Kingsway Reports Second Quarter Results

TORONTO, Aug. 13 /CNW/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its financial results for the second quarter ended June 30, 2010. All amounts are in U.S. dollars unless indicated otherwise.

The Company reported a second quarter net loss of $18.5 million (net income of $5.6 year to date) or loss of $0.36 (income of $0.11 year to date) per share diluted. The book value has decreased from $3.28 per share at December 31, 2009 to $2.91 per share at June 30, 2010.

The following are the highlights of the second quarter of 2010:

Major events:

    
    -   During the second quarter KFS Capital LLC commenced an offer to
        purchase up to 1,500,000 Kingsway Linked Return Of Capital ("KLROC")
        units at a price of C$20.00 cash per unit, which was completed
        subsequent to quarter end.
    -   $10.8 million of the Company's debt was repurchased in the quarter,
        resulting in a gain of $1.5 million.
    -   A legal set-off agreement was put in place during the second quarter
        which allows for the investment in KLROC units to be offset against
        the related debt. The KLROC units were carried at C$17.73 per unit at
        June 30, 2010. An increase to the carrying value of the KLROC units
        will increase the amount of the set-off and reduce the related debt.
    -   The Company's disclosure at August 3, 2010 was based on the KLROC
        units' redemption value in 2015 of C$25.00 per unit.
    -   Subsequent to quarter end, the Company repurchased an aggregate
        principal amount of $47.7 million of debt for a total purchase price
        of approximately $45.1 million.
    -   Subsequent to quarter end, the Company has extended an offer to
        William Hickey, who has agreed to the join the Company as a Managing
        Director of KFS Capital LLC and is expected to be appointed as Chief
        Operating Officer once his employment begins. Bill brings significant
        experience in property and casualty industry and will be charged with
        overseeing all the U.S. operations.
    

Operational results:

    
    -   An underwriting loss of $20.0 million was recorded in the US segment
        for the second quarter ($43.2 million year to date).
    -   Net income of $4.5 million was recorded in the Corporate segment for
        the second quarter (net loss of $5.3 million for year to date).
    -   85.2% of gross premiums written in the second quarter (84.6% year to
        date) were generated from non-standard automobile, the core line of
        business.
    -   Investment income increased by 6.4% to $11.7 million compared to the
        same quarter last year, which was primarily a result of favourable
        impact of the strengthening US dollar on the Company's unhedged
        Canadian dollar debt, mitigated by a decline in interest income on
        the fixed income securities portfolio due to smaller size of the
        portfolio as a result of reduction in premiums written and lower
        yields.
    -   A loss of $2.2 million was recorded on the disposal of Jevco
        Insurance Company generated by the disposition of property below
        carrying value.
    

Dividend

The Board of Directors has decided that a quarterly dividend will not be declared for the second quarter of 2010.

About the Company

Kingsway focuses on non-standard automobile insurance in the United States of 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. The Company operates through wholly-owned insurance subsidiaries in the U.S. which it is currently consolidating into three operating units to reduce overhead and strengthen its competitive position.

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:

The following information throughout the Financial Summary and Management's Discussion and Analysis presents the financial results as continuing operations unless otherwise specifically stated as discontinued operations:

    
    -------------------------------------------------------------------------
                       Three months ended June 30:  Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars except
     per share values)     2010     2009   Change     2010     2009   Change
    -------------------------------------------------------------------------
    Gross premiums
     written            $  58.9  $  86.7   (32.1%) $ 143.2  $ 223.6   (36.0%)
    Underwriting loss     (24.1)   (29.4)   18.0%    (53.6)   (37.3)  (43.7%)
    Investment income      11.7     11.0     6.4%     13.2     19.3   (31.6%)
    Net realized gains
     (loss)                 0.3      0.1   200.0%      0.9     (2.0)  145.0%
    Gain on buy back
     of debt                1.5      2.6   (42.3%)    16.6      2.6   538.5%
    Loss from
     continuing
     operations           (16.3)   (11.6)  (40.5%)   (33.1)   (17.2)  (92.4%)
    Net income (loss)     (18.5)   (38.4)   51.8%      5.6    (96.6)  105.8%
    Diluted loss per
     share - continuing
     operations           (0.31)   (0.21)  (47.6%)   (0.64)   (0.31) (106.5%)
    Diluted earnings
     (loss) per share -
     net income (loss)    (0.36)   (0.70)   48.6%     0.11    (1.75)  106.3%
    Book value per
     share                 2.91     6.67   (56.4%)    2.91     6.67   (56.4%)
    Combined ratio       134.6%   126.5%     8.1%   135.4%   115.1%    20.3%
    -------------------------------------------------------------------------
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    -   The loss of $16.3 million from continuing operations for the quarter
        ($33.1 million year to date) arose primarily from underwriting losses
        of $20.0 million in the quarter ($43.2 million year to date) in the
        US segment, which included adverse development of $5.3 million ($11.8
        million year to date), and expenses of $4.1 million in the Corporate
        segment for the quarter ($10.4 million year to date), partially
        offset by $11.7 million ($13.2 million year to date) of investment
        income, $0.3 million ($0.9 million year to date) of net realized
        gains, and $1.5 million ($16.6 million year to date) of gains on the
        buyback of debt. The loss incurred in the Corporate segment is a
        result of a higher remaining expense base in continuing operations as
        the Company is no longer allocating a portion of these costs to
        discontinued operations.

    -   Gross premiums written decreased by 32.1% for the quarter to $58.9
        million (36.0% to $143.2 million year to date) from $86.7 million in
        the second quarter last year ($223.6 million prior year to date). The
        significant reduction in premium volume is a reflection of the
        Company's strategy of discontinuing certain lines of business,
        primarily within its commercial lines.

    -   As a result of the Company re-focusing its efforts on core,
        profitable lines of business, non standard automobile premiums for
        six months to June 30, 2010 were $121.1 million or 84.6% of the total
        gross premiums written compared to $164.6 million or 73.6% of gross
        premiums written in the same period last year.

    -   The net adverse reserve development recorded in the quarter totaled
        $5.3 million. The adverse development was equally generated by the
        personal lines and commercial lines of business.

    -   For the three months ended June 30, 2010, investment income,
        excluding net realized gains was $11.7 million compared to $11.0
        million for the same quarter of 2009, a 6.4% increase. The increase
        in investment income was primarily a result of favourable impact of
        the strengthening US dollar on the Company's unhedged Canadian dollar
        debt, mitigated by a decline in interest income on the fixed income
        securities portfolio due to smaller size of the portfolio as a result
        of reduction in premiums written and lower yields.

    -   General and administrative expenses increased 4.6% to $25.0 million
        in the second quarter of 2010 from $23.9 million in the same quarter
        last year (17.8% to $49.6 million from $42.1 million for the year to
        date). This increase in 2010 general and administrative expenses is
        primarily the result of 2009 expenses being reduced by the receipt of
        $11.0 million in proceeds from the settlement of two lawsuits in the
        second quarter of 2009.

    -   As at June 30, 2010, the book value per share was $2.91 compared to
        $3.28 as at December 31, 2009 and $6.67 as at June 30, 2009.
    

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 2010, and the notes related thereto; (ii) the annual MD&A for fiscal 2009 set out on pages 1 to 44 in the Company's 2009 Annual Report, including the section on risk factors; and (iii) the audited consolidated financial statements for fiscal 2009 set out on pages 51 to 106 of the Company's 2009 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. The loss ratio is derived by dividing the amount of net claims incurred by net premiums earned. The expense ratio is derived by dividing the sum of commissions and premium taxes and general and administrative expenses by net premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio below 100% demonstrates underwriting profit whereas a combined ratio over 100% demonstrates an underwriting loss. We believe that consistently delivering an underwriting profit is a key measure of performance of the underwriting business of a property and casualty insurance company. Although there is not a property and casualty industry defined standard that is consistently applied in calculating these ratios, The Company 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 The Company's combined ratios to those of other public companies as they may not have been calculated on a comparable basis.

Date of MD&A

Unless otherwise noted, the information contained in this MD&A is based on information available to management as of August 13, 2010.

ACQUISITIONS

On January 4, 2010, the Company and its subsidiary Kingsway America Inc. ("KAI") acquired certain assets of Itasca Financial, LLC, a property and casualty insurance industry advisory firm, owned and controlled by Mr. Larry Swets, a former director and recently appointed Chief Executive Officer and President of the Company. The consideration for the assets purchased is equal to $1.5 million cash and one million restricted common shares of the Company, payable in three annual installments. Please refer to note 13, for additional details.

Effective June 30, 2010, the Company made an investment in JBA Associates, Inc. ("JBA") for approximately $16.3 million, following which the Company will have 100% interest in JBA. JBA is a managing general agency based in New Jersey that specializes in assigned risk automobile insurance. The acquisition allows the Company to benefit from its institutional knowledge of non-standard automobile and assigned risk business and expand in the agency market. Estimated goodwill of approximately $13.9 million was recognized related to the purchase. The final goodwill balance will be determined upon further evaluation.

DISCONTINUED OPERATIONS

During 2008, the Company disposed of Canadian subsidiary York Fire and Casualty Insurance Company ("York Fire").

During 2009, the Company disposed of:

    
    -   HI Holdings and its subsidiary Zephyr Insurance Company Inc.
        ("Zephyr");
    -   the assets of Avalon Risk Management Inc. ("Avalon"); and
    -   Walshire Assurance Company ("Walshire") and its subsidiary Lincoln
        General Insurance Company ("Lincoln").
    

During the first quarter of 2010, the Company disposed of Jevco Insurance Company ("Jevco").

For further information on the Company refer to the Corporate Overview on pages 2 to 4 of the 2009 Annual Report.

Each of the operations shown above are considered to be discontinued operations and are recorded as such in the statement of operations under the item "Income (loss) from discontinued operations, net of taxes". Assets and liabilities of discontinued operations have been reclassified and disclosed in the consolidated balance sheet as "Assets or Liabilities held for sale". In this MD&A, unless otherwise disclosed, only continuing operating activities of the Company are included.

RESULTS OF CONTINUING OPERATIONS

Premiums

    

    -------------------------------------------------------------------------
                       Three months ended June 30:  Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2010     2009   Change     2010     2009   Change
    -------------------------------------------------------------------------
    Gross premiums
     written            $  58.9  $  86.7   (32.1%) $ 143.2  $ 223.6   (36.0%)
    -------------------------------------------------------------------------
    Net premiums
     written            $  52.0  $  89.6   (42.0%) $ 129.0  $ 251.2   (48.6%)
    -------------------------------------------------------------------------
    Net premiums
     earned             $  69.7  $ 111.2   (37.3%) $ 151.2  $ 247.5   (38.9%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The following table provides a breakdown of gross premiums written by line of business:

    
    -------------------------------------------------------------------------
                                                  Three months ended June 30:
    -------------------------------------------------------------------------
    (in millions of dollars)                  2010                2009
    -------------------------------------------------------------------------
    Non-Standard Automobile            $  50.2    85.2 %   $  67.7    78.1 %
    Property (including liability)         2.0     3.4         2.2     2.5 %
    -------------------------------------------------------------------------
    Total Personal                     $  52.2    88.6 %   $  69.9    80.6 %
    -------------------------------------------------------------------------

    Commercial Automobile                  3.7     6.3 %      15.4    17.8 %
    Trucking                                 -       -         1.1     1.3 %
    Other                                  3.0     5.1         0.3     0.3 %
    -------------------------------------------------------------------------
    Total Commercial                   $   6.7    11.4 %   $  16.8    19.4 %
    -------------------------------------------------------------------------
    Total Gross Premiums Written       $  58.9   100.0 %   $  86.7   100.0 %
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                    Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of dollars)                  2010                2009
    -------------------------------------------------------------------------
    Non-Standard Automobile            $ 121.1    84.6 %   $ 164.6    73.6 %
    Property (including liability)         3.9     2.7         4.2     1.9 %
    -------------------------------------------------------------------------
    Total Personal                     $ 125.0    87.3 %   $ 168.8    75.5 %
    -------------------------------------------------------------------------

    Commercial Automobile                 12.7     8.9 %      48.6    21.7 %
    Trucking                                 -       -         4.4     2.0 %
    Other                                  5.5     3.8 %       1.8     0.8 %
    -------------------------------------------------------------------------
    Total Commercial                   $  18.2    12.7 %   $  54.8    24.5 %
    -------------------------------------------------------------------------
    Total Gross Premiums Written       $ 143.2   100.0 %   $ 223.6   100.0 %
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Gross premiums written decreased by 32.1% for the quarter to $58.9 million (36.0% to $143.2 million year to date) from $86.7 million in the second quarter last year ($223.6 million prior year to date). The significant reduction in premium volume across all segments is a reflection of the Company's strategy of discontinuing certain lines of business, primarily within its commercial lines as well as the general impact on volume due to the ongoing economic situation in the U.S.

The Company reported decreases in gross premiums written in the major lines of business. Non standard automobile and commercial automobile decreased by 25.8% and 76.0% respectively in second quarter (26.4% and 73.9% year to date) compared to the same period last year reflecting the Company's decision to terminate unprofitable business and exit certain commercial lines of business. Non standard automobile continues to be the Company's primary line of business, accounting for 85.2% in second quarter (84.6% year to date) of gross premiums written for the year compared to 78.1% (73.6% year to date) last year. The proportion of commercial automobile premiums as a percent of the Company's total gross premiums written has declined to 6.3% in second quarter (8.9% year to date) compared to 17.8% (21.7% year to date) last year.

Investment Income

    
    -------------------------------------------------------------------------
                       Three months ended June 30:  Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2010     2009   Change     2010     2009   Change
    -------------------------------------------------------------------------
    Investment income   $  11.7  $  11.0     6.4%  $  13.2  $  19.3   (31.6%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

For the three months ended June 30, 2010, investment income, excluding net realized gains was $11.7 million compared to $11.0 million for the same quarter of 2009, a 6.4% increase (31.6% decrease to $13.2 million year to date). The primary reason for this increase in the quarter is a higher gain recorded as compared to same quarter in 2009 of approximately $2.9 million due to the impact of the strengthening US dollar on the Company's unhedged Canadian dollar denominated debt and a foreign currency translation gain on cash held in Canadian banks; mitigated by reduction in interest income from lower yields as a result of a reduction in short term interest rates in the U.S. and from the duration and risk profile of the portfolio having been reduced. A smaller fixed income securities portfolio as a result of the reduction in premiums written has also contributed to the lower interest income in the quarter. For a more detailed analysis of investment income see Note 6 to the financial statements.

Net Realized Gains (Losses)

The table below presents a summary of the net realized gains (losses) for the three months and six months ended June 30, with comparative figures:

    
    -------------------------------------------------------------------------
                              Three months ended         Six months ended
                                    June 30:                  June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2010     2009   Change     2010     2009   Change
    -------------------------------------------------------------------------
    Fixed income        $   0.3  $   1.8   (83.3%) $   0.9  $  (0.1) 1000.0%
    Impairments               -     (1.7)  100.0%        -     (1.9)  100.0%
    -------------------------------------------------------------------------
    Total               $   0.3  $   0.1   200.0%  $   0.9  $  (2.0)  145.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

For the three months ended June 30, 2010, sales from the securities portfolio resulted in a net realized gain of $0.3 million ($0.9 million year to date) compared to a net realized gain of $1.8 million for the three months ended June 30, 2009 (loss of $0.1 million prior year to date).

Underwriting Results (excluding Corporate)

    
    -------------------------------------------------------------------------
                       Three months ended June 30:  Six months ended June 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars)              2010     2009   Change     2010     2009   Change
    -------------------------------------------------------------------------
    Underwriting profit
     (loss)             $ (20.0) $ (20.5)    2.4%  $ (43.2) $ (24.9)  (73.5%)
    Combined ratio       128.8%   118.5%    10.3%   128.6%   110.1%    18.5%
    Expense ratio         44.8%    36.1%     8.7%    45.3%    30.8%    14.5%
    Loss ratio            84.0%    82.4%     1.6%    83.2%    79.3%     3.9%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The underwriting loss for the U.S. operating segment was $20.0 million for the quarter ($43.2 million year to date) compared to a loss of $20.5 million in the same quarter last year ($24.9 million prior year to date). The underwriting results for the quarter ended June 30, 2010 were impacted by the expense structure of organization. Although the Company's efforts during its transformation process eliminated costs and expense from the organization, pressure on the Company's written and earned premiums caused by factors such as competitive pressure, the Company's AM Best rating, and regulatory limitations has had a detrimental impact on expense ratio.

Adverse Development on Unpaid Claims

    
    -------------------------------------------------------------------------
                                        Three months ended  Six months ended
                                                   June 30:          June 30:
    -------------------------------------------------------------------------
    (in millions of dollars)                 2010     2009     2010     2009
    -------------------------------------------------------------------------
    Unfavourable change in estimated
     unpaid claims for prior accident
     years (Note 1):                      $  (5.3) $ (10.9) $ (11.8) $  (9.3)
    As a % of net premiums earned
     (Note 2):                               7.6%     9.8%     7.8%     3.8%
    As a % of unpaid claims (Note 3):        1.4%     2.9%     3.2%     2.5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Note 1 -  Increase in estimates for unpaid claims from prior accident
              years reflected in current financial year results
    Note 2 -  Increase in current financial year reported combined ratio
    Note 3 -  Increase compared to estimated unpaid claims at the end of the
              preceding fiscal year
    

The Company experienced estimated net unfavourable unpaid claims development of $5.3 million for the quarter (net unfavourable unpaid claims development of $11.8 million year to date) resulting in an increase of 7.6% to the combined ratio for the quarter (7.8% year to date) compared with estimated net unfavourable unpaid claims development of $10.9 million in the same quarter last year (net unfavourable unpaid claims development of $9.3 million prior year to date). The adverse development was equally generated by the personal lines and commercial lines of business.

In 2009, the Company's internal actuarial team was significantly strengthened and the process on reserving unpaid claims changed, resulting in a more thorough internal review of unpaid claims. In 2010, instead of adjusting the reserves to the independent external actuary's point estimate, the Company now utilizes its internally developed reserve estimates.

Expenses

The expense ratio excluding the Corporate segment, increased to 44.8% in the quarter (45.3% year to date) compared to 36.1% for the same quarter (30.8% year to date) last year. Costs included in the expense ratio are commissions, premium taxes, general and administrative expenses, and restructuring costs. The increase in the expense ratio is attributed primarily to the disproportionate decrease in net premiums earned versus general and administrative expenses. Net premiums earned decreased by 39.3% to $69.7 million (38.9% to $151.2 million year to date) from the same period of the prior year. The increase in 2010 general and administrative expenses is primarily the result of 2009 expenses being reduced by the receipt of $11.0 million in proceeds from the settlement of two lawsuits in the second quarter of 2009.

General and administrative expenses increased 4.6% to $25.0 million in the second quarter of 2010 from $23.9 million in the same quarter last year (17.8% to $49.6 million from $42.1 for the prior year to date). This increase is primarily as a result of a higher remaining expense base in continuing operations as the Company is no longer allocating a portion of these costs to discontinued operations.

The Company recorded $1.2 million of severance expense in the second quarter of 2010.

Interest Expense

Interest expense in the second quarter of 2010 decreased to $4.2 million ($9.7 million year to date) compared to $5.9 million for the second quarter of 2009 ($12.2 million prior year to date) as a result of the debt buy-back activities in 2009 and 2010.

Gain on Buy-Back of Senior Notes

During the second quarter of 2010, KAI and Kingsway 2007 General Partnership purchased and cancelled $10.8 million ($95.6 million year to date) face value of its senior unsecured debentures for $9.3 million ($79.0 million year to date) recording a gain of $1.5 million ($16.6 million year to date).

Income Taxes

Income tax recovery on continuing operations for the second quarter was $0.3 million ($3.0 million year to date) compared with an income tax recovery of $ 15.9 million for the same quarter last year ($21.0 million prior year to date). An increase in the valuation allowance of $3.8 million was recorded in the current quarter ($7.8 million year to date).

Loss from Continuing Operations and Loss Per Share - Continuing Operations

In the second quarter, the Company reported a loss from continuing operations of $16.3 million ($33.1 million year to date), compared to a loss from continuing operations of $11.6 million in the first quarter of last year ($17.2 million prior year to date). Diluted loss per share was $0.31 for the quarter ($0.64 year to date), compared to diluted loss per share of $0.21 for the second quarter of 2009 ($0.31 prior year to date). As noted above, the current quarter's loss is primarily due to the underwriting losses and corporate expenses, which was partially offset by investment income, net realized gains, and the gain on the buy back of debt.

Income (Loss) from Discontinued Operations

In the second quarter, the Company reported no earnings from discontinued operations ($8.4 million year to date), compared to a loss from discontinued operations of $26.8 million in the second quarter of last year ($77.9 million prior year to date).

During the first quarter of 2010 the Company disposed of Jevco. As part of the agreement, the Company had the option to sell a property that was included in the purchase agreement. The purchase price would decrease if the sale price of the property was less than its carrying value, up to a maximum of approximately C$6.3 million. The purchase price would increase by 94.5% of every dollar that the sale price exceeded the carrying value. On June 15, 2010, the Company sold the property for less than its carrying value and as a result, the purchase price was decreased by C$2.2 million.

As a result of the disposal of Jevco, the Company realized an after tax loss of $2.2 million in the second quarter (gain of $30.4 million in the first six months of 2010). Included in this gain is a $34.1 million foreign currency exchange gain previously recorded in accumulated other comprehensive income and now recognized as a result of the disposal of Jevco in 2010.

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

In the second quarter, the Company reported a net loss of $18.5 million (net income of $5.6 million year to date), compared to net loss of $38.4 million in the second quarter of last year ($96.6 million prior year to date). Diluted loss per share was $0.36 for the quarter (earnings $0.11 year to date) compared to loss per share of $0.70 for the second quarter of 2009 ($1.75 prior year to date).

Balance Sheet

The table below shows a review of selected categories from the balance sheet reported in the financial statements as at June 30, 2010 compared to December 31, 2009.

    
    -------------------------------------------------------------------------
                                                           As at
    -------------------------------------------------------------------------
                                                      June December
    (in millions of dollars except per share            30,      31,
     values)                                          2010     2009   Change
    -------------------------------------------------------------------------
    Assets
    Cash and cash equivalents                      $ 186.7  $  58.7   218.1%
    Securities                                       406.6    512.2   (20.6%)
    Accounts receivable and other assets              97.9     94.3     3.8%
    Income taxes recoverable                          15.2     15.9    (4.4%)
    Funds held in escrow                              20.9        -        -
    -------------------------------------------------------------------------
    Future income taxes                                8.7      9.5    (8.4%)
    Capital assets                                    26.0     27.4    (5.1%)
    Goodwill and intangible assets                    51.0     37.6    35.6%
    Assets held for sale                               2.6  1,148.4   (99.8%)
    -------------------------------------------------------------------------

    Liabilities
    Unearned premiums                                104.6    120.7   (13.3%)
    Unpaid claims                                    323.2    368.5   (12.3%)
    Senior unsecured debentures                       82.7    176.8   (53.2%)
    Liabilities held for sale                            -    907.4  (100.0%)

    Shareholders' Equity
    Book value per share                              2.91     3.28   (11.3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Cash:

The cash balance increased to $186.7 million as at June 30, 2010 compared to $58.7 million as at December 31, 2009. The increase in cash is primarily due to the proceeds received from the Jevco sale partially offset by the funds used to repurchase debt. The offset to the increase in cash is reflected by the reduction of assets and liabilities held for sale reduced to nil.

Securities:

The fair value of the securities portfolio decreased 20.6% to $406.6 million, compared to $512.2 million as at December 31, 2009 as funds were used to reduce claims liabilities.

As at June 30, 2010, 96.6% 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:

    
    Maturity Profile:
    -------------------------------------------------------------------------
    Due in less than one year                                          7.4 %
    Due in one through five years                                     59.6
    Due after five through ten years                                  19.3
    Due after ten years                                               13.7
    -------------------------------------------------------------------------
    Total                                                            100.0 %
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

There were net unrealized gains of $15.8 million on the total securities portfolio at June 30, 2010 which is included as a component of "accumulated other comprehensive income", as compared to net unrealized gains of $5.8 million at December 31, 2009.

Funds held in escrow:

Funds held in escrow are the remaining proceeds to be received from the Jevco and HI Holdings sales once future contingent adjustments are known. See financial statement note 3 for further details.

Income taxes recoverable:

Income taxes recoverable decreased due to the receipt of income tax refunds that were generated from losses in the prior years.

Future income taxes:

Future income taxes have decreased primarily due to termporary differences that have arisen as a result of severance costs. The valuation allowance increased by $3.8 million in the current quarter ($7.8 million year to date). This allowance has been established as a result of the continuing losses of the US operations. Uncertainty over the Company's ability to utilize these loses over the short term has led to the Company recording this additional allowance.

Goodwill and intangible assets:

Goodwill and intangible assets increased due to the acquisition of JBA on June 30, 2010. See financial statement note 11 for further details.

Assets held for sale:

Assets held for sale at June 30, 2010 consist of properties held for sale. Assets held for sale at December 31, 2009 consisted of all of the assets of Jevco. These assets were sold on March 29, 2010.

Unearned premiums:

Unearned premiums decreased 13.3% since December 31, 2009 as a result of lower written premiums.

Liabilities held for sale

Liabilities held for sale at December 31, 2009, consisted of all of the liabilities of Jevco. These liabilities were sold on March 29, 2010.

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
    Line of Business                                          2010  31, 2009
    -------------------------------------------------------------------------
    Non-Standard Auto                                      $ 162.8   $ 183.0
    Commercial Auto                                          157.0     179.5
    Other                                                      3.4       6.0
    -------------------------------------------------------------------------
    Total                                                  $ 323.2   $ 368.5
    -------------------------------------------------------------------------
    

The provisions for unpaid claims decreased by 12.3% to $323.2 million at the end of the second quarter compared to $368.5 million at the end of 2009

The provision for unpaid claims includes case reserves for individual claims of $209.0 million ($229.6 million at December 31, 2009) and a provision for Incurred But Not Reported ("IBNR") claims which decreased 17.8% to $114.2 million ($138.9 million at December 31, 2009).

Book value per share:

Book value per share decreased by 11.3% to $2.91 at June 30, 2010 from $3.28 at December 31, 2009 as a result of $5.6 million of net income in the period and the decrease of $21.6 million in the "Accumulated other comprehensive income", component of shareholders' equity.

Contractual Obligations and Related Contingencies

Information concerning contractual maturities of financial instruments as at June 30, 2010 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 17 of the Company's 2009 audited consolidated financial statements and pages 20 to 25 of the 2009 Annual Report which sets out the Company's contractual obligations as at December 31, 2009.

On June 29, 2009, Kingsway and Lincoln entered into an agreement with Rockwall Financial Advisors, LLC ("Rockwall Financial"). Pursuant to the Run- off Management Agreement (the "Run-off Management Agreement"), Rockwall Financial was to serve as the run-off manager for Lincoln. In addition to base compensation of $1.3 million annually, the agreement provides for a minimum of $2.5 million to be paid to Rockwall Financial no later than March 1, 2014, provided the contract is not terminated by Kingsway or Lincoln for cause. As a result of the October 19, 2009 disposition of Lincoln, in 2009, the Company had accrued $3.2 million for the base compensation and the additional $2.5 million compensation for a total compensation of $5.7 million as at June 30, 2010.

In March 2010, Rockwall Financial stopped providing its services as the manager of the Lincoln run-off. Rockwall Financial notified Kingsway that it was terminating the Run-off Management Agreement, because, it claimed, Kingsway had not made certain payments to Rockwall Financial and had otherwise breached the Run-off Management Agreement. Shortly before Rockwall Financial's unilateral decision to stop providing services to support Lincoln, Rockwall Financial had entered into a settlement agreement to dispose of pending litigation between Rockwall Financial and Lincoln in which Rockwall Financial received payments and a release. In that litigation, Lincoln had alleged, among other things, that Rockwall Financial had engaged in self-dealing and other misconduct while serving as the Lincoln run-off manager.

Rockwall Financial then served upon Kingsway a demand for arbitration, claiming that Kingsway had breached the Run-off Management Agreement, and sought damages in excess of $26 million. Kingsway intends to defend the arbitration vigorously. As part of its defense of the matter, Kingsway intends to show that Rockwall Financial did not meet its obligations under the Run-off Management Agreement, abandoning the Lincoln run-off without cause and, as a result is not entitled to the sums it has demanded. Kingsway has also asserter counterclaims against Rockwall and two of its principals.

The Company is also the defendant in two separate breach of contract suits filed by two former employees.

Liquidity and Capital Resources

During the three and six months ended June 30, 2010, the cash used in operating activities were $32.0 million and $106.7 million, respectively. The Company's insurance subsidiaries fund their obligations primarily through the premium and investment income and maturities in the securities portfolio.

Certain debentures issued by the Company contain negative covenants in their trust indentures, placing limitations and restrictions over certain actions without the prior written consent of the indenture trustees. Included in the negative covenants is the limitation on the incurrence of additional debt in the event that the total debt to total capital ratio or the senior debt to total capital ratio exceed 50% and 35%, respectively. The total debt is calculated on a pro-forma basis taking into account the issuance of additional debt. The debentures also include covenants limiting the issuance and sale of voting stock of restricted subsidiaries, the payment of dividends or any other payment in respect of capital stock of the Company, or the retirement of debt subordinate to the debentures covered by the trust indentures if, after giving effect to such payments as described in the trust indentures, the total debt to total capital ratio exceeds 50%.

As at June 30, 2010, the Company's total debt to capital and senior debt to capital ratios were 59.8% and 36.6% respectively. As a result, the limitations and restrictions described above are applicable at June 30, 2010. Subsequent to quarter end, the Company has repurchased significant amounts of its unsecured 6% debentures due 2012 and the 7.5% senior notes due 2014, and also purchased additional units of the KLROC pursuant to a tender offer. These repurchases have resulted in a reduction of the total debt to capital and senior debt to capital ratios. Further details of the buybacks have been noted under note 17 to the financial statements pertaining to subsequent events.

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 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 the Company are inadequate to service its obligations, the Company would need to raise capital, sell assets or restructure its debt obligations.

On June 26, 2009, KFS Capital LLC, an indirect wholly-owned subsidiary of the Company, 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 ("KLROC") at a price per unit of C$12.00 in cash. The KLROC Offer expired on Tuesday, August 4, 2009 and 694,015 units were tendered. This tender was paid for using available cash. The Company acquired ownership of 121,000 units of the KLROC outside of the tender offer at an average price of C$10.45 per unit through a series of purchases on the Toronto Stock Exchange. As a result of these acquisitions, the Company beneficially owns and controls 833,715 units, representing approximately 26.72% of the issued and outstanding units. As of June 30, 2010, the Company has put in place a legal set-off agreement between KFS Capital LLC the owner within the Kingsway group of the KLROC units, KAI and Kingsway ROC LLC which allows for the offset of the KFS Capital LLC investment and the KAI loan payable in the consolidated financial statements of Kingsway. Effectively this set-off agreement allows the Company to offset its investment in KLROC units against a loan carried on its balance sheet related to the KLROC transaction, which has resulted in improvement of the debt ratios calculated pursuant to negative covenants mentioned above. At June 30, 2010, the KLROC investment is held at C$17.73 per unit and the corresponding value in U.S. dollar has been offset against the debt. Any increase in the carrying value of the KLROC units will increase the amount of the set-off, and reduce the related debt.

On June 9, 2010 KFS Capital LLC commenced a take-over bid (the "Offer") to acquire up to 750,000 KLROC units at a price per unit of C$17.50 in cash. On July 9, 2010 KFS Capital LLC increased the size and price of its previously announced Offer to 1,500,000 units at a price per unit of C$20.00 in cash. Further details of the tender have been noted under note 17 to the financial statements pertaining to subsequent events.

Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of the Company 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 2012 (the "2012 Debentures"). The 2012 Offer provided 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 expired Friday, August 14, 2009 with valid tenders (that were not withdrawn) of C$9.2 million in aggregate principal amount of Debentures. Kingsway 2007 General Partnership accepted for purchase all such tendered Debentures at the highest price specified of C$620 per C$1,000 principal amount. This tender was paid for using available cash.

On March 29, 2010, as part of the closing of the Jevco sale transaction the Company repurchased $36.9 million (C$37.5 million) of par value of the "2012 Debentures" realizing a gain of $5.9 million. The Company also repurchased $47.9 million of par value of the 7.50% senior notes due 2014 "2014 Debentures" realizing a gain of $9.2 million. In the second quarter the Company purchased $2.9 million (C$3.0 million) of par value of the "2012 Debentures" and $7.93 million of par value of the "2014 Debentures" realizing a gain of $0.2 million and $1.2 million, respectively.

The Company announced on July 29, 2009 an amendment to its normal course issuer bid for common shares had been approved by the Toronto Stock Exchange ("TSX"). The normal course issuer bid was originally announced by the Company 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, were limited to 5,386,545 common shares, or approximately 10% of the public float on November 28, 2008. The normal course issuer bid, as amended, terminated on December 1, 2009. Under this normal course issuer bid, 3,472,700 shares were repurchased at an average price of C$3.77.

As at June 30, 2010 the Company was adequately capitalized to support the premium volume of the insurance subsidiaries.

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, 2010, all U.S. subsidiaries are estimated to be above the required RBC levels, with RBC ratio estimates ranging between 274% and 480%, and have estimated aggregate capital of approximately $ 67.5 million in excess of the 200% level. During the second quarter of 2010, the Company rescinded its previously announced expansion of an intercompany pooling arrangement which had incorporated additional affiliated insurance entities effective January 1, 2010. Under this agreement, premiums, losses, acquisition costs and underwriting expenses are pooled and then allocated to the members of the pool based upon predetermined participation percentages. As a result of the rescission, effective January 1, 2010 the new members of the pool along with their corresponding participation percentage are as follows; American Service Insurance Company (70%) and American Country Insurance Company (30%).

In May 2009, the Company placed all of Lincoln General Insurance Company ("Lincoln") into voluntary run-off. After that date Lincoln continued to experience losses from unfavourable reserve development. The result of Lincoln's operational losses greatly reduced the Company's capital flexibility and created the potential of the Company breaching the covenants in its trust indentures. These ongoing losses also contributed to the financial strength rating downgrades of all operating companies.

On October 19, 2009, with the objective of protecting the interests of the Company's stakeholders, KAI, an indirect wholly owned subsidiary of the Company, disposed of its entire interest in its wholly owned subsidiary, Walshire. Walshire was the sole shareholder of Lincoln. All of the stock of Walshire was donated to charities, and with this disposition Lincoln ceased being a member of the Kingsway group of companies. The method of disposal of Walshire is lawful and valid but is not a standard method of disposing of an insurance company. The choice of this nonstandard method of disposition has led to litigation, as discussed below; has caused some regulatory scrutiny; and has the potential to adversely affect the reputation of the Company.

The Pennsylvania Insurance Department ("DOI") has challenged the disposition of Walshire and Lincoln. On November 20, 2009, DOI filed a complaint in the Commonwealth Court of Pennsylvania ("Commonwealth Court") against the Company, KAI and Walshire, seeking a declaration that the disposition was unlawful and not valid. The Company disagrees with the DOI's position and maintains that the donations of Walshire shares to the charities were lawful and valid. The Company therefore demurred to each of the claims in the DOI's complaint, thereby putting the legal sufficiency of the DOI's claims at issue. The demurrers were argued to a panel of the Commonwealth Court on February 9, 2010.

On April 1, 2010, the Commonwealth Court sustained the demurrers, rejecting the arguments made by DOI, and dismissing all of the DOI's claims against the Company. On April 30, 2010, the DOI appealed the April 1, 2010 decision to the Pennsylvania Supreme Court. The Company is opposing this appeal.

On November 19, 2009, the day before the DOI's complaint, the Company and KAI filed a complaint in the Commonwealth Court against the DOI seeking a declaration that the statute upon which the DOI principally relies did not apply to the donations. In response to the Company's complaint, the DOI filed an Answer and New Matter (in essence, a Counterclaim), making the same arguments the DOI made in its November 20, 2009 complaint. Because the two lawsuits raise the same issues, further proceedings in the Company's and KAI's lawsuit have been postponed, pending the Pennsylvania Supreme Court's decision in the DOI's lawsuit.

If the ultimate decision of the courts is unfavorable for the Company, the control of Lincoln may revert back to the Company, which would result in Lincoln's financial results being included in the Company's consolidated financial statements. Thus, if the Pennsylvania Supreme Court deems the transaction to be invalid, it could ultimately lead to the Company being in breach of its public debt covenants should Lincoln go into liquidation while still part of the Company. The Company's public debt is material, and a breach in covenants could lead to the debt being called and paid before maturity.

The Company's commitment to the DOI to provide a $10.0 million cash payment to Lincoln was paid in 2009. The Company also has continuing obligations on reinsurance agreements with Lincoln which are at market terms and conditions. These ongoing obligations are not significant and do not provide the Company with any control or significant influence over the operating activities or financial results of Lincoln.

On June 29, 2009, Kingsway and Lincoln entered into an agreement with Rockwall Financial Advisors, LLC ("Rockwall Financial"). Pursuant to that agreement (the "Run-off Management Agreement"), Rockwall Financial was to serve as the run-off manager for Lincoln. In addition to base compensation of $1.3 million annually, the agreement provides for a minimum of $2.5 million to be paid to Rockwall Financial no later than March 1, 2014, provided the contract is not terminated by Kingsway or Lincoln for cause. As a result of the October 19, 2009 disposition of Lincoln, in 2009, the Company had accrued $3.2 million for the base compensation and the additional $2.5 million compensation for a total compensation of $5.7 million as at June 30, 2010.

In March 2010, Rockwall Financial stopped providing its services as the manager of the Lincoln run-off. Rockwall Financial notified Kingsway that it was terminating the Run-off Management Agreement, because, it claimed, Kingsway had not made certain payments to Rockwall Financial and had otherwise breached the Run-off Management Agreement. Shortly before Rockwall Financial's unilateral decision to stop providing services to support Lincoln, Rockwall Financial had entered into a settlement agreement to dispose of pending litigation between Rockwall Financial and Lincoln in which Rockwall Financial received payments and a release. In that litigation, Lincoln had alleged, among other things, that Rockwall Financial had engaged in self-dealing and other misconduct while serving as the Lincoln run-off manager.

Rockwall Financial then served upon Kingsway a demand for arbitration, claiming that Kingsway had breached the Run-off Management Agreement, and sought damages in excess of $26 million. Kingsway intends to defend the arbitration vigorously. As part of its defense of the matter, Kingsway intends to show that Rockwall Financial did not meet its obligations under the Run-off Management Agreement, abandoning the Lincoln run-off without cause and, as a result is not entitled to the sums it has demanded. Kingsway has also asserted counterclaims against Rockwall and of its principals.

As part of the ongoing transformation program, during the second quarter of 2009 the Company began terminating all related party reinsurance treaties. As at September 30, 2009, all treaties between Kingsway Reinsurance Corporation and the U.S. operating companies have been commuted. This initiative has resulted in increased capital in our operating companies and it has released excess capital from the captive reinsurers to be used for corporate purposes.

As at September 30, 2009, following the commutation of all intercompany reinsurance treaties between Kingsway Reinsurance Corporation and the Company's U.S. operating subsidiaries, a significant portion of the remaining capital at Kingsway Reinsurance Corporation was repatriated. A portion of this capital was re-deployed directly into the U.S. operating subsidiaries and a portion was held at the parent company for corporate purposes. At June 30, 2010 the capital maintained by Kingsway Reinsurance Corporation was approximately $4.6 million in excess of the regulatory capital requirements in Barbados.

As at June 30, 2010, the capital maintained by Kingsway Reinsurance (Bermuda) Limited was approximately $0.5 million in excess of the regulatory capital requirements in Bermuda.

Off-Balance Sheet Financing

The Company entered into an off-balance sheet transaction through the KLROC transaction that was completed on July 14, 2005 which is more fully described in Note 17(d) of the 2009 audited consolidated annual financial statements and on page 25 of the 2009 Annual Report. As of June 30, 2010, the Company has put in place a legal set-off agreement between KFS Capital LLC, the owner within the Kingsway group of the KLROC units, KAI and Kingsway ROC LLC which allows for the offset of the KFS Capital LLC investment and the KAI loan payable in the consolidated financial statements of Kingsway. Effectively this set-off agreement allows the Company to offset its investment in KLROC units against a loan carried on its balance sheet related to the KLROC transaction, which has resulted in improvement of the debt ratios.

The Company has one other off-balance sheet financing arrangement as described on page 25 of the 2009 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 reflects 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, as described on page 28 of the 2009 Annual Report.

Related Party Transactions

Related-party transactions, including services provided to or received by the Company'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. For additional details, see Note 13 of the financial statements.

On January 4, 2010, the Company and its subsidiary Kingsway America Inc. acquired certain assets of Itasca Financial, LLC, a property and casualty insurance industry advisory firm, owned and controlled by Mr.Swets, a former director and recently appointed Chief Executive Officer and President of the Company. The consideration for the assets purchased is equal to $1.5 million cash and one million restricted common shares of the Company. The value of the consideration paid was approximately $2.5 million at the time of close.

Subsequent to the transaction, certain employees of Itasca are now employees within the KAI group, including Mr. Swets, who was appointed Chief Executive Officer and President of KFSI effective June 30, 2010.

In March 2009, the Company obtained a $20 million financing facility from American Physicians Assurance Corporation ("AP Assurance") to allow for specific capital initiatives. Two of the members of the Company's Board of Directors also sit on the board of AP Assurance making it a related party. The facility was at fair market terms and conditions. No funds were ever drawn on this facility and it has expired. In the fourth quarter of 2009, a new $20 million facility was obtained from AP Assurance. This new facility was at fair market terms and conditions. No funds were ever drawn on this facility and it was terminated on February 25, 2010.

In March 2010, the Company signed an agreement with AP Assurance to provide investment management and investment accounting services to the Company, commencing April 1, 2010. This agreement is at fair market terms and conditions.

In 2009, in addition to a previously agreed retainer of C$0.1 million, the Board of Directors had decided to pay additional retainer payments of $0.4 million and C$0.1 million to the Chairman of the Board. Of these additional amounts, in 2009, the Company had paid $0.2 million and C$0.1 million. In 2010, the remaining $0.2 million owing was paid.

In the first quarter of 2010, in addition to a previously agreed retainer of C$0.2 million, the Board of Directors had decided to pay an additional $0.1 million to the Chairman of the Board. This additional payment was made in the second quarter of 2010.

In the second quarter of 2010, the Board of Directors had decided to pay an additional $0.1 million to the Chairman of the Board. The Company paid half of this additional amount in the second quarter of 2010. This remaining payment was made in the third quarter of 2010.

The additional payments to the Chairman of the Board in 2010 were due to his increased workload with respect to various matters confronting the Company.

International Financial Reporting Standards (IFRS)

As previously disclosed, the Company will report its financial statements for the year ending December 31, 2011 and its quarterly financial statements commencing with the quarter ending March 31, 2011 in accordance with IFRS, including comparative prior period results and balances. An opening IFRS balance sheet as of January 1, 2010, the transition date, will also be presented together with reconciliation to the December 31, 2009 balances prepared on a Canadian GAAP basis. As permitted by the U.S. Securities and Exchange Commission ("SEC") the Company will not provide a reconciliation of its IFRS reported results to U.S. generally accepted accounting principles ("US GAAP") in its annual consolidated financial statements filed with the SEC.

The International Financial Reporting Standards consist of the IFRS and International Accounting Standards ("IAS") issued by the International Accounting Standards Board ("IASB") together with interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") or the former Standing Interpretations Committee ("SIC"). IFRS uses a conceptual framework similar to that of Canadian GAAP, but there are significant differences in recognition, measurement, and disclosure which have been identified and will be addressed in the course of implementing IFRS.

A formal IFRS Project Charter ("Project Charter") and an IFRS Project Plan ("Project Plan") were prepared during the Initial Assessment Phase, outlining the key elements and timing of the plan, and were both approved by the IFRS Project Steering Committee and Audit Committee.

The Project Charter focuses on the purpose and objectives of the project, expectations and deliverables to key stakeholders, project scope and approach, milestone plan with completion criteria, date and deliverables, significant project risks and mitigation actions, roles and responsibilities of the IFRS Project Steering and Implementation Committees, project management, issue resolution, and communication plan.

The project Plan is updated on a regular basis and tracked by the level of completion of the detailed activities as shown below:

    
    -------------------------------------------------------------------------
               Estimated
              completion                             Status at
    Phase           time  Key elements               June 30, 2010
    -------------------------------------------------------------------------
    Phase 1 -   November  a) Form IFRS Project       Completed
    Initial         2008     Steering and Implemen-
    Assessment               tation Committees;
                          b) Prepare a Project
                             Charter and a Project
                             Plan;
                          c) Prepare high level
                             impact assessment on
                             the Company's finan-
                             cial statements
    -------------------------------------------------------------------------
    Phase 2 -   December  a) Identify IFRS           Completed
    Detailed        2009     standards applicable
    Assessment               to the Company;
                          b) IFRS vs. Canadian GAAP
                             /U.S. GAAP accounting/
                             disclosure gap
                             analysis
                          c) IFRS 1 analysis
                          d) Accounting strategy
                             analysis (i.e. pre-
                             liminary accounting
                             policy choices);
                          e) Information technology
                             and internal controls
                             impact assessments
                          f) Business impact assess-
                             ment (such as assess
                             impact on contracts
                             which are based on
                             Canadian GAAP measures);
                          g) Bonuses/variable comp-
                             ensation impact assess-
                             ment
                          h) Design training strat-
                             egy for the employees
                             directly or indirectly
                             associated with IFRS
                             conversion;
                          i) Comply with the regu-
                             latory reporting re-
                             quirements (i.e. OSFI,
                             FSCO and CSA require-
                             ments)
    -------------------------------------------------------------------------
    Phase 3 -       July  a) Financial impact        Completed activities:
    Solutions       2010     analysis;               ---------------------
    Development           b) Quantification of IFRS  a) Financial impact
                             and Canadian GAAP          analysis;
                             differences;            b) Quantification of
                          c) Selection and docu-        IFRS and Canadian
                             mentation of IFRS          GAAP differences;
                             accounting policies;    c) Selection and
                          d) Design of internal         documentation of
                             controls;                  IFRS accounting
                          e) Document proposed          policies;
                             system changes;         d) Design of internal
                          f) Renegotiate contracts      controls;
                             if impacted by IFRS;    e) Document proposed
                          g) Redesign compensation      system changes;
                             plan;                   f) Comply with the
                          h) Prepare implementation     regulatory reporting
                             plan for accounting        requirements (i.e.
                             and reporting, systems,    OSFI, FSCO and CSA
                             business and people;       requirements)
                          i) Perform income tax      g) Compensation plan
                             impact assessment,         design remains
                          j) Prepare proforma IFRS      unchanged
                             financial statements;   h) Perform income tax
                          k) Revisit communication      impact
                             and training strategy;  i) Renegotiate contracts
                          l) Comply with the reg-       - no impact
                             ulatory reporting
                             requirements (i.e.      In Process:
                             OSFI, FSCO and CSA      -----------
                             requirements)           a) Prepare proforma IFRS
                                                        financial statements;

                                                     Pending
                                                     -------
                                                     a) Prepare implement-
                                                        ation plan for
                                                        accounting and
                                                        reporting, systems,
                                                        business and people;
                                                     b) Revisit communication
                                                        and training
                                                        strategy;
    -------------------------------------------------------------------------
    Phase 4 -   December  a) Implementation of       Completed activities:
    Implement-      2010     IFRS accounting         ---------------------
     ation                   policies;               a) Implementation of
                          b) Prepare for the            IFRS accounting
                             fiscal year 2010 IFRS      policies;
                             opening balance sheet;  b) Prepare for the
                          c) Prepare IFRS comp-         fiscal year 2010 IFRS
                             aratives for the first     opening balance
                             quarter to fourth          sheet;
                             quarter of 2010;         Pending
                          d) Perform system en-       -------
                             hancements to report     c) Prepare IFRS comp-
                             information under           aratives for the
                             IFRS;                       first quarter to
                          e) Implement new               fourth quarter of
                             accounting and busi-        2010;
                             ness processes;          d) Perform system
                          f) Document changes to         enhancements to
                             internal controls;          report information
                          g) Comply with the regu-       under IFRS;
                             latory reporting         e) Implement new
                             requirements (i.e.          accounting and
                             OSFI, FSCO and CSA          business processes;
                             requirements);           f) Document changes to
                          h) Execute IFRS technical      internal controls;
                             training and change to   g) Comply with the
                             processes;                  regulatory reporting
                          i) Draft accounting            requirements (i.e.
                             policy manual and           OSFI, FSCO and CSA
                             guidelines                  requirements);
                          j) Continuous monitoring    h) Execute IFRS tech-
                             of changes to IFRS          nical training and
                             standards, processes        change to processes;
                             and systems.             i) Draft accounting
                                                         policy manual and
                                                         guidelines
                                                      j) Continuous
                                                         monitoring of
                                                         changes to IFRS
                                                         standards, processes
                                                         and systems.
    -------------------------------------------------------------------------
    

The entire project is expected to be completed by December 31, 2010.

The following is an update of the impact of adopting IFRS on the Company's accounting, processes, information systems and internal controls as of June 30, 2010.

    
    1.  IFRS 1: First-Time Adoption of IFRS
        -----------------------------------
    

First-time Adoption of International Financial Reporting Standards ("IFRS 1") generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does require certain mandatory exceptions and permits limited optional exemptions to full retrospective application of standards in effect on the initial reporting date.

The following are the optional exemptions, that KFSI has elected at the transition date of January 1, 2010, to apply prospectively, whose impact is expected to be significant during preparation of the first financial statements under IFRS:

    
        1. Business combinations
           ---------------------
           IFRS 1 permits a first-time adopter to elect not to apply IFRS 3,
           Business Combinations retrospectively for business combinations
           that occurred before the date of transition to IFRS. KFSI has
           elected this exemption and will prospectively apply IFRS 3 to
           business combinations from the transition date of January 1, 2010.
           The classification and measurement of past business combinations
           will be based on acquisition date values and the goodwill carrying
           amount will be based on Canadian GAAP, subject to additional
           considerations under IFRS 1, Appendix B.

        2. Cumulative translation differences
           ----------------------------------
           International Accounting Standards ("IAS") 21, The Effects of
           Changes in Foreign Exchange Rates, requires an entity to determine
           the translation differences in accordance with IFRS from the date
           on which a subsidiary was formed or acquired. IFRS 1 allows
           cumulative translation differences for all foreign operations to
           be deemed zero at the date of transition to IFRS, with future
           gains or losses on subsequent disposal of any foreign operations
           to exclude translation differences arising from periods prior to
           the date of transition to IFRS. KFSI has elected to deem all
           cumulative translation differences to zero on the transition date
           to IFRS. Cumulative translation balance of $14.8 million will be
           deemed zero at December 31, 2009, and the transition date will be
           the reference point for future foreign entity disposals.

        3. Designation of previously recognized financial instruments
           ----------------------------------------------------------
           An entity is permitted to designate at the date of transition any
           financial asset as available for sale, or a financial instrument
           at fair value through profit and loss (FVTPL) provided that the
           asset or liability meets the criteria for such classification (IAS
           39.9(b) (i), (b) (ii) and (11A)). KFSI has elected to designate
           its senior unsecured debentures at FVTPL. This comprises of a
           $125.0 million note issued by Kingsway America Inc. due in 2014
           and a C$100.0 million debenture offering by a general partnership
           of the company due in 2012 of $97.6 million and $79.2 million
           respectively at December 31, 2009. The debt is currently
           classified as other financial liabilities and measured at
           amortized cost using the effective interest rate method under
           Canadian GAAP. The FVTPL election will first, reduce the
           accounting mismatch since the majority of the fixed income
           securities portfolio, which share interest rate risk with the debt
           liabilities, is classified as available for sale and measured at
           fair value, and secondly because the Kingsway debt is managed and
           evaluated on the basis of its fair value. As a result of the
           above change in accounting policy, a previously unrealized gain
           estimated at $73.3 million will be recognized in the retained
           earnings on transition date to IFRS. Subsequent gains or losses on
           fair valuation of the debt will be recognized in the profit and
           loss account under IFRS. As a result of gains recognized on the
           repurchase of senior indebtedness and the appreciation in the
           market value of the Company's senior indebtedness since the
           transition date the unrealized gain described above will decline
           significantly following the transition date.

           KFSI has also elected the following IFRS 1 exemptions on
           transition date. The impact has been determined not to be
           significant to the financial statements on adoption of IFRS.

           -  Insurance Contracts: IFRS 1 election allows KFSI as a first-
              time adopter to apply the transitional provisions of IFRS 4,
              Insurance contracts. See 2(d) below.
           -  Share-Based Payment Transactions: KFSI has elected to apply
              IFRS 2, Share Based Payments requirements for equity settled
              share based payments prospectively from transition date. There
              is no impact on the consolidated financial statements on
              transition date resulting from this election.
           -  Fair Value or Revaluation as Deemed Costs: KFSI previously
              reported that it had elected IFRS 1 exemption to use fair value
              as deemed cost for self constructed property on the transition
              date. With the sale of the Jevco subsidiary the Company no
              longer has self constructed property and accordingly will
              continue to use amortized cost as deemed cost.
           -  Leases: IFRS 1 election allows a first time adopter to
              determine whether an arrangement existing at the date of
              transition to IFRSs contains a lease on the basis of facts
              and circumstances existing at that date. Based on assessment
              performed by the Company no new arrangements which may contain
              a lease where identified, and there is no impact.
           -  Investments in Subsidiaries, Jointly Controlled Entities and
              Associates: KFSI has elected the IFRS 1 exemption to present
              investment in subsidiaries based on Canadian GAAP carrying
              value, in the separate financial statements, as the deemed cost
              under IFRS on transition date.

    2.  Accounting Impact Analysis
        --------------------------
    

During the Detailed Assessment Phase- Phase 2, an IFRS Accounting Impact Matrix was prepared, analyzing IFRS/ Canadian GAAP accounting differences, and the expected impact on the Company and its subsidiaries on adoption of IFRS. Based on the IFRS standards expected to have a significant impact on the Company and its subsidiaries, Position Papers were prepared to individually assess the financial, process, internal controls, information systems and people impact of each selected standard on the Company on adoption of IFRS. The quantification of the financial impacts is in process and will continue though the completion of the project.

The following is an update on impact on adoption of IFRS that has been quantified during the quarter ended June 30, 2010.

a) IAS 27 - Consolidated and Separate Financial Statements

Under Canadian GAAP, the Company recognizes, as variable interest entities (VIE), entities in which it is not considered the primary beneficiary. The financial statements of these entities are not consolidated and the Company's investments in them are accounted for under the equity method. IAS 27 and SIC 12 do not have a concept of VIE and require that a parent consolidate its investments in subsidiaries using the control model wherein it obtains the benefits from their activities. Kingsway Linked Return of Capital Trust ("KLROC Trust"), Kingsway Note Trust ("KN Trust"), KL LP, ROC GP and ROC LLC are entities that were formed in July 2005 in order to provide investors with exposure to a KAI note payable. The Company was a promoter of these entities. The Company has determined that these entities were formed under trust agreements that strictly control their activities and the Company obtains the benefits of their activities. Accordingly under IFRS, the Company will consolidate the financial statements of KLROC Trust which includes the accounts of the other aforementioned entities.

The most significant impacts from the consolidation of these entities, as at January 1, 2010, the date of the Company's opening IFRS balance sheet is the elimination of the KFSI investment in ROC GP and its wholly owned subsidiary, ROC LLC, elimination of the 7.37% loan with a stated principal balance of $66.2 million payable by KAI to ROC, LLC and the recognition of the KINGSWAY 5% preferred linked return of capital units due June 15, 2015 with a fair value of $16.5 million, after offsetting with units owned by KSFI. In addition the Company will recognize as an asset a Forward Purchase Agreement with an estimated fair value of $28.1 million entered into in connection with the issuance of the loan and the KLROC units and the recognition of a non-controlling interest of $28.1 million with the counterparty.

b) IAS 40 - Investment property

IAS requires that land and/or building, or part or both held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both be classified as an investment property. The Company and its subsidiaries own properties which are partially leased to third parties and owner occupied. The leased portions could be separately sold or leased out under a finance lease. The net carrying value of property leased to others was $1.3 million on an amortized cost basis at June 30, 2010. The amount will be reclassified from capital assets to investment property. The fair value of investment property based on an independent appraisal will also be disclosed.

After the transition date, the Company will continue to subsequently measure investment properties on an amortized cost basis and depreciation will be determined using the straight line basis. Fair valuation of investment properties will also be performed on transition date and periodically thereafter, for disclosure purposes in the IFRS financial statements as required by IAS 40.

c) Insurance contracts

IFRS 4 Insurance Contracts allows insurers adopting IFRS to continue with their existing accounting policies. IFRS also permits entities to continue to apply their existing policies for measuring insurance liabilities, subject to a liability adequacy test. Based on the qualitative and quantitative assessment performed by the Company, the impact on adoption of IFRS 4 is not significant.

IFRS 4 introduces new disclosures, which will be included in the Company's financial statements on adoption of IFRS. These include disclosures of insurance risk sensitivity, surrounding the nature and extent of risks arising from its insurance contracts, and showing the impact on profit or loss and equity if changes in the relevant risk variables that were reasonably possible at the end of the reporting period had occurred, and the methods and assumptions used in preparing the sensitivity analysis. New disclosures also include concentration of insurance risk, detailing management's basis of determining insurance risk concentration and a description of the shared characteristics identifying each concentration. In determining insurance risk sensitivity and concentration, the Company will implement additional monitoring controls over the use of estimates and end user computing processes.

IFRS 4 also disallows off setting of insurance liabilities against related insurance assets as well as income and expenses which are offset from reinsurance amounts.

d) Impairment of Assets

IAS 36 requires the recoverable amount of an asset to be measured whenever there is an indication that the asset may be impaired. In addition the standard also requires that intangible assets with indefinite lives be tested for impairment on the transition date and annually thereafter, by comparing the carrying value with the recoverable amount irrespective of whether there is an indication of impairment. Under Canadian GAAP, an evaluation is performed whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The Company will therefore perform a full impairment test by determining the recoverable value of an asset based on the higher of fair value less costs to sell or value in use. The value in use of an asset will be based on discounted cash flows under IFRS.

At December 31, 2009, KFSI had intangible assets with indefinite useful lives with a carrying value of $10.1 million. The Company is in the process of performing the impairment test for intangible assets on transition date based on IAS 36 requirements.

Based on the expected process changes above on adoption of IAS 36, the system will be modified to track the history of impairment losses arising on an individual asset basis- if any, and the impairment model will also be updated to apply discounted cash flows to determine the value in use of an asset under IFRS. Controls will be put in place for the appropriate selection of the discount rate and over tracking of impairments by asset in the event that an impairment charge is reversed.

e) Property, Plant and Equipment

IAS 16 requires that each part of an item of property, plant and equipment with a cost that is significant in relation to total cost of the item shall be depreciated separately. An analysis completed in the first quarter 2010 of the useful lives of components of buildings was performed and the impact of separately depreciating the components was determined to be immaterial. Accordingly depreciation will continue under the current method.

f) Non-current Assets Held for Sale and Discontinued Operations

Included in Liabilities Held for Sale at December 31, 2009 was a deferred gain of C$0.8 million related to a sale and leaseback of property owned by the Jevco subsidiary. The lease is an operating lease. IAS 17 requires that the gain be recognized in profit or loss at the date of the transaction. Accordingly the gain will be credited to retained earnings in our opening balance sheet.

g) Share-Based Payment Transactions

IFRS 2 Share Based Payments requires that forfeitures of equity settled share based payments which have been granted, are estimated upfront and re-estimated each period based on actual experience to determine the compensation expense over the vesting period. The Company will therefore change its basis of determining the estimate, which is currently based on actual forfeitures at period end over the vesting period. There will be no financial impact over the vesting period of the granted shares, although the estimated periodic compensation expense may differ from the current accounting policy.

On adoption of IFRS, each of the Company's subsidiaries, whose employees participate in the Kingsway Financial Stock Option Incentive Plan in which the parent company grants rights to its shares, to employees of its subsidiaries, will each recognize the corresponding compensation benefit for its employees, and a corresponding increase in equity as a contribution from the parent Company in accordance with IFRIC 11 Group and Treasury shares transactions. There will be no impact on the consolidated financial statements. Change management controls will be required over the accounting for the stock options at subsidiary level.

h) Presentation of financial statements

The Company has made additional accounting policy choices as a result of adoption of IFRS which will affect the disclosures in the financial statements, among which is the accounting policy choice for an entity to present its expenses either by nature or function on the face of the Statement of Comprehensive Income. The Company will present its expenses by nature, which is deemed to provide more relevant information as an insurance company. This will result in significant changes to the current mapping of the general ledger to the financial statements and appropriate controls will be implemented.

    
    3.  Impact on processes, information systems and controls
        -----------------------------------------------------
    

While new processes, internal controls and modifications to the existing information systems have been identified and plans are also underway to implement the changes arising from the new accounting policies selected under IFRS, the Company has determined that the other changes to its current accounting, information systems or its processes as a result of the conversion to IFRS will not be significant, except as described above.

The Company identified the processes and information systems changes which will be required as a result of adoption of IFRS. Proposed internal controls have been designed as part of the Position Papers analysis, to mitigate the risks arising from the process and information systems changes and to also ensure the internal control over financial reporting is robust. The process and internal controls changes resulting from adoption of IFRS have been identified in the respective Position Papers and will be formally documented and updated as the project progresses. Internal controls which have been designed to address the changes in processes as a result of adoption of IFRS are expected to be implemented and evaluated during Phase 4 Implementation Phase, of the project.

Regular Steering Committee meetings attended by various members of management are held to communicate, review the project progress and deliverables. The Audit Committee continues to provide oversight to the IFRS project, and reviews the project status periodically. To date, the group's IFRS 1 elections and IFRS accounting policy choices have been approved by both the Steering and Audit Committees.

    
    4.  Financial reporting expertise, including training requirements
        --------------------------------------------------------------
    

Initial education and training sessions on the adoption of IFRS, have been communicated to the Company's finance and accounting staff. A training program has been prepared for more detailed sessions across the group to be held within the Solutions Development and Implementation Phases of the project. This will focus among others, on the Company's IFRS policy choices, and the changes to the existing procedures and controls as a result of adopting IFRS. An additional IFRS Resource was also contracted to provide additional support to the in-house management team. Current resources are deemed appropriate to satisfactorily carry out the project to completion.

    
    5.  Future Modifications to IFRS
        ----------------------------
    

In July 2010, the IASB issued an Exposure Draft, Insurance Contracts, an Amendment to IFRS 4. The Exposure Draft proposes significant changes in the accounting for insurance contracts. The Company is studying the impact of these changes on its operations, financial position and results of operations, if issued in as set forth in the Exposure Draft.

The IASB is in process of modifying current standards and is expected to issue new standards in the coming months. The Company will continue to review proposed and issued standards and interpretations. The impact of these yet to be issued changes on the Company's business activities cannot be quantified at this date.

Disclosure of Outstanding Share Data

As at June 30, 2010, the Company had 52,095,828 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.

    
    -------------------------------------------------------------------------
    (in millions of dollars except per share values)
    -------------------------------------------------------------------------
                                       2010       2010       2009       2009
                                         Q2         Q1         Q4         Q3
    -------------------------------------------------------------------------
    Gross premiums written        $    58.9  $    84.3  $    70.4  $    82.8
    Net premiums earned                69.7       81.5       79.7      103.0
    Total Revenue                      81.8       83.4       71.3      106.7
    -------------------------------------------------------------------------
    Net (loss) income from
     continuing operations            (16.3)     (16.8)     (65.2)     (24.0)
    Net (loss) income                 (18.5)      24.1      (75.5)    (118.1)
    -------------------------------------------------------------------------
    (Loss) earnings per share -
     continuing operations
    -------------------------------------------------------------------------
    Basic                         $   (0.31) $   (0.32) $   (1.26) $   (0.44)
    Diluted                       $   (0.31) $   (0.32) $   (1.26) $   (0.44)
    -------------------------------------------------------------------------
    (Loss) earnings per share -
     net (loss) income
    Basic                         $   (0.36) $    0.46  $   (1.46) $   (2.19)
    Diluted                       $   (0.36) $    0.46  $   (1.46) $   (2.19)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (in millions of dollars except per share values)
    -------------------------------------------------------------------------
                                       2009       2009       2008       2008
                                         Q2         Q1         Q4         Q3
    -------------------------------------------------------------------------
    Gross premiums written        $    86.7  $   136.9  $   101.2  $   118.8
    Net premiums earned               111.1      136.4      119.3      153.1
    Total Revenue                     122.6      142.6      115.3      152.4
    -------------------------------------------------------------------------
    Net (loss) income from
     continuing operations            (11.6)      (5.6)    (165.2)       9.4
    Net (loss) income                 (38.4)     (58.3)    (360.4)     (17.4)
    -------------------------------------------------------------------------
    (Loss) earnings per share -
     continuing operations
    -------------------------------------------------------------------------
    Basic                         $   (0.21) $   (0.10) $   (3.00) $    0.17
    Diluted                       $   (0.21) $   (0.10) $   (3.00) $    0.17
    -------------------------------------------------------------------------
    (Loss) earnings per share -
     net (loss) income
    Basic                         $   (0.70) $   (1.06) $   (6.53) $   (0.32)
    Diluted                       $   (0.70) $   (1.06) $   (6.53) $   (0.32)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary Financial Information from Continuing Operations


    Financial Strength Indicators:
    -------------------------------------------------------------------------
    Some of the key indicators of the
    Company's financial strength are as follows:
    -------------------------------------------------------------------------
                                            June 30, 2010  December 31, 2009
    -------------------------------------------------------------------------
    Senior debt to capitalization ratio             36.6%              48.7%

    Total debt to capitalization ratio              59.8%              66.6%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Risk Factors

The Company's 2009 Annual Report ("2009 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.

Internal Controls over Financial Reporting and Disclosure Controls & Procedures

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.

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.

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 the Company's securities filings, including its 2009 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 the Company, including the Company's Annual Report and the Company'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)
    -------------------------------------------------------------------------
                                    Three months ended      Six months ended
    (Unaudited)                            June 30:              June 30:
    -------------------------------------------------------------------------
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    Gross premiums written        $  58,912  $  86,708  $ 143,205  $ 223,630
    -------------------------------------------------------------------------
    Net premiums written          $  52,038  $  89,601  $ 128,989  $ 251,175
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned         $  69,683  $ 111,154  $ 151,158  $ 247,500
      Investment income (Note 6)     11,730     11,040     13,153     19,291
      Net realized gain (loss)
       (Note 6)                         343        132        860     (2,041)
    -------------------------------------------------------------------------
                                     81,756    122,326    165,171    264,750
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred             $  58,530  $  91,576  $ 125,813  $ 196,227
      Commissions and premiums
       taxes                          9,013     18,099     24,397     38,149
      General and administrative
       expenses                      25,032     23,931     49,614     42,143
      Restructuring costs (Note 10)   1,208      6,952      4,898      8,281
      Interest expense                4,184      5,918      9,692     12,215
      Amortization of intangibles     1,861      5,971      3,382      8,536
    -------------------------------------------------------------------------
                                     99,828    152,447    217,796    305,551
    -------------------------------------------------------------------------
    Loss before unusual item and
     income taxes                   (18,072)   (30,121)   (52,625)   (40,801)
    Gain on buy-back of senior
     notes (Note 12)                  1,454      2,647     16,557      2,647
    -------------------------------------------------------------------------
    Loss from continuing operations
     before income taxes            (16,618)   (27,474)   (36,068)   (38,154)
    Income tax (recovery)              (301)   (15,887)    (2,958)   (20,976)
    -------------------------------------------------------------------------
    Loss from continuing operations (16,317)   (11,587)   (33,110)   (17,178)
    Income (loss) from discontinued
     operations, net of taxes
     (Note 3)                             -    (26,790)     8,358    (77,850)
    Income (loss) on disposal of
     discontinued operations,
     net of taxes (Note 3)           (2,179)         -     30,354     (1,616)
    -------------------------------------------------------------------------
    Net Income (loss)             $ (18,496) $ (38,377) $   5,602  $ (96,644)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Loss per share - continuing
     operations:
    Basic:                        $   (0.31) $   (0.21) $   (0.64) $   (0.31)
    Diluted:                      $   (0.31) $   (0.21) $   (0.64) $   (0.31)
    -------------------------------------------------------------------------
    Earnings (loss) per share
     - net income (loss):
    Basic:                        $   (0.36) $   (0.70) $    0.11  $   (1.75)
    Diluted:                      $   (0.36) $   (0.70) $    0.11  $   (1.75)
    Weighted average shares
     outstanding (in '000s):
    Basic:                           52,062     55,069     52,062     55,069
    Diluted:                         52,062     55,091     52,062     55,111
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands of U.S. dollars)
    -------------------------------------------------------------------------
                                            June 30, 2010  December 31, 2009
                                             (unaudited)
    -------------------------------------------------------------------------
    ASSETS
      Cash and cash equivalents               $   186,688        $    58,726
      Securities (Note 6)                         406,593            512,197
      Accrued investment income                     3,398              4,158
      Financed premiums                            18,509             15,237
      Accounts receivable and other assets         97,922             94,285
      Funds held in escrow (Note 3)                20,936                  -
      Due from reinsurers and other insurers            -              4,938
      Deferred policy acquisition costs            23,787             29,088
      Income taxes recoverable                     15,156             15,883
      Future income taxes                           8,707              9,481
      Capital assets                               26,011             27,375
      Goodwill and intangible assets               50,966             37,573
      Assets held for sale (Note 3)                 2,646          1,148,414
    -------------------------------------------------------------------------
                                              $   861,319        $ 1,957,355
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES
      Loans payable                           $    52,319        $    66,222
      Accounts payable and accrued
       liabilities                                 58,311             61,041
      Due to reinsurers and other insurers            916                  -
      Unearned premiums                           104,629            120,657
    -------------------------------------------------------------------------
      Unpaid claims                               323,177            368,501
      Senior unsecured debentures (Note 8)         82,701            176,764
      Subordinated indebtedness                    87,432             87,415
      Liabilities held for sale (Note 3)                -            907,416
                                                  709,485          1,788,016
    SHAREHOLDERS' EQUITY
      Share capital
        Issued and outstanding number of
         common shares                            296,091            295,291
          52,095,828 - June 30, 2010
          51,595,828 - December 31, 2009
      Contributed surplus                          18,227             20,549
      Deficit                                    (187,970)          (193,572)
      Accumulated other comprehensive income       25,486             47,071
                                                  151,834            169,339
    -------------------------------------------------------------------------
                                              $   861,319        $ 1,957,355
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
    (In thousands of U.S. dollars)
    -------------------------------------------------------------------------
                                                    Six months ended June 30:
    -------------------------------------------------------------------------
    (Unaudited)                                      2010               2009
    -------------------------------------------------------------------------
    Share capital
    Balance at beginning of period            $   295,291        $   322,344
    Issued during the period (Note 13)                800                  -
    -------------------------------------------------------------------------
    Balance at end of period                      296,091            322,344
    -------------------------------------------------------------------------
    Contributed surplus
    Balance at beginning of period            $    20,549        $     9,791
    Forfeited options                              (2,947)            (1,932)
    Stock option expense                              625                811
    -------------------------------------------------------------------------
    Balance at end of period                       18,227              8,670
    -------------------------------------------------------------------------
    Retained (deficit) earnings
    Balance at beginning of period            $  (193,572)       $    98,564
    Net income (loss) for the period                5,602            (96,644)
    Common share dividends                              -             (1,849)
    -------------------------------------------------------------------------
    Balance at end of period                     (187,970)                71
    -------------------------------------------------------------------------
    Accumulated other comprehensive income
    Balance at beginning of period            $    47,071        $    22,873
    Other comprehensive (loss) income             (21,585)            13,187
    -------------------------------------------------------------------------
    Balance at end of period                       25,486             36,060
    -------------------------------------------------------------------------
    Total shareholders' equity at end
     of period                                $   151,834        $   367,145
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    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)                        2010       2009       2010       2009
    -------------------------------------------------------------------------
    Comprehensive income (loss)
    Net income (loss)             $ (18,496) $ (38,377) $   5,602  $ (96,644)
    Other comprehensive income
     (loss), net of taxes:
    - Change in unrealized gains
      (losses) on available-for-
      sale securities:
        Unrealized gains (losses)
         arising during the period,
         net of income taxes(1)      13,488     19,507     11,766     15,763
        Recognition of realized
         gains to net income, net
         of income taxes(2)            (208)     2,281       (371)    (6,340)
    - Unrealized gains (losses)
       on translating financial
       statement of self-sustaining
       foreign operations            (9,719)     4,442      3,540     (5,081)
    - Recognition of currency
       translation gain on disposal
       of subsidiary (Note 3)             -          -    (34,075)         -
    - Gain (loss) on cash flow
       hedge                         (1,984)    10,205     (2,445)     8,845
    -------------------------------------------------------------------------
    Other comprehensive (loss)
     income                           1,577     36,435    (21,585)    13,187
    -------------------------------------------------------------------------
    Comprehensive income (loss)   $ (16,919) $  (1,942) $ (15,983) $ (83,457)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Net of income tax of ($159) for the three months ended June 30, 2010
        (($3,639) for year to date) and $12,676 for the three months ended
        June 30, 2009 ($7,704 for year to date).
    (2) Net of income tax of ($107) for the three months ended June 30, 2010
        ($ 191 for year to date) and $819 for the three months ended June 30,
        2009 ($629 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)                     2010        2009        2010        2009
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities
    Net income (loss)          $ (18,496)  $ (38,377)  $   5,602   $ (96,644)
    Items not affecting cash:
      Loss (income) from
       discontinued operations     2,179      26,790     (38,712)     79,466
      Amortization                 2,522       5,138       4,748       8,091
      Future and current income
       taxes                        (301)    (15,887)     (2,958)    (20,976)
      Net realized (gains) losses   (343)       (132)       (860)      2,041
      Amortization of bond premiums
       and discounts                 887         526       3,154         578
      Net change in other
       non-cash balances         (18,439)    (70,881)    (77,715)    (77,236)
    -------------------------------------------------------------------------
                                 (31,991)    (92,823)   (106,741)   (104,680)
    -------------------------------------------------------------------------
    Financing activities
    Share capital                      -           -         800           -
    Contributed surplus             (978)       (483)     (2,322)     (1,121)
    Dividends paid                     -        (977)          -      (1,849)
    Bank indebtedness and loans
     payable                     (13,894)      6,995     (13,886)      7,002
    Senior unsecured
     indebtedness                (12,680)      2,233     (94,063)       (200)
    -------------------------------------------------------------------------
                                 (27,552)      7,768    (109,471)      3,832
    -------------------------------------------------------------------------
    Investing activities
    Purchase of securities        (1,600) (1,358,801)    (34,819) (1,537,255)
    Proceeds from sale of
     securities                   57,370   1,355,491     142,486   1,736,769
    Financed premiums receivable,
     net                            (633)        873      (3,272)       (752)
    Acquisitions, net of cash
     required                    (13,752)          -     (13,752)          -
    Net proceeds from sale of
     discontinued operations         872           -     253,533      (1,941)
    Net capital assets and
     intangible assets               (35)    (12,198)         (2)     (5,192)
    -------------------------------------------------------------------------
                                  42,222     (14,635)    344,174     191,629
    -------------------------------------------------------------------------

    Net change in cash and
     cash equivalents            (17,321)    (99,690)    127,962      90,781
    Cash and cash equivalents
     at beginning of period      204,009     219,904      58,726      63,928
    -------------------------------------------------------------------------
    Cash and cash equivalents
     at end of period            186,688     120,214     186,688     154,709
    -------------------------------------------------------------------------
    Less cash and cash
     equivalents of discontinued
     operations at end of period       -      44,878           -      79,373
    -------------------------------------------------------------------------
    Cash and cash equivalents
     of continuing operations
     at end of period          $ 186,688   $  75,336   $ 186,688   $  75,336
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    For the three and six months ended June 30, 2010 and 2009
    (Unaudited - tabular amounts in thousands of U.S. dollars)


    NOTE 1  Basis of Presentation
    -------------------------------------------------------------------------

    These unaudited interim consolidated financial statements have been
    prepared by management in accordance with Canadian generally accepted
    accounting principles ("GAAP") using the same accounting policies as were
    used for Kingsway Financial Services Inc. ("Kingsway" or the "Company")
    consolidated financial statements for the year ended December 31, 2009.
    These interim consolidated financial statements do not contain all
    disclosures required by Canadian GAAP and accordingly should be read in
    conjunction with the Company's audited consolidated financial statements
    for the year ended December 31, 2009 as set out on pages 51 to 106 of the
    Company's 2009 Annual Report ("2009 Annual Report").

    NOTE 2  Changes in Accounting Policies
    -------------------------------------------------------------------------

    There were no new accounting policies adopted in the current fiscal year.

    NOTE 3  Discontinued Operations
    -------------------------------------------------------------------------
    Walshire Assurance Company ("Walshire"), Zephyr Insurance Company Inc.
    ("Zephyr") and Avalon Risk Management Inc. ("Avalon"), previously
    disclosed as part of the United States segment, and Jevco Insurance
    Company ("Jevco), Kingsway General Insurance Company ("KGIC") and York
    Fire and Casualty Insurance Company ("York Fire"), previously disclosed
    as part of the Canadian segment, have been classified as discontinued
    operations and the results of their operations are reported separately
    for all periods presented.

    Summarized financial information for discontinued operations is shown
    below.

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                        June 30:                June 30:
    -------------------------------------------------------------------------
                                    2010        2009        2010        2009
    -------------------------------------------------------------------------
    Operations:
    Revenue                   $        -  $  180,342  $   84,859  $  335,278
    -------------------------------------------------------------------------
    Income (loss) from
     discontinued operations
     before taxes                      -     (26,242)     13,436     (78,808)
    Income tax (recovery)              -         548       5,078        (958)
    -------------------------------------------------------------------------
    Income (loss) from
     discontinued operations
     before loss on disposal,
     net of taxes             $        -  $  (26,790)  $   8,358  $  (77,850)
    -------------------------------------------------------------------------
    Disposals:
    Gain (loss) on disposal
     before income taxes      $   (2,579) $        -   $  29,380  $   (1,941)
    Income taxes recovery           (400)          -        (974)       (325)
    -------------------------------------------------------------------------
                              $   (2,179) $        -   $  30,354  $   (1,616)
    -------------------------------------------------------------------------
    Income (loss) from
     discontinued operations,
     net of taxes             $   (2,179) $  (26,790)  $  38,712  $  (79,466)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                       30-Jun-10   31-Dec-09
    -------------------------------------------------------------------------
    Assets
    Cash and cash equivalents                         $        -  $   62,155
    Securities                                                 -     852,131
    Accrued Investment Income                                  -       5,970
    Finance Premiums                                           -      51,340
    Accounts Receivable and other assets                       -      19,930
    Due from reinsurers and other insurers                     -      76,293
    Deferred policy acquisition costs                          -      29,974
    Income taxes recoverable                                   -      (5,295)
    Future income taxes                                        -       2,802
    Capital assets*                                      2,646      51,818
    Goodwill and other intangible assets                       -       1,296
    Assets held for sale and discontinued operations  $    2,646  $1,148,414
    -------------------------------------------------------------------------
    Liabilities
    Accounts payable and accrued liabilities          $        -  $    9,759
    Unearned premiums                                          -     144,323
    Unpaid claims                                              -     753,334
    Liabilities held for sale and discontinued
     operations                                       $        -  $  907,416
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    * Capital assets include U.S. real estate held for sale

    Walshire:

    In May 2009, the Company placed all of Lincoln General Insurance Company
    ("Lincoln") into voluntary run-off. After that date Lincoln continued to
    experience losses from unfavourable reserve development. The result of
    Lincoln's operational losses greatly reduced the Company's capital
    flexibility and created the potential of the Company breaching the
    covenants in its trust indentures. These ongoing losses also contributed
    to the financial strength rating downgrades of all operating companies.

    On October 19, 2009, with the objective of protecting the interests of
    the Company's stakeholders, Kingsway America Inc. ("KAI"), an indirect
    wholly owned subsidiary of the Company, disposed of its entire interest
    in its wholly owned subsidiary, Walshire. Walshire was the sole
    shareholder of Lincoln. All of the stock of Walshire has been donated to
    charities, and with this disposition Lincoln ceased being a member of the
    Kingsway group of companies. The method of disposal of Walshire is lawful
    and valid but is not a standard method of disposing of an insurance
    company. The choice of this nonstandard method of disposition has led to
    litigation, as discussed below; has caused some regulatory scrutiny; and
    has the potential to adversely affect the reputation of the Company.

    The Pennsylvania Insurance Department ("DOI") has challenged the
    disposition of Walshire and Lincoln. On November 20, 2009, DOI filed a
    complaint in the Commonwealth Court of Pennsylvania ("Commonwealth
    Court") against the Company, KAI and Walshire, seeking a declaration that
    the disposition was unlawful and not valid. The Company disagrees with
    the DOI's position and maintains that the donations of Walshire shares to
    the charities were lawful and valid. The Company therefore demurred to
    each of the claims in the DOI's complaint, thereby putting the legal
    sufficiency of the DOI's claims at issue. The demurrers were argued to a
    panel of the Commonwealth Court on February 9, 2010.

    On April 1, 2010, the Commonwealth Court sustained the demurrers,
    rejecting the arguments made by DOI, and dismissing all of the DOI's
    claims against the Company. On April 30, 2010, the DOI appealed the April
    1, 2010 decision to Pennsylvania Supreme Court. The Company is opposing
    this appeal.

    On November 19, 2009 the day before the day the DOI's complaint, the
    Company and KAI filled a complaint in the Commonwealth Court against the
    DOI seeking a declaration that the statue upon which DOI principally
    release did not apply to the donations. In response to the Company's
    complaint, the DOI filed an Answer and New Matter (in essence, a
    Counterclaim), making the same arguments the DOI made in its November 20,
    2009 complaint. Because the two lawsuits raise the same issues, further
    proceedings in the Company's and KAI's lawsuit have been postponed,
    pending the Pennsylvania Supreme Court's decision in the DOI's lawsuit.

    If the ultimate decision of the courts is unfavorable for the Company,
    the control of Lincoln may revert back to the Company, which would result
    in Lincoln's financial results being included in the Company's
    consolidated financial statements. Thus, if the Pennsylvania Supreme
    Court deems the transaction to be invalid, it could ultimately lead to
    the Company being in breach of its public debt covenants should Lincoln
    go into liquidation while still part of the Company. The Company's public
    debt is material, and a breach in covenants could lead to the debt being
    called and paid before maturity.

    The Company's commitment to the DOI to provide a $10.0 million cash
    payment to Lincoln was paid in 2009. The Company also has continuing
    obligations on reinsurance agreements with Lincoln which are at market
    terms and conditions. These ongoing obligations are not significant and
    do not provide the Company with any control or significant influence over
    the operating activities or financial results of Lincoln.

    At September 30, 2009, the total investment in Walshire was written down
    to nil. After taking into account the operating loss of Lincoln from
    October 1 to 19, 2009, factoring in realized investment gains and the
    write down of net assets, a net gain on disposal of $1.4 million was
    recorded and included in discontinued operations. The results of Lincoln
    from January 1 to October 19, 2009, the aggregate of the write-down of
    the investment in Walshire and the $10.0 million cash payment have been
    included in the income (loss) from discontinued operations, net of taxes
    line item in the Company's consolidated statement of operations for the
    year ended December 31, 2009.

    The Company's revenues from discontinued operations relating to Walshire
    were nil and $74.0 million in the second quarters of 2010 and 2009
    respectively, and revenues of nil and $142.2 million in the first six
    months of 2010 and 2009 respectively. In total, the Company's loss from
    discontinued operations relating to Walshire, net of taxes was nil and
    $29.2 million in the second quarters of 2010 and 2009 respectively, and
    losses of $2.7 million and $71.2 million in the first six months of 2010
    and 2009 respectively.

    At the date of disposition, the securities, other non-cash assets and
    total liabilities of Walshire were $649.1 million, $322.7 million and
    $889.3 million respectively.

    Zephyr:

    On October 30, 2009, the Company completed its previously announced sale
    of Zephyr, a specialty property insurance company founded specifically to
    protect Hawaii homeowners and residents from catastrophic loss due to
    hurricanes, for $31.5 million plus a settlement of pre-closing earnings
    and other post closing adjustments of $4.5 million.

    As a result of the disposal, the Company recognized an after tax gain of
    $2.9 million during 2009. The Company's revenues from discontinued
    operations relating to Zephyr were nil and $4.0 million in the second
    quarters of 2010 and 2009 respectively, and revenues of nil and $7.5
    million in the first six months of 2010 and 2009 respectively. In total,
    the Company's income from discontinued operations relating to Zephyr, net
    of taxes were nil and $2.4 million in the second quarters of 2010 and
    2009 respectively, and income of nil and $4.7 million in the first six
    months of 2010 and 2009 respectively.

    Avalon:

    On October 9, 2009, specific assets of Avalon were sold for $1.5 million
    pursuant to an Asset Purchase agreement with FMG Specialty Insurance
    Agency LLC. The agreement also included a transition services agreement.

    As a result of the disposal, the Company recognized an after tax gain of
    $1.0 million during 2009. The Company wrote down the remaining associated
    intangible assets of $1.6 million. The Company's revenues from
    discontinued operations relating to Avalon were nil and $1.6 million in
    the second quarters of 2010 and 2009 respectively, and revenues of nil
    and $5.2 million in the first six months of 2010 and 2009 respectively.
    In total, the Company's loss from discontinued operations relating to
    Avalon, net of taxes were nil and $1.4 in the second quarters of 2010 and
    2009 respectively, and loss of nil and $1.4 million in the first six
    months of 2010 and 2009 respectively.

    Canadian Operations:

    As a result of the Company's ongoing strategic initiatives, on October 1,
    2009, Jevco assumed the assets and liabilities of KGIC, a wholly owned
    Canadian subsidiary of the Company.

    On November 20, 2009, the Company was advised by A. M. Best Company ("A.
    M. Best") that the financial strength rating for Jevco was downgraded
    from "B" to "B-". On November 23, 2009, as a result of A.M. Best's
    downgrade of Jevco's financial strength rating, the Company undertook to
    dispose of its majority interest in Jevco.

    On January 25, 2010, the Company entered into a definitive purchase
    agreement with The Westaim Corporation ("Westaim") to sell all of the
    issued and outstanding shares of Jevco to Westaim. On March 29, 2010,
    after receipt of all required regulatory approvals, the sale was
    completed for a purchase price of C$263.3 million. This was based on
    94.5% of the difference between the book value of Jevco as at
    December 31, 2009 and a dividend of C$10.8 million, an investment
    portfolio adjustment relating to the change in market value at the
    closing date and is subject to certain future contingent adjustments. The
    contingent adjustments include up to C$20.0 million decrease in the
    purchase price relating to specific future adverse claims development to
    be determined at the end of 2012. C$20.0 million is being held in escrow
    until this contingent adjustment is finalized. The Company also had the
    option to sell a property that was included in the purchase agreement.
    The purchase price would decrease if the sale price of the property was
    less than its carrying value, up to a maximum of approximately
    C$6.3 million. The purchase price would increase by 94.5% of every dollar
    that the sale price exceeded the carrying value. On June 15, 2010, the
    Company sold the property for less than its carrying value and as a
    result, the purchase price was decreased by C$2.2 million.

    As a result of the disposal of Jevco, the Company realized an after tax
    loss of $2.2 million for the quarter (gain of $30.3 million in the first
    six months of 2010). Included in this gain is a $34.1 million foreign
    currency exchange gain previously recorded in accumulated other
    comprehensive income and now recognized as a result of the disposal of
    Jevco in 2010.

    In 2009, given that the purchase price of Jevco was less than its net
    book value, it was determined that the goodwill relating to the Canadian
    operating segment was fully impaired. As a result, the Company recorded
    in operating income a non-cash goodwill impairment charge relating to the
    Canadian operations of $6.9 million in the fourth quarter of 2009.

    The Company's revenues from discontinued operations relating to the
    Canadian Operations were nil and $100.8 million in the second quarters of
    2010 and 2009 respectively, and revenues of $84.9 million and
    $180.5 million in the first six months of 2010 and 2009 respectively. In
    total, the Company's income (loss) from discontinued operations relating
    to the Canadian Operations, net of taxes were $(2.2) million, and
    $1.3 million in the second quarters of 2010 and 2009 respectively, and
    income (loss) of $41.4 million and $(7.7) million in the first six months
    of 2010 and 2009 respectively.

    At the date of disposition, the securities, other non-cash assets and
    total liabilities of Jevco were $909.4 million, $248.7 million and
    $913.6 million respectively.

    Due to covenant restrictions associated with the sale of restricted
    subsidiaries under the Kingsway America Inc., 7.50% senior notes and the
    Kingsway 2007 General Partnership, 6.00% senior unsecured debentures, the
    Company was required to lower its applicable ratios to a level where the
    restrictions would no longer apply. The Company entered into a series of
    contingent trades which were completed on March 30, 2010, whereby the
    Company repurchased $84.8 million of par value of the senior unsecured
    debentures. The repurchase resulted in a gain of $15.1 million, which was
    recorded in the first quarter of 2010.

    York Fire:

    On September 30, 2008, the Company sold York Fire, a primarily standard
    insurance writer, to La Capitale General Insurance Inc. for C$95 million
    in cash. The final settlement was completed in the first quarter of 2009
    and the adjustments were reflected accordingly. The Company's revenues
    from discontinued operations relating to York Fire were nil and nil in
    the second quarters of 2010 and 2009 respectively, and revenues of nil
    and $(0.2) million in the first six months of 2010 and 2009 respectively.
    In total, the Company's loss from discontinued operations relating to
    York Fire, net of taxes were nil and nil in the second quarters of 2010
    and 2009 respectively, and a loss of nil and $3.8 million in the first
    six months of 2010 and 2009 respectively.

    NOTE 4 Stock-based Compensation
    -------------------------------------------------------------------------

    Per share value of options granted during the first quarter of 2010 was
    C$1.55. Per share value of options granted in March 2009 were C$0.45
    and C$0.97. 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:
    -------------------------------------------------------------------------
                                                           2010       2009
    -------------------------------------------------------------------------
    Risk-free interest rate                                 3.7%       1.78%
    Dividend yield                                            -%       4.21%
    Volatility of the expected market price of the
     Company's common shares                              193.7%       88.1%
    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.

    In the second quarter 2010, the Company recognized a reversal of
    compensation expense as a result of forfeited options of $1.2 million
    ($2.9 million year to date) compared to $0.8 million for the same quarter
    in 2009 ($1.9 million prior year to date).

    NOTE 5 Segmented Information
    -------------------------------------------------------------------------

    The Company provides property and casualty insurance. Previously, the
    Company managed these businesses in three reportable segments, Canada,
    the United States and Corporate. As a result of implementing its
    Corporate restructuring plan, exiting non-core business and the sale of
    its remaining Canadian operations, the Company now manages its business
    in the following three segments: the United States, Business in Run-off
    and Corporate. The United States segment consists of U.S. operations and
    includes transactions with one of the Company's reinsurance subsidiaries.
    The Business in Run-off is comprised of the Southern United Fire
    Insurance Company Inc. ("SUFI") business. Beginning in the second quarter
    of 2010, SUFI's results are not considered material and are reported as
    part of the U.S. operations. Results for the Company's operating segments
    are based on the Company's internal financial reporting systems and are
    consistent with those followed in the preparation of the consolidated
    financial statements.


    -------------------------------------------------------------------------
                                       Three months ended June 30, 2010
    -------------------------------------------------------------------------
                               United
                               States      Run-off    Corporate        Total
    -------------------------------------------------------------------------
    Gross premiums
     written              $    58,912  $         -  $         -  $    58,912
    Net premiums
     earned                    69,683            -            -       69,683
    Investment income           3,328            -        8,402       11,703
    Net realized gain             327            -           16          343
    Interest expense            4,184            -            -        4,184
    Amortization of
     capital assets               625            -           37          662
    Amortization of
     intangible assets
     and goodwill
     impairment                 1,861            -            -        1,861
    Income tax expense
     (recovery)                  (115)           -         (186)        (301)
    (Loss) income from
     continuing
     operations
     after tax                (20,865)           -        4,548      (16,317)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                       Three months ended June 30, 2009
    -------------------------------------------------------------------------
                               United
                               States      Run-off    Corporate        Total
    -------------------------------------------------------------------------
    Gross premiums
     written              $    84,998  $     1,710  $         -  $    86,708
    Net premiums earned       105,692        5,462            -      111,154
    Investment income
     (loss)                    12,486          122       (1,568)      11,040
    Net realized (loss)
     gain                        (260)         (10)         402          132
    Interest expense            5,918            -            -        5,918
    Amortization of
     capital assets              (993)           9          151         (833)
    Amortization of
     intangible assets
     and goodwill
     impairment                 5,282            4          685        5,971
    Income tax recovery       (10,482)           -       (5,405)     (15,887)
    Loss from continuing
     operations after tax      (2,582)      (3,696)      (5,309)     (11,587)
    -------------------------------------------------------------------------


                                       Six months ended June 30, 2010
    -------------------------------------------------------------------------
                               United
                               States      Run-off    Corporate        Total
    -------------------------------------------------------------------------
    Gross premiums
     written              $   143,116  $        89  $         -  $   143,205
    Net premiums earned       150,738          420            -      151,158
    Investment income           7,386          141        5,626       13,153
    Net realized gain             844            -           16          860
    Interest expense            9,692            -            -        9,692
    Amortization of
     capital assets             1,285            8           73        1,366
    Amortization of
     intangible assets and
     goodwill impairment        3,382            -            -        3,382
    Income tax (recovery)
     expense                   (1,230)         363       (2,091)      (2,958)
    Loss from continuing
     operations after tax     (30,308)        (134)      (2,668)     (33,110)
    Total assets
     (excluding assets
     held for sale)*    $   665,122  $    22,255  $   171,296  $   858,673
    -------------------------------------------------------------------------
    * Total assets held for sale were $ 2,646


    -------------------------------------------------------------------------
                                       Six months ended June 30, 2009
    -------------------------------------------------------------------------
                               United
                               States      Run-off    Corporate        Total
    -------------------------------------------------------------------------
    Gross premiums
     written              $   217,112  $     6,518  $         -  $   223,630
    Net premiums earned       232,293       15,207            -      247,500
    Investment income          17,840          247        1,204       19,291
    Net realized (loss)
     gain                      (2,439)          (4)         402       (2,041)
    Interest expense           12,215            -            -       12,215
    Amortization of
     capital assets              (764)          23          296         (445)
    Amortization of
     intangible assets
     and goodwill
     impairment                 7,205            8        1,323        8,536
    Income tax recovery       (14,147)           -       (6,829)     (20,976)
    Loss from continuing
     operations after
     tax                       (4,722)      (7,202)      (5,254)     (17,178)
    Total assets
     (excluding assets
     held for
     sale)*             $ 1,172,300  $    45,691  $   107,562  $ 1,325,553
    -------------------------------------------------------------------------
    * Total assets were $3,139,941 and assets held for sale were $1,814,387


    NOTE 6 Securities
    -------------------------------------------------------------------------
    The table below provides the amortized cost and fair values of
    securities:

    -------------------------------------------------------------------------
                                               June 30, 2010
    -------------------------------------------------------------------------
                                             Gross       Gross
                            Amortized   Unrealized   Unrealized         Fair
                                 Cost        Gains       Losses        Value
    -------------------------------------------------------------------------
    Term deposits         $     1,968  $         -  $        (1) $     1,967
    Bonds:
    Canadian - Government         200            5            -          205
    U.S.     - Government     203,106        7,083            -      210,189
             - Corporate      164,260        8,470         (388)     172,342
             - Commercial
                mortgage
                backed         15,561          427            -       15,988
             - Other asset
                backed          5,652          169           (1)       5,820
    Sub-total             $   390,747  $    16,154  $      (390) $   406,511
    Preferred
     shares  - U.S.                92            -          (10)          82
    -------------------------------------------------------------------------
                          $   390,839  $    16,154  $      (400) $   406,593
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                               December 31, 2009
    -------------------------------------------------------------------------
                                             Gross        Gross
                            Amortized   Unrealized   Unrealized         Fair
                                 Cost        Gains       Losses        Value
    -------------------------------------------------------------------------
    Term deposits         $    23,791  $         -  $         -  $    23,791
    Bonds:
    Canadian - Government         208            7            -          215
    U.S.     - Government     265,117        4,240         (551)     268,806
             - Corporate      186,502        4,135       (1,094)     189,543
             - Commercial
                mortgage
                backed         14,141            -         (189)      13,952
             - Other
                asset
                backed          7,573          185          (66)       7,692
    -------------------------------------------------------------------------
    Sub-total             $   497,332  $     8,567  $    (1,900) $   503,999
    Preferred
     shares  - Canadian*      9,014            -         (893)       8,121
             - U.S.                92            -          (15)          77
    -------------------------------------------------------------------------
                          $   506,438  $     8,567  $    (2,808) $   512,197
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    * Canadian Preferred shares are the units of KLROC purchased by the
        Company

    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, 2010
    -------------------------------------------------------------------------
                                    0 - 12 months          Over 12 months
    -------------------------------------------------------------------------
                                 Fair   Unrealized         Fair   Unrealized
    Bonds:                      value         loss        value         loss
    -------------------------------------------------------------------------
    U.S. Term Deposits    $       601  $        (1) $         -  $         -
         - Corporate            5,732         (325)         952          (63)
         - Commercial
            mortgage
            backed                  -            -            -            -
         - Other asset
            backed                  -            -          318           (1)
    -------------------------------------------------------------------------
    Sub-total             $     6,333  $      (326) $     1,270  $       (64)
    Preferred
     shares
         - U.S.                     -            -           82          (10)
    -------------------------------------------------------------------------
                          $     6,333  $      (326) $     1,352  $       (74)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                               December 31, 2009
    -------------------------------------------------------------------------
                                    0 - 12 months          Over 12 months
    -------------------------------------------------------------------------
                                 Fair   Unrealized         Fair   Unrealized
    Bonds:                      value         loss        value         loss
    -------------------------------------------------------------------------
    U.S. - Government     $   161,535  $      (551) $         -  $         -
         - Corporate           91,989         (956)       1,878         (138)
         - Commercial
            mortgage
            backed             13,952         (189)           -            -
         - Other asset
            backed              1,805          (11)         996          (55)
    -------------------------------------------------------------------------
    Sub-total             $   269,281  $    (1,707) $     2,874  $      (193)
    Preferred
     shares
         - Canadian             8,121         (893)           -            -
         - U.S.                     -            -           77          (15)
    -------------------------------------------------------------------------
                          $   277,402  $    (2,600) $     2,951  $      (208)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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. The analysis includes some or all of the following procedures
    as deemed appropriate by management:

    -   identifying all security holdings in unrealized loss positions that
        have existed for at least six months or other circumstances that
        management believes may impact the recoverability of the security;
    -   obtaining a valuation analysis from third party investment managers
        regarding the intrinsic value of these holdings based on their
        knowledge, experience and other market based valuation techniques;
    -   reviewing the trading range of certain securities over the preceding
        calendar period;
    -   assessing if declines in market value are other than temporary for
        debt security holdings based on their investment grade credit ratings
        from third party security rating agencies;
    -   assessing if declines in market value are other than temporary for
        any debt security holding with non-investment grade credit rating
        based on the continuity of its debt service record;
    -   determining the necessary provision for declines in market value that
        are considered other than temporary based on the analyses performed;
    -   assessing the Company's ability and intent to hold these securities
        at least until the investment impairment is recovered. The risks and
        uncertainties inherent in the assessment methodology utilized to
        determine declines in market value that are other than temporary
        include, but may not be limited to, the following:
        -   the opinion of professional investment managers could be
            incorrect;
        -   the past trading patterns of individual securities may not
            reflect future valuation trends;
    -   the credit ratings assigned by independent credit rating agencies may
        be incorrect due to unforeseen or unknown facts related to a
        Company's financial situation; and
    -   the debt service pattern of non-investment grade securities may not
        reflect future debt service capabilities and may not reflect the
        Company's unknown underlying financial problems.

    As a result of the above analysis performed by management to determine
    declines in market value that are other than temporary, there were no
    write downs for other-than-temporary impairments for the quarter ended
    June 30, 2010 compared to $1.7 million for the same period last year (no
    write downs for the six month period ended June 30, 2010 compared to
    $1.9 million for the six month period ended June 30, 2009).

    Management has reviewed currently available information regarding other
    securities with estimated fair values that 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 three and six months ended June 30 is
    comprised as follows:

    -------------------------------------------------------------------------
                                  Three months ended        Six months ended
                                         June 30:                June 30:
    -------------------------------------------------------------------------
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    Investment income
      Interest                    $   4,297  $   6,044  $   8,246  $  11,607
      Dividends                          28         43        649        228
      Premium Finance                   (28)      (170)      (160)      (306)
      Other                           7,669      5,228      4,827      7,969
    -------------------------------------------------------------------------
    Gross Investment Income       $  11,966  $  11,145  $  13,562  $  19,498
    Investment Expenses                 236        105        409        207
    -------------------------------------------------------------------------
    Net Investment Income         $  11,730  $  11,040  $  13,153  $  19,291
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The decrease in interest income on short term securities for the quarter
    and year to date is primarily due to a significant reduction in short
    term interest rates in the U.S. in the current year compared to the same
    periods last year. The decrease in interest on bonds for the three and
    six months to June 30, 2010 compared to the same periods last year is
    partially due to a reduction in short-term yields described above. A
    smaller fixed income securities portfolio as a result of a reduction in
    premiums written has also contributed to the lower interest income on
    bonds in the quarter and year to date in the U.S.

    For the three months ended June 30, 2010, investment income, excluding
    net realized gains was $11.7 million compared to $11.0 million for the
    same quarter of 2009, a 6.4% increase. This increase in investment income
    was primarily a result of favorable impact of the strengthening US dollar
    on the Company's unhedged Canadian dollar debt and a foreign currency
    translation gain on cash held in Canadian banks; mitigated by a decline
    in interest income on the fixed income securities portfolio due to
    smaller size of the portfolio as a result of reduction in premiums
    written and lower yields.

    Net realized gains for the quarter ended June 30, 2010 were $0.3 million
    compared to $0.1 million for the quarter ended June 30, 2009. Net
    realized gains for the six months ended June 30, 2010 were $0.9 million
    compared to a net realized loss of $2.0 million for the six months ended
    June 30, 2009.


    NOTE 7 Financial Instruments
    -------------------------------------------------------------------------

    Risk Management

    The Company's risk management policies and practices are described on
    pages 9 to 10, 36 to 44 and 68 to 72 of the 2009 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:

    -------------------------------------------------------------------------
                                      June 30, 2010      December 31, 2009
    -------------------------------------------------------------------------
    AAA/Aaa                       $ 244,666      60.2%  $ 314,780      62.4%
    AA/Aa                            33,193       8.2      71,587      14.2
    A/A                             114,535      28.2     106,174      21.1
    BBB/Baa                          12,741       3.1       8,936       1.8
    CCC/Caa or lower, or not
     rated                            1,376       0.3       2,522       0.5
    -------------------------------------------------------------------------
    Total                         $ 406,511     100.0%  $ 503,999     100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at June 30, 2010, 96.6% of the fixed income portfolio is rated 'A' or
    better. Changes in this balance period over period are primarily due to
    timing of investment maturities and reinvestment.

    Market risk:

    The market risk exposure of the Company consists mainly of changes in
    interest rates and equity prices and to a smaller extent, to foreign
    currency exchange rates. Market risk is subject to risk management. The
    Investment Committee of the Board and senior management of the Company
    monitor the Company's market risk exposures and activities that give rise
    to these exposures.

    Interest rate risk:

    The Company is exposed to changes in the value of its fixed income
    securities to the extent that market interest rates change. The Company
    actively manages its interest rate exposure with the objective of
    enhancing net interest income within established risk tolerances and
    Board approved investment policies. Because most of the securities
    portfolio is comprised of fixed income securities that are usually held
    to maturity, periodic changes in interest rate levels generally impact
    the financial results to the extent that reinvestment yields are
    different than the original yields on maturing securities. Also, during
    periods of rising interest rates, the market value of the existing fixed
    income securities will generally decrease and realized gains on fixed
    income securities will likely be reduced. The reverse is true during
    periods of declining interest rates.

    Duration is a measure used to estimate the extent market values of fixed
    income instruments change with changes in interest rates. Using this
    measure, it is estimated that an immediate hypothetical 100 basis point
    or 1 percent parallel increase in interest rates would decrease the
    market value of the fixed income securities by $8.0 million at June 30,
    2010, representing 2.0% of the $406.6 million fair value fixed income
    securities portfolio.

    Computation of the prospective effect of hypothetical interest rate
    changes are based on numerous assumptions, including maintenance of the
    existing levels and composition of fixed income security assets at the
    indicated date and should not be relied on as indicative of future
    results. The analysis is done on the following assumptions:

        (a) the securities in the Company's portfolio are not impaired;
        (b) credit and liquidity risks have not been considered;
        (c) interest rates and equity prices move independently; and
        (d) shifts in the yield curve are parallel.

    Available-for-sale securities in an unrealized loss position as reflected
    in Accumulated Other Comprehensive Income, may at some point in the
    future be realized through a sale or impairment.

    Foreign currency risk:

    The Company is exposed to changes in the U.S. to Canadian dollar foreign
    currency exchange rate, primarily through Canadian dollar indebtedness.
    It does not hedge any of this foreign currency exposure. Its U.S.
    operations generally hold their investments in U.S. dollar denominated
    securities, and the Canadian operations in Canadian dollar denominated
    securities. A one cent appreciation in the value of the Canadian dollar
    relative to the U.S. dollar decreases income before income taxes by
    approximately $0.3 million.

    Liquidity and cash flow risk:

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

    The Company holds $187.3 million in cash and high grade short-term
    assets, representing approximately 31.6% of invested assets. The majority
    of the other fixed income securities are also liquid.

    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                     One to      Five      More        No
    June 30,      One year      five    to ten  than ten  Specific
    2010           or less     years     years     years      date     Total
    -------------------------------------------------------------------------
    Assets:
    Cash and cash
     equivalents  $186,688  $      -  $      -  $      -  $      -  $186,688
    Securities      30,039   242,373    78,646    55,453        82   406,593
    Accrued
     investment
     income          3,398         -         -         -         -     3,398
    Financed
     premiums       18,509         -         -         -         -    18,509
    Accounts
     receivable
     and other
     assets         97,922         -         -         -         -    97,922
    Funds held
     in escrow           -    20,936         -         -         -    20,936
    Due from
     reinsurers
     and other
     insurers            -         -         -         -         -         -
    -------------------------------------------------------------------------
    Total:        $336,556  $263,309  $ 78,646  $ 55,453  $     82  $734,046
    -------------------------------------------------------------------------
    Liabilities:
    Loans payable $      -  $ 52,319  $      -  $      -  $      -  $ 52,319
    Accounts
     payable and
     accrued
     liabilities    58,311         -         -         -         -    58,311
    Unpaid claims  136,715   165,348    20,164       950         -   323,177
    Senior
     unsecured
     debentures          -    82,701         -         -         -    82,701
    Subordinated
     indebtedness        -         -         -    87,432         -    87,432
    Due to
     reinsurers
     and other         387       469        57         3         -       916
    -------------------------------------------------------------------------
    Total:        $195,413  $300,837  $ 20,221  $ 88,385  $      -  $604,856
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at                     One to      Five      More        No
    December      One year      five    to ten  than ten  Specific
    31, 2009       or less     years     years     years      date     Total
    -------------------------------------------------------------------------
    Assets:
    Cash and cash
     equivalents  $ 58,726  $      -  $      -  $      -  $      -  $ 58,726
    Securities      68,138   293,868    94,675    55,439        77   512,197
    Accrued
     investment
     income          4,158         -         -         -         -     4,158
    Finance
     premiums       15,237         -         -         -         -    15,237
    Accounts
     receivable
     and other
     assets         94,285         -         -         -         -    94,285
    Due from
     reinsurers
     and other
     insurers        2,387     2,260       280        11         -     4,938
    Total:        $242,931  $296,128  $ 94,955  $ 55,450  $     77  $689,541
    Liabilities:
    Loans payable $      -  $      -  $ 66,222  $      -  $      -  $ 66,222
    Accounts
     payable
     and accrued
     liabilities    61,041         -         -         -         -    61,041
    Unpaid claims  181,302   165,836    20,553       810         -   368,501
    Senior
     unsecured
     debentures          -   176,764         -         -         -   176,764
    Subordinated
     indebtedness        -         -         -    87,415         -    87,415
    Total:        $242,343  $342,600  $ 86,775  $ 88,225  $      -  $759,943
    -------------------------------------------------------------------------

    Collateral pledged: As at June 30, 2010, bonds and term deposits with an
    estimated fair value of $32.2 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 insurance policies. At June 30, 2010, the amount of such
    pledged securities was $4.2 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 table below summarizes the fair valuation of debt liabilities, though
    they are held at amortized cost on the consolidated balance sheet:

                                                               June 30, 2010

                                                          Total
                                        Total fair     carrying
                                           value*       value    Favorable

    Loans Payable                       $   39,886   $   52,319   $   12,433
    Senior unsecured debentures             73,920       82,701        8,781
    Subordinated indebtedness               40,852       87,432       46,580


                                                           December 31, 2009

                                                          Total
                                        Total fair     carrying
                                           value*       value    Favorable

    Loans Payable                       $   24,187   $   66,222   $   42,035
    Senior unsecured debentures            103,512      176,764       73,252
    Subordinated indebtedness               22,788       87,415       64,627

    * The fair value is based on market observable inputs

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

    The Company uses a 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, 2010 was as follows:

    -------------------------------------------------------------------------
    Description                             Available for sale securities
    -------------------------------------------------------------------------
                                                                       Fixed
                                                         Equity       Income
    -------------------------------------------------------------------------
    Fair value                                       $       82   $  406,511
    Based on:
    Quoted market prices (level 1)                      100.0 %            -
    Valuation techniques -Significant market
     observable Inputs (level 2)                              -      100.0 %
    -------------------------------------------------------------------------
    Valuation techniques - Significant
     unobservable market inputs (level 3)                     -            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    NOTE 8 Capital Management
    -------------------------------------------------------------------------

    As a holding company, the Company derives cash from its subsidiaries
    generally in the form of dividends and management fees to meet its
    obligations, which primarily consist of interest payments. The Company's
    insurance subsidiaries fund their obligations primarily through the
    premium and investment income and maturities in the securities portfolio.
    The operating insurance subsidiaries require regulatory approval for the
    return of capital and, in certain circumstances, prior to the payment of
    dividends. In the event that dividends and management fees available to
    the holding company are inadequate to service its obligations, the
    Company would need to raise capital, sell assets or restructure its debt
    obligations.

    The Company did not pay any dividends on common shares in the second
    quarter of 2010 (nil year to date) as compared to $0.9 million for the
    same period last year ($1.8 million prior year to date). The Company
    suspended its dividends in the second quarter of 2009.

    The Company has continued to experience losses. The reduction in
    shareholders' equity as a result of these ongoing losses has reduced the
    Company's capital flexibility by triggering negative covenants in its
    trust indentures and limiting the dividend capacity of the operating
    subsidiaries. Certain debentures issued by the Company contain negative
    covenants in their trust indentures, placing limitations and restrictions
    over certain actions without the prior written consent of the indenture
    trustees. Included in the negative covenants is the limitation on the
    incurrence of additional debt in the event that the total debt to total
    capital ratio or the senior debt to total capital ratio exceed 50% and
    35%, respectively. The total debt is calculated on a pro-forma basis
    taking into account the issuance of additional debt. The debentures also
    include covenants limiting the issuance and sale of voting stock of
    restricted subsidiaries, the payment of dividends or any other payment in
    respect of capital stock of the Company, or the retirement of debt
    subordinate to the debentures covered by the trust indentures if, after
    giving effect to such payments as described in the trust indentures, the
    total debt to total capital ratio exceeds 50%.

    As at June 30, 2010, the Company's total debt to capital and senior debt
    to capital ratios were 59.8% and 36.6% respectively. As a result, the
    limitations and restrictions described above are applicable at June 30,
    2010. Subsequent to quarter end the Company has repurchased significant
    amounts of its unsecured 6% debentures due 2012 and the 7.5% senior notes
    due 2014, and also purchased additional units of the KLROC pursuant to a
    tender offer. These repurchases have resulted in a reduction of the total
    debt to capital and senior debt to capital ratios. Further details of the
    buybacks have been noted under note 17 to the financial statements
    pertaining to subsequent events. The Company continues to explore
    opportunities to buy back debt in the market. Pursuant to the debt
    buyback initiative the Company commenced in 2009 a take-over bid and a
    modified "Dutch Auction" tender offer for a portion of its outstanding
    KLROC units and Unsecured 6% Debentures due July 11, 2012 respectively.
    Both the tenders were paid for using available cash. During 2009, the
    Company also bought back its common shares pursuant to an amended normal
    course issuer bid that terminated on December 1, 2009. Under this normal
    course issuer bid, 3,472,700 shares were repurchased at an average price
    of C$3.77, none of which were repurchased in second quarter of 2009.
    Currently, there is no existing normal course issuer bid in place and no
    common stock repurchases have been made in 2010. As at June 30, 2010, the
    Company had 52,095,828 common shares outstanding compared with 55,068,528
    common shares outstanding at June 30, 2009.

    As of June 30, 2010, the Company has put in place a legal set-off
    agreement between KFS Capital LLC, the owner within the Kingsway group of
    the KLROC units, KAI and Kingsway ROC LLC which allows for the offset of
    the KFS Capital LLC investment and the KAI loan payable in the
    consolidated financial statements of Kingsway. Effectively this set-off
    agreement allows the Company to offset its investment in KLROC units
    against a loan carried on its balance sheet related to the KLROC
    transaction, which has resulted in improvement of the debt ratios
    calculated pursuant to negative covenants mentioned above. At June 30,
    2010, the KLROC investment is held at C$17.73 per unit and the
    corresponding value in U.S. dollar has been offset against the debt. Any
    increase in the carrying value of the KLROC units will increase the
    amount of the set-off, and reduce the related debt.

    Early in 2010, the Company announced that it had entered into a
    definitive agreement for the sale of Jevco. On March 29, 2010, after
    receipt of all required regulatory approvals, the sale of Jevco was
    completed for a purchase price of C$264.2 million. Due to covenant
    restrictions associated with the sale of restricted subsidiaries under
    the Kingsway America Inc., 7.50% senior notes and the Kingsway 2007
    General Partnership, 6.00% senior unsecured debentures, the Company was
    required to lower its applicable ratios to a level where the restrictions
    would no longer apply. The Company entered into a series of contingent
    trades which were completed on March 30, 2010, whereby the Company
    repurchased $47.9 million and $36.9 million (C$37.5 million) of
    outstanding par value of the Company's debt maturing in 2014 and 2012
    respectively resulting in a gain of $9.2 million and $5.9 million
    respectively. The Company used $69.1 million to make these repurchases.
    These buybacks have positively impacted the Company's debt ratios.
    Further details of the Jevco disposition have been noted under Note 3 to
    the financial statements pertaining to discontinued operations.

    In the second quarter the Company repurchased $2.9 million (C$3.0
    million) of par value of the 6% senior unsecured debentures and $7.9
    million of par value of the 7.5% senior notes realizing a gain of $0.2
    million and $1.3 million respectively.

    As at June 30, 2010, the Company was adequately capitalized to support
    the premium volume of the insurance subsidiaries.

    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, 2010, all U.S.
    subsidiaries are estimated to be above the required RBC levels, with RBC
    ratio estimates ranging between 274% and 480%, and have estimated
    aggregate capital of approximately $ 67.5 million in excess of the 200%
    level. During the second quarter of 2010, the company rescinded its
    previously announced expansion of an intercompany pooling arrangement
    which had incorporated additional affiliated insurance entities effective
    January 1, 2010. Under this agreement, premiums, losses, acquisition
    costs and underwriting expenses are pooled and then allocated to the
    members of the pool based upon predetermined participation percentages.
    As a result of the rescission, effective January 1, 2010 the new members
    of the pool along with their corresponding participation percentage are
    as follows; American Service Insurance Company (70%) and American Country
    Insurance Company (30%).

    The Company commuted all related party reinsurance treaties in 2009.
    Following the commutation of all intercompany reinsurance treaties
    between Kingsway Reinsurance Corporation and the Company's U.S. operating
    subsidiaries, a significant portion of the remaining capital at Kingsway
    Reinsurance Corporation was repatriated. A portion of this capital was
    re-deployed directly into the U.S. operating subsidiaries and a portion
    was held at the parent company for corporate purposes. At June 30, 2010
    the capital maintained by Kingsway Reinsurance Corporation was
    approximately $4.6 million in excess of the regulatory capital
    requirements in Barbados.

    As at June 30, 2010, the capital maintained by Kingsway Reinsurance
    (Bermuda) Limited was approximately $0.5 million in excess of the
    regulatory capital 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 was discontinued, any
    cumulative adjustment to the hedging instrument through other
    comprehensive income was 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 at the time of the
    discontinuance of the cash flow hedge was $6.2 million before tax of
    which $2.1 million was reclassified to net income in 2009 and $2.0
    million has been reclassified to net income for the quarter ended June
    30, 2010 ($2.5 million year to date).

    NOTE 10 Restructuring charges
    -------------------------------------------------------------------------

    In February 2009, the Company announced a corporate restructuring plan to
    concentrate on its core lines of business and to improve the Company's
    financial stability. The Company has consolidated operations in the U.S.
    and Canada, simplified the management structure, reduced costs through
    synergies and operational efficiencies and positioned the Company to
    seize competitive advantage. As the Company exited businesses and
    streamlined operations, a significant number of employees have been
    removed from the total workforce. Restructuring costs were expected to be
    approximately $20.0 million, to be incurred over fiscal 2009 and 2010.
    This targeted amount included costs related to discontinued operations.
    In 2009, the Company had expensed $14.8 million of restructuring costs.
    Due to the disposition of Walshire and the sale of Jevco, as described in
    Note 3, some of the planned restructuring costs were incurred in
    discontinued operations.

    During the quarter, restructuring costs were $1.2 million ($4.9 million
    year to date) which was primarily severance costs for senior management
    in Canada. The restructuring plan has concluded.

    Restructuring charges for the three months and six months ended June 30
    were as follows:

                                                             Restructuring
                                                                charges

                                                            Three        Six
                       Severance       Con-                months     months
                             and    sulting                 ended      ended
                        benefits    expense      Total    June 30,   June 30,
    Provision
     balance at
     January 1, 2010  $    3,523 $        - $    3,523
      Expense              4,872         26      4,898 $    1,208 $    4,898
      Payments             6,952         26      6,978          -          -
    Provision
     balance at
     June 30, 2010    $    1,443 $        - $    1,443
    Total re-
     structuring
     charges                                           $    1,208 $    4,898


                                                             Restructuring
                                                                charges

                                                            Three        Six
                       Severance       Con-                months     months
                             and    sulting                 ended      ended
                        benefits    expense      Total    June 30,   June 30,
    Provision
     balance at
     January 1, 2009  $        - $        - $        -
      Expense              3,455      4,826      8,281$    6,952  $   8,281
      Payments                51      4,826      4,877        -          -
    Provision
     balance at
     June 30, 2009    $    3,404 $        - $    3,404
    Total re-
      structuring
      charges                                          $   6,952 $   8,281

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

                                       U.S.    Run-off   Corporate     Total
    2010                         $    1,208 $        - $         - $   1,208
    2009                         $    2,275 $         -$     4,677 $   6,952

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

                                       U.S.    Run-off   Corporate     Total
    2010                         $    1,876 $       95 $     2,927 $   4,898
    2009                         $    2,352 $        - $     5,929 $   8,281

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

                                       U.S.    Run-off   Corporate     Total
    Total expected costs for
     restructuring plan          $    4,500 $      500 $    13,000 $  18,000

    The following table summarizes the total restructuring costs incurred by
    segment for the entire seventeen month period ended June 30, 2010:

                                       U.S.    Run-off   Corporate     Total
    Total continuing re-
     structuring costs incurred  $    4,113 $      493 $    15,075 $  19,681


    NOTE 11 Acquisitions
    -------------------------------------------------------------------------
    On January 4, 2010, the Company and its subsidiary Kingsway America Inc.
    acquired certain assets of Itasca Financial, LLC, a property and casualty
    insurance industry advisory firm, owned and controlled by Mr. Larry
    Swets, a former director and recently appointed Chief Executive Officer
    and President of the Company. The consideration for the assets purchased
    is equal to $1.5 million cash and one million restricted common shares of
    the Company, payable in three annual installments. Please refer to note
    13, for additional details.

    Effective June 30, 2010, the Company made an investment in JBA
    Associates, Inc. ("JBA") for approximately $16.3 million, following which
    the Company will have 100% interest in JBA. JBA is a managing general
    agency based in New Jersey that specializes in assigned risk automobile
    insurance. The acquisition allows the Company to benefit from its
    institutional knowledge of non-standard automobile and assigned risk
    business and expand in the agency market. Estimated goodwill of
    approximately $13.9 million was recognized related to the purchase. The
    final goodwill balance will be determined upon further evaluation.

    NOTE 12 Buy-Back of Senior Notes
    -------------------------------------------------------------------------

    As described in notes 3 and 8, due to covenant restrictions associated
    with the sale of restricted subsidiaries under the KAI, 7.50% senior
    notes and the Kingsway 2007 General Partnership, 6.00% senior unsecured
    debentures, the Company was required to lower its applicable ratios to a
    level where the restrictions would no longer apply. The Company entered
    into a series of contingent trades which closed on March 30, 2010,
    whereby the Company repurchased $47.9 million of par value of the KAI
    senior notes. The repurchase resulted in a gain of $9.2 million. The
    Company also repurchased $36.9 million (C$37.5 million) of par value of
    the Kingsway 2007 General Partnership senior notes. The repurchase
    resulted in a gain of $5.9 million.

    During the second quarter of 2010, KAI and Kingsway 2007 General
    Partnership purchased and cancelled $10.8 million ($95.6 million year to
    date) face value of its senior unsecured debentures for $9.3 million
    ($79.0 million year to date) recording a gain of $1.5 million ($16.6
    million year to date).

    NOTE 13 Related Party Transactions
    -------------------------------------------------------------------------

    Related-party transactions, including services provided to or received by
    the Company'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.

    On January 4, 2010, the Company and its subsidiary KAI acquired certain
    assets of Itasca Financial, LLC, a property and casualty insurance
    industry advisory firm, owned and controlled by Mr. Larry Swets, a former
    director and recently appointed President and Chief Executive Officer of
    the Company. The consideration for the assets purchased is equal to $1.5
    million cash and one million restricted common shares of the Company,
    payable in three annual installments as per the table below:

                                           1 business  1 business
                                          day follow- day follow-
                                          ing the 1st ing the 2nd
                                          anniversary anniversary
                                           after date  after date
                                              of this     of this
                                            agreement   agreement
                                       On   or change   or change
                                  Closing  of control  of control      Total
    -------------------------------------------------------------------------
    Cash (in 000's)             $     750 $       375 $       375 $    1,500
    Restricted Shares             500,000     250,000     250,000  1,000,000
    -------------------------------------------------------------------------

    The value of the consideration paid was approximately $2.5 million at the
    time of close.

    Subsequent to the transaction, certain employees of Itasca are now
    employees within the KAI group, including Mr. Swets, who was appointed
    Chief Executive Officer and President of KFSI effective June 30, 2010.

    In March 2009, the Company obtained a $20.0 million financing facility
    from American Physicians Assurance Corporation ("AP Assurance") to allow
    for specific capital initiatives. Two of the members of the Company's
    Board of Directors also sit on the board of AP Assurance making it a
    related party. The facility was at fair market terms and conditions. No
    funds were ever drawn on this facility and it has expired. In the fourth
    quarter of 2009, a new $20.0 million facility was obtained from AP
    Assurance. This new facility was at fair market terms and conditions. No
    funds were ever drawn on this facility and it was terminated on February
    25, 2010.

    In March 2010, the Company signed an agreement with AP Assurance to
    provide investment management and investment accounting services to the
    Company, commencing April 1, 2010. This agreement is at fair market terms
    and conditions.

    In 2009, in addition to a previously agreed annual retainer of C$0.1
    million, the Board of Directors had agreed to additional retainer
    payments of $0.4 million and C$0.1 million to the Chairman of the Board.
    Of these additional amounts, in 2009, the Company had paid $0.2 million
    and C$0.1 million. In 2010, the Company paid the remaining $0.2 million
    owed.

    In the first quarter of 2010, in addition to a previously agreed annual
    retainer of $0.2 million, the Board of Directors has decided to pay an
    additional retainer of $0.1 million to the Chairman of the Board. This
    additional payment was made in the second quarter of 2010.

    In the second quarter of 2010, the Board of Directors had decided to pay
    an additional $0.1 million to the Chairman of the Board. The Company paid
    half of this additional amount in the second quarter of 2010. This
    remaining payment was made in the third quarter of 2010.

    The additional payments to the Chairman of the Board in 2010 were due to
    his increased workload with respect to various matters confronting the
    Company.


    NOTE 14 Contractual Obligations and Related Contingencies
    -------------------------------------------------------------------------

    On June 29, 2009, Kingsway and Lincoln entered into an agreement with
    Rockwall Financial Advisors, LLC ("Rockwall Financial"). Pursuant to that
    agreement (the "Run-off Management Agreement"), Rockwall Financial was to
    serve as the run-off manager for Lincoln. In addition to base
    compensation of $1.3 million annually, the agreement provides for a
    minimum of $2.5 million to be paid to Rockwall Financial no later than
    March 1, 2014, provided the contract is not terminated by Kingsway or
    Lincoln for cause. As a result of the October 19, 2009 disposition of
    Lincoln, in 2009, the Company had accrued $3.2 million for the base
    compensation and the additional $2.5 million compensation for a total
    compensation of $5.7 million as at June 30, 2010.

    In March 2010, Rockwall Financial stopped providing its services as the
    manager of the Lincoln run-off. Rockwall Financial notified Kingsway that
    it was terminating the Run-off Management Agreement, because, it claimed,
    Kingsway had not made certain payments to Rockwall Financial and had
    otherwise breached the Run-off Management Agreement. Shortly before
    Rockwall Financial's unilateral decision to stop providing services to
    support Lincoln, Rockwall Financial had entered into a settlement
    agreement to dispose of pending litigation between Rockwall Financial and
    Lincoln in which Rockwall Financial received payments and a release. In
    that litigation, Lincoln had alleged, among other things, that Rockwall
    Financial had engaged in self-dealing and other misconduct while serving
    as the Lincoln run-off manager.

    Rockwall Financial then served upon Kingsway a demand for arbitration,
    claiming that Kingsway had breached the Run-off Management Agreement, and
    sought damages in excess of $26 million. Kingsway intends to defend the
    arbitration vigorously. As part of its defense of the matter, Kingsway
    intends to show that Rockwall Financial did not meet its obligations
    under the Run-off Management Agreement, abandoning the Lincoln run-off
    without cause and, as a result, is not entitled to the sums it has
    demanded. Kingsway has also asserted counterclaims against Rockwall and
    two of its principals.

    The Company is also the defendant in two separate breach of contract
    suits filed by two former employees.

    NOTE 15 Comparative Figures
    -------------------------------------------------------------------------

    Certain comparative figures have been re-classified to conform to the
    financial statement presentation adopted in the current period.

    NOTE 16 Supplemental Condensed Consolidating Financial Information
    -------------------------------------------------------------------------

    On July 10, 2007, the Kingsway 2007 General Partnership issued C$100.0
    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, 2010 and December
    31, 2009, and for the period ended June 30, 2010 and 2009, 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                                       Other sub-
     June 30, 2010               KFSI          KAI      K2007GP    sidiaries
    -------------------------------------------------------------------------
                                                                  (the "Non-
                                      (an "Issuer"                 Guarantor
                                   (a        and a          (an         sub-
                          "Guarantor") "Guarantor")    "Issuer")  sidiaries")
    -------------------------------------------------------------------------
    Revenue:
      Net premiums
       earned             $         -  $         -  $         -  $   151,158
      Investment related
       income (loss)            5,642        5,064          449        2,858
      Management fees               3        1,350            -            -
    -------------------------------------------------------------------------
                                5,645        6,414          449      154,016
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred               -            -            -      125,813
      Commissions and
       premium taxes                -            -            -       24,397
      Other expenses           10,403        8,878          133       39,833
      Interest expense              -       10,713        1,857       (2,878)
    -------------------------------------------------------------------------
                               10,403       19,591        1,990      187,165
    -------------------------------------------------------------------------
    Loss before unusual
     items and income
     taxes                     (4,758)     (13,177)      (1,541)     (33,149)
    Gain on buy back of
     senior notes                   -       10,395        6,162            -
    -------------------------------------------------------------------------
    Income (loss) before
     income taxes              (4,758)      (2,782)       4,621      (33,149)
    Income taxes
     (recovery)                (2,091)           -        1,571       (2,438)
    Equity in un-
     distributed net
     income of sub-
     sidiaries                (30,443)     (35,322)           -            -
    -------------------------------------------------------------------------
    Income (loss)
     from continuing
     operations               (33,110)     (38,104)       3,050      (30,711)
    Gain from discontinued
     operations, net of
     taxes                      8,358            -            -            -
    Gain on disposal of
     discontinued
     operations net of
     taxes                     30,354            -            -            -
    -------------------------------------------------------------------------
    Net income (loss)     $     5,602  $   (38,104) $     3,050  $   (30,711)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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




    -----------------------------------------------
    Revenue:
      Net premiums
       earned             $         - $    151,158
      Investment related
       income (loss)                -       14,013
      Management fees          (1,353)           -
    -----------------------------------------------
                               (1,353)     165,171
    -----------------------------------------------
    Expenses:
      Claims incurred               -      125,813
      Commissions and
       premium taxes                -       24,397
      Other expenses           (1,353)      57,894
      Interest expense              -        9,692
    -----------------------------------------------
                               (1,353)     217,796
    -----------------------------------------------
    Loss before unusual
     items and income
     taxes                          -      (52,625)
    Gain on buy back of
     senior notes                   -       16,557
    -----------------------------------------------
    Income (loss) before
     income taxes                   -      (36,068)
    Income taxes
     (recovery)                     -       (2,958)
    Equity in un-
     distributed net
     income of sub-
     sidiaries                 65,765            -
    -----------------------------------------------
    Income (loss)
     from continuing
     operations                65,765      (33,110)
    Gain from discontinued
     operations, net of
     taxes                          -        8,358
    Gain on disposal of
     discontinued
     operations net of
     taxes                          -       30,354
    -----------------------------------------------
    Net income (loss)     $    65,765  $     5,602
    -----------------------------------------------
    -----------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the six months ended June 30,
     2009                                  KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                                    (an "Issuer"
                                            (a          and a         (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned              $         -  $         -  $         -
      Investment related income (loss)       1,606        1,869        9,646
      Management fees                       16,680       10,346            -
    -------------------------------------------------------------------------
                                            18,286       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 items
     and income taxes                      (12,083)      (8,539)       6,768
    Gain on buy back of senior notes             -        2,647            -
    -------------------------------------------------------------------------
    Income (loss) before income taxes      (12,083)      (5,892)       6,768
    Income taxes (recovery)                 (6,830)      (2,003)       2,301
    Equity in undistributed net
     income of subsidiaries                (11,924)     (17,355)           -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (17,177)     (21,244)       4,467
    Loss from discontinued operations,
     net of taxes                          (77,850)           -            -
    Loss on disposal of discontinued
     operations, net of taxes               (1,616)           -            -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (96,643) $   (21,244) $     4,467
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    For the six months ended June 30,     Other     Consolidation
     2009                             subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned              $   247,500  $         -  $   247,500
      Investment related income (loss)       4,129            -       17,250
      Management fees                            -      (27,026)           -
    -------------------------------------------------------------------------
                                           251,629      (27,026)     264,750
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred                      196,227            -      196,227
      Commissions and  premium taxes        38,149            -       38,149
      Other expenses                        47,816      (27,026)      58,960
      Interest expense                      (3,616)           -       12,215
    -------------------------------------------------------------------------
                                           278,576      (27,026)     305,551
    -------------------------------------------------------------------------
    Income (loss) before unusual items
     and income taxes                      (26,947)           -      (40,801)
    Gain on buy back of senior notes             -            -        2,647
    -------------------------------------------------------------------------
    Income (loss) before income taxes      (26,947)           -      (38,154)
    Income taxes (recovery)                (14,444)           -      (20,976)
    Equity in undistributed net
     income of subsidiaries                      -       29,279            -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (12,503)      29,279      (17,178)
    Loss from discontinued operations,
     net of taxes                                -            -      (77,850)
    Loss on disposal of discontinued
     operations, net of taxes                    -            -       (1,616)
    -------------------------------------------------------------------------
    Net income (loss)                  $   (12,503) $    29,279  $   (96,644)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Balance Sheets
    -------------------------------------------------------------------------
    As at June 30, 2010                    KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                                    (an "Issuer"
                                            (a          and a         (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Assets
      Investments in subsidiaries      $   (13,002) $   328,221  $         -
      Cash and cash equivalents            125,421        4,510        1,540
      Investments                                -            -            -
      Goodwill and other intangible
       assets                                    -            -            -
      Other assets                          37,937      239,590       63,809
      Assets held for sale                       -            -            -
    -------------------------------------------------------------------------
                                       $   150,356  $   572,321  $    65,349
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
      Loans Payable                    $         -  $   130,714  $         -
      Other liabilities                     (1,478)      13,759        3,140
      Unearned premiums                          -            -            -
      Unpaid claims                              -            -            -
      Senior unsecured  debentures               -       62,119       40,225
      Subordinated  indebtedness                 -       90,500            -
      Liabilities held for sale                  -            -            -
    -------------------------------------------------------------------------
                                       $    (1,478) $   297,092  $    43,365
    Shareholders' equity:
      Share capital                        296,091      644,928       14,867
      Contributed surplus                   18,227            -            -
      Retained earnings                   (187,972)    (369,699)       8,572
      Accumulated other comprehensive
       income                               25,488            -       (1,455)
    -------------------------------------------------------------------------
                                           151,834      275,229       21,984
    -------------------------------------------------------------------------
                                       $   150,356  $   572,321  $    65,349
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                           Other     Consolidation
    As at June 30, 2010                subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Assets
      Investments in subsidiaries      $(1,211,647) $   896,428  $         -
      Cash and cash equivalents             55,217            -      186,688
      Investments                          416,656      (10,063)     406,593
      Goodwill and other intangible
       assets                               50,966            -       50,966
      Other assets                        (435,609)     311,345      217,072
      Assets held for sale                       -            -            -
    -------------------------------------------------------------------------
                                       $(1,124,417) $ 1,197,710  $   861,319
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
      Loans Payable                    $   (95,055) $    16,660  $    52,319
      Other liabilities                     59,105      (15,299)      59,227
      Unearned premiums                    104,629            -      104,629
      Unpaid claims                        323,177            -      323,177
      Senior unsecured  debentures          (2,983)     (16,660)      82,701
      Subordinated  indebtedness                 -       (3,068)      87,432
      Liabilities held for sale                  -            -            -
    -------------------------------------------------------------------------
                                       $   388,873  $   (18,367) $   709,485
    Shareholders' equity:
      Share capital                      1,569,472   (2,229,267)     296,091
      Contributed surplus                        -            -       18,227
      Retained earnings                 (3,123,891)   3,485,020     (187,970)
      Accumulated other comprehensive
       income                               41,129      (39,676)      25,486
    -------------------------------------------------------------------------
                                        (1,513,290)   1,216,077      151,834
    -------------------------------------------------------------------------
                                       $(1,124,417) $ 1,197,710  $   861,319
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Condensed Consolidating Balance Sheets
    -------------------------------------------------------------------------
    As at December 31,
     2009                                  KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                                    (an "Issuer"
                                            (a          and a         (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Assets
      Investments in subsidiaries      $   149,147  $   350,903  $         -
      Cash and cash equivalents             12,467       12,545        1,376
      Investments                                -            -            -
      Goodwill and other intangible
       assets                                    -            -            -
      Other assets                          10,066      256,282       97,157
      Assets held for sale                       -            -            -
    -------------------------------------------------------------------------
                                       $   171,680  $   619,730  $    98,533
    -------------------------------------------------------------------------
    Liabilities and
     Shareholders' Equity
    Liabilities:
      Loans Payable                    $         -  $   215,688  $         -
      Other liabilities                      2,342       21,520        2,275
      Unearned premiums                          -            -            -
      Unpaid claims                              -            -            -
      Senior unsecured debentures                -      117,975       79,156
      Subordinated indebtedness                  -       90,500            -
    Liabilities held for
     sale                                        -            -            -
    -------------------------------------------------------------------------
                                       $     2,342  $   445,683  $    81,431
    Shareholders' equity:
      Share capital                        295,291       541,96       14,867
      Contributed surplus                   20,549            -            -
      Retained earnings                   (193,572)    (367,920)       5,522
      Accumulated other comprehensive
       income                               47,070            -       (3,287)
    -------------------------------------------------------------------------
                                           169,338      174,047       17,102
    -------------------------------------------------------------------------
                                       $   171,680  $   619,730  $    98,533
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at December 31,                    Other     Consolidation
     2009                             subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Assets
      Investments in subsidiaries      $(1,188,296) $   688,246  $         -
      Cash and cash equivalents             32,338            -       58,726
      Investments                          522,773      (10,576)     512,197
      Goodwill and other intangible
       assets                               37,573            -       37,573
      Other assets                        (717,901)     554,841      200,445
      Assets held for sale               1,148,414            -    1,148,414
    -------------------------------------------------------------------------
                                       $  (165,099) $ 1,232,511  $ 1,957,355
    -------------------------------------------------------------------------
    Liabilities and
     Shareholders' Equity
    Liabilities:
      Loans Payable                    $  (166,499) $    17,033  $    66,222
      Other liabilities                     42,388       (7,484)      61,041
      Unearned premiums                    120,657            -      120,657
      Unpaid claims                        361,936        6,565      368,501
      Senior unsecured debentures           (3,488)     (16,879)     176,764
      Subordinated indebtedness                  -       (3,085)      87,415
    Liabilities held for
     sale                                  907,416            -      907,416
    -------------------------------------------------------------------------
                                       $ 1,262,410       (3,850) $ 1,788,016
    Shareholders' equity:
     Share capital                       1,515,276   (2,072,110)     295,291
     Contributed surplus                         -            -       20,549
     Retained earnings                  (2,966,589)   3,328,987     (193,572)
     Accumulated other comprehensive
      income                                23,804      (20,516)      47,071
    -------------------------------------------------------------------------
                                        (1,427,509)   1,236,361      169,339
    -------------------------------------------------------------------------
                                       $  (165,099) $ 1,232,511 $  1,957,355
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the six months
     ended June 30, 2010                   KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                                    (an "Issuer"
                                            (a          and a         (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Cash provided by
     (used in):

    Operating activities:
    Net income (loss)                  $     5,602  $   (38,104) $     3,050
    Adjustments to reconcile net
     income to net cash used by
     operating activities:
    Loss from discontinued operations      (38,712)           -            -
    Equity in undistributed earnings
     in subsidiaries                        30,443       35,322            -
    Other                                 (330,121)     (10,838)      35,762
    -------------------------------------------------------------------------
                                          (332,788)     (13,620)      38,812
    Financing Activities:
    Increase in share capital, net             800      102,961            -
    Repurchase of common shares for
     cancellation                                -            -            -
    Contributed surplus                     (2,322)           -            -
    Common share dividend                        -            -            -
    Increase (decrease) in bank
     indebtedness                                -      (90,211)     (38,649)
    Decrease in senior unsecured
     indebtedness                                -      (45,460)           -
    -------------------------------------------------------------------------
                                            (1,522)     (32,710)     (38,649)
    -------------------------------------------------------------------------
    Investing Activities:
    Purchase of investments                      -            -            -
    Net Proceeds from sale of
     investments                                 -            -            -
    Proceeds from sale of discontinued
     operations                            253,533            -            -
    Acquisitions net of cash acquired      193,707      (20,052)           -
    Other                                       24       58,347            -
    -------------------------------------------------------------------------
                                           447,264       38,295            -
    Increase (decrease) in cash during
     the period                            112,954       (8,035)         163
    Cash and cash equivalents,
     beginning of period                    12,467       12,545        1,377
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of
     period                            $   125,421  $     4,510  $     1,540
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the six months                      Other     Consolidation
     ended June 30, 2010                subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                          (the "Non-
                                          Guarantor
                                        subsidiaries")
    -------------------------------------------------------------------------
    Cash provided by
     (used in):

    Operating activities:
    Net income (loss)                  $   (30,711) $    65,765  $     5,602
    Adjustments to reconcile net
     income to net cash used by
     operating activities:
    Loss from discontinued operations            -            -      (38,712)
    Equity in undistributed earnings
     in subsidiaries                             -      (65,765)           -
    Other                                   15,155      216,411      (73,631)
    -------------------------------------------------------------------------
                                           (15,556)     216,411     (106,741)
    Financing Activities:
    Increase in share capital, net               -     (102,961)         800
    Repurchase of common shares for
     cancellation                                -            -            -
    Contributed surplus                          -            -       (2,322)
    Common share dividend                        -            -            -
    Increase (decrease) in bank
     indebtedness                          (13,886)     128,860      (13,886)
    Decrease in senior unsecured
     indebtedness                                -      (48,603)     (94,063)
    -------------------------------------------------------------------------
                                           (13,886)     (22,704)    (109,471)
    Investing Activities:
    Purchase of investments                (34,819)           -      (34,819)
    Net Proceeds from sale of
     investments                           142,486            -      142,486
    Proceeds from sale of discontinued
     operations                                  -            -      253,533
    Acquisitions net of cash acquired        6,300     (193,707)     (13,752)
    Other                                  (61,645)           -       (3,274)
    -------------------------------------------------------------------------
                                            52,322     (193,707)     344,174
    Increase (decrease) in cash during
     the period                             22,880            -      127,962
    Cash and cash equivalents,
     beginning of period                    32,337            -       58,726
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of
     period                            $    55,217  $         -  $   186,688
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the six months
     ended June 30, 2009                   KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                                    (an "Issuer"
                                            (a          and a         (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):

    Operating activities:
    Net income (loss)                  $   (96,643) $   (21,244) $     4,467
    Adjustments to reconcile net
     income to net cash used by
     operating activities:
    Income from discontinued
     operations                                  -            -            -
    Equity in undistributed earnings
     in subsidiaries                        11,924       17,355            -
    Other                                   50,066       (4,007)        (478)
    -------------------------------------------------------------------------
                                           (34,653)      (7,896)       3,989
    Financing Activities:
    Increase in share capital, net               -       44,479        4,200
    Contributed surplus                     (1,121)           -            -
    Common share dividend                   (1,849)           -            -
    Increase (decrease) in bank
     indebtedness                                -       39,828       (8,204)
    Decrease in senior unsecured
     indebtedness                                -       (1,953)           -
    -------------------------------------------------------------------------
                                            (2,970)      82,354       (4,004)
    Investing Activities:
    Purchase of investments                      -            -            -
    Proceeds from sale of
     investments                                 -            -            -
    Proceeds from sale of
     discontinued operations                (1,941)           -            -
    Acquisitions, net of cash
     acquired                               48,830      (76,302)           -
    Other                                      (71)       4,337            -
    -------------------------------------------------------------------------
                                            46,818      (71,965)           -
    Increase (decrease) in cash
     during the period                       9,195        2,493          (15)

    Cash and cash equivalents,
     beginning of period                    21,335        5,603          543

    Less cash and cash equivalents of
     discontinued operations                     -            -            -
    -------------------------------------------------------------------------

    Cash and cash equivalents, end of
     period                            $    30,530  $     8,096  $       528
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the six months                    Other     Consolidation
     ended June 30, 2009              subsidiaries   adjustments     Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):

    Operating activities:
    Net income (loss)                  $   (12,503) $    29,279  $   (96,644)
    Adjustments to reconcile net
     income to net cash used by
     operating activities:
    Income from discontinued
     operations                             79,466            -       79,466
    Equity in undistributed earnings
     in subsidiaries                             -       (29,279)          -
    Other                                 (260,463)      127,380     (87,502)
    -------------------------------------------------------------------------
                                          (193,500)      127,380    (104,680)
    Financing Activities:
    Increase in share capital, net               -       (48,679)          -
    Contributed surplus                          -             -      (1,121)
    Common share dividend                        -             -      (1,849)
    Increase (decrease) in bank
     indebtedness                            7,002       (31,624)      7,002
    Decrease in senior unsecured
     indebtedness                                -         1,753        (200)
    -------------------------------------------------------------------------
                                             7,002       (78,550)      3,832
    Investing Activities:
    Purchase of investments             (1,537,255)            -  (1,537,255)
    Proceeds from sale of
     investments                         1,736,769             -   1,736,769
    Proceeds from sale of
     discontinued operations                     -             -      (1,941)
    Acquisitions, net of cash
     acquired                               76,302       (48,830)          -
    Other                                  (10,210)            -      (5,944)
    -------------------------------------------------------------------------
                                           265,606       (48,830)    191,629
    Increase (decrease) in cash
     during the period                      79,108             -      90,781

    Cash and cash equivalents,
     beginning of period                    36,447             -      63,928

    Less cash and cash equivalents of
     discontinued operations                79,373             -      79,373
    -------------------------------------------------------------------------

    Cash and cash equivalents, end of
     period                            $    36,182  $          - $    75,336
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    NOTE 17  Subsequent Events
    -------------------------------------------------------------------------
    The subsequent events have been evaluated up to August 13, 2010, the date
    the financial statements are issued.

    Subsequent to quarter end, the Company has repurchased an aggregate
    principal amount of $30.1 million (C$30.9 million) of unsecured 6%
    debentures due 2012 and an aggregate principal amount of $17.6 million of
    7.5% senior notes due 2014 for a total purchase price of approximately
    $28.5 million (C$29.3 million) and $16.6 million, respectively. The
    repurchases resulted in a gain of $1.6 million on the unsecured 6%
    debentures due 2012 and $1.0 million on the 7.5% senior notes due 2014,
    which will be recorded in the third quarter.

    On June 9, 2010 KFS Capital LLC commenced the take-over bid (the "Offer")
    to acquire up to 750,000 KLROC units at a price per unit of C$17.50 in
    cash. On July 9, 2010, KFS Capital LLC increased the size and price of
    its previously announced Offer to 1,500,000 units at a price per
    unit of C$20.00 in cash. The Offer expired on Friday, July 23, 2010 and
    1,525,150 units were tendered, of which 1,500,000 were purchased on a
    pro-rata basis. The tender was paid for using available cash. As a result
    of these additional units acquired subsequent to quarter end, the Company
    beneficially owns and controls 2,333,715 units, representing 74.8% of the
    issued and outstanding units.

    The above repurchases have resulted in a reduction of the total debt to
    capital and senior debt to capital ratios.
    

%SEDAR: 00003152E %CIK: 0001072627

SOURCE Kingsway Financial Services Inc.


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