CONTACTS:
FOR IMMEDIATE RELEASE
OLDWICK, N.J. - JUNE 07, 2007 12:00 AM (EDT)
A.M. Best Co. has placed the financial strength rating (FSR) of A- (Excellent) and the issuer credit ratings (ICR) of "a-" of Lincoln General Insurance Company (Lincoln) (York, PA) and Kingsway Reinsurance Corporation (KRC) (Barbados) under review with negative implications.
Concurrently, A.M. Best has affirmed the ICRs of "bbb-" of Kingsway Financial Services Inc. (KFSI), (Mississauga, Ontario) and Kingsway America Inc. (KAI) (Elk Grove Village, IL). The outlook on these ratings has been revised to negative from stable.
Additionally, A.M. Best has affirmed the FSRs and ICRs of the remaining property/casualty subsidiaries of KFSI with various rating outlooks.
A.M. Best has also affirmed the debt ratings of "bbb-" on KFSI's CAD 78 million 8.25% senior unsecured debentures due 2007, KAI's USD 125 million 7.5% senior unsecured notes due 2014 and KAI's USD.74.1 million 7.12% senior unsecured note due 2015. The outlook for these ratings has been revised to negative from stable. The debt ratings of KAI are based upon the unconditional guarantee of KFSI. (See below for a detailed listing of the companies and ratings.)
The under review status of Lincoln's ratings is due to its continued poor operating performance, due primarily to adverse loss reserve development. As a result, risk-adjusted capitalization has deteriorated and no longer adequately supports the underwriting and investment risks at the current rating level, given the poor operating performance. In addition, A.M. Best remains concerned with this continued poor reserving trend of KFSI overall.
A.M. Best believes that market conditions in Lincoln's core commercial trucking, commercial auto and non-standard personal auto markets will have put greater pressure on pricing. Given the significant reserve deficiencies that Lincoln has exhibited, A.M. Best has concerns about current pricing levels. Moreover, Lincoln is highly dependent upon KRC for reinsurance protection and as a primary source of capital support. Because of the concentration of risk in the affiliated reinsurer, Lincoln's capitalization is highly susceptible to changes in the financial position of KRC and the overall capitalization of KFSI.
These rating concerns are partially mitigated by the explicit financial support provided by KFSI and management's commitment to achieve capitalization levels commensurate with Lincoln's risk appetite and current rating level. The ratings will be downgraded if, in A.M. Best's opinion, risk-adjusted capitalization-as measured by Best's Capital Adequacy Ratio (BCAR)-does not appropriately support the current ratings, subsequent to A.M. Best's review of the timely completion of management's capital solution. Furthermore, any significant deterioration in the financial strength of KRC would result in inadequate support of Lincoln General's current ratings.
The under review status of KRC is based upon A.M. Best's opinion that if KRC is further utilized to support Lincoln General, risk-adjusted capitalization of KRC will be weakened and may not support the current ratings without additional capital support from KFSI. As a dedicated reinsurer of KFSI's U.S. business, KRC is also dependent upon the profitability of its U.S. affiliates. Given current soft market conditions, A.M. Best does not expect KRC's 2007 earnings to be as strong as they have been in recent years. The ratings will be downgraded if financial projections for KRC do not exceed A.M. Best's expectations or if capital is not replenished by KFSI.
The affirmation of the ICRs of KFSI is reflective of its history of profitable operating performance, market leadership position among commercial trucking and professional non-standard auto writers in the United States and Canada, good geographic spread of risk and financial flexibility as a publicly traded company.
These positive rating factors are offset in part by KFSI's diminished risk-adjusted capitalization due to a continuing pattern of adverse reserve development and the growing use of debt to finance, what A.M. Best views is an aggressive growth appetite through organic growth as well as acquisitions. While the recent adverse development of loss reserves is not material relative to KFSI's overall reserve position, it is a continuation of a loss development pattern that in aggregate is material. Although reserves have been increased, in A.M. Best's opinion the pattern of adverse loss development will continue and be difficult to absorb in a soft market.
When considering this potential reserve deficiency within current capitalization levels, there is insufficient capitalization to support the current rating levels. Without improvement in capitalization to address KFSI's growth orientation, offset A.M. Best's concerns with potential reserve deficiencies and reduce adjusted financial leverage, the ratings of KFSI and its Excellent rated subsidiaries will be downgraded.
The FSR of A- (Excellent) and the ICRs "a-" have been affirmed with a negative outlook for the following subsidiaries of Kingsway Financial Services Inc.:
- American Service Insurance Company Inc.
- Southern United Fire Insurance Company
- Universal Casualty Company
The FSR of A- (Excellent) and the ICRs "a-"have been affirmed with a negative outlook for the following subsidiaries of Kingsway Financial Services Inc.:
- JEVCO Insurance Company
- Kingsway Reinsurance (Bermuda) Limited
The FSR of B++ (Good) and the ICRs of "bbb" have been affirmed with a stable outlook for the following subsidiaries of Kingsway Financial Services Inc.:
- Kingsway General Insurance Company
- York Fire & Casualty Insurance Company
The FSR of B+ (Good) and the ICRs of "bbb-" have been affirmed with a stable outlook for U.S. Security Insurance Company Inc., a subsidiary of Kingsway Financial Services Inc.
The FSR of B+ (Good) and the ICR of "bbb-" have been affirmed with a negative outlook for American Country Insurance Company, a subsidiary of Kingsway Financial Services Inc.
Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors.