Updating Our Current Recommendations on Kingsway Financial Services and True Energy Trust

KINGSWAY FINANCIAL SERVICES $2.90 (Toronto symbol KFS; SI Rating: Speculative) (905-629 -7888; www.kingsway-financial.com; Shares outstanding: 55.1 million; Market cap: $159.7 million) dropped recently after it announced that it expects to post a 2008 fourth-quarter loss of between $5.88 and $6.24 a share. (All figures except share price in U.S. dollars.) The expected loss is mainly the result of underwriting losses at its U.S. trucking insurance subsidiary, Lincoln General Insurance, and the weak performance of its investment portfolio.

In response to its losses, Kingsway will cut 750 jobs, or 26% of its workforce, as it reduces its nine operating divisions to three (two in Canada and one in the U.S.). Kingsway hopes this will save it $80 million a year. It will also eliminate about $350 million of its annual premiums (or roughly 20%) by dropping unprofitable business from its U.S. operations. To lower the volatility of its balance sheet, Kingsway will also sell its equity portfolio.

Kingsway’s initiatives are, in part, a response to pressure from New York-based money manager The Stilwell Group, which owns 8.4% of Kingsway. Stilwell wants Kingsway to cut its costs, sell unprofitable businesses and focus on its core business, which is non-standard auto insurance (for higher-risk drivers).

Kingsway may have trouble selling assets in today’s depressed markets. The company may also have to raise capital by selling shares at low prices.

Kingsway is now a hold.

TRUE ENERGY TRUST $0.77 (Toronto symbol TUI.UN; SI Rating: Speculative) (403-264-8875; www.trueenergy.ab.ca; Units outstanding: 78.5 million; Market cap: $60.4 million) will suspend its $0.02 monthly distribution with the payment that was scheduled for March 2009 because of falling energy prices and difficult credit markets. The $0.02 monthly distribution currently yields 29.3% on an annualized basis. True recently cut its January 2009 distribution by 50%, to $0.02 from $0.04, to conserve cash and pay down debt.

True produces oil and gas, mostly in Alberta and Saskatchewan. About 63% of its output is gas, 24% is heavy oil and 13% is light oil.

True has also dropped its 2009 exploration and development budget to $15 million from $43 million in 2008. The trust now forecasts average daily 2009 production of about 10,000 barrels of oil equivalent. That’s down from an estimated 11,900 barrels in 2008. The lower volumes will come from natural production declines, which will not be fully offset by exploration and development activities.

True Energy cut its long-term debt to $213.5 million at the end of 2008 from $251.2 million a year earlier, but its present debt is still a high 353% of its current $60.4-million market capitalization.

True Energy is now a hold.