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U.S. SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 6-K
REPORT OF FOREIGN
PRIVATE ISSUER
PURSUANT TO RULE
13a-16 OR 15d-16 OF
THE SECURITIES
EXCHANGE ACT OF 1934
For the month of May, 2003.
KINGSWAY
FINANCIAL SERVICES INC.
(Exact
name of Registrant as specified in its charter)
ONTARIO, CANADA
(Province or other
jurisdiction of incorporation or organization)
5310 Explorer Drive,
Suite 200, Mississauga, Ontario, Canada L4W 5H8
(Address of principal
executive offices)
[Indicate by check mark whether the registrant files or will file annual reports under cover or Form 20-F or Form 40-F:]
Form 20-F Form 40-F X
[Indicate by check mark whether the Registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:]
Yes No X
[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):]
N/A
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KINGSWAY FINANCIAL SERVICES INC.
Table of Contents
| Item | Description | Sequential Page Number |
|---|---|---|
| 1. | Report to Shareholders — Quarter Ended March 31, 2003 | 4 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KINGSWAY FINANCIAL SERVICES INC.
Dated: May 13,
2003
By: /s/ W. Shaun
Jackson
W. Shaun Jackson
Executive Vice President and
Chief Financial Officer
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PRESIDENT’S MESSAGE TO SHAREHOLDERS
Dear Shareholders:
I am pleased to report to you the results for the first quarter of 2003 which produced record levels of underwriting profit, net income and earnings per share.
For the three months ended March 31, 2003, net income increased by 50% to $24.4 million, compared to $16.3 million in the first quarter of last year. Return on equity (annualized) was 16.0% in the quarter compared to 11.9% in the same quarter last year. The combined ratio improved to 96.8% compared to 99.3% in the same quarter last year, producing record quarterly underwriting profit of $17.9 million in the quarter compared to $2.2 million in Q1 last year. Diluted earnings per share increased 48% to 49 cents for the quarter, compared to 33 cents for the first quarter of 2002.
We are particularly pleased to see the substantial improvement in the results from our Ontario private passenger automobile product as a result of remedial actions that were started in late 2002. We continue to benefit from the positive pricing environment that is prevalent in all of our core lines of business and all markets. This is a very good start to the year which we expect will be another record year for Kingsway.
Outlook
The outlook for the remainder of 2003 remains positive for pricing in the property and casualty insurance industry. Underwriting results of the industry are showing signs of improvement which are being offset by declining investment yields. Erosion of capital in the property and casualty industry coupled with increased pricing has constrained the capital base of many companies. As a result of these trends there continues to be significant opportunities for profitable growth in Canada and the United States.
Sincerely,
William G. Star
President and Chief Executive Officer
Kingsway Financial Services Inc.
May 1, 2003
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Management’s
Discussion and Analysis
Results of Operations
For the Period Ended March 31, 2003 and 2002
The following management’s discussion and analysis (MD&A) should be read in conjunction with the Company’s consolidated financial statements for the first quarter of fiscal 2003 and 2002; with the MD&A set out on pages 24 to 46 in the Company’s 2002 Annual Report, including the section on risks and uncertainties; and with the notes to the financial statements for the first quarter of fiscal 2003 and fiscal 2002 set out on pages 53 to 61 of the Company’s 2002 Annual Report. (All dollar amounts are in Canadian dollars unless otherwise indicated).
For the three months ended March 31, 2003 and 2002
Gross Premiums Written. During the first quarter of 2003, gross premiums written increased 69% to a quarterly record of $702.6 million, compared with $416.4 million in the first quarter last year. Written premiums from U.S. operations increased 78% to $575.6 compared with $324.1 million last year. In the quarter, U.S. operations represented 82% of gross premiums written compared with 78% in the first quarter last year. Written premiums from Canadian operations grew 38% to $127.0 million during the quarter, compared to $92.3 million in Q1 last year.
Written premiums from non-standard automobile increased by 25% to $248.9 million and by 107% to $319.8 million for trucking and commercial automobile over last year’s first quarter. Increased premium rates and firming market conditions are prevalent in all of the Company’s geographic locations.
Net Premiums Written. Net premiums written increased 67% to $666.7 million compared with $400.3 million for the first quarter of last year. Net premiums written from the U.S. operations increased 75% to $549.6 million compared with $314.8 million last year. Net premiums written from the Canadian operations increased 37% to $117.1 million compared with $85.6 million in the first quarter of last year.
Net Premiums Earned. Net premiums earned increased 78% to a record $551.3 million for the quarter, compared with $310.4 million for the first quarter last year. For U.S. operations, net premiums earned increased 94% to $439.1 million compared with $226.7 million in the first quarter of 2002. Net premiums earned from Canadian operations increased by 34% to $112.2 million compared with $83.7 million last year. Earned premiums have grown due to the increase in written premiums during the past year.
Investment Income. Investment income increased to $15.8 million compared with $13.8 million for the first quarter of 2002. The growth in our premiums written generated positive cash flow from operations which increased the investment portfolio during the period.
Net Realized Gains. Net realized losses amounted to $688,0000 compared with net realized gains of $3.7 million in the first quarter of 2002. Net realized losses include adjustments to the carrying value for declines in market value considered other than temporary of $2.6 million in the quarter on investments still held compared to $nil in the same quarter last year.
Claims Incurred. Our claims ratio for the first three months of 2003 was 70.5%, compared to 70.8% to last year. The claims ratio for the U.S. operations was 70.6% compared with 68.4% for the first three months of 2002. The slight deterioration in the U.S. operations claims ratio is a reflection of the growth of the business. The claims ratio for the Canadian operations improved to 70.1% compared to 77.2% in the first quarter of last year and 78.6% for the fourth quarter of 2002 as a result of the improvement in our Ontario automobile results.
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Underwriting Expenses. The combined ratio of 96.8% for the first quarter produced a record underwriting profit of $17.9 million, compared with the combined ratio of 99.3% and $2.2 million underwriting profit reported in the first quarter of 2002. For the quarter, the U.S. operations combined ratio improved to 96.0% (96.2% Q1 last year) and for the Canadian operations improved to 99.9% (107.6% Q1 last year). The results of our Canadian operations are starting to reflect our initiatives against fraud and increased pricing for the Ontario private passenger automobile product. The combined ratio for this product improved to 109.3% in the quarter (134.3% Q1 last year) on $20.5 million ($23.6 million Q1 last year) of net premiums earned.
Interest Expense. Interest expense in the first quarter of 2003 was $4.5 million, compared to $2.8 million for the first quarter of 2002, reflecting the issuance of $78 million in senior unsecured debentures in December, 2002.
Net Income and Earnings Per Share. Net income for the quarter was $24.4 million, a 50% increase over the $16.3 million reported in the first quarter last year. In the fourth quarter of 2002, in order to be more consistent with industry practice and its treatment of expenses on its program business, the Company commenced the deferral of underwriting and marketing costs relating to the acquisition of premiums on its non-program business, the impact of which was an increase in net income of $4.5 million (9 cents per share diluted) in the first quarter. Diluted earnings per share were 49 cents for the quarter compared to 33 cents for the first quarter of 2002.
A significant portion of the Company’s operations and net assets are denominated in U.S. dollars. The strengthening of the Canadian currency against the U.S. dollar during the quarter had a negative impact on results for the quarter. Had the results of U.S. operations for this quarter been translated at the same rate as the first quarter of 2002, the underwriting profit would have increased by $1.0 million, investment income by $0.6 million and net income by $1.3 million (3 cents per share diluted).
Book Value Per Share and Return on Equity. During the quarter, shareholders’ equity was reduced by $34.0 million and book value per share by 70 cents as a result of the unrealized currency translation adjustment. Despite this adjustment, book value per share increased by 9% to $12.35 from $11.37 a year ago. Our annualized return on equity was 16.0% for the first quarter of 2003 compared to 11.9% for the same quarter last year.
Balance Sheet. Total assets as at March 31, 2003 grew to $3.1 billion. The investment portfolio increased to $2,147.8 million (market value $2,169.8 million), compared to $2,094.9 million (market value $2,127.5 million) as at December 31, 2002. The continued growth in written premiums quarter-over-quarter has increased the amount of unearned premiums, the benefit of which will accrue in subsequent quarters. Unearned premiums as at March 31, 2003 grew to $846.6 million, an increase of 9% over the $776.3 million reported at the end of 2002.
Forward Looking Statements
This shareholders’ report includes “forward looking statements” that are subject to risks and uncertainties. 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 2002 Annual Report under the heading Risks and Uncertainties in the Management’s Discussion and Analysis section. 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.
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KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2003 and 2002
(In thousands of Canadian dollars, except for per share amounts)
| 2003 | 2002 | ||||
|---|---|---|---|---|---|
| (unaudited) | |||||
| Gross premiums written | $ 702,560 | $416,397 | |||
| Net premiums written | $ 666,663 | $400,317 | |||
| Revenue: | |||||
| Net premiums earned | $ 551,255 | $310,369 | |||
| Investment income | 15,766 | 13,770 | |||
| Net realized gains (losses) | (688 | ) | 3,713 | ||
| 566,333 | 327,852 | ||||
| Expenses: | |||||
| Claims incurred | 388,664 | 219,789 | |||
| Commissions and premium taxes | 114,309 | 64,147 | |||
| General and administrative expenses | 30,432 | 24,238 | |||
| Interest expense | 4,462 | 2,822 | |||
| Amortization of intangibles | 230 | -- | |||
| 538,097 | 310,996 | ||||
| Income before income taxes | 28,236 | 16,856 | |||
| Income taxes | 3,842 | 597 | |||
| Net income | $ 24,394 | $ 16,259 | |||
| Earnings per share: | |||||
| Basic: | $ 0.50 | $ 0.33 | |||
| Diluted: | $ 0.49 | $ 0.33 | |||
| Weighted average shares outstanding: | |||||
| Basic: | 48,827 | 48,678 | |||
| Diluted: | 49,400 | 49,470 | |||
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KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
| March 31 2003 (unaudited) |
Dec. 31 2002 (audited) | ||||
|---|---|---|---|---|---|
| ASSETS | |||||
| Cash | $ 211,535 | $ 244,921 | |||
| Investments | 1,919,286 | 1,833,744 | |||
| Accrued investment income | 16,994 | 16,223 | |||
| Accounts receivable and other assets | 386,338 | 334,603 | |||
| Due from reinsurers and other insurers | 163,935 | 164,742 | |||
| Deferred policy acquisition costs | 189,661 | 178,574 | |||
| Income taxes recoverable | 7,589 | 3,851 | |||
| Future income taxes | 50,895 | 59,505 | |||
| Capital assets | 40,537 | 43,981 | |||
| Goodwill and intangible assets | 97,815 | 104,290 | |||
| $ 3,084,585 | $2,984,434 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||
| LIABILITIES | |||||
| Bank indebtedness | $ 175,664 | $ 170,390 | |||
| Accounts payable and accrued liabilities | 84,097 | 122,606 | |||
| Unearned premiums | 846,648 | 776,323 | |||
| Unpaid claims | 1,273,998 | 1,200,554 | |||
| Senior unsecured debentures | 78,000 | 78,000 | |||
| 2,458,407 | 2,347,873 | ||||
| Subordinated indebtedness | 22,049 | 23,636 | |||
| SHAREHOLDERS' EQUITY | |||||
| Share capital | 357,994 | 357,192 | |||
| Issued and outstanding number of common | |||||
| shares | |||||
| 48,904,348 - March 31, 2003 | |||||
| 48,794,212 - December 31, 2002 | |||||
| Currency translation adjustment | (22,902 | ) | 11,090 | ||
| Retained earnings | 269,037 | 244,643 | |||
| 604,129 | 612,925 | ||||
| $ 3,084,585 | $2,984,434 | ||||
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KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the three months ended March 31, 2003 and 2002
(In thousands of Canadian dollars)
| 2003 | 2002 | ||||
|---|---|---|---|---|---|
| (unaudited) | |||||
| Retained earnings, beginning of period | $244,643 | $165,111 | |||
| Net income for the period | 24,394 | 16,259 | |||
| Retained earnings, end of period | $269,037 | $181,370 | |||
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KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS
For the three months ended March 31, 2003 and 2002
(In thousands of Canadian dollars)
| 2003 | 2002 | ||||
|---|---|---|---|---|---|
| (unaudited) | |||||
| Cash provided by (used in): | |||||
| Operating activities: | |||||
| Net income | $ 24,394 | $ 16,259 | |||
| Items not affecting cash: | |||||
| Amortization | 1,464 | 1,332 | |||
| Future income taxes | 427 | (1,368 | ) | ||
| Net realized (gains) losses | 688 | (3,713 | ) | ||
| Amortization of bond premiums and discounts | 2,597 | 767 | |||
| 29,570 | 13,277 | ||||
| Net change in non-cash balances: | 66,954 | 47,729 | |||
| 96,524 | 61,006 | ||||
| Financing activities: | |||||
| Increase of share capital, net | 802 | 473 | |||
| Increase (decrease) in bank indebtedness | 15,291 | (6 | ) | ||
| 16,093 | 467 | ||||
| Investing activities: | |||||
| Purchase of investments | (2,397,164 | ) | (679,669 | ) | |
| Proceeds from sale of investments | 2,250,813 | 616,850 | |||
| Financed premiums receivable, net | (67 | ) | 11,408 | ||
| Net change to capital assets | 415 | (2,725 | ) | ||
| (146,003 | ) | (54,136 | ) | ||
| Increase (decrease) in cash during period | (33,386 | ) | 7,337 | ||
| Cash, beginning of period | 244,921 | 96,200 | |||
| Cash, end of period | $ 211,535 | $ 103,537 | |||
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Management’s Discussion and Analysis
Results of Operations
For the Period Ended March 31, 2003 and 2002
| 1. | Basis of presentation |
| These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2002 as set out on pages 47 to 61 of the Company’s 2002 Annual Report. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as were used for the Company’s consolidated financial statements for the year ended December 31, 2002. |
| 2. | Stock-based compensation |
| As reported on pages 55 and 56 of the Company’s 2002 Annual Report, the Company applies the intrinsic-value method of accounting for stock-based compensation awards granted to employees and non-employee directors. The Company must provide the following pro forma disclosures of net income and earnings per share as if the Company had measured the compensation element of stock options granted based on the fair value on the date of grant. Such proforma disclosure follows: |
| Three months ended March 31, | |||||
|---|---|---|---|---|---|
| 2003 | 2002 | ||||
| Net income | |||||
| As reported | $ 24,394 | $ 16,259 | |||
| Pro forma | 23,814 | 15,787 | |||
| Basic earnings per share | |||||
| As reported | $ 0.50 | $ 0.33 | |||
| Pro forma | 0.49 | 0.32 | |||
| Diluted earnings per share | |||||
| As report | $ 0.49 | $ 0.33 | |||
| Pro forma | 0.48 | 0.32 | |||
| The per share weighted average fair value of options granted during 2003 and 2002 was $6.11 and $8.39. 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: |
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Management’s Discussion and Analysis
Results of Operations
For the Period Ended March 31, 2003 and 2002
| 2. | Stock-based compensation – continued: |
| As at March 31, 2003 |
September 30, 2002 | ||||
|---|---|---|---|---|---|
| Risk-free interest rate | 5.44 | % | 5.54 | % | |
| Dividend yield | 0.0 | % | 0.0 | % | |
| Volatility of the expected market price of the | |||||
| Company's common shares | 56.0 | % | 59.1 | % | |
| Expected option life (in years) | 5.5 | years | 5.4 | years | |
| 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. |
| 3. | Segmented information |
| The Company provides property and casualty insurance and other insurance related services in three reportable segments, Canada, the United States and corporate and other insurance related services. The Company’s Canadian and United States segments include transactions with the Company’s reinsurance subsidiaries. At the present time, other insurance related services are not significant. 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. |
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Management’s Discussion and Analysis
Results of Operations
For the Period Ended March 31, 2003 and 2002
| 3. | Segmented information – continued: |
| Three Months ended March 31, 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Canada | United States | Corporate and Other | Total | ||||||
| Gross premiums written | $ 127,008 | $ 575,552 | $ -- | $ 702,560 | |||||
| Net premiums earned | 112,180 | 439,075 | -- | 551,255 | |||||
| Investment income | 6,043 | 9,696 | 27 | 15,766 | |||||
| Net realized gains (losses) | (911 | ) | 225 | (2 | ) | (688 | ) | ||
| Interest expense | -- | 2,464 | 1,998 | 4,462 | |||||
| Amortization of capital assets | 176 | 1,326 | 307 | 1,809 | |||||
| Amortization of intangible assets | -- | 230 | -- | 230 | |||||
| Net income tax expense | 964 | 2,638 | 240 | 3,842 | |||||
| Net income (loss) | 2,992 | 22,276 | (874 | ) | 24,394 | ||||
| Total assets | $ 729,344 | $2,325,949 | $ 29,292 | $ 3,084,585 | |||||
| Claims ratio | 70.1 | % | 70.6 | % | -- | 70.5 | % | ||
| Expense ratio | 29.8 | % | 25.4 | % | -- | 26.3 | % | ||
| Combined ratio | 99.9 | % | 96.0 | % | -- | 96.8 | % | ||
| Three Months ended March 31, 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Canada | United States | Corporate and Other | Total | ||||||
| Gross premiums written | $ 92,325 | $ 324,072 | $ -- | $ 416,397 | |||||
| Net premiums earned | 83,675 | 226,694 | -- | 310,369 | |||||
| Investment income | 5,089 | 8,623 | 58 | 13,770 | |||||
| Net realized gains (losses) | (212 | ) | 2,947 | 978 | 3,713 | ||||
| Interest expense | -- | 2,543 | 279 | 2,822 | |||||
| Amortization of capital assets | 169 | 828 | 40 | 1,037 | |||||
| Net income tax expense | |||||||||
| (recovery) | (1,878 | ) | 2,235 | 240 | 597 | ||||
| Net income | (1,187 | ) | 15,384 | 2,062 | 16,259 | ||||
| Total assets | 624,478 | 1,262,645 | 70,843 | 1,957,966 | |||||
| Claims ratio | 77.2 | % | 68.4 | % | -- | 70.8 | % | ||
| Expense ratio | 30.4 | % | 27.8 | % | -- | 28.5 | % | ||
| Combined ratio | 107.6 | % | 96.2 | % | -- | 99.3 | % | ||
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Management’s Discussion and Analysis
Results of Operations
For the Period Ended March 31, 2003 and 2002
| 4. | Investments |
The carrying amounts and fair values of investments are summarized below:
| March 31, 2003 | |||||
|---|---|---|---|---|---|
| Carrying Amount | Fair Value | ||||
| Term deposits | $ 552,385 | $ 552,256 | |||
| Bonds: | |||||
| Government | 497,778 | 504,598 | |||
| Corporate | 618,175 | 633,222 | |||
| Preferred shares | 3,920 | 3,876 | |||
| Common shares | 162,181 | 162,425 | |||
| Financed premiums | 84,847 | 84,847 | |||
| $1,919,286 | $1,941,224 | ||||
| December 31, 2002 | |||||
|---|---|---|---|---|---|
| Carrying Amount | Fair Value | ||||
| Term depos | $ 506,575 | $ 506,511 | |||
| Bonds: | |||||
| Government | 441,674 | 454,482 | |||
| Corporate | 613,732 | 630,658 | |||
| Preferred shares | 2,045 | 2,025 | |||
| Common shares | 182,904 | 185,816 | |||
| Financed premiums | 86,814 | 86,814 | |||
| $1,833,744 | $1,866,306 | ||||