An anonymous director reports

KINGSWAY ANNOUNCES FINAL FULL YEAR RESULTS

Kingsway Financial Services Inc. has provided its financial results for the fourth quarter and year ended Dec. 31, 2010. All amounts are in U.S. dollars unless indicated otherwise.

The company reported a net loss of $46.3-million or a loss of 89 cents per share diluted for the fourth quarter and a net loss of $38.2-million or a loss of 73 cents per share diluted for the year.

Sept. 30, 2010, shareholders' equity was $149.9-million and book value per share was $2.88. After reflecting the sale of American Country Insurance Company and American Service Insurance Company Inc. and the fourth quarter results the shareholders' equity at Dec. 31, 2010, is $94.8-million and book value per share $1.82. The changes in book value, as previously announced are, due to:

• Approximately $21-million of loss reserve strengthening in the company's insurance subsidiaries, primarily in Universal Casualty Company, related to periods prior to fourth quarter 2010;
• Approximately $10-million of non-cash impairments and adjustments to certain operating assets and liabilities;
• Approximately $9-million relating to the disposition and fourth quarter operating results of American Country Insurance Company and American Service Insurance Company Inc.;
• With the remainder from fourth quarter results of operation and expenses of the holding company including interest expense.

Effective with the release of its first quarter 2011 financial results, Kingsway will be required to report under the principles of International Financial Reporting Standards, or IFRS. Under IFRS, the company will record its outstanding debt at fair market value rather than cost. Based upon market data available at the time of today's release, the company estimates the difference between debt at cost and debt at fair market value to be approximately $50-million. The company's Dec. 31, 2010, book value per share is $1.82, but, after reporting under IFRS, book value will increase by approximately 97 cents before taking into account the effect of income taxes on the fair value adjustment. This will result in pro forma book value per share of approximately $2.79 before any potential tax effects.

Major events for 2010:

• On March 29, 2010, the company closed the sale of Jevco Insurance company for $263.3-million (Canadian).
• The company repurchased $143.3-million of its debt in 2010, which resulted in a gain of $19.2-million.
• On June 30, 2010, the company acquired a 100-per-cent interest in JBA Associates Inc., a managing general agency specializing in assigned risk automotive insurance.
• On Dec. 31, 2010, the company closed the going-public transaction involving its subsidiaries American Country Insurance Company and American Service Insurance Company Inc.
• During the year, the company completed the purchase of 1.5 million Kingsway Linked Return of Capital (KLROC) units. As a result, the company beneficially owns and controls 2,333,715 units of KLROC trust representing 74.8 per cent of the issued and outstanding units. The company consolidated the KLROC trust which resulted in a gain on consolidation of $17.8-million in 2010.
• In Stockwatch on June 14, 2010, the company announced its intention to sell its wholly owned subsidiary, Mendota Insurance Company. Following a lengthy process, Kingsway is no longer pursuing the sale of Mendota after its attempts did not yield an acceptable offer. Kingsway is refocusing Mendota to operate on a smaller and more profitable premium base beginning in 2011.

Operational results for 2010:

• Net loss of $54.0-million was recorded in the U.S. segment for 2010.
• Net loss of $7.1-million was recorded in the corporate segment for 2010.
• Ninety-one point six per cent of gross premiums written in 2010 were generated from non-standard automobile, the core line of business.
• Investment income increased to $16.4-million in 2010 compared with $100,000 in 2009.

Dividend

The board of directors has decided that a dividend will not be declared for the fourth quarter of 2010.

Fourth quarter results

Gross premiums written in the fourth quarter of 2010 decreased by 15.6 per cent to $45.4-million compared with $53.8-million reported in the fourth quarter of 2009. The decrease is due to the various steps taken to discontinue unprofitable programs and the discontinuation of the managing general agent distribution channel for non-standard automobile insurance, and the move away from higher limit commercial business.

Also contributing to the reduction in non-standard automobile premium volumes is the continuing poor economic conditions in much of the U.S. The non-standard automobile insurance market tends to contract during periods of high unemployment.

Net premiums earned were $50.4-million in the fourth quarter of 2010, a decrease of 2.7 per cent compared with $51.8-million for the fourth quarter of 2009. This decrease is attributed to the same factors as those for gross premiums written as described above.

The combined ratio was 193.0 per cent in 2010 compared with 204.1 per cent in 2009, which produced an underwriting loss of $46.9-million compared with a loss of $53.9-million in 2009. The underwriting loss in 2010 is primarily a result of the increase in the loss ratio to 139.5 per cent from 87.9 per cent due to unfavourable development on the non-standard automobile line of business which relates primarily to business written at UCC and continuing elevated loss ratios at Amigo. Also contributing to the decrease in the underwriting loss is a decrease in the expense ratio to 53.5 per cent from 116.2 per cent, primarily due to costs associated with the transformation program and increased legal and other professional fees in 2009.

Investment income increased to a gain of $1.4-million in the fourth quarter of 2010 compared with a loss of $14.6-million for the fourth quarter of 2009, primarily due to foreign exchange loss recorded as part of miscellaneous investment.

In the fourth quarter of 2010, the company had net realized gains of $2.7-million, as compared with nil in the fourth quarter of 2009. The realized gains in the fourth quarter of 2010 pertain to disposal of securities in the company's fixed income portfolio.

In the fourth quarter of 2010, the company incurred a loss from continuing operations of $45.1-million compared with a loss from continuing operations of $70.9-million in 2009. The loss in the fourth quarter of 2010 is largely due to underwriting losses. The loss in the fourth quarter of 2009 is largely due to underwriting losses, a significant decline in investment income due to foreign exchange losses and lower yields on a smaller portfolio.

In the fourth quarter of 2010, the company incurred a net loss of $46.3-million compared with net loss of $75.5-million reported for the fourth quarter of 2009. The diluted loss per share was 89 cents in 2010 compared with diluted loss per share of $1.46 for 2009.

For the years ended Dec. 31, 2010, and 2009

Gross premiums written

During the year ended Dec. 31, 2010, gross premiums written were $214.0-million compared with $261.9-million for the year ended Dec. 31, 2009, representing an 18-per-cent decrease.

The decrease in gross premiums written is due to significant reductions in premium volumes in the non-standard and commercial automobile lines of business. The reduction in non-standard automobile premium is due to the various steps taken to discontinue unprofitable programs and the discontinuation of the managing general agent distribution channel, primarily at UCC. Also contributing to the reduction in non-standard automobile premium volumes is the continuing poor economic conditions in much of the U.S. The non-standard automobile insurance market tends to contract during periods of high unemployment as is currently being experienced in the U.S.

The reduction in commercial automobile premium represents the company's move away from higher limit commercial business.

Net premiums written

Net premiums written decreased 25 per cent to $203.7-million for the year ended Dec. 31, 2010, compared with $273.1-million for the year ended Dec. 31, 2009. This decrease is attributed to the same factors as described in the gross premiums written section above.

Net premiums earned

Net premiums earned decreased 25 per cent to $222.5-million for the year ended Dec. 31, 2010, compared with $298.2-million for 2009. This decrease is attributed to the same factors as described in the gross premiums written section above. The extent of the decrease is mitigated by the larger volume of business written in 2009 which is partially earned in 2010.

Investment income

Investment income, excluding net realized gains, increased to $16.4-million in 2010, compared with $100,000 in 2009. The increase in investment income is due to $2.2-million of foreign exchange gain as compared with $12.9-million of foreign exchange loss in 2009 and to lower yields and a reduction in the duration and risk profile of the portfolio. Also contributing to the reduction in interest income is the reduction in the size of the portfolio as a result of the reduced volumes of business in the company's continuing operations, the acceleration of claim payments, and debt and equity buybacks and other corporate initiatives.

Net realized gains

The company incurred net realized gains in 2010 of $9.2-million compared with $11.0-million in 2009. The net gain in 2010 is primarily due to gains realized from the liquidation of fixed income securities in the company's insurance subsidiaries in the third and fourth quarters. There were no impairments recorded during 2010 for other than temporarily impaired securities. The net gain in 2009 is due to gains realized from the liquidation of fixed income securities in the company's captive reinsurance company in Barbados to facilitate the related party reinsurance commutation transactions, partially offset by realized losses on the disposal of the company's common equity portfolio and impairments for other than temporarily impaired securities.

Claims incurred

The loss ratio for 2010 was 96.5 per cent compared with 79.4 per cent for 2009 due to increasing ultimate loss estimates for current and prior accident years. The results for 2010 reflect an increase in the provision for unpaid claims occurring prior to Dec. 31, 2009. This increase amounted to approximately $14.4-million which increased the ratio by 6.5 percentage points for 2010. The results in 2009 reflect an increase in the provision for unpaid claims occurring prior to Dec. 31, 2008, of $1.8-million which increased the ratio by 0.6 percentage point. Consolidated case reserves for individual claims increased 9 per cent to $118.6-million as at Dec. 31, 2010, compared with $108.4-million at Dec. 31, 2009, and IBNR decreased 28 per cent to $56.1-million at Dec. 31, 2010, compared with $78.3-million at Dec. 31, 2009.

Underwriting expenses

The expense ratio was 52.2 per cent in 2010 and 49.5 per cent in 2009. The higher ratio in 2010 is due to net premium earned decreasing at a greater rate than expense reductions. Expenses included increased legal and other professional fees.

Gain on buyback of debt

During 2010, Kingsway America Inc. (KAI) and Kingsway 2007 General Partnership (KGP) purchased and cancelled $143.3-million par value of its senior unsecured debentures for $124.1-million recording a gain of $19.2-million. During 2009, KAI and KGP purchased and cancelled $21.6-million par value of its senior unsecured debentures for $12.3-million, recording a gain of $9.5-million.

Gain on consolidation of debt

During 2010, the company recorded a gain of $17.8-million related to the KLROC units held by KFS Capital, as a result of the consolidation of the KLROC trust. See Note 19(c) of the consolidated financial statements for further details of the KLROC trust consolidation.

Combined ratio

The combined ratio was 148.7 per cent in 2010 compared with 128.9 per cent in 2009, which produced an underwriting loss of $108.4-million in 2010 compared with a loss of $86.1-million in 2009. The underwriting loss is attributable to the factors described in the claims incurred and underwriting expenses sections above.

Interest expense

Interest expense for 2010 was $14.8-million, compared with $23.9-million in 2009, representing a 38-per-cent decrease. The decrease is primarily due to the significant repurchase of debt during 2010. See gain on buyback of debt above.

Net income and earnings per share

In 2010 the company incurred a loss from continuing operations of $61.1-million compared with a loss from continuing operations of $69.6-million in 2009. The loss in 2010 is largely due to underwriting losses and adverse development. These factors have been partially offset by net realized gains on investments and the buyback of the company's debt which resulted in a gain and lowered interest expense. The company also recorded a gain on the consolidation of debt.

In 2010, the company incurred a net loss of $38.2-million compared with net loss of $290.3-million reported for 2009. The diluted loss per share was 73 cents for 2010 compared with a diluted loss per share of $5.38 for 2009.

Book value per share

Book value per share decreased by 44.5 per cent to $1.82 at Dec. 31, 2010, from $3.28 at Dec. 31, 2009. The decline in book value is due to the factors impacting net income as described above.

          CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
              Years ended Dec. 31
                                             2010        2009

Gross premiums written                     $214,048   $261,947
Net premiums written                       $203,723   $273,095
Revenue
Net premiums earned                        $222,481   $298,211
Net investment income                        16,353        144
Net realized investment gains (losses)        9,243     10,956
                                           --------   --------
                                            248,077    309,311
Expenses
Claims incurred                             214,681    236,801
Commissions and premium taxes                27,378     47,694
General and administrative expenses          83,990     85,066
Restructuring costs                           4,803     14,783
Interest expense                             14,825     23,912
Amortization of intangible assets             6,621     10,602
Goodwill impairment                               -          -
                                           --------   --------
                                            352,298    418,858
                                           --------   --------
(Loss) from continuing operations before
unusual item and income taxes              (104,221)  (109,547)
Gain on buy-back of debt                     19,157      9,501
Gain on consolidation of debt                17,821          -
                                           --------   --------
(Loss) from continuing operations before
income taxes                                (67,243)  (100,046)
Income taxes (recovery)
Current                                     (14,494)   (37,766)
Future                                        8,376      7,356
                                             (6,118)   (30,410)
                                           --------   --------
(Loss) from continuing operations          $(61,125)  $(69,636)
Income (loss) from discontinued operation
net of taxes                                 (7,508)  (222,836)
Gain (loss) on disposal of discontinued
operations, net of taxes                     30,390      2,185
                                           --------   --------
Net (loss)                                 $(38,243) $(290,287)
                                           ========   ========
Per share amounts (in dollars)
(Loss) per share -- continuing operations
Basic                                        $(1.17)    $(1.29)
Diluted                                      $(1.17)    $(1.29)
(Loss) per share -- discontinuing (loss)
Basic                                         $0.44     $(4.09)
Diluted                                       $0.44     $(4.09)
(Loss) per share -- net (loss)
Basic                                        $(0.73)    $(5.38)
Diluted                                      $(0.73)    $(5.38)
Dividends declared per common share
(in Canadian dollars)                            $-      $0.04

We seek Safe Harbor.