Kingsway Corporation · NYSE:KWY
Kingsway — Kingsway Financial Services — Investor Day (February 2018)
68 slides from Kingsway's investor day presentation, Feb 20, 2018
Slide 1: Kingsway Financial Services Inc. Investor Day
Kingsway Financial Services Inc. Investor Day February 20, 2018
Slide 2: Kingsway Forward-looking Statements
Kingsway Forward-looking Statements This presentation includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actua
Slide 3: Representatives and Agenda
Representatives and Agenda Kingsway Representatives Agenda (10:30 am – 1:30 pm ET / lunch to follow) Larry G. Swets, Jr., CEO and Board Member (Co-Chief Capital Allocator) 1. Opening Remarks John T. Fitzgerald, President, COO and Board Member 2. 2017 Operating Results (Co-Chief Capital Allocator) 3.
Slide 4: Opening Remarks: Kingsway Philosophy
Opening Remarks: Kingsway Philosophy Investor Day February 20, 2018 4
Slide 5: Kingsway Philosophy: Our Core Values
Kingsway Philosophy: Our Core Values Integrity we do the right thing Intellectual Curiosity we strive to be lifelong learners Continuous Improvement we are driven to surpass what has already been achieved Teamwork we operate in a team environment where egos have no place 5
Slide 6: Kingsway Philosophy: Kingsway At-A-Glance
Kingsway Philosophy: Kingsway At-A-Glance • Kingsway is a merchant bank with a focus on long-term value creation Kingsway At-A-Glance (as of 02/16/2018) Ticker KFS (NYSE), KFS.TO (TSX) • We aspire to compound our book value per share by 15 to 20% Stock Price $5.70 annually over the long-term by oper
Slide 7: Kingsway Philosophy: How We Build Value
Kingsway Philosophy: How We Build Value Compounding Capital Utilization of insurance and warranty company investment portfolios and available net operating loss tax attributes to compound and enhance investment results Focus on a 15-30 year perspective when creating/building value, while recognizing
Slide 8: Kingsway Philosophy: Our Compounding Formula
Kingsway Philosophy: Our Compounding Formula Invest Operate Effectively Efficiently Compound Capital Optimize Capital Structure Invest Effectively Operate Efficiently Optimize Capital Structure • Kingsway invests in operating businesses • While Kingsway operating companies • Kingsway is faced with c
Slide 9: Kingsway Philosophy: Invest Effectively
Kingsway Philosophy: Invest Effectively The Kingsway Investment Machine Structure Businesses Passive ^ Asymmetric Owned Investments Risk/Reward Businesses Owned Interesting Opportunities Structure Asymmetric Risk/Reward • Businesses Owned are assets • Interesting Opportunities are • Creative structu
Slide 10: Kingsway Philosophy: Operate Efficiently
Kingsway Philosophy: Operate Efficiently Kingsway uses a thin holding company structure to manage multiple operating companies Kingsway HoldCo Strategic Accountability, Capital Allocation decisions 1) Will always be a small, lean team 2) Makes all capital allocation decisions • Capital allocation wi
Slide 11: Kingsway Philosophy: Operate Efficiently (PDCA Cycle)
Kingsway Philosophy: Operate Efficiently The PDCA Cycle Vision 1 PLANNING Strategic Plan; 3-5 year Strategy - Annual IMPLEMENTATION Improvement Priorities SELF DIAGNOSIS 2 4 Action Plans (ADJUSTING) (DOING) Monthly Review 3 REVIEW Annual Review (CHECKING) 1. Focus on the Wildly Important 2. Act on L
Slide 12: Kingsway Philosophy: Optimize Capital Structure
Kingsway Philosophy: Optimize Capital Structure The Kingsway approach and current opportunities Approach • Attract and retain shareholders who share our long-term goals and treat them like business partners • Issue equity only when we can do so at a premium to intrinsic value • Repurchase shares whe
Slide 13: 2017 Operating Results
2017 Operating Results Investor Day February 20, 2018 13
Slide 14: 2017 Operating Results: Businesses Owned
2017 Operating Results: Businesses Owned Strategic Accountability, Kingsway Holding Company Strategic execution, cash Capital Allocation decisions CEO: Larry Swets flow to allocate President: J.T. Fitzgerald Operating Insurance Extended Warranty Segments Underwriting Mendota Insurance Trinity Warran
Slide 15: 2017 Operating Results: Overview
2017 Operating Results: Overview (All $ figures are in 000s) Three months ended December 31: Years ended December 31: 2017 Highlights 2017 2016 2017 2016 • $18,052 full year operating loss Segment operating (loss) income: • Driven by Insurance Underwriting segment Insurance Underwriting (17,006) (8,
Slide 16: Insurance Underwriting Segment (Mendota)
2017 Operating Results: Insurance Underwriting Segment (“Mendota”) Investor Day February 20, 2018 16
Slide 17: Mendota: Pros and Cons of the Nonstandard Auto Insurance Business
Mendota: Pros and Cons of the Nonstandard Auto Insurance Business Desired Industry Attributes NSA Industry Advantages NSA Industry Disadvantages Large Industry Estimated $33 to $40 billion in annual premium5 Growing Large markets follow population demographics; 6.4% 5-yr CAGR6 Fragmented industr
Slide 18: Mendota: Company Overview
Mendota: Company Overview • Insurance Underwriting principally offers personal automobile insurance to drivers who do not meet the criteria for coverage by standard automobile insurers, or nonstandard auto (“NSA”) insurance • We interchangeably refer to our insurance underwriting business as “Mendot
Slide 19: Mendota: Underwriting Coverage
Mendota: Underwriting Coverage Actively writing business Renewal policies only No underwriting activity 19
Slide 20: Mendota: Industry Update
Mendota: Industry Update NSA market faces some difficult headwinds Industry Loss Ratios8 Industry Direct Premiums Written8 85% $16 $14 Premiums Written (billions) 80% $12 75% $10 70% $8 65% $6 60% $4 55% $2 50% $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Competitive
Slide 21: Mendota: 2017 Update
Mendota: 2017 Update (All $ figures are in 000s) Years ended December 31: 2017 Results 2017 2016 2015 • Insurance Underwriting segment operating loss of $20,606 Segment revenues: Net premiums earned 130,443 127,608 117,433 Policy fee income 9,559 9,787 8,308 • Insurance Underwriting segment operatin
Slide 22: Mendota: 2017 Update (continued)
Mendota: 2017 Update (continued) A complete operations overhaul Initiative Accomplishment Result Still to Do Process reorganization and Consolidated multiple Policy and Claims 1) Reduced Bad debt expense more 1) Complete policy system turnover software implementation Systems to new, advanced cloud-b
Slide 23: Mendota: Financial Performance
Mendota: Financial Performance Net Premiums Earned per Exposure vs. PIF10 Average Policy Fees per Policy Written11 $280 100 $60 Net Premiums Earned per Exposure Policies in Force (thousands) $260 90 $55 11% CAGR12 $240 $220 80 $50 $200 $45 70 $180 $160 60 $40 $140 $35 50 $120 $30 $100 40 $25 $20 Pol
Slide 24: Mendota: Financial Performance (continued)
Mendota: Financial Performance (continued) Loss and ALAE Ratio13 Bad Debt Expense 78.0% $3,500,000 76.0% $3,000,000 74.0% -22% CAGR12 $2,500,000 72.0% 70.0% $2,000,000 68.0% $1,500,000 66.0% $1,000,000 64.0% $500,000 62.0% 60.0% $0 2014 2015 2016 2017 2015 2016 2017 Loss and ALAE Ratio13 Bad Debt Ex
Slide 25: Mendota: Financial Performance (continued)
Mendota: Financial Performance (continued) Operating Expenses (%)14 30.0% 25.0% 20.0% 15.0% 10.0% 2015 2016 2017 Operating Expenses (%)14 • Major reorganization at Mendota with a focus on cost containment and expense reduction • 2017 expenses impacted in Q1 2017 by restructuring charges 25
Slide 26: Mendota: 2018 Strategic Priorities
Mendota: 2018 Strategic Priorities What we will accomplish in 2018 How we will accomplish it Use reinsurance to immunize from underwriting Enter into quota-share reinsurance to relieve capital volatility strain and immunize balance sheet Continued improvement in Uncollected Premium Complete full cut
Slide 27: 2017 Operating Results: Extended Warranty Segment
2017 Operating Results: Extended Warranty Segment Investor Day February 20, 2018 27
Slide 28: Extended Warranty Segment: Why We Like the Industry
Extended Warranty Segment: Why We Like the Industry Desired Industry Attributes Warranty Industry Advantages Warranty Industry Disadvantages Large Industry Estimated at over $44b per year15 Growing VSC sales growing at 13.5% CAGR since ’0916 Fragmented industry with several small Management es
Slide 29: Trinity Warranty Services: Overview
Trinity Warranty Services: Overview • Trinity Warranty Services (“Trinity”) is a provider of warranty products and maintenance support to consumers and businesses in the heating, ventilation, air conditioning, standby generator, commercial LED lighting and refrigeration industries • Trinity distribu
Slide 30: Trinity Warranty Services: 2017 Update
Trinity Warranty Services: 2017 Update Initiative Accomplishment Result Still to Do Grow TNA Service fee and 1) Rebuilt Performance and 1) TNA Service fee and 1) Continue to roll out marketing commission income to $8.3m Development Plans (“PDP”) commission income of $8.8m campaign and variable comp
Slide 31: Trinity Warranty Services: Financial Performance
Trinity Warranty Services: Financial Performance Service Fee and Commission Income19 Gross Margin (%)18 $12,000,000 40.0% 35.0% $10,000,000 30.0% $8,000,000 25.0% $6,000,000 20.0% 15.0% $4,000,000 10.0% $2,000,000 5.0% $- 0.0% 2015 2016 2017 2015 2016 2017 General and Admin. Expenses (%)20 EBITDA21
Slide 32: Trinity Warranty Services: 2018 Strategic Priorities
Trinity Warranty Services: 2018 Strategic Priorities What we will accomplish in 2018 How we will accomplish it Continued growth in ESA segment Focused marketing campaign targeting HVAC distributors Improve Margin and diversify TNA segment Optimize pricing and add new non-retail accounts Ongoing focu
Slide 33: IWS Acquisition Corp.: Overview
IWS Acquisition Corp.: Overview • IWS Acquisition Corp. (“IWS”) is a licensed motor vehicle service agreement (“VSA”) company and is a provider of after-market vehicle protection services distributed by credit unions in 23 states and the District of Columbia to their members 33
Slide 34: IWS Acquisition Corp.: Underwriting Coverage
IWS Acquisition Corp.: Underwriting Coverage Actively writing business No underwriting activity 34
Slide 35: IWS Acquisition Corp.: Industry Update
IWS Acquisition Corp.: Industry Update Credit Unions and Credit Union Members22 New Cars Sold23 9 120 20,000,000 2.4% CAGR12 Credit Union Members (millions) Credit Unions (thousands) 18,000,000 8 110 16,000,000 7 100 14,000,000 -3.6% CAGR12 6 90 12,000,000 10,000,000 5 80 8,000,000 4 70 6,000,000 3
Slide 36: IWS Acquisition Corp.: 2017 Update
IWS Acquisition Corp.: 2017 Update Initiative Result Still to Do Increase the number of credit union 1) Average of 55 producing CU 1) Continue to increase average (“CU”) clients producing VSA from clients monthly producing CUs 56 to 62; grow in force VSA to 2) 45,212 total in force VSA 45,150 contra
Slide 37: IWS Acquisition Corp.: Financial Performance
IWS Acquisition Corp.: Financial Performance Service Fee and Commission Income19 Average In Force Contracts26 19,500,000 49,000 19,000,000 47,000 18,500,000 45,000 18,000,000 43,000 17,500,000 41,000 17,000,000 39,000 16,500,000 37,000 16,000,000 35,000 2015 2016 2017 2015 2016 2017 Loss and LAE Rat
Slide 38: IWS Acquisition Corp.: Invested Assets
IWS Acquisition Corp.: Invested Assets Total Investments, Cash and Cash Equivalents Dec. 31 $28,000,000 $26,000,000 $24,000,000 $22,000,000 $20,000,000 $18,000,000 $16,000,000 $14,000,000 2015 2016 2017 38
Slide 39: IWS Acquisition Corp.: 2018 Strategic Priorities
IWS Acquisition Corp.: 2018 Strategic Priorities What we will accomplish in 2018 How we will accomplish it Grow monthly VSA sales volume through Execute on pipeline of current continued penetration of CU channel opportunities; increase brand awareness and visibility Develop and refine new and existi
Slide 40: Professional Warranty Service Corporation: Overview
Professional Warranty Service Corporation: Overview • Founded in January 1995, Professional Warranty Service Corporation (“PWSC”) is the leading provider of new home warranty products and administration services to home builders and homeowners across the U.S. • Since inception, the Company has provi
Slide 41: Professional Warranty Service Corporation: Market Overview
Professional Warranty Service Corporation: Market Overview Monthly New Home Sales28 140 New Homes sold per month 120 100 (thousands) 80 60 40 20 0 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Pre-Crash Bot
Slide 42: Professional Warranty Service Corporation: Investment Thesis
Professional Warranty Service Corporation: Investment Thesis Thesis Rationale Future Plans Recurring revenue business with a strong ‘moat’ Diversified contractual revenue and great trade Continue to enhance product offering and service brand; partnerships with the leading homebuilders level to delig
Slide 43: Professional Warranty Service Corporation: Financial Performance
Professional Warranty Service Corporation: Financial Performance Service Fee and Commission Income19,29 Enrollments29,30 $10,000,000 80,000 $9,500,000 75,000 9% CAGR12 $9,000,000 9.5% CAGR12 70,000 $8,500,000 $8,000,000 65,000 $7,500,000 60,000 $7,000,000 55,000 $6,500,000 50,000 $6,000,000 $5,500,0
Slide 44: Extended Warranty Segment: Summary
Extended Warranty Segment: Summary Segment Service Fee and Commission Income19,29 Segment EBITDA21,29 $45,000,000 $8,000,000 $40,000,000 12.3% CAGR12 $35,000,000 $6,000,000 103% CAGR12 $30,000,000 $25,000,000 $4,000,000 $20,000,000 $15,000,000 $2,000,000 $10,000,000 $5,000,000 $0 $- 2015 2016 2017 2
Slide 45: Sum of the Parts Valuation
Sum of the Parts Valuation Investor Day February 20, 2018 45
Slide 46: Sum of the Parts: Equity Values
Sum of the Parts: Equity Values (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITDA21,29) Leased
Slide 47: Sum of the Parts: Insurance Underwriting
Sum of the Parts: Insurance Underwriting (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) • Private market values for asset-intensive businesses like specialty
Slide 48: Sum of the Parts: Extended Warranty
Sum of the Parts: Extended Warranty (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITDA21,29) •
Slide 49: Sum of the Parts: Leased Real Estate
Sum of the Parts: Leased Real Estate (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITDA21,29) L
Slide 50: Sum of the Parts: Asset Management Business
Sum of the Parts: Asset Management Business (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITDA2
Slide 51: Sum of the Parts: Holding Company Investments
Sum of the Parts: Holding Company Investments (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITD
Slide 52: Sum of the Parts: Net DTA Valuation Allowance
Sum of the Parts: Net DTA Valuation Allowance (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITD
Slide 53: Sum of the Parts: Net Other
Sum of the Parts: Net Other (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Insurance Underwriting Segment $37,995 Multiple of GAAP book value $37,995 (GAAP book value) Extended Warranty Segment $8,570 Multiple of EBITDA $7,548 (EBITDA21,29) Leased Rea
Slide 54: Sum of the Parts: Trust Preferred Units
Sum of the Parts: Trust Preferred Units (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Trust Preferred Units $52,105 Fair Value $52,105 (fair value) • Trust Preferred Units (“TruPs”), across 6 tranches, have spreads to LIBOR ranging from +3.85% to +4.
Slide 55: Sum of the Parts: Class A Preferred Stock
Sum of the Parts: Class A Preferred Stock (All $ figures are in 000s) Shareholders’ Equity at Valuation Observed 12.31.17 Method Metric31 Trust Preferred Units $52,105 Fair Value $52,105 (fair value) Class A Preferred Stock $5,461 GAAP book value $5,461 (GAAP book value) • Kingsway issued Class A Pr
Slide 56: Future Focus: Building Upon Our Foundation
Future Focus: Building Upon Our Foundation Investor Day February 20, 2018 56
Slide 57: Future Focus: 2018 Action Plan
Future Focus: 2018 Action Plan Invest Operate Effectively Efficiently Compound Capital Optimize Capital Structure Invest Effectively Operate Efficiently Optimize Capital Structure • Invest in, acquire, or create: • Produce operating income for reinvestment • If we believe there are investable • Oper
Slide 58: Key Takeaways
Key Takeaways • Kingsway provides an opportunity to invest in a diverse pool of insurance and warranty businesses led by experienced leadership team with a history of success • Through our merchant bank platform, we have the opportunity to capitalize on changing markets through a variety of funding
Slide 59: Contact Us
Contact Us KINGSWAY FINANCIAL SERVICES INC. INVESTOR RELATIONS INVESTOR DAY Hassan Baqar FEBRUARY 20, 2018 Kingsway Financial Services Inc. 1.847.700.8064 hbaqar@kingswayfinancial.com Adam Prior The Equity Group 1.212.836.9606 aprior@equityny.com 59
Slide 60: Appendix 1: Footnotes
Appendix 1: Footnotes 1) “Shares Outstanding” is the total number of common shares issued and outstanding and excludes any restricted common shares and restricted common stock units. 2) The common equity referred to here, and the ownership stake, is inclusive of common shares outstanding and restric
Slide 61: Appendix 1: Footnotes (continued)
Appendix 1: Footnotes (continued) 19) See Appendix 4. 20) “General and Admin. Expenses (%)” is calculated by dividing the General and administrative expenses by Service fee and commission income. See appendix 4. 21) “EBITDA” is defined as net income before interest expense, income tax expenses, depr
Slide 62: Appendix 2: Insurance Underwriting segment adjusted operating (loss) income reconciliation
Appendix 2: Insurance Underwriting segment adjusted operating (loss) income reconciliation (All $ figures are in 000s) Years ended December 31: 2017 2016 2015 Segment revenues: Net premiums earned 130,443 127,608 117,433 Policy fee income 9,559 9,787 8,308 Other income 342 485 629 Total segment reve
Slide 63: Appendix 3-A: Extended Warranty Segment EBITDA Reconciliation—2017
Appendix 3-A: Extended Warranty Segment EBITDA Reconciliation—2017 Reported Results Pro-Forma Results 2017 Trinity IWS PWSC Total PWSC 1 Total 2 EBITDA $ 1,036,003 $ 2,548,739 $ 916,231 $ 4,500,973 $ 3,962,808 $ 7,547,550 Net investment income and net realized gains (losses) included in EBITDA $ (30
Slide 64: Appendix 3-B: Extended Warranty Segment EBITDA Reconciliation—2016
Appendix 3-B: Extended Warranty Segment EBITDA Reconciliation—2016 Reported Results Pro-Forma Results 2016 Trinity IWS PWSC Total PWSC 1 Total 2 EBITDA $ (117,597) $ 1,846,802 $ - $ 1,729,205 $ 2,560,868 $ 4,290,073 Extraordinary expenses - severance and an agreement with former owners $ - $ (941,15
Slide 65: Appendix 3-C: Extended Warranty Segment EBITDA Reconciliation—2015
Appendix 3-C: Extended Warranty Segment EBITDA Reconciliation—2015 Reported Results Pro-Forma Results 2015 Trinity IWS PWSC Total PWSC 1 Total 2 EBITDA $ (1,339,348) $ 880,856 $ - $ (458,492) $ 2,289,308 $ 1,830,816 Net investment income and net realized gains (losses) included in EBITDA $ (40) $ (6
Slide 66: Appendix 4-A: Extended Warranty Segment Ratio Reconciliation—2017
Appendix 4-A: Extended Warranty Segment Loss and LAE Ratio, Gross Margin (%), and General and Admin. Expenses (%) Reconciliation—2017 Reported Results Pro-Forma Results 2017 Trinity IWS PWSC Total PWSC 1 Total 2 Service fee and commission income $ 10,572,653 $ 18,910,747 $ 2,425,825 $ 31,909,225 $ 9
Slide 67: Appendix 4-B: Extended Warranty Segment Ratio Reconciliation—2016
Appendix 4-B: Extended Warranty Segment Loss and LAE Ratio, Gross Margin (%), and General and Admin. Expenses (%) Reconciliation—2016 Reported Results Pro-Forma Results 2016 Trinity IWS PWSC Total PWSC 1 Total 2 Service fee and commission income $ 6,529,374 $ 17,702,833 $ - $ 24,232,207 $ 7,735,438
Slide 68: Appendix 4-C: Extended Warranty Segment Ratio Reconciliation—2015
Appendix 4-C: Extended Warranty Segment Loss and LAE Ratio, Gross Margin (%), and General and Admin. Expenses (%) Reconciliation—2015 Reported Results Pro-Forma Results 2015 Trinity IWS PWSC Total PWSC 1 Total 2 Service fee and commission income $ 5,911,020 $ 17,054,475 $ - $ 22,965,495 $ 7,801,777
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