S&P Affirms Kingsway’s ‘BBB- Ratings

June 13, 2006

Standard & Poor’s Ratings Services has affirmed its “BBB-” long-term counterparty credit and senior unsecured debt ratings on Toronto-based Kingsway Financial Services Inc. with a stable outlook.

“As Kingsway is a holding company, the ratings reflect the structural subordination of its debt to those of its operating companies, which notionally would hold a higher rating,” S&P explained. “The ratings on Kingsway reflect its strong business position in nonstandard auto, trucking, and motorcycle insurance, disciplined underwriting, and strong distribution channels.”

“Kingsway’s financial results for 2005 continued their favorable trend of several years, due to the increase in investment income, improved underwriting gains, and modest capital gains that were generated by the company’s investment portfolio,” stated S&P credit analyst Kevin Maher.

S&P noted: “As of first-quarter 2006 (ended March 31, 2006), Kingsway’s reported ROE was 14.0 percent (reported) (down from 17.4 percent at year-end 2005) while the combined ratio for both Canada and U.S. was 96.2 percent. Kingsway is the largest writer of nonstandard auto and motorcycle insurance in Canada as well as the second largest writer of trucking insurance in Canada. The group is growing as a leader in nonstandard lines with its U.S. business, which represents 75 percent of premiums at first-quarter 2006.

“In addition, Kingsway’s focus on its niche markets has enabled the company to be one of the few Canadian property and casualty writers to consistently produce underwriting profits and above industry average ROE.”

On the negative side S&P noted that the “ratings are restrained by the company’s strong appetite for growth and acquisitions, which has increased the company’s exposure to operational, financial, and integration risk. Furthermore, the soft insurance markets, low investment yield environment, and the impact of the devalued U.S. dollar against the Canadian dollar, represent ongoing challenges for the company.”

S&P also pointed out that Kingsway began reporting financial results in U.S. dollars in 2006. It also “expects Kingsway to generate organic growth of 8 percent-10 percent per year with more growth continuing to coming from the U.S. market than Canada.

“The consolidated combined ratio is expected to show improvement, remaining from 90 percent to below 100 percent, which would be in the area of the company’s historical levels.”

In addition S&P indicated that for fiscal year 2006, it “expects Kingsway to maintain an interest coverage of 4x or better (6.5x in 2005), a fixed-charge coverage ratio of 4x or better (6.5x in 2005), a debt plus preferreds and hybrids to total capital ratio of less than 35 percent (32 percent at year-end 2004 down from 38 percent immediately after the debt issue), a hybrids to total capital ratio of less than 15 percent, and a consolidated combined ratio of less than 100 percent.”

Commenting on the stable outlook, S&P said it “reflects Kingsway’s leading position in the nonstandard auto, motorcycle, and trucking insurance markets; the company’s strong operating performance; and the slowly improving industry trends. The outlook could be revised to negative if the company experiences a material deterioration in its operating performance or makes undue use of financial leverage.

“Conversely, the outlook could be revised to positive if the quality and consistency of the operating earnings continue to improve and remain strong in a down market, and continued progress is made in realizing strategic, operational, IT, and other infrastructure synergies from this relatively loose knit group of companies.”

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