A.M. Best Co. has downgraded the issuer credit ratings of Kingsway Financial Services Inc. of Mississauga, Ont. and Kingsway America Inc., of Elk Grove Village, Illinois. The ratings have been placed under review with negative implications.

Concurrently, the rating agency has downgraded the financial strength rating and the issuer credit rating to of Kingsway Financial’s subsidiary, Lincoln General Insurance Company, of York, Penn. These ratings remain under review with negative implications.

Additionally, A.M. Best has downgraded the debt ratings Kingsway Financial’s $78 million 8.25% senior unsecured debentures due 2007, Kingsway America’s US$125 million 7.5% senior unsecured notes due 2014 and its US$74.1 million 7.12% senior unsecured notes due 2015. These debt ratings have been placed under review with negative implications. The debt ratings of Kingsway American are based upon the unconditional guarantee of Kingsway Financial.

The rating downgrades are a result of Kingsway Financial’s weakened risk-adjusted capitalization, continued adverse reserve development, softening market conditions and operating performance, which is significantly below expectations.

The recent reserving action in Lincoln indicates a continuation of a long pattern of increases on prior accident years.

In A.M. Best’s opinion, “recent reserving increases primarily are a result of a systemic problem within the organization as a result of Lincoln’s rapid growth in 2002 and 2003. Given the significant reserve deficiencies that Lincoln has exhibited, A.M. Best has concerns about current pricing levels and the challenge the company will face to increase rates or select better risks in the current soft market.”

Furthermore, “KFSI has relied more heavily upon debt financing in recent years to raise capital to support its operation. While the company’s debt leverage is not excessive, it is a concern when viewed with the continuing pattern of loss reserve development and diminishing earnings performance.”

The rating agency says the under review status is based upon Kingsway Financial successfully executing a corrective plan of action to improve capitalization, debt leverage, reserve development, operating performance and overall enterprise risk management.

“Failure to execute this plan favorably will result in further negative rating pressure, which could result in a downgrading of the ratings,” A.M. Best says.