Kingsway’s outlook stable

A.M. Best Co. has removed Kingsway Financial Services Inc.’s issuer credit rating from under review, assigning it a rating of “bbb-.”
In addition, Kingsway received the debt rating of “bbb-” on its CDN$78 million 8.25% senior unsecured debentures, which are due in 2007.
A.M. Best assigned both ratings a stable outlook.
Kingsway’s subsidiary holding company, Kingsway America Inc., also received an issuer credit rating of “bbb-” and a debt rating of “bbb-” to its senior notes. Kingsway America’s ratings also have a stable outlook.
Kingsway’s ratings reflect its stronger balance sheet and ongoing profitability in its core property/casualty insurance operations, according to A.M. Best. The ratings furthermore reflect the Company’s financial flexibility, geographic diversification of risk, experienced management and its niche market leadership position. A.M. Best says the rating strengths are partially offset by the current downturn in the pricing cycle, pointing specifically towards commercial lines, historical reserve inadequacies, the use of managing general agents with binding and claim settling authority and continued sluggishness in the investment sector.
A.M. Best says the strength of Kingsway’s consolidated balance sheet is “excellent and continues to improve primarily as a result of improvement in its core property/casualty operating companies.” “Overall, these companies have produced solid profits due to improved underwriting results,” A.M. Best reports. “Combined ratios have dropped as a result of higher rates, lower claims frequency, more disciplined underwriting, tighter claims controls and higher case and incurred but not reported (IBNR) reserves.” A.M. Best says that Kingsway’s growth has slowed substantially, lowering critical leverage ratios to more normal levels. In addition, the rating agency claims the Company’s profitability has been enhanced by the use of internal reinsurance that has taken advantage of favorable business environments in Bermuda and Barbados thus maximizing returns.
“As a publicly-traded company on the Toronto and New York stock exchanges, KFSI (Kingsway Financial Services Inc.) has been able to bolster its balance sheet by using various capital-raising initiatives to support growth and acquisitions,” A.M. Best says. “These include common shares and various forms of debt offerings over the last five years and access to immediate cash through a credit facility with several banks. “
The rating strengths awarded by A.M. Best are partially offset by the current downturn in the underwriting cycle, primarily in commercial lines. Kingsway has a concentration of risk in only a few lines of business and A.M. Best says its risks are well diversified by geographic region, which minimizes the effects of local market competitive pricing pressures, weather-related losses and changes in the regulatory environment.
In addition, A.M. Best says Kingsway’s insurance subsidiaries have had a history of adverse reserve development, which was eroding the overall financial strength of the organization.
“KFSI has taken serious steps to mitigate any future development by aggressively closing older claims, shortening the claims settlement process, reorganizing its back office claims operations, setting higher initial case reserves and strengthening IBNR levels.” Furthermore, KFSI uses managing general agents extensively to produce business, especially in the United States. Because Kingsway uses managing general agents to produce business, it is a fact that the binding and claims settling authority of these agents puts the Company at risk to honor policies, which may be written outside the boundaries of its underwriting guidelines. However, A.M. Best says these risks are mitigated because the Company is bringing most of the claims settlement process in-house and making frequent operational audits to ensure compliance standards.