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Kingsway Financial


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I have been looking for new ideas lately and I must admit that it is a lot more difficult than it was in the recent past. Maybe that I have been spoiled with incomprehensible bargains and must now contend with regular bargains.

 

One that I am starting to revisit is KFS. The CFO resigned yesterday, many changes have been implemented and I am wondering if there is real value there. That company was also written off in the early part of this decade only to see its shares go back from $2 to $20 if I am not mistaken.

 

What do you think are the odds of new management to turn around this ship?

 

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I think the better question is whether there still remains anything to turn around.  The problem with KFS is that the company never seems to have the faintest clue about whether they are profitably underwriting insurance.  They have chronically reported significant adverse development.  Not only can you not trust their reported income numbers, the magnitude of their reserve adjustments leaves you  questioning the legitimacy of their book value number.  This crap has been going on for several years.

 

Can the new management turn it around?  Maybe.  If they are able to suddenly impose underwriting discipline for the 2009 accident year (lots of luck on a sudden change like that....) there might be hope.  However, the Starr/Jackson legacy will likely remain on the books for a few more years as it takes a while to find all the skeletons in the closet.  IMO, this will not be a quick turn-around as there needs to be a drastic shift in culture to a disciplined underwriting stance.

 

Are you thinking something this?

 

30% probability of going bust within 5 years

40% probability of going sideways for 5 years

20% probability of a double over 5 years

10% probability of a 4-bagger over 5 years ?

 

 

Or is that too pessimistic?

 

SJ

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I wonder to what extent their trouble will benefit to FFH (especially their Northbridge subsidiary).

 

It's debatebale whether Insurance products have a moat or not (I think some do because some are sticky and retention is high), but yeah Partner, you are thinking exatly what I'm thinking.  From a pure business standpoint, this can't hurt, it can only help.

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There is not alot of overlap between NB and KFS except maybe some with Markel.  KFS does non-standard non-commercial vehicle, for the most part, whereas NB does mostly commercial P&C. 

 

KFS specializes in auto facility in Canada, high risk auto in the US, long haul trucking in the US, and motorcycles.  I have never been able to figure out why they cant get the underwriting fixed in this operation since it is mostly short tail.  It's not as if they are only a little bit wrong either. 

 

As Stubble says, I think they will take at least a couple of years to clean up the past bad underwriting.  They have no special investment capability to overcome the bad underwriting.  They do alot of their business through MGAs.  Everything FFH has learned to avoid KFS practices. 

 

P&C is a crappy business as Buffett has shown over and over.  The only thing that makes it work is great investment management, and the ability to pull away when rates are crappy.  Kingsway has had neither.  Changing a culture will be very difficult especially during a proxy fight for control.

 

I have owned and made a little money from this in the past.  I sold my last shares in the low 20s at least a year ago.  By the third announcement of bad reserving from Lincoln General I had had enough of the promise never delivered. 

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It is usefull to think of KFS as essentially being a ponzi scheme, where the objective is to raise as much UW float as possible in the hopes of a 1 year investing/UW performance that hits it big. A casino bet on your number coming up & paying out at 32x the ante - and as long as there are enough new buyers to replace the sellers, the game can go on indefinately.

 

They have a book, but they have such a poor UW reputation that a buyer would have to heavily discount its value to get rid of the fleas ... & you can never really get rid of the fleas. Not good news for a shareholder.

 

In many ways they're really worth most as a casino bet but only when there's nothing else worth buying. When there are a smorgasboard of higher quality & better choices for about the same price - guess which one is on the bottom.

 

Easy to get in, but to get out - you need a rising price to bring in more buyers. If you effectively cannot sell the book, & are stuck with the culture, you pretty much need to turn yourself into a 'momentum' stock - & rely on there always being a greater fool ready to buy, at any price. The .com era proved that this can work very well for a time.

 

There are far better places than KFS.

 

SD

 

 

 

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when you are talking about an insurance company which is really an investment company loaded with risk, you really have to know you are buying the management - not just present but past as well.

 

I would stay away - I looked at this first around the millenium (00-02), I couldnt find reasons then that would compel me to buy and its just gotten worse from there.

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I wonder to what extent their trouble will benefit to FFH (especially their Northbridge subsidiary).

 

I agree with Uccmal -- KFS's business has been predominantly non-standard.  Very little benefit here for Northbridge.  You might instead take a look at EGI Financial -- they are highly involved in non-standard & specialty lines.  They could pick up some of KFS's business -- particularily in Ontario.  EGI is very underlevered and are now indicating that the time is right to finally lever up.  They resisted any significant expansion when multiples were too high and have patiently waited for the present opportunity.  M&A opportunities are significantly more attractive, standard insurers are exiting non-standard lines and the likes of KFS are now hemoraging.  It trades at about a 0.8x multiple to book (albeit very thinly). 

 

UCP / DD

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  • 3 years later...

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