Reserve costs, dollar blues dampen Kingsway’s 3-Q earnings

Specialty risk insurer Kingsway Financial Services Inc. (TSX: KFS) saw net income for the third quarter of this year drop by 28% to $15.6 million compared with the $21.7 million reported for the same period in 2002. This equates to earnings on a fully diluted basis of 28c a share for the latest quarterly reporting period versus the 44c a share shown at the end of the third quarter of 2002. As a result, the company’s annualized return on equity (ROE) for the third quarter of this year fell to 9.8% against the 15.2% made at the end of the same period last year.
Kingsway’s financial performance for the latest quarterly reporting period was negatively affected by a combination of increased reserve provisions totaling $61.5 million (relating to unpaid claims having occurred prior to the end of last year), as well as significant appreciation of the Canadian dollar over these months which undermined the value of earnings generated by the company’s U.S.-based operations, a statement observes. The insurer also completed a share offering in July of this year, which increased the average number of outstanding shares by 13% during the third quarter – thus adding to dilution of earnings on a per share basis (the number of outstanding shares rose by 4% for the first nine months of this year due to the share offering).
Despite the slump in earnings growth for the latest quarter, Kingsway produced a 24% year-on-year gain in net earnings of $67.3 million for the first nine months of this year (first nine months 2002: $54.1 million). This translates to diluted earnings of $1.31 a share for the first three quarters of this year, with the ROE clocking in at 13.9% for the same period versus the 12.8% reflected at the end of the first nine months of 2002.
In total, the company increased reserving for unpaid claims by 131.4 million during the first nine months of this year. The reserve shoring of $61.5 million incurred in the third quarter of this year breaks down to $40.4 million for Canadian operations and $21.1 million for U.S. operations. The Canadian operations account for $41.1 million of the prior year reserving cost for the first nine months of this year, while the reserving adjustment on U.S. business came in at $34.6 million for the same period. The increased reserving applies to non-standard auto, commercial auto and trucking business written in Canada, while the U.S. exposure relates to long-haul trucking and non-standard auto, a company statement says. The reserve strengthening taken will provide for greater earnings stability as the company moves forward, says Kingsway president Bill Star.
The insurer increased net written premiums by 32% year-on-year to $1.9 billion for the first three quarters of this year compared with the $1.4 billion reported for the same period a year ago. Net earned premiums rose by 48% to $1.8 billion for the latest nine month reporting period versus the $1.2 billion generated over the same period in 2002. Kingsway grew its U.S. business by 30% for the first nine months of this year (despite an estimated 29% reduction effect resulting from the stronger Canadian dollar) based on gross premiums which amounted to $1.5 billion, while the Canadian operations increased gross premiums by 31% year-on-year to reach $469.9 million. Much of the growth shown in Canadian gross volume is a result of rate increases, the statement notes.
The insurer saw its combined ratio for the third quarter rise marginally to 103.7%, producing an underwriting loss of $22.1 million compared with a loss of $5.9 million reported for the same period last year. Over the nine month period, Kingsway made an underwriting profit of $400,000 on the back of a combined ratio of 100%. This compares with an underwriting loss of $3.5 million on a combined ratio of 100.3% produced for the same period in 2002. The company was able to lift investment income to $22.7 million for the third quarter of this year (3-Q 2002: $19.6 million) while realized gains came in 2.6 times higher at $16.4 million (3-Q 2002: $6.3 million). Investment income for the nine month period rose by 14.5% to $57.6 million (nine months 2002: $50.3 million) with realized gains more than doubling to reach $25.2 million (nine months 2002: $11.6 million).