Pennsylvania insurance regulator seeks legal action against Kingsway

The Pennsylvania Department of Insurance (DOI) is taking legal action against Kingsway Financial Services, Inc. (TSX, NYE: KFS) to unwind the company’s donation of its shares of Lincoln General Insurance Company to charities.
Kingsway announced in October 2009 that it had donated its indirect interest in Lincoln General to 20 different charities.
Each charity received 5% of the parent’s stock plus a cheque in the amount of US$20,000 as an “inducement to accept the shares,” the DOI said in a statement.
“Pennsylvania’s insurance holding company laws require Insurance Department approval of a change of control of a Pennsylvania-domestic insurer,” said DOI commissioner Joel Ario.
“That did not occur. Instead, Kingsway sought to dispose of its control of Lincoln General without having another entity as the controlling shareholder. We are taking legal action to unwind this set of sham transactions.”
Kingsway issued a press release strongly disagreeing with the DOI’s position.
“Kingsway maintains its view that the donations of the Lincoln shares to the charities were lawfully made and that the DOI has no legal basis for demanding the unwinding of the donations,” the company said in response.
“Kingsway further believes that any assertion by the DOI that the donations did not comply with law, or any suggestion that there could be any ‘repercussions’ for the charities which received the lawful donations, is not only incorrect but also inappropriate.”
Kingsway says it is prepared to “defend its lawful right to dispose of the Lincoln shares as it has done and will vigorously defend its position if required to do so.”
As of press time, on Nov. 17, 2009, the date the DOI announced its legal intentions, Kingsway Financial Services’ share price dropped 40.82% in value on the TSX to Cdn$1.74 and dropped 40.43% to US$1.12 on the NYE.