An anonymous director reports

KINGSWAY REPORTS SECOND QUARTER RESULTS

Kingsway Financial Services Inc. has released its financial results for the second quarter and six months ended June 30, 2011. All amounts are in U.S. dollars unless indicated otherwise.

The company reported a second quarter net loss of $4.9-million ($23.3-million year to date) or loss of nine cents (45 cents year to date) per share diluted. The book value has decreased from $2.78 per share at Dec. 31, 2010, to $2.40 per share at June 30, 2011. The company also carries a valuation allowance, in the amount of $4.70 per share at June 30, 2011, against the deferred tax asset primarily related to its loss carried forward.

The following are the highlights of the second quarter of 2011:

Major event

In April, 2011, the company entered into a definitive agreement to purchase a minority stake in a newly formed holding company that, subject to regulatory approval, will own a majority of Walshire Assurance Co., the sole shareholder of Lincoln General Insurance Co. In addition, the company and the Pennsylvania Insurance Department (DOI) have been in settlement discussions to resolve the litigation in conjunction with the proposed Walshire transaction, whereby, upon approval and subsequent closing of this transaction, the appeal filed by DOI would be withdrawn and the litigation involving Kingsway, DOI and the charities would be discontinued.

Operational results

• Net loss of $9.0-million was recorded in the underwriting segment for the second quarter ($17.4-million year to date);
• Net loss of $300,000 was recorded in the agency and non-underwriting segment for the second quarter (net income of $700,000 year to date);
• Net income of $4.4-million was recorded in the corporate and other segment for the second quarter (net loss of $5.3-million year to date);
• Included in the corporate and other segment net income for the second quarter (net loss year to date) above is an unrealized gain on fair value of debt of $11.2-million ($8.6-million year to date).

The company recognized no loss on disposal of discontinued operations for the second quarter (after-tax loss of $1.3-million year to date).

Dividend

The board of directors has decided that a quarterly dividend will not be declared for the second quarter of 2011.

NYSE share price rule

On Aug. 2, 2011, the company received notification from the New York Stock Exchange of the company's non-compliance with an NYSE listing criterion requiring an average closing price of a security not be lower than $1 per share over a consecutive 30-trading-day period. Kingsway has notified the NYSE of its intention to address this non-compliance. The company's common stock continues to be listed on the NYSE and trades as usual; however, the consolidated tape now includes a ".BC" indicator, which will be removed at such time as the company is deemed compliant with the NYSE's continued listing standards.

                               STATEMENT OF OPERATIONS
               (in thousands of U.S. dollars, except per share amounts)
                                                                                                                     
                                               Three months ended June 30,  Six months ended June 30,
                                                       2011          2010           2011        2010

Gross premiums written                          $    31,986   $    50,207    $    74,401 $   115,011
Net premiums written                            $    29,590   $    47,630    $    69,783 $   110,010
Revenue
Net premiums earned                             $    42,575   $    57,020    $    88,211 $   118,101
Commission income                                     5,904         1,854         12,317       4,298
Investment income                                     1,152         2,654          2,229       5,407
Net realized gain                                        17           171             18         472
Unrealized gain (loss)
on fair value of debt                                11,237       (13,233)         8,632     (81,657)
Share of (loss) of associates                          (668)            -           (668)          -
Miscellaneous (loss) income                          (1,074)        9,082         (2,047)      6,614
                                                     59,143        57,548        108,692      53,235
Expenses
Claims incurred                                 $    35,993   $    43,743    $    76,020 $    96,950
Commissions and premium taxes                         6,908         8,011         14,279      20,891
General and administrative expenses                  19,416        21,285         36,567      42,089
Restructuring costs                                       -         1,208              -       4,898
Interest expense                                      1,833         3,680          3,736       8,655
Amortization of intangibles                             183         1,861            768       3,371
                                                     64,333        79,788        131,370     176,854
(Loss) before unusual item and income taxes          (5,190)      (22,240)       (22,678)   (123,619)
Gain (loss) on buyback of debt                          533         (304)            533       3,020
(Loss) from continuing operations
before income taxes                                  (4,657)      (22,544)       (22,145)   (120,599)
Income tax expense (benefit)                            267          (323)          (141)     (3,012)
(Loss) from continuing operations               $    (4,924)   $  (22,221)    $  (22,004) $ (117,587)
(Loss) from discontinued
operations, net of tax                                    -        (9,174)             -      (2,287)
(Loss) income on disposal of
discontinued operations, net of taxes                     -        (2,179)        (1,293)      6,093
Net (loss)                                      $    (4,924)   $  (33,574)    $  (23,297) $ (113,781)
Attributable to
Shareholders of Kingsway                             (2,735)      (47,712)       (20,574)   (116,703)
Non-controlling interests                            (2,189)        14,138        (2,723)      2,922
Total                                           $    (4,924)   $  (33,574)    $  (23,297) $ (113,781)
(Loss) per share -- continuing operations
Basic                                           $     (0.09)   $    (0.43)    $    (0.42) $    (2.26)
Diluted                                         $     (0.09)   $    (0.43)    $    (0.42) $    (2.26)
(Loss) per share -- net (loss)
Basic                                           $     (0.09)   $    (0.64)    $    (0.45) $    (2.19)
Diluted                                         $     (0.09)   $    (0.64)    $    (0.45) $    (2.19)

Loss from continuing operations and loss per share

Continuing operations

In the second quarter of 2011, the company reported a loss from continuing operations of $4.9-million ($22.0-million year to date), compared with a loss from continuing operations of $22.2-million in the second quarter of last year ($117.6-million prior year to date). Diluted loss per share was nine cents for the quarter (42 cents year to date), compared with diluted loss per share of 43 cents for the second quarter of 2010 ($2.26 prior year to date). As noted above, the current quarter's loss is primarily due to underwriting losses and corporate expenses offset by unrealized gain on fair value of debt and investment income.

Income (loss) from discontinued operations

For the second quarter and year to date ended June 30, 2011, the company reported no income from discontinued operations, compared with a loss of $9.2-million in the second quarter of 2010 ($2.3-million prior year to date).

As a result of the disposal of Jevco, the company realized an after-tax loss of nil in the second quarter of 2011 ($1.9-million year to date) and an after-tax loss of $2.2-million in the second quarter of 2010 (after-tax gain of $6.1-million prior year to date).

As a result of the disposal of American Country and American Service, the company realized an after-tax gain of nil in the second quarter of 2011 ($600,000 year to date).

Net loss and loss per share

Net loss

In the second quarter of 2011, the company reported net loss of $4.9-million ($23.3-million year to date), compared with net loss of $33.6-million in the second quarter of last year ($113.8-million prior year to date). Diluted loss per share was nine cents for the quarter (45 cents year to date) compared with diluted loss per share of 64 cents for the second quarter of 2010 ($2.19 prior year to date).

We seek Safe Harbor.