Best Downgrades Kingsway and Several Subsidiaries Ratings

A.M. Best Co. has downgraded the issuer credit ratings (ICR) and senior debt ratings to “ccc” from “b-” of Canadian insurer Kingsway Financial Services Inc. (KFSI) and Kingsway America Inc. (KAI), which is based in Illinois.

Best also downgraded the financial strength rating (FSR) to ‘B-‘ (Fair) from ‘B’ (Fair) and the ICRs to “bb-” from “bb” of several KFSI wholly owned P/C subsidiaries. All of the ratings, with the exception of Lincoln General Insurance Company, which is unchanged, remain under review with negative implications.

The downgrading of the ratings of KFSI, KAI and selected operating subsidiaries “reflects the continued deteriorating financial condition of the parent company through the first nine months of 2009,” best explained. “This is attributed to significant operating losses, primarily within discontinued or run-off operations.” As a result Best concludes that “this has contributed to a further diminution of Kingsway’s business profile and that of its insurance operating companies.

“The ratings for all companies remain under review with negative implications. The under review status is based upon KFSI’s actions to dispose of its indirect ownership of Lincoln. The transaction involves the donation of equal shares, which represent 5 percent of Lincoln’s holding company, Walshire General Assurance Company, plus $20,000 to each of 20 U.S. charities.”

However, Best also noted that the Commonwealth of Pennsylvania Department of Insurance (PA DOI) has stated that they will seek to unwind these transactions while Kingsway has filed an Action for Declaratory Judgment in Pennsylvania.”

Best’s rating on Lincoln is currently ‘D’ (Poor), and it is “in extreme financial distress.” The rating agency explained that the “unwinding of its disposition could ultimately lead to Kingsway being in breach of its public debt covenants should Lincoln go into liquidation while still part of Kingsway.

“Kingsway’s public debt is material, and a breach in covenants could lead to the liquidation of the company if principal and interest payments are called before maturity. The ratings will remain under review with negative implications pending resolution of the Lincoln matter before the courts in Pennsylvania.”

Best summarized its rating actions as follows:
— The FSRs have been downgraded to’ B-‘ (Fair) from ‘B’ (Fair) and the ICRs to “bb-” from “bb” for the following subsidiaries of Kingsway Financial Services Inc.
American Service Insurance Company, Inc.
JEVCO Insurance Company
Mendota Insurance Company
Mendakota Insurance Company
Southern United Fire Insurance Company
U.S. Security Insurance Company, Inc.
Universal Casualty Company
The ratings remain under review with negative implications.

— The FSRs of ‘B-‘ (Fair) and ICRs of “bb-” have been affirmed and remain under review with negative implications for American Country Insurance Company.

— The FSR of ‘C++’ (Marginal) and ICR of “b” have been affirmed and remain under review with negative implications for Kingsway Reinsurance Corporation.

— The FSRs of ‘B’ (Fair) and ICRs of “bb” have been withdrawn for Kingsway General Insurance Company and Kingsway Reinsurance (Bermuda) Ltd., and an NR-5 (Not Formally Followed) has been assigned to the FSR and an “nr” to the ICR. This follows the merger of Kingsway General into JEVCO and the commutation of all reinsurance treaties with Kingsway Re.

The following debt ratings have been downgraded and remain under review with negative implications:
— Kingsway America Inc.—
— to “ccc” from “b-” on USD 125 million 7.5 percent senior unsecured notes due 2014
— to “ccc” from “b-” on USD 74.1 million 7.12 percent senior unsecured
notes, due 2015
— Kingsway Financial Services Inc. (issued under Kingsway General
Partnership) – to “ccc” from “b-” on CAD 100 million 6 percent senior unsecured debentures, due 2012

All senior debt is unconditionally guaranteed by KFSI and KAI.

Source: A.M. Best –