10Q Q1 14
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, 2014 |
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, 2014
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 8, 2014 was 16,429,761.
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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, 2014 (unaudited) and December 31, 2013 | | |
Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (unaudited) | | |
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (unaudited) | | |
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (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, 2014 |
| | December 31, 2013 |
|
| | (unaudited) |
| | |
Assets | | | | |
Investments: | | | | |
Fixed maturities, at fair value (amortized cost of $50,778 and $53,455, respectively) | | $ | 51,456 |
| | $ | 54,151 |
|
Equity investments, at fair value (cost of $5,103 and $3,554, respectively) | | 9,982 |
| | 7,137 |
|
Limited liability investments | | 4,701 |
| | 4,406 |
|
Other investments, at cost which approximates fair value | | 2,000 |
| | 3,000 |
|
Short-term investments, at cost which approximates fair value | | 401 |
| | 501 |
|
Total investments | | 68,540 |
| — |
| 69,195 |
|
Cash and cash equivalents | | 72,080 |
| | 98,589 |
|
Investment in investee | | 7,661 |
| | — |
|
Accrued investment income | | 1,096 |
| | 614 |
|
Premiums receivable, net of allowance for doubtful accounts of $1,839 and $2,123, respectively | | 32,609 |
| | 32,035 |
|
Service fee receivable, net of allowance for doubtful accounts of $245 and $0, respectively | | 22,622 |
| | 19,012 |
|
Other receivables, net of allowance for doubtful accounts of $1,061 and $1,062, respectively | | 5,106 |
| | 4,097 |
|
Reinsurance recoverable | | 7,569 |
| | 10,335 |
|
Prepaid reinsurance premiums | | 148 |
| | 6,816 |
|
Deferred acquisition costs, net | | 12,559 |
| | 12,392 |
|
Property and equipment, net of accumulated depreciation of $15,894 and $15,848, respectively | | 1,671 |
| | 1,662 |
|
Goodwill | | 10,588 |
| | 10,588 |
|
Intangible assets, net of accumulated amortization of $18,997 and $18,583, respectively | | 48,504 |
| | 48,918 |
|
Other assets | | 3,525 |
| | 4,039 |
|
Asset held for sale | | 6,347 |
| | 6,347 |
|
Total Assets | | $ | 300,625 |
| | $ | 324,639 |
|
Liabilities and Shareholders' Equity | | | | |
| | | | |
Liabilities: | | | | |
Unpaid loss and loss adjustment expenses: | | | | |
Property and casualty | | $ | 77,285 |
| | $ | 84,534 |
|
Vehicle service agreements | | 3,128 |
| | 3,128 |
|
Total unpaid loss and loss adjustment expenses | | 80,413 |
| | 87,662 |
|
Unearned premiums | | 40,979 |
| | 48,577 |
|
Reinsurance payable | | 145 |
| | 1,033 |
|
LROC preferred units, at fair value | | 14,291 |
| | 14,854 |
|
Senior unsecured debentures, at fair value | | — |
| | 14,356 |
|
Subordinated debt, at fair value | | 28,471 |
| | 28,471 |
|
Deferred income tax liability | | 4,456 |
| | 4,173 |
|
Deferred service fees | | 49,262 |
| | 48,788 |
|
Income taxes payable | | 921 |
| | 2,984 |
|
Accrued expenses and other liabilities | | 37,538 |
| | 36,821 |
|
Total Liabilities | | $ | 256,476 |
| | $ | 287,719 |
|
Shareholders' Equity: | | | | |
Class A preferred stock, no par value; unlimited number authorized; 262,876 and zero issued and outstanding at March 31, 2014 and December 31, 2013, respectively | | $ | 6,402 |
| | $ | — |
|
Common stock, no par value; unlimited number authorized; 16,429,761 and 16,429,761 issued and outstanding at March 31, 2014 and December 31, 2013, respectively | | — |
| | — |
|
Additional paid-in capital | | 325,427 |
| | 324,803 |
|
Accumulated deficit | | (300,640 | ) | | (298,930 | ) |
Accumulated other comprehensive income | | 10,973 |
| | 9,601 |
|
Shareholders' equity attributable to common shareholders | | 42,162 |
| | 35,474 |
|
Noncontrolling interests in consolidated subsidiaries | | 1,987 |
| | 1,446 |
|
Total Shareholders' Equity | | 44,149 |
| | 36,920 |
|
Total Liabilities and Shareholders' Equity | | $ | 300,625 |
| | $ | 324,639 |
|
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, | |
| | 2014 |
| | 2013 |
|
Revenues: | | | | |
Net premiums earned | | $ | 31,920 |
| | $ | 28,068 |
|
Service fee and commission income | | 14,724 |
| | 13,124 |
|
Net investment income | | 413 |
| | 580 |
|
Net realized gains (losses) | | 39 |
| | (1,409 | ) |
Other income | | 2,071 |
| | 2,218 |
|
Total revenues | | 49,167 |
| | 42,581 |
|
Expenses: | | | | |
Loss and loss adjustment expenses | | 21,061 |
| | 21,831 |
|
Commissions and premium taxes | | 6,553 |
| | 6,712 |
|
Cost of services sold | | 856 |
| | — |
|
General and administrative expenses | | 18,524 |
| | 19,604 |
|
Restructuring expense | | 20 |
| | 780 |
|
Interest expense | | 1,433 |
| | 1,833 |
|
Amortization of intangible assets | | 414 |
| | 558 |
|
Contingent consideration expense | | 267 |
| | 155 |
|
Total expenses | | 49,128 |
| | 51,473 |
|
Income (loss) before gain (loss) on change in fair value of debt, loss on disposal of subsidiary, loss on buy-back of debt, equity in net income of investee and income tax expense (benefit) | | 39 |
| | (8,892 | ) |
Gain (loss) on change in fair value of debt | | 563 |
| | (8,951 | ) |
Loss on disposal of subsidiary | | (1,242 | ) | | — |
|
Loss on buy-back of debt | | — |
| | (24 | ) |
Equity in net income of investee | | — |
| | 255 |
|
Loss before income tax expense (benefit) | | (640 | ) | | (17,612 | ) |
Income tax expense (benefit) | | 366 |
| | (276 | ) |
Net loss | | (1,006 | ) | | (17,336 | ) |
Less: net income attributable to noncontrolling interests in consolidated subsidiaries | | 653 |
| | 95 |
|
Less: dividends on preferred stock | | 53 |
| | — |
|
Net loss attributable to common shareholders | | $ | (1,712 | ) | | $ | (17,431 | ) |
Loss per share – net loss attributable to common shareholders: | | | | |
Basic: | | $ | (0.10 | ) | | $ | (1.33 | ) |
Diluted: | | (0.10 | ) | | (1.33 | ) |
Weighted average shares outstanding (in ‘000s): | | | | |
Basic: | | 16,430 |
| | 13,149 |
|
Diluted: | | 16,430 |
| | 13,149 |
|
See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. |
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
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| | | | | | | | |
| | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
| | | | |
Net loss | | $ | (1,006 | ) | | $ | (17,336 | ) |
Other comprehensive income (loss), net of taxes(1): | | | | |
Unrealized gains (losses) on fixed maturities and equity investments: | | | | |
Unrealized gains (losses) arising during the period | | 1,226 |
| | (503 | ) |
Reclassification adjustment for amounts included in net loss | | 52 |
| | 248 |
|
Foreign currency translation adjustments | | (18 | ) | | 1 |
|
Equity in other comprehensive loss of investee | | — |
| | (105 | ) |
Other comprehensive income (loss) | | 1,260 |
| | (359 | ) |
Comprehensive income (loss) | | 254 |
| | (17,695 | ) |
Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries | | 541 |
| | 66 |
|
Comprehensive loss attributable to common shareholders | | $ | (287 | ) | | $ | (17,761 | ) |
(1) Net of income tax expense (benefit) of $0 and $0 for the three months ended March 31, 2014 and March 31, 2013, 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) |
| | | | | | | | |
| | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Cash provided by (used in): | | | | |
Operating activities: | | | | |
Net loss | | $ | (1,006 | ) | | $ | (17,336 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Equity in net income of investee | | — |
| | (255 | ) |
Equity in net income of limited liability investments | | (22 | ) | | (50 | ) |
Depreciation and amortization | | 693 |
| | 1,002 |
|
Contingent consideration expense | | 267 |
| | 155 |
|
Stock based compensation expense, net of forfeitures | | 624 |
| | — |
|
Net realized (gains) losses | | (39 | ) | | 1,409 |
|
(Gain) loss on change in fair value of debt | | (563 | ) | | 8,951 |
|
Deferred income taxes | | 459 |
| | (416 | ) |
Amortization of fixed maturities premiums and discounts | | 206 |
| | 1,270 |
|
Loss on disposal of subsidiary | | 1,242 |
| | — |
|
Realized loss on buy-back of debt | | — |
| | 24 |
|
Changes in operating assets and liabilities: | | | | |
Premiums and service fee receivable | | (4,184 | ) | | (6,086 | ) |
Reinsurance recoverable | | 2,766 |
| | (6,108 | ) |
Prepaid reinsurance premiums | | 6,668 |
| | (2,922 | ) |
Deferred acquisition costs | | (167 | ) | | 1,417 |
|
Unpaid loss and loss adjustment expenses | | (7,249 | ) | | (5,360 | ) |
Unearned premiums | | (7,598 | ) | | 7,069 |
|
Reinsurance payable | | (888 | ) | | 5,681 |
|
Deferred service fees | | 474 |
| | (174 | ) |
Other, net | | (623 | ) | | 470 |
|
Net cash used in operating activities | | (8,940 | ) | | (11,259 | ) |
Investing activities: | | | | |
Proceeds from sales and maturities of fixed maturities | | 5,100 |
| | 9,348 |
|
Proceeds from sales of equity investments | | 71 |
| | 175 |
|
Proceeds from sales of investment in investee | | — |
| | 13,638 |
|
Purchase of fixed maturities | | (5,878 | ) | | (879 | ) |
Purchase of equity investments | | (1,593 | ) | | (23 | ) |
Net acquisition of limited liability investments | | (263 | ) | | 99 |
|
Proceeds from other investments | | 1,000 |
| | — |
|
Net purchases of short-term investments | | (103 | ) | | (325 | ) |
Acquisition of investee | | (7,661 | ) | | — |
|
Net purchases of property and equipment | | (288 | ) | | (183 | ) |
Net cash (used in) provided by investing activities | | (9,615 | ) | | 21,850 |
|
Financing activities: | | | | |
Proceeds from issuance of preferred stock, net | | 6,402 |
| | — |
|
Redemption of senior unsecured debentures | | (14,356 | ) | | (583 | ) |
Net cash used in financing activities | | (7,954 | ) | | (583 | ) |
Net (decrease) increase in cash and cash equivalents | | (26,509 | ) | | 10,008 |
|
Cash and cash equivalents at beginning of period | | 98,589 |
| | 80,813 |
|
Cash and cash equivalents at end of period | | $ | 72,080 |
| | $ | 90,821 |
|
See accompanying notes to unaudited consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
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 Canadian holding company with operating subsidiaries located in the United States. The Company operates as a merchant bank 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 ("2013 Annual Report") for the year ended December 31, 2013.
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, fair value assumptions for debt obligations and contingent consideration.
The fair values of the Company's investments in fixed maturities and equity investments, LROC preferred units, senior unsecured debentures, subordinated debt and contingent consideration are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal balance. 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 2013 Annual Report.
NOTE 4 RECENTLY ISSUED 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.
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, the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the income
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
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 17, "Accumulated Other Comprehensive Income."
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 amends ASC Topic 740, Income Taxes, to provide guidance and reduce diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Effective January 1, 2014, the Company adopted ASU 2013-11. Except for the new disclosure requirements, the adoption of the standard did not have an impact on the consolidated financial statements.
NOTE 5 ACQUISITION AND DISPOSITION
(a) Acquisition
Trinity Warranty Solutions LLC:
Effective May 22, 2013, the Company's subsidiary, Trinity Warranty Solutions LLC ("Trinity"), acquired certain intangible assets and liabilities of Trinity Warranty Corp. for total consideration consisting of approximately $1.1 million in cash and future contingent payments. As further discussed in Note 18, "Segmented Information," Trinity is included in the Insurance Services segment. Trinity is based in Illinois and is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air conditioning ("HVAC") and refrigeration industry.
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 2013, the Company completed its fair value analysis on the assets acquired and liabilities assumed. Goodwill of $1.1 million was recognized in addition to $0.5 million of a separately identifiable intangible asset for customer-related relationships. Refer to Note 9, "Intangible Assets," for further disclosure on intangible assets related to this acquisition. The fair value analysis performed resulted in the establishment of a $0.6 million liability effective May 22, 2013 related to present value of future contingent payments. The maximum the Company can pay in future contingent payments is $2.4 million, on an undiscounted basis. The contingent payments are payable annually beginning in 2014 through 2023, are subject to the achievement of certain targets and may be adjusted in future periods based on actual performance achieved. As of March 31, 2014, the recorded value of the contingent payment liability is $0.8 million, which is included in accrued expenses and other liabilities on the consolidated balance sheets.
(b) Disposition
Effective March 31, 2014, the Company's wholly owned subsidiary, 1347 Property Insurance Holdings, Inc. ("PIH"), formerly known as Maison Insurance Holdings, Inc., completed an initial public offering of its common stock. Total consideration to the Company as a result of this transaction was $7.7 million, consisting of a 28.7% interest in the common shares of PIH. As a result of the disposal, the Company recognized a loss of $1.2 million for the three months ended March 31, 2014. The earnings of PIH are included in the consolidated statements of operations through the March 31, 2014 transaction date. Refer to Note 7, "Investment in Investee," for further disclosure on the Company's investment in PIH at March 31, 2014.
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KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
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, 2014 and December 31, 2013 are summarized in the tables shown below:
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| | | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2014 | |
| | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 15,255 |
| | $ | 531 |
| | $ | 21 |
| | $ | 15,765 |
|
Canadian government | | 4,417 |
| | — |
| | 161 |
| | 4,256 |
|
States municipalities and political subdivisions | | 6,118 |
| | 138 |
| | — |
| | 6,256 |
|
Mortgage-backed | | 1,952 |
| | 16 |
| | 1 |
| | 1,967 |
|
Asset-backed securities and collateralized mortgage obligations | | 4,489 |
| | 4 |
| | 2 |
| | 4,491 |
|
Corporate | | 18,547 |
| | 184 |
| | 10 |
| | 18,721 |
|
Total fixed maturities | | 50,778 |
| | 873 |
| | 195 |
| | 51,456 |
|
Equity investments: | | | | | | | | |
Common stock | | 5,103 |
| | 4,972 |
| | 93 |
| | 9,982 |
|
Total fixed maturities and equity investments | | $ | 55,881 |
| | $ | 5,845 |
| | $ | 288 |
| | $ | 61,438 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2013 | |
| | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Estimated Fair Value |
|
Fixed maturities: | | | | | | | | |
U.S. government, government agencies and authorities | | $ | 17,777 |
| | $ | 591 |
| | $ | 30 |
| | $ | 18,338 |
|
Canadian government | | 4,235 |
| | — |
| | 153 |
| | 4,082 |
|
States municipalities and political subdivisions | | 6,126 |
| | 105 |
| | — |
| | 6,231 |
|
Mortgage-backed | | 1,993 |
| | 15 |
| | 2 |
| | 2,006 |
|
Asset-backed securities and collateralized mortgage obligations | | 3,996 |
| | 1 |
| | 3 |
| | 3,994 |
|
Corporate | | 19,328 |
| | 183 |
| | 11 |
| | 19,500 |
|
Total fixed maturities | | 53,455 |
| | 895 |
| | 199 |
| | 54,151 |
|
Equity investments: | | | | | | | | |
Common stock | | 3,554 |
| | 3,623 |
| | 40 |
| | 7,137 |
|
Total fixed maturities and equity investments | | $ | 57,009 |
| | $ | 4,518 |
| | $ | 239 |
| | $ | 61,288 |
|
The table below summarizes the Company's fixed maturities at March 31, 2014 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.
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| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
|
| | | | | | | | |
(in thousands) | | March 31, 2014 | |
| | Amortized Cost |
| | Estimated Fair Value |
|
Due in one year or less | | $ | 17,500 |
| | $ | 17,596 |
|
Due after one year through five years | | 30,733 |
| | 31,296 |
|
Due after five years through ten years | | 614 |
| | 619 |
|
Due after ten years | | 1,931 |
| | 1,945 |
|
Total | | $ | 50,778 |
| | $ | 51,456 |
|
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, 2014 and December 31, 2013. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | March 31, 2014 | |
| 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 | $ | 2,514 |
| | $ | 19 |
| | $ | 861 |
| | $ | 2 |
| | $ | 3,375 |
| | $ | 21 |
|
Canadian government | — |
| | — |
| | 4,256 |
| | 161 |
| | 4,256 |
| | 161 |
|
Mortgage-backed | 603 |
| | 1 |
| | — |
| | — |
| | 603 |
| | 1 |
|
Asset-backed securities and collateralized mortgage obligations | 1,273 |
| | 2 |
| | — |
| | — |
| | 1,273 |
| | 2 |
|
Corporate | 816 |
| | 10 |
| | — |
| | — |
| | 816 |
| | 10 |
|
Total fixed maturities | 5,206 |
| | 32 |
| | 5,117 |
| | 163 |
| | 10,323 |
| | 195 |
|
Equity investments: | | | | | | | | |
|
| |
|
|
Common stock | 1,618 |
| | 93 |
| | — |
| | — |
| | 1,618 |
| | 93 |
|
Total | $ | 6,824 |
| | $ | 125 |
| | $ | 5,117 |
| | $ | 163 |
| | $ | 11,941 |
| | $ | 288 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | December 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: | | | | | | | | | | | |
U.S. government, government agencies and authorities | $ | 4,008 |
| | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | 4,008 |
| | $ | 30 |
|
Canadian government | — |
| | — |
| | 4,082 |
| | 153 |
| | 4,082 |
| | 153 |
|
Mortgage-backed | 919 |
| | 2 |
| | — |
| | — |
| | 919 |
| | 2 |
|
Asset-backed securities and collateralized mortgage obligations | 3,474 |
| | 3 |
| | — |
| | — |
| | 3,474 |
| | 3 |
|
Corporate | 408 |
| | 1 |
| | — |
| | 10 |
| | 408 |
| | 11 |
|
Total fixed maturities | 8,809 |
| | 36 |
| | 4,082 |
| | 163 |
| | 12,891 |
| | 199 |
|
Equity investments: | | | | | | | | | | | |
Common stock | 969 |
| | 35 |
| | 1 |
| | 5 |
| | 970 |
| | 40 |
|
Total | $ | 9,778 |
| | $ | 71 |
| | $ | 4,083 |
| | $ | 168 |
| | $ | 13,861 |
| | $ | 239 |
|
Fixed maturities and equity investments contain approximately 18 and 27 individual investments that were in unrealized loss positions as of March 31, 2014 and December 31, 2013, respectively.
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 analysis performed by the Company to determine declines in market value that are other-than-temporary, there were no write-downs for other-than-temporary impairments related to investments for the three months ended March 31, 2014 and March 31, 2013.
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
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
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.
The Company does not have any exposure to subprime mortgage-backed investments.
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, 2014 and December 31, 2013, the carrying value of limited liability investments totaled $4.7 million and $4.4 million, respectively. At March 31, 2014, the Company has unfunded commitments totaling $1.5 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 collateral loans and are reported at their unpaid principal balance. As of March 31, 2014 and December 31, 2013, the carrying value of other investments totaled $2.0 million and $3.0 million, respectively.
Gross realized gains and losses on fixed maturities, equity investments and limited liability investments for the three months ended March 31, 2014 and March 31, 2013 were as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Gross realized gains | | $ | 48 |
| | $ | 309 |
|
Gross realized losses | | (9 | ) | | — |
|
Total | | $ | 39 |
| | $ | 309 |
|
Gross realized losses for the three months ended March 31, 2013 reported in the preceding table excludes the realized loss on sale of Atlas Financial Holdings Inc. ("Atlas") common stock recorded during the first quarter of 2013. Refer to Note 7, "Investment in Investee," for further discussion.
Net investment income for the three months ended March 31, 2014 and March 31, 2013, respectively, is comprised as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Investment income | | | | |
Interest from fixed maturities | | $ | 272 |
| | $ | 282 |
|
Dividends | | 32 |
| | 253 |
|
Income from limited liability investments | | 22 |
| | 50 |
|
Other | | 142 |
| | 92 |
|
Gross investment income | | 468 |
| | 677 |
|
Investment expenses | | (55 | ) | | (97 | ) |
Net investment income | | $ | 413 |
| | $ | 580 |
|
At March 31, 2014, fixed maturities and short-term investments with an estimated fair value of $13.4 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, 2014, the amount of such pledged securities was $17.4 million.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
NOTE 7 INVESTMENT IN INVESTEE
Investment in investee includes the Company's investment in the common stock of PIH. The carrying value, estimated fair value and approximate voting and equity percentages for the Company's investment in the common stock of PIH, which is accounted for under the equity method of accounting and reported as investment in investee in the Company's consolidated balance sheets at March 31, 2014, were as follows:
|
| | | | | | | | | | | | | | |
(in thousands, except for percentages) | | | | |
| | March 31, 2014 |
| | Voting percentage | | Equity percentage | | Estimated Fair Value | | Carrying value |
PIH | | 28.7 | % | | 28.7 | % | | $ | 8,000 |
| | $ | 7,661 |
|
The fair value of the Company's investment in PIH at March 31, 2014 in the table above is calculated based on the initial public offering price of $8.00 per share.
Investment in investee formerly included the Company's investment in the preferred and restricted voting common stock of Atlas. 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. During the first quarter of 2013, the Company received net proceeds of $13.6 million and recognized a loss of $1.7 million, which is included in net realized gains (losses) on the consolidated statements of operations, resulting from commissions and other expenses incurred as part of the sale. As a result of this sale, the Company's approximate voting percentage in Atlas was reduced to 16.5%. As a result of this change in ownership and other qualitative factors, the Company determined that its investment in the common stock of Atlas no longer qualified for the equity method of accounting. Prior to discontinuing the use of the equity method of accounting for Atlas, the Company used a reporting lag of three months to report its proportionate share of Atlas' results.
Equity in net income of investee was zero and $0.3 million for the three months ended March 31, 2014 and March 31, 2013, 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.
During the fourth quarter of 2013, the Company further reduced its investment in the common stock of Atlas. The Company's investment in Atlas common stock at March 31, 2014 is included in equity investments and reported at fair value of $1.8 million in the consolidated balance sheets.
NOTE 8 DEFERRED ACQUISITION COSTS
Policy acquisition costs consist primarily of commissions, premium taxes, and underwriting and agency expenses, net of ceding commission income, incurred related to successful efforts to acquire new or renewal insurance contracts 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, 2014 and 2013, respectively, are comprised as follows:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Balance at January 1, net | | $ | 12,392 |
| | $ | 14,102 |
|
Additions | | 7,274 |
| | 9,172 |
|
Amortization | | (6,064 | ) | | (10,589 | ) |
Acquisition costs disposed of during the year related to PIH | | (1,043 | ) | | — |
|
Balance at March 31, net | | $ | 12,559 |
| | $ | 12,685 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
NOTE 9 INTANGIBLE ASSETS
Intangible assets are comprised as follows:
|
| | | | | | | | | | | | |
(in thousands) | | | March 31, 2014 | |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Intangible assets subject to amortization | | | | | | |
Database | | $ | 4,918 |
| | $ | 676 |
| | $ | 4,242 |
|
Vehicle service agreement in-force | | 3,680 |
| | 2,409 |
| | 1,271 |
|
Customer-related relationships | | 3,611 |
| | 441 |
| | 3,170 |
|
Non-compete agreement | | 70 |
| | 33 |
| | 37 |
|
Intangible assets not subject to amortization | | | | | | |
Renewal rights | | 46,756 |
| | 15,438 |
| | 31,318 |
|
Insurance licenses | | 7,803 |
| | — |
| | 7,803 |
|
Trade name | | 663 |
| | — |
| | 663 |
|
Total | | $ | 67,501 |
| | $ | 18,997 |
| | $ | 48,504 |
|
|
| | | | | | | | | | | | |
(in thousands) | | | December 31, 2013 | |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Intangible assets subject to amortization | | | | | | |
Database | | $ | 4,918 |
| | $ | 554 |
| | $ | 4,364 |
|
Vehicle service agreement in-force | | 3,680 |
| | 2,220 |
| | 1,460 |
|
Customer-related relationships | | 3,611 |
| | 344 |
| | 3,267 |
|
Non-compete agreement | | 70 |
| | 27 |
| | 43 |
|
Intangible assets not subject to amortization | | | | | | |
Renewal rights | | 46,756 |
| | 15,438 |
| | 31,318 |
|
Insurance licenses | | 7,803 |
| | — |
| | 7,803 |
|
Trade name | | 663 |
| | — |
| | 663 |
|
Total | | $ | 67,501 |
| | $ | 18,583 |
| | $ | 48,918 |
|
The Company's intangible assets with definite useful lives are amortized over their estimated useful lives. Amortization of intangible assets was $0.4 million and $0.6 million for the three months ended March 31, 2014 and March 31, 2013, respectively.
The insurance licenses, renewal rights and trade name intangible assets have indefinite useful lives and are not amortized. The renewal rights intangible assets, recognized related to the acquisitions of Northeast Alliance Insurance Agency, LLC ("NEA") and Assigned Risk Solutions Ltd. ("ARS"), were originally being amortized on a straight-line basis over 10 to 15 years. As a result of the acquisition of ARS during 2010, the Company determined that it was necessary to re-examine the useful lives assigned to the renewal rights intangible assets due to the fact that NEA and ARS service the assigned risk business in the states of New York and New Jersey and operate in the New York voluntary markets where there is limited competition for the renewal rights. As a result of the review performed, the Company determined that there were no legal, regulatory, contractual, competitive, economic, or other factors limiting the useful life of the renewal rights intangible assets; therefore, effective January 1, 2011, the renewal rights intangible assets were deemed to have indefinite useful lives and are no longer being amortized. The renewal rights had accumulated amortization of $15.4 million at December 31, 2010.
NOTE 10 ASSET HELD FOR SALE
As of March 31, 2014, property consisting of building and land located in Miami, Florida with a carrying value of $6.3 million was classified as held for sale. At March 31, 2014, the carrying value of the property is equal to its fair value net of estimated selling costs.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
NOTE 11 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, 2014 and March 31, 2013 were as follows:
|
| | | | | | | | |
(in thousands) | | March 31, 2014 |
| | March 31, 2013 |
|
Balance at beginning of period, gross | | $ | 84,534 |
| | $ | 103,116 |
|
Less reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses | | 7,942 |
| | 5,478 |
|
Balance at beginning of period, net | | 76,592 |
| | 97,638 |
|
Incurred related to: | | | | |
|
Current year | | 19,887 |
| | 20,950 |
|
Prior years | | (586 | ) | | (789 | ) |
Paid related to: | | | | |
|
Current year | | (6,268 | ) | | (8,210 | ) |
Prior years | | (17,727 | ) | | (19,685 | ) |
Disposal of unpaid loss and loss adjustment expenses related to PIH | | (405 | ) | | — |
|
Balance at end of period, net | | 71,493 |
| | 89,904 |
|
Plus reinsurance recoverable related to property and casualty unpaid loss and loss adjustment expenses | | 5,792 |
| | 8,019 |
|
Balance at end of period, gross | | $ | 77,285 |
| | $ | 97,923 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
(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, 2014 and March 31, 2013 were as follows:
|
| | | | | | | | |
(in thousands) | | March 31, 2014 |
| | March 31, 2013 |
|
Balance at beginning of period | | $ | 3,128 |
| | $ | 3,448 |
|
Incurred related to: | | | | |
Current year | | 1,760 |
| | 1,670 |
|
Prior years | | — |
| | — |
|
Paid related to: | | | | |
Current year | | (1,699 | ) | | (1,756 | ) |
Prior years | | (61 | ) | | (81 | ) |
Balance at end of period | | $ | 3,128 |
| | $ | 3,281 |
|
NOTE 12 DEBT
Debt consists of the following instruments:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | March 31, 2014 | | December 31, 2013 |
| | Principal |
| | Fair Value |
| | Principal |
| | Fair Value |
|
7.5% senior notes due 2014 | | $ | — |
| | $ | — |
| | $ | 14,356 |
| | $ | 14,356 |
|
LROC preferred units due 2015 | | 14,291 |
| | 14,291 |
| | 14,854 |
| | 14,854 |
|
Subordinated debt | | 90,500 |
| | 28,471 |
| | 90,500 |
| | 28,471 |
|
Total | | $ | 104,791 |
| | $ | 42,762 |
| | $ | 119,710 |
| | $ | 57,681 |
|
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, 2014, deferred interest payable of $13.9 million is included in accrued expenses and other liabilities in the consolidated balance sheets.
During the first quarter of 2014, the Company repaid the $14.4 million remaining amount outstanding on its senior unsecured debentures due February 1, 2014. During the three months ended March 31, 2013, the Company purchased for $0.6 million, including accrued interest, $0.6 million of par value of its senior unsecured debentures due February 1, 2014 with a carrying value of $0.6 million, including accrued interest, recording a loss of $0.0 million.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
NOTE 13 INCOME TAXES
Income tax expense (benefit) for the three months ended March 31, 2014 varies from the amount that would result by applying the applicable United States income tax rate of 34% to loss before income tax expense (benefit) primarily due to a valuation allowance being applied to the Company's operating losses, a tax expense being recorded attributable to the Company's indefinite life intangible assets, a tax benefit being recorded for a Canadian income tax refund, a tax benefit being recorded for non-taxable dividend income, a state income tax expense being recorded, a tax expense being recorded for a loss on the disposal of a subsidiary and a tax expense being recorded for stock option expense. Income tax expense (benefit) for the three months ended March 31, 2013 varies from the amount that would result by applying the applicable United States income tax rate of 34% to loss before income tax expense (benefit) primarily due to a valuation allowance being applied to the Company's operating losses, a tax expense being recorded attributable to the Company's indefinite life intangible assets and a tax benefit being recorded for non-taxable dividend income.
The Company maintains a valuation allowance for its gross deferred tax assets at March 31, 2014 and December 31, 2013. 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, 2014 and December 31, 2013 net deferred tax asset. The Company carries a deferred income tax liability of $4.5 million and $4.2 million at March 31, 2014 and December 31, 2013, respectively, all of which relates to indefinite life intangible assets.
As of March 31, 2014 and December 31, 2013, the Company carried a liability for unrecognized tax benefits of $1.5 million and $3.2 million, respectively, that is included in income taxes payable in the consolidated balance sheets. The Company generally recognizes interest and penalties related to unrecognized tax benefits in income tax expense (benefit).
NOTE 14 NET LOSS PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted loss per share computation for the three months ended March 31, 2014 and March 31, 2013:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 | | 2013 |
Numerator: | | | | |
Net loss | | $ | (1,006 | ) | | $ | (17,336 | ) |
Less: net income attributable to noncontrolling interests | | (653 | ) | | (95 | ) |
Less: dividends on preferred stock | | (53 | ) | | — |
|
Net loss attributable to common shareholders | | (1,712 | ) | | (17,431 | ) |
Denominator: | | | | |
Weighted average basic shares | | | | |
Weighted average common shares outstanding | | 16,430 |
| | 13,149 |
|
Weighted average diluted shares | | | | |
Weighted average common shares outstanding | | 16,430 |
| | 13,149 |
|
Effect of potentially dilutive securities | | — |
| | — |
|
Total weighted average diluted shares | | 16,430 |
| | 13,149 |
|
Basic loss per common share | | $ | (0.10 | ) | | $ | (1.33 | ) |
Diluted loss per common share | | $ | (0.10 | ) | | $ | (1.33 | ) |
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 securities. Potentially dilutive securities consist of stock options, unvested restricted stock awards, warrants and convertible preferred stock. Since the Company is reporting a net loss for the three months ended March 31, 2014 and March 31, 2013, all potentially dilutive securities outstanding were excluded from the calculation of both basic and diluted loss per share since their inclusion would have been anti-dilutive.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
NOTE 15 STOCK-BASED COMPENSATION
(a) Stock Options
The following table summarizes the stock option activity during the three months ended March 31, 2014:
|
| | | | | | | | | | | | | |
(in thousands, except for share data) | | | | | | | |
| | Number of Options Outstanding | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2013 | | 355,625 |
| | C$ | 18.35 |
| | | | — |
|
Granted | | 611,875 |
| | $ | 4.50 |
| | | | |
Exchanged and Cancelled | | (351,875 | ) | | C$ | 18.12 |
| | | | |
Expired | | (1,875 | ) | | C$ | 40.12 |
| | | | |
Forfeited | | (1,875 | ) | | C$ | 40.12 |
| | | | |
Outstanding at March 31, 2014 | | 611,875 |
| | $ | 4.50 |
| | 4.0 |
| | — |
|
Exercisable at March 31, 2014 | | 611,875 |
| | $ | 4.50 |
| | 4.0 |
| | — |
|
The intrinsic value of a stock option grant is the difference between the March 31, 2014 market price for the Company's common shares and the exercise price of the option. The aggregate intrinsic value for the stock options outstanding at March 31, 2014 was zero. The aggregate intrinsic value for stock options exercisable at March 31, 2014 was zero.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each option on the date of grant. The assumptions used in the Black-Scholes pricing model for options granted or exchanged during the three months ended March 31, 2014 were as follows:
|
| | | |
| | March 31, 2014 |
|
Risk-free interest rate | | 0.06% - 1.4% |
|
Dividend yield | | — |
|
Expected volatility | | 0.4 | % |
Expected term (in years) | | 0.78 - 4 |
|
(b) Restricted Stock Awards
Under the 2013 Equity Incentive Plan, the Company made grants of restricted stock to certain officers of the Company. The restricted stock vests after a ten-year period and is subject to the officer's continued employment through the vesting date. The restricted stock is amortized on a straight-line basis over the ten-year requisite service period. Total unamortized compensation expense related to unvested awards at March 31, 2014 was $8.2 million. The grant-date fair value of restricted stock awards is determined using the closing price of Kingsway common stock on the date of grant. The following table summarizes the activity related to unvested restricted stock for the three months ended March 31, 2014:
|
| | | | | | | | |
(in thousands, except for share data) | | | | |
| | Restricted stock awards | | Weighted-average grant date fair value (per share) |
Unvested at December 31, 2013 | | — |
| | — |
|
Granted | | $ | 1,972,345 |
| | $ | 4.14 |
|
Unvested at March 31, 2014 | | $ | 1,972,345 |
| | $ | 4.14 |
|
Total stock-based compensation expense, net of forfeitures was $0.6 million and $0.0 million for the three months ended March 31, 2014 and March 31, 2013, respectively.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
NOTE 16 SHAREHOLDERS' EQUITY
On May 13, 2013, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to create an unlimited number of zero par value class A preferred shares. The Company's Board of Directors will have the ability to fix the designation, rights, privileges, restrictions and conditions attaching to the shares of each series of preferred shares. The preferred shares will have priority over the common shares.
On February 3, 2014, the Company closed on its previously announced private placement totaling $6.6 million. At closing, the Company received gross proceeds of $6.6 million, resulting from the sale and issuance of 262,876 units for a purchase price of $25.00 per unit. Net proceeds to the Company were $6.4 million after deducting expenses.
Each unit consists of one class A convertible preferred share, series 1 (the "Preferred Shares"), and 6.25 common share class C purchase warrants. Each Preferred Share is convertible into 6.25 common shares at a conversion price of $4.00 per common share any time at the option of the holder prior to April 1, 2021. The maximum number of common shares issuable upon conversion of the Preferred Shares is 1,642,975 common shares. Each warrant will entitle the subscriber to purchase one common share of Kingsway at a price of $5.00 per common share at any time after September 16, 2016 and prior to expiry on September 15, 2023.
The Preferred Shares are not entitled to vote. The holders of the Preferred Shares are entitled to receive fixed, cumulative, preferential cash dividends at a rate of $1.25 per Preferred Share per year. The cash dividend rate shall be revised to $1.875 per Preferred Share per year if the dividend accumulates for a period greater than 30 consecutive months from the date of the most recent dividend payment. On and after February 3, 2016, the Company may redeem all or any part of the then outstanding Preferred Shares for the price of $28.75 per Preferred Share, plus accrued but unpaid dividends thereon, whether or not declared, up to and including the date specified for redemption. The Company will redeem all outstanding Preferred Shares on April 1, 2021 for the price of $25.00 per Preferred Share, plus accrued but unpaid dividends, whether or not declared, up to and including the date specified for redemption.
NOTE 17 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the change in the balance of each component of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2014 and March 31, 2013 as relates to shareholders' equity attributable to common shareholders on the unaudited consolidated balance sheets. On the other hand, the unaudited consolidated statements of comprehensive income (loss) present the components of other comprehensive income (loss), net of tax, only for the three months ended March 31, 2014 and March 31, 2013 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
|
| | | | | | | | | | | | |
(in thousands) | | | | |
| | Unrealized Gains (Losses) on Fixed Maturities and Equity Investments | | Foreign Currency Translation Adjustments | | Equity in Other Comprehensive Loss of Investee | | Total Accumulated Other Comprehensive Income |
| | | | | | | | |
Balance, January 1, 2014 | | 15,583 |
| | (5,982 | ) | | — |
| | 9,601 |
|
| | | | | | | | |
Other comprehensive income before reclassifications | | 1,276 |
| | 44 |
| | — |
| | 1,320 |
|
Amounts reclassified from accumulated other comprehensive income | | 52 |
| | — |
| | — |
| | 52 |
|
Net current-period other comprehensive income | | 1,328 |
| | 44 |
| | — |
| | 1,372 |
|
| | | | | | | | |
Balance, March 31, 2014 | | 16,911 |
| | (5,938 | ) | | — |
| | 10,973 |
|
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
|
| | | | | | | | | | | | |
(in thousands) | | | | |
| | Unrealized Gains (Losses) on Fixed Maturities and Equity Investments | | Foreign Currency Translation Adjustments | | Equity in Other Comprehensive Loss of Investee | | Total Accumulated Other Comprehensive Income |
| | | | | | | | |
Balance, January 1, 2013 | | 14,194 |
| | 1,210 |
| | (642 | ) | | 14,762 |
|
| | | | | | | | |
Other comprehensive (loss) income before reclassifications | | (498 | ) | | 26 |
| | (105 | ) | | (577 | ) |
Amounts reclassified from accumulated other comprehensive income | | 248 |
| | — |
| | — |
| | 248 |
|
Net current-period other comprehensive (loss) income | | (250 | ) | | 26 |
| | (105 | ) | | (329 | ) |
| | | | | | | | |
Balance, March 31, 2013 | | 13,944 |
| | 1,236 |
| | (747 | ) | | 14,433 |
|
Components of accumulated other comprehensive income were reclassified to the following lines of the unaudited consolidated statements of operations for the three months ended March 31, 2014 and March 31, 2013:
|
| | | | | | | | |
| | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Reclassification of accumulated other comprehensive income from unrealized (losses) gains on fixed maturities and equity investments to: | | | | |
Net realized gains (losses) | | $ | (52 | ) | | $ | (248 | ) |
Other-than-temporary impairment loss | | — |
| | — |
|
Loss before income tax expense (benefit) | | (52 | ) | | (248 | ) |
Income tax expense (benefit) | | — |
| | — |
|
Net loss | | $ | (52 | ) | | $ | (248 | ) |
NOTE 18 SEGMENTED INFORMATION
The Company operates as a merchant bank 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.
Insurance Underwriting Segment
Effective March 31, 2014, the Company's wholly owned subsidiary, PIH, completed an initial public offering of its common stock. Upon completion of the transaction, the Company maintained a 28.7% interest in the common shares of PIH, which is reported as investment in investee in the consolidated balance sheets. The earnings of PIH are included in the consolidated statements of operations through the March 31, 2014 transaction date. Prior to the transaction, PIH was included in the Insurance Underwriting segment. As a result of the disposal of the Company's majority interest in PIH on March 31, 2014, all segmented information has been restated to exclude PIH from the Insurance Underwriting segment.
Insurance Underwriting includes the following subsidiaries of the Company: Mendota Insurance Company, Mendakota Insurance Company, Universal Casualty Company ("UCC"), Kingsway Amigo Insurance Company ("Amigo") and Kingsway Reinsurance Corporation (collectively, "Insurance Underwriting"). In September 2013, Kingsway Reinsurance (Bermuda) Ltd., formerly included in Insurance Underwriting, was liquidated. 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 15 states.
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| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
The Company previously placed Amigo and UCC into voluntary run-off in 2012 and 2011, respectively. Each of Amigo and UCC has entered into a comprehensive run-off plan which has been approved by its respective state of domicile. Kingsway continues to manage Amigo and UCC in a manner consistent with the run-off plans.
Insurance Services Segment
Insurance Services includes the following subsidiaries of the Company: ARS, IWS Acquisition Corporation ("IWS") and Trinity (collectively, "Insurance Services").
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 to their members.
Trinity is a provider of warranty products and maintenance support to consumers and businesses in the HVAC and refrigeration industry. Trinity distributes its warranty products through original equipment manufacturers, HVAC distributors and commercial and residential contractors. Trinity distributes its maintenance support directly through corporate owners of retail spaces throughout the United States.
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.
Revenue by reportable segment reconciled to consolidated revenues for the three months ended March 31, 2014 and 2013 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Revenues: | | | | |
Insurance Underwriting: | | | | |
Net premiums earned | | $ | 27,806 |
| | $ | 27,153 |
|
Other income | | 2,134 |
| | 2,291 |
|
Total Insurance Underwriting | | 29,940 |
| | 29,444 |
|
Insurance Services: | | | | |
Service fee and commission income | | 14,724 |
| | 13,124 |
|
Other income | | 99 |
| | 86 |
|
Total Insurance Services | | 14,823 |
| | 13,210 |
|
Total segment revenues | | 44,763 |
| | 42,654 |
|
Net premiums earned not allocated to segments | | 4,114 |
| | 915 |
|
Net investment income | | 413 |
| | 580 |
|
Net realized gains (losses) | | 39 |
| | (1,409 | ) |
Other income not allocated to segments | | (162 | ) | | (159 | ) |
Total revenues | | $ | 49,167 |
| | $ | 42,581 |
|
The operating income (loss) of each segment in the following table is before income taxes and includes revenues and direct segment costs.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
Segment operating income (loss) reconciled to the consolidated net loss for the three months ended March 31, 2014 and 2013 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Segment operating income (loss) | | | | |
Insurance Underwriting | | $ | 257 |
| | $ | (3,045 | ) |
Insurance Services | | 1,914 |
| | 1,916 |
|
Total segment operating income (loss) | | 2,171 |
| | (1,129 | ) |
Net investment income | | 413 |
| | 580 |
|
Net realized gains (losses) | | 39 |
| | (1,409 | ) |
Other income and expenses not allocated to segments, net | | (470 | ) | | (4,388 | ) |
Interest expense | | (1,433 | ) | | (1,833 | ) |
Amortization of intangible assets | | (414 | ) | | (558 | ) |
Contingent consideration expense | | (267 | ) | | (155 | ) |
Gain (loss) on change in fair value of debt | | 563 |
| | (8,951 | ) |
Loss on disposal of subsidiary | | (1,242 | ) | | — |
|
Loss on buy-back of debt | | — |
| | (24 | ) |
Equity in net income of investee | | — |
| | 255 |
|
Loss before income tax expense (benefit) | | $ | (640 | ) | | $ | (17,612 | ) |
Income tax expense (benefit) | | 366 |
| | (276 | ) |
Net loss | | $ | (1,006 | ) | | $ | (17,336 | ) |
Net premiums earned by line of business for the three months ended March 31, 2014 and 2013 were:
|
| | | | | | | | |
(in thousands) | | Three months ended March 31, | |
| | 2014 |
| | 2013 |
|
Insurance Underwriting: | | | | |
Private passenger auto liability | | $ | 18,556 |
| | $ | 18,661 |
|
Auto physical damage | | 9,250 |
| | 7,843 |
|
Total non-standard automobile | | 27,806 |
| | 26,504 |
|
Commercial auto liability | | — |
| | 649 |
|
Total Insurance Underwriting | | 27,806 |
| | 27,153 |
|
Net premiums earned not allocated to segments: | | | | |
Allied lines | | 1,944 |
| | — |
|
Homeowners | | 2,159 |
| | 915 |
|
Other | | 11 |
| | — |
|
Total net premiums not allocated to segments | | $ | 4,114 |
| | $ | 915 |
|
Total net premiums earned | | $ | 31,920 |
| | $ | 28,068 |
|
NOTE 19 RESTRUCTURING
On September 17, 2012, the Company announced that it was restructuring its Insurance Underwriting and Insurance Services segments. 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. Amigo has entered into a comprehensive run-off plan which has been approved by the Florida Office of Insurance Regulation. Kingsway continues to manage Amigo in a manner consistent with its filed run-off plan.
|
| | |
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) March 31, 2014 |
As part of the restructuring, the Company will reduce staffing levels to be consistent with placing Amigo into run-off. The Company estimated that Insurance Underwriting would incur approximately $2.0 million in cash severance expenses due to reductions-in-force as part of the restructuring 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, 2014, the Company has incurred severance expense of $2.1 million, $2.0 million of which has been paid through March 31, 2014.
Changes in the restructuring liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, and the related restructuring expense for the three months ended March 31, 2014 and March 31, 2013 is as follows:
|
| | | | | | | | | | | | |
(in thousands) | | | | March 31, 2014 | |
| | Restructuring liability, beginning of period | | Restructuring expense | | Cash payments | | Restructuring liability, end of period |
Insurance Underwriting: | | | | | | | | |
Severance | | 236 |
| | — |
| | (127 | ) | | 109 |
|
Lease abandonment | | 648 |
| | 16 |
| | (92 | ) | | 572 |
|
Total Insurance Underwriting | | 884 |
| | 16 |
| | (219 | ) | | 681 |
|
Insurance Services: | | | | | | | | |
Lease abandonment | | 100 |
| | 4 |
| | (15 | ) | | 89 |
|
Total Insurance Services | | 100 |
| | 4 |
| | (15 | ) | | 89 |
|
Severance expense not allocated to segments | | 146 |
| | — |
| | (146 | ) | | — |
|
Total | | 1,130 |
| | 20 |
| | (380 | ) | | 770 |
|
|
| | | | | | | | | | | | |
(in thousands) | | | | March 31, 2013 | |
| | Restructuring liability, beginning of period | | Restructuring expense | | Cash payments | | Restructuring liability, end of period |
Insurance Underwriting: | | | | | | | | |
Severance | | 214 |
| | 759 |
| | (487 | ) | | 486 |
|
Lease abandonment | | 1,207 |
| | 21 |
| | (89 | ) | | 1,139 |
|
Total | | 1,421 | |