.7 million in Q1 last year), with Lincoln General accounting for $52.8 million (or $0.87 per share for the quarter) of this reserve development. Excluding the impact of the Lincoln General reserve development, the U.S. operations reported a combined ratio of 99.9% for the quarter.
3 months to March 31:
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(in millions of dollars) 2008 2007
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Favourable (unfavourable) change in estimated
unpaid claims for prior accident years
(note 1):
Canada $ (10.7) $ 5.5
U.S. (48.1) (44.7)
------------------------
Total $ (58.8) $ (39.2)
------------------------
As a % of net premiums earned (note 2):
Canada 8.1% (4.6%)
U.S. 15.5% 14.9%
------------------------
Total 13.3% 9.4%
------------------------
As a % of unpaid claims (note 3):
Canada 1.2% (0.7%)
U.S. 3.6% 3.9%
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Total 2.6% 2.0%
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Note 1 - (Increase) decrease in estimates for unpaid claims from prior
accident years reflected in current financial year results
Note 2 - Increase (decrease) in current financial year reported combined
ratio
Note 3 - Increase (decrease) compared to estimated unpaid claims at the
end of the preceding fiscal year
Expenses
The overall expenses increased in the quarter due to the acquisition of Mendota and the increased operating costs of the U.S. assigned risk business. Higher operating costs and depreciation expense of the new Head Office building in Canada also impacted the expenses. The general expense ratio increased to 14.8% compared to 12.4% in Q1 2007 primarily due to lower premium volume.
Interest Expense
Interest expense in the first quarter of 2008 was $9.9 million, compared to $8.2 million for the first quarter of 2007 as a result of the issuance of the C$100 million 6% debentures on July 10, 2007.
Income Taxes
Income taxes recovery for the first quarter of 2008 was $14.4 million as a result of losses recognized in the U.S. domiciled subsidiaries and the fully taxable status of the Canadian subsidiaries. This compares with a tax recovery of $8.8 million the same quarter last year.
Net Income (Loss) and Earnings (Loss) Per Share
Net income decreased by 276% in the first quarter to a loss of $34.4 million, compared to income of $19.6 million in the first quarter of last year. Diluted loss per share was $0.62 for the quarter compared to diluted earnings of $0.35 for the first quarter of 2007.
Operating Earnings
Operating earnings are calculated as net income excluding after-tax net realized gains and losses on securities to assess the profitability of the operations.
-------------------------------------------------------------------------
3 months to March 31:
-------------------------------------------------------------------------
(in millions of dollars except per
share amounts) 2008 2007 Change
-------------------------------------------------------------------------
Net income (loss) $ (34.4) $ 19.6 (276%)
Net realized gains (losses) after
tax:
Net realized gains (losses)
before tax (5.5) 9.1 (160%)
Tax effect on realized gains
(losses) (0.7) 1.4 (150%)
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(4.8) 7.7 (162%)
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Operating earnings (losses) (29.6) 11.9 (349%)
Average outstanding shares diluted
(in millions) 55.5 56.3 (1%)
Operating earnings (losses) per
share (0.53) 0.21 (352%)
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Balance Sheet
The table below shows a review of selected categories from the balance sheet reported in the financial statements at the end of Q1 2008 compared to December 31, 2007.
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As at
-------------------------------------------------------------------------
(in millions of dollars except per
share amounts) March 31, December 31, Change
2008 2007
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Assets
Securities $ 3,140.7 $ 3,256.4 (4%)
Accounts receivable and other
assets 385.2 365.4 5%
Income taxes recoverable 12.4 1.3 854%
Future income taxes 122.0 114.1 7%
Capital assets 129.3 133.4 (3%)
Goodwill and intangible assets 114.9 116.8 (2%)
Liabilities
Bank indebtedness 163.3 172.4 (5%)
Unearned premiums 729.2 758.5 (4%)
Unpaid claims 2,263.3 2,267.1 -
Senior unsecured debentures 199.9 220.1 (9%)
Shareholders' Equity 893.9 940.8 (5%)
Book value per share 16.18 16.95 (5%)
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Securities:
The fair value of the securities portfolio including cash decreased 4% to $3.4 billion, compared to $3.5 billion as at December 31, 2007. This decrease is primarily due to the net use of cash in operating activities and the impact of a slightly weaker Canadian dollar on the conversion of the Canadian dollar portfolio to U.S. dollars.
The fair value of the securities portfolio including cash decreased 3% to $61.02 per common share at March 31, 2008 compared to $63.22 at December 31, 2007.
The table below summarizes the fair value by contractual maturity of the fixed income securities portfolio, which includes term deposits and bonds, split between Canadian and U.S. operations:
Maturity Profile:
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Canadian U.S.
Operations Operations Total
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Due in less than one year 34.0% 16.7% 22.5%
Due in one through five years 32.7 53.0 46.2
Due in five through ten years 29.4 22.8 25.0
Due after ten years 3.9 7.5 6.3
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Total 100.0% 100.0% 100.0%
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Net unrealized gains on the total securities portfolio were $41.9 million or $0.76 per share outstanding at March 31, 2008 which is included as a component of "accumulated other comprehensive income", as compared to net unrealized gains of $34.6 million or $0.62 per share outstanding at December 31, 2007. Net unrealized losses on the common share portfolio were $13.0 million or $0.24 per share outstanding at March 31, 2008 compared to net unrealized gains of $16.0 million or $0.29 per share outstanding at December 31, 2007.
For a quantitative analysis of the impact to the fair value to the fixed income portfolio of a change in interest rates see Note 6 to the financial statements.
As at March 31, 2008 the securities portfolio did not include any collateralized debt obligations nor any direct exposure to any asset backed commercial paper. The securities portfolio has an exposure of approximately $3.1 million to the sub-prime mortgage market in the U.S. through home equity loan asset backed securities. As at March 31, 2008, these securities had an aggregate net unrealized loss of $0.3 million.
For a quantitative analysis of the credit exposure of the company from its securities in fixed income securities and term deposits by rating as assigned by S&P or Moody's Investor Services see Note 6 to the financial statements.
Accounts receivable and other assets:
Accounts receivable and other assets increased by 5% to $385.2 million, primarily as a result of the seasonal direct written premium in taxi programs, as well as increased writings in most private passenger states at American Service Insurance.
Income taxes recoverable:
Income taxes recoverable increased as a result of the recording of the Canadian operations tax loss carry back in 2008.
Future income taxes:
Future income taxes increased due to tax losses recognized by the U.S. operations which can be utilized in future periods.
Capital assets:
Capital assets decreased by 3% since the end of last year.
Goodwill and intangible assets:
Goodwill and intangible assets decreased by 2% since the end of last year due to the amortization of definite life intangible assets in certain of our U.S. subsidiaries.
Bank indebtedness:
Bank indebtedness decreased from $172.4 million at December 31, 2007 to $163.3 million. During the quarter the Company repaid approximately $7.5 million of outstanding debt under our credit facilities. The undrawn amount available under the bank credit facility as at March 31, 2008 was approximately $80.4 million.
Bank indebtedness, which totaled $163.3 million as at March 31, 2008, is subject to compliance with financial covenants and other provisions of the Credit Agreement.
As a result of the loss before income taxes the interest coverage ratio was (0.5) as at March 31, 2008, placing the company in breach of this covenant. Subsequent to the balance sheet date, the Company has obtained a waiver over compliance with the March 31, 2008 interest coverage covenant under the Credit Agreement. Although the future terms of the Credit Agreement are currently under review, the borrowing costs on this facility will increase as a result of the covenant breach.
Unearned premiums:
Unearned premiums decreased 4% since December 31, 2007 as a result of decreased premium volume.
Unpaid claims:
The following table presents a summary of the provision for unpaid claims by line of business:
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(in millions of dollars)
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March 31, December 31,
Line of Business 2008 2007
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Non - Standard Automobile $ 563.8 $ 575.2
Standard Automobile 138.3 144.5
Commercial Automobile 238.7 239.2
Trucking 838.2 811.6
Motorcycle 119.6 126.8
Property & Liability 294.2 303.3
Other 70.5 66.5
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Total $ 2,263.3 $ 2,267.1
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The provisions for unpaid claims decreased by 0.1% to $2.26 billion at the end of the first quarter compared to $2.27 billion at the end of 2007. At March 31, 2008 the provision for unpaid claims comprised case reserves for individual claims increased 1% to $1.33 billion ($1.31 billion at December 31, 2007) and a provision for Incurred But Not Reported (IBNR) claims which decreased 2% to $933.6 million ($952.8 million at December 31, 2007). IBNR at Lincoln General now represents 96 cents for every $1 of case reserves recorded.
Senior unsecured debentures:
On July 10, 2007 the Company through its newly formed wholly-owned subsidiary Kingsway 2007 General Partnership issued C$100 million 6% senior unsecured debentures with a maturity date of July 11, 2012.
Book value per share:
Book value per share decreased by 5% to $16.18 at March 31, 2008 from $16.95 at December 31, 2007.
Contractual Obligations
Information concerning contractual obligations as at March 31, 2008 is shown in Note 6 of the financial statements. For further details on the Company's long term debt and interest obligations, refer to Note 10 - Bank Indebtedness of the accompanying financial statements and Note 15 of the Company's 2007 audited consolidated financial statements and pages 39 to 43 of the 2007 Annual Report which sets out the Company's contractual obligations as at December 31, 2007.
Liquidity and Capital Resources
During the three months ended March 31, 2008, the cash used in operating activities was $64.2 million as a result of higher than expected claims payments. The Company believes that the cash generated from the operating activities will be sufficient to meet its ongoing cash requirements, including interest payment obligations and dividend payments.
During the three months ended March 31, 2008, the Company repurchased 368,200 common shares under the normal course issuer bid for a total purchase price of $4.4 million at an average price of $11.87 (Cdn $11.93).
As at March 31, 2008 the Company's subsidiaries were adequately capitalized to support their premium volume. For a more detailed discussion of the capital adequacy of the Companies insurance and reinsurance subsidiaries see Note 7 to the financial statements.
Off-Balance Sheet Financing
The Company entered into an off-balance sheet transaction through the Kingsway Linked Return of Capital Trust transaction that was completed on July 14, 2005 which is more fully described in Note 15(d) of the 2007 audited consolidated financial statements and page 42 of the 2007 Annual Report. The Company has one other off-balance sheet financing arrangement as described on page 43 of the 2007 Annual Report.
Summary of Quarterly Results
The following table presents the financial results over the previous eight quarters.
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2008 2007 2006
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(in
millions
of
dollars
except
per
share) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross
premiums
written $457.1 $449.0 $509.1 $525.2 $479.4 $409.1 $483.9 $532.5
Net
premiums
earned 442.6 464.5 485.3 474.0 418.2 425.0 458.3 456.2
Total
revenue 474.5 510.1 528.1 538.6 458.9 466.6 498.2 499.5
Net
income
(loss) (34.4) (103.5) 23.6 41.7 19.6 16.8 37.4 40.2
Earnings
(loss)
per
share
Basic (0.62) (1.86) 0.43 0.75 0.35 0.30 0.67 0.71
Diluted (0.62) (1.84) 0.42 0.74 0.35 0.30 0.66 0.71
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Supplementary Financial Information
Financial Strength Indicators:
Some of the key indicators of the Company's financial strength are as
follows:
March 31, December 31,
2008 2007
------------------------
Rolling four quarter calculations:
Net premiums written to estimated
statutory surplus ratio 1.7x 1.6x
Interest coverage ratio (0.5)x 0.9x
Total bank and senior debt to
capitalization ratio 30.3% 31.0%
Selected Financial Information expressed in Cdn. dollars, except for per share amounts
The selected financial information disclosed below has been translated using the Bank of Canada monthly average exchange rate for the income statement and the month end rate for the balance sheet. Readers should be cautioned as to the limited usefulness of the selected financial information presented below.
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3 months to March 31:
(in millions of dollars except per share amount) 2008 2007
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Gross premiums written $ 459.0 $ 561.5
Net premiums earned 444.5 489.9
Net income (34.4) 23.1
Earnings per share - diluted (0.62) 0.41
Underwriting profit (loss) (69.2) (24.2)
Book value per share 16.61 19.52
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Outlook
The Company's 2007 Annual Report includes description and analysis of the key factors and events that could impact future earnings under the heading Risks Factors in the Management's Discussion and Analysis section. These factors and events have, for the most part, remained substantially unchanged.
Disclosure Controls and Procedures
Management of the Company is responsible for establishing and maintaining disclosure controls and procedures for the Company as defined under Multilateral Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such disclosure controls and procedures, or caused them to be designed under its supervision, to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to the Chief Executive Officer and the Chief Financial Officer by others within those entities, particularly during the period in which the annual filings are being prepared.
Internal Controls over Financial Reporting
Management of the Company is responsible for designing internal controls over financial reporting for the Company as defined under Multilateral Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such internal controls over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Forward-Looking Statements
--------------------------
This press release (including the Management's Discussion and Analysis) includes "forward-looking statements" that are subject to risks and uncertainties. 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 2007 Annual Report under the heading Risk Factors in the Management's Discussion and Analysis section. The securities filings can be accessed on the Canadian Securities Administrators' website at http://www.sedar.com/, and on the EDGAR section of the U.S. Securities and Exchange Commission's website at http://www.sec.gov/ or through the Company's website at http://www.kingsway-financial.com/. 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.
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of U.S. dollars, except for per share amounts)
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(Unaudited) March 31 March 31
2008 2007
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Gross premiums written $ 457,100 $ 479,354
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Net premiums written $ 423,606 $ 444,121
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Revenue:
Net premiums earned $ 442,615 $ 418,189
Investment income 37,377 31,556
Net realized gains (losses) (5,477) 9,116
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474,515 458,861
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Expenses:
Claims incurred $ 369,428 $ 316,054
Commissions and premiums taxes 76,860 71,164
General and administrative expenses 65,415 51,679
Interest expense 9,916 8,219
Amortization of intangibles 1,711 876
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523,330 447,992
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Income (loss) before income taxes (48,815) 10,869
Income taxes (recovery) (14,416) (8,772)
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Net income (loss) $ (34,399) $ 19,641
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Earnings per share:
Basic: $ (0.62) $ 0.35
Diluted: $ (0.62) $ 0.35
Weighted average shares outstanding (in '000s):
Basic: 55,411 55,799
Diluted: 55,502 56,345
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KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
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March 31 December 31
2008 2007
(unaudited)
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ASSETS
Cash and cash equivalents $ 144,679 $ 161,635
Securities 3,140,673 3,256,365
Accrued investment income 29,976 33,186
Financed premiums 86,218 91,851
Accounts receivable and other assets 385,230 365,410
Due from reinsurers and other insurers 209,893 207,137
Deferred policy acquisition costs 169,953 176,202
Income taxes recoverable 12,412 1,348
Future income taxes 121,994 114,066
Capital assets 129,278 133,431
Goodwill and intangible assets 114,927 116,774
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$4,545,233 $4,657,405
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Bank indebtedness $ 163,327 $ 172,436
Loans payable 66,222 66,222
Accounts payable and accrued liabilities 141,991 144,940
Unearned premiums 729,154 758,490
Unpaid claims 2,263,282 2,267,082
Senior unsecured debentures 199,948 220,080
Subordinated indebtedness 87,361 87,354
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3,651,285 3,716,604
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SHAREHOLDERS' EQUITY
Share capital 323,530 326,151
Issued and outstanding number of common
shares
55,249,928 - March 31, 2008
55,515,728- December 31, 2007
Contributed surplus 7,647 7,619
Retained earnings 481,506 521,165
Accumulated other comprehensive income 81,265 85,866
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893,948 940,801
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$4,545,233 $4,657,405
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KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
March 31 March 31
(Unaudited) 2008 2007
-------------------------------------------------------------------------
Share capital
Balance at beginning of period $ 326,151 $ 328,473
Issued during the period 48 278
Repurchased for cancellation (2,669) (2,321)
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Balance at end of period 323,530 326,430
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Contributed surplus
Balance at beginning of period $ 7,619 $ 5,352
Stock option expense 28 219
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Balance at end of period 7,647 5,571
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Retained earnings
Balance at beginning of period $ 521,165 $ 560,126
Net income (loss) for the period (34,399) 19,641
Common share dividends (4,139) (3,574)
Repurchase of shares for cancellation (1,121) (3,741)
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Balance at end of period 481,506 572,452
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Accumulated other comprehensive income
Balance at beginning of period $ 85,866 $ 7,011
Cumulative effect of adopting new accounting
policies - 17,672
Other comprehensive income (loss) (4,601) 10,365
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Balance at end of period 81,265 35,048
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Total shareholders' equity at end of period $ 893,948 $ 939,501
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
March 31 March 31
(Unaudited) 2008 2007
-------------------------------------------------------------------------
Comprehensive income
Net income (loss) $ (34,399) $ 19,641
Other comprehensive income, net of taxes:
- Change in unrealized gains on available-for
securities:
Unrealized gains arising during the period,
net of income taxes(1) 9,952 9,212
Recognition of realized gains to net income,
net of income taxes(2) (347) (2,141)
- Unrealized gains (losses) on translating
financial statement of self-sustaining
foreign operations (14,206) 3,294
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Other comprehensive income (loss) (4,601) 10,365
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Comprehensive income $ (39,000) $ 30,006
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(1) Net of income tax of $(1,953) for the quarter to March 31, 2008 and
$7,382 for the quarter to March 31, 2007
(2) Net of income tax of $266 for the quarter to March 31, 2008 and $510
for the quarter to March 31, 2007 KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
3 months to March 31:
-------------------------------------------------------------------------
(Unaudited) 2008 2007
-------------------------------------------------------------------------
Cash flows from operating activities
Net income $ (34,399) $ 19,641
Items not affecting cash:
Amortization 4,931 2,899
Future and current income taxes (6,200) (17,091)
Net realized (gains) losses 5,547 (9,116)
Amortization of bond premiums and discounts (2,470) (1,995)
Net change in other non-cash balances (31,612) (22,437)
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(64,203) (28,099)
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Cash flows from financing activities
Increase in share capital 48 278
Repurchase of common shares for cancellation (3,790) (6,062)
Dividends paid (4,139) (3,574)
Increase (decrease) in bank indebtedness and
loans payable (10,655) 106,951
Decrease in senior unsecured indebtedness (17,289) -
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(35,825) 97,593
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Investing activities
Purchase of securities (719,671) (990,626)
Proceeds from sale of securities 801,273 971,309
Financed premiums receivable, net 3,156 3,301
Acquisitions, net of cash acquired (212) (13,860)
Net change to capital assets (1,474) (75)
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83,072 (29,951)
-------------------------------------------------------------------------
Net change in cash and cash equivalents (16,956) 39,543
Cash and cash equivalents at beginning of period 161,635 129,706
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Cash and cash equivalents at end of period $ 144,679 $ 169,249
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KINGSWAY FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2008 and 2007
(Unaudited - tabular amounts in thousands of U.S. dollars)
NOTE 1 Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as were used for the Company's consolidated financial statements for the year ended December 31, 2007 except for the changes in accounting policies as noted below. These interim consolidated financial statements do not contain all disclosures required by generally accepted accounting principles and accordingly should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2007 as set out on pages 63 to 85 of the Company's 2007 Annual Report. The results of the operations for the interim periods are not necessarily indicative of the full-year results.
NOTE 2 Change In Accounting Polices
On January 1, 2008, the Company adopted CICA Handbook Section 1535 Accounting Changes - Capital Disclosures, Section 3862 Financial Instruments - Disclosures and Section 3863 Financial Instruments - Presentation.
Handbook Section 1535 requires the following disclosures: (i) qualitative information about an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity manages as capital; (iii) whether the entity has complied with any externally imposed capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. See Note 7 for additional details.
Handbook Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements but not changing the existing presentation requirements for financial instruments. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. Handbook Section 3862 requires qualitative and quantitative disclosure of: (i) exposures to risks arising from financial instruments, how they arose and the potential impact on the amount, timing and certainty of future cash flows; (ii) information about the risk management function and the reporting and measurement systems used; (iii) the entity's policies for hedging or mitigating risk and avoiding concentrations of risk; and (iv) the sensitivity to individual market risk factors together with the methodology for performing the analysis. Handbook Section 3863 deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. See Note 6 for additional details.
NOTE 3 Stock-based Compensation
As reported on pages 74 - 75 of the Company's 2007 Annual Report, effective January 1, 2003 the Company adopted on a prospective basis the fair-value method of accounting for stock-based compensation awards granted to employees and non-employee directors. During the first quarter 2008, the Company recorded $28,000 of stock-based compensation expense included in employee compensation expense.
Per share weighted average fair value of options granted during 2008 was C$2.88, February 2007 was C$5.34 and in December 2007 was C$2.38, respectively. The fair value of the options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
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As at March 31
-------------------------------------------------------------------------
2008 2007
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Risk-free interest rate 3.22% 4.11%
Dividend yield 2.23% 1.30%
Volatility of the expected market price of the
Company's common shares 27.8% 25.2%
Expected option life (in years) 4.0 3.7
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The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. As the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the above pro forma adjustments are not necessarily a reliable single measure of the fair value of the Company's employee stock options.
NOTE 4 Segmented Information
The Company provides property and casualty insurance and other insurance related services in three reportable segments, Canada, the United States and corporate and other insurance related services. The Company's Canadian and United States segments include transactions with the Company's reinsurance subsidiaries. At the present time, other insurance related services are not significant. Results for the Company's operating segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the consolidated financial statements.
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Three months ended March 31, 2008
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United Corporate
Canada States and other Total
-------------------------------------------------------------------------
Gross premiums
written $ 119,729 $ 337,371 $ - $ 457,100
Net premiums earned 131,566 311,049 - 442,615
Investment income
(loss) 14,914 23,000 (537) 37,
