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By Andrew Willis

Red flags keep getting raised at insurer Kingsway Financial Services (NYSE:KFS), which announced a potential sale of its Canadian subsidiary that raised more questions than it answered about the troubled parent company.

Kingsway, already facing opposition from U.S. regulators over plans to spin out a money-losing U.S. subsidiary, announced late Monday that it has “undertaken to dispose of its majority interest in Jevco Insurance Company.”

In a report on the move, analysts at RBC Dominion said the press release that announced the potential sale “gives no indication of A) What portion of Jevco they are selling; B) How much they hope to receive; C) Who the buyer might be - if in fact they have a buyer (the language is a bit ambiguous as to whether they are simply looking for a buyer or if in fact they have found a buyer).”

In last year’s annual report, Kingsway said its Canadian division posted a $79.8 million loss on gross premiums of $449 million. The U.S. division lost $398.1 million after receiving $1.1 billion in premiums. In the most recent quarter, ending Sept. 30, the company has a $10.4 million profit in Canada, and a $8.8 million profit on its U.S. operations. Kingsway’s units insure high-risk drivers and other specialty segments, such as motorcycles, trucks and recreational vehicles.

“Most property and casualty insurance companies are being transacted at 'book value' or less, so [RBC Dominion Securities] would not expect a sale would be value creating so much as liquidity creating,” said the report Tuesday from the investment dealer. RBC Dominion recommends investors “avoid the stock, given the company’s considerable legal and financial risks.”

Separately, credit rating agency A.M. Best downgraded Kingsway Tuesday to a triple-C rating from single-B-minus. That’s deep into junk bond territory.

A. M. Best pointed out that Kingway’s move to dispose of its stake in Lincoln General Insurance Co. by donating its shares to charities is being “unwound” by Pennsylvania insurance regulators, and that Lincoln “is in extreme financial distress.”

“Unwinding of its disposition [of Lincoln] could ultimately lead to Kingsway being in breach of its public debt covenants,” said A.M. Best in a press release.

In response, Kingsway said that it was “disappointed by the decision of A.M. Best and will continue to work with them to improve the ratings of the group.”

Source: Kingsway Financial: More Questions than Answers