Kingsway Financial Services Inc. (KFS) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to Kingsway Financial Investor Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to a representative of the company. Please proceed.

Thank you. Good morning everyone. On this call, Kingsway may make forward-looking statements regarding the company, its subsidiaries, and businesses. This conference call may include 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 and are not historical fact and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as expects, believes, anticipates, intends, estimates, seeks, and variations and similar words and expression are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance but reflect Kingsway's management's current belief based on information currently available. A number of factors could cause actual events, performance, or results to differ materially from the events, performance, and results discussed in these forward-looking statements, right. Information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the section entitled "Risk Factors" in the company's 2016 Annual Report on Form 10-K. Except as expressly required by applicable securities law 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. With that, I would now like to turn the call over to Mr. Larry Swets, Chief Executive Officer of Kingsway. Please go ahead, Larry.

Thank you, Adam. I'm not sure; I could have gotten through all that, so appreciate that. Hello everyone thanks for joining. As Adam said, I'm Larry; I also have with me JT Fitzgerald, who is our President and COO; and Bill Hickey, our CFO. For those of you that know us well would guess that this is going to be much more of a dialogue, sorry a conversation than a dialogue or traditional conference call. At our Investor Day last November, we had talked about wanting to get in front of you twice a year to just give updates on the business and how we're thinking about the business and looking forward. And this is an attempt to do that. We thought we would try this, a different format as a call to maybe widen broaden the tent for those that couldn't make the actual in-person visit. We still intend to do an in-person Investor Day much like last year, we're targeting November again. So on the outset let everyone know that this is not a traditional quarterly earnings call. We would not expect to do this every quarter. In fact we don't intend to go through the quarter in meaningful detail. I would encourage you if you have specific questions regarding the quarterly report as many of you often do get a hold of Bill Hickey and he will walk you through to your content, your understanding of the financials, if you have not contacted him in the past, you can get a hold of him through Adam Prior. And I'm sure you'll be pleased with the explanations and understanding you will get from that. I will however use one of the tables out in the press release and in the Investor Presentation, I believe in Slide 6 called the adjusted operating income or loss table just as a way to kind of bridge how we think about the business and just use the quarter. We just reported as kind of a reference point so that you can get an understanding of how we think about the health and direction of the business rather than looking at the traditional income statement presentation. So after I do that, we'll turn it over to JT to go through a progress report and the operating business initiatives that we outlined last November and we will leave plenty of time for questions-and-answers because that is where we think the real opportunity happens, you get to ask us the questions and hear how we think about things. All right, let’s get started, with our annual letter, if you haven't started there that's where you should start to understand and think about how Kingsway is organized and how we run the business. You'll know from that that we focus on capital allocation here at the kind of holding company level. And when we think about capital allocation we think about our portfolio in allocating to either businesses that we own or passive investments that we make. And that is the kind of the number one responsibility of senior management is making sure that those capital allocation decisions over the long-term will deliver the results that we look to produce for you. And that we call it the value building philosophy and I think it's Slide 4, where we talk about focus on long-term, looking for asymmetric risk reward, margin of safety private market values those things guide and direct us in all of that capital allocation activity. Passive investments are what they are it's pretty self-explanatory and businesses owned however we think about trying to be good owners of businesses right now we have an insurance business couple warrantee businesses and a lease real estate. And with those, we have historically been good buyers and sellers and not very good owners and we look to change that with the addition of JT and I hope you'll find after hearing his update that that was a very good decision on the company's part. As we look at the businesses we see significant improvement in the operating metrics and that's new for us. Like I said, we've been good buyers and sellers and owners had something to do you desired. So the adjusted operating income or loss statement on page 6 was a way of trying to organize the income statement in a way that breaks out the businesses owned and investment results. So they could specifically look at those outside of all the other goings that happens in our financials. And the goal of our portfolio businesses owned and passive investments is to deliver enough results to cover the operating expenses and adjusted interest expenses and compound capital over time. And so you can see from this presentation that we've got those line items broken out and then of course foots back to the net income or loss number in the traditional format and so we're looking at that segment operating income or loss line item on a quarter-over-quarter or year-over-year basis in order to look at the health of the businesses owned. And then those kind of businesses, we're looking for kind of your traditional growth, profitable growth, constant progress, and occasionally there would be a number in there on a quarter or a year, year-over-year comparison that needs some explaining because we've made a one-time payment to clean out a liability or there's some prior period reserve adjustment for example in the insurance business, but more often than not those are pretty good comparisons to make and that gives us the direction that's the first number I'd look at in our financial statements is to look at the year-over-year, quarter-over-quarter results of the operating segment. The net investment income and the net realized gains and losses that's coming from the investment portfolio, and although we have a fair amount of steady predictable income, we also as you know have meaningful investments in things like Limbach and CIH 1347 property and those are subject to the Mr. Market and quarter-over-quarter, we can't predict how those are going to get treated. And unfortunately they show up into the income statement as if that was a business owned for example, it's the same kind of income or loss generally speaking, I mean different line item, but it's so all disclosed in. And when we look at let's just see Limbach for example, there was approximately $2 million loss in the quarter related to the mark-to-market at Limbach. We do not believe that Limbach's intrinsic value changed by that much. In fact I would make the argument that its intrinsic values increased over the last few quarters and yet we produced a result based on the quarter ending stock price that flow-through a bunch in mechanics and ends up in our financial statements. So we would look at that number over a much longer period of time and I think if you add it up the last 18 quarters, you'll find that that number is in excess of $45 million. So quarter-over-quarter, year over-year not, not very helpful to look at that because in quarters past you will have very large numbers from Limbach's rising stock price and then in this quarter, you see a reversal of that. If you take out the Limbach's mark-to-market loss and even including $1 million impairment on one particular investment, you still have a positive investor return for the quarter and one that we would be very comfortable with. And so I don't want to say I ignore the mark-to-markets because they're there and but we really look down to the private market value as we describe in the value building philosophy. So there's a couple of other things again as you will see I'll call it below the line below adjusted operating income things like income tax expense. I think there's a million dollars of income tax expense in this quarter related to purchase accounting adjustments and for those that know the company well we have a meaningful net operating loss and we do not expect to pay Federal income tax any time in the near future unless there is some change in laws or situation with regards to our Section 382. And so we are recording an expense that your management team doesn't ever believe will pay and so again we don't, I don't say we don't pay attention to it but we don't -- we don't let that interfere with our view of the health of the business. And there are several other of those kind of events that happen in our financial statements and that's why we really focus on the segment operating income and below down to the adjusted operating. It helps us be clear in kind of the economic picture of the company rather than the accounting picture. I think that's it from my side. I'm going to turn it over to JT. JT, if you want to talk us about the initiatives from last November.

Yes, sure, thanks Larry. Good morning everyone. As Larry mentioned, we thought it was a good time to provide our owners with a mid-year update on the progress we're making on the strategic initiatives and improvement priorities that we outlined last November at our Investor Day here in Chicago. So let's just jump in and start with our Insurance Underwriting segment. In short, Steve Harrison and his team have been incredibly busy at Mendota with what I describe as essentially a wholesale turnaround. We will walk through the handful of priorities we outlined. The first one was a software implementation and process reorganization and I'm happy to report that we're more than halfway through a comprehensive software implementation which once complete is going to allow us to migrate the Mendota business off of multiple legacy software systems and hardware infrastructure to a single cloud based platform for policy billing and claims. We're targeting a Q1 2018 completion, it's a big job. But things are going well which you can almost never say about a software implementation. We have undergone a process audit and billing change which has resulted in a greater than 35% reduction in bad debt expense year-to-date essentially eliminating negative equity in our policies. And finally, software modifications in the coding to our existing Green Screen legacy systems have increased our fee income per policy by 8% so far. And we're beginning to move back in line with industry averages on fee income. I will add that additional rate action and the capabilities that are embedded in the new software platform will allow us to further improve policy fee income in the months ahead. The second priority, we discussed was a reorganization of our claims department. Steve and his team have undertaken an overhaul of the entire claims organization, centralizing claims operations in a new facility in Nashville, Tennessee, which will give us access to higher caliber claims talent in the non-standard auto space. Also an increased focus on claims productivity has led to 13% reduction in our outstanding claims inventory and additionally the claims group has increased their focus on payment accuracy and reducing cycle times with real demonstrated progress on all fronts. We've outsourced our first notice of loss function and the subrogation function with the latter generating over 13% improvement in several recoveries, and an intense focus on improving our salvage returns to generate an increase in average net return per vehicle by over 50% per year, so doing well on that priority. The third initiative we discussed was additional rate taking with the idea that the non-standard auto market and private passenger in general was in a hard market and that we would want to follow the industry with additional rate. We've taken rate increases in our key markets and we've seen increase in premium per exposure of roughly 9% year-to-date. We will continue to monitor the market and our competitors and make sure that we're keeping up with the industry. We had a lot of other activities. No stone goes unturned in a comprehensive turnaround, we've got a lot of things underway, and all of the indicators give us reason to be optimistic about the 2017 accident year and the future prospects for the business, so more to report in the coming months. We'll switch over now to the appropriately renamed Extended Warranty segment what we used to call insurance services but after the sale of ARS, we renamed to the Extended Warranty segment. I think the presentation and the numbers therein speak largely for themselves. We're about 12 to 18 months into the turnaround that we started there. But we'll start with Trinity. We've achieved our goal at Trinity of growing the higher margin business and Peter Dikeos and his team have delivered impressive sales growth, improving margins, and strong operating earnings in the year-to-date period. At IWS, Eric Wikander and his team have posted solid gains in service contracts sold. Their focus on ongoing penetration of the credit union channels resulted in high earned revenues and solid operating profits. And of additional note, IWS now provides over $25 million of additional investable float that we are now investing. In summary, we're pleased with the progress we're making with our business in the warranty segment. Year-to-date operating income of roughly $1.250 million compares to roughly breakeven on an adjusted basis last year. And finally, we continue to search for strategic acquisition opportunities in the warranty industry. We're pleased to share that we're currently working on a deal that we have under an exclusive letter of intent not large by most objective standards a target represents a great addition to our portfolio of what we view to be a favourable valuation platform in the home warranty sector. I probably can't say much more than that but we're making meaningful progress on the deal and hopefully more to come on that topic. And that's all about -- that's about all I have on the operating segments. I guess I'll turn it back to you Larry for a Q&A Session.

Yes great. Before we jump into Q&A, I just want to point out as JT mentioned the LOI. We've not acquired a business that 100% owned business in some time, some of that had to do with our confidence of being able to own something and grow it profitably. And I think with the update that he just gave on the initiatives that we've seen in place and working in the warranty business for well over a year and now meaningful progress in the insurance business that we've just got more confidence in being able to buy on the M&A side and own for the long-term something that's profitable free cash flowing and producing opportunities for us to allocate capital with hopefully same kind of results that we've had in the past. So with that, let’s open it up for questions and --

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions]. Our first question comes from Gary Ribe with MACRO Consulting. Please proceed with your question.

I just had a couple kind of higher level questions looks like you guys are doing a good job with warranty and everything else. I guess I was just curious on the non-standard auto stuff, I think you guys had $60 million of capital in there; is that 15% to 20% ROE -- return on longer-term return you guys are targeting, is that -- I would assume that applies to that capital outside of the non-standard auto?

We've got about --

Yes.

I'm sorry we've got about $40 million of statutory capital invested in the business GAAP a little higher probably with some historical intangible or goodwill value in it. And obviously has a large investment portfolio right. So when we think about that business from an owner perspective, we would like long-term to have the insurance underwriting results produce something close to 10%. It is not today but I think I'll let JT to tell you whether or not he thinks that's in the near-term or longer-term. But we also have the investment float, right. And so if you look at the company's historical performance it's been quite bad on an underwriting perspective and yet the capital of the company is maintained at about the same value because of the investment results. And so we've always said if we could just even breakeven so we have the potential to generate 15% returns because of the leverage that we have from the investment portfolio. Now, if we can and we should be able to add returns from the underwriting side, that's when we can hit that target or do better. But I'll let JT give you his view on underwriting return objectives on the capital.

Gary, the first objective is to make an underwriting return right. We think we're making the necessary changes in order to deliver an underwriting profit that someday we might see in the mid-90s combined ratio. So if you think about it in the following way that we write -- we would write it roughly two times premium to statutory surplus and deliver say a 96 combined you could get an 8% return on equity just from the underwriting. Add to that the investment returns multiplied by the investment leverage. So in a perfect world, the target of 15% return on capital in the Underwriting segment would be a good target. It's a low return environment right, so you don't get a lot of juice from the investment portfolio, Larry is very good it at squeezing those much out of that as he can but we have to be mindful of the low return environment we live in.

Great, that makes a lot of sense. I mean you guys see that as a multi-year project to kind of get to that point?

Yes, I do right; I mean I think that all of our leading indicators are giving us confidence that we're seeing meaningful improvements but we're still working off the tail of 2016 and prior. You see that in some of the adverse development in the quarter. We made a small change to the way that we're doing our actuarial work, did a roll forward with 2016 and prior, at mid-year also so that we don't have large year-end surprises. And actuarial modeling doesn't do well with large change thrown into their rear facing models, but we have strong indications from all of our internal metrics that we're making meaningful progress and while it is probably a multi-year turnaround, we think we've come a long way already.

Terrific. And I will just ask one about CMC and then I will let other people ask questions. You guys I don’t know if you get nearly enough any credit for how good that deal is. What is if you guys have a good strong pipeline of stuff that you're looking at and I know Larry had talked I don't know it was at the Investor Day or some other time about various options for monetizing that to do some other things and kind of where you were thinking around that stuff?

Yes, great question, and Gary I said this before you probably understand the transaction as well as anybody through your diligent efforts of reading it and understanding the accounting on it and I appreciate the comment that we might not get as much due for that. But it is a great investment and we're very focused on looking for the right liquidity option there, it's going to do well just sitting back and that's an easy one to own, you just collect the check from Berkshire's subsidiary being a SAP. But there's going to be the right time and place for us to monetize that and so we're constantly thinking about that, how can we redeploy because really the value ad there was the structure in the purchase right. Now we were able with our partners to get a significant amount of increased rent $25 million that's probably 17 years in a negotiation with being a SAP by providing them with purchase option. And so from that, we've got to figure out really there's nothing more to do there right other than sit back and collect the rent check is to find the right way to monetize that and work with our partners and kind of determine the right time. There's -- and I don't want to get into the tax complications of when selling the assets versus selling the company stock that owns it et cetera but it's not a straightforward is hit a bit on it right. So what we're constantly thinking about that. And so the way we think about that just to give you others who maybe don't have the same insight that Gary has on this is that we think about it as a present value the future cash flows obviously from that stream and it goes through our agreement with our partners that's fairly complicated where you can read it and kind of schedule it out yourself and what's the right discount rate for cash flow SAP from being a SAP, their bonds might have a very low interest rate on it. And this is a general credit of that company. And so we think about when will someone give us something near that number, so that we can redeploy it because we're just collecting cash at a 3% or 4% discount rate that's not very interesting to us. If we could find a way to monetize it and redeploy it, we will do that.

You reported big slug of cash, could you redeploy it even kind of like larger arrangement is that a hindrance at this point or no?

Well in the real estate side specifically finding a CMC is -- I don't want to say it's once in a lifetime because I hope to do three or four of these. But they're very but spoke very one-off but having capital helps right and we were able to in this situation bring our tax attributes and our ability to structure, instead of capital when we put very little capital into it and that's our preferred approach is to put as little capital in as possible. But there are others -- other transactions that are maybe less kind of eye-popping returns but nonetheless very meaningful returns where we can use our tax attributes if we had capital. So, yes, capital gives us flexibility. So that outside of the CMCs and we're constantly on the hunt for another opportunity like that. We've got an individual here who spends a significant part of his time working with the real estate's brokerage community and owners of these assets and helping them understand that we can provide value just like we did with our partners at CMC. We can that that pipeline is growing, we've done one small transaction. This -- it doesn't hit the radar screen the way the CMC does but what we're looking for is kind of a repeatable process something that we can get into, apply our structure and tax attributes to, and then possibly kind of carve off and redeploy that capital, and we may end up with if you think of it like remainder many pieces right like kind of we'll hold some residual but get our capital redeployed and build up a portfolio of these. So that's -- that's kind of a different track in looking pretty for the big whale CMC type transactions. So we've got both caps going and this last year has really been about educating the market because we're really bringing kind of I know -- it's a product really right, we're trying to bring something new to investors of zero cash flow lease deals. And so you're educating the intermediary community, the tax accountants, the lawyers, and the investors themselves and so that pipeline has been building and we look forward to being able to do more of these and then be able to show you guys and fellow owners how this can be repeatable.

[Operator Instructions]. Our next question comes from Mitchell Wickham with Standard Financial Advisors. Please proceed with your question.

Hi Larry, how are you?

Good.

Most of it has been asked regarding the triple net lease, you just answered, I guess the only other question I had was what's going on with Itasca as far as finding something for that that entity?

Itasca Capital.

Yes.

Yes so Itasca Capital formally co-backs as significantly invested in fact 100% of its assets essentially invested in 1347 Investors LLC which helped fund the stacks merger into Limbach. And I obviously that's been a very successful transaction there.

Okay.

That that capital I think they report maybe this week or next week I don't remember but that capital long-term is going to be obviously diversified. I don't know what its holding period is going to be but ultimately that the goal there is to diversify. And we're open to that been diversified into another single project like 1347 Investors in Limbach or into a more diversified portfolio.

[Operator Instructions]. Our next question comes from Jon Old with Long Meadow Investors. Please proceed with your question.

Thanks for doing this. So, I guess couple of questions. One would you contemplate doing another -- I would take one another time would you contemplate doing another stack at some point.

Well my call the investment banker that had led both stacks and I've done first in FMG and the second one here at Kingsway has told me he will hit me over the head with a baseball bat the next time we consider doing it without significant backup capital and just given the challenges that stacks have. So now that being said we feel very comfortable doing them and we have seen the mechanics and we think that there are more investable companies that should be public in the kind of small micro cap space. And so it's always on the radar screen, and if you file the last one, what a challenge it was to get a finance in the end. And so I take Mike's counsel very wisely that we -- you need to really be thoughtful about how we would finance the backend merger before we do one. And so it is on the board of something we look at and when we have confidence in some financing alternatives I wouldn't be surprised if we move forward with one again probably be a smaller one we might look to do it with a partner, so.

Okay. And JT obviously thanks and congrats to you on the improvement in the warranty business. How much -- do you think there's still a lot of room for additional improvement there or is it sort of hitting a steady state in terms of margins and what something?

Yes, I mean. I think that we've -- well from a gross margin standpoint I don't know that there's a whole lot more we can do. From an operating margin standpoint I think that we will continue to see the benefits of operating leverage as we scale both those businesses. IWS is working diligently to continue to penetrate the credit union channel so, very long selling cycle they have a great pipeline anyone large new customer acquisition could be a needle moving event. But against the backdrop of a national auto sales landscape that is providing probably some headwind. So, good things happening at the micro level against a maybe a little bit more challenging macro backdrop at IWS but lots of activity in knocking down doors in their channel. At Trinity, probably not a lot more we can do on a gross margin standpoint just because it limits of our ability on pricing and however you'll see that they're growing at year-to-date over 70% year-on-year. And I would expect them to continue to grow at a very high annualized rate for the foreseeable future, specifically with a focus on their higher margin business in the Extended Warranty side of the company. And they do have the benefit of scale there as well, their struggle right now is to add staffing fast enough -- high quality staffing fast enough to keep up with the growth and continue to delight our customers right so, but you might see that trajectory even though may be hit a small inflection point it would still be positive so certainly more to do there.

Okay. When would you expect the deal that's under growing to hopefully close?

It's a dangerous question to answer Jon right as you know deals are tough to predict and anything can happen. We're moving as quickly as we can, provided nothing changes we would hope to report something in the third quarter. But like I said right I hate to go out on the limb about a deal that hasn't yet closed and so I'm almost regret letting it out there but unfortunately it's not -- it's not a -- it's -- from a size standpoint think of it as you know probably similar to an IWS type of thing or Trinity it's not a huge deal. But it is a nice new foothold in a new market segment in warranty.

It's worth noting. We've had two others under LOI in the last year or so and so did put a little target on his back by the way -- by putting this out there but we're also not afraid to walk away from a deal if it's not the right deal. And so I think it was important to let investors know we're busy and work in that space we like warranty and want to do more of it and so kind of want to let our fellow owners know where we're headed there but with that batting average run a third one and it wasn't, because we couldn’t do something that we needed to do in order to close with other two we walked away from them because we found something. Again buying and selling, buying it right. We might be too cheap but we think that has as much or more to do with the long-term success buying and selling it right. That we were going to buy business that we like and it's a good business. So there's a bit so far everything is moving in the direction and that gives some confidence that that will be one that we can close on.

Well appreciate the discipline. I guess continue to more work, how are you thinking about PIH long-term stock comes off halfway cheap, still stays cheap always has been since it's stayed there?

Yes. Obviously PIH this quarters coming out on the board so, I can't really speak specifically to their near-term but I think I can speak kind of high level strategically with that company. When we say in our information I'm going to just forward out page five long-term perspective focus on 15 to 30 year perspective creating value or recognizing short near-term reality that's not just a handful of words to pretty up an IR page and we see that's how we think about the business and PIH is one of those businesses where people sit back and say well what have you done for me lately or what's the company up to it's been building a business from the ground up that was started here in a shop with Doug Raucy and his team that's been just quietly delivering results that give us a confidence that when the opportunity exists that we can start to roll it out in a much more meaningful and productive way for shareholders. And so I've looked at it as a kind of a capital waiting for an opportunity and that opportunity maybe Florida. Florida was a market that you were wise to stay away from the last few years and many others did well early and then now are struggling with things like Assignment of Benefits, AOB, if you read the other companies involving space read their conference call transcripts, you'll see that they're really struggling and PIH isn't only recently have the ability to go into Florida and much of that was recognizing the reality of the dynamics in Florida and their focus is going to be on wind only which doesn't have a lot of issues that their competitors are facing. And so I'm excited for them and I think our capital is well placed there in the long run. Again that business in the short run can have volatility catastrophes but I like where they're situated and kind of the symmetry of the opportunity that they have to take advantage of dislocation in the markets when it exist and so I guess a little patience is required there but I don't disagree with you when I -- when you say that it looks cheap but we're not looking to sell so that I guess is an opportunity.

Okay. And then last one just sort of big picture long-term I mean you sort of layout your growth strategy I'm not saying it's just being full times in warranty, more real estate is there outside the warranty that you discussed already. Is there any -- can you give some sense of sort of a larger and bigger of pipeline potential things that could really transform the company with a real work or maybe it doesn't exist but what -- obviously can't be specific what other things now you’ll be working on really turn Kingsway into something special.

Yes, good question and I think some, Kingsway is something special already but some of that if you look at the majority of what we do it's the boring work to allow for the long-term compounding right. So the goal is you wake up in 10 years and go wholly how hard did that happen and it's just the daily grind of compounding right and the wonderful machine that that is. And so that's the work that JT is doing with the operating businesses and getting them to the point where we can let them grow in compound and that's why we stick to the investment discipline that we have in the rest of the portfolio by making decisions that have asymmetric returns and so that we can put our capital and let those compound, we invest in, in some really uninteresting from the outside perspective but things like investing in stacks for example, looks like they have Treasury returns until you look at the warrants and options that come along with that and we've got a little portfolio that has done very nicely just compounding its way. And again a lot of that's gotten lost historically because of the operating results from that being strong enough to allow all of that -- all those returns to kind of fall to the bottom line and therefore compound over time. And that's what we see changing that's what's still exciting for us as management never had the confidence that we have today to believe that we now can get to that point of allowing all of this the compound rather than fill the holes historically of the operating result. And so again I want our owners to know that most of our time is spent on just grinding out compounding opportunities. That being said we're always looking for whether it's the CMC or some other transformative transaction opportunity that could more fully utilize the NOLs for example do something creative or transformative in any way big merger reverse merger. There's never any one on the team that says we shouldn't look at that because -- because it'll put someone else in charge or if someone else control the company or we will turn over every rock available to us. It's just about time allocation so, do we say like to spend in 20% of my time looking for those kind of things the answer is yes. But we also don't want to take have that take away from the daily grind of compounding what we do have because we think with the philosophy that we have, the tools that we have, with that and enough runway that that's going to produce a pretty interesting result kind of an unexpected and if just look at the other great compounders, I think -- I think you'll see that many of them didn't have transformative event. They had some unique things. CMC here is really one of those unique things that we have that I think when you look back even say well didn’t feel like well that one was able to do. But generally they've been -- they've kind of just grind it through. That being said we're if you had to take that 20% of the time we're looking for transformative things where would I spend most of my time? It's really looking for other forms of leverage instead of putting financial leverage on our balance sheet and more interested in kind of leveraging through asset management, things like Itasca Capital, permanent capital vehicles where we could control much larger pool of capital in the form of and ask the manager for a better -- for lack of a better way of describing where we could earn fees and promote larger pools of capital. And they are -- there's a couple of benefits to that one that asymmetric we're not putting a lot of capital to work but we're getting returns based on other people's capital that provides the symmetry but it also has the potential to be very valuable as a -- as a fee stream. And so you know we think about the kind of things that we do well as investors and whether or not we could convert that into some form of asset management strategy. I think of things like insurance like securities IOWs. I think of rich mergers those kind of things and whether or not there's opportunities for us there. And so we do spend a bit of time on that. And if I think we made some of the progress with the go back to that capital situation. It just so happened that it went right to work and funding the staff merger and produced the returns probably that exceeded our expectations. And so we've got to now reset there and look for more so, does that answer your question Jon.

Yes, thank you very much.

Our next question comes from B.J. Patel a Private Investor. Please proceed with your question.

Hi thanks for taking my question. I know your book value per share has gone from 2.6 per share in 2013 to 2.2 today obviously very busy during this time some companies become inactive with starting stacks and so on and so forth but we're not seeing any value creation, can you explain why you think you are doing a good job at allocating capital.

Yes the book value obviously reflects all of the results including the non-cash, non-economic as well as the mark-to-market on Limbach. And so, that's the reality of the accounting book value and we think that when you look at book value over time that is an appropriate metric to judge our capital allocation abilities. In the near-term in the quarter-over-quarter, year-over-year near-term you get a lot of noise in that number as previously described. And so sometimes I envy the private equity venture capital investors who get to report to their investors using cost basis and other non-GAAP measures because if we were to own Limbach for example, as a passive private equity investment where we didn't have an equity method pickup or we didn't have a mark-to-market fair value you would have had no volatility in the reported -- previously reported quarter with regards to Limbach because everything we know about the business as we publicly reported and you can read yourself would suggest that the intrinsic value was neutral to positive. And yes we took a meaningful hit in our quarter because Mr. Market decided that it didn't want to bid more for that stock it’s a penetrated stock. And they're still developing their investor base and that doesn't give any concern. If I look at Apples Financial for example when any it’s early days as a public company and for those of you that don't remember that story that was a spinout of Kingsway at the time when no one was really interested in that story it took a while to develop before it became fairly valued. And so, just the realities of GAAP require us to post a loss when we think as investors our investment was worth more than it was the prior quarter. And so that book value I don't remember how much the 2.2 what did that translate too.

37 million

Yes $0.10 of that number is just a pure mark-to-market on Limbach and other $0.05 it is tax expense which doesn't exist in economic reality. There's probably more than I'm forgetting drops better value which is $0.20, 20 some cents, over $0.20 so that's still --

I understand, how these things work on a quarter-to-quarter basis just but 2013 versus here we are mid-2017 I appreciate that things go up and down in the public markets but I would have expected unless you’re telling me that book value per share doesn’t really matter for Kingsway like it does at many of the other holding companies, I would have expected to see a pickup. How are you going to find value creation anyway I just don't see that yet and I know you're doing a lot of things here and there trying to do that but we're just not seeing that and beginning to wonder whether this is an entity that is ever going to compound capital as you say even if it's something that's not realistic like 15 to 20 years or is it just a company that is here to enrich managing because I look at the proxy, most recent proxy and that’s not as you guys are underpaid I think Larry got $10 million package over a three-year period during the point when your book value didn't grow up 2.6 per share to 2.2 per share today so, I’m just wondering what's happening here is 15 to 20 year time period really a realistic thing or should we thinking -- see something more in the near-term.

Yes it is a long-term focus and I can appreciate your questions and your healthy skepticism as we investors ourselves would consider the same things and so if I got paid $10 million, I still look forward to my pockets because I can't find that.

What is the standard proxy? What does it stay in the proxy?

Again proxies are one of those things that turns numbers into financially required statements that always tied to economics. So the historical challenge has been to get through the overhead and the operating challenges and so those are not misguided concerns historically, if you look back the company's kind of tangible book value was probably negative and that was a result of an over-leverage situation, significant turnaround, all that's in the past and but those headwinds of not having enough scale to get through the overhead running a public company with level and complexity at Kingsway and then operating results that just weren't there. And so again we invested our way out of all those problems and so that the underlying investment is all covered through the significant expense and for operating results both years that you're talking about. And so yes we got to push our head above and then sort to compound and that's where we think we are and that's for you to decide as an investors whether or not you think that that investment activity that got us through all of that challenge is what's also going to allow us to now compound and if not and you sell your shares.

Thanks.

I will use that as an opportunity to get on a soap box there is one thing that I find misleading about book value per share as a proxy for embedded value and that’s the amortization of intangibles that are created through purchase accounting and we have historically experienced north of a $1 million a year of intangible amortization that is an expense for income statement purposes but isn’t in my view a true expense if the underlying businesses are adding value. We are expensing intangibles even though the underlying business could be so that business is worth less on book value per share all other things are constant even though the business may have improved or be more valuable because of operating performance. So that will forever be a headwind in using book value per share as a proxy for value if we're going to be buying businesses.

[Operator Instructions]. There are no questions in queue at this time. I would like to turn the call back to management for closing comments.

Well thank you guys for listening and we appreciate the confidence that you have shown in allowing us to invest your capital. As always I can be reached on my personal mobile at 6302902432, the only requirements that you tell me your name and how many shares you own and we'd love to connect with you on any questions you didn’t have a chance to ask here and just stay in touch and so we appreciate the time and the dialogue, even the skepticism and look forward to connecting with you hopefully in person at our Investor Day sometime this fall and again hopeful see you on one of these again conference calls but we appreciate the time. Thanks so much.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.