Canadian Underwriter
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Reserve Boosting Undermines Kingsway’s 3-Q Earnings


November 1, 2003   by Canadian Underwriter


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Specialty risk insurer Kingsway Financial Services Inc. (TSX: KFS) saw net income for the third quarter of this year drop by 28% to $15.6 million compared with the $21.7 million reported for the same period in 2002. This equates to diluted earnings of 28 a share for the latest quarterly reporting period versus the 44 a share shown at the end of the third quarter of 2002. As a result, the company’s annualized return on equity (ROE) for the latest reporting period fell to 9.8% from the 15.2% disclosed for same period in 2002.

Kingsway’s financial performance for the latest quarter was negatively affected by a combination of increased reserve provisions totaling $61.5 million (relating to unpaid claims having occurred prior to the end of last year), as well as strengthening of the Canadian dollar which negatively affected its U.S. earnings. The insurer also completed a share offering in July of this year, which saw the average number of outstanding shares rise by 13% – thus adding to dilution of earnings on a per share basis. Despite the slump in earnings growth for the latest quarter, Kingsway produced a 24% year-on-year gain in net earnings of $67.3 million for the first nine months of this year (first nine months 2002: $54.1 million) with the ROE clocking in at 13.9% versus the 12.8% reflected at the end of the first nine months of 2002.

In total, the company increased reserving for unpaid claims by $131.4 million during the first nine months of this year. The third quarter’s reserve adjustment of $61.5 million breaks down to $40.4 million for Canadian operations and $21.1 million for U.S. operations. Canadian business accounts for $41.1 million of the prior year reserving cost for the first nine months of this year, while the reserving adjustment on U.S. business came in at $34.6 million. The reserve strengthening taken will provide for greater earnings stability as the company moves forward, says Kingsway president Bill Star. “During the first eight months of this year we have made a concerted effort to review and strengthen our claim reserves. We felt this comprehensive review was necessary to significantly reduce the risk of future adverse claim development.”

Kingsway increased net written premiums by 32% year-on-year to $1.9 billion for the first three quarters of this year compared with the $1.4 billion reported for the same period a year ago. Net earned premiums rose by 48% to $1.8 billion for the latest nine month reporting period versus the $1.2 billion generated over the same period in 2002. Kingsway grew its U.S. business by 30% for the first nine months of this year based on gross premiums of $1.5 billion, while the Canadian operations increased gross premiums by 31% year-on-year to reach $469.9 million.

The insurer saw its combined ratio for the third quarter rise marginally to 103.7%, producing an underwriting loss of $22.1 million compared with a loss of $5.9 million reported for the same period last year. Over the nine months, Kingsway made an underwriting profit of $400,000 on the back of a combined ratio of 100%. This compares with an underwriting loss of $3.5 million on a combined ratio of 100.3% produced for the same period in 2002.


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