Pennsylvania Regulator to Fight Kingsway over Share Donations

November 17, 2009

The Pennsylvania Insurance Department said it will take legal action against Kingsway Financial Services Inc. over its attempt to divest Lincoln General Insurance Co.

In a press release, the state’s insurance regulator said it wants to intervene in order to ensure Kingsway retains its legal obligations as the controlling entity of Lincoln General Insurance Co.

Lincoln General, a Pennsylvania insurance company specializing in commercial insurance for the trucking industry, has been experiencing financial difficulties. The department has been in discussions with Lincoln General and Toronto-based Kingsway concerning Lincoln General’s financial condition and Kingsway’s responsibilities as the ultimate controlling corporation for Lincoln

The insurance department said that, rather than continuing these discussions, Kingsway 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. It did this by attempting to dispose of its entire interest in Lincoln General by donating 100 percent of the stock of Lincoln General’s immediate parent to 20 different charitable organizations. Each charity received 5 percent of the parent’s stock plus a check in the amount of $20,000 as an inducement to accept the shares.

The department said it will try to unwind those charitable donations

“Pennsylvania’s insurance holding company laws require Insurance Department approval of a change of control of a Pennsylvania-domestic insurer,” said 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.”

Ario also vowed to work with the charities, which he said “have been unwitting participants in this transaction.”

Kingsway said it disagrees with the Ario’s position, and claims that the donations of the Lincoln shares to the charities were lawfully made and that state regulators lack any legal basis for demanding the unwinding of the donations.

The company vowed to “vigorously defend its position if required to do so.”

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