S&P Lowers Kingsway’s Ratings to ‘B’; on CreditWatch/Negative

February 11, 2009

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. S&P also lowered the debt ratings on Kingsway’s subsidiaries to ‘B’ from ‘BB’, and has placed all of the ratings on CreditWatch with negative implications.

“The downgrade follows Kingsway’s Feb. 9 announcement that it expects to report a significant fourth-quarter loss due to further underwriting losses at its lead U.S. operating company, Lincoln General Insurance Co., impairments to goodwill, a further reassessment of its tax asset, and net realized losses on its investment portfolio,” explained credit analyst Foster Cheng [See also IJ web site – https://www.insurancejournal.com/news/international/2009/02/09/97735.htm]. “The CreditWatch placement reflects our uncertainty that additional losses could percolate or financial figures in the announcement could worsen,” he added.

S&P pointed out that “Kingsway expects a net loss of US$324 million-US$344 million. This would bring the full-year loss to US$369.5 million-US$389.5 million, which represents about 40% of the company’s shareholder’s equity.

“Kingsway attributed part of this loss to continued unfavorable reserve developments at Lincoln General. For the quarter, the company expects this to be about US$70 million, bringing the full-year negative reserve development at the subsidiary to about US$149 million. Since fourth-quarter 2006, the unfavorable reserve developments at Lincoln General (not rated) have totaled about US$433 million.”

S&P did recognize a “positive side,” citing Kingsway’s introduction of “several strategic initiatives to help derisk the company and bring it back to profitability. These include plans to divest away its common equity exposure and thus reduce balance-sheet volatility and regulatory capital requirements associated with holding equities; exit noncore or unprofitable lines of business at Lincoln General and Southern United Fire Insurance Co. (not rated); and sell off other noncore assets (including putting them into run-off) to free up more capital. Furthermore, in an attempt to rebuild profitability, the company also plans on making significant cost reductions that it hopes will significantly reduce its future cost base.”

S&P said it views “all these initiatives as positive toward rebuilding the company and franchise, we believe Kingsway probably should have made them earlier and are not significant enough to bring it back to profitability in the short term.”

The rating agency also indicated that it “continues to question the quality of governance and senior management oversight at Kingsway, and view the company’s enterprise risk management as ‘weak’.

“We expect to resolve the CreditWatch placement following our review of the company’s 2008 annual report. If, at that time, there are additional material items not already mentioned in the announcement, or if the audited financial figures are materially different from the items mentioned, we could lower the ratings further.”

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

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