Kingsway Financial Services Inc KFS

From Wall Street Journal

[CanMan17]

Pennsylvania Regulators Take Legal Action Against Kingsway Financial

The Pennsylvania Insurance Department is taking legal action against Kingsway Financial Services Inc. (KFS) after the Canadian property insurer tried to divest itself of its troubled U.S. subsidiary, Lincoln General, by donating the company's shares to charity in what the Department calls "sham transactions."

In a release, Pennsylvania insurance Commissioner Joel Ario said the department would move to "unwind certain transactions and ensure that Kingsway retains its legal obligations as the ultimate controlling entity of Lincoln General Insurance Company."

As reported, Kingsway donated the shares of Lincoln General to about 20 charities in a bid to stave off a bankruptcy filing.

Toronto-based Kingsway had been in advanced discussions with Pennsylvania authorities about the wind-down of Lincoln General's business. But Lincoln General's situation was deteriorating rapidly, and the company faced the possibility of violating the terms of the wind-down approved by the regulators. Violating those terms could have put the company at risk of insolvency.

According to the regulators, rather than continue discussions, "Kingsway unilaterally sought to divest itself of its responsibilities under state law by improperly removing Lincoln General as a member of the Kingsway consolidated group of companies."

The Pennsylvania Insurance Department said Kingsway gave each of the 20 charities 5% of the parent company's stock plus a check for $20,000 "as an inducement to accept the shares."

Ario also noted that any change of control of an insurance company requires approval from the Insurance Department. "That did not occur," the press release said. "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."

The Insurance Depatment also said it would work with the charities "which have been unwitting participants in this transaction" to ensure there are no repercussions.

Kingsway officials weren't immediately available to comment.

By Monica Gutschi, Dow Jones Newswires; 416-306-2017; [e-mail]
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