S&P Lowers Kingsway’s Ratings to ‘B-‘ Following Weak Q1 Results

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and senior unsecured debt ratings on Toronto-based specialty insurance provider Kingsway Financial Services Inc. to ‘B-‘ from ‘B’. S&P also removed the ratings from CreditWatch with negative implications, where they were placed Feb. 10, 2009. The outlook is negative.

“The downgrade reflects Kingsway’s weak first-quarter 2009 results and the continued deterioration and lack of stability surrounding its business franchise,” explained credit analyst Foster Cheng.

“Moreover,” S&P said, “it also reflects the company’s weaker liquidity and cash flow position. During the quarter, the company experienced weakness on both sides of the border. In Canada, underwriting losses were experienced at its cross-border trucking insurance operations, while in the U.S. the company continued to experience troubles within its lead U.S. operating company, Lincoln General Insurance Co.

“The results represent the 10th straight quarter the company has had unfavorable reserve development at Lincoln, which continues to be the main source of Kingsway’s financial issues without any clear end.”

S&P said it expects “Kingsway’s profitability to remain weak especially as the company tries to refocus. In efforts to rebuild profitability, capital adequacy, and de-risk its business, Kingsway has, or plans to, introduce several strategic initiatives. These include major cost cutting; staff reductions; divesture of its common equity exposure; exiting noncore or unprofitable lines of business at Lincoln, Kingsway General Insurance Co., and Southern United Fire Insurance Co.; and selling off other noncore assets (including putting them into run-off).”

In addition the rating agency noted that “part of its restructuring plans has also included executive changes, including the appointment of a several new board of directors and a new president and CEO, all of which we view as neutral to the rating.

“Despite these actions, we believe that a return to profitability in the immediate future will be difficult mainly due to the possibility of additional write-downs during Kingsway’s restructuring process, its uncertain insurance franchise, its reduced competitive position, and extremely competitive insurance markets.”

S&P said the “negative outlook reflects our assessment of the company’s weak financial profitability and liquidity, its weakened capital adequacy, its uncertain insurance franchise, and reduced competitive position. It also reflects what we view as the company’s weak management oversight, weak enterprise risk management, reduced financial flexibility, and the uncertainty surrounding the acceptance of Lincoln’s run-off plan by the Pennsylvania Insurance Department.

“If Kingsway were to experience additional deterioration within its insurance franchise or liquidity profile, or encounter further material reserve adjustments or write-downs, we could lower the ratings by at least one notch.

“However, if Kingsway demonstrates stability around its reserves and underwriting performance, we could revise the outlook to stable within the next six to 18 months. It is unlikely the ratings will improve in the near future, given it will take time for management to implement all of its initiatives in efforts to significantly improve its financial strength.

“Nevertheless, for year-end 2009, we expect Kingsway to maintain a leverage ratio of less than 65 percent (currently at 47.6 percent) and a hybrid-to-total capital ratio of less than 30 percent (currently at 23.6 percent). We believe the fixed-charge coverage and interest coverage ratio will continue to be negative for the remainder of 2009 as the company refocuses its strategy to become profitable again.”

Source: Standard & Poor’s – www.standardandpoors.com