Kingsway Notes 54% Gain in Net Income

Toronto-based Kingsway Financial Services Inc. announced financial results for the quarter and year ended Dec. 31, 2004, and the declaration of an initial quarterly dividend of 5 cents per share.

For the fourth quarter net income increased 102% to a quarterly record $36.3 million ($18.0 million last year) and income before income taxes increased 265% to $36.3 million ($9.9 million last year). Net income for the year was a record $131.0 million ($85.3 million last year) an increase of 54% over 2003, our previous record year, and income before income taxes increased 88% to $146.2 million ($77.6 million last year). Return on equity improved to 17.4% for the year (12.9% last year) and to 18.2% for the quarter (10.1% last year).

Diluted earnings per share doubled to a new quarterly record 64 cents compared to 32 cents for the fourth quarter last year. For the year, diluted earnings per share increased by 43% to a record $2.32 on 7% more shares outstanding than last year.

“I am pleased to report record earnings for 2004” said Bill Star, president & CEO. “Our Canadian operations reported very strong growth and a return to underwriting profitability and our U.S. operations produced very strong underwriting results again this year. In 2004 we continued to strengthen our balance sheet reserves and our capital while delivering outstanding profitability and return on equity. Our diversified North American distribution platform and strong market positions in our core products provide us with a strong foundation as we move into 2005.”

A significant portion of the company’s operations and net assets are denominated in U.S. dollars whereas the company reports in Canadian dollars. During 2003 and 2004, the Canadian dollar has appreciated significantly against the U.S. dollar thereby affecting the comparability of results.

Effective Jan. 1, 2005, the company changed its reporting currency from Canadian dollars to U.S. dollars. Had the results for the quarter been translated at the same exchange rates as last year, net income and earnings per share would have been further increased by $2.4 million ($7.0 million for the year) and 4 cents (12 cents for the year), respectively.

The supplementary information contained in this report contains selected financial information expressed in U.S. dollars. Net income increased 117% to U.S.$29.8 million compared to U.S.$13.7 million reported in the fourth quarter of last year. Net income for the year was U.S.$100.6 million an increase of 65% over U.S.$61.0 million reported in 2003. Diluted earnings per share increased 121% to U.S.$0.53 compared to U.S.$0.24 reported in the fourth quarter last year. For the year, diluted earnings per share increased by 53% in U.S. dollars to U.S.$1.78 compared to U.S.$1.16 last year. Book value per share grew by 20% from a year ago to U.S.$11.85.

For the fourth quarter, gross premiums written were $579.0 million ($651.6 million last year) and for the year they decreased by 1% to $2.6 billion reflecting both changes in currency exchange rates and softening conditions in certain U.S. markets. For the quarter, gross premiums written from U.S. operations decreased 14% (7% in U.S. dollars) to $403.2 million (U.S.$330.0 million) compared with $466.6 million (U.S.$356.0 million) last year. For the year, gross premiums written by the U.S. operations were $1.8 billion (U.S.$1.4 billion) compared with $2.0 billion last year (U.S.$1.4 billion). Gross premiums written in California increased by 40% to $353.9 million whereas gross premiums written in Florida and South Carolina declined by 15% to $271.2 million and 35% to $52.9 million, respectively.

Gross premiums written in Canada increased by 16% to $760.6 million for the year compared with $654.9 million in 2003. For the quarter gross premiums for the Canadian operations were $175.8 million, a decrease of 5% compared with the fourth quarter last year. In Alberta, the company was required to refund premiums to insureds ($7.2 million), and also assigned premiums to the Facility Association ($8.6 million) which reduced gross premiums written by $15.8 million in the fourth quarter this year. In 2004 gross premiums written in Ontario increased by 47% and declined by 4% in Alberta, and Canadian non-standard automobile and trucking premiums increased by 18% and 7%, respectively.

Net premiums written were $2.3 billion ($506.4 million for the quarter) compared with $2.5 billion ($621.5 million for the quarter) last year. Net premiums earned were $2.3 billion compared with $2.4 billion. During the second quarter of 2004 the company entered into two quota-share reinsurance arrangements in Canada and the United States with reinsurers rated A+ or better by A.M. Best.

Under both treaties the company has the option to vary the amount of premiums ceded in any quarter, which provides flexibility in managing premium leverage and capital. Under these treaties the company ceded $56.9 million for the quarter ($252.9 million for the year). As a result of entering into these treaties, net premiums earned were reduced by $58.9 million ($183.7 million for the year), underwriting profit by $2.4 million ($7.3 million for the year) net income by $1.6 million ($4.8 million for the year) and earnings per share by 3 cents for the quarter (8 cents for the year). As a result, the rolling four quarter net premiums written to statutory surplus ratio declined from 2.9x at December 31, 2003 to 2.2x at Dec. 31, 2004 providing greater underwriting and financial flexibility for 2005.

The combined ratio improved to 98.2% for the fourth quarter (105.6% last year), producing an underwriting profit of $9.8 million. For the quarter the combined ratio for the Canadian operations improved to 105.4% (117.0% last year) and for the U.S. operations improved to 95.3% (101.9% last year).

For the year, the combined ratio improved to 97.8% (101.4% last year), which produced record underwriting profit of $51.3 million ($33.9 million underwriting loss last year). The U.S. operations combined ratio improved to 97.7% (98.3% last year) producing an underwriting profit of $37.7 million ($31.5 million last year). The Canadian operations combined ratio improved to 97.9% (111.8% last year) which produced an underwriting profit of $13.6 million compared to an underwriting loss of $65.4 million in 2003.

For the fourth quarter, the loss ratio for the Canadian operations was 77.6% (72.2% for the year) an improvement compared to 88.7% (83.7% for the year) last year. For the U.S. operations the loss ratio improved to 69.8% (70.3% for the year) compared to 75.2% (71.5% for the year) last year.

Total assets as at Dec. 31, 2004 grew to $4.2 billion. The investment portfolio, including cash, increased to $3,104.5 million (market value $3,178.3 million), compared to $2,652.9 million (market value $2,705.5 million) as at Dec. 31, 2003. The fair value of the investment portfolio increased 17% to $56.54 per share outstanding compared to $48.46 per share outstanding as at Dec. 31, 2003.

At Dec. 31, 2004, unpaid claims increased 22% to $2,030.4 million compared to $1,669.7 million at the end of 2003. The incurred but not reported claims (IBNR) provision increased by 9% during the year to $811.8 million, representing 40% of total unpaid claims provisions.