Kingsway to Increase Lincoln General Reserves; Best Lowers, Reviews Ratings

December 19, 2007

Toronto-based Kingsway Financial Services Inc. (KFSI) announced that it would report a reserve increase at its Lincoln General subsidiary in the fourth quarter. After reviewing claims trends, Kingsway said the increases would be between $95 million and $125 million.

“This estimated reserve increase is attributable to loss trends that have emerged primarily in Lincoln’s long-haul trucking and artisan contractors general liability books of business,” said the announcement. “These trends have caused the Company to reevaluate its methods for estimating claim liabilities at Lincoln. The Company, in consultation with its actuaries, has decided to rely more heavily on Lincoln’s own data and trends rather than industry trends in calculating its estimated loss reserves for these lines of business. As Lincoln’s own data for these lines has become more predictable it is appropriate to utilize this information more fully in arriving at the Company’s best estimate of Lincoln’s unpaid claim liabilities.

“It is expected that the impact of this reserve increase on the Company’s net income will be a reduction of between $79 million and $105 million, or approximately $1.41 and $1.87 per share, for the fourth quarter and fiscal year 2007.”

A.M. Best reacted to the reserve increase by announcing that it has downgraded KFSI’s issuer credit ratings (ICR) to “bb” from “bbb-” as well as those of Kingsway America Inc. (KAI) of Elk Grove, Ill. Best also placed the ratings under review with negative implications.

Concurrently, Best downgraded the financial strength rating (FSR) to ‘B++’ (Good) from A- (Excellent) and the ICR to “bbb” from “a-” of Lincoln General, which remain under review with negative implications.

In addition Best downgraded the debt ratings to “bb” from “bbb-” on KFSI’s CAD$78 million (US$77.4 million) 8.25 percent senior unsecured debentures due 2007, KAI’s US$125 million 7.5 percent senior unsecured notes due 2014 and its US$74.1 million 7.12 percent senior unsecured notes due 2015. These debt ratings have also been placed under review with negative implications. “The debt ratings of KAI are based upon the unconditional guarantee of KFSI,” Best noted.

In its final action Best assigned a debt rating of “bb” to Kingsway General Partnership’s CAD$ 100 million (US$99.1 million), 6 percent senior unsecured debentures, due July 2012. This rating too has been placed under review with negative implications. Best aslo indiacted that the debt is unconditionally guaranteed by KFSI and KAI.

“We are very disappointed to report this further reserve increase at Lincoln. We have determined, in consultation with our external actuaries, that it is appropriate to increase our estimates for Incurred But Not Reported claims liabilities due to the loss trends on our trucking and contractors liability business”, stated Shaun Jackson, Executive Vice-President and Chief Financial Officer, who is also in line to take over as KFSI’s President and CEO.

He added that “despite this significant reserve increase at Lincoln, the performance of our Canadian operations and many of our other U.S. subsidiaries has enabled the Company to maintain a strong capital position. As a result of this increase, we will be in a much improved position as we enter 2008. This adjustment should be considered in the light of the income generated by the Company’s other subsidiaries and from its investment portfolio.”

Best wasn’t quite so optimistic. The rating agency stated that the “rating downgrades are a result of KFSI’s weakened risk-adjusted capitalization, continued adverse reserve development, softening market conditions and operating performance, which is significantly below expectations. The recent reserving action in Lincoln indicates a
continuation of a long pattern of increases on prior accident years.”

Best added that in its opinion the “recent reserving increases primarily are a result of a systemic problem within the organization as a result of Lincoln’s rapid growth in 2002 and 2003.” Given the significant reserve deficiencies that Lincoln has exhibited. Best also indicated that it remains concerned about “current pricing levels and the challenge the company will face to increase rates or select better risks in the current soft market.”

Source: Kingsway Financial – www.kingsway-financial.com and A.M. Best – www.ambest.com.