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What's up with Kingsway?


beerbaron
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I know a lot of you guys follow the insurance industry really closely. I remember reading KFS's annual report in February and believed their position was nos as bad as the share price reflected (didn't buy tough). But today I was updating myself on KFS and man did they screw up. Is it an underwriting problem or ...is it just their bad acquisitions... you know something similar to FFH problems when hurricanes almost wiped it's equity...

 

Since I'm novice in understanding insurance I would be interested on your views on this one.

 

BeerBaron

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I held Kingsway for years up until just before the fall.  To sum up:

- their business is auto insurance for high risk drivers - primarily.

- short tail business - most claims appear within a year or two

- Serial acquirers

- One large US sub - Lincoln General - was costing them hundreds of millions of dollars per year in reserve increases.  - this got worse and worse into the Spring of 2008 when I sold out.  They kept promising it would get better but it never did.  They use outside underwriters - MGAs - giving away the pen.

- Unlike Fairfax/BRk they have an average investment record - 1-3% on bonds' - average returns (mutual fund average) on stocks. 

 

The book value has imploded and the turnaround has become daunting.  Rather than cut back on underwriting during  soft market they kept writing at bad rates to keep money coming in the door to pay off past mistakes. 

 

Kingsway shows how bad it can get with insurance without an actual bankruptsy.  Good management and a hard market and some investment savvy would set it right but that's alot of ifs. 

 

In a time when I can buy FFH below book, Sunlife at book, MFC at 1.2 x book etc., PWF at multi-year lows, why would I waste money on a turnaround that may take years? 

 

 

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In a time when I can buy FFH below book, Sunlife at book, MFC at 1.2 x book etc., PWF at multi-year lows, why would I waste money on a turnaround that may take years? 

 

And EGI Financial (EFH) can still be had for less than .9x book.  A lot of business is sure to spill over to EFH due to this Kingsway uncertainty.  And at a very unique time when there are some pretty hefty premium hikes taking place and some regulations implemented that should reduce claims.

 

Rather than cut back on underwriting during  soft market they kept writing at bad rates to keep money coming in the door to pay off past mistakes. 

 

EFH is very conservative and discipline -- passing up on a lot of NS business the last few years. Meanwhile, their leverage ratio (of annualized net written premiums to Shareholder Equity) has been dropping like a rock ..... now 1.1 times (compared to 1.4 a year ago).  Management believes 2.5:1 would be a fully leverged ratio (MCT margin is currently 314%).  The company could pay out a substantial one time dividend and still be in very fine shape.  Of course they aren't about to do that ... instead they will be letting the business spill over from this unique situation (not only from the Kingsway blowup but from Standard insurers exiting NS), build out their niche products division and the business they are establishing in Florida.  Also the potential of acquiring distressed books/businesses in any of these (or other) situations.  IMO it is a great time to own a top of class insurer sitting on a ton of surplus cash. 

 

UCP / DD

 

 

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So are there parts of Kingsway that would be worth buying, given that one might have to assume part of short-tail book of business?  Or is it better to simply out-compete them by quoting to their former customers, ie organic growth into the marketplace being abandonned?  I have no perspective on Kingsway, except that I looked at them carefully a long time ago and decided to invest elsewhere - thereby avoiding some distress and risk but also missing out on some potential for trading on stock price volatility.  So I don't know what are Kingsway's moving parts nowadays, which are worthwhile business operations with good staff and organization, or even if there are poor operations with decent customer lists to be converted.

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I know a lot of you guys follow the insurance industry really closely. I remember reading KFS's annual report in February and believed their position was nos as bad as the share price reflected (didn't buy tough). But today I was updating myself on KFS and man did they screw up. Is it an underwriting problem or ...is it just their bad acquisitions... you know something similar to FFH problems when hurricanes almost wiped it's equity...

 

Since I'm novice in understanding insurance I would be interested on your views on this one.

 

BeerBaron

 

I held a small position in KFS for a brief period in 2008. Bought it because of its significant discount to book and took mgmt's remarks at face value that their Lincoln problems were in the past and they had adequately reserved for those. A couple of quarterly reports later, it became apparent that mgmt's comments/excuses re reserves did not square with the actual numbers. I decided that mgmt could not be trusted and got out.

 

The main risk in insurance investing comes from the subjectivity in estimating reserves and this gives mgmt a lot of wiggle room in reporting. THis combined with leverage can be a dangerous thing. When problems strike, the temptation to fudge numbers to maintain credit ratings is great. Sometimes, they get lucky if the pricing cycle turns around in time and the problems resolve themselves.

 

The key to spotting serial undereserving is to study the loss development triangles in the notes to the accounts.

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Judging by everybody's comments. Why would we expect a turnaround from a management we can't trust... maybe if management would change it could become a nice turnaround opportunities.

 

BeerBaron

 

You can only change management on a going-forward basis.  But KFS has a problem with its past. IMO, there are still more skeletons in the closet.

 

Just as a general comment, when you takeover a company, generally you try to pay less than what it's worth and when you sell a division, you generally try to charge more than what it's worth.  KFS tried to sell (er, donate) Lincoln General for a price of zero.  Tells me that they think it's worth less than zero

 

Nuff said.

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