DBRS Places Kingsway Ratings Under Review with Negative Implications

DBRS has today placed the ratings of Kingsway Financial Services Inc. (Kingsway or the Company), Kingsway America Inc. (its U.S. holding company) and Kingsway 2007 General Partnership Under Review with Negative Implications following the Company’s announcement that it was going to book an additional increase in claims expenses as a result of adverse reserve development at one of the Company’s major U.S. operating subsidiaries, Lincoln General Insurance Company (Lincoln General). The estimated increase in claims expenses is expected to be between $95 million and $125 million, which is in addition to the $162.2 million of reserve development reported since the beginning of 2006 that is largely due to long-haul trucking and contractor liability claims in California. The after-tax impact is expected to be between $79 million and $105 million in the fourth quarter of 2007. In its Rating Report issued on May 7, 2007, DBRS observed that, given the Company’s current debt ratios, continued adverse reserve development at Lincoln General would put additional downward pressure on the Company’s rating.

DBRS acknowledges the difficulty in precisely estimating insurance claim reserves, especially since Lincoln General, which had formerly delegated its program-related claims management processes to its MGA partners, has been in the process of bringing its claims processing in-house over the last two years. While the quality of information used to determine reserves has undoubtedly improved, pre-existing reserves have now been exposed as having been inadequate. Whether or not the latest announcement will address the deficiencies once and for all is uncertain.

As a result of recent acquisitions, the Company’s debt ratio has increased to 33.4% as of the end of September 2007. Pro forma for the latest announcement, we expect that the Company will report a debt ratio of close to 37%, which is high for the existing rating category. Of greater concern to DBRS is the possibility that the Company’s enterprise risk management may be inadequate relative to the complexity of its products and its operations. A final resolution of the rating will follow the DBRS annual review, which is expected to occur early in 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.