Kingsway’s rating confirmed, trend stable

Dominion Bond Rating Service (DBRS) has confirmed the ‘BBB’ rating of Kingsway Financial Services Inc. (TSX:KFS) and its U.S. holding company, Kingsway America Inc. in a reflection of Kingsway’s successfully executed Group niche strategy.
The Company’s success is a result of its focus on underwriting profitability and effective claims management, according to DBRS.
DBRS adds that Kingsway’s earnings have been excellent in both 2004 and 2005, reflecting firm industry-wide pricing, lower claims experience, and favourable reserve development. Kingwasy’s combined ratio for the first nine months of 2005 improved to 97% from 97.8% for all of 2004.
Nevertheless, DBRS predicts that industry profitability has probably peaked for this cycle, with regulation and competition putting downward pressure on pricing and some recovery in claims frequency.
Kingsway has been cutting back on writing insurance premiums in the softer insurance market because pricing does not compensate for risk. In addition DBRS says that Kingsway is not writing new auto business in Alberta where legislation requires insurance to be priced without respect to risk.
It is by refusing to compromise on price and therefore preserve volume and/or market share in soft markets, that Kingsway is and has become better able to avoid the worst of the traditional insurance cycle.
It is therefore, according to DBRS, Kingsway’s discipline and its diversified niche markets that continue to provide the Group with lower earnings volatility than its peer group as well as a higher average return on equity over the cycle.
“Having achieved growth and diversification through acquisition,” DBRS commentes, “the Company is presently more focused on enhancing its pre-tax margins by improving underwriting, claims management processes and procedures, as well as overall cost efficiency.”
By continuing to focus on underwriting vigilance and adequate pricing Kingsway should be able to mitigate the need to address large reserve deficiencies such as the ones in 2002 and 2003. DBRS predicts that an increase in conservative reserves will allow for earnings that will lead to less volatility in the future.
“Strategically, the Company sees acquisition opportunities in the fragmented, but consolidating US market,” DBRS adds, “especially in the non-standard and commercial auto lines which are consistent with its chosen niche strategy. While acquisitions give rise to integration risks, Kingsway has a proven record of making successful in-market acquisitions.”