Kingsway Reports a Net Loss in First Quarter



    TORONTO, May 8 /CNW/ - Kingsway Financial Services Inc. (TSX: KFS, NYSE:  
KFS) today announced its financial results for the first quarter ended March
31, 2009. The Company reported a net loss of $58.3 million or $1.06 per share
diluted, compared with a net loss of $34.4 million or $0.62 per share diluted
in the first quarter of 2008. The loss primarily reflects transition costs
related to the Company's transformation program, in addition to a significant
drop in trucking premiums on both sides of the border and a reduced return on
investments. All amounts are in U.S. dollars unless indicated otherwise.
    "Our Q1 results clearly indicate we need to move faster to exit
unprofitable lines of business, reduce organization complexity and cost." said
Colin Simpson, President and Chief Executive Officer. "We intend to do this in
a way that creates a solid base for rebuilding the company and restoring
shareholder value, returning to our roots and focusing on our core
competencies of non-standard auto and commercial automobile. Yesterday we
announced our intent to exit the Canadian cross-border trucking business
effective July 1 and made further staff reductions. Including yesterday's
announcement we have already taken action that has reduced our run-rate
headcount by 445 since the beginning of this year. We also submitted our plans
to put all but the strongest of Lincoln's programs into run-off to the
Pennsylvania Insurance Department. Based on success to date in the
transformation work announced in February, we are confident that we can
increase the overall target for savings delivered through this initiative to a
run-rate of $120 million by the end of 2010 from the previously announced $80
million. While losses incurred at Lincoln have taken their toll, Kingsway's
capital ratios exceed regulatory minimums for all subsidiaries except Lincoln.
We are taking action to strengthen them further and improve liquidity."
    Lincoln General submitted its proposed regulatory action plan on May 7,
2009 which is subject to approval of the Pennsylvania Insurance Department.
    "Our transformation program constitutes our 2009-2010 strategic plan, and
we expect to see positive results within this period. In the first quarter,
among many initiatives, we simplified our structure into three operating units
to reduce duplication, enable operational efficiency and take out cost, and
accelerated our implementation of better underwriting and pricing discipline
to ensure we're writing profitable business. We have reassigned
responsibilities inline with the new structure, and have an experienced team
that recognizes the urgent need to accelerate change and are committed to
achieving results."
    Gross premiums written decreased 40% to $259.0 million in the quarter
compared to $431.0 million in the same quarter a year ago. In the U.S.,
premiums written were down 42%, with most of the decline attributable to
Lincoln General due to the majority of its business being placed into run-off
in early 2009. Non-standard automobile premiums in the U.S. declined 26%
predominantly as a result of the planned premium reduction at Southern United.
Excluding Lincoln General, except for the exclusively managed business, gross
premiums written were down 26% from a year ago. In Canada, gross premiums
written were down 33% in U.S. dollars, however were down only 17% in Canadian
dollars. The decline was mainly attributable to the trucking line of business,
which fell 47% due to planned premium reductions in this line of business
where profits have been eroded due to aggressive pricing. For the quarter,
U.S. operations accounted for 76% of gross premiums, down from 78% a year ago.
    The combined ratio for continuing operations was 120.7%, compared with
132.6% in the fourth quarter of 2008 and 116.0% a year ago. The significant
reduction in premiums without a commensurate reduction in infrastructure costs
while certain business remains in run off, plus severance payments related to
strategic reductions in personnel resulted in an increase in the expense ratio
to 34.0%, from 31.6% in the first quarter of 2008. The loss ratio increased to
86.7% from 84.4% a year ago. Excluding Lincoln General, except for the
exclusively managed business, U.S. operations had a combined ratio of 105.0%
while Canadian operations had a combined ratio of 119.3%.
    Investment income decreased 25% to $27.0 million from $36.2 million in
the same quarter of 2008 primarily due to lower yields, the reduction in the
size of the portfolio as a result of the repayment of the Company's bank debt
and sale of York Fire later in 2008, and the impact of reduced premium volume.
There was a net realized loss on investments of $19.6 million, resulting
mainly from an additional realized loss of $18.2 million from the liquidation
for strategic reasons of the common share equity portfolio, as announced in
February 2009 and largely written down in fiscal 2008.
    At March 31, 2009, the book value per share was $6.73 compared with
$16.18 at March 31, 2008.

    Dividend

    The Board of Directors has declared a quarterly dividend of C$0.02 per
common share, payable on June 30, 2009 to shareholders of record on June 15,
2009.

    Capital Initiative

    The Board of Directors has delegated to the Capital Committee of the
Board the authority to repurchase debt of the Company up to a maximum of $40
million subject to an assessment of liquidity levels, market conditions and
any costs related to the unwinding of hedges and other related financial
instruments.
    The Board of Directors also wishes to extend its best wishes and thanks
to Jack Sullivan, who retired from the Board on May 7, 2009. Jack has served
on the Board since June of 2005 and has served in many important capacities in
the development of the Company, for which the Board and management are
grateful.

    Conference Call and Webcast

    You are invited to participate in our quarterly results conference call
that will take place on May 8, 2009 at 8:30 a.m. EDT. To access please dial
1-800-731-5319 about 5 minutes before the start of the call. An audio webcast
will also be broadcast live and can be accessed through our website at
http://www.kingsway-financial.com or directly at
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2616020

    About the Company

    Kingsway Financial Services Inc. ("Kingsway" or the "Company") is a
leading non-standard automobile insurer and commercial automobile insurer in
North America. Kingsway's primary businesses are the insuring of automobile
risks for drivers who do not meet the criteria for coverage by standard
automobile insurers, and commercial automobile insurance. The Company operates
through wholly-owned insurance subsidiaries in Canada and the U.S. which it is
currently consolidating into three operating units to reduce overhead and
strengthen its competitive position. The Company also operates reinsurance
subsidiaries in Barbados and Bermuda. The common shares of Kingsway Financial
Services Inc. are listed on the Toronto Stock Exchange and the New York Stock
Exchange, under the trading symbol "KFS".
    The common shares of Kingsway Financial Services Inc. are listed on the
Toronto Stock Exchange and the New York Stock Exchange, under the trading
symbol "KFS".

    This news release contains forward-looking information. This news release
also contains certain non-gaap measures. Please refer to the sections entitled
"Forward Looking Statements" and "Non-Gaap Financial Measures" in the
following Management's Discussion and Analysis.

    
    Financial Summary and Highlights:

    -------------------------------------------------------------------------
                                                  3 months to March 31:
    -------------------------------------------------------------------------
    (in millions of dollars except per
     share amounts)                           2009         2008       Change
    -------------------------------------------------------------------------
    Gross premiums written              $    259.0   $    431.0         (40%)
    Underwriting loss                        (58.8)       (66.1)        (11%)
    Investment income                         27.0         36.2         (25%)
    Net realized loss                        (19.6)        (5.7)        244%
    Operating loss                           (38.8)       (30.2)         28%
    Net loss                                 (58.3)       (34.4)         69%
    Diluted loss per share                   (1.06)       (0.62)         71%
    Book value per share                      6.73        16.18         (58%)
    Combined ratio                          120.7%       116.0%         4.7%
    -------------------------------------------------------------------------

    -   Gross premiums written decreased 40% to $259.0 million in the quarter
        compared to $431.0 million in Q1 last year, primarily as a result of
        the planned premium reductions in non-core lines of business and the
        run-off at Lincoln General. Excluding Lincoln General, except for
        exclusively managed business, proforma gross premiums written
        declined 26% to $230.6 million in the quarter. Excluding Lincoln
        General, except for the exclusively managed business, non-standard
        automobile premiums were $118.7 million or 51% of the proforma gross
        premiums written.

    -   The combined ratio was 120.7% in the quarter compared to 116.0% in
        the same quarter last year, with continuing Canadian operations
        reporting a combined ratio of 119.3% and U.S. operations a combined
        ratio of 121.3%. Excluding Lincoln General, the U.S. operations
        pro-forma combined ratio was 105.0% for the quarter and the
        consolidated combined ratio was 109.9% for the quarter.

    -   Estimated net unfavourable reserve development was $30.0 million in
        the quarter of which Lincoln General accounted for $21.5 million.
        Lincoln General reported $5.5 million of unfavourable reserve
        development on its' unallocated loss adjustment expenses or the
        internal expenses estimated to run-off the claims of the company.
        Trucking developed adversely at Lincoln General which contributed
        $6.2 million of unfavourable reserve development and other large
        claims developed adversely at Lincoln General, particularly on its
        higher limits programs, that also accounted for $3.4 million of the
        unfavourable reserve development. The reserve development increased
        the combined ratio by 10.6% for the quarter and impacted earnings per
        share by $0.43 per share for the quarter.

    -   Investment income, excluding net realized losses was $27.0 million
        compared to $36.2 million for the same quarter of 2008, a
        25% decrease. Included in net realized losses were adjustments to the
        carrying values of securities for declines in market value considered
        other than temporary of $1.7 million or $0.03 per share for the
        quarter.

    -   The fair value of the securities portfolio per share decreased by 7%
        since the beginning of the year to $43.02 (C$54.26).

    -   As at March 31, 2009 the securities portfolio did not include any
        collateralized debt obligations nor any direct exposure to any asset
        backed commercial paper. The securities portfolio has an exposure of
        approximately $1.7 million to the sub-prime mortgage market in the
        U.S. through home equity loan asset backed securities.

    -   As at March 31, 2009 the Canadian dollar book value per share was
        $8.49 compared to $10.03 as at December 31, 2008 and $16.61 as at
        March 31, 2008.


    Kingsway Financial Services Inc.
    Management's Discussion and Analysis
    For the three months ended March 31, 2009 and 2008
    (U.S. dollars)
    -------------------------------------------------------------------------
    

    The following management's discussion and analysis (MD&A) should be read
in conjunction with the Company's unaudited interim consolidated financial
statements for the first quarter of fiscal 2009 and 2008; with the MD&A set
out on pages 9 to 54 in the Company's 2008 Annual Report, including the
section on risk factors; and with the notes to the interim consolidated
financial statements for the first quarter of fiscal 2009 and the notes to the
audited consolidated financial statements for fiscal 2008 set out on pages 65
to 104 of the Company's 2008 Annual Report.

    The Company's financial results are reported in U.S. dollars.  Unless
otherwise indicated, all amounts are in U.S. dollars and have been derived
from financial statements prepared in accordance with Canadian generally
accepted accounting principles (GAAP).

    Non-GAAP Financial Measures

    The Company uses both GAAP and certain non-GAAP financial measures to
assess performance. Securities regulators require that companies caution
readers about non-GAAP financial measures that do not have a standardized
meaning under GAAP and are unlikely to be comparable to similar measures used
by other companies. Kingsway, like many insurance companies, analyzes
performance based on underwriting ratios such as combined, expense and loss
ratios. These terms are defined in the glossary of terms section beginning on
page 106 of the 2008 Annual Report. Although there is not a property and
casualty industry defined standard that is consistently applied in calculating
these ratios, Kingsway has historically included costs such as corporate
office expenses and excluded premium finance revenues whereas other public
companies have done otherwise in the calculation of their expense and combined
ratios. Readers are therefore cautioned when comparing Kingsway's combined
ratios to those of other public companies as they may not have been calculated
on a comparable basis.
    The Company also uses securities portfolio per share information which is
calculated based on the fair value of the securities portfolio divided by the
number of issued and outstanding common shares. The Company uses operating
earnings which are calculated as net income excluding after-tax net realized
gains and losses on securities to assess the profitability of its operations.
A reconciliation of net income to operating earnings is presented in the
section titled 'Operating Earnings'.

    Date of MD&A

    Unless otherwise noted, the information contained in this MD&A is based
on information available to management as of May 8, 2009.

    Premiums

    
    -------------------------------------------------------------------------
    (in millions of dollars)                      3 Months to March 31:
    -------------------------------------------------------------------------
                                              2009         2008       Change
    -------------------------------------------------------------------------
    Gross premiums written
      Canada                            $     62.4   $     93.6         (33%)
      U.S.                                   196.6        337.4         (42%)
    -------------------------------------------------------------------------
      Total                             $    259.0   $    431.0         (40%)

    Net premiums written
      Canada                            $     58.4   $     88.4         (34%)
      U.S.                                   190.1        309.6         (39%)
    -------------------------------------------------------------------------
      Total                             $    248.5   $    398.0         (38%)

    Net premiums earned
      Canada                            $     79.0   $    101.6         (22%)
      U.S.                                   204.5        311.1         (34%)
    -------------------------------------------------------------------------
      Total                             $    283.5   $    412.7         (31%)
    -------------------------------------------------------------------------
    

    The U.S. operations reported a decrease in premiums written of $140.8
million (or 42%) during the quarter. Lincoln General's premium volume declined
by $103.6 million in the quarter compared to the same quarter of last year due
to the majority of the business being placed into run-off in early 2009 and a
one-time cession of $4.1 million in premiums relating to the novation of one
of Lincoln's programs. Non-standard automobile premiums decreased 26% to
$134.5 million for the quarter. Excluding Lincoln General, except for the
exclusively managed business, gross written premiums declined 26% in the first
quarter to $230.6 million compared to the same quarter of last year.
    Gross premiums written for the Canadian operations decreased 33% in the
quarter compared to the same quarter last year. In Canadian dollars, gross
premiums written from Canadian operations declined by 17% for the quarter
compared to the same quarter last year. Canadian operations experienced a
decline of 47% in gross premiums written in the trucking line of business due
to planned premium reductions in this line of business where profits have been
eroded due to aggressive pricing.
    U.S. operations represented 76% of gross premiums written in the quarter
compared with 78% in the same quarter of last year. Non-standard automobile,
trucking, and commercial automobile premiums represented 52%, 9% and 16%,
respectively, of gross premiums written at the end of the quarter compared
with 42%, 17% and 19% for Q1 2008.

    Investment Income

    
    -------------------------------------------------------------------------
                                                  3 months to March 31:
    -------------------------------------------------------------------------
    (in millions of dollars)                  2009         2008       Change
    -------------------------------------------------------------------------

    Investment income                   $     27.0   $     36.2         (25%)

    -------------------------------------------------------------------------
    

    Investment income decreased 25% to $27.0 million in the quarter, compared
to the first quarter of 2008, primarily due to a reduction in the size of the
portfolio as a result of the repayment of the Company's bank debt, the sale of
York Fire in late 2008 and the impact of reduced premium volume. Also
contributing to the decrease in investment income in the quarter are lower
yields on both the Canadian and U.S. portfolios and a weaker Canadian dollar
compared to the same period last year which reduces the investment income
earned by the Canadian operations when reported in U.S. dollars. The cost
based yield on the fixed income portfolio decreased to 4.2% compared to 4.7%
for the same quarter last year. The cost based yield represents the total
interest income before expenses divided by the average amortized cost base of
fixed income securities held in the portfolio during the period. The yield is
calculated using a straight line average cost base which implies a change in
the balance occurs evenly throughout the period. Because the proceeds of the
common share equity portfolio began to be reinvested in fixed income
securities in the later part of the quarter, the straight line calculation
produces an inflated average amortized cost base and consequently a lower
yield. This, in conjunction with lower yields actually experienced on the
portfolio has resulted in the decrease in the cost based yield.

    Net Realized Gains (Losses)

    The table below presents a summary of the net realized gains (losses) for
the current quarter with comparative figures:

    
    -------------------------------------------------------------------------
                                                  3 months to March 31:
    -------------------------------------------------------------------------
    (in millions of dollars)                  2009         2008       Change
    -------------------------------------------------------------------------
      Fixed income                      $      0.3   $      2.6         (88%)
      Equities                               (18.2)         0.7      (2,700%)
      Impairments                             (1.7)        (9.0)        (81%)
    -------------------------------------------------------------------------
      Total                             $    (19.6)  $     (5.7)        244%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the three months ended March 31, 2009, sales from the securities
portfolio and the write-down of securities that are considered to be other
than temporarily impaired resulted in a net realized loss of $19.6 million
compared to a net realized loss of $5.7 million for the three months ended
March 31, 2008. Net realized gains on the sale of fixed income securities
amounted to $0.3 million for the three months ended March 31, 2009 compared a
net realized gain of $2.6 million for the same period last year. As was
previously announced, the Company elected to dispose of virtually all of its
common share equities during the quarter. In addition to the $91.9 million
impairment charge on the common share equity portfolio taken in the fourth
quarter of 2008, the liquidation resulted in a realized loss of $18.2 million
in 2009. The write-down of securities considered to be temporarily impaired as
at March 31, 2008 related to common share equity securities. The decision to
liquidate the equity portfolio has significantly reduced the number and value
of securities in an unrealized loss position and, consequently, the value of
securities considered to be other than temporarily impaired as at March 31,
2009.

    Underwriting Results

    
    -------------------------------------------------------------------------
                                                  3 months to March 31:
    -------------------------------------------------------------------------
    (in millions of dollars)                  2009         2008       Change
    -------------------------------------------------------------------------
    Underwriting profit (loss)
      Canada                            $    (15.2)  $    (14.5)          5%
      U.S.                                   (43.6)       (51.6)        (16%)
                                        -------------------------------------
      Total                             $    (58.8)  $    (66.1)        (11%)
                                        -------------------------------------
                                        -------------------------------------
    Combined ratio
      Canada                                119.3%       114.3%         5.0%
      U.S.                                  121.3%       116.6%         4.7%
                                        -------------------------------------
      Total                                 120.7%       116.0%         4.7%
                                        -------------------------------------
                                        -------------------------------------
    Expense ratio
      Canada                                 38.2%        38.5%        (0.3%)
      U.S.                                   32.4%        29.4%         3.0%
                                        -------------------------------------
      Total                                  34.0%        31.6%         2.4%
                                        -------------------------------------
                                        -------------------------------------
    Loss ratio
      Canada                                 81.1%        75.8%         5.3%
      U.S.                                   88.9%        87.2%         1.7%
                                        -------------------------------------
      Total                                  86.7%        84.4%         2.3%
                                        -------------------------------------
                                        -------------------------------------

    -------------------------------------------------------------------------
    

    The Canadian operations experienced estimated unfavourable reserve
development of $10.1 million for the quarter (or 12.8% to the Canadian
operations combined ratio) compared to unfavourable reserve development of
$10.7 million for the first quarter last year. The Canadian operations
reported a one time adjustment to write off recoveries for deductibles on
certain policies of $4.9 million that was classified as unfavourable reserve
development. The loss ratio in the quarter was 81.1% compared to 75.8% in Q1
2008.
    The U.S. operations experienced estimated net unfavourable reserve
development of $19.9 million for the quarter compared with $48.1 million in
the same quarter last year. Lincoln General accounts for $21.5 million of this
reserve development for the quarter or $0.33 per share after tax for the
quarter. An adjustment to the unallocated loss adjustment expenses at Lincoln
General accounted for $5.5 million of the unfavourable reserve development.
The terminated artisan contractors liability program reported favourable
development of $1.0 million in the quarter. Excluding Lincoln General, except
for the exclusively managed business, the proforma combined ratio for the U.S.
operations was 105.0% for the quarter. On a consolidated basis, the proforma
combined ratio, excluding Lincoln General except for the exclusively managed
business, was 109.9% for the quarter.

    
                                                       3 months to March 31:
    -------------------------------------------------------------------------
    (in millions of dollars)                               2009         2008
    -------------------------------------------------------------------------
    Favourable (unfavourable) change in estimated
     unpaid claims for prior accident years (note 1):
      Canada                                         $    (10.1)  $    (10.7)
      U.S.                                                (19.9)       (48.1)
                                                     ------------------------
      Total                                          $    (30.0)  $    (58.8)
                                                     ------------------------
    As a % of net premiums earned (note 2):
      Canada                                              12.8%        10.5%
      U.S.                                                 9.7%        15.5%
                                                     ------------------------
      Total                                               10.6%        14.3%
                                                     ------------------------
    As a % of unpaid claims (note 3):
      Canada                                               1.6%         1.4%
      U.S.                                                 1.6%         3.6%
                                                     ------------------------
      Total                                                1.6%         3.3%
                                                     ------------------------

    -------------------------------------------------------------------------

    Note 1 - (Increase) decrease in estimates for unpaid claims from prior
             accident years reflected in current financial year results
    Note 2 - Increase (decrease) in current financial year reported combined
             ratio
    Note 3 - Increase (decrease) compared to estimated unpaid claims at the
             end of the preceding fiscal year
    

    Expenses

    The overall expenses increased in the quarter due to the severance costs
associated with the Company's corporate restructuring plan totaled
approximately $2.9 million. The general expense ratio increased to 19.2%
compared to 14.4% in Q1 2008 primarily due to lower premium volume at Lincoln
General, and the short term costs associated with implementing the Company's
corporate restructuring plan. Excluding these items, the general expense ratio
was 18.0%.

    Interest Expense

    Interest expense in the first quarter was $6.3 million, compared to $9.9
million for the first quarter of 2008 as a result of the repayment of all the
short term bank debt in 2008.

    Income Taxes

    Income tax recovery on continuing operations for the first quarter was
$6.1 million compared with a tax recovery of $13.7 million for the same
quarter last year. A valuation allowance of $10.4 million was recorded in the
quarter against the future income tax asset for operating losses in the U.S.
that does not expire for up to 20 years. Uncertainty over the Company's
ability to utilize these losses over the short term has led to the Company
recording this valuation allowance.

    Net Income (Loss) and Earnings (Loss) Per Share

    In the first quarter the Company reported a net loss of $58.3 million,
compared to net loss of $34.4 million in the first quarter of last year.
Diluted loss per share was $1.06 for the quarter, compared to diluted loss per
share of $0.62 for the first quarter of 2008.

    Operating Earnings

    Operating earnings are calculated as income from continuing operations
excluding after-tax net realized gains and losses on securities to assess the
profitability of the operations.

    
    -------------------------------------------------------------------------
                                                       3 months to March 31:
    -------------------------------------------------------------------------
    (in millions of dollars except per share amounts)      2009         2008
    -------------------------------------------------------------------------
    Income (loss) from continuing operations         $    (54.4)  $    (35.2)
    Net realized gains (losses) after tax:
      Net realized gains(losses) before tax               (19.6)        (5.7)
      Tax effect on realized gains (losses)                (4.0)        (0.7)
    -------------------------------------------------------------------------
                                                          (15.6)        (5.0)
    -------------------------------------------------------------------------
    Operating earnings (losses)                           (38.8)       (30.2)
    Average outstanding shares diluted (in millions)       55.1         55.5
    Operating earnings (losses) per share                 (0.70)       (0.54)

    -------------------------------------------------------------------------
    

    Balance Sheet

    The table below shows a review of selected categories from the balance
sheet reported in the financial statements at the end of Q1 2009 compared to
December 31, 2008.

    
    -------------------------------------------------------------------------
                                                  As at
    -------------------------------------------------------------------------
    (in millions of dollars except per
     share amounts)                       March 31, December 31,      Change
                                              2009         2008
    -------------------------------------------------------------------------
    Assets
      Securities                        $  2,091.0   $  2,370.5         (12%)
      Accounts receivable and other
       assets                                260.3        276.5          (6%)
      Income taxes recoverable                26.9         14.7          83%
      Future income taxes                     21.9         25.3         (13%)
      Capital assets                          93.5         95.3          (2%)
      Goodwill and intangible assets          62.5         63.9          (2%)

    Liabilities
      Unearned premiums                      495.4        536.5          (8%)
      Unpaid claims                        1,804.5      1,879.0          (4%)
      Senior unsecured debentures            182.8        185.2          (1%)

    Shareholders' Equity                     370.5        453.6         (18%)
      Book value per share                    6.73         8.24         (18%)
    -------------------------------------------------------------------------
    

    Securities:
    The fair value of the securities portfolio including cash decreased 7% to
$2.4 billion, compared to $2.5 billion as at December 31, 2008. This decrease
is primarily due to the decline in premium volumes throughout the group,
particularly at Lincoln General. Also contributing to the decline in the fair
value of the securities portfolio is a small mark to market adjustment and the
impact of a weaker Canadian dollar at the balance sheet date on the conversion
of the Canadian dollar portfolio to U.S. dollars.
    As previously announced, the Company elected in early 2009 to liquidate
the entire common share equity portfolio in order to reduce volatility of the
balance sheet and protect the Company's capital. The common share equity
portfolio has been substantially disposed of during the quarter and proceeds
are in the process of being reinvested in high quality fixed income
securities. As at March 31, 2009, the fair value of the common share equity
portfolio was $2.3 million which the Company expect to dispose of in the
second quarter of 2009.
    Due to generalized spread widening on corporate debt instruments, the
gross unrealized losses on fixed income securities have increased to $46.2
million representing 2% of the securities portfolio. The Company has the
ability and intent to hold these securities to maturity and does not expect
any significant ultimate earnings impact in respect of these gross unrealized
losses.
    As at March 31, 2009, 92.8% of the fixed income portfolio is rated 'A' or
better. For a quantitative analysis of the credit exposure of the Company from
its investment in fixed income securities and term deposits by rating as
assigned by S&P or Moody's Investor Services see Note 7 to the financial
statements.
    The fair value of the securities portfolio per share including cash
decreased 7% to $43.02(C$ 54.26) per common share at March 31, 2009 compared
to $46.08 (C$56.13) at December 31, 2008.
    The table below summarizes the fair value by contractual maturity of the
fixed income securities portfolio, which includes term deposits and bonds,
split between Canadian and U.S. operations:

    
    Maturity Profile:
    -------------------------------------------------------------------------
                                          Canadian          U.S.
                                        Operations   Operations        Total
    -------------------------------------------------------------------------
    Due in less than one year                32.8%        16.7%        21.9%
    Due in one through five years             28.7         52.3         44.7
    Due in five through ten years             31.9         20.6         24.3
    Due after ten years                        6.6         10.4          9.1
    -------------------------------------------------------------------------
    Total                                   100.0%       100.0%       100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    There were net unrealized gains of $20.6 million on the total securities
portfolio or $0.37 per share outstanding at March 31, 2009 which is included
as a component of "accumulated other comprehensive income", as compared to net
unrealized gains of $35.0 million or $0.63 per share outstanding at December
31, 2008.
    For a quantitative analysis of the impact to the fair value of the fixed
income portfolio of a change in interest rates, see Note 7 to the financial
statements.
    As at March 31, 2009 the securities portfolio did not include any
collateralized debt obligations nor any direct exposure to any asset backed
commercial paper. The securities portfolio has a small exposure of
approximately $1.7 million to the sub-prime mortgage market in the U.S.
through home equity loan asset backed securities. As at March 31, 2009, these
securities had an aggregate net unrealized loss of $0.8 million.

    Accounts receivable and other assets:
    Accounts receivable and other assets decreased by 6% to $260.3 million
since the end of last year, primarily as a result of the settlement of
reinsurance.

    Income taxes recoverable:
    Income taxes recoverable increased as a result of the continuing losses
experienced in the quarter.

    Future income taxes:
    Future income taxes have decreased due to a valuation allowance recorded
in the quarter of $10.4 million as a result of the continued losses of the
U.S. operations. Uncertainty over the Company's ability to utilize these
losses over the short term has led to the Company recording the additional
allowance.

    Capital assets:
    Capital assets decreased by 2% since the end of last year primarily as a
result of depreciation of the capital assets.

    Goodwill and intangible assets:
    Goodwill and intangible assets decreased by 2% since the end of last year
mainly as a result of amortization of definite life intangible assets in
certain of the U.S. subsidiaries.

    Unearned premiums:
    Unearned premiums decreased 8% since December 31, 2008 as a result of
decreased premium.

    Unpaid claims:
    The following table presents a summary of the provision for unpaid claims
by line of business:

    
    -------------------------------------------------------------------------
    (in millions of dollars)
    -------------------------------------------------------------------------
                                                       March 31, December 31,
    Line of Business                                       2009         2008
    -------------------------------------------------------------------------
    Non - Standard Automobile                        $    477.5   $    489.3
    Standard Automobile                                     1.7          1.7
    Commercial Automobile                                 211.5        217.8
    Trucking                                              626.7        657.4
    Motorcycle                                            107.7        118.1
    Property & Liability                                  302.5        317.4
    Other                                                  76.9         77.3
    -------------------------------------------------------------------------
    Total                                            $  1,804.5   $  1,879.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The provisions for unpaid claims decreased by 4% to $1.80 billion at the
end of the first quarter compared to $1.88 billion at the end of 2008. The
provision for unpaid claims comprised case reserves for individual claims of
$1.05 billion ($1.05 billion at December 31, 2008) and a provision for
Incurred But Not Reported (IBNR) claims which decreased 9% to $750.1 million
($828.1 million at December 31, 2008). Lincoln General had $415.7 million of
case reserves and $426.4 million provision for IBNR claims as at March 31,
2009, a decrease of 9% compared to the prior year.

    Book value per share:
    Book value per share decreased by 18% to $6.73 (C$8.49) at March 31, 2009
from $8.24 (C$10.03) at December 31, 2008 as a result of the diluted loss per
share of $1.06 and the decline of $0.42 in the "Accumulated other
comprehensive income (loss)" component of shareholders' equity.

    Contractual Obligations

    Information concerning contractual obligations as at March 31, 2009 is
shown in Note 7 of the financial statements. For further details on the
Company's long term debt and interest obligations, refer to Note 20 of the
Company's 2008 audited consolidated financial statements and pages 35 to 40 of
the 2008 Annual Report which sets out the Company's contractual obligations as
at December 31, 2008.

    Liquidity and Capital Resources

    During the three months ended March 31, 2009, the cash used in operating
activities was $101.3 million. The Company's insurance subsidiaries fund their
obligations primarily through the premium and investment income and maturities
in the securities portfolio.
    As a holding company, Kingsway derives cash from its subsidiaries
generally in the form of dividends and management fees to meet its
obligations, which primarily consist of dividend and interest payments. The
Company believes that it has the flexibility to obtain the funds needed to
fulfill its cash requirements and also to satisfy regulatory capital
requirements through fiscal year 2009. The operating insurance subsidiaries
require regulatory approval for the return of capital and, in certain
circumstances, prior to the payment of dividends. In the event that dividends
and management fees available to the holding company were inadequate to
services its obligations, the Company would need to raise capital, sell assets
or restructure its debt obligations. Kingsway holds $451.4 million in cash and
high grade short term assets, representing approximately 19% of invested
assets. The majority of the other fixed income securities are also liquid.
    During the year ended December 31, 2008, the Company repurchased 468,200
common shares under the normal course issuer bid for a total purchase price of
$5.2 million at an average price of $11.02 (Cdn $11.17). The Company did not
repurchase any common shares during the first quarter of 2009.
    As at March 31, 2009 the Company was adequately capitalized to support
the premium volume of the insurance subsidiaries. Canadian property and
casualty insurance companies are regulated by the Office of the Superintendent
of Financial Institutions (OSFI) and the Financial Services Commission of
Ontario (FSCO) and are required to maintain a level of capital sufficient to
achieve a target of 150% of a minimum capital test (MCT) formula. As at March
31, 2009 the MCT's of the Canadian subsidiaries are above the target MCT
level, with MCT margins ranging between 192% and 216% and aggregate capital of
approximately $36.2 million in excess of required capital.
    In the United States, a risk based capital (RBC) formula is used by the
National Association of Insurance Commissioners (NAIC) to identify property
and casualty insurance companies that may not be adequately capitalized. The
NAIC requires that capital and surplus not fall below 200% of the authorized
control level. As at March 31, 2009, all the U.S. subsidiaries, with the
exception of Lincoln General, are above the required RBC levels, with RBC
ratios ranging between 305% and 34,110% and aggregate capital excluding
Lincoln of approximately $85.9 million in excess of the 200% level. As at
March 31, 2009, Lincoln General's RBC is estimated at 120% placing them at a
RBC regulatory action level. Please refer to Note 9 of the 2008 Annual Report
and Note 8 to these interim financial statements for further details.
    The reinsurance subsidiaries, which are domiciled in Barbados and
Bermuda, are required by the regulator in the jurisdictions in which they
operate to maintain minimum capital levels. As at March 31, 2009 the capital
maintained by Kingsway Reinsurance Corporation was approximately $74.9 million
in excess of the regulatory requirements in Barbados and the capital
maintained by Kingsway Reinsurance (Bermuda) Limited was approximately $9.6
million in excess of regulatory requirements.

    Off-Balance Sheet Financing

    The Company entered into an off-balance sheet transaction through the
Kingsway Linked Return of Capital Trust transaction that was completed on July
14, 2005 which is more fully described in Note 20(d) of the 2008 audited
consolidated financial statements and page 39 of the 2008 Annual Report. The
Company has one other off-balance sheet financing arrangement as described on
page 39 of the 2008 Annual Report.

    International Financial Reporting Standards (IFRS)

    In 2006, the Accounting Standards Board (AcSB) published a new plan that
will significantly affect financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of Canadian GAAP
with IFRS over an expected five year transitional period. In February 2008,
the AcSB announced that 2011 is the changeover date for publically-listed
companies to use IFRS, replacing existing Canadian GAAP. The date is for
interim and annual financial statements relating to fiscal years beginning on
or after January 1, 2011. The transition date of January 1, 2011 will require
the restatement for comparative purposes of amounts reported by the Company
for the year ended December 31, 2010. The Company has begun assessing the
adoption of IFRS for 2011, which is more fully described on pages 43 and 44 of
the 2008 Annual Report.

    
    Disclosure of Outstanding Share Data
    ------------------------------------
    As at April 30, 2009, the Company had 55,068,528 common shares
outstanding.

    Summary of Quarterly Results

    The following table presents the financial results over the previous eight
quarters.

    -------------------------------------------------------------------------
                2009    2008                            2007
    -------------------------------------------------------------------------
    (in millions
     of dollars
     except
     per share)   Q1      Q4      Q3      Q2      Q1      Q4      Q3      Q2
    -------------------------------------------------------------------------
    Gross
     premiums
     written  $259.0  $295.6  $354.6  $422.0  $431.0  $418.8  $478.2  $499.2
    Net
     premiums
     earned    283.5   305.6   371.0   395.0   412.7   432.8   451.6   444.4
    Total
     revenue   290.9   219.6   374.5   438.4   443.1   480.8   490.9   507.3
    Net
     income
     (loss)    (58.3) (360.4)  (17.4)    6.3   (34.4) (103.5)   23.6    41.7
    -------------------------------------------------------------------------
    Earnings
     (loss)
     per share
    Basic      (1.06)  (6.53)  (0.31)   0.11   (0.62)  (1.86)   0.43    0.75
    Diluted    (1.06)  (6.53)  (0.32)   0.11   (0.62)  (1.84)   0.42    0.74
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Supplementary Financial Information from Continuing Operations

    Financial Strength Indicators:

    Some of the key indicators of the Company's financial strength are as
follows:
                                                       March 31, December 31,
                                                           2009         2008
                                                     ------------------------
    Rolling four quarter calculations:
      Net premiums written to estimated
       statutory surplus ratio                             2.2x         2.1x

      Senior debt to capitalization ratio                 35.0%        31.9%

      Total debt to capitalization ratio                  47.4%        42.9%


    Selected Financial Information expressed in Canadian dollars

    The selected financial information disclosed below has been translated
using the Bank of Canada monthly average exchange rate for the income
statement and the month end rate for the balance sheet. Readers should be
cautioned as to the limited usefulness of the selected financial information
presented below.

    -------------------------------------------------------------------------
                                                        3 months to March 31:
    (in millions of dollars except per share amount)       2009         2008
    -------------------------------------------------------------------------
    Gross premiums written                          $     322.0   $    432.8
    Net premiums earned                                   353.6        414.4
    Net income (loss)                                     (73.3)       (34.4)
    Earnings per share - diluted                          (1.33)       (0.63)
    Underwriting profit (loss)                            (73.8)       (66.3)
    Book value per share                                   8.49        16.61
    -------------------------------------------------------------------------
    

    Outlook

    The Company's 2008 Annual Report includes description and analysis of the
key factors and events that could impact future earnings under the heading
Risks Factors in the Management's Discussion and Analysis section. These
factors and events have, for the most part, remained substantially unchanged.

    Disclosure Controls and Procedures

    Management of the Company is responsible for establishing and maintaining
disclosure controls and procedures for the Company as defined under
Multilateral Instrument 52-109 issued by the Canadian Securities
Administrators. Management has designed such disclosure controls and
procedures, or caused them to be designed under its supervision, to provide
reasonable assurance that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Chief Executive
Officer and the Chief Financial Officer by others within those entities,
particularly during the period in which the annual filings are being prepared.

    Internal Controls over Financial Reporting

    Management of the Company is responsible for designing internal controls
over financial reporting for the Company as defined under Multilateral
Instrument 52-109 issued by the Canadian Securities Administrators. Management
has designed such internal controls over financial reporting, or caused them
to be designed under their supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
financial statements for external purposes in accordance with GAAP. There has
been no change in the Company's internal control over financial reporting that
occurred during the Company's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

    
    Forward Looking Statements
    --------------------------
    
    This press release (including the Management's Discussion and Analysis)
includes "forward looking statements" that are subject to risks and
uncertainties. These statements relate to future events or future performance
and reflect management's current expectations and assumptions. The words
"anticipate", "expect", "believe", "may", "should", "estimate", "project",
"outlook", "forecast" or similar words are used to identify such forward
looking information. Such forward looking statements reflect management's
current beliefs and are based on information currently available to management
of the Company. A number of factors could cause actual events, performance or
results to differ materially from the events, performance and results
discussed in the forward-looking statements. For information identifying
important factors that could cause actual results to differ materially from
those anticipated in the forward looking statements, see Kingsway's securities
filings, including its 2008 Annual Report under the heading Risk Factors in
the Management's Discussion and Analysis section. The securities filings can
be accessed on the Canadian Securities Administrators' website at
www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange
Commission's website at www.sec.gov or through the Company's website at
www.kingsway-financial.com. The Company disclaims any intention or obligation
to update or revise any forward looking statements, whether as a result of new
information, future events or otherwise.

    
    Additional Information
    ----------------------
    
    Additional information relating to Kingsway, including Kingsway's Annual
Report and Kingsway's Annual Information Form is on SEDAR at www.sedar.com.


    
    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED STATEMENT OF OPERATIONS
    (In thousands of U.S. dollars, except for per share amounts)

    -------------------------------------------------------------------------
    (Unaudited)                                         3 months to March 31:
                                                           2009         2008
    -------------------------------------------------------------------------
    Gross premiums written                           $  258,978   $  431,027
    -------------------------------------------------------------------------
    Net premiums written                             $  248,531   $  397,988
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned                            $  283,492   $  412,655
      Investment income (Note 6)                         27,000       36,180
      Net realized losses (Note 6)                      (19,575)      (5,718)
    -------------------------------------------------------------------------
                                                        290,917      443,117
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred                                $  245,849   $  348,166
      Commissions and premiums taxes                     42,571       71,190
      General and administrative expenses                53,921       59,406
      Interest expense                                    6,296        9,916
      Amortization of intangibles (Note 2)                2,773        3,324
    -------------------------------------------------------------------------
                                                        351,410      492,002
    -------------------------------------------------------------------------
    Loss from continuing operations before
     income taxes                                       (60,493)     (48,885)
    Income taxes (recovery)                              (6,065)     (13,721)
    -------------------------------------------------------------------------
    Loss  from continuing operations                    (54,428)     (35,164)
    Income (loss) from discontinued operations,
     net of taxes (note 3)                               (2,223)         765
    Loss on disposal of discontinued operations,
     net of taxes                                        (1,616)           -
    -------------------------------------------------------------------------
    Net loss                                         $  (58,267)  $  (34,399)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings (loss) per share - continuing operations:

      Basic:                                         $    (0.99)  $    (0.63)
      Diluted:                                       $    (0.99)  $    (0.63)

    -------------------------------------------------------------------------

    Earnings (loss) per share - net loss:

      Basic:                                         $    (1.06)  $    (0.62)
      Diluted:                                       $    (1.06)  $    (0.62)
    Weighted average shares outstanding (in '000s):
      Basic:                                             55,069       55,411
      Diluted:                                           55,107       55,502

    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands of U.S. dollars)

    -------------------------------------------------------------------------
                                                       March 31  December 31
                                                           2009         2008
                                                     (unaudited)
    -------------------------------------------------------------------------
    ASSETS
      Cash and cash equivalents                      $  219,904   $  105,656
      Securities (Note 6)                             2,090,999    2,370,485
      Accrued investment income                          20,846       24,554
      Financed premiums                                  58,135       61,616
      Accounts receivable and other assets              260,328      276,450
      Due from reinsurers and other insurers            125,803      177,945
      Deferred policy acquisition costs                 117,977      127,555
      Income taxes recoverable                           26,910       14,737
      Future income taxes                                21,932       25,291
      Capital assets (Note 2)                            93,476       95,259
      Goodwill and intangible assets (Note 2)            62,478       63,893
    -------------------------------------------------------------------------
                                                     $3,098,788   $3,343,441
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES
      Loans payable                                  $   66,222   $   66,222
      Accounts payable and accrued liabilities           91,953      135,565
      Unearned premiums                                 495,377      536,480
      Unpaid claims                                   1,804,528    1,879,016
      Senior unsecured debentures                       182,770      185,203
      Subordinated indebtedness                          87,391       87,383
    -------------------------------------------------------------------------
                                                      2,728,241    2,889,869
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
      Share capital                                     322,344      322,344
        Issued and outstanding number of common shares
          55,068,528 - March 31, 2009
          55,068,528 - December 31, 2008
      Contributed surplus                                 9,153        9,791
      Retained earnings                                  39,425       98,564
      Accumulated other comprehensive income (loss)        (375)      22,873
    -------------------------------------------------------------------------
                                                        370,547      453,572
    -------------------------------------------------------------------------
                                                     $3,098,788   $3,343,441
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
    (In thousands of U.S. dollars)

    -------------------------------------------------------------------------
                                                  For the three months ended
    -------------------------------------------------------------------------
                                                       March 31     March 31
    (Unaudited)                                            2009         2008
    -------------------------------------------------------------------------
    Share capital
    Balance at beginning of period                   $  322,344   $  326,151
    Issued during the period                                  -           48
    Repurchased for cancellation                              -       (2,669)
    -------------------------------------------------------------------------
    Balance at end of period                            322,344      323,530
    -------------------------------------------------------------------------
    Contributed surplus
    Balance at beginning of period                   $    9,791   $    7,619
    Stock option expense                                   (638)          28
    -------------------------------------------------------------------------
    Balance at end of period                              9,153        7,647
    -------------------------------------------------------------------------
    Retained earnings
    Balance at beginning of period                   $   98,564   $  521,165
    Net loss for the period                             (58,267)     (34,399)
    Common share dividends                                 (872)      (4,139)
    Repurchase of shares for cancellation                     -       (1,121)
    -------------------------------------------------------------------------
    Balance at end of period                             39,425      481,506
    -------------------------------------------------------------------------
    Accumulated other comprehensive income
    Balance at beginning of period                   $   22,873   $   85,866
    Other comprehensive income (loss)                   (23,248)      (4,601)
    -------------------------------------------------------------------------
    Balance at end of period                               (375)      81,265
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total shareholders' equity at end of period      $  370,547   $  893,948
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
    (In thousands of U.S. dollars)

    -------------------------------------------------------------------------
                                                  For the three months ended
    -------------------------------------------------------------------------
                                                       March 31     March 31
    (Unaudited)                                            2009         2008
    -------------------------------------------------------------------------
    Comprehensive income
    Net loss                                         $  (58,267)  $  (34,399)
    Other comprehensive income, net of taxes:
      - Change in unrealized gains (losses)
       on available-for securities:
        Unrealized gains (losses) arising during
         the  period, net of income taxes(1)             (1,162)       9,952
        Recognition of realized losses (gains) to
         net income, net of income taxes(2)             (11,202)        (347)
      - Unrealized gains (losses) on translating
       financial statement of self-sustaining
       foreign operations                                (9,523)     (14,206)
      - Gain (loss) on cash flow hedge                   (1,361)           -
    -------------------------------------------------------------------------
    Other comprehensive income (loss)                   (23,248)      (4,601)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Comprehensive income (loss)                      $  (81,515)  $  (39,000)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Net of income tax of ($3,750) for the quarter to March 31, 2009 and
        $(1,953) for the quarter to March 31, 2008.
    (2) Net of income tax of $(2,670) for the quarter to March 31, 2009 and
        $(266) for the quarter to March 31, 2008.



    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED STATEMENT OF CASH FLOWS
    (In thousands of U.S. dollars)

    -------------------------------------------------------------------------
                                                        3 months to March 31:
    -------------------------------------------------------------------------
    (Unaudited)                                            2009         2008
    -------------------------------------------------------------------------
    Cash flows from operating activities
    Net loss                                         $  (58,267)  $  (34,399)
    Items not affecting cash:
      Amortization                                        3,828        4,931
      Future and current income taxes                     4,599       (6,200)
      Net realized (gains) losses                        21,516        5,547
      Amortization of bond premiums and discounts            64       (2,470)
      Net change in other non-cash balances             (73,019)     (31,612)
    -------------------------------------------------------------------------
                                                       (101,279)     (64,203)
    -------------------------------------------------------------------------
    Cash flows from financing activities
    Increase in share capital                                 -           48
    Repurchase of common shares for cancellation              -       (3,790)
    Dividends paid                                         (872)      (4,139)
    Increase (decrease) in bank indebtedness
     and loans payable                                     (368)     (10,655)
    Decrease in senior unsecured indebtedness                 -      (17,289)
    -------------------------------------------------------------------------
                                                         (1,240)     (35,825)
    -------------------------------------------------------------------------
    Investing activities
    Purchase of securities                             (533,020)    (719,671)
    Proceeds from sale of securities                    752,608      801,273
    Financed premiums receivable, net                     1,993        3,156
    Acquisitions, net of cash acquired                        -         (212)
    Net proceeds from sale of discontinued
     operations                                          (1,941)           -
    Net change to capital assets and
     intangible assets                                   (2,873)      (1,474)
    -------------------------------------------------------------------------
                                                        216,767       83,072
    -------------------------------------------------------------------------
    Net change in cash and cash equivalents             114,248      (16,956)
    Cash and cash equivalents at beginning
     of period                                          105,656      161,635
    -------------------------------------------------------------------------
    Cash and cash equivalents at
     end of period                                   $  219,904   $  144,679
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    NOTE 1  Basis of Presentation

    These interim consolidated financial statements have been prepared in
    accordance with The Canadian Institute of Chartered Accountants
    ("CICA") Canadian generally accepted accounting principles ("GAAP") using
    the same accounting policies as were used for the Company's consolidated
    financial statements for the year ended December 31, 2008 except for the
    changes in accounting policies as noted below. These interim
    consolidated financial statements do not contain all disclosures
    required by generally accepted accounting principles and accordingly
    should be read in conjunction with the Company's audited consolidated
    financial statements for the year ended December 31, 2008 as set out on
    pages 65 to 104 of the Company's 2008 Annual Report. The results of the
    operations for the interim periods are not necessarily indicative of the
    full-year results.

    NOTE 2 Change In Accounting Polices

    Commencing January 1, 2009, the Company adopted the CICA Handbook Section
    3064 Goodwill and Intangible Assets. As a result of adopting the new
    standard, certain software costs previously recorded as Capital assets
    are now recorded as Intangible assets in the Consolidated Balance Sheet.
    Accordingly, $18.1 million at December 31, 2008 was reclassified from
    Capital assets to Intangible assets. The related amortization expense
    that was previously recorded in General and administrative expenses on
    the Consolidated Statement of Operations is now recorded as Amortization
    of intangibles. Accordingly, $1.6 million for three month period ended
    March 31, 2008 was reclassified from General and administrative expenses
    to Amortization of intangibles.

    Commencing January 20, 2009, the Company adopted the CICA Handbook EIC
    173 - Credit Risk and the Fair Value of Financial Assets and Financial
    Liabilities, which clarifies the consideration of entity's own credit
    risk and the credit risk of the counterparty in determining the fair
    value of financial assets and financial liabilities, including derivative
    instruments. The accounting treatment should be applied retrospectively
    without restatement of prior periods to all financial assets and
    liabilities measured at fair value. There was no resulting difference
    noted on adoption.

    NOTE 3 Discontinued Operations

    On September 30, 2008 the company completed its previously announced sale
    of York Fire and Casualty Insurance Company (York Fire), a primarily
    standard insurance writer, for C$95 million in cash. The Company has
    classified York Fire as discontinued operations and the results of its
    operations are reported separately for all periods presented. Prior to
    the sale, York Fire was part of the Canadian reporting segment. The final
    settlement was completed in the first quarter of 2009 and the adjustments
    are reflected accordingly.

    Summarized financial information for discontinued York Fire operations is
    shown below.

    -------------------------------------------------------------------------
                                                         Quarter to March 31:
                                                           2009         2008
    -------------------------------------------------------------------------
    Operations:
      Revenue                                        $     (215)  $   31,398
    -------------------------------------------------------------------------
      Income (loss) from discontinued operations
       before taxes                                      (2,750)          70
      Income tax (recovery)                                (527)        (695)
    -------------------------------------------------------------------------
      Income (loss) from discontinued operations
       before disposal, net of taxes                 $   (2,223)  $      765
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Disposals:
      Loss on disposal before income taxes           $   (1,941)  $        -
      Income tax (recovery)                                (325)           -
    -------------------------------------------------------------------------
      Loss on disposal, net of taxes                 $   (1,616)  $        -
    -------------------------------------------------------------------------
    Total gain (loss) from discontinued
      operations, net of taxes                       $   (3,839)  $      765
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    NOTE 4 Stock-based Compensation

    As reported on pages 81 - 84 of the Company's 2008 Annual Report,
    effective January 1, 2003 the Company adopted on a prospective basis the
    fair-value method of accounting for stock-based compensation awards
    granted to employees and non-employee directors.

    Per share fair value of options granted during 2009 was C$0.45 and C$0.97
    in March. Per share fair value of options granted during 2008 was C$2.88
    in February, C$2.43 in May and C$2.45 in September. The fair value of the
    options granted was estimated at the date of grant using a Black-Scholes
    option pricing model with the following weighted average assumptions:

    -------------------------------------------------------------------------
                                                              As at March 31:
    -------------------------------------------------------------------------
                                                           2009         2008
    -------------------------------------------------------------------------
    Risk-free interest rate                               1.78%        3.22%
    Dividend yield                                        4.21%        2.23%
    Volatility of the expected market price of
     the Company's common shares                          88.1%        27.8%
    Expected option life (in years)                         4.0          4.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Black-Scholes option valuation model was developed for use in
    estimating fair value of traded options which have no vesting
    restrictions and are fully transferable. As the Company's employee stock
    options have characteristics significantly different from those of traded
    options, and because changes in the subjective input assumptions can
    materially affect the fair value estimate, in management's opinion, the
    above pro forma adjustments are not necessarily a reliable single measure
    of the fair value of the Company's employee stock options.

    NOTE 5 Segmented Information

    The Company provides property and casualty insurance and other insurance
    related services in three reportable segments, Canada, the United States
    and corporate and other insurance related services. The Company's
    Canadian and United States segments include transactions with the
    Company's reinsurance subsidiaries. At the present time, other insurance
    related services are not significant. Results for the Company's operating
    segments are based on the Company's internal financial reporting systems
    and are consistent with those followed in the preparation of the
    consolidated financial statements. The reportable segments for Canada
    have been updated to conform to current period's financial statement
    presentation for the results of continuing operations.


    -------------------------------------------------------------------------
                                     Three months ended March 31, 2009
    -------------------------------------------------------------------------
                                            United    Corporate
                               Canada       States    and other        Total
    -------------------------------------------------------------------------
    Gross premiums
     written               $   62,342   $  196,636   $        -   $  258,978
    Net premiums earned        78,998      204,494            -      283,492
    Investment income
     (loss)                    10,145       16,855            -       27,000
    Net realized loss          (6,390)     (13,185)           -      (19,575)
    Interest expense                -        6,296            -        6,296
    Amortization of
     capital assets               395          534          146        1,075
    Amortization of
     intangible assets              -        2,135          638        2,773
    Income tax
     expense (recovery)        (2,784)      (2,975)        (306)      (6,065)
    Income (loss) from
     continuing operations    (13,357)     (45,401)       4,330      (54,428)

    Capital assets         $   45,470   $   46,832   $    1,174   $   93,476
    Goodwill and
     intangible assets          5,790       38,778       17,910       62,478
    Total assets              923,083    2,092,537       83,168    3,098,788
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                     Three months ended March 31, 2008
    -------------------------------------------------------------------------
                                            United    Corporate
                               Canada       States    and other        Total
    -------------------------------------------------------------------------
    Gross premiums
     written               $   93,656   $  337,371   $        -   $  431,027
    Net premiums
     earned                   101,606      311,049            -      412,655
    Investment income
     (loss)                    13,717       23,000         (537)      36,180
    Net realized gains         (1,848)      (3,870)           -       (5,718)
    Interest expense                -        8,586        1,330        9,916
    Amortization of
     capital assets               543          811          424        1,778
    Amortization of
     intangible assets              -        2,609          715        3,324
    Income tax
     expense (recovery)        (6,273)      (9,545)       2,097      (13,721)
    Income (loss) from
     continuing operations     (4,968)     (34,094)       3,898      (35,164)

    Capital assets         $   59,620   $   48,962   $    1,870   $  110,452
    Goodwill and
     intangible assets          8,954      118,831        5,968      133,753
    Total assets            1,587,473    2,922,033       35,727    4,545,233
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    NOTE 6 Securities

    The table below provides the amortized cost and fair values of
    securities:

    -------------------------------------------------------------------------
                                               March 31, 2009
    -------------------------------------------------------------------------
                                             Gross        Gross
                            Amortized   Unrealized   Unrealized
                                 cost        Gains       Losses   Fair Value
    -------------------------------------------------------------------------
    Term Deposits          $  228,033   $    3,290   $        7   $  231,316
    Bonds:
      Canadian - Government   179,034        6,274           19      185,289
               - Corporate    260,531        4,381       10,185      254,727
      U.S      - Government    57,848        4,273           33       62,088
               - Corporate  1,260,636       49,361       34,477    1,275,520
      Other    - Government         -            -            -            -
               - Corporate     75,245        2,371        1,479       76,137
    -------------------------------------------------------------------------
    Sub-total              $2,061,327   $   69,950   $   46,200   $2,085,077
    Common shares
     - Canadian                 2,221           79           15        2,285
     - U.S                         15           14            -           29
    Preferred shares
     - Canadian                 6,343            -        3,159        3,184
     - U.S                        531            -          107          424
    -------------------------------------------------------------------------
                           $2,070,437   $   70,043   $   49,481   $2,090,999
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                            December 31, 2008
    -------------------------------------------------------------------------
                                             Gross        Gross
                            Amortized   Unrealized   Unrealized
                                 cost        Gains       Losses   Fair Value
    -------------------------------------------------------------------------
    Term Deposits          $  184,381   $    3,610   $       20   $  187,971
    Bonds:
      Canadian - Government   149,200        8,310            7      157,503
               - Corporate    257,758        2,414       12,420      247,752
      U.S      - Government    63,404        5,060          775       67,689
               - Corporate  1,284,516       49,356       27,627    1,306,245
      Other    - Government         -            -            -            -
               - Corporate    128,382        4,328          999      131,711
    -------------------------------------------------------------------------
    Sub-total              $2,067,641   $   73,078   $   41,848   $2,098,871
    Common shares
     - Canadian               114,167        2,590            -      116,757
     - U.S                    146,408        4,883            -      151,291
    Preferred shares
     - Canadian                 6,692            8        3,629        3,071
     - U.S                        634            -          139          495
    -------------------------------------------------------------------------
                           $2,335,542   $   80,559   $   45,616   $2,370,485
    -------------------------------------------------------------------------

    Fair values of term deposits, bonds and common and preferred shares are
    considered to approximate quoted market values based on the latest bid
    prices in active markets. Fair value of securities for which no active
    market exists are derived from quoted market prices of similar securities
    or third party evidence.

    As part of the quarterly analysis performed by management to determine
    declines in market value that are other than temporary, write downs for
    other-than-temporary impairments were $1.7 million compared to $9.0
    million for the quarter ended March 31, 2008.

    Management has reviewed currently available information regarding other
    securities whose estimated fair values are less than their carrying
    amounts and believes that these unrealized losses are not other than
    temporary and are primarily due to temporary market and sector related
    factors rather than to issuer-specific factors.

    Net investment income for the quarter ended March 31 is comprised as
    follows:

    -------------------------------------------------------------------------
                                                           2009         2008
    -------------------------------------------------------------------------
    Investment income
      Interest on short term securities              $      868   $    4,237
      Interest on Bonds                                  22,494       29,380
      Dividends                                           1,360        2,799
      Premium Finance                                       863          989
      Other                                               2,762          807
    -------------------------------------------------------------------------
    Gross Investment Income                          $   28,347   $   38,212
    Investment Expenses                                   1,347        2,032
    -------------------------------------------------------------------------
    Net Investment Income                            $   27,000   $   36,180
    -------------------------------------------------------------------------

    Net realized losses for the quarter ended March 31, 2009 were $19.6
    million compared to net realized loss of $5.7 million for the quarter
    ended March 31, 2008.

    NOTE 7 Financial Instruments

    Risk Management

    The Company's risk management policies and practices are described on
    pages 18 to 20, 45 to 53 and 74 to 78 of the Company's 2008 Annual
    Report. There has been no significant change in the risk management
    framework since December 31, 2008.

    In addition, the Company has provided herein the disclosures required
    under the Canadian Institute of Chartered Accountants (CICA) handbook
    section 3862, "Financial Instruments - Disclosures" related to the nature
    and extent of risks arising from financial instruments. These disclosures
    form an integral part of the interim consolidated financial statements.

    The table below summarizes the credit exposure of the Company from its
    investments in fixed income securities and term deposits by rating as
    assigned by S&P or Moody's Investor Services, using the higher of these
    ratings for any security where there is a split rating:

    -------------------------------------------------------------------------
                                      March 31, 2009       December 31, 2008
    -------------------------------------------------------------------------
    AAA/Aaa                        $1,098,317  52.7%       $1,146,703  54.7%
    AA/Aa2                            379,230   18.2          341,280   16.3
    A/A2                              456,751   21.9          505,748   24.1
    BBB/Baa2                           87,885    4.2           65,255    3.1
    BB/Ba2                              3,635    0.2            5,122    0.2
    B/B2                                7,325    0.4            7,838    0.4
    CCC/Caa or lower, or not rated     51,934    2.4           26,925    1.2
    -------------------------------------------------------------------------
    Total consolidated             $2,085,077 100.0%       $2,098,871 100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at March 31, 2009, 92.8% of the fixed income portfolio is rated 'A' or
    better. The 'not rated' category consists primarily of investments in
    money market instruments. Changes in this balance period over period are
    primarily due to timing of investment maturities and reinvestment.

    Duration is a measure used to estimate the extent market values of fixed
    income instruments change with changes in interest rates. Using this
    measure, it is estimated that an immediate hypothetical 100 basis point
    or 1 percent parallel increase in interest rates would decrease the
    market value of the fixed income securities by $68.6 million at March 31,
    2009, representing 3.3% of the $2.1 billion fair value fixed income
    securities portfolio.

    The Company has substantially eliminated its exposure to equity price
    risk subsequent to liquidation of its common equity portfolio during the
    quarter. The Company also has a small exposure to changes in the U.S. to
    Canadian dollar foreign currency exchange rate. The Company does not
    hedge any foreign currency exposure that may exist in the securities
    portfolio. Our U.S. operations generally hold their investments in U.S.
    dollar denominated securities, and the Canadian operations in Canadian
    dollar denominated securities.

    The following table summarizes carrying amounts of financial instruments
    by contractual maturity or expected cash flow dates (the actual repricing
    dates may differ from contractual maturity because certain securities and
    debentures have the right to call or prepay obligations with or without
    call or prepayment penalties):

    -------------------------------------------------------------------------
    As at March 31, 2009     One year       One to      Five to    More than
                              or less   five years    ten years    ten years
    -------------------------------------------------------------------------
    Assets:
    Cash & cash
     equivalents              219,904            -            -            -
    Securities                456,669      930,806      506,776      190,647
    Accrued Investment
     Income                    20,846            -            -            -
    Finance Premiums           58,135            -            -            -
    Accounts receivable
     and other assets         260,328            -            -            -
    Due from reinsurers
     and other insurers        44,685       67,880       11,667        1,571
    -------------------------------------------------------------------------
    Total:                  1,060,567      998,686      518,443      192,218
    -------------------------------------------------------------------------

    Liabilities:
    Loans payable                   -            -       66,222            -
    Accounts payable and
     accrued liabilities       91,953            -            -            -
    Unpaid claims             640,962      973,676      167,357       22,533
    Senior unsecured
     debentures                     -       78,566      104,204            -
    Subordinated
     indebtedness                   -            -            -       87,391
    -------------------------------------------------------------------------
    Total:                    732,915    1,052,242      337,783      109,924
    -------------------------------------------------------------------------


    -----------------------------------------------
    As at March 31, 2009           No
                             specific
                                 date        Total
    -----------------------------------------------
    Assets:
    Cash & cash
     equivalents                    -      219,904
    Securities                  6,101    2,090,999
    Accrued Investment
     Income                         -       20,846
    Finance Premiums                -       58,135
    Accounts receivable
     and other assets               -      260,328
    Due from reinsurers
     and other insurers             -      125,803
    -----------------------------------------------
    Total:                      6,101    2,776,015
    -----------------------------------------------

    Liabilities:
    Loans payable                   -       66,222
    Accounts payable and
     accrued liabilities            -       91,953
    Unpaid claims                   -    1,804,528
    Senior unsecured
     debentures                     -      182,770
    Subordinated
     indebtedness                   -       87,391
    -----------------------------------------------
    Total:                          -    2,232,864
    -----------------------------------------------



    -------------------------------------------------------------------------
    As at December 31, 2008  One year       One to      Five to    More than
                              or less   five years    ten years    ten years
    -------------------------------------------------------------------------
    Assets:
    Cash & cash
     equivalents           $  105,656   $        -   $        -   $        -
    Securities                405,619      986,244      524,479      182,529
    Accrued investment
     income                    24,554            -            -            -
    Finance premiums           61,616            -            -            -
    Accounts receivable
     and other assets         276,450            -            -            -
    Due from reinsurers
     and other insurers        63,195       95,990       16,533        2,227
    -------------------------------------------------------------------------
    Total:                    937,090    1,082,234      541,012      184,756
    -------------------------------------------------------------------------
    Liabilities:
    Loans payable                   -            -       66,222            -
    Accounts payable and
     accrued liabilities      135,565            -            -            -
    Unpaid claims             667,307    1,013,611      174,579       23,519
    Senior unsecured
     debentures                     -       81,137      104,066            -
    Subordinated
     indebtedness                   -            -            -       87,383
    -------------------------------------------------------------------------
    Total:                    802,872    1,094,748      344,867      110,902
    -------------------------------------------------------------------------


    -----------------------------------------------
    As at December 31, 2008        No
                             specific
                                 date        Total
    -----------------------------------------------
    Assets:
    Cash & cash
     equivalents           $        -   $  105,656
    Securities                271,614    2,370,485
    Accrued investment
     income                         -       24,554
    Finance premiums                -       61,616
    Accounts receivable
     and other assets               -      276,450
    Due from reinsurers
     and other insurers             -      177,945
    -----------------------------------------------
    Total:                    271,614    3,016,706
    -----------------------------------------------
    Liabilities:
    Loans payable                   -       66,222
    Accounts payable and
     accrued liabilities            -      135,565
    Unpaid claims                   -    1,879,016
    Senior unsecured
     debentures                     -      185,203
    Subordinated
     indebtedness                   -       87,383
    -----------------------------------------------
    Total:                          -    2,353,389
    -----------------------------------------------

    Collateral pledged: As at March 31, 2009, bonds and term deposits with an
    estimated fair value of $51.6 million were on deposit with state and
    provincial regulatory authorities. Also, from time to time, the Company
    pledges securities to third parties to collateralize liabilities incurred
    under its policies of insurance. At March 31, 2009, the amount of such
    pledged securities was $124.3 million. Collateral pledging transactions
    are conducted under terms that are common and customary to standard
    collateral pledging and are subject to the Company's standard risk
    management controls.

    The Company has a syndicate $300 million letter of credit facility which
    is principally used to collateralize inter-company reinsurance balances
    for statutory capital management purposes. The Company pledges securities
    to collateralize the utilized portion of the letter of credit facility.
    At March 31, 2009 the letter of credit facility utilization was
    $263.8 million.

    Fair value:

    Refer to Note 6 with respect to fair value disclosure on securities. The
    carrying value of unpaid claims does not take into consideration the time
    value of money or make an explicit provision for adverse deviation. In
    order to estimate the fair value of the unpaid claims, the Company uses
    an actuarial approach recognizing the time value of money which
    incorporates assumptions concerning projected cash flows and appropriate
    provisions for adverse deviation. As at March 31, 2009 the estimated fair
    value of the unpaid claims was $1,952.3 million ($1,820.8 million net of
    reinsurers' share of unpaid claims). The estimated fair value is
    approximately $148 million above the undiscounted carrying value as a
    result of the inclusion of a provision for adverse development totaling
    $184.6 million in addition to the present value of unpaid claims. There
    is no active market for policy liabilities, so a market value is not
    readily available.

    The table below summarizes the fair valuation of debt liabilities, though
    they are held at amortized cost on the consolidated balance sheet:

                                                   March 31, 2009
    -------------------------------------------------------------------------
                                                          Total
                                        Total fair     carrying
                                           value(*)       value    Favorable
    -------------------------------------------------------------------------
    Loans Payable                       $   32,483   $   66,222   $   33,739
    Senior unsecured debentures             89,242      182,770       93,528
    Subordinated indebtedness               20,281       87,391       67,110
    -------------------------------------------------------------------------


                                                 December 31, 2008
    -------------------------------------------------------------------------
                                                          Total
                                        Total fair     carrying
                                           value(*)       value    Favorable
    -------------------------------------------------------------------------
    Loans Payable                       $   43,094   $   66,222   $   23,128
    Senior unsecured debentures            128,497      185,203       56,706
    Subordinated indebtedness               17,712       87,383       69,671
    -------------------------------------------------------------------------
    (*)The fair value is based on market observable inputs.

    The carrying value of all other financial instruments approximates their
    fair value due to the short term to maturity of those financial
    instruments.

    The Company uses fair value hierarchy to categorize the inputs used in
    valuation techniques to measure fair value. The extent of the Company's
    use of quoted market prices (Level 1), internal models using observable
    market information as inputs (Level 2) and internal models without
    observable market information (Level 3) in the valuation of securities as
    at March 31, 2009 was as follows:

    -------------------------------------------------------------------------
    Description                                Available for sale securities
    -------------------------------------------------------------------------
                                                                       Fixed
                                                         Equity       income
    -------------------------------------------------------------------------
    Fair value                                           $5,922   $2,085,077
    -------------------------------------------------------------------------
    Based on:
    -------------------------------------------------------------------------
    Quoted market prices                                 100.0%            -
    -------------------------------------------------------------------------
    Valuation techniques-Significant market observable
     Inputs                                                   -       100.0%
    -------------------------------------------------------------------------
    Valuation techniques- Significant unobservable
     market inputs                                            -            -
    -------------------------------------------------------------------------

    NOTE 8 Capital Management

    As at March 31, 2009 the Company was adequately capitalized to support
    the premium volume of the insurance subsi diaries. Canadian property and
    casualty insurance companies are regulated by the Office of the
    Superintendent of Financial Institutions (OSFI) and the Financial
    Services Commission of Ontario (FSCO) and are required to maintain a
    level of capital sufficient to achieve a target of 150% of a minimum
    capital test (MCT) ratio. As at March 31, 2009 the MCT's of the Canadian
    subsidiaries are above the target MCT level, with MCT ratios ranging
    between 192% and 216% and aggregate capital of approximately $36.2
    million in excess of required capital.

    In the United States, a risk based capital (RBC) formula is used by the
    National Association of Insurance Commissioners (NAIC) to identify
    property and casualty insurance companies that may not be adequately
    capitalized. The NAIC requires that capital and surplus not fall below
    200% of the authorized control level. As at March 31, 2009, all the U.S.
    subsidiaries, with the exception of Lincoln General, are above the
    required RBC levels, with RBC ratios ranging between 305% and 34,110%
    and have aggregate capital excluding Lincoln General of approximately
    $85.9 million in excess of the 200% level. As at March 31, 2009 Lincoln
    General's RBC was 120% which is at the regulatory action level. Based on
    the current RBC level, an additional $38.6 million would be required to
    increase the Lincoln General RBC level above 200%. As a result of its
    current RBC level, the Pennsylvania Insurance Department is required to
    conduct an examination and issue an order outlining corrective action to
    be taken. Further, under Pennsylvania law, Lincoln may be deemed to be
    operating in a financially hazardous condition based on its financial
    statements at December 31, 2008. As a result, the Pennsylvania Insurance
    Department has the power to take a variety of regulatory actions,
    including but not limited to department supervision, and the seeking of a
    court order of rehabilitation or liquidation if it determines that
    Lincoln's condition is such that the further transaction of business
    would be hazardous, financially, to its policyholders, creditors or the
    public. If Lincoln were subject to an order of rehabilitation or
    liquidation it would have a material adverse effect on the Company's
    results of operations and financial condition.

    As part of a plan developed by management, Lincoln has initiated running
    off its book of business and, accordingly, management has ceased writing
    new or renewal business, except where otherwise required by law or pre-
    existing contractual obligations, and has initiated mid-term
    cancellations in certain lines of business. As at December 31, 2008,
    Lincoln had statutory admitted assets of $386.7 million, liabilities of
    $307.5 million, and statutory capital and surplus of $79.2 million. On
    March 11, 2009, Lincoln entered into a letter agreement with the
    Pennsylvania Insurance Department (the Department) that provides for
    increased supervisory oversight by the Department including but not
    limited to increased reporting and Department approval of non-routine
    matters including transfers or pledges of assets, extension of loans,
    incurring of debt, increases in salaries, payments of bonuses to officers
    and directors, and consummation of material transactions.

    Lincoln General submitted its regulatory action plan on May 7, 2009 which
    is subject to approval of the Pennsylvania Insurance Department.

    The reinsurance subsidiaries, which are domiciled in Barbados and
    Bermuda, are required by the regulator in the jurisdictions in which they
    operate to maintain minimum capital levels. As at March 31, 2009 the
    capital maintained by Kingsway Reinsurance Corporation was approximately
    $74.9 million ($ 77.9 million as at December 31, 2008) in excess of the
    regulatory requirements in Barbados and the capital maintained by
    Kingsway Reinsurance (Bermuda) Limited was approximately $9.6 million
    ($15.4 million as at December 31, 2008) in excess of regulatory
    requirements.

    NOTE 9 Hedges

    The Company has recorded a $0.3 million loss during the quarter due to
    the ineffective portion of the designated hedge. The cost to the Company
    to settle the swap as at March 31, 2009 was $17.9 million.

    NOTE 10 Special charges

    During the first quarter of 2009, the Company announced the corporate
    restructuring plan to concentrate in its core and profitable lines of
    business and is targeted to improve the Company's financial stability.
    The Company is consolidating operations in U.S. and Canada, simplifying
    the management structure, reducing costs through synergies and
    operational efficiencies and positioning the Company to seize competitive
    advantage. As the Company exits businesses and streamlines operations,
    approximately 1,000 employees will be removed from the total workforce
    over the next eighteen to twenty four months. Restructuring plan costs
    will be approximately $20 million, to be incurred over fiscal 2009 and
    2010, of which $2.9 million was expensed in the first three months of
    2009.

    During the three months ended March 31, 2009, the Company continued to
    implement these restructuring work plans. Special charges for the three
    months ended March 31, 2009 were as follows:

    -------------------------------------------------------------------------
                                                                   Severance
                                                                and Benefits
    -------------------------------------------------------------------------
    Provision balance at January 1, 2009                                   -
    -------------------------------------------------------------------------
      (Income) expense                                                 2,943
    -------------------------------------------------------------------------
      Payments                                                         2,056
    -------------------------------------------------------------------------
    Provision balance at March 31, 2009                                  887
    -------------------------------------------------------------------------

    Special charges are included in the statement of operations under General
    and administrative expenses.

    The following table summarizes the total special charges incurred by
    segment during the three months ended March 31, 2009:

    -------------------------------------------------------------------------
                                            Canada         U.S.        Total
    -------------------------------------------------------------------------
    Total special charges                    1,900        1,043        2,943
    -------------------------------------------------------------------------

    NOTE 11  Acquisitions

    On April 1, 2007 the Company acquired 100% of the voting shares of
    Mendota Insurance Company ('Mendota') whose primary business is non-
    standard automobile insurance. This transaction includes Mendota's wholly
    owned subsidiaries, Mendakota Insurance Company and Mendota Insurance
    Agency, Inc. The earnings of Mendota have been included in the statement
    of operations from April 1, 2007.

    During the first quarter of 2008, the final purchase price was determined
    at $51.1 million. The Company has recognized total goodwill $1.2 million
    related to this acquisition, of which $0.2 million was recorded in 2008
    and $1.0 million during 2007.

    The Company also recognized total intangible assets of $10.7 million
    related to this acquisition during 2007, of which $7.8 million was
    assigned to insurance licenses with an indefinite life and not subject to
    amortization, $1.1 million was assigned to computer software and is being
    amortized straight line over its defined useful life of 5 years and
    $1.8 million assigned to agent relationships and is also being amortized
    of a 5 year term but based on a pattern in which the economic benefits of
    the asset are expected to be consumed.

    NOTE 12 Related Party Transaction

    In March 2009, the Company obtained a facility from a related party to
    allow for specific purpose capital initiatives. This is a related party
    transaction for financial reporting purposes as there is common board
    representation between the related parties. The facility is at fair
    market terms and conditions. As of March 31, 2009, the facility remains
    undrawn.

    NOTE 13 Supplemental Condensed Consolidating Financial Information

    On July 10, 2007, K2007GP issued C$100 million of 6% senior unsecured
    debentures unconditionally guaranteed by the Company ("KFSI") and
    Kingsway America Inc. ("KAI"), a wholly-owned subsidiary of the Company.
    The following is the condensed consolidating financial information for
    the Company as of March 31, 2009 and December 31, 2008, and for the
    period ended March 31, 2009 and 2008, with a separate column for each
    Guarantor, the issuer and the other businesses of the Company combined
    ("Non-Guarantor subsidiaries").

    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the three months ended March 31, 2009

                                           KFSI          KAI         K2007GP
    -------------------------------------------------------------------------
                                            (a           (a           (the
                                       "Guarantor") "Guarantor")    "Issuer")
    -------------------------------------------------------------------------

    Revenue:
      Net premiums earned              $         -  $         -  $         -
      Investment related income                919          940        1,401
      Management fees                       17,084        6,822            -
    -------------------------------------------------------------------------
                                       $    18,003  $     7,762  $     1,401
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred                  $         -  $         -  $         -
      Commissions and premium taxes              -            -            -
      Other expenses                        15,595        6,748          220
      Interest expense                           -        6,590        1,446
    -------------------------------------------------------------------------
                                            15,595       13,338        1,666
    -------------------------------------------------------------------------

    Income (loss) from continuing
     operations before income taxes          2,408       (5,576)        (265)
    Income taxes (recovery)                   (306)      (1,896)         (90)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                              2,714       (3,680)        (175)
    Income (loss) from discontinued
     operations                                  -            -            -
    Gain (loss) on disposal of
     discontinued operations                (1,941)           -            -
    Equity in undistributed net
     income of subsidiaries                (59,040)     (30,920)           -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (58,267) $   (34,600) $      (175)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the three months ended March 31, 2009

                                          Other    Consolidation
                                      Subsidiaries  adjustments       Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                           subsid-
                                           iaries")
    -------------------------------------------------------------------------

    Revenue:
      Net premiums earned              $   298,126  $   (14,634) $   283,492
      Investment related income                933        3,232        7,425
      Management fees                            -      (23,906)           -
    -------------------------------------------------------------------------
                                       $   299,059  $   (35,308) $   290,917
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred                  $   278,484  $   (32,635) $   245,849
      Commissions and premium taxes         42,571            -       42,571
      Other expenses                        35,064         (933)      56,694
      Interest expense                           -       (1,740)       6,296
    -------------------------------------------------------------------------
                                           356,119      (35,308)     351,410
    -------------------------------------------------------------------------

    Income (loss) from continuing
     operations before income taxes        (57,060)           -      (60,493)
    Income taxes (recovery)                 (3,773)           -       (6,065)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (53,287)           -      (54,428)
    Income (loss) from discontinued
     operations                             (2,223)           -       (2,223)
    Gain (loss) on disposal of
     discontinued operations                   325            -       (1,616)
    Equity in undistributed net
     income of subsidiaries                      -       89,960            -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (55,185) $    89,960  $   (58,267)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the three months ended March 31, 2008

                                           KFSI          KAI         K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer"/       (an
                                       "Guarantor") "Guarantor")    "Issuer")
    -------------------------------------------------------------------------

    Revenue:
      Net premiums earned              $         -  $         -  $         -
      Investment related income               (537)         859        1,829
      Management fees                       30,008        4,471            -
    -------------------------------------------------------------------------
                                       $    29,471  $     5,330  $     1,829
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred                  $         -  $         -  $         -
      Commissions and premium taxes              -            -            -
      Other expenses                        22,147        6,927           59
      Interest expense                       1,330        7,141        1,498
    -------------------------------------------------------------------------
                                            23,477       14,068        1,557
    -------------------------------------------------------------------------

    Income (loss) from continuing
     operations before income taxes          5,994       (8,738)         272
    Income taxes (recovery)                  2,097       (2,971)          93
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                              3,897       (5,767)         179
    -------------------------------------------------------------------------
    Income (loss) from discontinued
     operations                                  -            -            -
    -------------------------------------------------------------------------
    Gain on disposal of discontinued
     operations                                  -            -            -
    -------------------------------------------------------------------------
    Equity in undistributed net
     income of subsidiaries                (38,296)     (28,241)           -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (34,399) $   (34,008) $       179
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the three months ended March 31, 2008

                                          Other    Consolidation
                                      Subsidiaries  adjustments       Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                           subsid-
                                           iaries")
    -------------------------------------------------------------------------

    Revenue:
      Net premiums earned              $   412,655  $         -  $   412,655
      Investment related income             18,724        9,587       30,462
      Management fees                            -      (34,479)           -
    -------------------------------------------------------------------------
                                       $   431,379  $   (24,892) $   443,117
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred                  $   360,676  $   (12,510) $   348,166
      Commissions and premium taxes         71,190            -       71,190
      Other expenses                        45,979      (12,382)      62,730
      Interest expense                         (53)           -        9,916
    -------------------------------------------------------------------------
                                           477,792      (24,892)     492,002
    -------------------------------------------------------------------------

    Income (loss) from continuing
     operations before income taxes        (46,413)           -      (48,885)
    Income taxes (recovery)                (12,940)           -      (13,721)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (33,473)           -      (35,164)
    -------------------------------------------------------------------------
    Income (loss) from discontinued
     operations                                765            -          765
    -------------------------------------------------------------------------
    Gain on disposal of discontinued
     operations                                  -            -            -
    -------------------------------------------------------------------------
    Equity in undistributed net
     income of subsidiaries                      -       66,537            -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (32,708) $    66,537  $   (34,399)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Balance Sheet
    -------------------------------------------------------------------------
    As at March 31, 2009

                                           KFSI          KAI         K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer"/       (an
                                       "Guarantor") "Guarantor")    "Issuer")
    -------------------------------------------------------------------------

    Assets
      Investments in subsidiaries      $   281,463  $   803,643  $         -
      Cash                                  22,492        4,364          834
      Securities                                 -            -            -
      Goodwill and other assets              5,790            -            -
      Other assets                          63,482       85,835      111,261
    -------------------------------------------------------------------------
                                       $   373,227  $   893,842  $   112,095
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
      Bank Indebtedness                $         -  $   210,175  $         -
      Other liabilities                      2,679       26,391       16,221
      Unearned premiums                          -            -            -
      Unpaid claims                              -            -            -
      Senior unsecured debentures                -      125,000       93,712
      Subordinated indebtedness                  -       90,500            -
    -------------------------------------------------------------------------
                                       $     2,679  $   452,066  $   109,933
    Shareholders' equity:
      Share capital                        322,344      490,719       10,667
      Contributed surplus                    9,153            -            -
      Retained Earnings                     39,426      (48,943)       2,222
      Accumulated other comprehensive
       income                                 (375)           -      (10,727)
    -------------------------------------------------------------------------
                                           370,548      441,776        2,162
    -------------------------------------------------------------------------
                                       $   373,227  $   893,842  $   112,095
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at March 31, 2009

                                          Other    Consolidation
                                      Subsidiaries  adjustments       Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                           subsid-
                                           iaries")
    -------------------------------------------------------------------------

    Assets
      Investments in subsidiaries      $(1,574,651) $   489,545  $         -
      Cash                                 192,214            -      219,904
      Securities                         2,163,579      (14,445)   2,149,134
      Goodwill and other assets             56,688            -       62,478
      Other assets                       1,942,233   (1,535,539)     667,272
    -------------------------------------------------------------------------
                                       $ 2,780,063  $(1,060,439) $ 3,098,788
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
      Bank Indebtedness                $  (287,806) $   143,853  $    66,222
      Other liabilities                    (88,862)     135,524       91,953
      Unearned premiums                    752,605     (257,228)     495,377
      Unpaid claims                      2,969,239   (1,164,711)   1,804,528
      Senior unsecured debentures          (19,063)     (16,879)     182,770
      Subordinated indebtedness                  -       (3,109)      87,391
    -------------------------------------------------------------------------
                                       $ 3,326,113  $(1,162,550) $ 2,728,241
    Shareholders' equity:
      Share capital                      1,917,234   (2,418,620)     322,344
      Contributed surplus                        -            -        9,153
      Retained Earnings                 (2,463,127)   2,509,847       39,425
      Accumulated other comprehensive
       income                                 (157)      10,884         (375)
    -------------------------------------------------------------------------
                                          (546,050)     102,111      370,547
    -------------------------------------------------------------------------
                                       $ 2,780,063  $(1,060,439) $ 3,098,788
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Balance Sheet
    -------------------------------------------------------------------------
    As at December 31, 2008

                                           KFSI          KAI         K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer"/       (an
                                       "Guarantor") "Guarantor")    "Issuer")
    -------------------------------------------------------------------------

    Assets
      Investments in subsidiaries      $   409,577  $   743,825  $         -
      Cash                                  21,335        5,603          543
      Securities                                 -            -            -
      Goodwill and other assets              5,996            -            -
      Other assets                          21,447       80,769      113,519
    -------------------------------------------------------------------------
                                       $   458,355  $   830,197  $   114,062
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
      Bank Indebtedness                $         -  $   170,175  $         -
      Other liabilities                      4,784       30,652       16,818
      Unearned premiums                          -            -            -
      Unpaid claims                              -            -            -
      Senior unsecured debentures                -      125,000       93,464
      Subordinated indebtedness                  -       90,500            -
    -------------------------------------------------------------------------
                                             4,784      416,327      110,282
    Shareholders' equity:
      Share capital                        322,344      459,133       10,667
      Contributed surplus                    9,791            -            -
      Retained Earnings                     98,563      (45,263)       2,397
      Accumulated other comprehensive
       income                               22,873            -       (9,284)
    -------------------------------------------------------------------------
                                           453,571      413,870        3,780
    -------------------------------------------------------------------------
                                       $   458,355  $   830,197  $   114,062
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at December 31, 2008

                                          Other    Consolidation
                                      Subsidiaries  adjustments       Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                           subsid-
                                           iaries")
    -------------------------------------------------------------------------

    Assets
      Investments in subsidiaries      $(1,470,854) $   317,452  $         -
      Cash                                  78,175            -      105,656
      Securities                         2,449,194      (17,093)   2,432,101
      Goodwill and other assets             57,897            -       63,893
      Other assets                       2,466,287   (1,940,231)     741,791
    -------------------------------------------------------------------------
                                       $ 3,580,699  $(1,639,872) $ 3,343,441
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
      Bank Indebtedness                $         -  $  (103,953) $    66,222
      Other liabilities                    (36,642)     119,953      135,565
      Unearned premiums                    823,071     (286,591)     536,480
      Unpaid claims                      3,109,263   (1,230,247)   1,879,016
      Senior unsecured debentures          (16,383)     (16,878)     185,203
      Subordinated indebtedness                  -       (3,117)      87,383
    -------------------------------------------------------------------------
                                         3,879,309   (1,520,833)   2,889,869
    Shareholders' equity:
      Share capital                      1,880,918   (2,350,718)     322,344
      Contributed surplus                        -            -        9,791
      Retained Earnings                 (2,211,705)   2,254,572       98,564
      Accumulated other comprehensive
       income                               32,177      (22,893)      22,873
    -------------------------------------------------------------------------
                                          (298,610)    (119,039)     453,572
    -------------------------------------------------------------------------
                                       $ 3,580,699  $(1,639,872) $ 3,343,441
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the three months ended March 31, 2009

                                           KFSI          KAI         K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer"/       (an
                                       "Guarantor") "Guarantor")    "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
      Net income                       $   (58,267) $   (34,600) $      (175)
      Adjustments to reconcile net
       income to net cash used by
       operating activities:
      Equity in undistributed earnings
       in subsidiaries                      59,040       30,920            -
      Other                                (39,888)      (9,574)         218
    -------------------------------------------------------------------------
                                           (39,115)     (13,254)          43

    Financing Activities:
      Increase in share capital, net             -       31,586            -
      Repurchase of common shares for
       cancellation                              -            -            -
      Common share dividend                   (872)           -            -
      Increase/(decrease) in bank
       indebtedness                              -       39,915          248
      Increase in senior unsecured
       indebtedness                              -            -            -
    -------------------------------------------------------------------------
                                              (872)      71,501          248

    Investing Activities:
      Purchase of securities                     -            -            -
      Proceeds from sale of
       securities                                -            -            -
      Proceeds from sale of
       discontinued operations              (1,941)           -            -
      Acquisitions                          43,371      (63,409)           -
      Other                                   (286)       3,923            -
    -------------------------------------------------------------------------
                                            41,144      (59,486)           -

    Increase (decrease) in cash
     during the year                         1,157       (1,239)         291
    Cash, beginning of year                 21,335        5,603          543
    -------------------------------------------------------------------------
                                       $    22,492  $     4,364  $       834
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the three months ended March 31, 2009

                                          Other    Consolidation
                                      Subsidiaries  adjustments       Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                           subsid-
                                           iaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
      Net income                       $   (55,185) $    89,960  $   (58,267)
      Adjustments to reconcile net
       income to net cash used by
       operating activities:
      Equity in undistributed earnings
       in subsidiaries                           -      (89,960)           -
      Other                               (108,888)     115,120      (43,012)
    -------------------------------------------------------------------------
                                          (164,073)     115,120     (101,279)

    Financing Activities:
      Increase in share capital, net             -      (31,586)           -
      Repurchase of common shares for
       cancellation                              -            -            -
      Common share dividend                      -            -         (872)
      Increase/(decrease) in bank
       indebtedness                           (368)     (40,163)        (368)
      Increase in senior unsecured
       indebtedness                              -            -            -
    -------------------------------------------------------------------------
                                              (368)     (71,749)      (1,240)

    Investing Activities:
      Purchase of securities              (533,020)           -     (533,020)
      Proceeds from sale of
       securities                          752,608            -      752,608
      Proceeds from sale of
       discontinued operations                   -            -       (1,941)
      Acquisitions                          63,409      (43,371)           -
      Other                                 (4,517)           -         (880)
    -------------------------------------------------------------------------
                                           278,480      (43,371)     216,767

    Increase (decrease) in cash
     during the year                       114,039            -      114,248
    Cash, beginning of year                 78,175            -      105,656
    -------------------------------------------------------------------------
                                       $   192,214  $         -  $   219,904
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the three months ended March 31, 2008

                                           KFSI          KAI         K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer"/       (an
                                       "Guarantor") "Guarantor")    "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
      Net income                       $   (34,399) $   (34,008) $       179
      Adjustments to reconcile net
       income to net cash used by
       operating activities:
      Equity in undistributed earnings
       in subsidiaries                      38,296       28,241            -
      Other                                (17,439)     (32,217)          36
    -------------------------------------------------------------------------
                                           (13,542)     (37,984)         215

    Financing Activities:
      Increase in share capital, net            48       37,843            -
      Repurchase of common shares for
       cancellation                         (3,790)           -            -
      Common share dividend                 (4,139)           -            -
      Increase/(decrease) in bank
       indebtedness                              -            -           57
      Increase in senior unsecured
       indebtedness                              -            -            -
    -------------------------------------------------------------------------
                                            (7,881)      37,843           57

    Investing Activities:
      Purchase of securities                     -            -            -
      Proceeds from sale of
       securities                                -            -            -
      Acquisitions                          15,957            -            -
      Other                                    260       (4,166)           -
    -------------------------------------------------------------------------
                                            16,217       (4,166)           -

    Increase (decrease) in cash
     during the year                        (5,206)      (4,307)         272
    Cash, beginning of year                 13,716        6,960          566
    -------------------------------------------------------------------------
                                       $     8,510  $     2,653  $       838
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the three months ended March 31, 2008

                                          Other    Consolidation
                                      Subsidiaries  adjustments       Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                           subsid-
                                           iaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
      Net income                       $   (32,708) $    66,537  $   (34,399)
      Adjustments to reconcile net
       income to net cash used by
       operating activities:
      Equity in undistributed earnings
       in subsidiaries                           -      (66,537)           -
      Other                                 19,816            -      (29,804)
    -------------------------------------------------------------------------
                                           (12,892)           -      (64,203)

    Financing Activities:
      Increase in share capital, net             -      (37,843)          48
      Repurchase of common shares for
       cancellation                              -            -       (3,790)
      Common share dividend                      -            -       (4,139)
      Increase/(decrease) in bank
       indebtedness                        (10,655)         (57)     (10,655)
      Increase in senior unsecured
       indebtedness                        (17,289)           -      (17,289)
    -------------------------------------------------------------------------
                                           (27,944)     (37,900)     (35,825)

    Investing Activities:
      Purchase of securities              (719,671)           -     (719,671)
      Proceeds from sale of
       securities                          801,273            -      801,273
      Acquisitions                            (212)     (15,957)        (212)
      Other                                (48,269)      53,857        1,682
    -------------------------------------------------------------------------
                                            33,121      (37,900)      83,072

    Increase (decrease) in cash
     during the year                        (7,715)           -      (16,956)
    Cash, beginning of year                140,393            -      161,635
    -------------------------------------------------------------------------
                                       $   132,678  $         -  $   144,679
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    %SEDAR: 00003152E          %CIK: 0001072627




For further information:

For further information: Shelly Gobin, Senior Vice President and Chief
Financial Officer, Tel: (905) 677-8889, Fax: (905) 677-5008, Web Site:
www.kingsway-financial.com


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