Best Takes Various Rating Actions on Kingsway and Subsidiaries

A.M. Best Co. announced that it has removed from under review with negative implications and affirmed the financial strength ratings (FSR) of ‘B-‘ (Fair) and issuer credit ratings (ICR) of “bb-” of Miami-based Kingsway Amigo Insurance Company and Illinois-based Universal Casualty Company. However, Best has also assigned negative outlooks to both these ratings.

Best has also affirmed the FSR of ‘B-‘ (Fair) and ICR of “bb-” of American Service Insurance Company, Inc. (ASI) and American Country Insurance Company (ACI), both domiciled in Elk Grove Village, Ill. These ratings remain under review, and the implications have been revised to developing from negative.

In addition Best has affirmed the FSR of ‘B-‘ (Fair) and ICR of “bb-” of Mendota Insurance Company and its wholly owned subsidiary, Mendakota Insurance Company, both domiciled in Eagan, Minn. The companies comprise the Mendota Group, and their ratings remain under review with negative implications.

In a related move Best has upgraded the FSR to ‘B-‘ (Fair) from ‘C++’ (Marginal) and ICR to “bb-“from “b” of Kingsway Reinsurance Corporation (KRC), which based in Barbados. The ratings have been removed from under review with negative implications, but have been assigned a negative outlook.

At the same time, Best has removed from under review with negative implications and affirmed the ICRs of “ccc” and senior debt ratings of “ccc” of Kingsway Financial Services Inc (KFSI) and Kingsway America Inc., both domiciled in Elk Grove Village, Ill. However, the outlook assigned to these ratings is also negative.

Best explained that the ratings for KFSI and its subsidiaries are “reflective of their weak capitalization, above average financial and operating leverage, unprofitable earnings trend and the challenges they face from strong competitive markets, weak economic conditions, below average interest rates, declining premium volume and rising claims costs.”

However, on a positive note, Best said that these concerns are “partially offset by KFSI’s actions to reorganize operations to improve efficiency and customer service; deleverage the 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 explained that the ratings for ASI and ACI are “based upon an intercompany pooling agreement between the two companies. Their ratings are under review with developing implications due to KFSI’s actions to find new ownership by creating a publicly traded holding company to hold their shares. Successful execution of the plan is expected to improve capitalization, reduce leverage, improve operating performance and enhance both companies’ business profile. However; KFSI faces significant execution risk in attracting investors. These ratings will remain under review pending a thorough review of all circumstances following completion of the transaction.

“The ratings for the Mendota Group remain under review with negative implications due to the uncertainty involved with its future financial strength. KFSI is in the process of selling the Mendota Group and anticipates completing a transaction before year-end 2010.”

Best also noted that KRC’s ratings were “upgraded to recognize its improved balance sheet strength and leverage position due to commutation with its U.S. affiliates in 2009. The negative outlook is based on the uncertainty of the company’s role within the KFSI organization going forward and the permanency of its current capital position. The company is currently in run off.”

The following debt ratings have been affirmed:
Kingsway America Inc.—
– “ccc” on USD 125 million 7.5 percent senior unsecured notes, due 2014 (currently USD 25.2 million outstanding)
– “ccc” on USD 74.1 million 7.12 percent senior unsecured notes, due 2015
(currently USD 14.8 million in the possession of non-KFSI owners)

Kingsway Financial Services Inc—
– “ccc” on CAD 100 million [US$98.32 million] 6 percent senior unsecured debentures, due 2012 (currently CAD 11.9 million outstanding)

All senior debt is unconditionally guaranteed by KFSI and KAI.

Source: A.M. Best