The Pennsylvania Department of Insurance is planning legal action against a Canadian property-casualty insurer who tried to divest itself of a troubled subsidiary by donating company shares to several charities.

Joel Ario

Pennsylvania Insurance Commissioner Joel Ario said in a statement that his agency is planning action against Ontario-based Kingsway Financial Services and its wholly owned subsidiary, Kingsway America Inc., to unwind those transactions.

The donations involve Lincoln General Insurance Co. of York, Pa., a commercial insurer for the trucking industry that has been experiencing financial difficulties. The PID has been in discussions with Kingsway and Lincoln General regarding the latter’s financial conditions and the parent company’s responsibilities as the ultimate controlling corporation, Ario said.

Rather than continuing those discussions, Ario said Kingsway sought to divest itself of responsibilities outlined in state law by removing Lincoln General as a member of its consolidated group of companies by donating 100% of the stock of Lincoln General’s immediate parent to 20 different charitable organizations. Each of the charities received 5% of the parent’s stock, along with a $20,000 “inducement to accept the shares,” according to Ario.

“Pennsylvania’s insurance holding company laws require insurance department approval of a change of control of a Pennsylvania-domestic insurer,” the commissioner said. “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 added that state insurance regulators also plan to contact the charities, “which have been unwitting participants,” and “will work with them to avoid any repercussions.”

In response, Kingsway said it disagrees with the PID’s position and that it “maintains its view that the donations of the Lincoln shares to the charities were lawfully made and that the [PID] has no legal basis for demanding the unwinding of the donations.

“Kingsway further believes that any assertion by the [PID] 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,” the insurer said in a statement.

Kingsway added that it is open to continuing discussions with Ario and his staff to reach a mutually agreeable solution, but is also “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.”