2008-08-07 10:26:00
Kingsway Reports Net Income of $6.3 Million in the Second Quarter
TORONTO, Aug. 7 /EMWNews/ - Kingsway Financial Services Inc. (TSE:KFS, NYSE:KFS) today announced its financial results for the second quarter ended June 30, 2008 (results are in U.S. dollars). The Company reported net income of $6.3 million or $0.11 diluted per share for the quarter, marking a significant improvement over the net loss of $34.4 million reported in the first quarter of 2008 but below net income of $41.7 million reported in the second quarter of 2007. Gross premiums written were $443.2 million, 16% lower than a year ago. The Company's securities portfolio continued to provide steady income despite challenging economic trends and volatile financial markets in the U.S. and Canada. Investment income, excluding net realized gains, was $33.6 million, virtually unchanged from a year ago. During the quarter, the investment portfolio produced net realized gains of $10.9 million which is net of an adjustment of $9.9 million for the write-down of securities held which were deemed to be other than temporarily impaired. Book value per share decreased 4% during the quarter to $15.49 (Cdn$15.80) as a result of the change in the market value of the securities portfolio which decreased book value by $0.81. Compared with the first quarter of this year, operating results improved despite challenging industry conditions. Quarterly results reflect improved reserving experience and the benefit of the termination of unprofitable programs since year-end. There was estimated net unfavourable reserve development of $7.3 million ($4.6 million in Canada and $2.7 million in the U.S.) or $0.14 per share on an after-tax basis in the second quarter of 2008, 88% lower than in the first quarter of 2008 which compares with net favourable reserve development of $1.4 million in the second quarter of 2007. The combined ratio was 107.0% in the second quarter, marking an improvement over the first quarter but above the 100.8% reported in Q2 2007. Lincoln General's claims management has been steadily moved in-house in recent years, and the benefit of the completion of this transition is being reflected in improved pricing and claims management. U.S. operations reported a combined ratio of 106.7% in the second quarter and, excluding terminated programs at Lincoln General, would have reported a combined ratio of 101.0% in the second quarter of 2008. Gross premiums declined $92.4 million (or 26%) in the quarter and by $118.4 million (or 16%) year to date in the U.S., reflecting the impact of termination of unprofitable programs and also the soft market conditions for commercial automobile business. Lincoln General's premium volume declined by $90.7 million in the quarter and $160.0 million year to date compared to the same periods last year. In Canada, premiums were 2% lower when adjusted for the stronger Canadian dollar, reflecting slowness in the trucking line of business as fleet operators have been reducing their cross border operations due to the slowing of the U.S. economy. Motorcycle premiums in Canada were $56.5 million, an increase of 18% for the first six months of 2008 compared to the same period last year. This reflects consumers movement to more fuel efficient vehicles. For the quarter, U.S. operations represented 59% of gross premiums compared with 68% a year ago, while Canadian operations represented 41% compared with 32% a year ago. "The return to overall profitability in the second quarter resulted from consistent income from our investment portfolio, despite challenging market conditions, and improving performance in our insurance operations, where we have established more conservative reserving practices. We have moved decisively to identify and remedy underperforming businesses in order to stabilize and then improve the future performance of our insurance operations," said Shaun Jackson, President and Chief Executive Officer. "During the quarter, we made several executive changes to strengthen our leadership team, to better align management responsibilities and to involve the broader management group in developing the corporate strategy. Kingsway will continue to focus on its core profitable business lines and will exit non-core underperforming businesses, thus better positioning it to restore profitability to acceptable levels while building a solid foundation for future growth." On July 21, 2008, the Company repaid $89.8 million, which was the entire amount outstanding under its three-year revolving credit facility, and also repaid C$19.9 million of the C$69.8 million outstanding under the 365-day credit agreement. Total bank debt has been reduced to $48.8 million from $157.9 million and on a proforma basis the Company thus improved its senior debt to total capital ratio to 25.5% from 31.2% prior to the payment. Mr. Jackson commented: "We have experienced a reduction in premium volumes. As a result, this created a situation where we had significant surplus capital which was not required for the Company's needs in the near term. It is a sign of Kingsway's strength that it was able to utilize its surplus capital to repay the majority of its short-term debt, reduce future interest expense and significantly de-leverage its balance sheet." Six month results For the six months ended June 30, 2008, Kingsway reported a net loss of $28.1 million ($0.51 per share diluted) compared with net income of $61.4 million ($1.09 per share diluted) in the same period of 2007. Investment income, excluding net realized gains, was $71.0 million, 9% above a year ago, while operations recorded a loss of $30.0 million which compares with operating income of $32.5 million in the same period of 2007. Gross premiums written were $900.3 million, 10% lower than the comparable six month period of 2007. Dividend The Board of Directors has declared a quarterly dividend of C$0.075 per common share, payable on September 30, 2008 to shareholders of record on September 15, 2008. Conference Call and Webcast You are invited to participate in our quarterly results conference call that will take place on August 7, 2008 at 8:30 a.m. EDT. To access please dial 1-800-732-0232 about 5 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=2321440
About the Company
Kingsway Financial Services Inc. "Kingsway" is one of the largest
non-standard automobile insurers and truck insurers in North America based
on A.M. Best data that we have compiled. Kingsway's primary business is the
insuring of automobile risks for drivers who do not meet the criteria for
coverage by standard automobile insurers and trucking insurance. The
Company currently operates through thirteen wholly-owned insurance
subsidiaries in Canada and the U.S. Canadian subsidiaries include Kingsway
General Insurance Company, York Fire & Casualty Insurance Company and Jevco
Insurance Company. U.S. subsidiaries include Universal Casualty Company,
American Service Insurance Company, Southern United Fire Insurance Company,
Lincoln General Insurance Company, U.S. Security Insurance Company,
American Country Insurance Company, Zephyr Insurance Company, Mendota
Insurance Company, Mendakota Insurance Company and Avalon Risk Management,
Inc. The Company also operates reinsurance subsidiaries in Barbados and
Bermuda.
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"
Financial Summary and Highlights:
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Quarter to June 30: 6 months to June 30:
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(in millions
of dollars
except per
share amounts) 2008 2007 Change 2008 2007 Change
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Gross premiums
written $ 443.2 $ 525.2 (16%) $ 900.3 $1,004.6 (10%)
Underwriting
loss (29.3) (3.7) 692% (98.4) (24.5) 302%
Investment
income 33.6 33.8 (1%) 71.0 65.4 9%
Net realized
gains 10.9 30.8 (65%) 5.5 39.9 (86%)
Operating
earnings (loss) (0.4) 20.6 (102%) (30.0) 32.5 (192%)
Net income (loss) 6.3 41.7 (85%) (28.1) 61.4 (146%)
Diluted earnings
(loss) per
share 0.11 0.74 (85%) (0.51) 1.09 (147%)
Book value
per share 15.49 17.77 (13%)
Combined ratio 107.0% 100.8% 6.2% 111.5% 102.7% 8.8%
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- Gross premiums written decreased 16% to $443.2 million in the quarter
compared to $525.2 million in Q2 last year, and for the first half of
the year was $900.3 million compared to $1,004.6 million for the same
period last year, primarily as a result of the impact of the soft
market and termination of business at Lincoln General. Lincoln
General's premium volume declined by $90.7 million in the quarter and
$160.0 million year to date compared to the same periods last year.
- For the quarter the Company reported net income of $6.3 million
compared to net income of $41.7 million in Q2 last year and a net
loss of $28.1 million for the first half of the year compared to a
net income of $61.4 million for the same period last year.
- For the quarter and year to date the Company reported operating
losses of $0.4 million and $30.0 million, respectively, compared to
operating income in Q2 of last year of $20.6 million and
$32.5 million last year to date.
- Diluted earning per share was $0.11 for the quarter compared to
earnings of $0.74 per share for Q2 last year and diluted loss per
share of $0.51 for the first half of 2008 compared to diluted
earnings per share of $1.09 for the same period last year.
- The combined ratio was 107.0% in the quarter compared to 100.8% same
quarter last year, with Canadian operations reporting a combined
ratio of 107.7% and U.S. operations a combined ratio of 106.7%.
- Estimated net unfavourable reserve development was $7.3 million in
the quarter ($66.1 million for the year to date) which increased the
combined ratio by 1.8% for the quarter (7.7% for the year to date).
The impact of this development on an after tax basis was $0.14 per
share for the quarter ($1.08 for the year to date).
- Investment income, excluding net realized gains dropped marginally by
1% to $33.6 million compared to $33.8 million for the same quarter of
2007. For the year to date investment income, excluding net realized
gains, has increased by 9% to $71.0 million compared to $65.4 million
for the corresponding period last year. Included in net realized
gains were adjustments to the carrying values of securities for
declines in market value considered other than temporary of
$9.9 million ($18.8 million for the year to date) or $0.18 per share
for the quarter ($0.34 per share for the year to date).
- The fair value of the securities portfolio per share decreased by 5%
since the beginning of the year to $59.96.
- As at June 30, 2008 the securities portfolio did not include any
collateralized debt obligations nor any direct exposure to any asset
backed commercial paper. The securities portfolio has an exposure of
approximately $2.7 million to the sub-prime mortgage market in the
U.S. through home equity loan asset backed securities.
Kingsway Financial Services Inc.
Management's Discussion and Analysis
For the three and six months ended June 30, 2008 and 2007
(U.S. dollars)
The following management's discussion and analysis (MD&A) should be
read in conjunction with the Company's unaudited interim consolidated
financial statements for the second quarter of fiscal 2008 and 2007; with
the MD&A set out on pages 12 to 57 in the Company's 2007 Annual Report,
including the section on risk factors; and with the notes to the interim
consolidated financial statements for the second quarter of fiscal 2008 and
the notes to the audited consolidated financial statements for fiscal 2007
set out on pages 68 to 85 of the Company's 2007 Annual Report.
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 87 of the 2007 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.
The Company also uses securities portfolio per share information which
is calculated based on the fair value of the securities portfolio divided
by the number of issued and outstanding common shares. The Company uses
operating earnings which are calculated as net income excluding after-tax
net realized gains and losses on securities to assess the profitability of
its operations. A reconciliation of net income to operating earnings is
presented in the section titled 'Operating Earnings'.
Premiums
-------------------------------------------------------------------------
(in millions of
dollars) Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Gross premiums
written
Canada $ 179.9 $ 169.5 6% $ 299.6 $ 285.5 5%
U.S. 263.3 355.7 (26%) 600.7 719.1 (16%)
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Total $ 443.2 $ 525.2 (16%) $ 900.3 $1,004.6 (10%)
Net premiums
written
Canada $ 174.1 $ 162.7 7% $ 288.1 $ 272.5 6%
U.S. 234.0 326.7 (28%) 543.6 661.0 (18%)
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Total $ 408.1 $ 489.4 (17%) $ 831.7 $ 933.5 (11%)
Net premiums
earned
Canada $ 136.2 $ 133.2 2% $ 267.8 $ 250.9 7%
U.S. 280.1 340.8 (18%) 591.1 641.3 (8%)
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Total $ 416.3 $ 474.0 (12%) $ 858.9 $ 892.2 (4%)
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The U.S. operations reported a decrease in premiums written of $92.4
million (or 26%) during the quarter and $118.4 million (or 16%) year to
date. Lincoln General's premium volume declined by $90.7 million in the
quarter ($160.0 million year to date) compared to the same period last year
due to the impact of terminations of unprofitable programs and the soft
market conditions for the trucking business in the U.S.
As a result of the strengthening Canadian dollar, gross premiums
written for the Canadian operations increased 6% in the quarter (5% year to
date) compared to last year. In Canadian dollars, gross premiums written
from Canadian operations declined by 2% for the quarter (declined 6% year
to date) compared to last year. Canadian operations experienced a decline
of 26% in gross premiums written in the trucking line of business as fleet
operators have been reducing their cross-border operations due to the
slowing North American economy.
U.S. operations represented 59% of gross premiums written in the
quarter (67% year to date) compared with 68% in the same quarter (72% year
to date last year) last year. Non-standard automobile, trucking, and
commercial automobile premiums represented 39%, 16% and 16%, respectively,
of gross premiums written for the quarter compared with 31%, 22% and 18%
last year. Mendota writes primarily non-standard automobile insurance which
primarily accounts for the increase in the percentage of non-standard
automobile for the year to date.
Investment Income
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(in millions of
dollars) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Investment
income $ 33.6 $ 33.8 (1%) $ 71.0 $ 65.4 9%
-------------------------------------------------------------------------
Investment income has decreased by 1% in the quarter primarily due to
lower short-tem yields in Canada and the U.S., partially offset by the
impact of the stronger Canadian dollar which increases the investment
income from Canadian operations reported in U.S. dollars. Investment income
has increased by 9% for the six months to June 30 as a result of the higher
short term yields in the first quarter of 2008 compared to the first
quarter of 2007. The cost based yield on the fixed income portfolio
decreased to 4.5% compared to 4.7% for the same quarter last year,
primarily attributable to the drop in short-term yields described above.
The cost based yield represents the total interest income before expenses
divided by the average amortized cost base of fixed income securities held
in the portfolio during the period.
Net Realized Gains
The table below presents a summary of the net realized gains (losses)
for the current quarter and year to date with comparative figures:
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(in millions of
dollars) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Fixed
income $ 2.0 $ (1.8) (211%) $ 4.9 $ (1.6) (406%)
Equities 18.8 34.4 (45%) 19.4 42.0 (54%)
Capital
assets - - - - 5.4 (100%)
Impairments (9.9) (1.8) 450% (18.8) (5.9) 219%
-------------------------------------------------------------------------
Total $ 10.9 $ 30.8 (65%) $ 5.5 $ 39.9 (86%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended June 30, 2008, sales from the securities
portfolio and the write-down of securities that are considered to be other
than temporarily impaired resulted in a net realized gain of $10.9 million
($5.5 million for year to date) compared to a net realized gain of $30.8
million for the three months ended June 30, 2007 ($39.9 million for year to
date). The challenging fixed income and equity markets which began in the
third quarter of 2007 have continued into 2008 resulting in the write-down
of $9.9 million of securities in the second quarter of 2008 ($18.8 million
for year to date) compared to $1.8 million in the second quarter of 2007
($5.9 million for year to date). The net realized gain in the first half of
2007 included a $5.4 million gain on the sale of the Company's former head
office building and a gain of $17.7 million on an investment in the
Canadian portfolio which was the subject of a completed takeover.
Underwriting Results
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(in millions of
dollars) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Underwriting profit
(loss)
Canada $ (10.5) $ 5.5 (291%) $ (27.1) $ 11.4 (338%)
U.S. (18.8) (9.2) (104%) (71.3) (35.9) (99%)
-----------------------------------------------------------
Total $ (29.3) $ (3.7) 692% $ (98.4) $ (24.5) 302%
-----------------------------------------------------------
-----------------------------------------------------------
Combined ratio
Canada 107.7% 95.9% 11.8% 110.1% 95.4% 14.7%
U.S. 106.7% 102.7% 4.0% 112.0% 105.6% 6.4%
-----------------------------------------------------------
Total 107.0% 100.8% 6.2% 111.5% 102.7% 8.8%
-----------------------------------------------------------
-----------------------------------------------------------
Expense ratio
Canada 34.9% 34.6% 0.3% 36.4% 35.2% 1.2%
U.S. 34.0% 30.2% 3.8% 31.7% 28.7% 3.0%
-----------------------------------------------------------
Total 34.3% 31.5% 2.8% 33.2% 30.4% 2.8%
-----------------------------------------------------------
-----------------------------------------------------------
Loss ratio
Canada 72.8% 61.3% 11.5% 73.7% 60.2% 13.5%
U.S. 72.7% 72.5% 0.2% 80.3% 76.9% 3.4%
-----------------------------------------------------------
Total 72.7% 69.3% 3.4% 78.3% 72.3% 6.0%
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-----------------------------------------------------------
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The Canadian operations experienced estimated net unfavourable reserve
development of $4.6 million ($15.3 million year to date) or 3.4% to the
Canadian operations combined ratio for the quarter (5.7% year to date)
compared to favourable reserve development of $12.1 million for the second
quarter last year ($17.6 million year to date). The loss ratio in the
quarter was 72.8% (73.7% year to date) compared to 61.3% in Q2 (60.2% year
to date) 2007.
The U.S. operations experienced estimated unfavourable reserve
development of $2.7 million for the quarter ($50.9 million for the year to
date) compared with $10.7 in the same quarter ($55.4 million year to date)
last year. Lincoln General accounts for $6.7 million for the quarter ($59.6
million year to date) or $0.13 per share for the quarter ($1.00 per share
year to date) of this reserve development. Lincoln has been actively
terminating and repricing underperforming business as previously indicated.
Combined ratio was 160.3% for the quarter on Lincoln's terminated (run-off)
programs including unfavourable development (or 137.4% excluding
unfavourable development), compared with 99.4% on active programs (or 98.9%
excluding unfavourable development) for the quarter. The earned premium on
Lincoln's active programs was $116.7 million and $26.9 million on the
terminated programs in the second quarter of 2008.
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(in millions of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Favourable (unfavourable)
change in estimated
unpaid claims for prior
accident years (note 1):
Canada $ (4.6) $ 12.1 $ (15.3) $ 17.6
U.S. (2.7) (10.7) (50.8) (55.4)
-----------------------------------------------
Total $ (7.3) $ 1.4 $ (66.1) $ (37.8)
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As a % of net premiums
earned (note 2):
Canada 3.4% (9.1%) 5.7% (7.0%)
U.S. 1.0% 3.1% 8.6% 8.6%
-----------------------------------------------
Total 1.8% (0.3%) 7.7% 4.2%
-----------------------------------------------
As a % of unpaid claims
(note 3):
Canada 1.7% (2.2%)
U.S. 3.8% 4.9%
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Total 2.9% 1.9%
-----------------------
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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
Expenses
The overall expenses increased in the quarter due to the acquisition of
Mendota and the increased operating costs of the U.S. assigned risk
business. Higher operating costs and depreciation expense of the new Head
Office building in Canada also impacted the expenses. The general expense
ratio increased to 15.3% (15.1% year to date) compared to 11.8% (12.1% year
to date 2007) in Q2 2007 primarily due to lower premium volume at Lincoln
General.
Interest Expense
Interest expense in the second quarter of 2008 decreased to $8.9
million, compared to $9.7 million for the second quarter of 2007 as a
result of the repayment of a portion of our debt. On a year to date basis,
interest expense was $18.8 million compared to $17.9 million last year as a
result of the issuance of the C$100 million 6% debentures on July 10, 2007.
As a result of the repayment of $109.7 million of bank indebtedness, it is
anticipated that interest expense will decrease for the remaining six
months of 2008.
Income Taxes
Income taxes recovery for the second quarter was $1.0 million ($15.4
million year to date) as a result of losses recognized in the U.S.
domiciled subsidiaries and the fully taxable status of the Canadian
subsidiaries. This compares with a tax charge of $8.5 million or 17% for
the same quarter last year (recovery of $0.3 million for the first half of
last year)
Net Income (Loss) and Earnings (Loss) Per Share
Net income decreased by 85% in the second quarter to $6.3 million
(decreased 146% to a loss of $28.1 million year to date), compared to
income of $41.7 million in the second quarter of last year ($61.4 million
year to date 2007). Diluted earnings per share was $0.11 for the quarter
(diluted loss per share of $0.51 year to date), compared to diluted
earnings per share of $0.74 for the second quarter of 2007 ($1.09 year to
date 2007).
Operating Earnings
Operating earnings are calculated as net income excluding after-tax net
realized gains and losses on securities to assess the profitability of the
operations.
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(in millions of
dollars except
per share
amounts 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Net income
(loss) $ 6.3 $ 41.7 (85%) $ (28.1) $ 61.4 (146%)
Net realized
gains after
tax:
Net realized
gains before
tax 10.9 30.8 (65%) 5.5 39.9 (86%)
Tax effect on
realized
gains 4.2 9.7 (57%) 3.6 11.0 (67%)
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6.7 21.1 (68%) 1.9 28.9 (93%)
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Operating
earnings
(losses) (0.4) 20.6 (102%) (30.0) 32.5 (192%)
Average
outstanding
shares diluted
(in millions) 55.2 56.0 (1%) 55.4 56.2 (1%)
Operating
earnings
(losses)
per share (0.01) 0.37 (103%) (0.54) 0.58 (193%)
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Balance Sheet
The table below shows a review of selected categories from the balance
sheet reported in the financial statements at the end of Q2 2008 compared
to December 31, 2007.
-------------------------------------------------------------------------
As at
-------------------------------------------------------------------------
(in millions of dollars June 30, December 31, Change
except per share amounts) 2008 2007
-------------------------------------------------------------------------
Assets
Securities $ 3,015.7 $ 3,256.4 (7%)
Accounts receivable and other
assets 358.1 365.4 (2%)
Income taxes recoverable 14.4 1.3 1,008%
Future income taxes 131.5 114.1 15%
Capital assets 128.2 133.4 (4%)
Goodwill and intangible assets 113.9 116.8 (2%)
Liabilities
Bank indebtedness 157.9 172.4 (8%)
Unearned premiums 719.1 758.5 (5%)
Unpaid claims 2,228.5 2,267.1 (2%)
Senior unsecured debentures 200.8 220.1 (9%)
Shareholders' Equity 854.4 940.8 (9%)
Book value per share 15.49 16.95 (9%)
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Securities:
The fair value of the securities portfolio including cash decreased 6%
to $3.3 billion, compared to $3.5 billion as at December 31, 2007. This
decrease is primarily due to the decrease in unrealized gains on the fixed
income portfolio as yield spreads on corporate fixed income holdings have
increased. Also contributing to the drop in the securities portfolio is the
net use of cash as the Company elected to reduce its borrowings as well as
the impact of a slightly weaker Canadian dollar at the balance sheet date
on the conversion of the Canadian dollar portfolio to U.S. dollars.
The fair value of the securities portfolio including cash decreased 5%
to $59.96 per common share at June 30, 2008 compared to $63.22 at December
31, 2007.
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:
Maturity Profile:
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Canadian U.S.
Operations Operations Total
-------------------------------------------------------------------------
Due in less than one year 37.0% 13.0% 21.5%
Due in one through five years 33.4 55.3 47.6
Due in five through ten years 25.7 23.5 24.2
Due after ten years 3.9 8.2 6.7
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Total 100.0% 100.0% 100.0%
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There were net unrealized losses of $11.8 million on the total
securities portfolio or $0.21 per share outstanding at June 30, 2008 which
is included as a component of "accumulated other comprehensive income", as
compared to net unrealized gains of $34.6 million or $0.62 per share
outstanding at December 31, 2007. Net unrealized losses on the common share
portfolio were $15.3 million or $0.28 per share outstanding at June 30,
2008 compared to net unrealized gains of $16.0 million or $0.29 per share
outstanding at December 31, 2007.
For a quantitative analysis of the impact to the fair value to the
fixed income portfolio of a change in interest rates see Note 6 to the
financial statements.
As at June 30, 2008 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 $2.7 million to the sub-prime mortgage market in the U.S.
through home equity loan asset backed securities. As at June 30, 2008,
these securities had an aggregate net unrealized loss of $0.4 million.
For a quantitative analysis of the credit exposure of the Company from
its securities in fixed income securities and term deposits by rating as
assigned by S&P or Moody's Investor Services see Note 6 to the financial
statements.
Accounts receivable and other assets:
Accounts receivable and other assets decreased by 2% to $358.1 million,
primarily as a result of the settlement of reinsurance receivables.
Income taxes recoverable:
Income taxes recoverable increased as a result of the recording of the
Canadian operations tax loss carry back in 2008.
Future income taxes:
Future income taxes increased due to tax losses recognized by the U.S.
operations which can be utilized in future periods up to twenty years.
Capital assets:
Capital assets decreased by 4% since the end of last year.
Goodwill and intangible assets:
Goodwill and intangible assets decreased by 2% since the end of last
year due to the amortization of definite life intangible assets in certain
of our U.S. subsidiaries.
Bank indebtedness:
Bank indebtedness decreased from $172.4 million at December 31, 2007 to
$157.9 million. During the first half of the year the Company repaid
approximately $12.5 million of outstanding debt under its credit
facilities.
Subsequent to quarter end, the Company repaid $109.7 million of bank
indebtedness utilizing the surplus capital resources held in its
reinsurance subsidiaries.
Bank indebtedness is subject to compliance with financial covenants and
other provisions of the credit agreement. For the remaining $48.8 million
of bank indebtedness due December 20, 2008, the Company has obtained a
waiver to September 30, 2008 from lender over non-compliance with certain
covenants. The Company is in the process of renegotiating the terms and
covenants of the bank indebtedness.
Unearned premiums:
Unearned premiums decreased 5% since December 31, 2007 as a result of
decreased premium volume.
Unpaid claims:
The following table presents a summary of the provision for unpaid
claims by line of business:
-------------------------------------------------------------------------
(in millions of dollars)
-------------------------------------------------------------------------
June 30, December 31,
Line of Business 2008 2007
-------------------------------------------------------------------------
Non - Standard Automobile $ 561.0 $ 575.2
Standard Automobile 140.5 144.5
Commercial Automobile 235.3 239.2
Trucking 790.2 811.6
Motorcycle 134.3 126.8
Property & Liability 296.1 303.3
Other 71.1 66.5
-------------------------------------------------------------------------
Total $ 2,228.5 $ 2,267.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The provisions for unpaid claims decreased by 2% to $2.23 billion at
the end of the second quarter compared to $2.27 billion at the end of 2007.
At June 30, 2008 the provision for unpaid claims comprised case reserves
for individual claims was unchanged from $1.31 billion ($1.31 billion at
December 31, 2007) and a provision for Incurred But Not Reported (IBNR)
claims which decreased 4% to $918.6 million ($952.8 million at December 31,
2007). IBNR at Lincoln General now represents $1.01 for every $1 of case
reserves recorded.
Senior unsecured debentures:
On July 10, 2007 the Company through its newly formed wholly-owned
subsidiary Kingsway 2007 General Partnership issued C$100 million 6% senior
unsecured debentures with a maturity date of July 11, 2012.
Book value per share:
Book value per share decreased by 9% to $15.49 at June 30, 2008 from
$16.95 at December 31, 2007 as a result of the diluted loss per share of
$0.51 and the decline of $0.84 in the "accumulated other comprehensive
income" component of shareholders' equity.
Contractual Obligations
Information concerning contractual obligations as at June 30, 2008 is
shown in Note 6 of the financial statements. For further details on the
Company's long term debt and interest obligations, refer to Note 10 - Bank
Indebtedness of the accompanying financial statements and Note 15 of the
Company's 2007 audited consolidated financial statements and pages 39 to 43
of the 2007 Annual Report which sets out the Company's contractual
obligations as at December 31, 2007.
Liquidity and Capital Resources
During the three and six months ended June 30, 2008, the cash used in
operating activities was $14.5 million and $78.7 million respectively, as a
result of reduced premium volume and an acceleration of claims payments.
The Company believes that the cash generated from the operating activities
will be sufficient to meet its ongoing cash requirements, including
interest payment obligations and dividend payments.
During the six months ended June 30, 2008, the Company repurchased
368,200 common shares under the normal course issuer bid for a total
purchase price of $4.4 million at an average price of $11.87 (Cdn $11.93).
As at June 30, 2008 the Company's subsidiaries were adequately
capitalized to support their premium volume. For a more detailed discussion
of the capital adequacy of the Companies insurance and reinsurance
subsidiaries see Note 7 to the financial statements.
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 15(d) of the 2007
audited consolidated financial statements and page 42 of the 2007 Annual
Report. The Company has one other off-balance sheet financing arrangement
as described on page 43 of the 2007 Annual Report.
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
publically-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. While the
Company has begun assessing the adoption of IFRS for 2011, the financial
reporting impact of the transition to IFRS cannot be reasonably estimated
at this time.
Summary of Quarterly Results
The following table presents the financial results over the previous
eight quarters.
-------------------------------------------------------------------------
2008 2007 2006
-------------------------------------------------------------------------
(in
millions
of
dollars
except
per
share) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross
premiums
written $443.2 $457.1 $449.0 $509.1 $525.2 $479.4 $409.1 $483.9
Net
premiums
earned 416.3 442.6 464.5 485.3 474.0 418.2 425.0 458.3
Total
revenue 460.8 474.5 510.1 528.1 538.6 458.9 466.6 498.2
Net
income
(loss) 6.3 (34.4) (103.5) 23.6 41.7 19.6 16.8 37.4
-------------------------------------------------------------------------
Earnings (loss) per share
Basic 0.11 (0.62) (1.86) 0.43 0.75 0.35 0.30 0.67
Diluted 0.11 (0.62) (1.84) 0.42 0.74 0.35 0.30 0.66
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary Financial Information
Financial Strength Indicators:
Some of the key indicators of the Company's financial strength are as
follows:
June 30, December 31,
2008 2007
----------------------------------
Rolling four quarter calculations:
Net premiums written to estimated
statutory surplus ratio 1.6x 1.6x
Interest coverage ratio n/a 0.9x
Total bank and senior debt to
capitalization ratio(x) 31.2% 31.0%
(x) The Company's repayment of $109.7 million of bank indebtedness
subsequent to the balance sheet date has reduced this ratio to
approximately 25.5%.
Selected Financial Information expressed in Cdn. dollars, except for per
share amounts
The selected financial information disclosed below has been translated
using the Bank of Canada monthly average exchange rate for the income
statement and the month end rate for the balance sheet. Readers should be
cautioned as to the limited usefulness of the selected financial
information presented below.
-------------------------------------------------------------------------
(in millions of dollars Quarter to June 30: 6 months to June 30:
except per share amount) 2008 2007 2008 2007
-------------------------------------------------------------------------
Gross premiums written $ 447.5 $ 576.6 $ 906.5 $ 1,138.1
Net premiums earned 420.3 520.4 864.8 1,010.4
Net income 6.1 45.3 (28.3) 68.3
Earnings per share
- diluted 0.11 0.81 (0.51) 1.22
Underwriting profit (loss) (29.7) (4.2) (98.9) (28.4)
Book value per share 15.80 18.93
-------------------------------------------------------------------------
Outlook
The Company's 2007 Annual Report includes description and analysis of
the key factors and events that could impact future earnings under the
heading Risks Factors in the Management's Discussion and Analysis section.
These factors and events have, for the most part, remained substantially
unchanged.
Disclosure Controls and Procedures
Management of the Company is responsible for establishing and
maintaining disclosure controls and procedures for the Company as defined
under Multilateral 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 annual filings are
being prepared.
Internal Controls over Financial Reporting
Management of the Company is responsible for designing internal
controls over financial reporting for the Company as defined under
Multilateral 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 their 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.
Forward Looking Statements
--------------------------
This press release (including the Management's Discussion and Analysis)
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 2007 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 http://www.sedar.com, and on
the EDGAR section of the U.S. Securities and Exchange Commission's website
at http://www.sec.gov or through the Company's website at
http://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.
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of U.S. dollars, except for per share amounts)
-------------------------------------------------------------------------
(Unaudited) Quarter to June 30: 6 months to June 30:
2008 2007 2008 2007
-------------------------------------------------------------------------
Gross premiums written $ 443,234 $ 525,245 $ 900,334 $1,004,599
-------------------------------------------------------------------------
Net premiums written $ 408,066 $ 489,356 $ 831,672 $ 933,477
-------------------------------------------------------------------------
Revenue:
Net premiums earned $ 416,249 $ 474,042 $ 858,864 $ 892,231
Investment income 33,599 33,815 70,976 65,371
Net realized gains 10,946 30,754 5,469 39,870
-------------------------------------------------------------------------
460,794 538,611 935,309 997,472
-------------------------------------------------------------------------
Expenses:
Claims incurred $ 302,741 $ 328,652 $ 672,169 $ 644,706
Commissions and
premiums taxes 78,887 92,978 155,747 164,142
General and
administrative expenses 63,900 56,162 129,315 107,841
Interest expense 8,872 9,731 18,788 17,950
Amortization of
intangibles 1,059 876 2,770 1,752
-------------------------------------------------------------------------
455,459 488,399 978,789 936,391
-------------------------------------------------------------------------
Income (loss) before
income taxes 5,335 50,212 (43,480) 61,081
Income taxes (recovery) (986) 8,496 (15,402) (276)
-------------------------------------------------------------------------
Net income (loss) $ 6,321 $ 41,716 $ (28,078) $ 61,357
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
per share:
Basic: $ 0.11 $ 0.75 $ (0.51) $ 1.10
Diluted: $ 0.11 $ 0.74 $ (0.51) $ 1.09
Weighted average shares
outstanding (in '000s):
Basic: 55,159 55,620 55,284 55,709
Diluted: 55,231 56,016 55,357 56,193
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
June 30 December 31
2008 2007
(unaudited)
-------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 188,548 $ 161,635
Securities 3,015,745 3,256,365
Accrued investment income 28,387 33,186
Financed premiums 102,900 91,851
Accounts receivable and other assets 358,062 365,410
Due from reinsurers and other insurers 202,799 207,137
Deferred policy acquisition costs 166,202 176,202
Income taxes recoverable 14,421 1,348
Future income taxes 131,533 114,066
Capital assets 128,225 133,431
Goodwill and intangible assets 113,934 116,774
-------------------------------------------------------------------------
$4,450,756 $4,657,405
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Bank indebtedness $ 157,918 $ 172,436
Loans payable 66,222 66,222
Accounts payable and accrued liabilities 136,481 144,940
Unearned premiums 719,072 758,490
Unpaid claims 2,228,469 2,267,082
Senior unsecured debentures 200,785 220,080
Subordinated indebtedness 87,368 87,354
-------------------------------------------------------------------------
3,596,315 3,716,604
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 323,102 326,151
Issued and outstanding number of
common shares
55,158,528 - June 30, 2008
55,515,728 - December 31, 2007
Contributed surplus 8,287 7,619
Retained earnings 483,598 521,165
Accumulated other comprehensive income 39,454 85,866
-------------------------------------------------------------------------
854,441 940,801
-------------------------------------------------------------------------
$4,450,756 $4,657,405
-------------------------------------------------------------------------
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Share capital
Balance at beginning
of period $ 323,530 $ 326,430 $ 326,151 $ 328,473
Issued during the period - 769 48 1,047
Repurchased for
cancellation (428) - (3,097) (2,321)
-------------------------------------------------------------------------
Balance at end of period 323,102 327,199 323,102 327,199
-------------------------------------------------------------------------
Contributed surplus
Balance at beginning
of period $ 7,647 $ 5,571 $ 7,619 $ 5,352
Stock option expense 640 573 668 792
-------------------------------------------------------------------------
Balance at end of period 8,287 6,144 8,287 6,144
-------------------------------------------------------------------------
Retained earnings
Balance at beginning
of period $ 481,506 $ 572,452 $ 521,165 $ 560,126
Net income (loss) for
the period 6,321 41,716 (28,078) 61,357
Common share dividends (4,069) (3,917) (8,208) (7,491)
Repurchase of shares for
cancellation (160) - (1,281) (3,741)
-------------------------------------------------------------------------
Balance at end of period 483,598 610,251 483,598 610,251
-------------------------------------------------------------------------
Accumulated other
comprehensive income
Balance at beginning of
period $ 81,265 $ 35,048 $ 85,866 $ 7,011
Cumulative effect of
adopting new accounting
policies - - - 17,672
Other comprehensive
income (loss) (41,811) 9,827 (46,412) 20,192
-------------------------------------------------------------------------
Balance at end of period 39,454 44,875 39,454 44,875
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total shareholders'
equity at end of period $ 854,441 $ 988,469 $ 854,441 $ 988,469
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Comprehensive income
Net income (loss) $ 6,321 $ 41,716 $ (28,078) $ 61,357
Other comprehensive
income, net of taxes:
- Change in unrealized
gains (losses) on
available-for securities:
Unrealized gains
arising during the
period, net of
income taxes(1) (44,433) (7,865) (31,962) (3,907)
Recognition of
realized gains
to net income,
net of income
taxes(2) (1,399) (12,364) (4,265) (9,251)
- Unrealized gains
(losses) on
translating financial
statement of
self-sustaining
foreign operations 4,021 30,056 (10,185) 33,350
-------------------------------------------------------------------------
Other comprehensive
income (loss) (41,811) 9,827 (46,412) 20,192
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive income $ (35,490) $ 51,543 $ (74,490) $ 81,549
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of income tax of $(6,281) for the quarter to June 30,
2008($(6,995) for Year to date) and $(3,103) for the quarter to
June 30, 2007 ($1,093) for year to date).
(2) Net of income tax of $(1,219) for the quarter to June 30, 2008
($(2,724) for year to date) and $(6,398) for the quarter to June 30,
2007 ($(3,722) for year to date).
KINGSWAY FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
Quarter to June 30: 6 months to June 30:
-------------------------------------------------------------------------
(Unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income $ 6,321 $ 41,716 $ (28,078) $ 61,357
Items not affecting cash:
Amortization 6,308 3,533 11,239 6,432
Future and current
income taxes (949) 2,332 (7,149) (14,759)
Net realized gains (10,946) (30,754) (5,469) (39,870)
Amortization of bond
premiums and discounts (1,562) (1,417) (4,032) (3,412)
Net change in other
non-cash balances (13,647) 67,009 (45,189) 44,572
-------------------------------------------------------------------------
(14,475) 82,419 (78,678) 54,320
-------------------------------------------------------------------------
Cash flows from financing
activities
Increase in share capital - 769 48 1,047
Repurchase of common
shares for cancellation (588) - (4,378) (6,062)
Dividends paid (4,069) (3,917) (8,208) (7,491)
Increase (decrease) in
bank indebtedness and
loans payable (4,628) (7) (15,283) 106,944
Decrease in senior
unsecured indebtedness (228) - (17,517) -
-------------------------------------------------------------------------
(9,513) (3,155) (45,338) 94,438
-------------------------------------------------------------------------
Investing activities
Purchase of securities (872,409) (1,199,988) (1,592,080) (2,190,614)
Proceeds from sale of
securities 958,539 1,130,102 1,759,812 2,101,411
Financed premiums
receivable, net (16,409) (10,896) (13,253) (7,595)
Acquisitions, net of cash
acquired - (26,823) (212) (40,683)
Net change to capital
assets (1,864) (14,752) (3,338) (14,827)
-------------------------------------------------------------------------
67,857 (122,357) 150,929 (152,308)
-------------------------------------------------------------------------
Net change in cash and
cash equivalents 43,869 (43,093) 26,913 (3,550)
Cash and cash equivalents
at beginning of period 144,679 169,249 161,635 129,706
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 188,548 $ 126,156 $ 188,548 $ 126,156
-------------------------------------------------------------------------
-------------------------------------------------------------------------
KINGSWAY FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2008 and 2007
(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 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, 2007 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, 2007 as set out on pages 63 to 85 of the
Company's 2007 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
On January 1, 2008, the Company adopted CICA Handbook Section 1535
Accounting Changes - Capital Disclosures, Section 3862 Financial
Instruments - Disclosures and Section 3863 Financial Instruments -
Presentation.
Handbook Section 1535 requires the following disclosures: (i)
qualitative information about an entity's objectives, policies and
processes for managing capital; (ii) quantitative data about what the
entity manages as capital; (iii) whether the entity has complied with any
externally imposed capital requirements; and (iv) if it has not complied,
the consequences of such non- compliance. See Note 7 for additional
details.
Handbook Sections 3862 and 3863 replace Handbook Section 3861,
Financial Instruments - Disclosure and Presentation, revising and enhancing
its disclosure requirements but not changing the existing presentation
requirements for financial instruments. These new sections place increased
emphasis on disclosures about the nature and extent of risks arising from
financial instruments and how the entity manages those risks. Handbook
Section 3862 requires qualitative and quantitative disclosure of: (i)
exposures to risks arising from financial instruments, how they arose and
the potential impact on the amount, timing and certainty of future cash
flows; (ii) information about the risk management function and the
reporting and measurement systems used; (iii) the entity's policies for
hedging or mitigating risk and avoiding concentrations of risk; and (iv)
the sensitivity to individual market risk factors together with the
methodology for performing the analysis. Handbook Section 3863 deals with
the classification of financial instruments, from the perspective of the
issuer, between liabilities and equity, the classification of related
interest, dividends, losses and gains, and the circumstances in which
financial assets and financial liabilities are offset. See Note 6 for
additional details.
NOTE 3 Stock-based Compensation
As reported on pages 74 - 75 of the Company's 2007 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. During the second quarter
2008, the Company recorded $640,000 ($668,000 year to date) of stock-based
compensation expense included in employee compensation expense.
Per share weighted average fair value of options granted during 2008
was C$2.88 in February and C$2.43 in May. Per share weighted average fair
value of options granted during 2007 was C$5.34 February and C$2.38 in
December. 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 June 30:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Risk-free interest rate 3.22% 4.11%
Dividend yield 2.23% 1.30%
Volatility of the expected market price of the
Company's common shares 27.8% 25.2%
Expected option life (in years) 4.0 3.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
NOTE 4 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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