TORONTO, Nov. 6 /PRNewswire-FirstCall/ - (TSX: KFS, NYSE: KFS) Kingsway
Financial Services Inc. ("Kingsway" or the "Company") today announced its
financial results for the third quarter and nine months ended September 30,
2009. It also provided shareholders with an update on the Company's progress
in executing its business transformation plan. All amounts are in U.S. dollars
unless indicated otherwise.
The Company reported a third quarter net loss of $118.1 million or $2.19 per
share diluted. This represents a loss of $128.8 million from run-off and
discontinued businesses, including a loss of $95.5 million from Lincoln
General Insurance Company ("Lincoln General").
Kingsway President and CEO Colin Simpson stated, "It's important to put these
results in context since the losses we're reporting for the quarter have come
from businesses that are not part of our ongoing operations. I believe we
reached an important turning point this quarter and we are now beginning to
see the evidence that our transformation plan was the right one."
The following are highlights of what the Company accomplished since the
release of its second quarter results, all aligned with the Company's strategy
to exit unprofitable businesses, shed non-core assets, and free up liquidity
in the group:
- Disposed of Lincoln General in order to protect the longer-term
interests of the Kingsway group of companies' and Lincoln General's
stakeholders.
- Completed the consolidation of Kingsway General Insurance Company and
JEVCO Insurance Company operations in Canada under a single "JEVCO
Insurance Company" marketing brand.
- Launched the consolidated Personal Lines and Commercial Lines
businesses in the U.S. under a single "Kingsway America Inc."
marketing brand.
- Improved Kingsway's working capital position by selling non-core
assets such as HI Holdings Inc. and its subsidiary Zephyr Insurance
Company Inc. ("Zephyr"), Avalon Risk Management Inc., and real estate
assets in Calgary.
- 87% of gross premiums written were generated from core lines of
business (non-standard auto/motorcycle, commercial auto and surety).
- Executed the planned reinsurance repatriation and debt and share buy-
back activities in order to increase capital in the operating
subsidiaries.
- Reduced expenses well ahead of schedule by accelerating the expense
reduction timetable, achieving $11.3 million in cost savings in the
quarter.
- Eliminated an additional 240 staff positions in the quarter for a
total of 850 staff reductions year to date against a target of 1,000
by the end of 2010.
Investment income was $5.8 million in the quarter, a decrease of 82% compared
to the same period a year ago, which was largely due to the impact of a
stronger Canadian dollar on the Company's unhedged Canadian dollar debt, as
well as lower interest income from a smaller fixed-income securities
portfolio.
The Company is progressing with its business transformation plan, and is on
track to achieve its annualized savings by year-end 2010:
- By accelerating execution of the transformation plan, the Company has
already succeeded in achieving expense reductions of $45 million for
2009 - or almost 130% of the previously disclosed $34.8 million
savings target for 2009. This represents an annual run rate of $70
million.
- Year-to-date, the Company has achieved 85% (850) of the 1,000 total
staff reductions target for completion by the end of 2010.
Approximately 73% of these reductions were in the U.S. operation and
27% in Canada.
- Workforce reduction alone will result in $22.0 million in savings
this year, and an annual run rate of $50.4 million.
- The Company remains on target to incur approximately $22 million in
transition costs. One-time costs of $18.4 million have been incurred
to date.
Mr. Simpson concluded by saying, "We still have a lot of work ahead of us, but
I believe we have turned the corner and we are on track to return the group to
profitability in 2010. We have spent most of this year looking behind us and
addressing the legacy problems that were holding us back. Now we can begin to
look forward and start building the Kingsway of the future."
Board of Directors
Kingsway further announced that Gregory P. Hannon was appointed to the Board
of Directors, effective September 16, 2009. William Andrus resigned from the
Board effective August 2, 2009. Robert Cassels and Walter E. Farnam resigned
from the Board effective September 16, 2009. J. Brian Reeve resigned from the
Board effective November 3, 2009.
Dividend
The Board of Directors has decided that a quarterly dividend will not be
declared for the third quarter of 2009.
Conference Call and Webcast
You are invited to participate in our quarterly results conference call that
will take place on November 6, 2009 at 8:30 a.m. EDT. To access please dial
1-800-732-1073 about five minutes before the start of the call. An audio
webcast will also be broadcast live and can be accessed:
- Through our website at http://www.kingsway-financial.com, or
- Directly at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2834920.
About the Company
Kingsway Financial Services Inc. ("Kingsway" or the "Company") focuses on non
standard automobile insurance in North America. Kingsway's primary businesses
are the insuring of automobile risks for drivers who do not meet the criteria
for coverage by standard automobile insurers, and commercial automobile
insurance. The Company operates through wholly-owned insurance subsidiaries in
Canada and the U.S. which it is currently consolidating to reduce overhead and
strengthen its competitive position.
The common shares of Kingsway Financial Services Inc. are listed on the
Toronto Stock Exchange and the New York Stock Exchange, under the trading
symbol "KFS".
This news release contains forward-looking information. This news release also
contains certain non-GAAP measures. Please refer to the sections entitled
"Forward Looking Statements" and "Non-GAAP Financial Measures" in the
following Management's Discussion and Analysis.
Financial Summary:
The following information throughout the Financial Summary and Management's
Discussion and Analysis presents the financial results as continuing
operations unless otherwise specifically stated as discontinued operations:
-------------------------------------------------------------------------
Three months Nine months
ended September 30: ended September 30:
-------------------------------------------------------------------------
(in millions of
dollars except
per share values) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Gross premiums
written $ 184.4 $335.0 (45%) $ 658.4 $1,151.9 (43%)
Underwriting loss (126.8) (49.5) (156%) (263.8) (142.5) (85%)
Investment income 5.8 31.9 (82%) 60.7 99.1 (39%)
Net realized gains
(loss) 30.5 (29.1) 205% 10.5 (24.2) 143%
Write-down of
investment in
subsidiary (23.6) - (100%) (23.6) - (100%)
Loss from continuing
operations (117.1) (42.1) (178%) (213.3) (73.2) (191%)
Net loss (118.1) (17.4) (579%) (214.8) (45.5) (372%)
Diluted loss per
share - continuing
operations (2.17) (0.76) (186%) (3.90) (1.32) (195%)
Diluted loss per
share - net loss (2.19) (0.32) 584% (3.93) (0.82) (379%)
Book value per share 5.31 14.02 (62%) 5.31 14.02 (62%)
Combined ratio 153.5% 113.3% 40.2% 133.4% 112.1% 21.3%
-------------------------------------------------------------------------
Segmented
Results
-------------------------------------------------------------------------
Three months ended September 30, 2009
-------------------------------------------------------------------------
(in thousands United Sub
of dollars) Canada States Corporate Total Run-off Total
-------------------------------------------------------------------------
Income (loss)
from
continuing
operations $10,410 $8,812 $(8,543) $10,679 $(127,823) $(117,144)
Add:
Restructuring
charges 68 80 5,400 5,548 313 5,861
Write-down of
intangible
asset - - - - 1,575 1,575
Write-down of
investment
in
subsidiary - - - - 23,613 23,613
Write-down on
assets held
for sale 1,743 - - 1,743 - 1,743
Accelerated
software
amortization
and write-
offs - - - - 3,800 3,800
Less:
Employees
health
insurance
claims
reserves
for 2008
year - 3,500 - 3,500 - 3,500
Gains on
sale of
securities
related to
commuted
reinsurance
arrangements - 10,689 - 10,689 - 10,689
Gains on
buy-back of
senior notes - 6,607 - 6,607 - 6,607
-------------------------------------------------------------------------
Normalized income
(loss) from
continuing
operations $12,221 $(11,904) $(3,143) $(2,826) $(98,522) $(101,348)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30, 2009
-------------------------------------------------------------------------
(in thousands United Sub
of dollars) Canada States Corporate Total Run-off Total
-------------------------------------------------------------------------
Income (loss)
from
continuing
operations $6,916 $7,137 $(8,447) $ 5,606 $(218,898) $(213,292)
Add:
Restructuring
charges 954 2,431 11,330 14,715 3,695 18,410
Write-down of
intangible
asset - - - - 1,575 1,575
Write-down of
investment
in
subsidiary - - - - 23,613 23,613
Write-down on
assets held
for sale 1,743 - - 1,743 - 1,743
Accelerated
software
amortization
and
write-offs - 3,200 - 3,200 5,800 9,000
Less:
Employees
health
insurance
claims
reserves for
2008 year - 3,500 - 3,500 - 3,500
Gains on
sale of
securities
related to
commuted
reinsurance
arrangements - 10,689 - 10,689 - 10,689
Proceeds on
settlement
of law
suits 3,850 7,150 - 11,000 - 11,000
Gains on
buy-back of
senior notes - 9,254 - 9,254 - 9,254
-------------------------------------------------------------------------
Normalized income
(loss) from
continuing
operations $5,763 $(17,825) $ 2,883 $(9,179) $(184,215) $(193,394)
-------------------------------------------------------------------------
- The tables above present the Company's financial performance, showing
separately the contribution of each reporting segment adjusted for
items the Company considers to be non-recurring. This information is
provided to show what the Company considers to be a more accurate
presentation of its ongoing operations. The figures presented are
from continuing operations which means that they do not include the
results of York Fire Insurance Company, HI Holdings and its
subsidiary Zephyr Insurance Company Inc. ("Zephyr") or Avalon Risk
Management Inc. which have been or were in the process of being sold
at the balance sheet date.
- The loss of $117.1 million from continuing operations for the quarter
($213.3 million year to date) arose primarily from a loss of $127.8
million in the quarter ($207.9 million year to date) in the Run-off
segment. The Canadian and U.S. segments report a profit of $10.4
million and $8.8 million respectively in the quarter ($6.9 million
profit and $3.8 million loss year to date respectively).
- After adjusting for what the Company considers to be non-recurring
items, the normalized loss from continuing operations was $101.3
million for the quarter ($193.4 million year to date). The $15.8
million reduction in the loss ($19.9 million year to date) when
compared to the loss from continuing operations is primarily due to
the one-time nature of the write-down of the Company's investment in
a subsidiary and the restructuring charges incurred in the Company's
transformation program, partially offset by gains on the sale of
securities to facilitate the commutation of internal reinsurance
agreements.
- On October 19, 2009, the Company's indirect wholly owned subsidiary,
Kingsway America Inc. ("KAI") donated all of the stock of its wholly
owned subsidiary Walshire Assurance Company ("Walshire") to charity,
and with this disposition Lincoln General Insurance Company ("Lincoln
General"), a subsidiary of Walshire, ceases being a member of the
Kingsway group of companies. Walshire is included in the Run-off
segment and has been consolidated in the Company's financial
statements as at September 30, 2009. The net loss of Walshire for the
quarter was $95.5 million ($169.8 million year to date). As of the
date of the disposition of Walshire, the Company is of the view that
its control over Walshire and its subsidiaries, including Lincoln
General was lost. Management intends that Walshire and its
subsidiaries will no longer be consolidated beginning October 19,
2009.
- During the quarter, the Company entered into a definitive agreement
to sell HI Holdings Inc. and its subsidiary Zephyr, wholly owned
subsidiaries of KAI. The Company also sold substantially all the
assets of Avalon Risk Management Inc. ("Avalon") subsequent to
quarter-end. Both transactions closed in the fourth quarter of 2009.
Revenue from these discontinued operations were $1.5 million ($2.4
million year to date) for the third quarter 2009 compared to $0.8
million ($1.4 million year to date) for the same quarter last year.
The net loss from these discontinued operations, net of taxes was
$1.0 million ($2.4 million net income year to date) in the third
quarter compared to net income of $1.3 million ($4.0 million year to
date) for the same quarter last year.
- During the quarter, the Company commuted all internal reinsurance
agreements between Kingsway Reinsurance Corporation and its U.S.
operating companies. The Company also took the steps necessary in
preparation for the consolidation of the Canadian operations
effective October 1, 2009 which involved the assumption by JEVCO
Insurance Company of the assets and liabilities of Kingsway General
Insurance Company and the commutation of all reinsurance agreements
between JEVCO Insurance Company, Kingsway General Insurance Company
and Kingsway Reinsurance (Bermuda) Limited.
- To facilitate the above-mentioned commutations, a significant portion
of the Barbados securities portfolio was liquidated during the
quarter which resulted in net realized gains of approximately $10.7
million.
- As was previously announced, management of the Company has decided
that JEVCO Insurance Company will become the marketing brand in
Canada. In the fourth quarter of 2009, capital has been injected into
JEVCO Insurance Company to support the consolidated operations. The
estimate of JEVCO Insurance Company's MCT as at October 1, 2009 on a
pro-forma basis meets the target ratio of 243% agreed with the Office
of the Superintendent of Financial Institutions ("OSFI") prior to the
transaction being approved. Subsequent to the balance sheet date, all
of Kingsway General Insurance Company's insurance licenses have been
surrendered.
- Gross premiums written for the Canadian operating segment decreased
by 20% for the quarter to $73.3 million (23% to $222.5 million year
to date) from $91.5 million in the third quarter last year ($290.6
million prior year to date). The U.S. operating segment reported a
decrease in premiums of 21% for the quarter to $82.2 million (19% to
$299.3 million year to date) from $103.7 million in the third quarter
last year ($371.4 million prior year to date). The Run-off operating
segment reported a decrease in premiums of 79% for the quarter to
$28.9 million (72% to $136.6 million year to date) from $139.8
million in the third quarter last year ($489.9 million prior year to
date). The significant reduction in premium volume across all
segments is a reflection of the Company's strategy of discontinuing
unprofitable lines of business, primarily within its commercial lines
as well as the K-Plus program in Canada.
- As a result of the Company re-focusing its efforts on core,
profitable lines of business, non standard automobile and motorcycle
premiums for the nine months to September 30, 2009 were $454.0
million or 69% of the total gross premiums written compared to $610.7
million or 53% of gross premiums written in the same period last
year.
- The net adverse reserve development recorded in the quarter totaled
$81.6 million, of which $84.1 million related to the Run-off segment
and $4.8 million related to the ongoing U.S. operations. Unfavourable
development in the Run-off and U.S. operating segments were partially
offset by favourable development of $7.3 million in the ongoing
Canadian operations.
- The Company has incurred restructuring costs of $5.9 million in the
quarter ($18.4 million year to date) as a result of implementing the
transformation plan announced in the first quarter of 2009. Of the
total restructuring costs, severance costs associated with the
Company's corporate restructuring plan account for $1.6 million in
the quarter ($9.3 million year to date).
- Investment income, excluding net realized gains was $5.8 million
compared to $31.9 million for the same quarter of 2008, an 82%
decrease. This decline is due primarily to a loss of approximately
$12.7 million from the impact of the strengthening of the Canadian
dollar on the Company's unhedged Canadian dollar debt as well as from
lower interest income from lower yields on a smaller portfolio.
- General and Administrative expenses decreased 17% to $47.7 million in
the third quarter of 2009 from $57.3 million in the same quarter last
year (19% to $135.3 million from $166.5 million for the year to
date). The decrease in the quarter and year to date is primarily due
to the impact of the transformation program which has produced
savings, the largest being approximately $10.7 million ($15.8 million
year to date) related to reduced headcount. Also contributing to the
decrease in General and Administrative expenses in the quarter and
year to date are reduced legal fees following the settlement in the
second quarter of two lawsuits. The year-to-date expenses include the
proceeds of $11.0 million on the settlement of these lawsuits. Also
in the third quarter, the Company recognized the reversal of a
previously recorded $3.5 million reserve for employee health
insurance claims. The savings described above have been partially
offset by the costs associated with the transformation program.
- As at September 30, 2009, the book value per share was $5.31 compared
to $8.24 as at December 31, 2008.
Kingsway Financial Services Inc.'s Management Discussion and Analysis
The following management's discussion and analysis ("MD&A") should be read in
conjunction with: (i) the Kingsway Financial Services Inc.'s ("Kingsway" or
the "Company") unaudited interim consolidated financial statements for the
third quarter of fiscal 2009, and the notes related thereto; (ii) the annual
MD&A for fiscal 2008 set out on pages 9 to 54 in the Company's 2008 Annual
Report, including the section on risk factors; and (iii) the audited
consolidated financial statements for fiscal 2008 set out on pages 61 to 104
of the Company's 2008 Annual Report, and the notes related thereto.
The Company's financial results are reported in U.S. dollars. Unless otherwise
indicated, all amounts are in U.S. dollars and have been derived from
financial statements prepared in accordance with Canadian generally accepted
accounting principles (GAAP).
Non-GAAP Financial Measures
The Company uses both GAAP and certain non-GAAP financial measures to assess
performance. Securities regulators require that companies caution readers
about non-GAAP financial measures that do not have a standardized meaning
under GAAP and are unlikely to be comparable to similar measures used by other
companies. Kingsway, like many insurance companies, analyzes performance based
on underwriting ratios such as combined, expense and loss ratios. These terms
are defined in the glossary of terms section beginning on page 106 of the 2008
Annual Report. Although there is not a property and casualty industry defined
standard that is consistently applied in calculating these ratios, Kingsway
has historically included costs such as corporate office expenses and excluded
premium finance revenues whereas other public companies have done otherwise in
the calculation of their expense and combined ratios. Readers are therefore
cautioned when comparing Kingsway's combined ratios to those of other public
companies as they may not have been calculated on a comparable basis.
Date of MD&A
Unless otherwise noted, the information contained in this MD&A is based on
information available to management as of November 6, 2009.
RESULTS OF CONTINUING OPERATIONS
Premiums
-------------------------------------------------------------------------
Three months Nine months
ended September 30: ended September 30:
-------------------------------------------------------------------------
(in millions
of dollars) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Gross premiums
written
Canada $ 73.3 $ 91.5 (20%) $ 222.5 $ 290.6 (23%)
U.S. 82.2 103.7 (21%) 299.3 371.4 (19%)
Run-off 28.9 139.8 (79%) 136.6 489.9 (72%)
-------------------------------------------------------------------------
Total $ 184.4 $335.0 (45%) $ 658.4 $1,151.9 (43%)
Net premiums
written
Canada $ 69.4 $ 99.5 (30%) $ 221.8 $ 319.0 (30%)
U.S. 82.2 106.5 (23%) 326.9 368.4 (11%)
Run-off 18.2 112.4 (84%) 94.9 418.0 (77%)
-------------------------------------------------------------------------
Total $ 169.8 $318.4 (47%) $ 643.6 $1,105.4 (42%)
Net premiums
earned
Canada $ 85.6 $109.4 (22%) $ 242.0 $ 294.9 (18%)
U.S. 100.1 121.3 (17%) 332.4 363.5 (9%)
Run-off 51.2 140.3 (64%) 215.6 521.3 (59%)
-------------------------------------------------------------------------
Total $ 236.9 $371.0 (36%) $ 790.0 $1,179.7 (33%)
-------------------------------------------------------------------------
Gross premiums written for the Canadian operating segment decreased by 20% for
the quarter to $73.3 million (23% to $222.5 million year to date) from $91.5
million in the third quarter last year ($290.6 million prior year to date).
The U.S. operating segment reported a decrease in premiums of 21% for the
quarter to $82.2 million (19% to $299.3 million year to date) from $103.7
million in the third quarter last year ($371.4 million prior year to date).
The Run-off operating segment reported a decrease in premiums of 79% for the
quarter to $28.9 million (72% to $136.6 million year to date) from $139.8
million in the third quarter last year ($489.9 million prior year to date).
The significant reduction in premium volume across all segments in a
reflection of the Company's strategy of discontinuing unprofitable lines of
business, primarily within its commercial lines as well as the K-Plus program
in Canada.
The Canadian segment accounted for 40% of gross premiums for the quarter (34%
year to date), while the U.S. segment accounted for 45% for the quarter (45%
year to date) and Run-Off 15% for the quarter (21% year to date).
The Company reported decreases in certain major lines across the group. Non
standard auto including motorcycle, trucking and commercial auto decreased by
26%, 94% and 47% respectively for the year to date compared to the same period
last year reflecting the Company's decision to terminate unprofitable business
and exit certain commercial lines of business. Non standard auto including
motorcycle has emerged as the Company's primary line of business, accounting
for 69% of gross premiums written for the year to date compared to 53% last
year. The proportion of trucking and commercial auto premiums as a percent of
the Company's total gross premiums written have declined to 2% and 13%
respectively compared to 18% and 14% respectively last year.
Investment Income
-------------------------------------------------------------------------
Three months Nine months
ended September 30: ended September 30:
-------------------------------------------------------------------------
(in millions
of dollars) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Investment income $ 5.8 $31.9 (82%) $60.7 $99.1 (39%)
-------------------------------------------------------------------------
Investment income in the quarter was $5.8 million, an 82% decrease compared to
the same period last year (decreased 39% to $60.7 million year to date). The
primary reason for this decrease in the quarter is a loss of approximately
$12.7 million from the impact of the strengthening Canadian dollar on the
Company's unhedged Canadian dollar denominated debt. Also contributing to the
decrease is the reduction in interest income from lower yields as a result of
a significant drop in short term interest rates in Canada and in the U.S. and
from the duration and risk profile of the portfolio having been reduced. A
smaller fixed income securities portfolio in the U.S. as a result of certain
lines of business being put into voluntary run-off has also contributed to the
lower interest income in the quarter. For a more detailed analysis of
investment income see Note 7 to the Consolidated Financial Statements.
The cost based yield on the fixed income portfolio decreased to 3.2% compared
to 4.4% for the same quarter last year. The cost based yield represents the
total interest income before expenses divided by the average amortized cost
base of fixed income securities, including cash, held in the portfolio during
the period. The lower yield is due to a reduction in duration and risk profile
of the portfolio during the quarter and the reinvestment of maturing
securities in a lower interest rate environment. The yield has also been
adversely impacted by the higher than normal cash balance during the quarter
to facilitate related party reinsurance transactions.
Net Realized Gains (Losses)
The table below presents a summary of the net realized gains (losses) for the
current quarter with comparative figures:
-------------------------------------------------------------------------
Three months Nine months
ended September 30: ended September 30:
-------------------------------------------------------------------------
(in millions
of dollars) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Fixed income $31.8 $(0.3) 10700% $34.7 4.3 707%
Write-down of assets
held for sale (1.7) - - (1.7) - -
Equities 0.5 (5.9) 108% (17.4) 12.2 (243%)
Impairments (0.1) (22.9) 100% (5.1) (40.7) 87%
-------------------------------------------------------------------------
Total $30.5 $(29.1) 205% $10.5 $(24.2) 143%
-------------------------------------------------------------------------
For the three months ended September 30, 2009, sales from the securities
portfolio, the write-down of assets held for sale and the write-down of
securities that are considered to be other than temporarily impaired resulted
in a net realized gain of $30.5 million ($10.5 million year to date) compared
to a net realized loss of $29.1 million for the three months ended September
30, 2008 ($24.2 million year to date).
Net realized gains on the sale of fixed income securities amounted to $31.8
million for the three months ended September 30, 2009 ($34.7 million year to
date) compared to a net realized loss of $0.3 million for the same period last
year (gain of $4.3 million year to date). Net realized gains in the current
quarter arose due to a rebalancing of the fixed income portfolio and from the
liquidation of securities in Bermuda and Barbados to facilitate the related
party reinsurance commutation transactions. During the quarter, longer
duration securities and lower credit securities were sold to better match the
expected cash flow needs of our lines of business now in run-off and to reduce
the risk profile and potential volatility of the portfolio.
The write-down of assets held for sale relates to an adjustment to fair market
value of the Company's head office building in Mississauga, Ontario. The
amount of the write-down represents the difference between the carrying value
and the value per the contract for sale.
As was previously announced, the Company elected to dispose of virtually all
of its common share equities during the first quarter of 2009. In addition to
the $91.9 million impairment charge on the common share equity portfolio taken
in the fourth quarter of 2008, the liquidation resulted in a realized loss of
$18.2 million in the first quarter of 2009. This decision to liquidate the
equity portfolio as well as the sale by the Company in the second and third
quarters of securities considered to be of a higher credit risk than desired,
has removed from the securities portfolio substantially all securities
believed to be other than temporarily impaired. Consequently, the value of
securities considered to be other than temporarily impaired as at September
30, 2009 is $0.1 million.
Underwriting Results (excluding Corporate)
-------------------------------------------------------------------------
Three months Nine months
ended September 30: ended September 30:
-------------------------------------------------------------------------
(in millions
of dollars) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Underwriting profit
(loss)
Canada $2.9 $(3.2) 190.6% $(16.5) $(34.1) 51.6%
U.S. (13.7) (20.4) 32.8% (31.8) (20.1) (58.2%)
Run-off (114.7) (31.1) (268.8%) (211.2) (103.0) (105.0%)
-------------------------------------------------------
Total $(125.5) $(54.7) (129.4%) $(259.5) $(157.2) (65.1%)
-------------------------------------------------------
Combined ratio
Canada 96.6% 103.0% (6.4%) 106.8% 111.5% (4.7%)
U.S. 113.7% 116.8% (3.1%) 109.6% 105.6% 4.0%
Run-off 324.0% 122.2% 201.8% 197.9% 119.7% 78.2%
-------------------------------------------------------
Total 152.9% 114.8% 38.1% 132.9% 113.4% 19.5%
-------------------------------------------------------
Expense ratio
Canada 39.3% 38.9% 0.4% 35.9% 41.0% (5.1%)
U.S. 28.3% 36.4% (8.1%) 29.9% 34.0% (4.1%)
Run-off 63.3% 34.5% 28.2% 48.0% 32.2% 15.8%
-------------------------------------------------------
Total 39.8% 36.4% 3.4% 36.7% 35.0% 1.7%
-------------------------------------------------------
Loss ratio
Canada 57.3% 64.1% (6.8%) 70.9% 70.5% 0.4%
U.S. 85.4% 80.4% 5.0% 79.7% 71.6% 8.2%
Run-off 260.7% 87.7% 173.0% 149.9% 87.5% 62.4%
-------------------------------------------------------
Total 113.1% 78.4% 34.7% 96.2% 78.4% 17.8%
-------------------------------------------------------
Underwriting profit for the Canadian operating segment was $2.9 million for
the quarter compared to an underwriting loss of $3.2 million in the third
quarter of 2008 (a loss of $16.5 million for the year to date compared to
$34.1 for the same period last year). The underwriting profit for the quarter
is primarily a result of favourable reserve development of $7.3 million. The
underwriting loss for the U.S. operating segment was $13.7 million for the
quarter compared to $20.4 million in the third quarter of 2008 ($31.8 million
for the year to date compared to $20.1 for the same period last year). The
underwriting loss for the quarter is attributable to unfavourable reserve
development of $4.8 million and increases to expected loss ratios on the
current accident year based upon revised indications of ultimate expected loss
payments. The underwriting loss for the Run-off segment was $114.7 million for
the quarter compared to $31.1 million in the third quarter of 2008 ($211.2
million for the year to date compared to $103.0 for the same period last
year). The underwriting loss for the quarter is primarily a result of
unfavourable reserve development of $84.1 million, primarily at Lincoln
General.
Adverse Development on Unpaid Claims
-------------------------------------------------------------------------
Three months Nine months
ended September 30: ended September 30:
-------------------------------------------------------------------------
(in millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Favourable (unfavourable)
change in estimated unpaid
claims for prior accident
years (note 1):
Canada $7.3 $(1.6) $(0.2) $(6.2)
U.S. (4.8) (3.0) (11.3) 6.1
Run-off (84.1) (9.2) (149.3) (78.7)
---------------------------------------------
Total $(81.6) $(13.8) $(160.8) $(78.8)
---------------------------------------------
As a % of net premiums
earned (note 2):
Canada (8.5%) 1.4% 0.1% 2.1%
U.S. 4.8% 2.5% 3.4% (1.7%)
Run-off 164.3% 6.6% 69.3% 15.1%
---------------------------------------------
Total 34.5% 3.7% 20.4% 6.7%
---------------------------------------------
As a % of unpaid claims
(note 3):
Canada 0.1% 0.9%
U.S. 3.2% (0.5%)
Run-off 13.9% 6.6%
---------------------
Total 5.8% 3.5%
---------------------
Note 1 - (Increase) decrease in estimates for unpaid claims from prior
accident years reflected in current financial year results
Note 2 - Increase (decrease) in current financial year reported combined
ratio
Note 3 - Increase (decrease) compared to estimated unpaid claims at the
end of the preceding fiscal year
The Canadian operations experienced estimated favourable unpaid claims
development of $7.3 million for the quarter (unfavourable unpaid claims of
$0.2 million year to date) resulting in a decrease of 8.5% to the Canadian
operations combined ratio for the quarter (increase of 0.1% year to date)
compared to unfavourable unpaid claims development of $1.6 million for the
third quarter last year ($6.2 million year to date).
The U.S. operations experienced estimated net unfavourable unpaid claims
development of $4.8 million for the quarter ($11.3 million year to date)
resulting in an increase of 4.8% to the U.S. operations combined ratio for the
quarter (3.4% year to date) compared with estimated net unfavourable unpaid
claims development of $3.0 million in the same quarter (favourable unpaid
claims development $6.1 million year to date) last year.
The business in run-off experienced estimated net unfavourable unpaid claims
development of $84.1 million for the quarter ($149.3 million year to date)
resulting in an increase of 164.3% to the Run-off business combined ratio for
the quarter (69.3% year to date) compared with estimated net unfavourable
unpaid claims development of $9.2 million in the same quarter ($78.7 million
year to date) last year.
Expenses
The expense ratio excluding corporate, increased to 39.8% in the quarter
(37.2% year to date) compared to 36.4% for the same quarter (35.0% year to
date) last year. Costs included in the expense ratio are commissions, premium
taxes, general and administration expenses and restructuring costs.
Commissions as a percent of net premium earned have decreased for the quarter
and year to date compared to the same periods last year due to the significant
change in mix of business. The impact of the decline in commissions on the
expense ratio is more than offset by the impact of general and administration
expenses which have also declined but at a slower pace than the reduction in
net premium earned.
General & Administrative expenses decreased 17% to $47.7 million in the third
quarter of 2009 from $57.3 million in the same quarter last year (19% to
$135.3 million from $166.5 million for the year to date). The decrease in the
quarter and year to date is primarily due to the impact of the transformation
program which has produced savings, the largest being approximately $10.7
million ($15.8 million year to date) related to reduced headcount. Also
contributing to the decrease in General and Administrative expenses in the
quarter and year to date are reduced legal fees following the settlement in
the second quarter of two lawsuits. The year-to-date expenses include the
proceeds of $11.0 million on the settlement of these lawsuits. Also in the
quarter, the Company recognized the reversal of a previously recorded $3.5
million reserve for employee health insurance claims. The savings described
above have been partially offset by the costs associated with the
transformation program which are $5.9 million in the quarter ($18.4 million
year to date).
Interest Expense
Interest expense in the third quarter of 2009 decreased to $5.8 million ($18.0
million year to date) compared to $9.3 million for the third quarter of 2008
($28.1 million year to date) as a result of the repayment of all short term
bank debt in 2008 and the debt buy-back in 2009.
Gain on Buy-Back of Senior Notes
During the quarter Kingsway America Inc. and Kingsway 2007 General Partnership
purchased and cancelled $16.5 million ($21.1 million year to date) face value
of its senior unsecured debentures for $9.9 million ($11.8 million year to
date) recording a gain of $6.6 million ($9.3 million year to date).
Income Taxes
Income tax recovery on continuing operations for the third quarter was $3.3
million ($26.4 million year to date) compared with an income tax recovery of
$17.4 million for the same quarter last year ($32.3 million year to date). An
increase in the valuation allowance of $32.8 million was recorded in the
quarter ($40.4 million year to date).
Income (Loss) from Continuing Operations and Earnings (Loss) Per Share -
Continuing Operations
In the third quarter, the Company reported a loss from continuing operations
of $117.1 million ($213.3 million year to date), compared to loss from
continuing operations of $42.1 million in the third quarter of last year
($73.2 million year to date). Diluted loss per share was $2.17 for the quarter
($3.90 year to date) compared to diluted loss per share of $0.76 for the third
quarter of 2008 (diluted loss per share of $1.32 year to date).
Net Income (Loss) and Earnings (Loss) Per Share - Net Income (Loss)
In the third quarter, the Company reported a net loss of $118.1 million
($214.8 million year to date), compared to net loss of $17.4 million in the
third quarter of last year ($45.5 million year to date). Diluted loss per
share was $2.19 for the quarter ($3.93 year to date) compared to diluted loss
per share of $0.32 for the third quarter of 2008 (diluted loss per share of
$0.82 year to date).
Balance Sheet
The table below shows a review of selected categories from the balance sheet
reported in the financial statements as at September 30, 2009 compared to
December 31, 2008.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars September 30, December 31, Change
except per share values) 2009 2008
-------------------------------------------------------------------------
Assets
Cash and cash equivalents 509.1 96.3 428.7%
Securities 1,758.3 2,319.4 (24.2%)
Accounts receivable and other
assets 188.2 275.7 (31.7%)
Income taxes recoverable 29.0 20.3 42.9%
Future income taxes 12.1 21.9 (44.7%)
Capital assets 60.7 60.8 (0.2%)
Goodw ill and intangible assets 51.5 63.9 (19.4%)
Assets held for sale 129.9 117.4 10.6%
Liabilities
Provision for loss on investment
in subsidiary 23.6 - 0.0%
Unearned premiums 372.2 500.0 (25.6%)
Unpaid claims 1,888.3 1,879.0 0.5%
Senior unsecured debentures 175.7 185.2 (5.1%)
Liabilities held for sale 57.5 48.4 18.8%
Shareholders ' Equity
Book value per share 5.31 8.24 (36%)
-------------------------------------------------------------------------
Cash:
The cash balance increased to $509.1 million as at September 30, 2009 compared
to $96.3 million as at December 31, 2008. This increase is primarily due to
the liquidation of securities in the Barbados captive reinsurance portfolio to
facilitate the related party reinsurance commutations which occurred around
the balance sheet date. Substantially all of the cash has been reinvested in
the fourth quarter in a combination of government securities and high quality
corporate bonds.
Securities:
The fair value of the securities portfolio decreased 24.2% to $1.8 billion,
compared to $2.3 billion as at December 31, 2008. This decrease is primarily
due to the temporary liquidation around the balance sheet date of a portion of
the portfolio to effect the commutation of internal reinsurance arrangements.
Also contributing to the decline is lower premium volumes throughout the
group, particularly at Lincoln General. Partially offsetting these factors are
an appreciation of the market value of the securities in the portfolio and the
impact of a stronger Canadian dollar at the balance sheet date on the
conversion of the Canadian dollar portfolio to U.S. dollars.
As previously announced, the Company elected to dispose of virtually all of
its common share equities during the first quarter of 2009 in order to reduce
volatility of the balance sheet and protect the Company's capital. The common
share equity portfolio was substantially disposed of during the first quarter
and proceeds were reinvested in high quality fixed income securities. As at
September 30, 2009, the fair value of the common share equity portfolio was
$5.2 million. These common share equity holdings are being monitored in the
context of the risk profile of the total portfolio.
As at September 30, 2009, 91.9% of the fixed income portfolio is rated 'A' or
better. For a quantitative analysis of the credit exposure of the Company from
its investment in fixed income securities and term deposits by rating as
assigned by S&P or Moody's Investor Services see Note 8 to the financial
statements.
The table below summarizes the fair value by contractual maturity of the fixed
income securities portfolio, which includes term deposits and bonds, split
between Canadian and U.S. operations:
-------------------------------------------------------------------------
Canadian U.S.
Operations Operations Total
-------------------------------------------------------------------------
Due in less than one year 3.9% 25.9% 15.5%
Due in one through five years 42.9% 45.4% 44.3%
Due in five through ten years 51.9% 12.2% 30.8%
Due after ten years 1.3% 16.5% 9.4%
-------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
There were net unrealized gains of $52.7 million on the total securities
portfolio at September 30, 2009 which is included as a component of
"accumulated other comprehensive income", as compared to net unrealized gains
of $32.4 million outstanding at December 31, 2008.
For a quantitative analysis of the impact to the fair value of the fixed
income portfolio of a change in interest rates, see Note 8 to the financial
statements.
As at September 30, 2009, the securities portfolio did not include any
collateralized debt obligations nor any direct exposure to any asset backed
commercial paper. The securities portfolio has a small exposure of
approximately $0.5 million to the sub-prime mortgage market in the U.S.
through home equity loan asset backed securities. As at September 30, 2009,
these securities had an aggregate net unrealized loss of $nil.
Accounts receivable and other assets:
The reduction in accounts receivable is primarily a result of declining
premiums written due to termination of lines of business.
Income taxes recoverable:
Income taxes recoverable increased primarily as a result of Canadian
operations continuing losses experienced in the quarter.
Future income taxes:
Future income taxes have decreased due to a valuation allowance recorded
during the year and due to the enactment of tax legislation relating to
investments.
The valuation allowance increased $32.8 million in the current quarter and by
$40.4 million for the year to date. This allowance has been established as a
result of the continued losses of the U.S. operations. Uncertainty over the
Company's ability to utilize these losses over the short term has led to the
Company recording the additional allowance.
As a result of the enactment of tax legislation a $6.6 million decrease in the
future income tax balance was recorded.
Goodwill and intangible assets:
Goodwill and intangible assets has decreased by $12.4 million or 19.4% since
the end of last year mainly as a result of the accelerated amortization of
computer software in certain U.S. subsidiaries and amortization of intangible
assets.
Assets held for sale:
Assets held for sale consist of all of the assets of Zephyr, the capital
assets of Avalon and the Canadian real estate properties.
Provision for loss on investment in subsidiary:
As a result of the disposition of Walshire for $nil proceeds subsequent to the
balance sheet date, the Company has recorded a provision against the net
assets of Walshire as at September 30, 2009 ($13.6 million) and has recorded a
provision for the $10 million cash commitment to Lincoln General. For further
details see Note 4 to the interim financial statements.
Unearned premiums:
Unearned premiums decreased 25.6% since December 31, 2008 as a result of lower
written premiums.
Liabilities held for sale
Liabilities held for sale consist of all the liabilities of Zephyr.
Unpaid claims:
The following table presents a summary of the provision for unpaid claims by
line of business:
-------------------------------------------------------------------------
(in millions of dollars)
-------------------------------------------------------------------------
September 30, December 31,
Line of Business 2009 2008
-------------------------------------------------------------------------
Non-Standard Automobile $ 520.5 $ 489.3
Standard Automobile 2.5 1.7
Commercial Automobile 223.0 217.8
Trucking 590.7 657.4
Motorcycle 135.1 118.1
Property & Liability 301.3 317.4
Other 115.2 77.3
-------------------------------------------------------------------------
Total $ 1,888.3 $ 1,879.0
-------------------------------------------------------------------------
The provisions for unpaid claims increased by 0.5% to $1.89 billion at the end
of the third quarter compared to $1.88 billion at the end of 2008. The
increase is a result of reserve strengthening during the year as well as the
impact of the stronger Canadian dollar on unpaid claims of the Canadian
operations when reported in U.S. dollars. These factors have been partially
offset by the run-off of certain lines of business.
The provision for unpaid claims includes case reserves for individual claims
of $1.12 billion ($1.05 billion at December 31, 2008) and a provision for
Incurred But Not Reported ("IBNR") claims which decreased 6.9% to $770.6
million ($828.1 million at December 31, 2008).
Book value per share:
Book value per share decreased by 39% to $5.31 at September 30, 2009 from
$8.24 at December 31, 2008 as a result of the diluted loss per share of $3.93
and the increase of $38.2 million in the "Accumulated other comprehensive
income" component of shareholders' equity.
Contractual Obligations
Information concerning contractual maturities of financial instruments as at
September 30, 2009 is shown in Note 8 of the financial statements. For further
details on the Company's long term debt and interest obligations, refer to
Note 20 of the Company's 2008 audited consolidated financial statements and
pages 35 to 40 of the 2008 Annual Report which sets out the Company's
contractual obligations as at December 31, 2008.
On June 29, 2009, Kingsway and Lincoln General entered into a consulting
agreement with an external run-off manager to provide certain consulting
services relating to Lincoln General, including advice and assistance in the
development of a Run-off Plan. In addition to base compensation of $1.3
million annually, the agreement provides for a minimum of $2.5 million to be
paid to the Run-off Manager at the termination of the contract (provided the
contract is not terminated for cause), which, at the latest will be March 1,
2014. As Lincoln General was disposed of subsequent to the balance sheet date,
the Company has accrued $6.1 million for the base compensation and additional
compensation as at September 30, 2009.
Liquidity and Capital Resources
During the three and nine months ended September 30, 2009, the cash used in
operating activities were $59.9 million and $246.4 million, respectively. The
Company's insurance subsidiaries fund their obligations primarily through the
premium and investment income and maturities in the securities portfolio.
Certain debentures issued by the Company contain negative covenants in their
trust indentures, placing limitations and restrictions over certain actions
without the prior written consent of the indenture trustees. Included in the
negative covenants is the limitation on the incurrence of additional debt in
the event that the total debt to total capital ratio or the senior debt to
total capital ratio exceed 50% and 35%, respectively. The total debt is
calculated on a pro-forma basis taking into account the issuance of additional
debt. The debentures also include covenants limiting the issuance and sale of
voting stock of restricted subsidiaries, the payment of dividends or any other
payment in respect of capital stock of the Company, or the retirement of debt
subordinate to the debentures covered by the trust indentures if, after giving
effect to such payments as described in the trust indentures, the total debt
to total capital ratio exceeds 50%.
As at September 30, 2009 the Company's total debt to capital and senior debt
to capital ratios were 55.4% and 41.1% respectively. As a result, the
limitations and restrictions described above are currently applicable. The
Board of Directors is considering alternatives to reduce these ratios to
remove the limitations and restrictions in place.
As a holding company, Kingsway derives cash from its subsidiaries generally in
the form of dividends and management fees to meet its obligations, which
primarily consist of dividend and interest payments. The Company believes that
it has the flexibility to obtain the funds needed to fulfill its cash
requirements and also to satisfy regulatory capital requirements over the next
twelve months. The operating insurance subsidiaries require regulatory
approval for the return of capital and, in certain circumstances, prior to the
payment of dividends. In the event that dividends and management fees
available to Kingsway are inadequate to service its obligations, the Company
would need to raise capital, sell assets or restructure its debt obligations.
On June 26, 2009, KFS Capital LLC, an indirect wholly-owned subsidiary of
Kingsway, commenced a take-over bid (the "KLROC Offer") to acquire up to
1,000,000 preferred, retractable, redeemable, cumulative units of Kingsway
Linked Return of Capital Trust at a price per unit of C$12.00 in cash. The
KLROC Offer expired on Tuesday, August 4, 2009 and 694,015 units were
tendered. This tender was paid for using available cash.
Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of
Kingsway announced on July 14, 2009 the commencement of a modified "Dutch
Auction" tender offer (the "2012 Offer") for a portion of its outstanding
Unsecured 6% Debentures due July 11, 2012 (the "2012 Debentures"). The 2012
Offer provided for a cash purchase of 2012 Debentures at a price per C$1,000
principal amount of debentures of not less than C$540 and not greater than
C$620, for a maximum aggregate purchase price to the offeror not to exceed
C$31 million (excluding accrued and unpaid interest). The 2012 Offer expired
Friday, August 14, 2009 with valid tenders (that were not withdrawn) of
C$9,174,000 in aggregate principal amount of Debentures. Kingsway 2007 General
Partnership accepted for purchase all such tendered Debentures at the highest
price specified of C$620 per C$1,000 principal amount. This tender was paid
for using available cash.
Subsequent to the balance sheet date the Company repaid in full a $6.9 million
mortgage, on a property.
Kingsway announced on July 29, 2009 an amendment to its normal course issuer
bid for common shares had been approved by the Toronto Stock Exchange ("TSX").
The normal course issuer bid was originally announced by Kingsway on November
28, 2008. Purchases under the normal course issuer bid from December 2, 2008
to December 1, 2009 were limited to 2,753,426 common shares (or approximately
5% of the aggregate number of common shares outstanding on November 15, 2008).
Purchases under the normal course issuer bid, as amended, are now limited to
5,386,545 common shares, or 10% of the public float on November 28, 2008.
Purchases under the normal course issuer bid, as amended, will terminate on
December 1, 2009. To date 3,394,800 shares have been repurchased under the
current normal course issuer bid at an average price of C$3.76.
The Capital Committee of Kingsway's board of directors has recommended that
capital allocated to the Capital Committee for its $40 million capital
initiative that was announced in May 2009 that remains unused following the
expiry of: (i) the modified "Dutch Auction" tender offer for a portion of its
outstanding Unsecured 6% Debentures due July 11, 2012, and (ii) the expiry of
the take-over bid for units of the Kingsway Linked Return of Capital Trust, be
applied to the repurchase of Kingsway common shares pursuant to the Company's
normal course issuer bid.
As at September 30, 2009, of the $40 million authorized by the Board of
Directors to repurchase debt and equity of the Company, approximately $31.8
million has been used.
As at September 30, 2009 the Company was adequately capitalized to support the
premium volume of the insurance subsidiaries.
In Canada, JEVCO Insurance Company is regulated by the OSFI and Kingsway
General Insurance Company is regulated by the Financial Services Commission of
Ontario ("FSCO"). OSFI and FSCO expect each institution to maintain ongoing
capital at no less than the supervisory target Minimum Capital Test ("MCT") of
150% and may establish, in consultation with an institution, an alternative
supervisory target level based upon an individual institution's risk profile.
As at September 30, 2009 the MCTs of JEVCO Insurance Company and Kingsway
General Insurance Company were 239% and 210% respectively. As at September 30,
2009 the Canadian insurance companies have aggregate capital of approximately
$60.2 million in excess of the 150% level.
As was previously announced, management of the Company has decided that JEVCO
Insurance Company will become the marketing brand in Canada. Effective October
1, 2009 JEVCO Insurance Company assumed the assets and liabilities of Kingsway
General Insurance Company and all intercompany reinsurance agreements between
JEVCO Insurance Company, Kingsway General Insurance Company and Kingsway
Reinsurance (Bermuda) Limited were commuted. In addition, capital has been
injected into JEVCO insurance Company to support the consolidated operations.
The estimate of JEVCO Insurance Company's MCT as at October 1, 2009 on a
pro-forma basis meets the target ratio of 243% agreed with OSFI prior to the
transaction being approved. Subsequent to the balance sheet date, all of
Kingsway General Insurance Company's insurance licenses have been surrendered.
In the United States, a risk based capital ("RBC") formula is used by the
National Association of Insurance Commissioners ("NAIC") to identify property
and casualty insurance companies that may not be adequately capitalized. The
NAIC requires that capital and surplus not fall below 200% of the authorized
control level. As at September 30, 2009, all U.S. subsidiaries, with the
exception of Lincoln General, are estimated to be above the required RBC
levels, with RBC ratio estimates ranging between 286% and 37,410%, and have
estimated aggregate capital (excluding Lincoln General) of approximately
$106.9 million in excess of the 200% level.
As a result of Lincoln General's RBC level as at December 31, 2008, the
Pennsylvania Insurance Department was required to conduct an examination and
issue an order outlining corrective action to be taken. Further, under
Pennsylvania law, Lincoln General may be deemed to be operating in a
financially hazardous condition based on its financial statements at December
31, 2008. As a result, the Pennsylvania Insurance Department has the power to
take a variety of regulatory actions, including but not limited to department
supervision, and the seeking of a court order of rehabilitation or liquidation
if it determines that Lincoln General's condition is such that the further
transaction of business would be hazardous, financially, to its policyholders,
creditors or the public.
As part of a plan developed by management, Lincoln General has initiated
running off its book of business and, accordingly, management has ceased
writing new or renewal business, except where otherwise required by law or
pre-existing contractual obligations, and has initiated mid-term cancellations
in certain lines of business. As at December 31, 2008, Lincoln General had
statutory admitted assets of $386.7 million, liabilities of $307.5 million,
and statutory capital and surplus of $79.2 million. On March 11, 2009, Lincoln
General entered into a letter agreement with the Pennsylvania Insurance
Department (the Department) that provides for increased supervisory oversight
by the Department including but not limited to increased reporting and
Department approval of non-routine matters including transfers or pledges of
assets, extension of loans, incurring of debt, increases in salaries, payments
of bonuses to officers and directors, and consummation of material
transactions.
On October 19, 2009, the Company announced that its indirect wholly owned
subsidiary, Kingsway America Inc. ("KAI"), has disposed of its entire interest
in KAI's wholly owned subsidiary Walshire Assurance Company ("Walshire").
Walshire is the sole shareholder of Lincoln General. All of the stock of
Walshire has been donated to charity, and with this disposition Lincoln
General ceases being a member of the Kingsway group of companies. As of the
date of the disposition of Walshire, the Company is of the view that its
control over Walshire and its subsidiaries, including Lincoln General was
lost. Management intends that Walshire and its subsidiaries will no longer be
consolidated beginning October 19, 2009.
The Company is of the view that the extent of its obligations in connection
with Walshire and its subsidiaries are the payment of a $10 million cash
contribution to Lincoln General; continued compliance with a run-off
management agreement, including certain continued support to the run-off
management team at Lincoln General; and continuing guarantee and reinsurance
obligations to inter-Company and third party insurance providers in respect of
certain Lincoln General obligations.
As part of the ongoing transformation program, during the second quarter the
Company began terminating all related party reinsurance treaties. As at
September 30, 2009, all treaties between Kingsway Reinsurance Corporation and
the U.S. operating companies have been commuted. As noted above, treaties
between the Canadian operating companies and Kingsway Reinsurance (Bermuda)
Limited were commuted effective October 1, 2009. This initiative has resulted
in increased capital in our operating companies and it has released excess
capital from the captive reinsurers to be used for corporate purposes.
As at September 30, 2009, following the commutation of all intercompany
reinsurance treaties between Kingsway Reinsurance Corporation and the
Company's U.S. operating subsidiaries, a significant portion of the remaining
capital at Kingsway Reinsurance Corporation was repatriated. A portion of this
capital was re-deployed directly into the U.S. operating subsidiaries and a
portion was held at the parent company for corporate purposes. The regulatory
capital remaining in Kingsway Reinsurance Corporation following the
commutation of all related party reinsurance treaties is below the amount
required under the Insurance Act of Barbados where Kingsway Reinsurance
Corporation is domiciled. The Company considers this situation to be temporary
as the calculation of the minimum capital required is based upon the premiums
of the previous calendar year when the level of underwriting activity was
significantly greater than those of the ongoing Barbados operation. This
situation has been communicated to the Office of the Supervisor of Insurance
in Barbados which has accepted the Company's commitment to resolve the
shortfall in early 2010. At that time, the Company believes that the capital
available will exceed the capital required with no additional capital
required.
As at September 30, 2009 the capital maintained by Kingsway Reinsurance
(Bermuda) Limited was approximately $28.6 million in excess of the regulatory
capital requirements in Bermuda. Subsequent to the balance sheet date, a
significant portion of the capital was removed as part of the consolidation of
the Canadian operations.
Off-Balance Sheet Financing
The Company entered into an off-balance sheet transaction through the Kingsway
Linked Return of Capital Trust transaction that was completed on July 14, 2005
which is more fully described in Note 20(d) of the 2008 audited consolidated
annual financial statements and on page 39 of the 2008 Annual Report. The
Company has one other off-balance sheet financing arrangement as described on
page 39 of the 2008 Annual Report.
Critical accounting estimates and assumptions
The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. The year-to-date results of the Company
reflect management's judgments regarding the impact of prevailing global
credit, and equity market conditions. Given the uncertainty surrounding the
continued volatility in these markets, and the general lack of liquidity in
financial markets, the actual financial results could differ from those
estimates.
There are no new critical accounting estimates or assumptions compared to the
information provided in the annual MD&A, as described on page 42 of the 2008
Annual Report.
Related Party Transactions
Related-party transactions, including services provided to or received by
Kingsway's subsidiaries, are carried out in the normal course of operations
and are measured at the amount of consideration paid or received as
established and agreed by the parties. Management believes that consideration
paid for such services approximate fair value.
In March 2009, the Company obtained a financing facility from a related party
to allow for specific capital initiatives. The facility was at fair market
terms and conditions. As at September 30, 2009, the facility was undrawn,
expired and has been terminated. In the fourth quarter, a new facility has
been obtained from the same related party. This new facility is at fair market
terms and conditions.
The Company has engaged the services of a company owned by a former director
and paid $0.8 million for the nine month period ended September 30, 2009.
In addition to a previously agreed retainer of C$0.1 million, the Board of
Directors has decided to pay an additional $0.4 million and C$0.1 million to
the Chairman of the Board. Of these amounts, the Company has paid $0.2 million
and C$0.1 million as at September 30, 2009.
International Financial Reporting Standards (IFRS)
In 2006, the Accounting Standards Board (AcSB) published a new plan that will
significantly affect financial reporting requirements for Canadian companies.
The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS
over an expected five year transitional period. In February 2008, the AcSB
announced that 2011 is the changeover date for publicly-listed companies to
use IFRS, replacing existing Canadian GAAP. The date is for interim and annual
financial statements relating to fiscal years beginning on or after January 1,
2011. The transition date of January 1, 2011 will require the restatement for
comparative purposes of amounts reported by the Company for the year ended
December 31, 2010. The Company has begun assessing the adoption of IFRS for
2011, which is more fully described on pages 43 and 44 of the 2008 Annual
Report.
Disclosure of Outstanding Share Data
As at September 30, 2009, the Company had 51,673,728 common shares outstanding
and there have been no changes up to the reporting date.
Summary of Quarterly Results
The following table presents the financial results over the previous eight
quarters.
-------------------------------------------------------------------------
2009 2008 2007
-------------------------------------------------------------------------
(in
millions
of dollars
except per
share
values) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Gross
premiums
written 184.4 $232.7 $241.4 $242.6 $335.1 $402.6 $414.1 $403.0
Net
premiums
earned 236.9 269.5 283.5 305.7 371.0 395.4 412.7 433.4
Total
revenue 273.1 297.6 290.4 218.8 373.7 438.0 442.9 481.9
Loss from
continuing
opera-
tions (117.1) (39.3) (56.9) (357.5) (42.1) 5.2 (36.3) (103.7)
Net
income
(loss) (118.1) (38.4) (58.3) (360.4) (17.4) 6.3 (34.4) (103.5)
-------------------------------------------------------------------------
Earnings
(loss) per
share -
continuing
operations
Basic (2.17) (0.71) (1.03) (6.49) (0.76) 0.09 (0.66) (1.87)
Diluted (2.17) (0.71) (1.03) (6.49) (0.76) 0.09 (0.66) (1.87)
Earnings
(loss) per
share -
net income
(loss)
Basic (2.19) (0.70) (1.06) (6.53) (0.32) 0.11 (0.62) (1.86)
Diluted (2.19) (0.70) (1.06) (6.53) (0.32) 0.11 (0.62) (1.86)
-------------------------------------------------------------------------
Supplementary Financial Information from Continuing Operations
Financial Strength Indicators:
Some of the key indicators of the Company's financial strength are as follows:
-------------------------------------------------------------------------
September 30, December 31,
2009 2008
-------------------------------------------------------------------------
Rolling four quarter calculations:
Net premiums written to estimated
statutory surplus ratio 1.9x 2.1x
Senior debt to capitalization ratio 41.1% 31.9%
Total debt to capitalization ratio 55.4% 42.9%
-------------------------------------------------------------------------
Outlook
The Company's 2008 Annual Report includes description and analysis of the key
factors and events that could impact future earnings under the heading "Risk
Factors" in the section entitled "Management's Discussion and Analysis". These
factors and events have, for the most part, remained substantially unchanged
except as otherwise disclosed herein.
Internal Controls over Financial Reporting and Disclosure Controls &
Procedures
Management of the Company is responsible for designing internal controls over
financial reporting for the Company as defined under National Instrument
52-109 issued by the Canadian Securities Administrators. Management has
designed such internal controls over financial reporting, or caused them to be
designed under its supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the financial
statements for external purposes in accordance with GAAP. There has been no
change in the Company's internal control over financial reporting that
occurred during the Company's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Management of the Company is responsible for establishing and maintaining
disclosure controls and procedures for the Company as defined under National
Instrument 52-109 issued by the Canadian Securities Administrators. Management
has designed such disclosure controls and procedures, or caused them to be
designed under its supervision, to provide reasonable assurance that material
information relating to the Company, including its consolidated subsidiaries,
is made known to the Chief Executive Officer and the Chief Financial Officer
by others within those entities, particularly during the period in which the
interim filings are being prepared.
Forward Looking Statements
This press release (including the Management's Discussion and Analysis)
includes "forward looking statements" that are subject to risks and
uncertainties. These statements relate to future events or future performance
and reflect management's current expectations and assumptions. The words
"anticipate", "expect", "believe", "may", "should", "estimate", "project",
"outlook", "forecast" or similar words are used to identify such forward
looking information. Such forward looking statements reflect management's
current beliefs and are based on information currently available to management
of the Company. A number of factors could cause actual events, performance or
results to differ materially from the events, performance and results
discussed in the forward-looking statements. For information identifying
important factors that could cause actual results to differ materially from
those anticipated in the forward looking statements, see Kingsway's securities
filings, including its 2008 Annual Report under the heading Risk Factors in
the Management's Discussion and Analysis section. The securities filings can
be accessed on the Canadian Securities Administrators' website at
www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange
Commission's website at www.sec.gov or through the Company's website at
www.kingsway-financial.com. The Company disclaims any intention or obligation
to update or revise any forward looking statements, whether as a result of new
information, future events or otherwise.
Additional Information
Additional information relating to Kingsway, including Kingsway's Annual
Report and Kingsway's Annual Information Form is on SEDAR at www.sedar.com.
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of U.S. dollars, except for per share values)
-------------------------------------------------------------------------
(Unaudited) Three months ended Nine months ended
September 30: September 30:
2009 2008 2009 2008
-------------------------------------------------------------------------
Gross premiums written $ 184,387 $ 335,051 $ 658,381 $1,151,867
-------------------------------------------------------------------------
Net premiums written $ 169,758 $ 318,429 $ 643,559 $1,105,368
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ 236,880 $ 371,040 $ 789,944 $1,179,746
Investment income
(Note 7) 5,791 31,881 60,719 99,058
Net realized gain (loss)
(Note 7) 30,456 (29,148) 10,461 (24,197)
-------------------------------------------------------------------------
273,127 373,773 861,124 1,254,607
-------------------------------------------------------------------------
Expenses:
Claims incurred $ 267,957 $ 290,726 $ 759,882 $ 924,456
Commissions and
premiums taxes 42,153 72,465 140,124 231,235
General and
administrative
expenses 47,718 57,323 135,294 166,549
Restructuring costs
(Note 11) 5,861 - 18,410 -
Interest expense 5,757 9,321 17,971 28,110
Amortization of
intangibles (Note 2) 7,125 3,444 14,813 9,732
-------------------------------------------------------------------------
376,571 433,279 1,086,494 1,360,082
-------------------------------------------------------------------------
Loss before unusual item
and income taxes (103,444) (59,506) (225,370) (105,475)
Write-down of
investment in
subsidiary (Note 4) (23,613) - (23,613) -
Gain on buy-back of
senior notes (Note 13) 6,607 - 9,254 -
-------------------------------------------------------------------------
Loss from continuing
operations before income
taxes (120,450) (59,506) (239,729) (105,475)
Income tax recovery (3,306) (17,391) (26,437) (32,290)
-------------------------------------------------------------------------
Loss from continuing
operations (117,144) (42,115) (213,292) (73,185)
Income (loss) from
discontinued operations,
net of taxes (Note 3) (981) (10,284) 140 (7,292)
Gain (loss) on disposal
of discontinued
operations, net of
taxes (Note 3) - 34,985 (1,616) 34,985
-------------------------------------------------------------------------
Net loss $ (118,125) $ (17,414) $ (214,768) $ (45,492)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per
share - continuing
operations:
Basic: $ (2.17) $ (0.76) $ (3.90) $ (1.32)
Diluted: $ (2.17) $ (0.76) $ (3.90) $ (1.32)
-------------------------------------------------------------------------
Earnings (loss) per
share - net income
(loss):
Basic: $ (2.19) $ (0.32) $ (3.93) $ (0.82)
Diluted: $ (2.19) $ (0.32) $ (3.93) $ (0.82)
Weighted average shares
outstanding (in '000s ):
Basic: 53,907 55,147 54,677 55,238
Diluted: 53,940 55,185 54,730 55,305
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
September 30, December 31,
2009 2008
(unaudited)
-------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 509,050 $ 96,320
Securities (Note 7) 1,758,273 2,319,363
Accrued investment income 17,776 24,069
Financed premiums 69,586 61,616
Accounts receivable and other assets 188,246 275,701
Due from reinsurers and other insurers 145,792 165,089
Deferred policy acquisition costs 90,591 122,522
Income taxes recoverable 28,930 20,348
Future income taxes 12,117 21,947
Capital assets (Note 2) 60,742 60,791
Goodwill and intangible assets (Note 2) 51,496 63,893
Assets held for sale (Note 3) 129,899 117,393
-------------------------------------------------------------------------
$ 3,062,498 $ 3,349,052
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loans payable $ 73,158 $ 66,222
Accounts payable and accrued liabilities 110,572 129,330
Provision for loss on investments in
subsidiary (Note 4) 23,613 -
Unearned premiums 372,169 499,936
Unpaid claims 1,888,261 1,879,016
Senior unsecured debentures 175,653 185,203
Subordinated indebtedness 87,407 87,383
Liabilities held for sale (Note 3) 57,525 48,390
-------------------------------------------------------------------------
2,788,358 2,895,480
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital
Issued and outstanding number of
common shares 295,916 322,344
51,673,728 - September 30, 2009
55,068,528 - December 31, 2008
Contributed surplus 21,294 9,791
Retained earnings (deficit) (118,053) 98,564
Accumulated other comprehensive income 74,983 22,873
-------------------------------------------------------------------------
274,140 453,572
-------------------------------------------------------------------------
$ 3,062,498 $ 3,349,052
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
Nine months ended
September 30:
-------------------------------------------------------------------------
(Unaudited) 2009 2008
-------------------------------------------------------------------------
Share capital
Balance at beginning of period $ 322,344 $ 326,151
Issued during the period - 89
Repurchased for cancellation (26,428) (3,896)
-------------------------------------------------------------------------
Balance at end of period 295,916 322,344
-------------------------------------------------------------------------
Contributed surplus
Balance at beginning of period $ 9,791 $ 7,619
Forfeited options (4,512) (510)
Repurchased for cancellation 14,663 -
Stock option expense 1,352 1,780
-------------------------------------------------------------------------
Balance at end of period 21,294 8,889
-------------------------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of period $ 98,564 $ 521,165
Net loss for the period (214,768) (45,492)
Common share dividends (1,849) (12,115)
Repurchase of shares for cancellation - (1,276)
-------------------------------------------------------------------------
Balance at end of period (118,053) 462,282
-------------------------------------------------------------------------
Accumulated other comprehensive income
Balance at beginning of period $ 22,873 $ 85,866
Other comprehensive income (loss) 52,110 (107,206)
-------------------------------------------------------------------------
Balance at end of period 74,983 (21,340)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders' equity at end of period $ 274,140 $ 772,175
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30: September 30:
-------------------------------------------------------------------------
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Comprehensive income
Net income (loss) $ (118,125) $ (17,414) $ (214,768) $ (45,492)
Other comprehensive
income, net of taxes:
- Change in unrealized
gains (losses) on
available-for
securities:
Unrealized gains
(losses) arising
during the period,
net of income
taxes(1) 22,633 (55,883) 31,199 (77,065)
Recognition of
realized losses
(gains) to net
income, net of
income taxes(2) (12,400) 11,256 (19,384) (3,789)
- Unrealized gains
(losses) on translating
financial statement of
self-sustaining foreign
operations 28,690 (13,872) 31,450 (23,526)
- Gain (loss) on cash flow
hedge - (2,295) 8,845 (2,826)
-------------------------------------------------------------------------
Other comprehensive income
(loss) 38,923 (60,794) 52,110 (107,206)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive loss $ (79,202) $ (78,208) $ (162,658) $ (152,698)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of income tax of $1,913 for the three months ended September 30,
2009 ($10,469 for year to date) and $(18,999) for the three months
ended September 30, 2008 ($(23,120) for year to date).
(2) Net of income tax of $(577) for the three months ended September 30,
2009 ($(2,058) for year to date) and $4,001 for the three months
ended September 30, 2008 ($(1,598) for year to date).
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30: September 30:
-------------------------------------------------------------------------
(Unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities
Net loss $ (118,125) $ (17,414) $ (214,768) $ (45,492)
Items not affecting cash:
Loss (income) from
discontinued operations 981 (24,701) 1,476 (27,693)
Amortization 10,793 3,616 16,826 14,694
Future and current
income taxes 4,072 (2,766) 6,798 (9,044)
Net realized (gains)
losses (37,064) 30,313 (19,715) 24,894
Amortization of bond
premiums and discounts 2,103 (1,222) 2,826 (5,228)
Net change in other
non-cash balances 77,305 (233,684) (39,831) (286,445)
-------------------------------------------------------------------------
(59,935) (245,858) (246,388) (334,314)
-------------------------------------------------------------------------
Financing activities
Share capital (26,428) (156) (26,428) (2,538)
Repurchase of common
shares for cancellation 14,664 6 14,664 (1,276)
Contributed surplus (2,040) - (3,440) -
Dividends paid - (3,907) 6,042 (9,786)
Bank indebtedness and
loans payable (5,871) (157,693) (3,651) (172,976)
Senior unsecured
indebtedness - - - (17,517)
-------------------------------------------------------------------------
(19,675) (161,750) (12,813) (204,093)
-------------------------------------------------------------------------
Investing activities
Purchase of securities (1,664,297) (820,773) (3,211,069) (2,402,973)
Proceeds from sale of
securities 2,105,227 1,160,019 3,885,161 2,913,079
Financed premiums
receivable, net 3,575 31,173 (1,647) 17,920
Acquisitions, net of
cash acquired - - (1,941) (212)
Net proceeds from sale
of discontinued
operations - 44,067 - 44,067
Net capital assets and
intangible assets (3,196) 858 (1,043) (2,364)
-------------------------------------------------------------------------
441,309 415,344 669,461 569,517
-------------------------------------------------------------------------
Discontinued Operations
Operating activities 5,245 4,562 14,025 13,673
Financing activities - - (7,891) (2,329)
Investing activities (2,710) (3,465) (3,107) (6,708)
-------------------------------------------------------------------------
2,535 1,097 3,027 4,636
-------------------------------------------------------------------------
Net change in cash and
cash equivalents 364,234 8,833 413,287 35,746
Cash and cash equivalents
at beginning of period 154,709 188,548 105,656 161,635
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period 518,943 197,381 518,943 197,381
-------------------------------------------------------------------------
Less cash and cash
equivalents of
discontinued operations
at end or period 9,893 14,674 9,893 14,674
-------------------------------------------------------------------------
Cash and cash equivalents
of continuing operations
at end of period $ 509,050 $ 182,707 $ 509,050 $ 182,707
-------------------------------------------------------------------------
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2009 and 2008
(Unaudited - tabular amounts in thousands of U.S. dollars)
-------------------------------------------------------------------------
NOTE 1 Basis of Presentation
-------------------------------------------------------------------------
These interim consolidated financial statements have been prepared in
accordance with The Canadian Institute of Chartered Accountants ("CICA")
Canadian generally accepted accounting principles ("GAAP") using the same
accounting policies as were used for the Company's consolidated financial
statements for the year ended December 31, 2008 except for the changes in
accounting policies as noted below. These interim consolidated financial
statements do not contain all disclosures required by generally accepted
accounting principles and accordingly should be read in conjunction with
the Company's audited consolidated financial statements for the year
ended December 31, 2008 as set out on pages 65 to 104 of the Company's
2008 Annual Report. The results of the operations for the interim periods
are not necessarily indicative of the full-year results.
NOTE 2 Change In Accounting Polices
-------------------------------------------------------------------------
Commencing January 1, 2009, the Company adopted the CICA Handbook Section
3064 Goodwill and Intangible Assets. As a result of adopting the new
standard, certain software costs previously recorded as Capital assets
are now recorded as Intangible assets in the Consolidated Balance Sheet.
Accordingly, $18.1 million as at December 31, 2008 ($12.6 million as at
September 30, 2008) was reclassified from Capital assets to Intangible
assets. The related amortization expense that was previously recorded in
General and administrative expenses on the Consolidated Statement of
Operations is now recorded as Amortization of intangibles. Accordingly,
$2.4 million for the three months ended September 30, 2008 ($6.0 million
for the nine months ended September 30, 2008) was reclassified from
General and administrative expenses to Amortization of intangibles.
Commencing January 20, 2009, the Company adopted the CICA Handbook EIC
173 - Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities, which clarifies the consideration of entity's own credit
risk and the credit risk of the counterparty in determining the fair
value of financial assets and financial liabilities, including derivative
instruments. The accounting treatment should be applied retrospectively
without restatement of prior periods to all financial assets and
liabilities measured at fair value. There was no resulting difference
noted on adoption.
NOTE 3 Discontinued Operations
-------------------------------------------------------------------------
Zephyr Insurance Company, Inc. ("Zephyr") and Avalon Risk Management Inc.
("Avalon") , previously disclosed as part of the United States segment,
and York Fire and Casualty Insurance Company ("York Fire'), previously
disclosed as part of the Canadian segment, have been classified as
discontinued operations and the results of their operations are reported
separately for all periods presented.
Summarized financial information for discontinued operations is shown
below.
-------------------------------------------------------------------------
30-Sep-09 31-Dec-08
Assets
Cash and cash equivalents $ 9,893 $ 9,336
Securities 56,587 51,122
Accrued Investment Income 419 485
Accounts Receivable and other assets 962 749
Due from reinsurers and other insurers 17,008 12,856
Deferred policy acquisition costs 5,637 5,033
Future income taxes 2,495 3,344
Capital assets 36,898 34,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assets held for sale and of discontinued
operations $ 129,899 $ 117,393
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Accounts payable and accrued liabilities $ 9,765 $ 6,235
Income taxes payable 9,640 5,611
Unearned premiums 38,120 36,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities of discontinued operations $ 57,525 $ 48,390
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital assets include Canadian real estate held for sale as follows:
-------------------------------------------------------------------------
September 30, 2009
-------------------------------------------------------------------------
Ontario, Alberta,
Canada Canada Total
-------------------------------------------------------------------------
Land $ 4,678 $ 567 $ 5,245
Building 29,118 2,115 31,233
-------------------------------------------------------------------------
Total assets held for sale $ 33,796 $ 2,682 $ 36,478
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
Ontario, Alberta,
Canada Canada Total
-------------------------------------------------------------------------
Land $ 4,112 $ 499 $ 4,611
Building 27,467 1,907 29,374
-------------------------------------------------------------------------
Total assets held for sale $ 31,579 $ 2,406 $ 33,985
-------------------------------------------------------------------------
The above assets were previously disclosed as part of the Canadian
segment and written down to their estimated fair market value less costs
to sell. The write down of $1.7 million is included in net realized gain
(loss).
Subsequent to the quarter, the sale of the building located in Alberta,
Canada closed with an estimated gain of approximately $2 million.
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30: September 30:
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Operations:
Revenue $ 1,451 $ 26,510 $ 2,165 $ 80,986
-------------------------------------------------------------------------
Income (loss) from
discontinued operations
before taxes 3,051 (12,709) 5,369 (10,221)
Income tax (recovery) 4,032 (2,425) 5,229 (2,929)
-------------------------------------------------------------------------
Income (loss) from
discontinued operations
before disposal, net of
taxes $ (981) $ (10,284) $ 140 $ (7,292)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Disposals:
Gain (loss) on disposal
before income taxes $ - $ 42,049 $ (1,941) $ 42,049
Income tax (recovery) - 7,064 (325) 7,064
-------------------------------------------------------------------------
Loss on disposal, net of
taxes $ - $ 34,985 $ (1,616) $ 34,985
-------------------------------------------------------------------------
Total gain (loss) from
discontinued operations,
net of taxes $ (981) $ 24,701 $ (1,476) $ 27,693
-------------------------------------------------------------------------
Zephyr:
On September 7, 2009, the Company entered into a definitive agreement to
sell HI Holdings Inc., and its subsidiary Zephyr Insurance Company
("Zephyr"), a specialty property insurance company founded specifically
to protect Hawaii homeowners and residents from catastrophic loss due to
hurricanes. The transaction has been completed during the fourth quarter
of 2009 following the receipt of regulatory approvals. The Company's
revenues from discontinued operations relating to Zephyr were $1.4
million and $0.7 million in the third quarters of 2009 and 2008
respectively, and $2.3 million and $1.3 million in the first nine months
of 2009 and 2008 respectively. In total, the Company's gain from
discontinued operations relating to Zephyr, net of taxes were $2.1
million and $2.3 million in the third quarters of 2009 and 2008
respectively, and $6.8 million and $6.2 million in the first nine months
of 2009 and 2008 respectively.
Avalon Risk Management Inc.:
The Company entered into a definitive agreement to sell substantially all
of the assets of Avalon. The transaction has been completed during the
fourth quarter of 2009. The Company's revenues from discontinued
operations relating to Avalon were $0.1 million and $0.1 million in the
third quarters of 2009 and 2008 respectively, and $0.1 million and $0.1
million in the first nine months of 2009 and 2008 respectively. The
Company's loss from discontinued operations relating to Avalon, net of
taxes were $3.1 million and $1.0 million in the third quarters of 2009
and 2008 respectively, and losses of $4.4 million and $2.1 million for
the first nine months of 2009 and 2008 respectively.
York Fire:
On September 30, 2008, the Company completed its previously announced
sale of York Fire, a primarily standard insurance writer, for C$95
million in cash. The final settlement was completed in the first quarter
of 2009 and the adjustments are reflected accordingly. The Company's
revenues from discontinued operations relating to York Fire were $nil and
$25.7 million in the third quarters of 2009 and 2008 respectively, and
$(0.2) million and $79.6 million in the first nine months of 2009 and
2008 respectively. In total, the Company's gain from discontinued
operations relating to York Fire, net of taxes were $ nil and $23.3
million in the third quarters of 2009 and 2008 respectively, and $(3.8)
million and $23.6 million in the first nine months of 2009 and 2008
respectively.
NOTE 4 Disposition of Walshire Assurance Company
-------------------------------------------------------------------------
On October 19 2009, Kingsway America Inc. ("KAI"), an indirect wholly
owned subsidiary of the Company, disposed of its entire interest in its
wholly owned subsidiary Walshire Assurance Company ("Walshire"). Walshire
is the sole shareholder of Lincoln General. All of the stock of Walshire
has been donated to charity, and with this disposition Lincoln General
ceases being a member of the Kingsway group of companies.
The Company is currently in discussions with the Pennsylvania Insurance
Department with respect to the transaction, however, the full extent of
the Company's commitment to the Pennsylvania Insurance Department is to
provide a $10 million cash contribution to Lincoln General. The Company
also maintains an obligation to provide certain continued support to the
run-off management team at Lincoln General.
As Walshire is a member of the consolidated group of companies as at
September 30, 2009 the financial position and results from operations of
Walshire and its subsidiaries form part of the Company's consolidated
financial statements as of that date. As a result of management's
decision subsequent to the balance sheet date to dispose of Walshire for
no proceeds, the Company's consolidated financial statements as of
September 30, 2009 include the write-down to $nil of the net assets of
Walshire. The value of this write-down is $13.6 million. Also included in
the financial statements for the period ended September 30, 2009 is the
provision for the $10 million cash contribution and a provision for its
obligation to support the run-off management team at Lincoln General. The
aggregate of the write-down of the net assets of Walshire and the
provision for the $10 million cash contribution, totaling $23.6 million,
have been separately disclosed in the Company's consolidated statement of
operations for the three and nine months ended September 30, 2009.
The securities portfolio of Walshire and its subsidiaries has been
assessed to determine if declines in market value are other than
temporary. Due to the Company's disposal of Walshire and its subsidiaries
subsequent to the balance sheet date, the required assertion that the
Company has the intent to hold the securities to recovery has not been
met. As a result, a decline in market value below amortized cost of $0.1
million has been included in write-downs for other than temporary
impairments. Property, plant and equipment is carried at cost less
accumulated amortization and any impairment losses and is reviewed for
impairment whenever events or changes in circumstance indicate that the
carrying amount of such assets may not be recoverable. The disposal of
Walshire triggered impairment tests for its property plant and equipment
and it was determined that the carrying amount was appropriate.
As at September 30, 2009 there is no goodwill on the consolidated
statement of financial position of the Company in connection with the
acquisition of Walshire.
As of the date of the disposition of Walshire, the Company is of the view
that its control over Walshire and its subsidiaries, including Lincoln
General was lost. Management intends that Walshire and its subsidiaries
will no longer be consolidated beginning October 19, 2009.
Additional disclosure to illustrate the impact of the disposition of
--------------------------------------------------------------------
Walshire
--------
The following information has been presented to illustrate Walshire's
portion of the consolidated financial statements of the Company. The
statement of operations and the statement of financial position of
Walshire and for the consolidated Kingsway group excluding Walshire are
disclosed below.
The 'Walshire Assurance Company' statement of operations is presented to
show Walshire's contribution to the consolidated statement and therefore
exclude the impact of transactions between Walshire and its subsidiaries
and other entities within the consolidated Kingsway group. Similarly, the
assets and liabilities in the 'Walshire Assurance Company' statement of
financial position exclude balances between Walshire and its subsidiaries
and other entities within the consolidated Kingsway group.
The 'Kingsway excluding Walshire' columns present the statements of the
consolidated group excluding Walshire. These statements are derived by
subtracting the 'Walshire Assurance Company' balances from the
consolidated Company statements. In the statement of financial position,
the net assets of Walshire have been disclosed on a single line in the
statement of financial position. As at September 30, 2009, the net assets
of Walshire are shown as negative $10 million since the net assets of
Walshire have been written down to $nil and an additional $10 million
provision has been taken for the obligation relating to the cash
contribution.
-------------------------------------------------------------------------
Walshire Kingsway
Assurance Company (Excluding Walshire)
3 Months Ended 3 Months Ended
September 30 September 30
2009 2008 2009 2008
-------------------------------------------------------------------------
Gross premiums written $ 26,971 $ 106,547 $ 157,416 $ 228,504
-------------------------------------------------------------------------
Net premiums written $ 18,566 $ 93,019 $ 151,192 $ 225,410
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ 44,238 $ 115,994 $ 192,642 $ 255,046
Investment income 5,070 2,978 721 28,903
Net realized gains/
(losses) 4,225 (235) 26,231 (28,913)
-------------------------------------------------------------------------
53,533 118,737 219,594 255,036
-------------------------------------------------------------------------
Expenses:
Claims incurred $ 124,804 $ 100,355 $ 143,153 $ 190,371
Commissions and
premiums taxes 8,147 28,025 34,006 44,440
General and
administrative
expenses 11,303 10,994 36,415 46,329
Restructuring Costs 103 5,758 -
Interest expense - - 5,757 9,321
Amortization of
intangibles 4,664 849 2,461 2,595
-------------------------------------------------------------------------
149,021 140,223 227,550 293,056
-------------------------------------------------------------------------
Loss before unusual item
And income taxes (95,488) (21,486) (7,956) (38,020)
Write-dow n of investment
in subsidiary (Note 4) - - (23,613) -
Gain on buy-back of
senior notes - - 6,607 -
-------------------------------------------------------------------------
Loss from continuing
operations before income
taxes (95,488) (21,486) (24,962) (38,020)
Income taxes (recovery) - - (3,306) (17,391)
-------------------------------------------------------------------------
Loss from continuing
operations (95,488) (21,486) (21,656) (20,629)
Income (loss) from
discontinued operations,
net of taxes - - (981) (10,284)
Gain (loss) on disposal of
discontinued operations,
net of taxes - - - 34,985
-------------------------------------------------------------------------
Net loss $ (95,488) $ (21,486) $ (22,637) $ 4,072
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Walshire Kingsway
Assurance Company (Excluding Walshire)
9 Months Ended 9 Months Ended
September 30 September 30
2009 2008 2009 2008
-------------------------------------------------------------------------
Gross premiums written $ 112,826 $ 370,731 $ 545,555 $ 781,136
-------------------------------------------------------------------------
Net premiums written $ 84,340 $ 343,790 $ 559,219 $ 761,578
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ 180,147 $ 438,047 $ 609,797 $ 741,699
Investment income 11,439 7,199 49,280 91,859
Net realized gains/
(losses) 1,214 (181) 9,247 (24,016)
-------------------------------------------------------------------------
192,800 445,065 668,324 809,542
-------------------------------------------------------------------------
Expenses:
Claims incurred $ 280,454 $ 386,541 $ 479,428 $ 537,915
Commissions and
premiums taxes 38,417 106,444 101,707 124,791
General and
administrative
expenses 37,074 35,118 98,220 131,431
Restructuring Costs 2,178 16,232 -
Interest expense - - 17,971 28,110
Amortization of
intangibles 4,439 1,600 10,374 8,132
-------------------------------------------------------------------------
362,562 529,703 723,932 830,379
-------------------------------------------------------------------------
Loss before unusual
item And income
taxes (169,762) (84,638) (55,608) (20,837)
Write-down of investment
in subsidiary - - (23,613) -
Gain on buy-back of
senior notes - - 9,254 -
-------------------------------------------------------------------------
Loss from continuing
operations before income
taxes (169,762) (84,638) (69,967) (20,837)
Income taxes (recovery) - - (26,437) (32,290)
-------------------------------------------------------------------------
Loss from continuing
operations (169,762) (84,638) (43,530) 11,453
Income (loss) from
discontinued operations,
net of taxes - - 140 (7,292)
Gain (loss) on disposal
of discontinued
operations, net of
taxes - - (1,616) 34,985
-------------------------------------------------------------------------
Net loss $ (169,762) $ (84,638) $ (45,006) $ 39,146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Walshire Kingsway Walshire Kingsway
Assurance Excluding Assurance Excluding
Company Walshire Company Walshire
-------------------------------------------------------------------------
September September December December
30, 30, 31, 31,
2009 2009 2008 2008
ASSETS
Cash and cash
equivalents $ 74,459 $ 434,591 $ 5,950 $ 90,370
Securities (Note 6) 663,530 1,094,743 929,487 1,389,876
Accrued investment
income 5,639 12,137 2,344 21,725
Financed premiums - 69,586 - 61,616
Accounts receivable
and other assets 49,108 139,137 101,258 174,443
Due from reinsurers
and other insurers 39,900 105,892 67,706 97,383
Deferred policy
acquisition costs 23,090 67,501 49,939 72,583
Income taxes recoverable 41,550 (12,620) - 20,348
Future income taxes - 12,117 - 21,947
Capital assets 16,999 43,743 23,915 36,876
Goodwill and intangible
assets - 51,496 - 63,893
Assets held for sale - 129,899 - 117,393
Net Assets of Walshire (10,000) - 94,147
-------------------------------------------------------------------------
$ 914,275 $2,138,222 $1,180,599 $2,262,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loans payable $ - $ 73,158 $ - $ 66,222
Accounts payable and
accrued liabilities 30,688 79,884 66,356 62,974
Provision for loss on
investments in
subsidiary
Unearned premiums 71,885 300,284 165,918 334,018
Unpaid claims 798,090 1,090,171 854,178 1,024,838
Senior unsecured
debentures - 175,653 - 185,203
Subordinated
indebtedness - 87,407 - 87,383
Liabilities held
for sale - 57,525 - 48,390
-------------------------------------------------------------------------
900,663 1,864,082 1,086,452 1,809,028
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 295,916 322,344
Issued and outstanding
number of common
shares
51,673,728 -
September 30, 2009
55,068,528 -
December 31, 2008
Contributed surplus 21,294 9,791
Retained earnings (118,053) 98,564
Accumulated other
comprehensive
income 74,983 22,873
-------------------------------------------------------------------------
13,612 274,140 94,147 453,572
-------------------------------------------------------------------------
$ 914,275 $2,138,222 $1,180,599 $2,262,600
-------------------------------------------------------------------------
NOTE 5 Stock-based Compensation
-------------------------------------------------------------------------
As reported on pages 81 - 84 of the Company's 2008 Annual Report,
effective January 1, 2003 the Company adopted on a prospective basis the
fair-value method of accounting for stock-based compensation awards
granted to employees and non-employee directors.
In March 2009, the Company issued two option grants at varying exercise
prices. The per share fair value of these grants were C$0.97 and C$0.45.
Per share fair value of options granted during 2008 was C$2.88 in
February, C$2.43 in May and C$2.45 in September. The fair value of the
options granted was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
-------------------------------------------------------------------------
As at September 30:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Risk-free interest rate 1.78% 3.22%
Dividend yield 4.21% 2.23%
Volatility of the expected market price of the
Company's common shares 88.1% 27.8%
Expected option life (in years) 4.0 4.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting
restrictions and are fully transferable. As the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
above pro forma adjustments are not necessarily a reliable single measure
of the fair value of the Company's employee stock options.
In the third quarter 2009, the Company recognized a reversal of
compensation expense as a result of forfeited options of $2.6 million
($4.5 million year to date) compared to $0.1 million ($0.5 million year
to date) for the same quarter in 2008.
NOTE 6 Segmented Information
-------------------------------------------------------------------------
The Company provides property and casualty insurance and other insurance
related services. Previously, the Company managed these businesses in
three reportable segments, Canada, the United States and Corporate. As a
result of implementing its corporate restructuring plan and exiting non-
core business, the Company now manages its business in four reportable
segments, Canada, the United States, Business in Run-off and Corporate.
The Company's Canadian and United States segments include transactions
with the Company's reinsurance subsidiaries. The business in Run-off is
comprised of the Lincoln General business except for specific product
lines transferred to related companies, the Southern United Fire
Insurance Company Inc. business and the Canadian long haul trucking
business. Results for the Company's operating segments are based on the
Company's internal financial reporting systems and are consistent with
those followed in the preparation of the consolidated financial
statements. The reportable segments for Canada have been updated to
conform to the current period's financial statement presentation for the
results of continuing operations.
-------------------------------------------------------------------------
Three months ended September 30, 2009
-------------------------------------------------------------------------
United
Canada States Run-off Corporate Total
-------------------------------------------------------------------------
Gross
premiums
written $ 73,330 $ 82,167 $ 28,890 $ - $ 184,387
Net premiums
earned 85,635 100,058 51,187 - 236,880
Investment
income
(loss) 8,109 (2,545) 5,242 (5,015) 5,791
Net realized
gain (loss) 1,813 24,904 4,112 (373) 30,456
Interest
expense - 5,757 - - 5,757
Amortization
of capital
assets 192 177 (107) 155 417
Amortization
of intangible
assets - 1,730 4,664 731 7,125
Income tax
expense
(recovery) 2,413 (1,013) (5,776) 1,070 (3,306)
Income (loss)
from
continuing
operations 10,410 8,812 (127,823) (8,543) (117,144)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended September 30, 2008
-------------------------------------------------------------------------
United
Canada States Run-off Corporate Total
-------------------------------------------------------------------------
Gross
premiums
written $ 91,518 $ 103,743 $ 139,790 $ - $ 335,051
Net premiums
earned 109,368 121,320 140,352 - 371,0401
Investment
income
(loss) 12,162 16,075 3,196 448 31,881
Net realized
gain (52,128) (18,843) (226) 42,049 (29,148)
Interest
expense - 7,593 - 1,728 9,321
Amortization
of capital
assets 523 693 (237) 300 1,279
Amortization
of intangible
assets - 1,872 860 712 3,444
Income tax
expense
(recovery) (8,029) (13,583) (1,795) 6,016 (17,391)
Income (loss)
from
continuing
operations (35,133) (19,028) (27,156) 39,202 (42,115)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30, 2009
-------------------------------------------------------------------------
United
Canada States Run-off Corporate Total
-------------------------------------------------------------------------
Gross premiums
written $ 222,521 $ 299,279 $ 136,581 $ - $ 658,381
Net premiums
earned 241,959 332,350 215,635 - 789,944
Investment
income
(loss) 23,938 28,330 11,990 (3,539) 60,719
Net realized
gain (loss) (1,105) 12,381 1,097 (1,912) 10,461
Interest
expense - 17,971 - - 17,971
Amortization
of capital
assets 999 28 1,000 452 2,479
Amortization
of intangible
assets - 8,320 4,439 2,054 14,813
Income tax
expense
(recovery) (598) (15,255) (7,292) (3,292) (26,437)
Income (loss)
from
continuing
operations 6,916 7,137 (218,898) (8,447) (213,292)
-------------------------------------------------------------------------
Total assets 1,185,312 835,769 948,661 92,756 3,062,498
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30, 2008
-------------------------------------------------------------------------
United
Canada States Run-off Corporate Total
-------------------------------------------------------------------------
Gross premiums
written $ 290,552 $ 371,382 $ 489,933 $ - $1,151,867
Net premiums
earned 294,935 363,512 521,299 - 1,179,746
Investment
income
(loss) 38,738 52,871 7,744 (295) 99,058
Net realized
gain (loss) (43,797) (22,277) (172) 42,049 (24,197)
Interest
expense - 24,182 - 3,928 28,110
Amortization
of capital
assets 1,603 2,118 (135) 1,391 4,977
Amortization
of intangible
assets - 5,945 1,631 2,156 9,732
Income tax
expense
(recovery) (13,690) (28,248) (3,332) 12,980 (32,290)
Income (loss)
from
continuing
operations (25,426) 8,656 (93,764) 37,349 (73,185)
-------------------------------------------------------------------------
Total assets 1,317,869 1,043,633 1,458,248 71,547 3,891,297
-------------------------------------------------------------------------
NOTE 7 Securities
-------------------------------------------------------------------------
The table below provides the amortized cost and fair values of
securities:
-------------------------------------------------------------------------
September 30, 2009
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
cost Gains Losses
-------------------------------------------------------------------------
Term Deposits $ 199,640 $ 18 $ - $ 199,658
Bonds:
Canadian - Government 394,052 3,322 57 397,317
- Corporate 307,137 13,648 131 320,654
- Commercial
mortgage
backed 1,573 5 66 1,512
- Other
asset
backed 33,896 1,010 - 34,906
U.S - Government 261,733 11,268 12 272,989
- Corporate 313,802 15,397 239 328,960
- Commercial
mortgage
backed 999 1 - 1,000
- Residential
mortgage
backed 149,389 4,769 12 154,146
- Other asset
backed 11,427 472 169 11,730
Other
- Corporate 13,941 357 - 14,298
-------------------------------------------------------------------------
Sub-total 1,687,589 50,267 686 1,737,170
Common shares
- Canadian 2,381 2,798 - 5,179
- U.S 15 10 - 25
Preferred shares
- Canadian 15,523 2,164 1,868 15,819
- U.S 92 - 12 80
-------------------------------------------------------------------------
$1,705,600 $ 55,239 $ 2,566 $1,758,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
cost Gains Losses
-------------------------------------------------------------------------
Term Deposits $ 183,807 $ 771 $ 20 $ 184,558
Bonds:
Canadian - Government 149,200 8,310 7 157,503
- Corporate 178,270 1,881 7,562 172,589
- Commercial
mortgage
backed 66,185 455 4,731 61,909
- Other asset
backed 13,304 78 127 13,255
U.S - Government 409,096 38,853 177 447,772
- Corporate 738,174 10,527 21,780 726,921
- Commercial
mortgage
backed 23,482 495 2,679 21,298
- Residential
mortgage
backed 111,698 3,131 868 113,961
- Other asset
backed 17,419 8 1,153 16,274
Other - Corporate 128,382 4,328 999 131,711
-------------------------------------------------------------------------
Sub-total $2,019,017 $ 68,837 $ 40,103 $2,047,751
Common shares
- Canadian 114,167 2,590 - 116,757
- U.S 146,406 4,882 - 151,288
Preferred shares
- Canadian 6,692 8 3,629 3,071
- U.S 635 - 139 496
-------------------------------------------------------------------------
$2,286,917 $ 76,317 $ 43,871 $2,319,363
-------------------------------------------------------------------------
The following tables highlight the aggregate unrealized loss position, by
security type, of holdings in an unrealized loss position. The tables
segregate the holdings based on the period of time the securities have
been continuously held in an unrealized loss position.
-------------------------------------------------------------------------
September 30, 2009
-------------------------------------------------------------------------
0 - 12 months Over 12 months
-------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
value loss value loss
-------------------------------------------------------------------------
Term Deposits $ - $ - - $ -
Bonds:
Canadian - Government 42,328 57 - -
- Corporate 18,955 115 12,350 16
- Commercial
mortgage
backed - - 789 66
- Other asset
backed - - - -
U.S - Government 12,796 8 198 4
- Corporate 21,125 23 12,365 216
- Commercial
mortgage
backed - - - -
- Residential
mortgage
backed 12,544 12 - -
- Other asset
backed - - 2,431 169
Other - Corporate - - - -
-------------------------------------------------------------------------
Sub-total $ 107,748 $ 215 $ 28,133 $ 471
Preferred shares
- Canadian - - 5,604 1,868
- U.S - - 79 12
-------------------------------------------------------------------------
$ 107,748 $ 215 $ 33,816 $ 2,351
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
0 - 12 months Over 12 months
-------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
value loss value loss
-------------------------------------------------------------------------
Term Deposits $ 18,856 $ 20 $ - $ -
Bonds:
Canadian - Government 2,482 7 - -
- Corporate 63,037 5,392 30,564 2,170
- Commercial
mortgage
backed 17,493 1,023 31,397 3,708
- Other asset
backed 3,279 29 3,472 98
U.S - Government 8,380 120 866 57
- Corporate 205,859 11,268 132,871 10,512
- Commercial
mortgage
backed 411 82 9,669 2,597
- Residential
mortgage
backed 105 1 639 867
- Other asset
backed 982 25 14,276 1,128
- Corporate 6,382 112 3,321 887
-------------------------------------------------------------------------
Sub-total $ 327,266 $ 18,079 $ 227,075 $ 22,024
Preferred shares
- Canadian - - 3,072 3,629
- U.S - - 496 139
-------------------------------------------------------------------------
$ 327,266 $ 18,079 $ 230,643 $ 25,792
-------------------------------------------------------------------------
Fair values of term deposits, bonds and common and preferred shares are
considered to approximate quoted market values based on the latest bid
prices in active markets. Fair value of securities for which no active
market exists are derived from quoted market prices of similar securities
or third party evidence.
Management performs a quarterly analysis of the Company's investment
holdings to determine if declines in market value are other than
temporary. Pursuant to FASB and Accounting Standards Board of Canada
guidance issued in April 2009, the analysis process has been revised
during the quarter to include consideration of the following factors:
- Assessing the Company's intent to sell those securities;
- Assessing whether it is more likely than not that the company will
be required to sell those securities before the recovery of its
amortized cost basis;
- Assessing if any credit losses are expected for those securities.
The assessment includes consideration of, among other things, all
available information and factors having a bearing upon
collectability of security such as changes to credit rating by
rating agencies, financial condition of the issuer, expected cash
flows and value of any underlying collateral.
As a result of the above analysis performed by management to determine
declines in market value that are other than temporary, write downs for
other-than-temporary impairments were $0.1 million for the quarter ended
September 30, 2009 compared to $22.9 million for the same period last
year ($5.1 million for the nine month period ended September 30, 2009
compared to $40.7 million for the nine month period ended September 30,
2008) and the entire amount of other-than-temporary impairments has been
recognized in earnings.
Management has reviewed currently available information regarding other
securities whose estimated fair values 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 securities and it is not more likely than not that
it will be required to sell those securities before recovery of its
amortized cost.
Net investment income for the quarter ended September 30 is comprised as
follows:
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30: September 30:
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Investment income
Interest on short term
securities 494 2,639 2,100 9,903
Interest on Bonds 17,269 25,324 60,880 82,067
Dividends 165 3,906 1,671 8,345
Premium Finance 1,038 1,264 3,405 3,361
Other (12,292) 485 (4,139) 731
-------------------------------------------------------------------------
Gross Investment Income 6,674 33,618 63,917 104,407
Investment Expenses 883 11,737 3,198 5,349
-------------------------------------------------------------------------
Net Investment Income 5,791 31,881 60,719 99,058
-------------------------------------------------------------------------
The decrease in interest income on short term securities for the quarter
and year to date is primarily due to a significant reduction in short
term interest rates in Canada and the U.S. in the current year compared
to the same periods last year. The decrease in interest on bonds for the
three and nine months to September 30, 2009 compared to the same periods
last year is partially due to a reduction in short-term yields described
above. A smaller fixed income securities portfolio as a result of certain
lines of business being put into voluntary run-off has also contributed
to the lower interest income on bonds in the quarter and year to date in
the U.S. The strength of the Canadian dollar in 2008, particularly in the
first two quarters, increased interest income in the Canadian portfolio
during that period when reported in U.S. dollars. This has contributed to
the decrease in interest income on bonds for the quarter and year to date
compared to the same periods last year.
Dividend income has declined for the three and nine months to September
30, 2009 compared to the same periods last year due to the disposition of
the common share equity portfolio in the first quarter of 2009.
Other income for the three months ended September 30, 2009 includes a
loss of $12.7 million ($1.3 million year to date) on the revaluation of
the Company's now unhedged Canadian dollar denominated debt.
Net realized gains for the quarter ended September 30, 2009 were $30.5
million compared to net realized losses of $29.1 million for the quarter
ended September 30, 2008. Net realized gains for the nine months ended
September 30, 2009 were $10.5 million compared to net realized losses of
$24.2 million for the quarter ended September 30, 2008.
NOTE 8 Financial Instruments
-------------------------------------------------------------------------
Risk Management
The Company's risk management policies and practices are described on
pages 18 to 20, 45 to 53 and 74 to 78 of the Company's 2008 Annual
Report. There has been no significant change in the risk management
framework.
In addition, the Company has provided herein the disclosures required
under the Canadian Institute of Chartered Accountants (CICA) handbook
section 3862, "Financial Instruments - Disclosures" related to the nature
and extent of risks arising from financial instruments. These disclosures
form an integral part of the interim consolidated financial statements.
Credit risk:
The Company is exposed to credit risk principally through its investment
securities and balances receivable from policyholders and reinsurers. The
Company monitors concentration and credit quality risk through policies
to limit and monitor its exposure to individual issuers or related groups
(with the exception of U.S. and Canadian government bonds) as well as
through ongoing review of the credit ratings of issuers held in the
securities portfolio. The Company's credit exposure to any one individual
policyholder is not material. The Company's policies, however, are
distributed by agents, program managers or brokers who manage cash
collection on its behalf. The Company has policies to evaluate the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer's insolvency.
The table below summarizes the credit exposure of the Company from its
investments in fixed income securities and term deposits by rating:
-------------------------------------------------------------------------
September 30, 2009 December 31, 2008
-------------------------------------------------------------------------
AAA/Aaa 854,839 49.2% 1,117,281 54.6%
AA/Aa2 387,714 22.3% 338,347 16.5%
A/A2 352,083 20.4% 496,095 24.2%
BBB/Baa2 127,360 7.3% 62,903 3.1%
BB/Ba2 1,978 0.1% 5,122 0.3%
B/B2 5,943 0.3% 7,838 0.4%
CCC/Caa or lower, or
not rated 7,253 0.4% 20,165 0.9%
-------------------------------------------------------------------------
Total consolidated 1,737,170 100.0% 2,047,751 100.0%
-------------------------------------------------------------------------
As at September 30, 2009, 91.9% of the fixed income portfolio is rated
'A' or better. Changes in this balance period over period are primarily
due to timing of investment maturities and reinvestment.
Market risk:
Our primary market risk exposure is changes in interest rates. Because
most of the securities portfolio is comprised of fixed income securities,
periodic changes in interest rate levels generally impact the financial
results to the extent that reinvestment yields are different than the
original yields on maturing securities. Also, during periods of rising
interest rates, the market value of the existing fixed income securities
will generally decrease and realized gains on fixed income securities
will likely be reduced. The reverse is true during periods of declining
interest rates.
Duration is a measure used to estimate the extent market values of fixed
income instruments change with changes in interest rates. Using this measure,
it is estimated that an immediate hypothetical 100 basis point or 1 percent
parallel increase in interest rates would decrease the market value of the
fixed income securities by $59.4 million at September 30, 2009, representing
3.4% of the $1.7 billion fair value fixed income securities portfolio.
The following table summarizes carrying amounts of financial instruments
by contractual maturity or expected cash flow dates (the actual repricing
dates may differ from contractual maturity because certain securities and
debentures have the right to call or prepay obligations with or without call
or prepayment penalties):
-------------------------------------------------------------------------
As at One No
September year One to Five to More than specific
30, 2009 or less five years ten years ten years date Total
-------------------------------------------------------------------------
Assets:
Cash &
cash
equiv-
alents 509,050 - - - - 509,050
Securi-
ties 271,686 773,232 539,024 163,443 10,888 1,758,273
Accrued
Invest-
ment
Income 17,776 - - - - 17,776
Finance
Premiums 69,586 - - - - 69,586
Accounts
receiv-
able and
other
assets 188,246 - - - - 188,246
Due from
reinsur-
ers and
other
insurers 51,140 78,587 14,169 1,896 - 145,792
-------------------------------------------------------------------------
Total: 1,107,484 851,819 553,193 165,339 10,888 2,688,723
-------------------------------------------------------------------------
Liabili-
ties:
Loans
payable - - 66,222 6,936 - 73,158
Accounts
payable
and
accrued
liabil-
ities 134,185 - - - - 134,185
Unpaid
claims 662,355 1,017,833 183,513 24,560 - 1,888,261
Senior
un-
secured
deben-
tures - 175,653 - - - 175,653
Subordi-
nated
indebt-
edness - - - 87,407 - 87,407
-------------------------------------------------------------------------
Total: 796,540 1,193,486 249,735 118,903 - 2,358,664
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at One No
December year One to Five to More than specific
31, 2008 or less five years ten years ten years date Total
-------------------------------------------------------------------------
Assets:
Cash &
cash
equiv-
alents 96,320 - - - - 96,320
Securi-
ties 395,355 971,299 516,397 164,700 271,612 2,319,363
Accrued
invest-
ment
income 24,069 - - - - 24,069
Finance
premiums 61,616 - - - - 61,616
Accounts
receiv-
able and
other
assets 275,701 - - - - 275,701
Due from
reinsur-
ers and
other
insurers 58,629 89,056 15,338 2,066 - 165,089
-------------------------------------------------------------------------
Total: 911,690 1,060,355 531,735 166,766 271,612 2,942,158
-------------------------------------------------------------------------
Liabili-
ties:
Loans
payable - - 66,222 - - 66,222
Accounts
payable
and
accrued
liabil-
ities 129,330 - - - - 129,330
Unpaid
claims 667,307 1,013,611 174,579 23,519 - 1,879,016
Senior
un-
secured
deben-
tures - 81,137 104,066 - - 185,203
Subordi-
nated
indebt-
edness - - - 87,383 - 87,383
-------------------------------------------------------------------------
Total: 796,637 1,094,748 344,867 110,902 - 2,347,154
-------------------------------------------------------------------------
Collateral pledged: As at September 30, 2009, bonds and term deposits
with an estimated fair value of $51.9 million were on deposit with state
and provincial regulatory authorities. Also, from time to time, the
Company pledges securities to third parties to collateralize liabilities
incurred under its policies of insurance. At September 30, 2009, the
amount of such pledged securities was $112.3 million. Collateral pledging
transactions are conducted under terms that are common and customary to
standard collateral pledging and are subject to the Company's standard
risk management controls.
The company has a syndicate letter of credit facility which is used to
collateralize reinsurance balances. The Company pledges securities to
collateralize the utilized portion of the letter of credit facility. At
September 30, 2009 the letter of credit facility utilization was $2.7
million.
Fair value:
Refer to Note 7 with respect to fair value disclosure on securities. The
carrying value of unpaid claims does not take into consideration the time
value of money or make an explicit provision for adverse deviation. In
order to estimate the fair value of the unpaid claims, the Company uses
an actuarial approach recognizing the time value of money which
incorporates assumptions concerning projected cash flows and appropriate
provisions for adverse deviation. As at September 30 , 2009 the estimated
fair value of the unpaid claims was $2,032.3 million ($1,898.9 million
net of reinsurers' share of unpaid claims). The estimated fair value is
approximately $144.1 million above the undiscounted carrying value as a
result of a provision for adverse development totaling $186.5 million in
addition to the present value of unpaid claims. There is no active market
for policy liabilities, so a market value is not readily available.
The table below summarizes the fair valuation of debt liabilities, though
they are held at amortized cost on the consolidated balance sheet:
-------------------------------------------------------------------------
September 30, 2009
-------------------------------------------------------------------------
Total Total
fair carrying
value* value Favorable
-------------------------------------------------------------------------
Loans Payable $ 53,813 $ 73,158 $ 19,345
Senior unsecured debentures 148,329 175,653 27,324
Subordinated indebtedness 35,168 87,407 52,239
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
Total Total
fair carrying
value* value Favorable
-------------------------------------------------------------------------
Loans Payable $ 43,094 $ 66,222 $ 23,128
Senior unsecured debentures 128,497 185,203 56,706
Subordinated indebtedness 17,712 87,383 69,671
-------------------------------------------------------------------------
*The fair value is based on observable market inputs.
The carrying value of all other financial instruments approximates their
fair value due to the short term to maturity of those financial
instruments.
The Company uses fair value hierarchy to categorize the inputs used in
valuation techniques to measure fair value. The extent of the Company's
use of quoted market prices (Level 1), internal models using observable
market information as inputs (Level 2) and internal models without
observable market information (Level 3) in the valuation of securities as
at September 30, 2009 was as follows:
Quoted
prices
in active
markets Significant Significant
for other un-
identical observable observable
September 30, assets inputs inputs
Description 2009 (Level 1) (Level 2) (Level 3)
-------------------------------------------------------------------------
Available for sale
securities:
Term deposits: $ 199,658 $ - $ 199,658 $ -
Debt securities:
----------------
Canadian - Government 397,317 - 397,317 -
- Corporate 320,654 - 320,654 -
- Commercial
mortgage
backed 1,512 - 1,512 -
- Other asset
backed 34,906 - 34,906 -
U.S - Government 272,989 - 272,989 -
- Corporate 328,960 - 328,960 -
- Commercial
mortgage
backed 1,000 - 1,000 -
- Residential
mortgage
backed 154,146 - 154,146 -
- Other
mortgage/
asset
backed 11,730 - 11,730 -
Other - Corporate 14,298 - 14,298 -
Equity Securities:
------------------
Canadian 5,179 5,179 - -
US 25 25 - -
Preferred Securities:
---------------------
Canadian 15,819 15,819 - -
US 80 80 - -
-------------------------------------------------------------------------
Total $1,758,273 $ 21,103 $1,737,170 $ -
-------------------------------------------------------------------------
NOTE 9 Capital Management
-------------------------------------------------------------------------
Certain debentures issued by the Company contain negative covenants in
their trust indentures, placing limitations and restrictions over certain
actions without the prior written consent of the indenture trustees.
Included in the negative covenants is the limitation on the incurrence of
additional debt in the event that the total debt to total capital ratio
or the senior debt to total capital ratio exceed 50% and 35%,
respectively. The total debt is calculated on a pro-forma basis taking
into account the issuance of additional debt. The debentures also include
covenants limiting the issuance and sale of voting stock of restricted
subsidiaries, the payment of dividends or any other payment in respect of
capital stock of the Company, or the retirement of debt subordinate to
the debentures covered by the trust indentures if, after giving effect to
such payments as described in the trust indentures, the total debt to
total capital ratio exceeds 50%.
As at September 30, 2009 the Company's total debt to capital and senior
debt to capital ratios were 55.4% and 41.1% respectively. As a result,
the limitations and restrictions described above are currently
applicable. The Board of Directors is considering alternatives to reduce
these ratios to remove the limitations and restrictions in place.
On June 26, 2009, KFS Capital LLC, an indirect wholly-owned subsidiary of
Kingsway, commenced a take-over bid (the "KLROC Offer") to acquire up to
1,000,000 preferred, retractable, redeemable, cumulative units of
Kingsway Linked Return of Capital Trust at a price per unit of C$12.00 in
cash. The KLROC Offer expired on Tuesday, August 4, 2009 and 694,015
units were tendered. This tender was paid for using available cash.
Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of
Kingsway announced on July 14, 2009 the commencement of a modified "Dutch
Auction" tender offer (the "2012 Offer") for a portion of its outstanding
Unsecured 6% Debentures due July 11, 2012 (the "2012 Debentures"). The
2012 Offer provides for a cash purchase of 2012 Debentures at a price per
C$1,000 principal amount of debentures of not less than C$540 and not
greater than C$620, for a maximum aggregate purchase price to the offeror
not to exceed C$31 million (excluding accrued and unpaid interest). The
Offer expired Friday, August 14, 2009 with valid tenders (that were not
withdrawn) of C$9,174,000 in aggregate principal amount of Debentures.
Kingsway 2007 General Partnership accepted for purchase all such tendered
Debentures at the highest price specified of C$620 per C$1,000 principal
amount. This tender was paid for using available cash.
Subsequent to the balance sheet date the Company repaid in full a $6.9
million mortgage on a property.
As at September 30, 2009 the Company was adequately capitalized to
support the premium volume of the insurance subsidiaries.
In Canada, JEVCO Insurance Company is regulated by the Office of the
Superintendent of Financial Institutions ("OSFI") and Kingsway General
Insurance Company is regulated by the Financial Services Commission of
Ontario ("FSCO"). OSFI and FSCO expect each institution to maintain
ongoing capital at no less than the supervisory target Minimum Capital
Test ("MCT") of 150% and may establish, in consultation with an
institution, an alternative supervisory target level based upon an
individual institution's risk profile. As at September 30, 2009 the MCTs
of JEVCO Insurance Company and Kingsway General Insurance Company were
239% and 210% respectively. As at September 30, 2009 the Canadian
insurance companies have aggregate capital of approximately $60.2 million
in excess of the 150% level.
In the United States, a risk based capital (RBC) formula is used by the
National Association of Insurance Commissioners (NAIC) to identify
property and casualty insurance companies that may not be adequately
capitalized. The NAIC requires that capital and surplus not fall below
200% of the authorized control level. As at September 30, 2009, all U.S.
subsidiaries, with the exception of Lincoln General, are estimated to be
above the required RBC levels, with RBC ratios estimates ranging between
286% and 37,410% and have estimated aggregate capital excluding Lincoln
General of approximately $106.9 million in excess of the 200% level.
As a result of Lincoln General's RBC level as at December 31, 2008, the
Pennsylvania Insurance Department was required to conduct an examination
and issue an order outlining corrective action to be taken. Further,
under Pennsylvania law, Lincoln General may be deemed to be operating in
a financially hazardous condition based on its financial statements at
December 31, 2008. As a result, the Pennsylvania Insurance Department has
the power to take a variety of regulatory actions, including but not
limited to department supervision, and the seeking of a court order of
rehabilitation or liquidation if it determines that Lincoln General's
condition is such that the further transaction of business would be
hazardous, financially, to its policyholders, creditors or the public.
As part of a plan developed by management, Lincoln General has initiated
running off its book of business and, accordingly, management has ceased
writing new or renewal business, except where otherwise required by law
or pre-existing contractual obligations, and has initiated mid-term
cancellations in certain lines of business. As at December 31, 2008,
Lincoln General had statutory admitted assets of $386.7 million,
liabilities of $307.5 million, and statutory capital and surplus of $79.2
million. On March 11, 2009, Lincoln General entered into a letter
agreement with the Pennsylvania Insurance Department (the Department)
that provides for increased supervisory oversight by the Department
including but not limited to increased reporting and Department approval
of non-routine matters including transfers or pledges of assets,
extension of loans, incurring of debt, increases in salaries, payments of
bonuses to officers and directors, and consummation of material
transactions.
On October 19, 2009 the Company announced that its indirect wholly owned
subsidiary, Kingsway America Inc. ("KAI"), has disposed of its entire
interest in KAI's wholly owned subsidiary Walshire Assurance Company
("Walshire"). Walshire is the sole shareholder of Lincoln General. All of
the stock of Walshire has been donated to charity, and with this
disposition Lincoln General ceases being a member of the Kingsway group
of companies. As of the date of the disposition of Walshire, the Company
is of the view that its control over Walshire and its subsidiaries,
including Lincoln General was lost. Management intends that Walshire and
its subsidiaries will no longer be consolidated beginning October 19,
2009.
The Company is of the view that the extent of its obligations in
connection with Walshire and its subsidiaries are the payment of a $10
million cash contribution to Lincoln General; continued compliance with a
run-off management agreement, including certain continued support to the
run-off management team at Lincoln General; and continuing guarantee and
reinsurance obligations to inter-Company and third party insurance
providers in respect of certain Lincoln General obligations.
As part of the ongoing transformation program, during the second quarter
the Company began terminating all related party reinsurance treaties. As
at September 30, 2009 all treaties between Kingsway Reinsurance
Corporation and the U.S. operating companies have been commuted. As noted
above, treaties between the Canadian operating companies and Kingsway
Reinsurance (Bermuda) Limited were commuted effective October 1, 2009.
This initiative has resulted in increased capital in our operating
companies and it has released excess capital from the captive reinsurers
to be used for corporate purposes.
As at September 30, 2009, following the commutation of all intercompany
reinsurance treaties between Kingsway Reinsurance Corporation and the
Company's U.S. operating subsidiaries, a significant portion of the
remaining capital at Kingsway Reinsurance Corporation was repatriated. A
portion of this capital was re-deployed directly into the U.S. operating
subsidiaries and a portion was held at the parent company for corporate
purposes. The regulatory capital remaining in Kingsway Reinsurance
Corporation following the commutation of all related party reinsurance
treaties is below the amount required under the Insurance Act of Barbados
where Kingsway Reinsurance is domiciled. The Company considers this
situation to be temporary as the calculation of the minimum capital
required is based upon the premiums of the previous calendar year when
the level of underwriting activity was significantly greater than those
of the ongoing Barbados operation. This situation has been communicated
to the Office of the Supervisor of Insurance in Barbados which has
accepted the Company's commitment to resolve the shortfall in early 2010.
At that time, the Company believes that the capital available will exceed
the capital required with no additional capital required.
As at September 30, 2009 the capital maintained by Kingsway Reinsurance
(Bermuda) Limited was approximately $28.6 million in excess of the
regulatory capital requirements in Bermuda. Subsequent to the balance
sheet date, a significant portion of the capital was removed as part of
the consolidation of the Canadian operations.
NOTE 10 Hedges
-------------------------------------------------------------------------
On June 2, 2009, the company discontinued the swap transaction which was
designated as a cash flow hedge. When the hedge is discontinued, any
cumulative adjustment to the hedging instrument through other
comprehensive income is recognized in income over the remaining term of
the hedged item, or when the hedged item is derecognized. The amount of
loss recorded in other comprehensive income as a result of the
discontinuance of the cash flow hedge is $6.2 million before tax of which
$1.5 million has been reclassified to net income for the quarter ended
September 30, 2009 ($1.6 million year to date).
NOTE 11 Restructuring charges
-------------------------------------------------------------------------
During the first quarter of 2009, the Company announced a corporate
restructuring plan to concentrate on its core and profitable lines of
business and is targeted to improve the Company's financial stability.
The Company is consolidating operations in U.S. and Canada, simplifying
the management structure, reducing costs through synergies and
operational efficiencies and positioning the Company to seize competitive
advantage. As the Company exits businesses and streamlines operations,
approximately 1,000 employees will be removed from the total workforce.
Restructuring costs are expected to be approximately $20 million, to be
incurred over fiscal 2009 and 2010, of which $18.5 million was expensed
in the first nine months of 2009.
During the nine months ended September 30, 2009, the Company continued to
implement this restructuring plan. Restructuring charges for the nine
months ended September 30, 2009 were as follows:
-------------------------------------------------------------------------
Restructuring charges
-------------------------------------------------------------------------
Three Nine
months months
ended ended
Severance Consulting September September
and benefits expense Total 30, 2009 30, 2009
-------------------------------------------------------------------------
Provision
balance
at January 1,
2009 $ - $ - $ -
(Income)
expense 9,347 9,063 18,410 $ 5,861 $ 18,410
Payments 5,009 9,063 14,072 - -
Provision
balance at
September
30, 2009 $ 4,338 $ - $ 4,338 - -
-------------------------------------------------------------------------
Total
restructur-
ing
charges $ 5,861 $ 18,410
-------------------------------------------------------------------------
The following table summarizes the total restructuring charges incurred
by segment during the three and nine months ended September 30, 2009:
-------------------------------------------------------------------------
Three months ended
September 30, 2009
-------------------------------------------------------------------------
Canada U.S. Run-off Corporate Total
-------------------------------------------------------------------------
Total
restructur-
ing
charges $ 68 $ 80 $ 313 $ 5,400 $ 5,861
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended
September 30, 2009
-------------------------------------------------------------------------
Canada U.S. Run-off Corporate Total
-------------------------------------------------------------------------
Total
restructur-
ing
charges $ 954 $ 2,431 $ 3,695 $ 11,330 $ 18,410
-------------------------------------------------------------------------
The following table summarizes the total amount of costs expected to be
incurred for each reporting segment over the span of the restructuring
plan:
-------------------------------------------------------------------------
Over the span of the
restructuring plan
-------------------------------------------------------------------------
Canada U.S. Run-off Corporate Total
-------------------------------------------------------------------------
Total
expected
costs for
restructur-
ing plan $ 1,900 $ 4,000 $ 3,100 $ 13,000 $ 22,000
-------------------------------------------------------------------------
As a result of the implementation of the restructuring plan being ahead
of target, the total restructuring costs for the year to date represent a
significant portion of the total expected costs over the span of the
restructuring plan.
NOTE 12 Acquisitions
-------------------------------------------------------------------------
On April 1, 2007 the Company acquired 100% of the voting shares of
Mendota Insurance Company ('Mendota') whose primary business is non
standard automobile insurance. This transaction includes Mendota's wholly
owned subsidiaries, Mendakota Insurance Company and Mendota Insurance
Agency, Inc. The earnings of Mendota have been included in the statement
of operations from April 1, 2007.
During the first quarter of 2008, the final purchase price was determined
at $51.1 million. The Company has recognized total goodwill of $1.2
million related to this acquisition, of which $0.2 million was recorded
in 2008 and $1.0 million during 2007. The goodwill was written down to
$nil in the fourth quarter of 2008.
The Company also recognized total intangible assets of $10.7 million
related to this acquisition during 2007, of which $7.8 million was
assigned to insurance licenses with an indefinite life and not subject to
amortization, $1.1 million was assigned to computer software and is being
amortized straight line over its defined useful life of 3 years and $1.8
million assigned to agent relationships and is also being amortized over
a 5 year term but based on a pattern in which the economic benefits of
the asset are expected to be consumed.
NOTE 13 Buy-Back of Senior Notes
-------------------------------------------------------------------------
During the quarter, Kingsway America Inc. bought back $1.9 million ($6.5
million year to date) face value of the senior notes due in 2014 at a
market rate of $1.3 million ($3.2 million year to date). Kingsway America
Inc. realized a gain of $0.6 million ($3.3 million year to date) during
the quarter.
Also during the quarter and year to date, a general partnership of the
Company, Kingsway 2007 General Partnership bought back $14.6 million face
value of the senior notes due in 2012 at a market rate of $8.6 million.
As a result, Kingsway 2007 General Partnership realized a gain of $6.0
million during the quarter.
NOTE 14 Related Party Transaction
-------------------------------------------------------------------------
Related-party transactions, including services provided to or received by
Kingsway's subsidiaries, are carried out in the normal course of
operations and are measured at the amount of consideration paid or
received as established and agreed by the parties. Management believes
that consideration paid for such services approximate fair value.
In March 2009, the Company obtained a financing facility from a related
party to allow for specific capital initiatives. The facility is at fair
market terms and conditions. As at September 30, 2009, the facility was
undrawn, expired and has been terminated. In the fourth quarter, a new
facility has been obtained from the same related party. This new facility
is at fair market terms and conditions.
The Company has engaged the services of a company owned by a former
director and paid $0.8 million for the nine month period ended September
30, 2009.
In addition to a previously agreed retainer of C$0.1 million, the Board
of Directors has decided to pay an additional $0.4 million and C$0.1
million to the Chairman of the Board. Of these amounts, the Company has
paid $0.2 million and C$0.1 million as at September 30, 2009.
NOTE 15 Contractual Obligation
-------------------------------------------------------------------------
On June 29, 2009, Kingsway and Lincoln General entered into a consulting
agreement with an external run-off manager to provide certain consulting
services relating to Lincoln General, including advice and assistance in
the development of a Run-off Plan. In addition to base compensation of
$1.3 million annually, the agreement provides for a minimum of $2.5
million to be paid to the Run-off Manager at the termination of the
contract (provided the contract is not terminated for cause), which, at
the latest will be March 1, 2014. Since the Lincoln General has been
disposed of by the Company on October 19, 2009, the Company accrued $6.1
million for the base compensation and additional compensation as at
September 30, 2009.
NOTE 16 Normal Course Issuer Bid
-------------------------------------------------------------------------
On July 29, 2009, the Company obtained approval from the Toronto Stock
Exchange to amend its normal course issuer bid for common shares. The
Toronto Stock Exchange ("TSX") accepted a revision to the maximum number
of common shares that can be purchased under the normal course issuer bid
to 5,386,545 common shares, or 10% of the public float on November 28,
2008. For the three months ended and year to date September 30, 2009, the
company repurchased 3,394,800 of its common shares at an average price of
C$3.76, representing approximately 6.2% of the then outstanding shares.
All of the repurchased common shares were cancelled.
NOTE 17 Mergers
-------------------------------------------------------------------------
During the quarter the Company announced that effective October 1, 2009,
JEVCO Insurance Company will assume the assets and liabilities of
Kingsway General Insurance Company subject to regulatory approval. Both
JEVCO Insurance Company and Kingsway General Insurance Company are wholly
owned Canadian subsidiaries of the Company.
NOTE 18 Comparative Figures
-------------------------------------------------------------------------
Certain comparative figures have been re-classified to conform to the
financial statement presentation adopted in the current period.
NOTE 19 Subsequent Events
-------------------------------------------------------------------------
The subsequent events have been evaluated up to November 6, 2009, the
date the financial statements are issued. The subsequent events noted are
as follows:
On October 19, 2009, the Company's indirect wholly owned subsidiary,
Kingsway America Inc. ("KAI") has donated all of the stock of its wholly
owned subsidiary Walshire Assurance Company ("Walshire") to charity, and
with this disposition Lincoln General Insurance Company (i.e. subsidiary
of Walshire) ceases being a member of The Kingsway group of companies.
In addition, after the end of the quarter, the Company has completed the
sale of substantially all of the assets of Avalon Risk Management Inc.
On October 30, 2009, the Company completed the sale of HI Holdings Inc.
and its subsidiary Zephyr Insurance Company Inc. for initial gross
proceeds of $31.5 million, plus a contingent, deferred earn-out plan. The
earn-out is calculated based upon the change in adjusted book value
between the valuation date and the closing date.
NOTE 20 Supplemental Condensed Consolidating Financial Information
-------------------------------------------------------------------------
On July 10, 2007, the Kingsway 2007 General Partnership issued C$100
million of 6% senior unsecured debentures unconditionally guaranteed by
the Company ("KFSI") and Kingsway America Inc. ("KAI"), a wholly-owned
subsidiary of the Company. The following is the condensed consolidating
financial information for the Company as of September 30, 2009 and
December 31, 2008, and for the period ended September 30, 2009 and 2008,
with a separate column for each Guarantor, the issuer and the other
businesses of the Company combined ("Non-Guarantor subsidiaries").
-------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
-------------------------------------------------------------------------
For the nine months ended September 30, 2009
KFSI KAI K2007GP
-------------------------------------------------------------------------
(a (a (the
"Guarantor") "Guarantor") "Issuer")
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ - $ - $ -
Investment related income (5,451) 2,249 4,420
Management fees 43,558 14,046 -
-------------------------------------------------------------------------
$ 38,107 $ 16,295 $ 4,420
-------------------------------------------------------------------------
Expenses:
Claims incurred $ - $ - $ -
Commissions and premium taxes - - -
Other expenses 54,872 10,422 331
Interest expense - 19,517 3,767
-------------------------------------------------------------------------
54,872 29,939 4,098
-------------------------------------------------------------------------
Income (loss) before unusual
items and income taxes (16,765) (13,644) 322
Write-down of investment in
subsidiary - (23,613) -
Gain on buy-back of senior notes - 3,270 5,984
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (16,765) (33,987) 6,306
Income taxes (recovery) (5,001) (3,527) 2,144
-------------------------------------------------------------------------
Income (loss) from continuing
operations (11,764) (30,460) 4,162
Income from discontinued
operations - - -
Loss on disposal of discontinued
operations (1,616) - -
Equity in undistributed net
income of subsidiaries (201,388) (64,306) -
-------------------------------------------------------------------------
Net income (loss) $ (214,768) $ (94,766) $ 4,162
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2009
Other
Subsidiaries Consolidation Total
-------------------------------------------------------------------------
(the "Non-
Guarantor
subsidiaries")
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ 802,577 $ (12,633) $ 789,944
Investment related income 85,449 (15,487) 71,180
Management fees - (57,604) -
-------------------------------------------------------------------------
$ 888,026 $ (85,724) $ 861,124
-------------------------------------------------------------------------
Expenses:
Claims incurred $ 759,882 $ - $ 759,882
Commissions and premium taxes 140,124 - 140,124
Other expenses 185,588 (82,696) 168,517
Interest expense (2,285) (3,028) 17,971
-------------------------------------------------------------------------
1,083,309 (85,724) 1,086,494
-------------------------------------------------------------------------
Income (loss) before unusual
items and income taxes (195,283) - (225,370)
Write-down of investment in
subsidiary - - (23,613)
Gain on buy-back of senior notes - - 9,254
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (195,283) - (239,729)
Income taxes (recovery) (20,053) - (26,437)
-------------------------------------------------------------------------
Income (loss) from continuing
operations (175,230) - (213,292)
Income from discontinued
operations 140 - 140
Loss on disposal of discontinued
operations - - (1,616)
Equity in undistributed net
income of subsidiaries - 265,694 -
-------------------------------------------------------------------------
Net income (loss) $ (175,090) $ 265,694 $ (214,768)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2008
KFSI KAI K2007GP
-------------------------------------------------------------------------
(a (an "issuer" / (an
"Guarantor") "Guarantor") "Issuer")
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ - $ - $ -
Investment related income 41,754 2,770 5,104
Management fees 78,797 14,041 -
-------------------------------------------------------------------------
$ 120,551 $ 16,811 $ 5,104
-------------------------------------------------------------------------
Expenses:
Claims incurred $ - $ - $ -
Commissions and premium taxes - - -
Other expenses 66,296 21,238 177
Interest expense 3,928 21,100 4,612
-------------------------------------------------------------------------
70,224 42,338 4,789
-------------------------------------------------------------------------
Income (loss) before unusual
items and income taxes 50,327 (25,527) 315
Write-down of investment in
subsidiary - - -
Gain on buy-back of senior notes - - -
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 50,327 (25,527) 315
Income taxes (recovery) 12,980 (8,679) 107
-------------------------------------------------------------------------
Income (loss) from continuing
operations 37,347 (16,848) 208
Loss from discontinued operations - - -
Gain on disposal of discontinued
operations 34,985 - -
Equity in undistributed net
income of subsidiaries (117,824) (58,077) -
-------------------------------------------------------------------------
Net income (loss) $ (45,492) $ (74,925) $ 208
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2008
Other
Subsidiaries Consolidation Total
-------------------------------------------------------------------------
(the "Non-
Guarantor
subsidiaries")
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ 1,188,932 $ (9,186) $ 1,179,746
Investment related income 51,706 (26,473) 74,861
Management fees - (92,838) -
-------------------------------------------------------------------------
$ 1,240,638 $ (128,497) $ 1,254,607
-------------------------------------------------------------------------
Expenses:
Claims incurred $ 924,456 $ - $ 924,456
Commissions and premium taxes 231,235 - 231,235
Other expenses 211,798 (123,228) 176,281
Interest expense 3,739 (5,269) 28,110
-------------------------------------------------------------------------
1,371,228 (128,497) 1,360,082
-------------------------------------------------------------------------
Income (loss) before unusual
items and income taxes (130,590) - (105,475)
Write-down of investment in
subsidiary - - -
Gain on buy-back of senior notes - - -
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (130,590) - (105,475)
Income taxes (recovery) (36,698) - (32,290)
-------------------------------------------------------------------------
Income (loss) from continuing
operations (93,892) - (73,185)
Loss from discontinued operations (7,292) - (7,292)
Gain on disposal of discontinued
operations - - 34,985
Equity in undistributed net
income of subsidiaries - 175,901 -
-------------------------------------------------------------------------
Net income (loss) $ (101,184) $ 175,901 $ (45,492)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed Consolidating Balance Sheet
-------------------------------------------------------------------------
As at September 30, 2009
KFSI KAI K2007GP
-------------------------------------------------------------------------
(a (an "issuer" / (an
"Guarantor") "Guarantor") "Issuer")
-------------------------------------------------------------------------
Assets
Investments in subsidiaries $ 164,335 $ 853,594 $ -
Cash 32,268 6,905 1,375
Securities - - -
Goodwill and intangible assets 6,821 - -
Other assets 57,932 99,652 94,756
Assets held for sale - - -
-------------------------------------------------------------------------
$ 261,356 $ 960,151 $ 96,131
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Liabilities:
Bank Indebtedness $ - $ 201,487 $ -
Other liabilities 1,173 26,636 957
Provision for loss on investment
in subsidiary - 23,613 -
Unearned premiums - - -
Unpaid claims - - -
Senior unsecured debentures - 118,525 77,641
Subordinated indebtedness - 90,500 -
Liabilities held for sale - - -
-------------------------------------------------------------------------
$ 1,173 $ 460,761 $ 78,598
Shareholders' equity:
Share capital 295,916 575,112 14,867
Contributed surplus 21,294 - -
Retained Earnings (118,053) (75,722) 6,559
Accumulated other comprehensive
income 61,026 - (3,893)
-------------------------------------------------------------------------
260,183 499,390 17,533
-------------------------------------------------------------------------
$ 261,356 $ 960,151 $ 96,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2009
Other
Subsidiaries Consolidation Total
-------------------------------------------------------------------------
(the "Non-
Guarantor
subsidiaries")
-------------------------------------------------------------------------
Assets
Investments in subsidiaries $(1,575,413) $ 557,484 $ -
Cash 468,502 - 509,050
Securities 1,844,613 (16,753) 1,827,860
Goodwill and intangible assets 44,675 - 51,496
Other assets 1,186,071 (894,218) 544,193
Assets held for sale 129,899 - 129,899
-------------------------------------------------------------------------
$ 2,098,347 $ (353,487) $ 3,062,498
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Liabilities:
Bank Indebtedness $ (168,329) $ 40,000 $ 73,158
Other liabilities 123,913 (42,107) 110,572
Provision for loss on investment
in subsidiary - - 23,613
Unearned premiums 489,224 (117,055) 372,169
Unpaid claims 2,275,565 (387,304) 1,888,261
Senior unsecured debentures (3,634) (16,879) 175,653
Subordinated indebtedness - (3,093) 87,407
Liabilities held for sale 57,525 - 57,525
-------------------------------------------------------------------------
$ 2,774,264 $ (526,438) $ 2,788,358
Shareholders' equity:
Share capital 1,998,688 (2,588,667) 295,916
Contributed surplus - - 21,294
Retained Earnings (2,745,883) 2,815,046 (118,053)
Accumulated other comprehensive
income 71,278 (53,428) 74,983
-------------------------------------------------------------------------
(675,917) 172,951 274,140
-------------------------------------------------------------------------
$ 2,098,347 $ (353,487) $ 3,062,498
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed Consolidating Balance Sheet
-------------------------------------------------------------------------
As at December 31, 2008
KFSI KAI K2007GP
-------------------------------------------------------------------------
(a (an "issuer" / (an
"Guarantor") "Guarantor") "Issuer")
-------------------------------------------------------------------------
Assets
Investments in subsidiaries $ 409,577 $ 743,825 $ -
Cash 21,335 5,603 543
Securities - - -
Goodwill and other assets 5,996 - -
Other assets 21,447 80,769 113,519
Assets held for sale - - -
-------------------------------------------------------------------------
$ 458,355 $ 830,197 $ 114,062
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Liabilities:
Bank Indebtedness $ - $ 170,175 $ -
Other liabilities 4,784 30,652 16,818
Provision for loss on investment
in subsidiary - - -
Unearned premiums - - -
Unpaid claims - - -
Senior unsecured debentures - 125,000 93,464
Subordinated indebtedness - 90,500 -
Liabilities held for sale - - -
-------------------------------------------------------------------------
$ 4,784 $ 416,327 $ 110,282
Shareholders' equity:
Share capital 322,344 459,133 10,667
Contributed surplus 9,791 - -
Retained Earnings 98,563 (45,263) 2,397
Accumulated other comprehensive
income 22,873 - (9,284)
-------------------------------------------------------------------------
453,571 413,870 3,780
-------------------------------------------------------------------------
$ 458,355 $ 830,197 $ 114,062
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
Other
Subsidiaries Consolidation Total
-------------------------------------------------------------------------
(the "Non-
Guarantor
subsidiaries")
-------------------------------------------------------------------------
Assets
Investments in subsidiaries $(1,470,854) $ 317,452 $ -
Cash 68,839 - 96,320
Securities 2,398,072 (17,093) 2,380,979
Goodwill and other assets 57,897 - 63,893
Other assets 2,409,352 (1,934,620) 690,467
Assets held for sale 117,393 - 117,393
-------------------------------------------------------------------------
$ 3,580,699 $(1,634,261) $ 3,349,052
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Liabilities:
Bank Indebtedness $ - $ (103,953) $ 66,222
Other liabilities (48,488) 125,564 129,330
Provision for loss on investment
in subsidiary - - -
Unearned premiums 786,527 (286,591) 499,936
Unpaid claims 3,109,263 (1,230,247) 1,879,016
Senior unsecured debentures (16,383) (16,878) 185,203
Subordinated indebtedness - (3,117) 87,383
Liabilities held for sale 48,390 - 48,390
-------------------------------------------------------------------------
$ 3,879,309 $(1,515,222) $ 2,895,480
Shareholders' equity:
Share capital 1,880,918 (2,350,718) 322,344
Contributed surplus - - 9,791
Retained Earnings (2,211,705) 2,254,572 98,564
Accumulated other comprehensive
income 32,177 (22,893) 22,873
-------------------------------------------------------------------------
(298,610) (119,039) 453,572
-------------------------------------------------------------------------
$ 3,580,699 $(1,634,261) $ 3,349,052
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
-------------------------------------------------------------------------
For the nine months ended September 30, 2009
KFSI KAI K2007GP
-------------------------------------------------------------------------
(a (an "issuer" / (an
"Guarantor") "Guarantor") "Issuer")
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) $ (214,768) $ (94,766) $ 4,162
Loss (income) from discontinued
operations - - -
Equity in undistributed earnings
in subsidiaries 201,388 64,306 -
Other (33,242) 1,241 2,309
-------------------------------------------------------------------------
(46,622) (29,219) 6,471
Financing Activities:
Share capital (26,428) 115,979 4,200
Repurchase of common shares for
cancellation 14,664 - -
Contributed surplus (3,440) - -
Dividends paid 6,042 - -
Bank indebtedness and loans
payable - 31,051 (9,839)
Senior unsecured indebtedness - (3,205) -
-------------------------------------------------------------------------
(9,162) 143,825 (5,639)
Investing Activities:
Purchase of securities - - -
Proceeds from sale of securities - - -
Proceeds from sale of discontinued
operations - - -
Acquisitions 66,812 (76,302) -
Other (95) (37,002) -
-------------------------------------------------------------------------
66,717 (113,304) -
Discontinued operations
Operating activities - - -
Financing activities - - -
Investing activities - - -
-------------------------------------------------------------------------
- - -
Increase (decrease) in cash during
the period 10,933 1,302 832
Cash and cash equivalents,
beginning of period 21,335 5,603 543
-------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 32,268 $ 6,905 $ 1,375
Less cash and cash equivalents of
discontinued operations, end of
period - - -
-------------------------------------------------------------------------
Cash and cash equivalents of
continuing operations at end of
period $ 32,268 $ 6,905 $ 1,375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2009
Other
Subsidiaries Consolidation Total
-------------------------------------------------------------------------
(the "Non-
Guarantor
subsidiaries")
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) $ (175,090) $ 265,694 $ (214,768)
Loss (income) from discontinued
operations 1,476 - 1,476
Equity in undistributed earnings
in subsidiaries - (265,694) -
Other (208,402) 204,998 (33,096)
-------------------------------------------------------------------------
(382,016) 204,998 (246,388)
Financing Activities:
Share capital - (120,179) (26,428)
Repurchase of common shares for
cancellation - - 14,664
Contributed surplus - - (3,440)
Dividends paid - - 6,042
Bank indebtedness and loans
payable (3,651) (21,212) (3,651)
Senior unsecured indebtedness - 3,205 -
-------------------------------------------------------------------------
(3,651) (138,186) (12,813)
Investing Activities:
Purchase of securities (3,211,069) - (3,211,069)
Proceeds from sale of securities 3,885,161 - 3,885,161
Proceeds from sale of discontinued
operations - - -
Acquisitions 74,361 (66,812) (1,941)
Other 34,407 - (2,690)
-------------------------------------------------------------------------
782,860 (66,812) 669,461
Discontinued operations
Operating activities 14,025 - 14,025
Financing activities (7,891) - (7,891)
Investing activities (3,107) - (3,107)
-------------------------------------------------------------------------
3,027 - 3,027
Increase (decrease) in cash during
the period 400,220 - 413,287
Cash and cash equivalents,
beginning of period 78,175 - 105,656
-------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 478,395 $ - $ 518,943
Less cash and cash equivalents of
discontinued operations, end of
period 9,893 - 9,893
-------------------------------------------------------------------------
Cash and cash equivalents of
continuing operations at end of
period $ 468,502 $ - $ 509,050
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2008
KFSI KAI K2007GP
-------------------------------------------------------------------------
(a (an "issuer" / (an
"Guarantor") "Guarantor") "Issuer")
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) $ (45,492) $ (74,925) $ 208
Loss (income) from discontinued
operations (34,985) - -
Equity in undistributed earnings
in subsidiaries 117,824 58,077 -
Other 51,688 (34,731) (237)
-------------------------------------------------------------------------
89,035 (51,579) (29)
Financing Activities:
Share capital (2,538) 111,683 -
Repurchase of common shares for
cancellation (1,276) - -
Contributed surplus - - -
Dividends paid (9,786) - -
Bank indebtedness and loans
payable (172,976) (246) 173
Senior unsecured indebtedness - - -
-------------------------------------------------------------------------
(186,576) 111,437 173
Investing Activities:
Purchase of securities (1,625) - -
Proceeds from sale of securities 1,184 - -
Proceeds from sale of discontinued
operations 44,067 - -
Acquisitions 87,600 - -
Other 207 (62,568) -
131,433 (62,568) -
Discontinued operations
Operating activities - - -
Financing activities - - -
Investing activities - - -
-------------------------------------------------------------------------
- - -
Increase (decrease) in cash during
the period 33,892 (2,710) 144
Cash and cash equivalents,
beginning of period 13,716 6,960 566
-------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 47,608 $ 4,250 $ 710
Less cash and cash equivalents of
discontinued operations, end of
period - - -
-------------------------------------------------------------------------
Cash and cash equivalents of
continuing operations at end of
period $ 47,608 $ 4,250 $ 710
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2008
Other
Subsidiaries Consolidation Total
-------------------------------------------------------------------------
(the "Non-
Guarantor
subsidiaries")
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) $ (101,184) $ 175,901 $ (45,492)
Loss (income) from discontinued
operations 7,292 - (27,693)
Equity in undistributed earnings
in subsidiaries - (175,901) -
Other (396,064) 118,215 (261,129)
-------------------------------------------------------------------------
(489,956) 118,215 (334,314)
Financing Activities:
Share capital - (111,683) (2,538)
Repurchase of common shares for
cancellation - - (1,276)
Contributed surplus - - -
Dividends paid - - (9,786)
Bank indebtedness and loans
payable (98,512) 98,585 (172,976)
Senior unsecured indebtedness - (17,517) (17,517)
-------------------------------------------------------------------------
(98,512) (30,615) (204,093)
Investing Activities:
Purchase of securities (2,401,348) - (2,402,973)
Proceeds from sale of securities 2,911,895 - 2,913,079
Proceeds from sale of discontinued
operations - - 44,067
Acquisitions (212) (87,600) (212)
Other 77,917 - 15,556
-------------------------------------------------------------------------
588,252 (87,600) 569,517
Discontinued operations
Operating activities 13,673 - 13,673
Financing activities (2,329) - (2,329)
Investing activities (6,708) - (6,708)
-------------------------------------------------------------------------
4,636 - 4,636
Increase (decrease) in cash during
the period 4,420 - 35,746
Cash and cash equivalents,
beginning of period 140,393 - 161,635
-------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 144,813 $ - $ 197,381
Less cash and cash equivalents of
discontinued operations, end of
period 14,674 - 14,674
-------------------------------------------------------------------------
Cash and cash equivalents of
continuing operations at end of
period $ 130,139 $ - $ 182,707
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SOURCE Kingsway Financial Services Inc.
