CONTACTS:
FOR IMMEDIATE RELEASE
OLDWICK, N.J. - DECEMBER 18, 2007 12:00 AM (EST)
A.M. Best Co. has downgraded the issuer credit ratings (ICR) to "bb" from "bbb-"of Kingsway Financial Services Inc. (KFSI), (Mississauga, Ontario) and Kingsway America Inc. (KAI) (Elk Grove Village, IL). The ratings have been placed under review with negative implications.
Concurrently, A.M. Best has downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) and the ICR to "bbb" from "a-" of KFSI's subsidiary, Lincoln General Insurance Company (Lincoln) (York, PA). These ratings remain under review with negative implications.
Additionally, A.M. Best has downgraded the debt ratings to "bb" from "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 its USD 74.1 million 7.12% senior unsecured notes due 2015. These debt ratings have been placed under review with negative implications. The debt ratings of KAI are based upon the unconditional guarantee of KFSI.
In addition, A.M. Best has assigned a debt rating of "bb" to Kingsway General Partnership's CAD 100 million, 6% senior unsecured debentures, due July 2012. This rating has been placed under review with negative implications. This debt is unconditionally guaranteed by KFSI and KAI. (See below for a detailed listing of the companies and ratings.)
The rating downgrades are a result of KFSI's weakened risk-adjusted capitalization,
continued adverse reserve development, softening market conditions and operating performance, which is significantly below expectations. The recent reserving action in Lincoln indicates a continuation of a long pattern of increases on prior accident years. In A.M. Best's opinion, recent reserving increases primarily are a result of a systemic problem within the organization as a result of Lincoln's rapid growth in 2002 and 2003. Given the significant reserve deficiencies that Lincoln has exhibited, A.M. Best has concerns about current pricing levels and the challenge the company will face to increase rates or select better risks in the current soft market. Moreover, Lincoln is highly dependent upon Kingsway Reinsurance Corporation (KRC) (Barbados) for reinsurance protection 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. In addition, the reserve increases in 2007 on prior accident years have put current year earnings significantly under projections, and the overall capitalization of KFSI has been weakened. Furthermore, KFSI has relied more heavily upon debt financing in recent years to raise capital to support its operation. While the company's debt leverage is not excessive, it is a concern when viewed with the continuing pattern of loss reserve development and diminishing earnings performance.
The under review status is based upon KFSI successfully executing a corrective plan of action to improve capitalization, debt leverage, reserve development, operating performance and overall enterprise risk management. Failure to execute this plan favorably will result in further
negative rating pressure, which could result in a downgrading of the ratings.
The FSR has been downgraded to B (Fair) from A- (Excellent) and the ICR to "bb" from "a-" for Kingsway Reinsurance Corporation. The ratings remain under review with negative implications.
The FSRs have been downgraded to B++ (Good) from A- (Excellent) and the ICRs to "bbb" from "a-" for the following subsidiaries of Kingsway Financial Services Inc. These ratings have been placed under review with negative implications.
- American Service Insurance Company Inc.
- JEVCO Insurance Company
- Kingsway Reinsurance (Bermuda) Ltd.
- Southern United Fire Insurance Company
- Universal Casualty Company
The FSRs have been downgraded to B++ (Good) from A (Excellent) and the ICRs to "bbb" from "a" for Mendota Insurance Company and its wholly owned subsidiary, Mendakota Insurance Company. These ratings remain under review with negative implications. These companies were purchased by KFSI in second quarter 2007.
The FSRs of B+ (Good) and the ICRs of "bbb-"have been placed under review with negative implications for American Country Insurance Company and U.S. Security Insurance Company Inc.
The FSRs of B++ (Good) and the ICRs of "bbb" of Kingsway General Insurance Company and York Fire & Casualty Insurance Company have been placed under review with negative implications.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers.