Kingsway Financial Services Inc. (TSX: KFS, NYSE: KFS) today announced its financial results for the third quarter and nine months ended September 30, 2008. The Company reported a net loss of $17.4 million or $0.32 per share diluted, primarily reflecting disappointing underwriting results and net realized losses, including the write-down of investments, which were partially offset by the gain on the sale of York Fire and Casualty Insurance Company (York Fire).
Operating losses resulted from a combination of factors, including net unfavourable reserve development from terminated programs at Lincoln General and a significant drop in trucking premiums on both sides of the border. York Fire, a Canadian subsidiary which was sold at quarter end, is accounted for as discontinued operations. As a result of this reclassification, certain comparative figures have been updated to conform to current period's financial statement presentation to reflect the effect of discontinued operations. All amounts are in U.S. dollars unless indicated otherwise.
Investment income decreased 8% to $33.1 million in the quarter, compared with a year ago, primarily due to lower short-term yields in Canada and the U.S. and a reduction in the size of the portfolio as a result of the sale of investments to repay the Company's bank debt in the quarter. The cost-based yield on the fixed income portfolio decreased to 4.4% from 4.8% for the same quarter of last year. Sales from the securities portfolio and a $22.9 million write-down of fixed income and equity investments that are considered to be other than temporarily impaired resulted in a net realized loss of $29.6 million ($0.53 per share) compared with a gain of $4.2 million ($0.07 per share) in Q3 2007.
The Company reported an operating loss from continuing operations of $17.5 million or $0.32 per share diluted, which compares with operating earnings in Q3 2007, on a pro forma basis excluding York Fire, of $16.0 million or $0.29 diluted per share. Gross premiums written from continuing operations decreased 26% to $354.5 million, primarily as a result of the impact of soft trucking markets and the termination of non-core and unprofitable business at Lincoln General, the Company's largest subsidiary. Estimated net unfavourable reserve development on prior years was $26.4 million in the quarter, representing $0.46 per share, of which $19.2 million was related to the terminated artisan contractors liability program at Lincoln General. Lincoln General has made the decision to bring all new and outstanding claims related to the artisan program in-house during the run-off period. An expert third party was engaged to provide recommendations which are being used to ensure that the run-off will be efficiently managed.
The combined ratio for continuing operations was 113.6%, compared with 102.1% in the third quarter of 2007. Canadian operations, excluding York Fire, had a combined ratio of 103.4% compared with 87.9% a year ago, while U.S. operations had a combined ratio of 118.5% compared with 106.8% the previous year. For the quarter, U.S. operations accounted for 68% of gross premiums compared with 76% a year ago.
"Our results need to be viewed in the context of turbulent credit and securities markets, and economic weakness affecting some business lines, notably trucking, at a time when we are fundamentally changing our business to achieve improved and consistent future performance," said Shaun Jackson, President and Chief Executive Officer. "The current market conditions are causing operating losses throughout the North American property and casualty insurance industry which we believe will accelerate the withdrawal of cyclical players from specialty markets. The weak underwriting results and substantial impairment of investment portfolios at many leading insurers and reinsurers throughout the world will lead to a reduction of available capital at a time when premium rates need to be increased. These are predictable preconditions for much firmer pricing in insurance markets. This will create opportunities for Kingsway to expand its underwritings and improve its profitability. The actions we have taken to deleverage and reduce risk at the company, to eliminate unprofitable lines of business, and to strengthen core operations since the beginning of this year should position us to improve performance throughout the cycle, particularly when markets harden."
"Our high quality investment portfolio performed relatively well in this period of extraordinary financial market conditions. Moreover, as it is our policy to hold fixed-income securities until maturity and the credit quality of this portfolio remains high we anticipate that most of these write-downs will be recovered in future periods. The reduction in premiums from last year has temporarily raised expense ratios and unfavourable development in Lincoln's terminated artisan program has had a significant negative impact; however, I am satisfied we are making progress in addressing these and other challenges while fundamentally changing Kingsway towards a more focused book of insurance business operated with strengthened capital and management practices."
On September 30, the Company completed the previously announced sale of York Fire for C$95 million (or 1.8 times book value). York Fire was considered non-core to our future and produced a loss of $11.4 million for the year to date. Kingsway realized an estimated initial gain on the sale of $35.0 million after tax. The final net gain will be determined subject to the completion of an audit of York Fire.
During the third quarter of 2008, the Company fully repaid its entire bank indebtedness of $157.9 million and thus improved its senior debt to total capital ratio to 23.3% from 31.2% as at June 30, 2008. The Company now does not have obligations to repay any additional debt until July 11, 2012. -- www.cnxmarketlink.com
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