S&P Raises Kingsway Financial Svcs Rtgs to `BBB'
NEW YORK--Standard & Poor's--Nov. 7, 2001-- Standard & Poor's today raised its counterparty credit and senior unsecured debt ratings on Kingsway Financial Services (Kingsway) to triple-'B' from triple-'B'-minus. The outlook is stable.The raised ratings stem from Kingsway's very strong operating performance in its chosen niche markets of non-standard automobile (NSA), long-haul trucking, and motorcycle insurance; very strong capital position; and improved leverage and financial flexibility. Partially offsetting these positive factors is the uncertainty involved in Kingsway's entrepreneurial approach to acquisitions, which could lead to divergent business strategies as opportunities arise.
Major Rating Factors:
| -- | Strong business position in NSA and motorcycle niches. Among the leading companies in the group, Kingsway General Insurance Co. is one of the top three NSA writers while Jevco Insurance Co. is the leading motorcycle insurance company in Canada. The group is growing as a leader in similar lines in its U.S. business. Standard & Poor's believes Kingsway's demonstrated ability to produce profitable growth within these companies in a strategic, opportunistic plan has enabled the company to retain this business position. |
| -- | Strong operating results. Kingsway's focus on its niche market has enabled the company to be one of the only Canadian property/casualty writers to produce consistent underwriting profits. Over the past five years, the combined ratio has remained less than 100% and has averaged 97.8%, except for 1999 because of a one-time residual value loss of about C$14.4 million. At mid-year 2001, the combined ratio was 99%. Kingsway does not expect any losses from the World Trade Center terrorist attack, but it expects to benefit from overall increased rates in late 2001 and early 2002. Kingsway's expense ratio has dropped by about 4 points in 2001 to about 29% because of cost-cutting measures and increased net premium volume. In addition, Standard & Poor's believes the company's ability to manage its claims costs through aggressive investigation and defense of fraud presents a sustainable advantage that will enable it to continue to produce margins at the historically strong level. |
| -- | Very strong capital position. Kingsway's Canadian companies have a capital score of 195.9% under Standard & Poor's risk based model, while the U.S. operations have a score of 152%. On a consolidated group basis including offshore reinsurance operations, Kingsway's capital adequacy ratio of 150% (low double-'A' level) is indicative of Standard & Poor's view of capital. In addition, the holding company raised $71.9 million in additional capital July 2001 in a public offering and was listed on the NYSE. Standard & Poor's recognizes that capital is easily transferred between all of the companies within the group. Standard & Poor's believes that Kingsway's focus on growth via acquisition could potentially have an adverse effect on future capitalization. |
| -- | Improved leverage at the holding company. Although short term in nature, Kingsway Financial had about C$140.9 million in unsecured bank debt outstanding at the end of the second quarter of 2001 (up from C$100 million at year-end 1998). Kingsway was also successful in raising an additional $71.9 million in a new public share offering July 2001 in support of its new business initiatives. Debt to total capital improved to 28% (from 39% at year-end 1999), and GAAP interest coverage has improved to the single-A level of more than 4 times (x). |
| -- | Acquisition risk. Kingsway is willing to acquire weak companies, expecting to turn them around. Kingsway's opportunistic approach has served it well, contributing significant growth but also unexpected losses, including the one-time reserve increase on residual value business in 1999 of about C$13 million. The company has since exited that line of business following a careful review. Kingsway grew its long-haul trucking portfolio through the assumption of renewal rights on business in this line from AXA Canada Inc. in 2000. (Kingsway incurs minimal incremental cost to acquire the rights to underwrite this block of business, which includes the right to increase rates or non-renew.) |
OUTLOOK: STABLE
Standard & Poor's expects organic growth of 8%-10% prospectively, with business continuing to be split almost evenly between the U.S. operations and the more mature Canadian operations in 2002, although growth opportunities are expected to be greater in the U.S. Combined ratios should continue to improve and remain at historical levels below 100%, although re-underwriting and competition might cause the U.S. book to lag behind the Canadian in profitability by a year or two. Kingsway should be able to take advantage of rate increases of 12%-15% in 2002, with market conditions continuing to harden. Capital adequacy of the group is expected to remain more than 140% (high single-'A' level), even with expected growth patterns. Debt leverage should remain strong at less than 30%, with GAAP interest coverage remaining more than 4x.