Kingsway Financial Services Inc. Q3 2009 Earnings Conference Call

Nov. 6.09 | About: Kingsway Financial (KFS)

Kingsway Financial Services Inc. (NYSE:KFS)

Q3 2009 Earnings Call

November 6, 2009 11:00 a.m. ET

Executives

Colin Simpson - President and CEO

Daniel Brazier - Interim CFO

Analysts

Michael Goldberg - Desjardins Securities

Doug Young - TD Newcrest

Doug Mewhirter - RBC Capital Markets

Tom Mackinnon - Scotia Capital

Jon Old - Long Meadow Investors

Presentation

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Kingsway Financial Services Inc. Q3, 2009 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for the queue-up for questions. (Operator Instructions). I'd like to remind everyone that this conference call is being recorded today November 6, 2009 at 8.30 a.m. Eastern Time. I'll now turn the conference over to Colin Simpson, President and Chief Executive Officer. Please go ahead sir.

Colin Simpson

Good morning everyone and welcome. Thanks for joining the call today. With me is Dan Brazier, our Interim Chief Financial Officer who is introduced in our Q2 results call. We issued a press release this morning, summarizing our third quarter financial results and reporting progress on the execution of our business transformation plan. The release will be available on our website and at CEDAR. Dan will open the call with the usual reminder by forward-looking statements. I'll make some initial remarks about the third quarter highlights then Dan will go into more detail about the third quarter results.

Daniel Brazier

Thanks Colin, I would like to remind all listeners that some of the remarks we will make today will contain forward-looking information with respect to the company's operating and financial plans and performance. These forward-looking statements are based on management's current assumptions, beliefs and expectations and are subject to a number of business risks, uncertainties and other factors beyond the company's ability to control or predict. Forward-looking statements can be identified by words such as anticipate, believe, expect, plan, intend, estimate, may, will, goal or similar words suggesting future outcomes or expectations about events or performance. Forward-looking information may include reserve and resource estimates.

We caution you that actual results or developments may differ materially from those contemplated by these forward-looking statements. Additional information on the material risk factors and assumptions that could cause actual result or developments to differ from expectations are contained in our third quarter press release and our Canadian and U.S. Securities filings including our 2008 annual report under the heading “Risk Factors” in the management's discussion and analysis section.

Any forward-looking information presented in the context of today's discussion represents the company's views only as of today's date. While subsequent events and developments may cause the company to change its view, the company does not undertake to update any forward-looking information except to the extent required by the applicable securities laws. Certain non-GAAP financial measures may be discussed or referred to today. Please refer to our third quarter release and other securities filings for a reconciliation of each of these non-GAAP measures to the most directly comparable GAAP measure. All amounts are US dollars unless otherwise indicated. Colin?

Colin Simpson

Thanks, Dan. I believe we are at the turning point in Kingsway's transformation. Since last quarter's call, we have taken action that will allow us to put the legacy of poor historical business strategies behind us. We can now concentrate our attention on rebuilding the strength and performance of the group. On last quarter's call, I provided an update on the considerable process we made in executing the transformation plan we announced in February of this year. I outlined what we were doing on all four fronts. All of which I'll touch on again this morning. The four were, restoring financial stability, managing the run-off of Lincoln, strengthening relationships with regulators and rating agencies, being sure we have the right people in the right role.

I want to start with Lincoln this time. Because of the actions they have taken recently to dispose off Kingsway interests in and control all Lincoln. Of the $128.8 million loss from run-off and discontinued businesses posted in the third quarter, it should be noted that $95.5 million is directly attributable to Lincoln with an additional $23.6 million write-down related to the disposition totaling $119.1 million.

For sometime, Kingsway has been engaged in managing the run-off of Lincoln and the way that bounces the interest of all stakeholders. Q2, I announced the appointment of senior run-off experts from the Rockwell Financial Advisory team to the Lincoln Management team on board. They created the run-off plans for Lincoln and took on the mandate of executing it. We said that we can continue to support the run-off and that we would be prepared to provide an additional contribution of $10 million maximum should that become necessary. Despite the amount of management time and energy that has been spent from Lincoln, there has continued to be uncertainty about the state of the business.

Late in the third quarter, Rockwell and its outside experts quantified additional areas of exposure. We determined that for the good of the Kingsway group of companies as well as Lincoln, we simply couldn't sustain the risk of potentially having to put more money into Lincoln beyond what we had already committed nor could we risk default on the Kingsway's public debt indentures. We decided to act immediately to dispose of all ownership in Lincon's parent Walshire Insurance Company. We acted to protect the interest of both Lincoln and the Kingsway Group of companies including shareholders, creditors, policyholders and employees.

Let me be clear, the purpose of this transaction is not in any way to trying to avoid any existing obligations of Kingsway, we will continue to honor our obligations with respect to Lincoln to do so we must maintain the financial viability of the publicly held trading company overall. It is possible that Lincolns continuing negative performance could have triggered a default in the Kingsway public debt indentures that scenario would have jeopardize Kingsway's ability to continue to support all of our insurance subsidiaries and meet obligations to policy holders including Lincoln's.

As previously disclosed, Kingsway ceased to control Lincoln as of October 19, but expects to continue to support the Lincoln run off to announce transition services agreement. That times action removed Lincolns from Kingsway's consolidating group balance sheet, thereby removing the rest of the group or potential future adverse development of Lincoln. We have disposed off our interest by donating the shares of Walshire which owner Lincoln shares to charity.

All of Walshire shares have been owned by Kingsway America Inc., which is a wholly owned subsidiary of Kingsway Financial Services Inc. Kingsway America donated the shares of Walshire to 20 bonafide charitable organizations, 5% to each. There is no [then] sites for the charities receiving the shares. They take a no liability with respect to Lincoln. The charities have all been sold and the shares are likely to be worthless and the shares cannot be returned to Kingsway. We are currently in on ongoing discussions with Pennsylvania Insurance Department and Rockwell regarding the transaction and so we are unable to provide more detail with this time.

The main point is that Lincoln is no longer a Kingsway subsidiary. The action we have taken will protect the financial health of the group overall and their ability to fulfill our obligations to stakeholders. This is a major step in our drive to restore financial stability to the Kingsway Group. We have made excellent progress in many other fronts as well. We began in Q2 to speed up the execution of our transformation strategy, the momentum have continued to build through Q3.

As Dan will explain further in a few minutes, we analyzed a significant loss we posted this quarter, we see that the losses are attributable to the operations that are not part of our future plans for the business primarily Lincoln. We are beginning to see more profitability in the core of business we intend to continue writing. We are also continuing to see the percentage of gross premiums presented by this core business increasing. This is entirely consistent with a strategy we have been executing and indicates that we are heading in the right direction. We are doing what we said we would do, we are acting quickly to build a strong financially viable foundation for the group going forward.

Let me underscore three financial achievements of this quarter. Progress on cost cutting, sale of non-core assets and successful execution of planned debt and share buyback activities. First cost cutting. We are ahead of schedule in our cost cutting targets. Our expense reduction goal for 2009 was $34.8 million. In the quarter, we achieved 11.3 million in cost savings. Expense reduction to date has produced a 2009 savings of $45 million or almost 130% of the full 2009 savings target. This represents annualized saving of $70 million a year going forward. These savings have been achieved through staff reductions and better expense managements. We eliminated an additional 240 positions in the Canadian and US businesses during the third quarter, bringing the total job eliminated this year to 850. That puts us well ahead of our schedule in relation to our target of one size and positions eliminated by the end of next year.

Workforce reduction will contribute $22 million in savings in 2009. This translates an annual run rate savings of approximately $50 million per year. [Sharing the] shown our spotlight this quarter on our expense management process to tying them up and to eliminate waste. We are also now beginning to see expense savings from our shift to share services model for functional areas such as finance, HR, and IT. Second, capital, we are improving our working capital position by selling non-core assets.

In the quarter, we signed a binding agreement to sell HI Holdings Inc, which owns all the shares of Zephyr Insurance Company in Hawaii. We have now closed that sale. The assets available on risk management were sold to Avalon's Management team and their investment partner Sun Management Group shortly after the close of the quarter. We also completed the sale of Kingsway real estate in Calgary early in Q4.

We are continuing to pursue other opportunities. Third, we executed the reinsurance repatriation and debt and share buyback activities we discussed on last quarter's call. Dan will give you an update on those activities. All in all, we are making very good progress in getting our financial house in order. I talked about two of our major thrust for this quarter, Lincoln and restoring financial stability to the organization. The third major thrust that we are continuing to reach out to regulatory and rating agencies. We have made it a priority to keep them fully informed about the actions we are taking to stabilize the company and resolve outstanding issues such as those related to historical claims handling practices. We believe that regular open dialogue is essential to strong relationships. We want regulators to have the confidence of the new Kingsway management team to succeeding and turning the group around and creating an enterprise that will be viable well into the future.

Finally, last quarter I highlighted changes in the executive team. Let me remind you that we've given you mandates to Serge Lavoie, CEO of the Canadian operations; Scott Woolney, CEO of the majority of our US operations now going to market as Kingsway America and Roberto Espin, CEO of our Miami-based business who has taken on the challenge from the board to expand that successful business model.

In Q2, we also largely completed the process of aligning the employee population in the US within the operating model including a much more efficient share service approach for support functions. With that platform in place in Q3, we've been able to further simplify our organizational structure and begin presenting a fresh face to the market.

In late September we announced the Jevco Insurance Company would assume all the assets from liabilities of Kingsway General Insurance Company. Going forward all our businesses in Canada will be marketed under the Jevco brand. Jevco has a 20-year track record of profitability and a same reputation in the Canadian market. We believe this move gives us a solid foundation from growth in Canada.

In the US, we announced that owner subsidiaries with the exception of US Security Insurance Company in Florida will be marketed under the Kingsway America brand. Internally, this step has given us a greater focus and cohesiveness. They are making progress in breaking down historic barriers between our various subsidiaries and thinking and acting as one company.

Externally the move reinforces our commitment to brining an attractive value propositions to t he market building owner's strength across all subsidiaries. We have much work to do before the end of 2010, which we stated that the asset was our target for completion of the transformation. But I do believe we have turned the corner.

Major decisions have been made and executed we are now beginning to see the results of intense effort of all of our employees that have been put into the transformation work. I'll say more about what I believe the future holds when stand has been over the highlights of the financial results.

Dan?

Daniel Brazier

Thanks Colin. I said last quarter that when we strip away the results of discontinued businesses as well as one time gains and losses. We believe we are beginning to see the emergence of a strong core Kingsway business. This quarter's results continue to reinforce that view that may be difficult to see when you look at the consolidated numbers that company reported a third quarter net loss of a $118.1 million or $2.19 per share diluted compared with a net loss of $17.4 million or $0.32 per share diluted in the third quarter of 2008.

As Colin pointed out, at the beginning of call, our operating loss from business that does not form part of our future plans was $128.8 million in the quarter. Lincoln directly accounted for $95.5 million of this total with an additional $23.6 million write-down related to the disposition for a total of a $119.1 million.

A very different picture emerges if you look at the results for the continuing business. Our Canadian unit delivered a profit of $12.2 million from continuing operations if you take away restructuring charges and a one time write down on assets related to the financial sale of real estate in Mississauga.

In the U.S. the results indicate we are getting cost under control. Although we show the profit it was driven by one-time gains in the quarter. Overall I am encouraged by the direction of the results but we still have lots to do. One time cost this quarter included restructuring costs at $5.9 million. Of this severance accounted for $1.6 million in the quarter.

Year-to-date restructuring costs totaled $18.4 million of which $9.3 million relates to severance. In next quarter results management intends to treat Lincoln as a discontinued operation as it is no longer a Kingsway subsidiary. Future results will also reflect the sale of Zephyr insurance company and substantially all the assets of Avalon risk management.

In the third quarter net revenues from discontinued operations for these two FDs were 1.5 million, net loss from discontinued operations net of taxes was $1 million. The numbers for the first nine months of 2009 are $2.4 million revenues from discontinued operations and $2.4 million net loss. All these moves are aligned with our stated intention to exit unprofitable business shedding non-core assets and free up liquidity in the group.

In October, we also sold the real estate we held in Calgary at a gain of approximately $2 million which will be booked in quarter four. We are currently considering an offer on our Mississauga real estate. We continue to see a decline in gross written premiums much of it driven by our intention to ship the mix to focus on our core profitable non-standard auto business. Gross written premium for the Canadian operating segment decreased by 20% for the quarter to $73.3 million from $91.5 million in the third quarter of 2008.

In the first nine months of 2009; Canadian gross written premium decreased by 23% to $222.5 million, year-to-date, down from $290.6 million in the same period last year. The U.S. operating segment reported a decrease in premiums of 21% for the quarter to $82.2 million from a $103.7 million in the third quarter of 2008. Year-to-date U.S. premiums totaled $299.3 million and 19% decrease from $371.4 million during the same period last year.

In Canada, our business is now predominantly non-standard auto and motorcycle. In the U.S. its mostly non-standard auto versus small amount of lower limit commercial auto. This core business including the small amount of surety now represents 87% of our total gross premium revenue. The net adverse reserved development, we saw in our ongoing business this quarter is within the reasonable range of what one can expect in this industry. If you take out adverse development related to the run-off business, you see that we had $4.8 million adverse development in the ongoing U.S. operations and favorable development of $7.3 million related to the ongoing Canadian operations.

We realized net gains of approximately $31.8 million in the quarter of which $10.7 million was due to the liquidation of a significant portion of the Barbados securities portfolio as a result of our commutation activity. Well, our underlying investment income was within our expectations, we suffered this quarter from the strengthening up the Canadian dollar. Investment income in the quarter excluding these net realized gains was $5.8 million compared to $31.9 million for the same quarter of 2008, an 82% decrease.

This decline is due primarily to a reevaluation loss of approximately $12.7 million from the impact of a stronger dollar on the company's unhedged Canadian dollar debt as well as from lower interest income from lower yields and a smaller portfolio.

On the quarter two call, we talked about our plans to increase the capital in our operating subsidiaries and to free up capital for use in debt or equity repurchases. We said we had begun commuting insurance fees between our US subsidiaries and our reinsurance captive in Barbados. We also indicated we were developing plans to commute insurance treaties between our operating subsidiaries in Canada and our reinsurance captive in Bermuda.

I am pleased to report that we received regulatory approval for our plans and have completed both efforts. And the US commutations were carried out before the end of Q3 on October 1, 2009 we consulted the Canadian operations. At that time Jevco Insurance Company assumed the assets and liabilities of Kingsway General Insurance Company and all reinsurance agreements between these two companies and Kingsway Reinsurance Bermuda Limited were commuted. The result is an improved capital base for our operating units. As a condition of approval for the consolidation of the Canadian business the regulator stipulated a target MCT of 243% for Jevco. We have met that target.

Last quarter we reported on further steps we were taking with freed up capital to secure the financial future of the company. In May of 2009, the board authorized a structured plan with resources of up to $40 million to retired debt or buyback shares. I can now report that today Kingsway has spent $20.1 million buying back debt and $11.7 million repurchasing shares.

In summary, I am confident we are taking the right steps to get to a profitable business model and ensure the financial viability of the Kingsway Group

With that I'll return the call to Colin.

Colin Simpson

Thanks Dan, I said earlier that we had much still to do. We must regain the confidence of all of our stakeholders. Internally we are working to read the full benefits of our consolidated operations through process efficiencies and technology improvements. We are making changes to ensure that we execute consistently and with excellence across all business units. Externally, our focus is on demonstrating to our agents and brokers the value of doing business with Kingsway.

I also said earlier that I believe we are at the turning point. For most of this year, we'd been looking in the rear view mirror. The tremendous amount of management time and attention has gone into addressing legacy problems, simplifying operations have become far too complex and restoring financial viability. This is being critical work but at the same time a distraction from our real business of providing value products and services to our business partners on policyholders.

I believe, we have turned the corner and we are on track to meet our stated goal of returning the profitability in 2010 but the fundamental changes behind us and with the platform we now have in place we will be able to look forward. We will focus our energy and execution in the market and building a new private successful Kingsway.

Operator, we are not prepared to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question today comes from Michael Goldberg with Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

Have a few questions first of all with a $118 million total loss including the $128 million in losses from the discontinued in run-offs of business. It implies that $10.7 million profit from continuing operations. Is this correct and can we view the roughly $0.20 per share earnings per share impact this amounts to, as indicative of the companies earning power you think can be sustained in 2010.

Daniel Brazier

You are right, the continuing operations was approximately $10.7 million in the quarter and I wouldn't say that there are some one-off gains in those numbers, but its starting to show a trend. It's starting to show some improvement and I think it's something that we look forward.

Michael Goldberg - Desjardins Securities

Can you give us some idea at this point of what you think normalized earnings power from continuing operations could be?

Daniel Brazier

Yeah Mike. We can't answer this, to go a point in time, we are still going through our planning cycle and so hopefully next quarter we can give you a better indication as to where that's going to lie.

Michael Goldberg - Desjardins Securities

Also I have a couple of other questions, you said the contribution of the Walshire shares to charities presents no potential liability to the charities. Is there any additional potential liability to Kingsway, if the run-off goes worse than expected?

Daniel Brazier

No.

Michael Goldberg - Desjardins Securities

And secondly, why distribute the Walshire shares so that no one ends up owning more than 5% of those shares. Is there a technical or legal reason for doing it that way and was this disposition cleared with the Pennsylvania Department of Insurance.

Colin Simpson

Yeah and when we chose to proceed the way we did by some of the advice of our advisors and we structured the transaction, so that our actions accorded with our contractual and statutory obligations.

Michael Goldberg - Desjardins Securities

What does that mean?

Colin Simpson

Basically, answers your question that we took the advice of our advisors and we executed inline with our contractual and statuary obligations.

Michael Goldberg - Desjardins Securities

And finally, does an open dialogue include returning phone calls from analysts in the future unlike the past?

Colin Simpson

Yes, Michael. It does. The challenge that we've had as many of you are aware and you probably hear, is the fact that we've had an incredible amount of challenge to deal with here within the group and I think our shareholders would prefer our full attention with on fixing those problems and that has been our full focus of the last few quarters, but as we move forward and progress, as evidenced through our group then certainly more open dialogue will be forthcoming.

Operator

Your next question comes from Doug Young with TD Newcrest. Please go ahead.

Doug Young - TD Newcrest

Just few questions, one, is it your view that you need the Pennsylvania Insurance Commission's approval to do this transfer?

Colin Simpson

No.

Doug Young - TD Newcrest

Secondly, you talked about how the charity isn't taken on the liability, but Kingsway doesn't have the liability related to Lincoln? Who owns the liability?

Colin Simpson

Walshire does, which is the parent company.

Doug Young - TD Newcrest

So, there is no recourse back to Kingsway?

Colin Simpson

As we have stated in our prior communication, our liability has been captured the $10 million contribution that we have agreed, and we are in discussions with the Pennsylvania Department at this particular point about the transition services agreement, we need to put in place to enable Lincoln to continue to functions and move forward.

Doug Young - TD Newcrest

And your legal advisors are comfortable with that transfer to a charity can be done as you structured it?

Colin Simpson

Yes we are.

Doug Young - TD Newcrest

Okay, other one you talked about in the US, you have consolidated all the operations except for Florida. Did I hear that right and why is that?

Colin Simpson

Yeah, Florida has got a very unique servicing model in it on the basis that it basically services a particular demographic of the population, which is something that we're looking to expand and leverage as we go forward. Consolidating that particular operation with the others would dilute that value that it brings to the organization as a whole. So, we're going to try and leverage that as we move forward.

Doug Young - TD Newcrest

So there is no issues that you are having with the Florida operations?

Colin Simpson

Oh, definitely not, no.

Doug Young - TD Newcrest

And lastly, in terms of you're covenanting in your debt, have you triggered an event of default because of the disposition of Lincoln or any other actions because your debt-to-cap is over now 50%.

Colin Simpson

No.

Operator

Your next question comes from Doug Mewhirter with RBC Capital Markets. Please go ahead.

Doug Mewhirter - RBC Capital Markets

I had a Lincoln General related question then a couple about the ongoing operations. First, have you filed a Form A with the Pennsylvania Department of Insurance?

Colin Simpson

No.

Doug Mewhirter - RBC Capital Markets

Regarding Lincoln General?

Colin Simpson

No.

Doug Mewhirter - RBC Capital Markets

The second question, what is the cash at the hoarding company, as of the end of the third quarter?

Colin Simpson

We don't disclose the cash amount in the holding company separately. Really what's in the financial statements is the total cash.

Doug Mewhirter - RBC Capital Markets

Going to the ongoing operations, I noticed that even if you sort of reverse the adverse development in the ongoing US operations, it's still mass out to about an 80% accident in your loss ratio for the ongoing US operations. Now, were there any other large losses in the quarter? It just seems a little high for operations that seemed to be fairly sound?

Colin Simpson

Yeah, what we've been doing is, we've actually built an actuarial team which is essential actuarial which has eight qualified actuaries and the Chief Actuary [Steve Morrison] comes from our company Mendota which has a very strong record of stability from a reserving perspective. We're taking that reserving philosophy across the group and we're reviewing every company.

So, although there has been a small amount of adverse development posted in the quarter, it should be noted that we are currently sitting at $8.4 million above Tillinghast select points and for those particular companies and we are very comfortable with the activities that we have at the moment in connection with reviewing our operations within those and reserving practices. We need to try and get the companies into stable for things so our pricing becomes more accurate as it goes forward. And just as part of those changes, there has been a little bit of a catch up in the quarter.

Doug Mewhirter - RBC Capital Markets

My last question, I guess for a general administrative expense, do you have a target for 2010 for the annual G&A expense?

Colin Simpson

Yeah I have said before, our overall target is trying to get to an expense ratio below 30%. Historically that's been split between commissions of about 18 and G&A of about 12. But as we go through the planning cycle again in the next couple of months, we'll be able to share more with you in the next quarters calls to what the future of 2010, looks like.

Operator

Your next question comes from Tom Mackinnon with Scotia Capital. Please go ahead.

Tom Mackinnon - Scotia Capital

Just a couple of questions here, one is, the fact that you have tripped some of these covenants. I understand you can't buy back your debt any more, you can't pay a dividend. Are you able to buy back the stock as a result of tripping these covenants now?

Colin Simpson

We have not actually tripped any of the covenants, the negative covenants. So it does prevent us from carrying out certain actions and we can buy back debt but we can't buy back stock.

Tom Mackinnon - Scotia Capital

Sorry, you can't buy back debt but you can buy back stock?

Colin Simpson

No, other way around. We can buy back debt, we can't buy back stock.

Tom Mackinnon - Scotia Capital

Okay, can't buy back stock. And you won't be able to buy back stock until when?

Colin Simpson

Until, the debt-to-capital ratio gets below 50% again.

Tom Mackinnon - Scotia Capital

Now, second question, just with respect to I think Lincoln had that one point somewhere around $79 million in terms of statutory surplus. Where does that go now? Is that all gone?

Colin Simpson

Yes. Basically the losses are reposted in the quarter, utilized the bulk of that surplus, and so as far as Kingsway is concerned, its all been written down to zero.

Tom Mackinnon - Scotia Capital

So, if we want to do any kind of book debt excluding Lincoln it's got to be about the same as the book that you're having right now. Book value per share.

Colin Simpson

If you want to look at the note to our financial statements, note for it shows the two entities.

Tom Mackinnon - Scotia Capital

Why don't you tell me what the book value per share is in excluding the Lincoln?

Colin Simpson

I don't have the book value here, but it shows you that the assets and liabilities of Kingsway excluding Lincoln.

Tom Mackinnon - Scotia Capital

What's the equity in Lincoln that you are then disposing off?

Colin Simpson

We had a write-down of $23.6 million on the disposition.

Tom Mackinnon - Scotia Capital

That's not in the book that's Q3, is that correct?

Daniel Brazier

We wrote that off, within the three key numbers yet.

Tom Mackinnon - Scotia Capital

Then, I am saying then the book value at the end of the quarter, reflects nothing with Lincoln and have not changed as a result going forward? Okay, so that's…

Colin Simpson

That's your question yes.

Tom Mackinnon - Scotia Capital

And just to get this straight, with respect to what's happened, Rockwell seems signal that there could be an area of potential exposure. Then you said you had to act quickly, so you sold it off to charity and then as a result, you've eliminated any kind of residual adverse development obligations with respect to Lincoln as a result of doing so. Is that the way we should look at that?

Colin Simpson

(Inaudible) we had sales it gets to…

Tom Mackinnon - Scotia Capital

Well yes, whatever, but it's gone?

Colin Simpson

What we basically did early…

Tom Mackinnon - Scotia Capital

(Inaudible), you tossed it.

Colin Simpson

Yeah. Early in the month, we recognized that there was going to be some further development in the numbers of Lincoln and at that point, we took the determination, we can no longer take the risk of the financial implications of that on the group and also on the basis of the risk under certain circumstances, we could have breached our debt covenants. And on that basis, we had to react quickly in order to resolve the issue and remove the risk from the group to protect the rest of our operating companies and as I have clearly stated, it also protects our ability in the future to support Lincoln by providing the services as they need to carry other operations on [arms length] agreement.

Tom Mackinnon - Scotia Capital

So, essentially if you hadn't gifted this ownership through Walshire to charity, then you could have been on the hook for further adverse development if it was to develop?

Colin Simpson

Yeah, it could be on the adverse development and we could have also triggered and opened our public debt indentures and (inaudible) are subjected to debt indentures and Lincoln had voluntary submitted itself or been placed into supervision, rehabilitation or liquidation, Kingsley would have been in default. And Kingsley repayment obligations under those public debt would have been accelerated and become immediately due and payable and that was the risk that we're trying to prevent.

Tom Mackinnon - Scotia Capital

Well this was a costless solution, just given the fact that there is no booking impact as a result of what you're telling us from the Lincoln book at the end of the third quarter was effectively zilch.

Colin Simpson

Yeah, I think it would be inappropriate for us to discuss all of our detail on this forum.

Tom Mackinnon - Scotia Capital

And then one final follow up. I think you mentioned with Jevco over the 150% MCT you've got $60 million in excess capital, but I think there was some MCT requirement as a result of putting in Kingsley with Jevco and I think that was somewhere around $240. So, are we to assume that there's no way we can get our hands on this $60 million.

Colin Simpson

Well, we've agreed with OSFI at this particular point because it's too very different businesses and the risk profiles are very different, that we would for the foreseeable future keep the MCT over the 243 level up towards the end of the year and then beyond the end of the year, over 250. And then, we'll continue to discuss with the regulators, the adequate capitalization of the subsidiary going forward.

Tom Mackinnon - Scotia Capital

How much excess capital do you think would be in the whole organization? I think you mentioned in the US you got about a $100 million over 200% RBC and then you've got an almost $29 million kind of still sitting somewhere in the Caribbean. Should we look at this thinking that move got a $130 million in excess capital. How are you looking at that?

Colin Simpson

Yeah we don't actually have that number at the hand, may be that's something we can pick up next quarter?

Tom Mackinnon - Scotia Capital

I am just getting this stuff out of your notes.

Colin Simpson

I just don't know. I can't give you the exact number, can't confirm that number right now. Maybe we can come back to you on that one.

Tom Mackinnon - Scotia Capital

To confirm, I am not sure what you want to confirm though. I just added up two numbers that are in your release. Should we be looking at those as excess capital or not? And is does that what you can't confirm right now?

Colin Simpson

Yes and you can look at those as excess capital.

Tom Mackinnon - Scotia Capital

Yes. We can look at those as excess capital?

Colin Simpson

Yes.

Operator

Your next question comes from Jeff [Gavarskoff] with Scotia Capital.

Unidentified Analyst

Just to clarify, there won't be any additional write-downs associated with Lincoln and the fourth quarter result will there?

Colin Simpson

No they will not

Unidentified Analyst

So is your -- was your expectation that you would dispose off Lincoln?

Colin Simpson

I think there is always something that has been considered. I wouldn't say has been our expectation.

Unidentified Analyst

Because if you were buying back stock and the covenants requires that you have a debt-per-cap no greater than 50 would suggest to me that you are anticipating that you would not dispose off Lincoln.

Colin Simpson

At that point no.

Unidentified Analyst

Is it an objective of yours to bring the debt-to-cap below 50 again?

Colin Simpson

That is the intention yes.

Unidentified Analyst

And given that you have excess capital, what's your opinion on additional debt buy backs?

Colin Simpson

Well we're continuing to work with the directors in our capital strategy and as that unfolds, we'll certainly let you know. But as you are aware there was the commitment to utilize up to $40 million and I belief there is just a little over $8 million of that left.

Unidentified Analyst

So, I didn't have access to the financials prior to the call or at least in a format that was easily review, but if you took the disposition of $23.6 million, does that mean that you have to have either capital gains from debt repurchases or operating earnings of $23.6 million or more before you are in a position where the debt-to-cap is below 50%?

Colin Simpson

I don't think we know the answer to that yet, the terms of the capital gains or the capital losses you're talking about?

Unidentified Analyst

Well your debt-to-cap seems to have been changed by this disposition which caused a loss of your equity value by $23.6, is that correct?

Colin Simpson

That's correct.

Unidentified Analyst

And I am wondering, how you get back to be having a debt-to-capital of 50, is it through capital gains or through operating earnings?

Colin Simpson

Yes. It's either operating earnings or repurchasing debt.

Unidentified Analyst

So, from the disposition of assets like Calgary or the building in Mississauga or any other dispositions, is there any numbers that you can point to as to what capital gain it might be?

Colin Simpson

As I say, we're still working on their financial strategy over the next couple of months into the future. We'll be obviously discussing that with the board. As the details become available, we can get back to everybody on the quarterly calls. But at this particular point as I have said, the only commitment we have for buying back debt is the surplus of what we've have already commitment in (inaudible) at the $8 million. And as we continue to work through our operating earnings and see what we can build additional funds and also look at the particular ratios, we will agree with the board as to what the most relevant strategy is and execute accordingly.

Unidentified Analyst

So, really the only thing you have communicated in this public form is that you anticipate a capital gain $2 million on the sale of the Calgary building?

Colin Simpson

That's correct.

Operator

(Operator Instructions). The next question comes from Michael Goldberg with Desjardins Securities. Please go ahead. Mr. Goldberg your line is now open.

Michael Goldberg - Desjardins Securities

Yes, I just like to review a couple of the points that you've made about the disposition of Lincoln. You say that there is no additional commitment to Lincoln beyond what you've written off in the quarter first. And secondly, the owner of Lincoln, Walshire has been described to the charities that it was gifted to as being worthless which seems to point to the Pennsylvania Department of Insurance as potentially holding the bag if things turn out to be worse than expected. Is there the potential for litigation risk arising out of this in terms of a possible dispute with the PA Department of Insurance?

Daniel Brazier

I don't believe so but as I said we are continually talking to the Pennsylvania Department and you know until those discussions are concluded it would be inappropriate for me to discuss kind of details at this point.

Michael Goldberg - Desjardins Securities

Why would you say that you don't think that there's any litigation risk.

Daniel Brazier

As I stated earlier on the call we have obviously taken advice on our actions and we believe that our actions are within the regulations and we will have to operate it.

Michael Goldberg - Desjardins Securities

So this is just your assertion.

Daniel Brazier

So I believe.

Operator

Your next question comes from Jon Old with Long Meadow Investors. Please go ahead.

Jon Old - Long Meadow Investors

Can you just clarify again just going back to the expense savings, are you still sort of in line for your original target of any life savings of $120 million when all this is said and done.

Colin Simpson

Generally the answer is yes obviously the target shifts a little but Lincoln is no longer part of the group so all the $120 million excluding Lincoln we are looking at a target of about $80 million we have achieved $57 million of the $80 million to-date which is about 71% of the target. So yes we are ahead of where we expect to be and we will achieve that and potentially more.

Operator

We have no further questions at this time please continue

Daniel Brazier

I want to close by reiterating my conviction that we've turned the quarter we can now focus our energy on building for the future. The action we have taken in disposing of Kingsway's interest and control all of Lincoln there is an important stat in our plans to address and bring an end to this legacy. We are of the view that'll provide all stake holders including policyholder, share holders and creditors with improved long-term value. We are seeing the emergence of a strong quarter in Kingsway business and the operations, we intend to continue. The tremendous effort that our employees have put into transforming the company is beginning to pay off and I'd just like to thank them for that. We can now start looking back and start looking forward to achieve our goal over returns profitability in 2010. So I would just like to thank you all for joining the call today.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!