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Kingsway Financial quits business lines, sells assets amid 'material' loss

Mon Feb 9, 9:24 AM

The Canadian Press Email Story IM Story Printable View

By The Canadian Press


TORONTO - Kingsway Financial Services Inc. (TSX: KFS.TO) is quitting some lines of business, cutting 750 jobs and selling assets, including its common-share equity portfolio, while warning of a "material" fourth-quarter loss.


The jobs will be eliminated during the next 18 to 24 months, the vehicle-insurance-focused company stated Monday.


Kingsway, headquartered in Toronto but keeping its accounts in U.S. dollars, said it expects to report a fourth-quarter loss of $324 million to $344 million, or $5.88 to $6.24 per share.


The loss is blamed on underwriting problems at Lincoln General Insurance Co., a U.S. subsidiary specializing in truckers and high-risk motorists, as well as impairments to goodwill, investment losses, and writedowns of future tax assets.


Kingsway said it will reduce its capital requirements by eliminating US$350 million in premiums through quitting non-core and unprofitable lines of business at Pennsylvania-based Lincoln and at Alabama-headquartered Southern United Fire Insurance Co.


Kingsway said other assets and business will also be run off "with the objective to free up approximately $200 million in capital."


Meanwhile, a corporate restructuring will aim to cut costs by $80 million annually.


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There was a recent VIC write-up focusing on Stilwell Group's involvement in Kingsway.


Stilwell seems to have a good record with many thrifts/insurance companies forcing improved capital allocation/sale of the company. For example, http://finance.yahoo.com/q/bc?s=ACAP&t=my&l=on&z=m&q=l&c=


Jan 30, 2009 -  A recent SCHEDULE 13D from Stilwell to KFS



Kingsway has accepted two of Stilwell's board members--plus Stilwell is trying to downsize the board, refocus KFS on core businesses, buyback debt and equity and cut expense. With today's announcement, the company seems to have thrown in the kitchen sink.


Anyone have experience with insurance turnarounds? As Stilwell only has two seats, it seems like a lot that can continue to go wrong with the poor corporate governance and corporate culture.


Also, as a Canadian company, where do I find records of Holders and Insider Buying?



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80M in additional UW provisioning, despite reducing the book 43%. So it would otherwise have been well north of 140M [80/(1-.43)] ? & in what is supposed to be short tail less risky business ?


114M of investment losses ? They knew there were reserving issues requiring greater conservatism, but still chose not to hedge the equity portfolio - despite direct & overwhelming evidence of growing volatility ?


We've fired one exec, now please believe us ?






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The information you seek can be found at:



http://www.canadianinsider.com/ also has insider info but it is not as complete -- but set up in a better format than Sedi.


I would suggest caution if you are considering KFS though.  I bought into it about 8 years ago when it 'appeared' very cheap -- but a while after I spotted a very peculiar oddity on the balance sheet.  I got out.  The skeletons have finally come out of the closet.  You don't know what is left lurking though.  This one's been swimming naked for a while.


An option you might consider is EGI Financial (EFH) --- very well managed with very disciplined underwriting.  They could 'possibly' benefit from some of KFS's Ontario business as it dribbles out (a result of their downgrading status).  But even if it doesn't EFH is very cheap. 



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The article paints an overly negative picture of what they actually said today.

The facts are not what they purport, the majority of the "loss" is "water" and an exit from any investment having risk.

They tend to litigate rather harshly, these losses are likely from a few years back SD...


The subs that have problems tend to be American and lines that they expanded irrationally.

Didn't think there was all that much FFH Family overlap where the KFS problems are.


Joseph Stilwell is very smart.

I'd suggest he has a lot more control than it appears.


btw - I own KFS

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UCP -- I know it was over 8 years ago, but can you recall what turned your stomach?  I love these stories... plus it would encourage me to re-read Financial Shenanigans (to brush up). They've done several acquisitions over the past few years-- acq. scare me when I don't know management.


calonego --- "he [stilwell] has a lot more control than it appears." How so? Stilwell's two board members seem strong-- a board member of American Physicians Capital and a former insurance executive (Larry Swets).... Could you discuss your conviction in Stilwell influence of the board and management?


I know the name has been a value trap for many BUT the company's "short tail" and Stilwell's record of good capital allocation keeps me interested.



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I share UCP's reservations about KFS. After a cursory look at their fundamentals I initiated a small position in KFS in late 2007. Intending to build up my postion, I started digging deeper as the stock got cheaper. The more I investigated the less comfortable I became.


Firstly, it appeared to me that mgmt were being serially dishonest about the extent of the problem at Lincoln. "The problems relate to past years' business; we've taken action; the problems are behind us now." The same message was repeated over several quarters.


Secondly, the reserve development triangles gave clues that their reserving practices were suspect.


Thirdly, I can't remember the specifics now but mgmt did not give a very convincing answer to a question of why they suddenly realised that the Lincoln reserves were inadequate.


KFS may look cheap but mgmt has failed the honesty test, and I don't think you want to place too much faith in their numbers. There are better alternatives out there - why scrape the bottom of the barrel? Btw, check out Shaun Jackson's interview on BNN today - maybe I'm biased but I thought the body language spoke volumes.


Incidentally, I took my loss (33%) in Q2 08 and moved on.


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Carvel - I've spoken to Stilwell a few times, have spoken to his guys as well (mainly prior to them getting onto the board, etc).

Everything that he said he would like to do here (or did at ACAP) is starting to happen. He also has many routes to go to finalize the control.


What I do know, from following the company for 8 or 9 yrs, is that they would never have done a few of the things announced yesterday (former management, present management, the board). So clearly someone forced their hand. He only has 2 seats, there are ways he encouraged his view (logic or pressure). It's likely similar to how Sardar brought people around to his thinking at SNS, or they left.

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Apologies if we came off as a little aggressive.


Shortly after KFS had their first 'hiccup' we bought in & did well. We made the gain because we got in at a very low price, & essentially got out at what was the best exit point in many years. Management was why we left.


The reserving issues aren't new - ordinary errors/re-assessments occurr in normal course business, but extra-ordinary adjustments are just that; extra-ordinary. Sizeable extra-ordinary adjustments year-after-year is hard evidence that key actuarial & executive controls are weak, & that current income is being systematically overstated by under-reserving. Add in evidence of casino betting, & a senior departure, &  it becomes fair assumption that there may well also be an ingrained cultural problem of boosting current earnings. You don't change culture by simply changing one exec.  


The press release suggest current quarter operational earnings in the $44M range. Given the reserving history, & the cultural assumption, the prudent question is why is the current CR not actually <100 ? - in a quarter when there were clearly a lot of internal strife. ie: shouldn't the current quarter's operational earnings really be negative? Granted extra-ordinary charges create noise, but the prudent action is to give benefit of the doubt only when there is evidence of reasonable credibility.      


Portions of the business aren't that bad, but there is a strong case that they would be far better served were they in another carrier. The business could be turned around, & there is evidence of an attempt - but doing it in a recession with credit markets seized & workforce morale probably near rock bottom, is no picnic. Hard markets will benefit other carriers as well, & at far less risk to the investor.


That said, we wish the management well, & hope to see them turn it around.







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Few years ago, I took a look at this business. There were reserving issues and other stuff. An insurance company might look cheap, but the problem is you can easily fool yourself because you never truly know the true cost of service sold immediatly and a significant part of the book value is based on actuarial reserves calculations...so the actual book value is never fully known. You need to have faith in their estimates. It was something tough with Fairfax. Year after year, you had these reserve developments. It wasn't an easy situation. Were they just pushing the problems forward or were they truly honest? I tought they were truly honest. If I had serious doubts about Prem's credibility and honesty, I would have sold all of my shares.


In the end, I decided to pass the KFS opportunity. I prefer to stick with the ones that I admire and like most, even if some other opportunities look cheap.

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  • 5 years later...

It has been several years now and the company has made much progress on its turnaround since 2010. I am wondering if any one has been following along for the last couple years, and is willing to share their understanding of the situation currently?

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Found it on zenolytics blog but I cannot access the report on my phone. If you have the PDF of the report handy could you post it here?  If not, I can pull it down tonight when I get back to my CPU.


Do you have any color on zenolytics?  Just heard of kingsway, and as I mentioned they seemed to be saying all the right things. Looking to spend a little more time on it. I've heard of joe stillwell but not the new CEO. I read some older VIC writeups to get some general info and get somewhat up to speed on the story.


Thanks, No Thanks.

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I'd say the Zenolytics report is substantially less informative than the shareholder letter.


Tangible book value is negative and profits are still elusive, several years after Stilwell took control. I don't see how KFS is attractively priced now, or at any time in the last 10 years. If management is successful, I suspect there will be many more opportunities to buy at more attractive prices.


Here's the direct link to the PDF: http://www.zenolytics.com/wp-content/uploads/2014/04/T11-KFS-research.pdf

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From what I gather, zenolytics definitely drums to his own rhythm.  I believe he has been invested in WMIH  for around two years, so he definitely does some deep research into complicated situations, but then he also is into some technical analysis.  I may be way off though.  That is just my quick take on him.  I really enjoy his research though and have followed him into both HH and KFS recently. 


I would be really surprised if KFS doesn't announce a large acquisition in the next 6 months. A lot of moving parts though...

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