RISK FACTORS

An investment in the Notes involves a number of risks. Prospective investors should carefully read and consider the following risks and the other information contained or incorporated by reference in this prospectus, including the financial statements and the related notes, before investing in the Notes. The business, financial condition and results of operations of Kingsway America or Kingsway Financial could be materially adversely affected by any of these risks.

Risks Relating to this Offering

The significant amount of debt of Kingsway America and Kingsway Financial could adversely affect our financial health, make us more vulnerable to adverse economic conditions and prevent Kingsway America or Kingsway Financial from fulfilling its obligations under the Notes.

As of March 31, 2004, including capital lease obligations and subordinated debt relating to trust preferred securities, Kingsway America had:

As of March 31, 2004, including capital lease obligations and subordinated debt relating to trust preferred securities, Kingsway Financial had:

Our leverage could have important consequences to you. For example, it could:

The ability of Kingsway America to pay interest on the Notes and to satisfy its other debt obligations will depend upon, among other things, its future operating performance and its ability to refinance debt when necessary. Each of these factors is to a large extent dependent on economic, financial, competitive and other factors beyond Kingsway America’s control. If, in the future, Kingsway America cannot generate sufficient cash from operations to make scheduled payments on the Notes or to meet its other obligations, it will need to refinance some or all of its debt, obtain additional financing or sell assets. The ability to borrow funds in the

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future to make payments on its debt will depend on our satisfaction of the covenants in our credit agreements, the indenture governing the Senior Debentures and other debt agreements, including the Indenture, and other future agreements.

Kingsway America and Kingsway Financial may incur additional debt in the future, which would intensify the risks we now face as a result of our debt levels described above.

Kingsway America and Kingsway Financial will be able to incur substantial additional indebtedness in the future. Although our credit agreements, debt indentures, the indenture governing the Senior Debentures and the Indenture restrict Kingsway America and Kingsway Financial from incurring additional debt, these restrictions are subject to important exceptions and qualifications. If Kingsway America and Kingsway Financial incur additional debt, the risks that we now face as a result of our leverage could intensify.

Although the Notes are referred to as “senior notes,” they will be subordinated to any secured indebtedness of Kingsway America or Kingsway Financial.

The Notes and the Parent Guarantee will be unsecured and subordinated to any secured indebtedness Kingsway America and Kingsway Financial, respectively, may incur to the extent of the assets securing such indebtedness. In the event of a bankruptcy or similar proceeding involving Kingsway America or Kingsway Financial, the assets which serve as collateral for any secured indebtedness will be available to satisfy the obligations under the secured indebtedness before any payments are made on the Notes. Currently, neither Kingsway America nor Kingsway Financial has any outstanding secured debt.

Our holding company structure effectively subordinates claims against Kingsway America and Kingsway Financial to claims against their respective operating subsidiaries.

Each of Kingsway America and Kingsway Financial is a holding company with assets consisting primarily of the capital stock of their respective operating subsidiaries. The right of Kingsway America and Kingsway Financial to claim the assets of their respective subsidiaries is therefore junior to the claims that creditors of their respective subsidiaries have against those subsidiaries except to the extent that Kingsway America or Kingsway Financial may itself be a creditor of a subsidiary. Holders of the Notes will only be creditors of Kingsway America and of Kingsway Financial. In the case of subsidiaries of Kingsway America and Kingsway Financial, all of the existing and future liabilities of those subsidiaries, including any claims of trade creditors and preferred stockholders, will be effectively senior to the Notes.

If our operating subsidiaries are unable to pay dividends, Kingsway America may be unable to make payments under the Notes and Kingsway Financial may be unable to make payments under the Parent Guarantee.

Kingsway Financial conducts its operations through its Canadian subsidiaries and Kingsway America conducts its operations through its U.S. operating subsidiaries. Kingsway Financial also has wholly owned reinsurance subsidiaries domiciled in Bermuda and Barbados. As a result, Kingsway Financial’s ability to make payments on the Parent Guarantee and Kingsway America’s ability to make payments on its Notes will depend primarily on distributions or other payments to Kingsway Financial and Kingsway America from their operating subsidiaries. The payment of distributions, making of loans and advances or other payments to Kingsway Financial and Kingsway America from their respective subsidiaries depends on the earnings of those subsidiaries and is subject to various other business considerations. In addition, distributions and other payments by our insurance and reinsurance subsidiaries are subject to various statutory and regulatory restrictions imposed by the insurance laws of the domiciliary jurisdiction of such subsidiaries, including Barbados and Bermuda. For the year 2004, under these insurance regulatory restrictions, based on our December 31, 2003 financial statements, our insurance and reinsurance subsidiaries would have aggregate dividend capacity of $212.9 million. However, our credit agreements contain financial covenants that may prevent our subsidiaries from paying any such dividends.

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Kingsway America, Kingsway Financial and their respective subsidiaries are separate and distinct legal entities. The subsidiaries of Kingsway America and Kingsway Financial (other than Kingsway America) have no obligation to pay principal or interest on the Notes or to fund or to make funds available to Kingsway America or Kingsway Financial for that purpose, whether in the form of distributions, loans, advances or other payments.

Our ability to deduct interest on the Notes for U.S. federal income tax purposes may be limited or deferred. If so, our income taxes could be increased and we may have a reduced amount of cash available to pay principal or interest to the holders of the Notes.

The deduction of interest payable with respect to the Notes as accrued for U.S. federal income tax purposes may be deferred or disallowed pursuant to the earnings stripping rules of Section 163(j) of the United States Internal Revenue Code of 1986, as amended, or the Code, or for that portion of the interest expense allocable to the holding of tax-exempt obligations as provided by Section 265 of the Code.

Under the earnings stripping rules of Section 163(j) of the Code, because the Notes are guaranteed by Kingsway Financial, a Canadian company, if the debt-to-equity ratio of our U.S. affiliated group exceeds a “safe harbor amount” equal to 1.5 to 1, the U.S. federal income tax deduction for interest accrued on the Notes would potentially be subject to partial or complete deferral or disallowance. The amount deferred or disallowed would be limited to the amount that our U.S. group’s net interest expense exceeds the sum of 50% of the group’s adjusted taxable income plus any unused “excess limitation” from the prior three years. Our U.S. group’s “excess limitation” would be equal to the amount by which 50% of the group’s adjusted taxable income exceeds its net interest expense. Any amount of the deduction for interest disallowed under the earnings stripping rules could be carried over to the succeeding taxable year. Legislation has been introduced in the Congress that would eliminate the 1.5 to 1 debt-equity safe harbor described above and reduce the adjusted taxable income threshold described above. This proposal also would limit the carryforward period for disallowed interest and eliminate the carryover of unused “excess limitation.” We believe that our deduction of interest payable with respect to the Notes would not currently be deferred or disallowed pursuant to the existing or proposed limitations. However, we cannot assure you that deductions may not be limited in the future.

Under Section 265(a)(2) of the Code, interest on indebtedness incurred or continued to purchase or carry obligations exempt from U.S. federal income tax is not deductible. The determination of whether the indebtedness incurred by Kingsway America from the issuance of the Notes was continued or incurred to purchase or carry tax-exempt obligations is based on relevant facts and circumstances, and to the extent that we currently own or invest in tax-exempt obligations after issuance of the Notes, our deduction for U.S. federal income taxes could be subject to disallowance.

The Original Notes are subject to restrictions on transfer.

We relied on an exemption from the registration requirements of the Securities Act and applicable state securities laws in offering the Original Notes. Accordingly, the Original Notes may be transferred or resold only in transactions registered, or exempt from registration, under the Securities Act and applicable state securities laws. The exchange of the Original Notes for Exchange Notes will be registered under the Securities Act.

No established market exists for the Notes.

There is currently no public market for the Original Notes. The Exchange Notes will constitute a new issue of securities for which there is no established trading market. Although the initial purchaser has advised Kingsway America that it currently intends to make a market in the Original Notes and, if issued, the Exchange Notes, it is not obligated to do so and may discontinue such market-making at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Securities and Exchange Act of 1934 (the “Exchange Act”), and may be limited during the exchange offer. Accordingly, we cannot assure you that you will be able to sell your Original Notes or Exchange Notes at a particular time or that

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the prices that you receive when you sell will be favorable. We also cannot assure you as to the level of liquidity of the trading market for the Exchange Notes or, in the case of any holders of Original Notes that do not participate in the exchange offer, the trading market for the Original Notes. Kingsway America does not intend to apply for listing or quotation of the Original Notes or, if issued, the Exchange Notes. If any of the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price. Future trading prices of the Notes will depend on many factors, including prevailing interest rates, the market for similar securities, general economic conditions and our financial condition, performance and prospects.

You must carefully follow the required procedures in order to exchange your Original Notes.

The Exchange Notes will be issued in exchange for Original Notes only after timely receipt by the exchange agent of a duly executed letter of transmittal and all other required documents. Therefore, if you wish to tender your Original Notes, you must allow sufficient time to ensure timely delivery. Neither we nor the exchange agent has any duty to notify you of defects or irregularities with respect to tenders of Original Notes for exchange. Any holder of Original Notes who tenders in the exchange offer for the purpose of participating in a distribution of the Exchange Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker or dealer that receives Exchange Notes for its own account in exchange for Original Notes that were acquired in market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of the Exchange Notes. See the sections entitled “The Exchange Offer—Procedure for Tendering” and “Plan of Distribution” beginning on

pages 78 and 89 of this prospectus, respectively.

If you do not exchange Original Notes for Exchange Notes, transfer restrictions will continue and trading of the Original Notes may be adversely affected.

The Original Notes have not been registered under the Securities Act and are subject to substantial restrictions on transfer. Original Notes that are not tendered for exchange or are tendered but are not accepted will, following completion of the exchange offer, continue to be subject to existing restrictions upon transfers. We do not currently expect to register the Original Notes under the Securities Act. To the extent that Original Notes are tendered and accepted in the exchange offer, the trading market for Original Notes, if any, could be adversely affected. See the section entitled “The Exchange Offer—Consequences of Failure to Exchange” beginning on page 82 of this prospectus.

It may be difficult for investors to enforce civil liabilities against Kingsway Financial under U.S. federal and state securities laws.

Kingsway Financial is incorporated under the laws of Ontario, Canada. Most of its directors and executive officers are residents of Canada and a substantial portion of our assets and the assets of these persons are located outside of the United States. As a result, it may be difficult or impossible for U.S. investors to effect service of process within the United States upon Kingsway Financial or its directors and officers or to realize against them upon judgments of courts of the United States predicated upon the civil liabilities of Kingsway Financial or its directors or officers under U.S. federal securities laws or securities or blue sky laws of any state within the United States. We believe that a judgment of a U.S. court predicated solely upon the civil liability under the Securities Act and/or the Exchange Act would likely be enforceable in Canada if the U.S. court in which the judgment was obtained had a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. We cannot assure you that this will be the case. There is substantial doubt whether an action could be brought in Canada in the first instance on the basis of liability predicated solely upon such laws.

You may be unable to enforce your rights under U.S. bankruptcy law.

Kingsway Financial is incorporated under the laws of Ontario, Canada and a substantial amount of its assets are located outside of the United States. Under bankruptcy laws in the United States, courts typically have jurisdiction over a debtor’s property, wherever located, including property situated in other countries. However, courts outside of the United States may not recognize the United States bankruptcy court’s jurisdiction.

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Accordingly, difficulties may arise in administering a United States bankruptcy case involving a Canadian debtor with property located outside of the United States, and any orders or judgments of a bankruptcy court in the United States may not be enforceable.

The rights of the Trustee and holders of the Notes to enforce remedies under the Indenture could be delayed by the restructuring provisions of applicable Canadian federal bankruptcy, insolvency and other restructuring legislation if the benefit of such legislation is sought with respect to us. For example, both the Canadian Bankruptcy and Insolvency Act and the Canadian Companies’ Creditors Arrangement Act contain provisions enabling “an insolvent person” to obtain an order which could prevent its creditors and others from initiating or continuing proceedings against it while it prepares a proposal or plan of arrangement for approval by those creditors who will be affected by the proposal or plan of arrangement. Such a restructuring plan or proposal, if accepted by the requisite majorities of each affected class of the insolvent’s creditors and approved by the supervising court, would be binding on the minorities in any such class who vote against the plan or proposal. This restructuring legislation generally permits the insolvent debtor to retain possession and administration of its property, even though it may be in default under the applicable debt instrument during the period that the stay against proceedings remains in force.

During the stay period, the Trustee and holders of the Notes are likely to be restrained from enforcing remedies under the Indenture and payments under the Parent Guarantee are unlikely to be made. It is equally unlikely that holders of the Notes would be compensated for any delay in payment, if any, of principal or interest other than a right to claim accrued and unpaid interest on the amounts owing under the Notes and the Indenture, unless the right is itself compromised under any restructuring plan or proposal approved by creditors and the court.

Risks Relating to Our Business

Our insurance subsidiaries’ provision for unpaid claims may be inadequate, which would result in a reduction in our net income.

Our insurance subsidiaries’ provisions for unpaid claims do not represent an exact calculation of our actual liability, but are estimates involving actuarial and statistical projections at a given point in time of what we expect to be the cost of the ultimate settlement and administration of known and unknown claims. The process for establishing the provision for unpaid claims reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown claims and as such, the process is inherently complex and imprecise. Actual losses from claims may deviate, perhaps substantially, from the provisions for unpaid claims reflected in our financial statements. As of March 31, 2004, our provisions for unpaid claims were $1,836.1 million, which we believe are adequate.

We base our provisions for unpaid claims on facts and circumstances then known, estimates of future trends in claims severity and other variable factors such as inflation. Furthermore, factors such as inflation, claims settlement patterns, legislative activity and litigation trends, all of which are difficult to predict, may have a substantial impact on our actual claims experience. As time passes and more information about the claims becomes known, the estimates are appropriately adjusted upward or downward to reflect this additional information. Because of the elements of uncertainty encompassed in this estimation process, and the extended time it can take to settle many of the more substantial claims, several years of experience are usually required before a meaningful comparison can be made between actual losses and the original provisions for unpaid claims.

The development of the provisions for unpaid claims is shown by the difference between estimates of claims as of the initial year-end and the re-estimated liability at each subsequent year end. Favorable development (reserve redundancy) means that the original claims estimates were higher than subsequently determined. Unfavorable development (reserve deficiency) means that the original claims estimates were lower than subsequently determined. During 2003, we experienced reserve deficiencies of $196.8 million on prior periods.

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Of this deficiency, 17% was related to non-standard automobile, standard automobile and motorcycle business in Ontario, which we refer to as our Ontario automobile business, 9% was related to our commercial automobile business in Canada, 10% was related to our non-standard automobile business in Florida, 18% was related to our non-standard automobile business in Alberta, 11% to our MGA non-standard automobile programs in the United States, 9% was related to trucking in the United States, and 7% was related to our trucking business in Canada. Although we have made adjustments in our reserving practices to reflect this claims experience, we cannot assure you that these unfavorable trends will not require additional reserves in the future. For a summary of the development of our provision for unpaid claims over the past ten years, see the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Provisions for Unpaid Claims” and “—Results of Operations” in our Annual Report on Form 40-F for the year ended December 31, 2003, which is incorporated by reference herein.

In addition, we have in the past, and may in the future, acquire other insurance companies. We cannot assure you that the provisions for unpaid claims of the companies that we acquire are or will be adequate.

To the extent our insurance subsidiaries’ actual claims experience is less favorable than our current claims estimates reflected in our provisions for unpaid claims, we will be required to increase our provisions for unpaid claims which will reduce our profitability in future periods. Moreover, insufficiencies in our insurance subsidiaries’ provisions for unpaid claims could have a material adverse effect on our results of operations and financial condition.

We may experience difficulty in managing our growth, which could adversely affect our results of operations and financial condition.

We have grown rapidly over the last several years. As a result, our gross premiums increased 66% in 2001, 99% in 2002, 24% in 2003 and 1% in the first three months of 2004 compared to the same period in 2003. This growth may place a strain on our management systems and operational and financial resources. Rapid growth in gross premiums may also place a strain on the surplus of our subsidiaries. We plan to continue to expand our specialty focus into selected regional markets in the United States and Canada and to increase the distribution of our core products in our existing markets. Our future growth and the successful integration and management of new MGA relationships, acquired businesses and other new business involves numerous risks that could adversely affect our growth and profitability, and are contingent on various factors, including:

As described elsewhere in this prospectus, A.M. Best announced in February 2003 that the financial strength rating for Lincoln General Insurance Company, our largest U.S. operating subsidiary, remained under review with negative implications pending the completion of our capital raising initiatives and effective management of Lincoln General’s premium growth in 2003. A.M. Best expressed concerns regarding our ability to secure

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significant amounts of new capital both to support our current book of business and to sustain our future growth plans as well as Lincoln General’s ability to maintain profitability and effectively manage its growth and administer the underwriting and claims functions associated with Lincoln General’s substantial amount of new business. On September 15, 2003, A.M. Best affirmed Lincoln General’s A- (Excellent) rating with a negative outlook, and stated that Lincoln General was no longer under review. In February 2003, A.M. Best lowered the financial strength rating of our Canadian subsidiaries from A (Excellent) to A- (Excellent) as a result of deterioration in the Canadian group’s capitalization due to strong premium growth and poor underwriting performance driven by adverse loss development on our Ontario automobile business. On March 5, 2004, A.M. Best lowered their financial strength ratings of two of our Canadian subsidiaries, Kingsway General Insurance Company, or Kingsway General, and York Fire Casualty Company, or York Fire, each from A- (Excellent) to B++ (Very Good) and assigned a negative outlook. A.M. Best stated that the lowered ratings of Kingsway General and York Fire were based on operating and underwriting performance and weak capitalization, partially offset by significant rate increases in 2002 and 2003, the strengthening of loss reserves, the progress made to reduce claim costs, as well as the explicit financial support of Kingsway Financial. In addition, A.M. Best expressed concerns regarding the impact of regulatory changes to automobile insurance products occurring in Ontario and Alberta on the profitability of Kingsway General and York Fire. A.M. Best also stated that the financial strength ratings of all of our insurance subsidiaries in both the United States and Canada will remain under pressure pending our ability to lower underwriting leverage by raising capital, meeting our 2004 profit targets, controlling premium growth and eliminating adverse loss reserve development. A.M. Best has also informed us that in the near term we will either need to substantially increase capital and surplus of our insurance subsidiaries or secure additional reinsurance to reduce our net premiums written. We believe that we will be able to address A.M. Best’s concerns within a time frame considered adequate by A.M. Best. We cannot assure you, however, that A.M. Best will not downgrade our ratings. If we are unable to maintain our current claims-paying ratings, our ability to write insurance and compete with other insurance companies may be adversely affected.

We cannot assure you that we will be able to manage our growth effectively or that we will be successful in expanding our business, that our existing infrastructure will be able to support additional expansion or that any new business will be profitable. If we are unable to manage our growth, our results of operations and financial condition may be adversely affected.

We rely on independent agents, MGAs and brokers and are exposed to risks.

We market and distribute our automobile insurance products through a network of over 2,900 independent agents and approximately 20 MGAs in the United States and over 3,000 independent brokers across Canada. In 2003, approximately 56% of our gross written premiums in the United States were sourced through MGAs and approximately 44% were sourced through independent agents. Our insurance products are marketed through a large number of independent agents, MGAs and brokers and we rely heavily on their ability to attract new business. These independent agencies and MGAs typically represent more than one insurance company, which may expose us to competition within the agencies and, therefore, we cannot rely on their commitment to our insurance products. In some markets, we operate pursuant to “open market” arrangements in which we have no formal relationships with the brokers who place our risk in these markets. Loss of all or a substantial portion of the business provided by these intermediaries could have a material adverse effect on our business, results of operations and financial condition.