DBRS Downgrades Kingsway Ratings and Discontinues Coverage

DBRS has today downgraded its ratings on the senior debt of Kingsway Financial Services Inc. and affiliates (Kingsway or the Company) to B (high) from BB (low). The Under Review with Negative Implications (UR-Negative) status, which was assigned to Kingsway on June 4, 2009, is being maintained. The downgrade reflects the continued adverse reserve development at Lincoln General Insurance Company (Lincoln), the corresponding erosion of the Company’s financial strength and flexibility, and the reduced scale and diversification of the remaining operations. The continuation of the UR-Negative status reflects the uncertainty raised by the announcement by the Pennsylvania insurance regulator that it would contest the Company’s disposal of its ownership in Lincoln. A reversal of the Company’s disposal would increase the probability that the Company will remain liable for continued adverse development in the run-off operation. Immediately following this rating action, the ratings are to be discontinued.

Our analysis is now based on public information only. The lack of transparency available to us, given the Company’s financial difficulties, has caused DBRS to choose to discontinue the ratings at B (high).

Following 13 consecutive quarters of adverse reserve development at Lincoln, including an additional $84 million charge taken in Q3 2009 that has eroded shareholder equity, the Company’s debt ratio has increased to 55.1%, up from 42.8% at year-end 2008. While primarily reflecting the Company’s deteriorated financial condition, the B (high) rating also recognizes certain operating strengths and adequate regulatory capital of Kingsway’s continuing core niche operations in non-standard auto insurance and the progress that it has made in improving operating efficiencies through cost-cutting and process improvements.

Lincoln is now in run-off under the supervision of the Pennsylvania Department of Insurance. On October 19, 2009, the Company stated that, in its opinion, its continuing exposure to Lincoln had been terminated with the disposal of its shareholdings to 20 charities and could correspondingly be considered a discontinued operation. However, on November 16, 2009, the Pennsylvania regulator announced its intention to take legal action against Kingsway in order to unwind what it called a “set of sham transactions,” thereby raising the prospect of the Company’s continuing liability for the underperformance of the run-off operations against the original plan.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Canadian Property and Casualty Insurance Companies, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.

This rating is based on public information.