Best Downgrades Universal Casualty; Other Kingsway Subs under Review

May 2, 2011

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘D’ (Poor) from ‘B-‘ (Fair) and issuer credit rating (ICR) to “c” from “bb-” of Universal Casualty Company (UCC). The outlook for both ratings is negative.

Best has also placed under review with negative implications the ICRs of “ccc” and senior debt ratings of “ccc” of Kingsway Financial Services Inc (KFSI) and Kingsway America Inc. (KAI).

In addition Best placed under review with negative implications the FSR of ‘B-‘ (Fair) and ICR of “bb-” of Barbados-based Kingsway Reinsurance Corporation (KRC).

The FSR of ‘B-‘ (Fair) and ICRs of “bb-” will “remain under review with negative implications for Mendota Group and its members, Mendota Insurance Company and its wholly owned subsidiary, Mendakota Insurance Company, both domiciled in Eagan, Minn.,” said Best. The other companies are all headquartered in Elk Grove Village, Illinois, unless otherwise specified.

Best explained that it took the rating actions on UCC, KFSI, KAI and KRC following its discussions with KFSI “regarding its strategic plans in response to the holding company’s year-end 2010 loss in equity of over $55 million.

“The ratings of KFSI, KAI, Mendota Group and KRC will remain under review as management continues to pursue pending recapitalization plans of these entities, along with A.M. Best’s assessment of the impact of these initiatives on the companies’ various ratings.”

Best added that the ratings for UCC” reflect its severe adverse reserve development at year-end 2010, which caused risk-adjusted capitalization to not support its ratings after reserves were strengthened.

“The ratings for KFSI and its subsidiaries also recognize their weak capitalization, above average financial and operating leverage, unprofitable earnings trends and the challenges they face from strong competitive markets, weak economic conditions, below average interest rates, declining premium volume and rising claims costs.”

Amid its concerns, Best did note that they are “partially offset by KFSI’s actions to reorganize operations to improve efficiency and customer service; de-leverage its balance sheet and improve liquidity by selling assets for cash and reducing debt; improve performance by cancelling non-core lines of business, unprofitable agents and accounts; focus on core non-standard automobile insurance; and consolidate management and back office operations.”

Best summarized the rating actions as follows:
Kingsway America Inc.—
— “ccc” on $125 million 7.5% senior unsecured notes, due 2014 (currently $27 million outstanding)
— “ccc” on C$ 74.1 million [US$78.15 million] 7.12% senior unsecured notes, due 2015 (currently C$ 19.7 million [US$20.78 million] of the related KLROC debt is in the possession of non-KFSI owners)

Kingsway Financial Services Inc—
— “ccc” on C$ 100 million [US$1.055 million] 6% senior unsecured debentures, due 2012 (currently C$ 1.9 million [US$2 million] outstanding)

Best also noted that “all senior debt is unconditionally guaranteed by KFSI and KAI.”

Source: A.M. Best

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