Kingsway Financial Services reports operating loss of US$2.499 million for 2015 Q2, but net income of US$833,000

Kingsway Financial Services Inc. (KFS) is reporting an operating loss of US$2.499 million for the second quarter of 2015 compared to income of US$1.314 million for the same quarter of 2014, but adds the moves made in the second quarter to make the company simpler are positive for the future.

The operating loss in 2015 Q2 reflects the company’s core operating activities, including its reportable segments, passive investment portfolio, merchant banking activities and corporate operating expenses, notes a statement Wednesday from KFS, a holding company that functions as a merchant bank and owns or controls stakes in several insurance industry assets. The operating income for the first six months of 2015 was US$1.189 million compared to US$950,000 for the first half of 2014, company figures show.

With regard to net income, however, that is up for both 2015 Q2 and half-year compared to the same periods in 2014. Net income for the three months ended June 30 was US$833,000 compared to a loss of US$5.474 million for the second quarter of 2014. As for half-year net income, it was US$4.267 million in 2015 and a loss of US$6.480 million in 2014.

The operating loss in 2015 Q2 compared to income in 2014 Q2 is a result of a number of factors. Among these are the following:

• the Insurance Underwriting segment operating loss was US$0.5 million compared to income of US$0.3 million;

• the Insurance Services segment operating loss was US$0.1 compared to US$0.2 million;

• the net realized gains of US$0.1 million compared to US$5.1 million (primarily from the liquidation of investments in KFS’s passive portfolio); and

• other operating income and expense was a net expense of US$2.5 million compared to US$4.2 million.

In addition, the KFS statement notes, adjusted operating loss was US$0.1 million compared with income of US$5.5 million.

In a bid to simplify operations, during the second quarter of 2015, KFS closed on the sale of its subsidiary, Assigned Risk Solutions Ltd. (ARS), to National General Holdings Corp. for US$47 million in cash and potential future earnout payments; the company repaid the C$15.8 million outstanding on its LROC preferred units due June 30, 2015 (as a result, KFS recorded a net gain on disposal of US$11.3 million during 2015 Q2); and the company’s controlling interest in Kingsway Linked Return on Capital Trust was reduced to zero upon KFS’s repayment of its C$15.8 million outstanding on its LROC preferred units (as such, KFS recorded a non-cash loss on deconsolidation of subsidiary of US$4.4 million).

Noting that Kingsway is now a much simpler company, president and CEO Larry G. Swets, Jr. reports the company owns two warranty businesses and a non-standard automobile insurance business, has a significant and growing portfolio of attractive passive investments, has sold ARS (which provides new resources to continue merchant banking activities) and has legacy holding company operating expenses that continue to be managed more efficiently.

“We believe most of the extraordinary, legacy, non-cash accounting items, such as the loss on deconsolidation we are reporting this quarter, should now be behind us,” Swets says. “We are now looking actively at options to leverage our considerable deferred tax asset in seeking fundamentally strong investment opportunities with asymmetric risk/reward profiles. We have never felt more confident about our future since your current management team joined the company,” he adds.