Best Downgrades Kingsway and Affiliates Ratings; Assigns Negative Outlook

October 7, 2011

A.M. Best Co. has downgraded the issuer credit ratings (ICR) to “c” from “ccc” and senior debt ratings to “c” from “ccc” of Kingsway Financial Services Inc (KFSI) and Kingsway America Inc. (KAI).

Best has also downgraded the financial strength rating (FSR) to C+’ (Marginal) from’ B-‘ (Fair) and ICR to “b-” from “bb-” of Barbados-based Kingsway Reinsurance Corporation (KRC), as well as the Mendota Group and its members, Mendota Insurance Company and its wholly owned subsidiary, Mendakota Insurance Company (both are domiciled in Eagan, Minnesota). Lastly, Best has affirmed the FSR of ‘D’ (Poor) and ICR of “c” of Universal Casualty Company (UCC), both with negative outlooks.

In addition Best said it has removed all of these ratings from under review with negative implications, but has assigned them a negative outlook.

All of the companies are headquartered in Elk Grove Village, Illinois, unless otherwise specified.

The rating actions on the Mendota Group, KFSI, KAI and KRC are a result of Best’s “discussions with KFSI regarding the results of its research into various recapitalization strategies for the holding companies, which to date have yet to materialize,” said the report. “These discussions are in response to the holding company’s year-end 2010 loss in equity of over $55 million, as well as its continued $19 million in equity losses through the second quarter of 2011. A.M. Best will continue to monitor management’s efforts to recapitalize KFSI, KAI and the Mendota Group.”

Best also indicated that the ratings for KFSI and its affiliates “recognize their weak risk-adjusted capitalization, above average financial and operating leverage, continued 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.”

On a more positive note, Best said that “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,” partially offset the more negative factors.

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,” said Best.

Best summarized the ratings affected by its actions as follows:

The following debt ratings have been downgraded:
Kingsway America Inc.—
— to “c” from “ccc” on USD 125 million 7.5 percent senior unsecured notes, due
2014 (currently USD 27 million outstanding)
— to “c” from “ccc” on CAD 74.1 million 7.12 percent senior unsecured notes, due
2015 (currently CAD 19.7 million of the related KLROC debt is in the possession of non-KFSI owners)
Kingsway Financial Services Inc—
— to “c” from “ccc” on CAD 100 million 6 percent senior unsecured debentures, due
2012 (currently CAD 1.9 million outstanding)

All senior debt is unconditionally guaranteed by KFSI and KAI.

Source: A.M. Best

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