Mississauga, Ont.-based non-standard auto and truck insurer Kingsway Financial Services Inc. reported a net loss of $360.4 million, or $6.53 per share diluted, for the fourth quarter ended Dec. 31, 2008, and $405.9 million, or $7.35 per share diluted, for the year.

The losses reflect disappointing underwriting results, net realized losses on investments, and a non-cash charge related to valuation allowances on future tax asset and goodwill impairment in the fourth quarter.

Kingsway sold Canadian subsidiary York Fire and Casualty Insurance Co. for a gain at the end of the third quarter, and York Fire accordingly is accounted for as discontinued operations, with previous year amounts updated for comparative purposes. All amounts are in U.S. dollars unless indicated otherwise.

Kingsway had estimated a net loss between $324 million and $344 million for the quarter on Feb. 9. The actual net loss is $16.4 million greater than the higher end of the net loss originally estimated primarily as a result of a higher than expected valuation allowance against the future tax asset.

“The disappointing results in 2008 reflect the impact of legacy operational problems,” said Shaun Jackson, Kingsway’s president and CEO. “The main factors contributing to the loss were the protracted problems at our largest subsidiary Lincoln General, losses on our securities portfolio and resulting valuation allowance on future tax assets and impairments to goodwill. Offsetting these negatives were profitable performance by a number of subsidiaries, and the sale of York Fire at an attractive price.”

Jackson added: “We are taking further actions to restructure our operations to reduce overheads and make Kingsway a profitable enterprise. We are taking actions to strengthen our capital ratios through further strategic reduction of premium income from non-core and/or unprofitable lines of business, and we are reducing volatility of the balance sheet by divesting our common share equity portfolio. I fully commit to do better for shareholders and be accountable to them.

“Lincoln General has been the main cause of losses beginning in 2007 relating to its legacy business. Resolution of this situation is a key component of the company’s turnaround plans. As previously announced, we are looking at strategic alternatives in conjunction with the Pennsylvania Insurance Department regarding the future of Lincoln. The outcome of these discussions may have a bearing on our capital position. We will report back to shareholders at the April 23 annual general meeting.”

Jackson continued: “As a result of the disappointing results, the company’s board of directors has reduced dividend payments to $0.02 this quarter, from $0.075 in the previous quarter as a precautionary measure in today’s challenging economic environment.”

At year end, Kingsway, excluding Lincoln General, had surplus capital in excess of the regulatory minimum required in its operating companies, no bank debt, and no long-term debt maturing before 2012.

In Q4, investment income decreased 24% to $28.3 million compared with a year ago, primarily due to lower short-term yields in Canada and the U.S. and a reduction in the size of the portfolio as a result of the sale of investments to repay the Company’s bank debt and the sale of York Fire during the year. The cost-based yield on the fixed-income portfolio decreased to 4.5% from 4.6% for the same quarter of last year.

Sales from the securities portfolio and a $94.2 million writedownof fixed-income and equity investments that are considered to be other than temporarily impaired resulted in a net realized loss of $114.3 million compared with a gain of $8.5 million in Q4 2007. The company announced its intent to dispose of the common stock equity portfolio on Feb. 9 and, as a result, no longer has the intent to hold the securities until they recover which resulted in the additional impairment charge in the quarter.

For the year, investment income excluding net realized losses was $130.3 million, 4% below the same period of 2007, while net realized losses were $139.0 million compared to net realized gains of $52.2 million in 2007. Gross premiums written from continuing operations were $1,503.2 million, compared with $1,848.7 million in 2007. Estimated net unfavourable reserve development on prior years was $160.8 million, representing $2.63 per share, of which $70.3 million was related to the terminated artisan contractors liability program at Lincoln General.

The combined ratio for continuing operations was 116.4%, compared with 110.5% in 2007. Canadian operations, excluding York Fire, had a combined ratio of 108.4% compared with 95.4% a year ago, while U.S. operations had a combined ratio of 119.6% compared with 115.3% the previous year. For the year, U.S. operations accounted for 70% of gross premiums compared with 75% a year ago.

@page_break@Kingsway had no bank indebtedness as of Dec. 31 compared with $172.4 million as of Dec. 31, 2007. During the year, the company repaid all of the outstanding debt under its credit facilities and is no longer subject to any financial covenant requirements under the terms of these cancelled credit facilities.