Penn Warranty Parent Reports Extended Warranty Service Fee Decrease

Breakeven results for Itasca, Illinois-based Kingsway Financial Services in Q2 2020

Posted by Craig Randall

August 13, 2020

Kingsway Financial Services Inc. filed its quarterly report on Form 10-Q for the three and six months ended June 30, 2020, which includes the following highlights:

 • For the three months ended June 30, 2020, operating income was essentially breakeven, compared to an operating loss of $0.8 million for the same period in 2019;

 • GAAP net loss was $1.4 million for the three months ended June 30, 2020 compared to a GAAP net loss of $0.4 million for the same period in 2019; Non-GAAP adjusted loss improved to $0.5 million (inclusive of $0.3 million tax benefit) for the three months ended June 30, 2020 compared to a Non-GAAP adjusted loss of $1.8 million (inclusive of $0.2 million tax expense) for the same period in 2019; and

 • Net cash used in operating activities improved to $1.0 million for the six months ended June 30, 2020 compared to $2.5 million for the same period in 2019.

The near-term impacts of COVID-19 are primarily with respect to our Extended Warranty segment. As consumer spending has been impacted, including a decline in the purchase of new and used vehicles, and many businesses through which we distribute our products remain closed, we have seen cash flows being affected by a reduction in new warranty sales for vehicle service agreements. With respect to homeowner warranties, we have seen a reduction in new enrollments in our home warranty programs associated with the impact of COVID-19 on new home sales in the United States.

Non-GAAP Adjusted Loss

Non-GAAP adjusted loss improved to $0.5 million for the three months ended June 30, 2020 compared to a Non-GAAP adjusted loss of $1.8 million for the same period in 2019, primarily due to improvements realized in our Extended Warranty segment and cost-cutting initiatives.

Total holding company expenses decreased by $0.5 million for the three months ended June 30, 2020 compared to the same period in 2019. However, excluding the impacts of redomestication expenses, litigation expenses, acquisition and disposition related expenses, employee termination and recruiting expenses, stock-based compensation expense and extraordinary audit and audit-related expenses, total holding company expenses would have been $0.6 million lower than 2019.

Extended Warranty

The Extended Warranty service fee and commission income decreased 11.9% (or $1.4 million) to $10.4 million for the three months ended June 30, 2020 compared with $11.8 million for the three months ended June 30, 2019. The decrease in service fee and commission income was primarily due to a $1.2 million decrease at Trinity, driven by reduced revenues in its equipment breakdown and maintenance support services due to the loss of a major customer and impacts from the COVID-19 pandemic, which was partially offset by an increase in its extended warranty services product. Slight declines in PWSC and IWS revenues were essentially offset by a slight increase in Geminus revenue.

The Extended Warranty operating income was $1.3 million for the three months ended June 30, 2020 compared with $1.0 million for the three months ended June 30, 2019. The increase in operating income is primarily due to the following:

 • A $0.3 million increase at Geminus for the three months ended June 30, 2020 to $0.5 million, primarily due to increased revenues and lower operating expenses;

 • A $0.1 million increase at PWSC to $0.2 million, as a slight reduction in revenue was more than offset by a decrease in operating expenses; and

 • A $0.3 million decrease at Trinity to $0.2 million for the three months ended June 30, 2020, driven by reduced revenues in its equipment breakdown and maintenance support services, partially offset by a related decrease in cost of services sold, operating expenses and increased margin on the extended warranty services product.

IWS' operating income remained flat at $0.3 million as a slight reduction in revenues was offset by operating expense reductions.

Extended Warranty Non-GAAP adjusted EBITDA increased by $0.2 million to $1.5 million for the three months ended June 30, 2020, compared with $1.3 million for the same period in 2019, primarily due to the increase in Extended Warranty operating income as explained above.

Leased Real Estate

Leased Real Estate rental income was, as expected, flat year-over-year with $3.3 million for the quarters ended June 30, 2020 and 2019. Leased Real Estate operating income was $0.8 million for the quarters ended June 30, 2020 and 2019. The rental income is derived from CMC's long-term triple net lease.

About the Company

Kingsway is a holding company that owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries. The common shares of Kingsway are listed on the New York Stock Exchange under the trading symbol "KFS."