By Andrew Willis
Kingsway Financial Services (KFS) faces regulatory scrutiny of the insurer’s plan to donate a troubled subsidiaries to charity, an inquiry that’s got analyst recommending investors steer clear of the stock.
Last month, auto insurer Kingsway announced plans to shed its Lincoln General Insurance unit by donating 100% of its stock in the company to 20 U.S. charities.
Lincoln lost $95.5 million in the most recent quarter. The company is based in York, Pennsylvania and focuses on insuring truckers. In a press release, Mississauga, Ont.-based Kingsway said shifting ownership of the unit to charities was part of a move to “protect the longer term interests of the Kingsway group of companies.”
That plan is now under fire. Kingsway put out a press release on Monday that said the Pennsylvania Department of Insurance plans to "take legal action... to unwind certain transactions and ensure that Kingsway retains its legal obligations as the ultimate controlling entity of Lincoln General Insurance."
In a report on Tuesday, RBC Dominion Securities analysts repeated their recommendation that investors “avoid” this stock - strong terms for a dealer to use.
“By its own account, Kingsway came close to defaulting on its bonds during the most recent quarter, and only the disposal of its Lincoln General unit via a "donation" to a group of charities likely prevented more severe financial consequences,” said RBC Dominion’s report.
“In the worst case, an adverse court ruling could reverse the transaction (which may put the bonds back in default) and/or require a capital injection to Lincoln General,” said RBC Dominion’s analysts. The firm has a $1 target price on Kingsway, which specializes in insuring drivers who can’t get coverage from mainstream property and casualty companies.