Interview with: W. Shaun Jackson, Exec. V.P. & CFO - featuring: their truck insurance and non-standard automobile insurance in North America.

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Shaun Jackson started his career in the United Kingdom in 1978 and qualified as a chartered accountant in 1982.

In 1985 he left the United Kingdom to join KPMG in Bermuda. As a senior manager he had responsibility for providing business advisory and audit services to insurers and reinsurers as well as a major local bank. 

In 1989 Shaun transferred to the Insurance and Financial Institutions Practice of KPMG Toronto. During his time at KPMG in Toronto, he specialized in advising clients in the Property and Casualty Insurance industry. 

In 1994, he joined Polaris Realty, a private investment company involved in commercial real estate in Canada. In 1995 he joined Kingsway Financial Services Inc. as Chief Financial Officer and in 1998 was appointed Executive Vice President of the company.

Whilst at Kingsway, he has overseen the substantial growth in the company which included its initial public offering in December 1995 and in 2001 the company became the first Canadian property and casualty insurer to be listed on the New York Stock Exchange. As well as overseeing several subsequent share offerings he has also been responsible for the acquisitions of 9 companies in Canada and the United States as well as the formation of the company’s offshore reinsurance divisions in Bermuda and Barbados.

In December 1995, the company’s revenue was approximately Cdn. $60 million and by end of fiscal 2004, gross premiums written had increased to $2.6 billion. Gross premiums written for year 2005 were approximately $2.3 billion.

Principal responsibility for all financial and several operational functions, which include:
- financial reporting;
- internal controls;
- investment management;
- investor relations;
- capital allocation;
- raising capital ;
- financial management of the group’s activities;
- board presentations;
- negotiation of banking arrangements;
- leading acquisition due diligence teams; and
- restructuring of acquisitions.

- Kingsway’s shares trade on the Toronto and New York Stock Exchanges under the symbol KFS. The Company now owns three insurance companies in Canada and six in the United States.

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

Lincoln General Insurance Company, Universal Casualty Insurance Company, American Service Insurance Company, Southern United Fire Insurance Company, Jevco Insurance Company, Kingsway Reinsurance Corporation, Barbados and Kingsway Reinsurance (Bermuda) Ltd. are all rated “A-” (Excellent) by A.M. Best. Kingsway General and York Fire are rated “B++” (Very Good) and American Country and U.S. Security are rated “B+” (Very Good) by A.M. Best. The Company's senior debt is rated investment grade “BBB-”(stable) by Standard and Poor's and A.M. Best and   “BBB” (stable) by Dominion Bond Rating Services. 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".

CEOCFO: Mr. Jackson, will you tell us about your background with Kingsway Financial Services?
Mr. Jackson: “I joined Kingsway about eleven-and-a-half years ago as the CFO. At that time, we were a subsidiary of a US public company. I joined the company about six months before Kingsway did its initial public offering and I have been CFO of the company since that time.”

CEOCFO: What was the vision when it became a standalone company and where are you today?
Mr. Jackson: “When we first became a public company in 1995, we were an Ontario based, small, specialty insurance company, specializing in non-standard automobile. There was a tremendous opportunity to grow in that market in Canada, but our parent company at the time did not have sufficient capital to allow Kingsway to grow. The initial public offering benefited both parties; it enabled us to become a public company and to grow. It also gave the parent company some additional funds to allow them to grow their business. Shortly thereafter, we started to grow very quickly in Canada. We completed subsequent share offerings to raise more capital to acquire two other insurance companies in Canada; namely York Fire & Casualty Insurance Company and Jevco Insurance Company. After acquiring those, we garnered a controlling market share in non-standard automobile and also motorcycle insurance in Canada.

Today we are the largest providers of non-standard automobile and motorcycle in Canada and we’ve also grown our trucking insurance business in Canada. In 1998, we realized that although we had a substantial market share in our core lines of business in Canada there were really limited opportunities to grow further unless we started to build a platform in the United States. In 1998 and 1999, we acquired several insurance companies in the U.S., and really built the franchise and distribution. When the insurance market started to turn during 2001, it was a period where the underwriting results of the industry started to deteriorate. Many companies in the world insurance market sustained losses from things such as the World Trade Center loss, the Enron situation and Worldcom bond defaults. The overall equity market declined as well which hurt a lot of insurance companies. It created a market opportunity to grow in the US for those companies that had access to capital and we were in the fortunate position to do so. During the year 2000, we wrote US$432 million in premium, in 2001 that increased to US$688 million and by 2003 that had grown to US$1.9 billion and by 2004 we wrote over US$2 billion in premium. That gives you a sense of the opportunity we were able to take advantage of particularly in the US. We built the platform in the late part of the nineties to take advantage of that opportunity.”

CEOCFO: Is it primarily trucking that you are in today?
Mr. Jackson: “When we first became a public company people recognized Kingsway as a non-standard automobile company in Canada and today I would describe the company as a North American specialty company. If you look at the lines of business, in terms of the geographic mix, we have about 30% of our business in Canada and about 70% in the United States. By product line, trucking is about 32% of our premium, automobile which is primarily non standard automobile, is 31% and commercial automobile, which is primarily taxicab and other commercial insurance is about 13%.”

CEOCFO: Would you like to see that mix change?
Mr. Jackson: “I think the only thing that may change in the near future is the mix between trucking and automobile. We are very comfortable with the products we are in; we are well diversified yet we have a real focus on those core products. Today we find ourselves being a major player in the trucking insurance business where we are the second largest writer of trucking insurance in North America. We are in the number two position in both Canada and in the United States. It is a market that is concentrated in a small number of insurers that really specialize in that line of business. Therefore, it is difficult to grow market share tremendously from this point other than if we were able to acquire one of the competitors, but that is the only way any of the companies could grow in that business right now. With non-standard automobile in the US, there is a much deeper opportunity to grow in that market. It is an extremely fragmented market and we compete against companies that are typically thinly capitalized. With us having a larger capital base and being able to invest more easily in infrastructure systems etc., it puts us at a greater competitive advantage over the weaker competitors.”

CEOCFO: How is the insurance sold; is it through agents or directly through subsidiaries?
Mr. Jackson: “Currently we do not sell insurance directly; it is all distributed through an agent and brokers. We deal with approximately 3000 independent agents in Canada and about the same number in the United States.”

CEOCFO: Why do they want to sell Kingsway insurance?
Mr. Jackson: “I think it is about service and our reputation in the market place. We are well known in the various lines of business in which we specialize. What we try to do is when we acquire the companies; we let them run autonomously. Therefore, their name recognition and brand recognition in the various markets that they operate has been preserved, yet the people that deal with them know that they have a large, well-capitalized group behind them. I think that has worked well in the markets where we operate.”

CEOCFO: Do you see yourselves going into additional states in the US and additional provinces Canada?
Mr. Jackson: “We are licensed in every state in the U.S. and province in Canada, so we do have the ability to operate throughout North America. I think there are certain states where we would like to grow; we are already there but we see potential to grow in Florida, Ontario, our largest market, and in Illinois. We also see an opportunity in the next year or so in Massachusetts as a result of the anticipated changes to their assigned risk program. We feel we are in a good position to take advantage of that if that comes to pass.”

CEOCFO: Is there much difference in the insurance industry in the US and Canada?
Mr. Jackson: “There isn’t much difference in terms of the product; the thing that really differs is the liability limits or the composition of the products. For example in Canada when we sell non-standard automobile, the minimum liability limit that we have to sell is C$200,000 dollars, whereas most people buy C$1 million dollars of coverage. We do not have a product that is similar to Ontario in any of the US states in which we operate. For example, most of the non-standard automobile we sell is at minimum limits of liability set by the state. Most of our non-standard auto insureds in the US just buy the minimum limit, which in some states is US$20,000 per person and US$40,000 per occurrence. Generally, we find that the liability limits of our products in the US are much lower than they are in Canada.”

CEOCFO: You had a good quarter; how do you continue on the path?
Mr. Jackson: “We have built a very solid diversified product and geographic base. We are always alert to opportunistic growth situations particularly where we see opportunity to write business at an underwriting profit and that has always been our focus. I think one of the biggest drivers of our increased profitability over the last few years has been our investment income. We are getting a large benefit from two things in that area; first of all, because we have grown over the last few years and have also generated significant profits, that has helped us build our investment portfolio. For example at the end of 2001, our investment portfolio was US$775 million and at the end of the last quarter that had grown to US$3.1 billion. It is a very substantial growth and at the same time, we are also benefiting from an increasing yield on the portfolio. When you put the two together, of increasing investment portfolio with an increasing yield that is generating significantly higher investment income. For the first nine months of this year, our investment income was up 33% compared to the same period last year.”

CEOCFO: What are you investing in?
Mr. Jackson: “Primarily high quality corporate bonds, government bonds. We have about 14% of our portfolio invested in equities. For our fixed income portfolio we have fairly strict guidelines in terms of asset quality.”

CEOCFO: What should potential investors know about Kingsway that might not jump off the page when they first look?
Mr. Jackson: “One of the things people should know is that our shareholders have done extremely well in terms of return. Over the ten years since we have been a public company, our initial offering, split adjusted, was C$2.50; we are now trading in excess of C$25.00. Therefore, it has been a good return for shareholders. We also delivered very strong growth in book value per share. We think the most important measure of any company is how you build book value per share, and we have consistently done that. In fact, over the last five years we have grown book value per share by 22% compounded annually; we have grown book value by 18% in the last year. One of the other things has been the consistency of our combined ratio over a long period of time. We have produced an underwriting profit in nine of the twelve years in which we have been a public company. There has been a consistency on our return on equity; we have only had one year in our history where we did not have a double-digit return on equity. There are not too many insurance companies that would have such a consistent track record.”

CEOCFO: In closing, what should people think of when they think of Kingsway?
Mr. Jackson: “I think people should think of us as a well diversified North American specialty insurance company; we are focused on underwriting profit and insuring that we have a high-quality investment portfolio. One of the nice attributes about Kingsway today is the leverage that we have in our investment portfolio relative to the book value of our shares. Our shares book value at the end of last quarter was just a little over US$16.00, and currently the investment portfolio on a per share basis is close to US$56.00. Therefore, an investor today is getting 3.4 times leverage on the book value per share, which I think should go a long way to sustain our earnings going forward.”

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“I think people should think of us as a well diversified North American specialty insurance company; we are focused on underwriting profit and insuring that we have a high-quality investment portfolio. One of the nice attributes about Kingsway today is the leverage that we have in our investment portfolio relative to the book value of our shares. Our shares book value at the end of last quarter was just a little over US$16.00, and currently the investment portfolio on a per share basis is close to US$56.00. Therefore, an investor today is getting 3.4 times leverage on the book value per share, which I think should go a long way to sustain our earnings going forward.” - W. Shaun Jackson