Kingsway Reports Second Quarter Loss and Provides Transformation Update



    TORONTO, Aug. 7 /CNW/ - Kingsway Financial Services Inc. (TSX/NYSE:   KFS,
"Kingsway", or "the Company") today announced its financial results for the
second quarter ended June 30, 2009. It also announced changes to the Board of
Directors and provided shareholders with an update on its company-wide
transformation. The Company reported a net loss of $38.4 million or ($0.70)
per share diluted, compared with a net income of $6.3 million or $0.11 per
share diluted in the second quarter of 2008. The loss reflects the adverse
development in run-off businesses, transition costs, a significant drop in
revenue from discontinued and run-off businesses, a reduced return on
investments and several one-time charges. All amounts are in U.S. dollars
unless indicated otherwise.
    "The second quarter's poor financial results reflect the legacy of past
business strategies and practices that we are rapidly eliminating or changing
through our ongoing transformation work," said Mr. Simpson. "Since being
appointed to the role of CEO early in the second quarter, I have restructured
the senior management team to get the right talent in key roles and taken
steps to put the company back on a solid financial footing. The team has
reached out to regulators to explain the new directions we're taking and seek
their support. We believe the Kingsway that emerges from the transformation -
considerably streamlined, with less complexity, and with strengthened
relationships with key stakeholders - will succeed, over time, in delivering
solid results to shareholders."

    Actions taken in the second quarter:

    
    -  Appointed Daniel Brazier to the role of interim Chief Financial
       Officer in May 2009, with a mandate to closely examine all accounting
       practices with fresh eyes, rigour and discipline. Dan brings
       significant experience in strategy development, business
       transformation and financial re-engineering to the task. Under Dan's
       guidance, the Company accelerated plans to restore financial stability
       by

          -  Launching a debt buy-back plan through a structured Capital
             Initiative

          -  Recapitalizing the core operating units by repatriating funds
             currently committed to reinsurance subsidiaries. As of June 30,
             2009, both our Canadian subsidiaries had an MCT of over 200,
             and our U.S subsidiaries (with the exception of Lincoln General
             Insurance Company - "Lincoln General") had an RBC in excess of
             200 - above minimum stautory capital requirements.  The
             repatriation of funds will further strengthen the capital
             positions of these operations and should enable us to continue
             with additional debt or share purchases

          -  Continuing to seek and leverage cost reduction opportunities

       -  Appointed Scott Wollney, previously announced as Chief Executive
          Officer of U.S. Commercial Lines, to head the consolidated
          operations for Kingsway in the U.S.

       -  Charged Roberto Espin, Chief Executive Officer of Hamilton Risk
          Management, with a new mandate to expand this successful Miami-
          based business

       -  Secured acceptance by the Pennsylvania Department of Insurance of
          Kingsway's plan for Lincoln General, on May 28, 2009.  This
          voluntary process provides for a solvent and orderly run-off of
          the Lincoln General business, including efficient resolution and
          payment of all policy-related and other obligations. Appointed
          external senior run-off management experts to the Lincoln General
          management team and board to ensure the successful execution of
          the plan

       -  Met with U.S. regulators to underscore the Company's commitment to
          addressing outstanding issues as well as improving service and
          claims handling. Continued to build key relationships with
          regulators, advisors and ratings agencies

       -  Largely completed the process of aligning the employee population
          in the U.S. with the new operating model, applying a disciplined
          and rigorous approach to getting people with the right skills and
          experience in the right roles to drive a successful turnaround of
          the business

       -  Consolidated support functions (human resources, information
          technology, corporate legal) across the organization to reduce
          duplication and eliminate unnecessary cost

       -  Further reduced staffing levels by a total of 165 in the quarter
          across the Company

       -  Achieved $14 million or 40.2% of the 2009 expense savings target of
          $34.8 million, while incurring approximately $10 million in
          transition costs.

    As a result of this quarter's progress, the Company is ahead of plan on
    a number of key deliverables, and on track to achieve an annualized
    savings run-rate of $120 million by year-end 2010:

      -  By accelerating execution of the transformation strategy, the
         Company has already succeeded in achieving 97% or $33.7 million of
         the previously disclosed $34.8 million savings target for 2009:

          -  Savings related to workforce reductions stand at $21.9 million,
             more than double the $10m savings target for 2009;

          -  As part of the claims improvement initiative, the Company
             completed an extensive review of the claims handling process.
             Execution is in the early stages and will take some time to
             complete.

       -  Year to date, the Company has achieved more than 60% (610) of the
          1,000 total position eliminations targeted to be complete by the
          end of 2010. Approximately 400 of these reductions were in U.S.
          operations and 200 in Canada.

       -  The Company remains on target to incur $15-20 million in transition
          costs. One-time costs of $12.9 million have been incurred to date.

    The Company further announced that Colin Simpson, Kingsway's President
    and Chief Executive Officer (CEO), is joining the Board of Directors,
    effective August 6, 2009.  Mr. Simpson replaces William Andrus, who
    resigned effective August 1, 2009.
    

    "Management and the Board of Directors are completely aligned and
unrelenting in our focus on execution," said Simpson. "The overarching
strategy has not changed: we are focusing on profitable core business, getting
the right infrastructure in place to support it, and reducing our cost base to
become more competitive in the marketplace. We will continue to evaluate and
refine the details of the plan as business conditions shift to ensure we meet
our objectives of returning the Company to financial stability, restoring
shareholder value, and building a strong foundation for the future. While we
have made significant progress to date, it will take time for the positive
effects of many of these actions, such as our major business unit
consolidations, to be reflected in our financial results. We expect to
continue to gain momentum during the remainder of 2009 and throughout 2010."

    Detailed Financial Results

    This quarter's results reflect the businesses continuing under the
transformation plan and the businesses put in run-off. The result from
continuing business before restructuring, software write-offs and settlements
of lawsuits was a loss of $2.6 million for the quarter. The year-to-date
results from continuing businesses reflect a loss of $17.4 million.
    As a direct result of our transformation plan, gross premiums written for
the Canadian operations decreased 25% in the quarter (25% year to date)
compared to the same periods last year. This results from the Company's
execution of its plan to discontinue writing unprofitable lines of business
within its commercial lines. U.S. operations reported a decrease in premiums
written of $44.4 million during the quarter (24% less than in Q2 2008) and
$74.0 million year to date (down 19% compared to the previous year), The
run-off business premium volume declined by $93.8 million in the quarter
($218.7 million year to date) compared to the same period last year due to the
majority of the business being placed into run-off in early 2009.
    As a result of the Company re-focusing its efforts on its core profitable
business, non-standard automobile premiums for the six months to June 30, 2009
were $252.7 million or 50% of the total gross premiums written compared to 41%
in the same period of the prior year.
    Adverse reserve development recorded in the quarter totaled $49.1 million
of which $36.2 million related to the run-off business, $3.6 million related
to the ongoing Canadian operations and $9.3 million to the ongoing U.S.
operations.
    During the quarter, the Company decided to decommission computer software
that was not being fully utilized in the business.  As a result of this
decision, the amortization of the software for the quarter was increased by
$2.0 million and in addition, $3.2 million of prepaid expenses relating to
computer software were written off and included in general and administrative
expenses.
    The Company has incurred restructuring costs of $10.0 million in the
quarter ($12.9 million year to date). Of the total restructuring costs,
severance costs associated with the Company's corporate restructuring accounts
for $6.1 million in the quarter ($8.1 million year to date).
    Also included in expenses in the quarter is an additional allowance for
doubtful accounts of approximately $5.5 million primarily in Lincoln General.
    Investment income, excluding net realized gains, was $29.1 million
compared to $32.7 million for the same quarter of 2008, an 11% decrease.
Included in net realized gains were adjustments to the carrying values of
securities for declines in market value considered other than temporary of
$3.3 million.
    As at June 30, 2009 the securities portfolio did not include any
collateralized debt obligations nor any direct exposure to any asset backed
commercial paper. The securities portfolio has an exposure of approximately
$1.5 million to the sub-prime mortgage market in the U.S. through home equity
loan asset backed securities.
    As at June 30, 2009 the book value per share was $6.67 compared to $8.24
as at December 31, 2008 and $15.49 at June 30, 2008.

    Dividend

    The Board of Directors has decided not to declare a quarterly dividend
for the second quarter of 2009.

    Capital Initiative

    The Board of Directors has delegated to the Capital Committee of the
Board the authority to repurchase debt of the Company up to a maximum of $40
million subject to an assessment of liquidity levels, market conditions and
any costs related to the unwinding of hedges and other related financial
instruments. The Company has issued two tenders. The first tender for a series
of affiliated debt closed on August 4, 2009 and 22.24% of the instruments were
tendered. The second tender for a direct bond issue remains open. To date
Kingsway has spent $8 million buying back debt under these tenders as well as
$6 million outside of these tenders.
    The Company has also issued and recently expanded a Normal Course Issuer
Bid to repurchase up to 10% of its public float or approximately 5.5 million
shares. A portion of the $40 million allotment may be used for this latter
purpose.

    Conference Call and Webcast

    You are invited to participate in our quarterly results conference call
that will take place on August 7, 2009 at 8:30 a.m. EDT. To access please dial
1-800-732-1073 about five 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
       www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2729980.
    

    About the Company

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

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

    
    Financial Summary:

    -------------------------------------------------------------------------
                       Three months ended June 30:  Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars except
     per share
     values)               2009     2008    Change    2009     2008   Change
    -------------------------------------------------------------------------
    Gross premiums
     written             $251.4   $422.0     (40%)  $510.4   $853.1     (40%)
    Underwriting loss     (74.0)   (24.6)    201%   (132.7)   (90.6)     46%
    Investment income      29.1     32.7     (11%)    56.1     68.9     (19%)
    Net realized
     gains (loss)          (0.7)    10.7    (107%)   (20.3)     5.0    (506%)
    Operating earnings
    (loss)                (39.0)     0.2   19600%    (77.8)   (30.0)    159%
    Net income (loss)     (38.4)     6.3    (710%)   (96.6)   (28.1)    244%
    Diluted earnings
     (loss) per share     (0.70)    0.11    (736%)   (1.75)   (0.51)    243%
    Book value per share   6.67    15.49     (57%)    6.67    15.49     (57%)
    Combined ratio       127.4%   106.2%    21.2%   124.0%   111.2%    12.8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Segmented Results

    -------------------------------------------------------------------------
                                    Three months ended June 30, 2009
    -------------------------------------------------------------------------

                                      Corporate   Total
    (in thousands             United     and    Continuing            Grand
     of dollars)   Canada     States    Other    Business   Run-off   Total
    -------------------------------------------------------------------------
    Income (loss)
     from
     continuing
     operations   $(1,437)    $2,091   $(2,619)  $(1,965) $(36,412) $(38,377)
      Add back:
       Restructuring
       Charges        307      2,161     4,678     7,146     2,832     9,978
      Add back:
       Accelerated
       software
       amortization
       and
       write-offs       -      3,200         -     3,200     2,000     5,200
      Deduct: Proceeds
       on settlement
       of
       lawsuits     3,850      7,150         -    11,000         -    11,000
    -------------------------------------------------------------------------
    Income (loss)
     before
     restructuring,
     software
     write-offs
     and
     settlements
     of lawsuits  $(4,980)      $302    $2,059   $(2,619) $(31,580) $(34,199)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                 Six months ended June 30, 2009
    -------------------------------------------------------------------------
                                      Corporate   Total
    (in thousands             United     and    Continuing            Grand
     of dollars)   Canada     States    Other    Business   Run-off   Total
    -------------------------------------------------------------------------
    Income (loss)
     from
     continuing
     operations    $(9,165) $(11,801)   $1,712  $(19,254) $(73,551) $(92,805)
      Add back:
       Restructuring
       Charges         518     3,212     5,930     9,660     3,261    12,921
      Add back:
       Accelerated
       software
       amortization
       and
       write-offs        -     3,200         -     3,200     2,000     5,200
      Deduct:
       Proceeds on
       settlement of
       lawsuits      3,850     7,150         -    11,000         -    11,000
    -------------------------------------------------------------------------
    Income (loss)
     before
     restructuring,
     software
     write-offs
     and settlements
     of lawsuits  $(12,497) $(12,539)   $7,642  $(17,394) $(68,290) $(85,684)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -  This quarter's results reflect the businesses continuing under the
       transformation plan and the businesses put in run-off. The result
       from continuing business before restructuring, software write-offs and
       settlements of lawsuits was a loss of $2.6 million loss for the
       quarter. The year to date results from continuing businesses reflect
       a loss of $17.4 million.

    -  As a direct result of our transformation plan, gross premiums written
       for the Canadian operations decreased 25% in the quarter (25% year to
       date) compared to the same periods last year. This decrease results
       from the Company's execution of its plan to discontinue writing
       unprofitable lines of business within its commercial lines and the K-
       Plus program in Canada. U.S. operations reported a decrease in
       premiums written of $44.4 million during the quarter (24% less than
       in Q2 2008) and $74.0 million year to date (down 19% compared to the
       previous year), The run-off business premium volume declined by $93.8
       million in the quarter ($218.7 million year to date) compared to the
       same period last year due to the majority of the business being
       placed into run-off in early 2009.

    -  As a result of the Company re-focusing its efforts on its core
       profitable business, non-standard automobile premiums for the six
       months to June 30, 2009, were $252.7 million or 50% of the total
       gross premiums written compared to 41% in the same period of the
       prior year.

    -  Adverse reserve development recorded in the quarter totaled $49.1
       million of which $36.2 million related to the run-off business, $3.6
       million related to the ongoing Canadian operations and $9.3 million
       to the ongoing U.S. operations.

    -  During the quarter, the company decided to decommission computer
       software that was not being fully utilized in the business. As a
       result of this decision, the amortization of the software for the
       quarter was increased by $2.0 million and in addition, $3.2 million of
       prepaid expenses relating to computer software were written off and
       included in general and administrative expenses.

    -  The Company has incurred restructuring costs of $10.0 million in the
       quarter ($12.9 million year to date) as a result of implementing the
       transformation plan announced in the first quarter of 2009. Of the
       total restructuring costs, severance costs associated with the
       Company's corporate restructuring plan accounts for $6.1 million in
       the quarter ($8.1 million year to date).

    -  Also included in expenses in the quarter is an additional allowance
       for doubtful accounts of approximately $5.5 million primarily in
       Lincoln General.

    -  The Company settled two lawsuits during the quarter and received
       proceeds of $11.0 million. The settlements approximated the
       professional services expense incurred in previous years to initiate
       and support the actions and have been recorded as a reduction of
       professional service expense included in general and administrative
       expenses.

    -  Investment income, excluding net realized gains was $29.1 million
       compared to $32.7 million for the same quarter of 2008, an 11%
       decrease. Included in net realized gains were adjustments to the
       carrying values of securities for declines in market value considered
       other than temporary of $3.3 million or $0.06 per share for the
       quarter.

    -  As at June 30, 2009, the securities portfolio did not include any
       collateralized debt obligations nor any direct exposure to any asset
       backed commercial paper. The securities portfolio has an exposure of
       approximately $1.5 million to the sub-prime mortgage market in the
       U.S. through home equity loan asset backed securities.

    -  As at June 30, 2009, the book value per share was $6.67 compared to
       $8.24 as at December 31, 2008, and $15.49 as at June 30, 2008.
    

    Kingsway Financial Services Inc.'s Management Discussion and Analysis

    The following management's discussion and analysis ("MD&A") should be
read in conjunction with: (i) the Kingsway Financial Services Inc.'s
("Kingsway" or the "Company") unaudited interim consolidated financial
statements for the second quarter of fiscal 2009, and the notes related
thereto; (ii) the annual MD&A for fiscal 2008 set out on pages 9 to 54 in the
Company's 2008 Annual Report, including the section on risk factors; and (iii)
the audited consolidated financial statements for fiscal 2008 set out on pages
61 to 104 of the Company's 2008 Annual Report, and the notes related thereto.

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

    Non-GAAP Financial Measures

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

    Date of MD&A

    Unless otherwise noted, the information contained in this MD&A is based
on information available to management as of August 6, 2009.

    
    Kingsway Financial Services Inc.
    Management's Discussion and Analysis
    For the three and six months ended June 30, 2009
    (All amounts in U.S. dollars except where noted)
    -------------------------------------------------------------------------


    RESULTS OF OPERATIONS

    Premiums

    -------------------------------------------------------------------------
    (in millions
     of dollars)       Three months ended June 30:  Six months ended June 30:
    -------------------------------------------------------------------------
                           2009     2008   Change     2009     2008   Change
    -------------------------------------------------------------------------
    Gross
     premiums
     written
      Canada              $95.8   $128.2     (25%)  $149.0   $199.0     (25%)
      U.S.                140.4    184.8     (24%)   323.0    397.0     (19%)
      Run-off              15.2    109.0     (86%)    38.4    257.1     (85%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Total              $251.4   $422.0     (40%)  $510.4   $853.1     (40%)

    Net premiums written
      Canada              $93.0   $125.7     (26%)  $143.6   $194.4     (26%)
      U.S.                110.1    137.0     (20%)   280.9    313.2     (10%)
      Run-off              21.9    124.7     (82%)    49.0    277.7     (82%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Total              $225.0   $387.4     (42%)  $473.5   $785.3     (40%)

    Net premiums earned
      Canada              $76.4    $85.0     (10%)  $138.8   $155.7     (11%)
      U.S.                135.1    142.1      (5%)   289.5    286.9       1%
      Run-off              58.1    167.9     (65%)   124.8    365.1     (66%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Total              $269.6   $395.0     (32%)  $553.1   $807.7     (32%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    U.S. operations reported a decrease in premiums written of $44.4 million
(or 24%) during the quarter and $74.0 million (or 19%) year to date compared
with the same periods of the prior year. This decrease is a result of the
Company's decision to discontinue writing unprofitable lines of business
within its commercial and non-standard auto lines. The run-off business
premium volume declined by $93.8 million in the quarter ($218.7 million year
to date) compared to the same periods last year due to the majority of the
business being placed into run-off in early 2009. Non-standard automobile
premiums decreased 30% to $118.2 million for the quarter (28% to $252.7
million year to date) compared to the same periods of the prior year.
Excluding the run-off business, gross written premiums declined 25% in the
second quarter to $236.2 million (21% to $472.0 million year to date) compared
to the same periods last year.
    Gross premiums written for the Canadian operations decreased 25% in the
quarter (25% year to date) compared to the same periods of the prior year.
This decrease is also the direct result of the Company's decision to
discontinue writing unprofitable lines of business within its commercial and
non-standard auto lines.
    U.S. operations represented 56% of gross premiums written in the quarter
(63% year to date) compared with 44% in the same quarter (47% year to date)
last year. Non-standard automobile, trucking, and commercial automobile
premiums represented 50%, 6% and 14%, respectively, of gross premiums written
for the quarter compared with 41%, 16% and 16% for Q2 2008 reflecting the
decision to exit the trucking and some commercial lines business.

    
    Investment Income

    -------------------------------------------------------------------------
                      Three months ended June 30:   Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2009     2008   Change     2009     2008   Change
    -------------------------------------------------------------------------
    Investment  income    $29.1    $32.7     (11%)   $56.1    $68.9     (19%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Investment income decreased 11% to $29.1 million in the quarter (decr
eased 19% to $56.1 million year to date), compared to the same periods last
year, primarily due to a reduction in the size of the portfolio as a result of
reduced premium volumes due to certain lines of business being put into
voluntary run-off, the repayment of the Company's bank debt in the second half
of 2008 and the sale of York Fire in late 2008. Also contributing to the
decrease in investment income in the quarter are lower short-term yields on
the Canadian portfolio and a weaker Canadian dollar compared to the same
period last year which reduces the investment income earned by the Canadian
operations when reported in U.S. dollars. The cost based yield on the fixed
income portfolio decreased to 4.1% compared to 4.5% for the same quarter last
year (4.2% year to date compared to 4.6% for the same period in the prior
year). The cost based yield represents the total interest income before
expenses divided by the average amortized cost base of fixed income securities
held in the portfolio during the period.

    Net Realized Gains (Losses)

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

    
    -------------------------------------------------------------------------
                      Three months ended June 30:   Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2009     2008   Change     2009     2008   Change
    -------------------------------------------------------------------------
    Fixed income           $2.3     $2.1      10%     $2.6     $4.6     (43%)
    Equities                0.3     18.5     (98%)   (17.9)    19.2    (193%)
    Impairments            (3.3)    (9.9)    (67%)    (5.0)   (18.8)    (73%)
    -------------------------------------------------------------------------
    Total                 $(0.7)   $10.7    (107%)  $(20.3)    $5.0    (506%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the three months ended June 30, 2009, sales from the securities
portfolio and the write-down of securities that are considered to be other
than temporarily impaired resulted in a net realized loss of $0.7 million
($20.3 million year to date) compared to a net realized gain of $10.7 million
for the three months ended June 30, 2008 ($5.0 million year to date). Net
realized gains on the sale of fixed income securities amounted to $2.3 million
for the three months ended June 30, 2009 ($2.6 million year to date) compared
to a net realized gain of $2.1 million for the same period last year ($4.6
million year to date).
    As was previously announced, the Company elected to dispose of virtually
all of its common share equities during the first quarter of 2009. In addition
to the $91.9 million impairment charge on the common share equity portfolio
taken in the fourth quarter of 2008, the liquidation resulted in a realized
loss of $18.2 million in the first quarter of 2009. The decision to liquidate
the equity portfolio has significantly reduced the number and value of
securities in an unrealized loss position and, consequently, the value of
securities considered to be other than temporarily impaired as at June 30,
2009. Also, contributing to the reduction in securities judged to be other
than temporary impaired is the sale by the Company during the quarter of
certain fixed income securities considered to be of a higher credit risk than
desired.

    
    Underwriting Results

    -------------------------------------------------------------------------
                      Three months ended June 30:   Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2009     2008   Change     2009     2008   Change
    -------------------------------------------------------------------------
    Underwriting profit
     (loss)
    Canada                $(5.1)   $(3.9)   30.8%   $(14.9)   $(9.6)   55.2%
    U.S.                  (21.0)     2.3 (1013.0%)   (24.1)     7.4  (425.7%)
    Run-off               (47.9)   (23.0)  108.3%    (93.7)   (88.4)    6.0%
                      -------------------------------------------------------
    Total                $(74.0)  $(24.6)  200.8%  $(132.7)  $(90.6)   46.5%
                      -------------------------------------------------------
    Combined ratio
    Canada               104.8%   103.6%     1.2%   110.7%   106.2%     4.5%
    U.S.                 110.9%    98.8%    12.1%   107.4%    97.4%    10.0%
    Run-off              195.4%   113.7%    81.7%   177.3%   124.2%    53.1%
                      -------------------------------------------------------
    Total                127.4%   106.2%    21.2%   124.0%   111.2%    12.8%
                      -------------------------------------------------------
    Expense ratio
    Canada                37.7%    36.0%     1.7%    37.5%    39.2%    (1.7%)
    U.S.                  31.9%    31.8%     0.1%    30.0%    31.8%    (1.8%)
    Run-off               43.9%    34.6%     9.3%    44.1%    30.8%    13.3%
                      -------------------------------------------------------
    Total                 36.1%    33.9%     2.2%    35.1%    32.7%     2.4%
                      -------------------------------------------------------
    Loss ratio
    Canada                67.1%    67.6%   (0.5)%    73.2%    67.0%     6.2%
    U.S.                  79.0%    67.0%    12.0%    77.4%    65.6%    11.8%
    Run-off              151.5%    79.1%    72.4%   133.2%    93.4%    39.8%
                      -------------------------------------------------------
    Total                 91.3%    72.3%    19.0%    88.9%    78.5%    10.4%
                      -------------------------------------------------------


    Adverse Development on Unpaid Claims

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Favourable (unfavourable)
     change in estimated unpaid
     claims for prior accident
     years (note 1):
      Canada                       $(3.6)      $(2.2)      $(7.5)      $(4.6)
      U.S.                          (9.3)        3.8        (6.5)        9.2
      Run-off                      (36.2)       (7.7)      (65.2)      (69.5)
                              -----------------------------------------------
      Total                       $(49.1)      $(6.1)     $(79.2)     $(64.9)
                              -----------------------------------------------
    As a % of net premiums
     earned (note 2):
      Canada                        4.8%        2.6%        5.4%        3.0%
      U.S.                          6.9%       (2.7%)       2.2%       (3.2%)
      Run-off                      62.3%        4.6%       52.2%       19.0%
                              -----------------------------------------------
      Total                        18.2%        1.5%       14.3%        8.0%
                              -----------------------------------------------
    As a % of unpaid claims
     (note 3):
      Canada                                                1.6%        0.7%
      U.S.                                                  1.9%       (0.7%)
      Run-off                                               6.1%        5.8%
                                                        ---------------------
     Total                                                  4.2%        2.9%
                                                        ---------------------

    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
    

    The Canadian operations experienced estimated unfavourable unpaid claims
development of $3.6 million for the quarter ($7.5 million year to date) or
4.8% to the Canadian operations combined ratio for the quarter (5.4% year to
date) compared to unfavourable unpaid claims development of $2.2 million for
the second quarter last year ($4.6 million year to date).
    The U.S. operations experienced estimated net unfavourable unpaid claims
development of $9.3 million for the quarter ($6.5 million year to date) or
6.9% to the U.S. operations combined ratio for the quarter (2.2% year to date)
compared with estimated net favourable unpaid claims development of $3.9
million in the same quarter ($9.2 million year to date) last year.
    The business in run-off business experienced estimated net unfavourable
unpaid claims development of $36.2 million for the quarter ($65.2 million year
to date) or 62.3% to the Run-off business combined ratio for the quarter
(52.2% year to date) compared with $7.7 million in the same quarter ($69.5
million year to date) last year.

    Expenses

    Overall, the expense ratio increased to 36.1% in the quarter (35.1% year
to date) compared to 33.9% for the same quarter (32.7% year to date) last
year. The increase in the general & administrative expense ratio is attributed
primarily to the disproportionate decrease in net premiums earned versus
general & administrative expenses. Net premiums earned decreased by 31.7% in
the quarter (31.5% year to date) compared to last year. Actual general and
administrative expenses decreased by $15.1 million from the second quarter
last year ($23.5 million year to date from the same period of the prior year)
as a result of lower administrative costs resulting from the execution of the
transformation plan and the receipt of $11.0 million in proceeds as the result
of the settlement of two lawsuits.
    Amortization of intangibles increased in the quarter primarily due to
$2.0 million of accelerated amortization of computer software as a result of
the decision to decommission computer software not fully utilized in the
business.
    The Company has incurred restructuring costs of $10.0 million in the
quarter ($12.9 million year to date) as a result of implementing the
transformation plan announced in the first quarter of 2009. Of the total
restructuring costs, severance costs associated with the Company's corporate
restructuring plan accounts for $6.1 million in the quarter ($8.1 million year
to date).

    Interest Expense

    Interest expense in the second quarter was $5.9 million ($12.2 million
year to date), compared to $8.9 million for the second quarter of 2008 ($18.8
million year to date) as a result of the repayment of all the short term bank
debt in 2008.

    Gain on Buy-Back of Senior Notes

    During the quarter Kingsway America Inc. purchased and cancelled $4.6
million face value of its senior unsecured debentures for $2.0 million
recording a gain of $2.6 million.

    Income Taxes

    Income tax recovery on continuing operations for the second quarter was
$15.3 million ($21.4 million year to date) compared with income tax of $0.2
million for the same quarter last year (tax recovery of $13.5 million year to
date). A reduction in the valuation allowance of $2.8 million was recorded in
the quarter as a result of utilization of some of the operating losses in the
U.S. that do not expire for up to 20 years.

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

    In the second quarter, the Company reported a net loss of $38.4 million
($96.6 million year to date), compared to net income of $6.3 million in the
second quarter of last year (net loss of $28.1 million year to date). Diluted
loss per share was $0.70 for the quarter ($1.75 year to date), compared to
diluted earnings per share of $0.11 for the second quarter of 2008 (diluted
loss per share of $0.51 year to date).

    Operating Earnings

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

    
    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
    (in millions of dollars
     except per share values)       2009        2008        2009        2008
    -------------------------------------------------------------------------
    Income (loss) from
     continuing operations        $(38.4)       $6.8      $(92.8)     $(28.4)
    Net realized gains (losses)
     after tax:
      Net realized gains(losses)
       before tax                    1.9        10.7       (17.7)        5.0
      Tax effect on realized
       gains (losses)                1.3         4.1        (2.7)        3.4
    -------------------------------------------------------------------------
                                     0.6         6.6       (15.0)        1.6
    -------------------------------------------------------------------------
    Operating earnings (losses)    (39.0)        0.2       (77.8)      (30.0)
    Average outstanding shares
     diluted (in millions)          55.1        55.2        55.1        55.4
    Operating earnings (losses)
     per share                     (0.71)       0.00       (1.41)      (0.54)
    -------------------------------------------------------------------------

    Balance Sheet

    The table below shows a review of selected categories from the balance
sheet reported in the financial statements as at June 30, 2009 compared to
December 31, 2008.

    -------------------------------------------------------------------------
                                                         As at
    -------------------------------------------------------------------------
    (in millions of dollars except per   June 30,  December 31,       Change
     share values)                          2009          2008
    -------------------------------------------------------------------------
    Assets
    Securities                           2,170.9      2,370.5            (8%)
    Accounts receivable and other
     assets                                270.7        276.5            (2%)
    Income taxes recoverable                46.6         14.7           217%
    Future income taxes                     17.4         25.3           (31%)
    Capital assets                          57.3         95.3           (40%)
    Goodwill and intangible assets          58.5         63.9            (8%)

    Liabilities
    Unearned premiums                      462.2        536.5           (14%)
    Unpaid claims                        1,830.7      1,879.0            (3%)
    Senior unsecured debentures            185.0        185.2            (0%)

    Shareholders' Equity                   367.1        453.6           (19%)
    Book value per share                    6.67         8.24           (19%)
    -------------------------------------------------------------------------
    

    Securities:

    The fair value of the securities portfolio, including cash, decreased 6%
to $2.4 billion, compared to $2.5 billion as at December 31, 2008. This
decrease is primarily due to the decline in premium volumes throughout the
group, particularly at Lincoln General. Partially offsetting this factor is
the impact of a stronger Canadian dollar at the balance sheet date on the
conversion of the Canadian dollar portfolio to U.S. dollars.
    As previously announced, the Company elected to dispose of virtually all
of its common share equities during the first quarter of 2009 in order to
reduce volatility of the balance sheet and protect the Company's capital. The
common share equity portfolio was substantially disposed of during the first
quarter and proceeds were reinvested in high quality fixed income securities.
As at June 30, 2009, the fair value of the common share equity portfolio was
$4.0 million. These common share equity holdings are being monitored in the
context of the risk profile of the total portfolio.
    As at June 30, 2009, 93.5% of the fixed income portfolio is rated 'A' or
better. For a quantitative analysis of the credit exposure of the Company from
its investment in fixed income securities and term deposits by rating as
assigned by S&P or Moody's Investor Services see Note 7 to the financial
statements.
    The 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:

    
    -------------------------------------------------------------------------
                                        Canadian          U.S.
                                      Operations    Operations         Total
    -------------------------------------------------------------------------
    Due in less than one year              24.7%         16.2%         19.0%
    Due in one through five years          25.2%         57.0%         46.5%
    Due in five through ten years          43.1%         17.5%         26.0%
    Due after ten years                     7.0%          9.3%          8.5%
    -------------------------------------------------------------------------
    Total                                 100.0%        100.0%        100.0%
    -------------------------------------------------------------------------
    

    There were net unrealized gains of $53.6 million on the total securities
portfolio at June 30, 2009 which are included as a component of "accumulated
other comprehensive income", as compared to net unrealized gains of $35.0
million outstanding at December 31, 2008.
    For a quantitative analysis of the impact to the fair value of the fixed
income portfolio of a change in interest rates, see Note 7 to the financial
statements.
    As at June 30, 2009 the securities portfolio did not include any
collateralized debt obligations nor any direct exposure to any asset backed
commercial paper. The securities portfolio has a small exposure of
approximately $1.5 million to the sub-prime mortgage market in the U.S.
through home equity loan asset backed securities. As at June 30, 2009, these
securities had an aggregate net unrealized loss of $0.2 million.

    Accounts receivable and other assets:

    Included in other assets is Assets Held for Sale in the amount of $37.7
million which have been reclassified from Capital assets. As part of the
announced transformation program, management is actively marketing some of its
land and buildings.
    Overall, accounts receivable have decreased primarily as a result of the
settlement of reinsurance and a decline in the premiums written.

    Income taxes recoverable:

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

    Future income taxes:

    Future income taxes have decreased primarily due to a valuation allowance
recorded in during the first half of the year. During the quarter a reduction
in the valuation allowance of $2.8 million was recorded, however for the year
an overall increase in the valuation allowance of $7.6 million was recorded as
a result of the continued losses of the U.S. operations. Uncertainty over the
Company's ability to utilize these losses over the short term has led to the
Company recording the additional allowance.

    Capital assets:

    Capital assets decreased by 40% since the end of last year primarily as a
result of the reclassification of $37.7 million of Assets Held for Sale to
Accounts receivable and other assets.

    Goodwill and intangible assets:

    Goodwill and intangible assets decreased by 8% since the end of last year
mainly as a result of the accelerated amortization of computer software in
certain of the U.S. subsidiaries.

    Unearned premiums:

    Unearned premiums decreased 14% since December 31, 2008 as a result of
lower written premiums.

    Unpaid claims:

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

    
    -------------------------------------------------------------------------
    (in millions of dollars)                                   As at
    -------------------------------------------------------------------------
                                                       June 30,  December 31,
    Line of Business                                      2009          2008
    -------------------------------------------------------------------------
    Non - Standard Automobile                       $    501.4    $    489.3
    Standard Automobile                                    1.8           1.7
    Commercial Automobile                                221.1         217.8
    Trucking                                             600.2         657.4
    Motorcycle                                           120.8         118.1
    Property & Liability                                 296.7         317.4
    Other                                                 88.7          77.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total                                           $  1,830.7    $  1,879.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The provisions for unpaid claims decreased by 3% to $1.83 billion at the
end of the second quarter compared to $1.88 billion at the end of 2008. The
provision for unpaid claims comprised case reserves for individual claims of
$1.09 billion ($1.05 billion at December 31, 2008) and a provision for
Incurred But Not Reported (IBNR) claims which decreased 10.4% to $741.6
million ($828.1 million at December 31, 2008). The Run-off business had $523.8
million of case reserves and $479.7 million provision for IBNR claims as at
June 30, 2009, a decrease of 13% since December 31, 2008.

    Book value per share:
    Book value per share decreased by 19% to $6.67 (C$7.76) at June 30, 2009
from $8.24 (C$10.03) at December 31, 2008 as a result of the diluted loss per
share of $1.75 and the increase of $13.2 million in the "Accumulated other
comprehensive income" component of shareholders' equity.

    Contractual Obligations

    Information concerning contractual maturities of financial instruments as
at June 30, 2009 is shown in Note 7 of the financial statements. For further
details on the Company's long term debt and interest obligations, refer to
Note 20 of the Company's 2008 audited consolidated financial statements and
pages 35 to 40 of the 2008 Annual Report which sets out the Company's
contractual obligations as at December 31, 2008.
    On June 29, 2009, Kingsway and Lincoln General entered into a consulting
agreement with an external run-off manager to provide certain consulting
services relating to Lincoln General, including advice and assistance in the
development of a Run-off Plan. In addition to base compensation of $1.3
million annually, the agreement provides for a minimum of $2.5 million to be
paid to the Run-off Manager at the termination of the contract (provided the
contract is not terminated for cause), which, at the latest will be March 1,
2014. This bonus may be increased upon the occurrence of certain events, the
likelihood of which will be remeasured and accrued quarterly. The minimum
bonus amount of $2.5 million is being accrued over the term of the contract.

    Liquidity and Capital Resources

    During the three and six months ended June 30, 2009, the cash used in
operating activities were $82.2 million and $183.5 million, respectively. The
Company's insurance subsidiaries fund their obligations primarily through the
premium and investment income and maturities in the securities portfolio.
    As a holding company, Kingsway derives cash from its subsidiaries
generally in the form of dividends and management fees to meet its
obligations, which primarily consist of dividend and interest payments. The
Company believes that it has the flexibility to obtain the funds needed to
fulfill its cash requirements and also to satisfy regulatory capital
requirements over the next twelve months. The operating insurance subsidiaries
require regulatory approval for the return of capital and, in certain
circumstances, prior to the payment of dividends. In the event that dividends
and management fees available to Kingsway are inadequate to service its
obligations, the Company would need to raise capital, sell assets or
restructure its debt obligations. The Company holds $489.0 million in cash and
high grade short term assets, representing approximately 20% of invested
assets. The majority of the other fixed income securities are also liquid.
    On June 26, 2009, KFS Capital LLC, an indirect wholly-owned subsidiary of
Kingsway, commenced a take-over bid (the "KLROC Offer") to acquire up to
1,000,000 preferred, retractable, redeemable, cumulative units of Kingsway
Linked Return of Capital Trust at a price per unit of C$12.00 in cash. The
KLROC Offer expired at 5:00 p.m. (Toronto time) on Tuesday, August 4, 2009 and
694,015 units were tendered. This tender was paid for using available cash.
    Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of
Kingsway announced on July 14, 2009 the commencement of a modified "Dutch
Auction" tender offer (the "2012 Offer") for a portion of its outstanding
Unsecured 6% Debentures due July 11, 2012 (the "2012 Debentures"). The 2012
Offer provides for a cash purchase of 2012 Debentures at a price per C$1,000
principal amount of debentures of not less than C$540 and not greater than
C$620, for a maximum aggregate purchase price to the offeror not to exceed
C$31 million (excluding accrued and unpaid interest). The 2012 Offer expires
at 5:00 p.m. (Toronto time) on August 14, 2009, unless extended or earlier
terminated by the Offeror. The Company expects to pay for the 2012 offer using
available cash and/or proceeds from an undrawn $20 million line of credit.
    Kingsway announced on July 29, 2009 an amendment to its normal course
issuer bid for common shares had been approved by the TSX. The normal course
issuer bid was originally announced by Kingsway on November 28, 2008.
Purchases under the normal course issuer bid from December 2, 2008 to December
1, 2009 were limited to 2,753,426 common shares (or approximately 5% of the
aggregate number of common shares outstanding on November 15, 2008). Purchases
under the normal course issuer bid, as amended, are now limited to 5,386,545
common shares, or 10% of the public float on November 28, 2008. Purchases
under the normal course issuer bid, as amended, will terminate on December 1,
2009.
    The Capital Committee of Kingsway's board of directors has recommended
that capital allocated to the Capital Committee for its $40 million capital
initiative that was announced in May 2009 that remains unused following the
expiry of: (i) the modified "Dutch Auction" tender offer for a portion of its
outstanding Unsecured 6% Debentures due July 11, 2012, and (ii) the expiry of
the take-over bid for units of the Kingsway Linked Return of Capital Trust, be
applied to the repurchase of Kingsway common shares pursuant to the Company's
normal course issuer bid.
    As at June 30, 2009 the Company was adequately capitalized to support the
premium volume of the insurance subsidiaries. The Company's Canadian operating
entities are regulated by the Office of the Superintendent of Financial
Institutions ("OSFI") and the Financial Services Commission of Ontario
("FSCO") and are required to maintain a level of capital sufficient to achieve
a target of 150% of a minimum capital test ("MCT") ratio. As at June 30, 2009
the MCT's of Jevco Insurance Company and Kingsway General Insurance Company
were 221% and 203% respectively. As at June 30, 2009 the Canadian insurance
companies have aggregate capital of approximately $46.4 million in excess of
the 150% level.
    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, 2009, all U.S. subsidiaries, with the exception
of Lincoln General, are estimated to be above the required RBC levels, with
RBC ratio estimates ranging between 264% and 42,600%, and have estimated
aggregate capital (excluding Lincoln General) of approximately $83.6 million
in excess of the 200% level. As at June 30, 2009, Lincoln General's estimated
RBC was 63%.
    Lincoln General submitted its regulatory action plan on May 7, 2009 that
the Pennsylvania Insurance Department subsequently determined is satisfactory.
Please refer to Note 9 of the 2008 Annual Report and Note 8 to the interim
financial statements for further details.
    The Company's 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, 2009 the capital
maintained by Kingsway Reinsurance Corporation was approximately $49.9 million
in excess of the regulatory requirements in Barbados and the capital
maintained by Kingsway Reinsurance (Bermuda) Limited was approximately $12.6
million in excess of regulatory requirements in Bermuda.
    As part of the ongoing transformation program, during the second quarter
the Company began terminating all related party reinsurance treaties. As at
June 30, 2009 the treaties between Lincoln General and Kingsway Reinsurance
Corporation have been commuted. All other treaties between Kingsway
Reinsurance Corporation and the U.S. operating companies are expected to be
commuted in the third quarter of 2009. Treaties between the Canadian operating
companies and Kingsway Reinsurance (Bermuda) Limited are expected to be
commuted before the end of 2009. The objective of this initiative is to
increase capital in our operating companies and release excess capital to be
used for corporate purposes.

    Off-Balance Sheet Financing

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

    Critical accounting estimates and assumptions

    The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. The year-to-date results of the company
reflect management's judgments regarding the impact of prevailing global
credit, and equity market conditions. Given the uncertainty surrounding the
continued volatility in these markets, and the general lack of liquidity in
financial markets, the actual financial results could differ from those
estimates.
    There are no new critical accounting estimates or assumptions compared to
the information provided in the annual MD&A.

    Related Party Transactions

    Related-party transactions, also including services provided to or
received by Kingsway's subsidiaries, are carried out in the normal course of
operations and are measured at the amount of consideration paid or received as
established and agreed by the parties. Management believes that consideration
paid for such services approximate fair value.
    In March 2009, the Company obtained a facility from a related party to
allow for specific capital initiatives. The facility is at fair market terms
and conditions and is more fully described in Note 14 of the interim financial
statements.

    International Financial Reporting Standards (IFRS)

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

    Disclosure of Outstanding Share Data

    As at June 30, 2009, the Company had 55,068,528 common shares outstanding
and there have been no changes up to the reporting date.

    
    Summary of Quarterly Results

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

    -------------------------------------------------------------------------
                2009            2008                            2007
    -------------------------------------------------------------------------
    (in millions
     of dollars
     except per
     share
     values)      Q2      Q1      Q4      Q3      Q2      Q1      Q4      Q3
    -------------------------------------------------------------------------
    Gross
     premiums
     written  $251.4  $259.0  $295.6  $354.6  $422.0  $431.0  $418.8  $478.2
    Net
     premiums
     earned    269.6   283.5   305.6   371.0   395.0   412.7   432.8   451.6
    Total
     revenue   298.0   290.9   219.6   374.5   438.4   443.1   480.8   490.9
    Net income
     (loss)    (38.4)  (58.3) (360.4)  (17.4)    6.3   (34.4) (103.5)   23.6
    -------------------------------------------------------------------------
    Earnings
     (loss)
     per share
    Basic      (0.70)  (1.06)  (6.53)  (0.31)   0.11   (0.62)  (1.86)   0.43
    Diluted    (0.70)  (1.06)  (6.53)  (0.32)   0.11   (0.62)  (1.84)   0.42
    -------------------------------------------------------------------------


    Supplementary Financial Information from Continuing Operations

                                                       June 30,  December 31,
                                                          2009          2008
                                                   --------------------------
    Rolling four quarter calculations:

    Net premiums written to estimated statutory
     surplus ratio                                        2.0x          2.1x

    Senior debt to capitalization ratio                  36.9%         31.9%

    Total debt to capitalization ratio                   49.1%         42.9%


    Selected Financial Information expressed in Canadian dollars

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

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
    (in millions of dollars
     except per share values)       2009        2008        2009        2008
    -------------------------------------------------------------------------
    Gross premiums written    C$   293.8  C$   426.2  C$   615.8  C$  $859.1
    Net premiums earned            315.2       398.9       668.8       790.7
    Net income (loss)              (42.8)        6.1       (85.3)      (28.3)
    Earnings (loss) per share
     - diluted                     (0.78)        0.1       (1.56)       (0.5)
    Underwriting (loss)            (83.6)      (26.7)     (157.1)      (94.6)
    Book value per share            7.76       15.80        7.76       15.80
    -------------------------------------------------------------------------
    

    Outlook

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

    Disclosure Controls and Procedures

    Management of the Company is responsible for establishing and maintaining
disclosure controls and procedures for the Company as defined under National
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
interim 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 National 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 its supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the financial
statements for external purposes in accordance with GAAP. There has been no
change in the Company's internal control over financial reporting that
occurred during the Company's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

    Forward Looking Statements

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

    Additional Information

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

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

    -------------------------------------------------------------------------
    (Unaudited)                   Three months ended        Six months ended
                                        June 30:                June 30:
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Gross premiums written    $  251,392  $  422,043  $  510,370  $  853,070
    -------------------------------------------------------------------------
    Net premiums written      $  224,974  $  387,329  $  473,505  $  785,317
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned     $  269,629  $  395,014  $  553,121  $  807,669
      Investment income
       (Note 6)                   29,114      32,672      56,114      68,852
      Net realized gain (loss)
       (Note 6)                     (734)     10,671     (20,309)      4,953
    -------------------------------------------------------------------------
                                 298,009     438,357     588,926     881,474
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred         $  246,076  $  285,583  $  491,925  $  633,749
      Commissions and
       premiums taxes             43,585      74,893      86,156     146,083
      General and
       administrative expenses    43,901      58,995      94,879     118,401
      Restructuring costs
       (Note 10)                   9,978           -      12,921           -
      Interest expense             5,919       8,872      12,215      18,788
      Amortization of
       intangibles (Note 2)        4,915       2,994       7,688       6,318
    -------------------------------------------------------------------------
                                 354,374     431,337     705,784     923,339
    -------------------------------------------------------------------------
    Income (loss) before
     unusual item and income
     taxes                       (56,365)      7,020    (116,858)    (41,865)
      Gain on buy-back of
       senior notes (Note 13)      2,647           -       2,647           -
    -------------------------------------------------------------------------
    Income (loss) from
     continuing operations
     before income taxes         (53,718)      7,020    (114,211)    (41,865)
    Income taxes (recovery)      (15,341)        216     (21,406)    (13,505)
    -------------------------------------------------------------------------
    Income (loss) from
     continuing operations       (38,377)      6,804     (92,805)    (28,360)
    Income (loss) from
     discontinued operations,
     net of taxes (Note 3)             -        (483)     (2,223)        282
    Loss on disposal of
     discontinued operations,
     net of taxes (Note 3)             -           -      (1,616)          -
    -------------------------------------------------------------------------
    Net income (loss)         $  (38,377) $    6,321  $  (96,644) $  (28,078)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings (loss) per share
     - continuing operations:
    Basic:                    $    (0.70) $     0.12  $    (1.69) $    (0.51)
    Diluted:                  $    (0.70) $     0.12  $    (1.69) $    (0.51)

    -------------------------------------------------------------------------
    Earnings (loss) per share
     - net income (loss):
    Basic:                    $    (0.70) $     0.11  $    (1.75) $    (0.51)
    Diluted:                  $    (0.70) $     0.11  $    (1.75) $    (0.51)
    Weighted average shares
     outstanding (in '000s):
    Basic:                        55,069      55,159      55,069      55,284
    Diluted:                      55,091      55,231      55,111      55,357

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



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

    -------------------------------------------------------------------------
                                                       June 30,  December 31,
                                                          2009          2008
                                                    (unaudited)
    -------------------------------------------------------------------------
    ASSETS
      Cash and cash equivalents                     $  154,709    $  105,656
      Securities (Note 6)                            2,170,908     2,370,485
      Accrued investment income                         23,878        24,554
      Financed premiums                                 68,771        61,616
      Accounts receivable and other assets (Note 12)   270,742       276,450
      Due from reinsurers and other insurers           163,353       177,945
      Deferred policy acquisition costs                107,903       127,555
      Income taxes recoverable                          46,559        14,737
      Future income taxes                               17,405        25,291
      Capital assets (Note 2 and 12)                    57,258        95,259
      Goodwill and intangible assets (Note 2)           58,455        63,893
    -------------------------------------------------------------------------
                                                    $3,139,941    $3,343,441
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES
      Loans payable                                 $   73,208    $   66,222
      Accounts payable and accrued liabilities         134,222       135,565
      Unearned premiums                                462,223       536,480
      Unpaid claims                                  1,830,741     1,879,016
      Senior unsecured debentures                      185,003       185,203
      Subordinated indebtedness                         87,399        87,383
    -------------------------------------------------------------------------
                                                     2,772,796     2,889,869
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
      Share capital                                    322,344       322,344
        Issued and outstanding number of
         common shares
        55,068,528 - June 30, 2009
        55,068,528 - December 31, 2008
      Contributed surplus                                8,670         9,791
      Retained earnings                                     71        98,564
      Accumulated other comprehensive income            36,060        22,873
    -------------------------------------------------------------------------
                                                       367,145       453,572
    -------------------------------------------------------------------------
                                                    $3,139,941    $3,343,441
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                                            Six months ended
                                                                June 30:
    -------------------------------------------------------------------------
    (Unaudited)                                             2009        2008
    -------------------------------------------------------------------------
    Share capital
    Balance at beginning of period                    $  322,344  $  326,151
    Issued during the period                                   -          48
    Repurchased for cancellation                               -      (3,097)
    -------------------------------------------------------------------------
    Balance at end of period                             322,344     323,102
    -------------------------------------------------------------------------
    Contributed surplus
    Balance at beginning of period                    $    9,791  $    7,619
    Stock option expense                                  (1,121)        668
    -------------------------------------------------------------------------
    Balance at end of period                               8,670       8,287
    -------------------------------------------------------------------------
    Retained earnings
    Balance at beginning of period                    $   98,564  $  521,165
    Net income (loss) for the period                     (96,644)    (28,078)
    Common share dividends                                (1,849)     (8,208)
    Repurchase of shares for cancellation                      -      (1,281)
    -------------------------------------------------------------------------
    Balance at end of period                                  71     483,598
    -------------------------------------------------------------------------
    Accumulated other comprehensive income
    Balance at beginning of period                    $   22,873  $   85,866
    Other comprehensive income (loss)                     13,187     (46,412)
    -------------------------------------------------------------------------
    Balance at end of period                              36,060      39,454
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total shareholders' equity at end of period       $  367,145  $  854,441
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
    (Unaudited)                     2009        2008        2009        2008
    -------------------------------------------------------------------------
    Comprehensive income
    Net income (loss)         $  (38,377) $    6,321  $  (96,644) $  (28,078)
    Other comprehensive
     income, net of taxes:
      Change in unrealized
       gains (losses) on
       available-for
       securities:
        Unrealized gains
         (losses) arising
         during the period,
         net of income taxes(1)   19,507     (44,433)     15,763     (31,962)
        Recognition of
         realized losses
         (gains) to net income,
         net of income taxes(2)    2,281      (1,399)     (6,340)     (4,265)
      Unrealized gains (losses)
       on translating financial
       statement of
       self-sustaining foreign
       operations                  4,442       4,021      (5,081)    (10,185)
      Gain (loss) on cash
       flow hedge                 10,205           -       8,845           -
    -------------------------------------------------------------------------
    Other comprehensive
     income (loss)                36,435     (41,811)     13,187     (46,412)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Comprehensive income
     (loss)                   $   (1,942) $  (35,490) $  (83,457) $  (74,490)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Net of income tax of $12,676 for the three months ended June 30, 2009
        ($7,704 for year to date) and $6,281 for the three months ended
        June 30, 2008 ($6,995 for year to date).

    (2) Net of income tax of $819 for the three months ended June 30, 2009
        ($629 for year to date) and $1,219 for the three months ended
        June 30, 2008 ($2,724 for year to date).



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

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
    (Unaudited)                     2009        2008        2009        2008
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities
    Net income (loss)         $  (38,377) $    6,321  $  (96,644) $  (28,078)
    Items not affecting cash:
      Amortization                 6,058       6,308       9,886      11,239
      Future and current
       income taxes               (2,695)       (949)      1,904      (7,149)
      Net realized (gains)
       losses                     (1,913)    (10,946)     19,603      (5,469)
      Amortization of bond
       premiums and discounts        640      (1,562)        704      (4,032)
      Net change in other
       non-cash balances         (37,517)    (13,647)   (110,536)    (45,189)
    -------------------------------------------------------------------------
                                 (73,804)    (14,475)   (175,083)    (78,678)
    -------------------------------------------------------------------------
    Financing activities
    Increase (decrease) share
     capital                        (279)          -        (279)         48
    Repurchase of common shares
     for cancellation                  -        (588)          -      (4,378)
    Dividends paid                  (977)     (4,069)     (1,849)     (8,208)
    Increase (decrease) in
     bank indebtedness and
     loans payable                 2,586      (4,628)      2,218     (15,283)
    Decrease in senior
     unsecured indebtedness            -        (228)          -     (17,517)
    -------------------------------------------------------------------------
                                   1,330      (9,513)         90     (45,338)
    -------------------------------------------------------------------------
    Investing activities
    Purchase of securities    (1,038,816)   (872,409) (1,571,836) (1,592,080)
    Proceeds from sale of
     securities                1,052,066     958,539   1,804,674   1,759,812
    Financed premiums
     receivable, net              (7,214)    (16,409)     (5,221)    (13,253)
    Acquisitions, net of
     cash acquired                     -           -           -        (212)
    Net proceeds from sale of
     discontinued operations                       -      (1,941)          -
    Net change to capital
     assets and intangible
     assets                        1,243      (1,864)     (1,630)     (3,338)
    -------------------------------------------------------------------------
                                   7,279      67,857     224,046     150,929
    -------------------------------------------------------------------------
    Net change in cash and
     cash equivalents            (65,195)     43,869      49,053      26,913
    Cash and cash equivalents
     at beginning of period      219,904     144,679     105,656     161,635
    -------------------------------------------------------------------------
    Cash and cash equivalents
     at end of period         $  154,709  $  188,548  $  154,709  $  188,548
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    For the three and six months ended June 30, 2009 and 2008
    (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 The Canadian Institute of Chartered Accountants ("CICA")
    Canadian generally accepted accounting principles ("GAAP") using the same
    accounting policies as were used for the Company's consolidated financial
    statements for the year ended December 31, 2008 except for the changes in
    accounting policies as noted below. These interim consolidated financial
    statements do not contain all disclosures required by generally accepted
    accounting principles and accordingly should be read in conjunction with
    the Company's audited consolidated financial statements for the year
    ended December 31, 2008 as set out on pages 65 to 104 of the Company's
    2008 Annual Report. The results of the operations for the interim periods
    are not necessarily indicative of the full-year results.

    NOTE 2  Change In Accounting Polices

    Commencing January 1, 2009, the Company adopted the CICA Handbook Section
    3064 Goodwill and Intangible Assets. As a result of adopting the new
    standard, certain software costs previously recorded as Capital assets
    are now recorded as Intangible assets in the Consolidated Balance Sheet.
    Accordingly, $18.1 million as at December 31, 2008 ($17.9 million as at
    June 30, 2008) was reclassified from Capital assets to Intangible assets.
    The related amortization expense that was previously recorded in General
    and administrative expenses on the Consolidated Statement of Operations
    is now recorded as Amortization of intangibles. Accordingly, $1.9 million
    for the three months ended June 30, 2008 ($3.5 million for the six months
    ended June 30, 2008) was reclassified from General and administrative
    expenses to Amortization of intangibles.

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

    NOTE 3  Discontinued Operations

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

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

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Operations:
    Revenue                   $        -  $   22,437  $     (215) $   53,835
    -------------------------------------------------------------------------
    Loss from discontinued
     operations before taxes           -      (1,685)     (2,750)     (1,615)
    Income tax (recovery)              -      (1,202)       (527)     (1,897)
    -------------------------------------------------------------------------
    Income (loss) from
     discontinued operations
     before disposal, net
     of taxes                 $        -  $     (483) $   (2,223) $      282
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Disposals:
    Loss on disposal before
     income taxes             $        -  $        -  $   (1,941) $        -
    Income tax (recovery)              -           -        (325)          -
    -------------------------------------------------------------------------
    Loss on disposal, net
     of taxes                 $        -  $        -  $   (1,616) $        -
    -------------------------------------------------------------------------
    Total gain (loss) from
     discontinued operations,
     net of taxes             $        -  $     (483) $   (3,839) $      282
    -------------------------------------------------------------------------

    NOTE 4  Stock-based Compensation

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

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

    -------------------------------------------------------------------------
                                                             As at June 30:
    -------------------------------------------------------------------------
                                                            2009        2008
    -------------------------------------------------------------------------
    Risk-free interest rate                                 1.78%       3.22%
    Dividend yield                                          4.21%       2.23%
    Volatility of the expected market price of the
     Company's common shares                                88.1%       27.8%
    Expected option life (in years)                          4.0         4.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    NOTE 5  Segmented Information

    The Company provides property and casualty insurance and other insurance
    related services. Previously, the Company managed these businesses in
    three reportable segments, Canada, the United States and Corporate and
    other insurance related services. As a result of implementing its
    corporate restructuring plan and exiting non-core business, the Company
    now manages its business in four reportable segments, Canada, the United
    States, Business in run-off and Corporate and other insurance related
    services. The Company's Canadian and United States segments include
    transactions with the Company's reinsurance subsidiaries. The business in
    run-off is comprised of the Lincoln General business except for specific
    product lines transferred to related companies, the Southern United
    business and the Canadian long haul trucking business. At the present
    time, other insurance related services are not significant. Results for
    the Company's operating segments are based on the Company's internal
    financial reporting systems and are consistent with those followed in the
    preparation of the consolidated financial statements. The reportable
    segments for Canada have been updated to conform to the current period's
    financial statement presentation for the results of continuing
    operations.

    -------------------------------------------------------------------------
                                   Three months ended June 30, 2009
    -------------------------------------------------------------------------
                                     United             Corporate
                          Canada     States    Run-off  and other      Total
    -------------------------------------------------------------------------
    Gross premiums
     written           $  95,775  $ 140,362  $  15,255  $       -  $ 251,392
    Net premiums
     earned               76,393    135,147     58,089          -    269,629
    Investment income      6,333     18,238      5,928     (1,385)    29,114
    Net realized gain
     (loss)                1,118     (1,480)      (775)       403       (734)
    Interest expense           -      5,919          -          -      5,919
    Amortization of
     capital assets          413        546         13        171      1,143
    Amortization of
     intangible assets         -      4,230          -        685      4,915
    Income tax expense
     (recovery)           (1,369)   (13,795)     3,878     (4,055)   (15,341)
    Income (loss) from
     operations           (1,437)     2,091    (36,412)    (2,619)   (38,377)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                   Three months ended June 30, 2008
    -------------------------------------------------------------------------
                                     United             Corporate
                          Canada     States    Run-off  and other      Total
    -------------------------------------------------------------------------
    Gross premiums
     written           $ 128,226  $ 184,765  $ 109,052  $       -  $ 422,043
    Net premiums
     earned               85,019    142,144    167,851          -    395,014
    Investment income
     (loss)                9,067     17,576      6,235       (206)    32,672
    Net realized gain      7,125        724      2,822          -     10,671
    Interest expense           -      8,002          -        870      8,872
    Amortization of
     capital assets          524        809         38        667      2,038
    Amortization of
     intangible assets         -      2,264          -        730      2,994
    Income tax expense
     (recovery)             (932)       619     (4,338)     4,867        216
    Income (loss) from
     operations           12,379      9,737     (9,561)    (5,751)     6,804
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                    Six months ended June 30, 2009
    -------------------------------------------------------------------------
                                     United             Corporate
                          Canada     States    Run-off  and other      Total
    -------------------------------------------------------------------------
    Gross premiums
     written           $ 149,020  $ 322,969  $  38,381  $       -  $ 510,370
    Net premiums
     earned              138,820    289,497    124,804          -    553,121
    Investment income     11,651     32,236     10,752      1,475     56,114
    Net realized
     (loss)               (2,130)   (12,919)    (3,721)    (1,539)   (20,309)
    Interest expense           -     12,215          -          -     12,215
    Amortization of
     capital assets          807      1,094          -        296      2,197
    Amortization of
     intangible assets         -      6,365          -      1,323      7,688
    Income tax expense
     (recovery)           (2,123)    (8,913)    (6,334)    (4,036)   (21,406)
    Income (loss) from
     operations           (9,165)   (11,801)   (73,551)     1,712    (92,805)

    Capital assets     $  11,528  $  19,892  $  25,037  $     801  $  57,258
    Goodwill and
     intangible assets     6,279     43,804      5,516      2,856     58,455
    Total assets         221,740  1,488,527  1,337,941     91,733  3,139,941
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                    Six months ended June 30, 2008
    -------------------------------------------------------------------------
                                     United             Corporate
                          Canada     States    Run-off  and other      Total
    -------------------------------------------------------------------------
    Gross premiums
     written           $ 199,020  $ 396,956  $ 257,094  $       -  $ 853,070
    Net premiums
     earned              155,668    286,877    365,124          -    807,669
    Investment income
     (loss)               18,669     38,571     12,355       (743)    68,852
    Net realized gain
     (loss)                5,833     (3,433)     2,553          -      4,953
    Interest expense           -     16,588          -      2,200     18,788
    Amortization of
     capital assets        1,056      1,579         77      1,091      3,803
    Amortization of
     intangible assets         -      4,874          -      1,444      6,318
    Income tax expense
     (recovery)           (7,204)     7,787    (21,052)     6,964    (13,505)
    Income (loss) from
     operations           12,600     13,332    (52,439)    (1,853)   (28,360)

    Capital assets     $  60,091  $  18,380  $  27,446  $   4,399  $ 110,316
    Goodwill and
     intangible assets     9,014    114,105      5,516      3,208    131,843
    Total assets       1,489,941  1,123,263  1,802,265     35,287  4,450,756
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    NOTE 6 Securities

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

    -------------------------------------------------------------------------
                                              June 30, 2009
    -------------------------------------------------------------------------
                                               Gross       Gross
                               Amortized  Unrealized  Unrealized
                                    cost       Gains      Losses  Fair Value
    -------------------------------------------------------------------------
    Term Deposits             $  331,375  $    2,935  $       20  $  334,290
    Bonds:
      Canadian
       - Government              209,594       3,381         783     212,192
       - Corporate               221,780       8,391         928     229,243
       - Commercial
          mortgage backed         53,500           -       4,819      48,681
       - Other asset backed       19,071         477         145      19,403
      U.S
       - Government              507,262      27,668         123     534,807
       - Corporate               580,454      17,715       3,690     594,479
       - Commercial
          mortgage backed         10,229           -       1,290       8,939
       - Residential
          mortgage backed        121,612       4,490          91     126,011
       - Other asset backed       18,310         406         451      18,265
      Other
       - Corporate                34,450       1,146         219      35,377
    -------------------------------------------------------------------------
    Sub-total                  2,107,637      66,609      12,559   2,161,687
    Common shares
     - Canadian                    2,294       1,719           -       4,013
     - U.S                            15          14           -          29
    Preferred shares
     - Canadian                    6,879           -       2,127       4,752
     - U.S                           531           -         104         427
    -------------------------------------------------------------------------
                              $2,117,356  $   68,342  $   14,790  $2,170,908
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                             December 31, 2008
    -------------------------------------------------------------------------
                                               Gross       Gross
                               Amortized  Unrealized  Unrealized
                                    cost       Gains      Losses  Fair Value
    -------------------------------------------------------------------------
    Term Deposits             $  184,381  $    3,610  $       20  $  187,971
    Bonds:
      Canadian
       - Government              149,200       8,310           7     157,503
       - Corporate               178,269       1,881       7,562     172,588
       - Commercial
          mortgage backed         66,185         455       4,731      61,909
       - Other asset backed       13,304          78         127      13,255
      U.S
       - Government              420,540      39,498         895     459,143
       - Corporate               772,171      11,289      23,279     760,181
       - Commercial
          mortgage backed          6,507           -       1,328       5,179
       - Residential
          mortgage backed        126,574       3,621         868     129,327
       - Other asset backed       22,128           8       2,032      20,104
      Other
       - Corporate               128,382       4,328         999     131,711
    -------------------------------------------------------------------------
    Sub-total                 $2,067,641  $   73,078  $   41,848  $2,098,871
    Common shares
     - Canadian                  114,167       2,590           -     116,757
     - U.S                       146,408       4,883           -     151,291
    Preferred shares
     - Canadian                    6,692           8       3,629       3,071
     - U.S                           634           -         139         495
    -------------------------------------------------------------------------
                              $2,335,542  $   80,559  $   45,616  $2,370,485
    -------------------------------------------------------------------------

    The following tables highlight the aggregate unrealized loss position, by
    security type, of holdings in an unrealized loss position. The tables
    segregate the holdings based on the period of time the securities have
    been continuously held in an unrealized loss position.

    -------------------------------------------------------------------------
                                              June 30, 2009
    -------------------------------------------------------------------------
                                 Less than 12 months    12 months or greater
    -------------------------------------------------------------------------
                                          Unrealized              Unrealized
                              Fair value        loss  Fair value        loss
    -------------------------------------------------------------------------
    Term Deposits             $   19,985  $       20           -  $        -
    Bonds:
      Canadian
       - Government               57,589         783           -           -
       - Corporate                12,761         145      21,232         783
       - Commercial
          mortgage backed         11,371         502      36,653       4,317
       - Other asset backed        4,154          41       1,758         104
      U.S
       - Government              106,151         117       2,193           6
       - Corporate                96,720       1,115      39,267       2,575
       - Commercial
          mortgage backed          3,003         210       9,427       1,080
       - Residential
          mortgage backed          7,878          91           -           -
       - Other asset backed          822          80       1,946         371
      Other
       - Corporate                 4,190         143         784          76
    -------------------------------------------------------------------------
    Sub-total                 $  324,624  $    3,247  $  113,260  $    9,312
    Common shares
     - Canadian                        -           -           -           -
     - U.S                             -           -           -           -
    Preferred shares
     - Canadian                        -           -       4,752       2,127
     - U.S                             -           -         427         104
    -------------------------------------------------------------------------
                              $  324,624  $    3,247  $  118,439  $   11,543
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                             December 31, 2008
    -------------------------------------------------------------------------
                                 Less than 12 months    12 months or greater
    -------------------------------------------------------------------------
                                          Unrealized              Unrealized
                              Fair value        loss  Fair value        loss
    -------------------------------------------------------------------------
    Term Deposits             $   18,856  $       20  $        -  $        -
    Bonds:
      Canadian
       - Government                2,482           7           -           -
       - Corporate                63,037       5,392      30,564       2,170
       - Commercial
          mortgage backed         17,493       1,023      31,397       3,708
       - Other asset backed        3,279          29       3,472          98
      U.S
       - Government               11,415         769         376         126
       - Corporate               258,079      16,349      94,665       6,930
       - Commercial
          mortgage backed          4,790       1,212         389         116
       - Residential
          mortgage backed             33           1         711         867
       - Other asset backed       16,269       1,451       2,329         581
       - Corporate                 6,381         112       3,321         887
    -------------------------------------------------------------------------
    Sub-total                 $  402,114  $   26,365  $  167,224  $   15,483
    Common shares
     - Canadian                        -           -           -           -
     - U.S                             -           -           -           -
    Preferred shares
     - Canadian                        -           -       3,072       3,629
     - U.S                           101           3         394         136
    -------------------------------------------------------------------------
                              $  402,215  $   26,368  $  170,690  $   19,248
    -------------------------------------------------------------------------

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

    Management performs a quarterly analysis of the Company's investment
    holdings to determine if declines in market value are other than
    temporary. Pursuant to FASB and Accounting Standards Board of Canada
    guidance issued in April 2009, the analysis process has been revised
    during the quarter to include consideration of the following factors:

    -   Assessing the company's intent to sell those securities;
    -   Assessing whether it is more likely than not that the company will be
        required to sell those securities before the recovery of its
        amortized cost basis;
    -   Assessing if any credit losses are expected for those securities. The
        assessment includes consideration of, among other things, all
        available information and factors having a bearing upon
        collectability of security such as changes to credit rating by rating
        agencies, financial condition of the issuer, expected cash flows and
        value of any underlying collateral.

    As a result of the above analysis performed by management to determine
    declines in market value that are other than temporary, write downs for
    other-than-temporary impairments were $3.3 million compared to
    $9.9 million for the quarter ended June 30, 2008 and the entire amount of
    other-than-temporary impairments has been recognized in earnings.

    Management has reviewed currently available information regarding other
    securities whose estimated fair values are less than their carrying
    amounts and believes that these unrealized losses are not other than
    temporary and are primarily due to temporary market and sector related
    factors rather than to issuer-specific factors. The company does not
    intend to sell those securities and it is not more likely than not that
    it will be required to sell those securities before recovery of its
    amortized cost.

    Net investment income for the quarter ended June 30 is comprised as
    follows:

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                             June 30:                June 30:
    -------------------------------------------------------------------------
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Investment income
      Interest on short term
       securities                    748       3,040       1,616       7,277
      Interest on Bonds           22,337      28,501      44,831      57,881
      Dividends                      146       1,648       1,506       4,447
      Premium Finance              1,504       1,108       2,367       2,097
      Other                        5,391          (7)      8,153         800
    -------------------------------------------------------------------------
    Gross Investment Income       30,126      34,290      58,473      72,502
    Investment Expenses            1,012       1,618       2,359       3,650
    -------------------------------------------------------------------------
    Net Investment Income         29,114      32,672      56,114      68,852
    -------------------------------------------------------------------------

    Net realized losses for the quarter ended June 30, 2009 were $0.7 million
    compared to net realized gains of $10.7 million for the quarter ended
    June 30, 2008.

    NOTE 7  Financial Instruments

    Risk Management

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

    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 is 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's policies, however, are
    distributed by agents, program managers or brokers who manage cash
    collection on its behalf. 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, 2009         December 31, 2008
    -------------------------------------------------------------------------

    AAA/ Aaa                   1,160,455       53.7%   1,146,703       54.7%
    AA/Aa2                       399,061       18.5%     341,280       16.3%
    A/A2                         461,418       21.3%     505,748       24.1%
    BBB/Baa2                      98,636        4.6%      65,255        3.1%
    BB/Ba2                         8,309        0.4%       5,122        0.2%
    B/B2                           9,597        0.4%       7,838        0.4%
    CCC/Caa or lower,
     or not rated                 24,211        1.1%      26,925        1.2%
    -------------------------------------------------------------------------
    Total consolidated         2,161,687      100.0%   2,098,871      100.0%
    -------------------------------------------------------------------------

    As at June 30, 2009, 93.5% of the fixed income portfolio is rated 'A' or
    better. The 'not rated' category consists primarily of investments in
    money market instruments. Changes in this balance period over period are
    primarily due to timing of investment maturities and reinvestment.

    Market risk:

    Our primary market risk exposure is changes in interest rates. Because
    most of the securities portfolio is comprised of fixed income securities,
    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 $71.6 million at June 30,
    2009, representing 3.3% of the $2.2 billion fair value fixed income
    securities portfolio.

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

    -------------------------------------------------------------------------
    As at June 30, 2009         One year      One to     Five to   More than
                                 or less  five years   ten years   ten years
    -------------------------------------------------------------------------
    Assets:
    Cash & cash equivalents      154,709           -           -           -
    Securities                   411,005   1,004,046     561,744     184,694
    Accrued Investment Income     23,878           -           -           -
    Finance Premiums              68,771           -           -           -
    Accounts receivable and
     other assets                266,188           -           -           -
    Due from reinsurers and
     other insurers               57,507      88,105      15,649       2,092
    -------------------------------------------------------------------------
    Total:                       982,058   1,092,151     577,393     186,786
    -------------------------------------------------------------------------

    Liabilities:
    Loans payable                      -           -      66,222       6,986
    Accounts payable and
     accrued liabilities         134,222           -           -           -
    Unpaid claims                644,501     987,408     175,383      23,449
    Senior unsecured
     debentures                        -     185,003           -           -
    Subordinated indebtedness          -           -           -      87,399
    -------------------------------------------------------------------------
    Total:                       778,723   1,172,411     241,605     117,834
    -------------------------------------------------------------------------

    -------------------------------------------------
    As at June 30, 2009      No specific
                                    date       Total
    -------------------------------------------------
    Assets:
    Cash & cash equivalents            -     154,709
    Securities                     9,419   2,170,908
    Accrued Investment Income          -      23,878
    Finance Premiums                   -      68,771
    Accounts receivable and
     other assets                      -     266,188
    Due from reinsurers and
     other insurers                    -     163,353
    -------------------------------------------------
    Total:                         9,419   2,847,807
    -------------------------------------------------

    Liabilities:
    Loans payable                      -      73,208
    Accounts payable and
     accrued liabilities               -     134,222
    Unpaid claims                      -   1,830,741
    Senior unsecured
     debentures                        -     185,003
    Subordinated indebtedness          -      87,399
    -------------------------------------------------
    Total:                             -   2,310,573
    -------------------------------------------------



    -------------------------------------------------------------------------
    As at December 31, 2008     One year      One to     Five to   More than
                                 or less  five years   ten years   ten years
    -------------------------------------------------------------------------
    Assets:
    Cash & cash equivalents      105,656           -           -           -
    Securities                   405,619     986,244     524,479     182,529
    Accrued investment income     24,554           -           -           -
    Finance premiums              61,616           -           -           -
    Accounts receivable and
     other assets                276,450           -           -           -
    Due from reinsurers and
     other insurers               63,195      95,990      16,533       2,227
    -------------------------------------------------------------------------
    Total:                       937,090   1,082,234     541,012     184,756
    -------------------------------------------------------------------------

    Liabilities:
    Loans payable                      -           -      66,222           -
    Accounts payable and
     accrued liabilities         135,565           -           -           -
    Unpaid claims                667,307   1,013,611     174,579      23,519
    Senior unsecured
     debentures                        -      81,137     104,066           -
    Subordinated indebtedness          -           -           -      87,383
    -------------------------------------------------------------------------
    Total:                       802,872   1,094,748     344,867     110,902
    -------------------------------------------------------------------------


    -------------------------------------------------
    As at December 31, 2008   No specific
                                    date       Total
    -------------------------------------------------
    Assets:
    Cash & cash equivalents            -     105,656
    Securities                   271,614   2,370,485
    Accrued investment income          -      24,554
    Finance premiums                   -      61,616
    Accounts receivable and
     other assets                      -     276,450
    Due from reinsurers and
     other insurers                    -     177,945
    -------------------------------------------------
    Total:                       271,614   3,016,706
    -------------------------------------------------

    Liabilities:
    Loans payable                      -      66,222
    Accounts payable and
     accrued liabilities               -     135,565
    Unpaid claims                      -   1,879,016
    Senior unsecured
     debentures                        -     185,203
    Subordinated indebtedness          -      87,383
    -------------------------------------------------
    Total:                             -   2,353,389
    -------------------------------------------------

    Collateral pledged: As at June 30, 2009, bonds and term deposits with an
    estimated fair value of $52.3 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, 2009, the amount of such
    pledged securities was $116.0 million. Collateral pledging transactions
    are conducted under terms that are common and customary to standard
    collateral pledging and are subject to the Company's standard risk
    management controls.

    The company has a syndicate letter of credit facility which is
    principally used to collateralize inter-company reinsurance balances for
    statutory capital management purposes. The Company pledges securities to
    collateralize the utilized portion of the letter of credit facility. At
    June 30, 2009 the letter of credit facility utilization was
    $20.2 million.

    Fair value:

    Refer to Note 6 with respect to fair value disclosure on securities. The
    carrying value of unpaid claims does not take into consideration the time
    value of money or make an explicit provision for adverse deviation. In
    order to estimate the fair value of the unpaid claims, the Company uses
    an actuarial approach recognizing the time value of money which
    incorporates assumptions concerning projected cash flows and appropriate
    provisions for adverse deviation. As at June 30, 2009 the estimated fair
    value of the unpaid claims was $1,974.8 million ($1,836.4 million net of
    reinsurers' share of unpaid claims). The estimated fair value is
    approximately $144.1 million above the undiscounted carrying value as a
    result of a provision for adverse development totaling $186.6 million in
    addition to the present value of unpaid claims. There is no active market
    for policy liabilities, so a market value is not readily available.

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

    -------------------------------------------------------------------------
                                                     June 30, 2009
    -------------------------------------------------------------------------
                                                          Total
                                        Total fair     carrying
                                           value(*)       value    Favorable
    -------------------------------------------------------------------------
    Loans Payable                       $   35,036   $   73,208   $   38,172
    Senior unsecured debentures             50,421       99,744       49,323
    Subordinated indebtedness               22,254       87,399       65,145
    -------------------------------------------------------------------------


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


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

    The Company uses fair value hierarchy to categorize the inputs used in
    valuation techniques to measure fair value. The extent of the Company's
    use of quoted market prices (Level 1), internal models using observable
    market information as inputs (Level 2) and internal models without
    observable market information (Level 3) in the valuation of securities as
    at June 30, 2009 was as follows:

    -------------------------------------------------------------------------
                                     Quoted prices
                                         in active  Significant
                                       markets for        other   Significant
                                         identical   observable  unobservable
                              June 30       assets       inputs       inputs
    Description                  2009     (Level 1)    (Level 2)    (Level 3)
    -------------------------------------------------------------------------
    Available for sale
     securities:
    Term deposits:         $  334,290   $        -   $  334,290   $        -

    Debt securities:
    ----------------
    Canadian
     - Government             212,192            -      212,192            -
     - Corporate              229,243            -      229,243            -
     - Commercial
        mortgage backed        48,681            -       48,681            -
     - Other asset backed      19,403            -       19,403            -
    U.S
     - Government             534,807            -      534,807            -
     - Corporate              594,479            -      594,479            -
     - Commercial
        mortgage backed         8,939            -        8,939            -
     - Residential
        mortgage backed       126,011            -      126,011            -
     - Other mortgage/
        asset backed           18,265            -       18,265            -
    Other
     - Corporate               35,377            -       35,377            -

    Equity Securities:
    ------------------
    Canadian                    4,013        4,013            -            -
    US                             29           29            -            -

    Preferred Securities:
    ---------------------
    Canadian                    4,752        4,752            -            -
    US                            427          427            -            -

    -------------------------------------------------------------------------
    Total                  $2,170,908   $    9,221   $2,161,687   $        -
    -------------------------------------------------------------------------

    NOTE 8  Capital Management

    On June 26, 2009, KFS Capital LLC, an indirect wholly-owned subsidiary of
    Kingsway, commenced a take-over bid (the "KLROC Offer") to acquire up to
    1,000,000 preferred, retractable, redeemable, cumulative units of
    Kingsway Linked Return of Capital Trust at a price per unit of C$12.00 in
    cash. The KLROC Offer expired at 5:00 p.m. (Toronto time) on Tuesday,
    August 4, 2009 and 694,015 units were tendered. This tender was paid for
    using available cash.

    Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of
    Kingsway announced on July 14, 2009 the commencement of a modified "Dutch
    Auction" tender offer (the "2012 Offer") for a portion of its outstanding
    Unsecured 6% Debentures due July 11, 2012 (the "2012 Debentures"). The
    2012 Offer provides for a cash purchase of 2012 Debentures at a price per
    C$1,000 principal amount of debentures of not less than C$540 and not
    greater than C$620, for a maximum aggregate purchase price to the offeror
    not to exceed C$31 million (excluding accrued and unpaid interest). The
    2012 Offer expires at 5:00 p.m. (Toronto time) on August 14, 2009, unless
    extended or earlier terminated by the Offeror. The Company expects to pay
    for the 2012 offer using available cash and/or proceeds from an undrawn
    $20 million line of credit.

    As at June 30, 2009 the Company was adequately capitalized to support the
    premium volume of the insurance subsidiaries. Canadian property and
    casualty insurance companies are regulated by the Office of the
    Superintendent of Financial Institutions (OSFI) and the Financial
    Services Commission of Ontario (FSCO) and are required to maintain a
    level of capital sufficient to achieve a target of 150% of a minimum
    capital test (MCT) ratio. As at June 30, 2009 the MCT's of Jevco
    Insurance Company and Kingsway General Insurance Company were 221% and
    203% respectively. As at June 30, 2009 the Canadian insurance companies
    have aggregate capital of approximately $46.4 million in excess of the
    150% level.

    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, 2009, all U.S.
    subsidiaries, with the exception of Lincoln General, are estimated to be
    above the required RBC levels, with RBC ratios estimates ranging between
    263% and 42,600% and have estimated aggregate capital excluding Lincoln
    General of approximately $83.6 million in excess of the 200% level. As at
    June 30, 2009 Lincoln General's estimated RBC was 63%.

    As a result of Lincoln's RBC level as at December 31, 2008, the
    Pennsylvania Insurance Department was required to conduct an examination
    and issue an order outlining corrective action to be taken. Further,
    under Pennsylvania law, Lincoln may be deemed to be operating in a
    financially hazardous condition based on its financial statements at
    December 31, 2008. As a result, the Pennsylvania Insurance Department has
    the power to take a variety of regulatory actions, including but not
    limited to department supervision, and the seeking of a court order of
    rehabilitation or liquidation if it determines that Lincoln's condition
    is such that the further transaction of business would be hazardous,
    financially, to its policyholders, creditors or the public.

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

    Lincoln General submitted its regulatory action plan on May 7, 2009 which
    the Pennsylvania Insurance Department has subsequently determined is
    satisfactory. The plan is a run-off plan that provides for the orderly,
    efficient resolution and payment of all policy-related claims and other
    obligations in full and when due. To execute the run-off plan the Company
    has engaged a run-off manager, principals in which have been appointed to
    key positions at Lincoln General.

    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, 2009 the
    capital maintained by Kingsway Reinsurance Corporation was approximately
    $49.9 million ($77.9 million as at December 31, 2008) in excess of the
    regulatory requirements in Barbados and the capital maintained by
    Kingsway Reinsurance (Bermuda) Limited was approximately $12.6 million
    ($15.4 million as at December 31, 2008) in excess of regulatory
    requirements in Bermuda.

    NOTE 9  Hedges

    On June 2, 2009, the company discontinued the swap transaction which was
    designated as a cash flow hedge. When the hedge is discontinued, any
    cumulative adjustment to either the hedged item or other comprehensive
    income is recognized in income over the remaining term of the hedged
    item, or when the hedged item is derecognized. The amount of loss
    recorded in other comprehensive income is $6.2 million before tax of
    which $0.2 million has been reclassified to net income for the period
    ended June 30, 2009 as a result of the discontinuance of the cash flow
    hedge.

    NOTE 10  Restructuring charges

    During the first quarter of 2009, the Company announced the corporate
    restructuring plan to concentrate on its core and profitable lines of
    business and is targeted to improve the Company's financial stability.
    The Company is consolidating operations in U.S. and Canada, simplifying
    the management structure, reducing costs through synergies and
    operational efficiencies and positioning the Company to seize competitive
    advantage. As the Company exits businesses and streamlines operations,
    approximately 1,000 employees will be removed from the total workforce.
    Restructuring plan costs will be approximately $20 million, to be
    incurred over fiscal 2009 and 2010, of which $12.9 million was expensed
    in the first six months of 2009.

    During the six months ended June 30, 2009, the Company continued to
    implement these restructuring work plans. Restructuring charges for the
    six months ended June 30, 2009 were as follows:

    -------------------------------------------------------------------------
                                                       Restructuring charges
    -------------------------------------------------------------------------
                                                            Three        Six
                                                           months     months
                       Severance                            ended      ended
                             and  Consulting              June 30,   June 30,
                        benefits     expense     Total       2009       2009
    -------------------------------------------------------------------------
    Provision balance
     at January 1,
     2009              $       -  $       -  $       -
      (Income) expense     8,095      4,826     12,921  $   9,978  $  12,921
      Payments             3,084      4,826      7,910
    Provision balance
     at June 30, 2009  $   5,011  $       -  $   5,011
    -------------------------------------------------------------------------
    Total restructuring
     charges                                            $   9,978  $  12,921
    -------------------------------------------------------------------------

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

    The following table summarizes the total restructuring charges incurred
    by segment during the three and six months ended June 30, 2009:

    -------------------------------------------------------------------------
                                            Three months ended June 30, 2009
    -------------------------------------------------------------------------
                          Canada        U.S.   Run-off  Corporate      Total
    -------------------------------------------------------------------------
    Total
     restructuring
     charges           $     307  $   2,161  $   2,832  $   4,678  $   9,978
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                              Six months ended June 30, 2009
    -------------------------------------------------------------------------
                          Canada        U.S.   Run-off  Corporate      Total
    -------------------------------------------------------------------------
    Total
     restructuring
     charges           $     518  $   3,212  $   3,261  $   5,930  $  12,921
    -------------------------------------------------------------------------

    The following table summarizes the total amount of costs expected to be
    incurred for each reporting segment over the span of the restructuring
    plan:

    -------------------------------------------------------------------------
                                     Over the span of the restructuring plan
    -------------------------------------------------------------------------
                          Canada        U.S.   Run-off  Corporate      Total
    -------------------------------------------------------------------------
    Total expected
     costs for
     restructuring
     plan              $   3,200  $   7,000  $   3,100  $   6,700  $  20,000
    -------------------------------------------------------------------------

    NOTE 11  Acquisitions

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

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

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

    NOTE 12  Assets held for sale

    Assets held for sale are included in accounts receivable and other assets
    in the consolidated balance sheets. The major components of the assets
    held for sale as at June 30, 2009 are:

    -------------------------------------------------------------------------
                                                               June 30, 2009
    -------------------------------------------------------------------------
    Land                                                           $   5,616
    Building                                                          32,072
    -------------------------------------------------------------------------
    Total assets held for sale                                     $  37,688
    -------------------------------------------------------------------------

    NOTE 13  Buy-Back of Senior Notes

    During the quarter, Kingsway America Inc. bought back $4.6 million face
    value of the senior notes due in 2014 at a market rate of $2.0 million.
    Kingsway America Inc. realized a gain of $2.6 million during the quarter.

    NOTE 14  Related Party Transaction

    In March 2009, the Company obtained a facility from a related party to
    allow for specific purpose capital initiatives. This is a related party
    transaction for financial reporting purposes as there is common board
    representation between the related parties. The facility is at fair
    market terms and conditions. As of June 30, 2009, the facility remains
    undrawn.

    NOTE 15  Contractual Obligation

    On June 29, 2009, Kingsway and Lincoln General entered into a consulting
    agreement with an external run-off manager to provide certain consulting
    services relating to Lincoln General, including advice and assistance in
    the development of a Run-off Plan. In addition to base compensation of
    $1.3 million annually, the agreement provides for a minimum of
    $2.5 million to be paid to the Run-off Manager at the termination of the
    contract (provided the contract is not terminated for cause), which, at
    the latest will be March 1, 2014. This bonus may be increased upon the
    occurrence of certain events, the likelihood of which will be remeasured
    and accrued quarterly. The minimum bonus amount of $2.5 million is being
    accrued over the term of the contract.

    NOTE 16  Subsequent Events

    The subsequent events have been evaluated till August 7, 2009, the date
    the financial statements are issued. There are no subsequent events
    noted.

    NOTE 17  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, 2009 and December 31, 2008, and for the period
    ended June 30, 2009 and 2008, with a separate column for each Guarantor,
    the issuer and the other businesses of the Company combined ("Non-
    Guarantor subsidiaries").

    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the six months ended June 30, 2009

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

    Revenue:
    Net premiums earned                $         -  $         -  $         -
    Investment related income                  (63)       1,869        9,646
    Management fees                         26,166       10,346            -
    -------------------------------------------------------------------------
                                       $    26,103  $    12,215  $     9,646
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $         -  $         -  $         -
    Commissions and premium taxes                -            -            -
    Other expenses                          30,369        7,527          274
    Interest expense                             -       13,227        2,604
    -------------------------------------------------------------------------
                                            30,369       20,754        2,878
    -------------------------------------------------------------------------

    Income (loss) before unusual
     item and income taxes                  (4,266)      (8,539)       6,768
    Gain on buy-back of senior notes             -        2,647            -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes         (4,266)      (5,892)       6,768
    Income taxes (recovery)                 (4,362)      (2,003)       2,301
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                                 96       (3,889)       4,467
    Loss from discontinued operations            -            -            -
    Loss on disposal of discontinued
     operations                                  -            -            -
    Equity in undistributed net
     income of subsidiaries                (59,040)     (19,990)           -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (58,944) $   (23,879) $     4,467
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the six months ended June 30, 2009

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

    Revenue:
    Net premiums earned                $   565,754  $   (12,633) $   553,121
    Investment related income               32,852       (8,499)      35,805
    Management fees                              -      (36,512)           -
    -------------------------------------------------------------------------
                                       $   598,606  $   (57,644) $   588,926
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $   524,560  $   (32,635) $   491,925
    Commissions and premium taxes           86,156            -       86,156
    Other expenses                          99,299      (21,981)     115,488
    Interest expense                          (588)      (3,028)      12,215
    -------------------------------------------------------------------------
                                           709,427      (57,644)     705,784
    -------------------------------------------------------------------------

    Income (loss) before unusual
     item and income taxes                (110,821)           -     (116,858)
    Gain on buy-back of senior notes             -            -        2,647
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes       (110,821)           -     (114,211)
    Income taxes (recovery)                (17,342)           -      (21,406)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (93,479)           -      (92,805)
    Loss from discontinued operations       (2,223)           -       (2,223)
    Loss on disposal of discontinued
     operations                             (1,616)           -       (1,616)
    Equity in undistributed net
     income of subsidiaries                      -       79,030            -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (97,318) $    79,030  $   (96,644)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

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

    Revenue:
    Net premiums earned                $         -  $         -  $         -
    Investment related income          $      (742) $     1,817  $     3,582
    Management fees                    $    51,440  $     9,158  $         -
    -------------------------------------------------------------------------
                                       $    50,698  $    10,975  $     3,582
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $         -  $         -  $         -
    Commissions and premium taxes      $         -  $         -  $         -
    Other expenses                     $    43,869  $    12,961  $       117
    Interest expense                   $     2,200  $    14,142  $     3,064
    -------------------------------------------------------------------------
                                       $    46,069  $    27,103  $     3,181
    -------------------------------------------------------------------------

    Income (loss) before unusual
     item and income taxes             $     4,629  $   (16,128) $       401
    Gain on buy-back of senior notes   $         -  $         -  $         -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes    $     4,629  $   (16,128) $       401
    Income taxes (recovery)            $     6,964  $    (5,483) $       136
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                        $    (2,335) $   (10,645) $       265
    Income from discontinued
     operations                        $         -  $         -  $         -
    Gain (loss) on disposal of
     discontinued operations           $         -  $         -  $         -
    Equity in undistributed net
     income of subsidiaries            $   (25,743) $   (39,287) $         -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (28,078) $   (49,932) $       265
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the six months ended June 30, 2008

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

    Revenue:
    Net premiums earned                $   815,124  $    (7,455) $   807,669
    Investment related income          $    81,157  $   (12,009) $    73,805
    Management fees                    $         -  $   (60,598) $         -
    -------------------------------------------------------------------------
                                       $   896,281  $   (80,062) $   881,474
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $   658,518  $   (24,769) $   633,749
    Commissions and premium taxes      $   146,083  $         -  $   146,083
    Other expenses                     $   119,565  $   (51,793) $   124,719
    Interest expense                   $     2,882  $    (3,500) $    18,788
    -------------------------------------------------------------------------
                                       $   927,048  $   (80,062) $   923,339
    -------------------------------------------------------------------------

    Income (loss) before unusual
     item and income taxes             $   (30,767) $         -  $   (41,865)
    Gain on buy-back of senior notes   $         -  $         -  $         -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes    $   (30,767) $         -  $   (41,865)
    Income taxes (recovery)            $   (15,122)              $   (13,505)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                        $   (15,645) $         -  $   (28,360)
    Income from discontinued
     operations                        $       282               $       282
    Gain (loss) on disposal of
     discontinued operations           $         -  $         -  $         -
    Equity in undistributed net
     income of subsidiaries            $         -  $    65,030  $         -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (15,363) $    65,030  $   (28,078)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Balance Sheet
    -------------------------------------------------------------------------
    As at June 30, 2009

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

    Assets
    Investments in subsidiaries        $   269,714  $   816,155  $         -
    Cash                                    30,530        8,096          528
    Securities                                   -            -            -
    Goodwill and intangible assets           6,279            -            -
    Other assets                            58,827       83,420      105,755
    -------------------------------------------------------------------------
                                       $   365,350  $   907,671  $   106,283
    -------------------------------------------------------------------------
    Liabilities and
     Shareholders' Equity
    Liabilities:
    Bank Indebtedness                  $         -  $   210,175  $         -
    Other liabilities                       (1,795)      32,135        2,608
    Unearned premiums                            -            -            -
    Unpaid claims                                -            -            -
    Senior unsecured debentures                  -      120,400       85,260
    Subordinated indebtedness                    -       90,500            -
    -------------------------------------------------------------------------
                                       $    (1,795) $   453,210  $    87,868
    Shareholders' equity:
    Share capital                          322,344      503,612       14,867
    Contributed surplus                      8,670            -            -
    Retained Earnings                           71      (49,151)       6,863
    Accumulated other
     comprehensive income                   36,060            -       (3,315)
    -------------------------------------------------------------------------
                                           367,145      454,461       18,415
    -------------------------------------------------------------------------
                                       $   365,350  $   907,671  $   106,283
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at June 30, 2009

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

    Assets
    Investments in subsidiaries        $(1,442,859) $   356,990  $         -
    Cash                                   115,555            -      154,709
    Securities                           2,255,206      (15,527)   2,239,679
    Goodwill and intangible assets          52,176            -       58,455
    Other assets                         1,578,447   (1,139,351)     687,098
    -------------------------------------------------------------------------
                                       $ 2,558,525  $  (797,888) $ 3,139,941
    -------------------------------------------------------------------------
    Liabilities and
     Shareholders' Equity
    Liabilities:
    Bank Indebtedness                  $  (176,967) $    40,000  $    73,208
    Other liabilities                       82,385       18,889      134,222
    Unearned premiums                      644,877     (182,654)     462,223
    Unpaid claims                        2,453,754     (623,013)   1,830,741
    Senior unsecured debentures             (3,778)     (16,879)     185,003
    Subordinated indebtedness                    -       (3,101)      87,399
    -------------------------------------------------------------------------
                                       $ 3,000,271  $  (766,758) $ 2,772,796
    Shareholders' equity:
    Share capital                        1,941,304   (2,459,783)     322,344
    Contributed surplus                          -            -        8,670
    Retained Earnings                   (2,415,261)   2,457,549           71
    Accumulated other
     comprehensive income                   32,211      (28,896)      36,060
    -------------------------------------------------------------------------
                                          (441,746)     (31,130)     367,145
    -------------------------------------------------------------------------
                                       $ 2,558,525  $  (797,888) $ 3,139,941
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

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

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


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

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

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



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the six months ended June 30, 2009

                                           KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                            (a      (an "issuer"/     (an
                                       "Guarantor")  "Guarantor")  "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income (loss)                  $   (58,944) $   (23,879) $     4,467
    Adjustments to reconcile net
     income to net cash used by
     operating activities:
    Equity in undistributed
     earnings in subsidiaries               59,040       19,990            -
    Other                                  (35,591)      (4,007)        (478)
    -------------------------------------------------------------------------
                                           (35,495)      (7,896)       3,989

    Financing Activities:
    Increase in share capital, net            (279)      44,479        4,200
    Repurchase of common shares
     for cancellation                            -            -            -
    Common share dividend                   (1,849)           -            -
    Increase/(decrease) in bank
     indebtedness                                -       39,828       (8,204)
    Increase in senior unsecured
     indebtedness                                -       (1,953)           -
    -------------------------------------------------------------------------
                                            (2,128)      82,354       (4,004)

    Investing Activities:
    Purchase of securities                       -            -            -
    Proceeds from sale of securities             -            -            -
    Proceeds from sale of
     discontinued operations                (1,941)           -            -
    Acquisitions                            48,830      (76,302)           -
    Other                                      (71)       4,337            -
    -------------------------------------------------------------------------
                                            46,818      (71,965)           -

    Increase (decrease) in cash
     during the year                         9,195        2,493          (15)
    Cash, beginning of year                 21,335        5,603          543
    -------------------------------------------------------------------------
                                       $    30,530  $     8,096  $       528
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the six months ended June 30, 2009

                                          Other     Consolidation
                                      Subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income (loss)                  $   (97,318) $    79,030  $   (96,644)
    Adjustments to reconcile net
     income to net cash used by
     operating activities:
    Equity in undistributed
     earnings in subsidiaries                    -      (79,030)           -
    Other                                 (165,543)     127,180      (78,439)
    -------------------------------------------------------------------------
                                          (262,861)     127,180     (175,083)

    Financing Activities:
    Increase in share capital, net               -      (48,679)        (279)
    Repurchase of common shares
     for cancellation                            -            -            -
    Common share dividend                        -            -       (1,849)
    Increase/(decrease) in bank
     indebtedness                            2,218      (31,624)       2,218
    Increase in senior unsecured
     indebtedness                                -        1,953            -
    -------------------------------------------------------------------------
                                             2,218      (78,350)          90

    Investing Activities:
    Purchase of securities              (1,571,836)           -   (1,571,836)
    Proceeds from sale of securities     1,804,674            -    1,804,674
    Proceeds from sale of
     discontinued operations                     -            -       (1,941)
    Acquisitions                            76,302      (48,830)           -
    Other                                  (11,117)           -       (6,851)
    -------------------------------------------------------------------------
                                           298,023      (48,830)     224,046

    Increase (decrease) in cash
     during the year                        37,380            -       49,053
    Cash, beginning of year                 78,175            -      105,656
    -------------------------------------------------------------------------
                                       $   115,555  $         -  $   154,709
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                                           KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                            (a      (an "issuer"/     (an
                                       "Guarantor")  "Guarantor")  "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income                         $   (28,078) $   (49,932) $       265
    Adjustments to reconcile net
     income to net cash used by
     operating activities: -
    Equity in undistributed
     earnings in subsidiaries               25,743       39,287            -
    Other                                    7,552      (31,549)        (129)
    -------------------------------------------------------------------------
                                             5,217      (42,194)         136

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

    Investing Activities:
    Purchase of securities                       -            -            -
    Proceeds from sale of securities             -            -            -
    Acquisitions                             8,919            -            -
    Other                                     (457)     (59,835)           -
    -------------------------------------------------------------------------
                                             8,462      (59,835)           -

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


    -------------------------------------------------------------------------
    For the six months ended June 30, 2008

                                          Other     Consolidation
                                      Subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income                         $   (15,363) $    65,030  $   (28,078)
    Adjustments to reconcile net
     income to net cash used by
     operating activities:                                                 -
    Equity in undistributed
     earnings in subsidiaries                    -      (65,030)           -
    Other                                 (150,091)     123,617      (50,600)
    -------------------------------------------------------------------------
                                          (165,454)     123,617      (78,678)

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

    Investing Activities:
    Purchase of securities              (1,592,080)           -   (1,592,080)
    Proceeds from sale of securities     1,759,812            -    1,759,812
    Acquisitions                              (212)      (8,919)        (212)
    Other                                   43,701            -      (16,591)
    -------------------------------------------------------------------------
                                           211,221       (8,919)     150,929

    Increase (decrease) in cash
     during the year                        30,484            -       26,913
    Cash, beginning of year                140,393            -      161,635
    -------------------------------------------------------------------------
                                       $   170,877  $         -  $   188,548
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    %SEDAR: 00003152E          %CIK: 0001072627




For further information:

For further information: Daniel Brazier, Chief Financial Officer, Tel:
(905) 677-8889, Fax: (905) 677-5008, Web Site: www.kingsway-financial.com


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