Kingsway ROE drops slightly on reserve strengthening, currency fluctuations

Specialty insurer Kingsway Financial Services (TXS, NYSE: KFS) saw its return on equity drop slightly in 2003, although the company still boasted double-digit returns for the year.For the 12 months ending December 31, 2003, ROE was 12.9%, down from 13.8% the year prior. However, the company’s net income rose 7% to $83.5 million, or $16.2 per share, compared to $79.5 million, or $1.61 per share in 2002.Gross written premiums were up for the year, to $2.6 billion from $2.1 billion the year prior, and net earned premiums grew to $2.4 billion from $1.7 billion in 2002.Investment income also blossomed, up to $78.4 million from $64.9 million in 2002. Net realized gains were up to $55.0 million in 2003 from $16.3 million the year prior.The company did post a higher claims ratio in 2003, at 74.3% versus 71.4% in 2002. And the combined ratio was up slightly to 101.4% from 99.8% the year previous. This saw the company posting an underwriting loss of $33.9 million, against an underwriting profit of $2.6 million in 2002.The Canadian operations produced much of this underwriting lag, posting an underwriting loss of $65.4 million in 2003, compared to a loss of $34.9 million in 2002. The combined ratio for Canadian operations was 111.8%, up from 108.4% in 2002, and the loss ratio rose to 83.7% last year from 78.3% the year previous. Unfavorable development on prior year claims rose to $103.9 million for Canadian business in 2003, even worse than the $65.8 million in adverse development recorded in 2002.U.S. operations fared better, posting an underwriting profit of $31.5 million, although this was down from the $37.5 million posted in 2002. The U.S. combined ratio was 98.3%, up slightly from 97.2% in 2002, while the loss ratio rose to 71.5% last year from 69.2% the year prior. Adverse development in the U.S. amounted to $92.8 million, compared to $35.3 million in 2002.Kingsway CEO Bill Star notes that the company took reserve charges in 2003 which dragged results, as well as suffering from currency changes had the Canadian dollar remained steady at 2002 levels, net income for 2003 would have jumped a further $10.5 million. Following a claims review of all operations, the provision for unpaid claims was increased by 39%. “In 2003 we took decisive steps to ensure that we achieved our stated commitment to reach claim reserve levels recommended by independent actuaries by year-end,” Star notes. Despite the challenges that we faced in 2003 it still turned out to be the most profitable in our history. As a result, we are well positioned to produce much better results in 2004 and to reach our targeted underwriting profit goals.”