Kingsway Financial Downgraded on 1Q Loss

Kingsway Financial Services Inc. (KFS) might be working hard to clean up the mess at U.S. subsidiary Lincoln General, but so far, all that effort is falling short.

The company reported another reserve increase at Lincoln on Wednesday that resulted in a first quarter loss for the parent company of C$0.62 per share – way off analyst expectations. Investors were less than impressed, driving shares in the company down 30% in Thursday morning.

The C$52.8-million reserve increase marks the seventh consecutive quarter that Lincoln has suffered from a reserve increase for a grand total over that period of $330-million. The company also announced a $12.2-million reserve increase at Kingsway General.

"Given the persistency of this problem, management has some credibility it needs to rebuild with investors," BMO Capital analyst John Reucassel said in a note to clients.

Mr. Reucassel noted that the company has made several successful changes in recent months to address the challenges at Lincoln, including moving claims in-house, hiring new actuaries and improving pricing models.

But while the worst of Lincoln's problems, primarily stemming from its long-haul trucking policies written in 2007, appear to be behind it, Mr. Reucassel said it remains difficult to predict the Kingsway's financial future given management statements that more "clean up" is needed.

During the earnings call, the company announced the appointment of Scott Woolney as president and CEO of Lincoln, following the retirement of John Clark. Kingsway also alluded to more management changes, the analyst added, as part of its undergoing strategic review of its Lincoln businesses.

Mr. Reucassel told clients he hopes one of the options explored is a complete shutdown of Lincoln, but added, to his knowledge, that scenario is not being contemplated.

He downgraded Kingsway stock from "market perform" to "underperform" and reduced his target price from C$13.50 to C$10.