All right. Good morning, everybody, and thank you all for being at the Midwest Ideas Conference. My name is Errol Gerken on behalf of Three Part Advisors. Up next, we have Kingsway Financial Services, traded on the New York Stock Exchange under KFS. On behalf of the company, we have Kent Hansen, CFO. Kent?
Thank you, Errol. Good morning, everybody. I'm joined today by our CEO, J.T. Fitzgerald. First, I'd like to just go through the investment highlights for Kingsway. We do have two segments that we think about. One is extended warranty, the other one we call Kingsway Search Accelerator. I'll go through each of those and then kind of wrap it up with some overall highlights as well, and then hopefully that leaves some time for Q&A at the end. Basically, Kingsway is a holding company, and we're a very small, lean holding company at the top. There's only 10 full-time employees at the holding company, and we basically oversee the extended warranty and the Kingsway Search Accelerator companies. These are a collection of recurring revenue, high margin, asset-light growing businesses.
We generally don't invest in capital-intensive businesses, look for sticky revenue in industries that have a little bit of tailwind to them. For the metric that we commonly use is what we call run rate adjusted EBITDA. So this is what we believe our EBITDA would be if we held all of the businesses that we currently own for twelve months. We do have some recent acquisitions, so if you just look at our actual TTM or, you know, actual EBITDA, you can't take the last quarter and multiply it by four because we've only owned some of those companies for a partial period of time.
This sort of adjusts for the pro forma for the period we didn't own them, and also make up some adjustments for some investment income that I'll get into a little bit later. We do have a significant NOL. It's about $626 million, federal NOL that we can use to shield any federal taxable gains. This was created, probably about around 2008, 2009, when the company. You know, we started off as a traditional, property casualty insurance company. About the time of the Great Recession, our underwriting kind of caught up with us, and we incurred a lot of capital losses at that time.
Originally, it was probably about $1 billion, and now it stands about a little bit over $600 million. So we view that as a valuable asset to the company. We've built a disciplined M&A engine, and mostly on the KSX side, and I'll get into that a little bit later, too. Management and board owns a substantial portion of the outstanding stock of the company, most recently is about 55%. JT and I and the rest of the management team have spent a lot of time over the past few years trying to simplify our capital structure, and what we invest in and focus on our core operating. Hopefully, you've seen that as you've re-read through, perhaps, recent filings and press releases.
This just shows a track record of our EBITDA growth over the past few years since two thousand and eighteen. Some good growth. As we've talked about on some of our recent press releases and earnings calls, starting about twelve, fifteen months ago, on the extended warranty side, we've seen a significant amount of claims inflation. So we pay extended warranty claims, which is just basically mechanical breakdown. It, you know, inflation hit other parts of the market before it hit us, but beginning in twenty-three, mostly on the labor side, we've seen our labor rates go up, which took a bite out of our traditional or our run rate EBITDA. We've seen those claims start to moderate here in 2024.
So this just gives you a breakdown of how we see our businesses. So on the left side is our extended warranty segment, and for the TTM period, ending June 30th, 2024, it was about $68 million of revenue, which was about 66% of total revenue and about 58% of total EBITDA. On the right side is our search accelerator segment, which was 34% of revenue and about 42% of EBITDA. And if you go back, if you look at these charts over time, the Kingsway Search Accelerator keeps growing as a percent of the total, and we would expect that to continue as we really start to lean into acquiring companies under that part of our segment, and you know, continue to grow, but continue to grow extended warranty, mostly organically.
Maybe I'll just do a little bit of a deeper dive in extended warranty. Why do we like extended warranty? Well, it's a large market, and it's a growing market. It's very fragmented, a lot of players in there. There's high barriers to entry. It's not regulated like an insurance company is, so we're not a regulated insurance company, but it's sort of insurance-like, as we call it. All of our policies that we write are required to be backstopped by an A-rated insurance carrier, since we're not one ourselves. We get paid upfront for our policies, so our policies are usually multi-year. So, we get paid today for a three-year policy. We get to hold that money, we invest it, and we get to keep the interest on that investment.
So it's almost a negative working capital situation for us and very low capital intensity. We can really scale up the businesses for growth. You know, we did post this deck to the website last night, so you can take a look at some of these slides. I'm not gonna go into all of them in a lot of detail. But basically, in extended warranty, we go to market in three different ways, and two of those are related to auto extended warranties. So on the left side here, we have a credit union channel, and we sell our warranties exclusively through the credit union to a member who's getting a loan from the credit union.
So if you're a member of a credit union, you're gonna get a car loan, you go to the credit union, you get pre-approved, then you go to the car dealer, you find the car that you want, and then you close the loan with the credit union. And during that process, they would say something like, "Hey, are you interested in hearing about a five-year warranty for the car that you just bought?" And you say yes, then they will tell you about our product, and it's an exclusive relationship with the credit union. So they're only if they're offering a warranty product, it's only if it's us, it's IWS, then they're not gonna offer a competitor's product.
And so we're sort of distributing that through the credit union, but our end customer is the policyholder, the car owner. We like this model because credit unions are very sticky. Our average customer relationship is a little bit over twelve years, I believe. Our longest one is over twenty. So they're very sticky, but then they do have a long sales cycle because of that, and we think we have some differentiating factors that, you know, help us with that. So one of the things that we do is we have a thing called a Product Information Center or PIC, as we call it.
So historically, loan officers aren't very good salespeople when it comes to selling extended warranties, and their average close rate, you know, on a loan when trying to sell an extended warranty is about 4% or 5%. We offer a service where they, during the process, the closing process of that loan, they can refer the applicant to our call center, and we answer that call within 10 seconds, I believe, is our average. And they're talking to a person who is specialized in explaining to them our extended warranty product and the benefits and things like that. It's a pretty soft sell process. We don't go in for the hard sell, and our close rate on loans that get referred in through the PIC are 50%.
So it's significantly higher than what a loan officer does by themselves, and that's a huge selling point when we're going and talking to credit unions. In the middle space is we also distribute vehicle extended warranties through independent dealers. So don't think the Ford, the GMs, the Chryslers. Think maybe a dealer who has just one lot or maybe a couple lots, and they sell the extended warranty through their F&I process when they extend the loan. And that is a non-exclusive relationship, so they're usually offering two or three other products at that close. So that business is all about getting our salespeople out in front of our existing dealers, educating them on our products, making sure we're top of mind, so that when the dealer goes to close the loan, you know, they're offering our product first.
That we go to market under two brands. One is Penn, one is PWI. And so in both those models, we're not direct to consumer. So the postcards you get in the mail or the phone calls you get or the ads you see on TV, that's not us. We believe that's really a hard market to make money in because the customer acquisition cost is pretty high, and we believe that a lot of times you're either selling into a cancellation or a repair. Why is that? Through our channels, our extended warranty gets bundled into the loan.
As a consumer, you're just paying $500 a month, your loan payment, whatever it may be, and you're not seeing a line item on there for extended warranties X. Now, you can certainly cancel our product, but we believe our cancellation rate is lower because of those dynamics. Direct to consumer, you're usually getting a credit card statement every month, and you're saying, "Why am I paying X dollars a month for this warranty that I'm never using?" And you probably might cancel that. Also, as a consumer, you get that postcard, or you see the ad on TV, and you just remembered, "My car was making a funny noise. Maybe it's about to have some sort of repair." And so you might call up and sign up then, and then within 30 or 60 days, there's a claim.
I think it's a fine market, but for us, we've just sort of stayed away from it for now, and we sort of focus on the. We like the channels that we're in on the dealer side and the credit union side. The third sort of pillar that we're in is a little bit different. It's not auto extended warranties. It's a couple different things. One is extended warranties on commercial and home HVAC equipment, LED lighting, standby generators. So we offer those extended warranties either through OEMs, distributors, or the contractor level, and we don't take the risk on those, so it's a little bit different model from the auto extended warranty. So we're just writing the paper on behalf of the insurance company.
We've been doing that for a little bit over 10 years now, and the average policy happens to be about 10 years in length. So we feel like we're at a point where we've gathered a lot of data. We know how claims emerge, and so, you know, we have on sort of our strategic horizon, taking on the risk and making it look more like a car warranty model as opposed to what we're doing now. But we haven't done that yet, but it's definitely on our list of things that we'd like to get into. We think there's a lot of white space there. There's only two other competitors that we know of offering these types of warranty products.
As you may know, the commercial and residential HVAC and generator and equipment market is quite huge, so we think there's a large untapped market there that we could get into. The other thing that we do on the one all the way over the right, which is under our Trinity brand, is mechanical repair, so for commercial customers. So think about a commercial customer, usually retail, that has multiple locations. So Hertz, for example, is one of our customers. Hertz has their HVAC breakdown, and instead of the store manager being left to their own devices to call and get a contractor to get that fixed, they call us, and we can roll a truck within four hours within anywhere in the Lower forty-eight. The truck is not ours. We're contracted with thousands of contractors across the United States.
They do the repair, they send us the bill, we mark it up, and we get paid by our customer. So that's a nice little business too that sort of fits in nicely with the extended warranty side of things. And I mentioned these are our brands IWS, PWI, Penn are the auto, Trinity is the mechanical breakdown and also warranty. Just to give you a sense of size of these businesses, so on the left is the revenue, TTM revenue as of six thirty. So PWI, in terms of revenue, is the largest, IWS second, and then Trinity and Penn are kind of about the same size.
I'd say in terms of profitability, we don't break that down specifically, but IWS is probably the most profitable of all those, just because of the credit union relationship, and the sort of classic customer there. On the right is our trend of EBITDA, adjusted EBITDA in the warranty segment over time. And as I mentioned, you know, 2023 got hit a little bit hard because of the claims, which is sort of we have seen that start to subside here in 2024. So for example, claims increased just under 3% in the June quarter versus a year ago. In Q1, that increase was still closer to 14 or 15%, I believe. And then also in 2022 and prior, that includes the results of one of our extended warranty companies that we sold back in 2022.
In July of 2022, so that those periods include results of that business. Extended warranty net debt, I think we've done a really nice job sort of managing this to a good level. We took out a loan back in 2020 to buy PWI. So PWI was the most recent acquisition we did in this space. And we took out a $24 million loan at that time that we've been amortizing down every year, which also had an excess cash flow payment component to it. So our net debt at six 30 was $10.7 million. It went up because during the Q2 , we refinanced that.
We refinanced that debt, so we were able to increase it to the term loan to $15 million, pay off the old added delayed draw of, I believe, $6-$7 million, and reloaded the revolver at $1 million. We used those proceeds to pay off the prior debt, and some excess cash actually went up to corporate because of that. We felt like we could relever that and take some value out, and have the cash deployed elsewhere in the business. I talked before about the float. The way our cash flow model works on the warranty side is, like I said, we get paid up front for the policy. If we sold a policy for $1,000, we receive $1,000 today.
Because our contracts are backstopped by a third-party insurance company, they require us to set aside part of that $1,000 for future claims. Just so happens the average across all policies is about 50%. If I collected $1,000 today, I get to keep $500 to run my business. The other $500, I have to put in a trust account that's in our company's name, and that is used to pay claims. That trust account is reviewed quarterly with the insurance provider, looking at how claims have emerged, how contracts have developed, and usually we get a release every quarter that basically is the underwriting profit from those claims.
While that money is sitting in the trust, we get to invest it, and we invest it in treasuries, government bonds, and high-quality corporate bonds as well. The current market yield's probably around 5%, but we invest. We look for fixed maturities that have a duration that sort of match our claims experience. So our average claim comes between year two and year three of a contract, and so that's the duration of the portfolio that we tried to build. So it's constantly turning over. We invested a substantial portion of it a couple of years ago after we acquired PWI. They didn't invest any of their portfolio, so at that time, we invested a huge portion into fixed maturity investments.
At that time, they have a much lower yield, so as those unlock, our interest rate, you know, assuming market yields stay where they are, should be going up, and we make a slight adjustment for that in our run rate, and you can see our actual interest rate, our actual interest income has been increasing over the last couple of years because of that dynamic. Now I'd like to talk about the Kingsway Search Accelerator segment. I'm not sure how familiar people are with the search fund model, so I'll describe that overall first, and then kind of get into how we apply it at Kingsway, so J.T., our CEO, comes from the search fund industry.
He was a searcher out of grad school and purchased a, I believe it was a manufacturing company. And he'll tell you that he learned a lot of things, what not to do in search because of that. So J.T.'s has a long history of doing that. But basically, what the search model is you find an entrepreneur who wants to run their own business, but they don't have the next whiz-bang idea themselves, right? They didn't invent something, but they want to go out and run a company. So what the traditional model is, they will get funded by some, you know, some LPs usually, who will pay their salary and, you know, a nominal salary during their search.
The searcher will comb through industries they like, they'll make cold calls, they'll go to industry conferences and try to find that company that's a good fit for them. Once they do find that, then there's sort of the simplistic agreement with the LPs that they'll fund part of the acquisition price, and the balance is usually paid with debt. And then, once the acquisition is concluded, the searcher now becomes the CEO of that business. He usually gets up to a 25% stake in that, and they'll run that business for a number of years. And then, usually, there's an exit around year four or year five, and then the searcher kind of moves on, and the next owner takes over the business. For us, we've kind of built that model internally.
So we hire early in career professionals usually a couple of years out from grad school and we pay them a nominal salary to go out and find our next acquisition. And over the course of the last few years that we've really leaned into this, we've built some tools that help them search some methods, some processes. They will go out, and they will find our next acquisition. We have a set of criteria, which I'll get into. And you know, if it passes reviews and our sniff tests and everything like that, we close on the deal, then the searcher takes over the business, becomes the new president or CEO. The seller usually stays around for a transition period.
It could be a few months or up to 12 months, depends on the situation, and then, the searcher can earn up to 25% in that business. So we've sort of copied that model internally, but the difference is, we don't have a clock on when we need to be out of this. We'd like to buy and hold these things as long as we can. Not to say, you know, if the right opportunity came along, that we wouldn't sell, but, you know, our long-term vision is to hold these companies as long as we can, because there's been a lot of studies out there that show the returns on search funds is quite compelling, which I'll get to in a minute. Yeah, I think I've covered this one. So yeah, so the returns.
So why, why we like this? So Stanford does a lot of tracking and statistics in the search fund world, and they did a study. So if someone had invested in every search fund from, you know, the beginning through now, pro rata, and the average return, including those searches that never closed and people didn't get their money back to those that were home runs, the average return is somewhere around 35%. Not to say that that's what we're gonna guarantee and deliver, but that's kind of why we like, like the model. There's been further studies that show that once that company's been sold, you know, and the first owner got that 35%, the returns to the next owner are even more compelling than that.
So suggesting that longer-term growth could be a good thing as well, and so that's the model that we try to replicate. We think there are a lot of businesses out there. Some people call it the Gray Wave or Silver Tsunami. So there's a lot of small businesses out there. Our sweet spot is businesses that have one to three million of EBITDA, sort of the lower end of the lower middle market. We don't run into a lot of competition from PEs out there. We do see some more searchers in that space, but that's the sweet spot that we have, and there are just literally thousands of businesses out there that could be an opportunity. And why would they want to sell their business to us?
It's usually a founder who either doesn't have kids, or their kids don't wanna succeed in the business, or they don't have a deep management bench to take over the business, but they want to sell their business to someone who will keep it going. These are people who spent years building the business, and a lot of them don't wanna see it be absorbed and dismantled into something else. So our searcher, through their process, will find these founders or owners and develop a relationship with them, and we'll explain our model to them, that you know, we're gonna buy it, you know, and continue to run it on its own. The searcher will be at the head of it, and that's usually very compelling to the seller owner.
Then, having being backed by a publicly traded company brings a lot of surety to the process, right? That we have the capital to close, that we have the expertise to close. So I think there's a lot of distinguishing things that come with being a searcher as part of Kingsway, as opposed to maybe being a searcher not part of Kingsway. So I think, you know, one of the limiting factors to why can't we do more, why can't we go faster, is the talent. All right? So we're very selective on the searchers, or we call them OIRs, Operator in Residence, is the sort of internal nomenclature that we use.
So, I think JT was telling me that for every OIR that we hire, he's probably looked at at least a hundred resumes and done, you know, a couple dozen interviews. So it's a very selective process. What we also believe in is decentralization. So the warranty companies, the search companies, we pretty much let them run themselves. There are some oversights in terms of, gotta use the same GL system, gotta adhere to these HR things, right? As being part of a public company, there's some things that we do have to have oversight on, and we do budget and forecasting with them. But, you know, we set the budgets with them, we set the strategy with them, and then we let them run with it.
And so, if we're going to entrust a business to a person, they need to have certain qualities that we look for. One of them is honesty, right? If you're gonna give them the keys to something, then you gotta be able to trust the person that they're gonna run it, be ethical, come to you when they have questions, that type of thing. Humility. You know, hiring people that, you know, they know they don't know everything, they still wanna learn, and when they don't know something, they know how to get the answer. You know, we think that's an important trait. Hustle, you know, people who are gonna work for it, knowing that you have to earn things, and things aren't just handed to you. And that, you know, if it was easy, everybody would do it.
Roll up your sleeves and get the hard work done. Same with hunger, similar to hunger, right? Someone who wants to do it, who has the desire to achieve greatness. Then horsepower, you know, this is, you know, someone who's smart and has a lot of curiosity, someone who wants to be a lifelong learner. These are the traits that we look for when we hire an OIR. Not gonna go through all the bios here, but how that translates into the profiles that we usually get are a couple different things. It could be a first-generation American. Their parents came over, they were raised in the United States. They have that strong will to achieve, to run a successful business. They're curious.
And then another profile that we get are a lot of former military personnel. We have OIRs, now presidents that, you know, fought in Afghanistan or fly Apache helicopters. So it's sort of... Not to say that's all we look for, but a lot of times that's what we see. And I encourage you to read the backgrounds of these different people. They're really quite impressive.
And then, we also have a person that we hired early last year, Charlie Joyce, who is helping us build, or has built a lot of the internal processes for searching, helping with business development, helping once we get a letter, someone under LOI, with moving through the banking process, the legal process, sort of like a jack of all trades, BD person, embedded solely within the KSX business. Let's see. I'll be mindful of time here. So the current portfolio, we have five: Ravix and C-Suite, which are sort of in the accounting, finance, HR staffing, fractional CFO side. SPI, which is a software, small software company that we bought in September of last year. We think that's a great foothold into the vertical market software space.
Digital Diagnostics that we bought in October of last year. They do remote telemetry, EKG telemetry for long-term acute care hospitals and rehab centers. Think about hospitals that have to monitor EKGs. They don't have a lot of resources to do that. Oftentimes, it's the receptionist walking around and monitoring them. We have a remote facility, where all the telemetry comes into us, and you have a technician who's monitoring a number of different EKGs. Something goes wrong, they can signal the hospital, signal the doctor. And that's. I didn't know that space existed until Peter found it, and there seems to be really no competitors in that space right now, so we see a lot of great runway there.
And then Secure Nursing is a staffing company, nurse staffing company in, in LA that we bought in... November of 2022. So think about hospitals. They need nurses on a daily basis, or maybe for a one- or two-week assignment. They come to us, we can place nurses there. It was huge during COVID. We bought it on this side of COVID, so we did feel like the rates were gonna come down a bit, which they did. We've kinda seen we think we're seeing a leveling off point, and we, you know, we still really like that business because in the U.S., there's still a prediction that there'll be nursing shortages for the near to mid-term. Just a breakdown of revenue, so you can see the size.
Ravix was the oldest acquisition, it's the biggest in terms of revenue, Secure Nursing Services. And then on the right, you can see the EBITDA pattern, you know, going up because of acquisitions. Leveling off just a little bit for now, like I said, SNS. So the hospitals sort of like overcorrected on their rates and the number of staffing, and we're seeing that come back. And C-Suite, which is a sort of a recruiting fractional CFO in the PE space, has also slowed down a little bit, but we're doing efforts to refill that pipeline there. Net debt, about $15.5 million. Each transaction, we usually lay down on a piece of debt, and that debt is secured only by the resources of that company.
Nothing is recourse to other companies or back to the parent company. Let's see. And then, another thing that we think distinguishes us, on the search accelerator side, is we set up an advisory board, to help our new OIRs and new presidents sort of navigate. You know, river guides, we call them sometimes. So Tom Joyce, the former CEO of Danaher, is on our advisory board. Will Thorndike, who a lot of people know from the book, The Outsiders, but may not know, he's sort of like the original OG of the search funders. And then Tyler Gordy. Tyler actually ran one of our warranty businesses that we sold in 2022. He was basically one of our first searchers, and so now he's come back and is on the advisory board. These...
The board meets three or four times a year in person, but more importantly, each one of the board members has developed a mentor-mentee relationship with our OIRs and our search presidents, and so they can, and they do. They pick up the phone all the time, and they talk to each other, you know, getting questions on business issues. Will Thorndike has great pattern recognition on companies that may be a good acquisition. So just a lot of knowledge that these people are giving back to the searchers, and we pay them a very nominal amount to be on that board. So it's. I think it's a great if you're sort of an early career professional, it's just some great resources that you can tap.
Just real quick, we did sell one of our warranty businesses back in 2022. It was a home warranty business. We had great inbound interest on it, unsolicited, and we also had the opportunity to redeploy that capital at a high IRR. So we ended up selling PWSC. It was a company we acquired back in 2015. Net, we got about $50 million total for that. We got about 10X on our investment, and Tyler walked away with a good chunk of money in his pocket, too, so it was a win-win for everybody. It was sort of our proof of concept model, and for the board, and once they saw that, they said, "Yeah, let's really lean into the KSX segment." Just a quick closing notes here.
I mean, if you read this, some of the highlights for the past couple of years, we were added to the Russell 2000 in June of last year. We do have a securities repurchase program out there. We have about $2 million left on it. And let's see, we're actively-- we have this one piece of non-strategic realty left, a VA clinic, which is currently being marketed for sale. So, and that debt's come down significantly, basically 'cause some sale of real estate over the past couple of years. So, wanted to leave time for questions, so, with that, I'll just open it up for any questions. Yes?
Under, sort of mark-to-market, given these search businesses, do you have to put a value on them regularly and report that to shareholders?
Yeah, so the question was, do we have to mark to market our investments in these companies? No, because we own 100% of them, and they're consolidated into our balance sheet. So it's just, there's, you know... When we buy them, we have to value them at current value under purchase accounting, but once that value is set, you know, they just become another sort of column in our consolidated financials. Yep. Yes?
You said you own 100% of them. So what type of... Is it, is it phantom equity that you're getting?
Yes. Yeah, so yeah, I'll just clarify that. So we have to own 80.1% in order to tax consolidate the entities. So what we give the searcher in the searchers are only on the KSX side. We own 100% of the warranty companies. On the KSX side, the searcher can earn up to 19.9% in the equity of that company, and then the remaining is usually phantom. Yes. So...
Okay, couple of...
Yeah, so when we invest our, we drop in the equity portion into the stack, and our equity goes into the form of a preferred, and before the searcher's equity has any value, our preferred has to be paid back, plus a preferred interest. So, so if we put in $5 million, over time, that business has to return to us $5 million plus interest before the equity class of the searcher, you know, participates in any value of the company. So much like a traditional model.
Now, the good thing is, so since we have all those NOLs, we don't pay federal income tax, but what we do is we say, "Hey, company, we're preparing a tax return for you standalone to figure out what your tax would've been," and instead of remitting that to Uncle Sam, they remit it to Kingsway, but that counts as a return of our pref. So if you were outside that model, like a traditional search, you'd just be leaking that money to the U.S. government. So here, it's a faster way for one of our searchers to get their equity, you know, into the money. Yeah?
I don't have the proxy in front of me, but for the management team, what are the metrics that you guys are judged by? What are your long-term incentives based off of, given kind of a different dynamic here with the warranty side and also sort of funding this?
Yeah. So the annual is usually EBITDA-based, so versus a budget. And then long term, you know, there have been some grants in the past that were based upon when people joined, and then there's just some annual grants. But I think, you know, the compensation committee looks at EBITDA achievement to budget, and maybe some return on capital metrics as well, I think so. Okay, I think we're out of time, so thank you, everybody. I appreciate you joining us today, and if you wanna get on our schedule, either today or in the future, you can email james@haydenir.com.
If you just take a look at our website, you can find the contact information there, and we're always happy to talk to people one-on-one, so thank you very much.