Kingsway Financial Services Inc.
Q4 2008 Earnings Call Transcript

Published: 20 Feb 2009

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Kingsway Financial Services, Inc. Q4 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would like to remind everyone that this conference call is being recorded on Friday, February 20, 2009, at 8.30 am Eastern Time. I will now turn the conference over to Shaun Jackson, President of Kingsway Financial. Please go ahead sir.

[W. Shaun Jackson:]

Okay. Thank you, and good morning everyone. Thanks for joining us today for our earnings call following the release of our fourth quarter and fiscal 2008 results earlier this morning. Also here with me today is Shelly Gobin, our Senior Vice President and Chief Financial Officer, Colin Simpson, previously Senior Vice President and Chief Strategy Officer, who was recently appointed Senior Vice President and Chief Operating Officer. And also Scott Wollney, President and CEO of Lincoln General, and of our newly created U.S. Commercial Lines business unit. Shelly and I will present the results for the fourth quarter and for the year. Following which, Shelly, Colin, Scott and I will be pleased to answer any questions you may have. Before getting into the formal part of the presentation. Shelly will read our forward-looking statements. Shelly?

[Shelly Gobin:]

Thanks Shaun. The remarks that Shaun and I will make in today's discussions contain certain forward-looking information with respect to the company's operating and financial plans and performance. These forward-looking statements are based on management's current assumptions, beliefs, and expectations and are subject to a number of risks, uncertainty, and other factors beyond the company's ability to control or predict. We caution you that actual results or developments may differ materially from those contemplated by these forward-looking statements. Additional information on the material risk factors and material assumptions that could cause actual results or developments to differ from expectations are contained in our fourth quarter press release and our Canadian and U.S. Securities filings including our 2007 Annual Report under the heading Risk Factors in Management's Discussion and Analysis section. Any forward-looking information provided in the context of today's discussion represents the company's views only as of today's date. While subsequent events and developments may cause the company to change its views, the company does not undertake to update any forward-looking information except to the extent required by applicable securities laws. Certain non-GAAP financial measures may be discussed or referred to today. Please refer to our fourth quarter press release and other securities filings for a reconciliation of each of these non-GAAP measures to the most directly comparable GAAP measure.

[W. Shaun Jackson:]

Okay. Thank you, Shelly. We are obviously very disappointed with the results of 2008 in particularly with the fourth quarter. They reflect the continuing impact of legacy operational problems at our Lincoln General subsidiary. The impact of our first ever loss on our securities portfolio and resulting non-cash valuation allowances. In the fourth quarter based on recommendations of our independent actuaries, we increased reserves at Lincoln General, the discontinued artisan contractor book of business. Lincoln's loss ratio also increased for the 2008 accident year. We are taking decisive actions to de-risk its business, by exiting the volatile and unprofitable legacy businesses and divesting of certain unprofitable business lines, we expect to reduce written premiums at Lincoln by approximately $350 million in 2009 and thereby reduce its premium to surplus ratio. Lincoln has been the main cause of Kingsway's losses beginning in 2007 relating to its legacy business. As previously announced, we are looking at strategic alternatives in conjunction with the Pennsylvania Insurance Department relative to the future of Lincoln. We will report back to shareholders on our strategy with respect to Lincoln at or before our 2009 annual meeting in April. Early in 2009, we made the decision to divest of our common share equity portfolio in order to reduce the volatility of our balance sheet and thereby protect the company's capital position. This decision led to our recording of a net realized loss on the investment portfolio of a 114.3 million in the fourth quarter. This in turn led to our recording a non-cash valuation allowance against the future tax asset and goodwill amounting to 215 million in the quarter. As a result of the disappointing results, the Board decided to reduce the dividend payment to $0.02 per share this quarter from $7.50 in the previous quarter. We understand the importance of the dividend to many of our shareholders and made this decision to be prudent in today's challenging markets. The challenges we have been facing prompted A.M. Best to reduce its financial strength ratings or subsidiaries and Kingsway's issue a debt rating in January and S&P to lower our ratings following our results pre-announcement. We anticipate little impact to the majority of our operating company's business, notably our non-standard automobile business and we will be working hard to regain higher ratings as we move forward. Looking ahead, we will focus on our core business line. At the same time, we are taking actions to further reduce expenses through initiatives that we announced earlier this month including our corporate restructuring plan, which I will expand on in my closing remarks. But first, Shelly will discuss our financial results in greater detail.

[Shelly Gobin:]

Thanks Shawn. As preannounced on February 9 we reported a significant net loss in the fourth quarter, the loss was 360.4 million or $7.35 per share and the main components are as follows. Net realized losses of a $114.3 million based on our plan to dispose the company's equity common stock portfolio, a non-cash charge of $62.9 million for goodwill impairment on the U.S. operations, a non-cash charge of $152.4 million for additional valuation allowance against the U.S. operations future tax asset and a net loss at Lincoln General of $77.5 million excluding the above mentioned items. The loss was $16.4 million higher than we preannounced primarily as a result of a higher than expected valuation allowance against the future tax assets. As Shaun noted we are taking actions to strengthen our capital levels, reduce cost, and improve operating efficiency. The decision to sell the equity common stock portfolio is important for the company as it will limit, further limit charges to earnings for other than temporary impairments and eliminate exposure of the company's reduced capital to stock market volatility. It will also improve the regulatory capital of this subsidiary particularly in Canada, where a higher level of capital is required when equity securities are held. The other three items are tied to the poor results at Lincoln General. Based on the continued losses in the U.S. operations, despite corrective actions that were taken during the year, there was uncertainty regarding the company's ability to use in the short-term tax loss that have expires of up to 20 years. As a result, a valuation allowance was recorded against the U.S. operations tax asset. Based on the company's assessment, the goodwill associated with the U.S. operations was written off, the U.S. reporting unit, which includes Lincoln as well as other U.S. subsidiaries at 62.9 million of goodwill recorded. And finally there was the net loss at Lincoln General significant increases in estimated provisions for unpaid claims were made in the quarter particularly on the troubled artisan contractors' line that resulted in the net loss of $77.5 million. The following are some other key components of our results for the fourth quarter and the year. Gross premiums written from continuing operations decreased 30% to 295.6 million in the quarter and decreased 19% to 1.5 billion for the year. Excluding Lincoln General, except for the Kingsway managed business premiums declined 14% to 227.9 million. As part of the restructuring plan Kingsway's objective is to make control of this business going forward. Canadian operations premiums declined 23% in the quarter in U.S. dollars, but declined a lesser 2% in Canadian dollars to a $103 million. The Canadian dollar depreciated against the U.S. dollar from September, when it was almost at par with the U.S. dollar. Non-standard automobile premiums increased 4% to $643.6 million for the year and represented 43% of the total premiums written in 2008, compared to 31% in 2007. Trucking premiums declined 39% to 255.8 million and represent just 17% of the consolidated total premiums, compared to 21% last year it is anticipated that this line of business will decline as part of the premium reduction plan. Canadian motorcycle premiums had another strong season and increased 12% in Canadian dollars, so in U.S. dollars they declined 3% to $78.9 million. Estimated net unfavorable reserve development was $69.4 million in the quarter, a $160.8 million for the year-to-date, which impacted the fourth quarter earning by a $1.11 per share on an after-tax basis and $2.63 for the year. The terminated artisan program at Lincoln General accounted for 42 million of this development this quarter. A portion of the development relates to costs incurred to bring the claims in house during the fourth quarter of 2008. The Canadian operations reported favorable developments for the first time in three quarters of $1.2 million. The underwriting loss of $99.7 million was reported from the continuing operations resulting in a combined ratio of a $132.6 million for Q4 with unfavorable reserve development increasing the combined ratio by 22.7 percentage points and non-recurring expenses adding a further 4.6 percentage points. Excluding Lincoln General, excepts for Kingsway managed business the U.S. operations combined ratio was a $105.1 million in the quarter and the consolidated combined ratio was a $107 million. For the quarter, the company reported the net loss of $360.4 million, compared to a net loss of a 103.5 million in Q4 last year and for the year a net loss of $405.9 million, compared to net income of $18.5 million for last year. Diluted loss per share was $6.53 for the quarter, compared to a loss of a $1.84 per share for Q4 last year. For the year ended December 31, 2008 diluted loss per share was $7.35, compared to diluted loss per share of $0.33 last year. Investment income was $28.3 million in the quarter, compared to $33.1 million in Q3, but down 24% compared to the fourth quarter of 2007 reflecting decreased short-term yields and a smaller securities portfolio as a result of a repayment of the company's bank debt and disposition of York Fire. The fair value of the securities portfolio per share decreased 10% in this quarter to 46.08. At year-end the composition of the portfolio was 9% in government bonds, 66% in corporate bonds and a 11% in equity. Over 95% of our fixed income portfolio is rated A or higher. The senior debt-to-capital ratio increased to 31.9%, compared to 23.3% at September 30, based on the reduced capitalization of the consolidated entity. We have no debt maturing till mid-2012 and currently have sufficient cash on hand at the holding companies to meet all of the obligations under the debt agreement in 2009. Excluding Lincoln General, there is over $545 million of regulatory capital within the insurance and reinsurance subsidiaries given the anticipated premium ratings of 2009 will be reduced this capital is currently sufficient to support the operations of the insurance companies. In summary, we are clearly disappointed with the net loss reported of which over $200 million related to non-cash items, we are working with the sense of urgency to restructure our operation, reduce cost and free up available capital that will increase the capital flexibility of the Kingsway going forward. I will now turn the presentation back to Shaun for his closing remarks.

[W. Shaun Jackson:]

Okay. Thanks Shelly. As discussed, the combination of factors resulted in the disappointing loss for 2008, most of it in the fourth quarter. But at the same time, we made considerable progress towards repositioning Kingsway for future profitability. During the year, we took decisive actions to strengthen management, terminate non-core and non-profitable business lines and streamline operations by consolidating certain subsidiaries. A number of our subsidiaries and business lines within Lincoln continue to be very profitable. And we sold York Fire at an attractive price applying the proceeds towards eliminating bank debt. During 2008, we also instituted a rigorous planning process to develop the strategy that would complete the transformation of Kingsway to a much leaner, more flexible, and competitive enterprise through actions that have been taken and will be accelerated in 2009 and 2010. We have many talented experienced and relatively young senior executives throughout the company and they have worked tirelessly and collaboratively this past year to execute their respective business plan and to develop an effective strategy for 2009 and 2010. We announced this next phase of our strategy earlier this month. As announced, this next phase of our strategy is aimed at strengthening our capital position, significantly reducing costs and restructuring operations into an operating model structured along product and distribution lines. The new model will consolidate nine subsidiaries into three business units, two in the U.S. and one in Canada. In the U.S., we now have a commercial lines business and personal lines business and in Canada we now have one unit with Co-Heads responsible for specialty lines and the standard lines in Quebec based business respectively. This restructuring is targeted to improve the Group's financial stability, current economic climate and place the company in a stronger position going forward. It will simplify our management structure and reduce costs, create synergies and operational efficiencies and position Kingsway to seize competitive advantage in the future. We anticipate that the plan will deliver substantial savings in 2009 and estimated annual savings in excess of 80 million by the end of 2010 and significantly reduce our future cost base. These restructuring initiatives will result in approximately 750 additional positions being eliminated over the next 18 to 24 months. This reduction, which is difficult, but necessary measure will inevitably lead to additional short-term transition costs. In addition, we have announced that we are reviewing and we will divest all non-core assets as well as running off certain business to free up capital in 2009. While dealing with our own operational challenges, and refocusing the organization we've also had to deal with turbulent financial markets. Mark-to-market has reduced our capital base and led to our decision to reduce balance sheet risk and divest of our common stock portfolio. Going forward, our investment portfolio will comprise of a well-diversified high quality fixed income portfolio. While we have made operational progress as we've managed the company while changing it results underlying that we still have a lot of work to do to restore the company to an acceptable level of profitability. Our goal for 2009 and 2010 is to reduce volatility of our results by focusing on our core lines of business and streamlining our operations to aggressively reduce costs. We have already taken extensive measures in 2008 and in early 2009 to de-risk our balance sheet, reduced costs and streamline operations and that many more initiatives that we plan to implement, protect and rebuild the financial strength of the company. I am committed to turning the company around in 2009 and beyond and to rebuild shareholder value and confidence forward. We appreciate your continuing interest Shelly, Colin, Scott, and I will now be pleased to answer any questions you may have.

[Operator:]

Thank you. (Operator Instructions). One moment please for your first question. And our first question comes from Doug Young of TD Newcrest. Please go ahead.

[Doug Young:]

Yes. I guess, my first question is around Lincoln General as I am sure there is going to be a few, Shaun, can you talk about what's being discussed with the Pennsylvania regulator and is one of the options that they simply take over Lincoln General and if that's the case, what is it do for Kingsway does that trip up and debt covenants and you say in the press release that the discussions may have a bearing on the capital position can you talk about what that means?

[W. Shaun Jackson:]

Well, Doug. We've had discussions with the Department of Insurance, we have consistently kept up appraised of the initiatives that we are taking at Lincoln that has a regular dialog with the department. And again we are in the process as we put in together a plan that we will be presenting to the department over the next couple of weeks. This is our thoughts for Lincoln going forward. The risk-based capital of the company is over a 100% it ran about 119.

[Shelly Gobin:]

Yes 117.

[W. Shaun Jackson:]

117, as of the end of December. And so at that level with the reduced premium levels going forward, we feel obviously there is sufficient capital to pay the obligations of the company going forward. But there will be further discussions and we will be working with the department-formulated plan.

[Doug Young:]

What's the RBC on Lincoln General today?

[W. Shaun Jackson:]

That's what I just said Doug. It's…

[Shelly Gobin:]

117.

[W. Shaun Jackson:]

117.

[Doug Young:]

But you said that's as of the end of this, that's not as of the end of 2008 that's as of today.

[W. Shaun Jackson:]

No, that's as of 2008.

[Shelly Gobin:]

That's as of. Yeah at December 31.

[W. Shaun Jackson:]

Yes.

[Doug Young:]

So, that's as of December 31, but what is do you have it as of today?

[Shelly Gobin:]

No.

[W. Shaun Jackson:]

You don't measure it on a daily basis Doug, you measure it as a measurement at the end of the quarter and that's, as Shelly said that's the RBC as of the end of December.

[Doug Young:]

And the discussions you've had with the department, I mean you say, you think, you have sufficient capital at Lincoln General, what is their position then at this point.

[W. Shaun Jackson:]

Scott said that, he'll detail this discussion. So, I will let Scott may be make a brief comment on that.

[Scott Wollney:]

Sure, Doug. I think the first important thing to notice, we have offered to the department that we would like to submit a plan voluntarily in terms of how to best manage the disposition of Lincoln. So, we are not in a mandatory control situation and backward two steps above that in terms of our current RBC ratio, but we do think it's prudent to stop writing new business in Lincoln to the extent that we can contractually and obviously subject to the various state insurance departments that regulate our business in 49 states. So, it isn't a situation where we can simply, turn things off, obviously we want to manage the process, but we have been very clear that it is not our intention to continue to write any substantial business in Lincoln in fact, a week ago we did advice all of our external commercial agents that we were going to be discontinuing any relationships going forward and as of earlier this week, actually officially terminated those relationships, many in the last week had actually voluntarily withdrawn their contracts with us. So, I mean the first key component I think is there will be a very significant reduction in written premiums, as a practical matter in QA or in Q4 of '08 written premiums were down to about $88 million that compares to an average quarterly written premium a year earlier of approximately $250 million. So, because we had terminated so many non-profitable and non-core programs in 2008, we really had put a very significant percentage more than half the company's business into sort of a run off type situation anyway. So, many of the things that we are proposing to do now going forward are going to be consistent with what was really already underway to a great extent, but, again it is important to understand that at the RBC level we are at now we are not at any kind of a mandatory control level and obviously it is our goal to maintain control of the entity and continue to work with the department in a constructive way so that everybody is comfortable without doing that.

[Doug Young:]

Okay. Thanks Scott. And then just one last one and I will requeue with Shaun, or Shelly what are the debt covenants around your remaining debt?

[Shelly Gobin:]

Majority of the covenants are new issuance type covenant, there is a 50% debt-to-total-cap covenant on one of the issue – on the issuance, I guess, sorry on the existing debt, with the 50% senior debt-to-cap I believe. For a total debt.

[W. Shaun Jackson:]

50% is, 50% total debt-to-capital new issuance and 35% senior

[Shelly Gobin:]

New issuance.

[W. Shaun Jackson:]

New issuance for new debt of the capital ratios, but of course the write-off of the intangible assets in this quarter had a significant effect on those ratios.

[Doug Young:]

And is there anything else within the covenants that we should watch for?

[W. Shaun Jackson:]

That wasn't the main…

[Shelly Gobin:]

No.

[W. Shaun Jackson:]

Main covenants, Doug, I think, other than obviously, not defaulting on the payments.

[Shelly Gobin:]

Right.

[W. Shaun Jackson:]

And I think as Shelly already said in the presentation, we have sufficient capital at the holding companies to meet those obligations as we go through ’09.

[Doug Young:]

Okay, thank you.

[Scott Wollney:]

Okay.

[W. Shaun Jackson:]

Thanks Doug.

[Operator:]

And your next question comes from Tom MacKinnon of Scotia Capital. Please go ahead.

[Tom MacKinnon:]

Yeah, thanks. Just a couple of numbers question on the follow-up, with respect to Lincoln, what is the capital you have in Lincoln right now somewhere around a $130 million?

[Scott Wollney:]

No it's about, well the it's about $79 million in statutory entity as of the end of December.

[Tom MacKinnon:]

Okay. Just trying to tie this into say the net premiums written to the stat surplus ratio, that's at two times on net premiums written for the last four quarters puts the total stat capital at 683 I think was is it 549 is that what you said you had in terms of, is that the regulatory capital or is that total stat capital. What is that the 549 that you had mentioned?

[Shelly Gobin:]

I mentioned $545 million, which…

[Tom MacKinnon:]

545.

[Shelly Gobin:]

Regulatory capital in the insurance company, excluding Lincoln General.

[Tom MacKinnon:]

Yeah. So, if we get, if you two times on net premiums written to stat capital that's 683 and less 545, you're over a 130 for Lincoln and you're talking about 79. I am just, am I missing anything else here?

[Shelly Gobin:]

I am not sure the calculation you are doing Tom, don’t the 683 number you are mentioning I am sorry where is that one from.

[Tom MacKinnon:]

Well, you have got net premium written to estimated stat surplus?

[Shelly Gobin:]

The 2 to 1 you are talking.

[Tom MacKinnon:]

Yeah, yeah.

[Shelly Gobin:]

Yeah that includes Lincoln.

[Tom MacKinnon:]

Yeah. That's great so.

[Shelly Gobin:]

So, Lincoln.

[Tom MacKinnon:]

So, if you take 1368 that's rolling 12 on net premiums written divide that by two you get 683 and then you mentioned 545, then you said you only had 79 in Lincoln. So, where is the other [about] $80 million.

[Shelly Gobin:]

Yeah. I think it's just how Lincoln's premiums are coming down, but let me take a or let me get back to you on that, because I don't have that number in front of me.

[Tom MacKinnon:]

But you said you got 79 and, so really if you turn Lincoln into run-off how does that 79 come back it has to just back over a long time and does it as the artisan stuff all runs off? I am trying to think of how are you turning Lincoln into run off at least freeze up things other than just knocks down your premiums? How do you get capital out of it?

[W. Shaun Jackson:]

Well I think well it releases capital Tom is that Lincoln reinsures a substantial portion of it's business into captive, and so as the business declines that means we write less business in the captive, which will free up capital then.

[Tom MacKinnon:]

So, in the Barbados captives.

[W. Shaun Jackson:]

That's correct.

[Tom MacKinnon:]

So, those figures should intuitively go, they haven't really gone up, but they've gone down only just because of unrealized losses, realized or unrealized losses, is that the only reason that their capital numbers have gone down?

[Shelly Gobin:]

Yes and losses under the reinsurance, inter-company reinsurance arrangements, yes.

[Tom MacKinnon:]

Okay. So, as you turn Lincoln into run off that 79 that you've got captured in there really comes back in through.

[W. Shaun Jackson:]

Well the capital.

[Tom MacKinnon:]

Through the other captives and right not, and not that's the only way we get the capital back.

[W. Shaun Jackson:]

You bet. Tom is the capital that's in Lincoln, which supports the run off obligations at Lincoln and the capital in the captive because we're writing less business through the captive would be freed up.

[Tom MacKinnon:]

And in your discussions with the regulators, is there, do you have to put some more capital into Lincoln in the short-term?

[Scott Wollney:]

We are at in those discussions it's pre-mature I think to know the answer to that what we're proposing into our modeling will demonstrate that we have the capability to effectively run Lincoln off with the capital that's in Lincoln. It's important I think to recognize it's up to the regulator ultimately to determine whether they will support the plan and what their expectations will be obviously, but based on our preliminary assessment we feel confident that we will be able to propose a plan that demonstrates our ability to do that. But again we have to rely on their ultimate judgment in terms of what their expectation is going to be.

[Tom MacKinnon:]

And then..

[Scott Wollney:]

We will as Shaun mentioned have had those discussions and should be able to have absolute clarity in terms of the expectations for the next quarterly call.

[W. Shaun Jackson:]

Yeah and I think, we are working on a plan as Scott said, we are working to engage experts that have experience in these sort of situations that we are working with the management team, and meeting the initiatives to formulate and present the plan to the Department of Insurance.

[Tom MacKinnon:]

What was that 79 that you mentioned for Lincoln, what was that at the third quarter?

[W. Shaun Jackson:]

I believe is a 128.

[Shelly Gobin:]

128.

[Tom MacKinnon:]

That was the stat capital at that time. And I believe there was, believe the reserve build up.

[W. Shaun Jackson:]

No it was reserves and some of that were investment write-downs as well Tom.

[Tom MacKinnon:]

And you don’t get the full impact of the $80 million reserve build-up because some of it's reflected in through the Barbados captives, is that exactly correct?

[W. Shaun Jackson:]

That's correct. Some of it is in was reported and caught in the Barbados captive that's correct.

[Tom MacKinnon:]

And then a question about I mean in I think in the 13-D filing that [Stillwater] put out talks about a combined ratio of under a 100 at the end of year. I mean that seems to imply if you want to get. What are you excluding Lincoln that you say that combined in the quarter was around, was that a 108?

[Shelly Gobin:]

107.

[Tom MacKinnon:]

107 then.

[Shelly Gobin:]

Yeah.

[Tom MacKinnon:]

So, we've got, and where should we be looking at in terms of an earned for 2009 and with a significant reduction are we looking at, something under a billion in terms of earned in 2009?

[W. Shaun Jackson:]

No, I think the earned will be higher than that Tom because premiums that we come in the year that we will earn throughout 2009. So, I would anticipate at this stage with companies that we have that the earned premium be over a billion, but trending down as you say as we exit this businesses.

[Tom MacKinnon:]

Okay. So, at 1.1 billion.

[W. Shaun Jackson:]

Yeah.

[Tom MacKinnon:]

It sounds like you are going to have to get that $80 million cost cuts, that $80 million on that is probably around 7 points on a combined, so that’s you got to do that a lot faster than the next 12 to 24 months it sounds or 18 to 24 months. At least in terms of, while I was working some of these numbers to get that number down under a 100 by the end of the year?

[W. Shaun Jackson:]

Yeah, yeah, but the $80 million I think is on a 1.3 was originally on a larger number so, if we get $80 million out of a smaller premium number, it has a bigger impact. So, I mean there is a number of moving parts and I think that we are obviously working very diligently to take out costs and streamlining the operations, and we will certainly be reporting back on a regular quarterly basis to everybody.

[Tom MacKinnon:]

One final one, when can we expect…

[W. Shaun Jackson:]

Tom I think they are probably a, I don’t mean to, certainly there are other people who want to ask…

[Tom MacKinnon:]

Sure. Okay. Sorry about that.

[W. Shaun Jackson:]

Circling back. Thanks.

[Operator:]

And your next question comes from Doug Mewhirter of RBC Capital Markets. Please go ahead.

[Doug Mewhirter:]

Hi good morning. Two, or just a couple of quick questions. First, I just want to confirm, Shelly you mentioned or Shaun or Shelly you mentioned I think in the press release you had over $200 million in cash in the press release and that is cash at the holding company?

[Shelly Gobin:]

No, that's cash throughout the organization.

[Doug Mewhirter:]

Okay. What's your holding company cash balance as of the end of the year, or liquid securities balance?

[Shelly Gobin:]

It is I don't have that number, we have been focusing more on it, current it is sufficient to cover the current obligations in 2009 as of today's date.

[Doug Mewhirter:]

Okay. The reserve charge from the artisan contractors' volume what accidents years did they come from primarily?

[Shelly Gobin:]

I’m going to let Scott answer that's why he I here for you.

[Scott Wollney:]

It was the biggest impact as a percentage goes back to the earlier accident years I mean there was some increase in all accident years though I think the material thing that happened I think on the last quarterly call, we had confirmed that we had terminated that program in the third quarter of '08. We internalized the claims process, the claims for that program. Program that have been written from 2001 through mid-2008 as I mentioned. The claims have been handled by an external third-party administrator, we internalized the claims process in the fourth quarter in 3Is, every single one of 900 open claim files, and so that was really the difference in terms of the view there. So, it was a combination of increasing case reserve for the open files, and again those stand all for different accident years, but we are seeing the biggest development as a percentage in terms of loss ratio, it goes back to the 2001, 2002, and 2003 accident years. So, I don't have the exact dollar amount by accident year in front of me, but it's those three earliest accidents years that have been the most challenging, and it is worth noting that significant changes were made by Lincoln in 2003 that took effect in 2004, both in terms of the policy form exclusions, and also underwriting conditions. So, it would be logical that post-2009, the 2004 accident years forward would have a different experience in the earlier accident years.

[Doug Mewhirter:]

Okay, thanks. And one last very quick question. You mentioned Shelly and Shaun you said you are still you are going to sell all of the equities from the portfolio, first I want to make sure, I confirmed that correctly. And second of all you still showed a balance of a certain number of equity securities in your press release. So, I assume that that's sort of an ongoing process and that you would be down to zero by say the end of first quarter?

[W. Shaun Jackson:]

Yeah. Well I mean the decision Doug was made early in the first quarter so the equities were actually on the balance sheet as of the end of the quarter that disposition process is well advanced. And I think, we expect we should be out of them by the end of the quarter, the common share equities.

[Doug Mewhirter:]

Okay, thanks a lot. That's all the questions.

[W. Shaun Jackson:]

Thanks Doug.

[Operator:]

And your next question comes from Michael Goldberg of Desjardins Securities. Please go ahead.

[Michael Goldberg:]

Good morning.

[W. Shaun Jackson:]

Good morning Michael.

[Michael Goldberg:]

Few questions. First of all, how much more capital would Lincoln need to have in order to be at a 200% RBC as at year-end, and also assuming the reduction in premiums that you are talking about?

[W. Shaun Jackson:]

I will let Scott respond to it.

[Scott Wollney:]

To Michael to get to the 200 it would 56 million and I am not sure what answer you would be looking for in terms of the second question, since we are not going to be proposing writing new premiums in Lincoln. Can you clarify what you're looking for there?

[Michael Goldberg:]

Well I guess then as a run off business. What kind of what additional capital would Lincoln require?

[Scott Wollney:]

What we're proposing to the department is that we don't believe any additional capital will be required, but again it ultimately will be up to them to determine, whether they agree with the plan that Shaun had mentioned, we've already engaged in a dialog with a number of outside experts, we will be working with them in terms of the modeling, both from a RBC and a liquidity standpoint to demonstrate that, but our preliminary modeling to adjust that that should be a reasonable expectation.

[Michael Goldberg:]

So, would it be fair to characterize – to characterize the situation as sort of a negotiating process?

[W. Shaun Jackson:]

Well I think it’s a process of I think that’s maybe a little strong I mean I think it's a collaborative process with the Department of Insurance, Michael where we, as we said we're working with experts that do this thing for a living in terms of helping companies formulate a plan and model how the business will run off to the benefit of shareholders and policyholders. So, we are working on that plan and we expect to have those meetings and discussions with the Department of Insurance over the next few weeks.

[Michael Goldberg:]

What I am trying to do though is just to try to look at this on a worst case basis and you mentioned the 56 million to get to 200% as of the year-end could I view that as a worst case situation?

[Scott Wollney:]

Well I think if you were to use the 200 as a worst case, you would have to be assuming that we wanted to continue to write business in Lincoln at a level that's been consistent with what Lincoln had been writing. And we are not as I mentioned we have already taken action to terminate all of our external commercial distribution partners. So, I don't think, I would wanted to be very careful not to try to speak for the department, I mean obviously their expectations will be based on the various constituents they have to regulate on, but I think it is safe to say that we are doing the things that the department would want to see so that we are creating a situation where they would expect an RBC of 200.

[Michael Goldberg:]

Okay. Let me move on to the equities, and you mentioned that the disposition is well advanced, how much additional loss has been incurred subsequent to year-end in terms of realizations and, if you took recent levels what would be the remaining unrealized loss?

[W. Shaun Jackson:]

Well, I think Michael, I mean there will be some difference between the year-end, but essentially by us making the decision that we didn't have the intent to hold the equities, we essentially took the unrealized loss through the income statement in 2008. The unrealized loss of cost was already reflected in the book value, but the decision that we no longer had the intent to hold the common share equity portfolio going forward, causes to, to put that loss through the 2008 levels.

[Michael Goldberg:]

No, I understand. but that was I presume based on prices as of December 31.

[W. Shaun Jackson:]

That's right, Michael. Yeah, I don’t think Shelly we have…

[Shelly Gobin:]

We don’t have a number quite yet, but just to let to you know, that there were some realized gains within the portfolio. So, that whatever losses are realized I the first quarter there is potential obviously that there is some realized gains to offset that as well, Michael.

[Michael Goldberg:]

So, can I expect though that if we looked at where prices are now is there any idea that you could give us as to what incremental additional net losses there might be?

[Shelly Gobin:]

Well the equity markets I mean its tough for me to make an estimate of that number, but equity markets were down we had a market value of the portfolio of 268 million. So, I think you can expect that there will be some incremental loss based on the market movement. But just to emphasize there were gains that we did not provide for obviously don’t provide for gains at year-end. So, that may offset it, so if it is a 5% or 10% loss on, there is gains to offset that.

[Michael Goldberg:]

Okay. And you also talked about transitional charges that could result from the repositioning of the company could you give us some idea of what those charges might amount to, can they be viewed as restructuring charges?

[W. Shaun Jackson:]

I think that’s an appropriate way to look at that Michael, but I want Colin's comment specifically.

[Colin Simpson:]

Sure, Michael the bulk of those costs are due to severance of a number of staff that we will be reducing by and also some consulting cost that we are incurring to setup the program in the first place. And the expectation to deliver the $80 million is there will be somewhere between $15 million and $20 million.

[Michael Goldberg:]

$15 million to $20 million.

[Colin Simpson:]

That’s correct.

[Michael Goldberg:]

Okay. So, to take these three things all together I guess the cost of, exiting in some way from Lincoln the additional losses of sale of equities and the restructuring charges on repositioning the company. Could you give us some idea, arrange let's say of where would, you would expect your book value to be taking these three items into account?

[W. Shaun Jackson:]

I'm not sure I'm following you Michael. Shelly, do you want to?

[Shelly Gobin:]

I'm mean the restructuring costs are going to be incurred over a period of time, Michael.

[W. Shaun Jackson:]

Yeah.

[Shelly Gobin:]

I mean there is a lot of factors that enter into our book value.

[W. Shaun Jackson:]

Yes.

[Shelly Gobin:]

Such as the Canadian dollar, the conversion, there is many factor of the book value calculation that would be difficult to determine what a number would be.

[W. Shaun Jackson:]

I mean the restructuring cost are the ones that are likely to happen in 2009, but I mean that the other events are the equities, Michael, they have already been factored into the book value.

[Shelly Gobin:]

Right.

[W. Shaun Jackson:]

At the beginning of the year. So, the 15 million to 20 million that Colin mentioned was essentially cost to restructure the 80 million cost savings are that sort of ones that in place they will be not one-time, but sort of consistently taken out of the system.

[Colin Simpson:]

Yeah, I mean Michael in our overall objective in the two-year timeframe as we said in the Investor Day presentation is to get to a point where we're obviously operating under a combined of a 100, which is aimed at a loss ratio of about 70 and expense ratio of less than 30. If you're going to look at the cost of actually achieving that you have to look at the benefits there delivered as we achieve that to get to net book value.

[Michael Goldberg:]

Right, I understand. I’m just trying to come up with sort of a starting point on a worst-case basis, as you move on to those objectives?

[W. Shaun Jackson:]

Okay. So, if I can then just talk about the cost saving initiatives on the realm that generally what we are experiencing, and what we are expecting is that for every dollar that we save is going to cost us about $0.33 in costs from a staffing perspective. There is also other costs on top of that, another savings on top of that, but what you're really looking at is a lag of about three or four months to get the money back into the organization from paying out the cost in the first place. So, dependent on what timeframe you are looking at is to when the net book value will shift. So, worst-case scenario will be slightly depressed in the first part of any activity, but after a three or four months, you have break-even and then you should be gaining after that.

[Michael Goldberg:]

Okay. And I have got one other question, at year-end what's the amount of tax loss carry forwards that the company has and can I assume that that's all in the United States?

[Shelly Gobin:]

Yes. There are some losses that can be carried back in Canada based on the Canadian results this year, those are recoverables. So, the operating loss carry forwards in the U.S. are in around 400 million, in excess of 400 million.

[Michael Goldberg:]

Thank you.

[W. Shaun Jackson:]

Thanks Michael.

[Operator:]

Your next question comes from Tom Hayden of Liberty Bankers Life Insurance. Please go ahead.

[Thomas Hayden:]

Hello. My name is Tom and I apologize I’m on a cellphone. I’m a debt holder of Kingsway Financial. And like the previous caller, I’d also like to look at things from a worst-case scenario, strategic alternatives with Lincoln no one really ultimately knows where that all end up being. If Lincoln was removed from the equation, do the remaining companies have the ability to service the debt and also were they still being compliant with the covenants if Lincoln was not part of the equation?

[Shelly Gobin:]

The answer on that question is, we currently have sufficient cash on hand with the obligations in 2009. And there is regulatory capital within the insurance companies, we do expect to be able to continue to service the debt as we go forward. We’re obviously waiting for determining the course of action with Lincoln to determine the impact on the group, but do not anticipate tripping a covenant based on that.

[W. Shaun Jackson:]

And I think over the last certainly year and giving a part of 2007, a sizable portion of the capital that has been generated by other entities within the group has been used to support Lincoln’s capital need over the last two years. So….

[Thomas Hayden:]

One other question now that you've bought bank debt from in the open market. Can you tell me how much debt is currently outstanding on the company?

[W. Shaun Jackson:]

Well I think that's Tom that’s on the balance sheet. I know you may be on a cell phone so Shelly can maybe read from the press release.

[Shelly Gobin:]

Yeah. The senior unsecured debentures there is a $185 million outstanding. And the loans payable on the balance sheet is $66 million.

[Thomas Hayden:]

Great. Thank you.

[Operator:]

Your next question comes from Amit Kumar of Fox-Pitt Kelton. Please go ahead.

[Amit Kumar:]

Thanks. I guess just going back to the employee cost reduction, those 750 people, what’s that as a percent of overall employees?

[Scott Wollney:]

Go ahead, Colin.

[Colin Simpson:]

No, you go. You respond.

[Scott Wollney:]

It's just under about 30%

[Amit Kumar:]

30% and could you sort of just give us some sort of a breakdown, are those underwriters, claim staff or IT, what's the main component.

[Scott Wollney:]

It’s across the whole organization. I mean what we basically have today is a very complex and large infrastructure, supporting a decline in book of business. And what we intend to do over the next two years and what we are currently executing on right now is to modernize the infrastructure and simplify it in order to become more effective in the marketplace and by doing so removing cost of the organization and making us more effective. The staffing themselves if you could imagine that we currently have multiple companies, and there is multiple duplication in all units in all functions and therefore it will impact numerous areas of our business.

[Amit Kumar:]

And what was the cost associated in the short-term?

[Colin Simpson:]

As we said it is roughly, its somewhere between $15 million and $20 million overall for the whole program for $80 million. There is as you start to decline your staffing its generally about a third of the cost of what you say. So, there is about a four-month lead–time to get into break even as you start to remove the staff of the organization.

[Amit Kumar:]

And in terms of, obviously that is a meaningful reduction in terms of the remaining employees, have their sort of compensation plans changed. So, that at least you can retain, the relatively I guess better talent.

[Colin Simpson:]

Yeah. I mean as you go through any kind of changed program like this, you have to way up ensuring that you keep the talent required in the organization to execute and continue to run the business moving forward. That is a consideration that we have within the program at this point in time.

[Amit Kumar:]

And have there been any meaningful employee departures, at the senior level?

[W. Shaun Jackson:]

When you say meaningful does that mean voluntary, involuntary, I mean we're basically working through our plan right now. What I can tell you is that having just begun the first few weeks of it, we are slightly ahead of where we expect it to be, we continue to move very rapidly getting the integration team setup and moving forward and we'll continue to report on a quarterly basis on our progress.

[Amit Kumar:]

Okay. That's helpful and I guess just quickly moving on to the reserving increase. Could you remind us who the external actuary was and has that changed?

[Scott Wollney:]

The external actuary is Tillinghast-Towers Perrin and they have been external consulting actuaries, but I think the last four, five years I think.

[Shelly Gobin:]

And there is no change in that.

[Scott Wollney:]

And there is no change in that.

[Amit Kumar:]

No change and in terms of the increase in the reserves, could you just give us some sense as to, they gave you a point estimate and that were the increase is was there a range.

[Shelly Gobin:]

Our policy is to be above the point estimate given by the actuary, the external actuary. So, we are above the point estimate. And yes they do give a range and we do publish the ranges in the Annual Report. When it's produced.

[Amit Kumar:]

Okay. That's helpful, and I guess the next question is for Shaun. Obviously, we’ve seen these reserve increases over a lengthy period of time and I guess what every questioner is sort of tying to ask is, that is this it or, how far as we from getting to the point, where one can say that the noise is going to diminish and, now let's look at the non-standard operations going forward like are we getting closer or are we still so much influx that, that over '09 I guess the aim is to just get deal with all these things and then maybe in 2010, '11, '12 look at some sort of positive return numbers?

[W. Shaun Jackson:]

Well I think most of you should trace Amit noise has really been surrounding Lincoln. I think if you look at the other parts of our operation the reserves have been relatively stable. So, I think the initiatives that went out, we took during 2008 and now escalated in 2009 to control the results of Lincoln by existing these businesses. And as the reserve settle that should create more stability and all of these moves are really designed to reduce the volatility of our results and that is obviously a major factor in the discussion that we have to reduce the business at Lincoln. And we now have a much better control over the claims handling, all of the claims now that were previously outsourced to third parties and now under the control of Lincoln. So, we do feel we have a much better control over that going forward. But again all of these news structural link kind of really redesigned is that volatility going forward.

[Amit Kumar:]

And maybe just sort of switching and this is the last question?

[W. Shaun Jackson:]

Amit would you mind circling back, because I am sure there are other people that would like to ask questions.

[Amit Kumar:]

Sure. I will come back thanks.

[W. Shaun Jackson:]

Okay. Thanks Amit.

[Operator:]

(Operator Instructions). Next question is a follow-up from Tom MacKinnon of Scotia Capital. Please go ahead.

[Tom MacKinnon:]

Yeah thanks.

[W. Shaun Jackson:]

Hi. Thanks Tom that you're patiently waiting to circle back.

[Tom MacKinnon:]

Yeah, sure. How much it doesn’t look like much of the common stock portfolio was actually sold in the fourth quarter?

[W. Shaun Jackson:]

No, Tom.

[Tom MacKinnon:]

Was any of it sold then and so is it anticipated that it is to be for….

[W. Shaun Jackson:]

Yeah. There was some that was sold in the fourth quarter and there actually were some realized losses, but the decision to divest to the portfolio was actually made in the first quarter, and so as I said earlier because we've made the decision, we no longer have the intent to hold those that come stock equities it was appropriate to do we call it the loss in, in realized loss.

[Tom MacKinnon:]

Got it.

[W. Shaun Jackson:]

Got it

[Tom MacKinnon:]

Yeah. And but the…

[W. Shaun Jackson:]

But we are in the process of divesting those equities right now and that process is very well advanced.

[Tom MacKinnon:]

What's the estimated capital free up just from the, from a required capital perspective on that somewhere around 60ish I mean.

[W. Shaun Jackson:]

Let me comment, I mean the thing with the mark-to-market, the affect on our capital it has fairly small effect on statutory capital in the U.S.

[Tom MacKinnon:]

No, I am talking on the required not the….

[W. Shaun Jackson:]

Tom I’d just want to walk through the different….

[Tom MacKinnon:]

Sure.

[W. Shaun Jackson:]

In Canada, under the MCT if you hold equities there is a 15% margin, so any mark-to-market fluctuations essentially cost 15% in the MCT. So, that removes that volatility and in the captive in, Bermuda and Barbados where a sizable part of our equity portfolio was, those capital base is basically mark-to-market and that forms the base of the capital. But selling the common stock portfolio should will alleviate the volatility attributable to the, even in the equity markets.

[Tom MacKinnon:]

How much of that 268 market value kind of resides on the Canadian MCT though if I don't apply 15% sort of…

[Shelly Gobin:]

No, not….

[Tom MacKinnon:]

Regulatory free up to whole suite match there, what percent should I apply that to?

[Shelly Gobin:]

It's probably about $100 million.

[Tom MacKinnon:]

Okay. So…

[W. Shaun Jackson:]

Yeah. But I mean it's…

[Tom MacKinnon:]

[Stocking] 15 million for your F year is that right?

[W. Shaun Jackson:]

In Canada, but in Barbados and Bermuda because they are lower tax jurisdictions any mark-to-market movement has almost the dollar effect on the statutory capital.

[Tom MacKinnon:]

Yeah. That's just from the fluctuation, but not any kind of [requiredish] capital.

[W. Shaun Jackson:]

It reduces the capital that's in the company.

[Shelly Gobin:]

Yeah. It reduces the availability of that capital.

[Tom MacKinnon:]

Okay. Thank you.

[W. Shaun Jackson:]

Okay. Thanks Tom.

[Operator:]

And your next question comes from Michael Goldberg of Desjardins Securities. Please go ahead.

[Michael Goldberg:]

Thank you. Again looking at the common share portfolio I just like to get some idea of the composition, could I view the Canadian and U.S. portfolios as being fairly similar to the related industries, in other words are there any significant differences in performance from how the Canadian and U.S. industries might have done?

[W. Shaun Jackson:]

Michael I think that's probably difficult, because, they're not index portfolios they are sort of focused portfolios predominantly, value based equity managers.

[Shelly Gobin:]

Right.

[W. Shaun Jackson:]

So, I think it would be difficult to use a sort of and just see index to sort of estimate that.

[Michael Goldberg:]

Great. What I am still trying to get at is I know that you've, taken a charge for unrealized losses at year-end to get to the fair values that you have about a 116 and a 151 for the Canadian and U.S. portfolios. So, I am still trying to get some idea of what additional losses there might be subsequent to year-end.

[W. Shaun Jackson:]

Shelly, if you want to.

[Shelly Gobin:]

Yeah I think I mean Michael we don’t I mean as I made a comment earlier there still are gains within the portfolio that would offset. So, I mean if you just assume, either a 5% to 10% realized loss on the portfolio, there is still gains within that portfolio to offset it, but the markets are down, so we are expecting some realized losses, but the portfolio is not completely liquidated yet. So, it is difficult for us to estimate.

[Michael Goldberg:]

Why is it difficult you know where stock prices are?

[Shelly Gobin:]

We employ third party portfolio management.

[Michael Goldberg:]

I understand that.

[Shelly Gobin:]

To liquidate that and did, they're not the I mean we don’t control the liquidation of the portfolio, so.

[W. Shaun Jackson:]

And the liquidation isn’t yet complete Michael, I mean I think we will know, we will have some clarity on that probably within the next week or so.

[Shelly Gobin:]

Right.

[Michael Goldberg:]

Okay. Okay. Thank you.

[W. Shaun Jackson:]

Thanks Michael.

[Operator:]

Mr. Jackson, there are no further questions at this time. Please continue.

[W. Shaun Jackson:]

Okay. Well thank you very much everyone for participating today. And we will appreciate your questions and comments and we will continue to update you on as we progress through our plans for 2009 and into 2010. Thank you very much.

[Operator:]

Ladies and gentlemen this concludes the conference call for today. Thank you for participating. Please disconnect your lines.