Kingsway Financial Disposes of Interest in Lincoln General by Giving Stock to Charity

TORONTO, Oct 20, 2009 (A. M. Best via COMTEX) -- KFS | Quote | Chart | News | PowerRating -- Kingsway Financial Services Inc. said it has disposed of its interest in U.S. unit, Lincoln General Insurance Co., by donating stock in the company to charity.

In a statement, Kingsway (NYSE: KFS | Quote | Chart | News | PowerRating) explained that its indirect wholly owned subsidiary, Kingsway America Inc., got rid of its interest in its wholly owned subsidiary, Walshire General Assurance Co. -- the sole shareholder of Lincoln General.

All the stock of Walshire was donated to charity. To meet regulatory and contractual obligations having to do with Lincoln General, Kingsway said it agreed to pay off $10 million in debt from a surplus note facility agreement.

"Kingsway is of the view that disposing of Lincoln General at this time will provide all stakeholders, including policyholders, shareholders and creditors, with improved long-term value and is consistent with Kingsway's prior determination that it will not continue to voluntarily fund Lincoln General's reserve shortfalls," said Kingsway, a seller of nonstandard automobile and commercial auto insurance in North America.

In September, A.M. Best Co. downgraded the financial strength rating to D (Poor) from B- (Fair) of Lincoln General Insurance Co. The downgrade was the result of a significant drop in Lincoln's risk-adjusted capitalization and change in business profile following its submission on May 7 of a proposed runoff plan for the company. This action came from a decision by Lincoln's ultimate parent, Kingsway Financial Services Inc., not to continue operations at Lincoln following several years of significant operating losses. The Pennsylvania Insurance Department accepted the plan on May 29 (BestWire, Sept. 8, 2009).

Kingsway said it will continue compliance with its runoff agreement, which includes support of runoff management at Lincoln General.

"Kingsway's recent financial performance has been adversely impacted by historic strategies and practices that proved to be unprofitable," said the company, which reported a second-quarter net loss of $38.4 million. "These dispositions are an important step in Kingsway's previously announced transformation plan to address and bring an end to this legacy."

Kingsway outlined a plan in February to cut costs, which included consolidating operations in the United States and Canada ? a move the company said is expected to save $80 million by the end of 2010. Nine companies are to become three operating units, and about 750 employees are to be laid off within two years (BestWire, Feb. 9, 2009). Kingsway consolidated two of its Canadian units in September. Jevco Insurance Co. assumed the assets and liabilities of Kingsway General Insurance Co., effective Oct. 1. Both subsidiaries are wholly owned by Kingsway, which said folding KGIC into Jevco will contribute to a reduction in the company's operating expenses (BestWire, Sept. 23, 2009).

In January, Kingsway reached a settlement with shareholders, the Stilwell Group, pertaining to the group's demand that former president and chief executive officer W. Shaun Jackson be removed from that board, along with F. Michael Walsh, nonexecutive chairman of the board (BestWire, Jan. 8, 2009). The two sides agreed that Jackson leave the board and Walsh remain a director and the nonexecutive chairman. Joseph Stilwell, principal of the Stilwell Group, was appointed a director. New York-based Stilwell Group, owners of about 9% of Kingsway stock, has demanded massive changes throughout the company.

During the afternoon of Oct. 20, shares of Kingsway stock were selling at $4.60, up about 4.55% from the previous close.

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)

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