S&P Lowers Kingsway’s ‘Unsolicited’ Ratings to ‘CCC+’

September 28, 2009

Standard & Poor’s Ratings Services has lowered its unsolicited long-term counterparty credit and senior unsecured debt ratings on Toronto-based specialty insurance provider Kingsway Financial Services Inc. to ‘CCC+’ from ‘B-‘ with a negative outlook.

“The downgrade reflects our concerns over the company’s rapidly deteriorating profitability, liquidity position, and capital adequacy, which we believe will worsen as Kingsway continues to face very difficult underwriting conditions and reserve strengthening issues, which have also developed in other operations besides Lincoln General,” explained credit analyst Foster Cheng. It also reflects our concerns over its worsening franchise value.

S&P noted that Kingsway’s most recent quarterly results represent the 11th straight quarter Kingsway and Lincoln General have needed to increase reserves. “Over that time the company has incurred about US$490 million in reserve strengthening, with no clear end in sight. The reserve development at its other operations (including run-off business at Kingsway General–its largest Canadian operations) is particularly alarming, in our view, as it could signal the development of ‘Lincoln-like’ reserve issues at those operating companies as well.”

S&P said the “negative outlook reflects our assessment of the company’s weak profitability, weak liquidity, weak capital adequacy, uncertain insurance franchise, reduced competitive position, weak management oversight, weak enterprise risk management, and limited financial flexibility.

“If Kingsway were to experience additional deterioration in its profitability, liquidity, 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 12 to 18 months. In our opinion, it is unlikely the ratings will improve in the near future, given all the financial challenges the company continues to face.”

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

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