Kingsway Financial Services faces regulatory scrutiny of the auto insurer's plan to donate a troubled subsidiary to charity, an inquiry that has analysts recommending investors steer clear of the stock.
Last month, Kingsway announced plans to shed its Lincoln General Insurance unit by donating 100 per cent of its stock in the company to 20 U.S. charities. It was, to say the least, a novel approach to dealing with a potential liability, the corporate equivalent of dropping an unwanted child on the steps of an orphanage.
Lincoln lost $95.5-million (U.S.) in the most recent quarter. The company is based in York, Pa., and focuses on insuring truckers. In a news release meant to explain the charity gift, Mississauga-based Kingsway said shifting ownership of the unit was part of a move to "protect the longer-term interests of the Kingsway group of companies."
That plan is now under fire. Kingsway said earlier this week that 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 yesterday, RBC Dominion Securities analysts pointed out that the Pennsylvania regulator wants to "unwind" the transactions, and 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," RBC said. "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."
Kingsway stock closed yesterday at $1.70 (Canadian) on the Toronto Stock Exchange, down $1.24. RBC has a $1 target price on Kingsway, which specializes in insuring drivers who can't get coverage from mainstream property and casualty companies.
Sandfire's new partner
The Street's newest dealer has a deep-pocketed partner and a national expansion plan, as employee-owned Sandfire Securities landed financial backing from private equity fund Northland Bancorp.
Sandfire, an 11-person dealer launched in the teeth of the market downturn in October, 2008, yesterday sold what founder and chairman Jonathan Robinson described as a "significant" slug of equity to Northland.
The new partner is a Calgary-based firm launched two years ago by a father-and-son team of real estate developers, Cliff and Bob Johnson, and three partners. No terms were released on the transaction, which still requires regulatory approval.
At the moment, Sandfire's focus is financing mining companies from its Toronto office.
The new capital is earmarked for funding construction of a national institutional dealer, with expertise in oil and gas, alternative energy, tech and special situations.
Mr. Robinson said the firm's ambition is to triple in size to 30 professionals over the next year, with offices planned for the cities of Calgary and Vancouver.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
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