Kingsway Financial Services, Inc. :KFS-US: Earnings Analysis: Q3, 2017 By the Numbers : December 18, 2017

Kingsway Financial Services, Inc. reports financial results for the quarter ended September 30, 2017.

We analyze the earnings along side the following peers of Kingsway Financial Services, Inc. – Progressive Corporation, Allstate Corporation, First Acceptance Corporation, Atlas Financial Holdings, Inc., Mercury General Corporation and Infinity Property and Casualty Corporation (PGR-US, ALL-US, FAC-US, AFH-US, MCY-US and IPCC-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 47.52 million, Net Earnings of USD -1.64 million.
  • Year-on-year change in operating cash flow of -0.83% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings decline largely a result of unusuals – operating margins after interest up from -4.50% to 3.72%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 47.52 46.52 45.26 46 43.93
Revenue Growth (%YOY) 8.19 17.12 23.34 446.64 19.44
Earnings (mil) -1.64 -8.76 -1.59 -8.81 1.54
Earnings Growth (%YOY) -206.63 -434.74 -9.13 -302.19 290.47
Net Margin (%) -3.45 -18.83 -3.51 -19.16 3.5
EPS -0.07 -0.41 -0.08 -0.43 0.06
Return on Equity (%) -3.03 -15.54 -2.75 -15.92 2.92
Return on Assets (%) -1.36 -7.1 -1.23 -7.21 1.81

Access our Ratings and Scores for Kingsway Financial Services, Inc.

Market Share Versus Profits

Revenues History
Earnings History

KFS-US’s change in revenue this period compared to the same period last year of 8.19% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that KFS-US is holding onto its market share. Also, for comparison purposes, revenues changed by 2.17% and earnings by 81.26% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

Insurance companies sometimes tradeoff for improvements in premiums earned by relaxing standards in underwriting policies. A quick way to check against such activity is to compare the changes in loan loss provisions as well any chnages in the level of policy claims. If either of these checks point to a decline in the underwriting standards, it is quite possible that the company’s performance is a result of underwriting policy changes that could have a longer term impact compared to the shorter term pop in premiums earned.

Premiums Earned Percent History
Loss Ratio History

The company’s year-on-year decline in earnings has been influenced by the following factors: (1) Decline in premiums earned as a percent of total revenues from 75.01% to 68.50% and (2) issues with underwriting policies. As a result, loss ratio went from 81.35% to 90.21% in this period. For comparison, premiums earned as a percent of revenues were 72.06% and the loss ratio 81.95% in the immediate last period.

Premiums Earned Percent Versus Loss Ratio

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

KFS-US’s change in operating cash flow of -0.83% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Margins

Despite overall improvement in operating margins, the company’s earnings fell. Operating margins after interest widened from -4.50% to 3.72%. The decline in earnings appears to be largely because of one-time items. Pretax margins weakened from 3.74% to -3.03%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Kingsway Financial Services, Inc.

Company Profile

Kingsway Financial Services, Inc. is a holding company functioning as a merchant bank, which focuses on long-term value creation. It operates through the following business segments: Insurance Underwriting, Extended Warranty, and Leased Real Estate. The Insurance Underwriting segment offers personal automobile insurance to drivers. The Extended Warranty segment provides after-market vehicle protection services distributed by credit unions. The Leased Real Estate segment leases a real property to a third party pursuant to a long-term triple net lease. The company was founded on September 19, 1989 and is headquartered in Toronto, Canada.

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