Kingsway Reports Net Income of $6.3 Million in the Second Quarter



    TORONTO, Aug. 7 /CNW/ - Kingsway Financial Services Inc. (TSE:KFS,
NYSE:  KFS) today announced its financial results for the second quarter ended
June 30, 2008 (results are in U.S. dollars). The Company reported net income
of $6.3 million or $0.11 diluted per share for the quarter, marking a
significant improvement over the net loss of $34.4 million reported in the
first quarter of 2008 but below net income of $41.7 million reported in the
second quarter of 2007. Gross premiums written were $443.2 million, 16% lower
than a year ago.
    The Company's securities portfolio continued to provide steady income
despite challenging economic trends and volatile financial markets in the U.S.
and Canada. Investment income, excluding net realized gains, was
$33.6 million, virtually unchanged from a year ago. During the quarter, the
investment portfolio produced net realized gains of $10.9 million which is net
of an adjustment of $9.9 million for the write-down of securities held which
were deemed to be other than temporarily impaired. Book value per share
decreased 4% during the quarter to $15.49 (Cdn$15.80) as a result of the
change in the market value of the securities portfolio which decreased book
value by $0.81.
    Compared with the first quarter of this year, operating results improved
despite challenging industry conditions. Quarterly results reflect improved
reserving experience and the benefit of the termination of unprofitable
programs since year-end. There was estimated net unfavourable reserve
development of $7.3 million ($4.6 million in Canada and $2.7 million in the
U.S.) or $0.14 per share on an after-tax basis in the second quarter of 2008,
88% lower than in the first quarter of 2008 which compares with net favourable
reserve development of $1.4 million in the second quarter of 2007. The
combined ratio was 107.0% in the second quarter, marking an improvement over
the first quarter but above the 100.8% reported in Q2 2007. Lincoln General's
claims management has been steadily moved in-house in recent years, and the
benefit of the completion of this transition is being reflected in improved
pricing and claims management. U.S. operations reported a combined ratio of
106.7% in the second quarter and, excluding terminated programs at Lincoln
General, would have reported a combined ratio of 101.0% in the second quarter
of 2008.
    Gross premiums declined $92.4 million (or 26%) in the quarter and by
$118.4 million (or 16%) year to date in the U.S., reflecting the impact of
termination of unprofitable programs and also the soft market conditions for
commercial automobile business. Lincoln General's premium volume declined by
$90.7 million in the quarter and $160.0 million year to date compared to the
same periods last year. In Canada, premiums were 2% lower when adjusted for
the stronger Canadian dollar, reflecting slowness in the trucking line of
business as fleet operators have been reducing their cross border operations
due to the slowing of the U.S. economy. Motorcycle premiums in Canada were
$56.5 million, an increase of 18% for the first six months of 2008 compared to
the same period last year. This reflects consumers movement to more fuel
efficient vehicles. For the quarter, U.S. operations represented 59% of gross
premiums compared with 68% a year ago, while Canadian operations represented
41% compared with 32% a year ago.
    "The return to overall profitability in the second quarter resulted from
consistent income from our investment portfolio, despite challenging market
conditions, and improving performance in our insurance operations, where we
have established more conservative reserving practices. We have moved
decisively to identify and remedy underperforming businesses in order to
stabilize and then improve the future performance of our insurance
operations," said Shaun Jackson, President and Chief Executive Officer.
"During the quarter, we made several executive changes to strengthen our
leadership team, to better align management responsibilities and to involve
the broader management group in developing the corporate strategy. Kingsway
will continue to focus on its core profitable business lines and will exit
non-core underperforming businesses, thus better positioning it to restore
profitability to acceptable levels while building a solid foundation for
future growth."
    On July 21, 2008, the Company repaid $89.8 million, which was the entire
amount outstanding under its three-year revolving credit facility, and also
repaid C$19.9 million of the C$69.8 million outstanding under the 365-day
credit agreement. Total bank debt has been reduced to $48.8 million from
$157.9 million and on a proforma basis the Company thus improved its senior
debt to total capital ratio to 25.5% from 31.2% prior to the payment.
    Mr. Jackson commented: "We have experienced a reduction in premium
volumes. As a result, this created a situation where we had significant
surplus capital which was not required for the Company's needs in the near
term. It is a sign of Kingsway's strength that it was able to utilize its
surplus capital to repay the majority of its short-term debt, reduce future
interest expense and significantly de-leverage its balance sheet."

    Six month results

    For the six months ended June 30, 2008, Kingsway reported a net loss of
$28.1 million ($0.51 per share diluted) compared with net income of
$61.4 million ($1.09 per share diluted) in the same period of 2007. Investment
income, excluding net realized gains, was $71.0 million, 9% above a year ago,
while operations recorded a loss of $30.0 million which compares with
operating income of $32.5 million in the same period of 2007. Gross premiums
written were $900.3 million, 10% lower than the comparable six month period of
2007.

    Dividend

    The Board of Directors has declared a quarterly dividend of C$0.075 per
common share, payable on September 30, 2008 to shareholders of record on
September 15, 2008.

    Conference Call and Webcast

    You are invited to participate in our quarterly results conference call
that will take place on August 7, 2008 at 8:30 a.m. EDT. To access please dial
1-800-732-0232 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=2321440

    About the Company

    Kingsway Financial Services Inc. "Kingsway" is one of the largest
non-standard automobile insurers and truck insurers in North America based on
A.M. Best data that we have compiled. Kingsway's primary business is the
insuring of automobile risks for drivers who do not meet the criteria for
coverage by standard automobile insurers and trucking insurance. The Company
currently operates through thirteen wholly-owned insurance subsidiaries in
Canada and the U.S. Canadian subsidiaries include Kingsway General Insurance
Company, York Fire & Casualty Insurance Company and Jevco Insurance Company.
U.S. subsidiaries include Universal Casualty Company, American Service
Insurance Company, Southern United Fire Insurance Company, Lincoln General
Insurance Company, U.S. Security Insurance Company, American Country Insurance
Company, Zephyr Insurance Company, Mendota Insurance Company, Mendakota
Insurance Company and Avalon Risk Management, Inc. 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"


    
    Financial Summary and Highlights:

    -------------------------------------------------------------------------
                       Quarter to June 30:          6 months to June 30:
    -------------------------------------------------------------------------
    (in millions
     of dollars
     except per
     share amounts)   2008      2007    Change      2008      2007    Change
    -------------------------------------------------------------------------
    Gross premiums
     written      $  443.2  $  525.2      (16%) $  900.3  $1,004.6      (10%)
    Underwriting
     loss            (29.3)     (3.7)     692%     (98.4)    (24.5)     302%
    Investment
     income           33.6      33.8       (1%)     71.0      65.4        9%
    Net realized
     gains            10.9      30.8      (65%)      5.5      39.9      (86%)
    Operating
     earnings (loss)  (0.4)     20.6     (102%)    (30.0)     32.5     (192%)
    Net income (loss)  6.3      41.7      (85%)    (28.1)     61.4     (146%)
    Diluted earnings
     (loss) per
     share            0.11      0.74      (85%)    (0.51)     1.09     (147%)
    Book value
     per share                                     15.49     17.77      (13%)
    Combined ratio  107.0%    100.8%      6.2%    111.5%    102.7%      8.8%
    -------------------------------------------------------------------------

    -   Gross premiums written decreased 16% to $443.2 million in the quarter
        compared to $525.2 million in Q2 last year, and for the first half of
        the year was $900.3 million compared to $1,004.6 million for the same
        period last year, primarily as a result of the impact of the soft
        market and termination of business at Lincoln General. Lincoln
        General's premium volume declined by $90.7 million in the quarter and
        $160.0 million year to date compared to the same periods last year.

    -   For the quarter the Company reported net income of $6.3 million
        compared to net income of $41.7 million in Q2 last year and a net
        loss of $28.1 million for the first half of the year compared to a
        net income of $61.4 million for the same period last year.

    -   For the quarter and year to date the Company reported operating
        losses of $0.4 million and $30.0 million, respectively, compared to
        operating income in Q2 of last year of $20.6 million and
        $32.5 million last year to date.

    -   Diluted earning per share was $0.11 for the quarter compared to
        earnings of $0.74 per share for Q2 last year and diluted loss per
        share of $0.51 for the first half of 2008 compared to diluted
        earnings per share of $1.09 for the same period last year.

    -   The combined ratio was 107.0% in the quarter compared to 100.8% same
        quarter last year, with Canadian operations reporting a combined
        ratio of 107.7% and U.S. operations a combined ratio of 106.7%.

    -   Estimated net unfavourable reserve development was $7.3 million in
        the quarter ($66.1 million for the year to date) which increased the
        combined ratio by 1.8% for the quarter (7.7% for the year to date).
        The impact of this development on an after tax basis was $0.14 per
        share for the quarter ($1.08 for the year to date).

    -   Investment income, excluding net realized gains dropped marginally by
        1% to $33.6 million compared to $33.8 million for the same quarter of
        2007. For the year to date investment income, excluding net realized
        gains, has increased by 9% to $71.0 million compared to $65.4 million
        for the corresponding period last year. Included in net realized
        gains were adjustments to the carrying values of securities for
        declines in market value considered other than temporary of
        $9.9 million ($18.8 million for the year to date) or $0.18 per share
        for the quarter ($0.34 per share for the year to date).

    -   The fair value of the securities portfolio per share decreased by 5%
        since the beginning of the year to $59.96.

    -   As at June 30, 2008 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 $2.7 million to the sub-prime mortgage market in the
        U.S. through home equity loan asset backed securities.
    



    Kingsway Financial Services Inc.
    Management's Discussion and Analysis
    For the three and six months ended June 30, 2008 and 2007
    (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 second quarter of fiscal 2008 and 2007; with the MD&A set
out on pages 12 to 57 in the Company's 2007 Annual Report, including the
section on risk factors; and with the notes to the interim consolidated
financial statements for the second quarter of fiscal 2008 and the notes to
the audited consolidated financial statements for fiscal 2007 set out on pages
68 to 85 of the Company's 2007 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 87 of the 2007 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'.

    
    Premiums

    -------------------------------------------------------------------------
    (in millions of
     dollars)          Quarter to June 30:          6 months to June 30:
    -------------------------------------------------------------------------
                      2008      2007    Change      2008      2007    Change
    -------------------------------------------------------------------------
    Gross premiums
     written
      Canada      $  179.9  $  169.5        6%  $  299.6  $  285.5        5%
      U.S.           263.3     355.7      (26%)    600.7     719.1      (16%)
    -------------------------------------------------------------------------
      Total       $  443.2  $  525.2      (16%) $  900.3  $1,004.6      (10%)

    Net premiums
     written
      Canada      $  174.1  $  162.7        7%  $  288.1  $  272.5        6%
      U.S.           234.0     326.7      (28%)    543.6     661.0      (18%)
    -------------------------------------------------------------------------
      Total       $  408.1  $  489.4      (17%) $  831.7  $  933.5      (11%)

    Net premiums
     earned
      Canada      $  136.2  $  133.2        2%  $  267.8  $  250.9        7%
      U.S.           280.1     340.8      (18%)    591.1     641.3       (8%)
    -------------------------------------------------------------------------
      Total       $  416.3  $  474.0      (12%) $  858.9  $  892.2       (4%)
    -------------------------------------------------------------------------
    

    The U.S. operations reported a decrease in premiums written of
$92.4 million (or 26%) during the quarter and $118.4 million (or 16%) year to
date. Lincoln General's premium volume declined by $90.7 million in the
quarter ($160.0 million year to date) compared to the same period last year
due to the impact of terminations of unprofitable programs and the soft market
conditions for the trucking business in the U.S.
    As a result of the strengthening Canadian dollar, gross premiums written
for the Canadian operations increased 6% in the quarter (5% year to date)
compared to last year. In Canadian dollars, gross premiums written from
Canadian operations declined by 2% for the quarter (declined 6% year to date)
compared to last year. Canadian operations experienced a decline of 26% in
gross premiums written in the trucking line of business as fleet operators
have been reducing their cross-border operations due to the slowing North
American economy.
    U.S. operations represented 59% of gross premiums written in the quarter
(67% year to date) compared with 68% in the same quarter (72% year to date
last year) last year. Non-standard automobile, trucking, and commercial
automobile premiums represented 39%, 16% and 16%, respectively, of gross
premiums written for the quarter compared with 31%, 22% and 18% last year.
Mendota writes primarily non-standard automobile insurance which primarily
accounts for the increase in the percentage of non-standard automobile for the
year to date.

    
    Investment Income

    -------------------------------------------------------------------------
                       Quarter to June 30:          6 months to June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)         2008      2007    Change      2008      2007    Change
    -------------------------------------------------------------------------

    Investment
     income       $   33.6  $   33.8       (1%) $   71.0  $   65.4        9%

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

    Investment income has decreased by 1% in the quarter primarily due to
lower short-tem yields in Canada and the U.S., partially offset by the impact
of the stronger Canadian dollar which increases the investment income from
Canadian operations reported in U.S. dollars. Investment income has increased
by 9% for the six months to June 30 as a result of the higher short term
yields in the first quarter of 2008 compared to the first quarter of 2007. The
cost based yield on the fixed income portfolio decreased to 4.5% compared to
4.7% for the same quarter last year, primarily attributable to the drop in
short-term yields described above. 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.

    Net Realized Gains

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

    
    -------------------------------------------------------------------------
                       Quarter to June 30:          6 months to June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)         2008      2007    Change      2008      2007    Change
    -------------------------------------------------------------------------
      Fixed
       income     $    2.0  $   (1.8)    (211%) $    4.9  $   (1.6)    (406%)
      Equities        18.8      34.4      (45%)     19.4      42.0      (54%)
      Capital
       assets            -         -         -         -       5.4     (100%)
      Impairments     (9.9)     (1.8)     450%     (18.8)     (5.9)     219%
    -------------------------------------------------------------------------
      Total       $   10.9  $   30.8      (65%) $    5.5  $   39.9      (86%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the three months ended June 30, 2008, 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 gain of $10.9 million
($5.5 million for year to date) compared to a net realized gain of
$30.8 million for the three months ended June 30, 2007 ($39.9 million for year
to date). The challenging fixed income and equity markets which began in the
third quarter of 2007 have continued into 2008 resulting in the write-down of
$9.9 million of securities in the second quarter of 2008 ($18.8 million for
year to date) compared to $1.8 million in the second quarter of 2007
($5.9 million for year to date). The net realized gain in the first half of
2007 included a $5.4 million gain on the sale of the Company's former head
office building and a gain of $17.7 million on an investment in the Canadian
portfolio which was the subject of a completed takeover.

    
    Underwriting Results

    -------------------------------------------------------------------------
                       Quarter to June 30:          6 months to June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)         2008      2007    Change      2008      2007    Change
    -------------------------------------------------------------------------
    Underwriting profit
     (loss)
      Canada      $  (10.5) $    5.5     (291%) $  (27.1) $   11.4     (338%)
      U.S.           (18.8)     (9.2)    (104%)    (71.3)    (35.9)     (99%)
                  -----------------------------------------------------------
      Total       $  (29.3) $   (3.7)     692%  $  (98.4) $  (24.5)     302%
                  -----------------------------------------------------------
                  -----------------------------------------------------------
    Combined ratio
      Canada        107.7%     95.9%     11.8%    110.1%     95.4%     14.7%
      U.S.          106.7%    102.7%      4.0%    112.0%    105.6%      6.4%
                  -----------------------------------------------------------
      Total         107.0%    100.8%      6.2%    111.5%    102.7%      8.8%
                  -----------------------------------------------------------
                  -----------------------------------------------------------
    Expense ratio
      Canada         34.9%     34.6%      0.3%     36.4%     35.2%      1.2%
      U.S.           34.0%     30.2%      3.8%     31.7%     28.7%      3.0%
                  -----------------------------------------------------------
      Total          34.3%     31.5%      2.8%     33.2%     30.4%      2.8%
                  -----------------------------------------------------------
                  -----------------------------------------------------------
    Loss ratio
      Canada         72.8%     61.3%     11.5%     73.7%     60.2%     13.5%
      U.S.           72.7%     72.5%      0.2%     80.3%     76.9%      3.4%
                  -----------------------------------------------------------
      Total          72.7%     69.3%      3.4%     78.3%     72.3%      6.0%
                  -----------------------------------------------------------
                  -----------------------------------------------------------

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

    The Canadian operations experienced estimated net unfavourable reserve
development of $4.6 million ($15.3 million year to date) or 3.4% to the
Canadian operations combined ratio for the quarter (5.7% year to date)
compared to favourable reserve development of $12.1 million for the second
quarter last year ($17.6 million year to date). The loss ratio in the quarter
was 72.8% (73.7% year to date) compared to 61.3% in Q2 (60.2% year to date)
2007.
    The U.S. operations experienced estimated unfavourable reserve
development of $2.7 million for the quarter ($50.9 million for the year to
date) compared with $10.7 in the same quarter ($55.4 million year to date)
last year. Lincoln General accounts for $6.7 million for the quarter
($59.6 million year to date) or $0.13 per share for the quarter ($1.00 per
share year to date) of this reserve development. Lincoln has been actively
terminating and repricing underperforming business as previously indicated.
Combined ratio was 160.3% for the quarter on Lincoln's terminated (run-off)
programs including unfavourable development (or 137.4% excluding unfavourable
development), compared with 99.4% on active programs (or 98.9% excluding
unfavourable development) for the quarter. The earned premium on Lincoln's
active programs was $116.7 million and $26.9 million on the terminated
programs in the second quarter of 2008.

    
                                Quarter to June 30:     6 months to June 30:
    -------------------------------------------------------------------------
    (in millions of dollars)        2008        2007        2008        2007
    -------------------------------------------------------------------------
    Favourable (unfavourable)
     change in estimated
     unpaid claims for prior
     accident years (note 1):
      Canada                  $     (4.6) $     12.1  $    (15.3) $     17.6
      U.S.                          (2.7)      (10.7)      (50.8)      (55.4)
                              -----------------------------------------------
      Total                   $     (7.3) $      1.4  $    (66.1) $    (37.8)
                              -----------------------------------------------
    As a % of net premiums
     earned (note 2):
      Canada                        3.4%       (9.1%)       5.7%       (7.0%)
      U.S.                          1.0%        3.1%        8.6%        8.6%
                              -----------------------------------------------
      Total                         1.8%       (0.3%)       7.7%        4.2%
                              -----------------------------------------------
    As a % of unpaid claims
     (note 3):
      Canada                                                1.7%       (2.2%)
      U.S.                                                  3.8%        4.9%
                                                      -----------------------
      Total                                                 2.9%        1.9%
                                                      -----------------------

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

    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 acquisition of
Mendota and the increased operating costs of the U.S. assigned risk business.
Higher operating costs and depreciation expense of the new Head Office
building in Canada also impacted the expenses. The general expense ratio
increased to 15.3% (15.1% year to date) compared to 11.8% (12.1% year to date
2007) in Q2 2007 primarily due to lower premium volume at Lincoln General.

    Interest Expense

    Interest expense in the second quarter of 2008 decreased to $8.9 million,
compared to $9.7 million for the second quarter of 2007 as a result of the
repayment of a portion of our debt. On a year to date basis, interest expense
was $18.8 million compared to $17.9 million last year as a result of the
issuance of the C$100 million 6% debentures on July 10, 2007. As a result of
the repayment of $109.7 million of bank indebtedness, it is anticipated that
interest expense will decrease for the remaining six months of 2008.

    Income Taxes

    Income taxes recovery for the second quarter was $1.0 million
($15.4 million year to date) as a result of losses recognized in the U.S.
domiciled subsidiaries and the fully taxable status of the Canadian
subsidiaries. This compares with a tax charge of $8.5 million or 17% for the
same quarter last year (recovery of $0.3 million for the first half of last
year)

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

    Net income decreased by 85% in the second quarter to $6.3 million
(decreased 146% to a loss of $28.1 million year to date), compared to income
of $41.7 million in the second quarter of last year ($61.4 million year to
date 2007). Diluted earnings per share was $0.11 for the quarter (diluted loss
per share of $0.51 year to date), compared to diluted earnings per share of
$0.74 for the second quarter of 2007 ($1.09 year to date 2007).

    Operating Earnings

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

    
    -------------------------------------------------------------------------
                       Quarter to June 30:          6 months to June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars except
     per share
     amounts          2008      2007    Change      2008      2007    Change
    -------------------------------------------------------------------------
    Net income
     (loss)       $    6.3  $   41.7      (85%) $  (28.1) $   61.4     (146%)
    Net realized
     gains after
     tax:
      Net realized
       gains before
       tax            10.9      30.8      (65%)      5.5      39.9      (86%)
      Tax effect on
       realized
       gains           4.2       9.7      (57%)      3.6      11.0      (67%)
    -------------------------------------------------------------------------
                       6.7      21.1      (68%)      1.9      28.9      (93%)
    -------------------------------------------------------------------------
    Operating
     earnings
     (losses)         (0.4)     20.6     (102%)    (30.0)     32.5     (192%)
    Average
     outstanding
     shares diluted
     (in millions)    55.2      56.0       (1%)     55.4      56.2       (1%)
    Operating
     earnings
     (losses)
     per share       (0.01)     0.37     (103%)    (0.54)     0.58     (193%)

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

    Balance Sheet

    The table below shows a review of selected categories from the balance
sheet reported in the financial statements at the end of Q2 2008 compared to
December 31, 2007.

    -------------------------------------------------------------------------
                                                         As at
    -------------------------------------------------------------------------
    (in millions of dollars                 June 30, December 31,     Change
     except per share amounts)                 2008         2007
    -------------------------------------------------------------------------
    Assets
      Securities                         $  3,015.7   $  3,256.4         (7%)
      Accounts receivable and other
       assets                                 358.1        365.4         (2%)
      Income taxes recoverable                 14.4          1.3      1,008%
      Future income taxes                     131.5        114.1         15%
      Capital assets                          128.2        133.4         (4%)
      Goodwill and intangible assets          113.9        116.8         (2%)

    Liabilities
      Bank indebtedness                       157.9        172.4         (8%)
      Unearned premiums                       719.1        758.5         (5%)
      Unpaid claims                         2,228.5      2,267.1         (2%)
      Senior unsecured debentures             200.8        220.1         (9%)

    Shareholders' Equity                      854.4        940.8         (9%)
      Book value per share                    15.49        16.95         (9%)
    -------------------------------------------------------------------------
    

    Securities:
    The fair value of the securities portfolio including cash decreased 6% to
$3.3 billion, compared to $3.5 billion as at December 31, 2007. This decrease
is primarily due to the decrease in unrealized gains on the fixed income
portfolio as yield spreads on corporate fixed income holdings have increased.
Also contributing to the drop in the securities portfolio is the net use of
cash as the Company elected to reduce its borrowings as well as the impact of
a slightly weaker Canadian dollar at the balance sheet date on the conversion
of the Canadian dollar portfolio to U.S. dollars.
    The fair value of the securities portfolio including cash decreased 5% to
$59.96 per common share at June 30, 2008 compared to $63.22 at December 31,
2007.
    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                  37.0%       13.0%       21.5%
    Due in one through five years              33.4        55.3        47.6
    Due in five through ten years              25.7        23.5        24.2
    Due after ten years                         3.9         8.2         6.7
    -------------------------------------------------------------------------
    Total                                     100.0%      100.0%      100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    There were net unrealized losses of $11.8 million on the total securities
portfolio or $0.21 per share outstanding at June 30, 2008 which is included as
a component of "accumulated other comprehensive income", as compared to net
unrealized gains of $34.6 million or $0.62 per share outstanding at
December 31, 2007. Net unrealized losses on the common share portfolio were
$15.3 million or $0.28 per share outstanding at June 30, 2008 compared to net
unrealized gains of $16.0 million or $0.29 per share outstanding at
December 31, 2007.
    For a quantitative analysis of the impact to the fair value to the fixed
income portfolio of a change in interest rates see Note 6 to the financial
statements.
    As at June 30, 2008 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 $2.7 million to the sub-prime mortgage market in the U.S.
through home equity loan asset backed securities. As at June 30, 2008, these
securities had an aggregate net unrealized loss of $0.4 million.
    For a quantitative analysis of the credit exposure of the Company from
its securities in fixed income securities and term deposits by rating as
assigned by S&P or Moody's Investor Services see Note 6 to the financial
statements.

    Accounts receivable and other assets:
    Accounts receivable and other assets decreased by 2% to $358.1 million,
primarily as a result of the settlement of reinsurance receivables.

    Income taxes recoverable:
    Income taxes recoverable increased as a result of the recording of the
Canadian operations tax loss carry back in 2008.

    Future income taxes:
    Future income taxes increased due to tax losses recognized by the U.S.
operations which can be utilized in future periods up to twenty years.

    Capital assets:
    Capital assets decreased by 4% since the end of last year.

    Goodwill and intangible assets:
    Goodwill and intangible assets decreased by 2% since the end of last year
due to the amortization of definite life intangible assets in certain of our
U.S. subsidiaries.

    Bank indebtedness:
    Bank indebtedness decreased from $172.4 million at December 31, 2007 to
$157.9 million. During the first half of the year the Company repaid
approximately $12.5 million of outstanding debt under its credit facilities.
    Subsequent to quarter end, the Company repaid $109.7 million of bank
indebtedness utilizing the surplus capital resources held in its reinsurance
subsidiaries.
    Bank indebtedness is subject to compliance with financial covenants and
other provisions of the credit agreement. For the remaining $48.8 million of
bank indebtedness due December 20, 2008, the Company has obtained a waiver to
September 30, 2008 from lender over non-compliance with certain covenants. The
Company is in the process of renegotiating the terms and covenants of the bank
indebtedness.

    Unearned premiums:
    Unearned premiums decreased 5% since December 31, 2007 as a result of
decreased premium volume.

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

    
    -------------------------------------------------------------------------
    (in millions of dollars)
    -------------------------------------------------------------------------
                                                        June 30, December 31,
    Line of Business                                       2008         2007
    -------------------------------------------------------------------------
    Non - Standard Automobile                        $    561.0   $    575.2
    Standard Automobile                                   140.5        144.5
    Commercial Automobile                                 235.3        239.2
    Trucking                                              790.2        811.6
    Motorcycle                                            134.3        126.8
    Property & Liability                                  296.1        303.3
    Other                                                  71.1         66.5
    -------------------------------------------------------------------------
    Total                                            $  2,228.5   $  2,267.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The provisions for unpaid claims decreased by 2% to $2.23 billion at the
end of the second quarter compared to $2.27 billion at the end of 2007. At
June 30, 2008 the provision for unpaid claims comprised case reserves for
individual claims was unchanged from $1.31 billion ($1.31 billion at
December 31, 2007) and a provision for Incurred But Not Reported (IBNR) claims
which decreased 4% to $918.6 million ($952.8 million at December 31, 2007).
IBNR at Lincoln General now represents $1.01 for every $1 of case reserves
recorded.

    Senior unsecured debentures:

    On July 10, 2007 the Company through its newly formed wholly-owned
subsidiary Kingsway 2007 General Partnership issued C$100 million 6% senior
unsecured debentures with a maturity date of July 11, 2012.

    Book value per share:
    Book value per share decreased by 9% to $15.49 at June 30, 2008 from
$16.95 at December 31, 2007 as a result of the diluted loss per share of $0.51
and the decline of $0.84 in the "accumulated other comprehensive income"
component of shareholders' equity.

    Contractual Obligations

    Information concerning contractual obligations as at June 30, 2008 is
shown in Note 6 of the financial statements. For further details on the
Company's long term debt and interest obligations, refer to Note 10 - Bank
Indebtedness of the accompanying financial statements and Note 15 of the
Company's 2007 audited consolidated financial statements and pages 39 to 43 of
the 2007 Annual Report which sets out the Company's contractual obligations as
at December 31, 2007.

    Liquidity and Capital Resources

    During the three and six months ended June 30, 2008, the cash used in
operating activities was $14.5 million and $78.7 million respectively, as a
result of reduced premium volume and an acceleration of claims payments. The
Company believes that the cash generated from the operating activities will be
sufficient to meet its ongoing cash requirements, including interest payment
obligations and dividend payments.
    During the six months ended June 30, 2008, the Company repurchased
368,200 common shares under the normal course issuer bid for a total purchase
price of $4.4 million at an average price of $11.87 (Cdn $11.93).
    As at June 30, 2008 the Company's subsidiaries were adequately
capitalized to support their premium volume. For a more detailed discussion of
the capital adequacy of the Companies insurance and reinsurance subsidiaries
see Note 7 to the financial statements.

    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 15(d) of the 2007 audited
consolidated financial statements and page 42 of the 2007 Annual Report. The
Company has one other off-balance sheet financing arrangement as described on
page 43 of the 2007 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. While the Company has begun assessing
the adoption of IFRS for 2011, the financial reporting impact of the
transition to IFRS cannot be reasonably estimated at this time.

    Summary of Quarterly Results

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

    
    -------------------------------------------------------------------------
                2008            2007                            2006
    -------------------------------------------------------------------------
    (in
     millions
     of
     dollars
     except
     per
     share)       Q2      Q1      Q4      Q3      Q2      Q1      Q4      Q3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Gross
     premiums
     written  $443.2  $457.1  $449.0  $509.1  $525.2  $479.4  $409.1  $483.9
    Net
     premiums
     earned    416.3   442.6   464.5   485.3   474.0   418.2   425.0   458.3
    Total
     revenue   460.8   474.5   510.1   528.1   538.6   458.9   466.6   498.2
    Net
     income
     (loss)      6.3   (34.4) (103.5)   23.6    41.7    19.6    16.8    37.4
    -------------------------------------------------------------------------

    Earnings (loss) per share

    Basic       0.11   (0.62)  (1.86)   0.43    0.75    0.35    0.30    0.67
    Diluted     0.11   (0.62)  (1.84)   0.42    0.74    0.35    0.30    0.66
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary Financial Information

    Financial Strength Indicators:

    Some of the key indicators of the Company's financial strength are as
    follows:

                                                        June 30, December 31,
                                                           2008         2007
                                           ----------------------------------
      Rolling four quarter calculations:

        Net premiums written to estimated
         statutory surplus ratio                           1.6x         1.6x

        Interest coverage ratio                            n/a          0.9x

      Total bank and senior debt to
       capitalization ratio(*)                            31.2%        31.0%

    (*) The Company's repayment of $109.7 million of bank indebtedness
        subsequent to the balance sheet date has reduced this ratio to
        approximately 25.5%.

    Selected Financial Information expressed in Cdn. dollars, except for per
    share amounts

    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.

    -------------------------------------------------------------------------
    (in millions of dollars      Quarter to June 30:    6 months to June 30:
     except per share amount)       2008        2007        2008        2007
    -------------------------------------------------------------------------
    Gross premiums written    $    447.5  $    576.6  $    906.5  $  1,138.1
    Net premiums earned            420.3       520.4       864.8     1,010.4
    Net income                       6.1        45.3       (28.3)       68.3
    Earnings per share
     - diluted                      0.11        0.81       (0.51)       1.22
    Underwriting profit (loss)     (29.7)       (4.2)      (98.9)      (28.4)
    Book value per share                                   15.80       18.93
    -------------------------------------------------------------------------
    

    Outlook

    The Company's 2007 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. 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 2007
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.


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


    -------------------------------------------------------------------------
    (Unaudited)                  Quarter to June 30:    6 months to June 30:
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Gross premiums written    $  443,234  $  525,245  $  900,334  $1,004,599
    -------------------------------------------------------------------------
    Net premiums written      $  408,066  $  489,356  $  831,672  $  933,477
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned     $  416,249  $  474,042  $  858,864  $  892,231
      Investment income           33,599      33,815      70,976      65,371
      Net realized gains          10,946      30,754       5,469      39,870
    -------------------------------------------------------------------------
                                 460,794     538,611     935,309     997,472
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred         $  302,741  $  328,652  $  672,169  $  644,706
      Commissions and
       premiums taxes             78,887      92,978     155,747     164,142
      General and
       administrative expenses    63,900      56,162     129,315     107,841
      Interest expense             8,872       9,731      18,788      17,950
      Amortization of
       intangibles                 1,059         876       2,770       1,752
    -------------------------------------------------------------------------
                                 455,459     488,399     978,789     936,391
    -------------------------------------------------------------------------
    Income (loss) before
     income taxes                  5,335      50,212     (43,480)     61,081
    Income taxes (recovery)         (986)      8,496     (15,402)       (276)
    -------------------------------------------------------------------------
    Net income (loss)         $    6,321  $   41,716  $  (28,078) $   61,357
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings (loss)
     per share:
      Basic:                  $     0.11  $     0.75  $    (0.51) $     1.10
      Diluted:                $     0.11  $     0.74  $    (0.51) $     1.09
    Weighted average shares
     outstanding (in '000s):
      Basic:                      55,159      55,620      55,284      55,709
      Diluted:                    55,231      56,016      55,357      56,193
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                                        June 30  December 31
                                                           2008         2007
                                                     (unaudited)
    -------------------------------------------------------------------------
    ASSETS
      Cash and cash equivalents                      $  188,548   $  161,635
      Securities                                      3,015,745    3,256,365
      Accrued investment income                          28,387       33,186
      Financed premiums                                 102,900       91,851
      Accounts receivable and other assets              358,062      365,410
      Due from reinsurers and other insurers            202,799      207,137
      Deferred policy acquisition costs                 166,202      176,202
      Income taxes recoverable                           14,421        1,348
      Future income taxes                               131,533      114,066
      Capital assets                                    128,225      133,431
      Goodwill and intangible assets                    113,934      116,774
    -------------------------------------------------------------------------
                                                     $4,450,756   $4,657,405
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES
      Bank indebtedness                              $  157,918   $  172,436
      Loans payable                                      66,222       66,222
      Accounts payable and accrued liabilities          136,481      144,940
      Unearned premiums                                 719,072      758,490
      Unpaid claims                                   2,228,469    2,267,082
      Senior unsecured debentures                       200,785      220,080
      Subordinated indebtedness                          87,368       87,354
    -------------------------------------------------------------------------
                                                      3,596,315    3,716,604
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
      Share capital                                     323,102      326,151
        Issued and outstanding number of
         common shares
          55,158,528 - June 30, 2008
          55,515,728 - December 31, 2007
      Contributed surplus                                 8,287        7,619
      Retained earnings                                 483,598      521,165
      Accumulated other comprehensive income             39,454       85,866
    -------------------------------------------------------------------------
                                                        854,441      940,801
    -------------------------------------------------------------------------
                                                     $4,450,756   $4,657,405
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                 Quarter to June 30:    6 months to June 30:
    (Unaudited)                     2008        2007        2008        2007
    -------------------------------------------------------------------------
    Share capital
    Balance at beginning
     of period                $  323,530  $  326,430  $  326,151  $  328,473
    Issued during the period           -         769          48       1,047
    Repurchased for
     cancellation                   (428)          -      (3,097)     (2,321)
    -------------------------------------------------------------------------
    Balance at end of period     323,102     327,199     323,102     327,199
    -------------------------------------------------------------------------
    Contributed surplus
    Balance at beginning
     of period                $    7,647  $    5,571  $    7,619  $    5,352
    Stock option expense             640         573         668         792
    -------------------------------------------------------------------------
    Balance at end of period       8,287       6,144       8,287       6,144
    -------------------------------------------------------------------------
    Retained earnings
    Balance at beginning
     of period                $  481,506  $  572,452  $  521,165  $  560,126
    Net income (loss) for
     the period                    6,321      41,716     (28,078)     61,357
    Common share dividends        (4,069)     (3,917)     (8,208)     (7,491)
    Repurchase of shares for
     cancellation                   (160)          -      (1,281)     (3,741)
    -------------------------------------------------------------------------
    Balance at end of period     483,598     610,251     483,598     610,251
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive income
    Balance at beginning of
     period                   $   81,265  $   35,048  $   85,866  $    7,011
    Cumulative effect of
     adopting new accounting
     policies                          -           -           -      17,672
    Other comprehensive
     income (loss)               (41,811)      9,827     (46,412)     20,192
    -------------------------------------------------------------------------
    Balance at end of period      39,454      44,875      39,454      44,875
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total shareholders'
     equity at end of period  $  854,441  $  988,469  $  854,441  $  988,469
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
    (In thousands of U.S. dollars)

    -------------------------------------------------------------------------
                                 Quarter to June 30:    6 months to June 30:
    -------------------------------------------------------------------------
    (Unaudited)                     2008        2007        2008        2007
    -------------------------------------------------------------------------
    Comprehensive income
    Net income (loss)         $    6,321  $   41,716  $  (28,078) $   61,357
    Other comprehensive
     income, net of taxes:
      - Change in unrealized
         gains (losses) on
         available-for securities:
          Unrealized gains
           arising during the
           period, net of
           income taxes(1)       (44,433)     (7,865)    (31,962)    (3,907)
          Recognition of
           realized gains
           to net income,
           net of income
           taxes(2)               (1,399)    (12,364)     (4,265)     (9,251)
      - Unrealized gains
         (losses) on
         translating financial
         statement of
         self-sustaining
         foreign operations        4,021      30,056     (10,185)     33,350
    -------------------------------------------------------------------------
    Other comprehensive
     income (loss)               (41,811)      9,827     (46,412)     20,192
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Comprehensive income      $  (35,490) $   51,543  $  (74,490) $   81,549
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Net of income tax of $(6,281) for the quarter to June 30,
        2008($(6,995) for Year to date) and $(3,103) for the quarter to
        June 30, 2007 ($1,093) for year to date).
    (2) Net of income tax of $(1,219) for the quarter to June 30, 2008
        ($(2,724) for year to date) and $(6,398) for the quarter to June 30,
        2007 ($(3,722) for year to date).



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

    -------------------------------------------------------------------------
                                 Quarter to June 30:    6 months to June 30:
    -------------------------------------------------------------------------
    (Unaudited)                     2008        2007        2008        2007
    -------------------------------------------------------------------------
    Cash flows from operating
     activities
    Net income                $    6,321  $  41,716   $  (28,078) $   61,357
    Items not affecting cash:
      Amortization                 6,308      3,533       11,239       6,432
      Future and current
       income taxes                 (949)     2,332       (7,149)    (14,759)
      Net realized gains         (10,946)   (30,754)      (5,469)    (39,870)
      Amortization of bond
       premiums and discounts     (1,562)    (1,417)      (4,032)     (3,412)
      Net change in other
       non-cash balances         (13,647)    67,009      (45,189)     44,572
    -------------------------------------------------------------------------
                                 (14,475)    82,419      (78,678)     54,320
    -------------------------------------------------------------------------
    Cash flows from financing
     activities
    Increase in share capital          -         769          48       1,047
    Repurchase of common
     shares for cancellation        (588)          -      (4,378)     (6,062)
    Dividends paid                (4,069)     (3,917)     (8,208)     (7,491)
    Increase (decrease) in
     bank indebtedness and
     loans payable                (4,628)         (7)    (15,283)    106,944
    Decrease in senior
     unsecured indebtedness         (228)          -     (17,517)          -
    -------------------------------------------------------------------------
                                  (9,513)     (3,155)    (45,338)     94,438
    -------------------------------------------------------------------------
    Investing activities
    Purchase of securities      (872,409) (1,199,988) (1,592,080) (2,190,614)
    Proceeds from sale of
     securities                  958,539   1,130,102   1,759,812   2,101,411
    Financed premiums
     receivable, net             (16,409)    (10,896)    (13,253)     (7,595)
    Acquisitions, net of cash
     acquired                          -     (26,823)       (212)    (40,683)
    Net change to capital
     assets                       (1,864)    (14,752)     (3,338)    (14,827)
    -------------------------------------------------------------------------
                                  67,857    (122,357)    150,929    (152,308)
    -------------------------------------------------------------------------
    Net change in cash and
     cash equivalents             43,869     (43,093)     26,913      (3,550)
    Cash and cash equivalents
     at beginning of period      144,679     169,249     161,635     129,706
    -------------------------------------------------------------------------
    Cash and cash equivalents
     at end of period         $  188,548  $  126,156  $  188,548  $  126,156
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    KINGSWAY FINANCIAL SERVICES INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    For the three and six months ended June 30, 2008 and 2007
    (Unaudited - tabular amounts in thousands of U.S. dollars)

    NOTE 1  Basis of Presentation

    These interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles using the
same accounting policies as were used for the Company's consolidated financial
statements for the year ended December 31, 2007 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, 2007 as set out on pages 63 to 85 of the Company's 2007 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

    On January 1, 2008, the Company adopted CICA Handbook Section 1535
Accounting Changes - Capital Disclosures, Section 3862 Financial Instruments -
Disclosures and Section 3863 Financial Instruments - Presentation.

    Handbook Section 1535 requires the following disclosures: (i) qualitative
information about an entity's objectives, policies and processes for managing
capital; (ii) quantitative data about what the entity manages as capital;
(iii) whether the entity has complied with any externally imposed capital
requirements; and (iv) if it has not complied, the consequences of such non-
compliance. See Note 7 for additional details.

    Handbook Sections 3862 and 3863 replace Handbook Section 3861, Financial
Instruments - Disclosure and Presentation, revising and enhancing its
disclosure requirements but not changing the existing presentation
requirements for financial instruments. These new sections place increased
emphasis on disclosures about the nature and extent of risks arising from
financial instruments and how the entity manages those risks. Handbook Section
3862 requires qualitative and quantitative disclosure of: (i) exposures to
risks arising from financial instruments, how they arose and the potential
impact on the amount, timing and certainty of future cash flows; (ii)
information about the risk management function and the reporting and
measurement systems used; (iii) the entity's policies for hedging or
mitigating risk and avoiding concentrations of risk; and (iv) the sensitivity
to individual market risk factors together with the methodology for performing
the analysis. Handbook Section 3863 deals with the classification of financial
instruments, from the perspective of the issuer, between liabilities and
equity, the classification of related interest, dividends, losses and gains,
and the circumstances in which financial assets and financial liabilities are
offset. See Note 6 for additional details.

    NOTE 3  Stock-based Compensation

    As reported on pages 74 - 75 of the Company's 2007 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. During the second quarter 2008, the
Company recorded $640,000 ($668,000 year to date) of stock-based compensation
expense included in employee compensation expense.

    Per share weighted average fair value of options granted during 2008 was
C$2.88 in February and C$2.43 in May. Per share weighted average fair value of
options granted during 2007 was C$5.34 February and C$2.38 in December. 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 June 30:
    -------------------------------------------------------------------------
                                                            2008        2007
    -------------------------------------------------------------------------
    Risk-free interest rate                                 3.22%       4.11%
    Dividend yield                                          2.23%       1.30%
    Volatility of the expected market price of the
     Company's common shares                                27.8%       25.2%
    Expected option life (in years)                          4.0         3.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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 4  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.

    
    -------------------------------------------------------------------------
                                     Three months ended June 30, 2008
    -------------------------------------------------------------------------
                                              United   Corporate
                                  Canada      States   and other       Total
    -------------------------------------------------------------------------
    Gross premiums written    $  179,878  $  263,356  $        -  $  443,234
    Net premiums earned          136,242     280,007           -     416,249
    Investment income (loss)      13,880      19,925        (206)     33,599
    Net realized gains            10,455         491           -      10,946
    Interest expense                   -       8,002         870       8,872
    Amortization of capital
     assets                          536       2,052       1,396       3,984
    Amortization of
     intangible assets                 -       1,059           -       1,059
    Net income tax expense
     (recovery)                   (2,134)     (3,719)      4,867        (986)
    Net income (loss)             15,789      (3,717)     (5,751)      6,321

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


    -------------------------------------------------------------------------
                                     Three months ended June 30, 2007
    -------------------------------------------------------------------------
                                              United   Corporate
                                  Canada      States   and other       Total
    -------------------------------------------------------------------------
    Gross premiums written    $  169,494  $  355,751  $        -  $  525,245
    Net premiums earned          133,225     340,817           -     474,042
    Investment income (loss)      13,564      21,072        (821)     33,815
    Net realized gains            23,856       6,898           -      30,754
    Interest expense                   -       7,632       2,099       9,731
    Amortization of capital
     assets                          499       1,223         750       2,472
    Amortization of
     intangible assets                 -         876           -         876
    Net income tax expense
     (recovery)                    9,379      (5,957)      5,074       8,496
    Net income (loss)             32,251      16,164      (6,699)     41,716

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


    -------------------------------------------------------------------------
                                     Six months ended June 30, 2008
    -------------------------------------------------------------------------
                                              United   Corporate
                                  Canada      States   and other       Total
    -------------------------------------------------------------------------
    Gross premiums written    $  299,607  $  600,727  $        -  $  900,334
    Net premiums earned          267,808     591,056           -     858,864
    Investment income (loss)      28,794      42,925        (743)     70,976
    Net realized gains
     (losses)                      8,849      (3,380)          -       5,469
    Interest expense                   -      16,588       2,200       8,788
    Amortization of capital
     assets                        1,079       3,760       2,535       7,374
    Amortization of
     intangible assets                 -       2,770           -       2,770
    Net income tax expense
     (recovery)                   (9,101)    (13,265)      6,964     (15,402)
    Net income (loss)             11,586     (37,811)     (1,853)    (28,078)

    Capital assets            $   60,091  $   60,527  $    7,607  $  128,225
    Goodwill and intangible
     assets                        9,014     104,920           -     113,934
    Total assets               1,701,912   2,713,557      35,287   4,450,756
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                     Six months ended June 30, 2007
    -------------------------------------------------------------------------
                                              United   Corporate
                                  Canada      States   and other       Total
    -------------------------------------------------------------------------
    Gross premiums written    $  285,549  $  719,050  $        -  $1,004,599
    Net premiums earned          250,927     641,304           -     892,231
    Investment income (loss)      26,719      39,601        (949)     65,371
    Net realized gains            25,331      14,539           -      39,870
    Interest expense                   -      13,977       3,973      17,950
    Amortization of capital
     assets                          847       2,466       1,129       4,442
    Amortization of
     intangible assets                 -       1,752           -       1,752
    Net income tax expense
     (recovery)                   11,370     (19,611)      7,965        (276)
    Net income (loss)             48,018      22,140      (8,801)     61,357

    Capital assets            $   58,275  $   59,783  $   11,072  $  129,130
    Goodwill and intangible
     assets                        8,627     105,433           -     114,060
    Total assets               1,868,407   2,625,910      35,644   4,529,961
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    NOTE 5  Securities

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

    -------------------------------------------------------------------------
                                               June 30, 2008
    -------------------------------------------------------------------------
                                               Gross       Gross
                               Amortized  Unrealized  Unrealized
                                    cost       Gains      Losses  Fair Value
    -------------------------------------------------------------------------
    Term Deposits             $  334,262  $      801  $      602  $  334,461
    Bonds:
      Canadian   - Government    220,854       3,788         807     223,835
                 - Corporate     361,643       1,949       6,959     356,633
      U.S        - Government    107,344       2,256         408     109,192
                 - Corporate   1,464,379      19,507      16,811   1,467,075
      Other      - Government     11,981          12           -      11,993
                 - Corporate     145,317       3,756         424     148,649
    -------------------------------------------------------------------------
    Sub-total                $ 2,645,780  $   32,069  $   26,011  $2,651,838
    Common
     shares      - Canadian      196,165      14,327      15,412     195,080
                 - U.S           177,015       6,912      21,076     162,851
    Preferred
     shares      - Canadian        7,982           -       2,595       5,387
                 - U.S               635           -          46         589
    -------------------------------------------------------------------------
                              $3,027,577  $   53,308  $   65,140  $3,015,745
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                             December 31, 2007
    -------------------------------------------------------------------------
                                               Gross       Gross
                               Amortized  Unrealized  Unrealized
                                    cost       Gains      Losses  Fair Value
    -------------------------------------------------------------------------
    Term Deposits             $  393,788  $      836  $       69  $  394,555
    Bonds:
      Canadian   - Government    260,309       4,164         115     264,358
                 - Corporate     368,243       1,834       6,464     363,613
      U.S        - Government     90,305       2,270          13      92,562
                 - Corporate   1,461,177      23,153       8,657   1,475,673
    Other        - Government     15,492          -          106      15,386
                 - Corporate     204,876       4,381         812     208,445
    -------------------------------------------------------------------------
    Sub-total                $ 2,794,190  $   36,638  $   16,236  $2,814,592
    Common
     shares      - Canadian      224,086      25,624      12,786     236,924
                 - U.S           194,545      16,045      12,847     197,743
    Preferred
     shares      - Canadian        8,211           -       1,828       6,383
                 - U.S               780           -          57         723
    -------------------------------------------------------------------------
                              $3,221,812  $   78,307  $   43,754  $3,256,365
    -------------------------------------------------------------------------

    Fair values of term deposits, bonds and common and preferred shares are
considered to approximate quoted market values based on the latest bid prices.

    Net investment income for the quarter and period ended is comprised as
follows:

    -------------------------------------------------------------------------
                                Quarter to June 30:     6 months to June 30
    -------------------------------------------------------------------------
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Investment income
      Interest on short term
       securities             $    3,196  $    5,725  $    7,619  $   10,424
      Interest on Bonds           28,797      26,418      58,545      50,811
      Dividends                    1,676       2,958       4,512       6,185
      Premium Finance              1,668       1,180       3,264       2,284
      Other                           (3)       (483)        803        (354)
    -------------------------------------------------------------------------
    Gross Investment Income   $   35,334  $   35,798  $   74,743  $   69,350
    Investment Expenses            1,735       1,983       3,767       3,979
    -------------------------------------------------------------------------
    Net Investment Income     $   33,599  $   33,815  $   70,976  $   65,371
    -------------------------------------------------------------------------
    

    Net realized gains for the quarter ended June 30, 2008 were $10.9 million
($5.5 million for year to date) compared to net realized gains of $30.8
million for the quarter ended June 30, 2007 ($39.9 million for year to date).
Included in net realized gains were adjustments to the carrying values of
securities for declines in market value considered other than temporary of
$9.9 million for the quarter ended June 30, 2008 ($18.8 million for year to
date) compared to $1.8 million for the quarter ended June 30, 2007
($5.9 million for year to date).

    NOTE 6  Financial Instruments

    Risk Management

    The Company's risk management policies and practices are described on
pages 23, 47 and 72 to 73 of the Company's 2007 Annual Report. There has been
no significant change in the risk management framework.

    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.

    Credit risk:
    The Company remains exposed to credit risk principally through its
investment securities and balances receivable from policyholders and
reinsurers. The Company monitors concentration and credit quality risk through
policies to limit and monitor its exposure to individual issuers or related
groups (with the exception of U.S. and Canadian government bonds) as well as
through ongoing review of the credit ratings of issuers held in the securities
portfolio. The Company's credit exposure to any one individual policyholder is
not material. The Company has policies to evaluate the financial condition of
its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers
to minimize its exposure to significant losses from reinsurer's insolvency.

    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:

    
    -------------------------------------------------------------------------
                                   June 30, 2008         December 31, 2007
    -------------------------------------------------------------------------
    AAA/ Aaa                  $1,484,990     56.0 %   $1,516,064     53.9 %
    AA/Aa2                       509,555     19.2        661,891     23.5
    A/A2                         504,228     19.0        470,909     16.7
    BBB/Baa2                      95,668      3.6         96,076      3.4
    BB/Ba2                         6,265      0.2          8,081      0.3
    B/B2                          12,620      0.5         12,629      0.4
    CCC/Caa or lower               1,425      0.1          1,724      0.1
    Not rated                     37,087      1.4         47,218      1.7
    -------------------------------------------------------------------------
    Total consolidated        $2,651,838    100.0 %   $2,814,592    100.0 %
    -------------------------------------------------------------------------
    
    As at June 30, 2008, 94.2% of the fixed income portfolio is rated 'A' or
better. The 'not rated' category consists primarily of investments in money
market instruments.

    Market risk:
    Our primary market risk exposures continue to be the changes in interest
rates and equity prices. Because most of the securities portfolio is comprised
of fixed income securities that are usually held to maturity, periodic changes
in interest rate levels generally impact the financial results to the extent
that reinvestment yields are different than the original yields on maturing
securities. Also, during periods of rising interest rates, the market value of
the existing fixed income securities will generally decrease and realized
gains on fixed income securities will likely be reduced. The reverse is true
during periods of declining interest rates.

    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 $86.0 million at June 30, 2008, representing 3.2%
of the $2.7 billion fair value fixed income securities portfolio.

    Fluctuations in value of the equity securities due to changes in general
economic or stock market conditions affect the carrying value of these
securities and the level and timing of recognition of gains and losses on
securities held, causing changes in realized and unrealized gains and losses.

    We have a smaller exposure to changes in the U.S. to Canadian dollar
foreign currency exchange rate. We do 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.

    Liquidity risk:
    Liquidity risk is the risk of having insufficient cash resources to meet
current financial obligations without raising funds at unfavorable rates or
selling assets on a forced basis. Liquidity risk arises from the general
business activities and in the course of managing the assets and liabilities.
The purpose of liquidity management is to ensure that there is sufficient cash
to meet all financial commitments and obligations as they fall due. The
liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income and other returns
received on securities. Cash provided from these sources is used primarily for
claims and claim adjustment expense payments and operating expenses. The
timing and amount of catastrophe claims are inherently unpredictable and may
create increased liquidity requirements. To meet these cash requirements, the
Company has policies to limit and monitor its exposure to individual issuers
or related groups and to ensure that assets and liabilities are broadly
matched in terms of their duration and currency. The Company believes that it
has the flexibility to obtain, from internal sources, the funds needed to
fulfill the cash requirements, including the quarterly dividend, during the
current financial year and also to satisfy regulatory capital requirements.

    The following table summarizes carrying amounts of financial instruments
by contractual maturity or expected cash flow dates (the actual re pricing
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 June 30, 2008         One year      One to     Five to   More than
                                 or less  five years   ten years   ten years
    -------------------------------------------------------------------------
    Assets:
    Cash & cash equivalents   $  188,548  $        -  $        -  $        -
    Securities                   570,449   1,260,061     642,963     178,032
    Accrued Investment Income     28,387           -           -           -
    Finance Premiums             102,900           -           -           -
    Accounts receivable and
     other assets                358,062           -           -           -
    Due from reinsurers and
     other insurers               65,396     115,162      19,138       3,103

    Liabilities:
    Bank Indebtedness            157,918           -           -           -
    Loans payable                      -           -      66,222           -
    Accounts payable and
     accrued liabilities         136,481           -           -           -
    Unpaid claims                718,609   1,265,466     210,298      34,096
    Senior unsecured debentures        -      96,985     103,800           -
    Subordinated indebtedness          -           -           -      87,368
    -------------------------------------------------------------------------

    -------------------------------------------------
    As at June 30, 2008      No specific       Total
                                    date
    -------------------------------------------------
    Assets:
    Cash & cash equivalents   $        -  $  188,548
    Securities                   364,240   3,015,745
    Accrued Investment Income          -      28,387
    Finance Premiums                   -     102,900
    Accounts receivable and
     other assets                      -     358,062
    Due from reinsurers and
     other insurers                          202,799

    Liabilities:
    Bank Indebtedness                  -     157,918
    Loans payable                      -      66,222
    Accounts payable and
     accrued liabilities               -     136,481
    Unpaid claims                      -   2,228,469
    Senior unsecured debentures        -     200,785
    Subordinated indebtedness          -      87,368
    -------------------------------------------------


    -------------------------------------------------------------------------
    As at December 31, 2007     One year      One to     Five to   More than
                                 or less  five years   ten years   ten years
    -------------------------------------------------------------------------
    Assets:
    Cash & cash equivalents   $  161,635  $        -  $        -  $        -
    Securities                   714,339   1,242,667     720,464     137,122
    Accrued Investment Income     33,186           -           -           -
    Finance Premiums              91,851           -           -           -
    Accounts receivable and
     other assets                365,410           -           -           -
    Due from reinsurers and
     other insurers               (5,999)    181,135      27,676       4,325

    Liabilities:
    Bank Indebtedness            172,436           -           -           -
    Loans payable                      -           -      66,222           -
    Accounts payable and
     accrued liabilities         144,940           -           -           -
    Unpaid claims                735,534   1,284,106     213,264      34,178
    Senior unsecured debentures        -      99,680     120,400           -
    Subordinated indebtedness          -           -           -      87,354
    -------------------------------------------------------------------------

    -------------------------------------------------
    As at December 31, 2007   No specific       Total
                                    date
    -------------------------------------------------
    Assets:
    Cash & cash equivalents   $        -  $  161,635
    Securities                $  441,773   3,256,365
    Accrued Investment Income          -      33,186
    Finance Premiums                   -      91,851
    Accounts receivable and
     other assets                      -     365,410
    Due from reinsurers and
     other insurers                    -     207,137

    Liabilities:
    Bank Indebtedness                  -     172,436
    Loans payable                      -      66,222
    Accounts payable and
     accrued liabilities               -     144,940
    Unpaid claims                      -   2,267,082
    Senior unsecured debenture         -     220,080
    Subordinated indebtedness          -      87,354
    -------------------------------------------------
    

    Collateral pledged: As at June 30, 2008, bonds and term deposits with an
estimated fair value of $49.7 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 June 30, 2008, the amount of such pledged
securities was $85.1 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.

    On October 4, 2002 the Company entered into an annually renewable
syndicated $350 million letter of credit facility. The letter of credit
facility 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 June 30, 2008 the letter of credit facility utilization was
$273.2 million.

    Past due loans but not impaired: Past due loans are loans where repayment
of principal or payment of interest is contractually in arrears. There are no
such loans as at June 30, 2008.

    Fair value:
    Refer to Note 5 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 June 30, 2008 the discounted value of the unpaid claims was
$2,306.2 million ($2,159.3 million net of reinsurers' share 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:

                                                     June 30, 2008
    -------------------------------------------------------------------------
                                                          Total
                                         Total fair    carrying    Favorable
                                            value(*)      value (Unfavorable)
    -------------------------------------------------------------------------
    Loans Payable                        $   50,538  $   66,222   $   15,684
    Senior unsecured debentures             175,288     200,785       25,497
    Subordinated indebtedness                90,500      87,368       (3,132)
    -------------------------------------------------------------------------


                                                   December 31, 2007
    -------------------------------------------------------------------------
                                                          Total
                                         Total fair    carrying    Favorable
                                            value(*)      value (Unfavorable)
    -------------------------------------------------------------------------
    Loans Payable                        $   54,493  $   66,222   $   11,729
    Senior unsecured debentures             221,517     220,080       (1,437)
    Subordinated indebtedness                90,500      87,354       (3,146)
    -------------------------------------------------------------------------

    (*) 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 June 30, 2008 were
as follows:

    
    ($ in 000s)

    -------------------------------------------------------------------------
                                             Quoted Significant
                                          prices in       Other
                                             active  Observable   Significant
                                        markets for      Inputs  Unobservable
                                          identical                    Inputs
    Description                 June 30,     Assets
                                   2008    (Level 1)   (Level 2)    (Level 3)
    -------------------------------------------------------------------------
    Available for sale
     securities              $3,015,745  $  363,907  $2,651,838    $        -
    -------------------------------------------------------------------------
    

    NOTE 7  Capital Management

    The Company has a capital management process in place to measure, deploy
and monitor its available capital and assess its adequacy. The process is
aimed to achieve three major objectives: Meet regulatory requirements,
maintain strong credit rating and maximize returns to shareholders. Senior
executive management develops the capital strategy and oversees the capital
management processes of the Company. Capital is managed using both regulatory
capital measures and internal metrics.

    As at June 30, 2008 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 June 30, 2008
the MCT's of the Canadian subsidiaries are above the target MCT level, with
MCT margins ranging between 192% and 219% and aggregate available capital of
approximately $64.3 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 June 30, 2008, all the U.S. subsidiaries are above the
required RBC levels, with RBC ratios ranging between 249% and 1,437% and have
aggregate available capital of approximately $121.1 million in excess of
required capital.

    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 June 30, 2008 the capital
maintained by Kingsway Reinsurance Corporation was approximately
$224.1 million in excess of the regulatory requirements in Barbados and the
capital maintained by Kingsway Reinsurance (Bermuda) Limited was approximately
$55.6 million in excess of regulatory requirements.

    Subsequent to the balance sheet date, the Company repatriated funds from
the reinsurance subsidiaries for the primary purpose of repaying a significant
portion of bank indebtedness. As a result, the capital in excess of regulatory
requirements has been reduced to approximately $114.1 million and
$36.0 million in Barbados and Bermuda respectively.

    For additional details, refer to page 39 to 42 of the Company's 2007
Annual Report.

    NOTE 8  Hedges

    On July 10, 2007, a general partnership of the Company (Kingsway 2007
General Partnership) issued a five year C$100 million debt obligation due on
July 11, 2012 with fixed semi-annual C$3 million interest payments. Kingsway
2007 General Partnership's risk management objective is to lock in the cash
flow requirements on this debt obligation in U.S dollar terms which is the
currency in which its cash inflows are received, thus mitigating exposure to
variability in expected future cash flows. In order to meet this objective,
Kingsway 2007 General Partnership has entered into a cross-currency swap with
Bank of Nova Scotia to swap U.S. dollar cash flows into Canadian dollar cash
flows providing the Company with the required Canadian dollar funds each
semi-annual period and upon maturity to settle the senior debenture offering
interest payments.

    The swap transaction has been designated as a cash flow hedge. Any
changes in the fair value of hedging instrument are recorded in other
comprehensive income until the hedged item affects the Consolidated Statement
of Income. Hedge ineffectiveness is measured and recorded in the current
period in the Consolidated Statement of Income. The Company has recorded a nil
gain during the quarter ($0.1 million year to date) due to the ineffective
portion of the designated hedge. As at June 30, 2008, the time length of cash
flow hedge outstanding was less than five years. When the hedge is
discontinued, any cumulative adjustment to either the hedged item or other
comprehensive income will be recognized in income over the remaining term of
the original hedge, or when the hedged item is derecognized.

    NOTE 9  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 10 Bank Indebtedness

    Bank indebtedness decreased from $172.4 million at December 31, 2007 to
$157.9 million. During the first half of the year the Company repaid
approximately $12.5 million of outstanding debt under our credit facilities.

    Subsequent to quarter end, the Company repaid $109.7 million of bank
indebtedness utilizing the surplus capital resources held in its reinsurance
subsidiaries. Bank indebtedness is subject to compliance with financial
covenants and other provisions of the Credit Agreement. For the remaining
$48.8 million of bank indebtedness due December 20, 2008, the Company has
obtained a waiver to September 30, 2008 from lender over non- compliance with
certain covenants. The Company is in the process of renegotiating the terms
and covenants of the bank indebtedness.

    NOTE 11 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
June 30, 2008 and December 31, 2007, and for the period ended June 30, 2008
and 2007, 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 six months ended June 30, 2008

                                                                    Other
                           KFSI          KAI           K2007GP   Subsidiaries
    -------------------------------------------------------------------------
                                                                    (the
                           (a            (a            (the    "Non-Guarantor
                       "Guarantor")  "Guarantor")    "Issuer") subsidiaries")
    -------------------------------------------------------------------------

    Revenue:
      Net premiums
       earned          $         -   $         -   $         -   $   866,319
      Investment
       related income         (742)        1,817         3,582        83,799
      Management
       fees                 51,440         9,158             -             -
                       $    50,698   $    10,975   $     3,582   $   950,116

    Expenses:
      Claims incurred  $         -   $         -   $         -   $   696,938
      Commissions and
       premium taxes             -             -             -       155,747
      Other expenses        43,869        12,961           117       126,931
      Interest expense       2,200        14,142         3,064         2,882
                            46,069        27,103         3,181       982,498

    Income before
     income taxes            4,629       (16,128)          401       (32,382)
    Income taxes             6,964        (5,483)          136       (17,019)
    Equity in undist-
     ributed net income
     of subsidiaries       (25,743)      (39,287)            -             -
    Net income (loss)  $   (28,078)  $   (49,932)  $       265   $   (15,363)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                           Con-
                        solidation
                       adjustments       Total
    ---------------------------------------------



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

    Revenue:
      Net premiums
       earned          $    (7,455)  $   858,864
      Investment
       related income      (12,009)       76,445
      Management
       fees                (60,598)            -
                       $   (80,062)  $   935,309

    Expenses:
      Claims incurred  $    24,769   $   672,169
      Commissions and
       premium taxes             -       155,747
      Other expenses       (51,793)      132,085
      Interest expense      (3,500)       18,788
                           (80,062)      978,789

    Income before
     income taxes                -       (43,480)
    Income taxes                 -       (15,402)
    Equity in undist-
     ributed net income
     of subsidiaries        65,030             -
    Net income (loss)  $    65,030  $    (28,078)
    ---------------------------------------------
    ---------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the six months ended June 30, 2007

                                                                    Other
                           KFSI          KAI           K2007GP   Subsidiaries
    -------------------------------------------------------------------------
                                        (an                         (the
                           (a         "issuer" /       (the    "Non-Guarantor
                       "Guarantor")  "Guarantor")    "Issuer") subsidiaries")
    -------------------------------------------------------------------------

    Revenue:
      Net premiums
       earned          $         -   $         -   $         -   $   892,231
      Investment
       related income         (949)        2,460             -       104,855
      Management fees       39,342         6,756             -             -
                       $    38,393   $     9,216   $         -   $   997,086

    Expenses:
      Claims incurred  $         -   $         -   $         -   $   656,098
      Commissions and
       premium taxes             -             -             -       164,147
      Other expenses        36,178         8,756             -       100,490
      Interest expense       3,973        11,434             -         2,543
                            40,146        20,190             -       923,278

    Income before
     income taxes           (1,753)      (10,974)            -        73,808
    Income taxes             5,075        (3,731)            -        (1,620)
    Equity in undist-
     ributed net income
     of subsidiaries        68,185       (31,431)            -             -
    Net income (loss)  $    61,357   $   (38,674)   $        -   $    75,428
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                           Con-
                        solidation
                       adjustments       Total
    ---------------------------------------------



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

    Revenue:
      Net premiums
       earned          $         -   $   892,231
      Investment
       related income       (1,125)      105,241
      Management fees      (46,098)            -
                       $   (47,223)  $   997,472

    Expenses:
      Claims incurred  $   (11,392)  $   644,706
      Commissions and
       premium taxes             -       164,142
      Other expenses       (35,831)      109,593
      Interest expense           -        17,950
                           (47,223)      936,391

    Income before
     income taxes                -        61,081
    Income taxes                 -          (276)
    Equity in undist-
     ributed net income
     of subsidiaries       (36,754)            -
    Net income (loss)  $   (36,754)  $    61,357
    ---------------------------------------------
    ---------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Balance Sheet
    -------------------------------------------------------------------------
    As at June 30, 2008

                                                                    Other
                           KFSI          KAI           K2007GP   Subsidiaries
    -------------------------------------------------------------------------
                                        (an                         (the
                           (a         "issuer" /       (the    "Non-Guarantor
                       "Guarantor")  "Guarantor")    "Issuer") subsidiaries")
    -------------------------------------------------------------------------

    Assets
      Investments in
       subsidiaries    $   878,083   $   741,719   $         -   $  (340,624)
      Cash                   8,305         8,550           816       170,877
      Securities                 -             -             -     3,134,416
      Goodwill and
       other assets          9,780             -             -       104,154
      Other assets          17,708        71,344       109,493     3,109,314
                       $   913,875   $   821,613   $   110,309   $ 6,178,137

    Liabilities and
     Shareholders'
     Equity
    Liabilities:
      Bank Indebted-
       ness            $    37,000   $   170,175   $         -   $   120,918
      Other liabilities      3,934        28,094         4,609       293,652
      Unearned premiums          -             -             -     1,128,688
      Unpaid claims              -             -             -     3,702,914
      Senior unsecured
       debentures           18,500       125,000        93,346       (19,184)
      Subordinated
       indebtedness              -        90,500             -             -
                            59,434       413,769        97,954     5,226,988

    Shareholders' equity:
      Share capital        323,102       446,069        10,667     1,827,710
      Contributed surplus    8,287             -             -             -
      Retained Earnings    483,598       (38,225)        2,318      (906,776)
      Accumulated other
       comprehensive
       income               39,454             -          (630)       30,215
                           854,441       407,844        12,355       951,149
                       $   913,875   $   821,613   $   110,309   $ 6,178,137
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                           Con-
                        solidation
                       adjustments       Total
    ---------------------------------------------



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

    Assets
      Investments in
       subsidiaries    $(1,279,178)  $         -
      Cash                       -       188,548
      Securities           (15,771)    3,118,645
      Goodwill and
       other assets              -       113,934
      Other assets      (2,278,230)    1,029,629
                       $(3,573,179)  $ 4,450,756

    Liabilities and
     Shareholders'
     Equity
    Liabilities:
      Bank Indebted-
       ness            $  (103,953)  $   224,140
      Other liabilities   (193,808)      136,481
      Unearned premiums   (409,616)      719,072
      Unpaid claims     (1,474,445)    2,228,469
      Senior unsecured
       debentures          (16,877)      200,785
      Subordinated
       indebtedness         (3,132)       87,368
                        (2,201,831)    3,596,315

    Shareholders' equity:
      Share capital     (2,284,446)      323,102
      Contributed surplus        -         8,287
      Retained Earnings    942,683       483,598
      Accumulated other
       comprehensive
       income              (29,585)       39,454
                        (1,371,348)      854,441
                       $(3,573,179)  $ 4,450,756
    ---------------------------------------------
    ---------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Balance Sheet
    -------------------------------------------------------------------------
    As at December 31, 2007

                                                                    Other
                           KFSI          KAI           K2007GP   Subsidiaries
    -------------------------------------------------------------------------
                                        (an                         (the
                           (a         "issuer" /       (the    "Non-Guarantor
                       "Guarantor")  "Guarantor")    "Issuer") subsidiaries")
    -------------------------------------------------------------------------

    Assets
      Investments in
       subsidiaries    $   964,286   $   682,266   $         -   $  (150,463)
      Cash                  13,716         6,960           566       140,393
      Securities                 -             -             -     3,348,216
      Goodwill and
       other assets              -             -             -       116,774
      Other assets          34,042        16,302       113,217     3,181,277
                       $ 1,012,044   $   705,528   $   113,783   $ 6,636,197

    Liabilities and
     Shareholders' Equity
    Liabilities:
      Bank Indebted-
       ness            $    42,369   $   170,175   $         -   $   130,068
      Other liabilities      7,797        25,184         6,607       339,938
      Unearned premiums          -             -             -     1,220,813
      Unpaid claims              -             -             -     3,810,139
      Senior unsecured
       debentures           21,077       125,000        94,429       (20,426)
      Subordinated
       indebtedness              -        90,500             -             -
                            71,243       410,859       101,036     5,480,532

    Shareholders' equity:
      Share capital        326,151       342,450        10,667     1,773,287
      Contributed surplus    7,619             -             -             -
      Retained Earnings    521,165       (47,781)        2,053      (713,618)
      Accumulated other
       comprehensive
       income               85,866             -            27        95,996
                           940,801       294,669        12,747     1,155,665
                       $ 1,012,044   $   705,528   $   113,783   $ 6,636,197
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                           Con-
                        solidation
                       adjustments       Total
    ---------------------------------------------



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

    Assets
      Investments in
       subsidiaries    $(1,496,089)  $         -
      Cash                       -       161,635
      Securities                 -     3,348,216
      Goodwill and
       other assets              -       116,774
      Other assets      (2,314,058)    1,030,780
                       $(3,810,147)  $ 4,657,405

    Liabilities and
     Shareholders' Equity
    Liabilities:
      Bank Indebted-
       ness            $  (103,954)  $   238,658
      Other liabilities   (234,586)      144,940
      Unearned premiums   (462,323)      758,490
      Unpaid claims     (1,543,057)    2,267,082
      Senior unsecured
       debentures                -       220,080
      Subordinated
       indebtedness         (3,146)       87,354
                        (2,347,066)    3,716,604

    Shareholders' equity
      Share capital     (2,126,404)      326,151
      Contributed surplus        -         7,619
      Retained Earnings    759,346       521,165
      Accumulated other
       comprehensive
       income              (96,023)       85,866
                        (1,463,081)      940,801
                       $(3,810,147)  $ 4,657,405
    ---------------------------------------------
    ---------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the six months ended June 30, 2008

                                                                    Other
                           KFSI          KAI           K2007GP   Subsidiaries
    -------------------------------------------------------------------------
                                                                    (the
                           (a            (a            (the    "Non-Guarantor
                       "Guarantor")  "Guarantor")    "Issuer") subsidiaries")
    -------------------------------------------------------------------------

    Cash provided by
     (used in):
    Operating
     Activities:
      Net income       $   (28,078)  $   (49,932)  $       265   $   (15,363)
      Adjustments to
       reconcile net
       income to net
       cash used by
       operating
       activities:
      Equity in undis-
       tributed earnings
       in subsidiaries      25,743        39,287             -             -
      Other                  7,552       (31,549)         (129)     (150,091)
                             5,217       (42,194)          136      (165,454)

    Financing Activities:
      Increase in share
       capital, net             48       103,619             -             -
      Repurchase of common
       shares for cancel-
       lation               (4,378)            -             -             -
      Common share
       dividend             (8,208)            -             -             -
      Increase/(decrease)
       in bank indebted-
       ness                  6,552             -           114       (15,283)
      Increase in senior
       unsecured indebted-
       ness                      -             -             -             -
                           (19,090)      103,619           114       (15,283)

    Investing Activities:
      Purchase of
       securities                -             -             -    (1,592,080)
      Proceeds from sale
       of securities             -             -             -     1,759,812
      Acquisitions           8,919             -             -          (212)
      Other                   (457)      (59,835)            -        43,701
                             8,462       (59,835)            -       211,221


    Increase (decrease)
     in cash during the
     year                   (5,411)        1,590           250        30,484
    Cash, beginning of
     year                   13,716         6,960           566       140,393
                       $     8,305   $     8,550   $       816   $   170,877
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    ---------------------------------------------
                            Con-
                        solidation
                       adjustments       Total
    ---------------------------------------------



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

    Cash provided by
     (used in):
    Operating
     Activities:
      Net income       $    65,030   $   (28,078)
      Adjustments to
       reconcile net
       income to net
       cash used by
       operating
       activities:
      Equity in undis-
       tributed earnings
       in subsidiaries     (65,030)            -
      Other                123,617       (50,600)
                           123,617       (78,678)

    Financing Activities:
      Increase in share
       capital, net       (103,619)           48
      Repurchase of commo
       shares for cancel-
       lation                    -        (4,378)
      Common share
       dividend                  -        (8,208)
      Increase/(decrease)
       in bank indebted-
       ness                  6,438       (15,283)
      Increase in senior
       unsecured indebted
       ness                (17,517)      (17,517)
                          (114,698)      (45,338)

    Investing Activities:
      Purchase of
       securities                -    (1,592,080)
      Proceeds from sale
       of securities             -     1,759,812
      Acquisitions          (8,919)         (212)
      Other                      -       (16,591)
                            (8,919)      150,929


    Increase (decrease)
     in cash during the
     year                        -       26,913
    Cash, beginning of
     year                        -      161,635
                       $         -   $  188,548
    ---------------------------------------------
    ---------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the six months ended June 30, 2007

                                                                    Other
                           KFSI          KAI           K2007GP   Subsidiaries
    -------------------------------------------------------------------------
                                                                    (the
                           (a            (a            (the    "Non-Guarantor
                       "Guarantor")  "Guarantor")    "Issuer") subsidiaries")
    -------------------------------------------------------------------------

    Cash provided by
     (used in):
    Operating Activities:
      Net income       $    61,357    $  (38,674)  $         -  $     75,428
      Adjustments to
       reconcile net
       income to net
       cash used by
       operating
       activities:
      Equity in undist-
       ributed earnings
       in subsidiaries     (68,185)       31,431           -               -
      Other                 16,889        (3,503)          -         (20,423)
                            10,061       (10,746)          -          55,005

    Financing Activities:
      Increase in share
       capital, net          1,047       156,545           -               -
      Repurchase of common
       shares for
       cancellation         (6,062)            -           -               -
      Common share
       dividend             (7,491)            -           -               -
      Increase/(decrease)
       in bank indebted-
       ness                 11,959             -           -          94,985
      Increase in senior
       unsecured indebted-
       ness                      -             -           -               -
                              (547)      156,545           -          94,985

    Investing Activities:
      Purchase of
       securities                -             -           -      (2,358,631)
      Proceeds from sale
       of securities            99             -           -       2,101,312
      Acquisitions          11,472       (54,085)          -          13,402
      Other                 (8,642)      (89,051)          -          75,271
                             2,929      (143,136)          -        (168,646)

    Increase (decrease)
     in cash during
     the year               12,443         2,663           -         (18,656)
    Cash, beginning
     of year                 3,475         3,204           -         123,027
                       $    15,918   $     5,867   $       -   $     104,371
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    ---------------------------------------------
                           Con-
                        solidation
                       adjustments       Total
    ---------------------------------------------



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

    Cash provided by
     (used in):
    Operating Activities:
      Net income       $   (36,754)  $    61,357
      Adjustments to
       reconcile net
       income to net
       cash used by
       operating
       activities:
      Equity in undist-
       ributed earnings
       in subsidiaries      36,754             -
      Other                      -        (7,037)
                                 -        54,320

    Financing Activities:
      Increase in share
       capital, net       (156,545)        1,047
      Repurchase of common
       shares for
       cancellation              -        (6,062)
      Common share
       dividend                  -        (7,491)
      Increase/(decrease)
       in bank indebted-
       ness                      -       106,944
      Increase in senior
       unsecured indebted-
       ness                      -             -
                          (156,545)       94,438

    Investing Activities:
      Purchase of
       securities          168,017    (2,190,614)
      Proceeds from sale
       of securities             -     2,101,411
      Acquisitions         (11,472)      (40,683)
      Other                      -       (22,422)
                           156,545      (152,308)

    Increase (decrease)
     in cash during
     the year                    -        (3,550)
    Cash, beginning
     of year                     -       129,706
                       $         -  $    126,156
    ---------------------------------------------
    ---------------------------------------------
    

    %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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