DBRS today confirmed the long-term debt ratings of Kingsway Financial Services Inc.

“Though Kingsway generally continues to successfully execute its chosen niche strategy of offering specialized insurance products in regional markets in North America, earnings in 2006 and in Q1 2007 have been hurt by higher than normal policy reserve development in the U.S. trucking and construction liability segments at Lincoln General,” DBRS says.

The rating agency says that consulting actuaries have deemed it prudent to increase reserves relating to the 2004 and 2005 accident years on the basis of recent paid losses. “While this development is disappointing, DBRS remains confident that earnings diversity gives the company the ability to absorb such losses, that there is no systemic weakness, and that specific actions such as rate adjustments, a review of the responsible programs and new personnel at Lincoln General have largely addressed the problem,” it says. But, it adds, “Should this reserve development continue, given the company’s current financial leverage, the rating would come under downward pressure.”

“However, the company’s disciplined and focused approach to risk underwriting, pricing and claims management has generally resulted in consistent underwriting profitability. Combined with steady investment results, company earnings have been relatively stable as measured by ROE over the past five years,” DBRS says.

“Even though the insurance cycle is softening in the wake of several years of excellent profitability, Kingsway is well positioned to avoid the worst of the cycle through its discipline and its diversification,” DBRS concludes.

“The recent acquisition of Mendota Insurance Company, the non-standard auto insurance subsidiary of St. Paul Travelers, further improves the company’s geographical diversification, while leveraging its existing specialization and product expertise. Further consolidation in the U.S. insurance industry is expected to give the company additional acquisition opportunities, though DBRS again notes that the company’s leverage is at the limit for the rating category,” it adds.