10Q Q1 13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
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(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
March 31, 2013 |
or |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
Commission File Number: 001-15204
Kingsway Financial Services Inc.
(Exact name of registrant as specified in its charter)
_________________________
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Ontario, Canada (State or other jurisdiction of incorporation or organization) | | Not Applicable (I.R.S. Employer Identification No.) |
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45 St. Clair Avenue West, Suite 400 Toronto, Ontario M4V 1K9 |
(Address of principal executive offices and zip code) |
1-416-848-1171 |
(Registrant's telephone number, including area code) |
_________________________
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The number of shares outstanding of the registrant's common stock as of May 10, 2013 was 13,148,971.
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KINGSWAY FINANCIAL SERVICES INC. |
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Table Of Contents |
PART I - FINANCIAL INFORMATION | | |
ITEM 1. FINANCIAL STATEMENTS | | |
Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012 | | |
Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited) | | |
Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2013 and 2012 (unaudited) | | |
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited) | | |
Notes to Consolidated Financial Statements (unaudited) | | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | |
ITEM 4. CONTROLS AND PROCEDURES | | |
PART II - OTHER INFORMATION | | |
ITEM 1. LEGAL PROCEEDINGS | | |
ITEM 1A. RISK FACTORS | | |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | | |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | | |
ITEM 4. MINE SAFETY DISCLOSURES | | |
ITEM 5. OTHER INFORMATION | | |
ITEM 6. EXHIBITS | | |
SIGNATURES | | |
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KINGSWAY FINANCIAL SERVICES INC. |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands, except per share data)
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| | | | | | | | |
| | March 31, 2013 |
| | December 31, 2012 |
|
| | (unaudited) |
| | |
ASSETS | | | | |
Investments: | | | | |
Fixed maturities, at fair value (amortized cost of $69,626 and $77,858, respectively) | | $ | 71,010 |
| | $ | 79,534 |
|
Equity investments, at fair value (cost of $2,024 and $2,305, respectively) | | 3,304 |
| | 3,548 |
|
Limited liability investments | | 1,476 |
| | 2,333 |
|
Other investments, at cost which approximates fair value | | 2,000 |
| | 2,000 |
|
Short-term investments, at cost which approximates fair value | | 586 |
| | 585 |
|
Total investments | | 78,376 |
| | 88,000 |
|
Cash and cash equivalents | | 90,821 |
| | 80,813 |
|
Investment in investee | | 26,526 |
| | 41,733 |
|
Accrued investment income | | 1,356 |
| | 2,263 |
|
Premiums receivable, net of allowance for doubtful accounts of $3,880 and $4,040, respectively | | 39,968 |
| | 35,598 |
|
Service fee receivable | | 16,889 |
| | 15,173 |
|
Other receivables, net of allowance for doubtful accounts of $1,002 and $1,002, respectively | | 4,435 |
| | 4,750 |
|
Reinsurance recoverable | | 14,665 |
| | 8,557 |
|
Prepaid reinsurance premiums | | 10,238 |
| | 7,316 |
|
Deferred acquisition costs, net | | 12,685 |
| | 14,102 |
|
Property and equipment, net of accumulated depreciation of $23,332 and $22,887, respectively | | 2,448 |
| | 2,709 |
|
Goodwill | | 9,105 |
| | 8,421 |
|
Intangible assets, net of amortization of $19,821 and $19,263, respectively | | 50,025 |
| | 50,583 |
|
Other assets | | 3,974 |
| | 4,045 |
|
Asset held for sale | | 8,737 |
| | 8,737 |
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TOTAL ASSETS | | $ | 370,248 |
| | $ | 372,800 |
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LIABILITIES AND EQUITY | | | | |
| | | | |
LIABILITIES | | | | |
Unpaid loss and loss adjustment expenses: | | | | |
Property and casualty | | $ | 97,923 |
| | $ | 103,116 |
|
Vehicle service agreements | | 3,281 |
| | 3,448 |
|
Total unpaid loss and loss adjustment expenses | | 101,204 |
| | 106,564 |
|
Unearned premiums | | 52,116 |
| | 45,047 |
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Reinsurance payable | | 10,637 |
| | 4,956 |
|
LROC preferred units | | 14,903 |
| | 13,655 |
|
Senior unsecured debentures | | 25,888 |
| | 23,730 |
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Subordinated debt | | 28,781 |
| | 23,774 |
|
Deferred income tax liability | | 3,322 |
| | 3,054 |
|
Deferred service fees | | 48,813 |
| | 48,987 |
|
Income taxes payable | | 2,827 |
| | 2,879 |
|
Accrued expenses and other liabilities | | 34,038 |
| | 34,740 |
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TOTAL LIABILITIES | | $ | 322,529 |
| | $ | 307,386 |
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EQUITY | | | | |
Common stock, no par value; unlimited number authorized; 13,148,971 issued and outstanding at March 31, 2013 and December 31, 2012 | | $ | 296,621 |
| | $ | 296,621 |
|
Additional paid-in capital | | 15,757 |
| | 15,757 |
|
Accumulated deficit | | (279,501 | ) | | (262,069 | ) |
Accumulated other comprehensive income | | 14,433 |
| | 14,762 |
|
Shareholders' equity attributable to common shareholders | | 47,310 |
| | 65,071 |
|
Noncontrolling interests in consolidated subsidiaries | | 409 |
| | 343 |
|
TOTAL EQUITY | | 47,719 |
| | 65,414 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 370,248 |
| | $ | 372,800 |
|
See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
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| | | | | | | | |
| | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Revenue: | | | | |
Net premiums earned | | $ | 28,068 |
| | $ | 29,267 |
|
Service fee and commission income | | 13,124 |
| | 9,529 |
|
Net investment income | | 580 |
| | 826 |
|
Net realized (losses) gains | | (1,409 | ) | | 273 |
|
Loss on change in fair value of debt | | (8,951 | ) | | (4,331 | ) |
Other income | | 2,218 |
| | 1,083 |
|
Total revenues | | 33,630 |
| | 36,647 |
|
Expenses: | | | | |
Loss and loss adjustment expenses | | 21,831 |
| | 21,775 |
|
Commissions and premium taxes | | 6,712 |
| | 4,419 |
|
General and administrative expenses | | 19,759 |
| | 18,801 |
|
Restructuring expense | | 780 |
| | — |
|
Interest expense | | 1,833 |
| | 1,849 |
|
Amortization of intangible assets | | 558 |
| | — |
|
Total expenses | | 51,473 |
| | 46,844 |
|
Loss before loss on buy-back of debt, equity in net income (loss) of investee and income tax (benefit) expense | | (17,843 | ) | | (10,197 | ) |
Loss on buy-back of debt | | (24 | ) | | — |
|
Equity in net income (loss) of investee | | 255 |
| | (2,266 | ) |
Loss before income tax (benefit) expense | | (17,612 | ) | | (12,463 | ) |
Income tax (benefit) expense | | (276 | ) | | 59 |
|
Net loss | | (17,336 | ) | | (12,522 | ) |
Less: net income (loss) attributable to noncontrolling interests in consolidated subsidiaries | | 95 |
| | (1,514 | ) |
Net loss attributable to common shareholders | | $ | (17,431 | ) | | $ | (11,008 | ) |
Loss per share – net loss: | | | | |
Basic: | | $ | (1.32 | ) | | $ | (0.96 | ) |
Diluted: | | (1.32 | ) | | (0.96 | ) |
Weighted average shares outstanding (in ‘000s): | | | | |
Basic: | | 13,149 |
| | 13,102 |
|
Diluted: | | 13,149 |
| | 13,102 |
|
See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
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| | | | | | | | |
| | Three months ended March 31, | |
| | 2013 |
| | 2012 |
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| | | | |
Net loss | | $ | (17,336 | ) | | $ | (12,522 | ) |
Other comprehensive loss, net of taxes(1): | | | | |
Unrealized losses on fixed maturities and equity investments: | | | | |
Unrealized losses arising during the period | | (503 | ) | | (220 | ) |
Reclassification adjustment for losses included in net loss | | 248 |
| | 142 |
|
Foreign currency translation adjustments | | 1 |
| | 1,524 |
|
Equity in other comprehensive (loss) income of investee | | (105 | ) | | 311 |
|
Other comprehensive (loss) income | | (359 | ) | | 1,757 |
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Comprehensive loss | | (17,695 | ) | | (10,765 | ) |
Less: comprehensive income (loss) attributable to noncontrolling interests in consolidated subsidiaries | | 66 |
| | (1,596 | ) |
Comprehensive loss attributable to common shareholders | | $ | (17,761 | ) | | $ | (9,169 | ) |
(1) Net of income tax (benefit) expense of $0 and $0 for the three months ended March 31, 2013 and March 31, 2012, respectively. |
See accompanying notes to unaudited consolidated financial statements
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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| | | | | | | | |
| | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Cash provided by (used in): | | | | |
Operating activities: | | | | |
Net loss | | $ | (17,336 | ) | | $ | (12,522 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Equity in net (income) loss of investee | | (255 | ) | | 2,266 |
|
Equity in net (income) loss of limited liability investments | | (50 | ) | | 4 |
|
Depreciation and amortization | | 1,002 |
| | 532 |
|
Stock based compensation expense, net of forfeitures | | — |
| | (31 | ) |
Net realized losses (gains) | | 1,409 |
| | (273 | ) |
Loss on change in fair value of debt | | 8,951 |
| | 4,331 |
|
Deferred income taxes | | (416 | ) | | — |
|
Amortization of fixed maturities premiums and discounts | | 1,270 |
| | 650 |
|
Realized loss on buy-back of debt | | 24 |
| | — |
|
Changes in operating assets and liabilities: | | | | |
Premiums and service fee receivable | | (6,086 | ) | | (12,906 | ) |
Reinsurance recoverable | | (6,108 | ) | | (596 | ) |
Deferred acquisition costs | | 1,417 |
| | (287 | ) |
Income taxes recoverable | | — |
| | 718 |
|
Unpaid loss and loss adjustment expenses | | (5,360 | ) | | (14,201 | ) |
Unearned premiums | | 7,069 |
| | 6,218 |
|
Reinsurance payable | | 5,681 |
| | 530 |
|
Deferred service fees | | (174 | ) | | 1,036 |
|
Other, net | | (2,297 | ) | | 7,724 |
|
Net cash used in operating activities | | (11,259 | ) | | (16,807 | ) |
Investing activities: | | | | |
Proceeds from sales and maturities of fixed maturities | | 9,348 |
| | 37,356 |
|
Proceeds from sales of equity investments | | 175 |
| | — |
|
Proceeds from sales of investment in investee | | 13,638 |
| | — |
|
Purchase of fixed maturities | | (879 | ) | | (32,423 | ) |
Purchase of equity investments | | (23 | ) | | (750 | ) |
Net proceeds from sales of limited liability investments | | 99 |
| | — |
|
Net purchases of short-term investments | | (325 | ) | | — |
|
Net purchases of property and equipment and intangible assets | | (183 | ) | | (348 | ) |
Net cash provided by investing activities | | 21,850 |
| | 3,835 |
|
Financing activities: | | | | |
Common stock issued | | — |
| | 132 |
|
Redemption of senior unsecured debentures | | (583 | ) | | — |
|
Net cash (used in) provided by financing activities | | (583 | ) | | 132 |
|
Net increase (decrease) in cash and cash equivalents | | 10,008 |
| | (12,840 | ) |
Cash and cash equivalents at beginning of period | | 80,813 |
| | 85,486 |
|
Cash and cash equivalents at end of period | | $ | 90,821 |
| | $ | 72,646 |
|
See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 1 BUSINESS
Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Kingsway is a holding company and is primarily engaged, through its subsidiaries, in the property and casualty insurance business.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year.
The accompanying unaudited consolidated interim financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included within our Annual Report on Form 10-K ("2012 Annual Report") for the year ended December 31, 2012.
The unaudited consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect application of policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined. The critical accounting estimates and assumptions in the accompanying unaudited consolidated interim financial statements include the provision for unpaid loss and loss adjustment expenses, valuation of fixed maturities and equity investments, valuation of deferred income taxes, valuation of intangible assets, goodwill recoverability, deferred acquisition costs, and fair value assumptions for debt obligations.
The fair values of the Company's investments in fixed maturities and equity investments, LROC preferred units, senior unsecured debentures and subordinated debt are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. The fair value disclosure of the Company's investment in investee is based on quoted market prices. Fair values for other investments approximate their unpaid principal balances. The carrying amounts reported in the consolidated balance sheets approximate fair values for cash, short-term investments and certain other assets and other liabilities because of their short-term nature.
The Company's financial results contained herein are reported in U.S. dollars unless otherwise indicated.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies as reported in our 2012 Annual Report.
NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS
Adoption of New Accounting Standards:
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. Effective January 1, 2013, the Company adopted ASU 2012-02 and the adoption did not have an impact on the consolidated financial statements. There have been no triggering events that would suggest possible impairment or that it is more-likely-than-not that the fair values of indefinite-lived intangible assets are less than their carrying amounts. The Company will utilize the new guidance during its annual impairment testing in December 2013.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. The ASU requires an entity to report, either on the face of the income statement or in the notes to the financial statements,
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the income statement if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other required disclosures that provide additional detail about those amounts. Effective January 1, 2013, the Company adopted ASU 2013-02. Except for the new disclosure requirements, the adoption of the standard did not have an impact on the consolidated financial statements. The required disclosures are included in Note 16, "Accumulated Other Comprehensive Income".
NOTE 5 ACQUISITION
Effective November 16, 2012, the Company's subsidiary, IWS Acquisition Corporation ("IWS"), acquired certain tangible and intangible assets and liabilities of Intercontinental Warranty Services, Inc. for total consideration consisting of approximately $4.9 million in cash, future contingent payments and common equity in a newly formed entity.
IWS is based in Florida and is a provider of after-market vehicle protection services distributed by credit unions throughout the United States and Puerto Rico to their members. The acquisition allows the Company to benefit from the institutional knowledge of the credit unions' vehicle loan programs and expand into the vehicle protection service business.
This acquisition was accounted for as a business combination using the purchase method of accounting. The purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. During the fourth quarter of 2012, the Company began its fair value analysis on the assets acquired and liabilities assumed. In accordance with U.S. GAAP, fair value accounting effects may be adjusted up to one year from the acquisition date upon finalization of the valuation process. The Company recorded adjustments related to the acquisition during the first quarter of 2013, which resulted in an increase to goodwill of $0.7 million from the amount recorded at December 31, 2012.
After allocation of additional purchase price, goodwill of $8.6 million was recognized in addition to $12.4 million of separately identifiable intangible assets. Of this amount, $8.7 million of separately identifiable intangible assets related to this acquisition resulted from the valuations of acquired database, customer-related relationships, trade name and non-compete agreement. An additional $3.7 million of separately identifiable intangible assets resulted from the valuation of vehicle service agreements in-force ("VSA in-force"). Refer to Note 10, "Intangible Assets," for further disclosure on intangible assets related to this acquisition. The fair value analysis performed included $3.9 million related to present value of future contingent payments. The maximum the Company can pay in future contingent payments is $11.1 million, on an undiscounted basis. The contingent payments are payable annually beginning in 2013 through 2018 and are subject to the achievement of certain targets and may be adjusted in future periods based on actual performance achieved. As of March 31, 2013, the recorded value of the contingent earn-out agreement is $4.1 million, which is included in accrued expenses and other liabilities on the consolidated balance sheets.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 6 INVESTMENTS
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's investments in fixed maturities and equity investments at March 31, 2013 and December 31, 2012 are summarized in the tables shown below:
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| | | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2013 | |
| | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 21,761 |
| | $ | 884 |
| | $ | — |
| | $ | 22,645 |
|
Canadian government | | 4,085 |
| | — |
| | 56 |
| | 4,029 |
|
States municipalities and political subdivisions | | 7,150 |
| | 170 |
| | — |
| | 7,320 |
|
Mortgage-backed | | 631 |
| | 20 |
| | — |
| | 651 |
|
Asset-backed securities and collateralized mortgage obligations | | 157 |
| | 3 |
| | — |
| | 160 |
|
Corporate | | 35,842 |
| | 377 |
| | 14 |
| | 36,205 |
|
Total fixed maturities | | $ | 69,626 |
| | $ | 1,454 |
| | $ | 70 |
| | $ | 71,010 |
|
Equity investments | | 2,024 |
| | 1,296 |
| | 16 |
| | 3,304 |
|
Total fixed maturities and equity investments | | $ | 71,650 |
| | $ | 2,750 |
| | $ | 86 |
| | $ | 74,314 |
|
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| | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2012 | |
| | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 23,954 |
| | $ | 962 |
| | $ | 1 |
| | $ | 24,915 |
|
Canadian government | | 3,822 |
| | — |
| | 40 |
| | 3,782 |
|
States municipalities and political subdivisions | | 7,158 |
| | 187 |
| | — |
| | 7,345 |
|
Mortgage-backed | | 4,850 |
| | 193 |
| | — |
| | 5,043 |
|
Asset-backed securities and collateralized mortgage obligations | | 1,084 |
| | 8 |
| | — |
| | 1,092 |
|
Corporate | | 36,990 |
| | 391 |
| | 24 |
| | 37,357 |
|
Total fixed maturities | | $ | 77,858 |
| | $ | 1,741 |
| | $ | 65 |
| | $ | 79,534 |
|
Equity investments | | 2,305 |
| | 1,256 |
| | 13 |
| | 3,548 |
|
Total fixed maturities and equity investments | | $ | 80,163 |
| | $ | 2,997 |
| | $ | 78 |
| | $ | 83,082 |
|
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
The table below summarizes the Company's fixed maturities at March 31, 2013 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.
|
| | | | | | | | |
(in thousands) | | March 31, 2013 | |
| | Amortized Cost |
| | Estimated Fair Value |
|
Due in one year or less | | $ | 20,119 |
| | $ | 20,207 |
|
Due after one year through five years | | 47,781 |
| | 48,934 |
|
Due after five years through ten years | | 1,132 |
| | 1,257 |
|
Due after ten years | | 594 |
| | 612 |
|
Total | | $ | 69,626 |
| | $ | 71,010 |
|
The following tables highlight the aggregate unrealized loss position, by security type, of fixed maturities and equity investments in unrealized loss positions as of March 31, 2013 and December 31, 2012. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
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| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | March 31, 2013 | |
| Less than 12 Months | | Greater than 12 Months | | Total |
| Estimated Fair Value | | Unrealized Loss | | Estimated Fair Value | | Unrealized Loss | | Estimated Fair Value | | Unrealized Loss |
Fixed maturities: | | | | | | | | | | | |
Canadian government | $ | 4,028 |
| | $ | 56 |
| | $ | — |
| | $ | — |
| | $ | 4,028 |
| | $ | 56 |
|
Mortgage-backed | 256 |
| | — |
| | — |
| | — |
| | 256 |
| | — |
|
Corporate | 1,015 |
| | 14 |
| | — |
| | — |
| | 1,015 |
| | 14 |
|
Total fixed maturities | $ | 5,299 |
| | $ | 70 |
| | $ | — |
| | $ | — |
| | $ | 5,299 |
| | $ | 70 |
|
Equity investments | 18 |
| | 5 |
| | 3 |
| | 11 |
| | 21 |
| | 16 |
|
Total | $ | 5,317 |
| | $ | 75 |
| | $ | 3 |
| | $ | 11 |
| | $ | 5,320 |
| | $ | 86 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | December 31, 2012 | |
| Less than 12 Months | | Greater than 12 Months | | Total |
| Estimated Fair Value | | Unrealized Loss | | Estimated Fair Value | | Unrealized Loss | | Estimated Fair Value | | Unrealized Loss |
Fixed maturities: | | | | | | | | | | | |
U.S. government, government agencies and authorities | $ | 4,612 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 4,612 |
| | $ | 1 |
|
Canadian government | 3,782 |
| | 40 |
| | — |
| | — |
| | 3,782 |
| | 40 |
|
Mortgage-backed | — |
| | — |
| | 267 |
| | — |
| | 267 |
| | — |
|
Corporate | 4,169 |
| | 14 |
| | — |
| | 10 |
| | 4,169 |
| | 24 |
|
Total fixed maturities | $ | 12,563 |
| | $ | 55 |
| | $ | 267 |
| | $ | 10 |
| | $ | 12,830 |
| | $ | 65 |
|
Equity investments | 8 |
| | 1 |
| | 38 |
| | 12 |
| | 46 |
| | 13 |
|
Total | $ | 12,571 |
| | $ | 56 |
| | $ | 305 |
| | $ | 22 |
| | $ | 12,876 |
| | $ | 78 |
|
Fixed maturities and equity investments contain approximately 7 and 19 individual investments that were in unrealized loss positions as of March 31, 2013 and December 31, 2012, respectively.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:
| |
• | identifying all unrealized loss positions that have existed for at least six months; |
| |
• | identifying other circumstances which management believes may impact the recoverability of the unrealized loss positions; |
| |
• | obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments based on their knowledge and experience together with market-based valuation techniques; |
| |
• | reviewing the trading range of certain investments over the preceding calendar period; |
| |
• | assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit ratings from third-party rating agencies; |
| |
• | assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit rating based on the continuity of its debt service record; |
| |
• | determining the necessary provision for declines in market value that are considered other-than-temporary based on the analyses performed; and |
| |
• | assessing the company's ability and intent to hold these investments at least until the investment impairment is recovered. |
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:
| |
• | the opinions of professional investment managers could be incorrect; |
| |
• | the past trading patterns of individual investments may not reflect future valuation trends; |
| |
• | the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts related to a company's financial situation; and |
| |
• | the debt service pattern of non-investment grade instruments may not reflect future debt service capabilities and may not reflect a company's unknown underlying financial problems. |
As a result of the above analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write-downs related to fixed maturities and equity investments for other-than-temporary impairments for the three months ended March 31, 2013 and March 31, 2012.
The Company has reviewed currently available information regarding investments with estimated fair values that are less than their carrying amounts and believes that these unrealized losses are not other-than-temporary and are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell those investments, and it is not likely that it will be required to sell those investments before recovery of its amortized cost.
Limited liability investments include investments in limited liability companies and a limited partnership that primarily invest in income-producing real estate. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. As of March 31, 2013 and December 31, 2012, the carrying value of limited liability investments totaled $1.5 million and $2.3 million, respectively. At March 31, 2013, the Company has unfunded commitments totaling $4.7 million to fund limited liability investments. Income from limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities and is included in net investment income.
Other investments include mortgage loans and are reported at their unpaid principal balance. As of March 31, 2013 and December 31, 2012, the carrying value of other investments totaled $2.0 million and $2.0 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the three months ended March 31, 2013 and March 31, 2012 were as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Gross realized gains | | $ | 309 |
| | $ | 273 |
|
Gross realized losses | | — |
| | — |
|
Total | | $ | 309 |
| | $ | 273 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
Net investment income for the three months ended March 31, 2013 and March 31, 2012, respectively, is comprised as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Investment income | | | | |
Interest from fixed maturities | | $ | 282 |
| | $ | 518 |
|
Dividends | | 253 |
| | 242 |
|
Income (loss) from limited liability investments | | 50 |
| | (4 | ) |
Other | | 92 |
| | 166 |
|
Gross investment income | | $ | 677 |
| | $ | 922 |
|
Investment expenses | | (97 | ) | | (96 | ) |
Net investment income | | $ | 580 |
| | $ | 826 |
|
At March 31, 2013, fixed maturities and short-term investments with an estimated fair value of $14.9 million were on deposit with state and provincial regulatory authorities. Also, from time to time, the Company pledges investments to third-parties to collateralize liabilities incurred under its policies of insurance. At March 31, 2013, the amount of such pledged securities was $23.1 million.
NOTE 7 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the preferred and restricted voting common stock of Atlas Financial Holdings Inc. ("Atlas"). The Company accounted for this investment as of and for the three months ended March 31, 2013 under the equity method because the Company was deemed to have significant influence over Atlas during this period. The Company's investment in Atlas is recorded on a three-month lag basis. The carrying value, estimated fair value and approximate voting and equity percentages at March 31, 2013 and December 31, 2012 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except for percentages) | | | | | | | | | | |
| March 31, 2013 | | December 31, 2012 |
| Voting percentage | | Equity percentage | | Estimated Fair Value | | Carrying value | | Voting percentage | | Equity percentage | | Estimated Fair Value | | Carrying value |
Atlas | 16.5 | % | | 16.5 | % | | $ | 25,994 |
| | $ | 26,526 |
| | 30.0 | % | | 63.3 | % | | $ | 38,758 |
| | $ | 41,733 |
|
The fair values of the Company's investment in Atlas at March 31, 2013 and December 31, 2012 in the table above are calculated based on the published closing prices of Atlas at December 31, 2012 and September 30, 2012, respectively, to be consistent with the three-month lag in reporting its carrying value under the equity method. The estimated fair value of the Company's investment in Atlas based on the published closing price of Atlas at March 31, 2013 is $25.5 million.
Equity in net income (loss) of investee was income of $0.3 million and a loss of $2.3 million for the three months ended March 31, 2013 and March 31, 2012, respectively. The Company also recognized a decrease to shareholders' equity attributable to common shareholders of $0.1 million for the three months ended March 31, 2013 for the Company's pro rata share of its investee's accumulated other comprehensive income.
Summarized financial information for Atlas is presented below at December 31, 2012. To be consistent with the three-month lag in reporting, total revenue and net income is presented below for the three months ended December 31, 2012:
|
| | | |
(in thousands) | | Three months ended December 31, 2012 |
|
Total revenue | | 12,851 |
|
Net income | | 1,244 |
|
On February 12, 2013, the Company executed an underwriting agreement to sell 2,625,000 shares of Atlas common stock. The shares were being offered as part of Atlas' United States initial public offering at a price per share of $5.85. The Company received net proceeds of $13.6 million and recognized a loss of $1.7 million which is included in net realized losses on the consolidated statements of operations, resulting from commissions and other expenses incurred as part of the sale, during the first quarter.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 8 DEFERRED ACQUISITION COSTS
Policy acquisition costs consist primarily of commissions, premium taxes, and underwriting and agency expenses incurred related to successful efforts to acquire new or renewal insurance contracts, net of ceding commission income, and vehicle service agreements. Acquisition costs deferred on both property and casualty insurance products and vehicle service agreements are amortized over the period in which the related revenues are earned.
The components of deferred acquisition costs and the related amortization expense for the three months ended March 31, 2013 and 2012, respectively, is comprised as follows:
|
| | | | | | |
(in thousands) | | March 31 | |
| | 2013 |
| | 2012 |
|
Beginning balance, net | | 14,102 |
| | 8,116 |
|
Additions | | 9,172 |
| | 6,209 |
|
Amortization | | (10,589 | ) | | (5,922 | ) |
Balance at March 31, net | | 12,685 |
| | 8,403 |
|
NOTE 9 GOODWILL
Goodwill was $9.1 million and $8.4 million at March 31, 2013 and December 31, 2012. As further discussed in Note 5, "Acquisition," during the first quarter of 2013, the Company continued its evaluation of certain tangible and intangible assets and liabilities of Intercontinental Warranty Services, Inc. that were acquired on November 16, 2012, which resulted in an increase to goodwill of $0.7 million from the amount recorded at December 31, 2012.
NOTE 10 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
|
| | | | | | | | |
(in thousands) | | | | |
| | March 31, 2013 |
| | December 31, 2012 |
|
Intangible assets subject to amortization | | | | |
Database | | $ | 4,734 |
| | $ | 4,907 |
|
VSA in-force | | 2,443 |
| | 2,770 |
|
Customer-related relationships | | 3,004 |
| | 3,056 |
|
Non-compete agreement | | 60 |
| | 66 |
|
Intangible assets not subject to amortization | | | | |
Insurance licenses | | 7,803 |
| | 7,803 |
|
Renewal rights | | 31,318 |
| | 31,318 |
|
Trade name | | 663 |
| | 663 |
|
Intangible assets | | $ | 50,025 |
| | $ | 50,583 |
|
The Company's intangible assets with indefinite useful lives are not amortized. The Company's intangible assets with definite useful lives are amortized over their estimated useful lives. Accumulated amortization for these intangibles as of March 31, 2013 and December 31, 2012 was $19.9 million and $19.3 million, respectively. Amortization of intangible assets was $0.6 million and zero for the years ended March 31, 2013 and 2012, respectively.
NOTE 11 ASSET HELD FOR SALE
As of March 31, 2013, property consisting of building and land located in Miami, Florida with a carrying value of $8.7 million was classified as held for sale. The carrying value of the property was less than the appraised value net of estimated selling costs at the time the property was deemed held for sale.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 12 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
The establishment of the provision for unpaid loss and loss adjustment expenses is based on known facts and interpretation of circumstances and is therefore a complex and dynamic process influenced by a large variety of factors. These factors include the Company's experience with similar cases and historical trends involving loss payment patterns, pending levels of unpaid loss and loss adjustment expenses, product mix or concentration, loss severity and loss frequency patterns.
Other factors include the continually evolving and changing regulatory and legal environment; actuarial studies; professional experience and expertise of the Company's claims departments' personnel and independent adjusters retained to handle individual claims; the quality of the data used for projection purposes; existing claims management practices including claims-handling and settlement practices; the effect of inflationary trends on future loss settlement costs; court decisions; economic conditions; and public attitudes.
Consequently, the process of determining the provision necessarily involves risks that the actual results will deviate, perhaps materially, from the best estimates made.
The Company's evaluation of the adequacy of unpaid loss and loss adjustment expenses includes a re-estimation of the liability for unpaid loss and loss adjustment expenses relating to each preceding financial year compared to the liability that was previously established.
(a) Property and Casualty
The results of this comparison and the changes in the provision for property and casualty unpaid loss and loss adjustment expenses, net of amounts recoverable from reinsurers, as of March 31, 2013 and March 31, 2012 were as follows:
|
| | | | | | | | |
(in thousands) | | March 31, 2013 |
| | March 31, 2012 |
|
Balance at beginning of period, gross | | $ | 103,116 |
| | $ | 120,258 |
|
Less reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses | | 5,478 |
| | 298 |
|
Balance at beginning of period, net | | 97,638 |
| | 119,960 |
|
Incurred related to: | | | | |
|
Current year | | 20,950 |
| | 21,533 |
|
Prior years | | (789 | ) | | 242 |
|
Paid related to: | | | | |
|
Current year | | (8,210 | ) | | (7,101 | ) |
Prior years | | (19,685 | ) | | (29,546 | ) |
Balance at end of period, net | | 89,904 |
| | 105,088 |
|
Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses | | 8,019 |
| | 969 |
|
Balance at end of period, gross | | $ | 97,923 |
| | $ | 106,057 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
(b) Vehicle Service Agreements
The results of the comparison and the changes in the provision for vehicle service agreement unpaid loss and loss adjustment expenses as of March 31, 2013 are presented below. The changes in and the provision for vehicle service agreement unpaid loss and loss adjustment expenses were zero as of March 31, 2012.
|
| | | | |
(in thousands) | | March 31, 2013 |
|
Balance at beginning of period | | $ | 3,448 |
|
Incurred related to: | | |
Current year | | 1,670 |
|
Prior years | | — |
|
Paid related to: | | |
Current year | | (1,756 | ) |
Prior years | | (81 | ) |
Balance at end of period | | $ | 3,281 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 13 DEBT
Debt consists of the following instruments:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2013 | | December 31, 2012 |
| | Principal |
| | Fair Value |
| | Principal |
| | Fair Value |
|
7.5% Senior notes due 2014 | | $ | 26,356 |
| | $ | 25,888 |
| | $ | 26,966 |
| | $ | 23,730 |
|
LROC preferred units due 2015 | | 15,550 |
| | 14,903 |
| | 15,879 |
| | 13,655 |
|
Subordinated debt | | 90,500 |
| | 28,781 |
| | 90,500 |
| | 23,774 |
|
Total | | $ | 132,406 |
| | $ | 69,572 |
| | $ | 133,345 |
| | $ | 61,159 |
|
Subordinated indebtedness mentioned above consists of the following trust preferred debt instruments:
|
| | | | | |
Issuer | Principal |
| Issue date | Interest | Redemption date |
Kingsway CT Statutory Trust I | 15,000 |
| 12/4/2002 | annual interest rate equal to LIBOR, plus 4.00% payable quarterly | 12/4/2032 |
Kingsway CT Statutory Trust II | 17,500 |
| 5/15/2003 | annual interest rate equal to LIBOR, plus 4.10% payable quarterly | 5/15/2033 |
Kingsway CT Statutory Trust III | 20,000 |
| 10/29/2003 | annual interest rate equal to LIBOR, plus 3.95% payable quarterly | 10/29/2033 |
Kingsway DE Statutory Trust III | 15,000 |
| 5/23/2003 | annual interest rate equal to LIBOR, plus 4.20% payable quarterly | 5/23/2033 |
Kingsway DE Statutory Trust IV | 10,000 |
| 9/30/2003 | annual interest rate equal to LIBOR, plus 3.85% payable quarterly | 9/30/2033 |
Kingsway DE Statutory Trust VI | 13,000 |
| 1/8/2004 | annual interest rate equal to LIBOR, plus 4.00% payable quarterly | 1/8/2034 |
During the first quarter of 2011, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. At March 31, 2013, deferred interest payable of $9.4 million is included in accrued expenses and other liabilities in the consolidated balance sheets. The cash interest due in 2016 is subject to changes in the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR") over the deferral period.
During the first quarter of 2013, the Company purchased for $0.6 million, including accrued interest, $0.6 million of par value of its senior unsecured debentures with a carrying value of $0.6 million, including accrued interest, recording a loss of $0.0 million. The Company subsequently canceled the acquired debentures. During the first quarter of 2012, the Company did not buy-back any of its outstanding debt.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 14 INCOME TAXES
Income tax (benefit) expense for the three months ended March 31, 2013 and March 31, 2012 varies from the amount that would result by applying the applicable United States income tax rate of 34% to loss before income tax (benefit) expense primarily due to a valuation allowance being applied to the Company's operating losses.
The Company maintains a valuation allowance for its gross deferred tax assets at March 31, 2013 and December 31, 2012. The Company's operations have generated substantial operating losses during the last several years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income. The Company's operations, however, remain challenged and, as a result, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its March 31, 2013 and December 31, 2012 net deferred tax asset. The Company carries a deferred tax liability of $3.3 million and $3.1 million at March 31, 2013 and December 31, 2012, respectively, all of which relates to indefinite life intangible assets.
As of March 31, 2013 and December 31, 2012, the Company carried a liability for unrecognized tax benefits of $3.0 million and $3.0 million, respectively. The Company generally recognizes interest and penalties related to unrecognized tax benefits in income tax (benefit) expense.
NOTE 15 NET LOSS PER SHARE
Net loss per share is based on the weighted-average number of shares outstanding. Diluted weighted-average shares is calculated by adjusting basic weighted-average shares outstanding by all potentially dilutive stock options. Since the Company is reporting a net loss for the three months ended March 31, 2013 and March 31, 2012, all stock options outstanding were excluded from the calculation of both basic and diluted loss per share since their inclusion would have been anti-dilutive.
On July 3, 2012, the Company announced that the Board of Directors of the Company authorized the implementation of a share consolidation at a ratio of one post-consolidation share for every four pre-consolidation shares. The share consolidation, which was approved by the stockholders at the Company's Annual and Special Meeting held on May 31, 2012, was effective as of July 3, 2012 (the "Effective Date"). As a result of the consolidation, every four of the Company's common shares that were issued and outstanding on the Effective Date were automatically combined into one issued and outstanding common share, without any change in the par value of such shares. Any fractional shares resulting from the consolidation were rounded up to the nearest whole. The consolidation had the effect of reducing the number of common shares of the Company issued and outstanding from 52,595,828 shares pre-consolidation to 13,148,971 shares post-consolidation. The issued and outstanding shares reported in the consolidated balance sheets and the number of weighted-average shares outstanding included in the loss per share computations, as reported in the consolidated statements of operations, have been restated for all periods presented to reflect the impact of the share consolidation.
NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013 and March 31, 2012 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets. On the other hand, the unaudited consolidated statements of comprehensive loss present the components of other comprehensive income, net of tax, only for the three months ended March 31, 2013 and March 31, 2012 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
|
| | | | | | | | |
| | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Beginning balance | | $ | 14,762 |
| | $ | 12,749 |
|
Unrealized losses on fixed maturities and equity investments arising during the period | | (498 | ) | | (122 | ) |
Reclassification adjustment for losses included in net loss | | 248 |
| | 142 |
|
Foreign currency translation adjustments | | 26 |
| | 1,508 |
|
Equity in other comprehensive (loss) income of investee | | (105 | ) | | 311 |
|
Balance at March 31 | | $ | 14,433 |
| | $ | 14,588 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
Components of accumulated other comprehensive income were reclassified to the following lines of the consolidated statements of operations for the three months ended March 31, 2013 and March 31, 2012:
|
| | | | | | | | |
| | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Reclassification of accumulated other comprehensive income from unrealized losses on fixed maturities and equity investments to: | | | | |
Net realized (losses) gains | | $ | (248 | ) | | $ | (142 | ) |
Other-than-temporary impairment loss | | — |
| | — |
|
Loss before income tax (benefit) expense | | (248 | ) | | (142 | ) |
Income tax (benefit) expense | | — |
| | — |
|
Net loss | | $ | (248 | ) | | $ | (142 | ) |
NOTE 17 SEGMENTED INFORMATION
The Company is primarily engaged, through its subsidiaries, in the property and casualty insurance business. The Company conducts its business through the following two reportable segments: Insurance Underwriting and Insurance Services.
On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments under two separate management teams. As a result of the Company's intent to streamline its non-standard property and casualty insurance business operations under one management team, KAI Advantage Auto, Inc. ("Advantage Auto"), formerly included in Insurance Services, is now part of Insurance Underwriting. All segmented information has been restated for all periods presented to include Advantage Auto in Insurance Underwriting.
Insurance Underwriting Segment
Insurance Underwriting includes the following subsidiaries of the Company: Mendota Insurance Company, Mendakota Insurance Company, Universal Casualty Company, Maison Insurance Company ("Maison"), Kingsway Amigo Insurance Company ("Amigo"), Advantage Auto, Kingsway Reinsurance Corporation and Kingsway Reinsurance (Bermuda) Ltd. (collectively, "Insurance Underwriting"). In November 2012, the Company formed Maison, a Louisiana-domiciled property and casualty insurance company, which provides homeowners policies for wind and hail-related property losses of residential dwellings and certain contents. Insurance Underwriting principally offers personal automobile insurance to drivers who do not meet the criteria for coverage by standard automobile insurers and actively conducts business in 18 states.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. On November 19, 2012, the Florida Office of Insurance Regulation (“OIR”) approved Amigo's plan to withdraw from the business of offering commercial lines insurance in Florida. On January 30, 2013, the OIR approved Amigo's plan to withdraw from the business of offering personal lines insurance in Florida. In April 2013, Kingsway filed a comprehensive run-off plan with the OIR, which outlines plans for Amigo's run-off. The comprehensive run-off plan is subject to OIR approval.
Insurance Services Segment
Insurance Services includes the following subsidiaries of the Company: Assigned Risk Solutions Ltd. ("ARS") and IWS (collectively, "Insurance Services"). During the first quarter of 2013, Northeast Alliance Insurance Agency, LLC, formerly included in Insurance Services, was merged into ARS. Insurance Services is organized under ARS and IWS.
ARS is a licensed property and casualty agent, full service managing general agent and third-party administrator focused primarily on the assigned risk market. ARS is licensed to administer business in 22 states but generates its revenues primarily by operating in the states of New York and New Jersey.
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 26 states and Puerto Rico to their members.
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the unaudited consolidated interim financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
Segment revenues for the three months ended March 31, 2013 and 2012 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Revenues: | | | | |
Insurance Underwriting: | | | | |
Net premiums earned | | $ | 28,068 |
| | $ | 29,267 |
|
Other income | | 2,298 |
| | 1,786 |
|
Total Insurance Underwriting | | 30,366 |
| | 31,053 |
|
Insurance Services: | | | | |
Service fee and commission income | | 13,124 |
| | 9,529 |
|
Total Insurance Services | | 13,124 |
| | 9,529 |
|
Total segment revenues | | 43,490 |
| | 40,582 |
|
Net investment income | | 580 |
| | 826 |
|
Net realized (losses) gains | | (1,409 | ) | | 273 |
|
Loss on change in fair value of debt | | (8,951 | ) | | (4,331 | ) |
Other income not allocated to segments | | (80 | ) | | (703 | ) |
Total revenues | | $ | 33,630 |
| | $ | 36,647 |
|
The operating (loss) income of each segment is before income taxes and includes revenues and direct segment costs. For the three months ended March 31, 2013 and 2012, Insurance Services operating income includes amortization expense of $0.3 million and zero. respectively, related to its VSA in-force intangible asset.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
Segment (loss) income for the three months ended March 31, 2013 and 2012 were:
|
| | | | | | | | |
| | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Segment operating (loss) income | | | | |
Insurance Underwriting | | $ | (4,529 | ) | | $ | (3,226 | ) |
Insurance Services | | 1,349 |
| | 1,733 |
|
Total segment operating loss | | (3,180 | ) | | (1,493 | ) |
Net investment income | | 580 |
| | 826 |
|
Net realized (losses) gains | | (1,409 | ) | | 273 |
|
Loss on change in fair value of debt | | (8,951 | ) | | (4,331 | ) |
Other income and expenses not allocated to segments, net | | (2,819 | ) | | (3,623 | ) |
Interest expense | | (1,833 | ) | | (1,849 | ) |
Amortization of intangible assets not allocated to segments | | (231 | ) | | — |
|
Loss on buy-back of debt | | (24 | ) | | — |
|
Equity in net income (loss) of investee | | 255 |
| | (2,266 | ) |
Loss before income tax (benefit) expense | | $ | (17,612 | ) | | $ | (12,463 | ) |
Income tax (benefit) expense | | (276 | ) | | 59 |
|
Net loss | | $ | (17,336 | ) | | $ | (12,522 | ) |
Net premiums earned by line of business for the three months ended March 31, 2013 and 2012 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2013 |
| | 2012 |
|
Insurance Underwriting: | | | | |
Private passenger auto liability | | $ | 18,661 |
| | $ | 19,405 |
|
Auto physical damage | | 7,843 |
| | 7,304 |
|
Total non-standard automobile | | 26,504 |
| | 26,709 |
|
Commercial auto liability | | 649 |
| | 2,556 |
|
Homeowners | | 915 |
| | — |
|
Other | | — |
| | 2 |
|
Total net premiums earned | | $ | 28,068 |
| | $ | 29,267 |
|
NOTE 18 RESTRUCTURING
On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments under two separate management teams. As part of the restructuring, the Company intends to streamline its non-standard property and casualty insurance business operations. Specific to Insurance Underwriting, during the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. On November 19, 2012, the OIR approved Amigo's plan to withdraw from the business of offering commercial lines insurance in Florida. On January 30, 2013, the OIR approved Amigo's plan to withdraw from the business of offering personal lines insurance in Florida. In April 2013, Kingsway filed a comprehensive run-off plan with the OIR, which outlines plans for Amigo's run-off. The comprehensive run-off plan is subject to OIR approval.
As part of the restructuring, the Company will reduce staffing levels to be consistent with placing Amigo into run-off. The Company continues to estimate that Insurance Underwriting will incur approximately $2.0 million in cash severance expenses due to
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
reductions-in-force as part of the restructuring, and the Company now expects that these expenses will be incurred during the period beginning with the announcement through the end of 2013. From the time the restructuring was announced on September 17, 2012 through March 31, 2013, the Company has incurred severance expense of $1.4 million.
Changes in the restructuring liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, as of March 31, 2013 is as follows:
|
| | | | | | | | | | | | |
| | Severance | | Lease abandonment | | Total |
Restructuring liability, beginning of period | | $ | 214 |
| | $ | 1,207 |
| | $ | 1,421 |
|
Restructuring expense | | 759 |
| | 21 |
| | 780 |
|
Cash payments | | (487 | ) | | (89 | ) | | (576 | ) |
Restructuring liability, end of period | | 486 |
| | 1,139 |
| | 1,625 |
|
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company classifies its investments in fixed maturities and equity investments as available-for-sale and reports these investments at fair value. The Company's LROC preferred units, senior unsecured debentures and subordinated debt are measured and reported at fair value.
Fair values of equity investments are considered to approximate quoted market values based on the latest bid prices in active markets. Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence.
The fair value of the LROC preferred units is based on quoted market prices, and the fair value of the subordinated debt is estimated using an internal model based on significant market observable inputs. The fair values of senior unsecured debentures, for which no active market exists, are derived from quoted market prices of similar instruments or other third-party evidence.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The extent of use of quoted market prices (Level 1), valuation models using observable market information (Level 2) and internal models without observable market information (Level 3) in the valuation of the Company's financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 was as follows:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | | | | | March 31, 2013 | |
| | | | Fair Value Measurements at the End of the Reporting Period Using |
| | | | | | | | |
| | Total |
| | Quoted Prices in Active Markets for Identical Assets(Level 1) |
| | Significant Other Observable Inputs (Level 2) |
| | Significant Unobservable Inputs (Level 3) |
|
Recurring fair value measurements | | | | | | | | |
| | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 22,645 |
| | $ | — |
| | $ | 22,645 |
| | $ | — |
|
Canadian government | | 4,029 |
| | — |
| | 4,029 |
| | — |
|
States municipalities and political subdivisions | | 7,320 |
| | — |
| | 7,320 |
| | — |
|
Mortgage-backed | | 651 |
| | — |
| | 651 |
| | — |
|
Asset-backed securities and collateralized mortgage obligations | | 160 |
| | — |
| | 160 |
| | — |
|
Corporate | | 36,205 |
| | — |
| | 36,205 |
| | — |
|
Total fixed maturities | | $ | 71,010 |
| | $ | — |
| | $ | 71,010 |
| | $ | — |
|
| | | | | | | | |
Equity investments | | 3,304 |
| | 3,304 |
| | — |
| | — |
|
Other investments | | 2,000 |
| | — |
| | 2,000 |
| | — |
|
Short-term investments | | 586 |
| | — |
| | 586 |
| | — |
|
Total assets | | $ | 76,900 |
| | $ | 3,304 |
| | $ | 73,596 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
LROC preferred units | | $ | 14,903 |
| | $ | 14,903 |
| | $ | — |
| | $ | — |
|
Senior unsecured debentures | | 25,888 |
| | — |
| | 25,888 |
| | — |
|
Subordinated debt | | 28,781 |
| | — |
| | 28,781 |
| | — |
|
Total liabilities | | $ | 69,572 |
| | $ | 14,903 |
| | $ | 54,669 |
| | $ | — |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
|
| | | | | | | | | | | | | | | | |
(in thousands) | | | | | | December 31, 2012 | |
| | | | Fair Value Measurements at the End of the Reporting Period Using |
| | | | | | | | |
| | Total |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) |
| | Significant Other Observable Inputs (Level 2) |
| | Significant Unobservable Inputs (Level 3) |
|
Recurring fair value measurements | | | | | | | | |
| | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 24,915 |
| | $ | — |
| | $ | 24,915 |
| | $ | — |
|
Canadian government | | 3,782 |
| | — |
| | 3,782 |
| | — |
|
States municipalities and political subdivisions | | 7,345 |
| | — |
| | 7,345 |
| | — |
|
Mortgage-backed | | 5,043 |
| | — |
| | 5,043 |
| | — |
|
Asset-backed securities and collateralized mortgage obligations | | 1,092 |
| | — |
| | 1,092 |
| | — |
|
Corporate | | 37,357 |
| | — |
| | 37,357 |
| | — |
|
Total fixed maturities | | $ | 79,534 |
| | $ | — |
| | $ | 79,534 |
| | $ | — |
|
| | | | | | | | |
Equity investments | | 3,548 |
| | 3,548 |
| | — |
| | — |
|
Other investments | | 2,000 |
| | — |
| | 2,000 |
| | — |
|
Short-term investments | | 585 |
| | — |
| | 585 |
| | — |
|
Total assets | | $ | 85,667 |
| | $ | 3,548 |
| | $ | 82,119 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
LROC preferred units | | $ | 13,655 |
| | $ | 13,655 |
| | $ | — |
| | $ | — |
|
Senior unsecured debentures | | 23,730 |
| | — |
| | 23,730 |
| | — |
|
Subordinated debt | | 23,774 |
| | — |
| | 23,774 |
| | — |
|
Total liabilities | | $ | 61,159 |
| | $ | 13,655 |
| | $ | 47,504 |
| | $ | — |
|
NOTE 20 RELATED PARTY TRANSACTIONS
Related party transactions, including services provided to or received by the Company's subsidiaries, are carried out in the normal course of operations and are measured in part by the amount of consideration paid or received as established and agreed by the parties. Management believes that consideration paid for such services in each case approximates fair value. Except where disclosed elsewhere in these unaudited consolidated interim financial statements, the following is a summary of related party transactions.
In August 2011, the Company and its subsidiary, 1347 Advisors, entered into a management services agreement with United Insurance Holdings Corp. ("United"), a third-party. This agreement provided that 1347 Advisors supply the services of an interim Chief Financial Officer to United, as well as certain strategy consulting, corporate development, corporate finance and actuarial services. Pursuant to the management services agreement, Hassan Baqar was appointed interim Chief Financial Officer at United. Mr. Baqar is currently a Managing Director of 1347 Advisors as well as a Vice President of KAI. Mr. Larry G. Swets, Jr., Chief Executive Officer and President of the Company, also served on the Board of Directors of United. In February 2012, Amigo received a letter from the OIR which stated that Amigo, the Company and its subsidiaries, and United are affiliated entities due to their common managerial control. As a result of the foregoing, among other things, the Company may not transfer any assets to United or any of its affiliates without the prior written approval of the OIR. Subsequently, the Company and United mutually
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
agreed to terminate their management services agreement effective April 2, 2012. Furthermore, Mr. Swets resigned as a member of United's Board of Directors effective April 5, 2012.
NOTE 21 COMMITMENTS AND CONTINGENCIES
(a) Legal proceedings:
In connection with its operations in the ordinary course of business, the Company and its subsidiaries are named as defendants in various actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate the loss, or range of loss, if any, that may be incurred in connection with any of the various proceedings at this time, it is possible that individual actions may result in a loss having a material adverse effect on the Company's financial condition or results of operations.
(b) Guarantee:
The Company provided a letter of guarantee to a third-party for customs bonds reinsured by Lincoln General Insurance Company ("Lincoln General"). This guarantee may require the Company to compensate the third-party if Lincoln General is unable to fulfill its obligations relating to the customs bonds. On May 25, 2012, U.S. Customs made a demand on the third-party for $12.0 million plus interest. At this time, no demand has been made of the Company. The Company continues to believe that it has substantial defenses and that the potential loss in not probable; therefore, no liability has been recorded in the financial statements at March 31, 2013.
(c) Commitment:
During the second quarter of 2012, the Company entered into a subscription agreement to commit up to $6.0 million of capital to allow for participation in a limited liability investment which invests principally in income-producing real estate. At March 31, 2013, the unfunded commitment was $4.7 million.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
NOTE 22 SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In 2004, KAI issued $125.0 million 7.5% senior notes due in 2014 through a private offering. These notes are redeemable at KAI's option on or after February 1, 2009 and are fully and unconditionally guaranteed by the Company (a "Guarantor"). The following tables show condensed consolidating financial information for the Company as of March 31, 2013 and December 31, 2012 and for the periods ended March 31, 2013 and 2012, with a separate column for the Guarantor, the issuer and the other businesses of the Company combined ("Non-Guarantor subsidiaries").
|
| | | | | | | | | | | | | | | |
| | Condensed Consolidating Statement of Operations | |
| For the three months ended March 31, 2013 | |
| KFSI | KAI | Other subsidiaries | Consolidation adjustments | Total |
| (a "Guarantor") | (an "Issuer") | (the "Non-Guarantor subsidiaries") | | |
Revenue: | | | | | |
Net premiums earned | $ | — |
| $ | — |
| $ | 28,068 |
| $ | — |
| $ | 28,068 |
|
Service fee and commission income | — |
| — |
| 13,124 |
| — |
| 13,124 |
|
Net investment income, net realized losses other income | (116 | ) | (1,396 | ) | 2,901 |
| — |
| 1,389 |
|
Loss on change in fair value of debt | — |
| (7,702 | ) | (1,249 | ) | — |
| (8,951 | ) |
Total revenues | (116 | ) | (9,098 | ) | 42,844 |
| — |
| 33,630 |
|
Expenses: | | | | | |
Loss and loss adjustment expenses | — |
| — |
| 21,831 |
| — |
| 21,831 |
|
Commissions and premium taxes | — |
| — |
| 6,712 |
| — |
| 6,712 |
|
Other expenses | 823 |
| 1,633 |
| 18,641 |
| — |
| 21,097 |
|
Interest expense | — |
| 2,799 |
| (966 | ) | — |
| 1,833 |
|
Total expenses | 823 |
| 4,432 |
| 46,218 |
| — |
| 51,473 |
|
Loss before loss on buy-back of debt, equity in net income (loss) of investee and income tax (benefit) expense | (939 | ) | (13,530 | ) | (3,374 | ) | — |
| (17,843 | ) |
Loss on buy-back of debt | — |
| (24 | ) | — |
| — |
| (24 | ) |
Equity in net income (loss) of investee | — |
| 255 |
| — |
| — |
| 255 |
|
Loss before income tax (benefit) expense | (939 | ) | (13,299 | ) | (3,374 | ) | — |
| (17,612 | ) |
Income tax (benefit) expense | — |
| — |
| (276 | ) | — |
| (276 | ) |
Equity in undistributed net (loss) income of subsidiaries | (16,397 | ) | (3,770 | ) | — |
| 20,167 |
| — |
|
Net (loss) income | $ | (17,336 | ) | $ | (17,069 | ) | $ | (3,098 | ) | $ | 20,167 |
| $ | (17,336 | ) |
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2013 |
|
| | | | | | | | | | | | | | | |
| | Condensed Consolidating Statement of Operations | |
| For the three months ended March 31, 2012 | |
| KFSI | KAI | |