Kingsway Reports Third Quarter Loss and Provides Update on Progress

TORONTO, Nov. 6 /CNW/ - (TSX: KFS, NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its financial results for the third quarter and nine months ended September 30, 2009. It also provided shareholders with an update on the Company's progress in executing its business transformation plan. All amounts are in U.S. dollars unless indicated otherwise.

The Company reported a third quarter net loss of $118.1 million or $2.19 per share diluted. This represents a loss of $128.8 million from run-off and discontinued businesses, including a loss of $95.5 million from Lincoln General Insurance Company ("Lincoln General").

Kingsway President and CEO Colin Simpson stated, "It's important to put these results in context since the losses we're reporting for the quarter have come from businesses that are not part of our ongoing operations. I believe we reached an important turning point this quarter and we are now beginning to see the evidence that our transformation plan was the right one."

The following are highlights of what the Company accomplished since the release of its second quarter results, all aligned with the Company's strategy to exit unprofitable businesses, shed non-core assets, and free up liquidity in the group:

    
    -   Disposed of Lincoln General in order to protect the longer-term
        interests of the Kingsway group of companies' and Lincoln General's
        stakeholders.
    -   Completed the consolidation of Kingsway General Insurance Company and
        JEVCO Insurance Company operations in Canada under a single "JEVCO
        Insurance Company" marketing brand.
    -   Launched the consolidated Personal Lines and Commercial Lines
        businesses in the U.S. under a single "Kingsway America Inc."
        marketing brand.
    -   Improved Kingsway's working capital position by selling non-core
        assets such as HI Holdings Inc. and its subsidiary Zephyr Insurance
        Company Inc. ("Zephyr"), Avalon Risk Management Inc., and real estate
        assets in Calgary.
    -   87% of gross premiums written were generated from core lines of
        business (non-standard auto/motorcycle, commercial auto and surety).
    -   Executed the planned reinsurance repatriation and debt and share buy-
        back activities in order to increase capital in the operating
        subsidiaries.
    -   Reduced expenses well ahead of schedule by accelerating the expense
        reduction timetable, achieving $11.3 million in cost savings in the
        quarter.
    -   Eliminated an additional 240 staff positions in the quarter for a
        total of 850 staff reductions year to date against a target of 1,000
        by the end of 2010.
    

Investment income was $5.8 million in the quarter, a decrease of 82% compared to the same period a year ago, which was largely due to the impact of a stronger Canadian dollar on the Company's unhedged Canadian dollar debt, as well as lower interest income from a smaller fixed-income securities portfolio.

The Company is progressing with its business transformation plan, and is on track to achieve its annualized savings by year-end 2010:

    
    -   By accelerating execution of the transformation plan, the Company has
        already succeeded in achieving expense reductions of $45 million for
        2009 - or almost 130% of the previously disclosed $34.8 million
        savings target for 2009. This represents an annual run rate of $70
        million.
    -   Year-to-date, the Company has achieved 85% (850) of the 1,000 total
        staff reductions target for completion by the end of 2010.
        Approximately 73% of these reductions were in the U.S. operation and
        27% in Canada.
    -   Workforce reduction alone will result in $22.0 million in savings
        this year, and an annual run rate of $50.4 million.
    -   The Company remains on target to incur approximately $22 million in
        transition costs. One-time costs of $18.4 million have been incurred
        to date.
    

Mr. Simpson concluded by saying, "We still have a lot of work ahead of us, but I believe we have turned the corner and we are on track to return the group to profitability in 2010. We have spent most of this year looking behind us and addressing the legacy problems that were holding us back. Now we can begin to look forward and start building the Kingsway of the future."

Board of Directors

Kingsway further announced that Gregory P. Hannon was appointed to the Board of Directors, effective September 16, 2009. William Andrus resigned from the Board effective August 2, 2009. Robert Cassels and Walter E. Farnam resigned from the Board effective September 16, 2009. J. Brian Reeve resigned from the Board effective November 3, 2009.

Dividend

The Board of Directors has decided that a quarterly dividend will not be declared for the third quarter of 2009.

Conference Call and Webcast

You are invited to participate in our quarterly results conference call that will take place on November 6, 2009 at 8:30 a.m. EDT. To access please dial 1-800-732-1073 about five minutes before the start of the call. An audio webcast will also be broadcast live and can be accessed:

- Through our website at http://www.kingsway-financial.com, or

- Directly at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2834920.

About the Company

Kingsway Financial Services Inc. ("Kingsway" or the "Company") focuses on non standard automobile insurance in North America. Kingsway's primary businesses are the insuring of automobile risks for drivers who do not meet the criteria for coverage by standard automobile insurers, and commercial automobile insurance. The Company operates through wholly-owned insurance subsidiaries in Canada and the U.S. which it is currently consolidating to reduce overhead and strengthen its competitive position.

The 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               Nine months
                            ended September 30:        ended September 30:
    -------------------------------------------------------------------------
    (in millions of
     dollars except
     per share values)     2009     2008    Change    2009     2008   Change
    -------------------------------------------------------------------------
    Gross premiums
     written             $ 184.4  $335.0     (45%) $ 658.4 $1,151.9     (43%)
    Underwriting loss     (126.8)  (49.5)   (156%)  (263.8)  (142.5)    (85%)
    Investment income        5.8    31.9     (82%)    60.7     99.1     (39%)
    Net realized gains
     (loss)                 30.5   (29.1)    205%     10.5    (24.2)    143%
    Write-down of
     investment in
     subsidiary            (23.6)      -    (100%)   (23.6)       -    (100%)
    Loss from continuing
     operations           (117.1)  (42.1)   (178%)  (213.3)   (73.2)   (191%)
    Net loss              (118.1)  (17.4)   (579%)  (214.8)   (45.5)   (372%)
    Diluted loss per
     share - continuing
     operations            (2.17)  (0.76)   (186%)   (3.90)   (1.32)   (195%)
    Diluted loss per
     share - net loss      (2.19)  (0.32)    584%    (3.93)   (0.82)   (379%)
    Book value per share    5.31   14.02     (62%)    5.31    14.02     (62%)
    Combined ratio        153.5%  113.3%    40.2%   133.4%   112.1%    21.3%
    -------------------------------------------------------------------------
    Segmented
    Results



    -------------------------------------------------------------------------
                             Three months ended September 30, 2009
    -------------------------------------------------------------------------
    (in thousands            United               Sub
     of dollars)    Canada   States  Corporate   Total     Run-off     Total
    -------------------------------------------------------------------------
    Income (loss)
     from
     continuing
     operations  $10,410    $8,812   $(8,543)  $10,679  $(127,823) $(117,144)
    Add:
      Restructuring
       charges        68        80     5,400     5,548        313      5,861
      Write-down of
       intangible
       asset           -         -         -         -      1,575      1,575
      Write-down of
       investment
       in
       subsidiary      -         -         -         -     23,613     23,613
      Write-down on
       assets held
       for sale    1,743         -         -     1,743          -      1,743
      Accelerated
       software
       amortization
       and write-
       offs            -         -         -         -      3,800      3,800
    Less:
      Employees
       health
       insurance
       claims
       reserves
       for 2008
       year            -      3,500        -     3,500          -      3,500
      Gains on
       sale of
       securities
       related to
       commuted
       reinsurance
       arrangements    -    10,689         -    10,689          -     10,689
      Gains on
       buy-back of
       senior notes    -     6,607         -     6,607          -      6,607
    -------------------------------------------------------------------------
    Normalized income
     (loss) from
     continuing
     operations  $12,221  $(11,904)  $(3,143)  $(2,826)  $(98,522) $(101,348)
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                             Nine months ended September 30, 2009
    -------------------------------------------------------------------------
    (in thousands            United               Sub
     of dollars)    Canada   States  Corporate   Total     Run-off     Total
    -------------------------------------------------------------------------
    Income (loss)
     from
     continuing
     operations   $6,916    $7,137   $(8,447)  $ 5,606  $(218,898) $(213,292)
    Add:
      Restructuring
       charges       954     2,431    11,330    14,715      3,695     18,410
      Write-down of
       intangible
       asset           -         -         -         -      1,575      1,575
      Write-down of
       investment
       in
       subsidiary      -         -         -         -     23,613     23,613
      Write-down on
       assets held
       for sale    1,743         -         -     1,743          -      1,743
      Accelerated
       software
       amortization
       and
       write-offs      -     3,200         -     3,200      5,800      9,000
    Less:
      Employees
       health
       insurance
       claims
       reserves for
       2008 year       -     3,500         -     3,500          -      3,500
      Gains on
       sale of
       securities
       related to
       commuted
       reinsurance
       arrangements    -    10,689         -    10,689          -     10,689
      Proceeds on
       settlement
       of law
       suits       3,850     7,150         -    11,000          -     11,000
      Gains on
       buy-back of
       senior notes    -     9,254         -     9,254          -      9,254
    -------------------------------------------------------------------------
    Normalized income
     (loss) from
     continuing
     operations   $5,763  $(17,825)  $ 2,883   $(9,179) $(184,215) $(193,394)
    -------------------------------------------------------------------------

    -   The tables above present the Company's financial performance, showing
        separately the contribution of each reporting segment adjusted for
        items the Company considers to be non-recurring. This information is
        provided to show what the Company considers to be a more accurate
        presentation of its ongoing operations. The figures presented are
        from continuing operations which means that they do not include the
        results of York Fire Insurance Company, HI Holdings and its
        subsidiary Zephyr Insurance Company Inc. ("Zephyr") or Avalon Risk
        Management Inc. which have been or were in the process of being sold
        at the balance sheet date.

    -   The loss of $117.1 million from continuing operations for the quarter
        ($213.3 million year to date) arose primarily from a loss of $127.8
        million in the quarter ($207.9 million year to date) in the Run-off
        segment. The Canadian and U.S. segments report a profit of $10.4
        million and $8.8 million respectively in the quarter ($6.9 million
        profit and $3.8 million loss year to date respectively).

    -   After adjusting for what the Company considers to be non-recurring
        items, the normalized loss from continuing operations was $101.3
        million for the quarter ($193.4 million year to date). The $15.8
        million reduction in the loss ($19.9 million year to date) when
        compared to the loss from continuing operations is primarily due to
        the one-time nature of the write-down of the Company's investment in
        a subsidiary and the restructuring charges incurred in the Company's
        transformation program, partially offset by gains on the sale of
        securities to facilitate the commutation of internal reinsurance
        agreements.

    -   On October 19, 2009, the Company's indirect wholly owned subsidiary,
        Kingsway America Inc. ("KAI") donated all of the stock of its wholly
        owned subsidiary Walshire Assurance Company ("Walshire") to charity,
        and with this disposition Lincoln General Insurance Company ("Lincoln
        General"), a subsidiary of Walshire, ceases being a member of the
        Kingsway group of companies. Walshire is included in the Run-off
        segment and has been consolidated in the Company's financial
        statements as at September 30, 2009. The net loss of Walshire for the
        quarter was $95.5 million ($169.8 million year to date). As of the
        date of the disposition of Walshire, the Company is of the view that
        its control over Walshire and its subsidiaries, including Lincoln
        General was lost. Management intends that Walshire and its
        subsidiaries will no longer be consolidated beginning October 19,
        2009.

    -   During the quarter, the Company entered into a definitive agreement
        to sell HI Holdings Inc. and its subsidiary Zephyr, wholly owned
        subsidiaries of KAI. The Company also sold substantially all the
        assets of Avalon Risk Management Inc. ("Avalon") subsequent to
        quarter-end. Both transactions closed in the fourth quarter of 2009.
        Revenue from these discontinued operations were $1.5 million ($2.4
        million year to date) for the third quarter 2009 compared to $0.8
        million ($1.4 million year to date) for the same quarter last year.
        The net loss from these discontinued operations, net of taxes was
        $1.0 million ($2.4 million net income year to date) in the third
        quarter compared to net income of $1.3 million ($4.0 million year to
        date) for the same quarter last year.

    -   During the quarter, the Company commuted all internal reinsurance
        agreements between Kingsway Reinsurance Corporation and its U.S.
        operating companies. The Company also took the steps necessary in
        preparation for the consolidation of the Canadian operations
        effective October 1, 2009 which involved the assumption by JEVCO
        Insurance Company of the assets and liabilities of Kingsway General
        Insurance Company and the commutation of all reinsurance agreements
        between JEVCO Insurance Company, Kingsway General Insurance Company
        and Kingsway Reinsurance (Bermuda) Limited.

    -   To facilitate the above-mentioned commutations, a significant portion
        of the Barbados securities portfolio was liquidated during the
        quarter which resulted in net realized gains of approximately $10.7
        million.

    -   As was previously announced, management of the Company has decided
        that JEVCO Insurance Company will become the marketing brand in
        Canada. In the fourth quarter of 2009, capital has been injected into
        JEVCO Insurance Company to support the consolidated operations. The
        estimate of JEVCO Insurance Company's MCT as at October 1, 2009 on a
        pro-forma basis meets the target ratio of 243% agreed with the Office
        of the Superintendent of Financial Institutions ("OSFI") prior to the
        transaction being approved. Subsequent to the balance sheet date, all
        of Kingsway General Insurance Company's insurance licenses have been
        surrendered.

    -   Gross premiums written for the Canadian operating segment decreased
        by 20% for the quarter to $73.3 million (23% to $222.5 million year
        to date) from $91.5 million in the third quarter last year ($290.6
        million prior year to date). The U.S. operating segment reported a
        decrease in premiums of 21% for the quarter to $82.2 million (19% to
        $299.3 million year to date) from $103.7 million in the third quarter
        last year ($371.4 million prior year to date). The Run-off operating
        segment reported a decrease in premiums of 79% for the quarter to
        $28.9 million (72% to $136.6 million year to date) from $139.8
        million in the third quarter last year ($489.9 million prior year to
        date). The significant reduction in premium volume across all
        segments is a reflection of the Company's strategy of discontinuing
        unprofitable lines of business, primarily within its commercial lines
        as well as the K-Plus program in Canada.

    -   As a result of the Company re-focusing its efforts on core,
        profitable lines of business, non standard automobile and motorcycle
        premiums for the nine months to September 30, 2009 were $454.0
        million or 69% of the total gross premiums written compared to $610.7
        million or 53% of gross premiums written in the same period last
        year.

    -   The net adverse reserve development recorded in the quarter totaled
        $81.6 million, of which $84.1 million related to the Run-off segment
        and $4.8 million related to the ongoing U.S. operations. Unfavourable
        development in the Run-off and U.S. operating segments were partially
        offset by favourable development of $7.3 million in the ongoing
        Canadian operations.

    -   The Company has incurred restructuring costs of $5.9 million in the
        quarter ($18.4 million year to date) as a result of implementing the
        transformation plan announced in the first quarter of 2009. Of the
        total restructuring costs, severance costs associated with the
        Company's corporate restructuring plan account for $1.6 million in
        the quarter ($9.3 million year to date).

    -   Investment income, excluding net realized gains was $5.8 million
        compared to $31.9 million for the same quarter of 2008, an 82%
        decrease. This decline is due primarily to a loss of approximately
        $12.7 million from the impact of the strengthening of the Canadian
        dollar on the Company's unhedged Canadian dollar debt as well as from
        lower interest income from lower yields on a smaller portfolio.

    -   General and Administrative expenses decreased 17% to $47.7 million in
        the third quarter of 2009 from $57.3 million in the same quarter last
        year (19% to $135.3 million from $166.5 million for the year to
        date). The decrease in the quarter and year to date is primarily due
        to the impact of the transformation program which has produced
        savings, the largest being approximately $10.7 million ($15.8 million
        year to date) related to reduced headcount. Also contributing to the
        decrease in General and Administrative expenses in the quarter and
        year to date are reduced legal fees following the settlement in the
        second quarter of two lawsuits. The year-to-date expenses include the
        proceeds of $11.0 million on the settlement of these lawsuits. Also
        in the third quarter, the Company recognized the reversal of a
        previously recorded $3.5 million reserve for employee health
        insurance claims. The savings described above have been partially
        offset by the costs associated with the transformation program.

    -   As at September 30, 2009, the book value per share was $5.31 compared
        to $8.24 as at December 31, 2008.
    

Kingsway Financial Services Inc.'s Management Discussion and Analysis

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

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

Non-GAAP Financial Measures

The Company uses both GAAP and certain non-GAAP financial measures to assess performance. Securities regulators require that companies caution readers about non-GAAP financial measures that do not have a standardized meaning under GAAP and are unlikely to be comparable to similar measures used by other companies. Kingsway, like many insurance companies, analyzes performance based on underwriting ratios such as combined, expense and loss ratios. These terms are defined in the glossary of terms section beginning on page 106 of the 2008 Annual Report. Although there is not a property and casualty industry defined standard that is consistently applied in calculating these ratios, Kingsway has historically included costs such as corporate office expenses and excluded premium finance revenues whereas other public companies have done otherwise in the calculation of their expense and combined ratios. Readers are therefore cautioned when comparing Kingsway's combined ratios to those of other public companies as they may not have been calculated on a comparable basis.

Date of MD&A

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

RESULTS OF CONTINUING OPERATIONS

Premiums

    
    -------------------------------------------------------------------------
                                Three months               Nine months
                            ended September 30:        ended September 30:
    -------------------------------------------------------------------------
    (in millions
     of dollars)           2009     2008    Change    2009     2008    Change
    -------------------------------------------------------------------------
    Gross premiums
     written
      Canada            $  73.3   $ 91.5     (20%) $ 222.5 $  290.6     (23%)
      U.S.                 82.2    103.7     (21%)   299.3    371.4     (19%)
      Run-off              28.9    139.8     (79%)   136.6    489.9     (72%)
    -------------------------------------------------------------------------
      Total             $ 184.4   $335.0     (45%) $ 658.4 $1,151.9     (43%)

    Net premiums
     written
      Canada            $  69.4   $ 99.5     (30%) $ 221.8 $  319.0     (30%)
      U.S.                 82.2    106.5     (23%)   326.9    368.4     (11%)
      Run-off              18.2    112.4     (84%)    94.9    418.0     (77%)
    -------------------------------------------------------------------------
      Total             $ 169.8   $318.4     (47%) $ 643.6 $1,105.4     (42%)

    Net premiums
     earned
      Canada            $  85.6   $109.4     (22%) $ 242.0 $  294.9     (18%)
      U.S.                100.1    121.3     (17%)   332.4    363.5      (9%)
      Run-off              51.2    140.3     (64%)   215.6    521.3     (59%)
    -------------------------------------------------------------------------
      Total             $ 236.9   $371.0     (36%) $ 790.0 $1,179.7     (33%)
    -------------------------------------------------------------------------
    

Gross premiums written for the Canadian operating segment decreased by 20% for the quarter to $73.3 million (23% to $222.5 million year to date) from $91.5 million in the third quarter last year ($290.6 million prior year to date). The U.S. operating segment reported a decrease in premiums of 21% for the quarter to $82.2 million (19% to $299.3 million year to date) from $103.7 million in the third quarter last year ($371.4 million prior year to date). The Run-off operating segment reported a decrease in premiums of 79% for the quarter to $28.9 million (72% to $136.6 million year to date) from $139.8 million in the third quarter last year ($489.9 million prior year to date). The significant reduction in premium volume across all segments in a reflection of the Company's strategy of discontinuing unprofitable lines of business, primarily within its commercial lines as well as the K-Plus program in Canada.

The Canadian segment accounted for 40% of gross premiums for the quarter (34% year to date), while the U.S. segment accounted for 45% for the quarter (45% year to date) and Run-Off 15% for the quarter (21% year to date).

The Company reported decreases in certain major lines across the group. Non standard auto including motorcycle, trucking and commercial auto decreased by 26%, 94% and 47% respectively for the 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 auto including motorcycle has emerged as the Company's primary line of business, accounting for 69% of gross premiums written for the year to date compared to 53% last year. The proportion of trucking and commercial auto premiums as a percent of the Company's total gross premiums written have declined to 2% and 13% respectively compared to 18% and 14% respectively last year.

    
    Investment Income

    -------------------------------------------------------------------------
                                Three months               Nine months
                            ended September 30:        ended September 30:
    -------------------------------------------------------------------------
    (in millions
     of dollars)           2009     2008    Change    2009     2008    Change
    -------------------------------------------------------------------------
    Investment income     $ 5.8    $31.9     (82%)   $60.7    $99.1     (39%)
    -------------------------------------------------------------------------
    

Investment income in the quarter was $5.8 million, an 82% decrease compared to the same period last year (decreased 39% to $60.7 million year to date). The primary reason for this decrease in the quarter is a loss of approximately $12.7 million from the impact of the strengthening Canadian dollar on the Company's unhedged Canadian dollar denominated debt. Also contributing to the decrease is the reduction in interest income from lower yields as a result of a significant drop in short term interest rates in Canada and in the U.S. and from the duration and risk profile of the portfolio having been reduced. A smaller fixed income securities portfolio in the U.S. as a result of certain lines of business being put into voluntary run-off has also contributed to the lower interest income in the quarter. For a more detailed analysis of investment income see Note 7 to the Consolidated Financial Statements.

The cost based yield on the fixed income portfolio decreased to 3.2% compared to 4.4% for the same quarter last year. The cost based yield represents the total interest income before expenses divided by the average amortized cost base of fixed income securities, including cash, held in the portfolio during the period. The lower yield is due to a reduction in duration and risk profile of the portfolio during the quarter and the reinvestment of maturing securities in a lower interest rate environment. The yield has also been adversely impacted by the higher than normal cash balance during the quarter to facilitate related party reinsurance transactions.

Net Realized Gains (Losses)

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

    
    -------------------------------------------------------------------------
                                Three months               Nine months
                            ended September 30:        ended September 30:
    -------------------------------------------------------------------------
    (in millions
     of dollars)           2009     2008    Change    2009     2008    Change
    -------------------------------------------------------------------------
    Fixed income          $31.8    $(0.3)  10700%    $34.7      4.3     707%
    Write-down of assets
      held for sale        (1.7)       -        -     (1.7)       -        -
    Equities                0.5     (5.9)    108%    (17.4)    12.2    (243%)
    Impairments            (0.1)   (22.9)    100%     (5.1)   (40.7)     87%
    -------------------------------------------------------------------------
    Total                 $30.5   $(29.1)    205%    $10.5   $(24.2)    143%
    -------------------------------------------------------------------------
    

For the three months ended September 30, 2009, sales from the securities portfolio, the write-down of assets held for sale and the write-down of securities that are considered to be other than temporarily impaired resulted in a net realized gain of $30.5 million ($10.5 million year to date) compared to a net realized loss of $29.1 million for the three months ended September 30, 2008 ($24.2 million year to date).

Net realized gains on the sale of fixed income securities amounted to $31.8 million for the three months ended September 30, 2009 ($34.7 million year to date) compared to a net realized loss of $0.3 million for the same period last year (gain of $4.3 million year to date). Net realized gains in the current quarter arose due to a rebalancing of the fixed income portfolio and from the liquidation of securities in Bermuda and Barbados to facilitate the related party reinsurance commutation transactions. During the quarter, longer duration securities and lower credit securities were sold to better match the expected cash flow needs of our lines of business now in run-off and to reduce the risk profile and potential volatility of the portfolio.

The write-down of assets held for sale relates to an adjustment to fair market value of the Company's head office building in Mississauga, Ontario. The amount of the write-down represents the difference between the carrying value and the value per the contract for sale.

As was previously announced, the Company elected to dispose of virtually all of its common share equities during the first quarter of 2009. In addition to the $91.9 million impairment charge on the common share equity portfolio taken in the fourth quarter of 2008, the liquidation resulted in a realized loss of $18.2 million in the first quarter of 2009. This decision to liquidate the equity portfolio as well as the sale by the Company in the second and third quarters of securities considered to be of a higher credit risk than desired, has removed from the securities portfolio substantially all securities believed to be other than temporarily impaired. Consequently, the value of securities considered to be other than temporarily impaired as at September 30, 2009 is $0.1 million.

    
    Underwriting Results (excluding Corporate)

    -------------------------------------------------------------------------
                                Three months               Nine months
                            ended September 30:        ended September 30:
    -------------------------------------------------------------------------
    (in millions
     of dollars)           2009     2008    Change    2009     2008    Change
    -------------------------------------------------------------------------
    Underwriting profit
     (loss)
    Canada                 $2.9    $(3.2)  190.6%   $(16.5)  $(34.1)   51.6%
    U.S.                  (13.7)   (20.4)   32.8%    (31.8)   (20.1)  (58.2%)
    Run-off              (114.7)   (31.1) (268.8%)  (211.2)  (103.0) (105.0%)
                      -------------------------------------------------------
    Total               $(125.5)  $(54.7) (129.4%) $(259.5) $(157.2)  (65.1%)
                      -------------------------------------------------------

    Combined ratio
    Canada                96.6%   103.0%    (6.4%)  106.8%   111.5%    (4.7%)
    U.S.                 113.7%   116.8%    (3.1%)  109.6%   105.6%     4.0%
    Run-off              324.0%   122.2%   201.8%   197.9%   119.7%    78.2%
                      -------------------------------------------------------
    Total                152.9%   114.8%    38.1%   132.9%   113.4%    19.5%
                      -------------------------------------------------------

    Expense ratio
    Canada                39.3%    38.9%     0.4%    35.9%    41.0%    (5.1%)
    U.S.                  28.3%    36.4%    (8.1%)   29.9%    34.0%    (4.1%)
    Run-off               63.3%    34.5%    28.2%    48.0%    32.2%    15.8%
                      -------------------------------------------------------
    Total                 39.8%    36.4%     3.4%    36.7%    35.0%     1.7%
                      -------------------------------------------------------

    Loss ratio
    Canada                57.3%    64.1%    (6.8%)   70.9%    70.5%     0.4%
    U.S.                  85.4%    80.4%     5.0%    79.7%    71.6%     8.2%
    Run-off              260.7%    87.7%   173.0%   149.9%    87.5%    62.4%
                      -------------------------------------------------------
    Total                113.1%    78.4%    34.7%    96.2%    78.4%    17.8%
                      -------------------------------------------------------
    

Underwriting profit for the Canadian operating segment was $2.9 million for the quarter compared to an underwriting loss of $3.2 million in the third quarter of 2008 (a loss of $16.5 million for the year to date compared to $34.1 for the same period last year). The underwriting profit for the quarter is primarily a result of favourable reserve development of $7.3 million. The underwriting loss for the U.S. operating segment was $13.7 million for the quarter compared to $20.4 million in the third quarter of 2008 ($31.8 million for the year to date compared to $20.1 for the same period last year). The underwriting loss for the quarter is attributable to unfavourable reserve development of $4.8 million and increases to expected loss ratios on the current accident year based upon revised indications of ultimate expected loss payments. The underwriting loss for the Run-off segment was $114.7 million for the quarter compared to $31.1 million in the third quarter of 2008 ($211.2 million for the year to date compared to $103.0 for the same period last year). The underwriting loss for the quarter is primarily a result of unfavourable reserve development of $84.1 million, primarily at Lincoln General.

    
    Adverse Development on Unpaid Claims

    -------------------------------------------------------------------------
                                Three months               Nine months
                            ended September 30:        ended September 30:
    -------------------------------------------------------------------------
    (in millions of dollars)        2009        2008        2009        2008
    -------------------------------------------------------------------------
    Favourable (unfavourable)
     change in estimated unpaid
     claims for prior accident
     years (note 1):
      Canada                        $7.3       $(1.6)      $(0.2)      $(6.2)
      U.S.                          (4.8)       (3.0)      (11.3)        6.1
      Run-off                      (84.1)       (9.2)     (149.3)      (78.7)
                                ---------------------------------------------
      Total                       $(81.6)     $(13.8)    $(160.8)     $(78.8)
                                ---------------------------------------------
    As a % of net premiums
     earned (note 2):
      Canada                       (8.5%)       1.4%        0.1%        2.1%
      U.S.                          4.8%        2.5%        3.4%       (1.7%)
      Run-off                     164.3%        6.6%       69.3%       15.1%
                                ---------------------------------------------
      Total                        34.5%        3.7%       20.4%        6.7%
                                ---------------------------------------------
    As a % of unpaid claims
     (note 3):
      Canada                                                0.1%        0.9%
      U.S.                                                  3.2%       (0.5%)
      Run-off                                              13.9%        6.6%
                                                        ---------------------
      Total                                                 5.8%        3.5%
                                                        ---------------------

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

The Canadian operations experienced estimated favourable unpaid claims development of $7.3 million for the quarter (unfavourable unpaid claims of $0.2 million year to date) resulting in a decrease of 8.5% to the Canadian operations combined ratio for the quarter (increase of 0.1% year to date) compared to unfavourable unpaid claims development of $1.6 million for the third quarter last year ($6.2 million year to date).

The U.S. operations experienced estimated net unfavourable unpaid claims development of $4.8 million for the quarter ($11.3 million year to date) resulting in an increase of 4.8% to the U.S. operations combined ratio for the quarter (3.4% year to date) compared with estimated net unfavourable unpaid claims development of $3.0 million in the same quarter (favourable unpaid claims development $6.1 million year to date) last year.

The business in run-off experienced estimated net unfavourable unpaid claims development of $84.1 million for the quarter ($149.3 million year to date) resulting in an increase of 164.3% to the Run-off business combined ratio for the quarter (69.3% year to date) compared with estimated net unfavourable unpaid claims development of $9.2 million in the same quarter ($78.7 million year to date) last year.

Expenses

The expense ratio excluding corporate, increased to 39.8% in the quarter (37.2% year to date) compared to 36.4% for the same quarter (35.0% year to date) last year. Costs included in the expense ratio are commissions, premium taxes, general and administration expenses and restructuring costs. Commissions as a percent of net premium earned have decreased for the quarter and year to date compared to the same periods last year due to the significant change in mix of business. The impact of the decline in commissions on the expense ratio is more than offset by the impact of general and administration expenses which have also declined but at a slower pace than the reduction in net premium earned.

General & Administrative expenses decreased 17% to $47.7 million in the third quarter of 2009 from $57.3 million in the same quarter last year (19% to $135.3 million from $166.5 million for the year to date). The decrease in the quarter and year to date is primarily due to the impact of the transformation program which has produced savings, the largest being approximately $10.7 million ($15.8 million year to date) related to reduced headcount. Also contributing to the decrease in General and Administrative expenses in the quarter and year to date are reduced legal fees following the settlement in the second quarter of two lawsuits. The year-to-date expenses include the proceeds of $11.0 million on the settlement of these lawsuits. Also in the quarter, the Company recognized the reversal of a previously recorded $3.5 million reserve for employee health insurance claims. The savings described above have been partially offset by the costs associated with the transformation program which are $5.9 million in the quarter ($18.4 million year to date).

Interest Expense

Interest expense in the third quarter of 2009 decreased to $5.8 million ($18.0 million year to date) compared to $9.3 million for the third quarter of 2008 ($28.1 million year to date) as a result of the repayment of all short term bank debt in 2008 and the debt buy-back in 2009.

Gain on Buy-Back of Senior Notes

During the quarter Kingsway America Inc. and Kingsway 2007 General Partnership purchased and cancelled $16.5 million ($21.1 million year to date) face value of its senior unsecured debentures for $9.9 million ($11.8 million year to date) recording a gain of $6.6 million ($9.3 million year to date).

Income Taxes

Income tax recovery on continuing operations for the third quarter was $3.3 million ($26.4 million year to date) compared with an income tax recovery of $17.4 million for the same quarter last year ($32.3 million year to date). An increase in the valuation allowance of $32.8 million was recorded in the quarter ($40.4 million year to date).

Income (Loss) from Continuing Operations and Earnings (Loss) Per Share - Continuing Operations

In the third quarter, the Company reported a loss from continuing operations of $117.1 million ($213.3 million year to date), compared to loss from continuing operations of $42.1 million in the third quarter of last year ($73.2 million year to date). Diluted loss per share was $2.17 for the quarter ($3.90 year to date) compared to diluted loss per share of $0.76 for the third quarter of 2008 (diluted loss per share of $1.32 year to date).

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

In the third quarter, the Company reported a net loss of $118.1 million ($214.8 million year to date), compared to net loss of $17.4 million in the third quarter of last year ($45.5 million year to date). Diluted loss per share was $2.19 for the quarter ($3.93 year to date) compared to diluted loss per share of $0.32 for the third quarter of 2008 (diluted loss per share of $0.82 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 September 30, 2009 compared to December 31, 2008.

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

    -------------------------------------------------------------------------
    (in millions of dollars         September 30, December 31,         Change
     except per share values)               2009         2008
    -------------------------------------------------------------------------
    Assets
    Cash and cash equivalents              509.1         96.3         428.7%
    Securities                           1,758.3      2,319.4         (24.2%)
    Accounts receivable and other
     assets                                188.2        275.7         (31.7%)
    Income taxes recoverable                29.0         20.3          42.9%
    Future income taxes                     12.1         21.9         (44.7%)
    Capital assets                          60.7         60.8          (0.2%)
    Goodw ill and intangible assets         51.5         63.9         (19.4%)
    Assets held for sale                   129.9        117.4          10.6%

    Liabilities
    Provision for loss on investment
     in subsidiary                          23.6            -           0.0%
    Unearned premiums                      372.2        500.0         (25.6%)
    Unpaid claims                        1,888.3      1,879.0           0.5%
    Senior unsecured debentures            175.7        185.2          (5.1%)
    Liabilities held for sale               57.5         48.4          18.8%

    Shareholders ' Equity
    Book value per share                    5.31         8.24           (36%)
    -------------------------------------------------------------------------
    

Cash:

The cash balance increased to $509.1 million as at September 30, 2009 compared to $96.3 million as at December 31, 2008. This increase is primarily due to the liquidation of securities in the Barbados captive reinsurance portfolio to facilitate the related party reinsurance commutations which occurred around the balance sheet date. Substantially all of the cash has been reinvested in the fourth quarter in a combination of government securities and high quality corporate bonds.

Securities:

The fair value of the securities portfolio decreased 24.2% to $1.8 billion, compared to $2.3 billion as at December 31, 2008. This decrease is primarily due to the temporary liquidation around the balance sheet date of a portion of the portfolio to effect the commutation of internal reinsurance arrangements. Also contributing to the decline is lower premium volumes throughout the group, particularly at Lincoln General. Partially offsetting these factors are an appreciation of the market value of the securities in the portfolio and the impact of a stronger Canadian dollar at the balance sheet date on the conversion of the Canadian dollar portfolio to U.S. dollars.

As previously announced, the Company elected to dispose of virtually all of its common share equities during the first quarter of 2009 in order to reduce volatility of the balance sheet and protect the Company's capital. The common share equity portfolio was substantially disposed of during the first quarter and proceeds were reinvested in high quality fixed income securities. As at September 30, 2009, the fair value of the common share equity portfolio was $5.2 million. These common share equity holdings are being monitored in the context of the risk profile of the total portfolio.

As at September 30, 2009, 91.9% 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 8 to the financial statements.

The table below summarizes the fair value by contractual maturity of the fixed income securities portfolio, which includes term deposits and bonds, split between Canadian and U.S. operations:

    
    -------------------------------------------------------------------------
                                       Canadian          U.S.
                                     Operations    Operations         Total
    -------------------------------------------------------------------------
    Due in less than one year               3.9%         25.9%         15.5%
    Due in one through five years          42.9%         45.4%         44.3%
    Due in five through ten years          51.9%         12.2%         30.8%
    Due after ten years                     1.3%         16.5%          9.4%
    -------------------------------------------------------------------------
    Total                                 100.0%        100.0%        100.0%
    -------------------------------------------------------------------------
    

There were net unrealized gains of $52.7 million on the total securities portfolio at September 30, 2009 which is included as a component of "accumulated other comprehensive income", as compared to net unrealized gains of $32.4 million outstanding at December 31, 2008.

For a quantitative analysis of the impact to the fair value of the fixed income portfolio of a change in interest rates, see Note 8 to the financial statements.

As at September 30, 2009, the securities portfolio did not include any collateralized debt obligations nor any direct exposure to any asset backed commercial paper. The securities portfolio has a small exposure of approximately $0.5 million to the sub-prime mortgage market in the U.S. through home equity loan asset backed securities. As at September 30, 2009, these securities had an aggregate net unrealized loss of $nil.

Accounts receivable and other assets:

The reduction in accounts receivable is primarily a result of declining premiums written due to termination of lines of business.

Income taxes recoverable:

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

Future income taxes:

Future income taxes have decreased due to a valuation allowance recorded during the year and due to the enactment of tax legislation relating to investments.

The valuation allowance increased $32.8 million in the current quarter and by $40.4 million for the year to date. This allowance has been established as a result of the continued losses of the U.S. operations. Uncertainty over the Company's ability to utilize these losses over the short term has led to the Company recording the additional allowance.

As a result of the enactment of tax legislation a $6.6 million decrease in the future income tax balance was recorded.

Goodwill and intangible assets:

Goodwill and intangible assets has decreased by $12.4 million or 19.4% since the end of last year mainly as a result of the accelerated amortization of computer software in certain U.S. subsidiaries and amortization of intangible assets.

Assets held for sale:

Assets held for sale consist of all of the assets of Zephyr, the capital assets of Avalon and the Canadian real estate properties.

Provision for loss on investment in subsidiary:

As a result of the disposition of Walshire for $nil proceeds subsequent to the balance sheet date, the Company has recorded a provision against the net assets of Walshire as at September 30, 2009 ($13.6 million) and has recorded a provision for the $10 million cash commitment to Lincoln General. For further details see Note 4 to the interim financial statements.

Unearned premiums:

Unearned premiums decreased 25.6% since December 31, 2008 as a result of lower written premiums.

Liabilities held for sale

Liabilities held for sale consist of all the liabilities of Zephyr.

Unpaid claims:

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

    
    -------------------------------------------------------------------------
    (in millions of dollars)
    -------------------------------------------------------------------------
                                                 September 30,   December 31,
    Line of Business                                     2009           2008
    -------------------------------------------------------------------------
    Non-Standard Automobile                       $     520.5    $     489.3
    Standard Automobile                                   2.5            1.7
    Commercial Automobile                               223.0          217.8
    Trucking                                            590.7          657.4
    Motorcycle                                          135.1          118.1
    Property & Liability                                301.3          317.4
    Other                                               115.2           77.3
    -------------------------------------------------------------------------
    Total                                         $   1,888.3    $   1,879.0
    -------------------------------------------------------------------------
    

The provisions for unpaid claims increased by 0.5% to $1.89 billion at the end of the third quarter compared to $1.88 billion at the end of 2008. The increase is a result of reserve strengthening during the year as well as the impact of the stronger Canadian dollar on unpaid claims of the Canadian operations when reported in U.S. dollars. These factors have been partially offset by the run-off of certain lines of business.

The provision for unpaid claims includes case reserves for individual claims of $1.12 billion ($1.05 billion at December 31, 2008) and a provision for Incurred But Not Reported ("IBNR") claims which decreased 6.9% to $770.6 million ($828.1 million at December 31, 2008).

Book value per share:

Book value per share decreased by 39% to $5.31 at September 30, 2009 from $8.24 at December 31, 2008 as a result of the diluted loss per share of $3.93 and the increase of $38.2 million in the "Accumulated other comprehensive income" component of shareholders' equity.

Contractual Obligations

Information concerning contractual maturities of financial instruments as at September 30, 2009 is shown in Note 8 of the financial statements. For further details on the Company's long term debt and interest obligations, refer to Note 20 of the Company's 2008 audited consolidated financial statements and pages 35 to 40 of the 2008 Annual Report which sets out the Company's contractual obligations as at December 31, 2008.

On June 29, 2009, Kingsway and Lincoln General entered into a consulting agreement with an external run-off manager to provide certain consulting services relating to Lincoln General, including advice and assistance in the development of a Run-off Plan. In addition to base compensation of $1.3 million annually, the agreement provides for a minimum of $2.5 million to be paid to the Run-off Manager at the termination of the contract (provided the contract is not terminated for cause), which, at the latest will be March 1, 2014. As Lincoln General was disposed of subsequent to the balance sheet date, the Company has accrued $6.1 million for the base compensation and additional compensation as at September 30, 2009.

Liquidity and Capital Resources

During the three and nine months ended September 30, 2009, the cash used in operating activities were $59.9 million and $246.4 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 September 30, 2009 the Company's total debt to capital and senior debt to capital ratios were 55.4% and 41.1% respectively. As a result, the limitations and restrictions described above are currently applicable. The Board of Directors is considering alternatives to reduce these ratios to remove the limitations and restrictions in place.

As a holding company, Kingsway derives cash from its subsidiaries generally in the form of dividends and management fees to meet its obligations, which primarily consist of dividend and interest payments. The Company believes that it has the flexibility to obtain the funds needed to fulfill its cash requirements and also to satisfy regulatory capital requirements over the next twelve months. The operating insurance subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. In the event that dividends and management fees available to Kingsway are inadequate to service its obligations, the Company would need to raise capital, sell assets or restructure its debt obligations.

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

Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of Kingsway announced on July 14, 2009 the commencement of a modified "Dutch Auction" tender offer (the "2012 Offer") for a portion of its outstanding Unsecured 6% Debentures due July 11, 2012 (the "2012 Debentures"). The 2012 Offer 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$9,174,000 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.

Subsequent to the balance sheet date the Company repaid in full a $6.9 million mortgage, on a property.

Kingsway 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 Kingsway on November 28, 2008. Purchases under the normal course issuer bid from December 2, 2008 to December 1, 2009 were limited to 2,753,426 common shares (or approximately 5% of the aggregate number of common shares outstanding on November 15, 2008). Purchases under the normal course issuer bid, as amended, are now limited to 5,386,545 common shares, or 10% of the public float on November 28, 2008. Purchases under the normal course issuer bid, as amended, will terminate on December 1, 2009. To date 3,394,800 shares have been repurchased under the current normal course issuer bid at an average price of C$3.76.

The Capital Committee of Kingsway's board of directors has recommended that capital allocated to the Capital Committee for its $40 million capital initiative that was announced in May 2009 that remains unused following the expiry of: (i) the modified "Dutch Auction" tender offer for a portion of its outstanding Unsecured 6% Debentures due July 11, 2012, and (ii) the expiry of the take-over bid for units of the Kingsway Linked Return of Capital Trust, be applied to the repurchase of Kingsway common shares pursuant to the Company's normal course issuer bid.

As at September 30, 2009, of the $40 million authorized by the Board of Directors to repurchase debt and equity of the Company, approximately $31.8 million has been used.

As at September 30, 2009 the Company was adequately capitalized to support the premium volume of the insurance subsidiaries.

In Canada, JEVCO Insurance Company is regulated by the OSFI and Kingsway General Insurance Company is regulated by the Financial Services Commission of Ontario ("FSCO"). OSFI and FSCO expect each institution to maintain ongoing capital at no less than the supervisory target Minimum Capital Test ("MCT") of 150% and may establish, in consultation with an institution, an alternative supervisory target level based upon an individual institution's risk profile. As at September 30, 2009 the MCTs of JEVCO Insurance Company and Kingsway General Insurance Company were 239% and 210% respectively. As at September 30, 2009 the Canadian insurance companies have aggregate capital of approximately $60.2 million in excess of the 150% level.

As was previously announced, management of the Company has decided that JEVCO Insurance Company will become the marketing brand in Canada. Effective October 1, 2009 JEVCO Insurance Company assumed the assets and liabilities of Kingsway General Insurance Company and all intercompany reinsurance agreements between JEVCO Insurance Company, Kingsway General Insurance Company and Kingsway Reinsurance (Bermuda) Limited were commuted. In addition, capital has been injected into JEVCO insurance Company to support the consolidated operations. The estimate of JEVCO Insurance Company's MCT as at October 1, 2009 on a pro-forma basis meets the target ratio of 243% agreed with OSFI prior to the transaction being approved. Subsequent to the balance sheet date, all of Kingsway General Insurance Company's insurance licenses have been surrendered.

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 September 30, 2009, all U.S. subsidiaries, with the exception of Lincoln General, are estimated to be above the required RBC levels, with RBC ratio estimates ranging between 286% and 37,410%, and have estimated aggregate capital (excluding Lincoln General) of approximately $106.9 million in excess of the 200% level.

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

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

On October 19, 2009, the Company announced that its indirect wholly owned subsidiary, Kingsway America Inc. ("KAI"), has disposed of its entire interest in KAI's wholly owned subsidiary Walshire Assurance Company ("Walshire"). Walshire is the sole shareholder of Lincoln General. All of the stock of Walshire has been donated to charity, and with this disposition Lincoln General ceases being a member of the Kingsway group of companies. As of the date of the disposition of Walshire, the Company is of the view that its control over Walshire and its subsidiaries, including Lincoln General was lost. Management intends that Walshire and its subsidiaries will no longer be consolidated beginning October 19, 2009.

The Company is of the view that the extent of its obligations in connection with Walshire and its subsidiaries are the payment of a $10 million cash contribution to Lincoln General; continued compliance with a run-off management agreement, including certain continued support to the run-off management team at Lincoln General; and continuing guarantee and reinsurance obligations to inter-Company and third party insurance providers in respect of certain Lincoln General obligations.

As part of the ongoing transformation program, during the second quarter 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. As noted above, treaties between the Canadian operating companies and Kingsway Reinsurance (Bermuda) Limited were commuted effective October 1, 2009. 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. The regulatory capital remaining in Kingsway Reinsurance Corporation following the commutation of all related party reinsurance treaties is below the amount required under the Insurance Act of Barbados where Kingsway Reinsurance Corporation is domiciled. The Company considers this situation to be temporary as the calculation of the minimum capital required is based upon the premiums of the previous calendar year when the level of underwriting activity was significantly greater than those of the ongoing Barbados operation. This situation has been communicated to the Office of the Supervisor of Insurance in Barbados which has accepted the Company's commitment to resolve the shortfall in early 2010. At that time, the Company believes that the capital available will exceed the capital required with no additional capital required.

As at September 30, 2009 the capital maintained by Kingsway Reinsurance (Bermuda) Limited was approximately $28.6 million in excess of the regulatory capital requirements in Bermuda. Subsequent to the balance sheet date, a significant portion of the capital was removed as part of the consolidation of the Canadian operations.

Off-Balance Sheet Financing

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

Critical accounting estimates and assumptions

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The year-to-date results of the Company reflect management's judgments regarding the impact of prevailing global credit, and equity market conditions. Given the uncertainty surrounding the continued volatility in these markets, and the general lack of liquidity in financial markets, the actual financial results could differ from those estimates.

There are no new critical accounting estimates or assumptions compared to the information provided in the annual MD&A, as described on page 42 of the 2008 Annual Report.

Related Party Transactions

Related-party transactions, including services provided to or received by Kingsway's subsidiaries, are carried out in the normal course of operations and are measured at the amount of consideration paid or received as established and agreed by the parties. Management believes that consideration paid for such services approximate fair value.

In March 2009, the Company obtained a financing facility from a related party to allow for specific capital initiatives. The facility was at fair market terms and conditions. As at September 30, 2009, the facility was undrawn, expired and has been terminated. In the fourth quarter, a new facility has been obtained from the same related party. This new facility is at fair market terms and conditions.

The Company has engaged the services of a company owned by a former director and paid $0.8 million for the nine month period ended September 30, 2009.

In addition to a previously agreed retainer of C$0.1 million, the Board of Directors has decided to pay an additional $0.4 million and C$0.1 million to the Chairman of the Board. Of these amounts, the Company has paid $0.2 million and C$0.1 million as at September 30, 2009.

International Financial Reporting Standards (IFRS)

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

Disclosure of Outstanding Share Data

As at September 30, 2009, the Company had 51,673,728 common shares outstanding and there have been no changes up to the reporting date.

Summary of Quarterly Results

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

    
    -------------------------------------------------------------------------
                         2009                        2008               2007
    -------------------------------------------------------------------------
    (in
     millions
     of dollars
     except per
     share
     values)      Q3      Q2      Q1      Q4      Q3      Q2      Q1      Q4
    -------------------------------------------------------------------------
    Gross
     premiums
     written   184.4  $232.7  $241.4  $242.6  $335.1  $402.6  $414.1  $403.0
    Net
     premiums
     earned    236.9   269.5   283.5   305.7   371.0   395.4   412.7   433.4
    Total
     revenue   273.1   297.6   290.4   218.8   373.7   438.0   442.9   481.9
    Loss from
     continuing
     opera-
     tions    (117.1)  (39.3)  (56.9) (357.5)  (42.1)    5.2   (36.3) (103.7)
    Net
     income
     (loss)   (118.1)  (38.4)  (58.3) (360.4)  (17.4)    6.3   (34.4) (103.5)
    -------------------------------------------------------------------------
    Earnings
     (loss) per
     share -
     continuing
     operations
    Basic      (2.17)  (0.71)  (1.03)  (6.49)  (0.76)   0.09   (0.66)  (1.87)
    Diluted    (2.17)  (0.71)  (1.03)  (6.49)  (0.76)   0.09   (0.66)  (1.87)
    Earnings
     (loss) per
     share -
     net income
     (loss)
    Basic      (2.19)  (0.70)  (1.06)  (6.53)  (0.32)   0.11   (0.62)  (1.86)
    Diluted    (2.19)  (0.70)  (1.06)  (6.53)  (0.32)   0.11   (0.62)  (1.86)
    -------------------------------------------------------------------------
    

Supplementary Financial Information from Continuing Operations

Financial Strength Indicators:

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

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

    Net premiums written to estimated
     statutory surplus ratio                             1.9x           2.1x

    Senior debt to capitalization ratio                 41.1%          31.9%

    Total debt to capitalization ratio                  55.4%          42.9%
    -------------------------------------------------------------------------
    

Outlook

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

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 Kingsway's securities filings, including its 2008 Annual Report under the heading Risk Factors in the Management's Discussion and Analysis section. The securities filings can be accessed on the Canadian Securities Administrators' website at www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange Commission's website at www.sec.gov or through the Company's website at www.kingsway-financial.com. The Company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.

Additional Information

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

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

    -------------------------------------------------------------------------
    (Unaudited)                 Three months ended       Nine months ended
                                   September 30:           September 30:
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Gross premiums written    $  184,387  $  335,051  $  658,381  $1,151,867
    -------------------------------------------------------------------------
    Net premiums written      $  169,758  $  318,429  $  643,559  $1,105,368
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned     $  236,880  $  371,040  $  789,944  $1,179,746
      Investment income
       (Note 7)                    5,791      31,881      60,719      99,058
      Net realized gain (loss)
       (Note 7)                   30,456     (29,148)     10,461     (24,197)
    -------------------------------------------------------------------------
                                 273,127     373,773     861,124   1,254,607
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred         $  267,957  $  290,726  $  759,882  $  924,456
      Commissions and
       premiums taxes             42,153      72,465     140,124     231,235
      General and
       administrative
       expenses                   47,718      57,323     135,294     166,549
      Restructuring costs
       (Note 11)                   5,861           -      18,410           -
      Interest expense             5,757       9,321      17,971      28,110
      Amortization of
       intangibles (Note 2)        7,125       3,444      14,813       9,732
    -------------------------------------------------------------------------
                                 376,571     433,279   1,086,494   1,360,082
    -------------------------------------------------------------------------
    Loss before unusual item
     and income taxes           (103,444)    (59,506)   (225,370)   (105,475)
      Write-down of
       investment in
       subsidiary (Note 4)       (23,613)          -     (23,613)          -
      Gain on buy-back of
       senior notes (Note 13)      6,607           -       9,254           -
    -------------------------------------------------------------------------
    Loss from continuing
     operations before income
     taxes                      (120,450)    (59,506)   (239,729)   (105,475)
    Income tax recovery           (3,306)    (17,391)    (26,437)    (32,290)
    -------------------------------------------------------------------------
    Loss from continuing
     operations                 (117,144)    (42,115)   (213,292)    (73,185)
    Income (loss) from
     discontinued operations,
     net of taxes (Note 3)          (981)    (10,284)        140      (7,292)
    Gain (loss) on disposal
     of discontinued
     operations, net of
     taxes (Note 3)                    -      34,985      (1,616)     34,985
    -------------------------------------------------------------------------
    Net loss                  $ (118,125) $  (17,414) $ (214,768) $  (45,492)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings (loss) per
     share - continuing
     operations:

    Basic:                    $    (2.17) $    (0.76) $    (3.90) $    (1.32)
    Diluted:                  $    (2.17) $    (0.76) $    (3.90) $    (1.32)
    -------------------------------------------------------------------------
    Earnings (loss) per
     share - net income
     (loss):
    Basic:                    $    (2.19) $    (0.32) $    (3.93) $    (0.82)
    Diluted:                  $    (2.19) $    (0.32) $    (3.93) $    (0.82)
    Weighted average shares
     outstanding (in '000s ):
    Basic:                        53,907      55,147      54,677      55,238
    Diluted:                      53,940      55,185      54,730      55,305

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



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

    -------------------------------------------------------------------------
                                                  September 30,  December 31,
                                                          2009          2008
                                                    (unaudited)
    -------------------------------------------------------------------------
    ASSETS
      Cash and cash equivalents                    $   509,050   $    96,320
      Securities (Note 7)                            1,758,273     2,319,363
      Accrued investment income                         17,776        24,069
      Financed premiums                                 69,586        61,616
      Accounts receivable and other assets             188,246       275,701
      Due from reinsurers and other insurers           145,792       165,089
      Deferred policy acquisition costs                 90,591       122,522
      Income taxes recoverable                          28,930        20,348
      Future income taxes                               12,117        21,947
      Capital assets (Note 2)                           60,742        60,791
      Goodwill and intangible assets (Note 2)           51,496        63,893
      Assets held for sale (Note 3)                    129,899       117,393
    -------------------------------------------------------------------------
                                                   $ 3,062,498   $ 3,349,052
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES
      Loans payable                                $    73,158   $    66,222
      Accounts payable and accrued liabilities         110,572       129,330
      Provision for loss on investments in
       subsidiary (Note 4)                              23,613             -
      Unearned premiums                                372,169       499,936
      Unpaid claims                                  1,888,261     1,879,016
      Senior unsecured debentures                      175,653       185,203
      Subordinated indebtedness                         87,407        87,383
      Liabilities held for sale (Note 3)                57,525        48,390
    -------------------------------------------------------------------------
                                                     2,788,358     2,895,480
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
      Share capital
        Issued and outstanding number of
         common shares                                 295,916       322,344
        51,673,728 - September 30, 2009
        55,068,528 - December 31, 2008
      Contributed surplus                               21,294         9,791
      Retained earnings (deficit)                     (118,053)       98,564
      Accumulated other comprehensive income            74,983        22,873
    -------------------------------------------------------------------------
                                                       274,140       453,572
    -------------------------------------------------------------------------
                                                   $ 3,062,498   $ 3,349,052
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                                       Nine months ended
                                                         September 30:
    -------------------------------------------------------------------------
    (Unaudited)                                           2009          2008
    -------------------------------------------------------------------------
    Share capital
    Balance at beginning of period                 $   322,344   $   326,151
    Issued during the period                                 -            89
    Repurchased for cancellation                       (26,428)       (3,896)
    -------------------------------------------------------------------------
    Balance at end of period                           295,916       322,344
    -------------------------------------------------------------------------
    Contributed surplus
    Balance at beginning of period                 $     9,791   $     7,619
    Forfeited options                                   (4,512)         (510)
    Repurchased for cancellation                        14,663             -
    Stock option expense                                 1,352         1,780
    -------------------------------------------------------------------------
    Balance at end of period                            21,294         8,889
    -------------------------------------------------------------------------
    Retained earnings (deficit)
    Balance at beginning of period                 $    98,564   $   521,165
    Net loss for the period                           (214,768)      (45,492)
    Common share dividends                              (1,849)      (12,115)
    Repurchase of shares for cancellation                    -        (1,276)
    -------------------------------------------------------------------------
    Balance at end of period                          (118,053)      462,282
    -------------------------------------------------------------------------
    Accumulated other comprehensive income
    Balance at beginning of period                 $    22,873   $    85,866
    Other comprehensive income (loss)                   52,110      (107,206)
    -------------------------------------------------------------------------
    Balance at end of period                            74,983       (21,340)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total shareholders' equity at end of period    $   274,140   $   772,175
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                Three months ended       Nine months ended
                                   September 30:           September 30:
    -------------------------------------------------------------------------
    (Unaudited)                     2009        2008        2009        2008
    -------------------------------------------------------------------------
    Comprehensive income
    Net income (loss)         $ (118,125) $  (17,414) $ (214,768) $  (45,492)
    Other comprehensive
     income, net of taxes:
    - Change in unrealized
       gains (losses) on
       available-for
       securities:
        Unrealized gains
         (losses) arising
         during the period,
         net of income
         taxes(1)                 22,633     (55,883)     31,199     (77,065)
        Recognition of
         realized losses
         (gains) to net
         income, net of
         income taxes(2)         (12,400)     11,256     (19,384)     (3,789)
    - Unrealized gains
       (losses) on translating
       financial statement of
       self-sustaining foreign
       operations                 28,690     (13,872)     31,450     (23,526)
    - Gain (loss) on cash flow
       hedge                           -      (2,295)      8,845      (2,826)
    -------------------------------------------------------------------------
    Other comprehensive income
     (loss)                       38,923     (60,794)     52,110    (107,206)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Comprehensive loss        $  (79,202) $  (78,208) $ (162,658) $ (152,698)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Net of income tax of $1,913 for the three months ended September 30,
        2009 ($10,469 for year to date) and $(18,999) for the three months
        ended September 30, 2008 ($(23,120) for year to date).

    (2) Net of income tax of $(577) for the three months ended September 30,
        2009 ($(2,058) for year to date) and $4,001 for the three months
        ended September 30, 2008 ($(1,598) for year to date).



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

    -------------------------------------------------------------------------
                                Three months ended       Nine months ended
                                   September 30:           September 30:
    -------------------------------------------------------------------------
    (Unaudited)                     2009        2008        2009        2008
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities
    Net loss                  $ (118,125) $  (17,414) $ (214,768) $  (45,492)
    Items not affecting cash:
      Loss (income) from
       discontinued operations       981     (24,701)      1,476     (27,693)
      Amortization                10,793       3,616      16,826      14,694
      Future and current
       income taxes                4,072      (2,766)      6,798      (9,044)
      Net realized (gains)
       losses                    (37,064)     30,313     (19,715)     24,894
      Amortization of bond
       premiums and discounts      2,103      (1,222)      2,826      (5,228)
      Net change in other
       non-cash balances          77,305    (233,684)    (39,831)   (286,445)
    -------------------------------------------------------------------------
                                 (59,935)   (245,858)   (246,388)   (334,314)
    -------------------------------------------------------------------------
    Financing activities
    Share capital                (26,428)       (156)    (26,428)     (2,538)
    Repurchase of common
     shares for cancellation      14,664           6      14,664      (1,276)
    Contributed surplus           (2,040)          -      (3,440)          -
    Dividends paid                     -      (3,907)      6,042      (9,786)
    Bank indebtedness and
     loans payable                (5,871)   (157,693)     (3,651)   (172,976)
    Senior unsecured
     indebtedness                      -           -           -     (17,517)
    -------------------------------------------------------------------------
                                 (19,675)   (161,750)    (12,813)   (204,093)
    -------------------------------------------------------------------------
    Investing activities
    Purchase of securities    (1,664,297)   (820,773) (3,211,069) (2,402,973)
    Proceeds from sale of
     securities                2,105,227   1,160,019   3,885,161   2,913,079
    Financed premiums
     receivable, net               3,575      31,173      (1,647)     17,920
    Acquisitions, net of
     cash acquired                     -           -      (1,941)       (212)
    Net proceeds from sale
     of discontinued
     operations                        -      44,067           -      44,067
    Net capital assets and
     intangible assets            (3,196)        858      (1,043)     (2,364)
    -------------------------------------------------------------------------
                                 441,309     415,344     669,461     569,517
    -------------------------------------------------------------------------
    Discontinued Operations
    Operating activities           5,245       4,562      14,025      13,673
    Financing activities               -           -      (7,891)     (2,329)
    Investing activities          (2,710)     (3,465)     (3,107)     (6,708)
    -------------------------------------------------------------------------
                                   2,535       1,097       3,027       4,636
    -------------------------------------------------------------------------

    Net change in cash and
     cash equivalents            364,234       8,833     413,287      35,746
    Cash and cash equivalents
     at beginning of period      154,709     188,548     105,656     161,635
    -------------------------------------------------------------------------
    Cash and cash equivalents
     at end of period            518,943     197,381     518,943     197,381
    -------------------------------------------------------------------------
    Less cash and cash
     equivalents of
     discontinued operations
     at end or period              9,893      14,674       9,893      14,674
    -------------------------------------------------------------------------
    Cash and cash equivalents
     of continuing operations
     at end of period         $  509,050  $  182,707  $  509,050  $  182,707
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    KINGSWAY FINANCIAL SERVICES INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    For the three and nine months ended September 30, 2009 and 2008
    (Unaudited - tabular amounts in thousands of U.S. dollars)
    -------------------------------------------------------------------------

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

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

    NOTE 2 Change In Accounting Polices
    -------------------------------------------------------------------------

    Commencing January 1, 2009, the Company adopted the CICA Handbook Section
    3064 Goodwill and Intangible Assets. As a result of adopting the new
    standard, certain software costs previously recorded as Capital assets
    are now recorded as Intangible assets in the Consolidated Balance Sheet.
    Accordingly, $18.1 million as at December 31, 2008 ($12.6 million as at
    September 30, 2008) was reclassified from Capital assets to Intangible
    assets. The related amortization expense that was previously recorded in
    General and administrative expenses on the Consolidated Statement of
    Operations is now recorded as Amortization of intangibles. Accordingly,
    $2.4 million for the three months ended September 30, 2008 ($6.0 million
    for the nine months ended September 30, 2008) was reclassified from
    General and administrative expenses to Amortization of intangibles.

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

    NOTE 3 Discontinued Operations
    -------------------------------------------------------------------------

    Zephyr Insurance Company, Inc. ("Zephyr") and Avalon Risk Management Inc.
    ("Avalon") , previously disclosed as part of the United States segment,
    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.

    -------------------------------------------------------------------------
                                                       30-Sep-09   31-Dec-08
    Assets
    Cash and cash equivalents                         $    9,893  $    9,336
    Securities                                            56,587      51,122
    Accrued Investment Income                                419         485
    Accounts Receivable and other assets                     962         749
    Due from reinsurers and other insurers                17,008      12,856
    Deferred policy acquisition costs                      5,637       5,033
    Future income taxes                                    2,495       3,344
    Capital assets                                        36,898      34,468
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Assets held for sale and of discontinued
     operations                                       $  129,899  $  117,393
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Accounts payable and accrued liabilities          $    9,765  $    6,235
    Income taxes payable                                   9,640       5,611
    Unearned premiums                                     38,120      36,544
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities of discontinued operations            $   57,525  $   48,390
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital assets include Canadian real estate held for sale as follows:

    -------------------------------------------------------------------------
                                              September 30, 2009
    -------------------------------------------------------------------------
                                             Ontario,    Alberta,
                                              Canada      Canada       Total
    -------------------------------------------------------------------------
    Land                                  $    4,678  $      567  $    5,245
    Building                                  29,118       2,115      31,233
    -------------------------------------------------------------------------
    Total assets held for sale            $   33,796  $    2,682  $   36,478
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                              December 31, 2008
    -------------------------------------------------------------------------
                                             Ontario,    Alberta,
                                              Canada      Canada       Total
    -------------------------------------------------------------------------
    Land                                  $    4,112  $      499  $    4,611
    Building                                  27,467       1,907      29,374
    -------------------------------------------------------------------------
    Total assets held for sale            $   31,579  $    2,406  $   33,985
    -------------------------------------------------------------------------

    The above assets were previously disclosed as part of the Canadian
    segment and written down to their estimated fair market value less costs
    to sell. The write down of $1.7 million is included in net realized gain
    (loss).

    Subsequent to the quarter, the sale of the building located in Alberta,
    Canada closed with an estimated gain of approximately $2 million.

    -------------------------------------------------------------------------
                                  Three months ended       Nine months ended
                                      September 30:           September 30:
    -------------------------------------------------------------------------
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Operations:
    Revenue                   $    1,451  $   26,510  $    2,165  $   80,986
    -------------------------------------------------------------------------
    Income (loss) from
     discontinued operations
     before taxes                  3,051     (12,709)      5,369     (10,221)
    Income tax (recovery)          4,032      (2,425)      5,229      (2,929)
    -------------------------------------------------------------------------
    Income (loss) from
     discontinued operations
     before disposal, net of
     taxes                    $     (981) $  (10,284) $      140  $   (7,292)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Disposals:
    Gain (loss) on disposal
     before income taxes      $        -  $   42,049  $   (1,941) $   42,049
    Income tax (recovery)              -       7,064        (325)      7,064
    -------------------------------------------------------------------------
    Loss on disposal, net of
     taxes                    $        -  $   34,985  $   (1,616) $   34,985
    -------------------------------------------------------------------------
    Total gain (loss) from
     discontinued operations,
     net of taxes             $     (981) $   24,701  $   (1,476) $   27,693
    -------------------------------------------------------------------------

    Zephyr:

    On September 7, 2009, the Company entered into a definitive agreement to
    sell HI Holdings Inc., and its subsidiary Zephyr Insurance Company
    ("Zephyr"), a specialty property insurance company founded specifically
    to protect Hawaii homeowners and residents from catastrophic loss due to
    hurricanes. The transaction has been completed during the fourth quarter
    of 2009 following the receipt of regulatory approvals. The Company's
    revenues from discontinued operations relating to Zephyr were $1.4
    million and $0.7 million in the third quarters of 2009 and 2008
    respectively, and $2.3 million and $1.3 million in the first nine months
    of 2009 and 2008 respectively. In total, the Company's gain from
    discontinued operations relating to Zephyr, net of taxes were $2.1
    million and $2.3 million in the third quarters of 2009 and 2008
    respectively, and $6.8 million and $6.2 million in the first nine months
    of 2009 and 2008 respectively.

    Avalon Risk Management Inc.:

    The Company entered into a definitive agreement to sell substantially all
    of the assets of Avalon. The transaction has been completed during the
    fourth quarter of 2009. The Company's revenues from discontinued
    operations relating to Avalon were $0.1 million and $0.1 million in the
    third quarters of 2009 and 2008 respectively, and $0.1 million and $0.1
    million in the first nine months of 2009 and 2008 respectively. The
    Company's loss from discontinued operations relating to Avalon, net of
    taxes were $3.1 million and $1.0 million in the third quarters of 2009
    and 2008 respectively, and losses of $4.4 million and $2.1 million for
    the first nine months of 2009 and 2008 respectively.

    York Fire:

    On September 30, 2008, the Company completed its previously announced
    sale of York Fire, a primarily standard insurance writer, for C$95
    million in cash. The final settlement was completed in the first quarter
    of 2009 and the adjustments are reflected accordingly. The Company's
    revenues from discontinued operations relating to York Fire were $nil and
    $25.7 million in the third quarters of 2009 and 2008 respectively, and
    $(0.2) million and $79.6 million in the first nine months of 2009 and
    2008 respectively. In total, the Company's gain from discontinued
    operations relating to York Fire, net of taxes were $ nil and $23.3
    million in the third quarters of 2009 and 2008 respectively, and $(3.8)
    million and $23.6 million in the first nine months of 2009 and 2008
    respectively.

    NOTE 4 Disposition of Walshire Assurance Company
    -------------------------------------------------------------------------

    On October 19 2009, Kingsway America Inc. ("KAI"), an indirect wholly
    owned subsidiary of the Company, disposed of its entire interest in its
    wholly owned subsidiary Walshire Assurance Company ("Walshire"). Walshire
    is the sole shareholder of Lincoln General. All of the stock of Walshire
    has been donated to charity, and with this disposition Lincoln General
    ceases being a member of the Kingsway group of companies.

    The Company is currently in discussions with the Pennsylvania Insurance
    Department with respect to the transaction, however, the full extent of
    the Company's commitment to the Pennsylvania Insurance Department is to
    provide a $10 million cash contribution to Lincoln General. The Company
    also maintains an obligation to provide certain continued support to the
    run-off management team at Lincoln General.

    As Walshire is a member of the consolidated group of companies as at
    September 30, 2009 the financial position and results from operations of
    Walshire and its subsidiaries form part of the Company's consolidated
    financial statements as of that date. As a result of management's
    decision subsequent to the balance sheet date to dispose of Walshire for
    no proceeds, the Company's consolidated financial statements as of
    September 30, 2009 include the write-down to $nil of the net assets of
    Walshire. The value of this write-down is $13.6 million. Also included in
    the financial statements for the period ended September 30, 2009 is the
    provision for the $10 million cash contribution and a provision for its
    obligation to support the run-off management team at Lincoln General. The
    aggregate of the write-down of the net assets of Walshire and the
    provision for the $10 million cash contribution, totaling $23.6 million,
    have been separately disclosed in the Company's consolidated statement of
    operations for the three and nine months ended September 30, 2009.

    The securities portfolio of Walshire and its subsidiaries has been
    assessed to determine if declines in market value are other than
    temporary. Due to the Company's disposal of Walshire and its subsidiaries
    subsequent to the balance sheet date, the required assertion that the
    Company has the intent to hold the securities to recovery has not been
    met. As a result, a decline in market value below amortized cost of $0.1
    million has been included in write-downs for other than temporary
    impairments. Property, plant and equipment is carried at cost less
    accumulated amortization and any impairment losses and is reviewed for
    impairment whenever events or changes in circumstance indicate that the
    carrying amount of such assets may not be recoverable. The disposal of
    Walshire triggered impairment tests for its property plant and equipment
    and it was determined that the carrying amount was appropriate.

    As at September 30, 2009 there is no goodwill on the consolidated
    statement of financial position of the Company in connection with the
    acquisition of Walshire.

    As of the date of the disposition of Walshire, the Company is of the view
    that its control over Walshire and its subsidiaries, including Lincoln
    General was lost. Management intends that Walshire and its subsidiaries
    will no longer be consolidated beginning October 19, 2009.

    Additional disclosure to illustrate the impact of the disposition of
    --------------------------------------------------------------------
    Walshire
    --------

    The following information has been presented to illustrate Walshire's
    portion of the consolidated financial statements of the Company. The
    statement of operations and the statement of financial position of
    Walshire and for the consolidated Kingsway group excluding Walshire are
    disclosed below.

    The 'Walshire Assurance Company' statement of operations is presented to
    show Walshire's contribution to the consolidated statement and therefore
    exclude the impact of transactions between Walshire and its subsidiaries
    and other entities within the consolidated Kingsway group. Similarly, the
    assets and liabilities in the 'Walshire Assurance Company' statement of
    financial position exclude balances between Walshire and its subsidiaries
    and other entities within the consolidated Kingsway group.

    The 'Kingsway excluding Walshire' columns present the statements of the
    consolidated group excluding Walshire. These statements are derived by
    subtracting the 'Walshire Assurance Company' balances from the
    consolidated Company statements. In the statement of financial position,
    the net assets of Walshire have been disclosed on a single line in the
    statement of financial position. As at September 30, 2009, the net assets
    of Walshire are shown as negative $10 million since the net assets of
    Walshire have been written down to $nil and an additional $10 million
    provision has been taken for the obligation relating to the cash
    contribution.

    -------------------------------------------------------------------------
                                        Walshire               Kingsway
                                   Assurance Company     (Excluding Walshire)
                                     3 Months Ended          3 Months Ended
                                      September 30            September 30
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Gross premiums written    $   26,971  $  106,547  $  157,416  $  228,504
    -------------------------------------------------------------------------
    Net premiums written      $   18,566  $   93,019  $  151,192  $  225,410
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned     $   44,238  $  115,994  $  192,642  $  255,046
      Investment income            5,070       2,978         721      28,903
      Net realized gains/
       (losses)                    4,225        (235)     26,231     (28,913)
    -------------------------------------------------------------------------
                                  53,533     118,737     219,594     255,036
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred         $  124,804  $  100,355  $  143,153  $  190,371
      Commissions and
       premiums taxes              8,147      28,025      34,006      44,440
      General and
       administrative
       expenses                   11,303      10,994      36,415      46,329
      Restructuring Costs            103                   5,758           -
      Interest expense                 -           -       5,757       9,321
      Amortization of
       intangibles                 4,664         849       2,461       2,595
    -------------------------------------------------------------------------
                                 149,021     140,223     227,550     293,056
    -------------------------------------------------------------------------
    Loss before unusual item
     And income taxes            (95,488)    (21,486)     (7,956)    (38,020)
    Write-dow n of investment
     in subsidiary (Note 4)            -           -     (23,613)          -
    Gain on buy-back of
     senior notes                      -           -       6,607           -
    -------------------------------------------------------------------------
    Loss from continuing
     operations before income
     taxes                       (95,488)    (21,486)    (24,962)    (38,020)
    Income taxes (recovery)            -           -      (3,306)    (17,391)
    -------------------------------------------------------------------------
    Loss from continuing
     operations                  (95,488)    (21,486)    (21,656)    (20,629)
    Income (loss) from
     discontinued operations,
     net of taxes                      -           -        (981)    (10,284)
    Gain (loss) on disposal of
     discontinued operations,
     net of taxes                      -           -           -      34,985
    -------------------------------------------------------------------------
    Net loss                  $  (95,488) $  (21,486) $  (22,637) $    4,072
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                        Walshire               Kingsway
                                   Assurance Company     (Excluding Walshire)
                                     9 Months Ended          9 Months Ended
                                      September 30            September 30
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Gross premiums written    $  112,826  $  370,731  $  545,555  $  781,136
    -------------------------------------------------------------------------
    Net premiums written      $   84,340  $  343,790  $  559,219  $  761,578
    -------------------------------------------------------------------------
    Revenue:
      Net premiums earned     $  180,147  $  438,047  $  609,797  $  741,699
      Investment income           11,439       7,199      49,280      91,859
      Net realized gains/
       (losses)                    1,214        (181)      9,247     (24,016)
    -------------------------------------------------------------------------
                                 192,800     445,065     668,324     809,542
    -------------------------------------------------------------------------
    Expenses:
      Claims incurred         $  280,454  $  386,541  $  479,428  $  537,915
      Commissions and
       premiums taxes             38,417     106,444     101,707     124,791
      General and
       administrative
       expenses                   37,074      35,118      98,220     131,431
      Restructuring Costs          2,178                  16,232           -
      Interest expense                 -           -      17,971      28,110
      Amortization of
       intangibles                 4,439       1,600      10,374       8,132
    -------------------------------------------------------------------------
                                 362,562     529,703     723,932     830,379
    -------------------------------------------------------------------------
    Loss before unusual
     item And income
     taxes                      (169,762)    (84,638)    (55,608)    (20,837)
    Write-down of investment
     in subsidiary                     -           -     (23,613)          -
      Gain on buy-back of
       senior notes                    -           -       9,254           -
    -------------------------------------------------------------------------
    Loss from continuing
     operations before income
     taxes                      (169,762)    (84,638)    (69,967)    (20,837)
    Income taxes (recovery)            -           -     (26,437)    (32,290)
    -------------------------------------------------------------------------
    Loss from continuing
     operations                 (169,762)    (84,638)    (43,530)     11,453
    Income (loss) from
     discontinued operations,
     net of taxes                      -           -         140      (7,292)
    Gain (loss) on disposal
     of discontinued
     operations, net of
     taxes                             -           -      (1,616)     34,985
    -------------------------------------------------------------------------
    Net loss                  $ (169,762) $  (84,638) $  (45,006) $   39,146
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                Walshire    Kingsway    Walshire    Kingsway
                               Assurance   Excluding   Assurance   Excluding
                                 Company    Walshire     Company    Walshire
    -------------------------------------------------------------------------
                               September   September    December    December
                                      30,         30,         31,         31,
                                    2009        2009        2008        2008
    ASSETS
      Cash and cash
       equivalents            $   74,459  $  434,591  $    5,950  $   90,370
      Securities (Note 6)        663,530   1,094,743     929,487   1,389,876
      Accrued investment
       income                      5,639      12,137       2,344      21,725
      Financed premiums                -      69,586           -      61,616
      Accounts receivable
       and other assets           49,108     139,137     101,258     174,443
      Due from reinsurers
       and other insurers         39,900     105,892      67,706      97,383
      Deferred policy
       acquisition costs          23,090      67,501      49,939      72,583
      Income taxes recoverable    41,550     (12,620)          -      20,348
      Future income taxes              -      12,117           -      21,947
      Capital assets              16,999      43,743      23,915      36,876
      Goodwill and intangible
       assets                          -      51,496           -      63,893
      Assets held for sale             -     129,899           -     117,393
      Net Assets of Walshire                 (10,000)          -      94,147
    -------------------------------------------------------------------------
                              $  914,275  $2,138,222  $1,180,599  $2,262,600
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES
      Loans payable           $        -  $   73,158  $        -  $   66,222
      Accounts payable and
       accrued liabilities        30,688      79,884      66,356      62,974
      Provision for loss on
       investments in
       subsidiary
      Unearned premiums           71,885     300,284     165,918     334,018
      Unpaid claims              798,090   1,090,171     854,178   1,024,838
      Senior unsecured
       debentures                      -     175,653           -     185,203
      Subordinated
       indebtedness                    -      87,407           -      87,383
      Liabilities held
       for sale                        -      57,525           -      48,390
    -------------------------------------------------------------------------
                                 900,663   1,864,082   1,086,452   1,809,028
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
      Share capital                          295,916                 322,344
        Issued and outstanding
         number of common
         shares
        51,673,728 -
         September 30, 2009
        55,068,528 -
         December 31, 2008
      Contributed surplus                     21,294                   9,791
      Retained earnings                     (118,053)                 98,564
      Accumulated other
       comprehensive
       income                                 74,983                  22,873
    -------------------------------------------------------------------------
                                  13,612     274,140      94,147     453,572
    -------------------------------------------------------------------------
                              $  914,275  $2,138,222  $1,180,599  $2,262,600
    -------------------------------------------------------------------------

    NOTE 5 Stock-based Compensation
    -------------------------------------------------------------------------

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

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

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

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

    In the third quarter 2009, the Company recognized a reversal of
    compensation expense as a result of forfeited options of $2.6 million
    ($4.5 million year to date) compared to $0.1 million ($0.5 million year
    to date) for the same quarter in 2008.

    NOTE 6 Segmented Information
    -------------------------------------------------------------------------

    The Company provides property and casualty insurance and other insurance
    related services. Previously, the Company managed these businesses in
    three reportable segments, Canada, the United States and Corporate. As a
    result of implementing its corporate restructuring plan and exiting non-
    core business, the Company now manages its business in four reportable
    segments, Canada, the United States, Business in Run-off and Corporate.
    The Company's Canadian and United States segments include transactions
    with the Company's reinsurance subsidiaries. The business in Run-off is
    comprised of the Lincoln General business except for specific product
    lines transferred to related companies, the Southern United Fire
    Insurance Company Inc. business and the Canadian long haul trucking
    business. Results for the Company's operating segments are based on the
    Company's internal financial reporting systems and are consistent with
    those followed in the preparation of the consolidated financial
    statements. The reportable segments for Canada have been updated to
    conform to the current period's financial statement presentation for the
    results of continuing operations.

    -------------------------------------------------------------------------
                               Three months ended September 30, 2009
    -------------------------------------------------------------------------
                                  United
                      Canada      States     Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Gross
     premiums
     written      $   73,330  $   82,167  $   28,890  $        -  $  184,387
    Net premiums
     earned           85,635     100,058      51,187           -     236,880
    Investment
     income
     (loss)            8,109      (2,545)      5,242      (5,015)      5,791
    Net realized
     gain (loss)       1,813      24,904       4,112        (373)     30,456
    Interest
     expense               -       5,757           -           -       5,757
    Amortization
     of capital
     assets              192         177        (107)        155         417
    Amortization
     of intangible
     assets                -       1,730       4,664         731       7,125
    Income tax
     expense
     (recovery)        2,413      (1,013)     (5,776)      1,070      (3,306)
    Income (loss)
     from
     continuing
     operations       10,410       8,812    (127,823)     (8,543)   (117,144)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                               Three months ended September 30, 2008
    -------------------------------------------------------------------------
                                  United
                      Canada      States     Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Gross
     premiums
     written      $   91,518  $  103,743  $  139,790  $        -  $  335,051
    Net premiums
     earned          109,368     121,320     140,352           -    371,0401
    Investment
     income
     (loss)           12,162      16,075       3,196         448      31,881
    Net realized
     gain            (52,128)    (18,843)       (226)     42,049     (29,148)
    Interest
     expense               -       7,593           -       1,728       9,321
    Amortization
     of capital
     assets              523         693        (237)        300       1,279
    Amortization
     of intangible
     assets                -       1,872         860         712       3,444
    Income tax
     expense
     (recovery)       (8,029)    (13,583)     (1,795)      6,016     (17,391)
    Income (loss)
     from
     continuing
     operations      (35,133)    (19,028)    (27,156)     39,202     (42,115)
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                               Nine months ended September 30, 2009
    -------------------------------------------------------------------------
                                  United
                      Canada      States     Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Gross premiums
     written      $  222,521  $  299,279  $  136,581  $        -  $  658,381
    Net premiums
     earned          241,959     332,350     215,635           -     789,944
    Investment
     income
     (loss)           23,938      28,330      11,990      (3,539)     60,719
    Net realized
     gain (loss)      (1,105)     12,381       1,097      (1,912)     10,461
    Interest
     expense               -      17,971           -           -      17,971
    Amortization
     of capital
     assets              999          28       1,000         452       2,479
    Amortization
     of intangible
     assets                -       8,320       4,439       2,054      14,813
    Income tax
     expense
     (recovery)         (598)    (15,255)     (7,292)     (3,292)    (26,437)
    Income (loss)
     from
     continuing
     operations        6,916       7,137    (218,898)     (8,447)   (213,292)
    -------------------------------------------------------------------------

    Total assets   1,185,312     835,769     948,661      92,756   3,062,498
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                               Nine months ended September 30, 2008
    -------------------------------------------------------------------------
                                  United
                      Canada      States     Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Gross premiums
     written      $  290,552  $  371,382  $  489,933  $        -  $1,151,867
    Net premiums
     earned          294,935     363,512     521,299           -   1,179,746
    Investment
     income
     (loss)           38,738      52,871       7,744        (295)     99,058
    Net realized
     gain (loss)     (43,797)    (22,277)       (172)     42,049     (24,197)
    Interest
     expense               -      24,182           -       3,928      28,110
    Amortization
     of capital
     assets            1,603       2,118        (135)      1,391       4,977
    Amortization
     of intangible
     assets                -       5,945       1,631       2,156       9,732
    Income tax
     expense
     (recovery)      (13,690)    (28,248)     (3,332)     12,980     (32,290)
    Income (loss)
     from
     continuing
     operations      (25,426)      8,656     (93,764)     37,349     (73,185)
    -------------------------------------------------------------------------

    Total assets   1,317,869   1,043,633   1,458,248      71,547   3,891,297
    -------------------------------------------------------------------------

    NOTE 7 Securities
    -------------------------------------------------------------------------

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

    -------------------------------------------------------------------------
                                               September 30, 2009
    -------------------------------------------------------------------------
                                               Gross       Gross
                               Amortized  Unrealized  Unrealized  Fair Value
                                    cost       Gains      Losses
    -------------------------------------------------------------------------
    Term Deposits             $  199,640  $       18  $        -  $  199,658
    Bonds:
      Canadian - Government      394,052       3,322          57     397,317
               - Corporate       307,137      13,648         131     320,654
               - Commercial
                  mortgage
                  backed           1,573           5          66       1,512
               - Other
                  asset
                  backed          33,896       1,010           -      34,906
      U.S      - Government      261,733      11,268          12     272,989
               - Corporate       313,802      15,397         239     328,960
               - Commercial
                  mortgage
                  backed             999           1           -       1,000
               - Residential
                  mortgage
                  backed         149,389       4,769          12     154,146
               - Other asset
                  backed          11,427         472         169      11,730
      Other
               - Corporate        13,941         357           -      14,298
    -------------------------------------------------------------------------
    Sub-total                  1,687,589      50,267         686   1,737,170
    Common shares
     - Canadian                    2,381       2,798           -       5,179
     - U.S                            15          10           -          25
    Preferred shares
     - Canadian                   15,523       2,164       1,868      15,819
     - U.S                            92           -          12          80
    -------------------------------------------------------------------------
                              $1,705,600  $   55,239  $    2,566  $1,758,273
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                               December 31, 2008
    -------------------------------------------------------------------------
                                               Gross       Gross
                               Amortized  Unrealized  Unrealized  Fair Value
                                    cost       Gains      Losses
    -------------------------------------------------------------------------
    Term Deposits             $  183,807  $      771  $       20  $  184,558
    Bonds:
      Canadian - Government      149,200       8,310           7     157,503
               - Corporate       178,270       1,881       7,562     172,589
               - Commercial
                  mortgage
                  backed          66,185         455       4,731      61,909
               - Other asset
                  backed          13,304          78         127      13,255
      U.S      - Government      409,096      38,853         177     447,772
               - Corporate       738,174      10,527      21,780     726,921
               - Commercial
                  mortgage
                  backed          23,482         495       2,679      21,298
               - Residential
                  mortgage
                  backed         111,698       3,131         868     113,961
               - Other asset
                  backed          17,419           8       1,153      16,274
      Other    - Corporate       128,382       4,328         999     131,711
    -------------------------------------------------------------------------
    Sub-total                 $2,019,017   $  68,837   $  40,103  $2,047,751
    Common shares
     - Canadian                  114,167       2,590           -     116,757
     - U.S                       146,406       4,882           -     151,288
    Preferred shares
     - Canadian                    6,692           8       3,629       3,071
     - U.S                           635           -         139         496
    -------------------------------------------------------------------------
                              $2,286,917   $  76,317   $  43,871  $2,319,363
    -------------------------------------------------------------------------

    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.

    -------------------------------------------------------------------------
                                            September 30, 2009
    -------------------------------------------------------------------------
                                    0 - 12 months          Over 12 months
    -------------------------------------------------------------------------
                                    Fair  Unrealized        Fair  Unrealized
                                   value        loss       value        loss
    -------------------------------------------------------------------------
    Term Deposits             $        -  $        -           -  $        -
    Bonds:
      Canadian - Government       42,328          57           -           -
               - Corporate        18,955         115      12,350          16
               - Commercial
                  mortgage
                  backed               -           -         789          66
               - Other asset
                  backed               -           -           -           -
      U.S      - Government       12,796           8         198           4
               - Corporate        21,125          23      12,365         216
               - Commercial
                  mortgage
                  backed               -           -           -           -
               - Residential
                  mortgage
                  backed          12,544          12           -           -
               - Other asset
                  backed               -           -       2,431         169
      Other    - Corporate             -           -           -           -
    -------------------------------------------------------------------------
    Sub-total                 $  107,748  $      215  $   28,133  $      471
    Preferred shares
     - Canadian                        -           -       5,604       1,868
     - U.S                             -           -          79          12
    -------------------------------------------------------------------------
                              $  107,748  $      215  $   33,816  $    2,351
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                            December 31, 2008
    -------------------------------------------------------------------------
                                    0 - 12 months          Over 12 months
    -------------------------------------------------------------------------
                                    Fair  Unrealized        Fair  Unrealized
                                   value        loss       value        loss
    -------------------------------------------------------------------------
    Term Deposits             $   18,856  $       20  $        -  $        -
    Bonds:
      Canadian - Government        2,482           7           -           -
               - Corporate        63,037       5,392      30,564       2,170
               - Commercial
                  mortgage
                  backed          17,493       1,023      31,397       3,708
               - Other asset
                  backed           3,279          29       3,472          98
      U.S      - Government        8,380         120         866          57
               - Corporate       205,859      11,268     132,871      10,512
               - Commercial
                  mortgage
                  backed             411          82       9,669       2,597
               - Residential
                  mortgage
                  backed             105           1         639         867
               - Other asset
                  backed             982          25      14,276       1,128
               - Corporate         6,382         112       3,321         887
    -------------------------------------------------------------------------
    Sub-total                 $  327,266  $   18,079  $  227,075  $   22,024
    Preferred shares
     - Canadian                        -           -       3,072       3,629
     - U.S                             -           -         496         139
    -------------------------------------------------------------------------
                              $  327,266  $   18,079  $  230,643  $   25,792
    -------------------------------------------------------------------------

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

    Management performs a quarterly analysis of the Company's investment
    holdings to determine if declines in market value are other than
    temporary. Pursuant to FASB and Accounting Standards Board of Canada
    guidance issued in April 2009, the analysis process has been revised
    during the quarter to include consideration of the following factors:
        -  Assessing the Company's intent to sell those securities;
        -  Assessing whether it is more likely than not that the company will
           be required to sell those securities before the recovery of its
           amortized cost basis;
        -  Assessing if any credit losses are expected for those securities.
           The assessment includes consideration of, among other things, all
           available information and factors having a bearing upon
           collectability of security such as changes to credit rating by
           rating agencies, financial condition of the issuer, expected cash
           flows and value of any underlying collateral.

    As a result of the above analysis performed by management to determine
    declines in market value that are other than temporary, write downs for
    other-than-temporary impairments were $0.1 million for the quarter ended
    September 30, 2009 compared to $22.9 million for the same period last
    year ($5.1 million for the nine month period ended September 30, 2009
    compared to $40.7 million for the nine month period ended September 30,
    2008) and the entire amount of other-than-temporary impairments has been
    recognized in earnings.

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

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

    -------------------------------------------------------------------------
                                  Three months ended       Nine months ended
                                        September 30:           September 30:
    -------------------------------------------------------------------------
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Investment income
      Interest on short term
       securities                    494       2,639       2,100       9,903
      Interest on Bonds           17,269      25,324      60,880      82,067
      Dividends                      165       3,906       1,671       8,345
      Premium Finance              1,038       1,264       3,405       3,361
      Other                      (12,292)        485      (4,139)        731
    -------------------------------------------------------------------------
    Gross Investment Income        6,674      33,618      63,917     104,407
    Investment Expenses              883      11,737       3,198       5,349
    -------------------------------------------------------------------------
    Net Investment Income          5,791      31,881      60,719      99,058
    -------------------------------------------------------------------------

    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 Canada and the U.S. in the current year compared
    to the same periods last year. The decrease in interest on bonds for the
    three and nine months to September 30, 2009 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 certain
    lines of business being put into voluntary run-off has also contributed
    to the lower interest income on bonds in the quarter and year to date in
    the U.S. The strength of the Canadian dollar in 2008, particularly in the
    first two quarters, increased interest income in the Canadian portfolio
    during that period when reported in U.S. dollars. This has contributed to
    the decrease in interest income on bonds for the quarter and year to date
    compared to the same periods last year.

    Dividend income has declined for the three and nine months to September
    30, 2009 compared to the same periods last year due to the disposition of
    the common share equity portfolio in the first quarter of 2009.

    Other income for the three months ended September 30, 2009 includes a
    loss of $12.7 million ($1.3 million year to date) on the revaluation of
    the Company's now unhedged Canadian dollar denominated debt.

    Net realized gains for the quarter ended September 30, 2009 were $30.5
    million compared to net realized losses of $29.1 million for the quarter
    ended September 30, 2008. Net realized gains for the nine months ended
    September 30, 2009 were $10.5 million compared to net realized losses of
    $24.2 million for the quarter ended September 30, 2008.

    NOTE 8 Financial Instruments
    -------------------------------------------------------------------------

    Risk Management

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

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

    Credit risk:

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

    The table below summarizes the credit exposure of the Company from its
    investments in fixed income securities and term deposits by rating:

    -------------------------------------------------------------------------
                                September 30, 2009       December 31, 2008
    -------------------------------------------------------------------------
    AAA/Aaa                      854,839        49.2%  1,117,281        54.6%
    AA/Aa2                       387,714        22.3%    338,347        16.5%
    A/A2                         352,083        20.4%    496,095        24.2%
    BBB/Baa2                     127,360         7.3%     62,903         3.1%
    BB/Ba2                         1,978         0.1%      5,122         0.3%
    B/B2                           5,943         0.3%      7,838         0.4%
    CCC/Caa or lower, or
     not rated                     7,253         0.4%     20,165         0.9%
    -------------------------------------------------------------------------
    Total consolidated         1,737,170       100.0%  2,047,751       100.0%
    -------------------------------------------------------------------------

    As at September 30, 2009, 91.9% 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:

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

    Duration is a measure used to estimate the extent market values of fixed
income instruments change with changes in interest rates. Using this measure,
it is estimated that an immediate hypothetical 100 basis point or 1 percent
parallel increase in interest rates would decrease the market value of the
fixed income securities by $59.4 million at September 30, 2009, representing
3.4% of the $1.7 billion fair value fixed income securities portfolio.
    The following table summarizes carrying amounts of financial instruments
by contractual maturity or expected cash flow dates (the actual repricing
dates may differ from contractual maturity because certain securities and
debentures have the right to call or prepay obligations with or without call
or prepayment penalties):


    -------------------------------------------------------------------------
    As at          One                                          No
     September    year     One to    Five to  More than   specific
     30, 2009  or less five years  ten years  ten years       date      Total
    -------------------------------------------------------------------------
    Assets:
    Cash &
     cash
     equiv-
     alents    509,050          -          -          -          -    509,050
    Securi-
     ties      271,686    773,232    539,024    163,443     10,888  1,758,273
    Accrued
     Invest-
     ment
     Income     17,776          -          -          -          -     17,776
    Finance
     Premiums   69,586          -          -          -          -     69,586
    Accounts
     receiv-
     able and
     other
     assets    188,246          -          -          -          -    188,246
    Due from
     reinsur-
     ers and
     other
     insurers   51,140     78,587     14,169      1,896          -    145,792
    -------------------------------------------------------------------------
    Total:   1,107,484    851,819    553,193    165,339     10,888  2,688,723
    -------------------------------------------------------------------------

    Liabili-
     ties:
    Loans
     payable         -          -     66,222      6,936          -     73,158
    Accounts
     payable
     and
     accrued
     liabil-
     ities     134,185          -          -          -          -    134,185
    Unpaid
     claims    662,355  1,017,833    183,513     24,560          -  1,888,261
    Senior
     un-
     secured
     deben-
     tures           -    175,653          -          -          -    175,653
    Subordi-
     nated
     indebt-
     edness          -          -          -     87,407          -     87,407
    -------------------------------------------------------------------------
    Total:     796,540  1,193,486    249,735    118,903          -  2,358,664
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at          One                                          No
     December     year     One to    Five to  More than   specific
     31, 2008  or less five years  ten years  ten years       date      Total
    -------------------------------------------------------------------------
    Assets:
    Cash &
     cash
     equiv-
     alents     96,320          -          -          -          -     96,320
    Securi-
     ties      395,355    971,299    516,397    164,700    271,612  2,319,363
    Accrued
     invest-
     ment
     income     24,069          -          -          -          -     24,069
    Finance
     premiums   61,616          -          -          -          -     61,616
    Accounts
     receiv-
     able and
     other
     assets    275,701          -          -          -          -    275,701
    Due from
     reinsur-
     ers and
     other
     insurers   58,629     89,056     15,338      2,066          -    165,089
    -------------------------------------------------------------------------
    Total:     911,690  1,060,355    531,735    166,766    271,612  2,942,158
    -------------------------------------------------------------------------

    Liabili-
     ties:
    Loans
     payable         -          -     66,222          -          -     66,222
    Accounts
     payable
     and
     accrued
     liabil-
     ities     129,330          -          -          -          -    129,330
    Unpaid
     claims    667,307  1,013,611    174,579     23,519          -  1,879,016
    Senior
     un-
     secured
     deben-
     tures           -     81,137    104,066          -          -    185,203
    Subordi-
     nated
     indebt-
     edness          -          -          -     87,383          -     87,383
    -------------------------------------------------------------------------
    Total:     796,637  1,094,748    344,867    110,902          -  2,347,154
    -------------------------------------------------------------------------

    Collateral pledged: As at September 30, 2009, bonds and term deposits
    with an estimated fair value of $51.9 million were on deposit with state
    and provincial regulatory authorities. Also, from time to time, the
    Company pledges securities to third parties to collateralize liabilities
    incurred under its policies of insurance. At September 30, 2009, the
    amount of such pledged securities was $112.3 million. Collateral pledging
    transactions are conducted under terms that are common and customary to
    standard collateral pledging and are subject to the Company's standard
    risk management controls.

    The company has a syndicate letter of credit facility which is used to
    collateralize reinsurance balances. The Company pledges securities to
    collateralize the utilized portion of the letter of credit facility. At
    September 30, 2009 the letter of credit facility utilization was $2.7
    million.

    Fair value:

    Refer to Note 7 with respect to fair value disclosure on securities. The
    carrying value of unpaid claims does not take into consideration the time
    value of money or make an explicit provision for adverse deviation. In
    order to estimate the fair value of the unpaid claims, the Company uses
    an actuarial approach recognizing the time value of money which
    incorporates assumptions concerning projected cash flows and appropriate
    provisions for adverse deviation. As at September 30 , 2009 the estimated
    fair value of the unpaid claims was $2,032.3 million ($1,898.9 million
    net of reinsurers' share of unpaid claims). The estimated fair value is
    approximately $144.1 million above the undiscounted carrying value as a
    result of a provision for adverse development totaling $186.5 million in
    addition to the present value of unpaid claims. There is no active market
    for policy liabilities, so a market value is not readily available.

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

    -------------------------------------------------------------------------
                                                    September 30, 2009
    -------------------------------------------------------------------------
                                                 Total      Total
                                                  fair   carrying
                                               value*     value  Favorable
    -------------------------------------------------------------------------
    Loans Payable                           $   53,813 $   73,158 $   19,345
    Senior unsecured debentures                148,329    175,653     27,324
    Subordinated indebtedness                   35,168     87,407     52,239
    -------------------------------------------------------------------------


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

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

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

                                              Quoted
                                              prices
                                           in active
                                             markets Significant Significant
                                                 for       other          un-
                                           identical  observable  observable
                            September 30,     assets      inputs      inputs
    Description                     2009    (Level 1)   (Level 2)   (Level 3)
    -------------------------------------------------------------------------
    Available for sale
     securities:
    Term deposits:            $  199,658  $        -  $  199,658  $        -
    Debt securities:
    ----------------
    Canadian - Government        397,317           -     397,317           -
             - Corporate         320,654           -     320,654           -
             - Commercial
                mortgage
                backed             1,512           -       1,512           -
             - Other asset
                backed            34,906           -      34,906           -
      U.S    - Government        272,989           -     272,989           -
             - Corporate         328,960           -     328,960           -
             - Commercial
                mortgage
                backed             1,000           -       1,000           -
             - Residential
                mortgage
                backed           154,146           -     154,146           -
             - Other
                mortgage/
                asset
                backed            11,730           -      11,730           -
      Other  - Corporate          14,298           -      14,298           -
    Equity Securities:
    ------------------
    Canadian                       5,179       5,179           -           -
    US                                25          25           -           -
    Preferred Securities:
    ---------------------
    Canadian                      15,819      15,819           -           -
    US                                80          80           -           -
    -------------------------------------------------------------------------
    Total                     $1,758,273  $   21,103  $1,737,170  $        -
    -------------------------------------------------------------------------

    NOTE 9 Capital Management
    -------------------------------------------------------------------------

    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 September 30, 2009 the Company's total debt to capital and senior
    debt to capital ratios were 55.4% and 41.1% respectively. As a result,
    the limitations and restrictions described above are currently
    applicable. The Board of Directors is considering alternatives to reduce
    these ratios to remove the limitations and restrictions in place.

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

    Kingsway 2007 General Partnership, an indirect wholly-owned subsidiary of
    Kingsway announced on July 14, 2009 the commencement of a modified "Dutch
    Auction" tender offer (the "2012 Offer") for a portion of its outstanding
    Unsecured 6% Debentures due July 11, 2012 (the "2012 Debentures"). The
    2012 Offer provides for a cash purchase of 2012 Debentures at a price per
    C$1,000 principal amount of debentures of not less than C$540 and not
    greater than C$620, for a maximum aggregate purchase price to the offeror
    not to exceed C$31 million (excluding accrued and unpaid interest). The
    Offer expired Friday, August 14, 2009 with valid tenders (that were not
    withdrawn) of C$9,174,000 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.

    Subsequent to the balance sheet date the Company repaid in full a $6.9
    million mortgage on a property.

    As at September 30, 2009 the Company was adequately capitalized to
    support the premium volume of the insurance subsidiaries.

    In Canada, JEVCO Insurance Company is regulated by the Office of the
    Superintendent of Financial Institutions ("OSFI") and Kingsway General
    Insurance Company is regulated by the Financial Services Commission of
    Ontario ("FSCO"). OSFI and FSCO expect each institution to maintain
    ongoing capital at no less than the supervisory target Minimum Capital
    Test ("MCT") of 150% and may establish, in consultation with an
    institution, an alternative supervisory target level based upon an
    individual institution's risk profile. As at September 30, 2009 the MCTs
    of JEVCO Insurance Company and Kingsway General Insurance Company were
    239% and 210% respectively. As at September 30, 2009 the Canadian
    insurance companies have aggregate capital of approximately $60.2 million
    in excess of the 150% level.

    In the United States, a risk based capital (RBC) formula is used by the
    National Association of Insurance Commissioners (NAIC) to identify
    property and casualty insurance companies that may not be adequately
    capitalized. The NAIC requires that capital and surplus not fall below
    200% of the authorized control level. As at September 30, 2009, all U.S.
    subsidiaries, with the exception of Lincoln General, are estimated to be
    above the required RBC levels, with RBC ratios estimates ranging between
    286% and 37,410% and have estimated aggregate capital excluding Lincoln
    General of approximately $106.9 million in excess of the 200% level.

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

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

    On October 19, 2009 the Company announced that its indirect wholly owned
    subsidiary, Kingsway America Inc. ("KAI"), has disposed of its entire
    interest in KAI's wholly owned subsidiary Walshire Assurance Company
    ("Walshire"). Walshire is the sole shareholder of Lincoln General. All of
    the stock of Walshire has been donated to charity, and with this
    disposition Lincoln General ceases being a member of the Kingsway group
    of companies. As of the date of the disposition of Walshire, the Company
    is of the view that its control over Walshire and its subsidiaries,
    including Lincoln General was lost. Management intends that Walshire and
    its subsidiaries will no longer be consolidated beginning October 19,
    2009.

    The Company is of the view that the extent of its obligations in
    connection with Walshire and its subsidiaries are the payment of a $10
    million cash contribution to Lincoln General; continued compliance with a
    run-off management agreement, including certain continued support to the
    run-off management team at Lincoln General; and continuing guarantee and
    reinsurance obligations to inter-Company and third party insurance
    providers in respect of certain Lincoln General obligations.

    As part of the ongoing transformation program, during the second quarter
    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. As noted
    above, treaties between the Canadian operating companies and Kingsway
    Reinsurance (Bermuda) Limited were commuted effective October 1, 2009.
    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. The regulatory capital remaining in Kingsway Reinsurance
    Corporation following the commutation of all related party reinsurance
    treaties is below the amount required under the Insurance Act of Barbados
    where Kingsway Reinsurance is domiciled. The Company considers this
    situation to be temporary as the calculation of the minimum capital
    required is based upon the premiums of the previous calendar year when
    the level of underwriting activity was significantly greater than those
    of the ongoing Barbados operation. This situation has been communicated
    to the Office of the Supervisor of Insurance in Barbados which has
    accepted the Company's commitment to resolve the shortfall in early 2010.
    At that time, the Company believes that the capital available will exceed
    the capital required with no additional capital required.

    As at September 30, 2009 the capital maintained by Kingsway Reinsurance
    (Bermuda) Limited was approximately $28.6 million in excess of the
    regulatory capital requirements in Bermuda. Subsequent to the balance
    sheet date, a significant portion of the capital was removed as part of
    the consolidation of the Canadian operations.

    NOTE 10 Hedges
    -------------------------------------------------------------------------

    On June 2, 2009, the company discontinued the swap transaction which was
    designated as a cash flow hedge. When the hedge is discontinued, any
    cumulative adjustment to the hedging instrument through other
    comprehensive income is recognized in income over the remaining term of
    the hedged item, or when the hedged item is derecognized. The amount of
    loss recorded in other comprehensive income as a result of the
    discontinuance of the cash flow hedge is $6.2 million before tax of which
    $1.5 million has been reclassified to net income for the quarter ended
    September 30, 2009 ($1.6 million year to date).

    NOTE 11 Restructuring charges
    -------------------------------------------------------------------------

    During the first quarter of 2009, the Company announced a corporate
    restructuring plan to concentrate on its core and profitable lines of
    business and is targeted to improve the Company's financial stability.
    The Company is consolidating operations in U.S. and Canada, simplifying
    the management structure, reducing costs through synergies and
    operational efficiencies and positioning the Company to seize competitive
    advantage. As the Company exits businesses and streamlines operations,
    approximately 1,000 employees will be removed from the total workforce.
    Restructuring costs are expected to be approximately $20 million, to be
    incurred over fiscal 2009 and 2010, of which $18.5 million was expensed
    in the first nine months of 2009.

    During the nine months ended September 30, 2009, the Company continued to
    implement this restructuring plan. Restructuring charges for the nine
    months ended September 30, 2009 were as follows:

    -------------------------------------------------------------------------
                                                        Restructuring charges
    -------------------------------------------------------------------------
                                                           Three       Nine
                                                          months      months
                                                           ended       ended
                   Severance  Consulting               September   September
                and benefits     expense       Total    30, 2009    30, 2009
    -------------------------------------------------------------------------
    Provision
     balance
     at January 1,
     2009         $        -  $        -  $        -
      (Income)
       expense         9,347       9,063      18,410  $    5,861  $   18,410
      Payments         5,009       9,063      14,072           -           -
    Provision
     balance at
     September
     30, 2009     $    4,338  $        -  $    4,338           -           -
    -------------------------------------------------------------------------
    Total
     restructur-
     ing
     charges                                          $    5,861  $   18,410
    -------------------------------------------------------------------------

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

    -------------------------------------------------------------------------
                                                   Three months ended
                                                   September 30, 2009
    -------------------------------------------------------------------------
                      Canada         U.S.    Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Total
     restructur-
     ing
     charges      $       68  $        80  $     313  $    5,400   $    5,861
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                   Nine months ended
                                                   September 30, 2009
    -------------------------------------------------------------------------
                      Canada         U.S.    Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Total
     restructur-
     ing
     charges     $       954  $    2,431  $    3,695  $   11,330  $   18,410
    -------------------------------------------------------------------------

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

    -------------------------------------------------------------------------
                                                   Over the span of the
                                                    restructuring plan
    -------------------------------------------------------------------------
                      Canada         U.S.    Run-off   Corporate       Total
    -------------------------------------------------------------------------
    Total
     expected
     costs for
     restructur-
     ing plan    $     1,900  $    4,000  $    3,100  $   13,000  $   22,000
    -------------------------------------------------------------------------

    As a result of the implementation of the restructuring plan being ahead
    of target, the total restructuring costs for the year to date represent a
    significant portion of the total expected costs over the span of the
    restructuring plan.

    NOTE 12 Acquisitions
    -------------------------------------------------------------------------

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

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

    The Company also recognized total intangible assets of $10.7 million
    related to this acquisition during 2007, of which $7.8 million was
    assigned to insurance licenses with an indefinite life and not subject to
    amortization, $1.1 million was assigned to computer software and is being
    amortized straight line over its defined useful life of 3 years and $1.8
    million assigned to agent relationships and is also being amortized over
    a 5 year term but based on a pattern in which the economic benefits of
    the asset are expected to be consumed.

    NOTE 13 Buy-Back of Senior Notes
    -------------------------------------------------------------------------

    During the quarter, Kingsway America Inc. bought back $1.9 million ($6.5
    million year to date) face value of the senior notes due in 2014 at a
    market rate of $1.3 million ($3.2 million year to date). Kingsway America
    Inc. realized a gain of $0.6 million ($3.3 million year to date) during
    the quarter.

    Also during the quarter and year to date, a general partnership of the
    Company, Kingsway 2007 General Partnership bought back $14.6 million face
    value of the senior notes due in 2012 at a market rate of $8.6 million.
    As a result, Kingsway 2007 General Partnership realized a gain of $6.0
    million during the quarter.

    NOTE 14 Related Party Transaction
    -------------------------------------------------------------------------

    Related-party transactions, including services provided to or received by
    Kingsway's subsidiaries, are carried out in the normal course of
    operations and are measured at the amount of consideration paid or
    received as established and agreed by the parties. Management believes
    that consideration paid for such services approximate fair value.

    In March 2009, the Company obtained a financing facility from a related
    party to allow for specific capital initiatives. The facility is at fair
    market terms and conditions. As at September 30, 2009, the facility was
    undrawn, expired and has been terminated. In the fourth quarter, a new
    facility has been obtained from the same related party. This new facility
    is at fair market terms and conditions.

    The Company has engaged the services of a company owned by a former
    director and paid $0.8 million for the nine month period ended September
    30, 2009.

    In addition to a previously agreed retainer of C$0.1 million, the Board
    of Directors has decided to pay an additional $0.4 million and C$0.1
    million to the Chairman of the Board. Of these amounts, the Company has
    paid $0.2 million and C$0.1 million as at September 30, 2009.

    NOTE 15 Contractual Obligation
    -------------------------------------------------------------------------

    On June 29, 2009, Kingsway and Lincoln General entered into a consulting
    agreement with an external run-off manager to provide certain consulting
    services relating to Lincoln General, including advice and assistance in
    the development of a Run-off Plan. In addition to base compensation of
    $1.3 million annually, the agreement provides for a minimum of $2.5
    million to be paid to the Run-off Manager at the termination of the
    contract (provided the contract is not terminated for cause), which, at
    the latest will be March 1, 2014. Since the Lincoln General has been
    disposed of by the Company on October 19, 2009, the Company accrued $6.1
    million for the base compensation and additional compensation as at
    September 30, 2009.

    NOTE 16 Normal Course Issuer Bid
    -------------------------------------------------------------------------

    On July 29, 2009, the Company obtained approval from the Toronto Stock
    Exchange to amend its normal course issuer bid for common shares. The
    Toronto Stock Exchange ("TSX") accepted a revision to the maximum number
    of common shares that can be purchased under the normal course issuer bid
    to 5,386,545 common shares, or 10% of the public float on November 28,
    2008. For the three months ended and year to date September 30, 2009, the
    company repurchased 3,394,800 of its common shares at an average price of
    C$3.76, representing approximately 6.2% of the then outstanding shares.
    All of the repurchased common shares were cancelled.

    NOTE 17 Mergers
    -------------------------------------------------------------------------

    During the quarter the Company announced that effective October 1, 2009,
    JEVCO Insurance Company will assume the assets and liabilities of
    Kingsway General Insurance Company subject to regulatory approval. Both
    JEVCO Insurance Company and Kingsway General Insurance Company are wholly
    owned Canadian subsidiaries of the Company.

    NOTE 18 Comparative Figures
    -------------------------------------------------------------------------

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

    NOTE 19 Subsequent Events
    -------------------------------------------------------------------------

    The subsequent events have been evaluated up to November 6, 2009, the
    date the financial statements are issued. The subsequent events noted are
    as follows:

    On October 19, 2009, the Company's indirect wholly owned subsidiary,
    Kingsway America Inc. ("KAI") has donated all of the stock of its wholly
    owned subsidiary Walshire Assurance Company ("Walshire") to charity, and
    with this disposition Lincoln General Insurance Company (i.e. subsidiary
    of Walshire) ceases being a member of The Kingsway group of companies.

    In addition, after the end of the quarter, the Company has completed the
    sale of substantially all of the assets of Avalon Risk Management Inc.

    On October 30, 2009, the Company completed the sale of HI Holdings Inc.
    and its subsidiary Zephyr Insurance Company Inc. for initial gross
    proceeds of $31.5 million, plus a contingent, deferred earn-out plan. The
    earn-out is calculated based upon the change in adjusted book value
    between the valuation date and the closing date.

    NOTE 20 Supplemental Condensed Consolidating Financial Information
    -------------------------------------------------------------------------

    On July 10, 2007, the Kingsway 2007 General Partnership issued C$100
    million of 6% senior unsecured debentures unconditionally guaranteed by
    the Company ("KFSI") and Kingsway America Inc. ("KAI"), a wholly-owned
    subsidiary of the Company. The following is the condensed consolidating
    financial information for the Company as of September 30, 2009 and
    December 31, 2008, and for the period ended September 30, 2009 and 2008,
    with a separate column for each Guarantor, the issuer and the other
    businesses of the Company combined ("Non-Guarantor subsidiaries").

    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Operations
    -------------------------------------------------------------------------
    For the nine months ended September 30, 2009

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

    Revenue:
    Net premiums earned                $         -  $         -  $         -
    Investment related income               (5,451)       2,249        4,420
    Management fees                         43,558       14,046            -
    -------------------------------------------------------------------------
                                       $    38,107  $    16,295  $     4,420
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $         -  $         -  $         -
    Commissions and premium taxes                -            -            -
    Other expenses                          54,872       10,422          331
    Interest expense                             -       19,517        3,767
    -------------------------------------------------------------------------
                                            54,872       29,939        4,098
    -------------------------------------------------------------------------

    Income (loss) before unusual
     items and income taxes                (16,765)     (13,644)         322
    Write-down of investment in
     subsidiary                                  -      (23,613)           -
    Gain on buy-back of senior notes             -        3,270        5,984
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes        (16,765)     (33,987)       6,306
    Income taxes (recovery)                 (5,001)      (3,527)       2,144
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (11,764)     (30,460)       4,162
    Income from discontinued
     operations                                  -            -            -
    Loss on disposal of discontinued
     operations                             (1,616)           -            -
    Equity in undistributed net
     income of subsidiaries               (201,388)     (64,306)           -
    -------------------------------------------------------------------------
    Net income (loss)                  $  (214,768) $   (94,766) $     4,162
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended September 30, 2009

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

    Revenue:
    Net premiums earned                $   802,577  $   (12,633) $   789,944
    Investment related income               85,449      (15,487)      71,180
    Management fees                              -      (57,604)           -
    -------------------------------------------------------------------------
                                       $   888,026  $   (85,724) $   861,124
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $   759,882  $         -  $   759,882
    Commissions and premium taxes          140,124            -      140,124
    Other expenses                         185,588      (82,696)     168,517
    Interest expense                        (2,285)      (3,028)      17,971
    -------------------------------------------------------------------------
                                         1,083,309      (85,724)   1,086,494
    -------------------------------------------------------------------------

    Income (loss) before unusual
     items and income taxes               (195,283)           -     (225,370)
    Write-down of investment in
     subsidiary                                  -            -      (23,613)
    Gain on buy-back of senior notes             -            -        9,254
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes       (195,283)           -     (239,729)
    Income taxes (recovery)                (20,053)           -      (26,437)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                           (175,230)           -     (213,292)
    Income from discontinued
     operations                                140            -          140
    Loss on disposal of discontinued
     operations                                  -            -       (1,616)
    Equity in undistributed net
     income of subsidiaries                      -      265,694            -
    -------------------------------------------------------------------------
    Net income (loss)                  $  (175,090) $   265,694  $  (214,768)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended September 30, 2008

                                           KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer" /    (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Revenue:
    Net premiums earned                $         -  $         -  $         -
    Investment related income               41,754        2,770        5,104
    Management fees                         78,797       14,041            -
    -------------------------------------------------------------------------
                                       $   120,551  $    16,811  $     5,104
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $         -  $         -  $         -
    Commissions and premium taxes                -            -            -
    Other expenses                          66,296       21,238          177
    Interest expense                         3,928       21,100        4,612
    -------------------------------------------------------------------------
                                            70,224       42,338        4,789
    -------------------------------------------------------------------------

    Income (loss) before unusual
     items and income taxes                 50,327      (25,527)         315
    Write-down of investment in
     subsidiary                                  -            -            -
    Gain on buy-back of senior notes             -            -            -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes         50,327      (25,527)         315
    Income taxes (recovery)                 12,980       (8,679)         107
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                             37,347      (16,848)         208
    Loss from discontinued operations            -            -            -
    Gain on disposal of discontinued
     operations                             34,985            -            -
    Equity in undistributed net
     income of subsidiaries               (117,824)     (58,077)           -
    -------------------------------------------------------------------------
    Net income (loss)                  $   (45,492) $   (74,925) $       208
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended September 30, 2008

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

    Revenue:
    Net premiums earned                $ 1,188,932  $    (9,186) $ 1,179,746
    Investment related income               51,706      (26,473)      74,861
    Management fees                              -      (92,838)           -
    -------------------------------------------------------------------------
                                       $ 1,240,638  $  (128,497) $ 1,254,607
    -------------------------------------------------------------------------
    Expenses:
    Claims incurred                    $   924,456  $         -  $   924,456
    Commissions and premium taxes          231,235            -      231,235
    Other expenses                         211,798     (123,228)     176,281
    Interest expense                         3,739       (5,269)      28,110
    -------------------------------------------------------------------------
                                         1,371,228     (128,497)   1,360,082
    -------------------------------------------------------------------------

    Income (loss) before unusual
     items and income taxes               (130,590)           -     (105,475)
    Write-down of investment in
     subsidiary                                  -            -            -
    Gain on buy-back of senior notes             -            -            -
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes       (130,590)           -     (105,475)
    Income taxes (recovery)                (36,698)           -      (32,290)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (93,892)           -      (73,185)
    Loss from discontinued operations       (7,292)           -       (7,292)
    Gain on disposal of discontinued
     operations                                  -            -       34,985
    Equity in undistributed net
     income of subsidiaries                      -      175,901            -
    -------------------------------------------------------------------------
    Net income (loss)                  $  (101,184) $   175,901  $   (45,492)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

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

    Assets
    Investments in subsidiaries        $   164,335  $   853,594  $         -
    Cash                                    32,268        6,905        1,375
    Securities                                   -            -            -
    Goodwill and intangible assets           6,821            -            -
    Other assets                            57,932       99,652       94,756
    Assets held for sale                         -            -            -
    -------------------------------------------------------------------------
                                       $   261,356  $   960,151  $    96,131
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
    Bank Indebtedness                  $         -  $   201,487  $         -
    Other liabilities                        1,173       26,636          957
    Provision for loss on investment
     in subsidiary                               -       23,613            -
    Unearned premiums                            -            -            -
    Unpaid claims                                -            -            -
    Senior unsecured debentures                  -      118,525       77,641
    Subordinated indebtedness                    -       90,500            -
    Liabilities held for sale                    -            -            -
    -------------------------------------------------------------------------
                                       $     1,173  $   460,761  $    78,598
    Shareholders' equity:
    Share capital                          295,916      575,112       14,867
    Contributed surplus                     21,294            -            -
    Retained Earnings                     (118,053)     (75,722)       6,559
    Accumulated other comprehensive
     income                                 61,026            -       (3,893)
    -------------------------------------------------------------------------
                                           260,183      499,390       17,533
    -------------------------------------------------------------------------
                                       $   261,356  $   960,151  $    96,131
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    As at September 30, 2009

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

    Assets
    Investments in subsidiaries        $(1,575,413) $   557,484  $         -
    Cash                                   468,502            -      509,050
    Securities                           1,844,613      (16,753)   1,827,860
    Goodwill and intangible assets          44,675            -       51,496
    Other assets                         1,186,071     (894,218)     544,193
    Assets held for sale                   129,899            -      129,899
    -------------------------------------------------------------------------
                                       $ 2,098,347  $  (353,487) $ 3,062,498
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
    Bank Indebtedness                  $  (168,329) $    40,000  $    73,158
    Other liabilities                      123,913      (42,107)     110,572
    Provision for loss on investment
     in subsidiary                               -            -       23,613
    Unearned premiums                      489,224     (117,055)     372,169
    Unpaid claims                        2,275,565     (387,304)   1,888,261
    Senior unsecured debentures             (3,634)     (16,879)     175,653
    Subordinated indebtedness                    -       (3,093)      87,407
    Liabilities held for sale               57,525            -       57,525
    -------------------------------------------------------------------------
                                       $ 2,774,264  $  (526,438) $ 2,788,358
    Shareholders' equity:
    Share capital                        1,998,688   (2,588,667)     295,916
    Contributed surplus                          -            -       21,294
    Retained Earnings                   (2,745,883)   2,815,046     (118,053)
    Accumulated other comprehensive
     income                                 71,278      (53,428)      74,983
    -------------------------------------------------------------------------
                                          (675,917)     172,951      274,140
    -------------------------------------------------------------------------
                                       $ 2,098,347  $  (353,487) $ 3,062,498
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

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

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


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

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

    Assets
    Investments in subsidiaries        $(1,470,854) $   317,452  $         -
    Cash                                    68,839            -       96,320
    Securities                           2,398,072      (17,093)   2,380,979
    Goodwill and other assets               57,897            -       63,893
    Other assets                         2,409,352   (1,934,620)     690,467
    Assets held for sale                   117,393            -      117,393
    -------------------------------------------------------------------------
                                       $ 3,580,699  $(1,634,261) $ 3,349,052
    -------------------------------------------------------------------------
    Liabilities and Shareholders'
     Equity
    Liabilities:
    Bank Indebtedness                  $         -  $  (103,953) $    66,222
    Other liabilities                      (48,488)     125,564      129,330
    Provision for loss on investment
     in subsidiary                               -            -            -
    Unearned premiums                      786,527     (286,591)     499,936
    Unpaid claims                        3,109,263   (1,230,247)   1,879,016
    Senior unsecured debentures            (16,383)     (16,878)     185,203
    Subordinated indebtedness                    -       (3,117)      87,383
    Liabilities held for sale               48,390            -       48,390
    -------------------------------------------------------------------------
                                       $ 3,879,309  $(1,515,222) $ 2,895,480
    Shareholders' equity:
    Share capital                        1,880,918   (2,350,718)     322,344
    Contributed surplus                          -            -        9,791
    Retained Earnings                   (2,211,705)   2,254,572       98,564
    Accumulated other comprehensive
     income                                 32,177      (22,893)      22,873
    -------------------------------------------------------------------------
                                          (298,610)    (119,039)     453,572
    -------------------------------------------------------------------------
                                       $ 3,580,699  $(1,634,261) $ 3,349,052
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Condensed Consolidating Statement of Cash Flows
    -------------------------------------------------------------------------
    For the nine months ended September 30, 2009

                                           KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer" /    (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income (loss)                  $  (214,768) $   (94,766) $     4,162
    Loss (income) from discontinued
     operations                                  -            -            -
    Equity in undistributed earnings
     in subsidiaries                       201,388       64,306            -
    Other                                  (33,242)       1,241        2,309
    -------------------------------------------------------------------------
                                           (46,622)     (29,219)       6,471
    Financing Activities:
    Share capital                          (26,428)     115,979        4,200
    Repurchase of common shares for
     cancellation                           14,664            -            -
    Contributed surplus                     (3,440)           -            -
    Dividends paid                           6,042            -            -
    Bank indebtedness and loans
     payable                                     -       31,051       (9,839)
    Senior unsecured indebtedness                -       (3,205)           -
    -------------------------------------------------------------------------
                                            (9,162)     143,825       (5,639)
    Investing Activities:
    Purchase of securities                       -            -            -
    Proceeds from sale of securities             -            -            -
    Proceeds from sale of discontinued
     operations                                  -            -            -
    Acquisitions                            66,812      (76,302)           -
    Other                                      (95)     (37,002)           -
    -------------------------------------------------------------------------
                                            66,717     (113,304)           -
    Discontinued operations
    Operating activities                         -            -            -
    Financing activities                         -            -            -
    Investing activities                         -            -            -
    -------------------------------------------------------------------------
                                                 -            -            -
    Increase (decrease) in cash during
     the period                             10,933        1,302          832
    Cash and cash equivalents,
     beginning of period                    21,335        5,603          543
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of
     period                            $    32,268  $     6,905  $     1,375
    Less cash and cash equivalents of
     discontinued operations, end of
     period                                      -            -            -
    -------------------------------------------------------------------------
    Cash and cash equivalents of
     continuing operations at end of
     period                            $    32,268  $     6,905  $     1,375
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended September 30, 2009

                                          Other
                                      Subsidiaries   Consolidation    Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income (loss)                  $  (175,090) $   265,694  $  (214,768)
    Loss (income) from discontinued
     operations                              1,476            -        1,476
    Equity in undistributed earnings
     in subsidiaries                             -     (265,694)           -
    Other                                 (208,402)     204,998      (33,096)
    -------------------------------------------------------------------------
                                          (382,016)     204,998     (246,388)
    Financing Activities:
    Share capital                                -     (120,179)     (26,428)
    Repurchase of common shares for
     cancellation                                -            -       14,664
    Contributed surplus                          -            -       (3,440)
    Dividends paid                               -            -        6,042
    Bank indebtedness and loans
     payable                                (3,651)     (21,212)      (3,651)
    Senior unsecured indebtedness                -        3,205            -
    -------------------------------------------------------------------------
                                            (3,651)    (138,186)     (12,813)
    Investing Activities:
    Purchase of securities              (3,211,069)           -   (3,211,069)
    Proceeds from sale of securities     3,885,161            -    3,885,161
    Proceeds from sale of discontinued
     operations                                  -            -            -
    Acquisitions                            74,361      (66,812)      (1,941)
    Other                                   34,407            -       (2,690)
    -------------------------------------------------------------------------
                                           782,860      (66,812)     669,461
    Discontinued operations
    Operating activities                    14,025            -       14,025
    Financing activities                    (7,891)           -       (7,891)
    Investing activities                    (3,107)           -       (3,107)
    -------------------------------------------------------------------------
                                             3,027            -        3,027
    Increase (decrease) in cash during
     the period                            400,220            -      413,287
    Cash and cash equivalents,
     beginning of period                    78,175            -      105,656
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of
     period                            $   478,395  $         -  $   518,943
    Less cash and cash equivalents of
     discontinued operations, end of
     period                                  9,893            -        9,893
    -------------------------------------------------------------------------
    Cash and cash equivalents of
     continuing operations at end of
     period                            $   468,502  $         -  $   509,050
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    For the nine months ended September 30, 2008

                                           KFSI          KAI        K2007GP
    -------------------------------------------------------------------------
                                            (a     (an "issuer" /    (an
                                       "Guarantor") "Guarantor")   "Issuer")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income (loss)                  $   (45,492) $   (74,925) $       208
    Loss (income) from discontinued
     operations                            (34,985)           -            -
    Equity in undistributed earnings
     in subsidiaries                       117,824       58,077            -
    Other                                   51,688      (34,731)        (237)
    -------------------------------------------------------------------------
                                            89,035      (51,579)         (29)
    Financing Activities:
    Share capital                           (2,538)     111,683            -
    Repurchase of common shares for
     cancellation                           (1,276)           -            -
    Contributed surplus                          -            -            -
    Dividends paid                          (9,786)           -            -
    Bank indebtedness and loans
     payable                              (172,976)        (246)         173
    Senior unsecured indebtedness                -            -            -
    -------------------------------------------------------------------------
                                          (186,576)     111,437          173
    Investing Activities:
    Purchase of securities                  (1,625)           -            -
    Proceeds from sale of securities         1,184            -            -
    Proceeds from sale of discontinued
     operations                             44,067            -            -
    Acquisitions                            87,600            -            -
    Other                                      207      (62,568)           -
                                           131,433      (62,568)           -
    Discontinued operations
    Operating activities                         -            -            -
    Financing activities                         -            -            -
    Investing activities                         -            -            -
    -------------------------------------------------------------------------
                                                 -            -            -
    Increase (decrease) in cash during
     the period                             33,892       (2,710)         144
    Cash and cash equivalents,
     beginning of period                    13,716        6,960          566
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of
     period                            $    47,608  $     4,250  $       710
    Less cash and cash equivalents of
     discontinued operations, end of
     period                                      -            -            -
    -------------------------------------------------------------------------
    Cash and cash equivalents of
     continuing operations at end of
     period                            $    47,608  $     4,250  $       710
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    For the nine months ended September 30, 2008

                                          Other
                                      Subsidiaries   Consolidation    Total
    -------------------------------------------------------------------------
                                        (the "Non-
                                        Guarantor
                                      subsidiaries")
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
    Net income (loss)                  $  (101,184) $   175,901  $   (45,492)
    Loss (income) from discontinued
     operations                              7,292            -      (27,693)
    Equity in undistributed earnings
     in subsidiaries                             -     (175,901)           -
    Other                                 (396,064)     118,215     (261,129)
    -------------------------------------------------------------------------
                                          (489,956)     118,215     (334,314)
    Financing Activities:
    Share capital                                -     (111,683)      (2,538)
    Repurchase of common shares for
     cancellation                                -            -       (1,276)
    Contributed surplus                          -            -            -
    Dividends paid                               -            -       (9,786)
    Bank indebtedness and loans
     payable                               (98,512)      98,585     (172,976)
    Senior unsecured indebtedness                -      (17,517)     (17,517)
    -------------------------------------------------------------------------
                                           (98,512)     (30,615)    (204,093)
    Investing Activities:
    Purchase of securities              (2,401,348)           -   (2,402,973)
    Proceeds from sale of securities     2,911,895            -    2,913,079
    Proceeds from sale of discontinued
     operations                                  -            -       44,067
    Acquisitions                              (212)     (87,600)        (212)
    Other                                   77,917            -       15,556
    -------------------------------------------------------------------------
                                           588,252      (87,600)     569,517
    Discontinued operations
    Operating activities                    13,673            -       13,673
    Financing activities                    (2,329)           -       (2,329)
    Investing activities                    (6,708)           -       (6,708)
    -------------------------------------------------------------------------
                                             4,636            -        4,636
    Increase (decrease) in cash during
     the period                              4,420            -       35,746
    Cash and cash equivalents,
     beginning of period                   140,393            -      161,635
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of
     period                            $   144,813  $         -  $   197,381
    Less cash and cash equivalents of
     discontinued operations, end of
     period                                 14,674            -       14,674
    -------------------------------------------------------------------------
    Cash and cash equivalents of
     continuing operations at end of
     period                            $   130,139  $         -  $   182,707
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

%SEDAR: 00003152E %CIK: 0001072627

SOURCE Kingsway Financial Services Inc.


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890