Kingsway Financial Services Inc. expects to report a fourth quarter loss due to underwriting losses at its subsidiary Lincoln General Insurance Co., the Mississauga, Ont.-based holding company said Monday.

Other factors contributing to an expected Q4 loss include pairments to goodwill, a further valuation allowance of future tax assets and net realized losses on investments, Kingsway said.

Do deal with the loss, Kingsway said it undertake a strategy that includes:

> reducing the volatility of the balance sheet through the divestiture of the common share equity portfolio;

> shrinking premiums by approximately $350 million to achieve an acceptable level of capital, which will include exiting non-core and/or unprofitable lines of business at Lincoln and Southern United Fire Insurance Co.;

> selling non-core assets and running off of certain business with the objective to free up approximately $200 million in capital; and

> continuing corporate restructuring plan to focus on core lines of business and reduce expenses in excess of $80 million.

“These moves reflect the urgent need to reduce costs and focus on our core business lines. We also need to put the issues at Lincoln and Southern United behind us, and stabilize the company’s finances,” said Shaun Jackson, president and CEO. “The result will be a more focused, flexible and competitive enterprise.”

In addition, Robert Gillespie has also resigned from the board of directors for personal reasons, Kingsway said.

Kingsway said that it expects to report an underwriting loss of approximately US$80 million at Lincoln in the fourth quarter of 2008. Included in this underwriting loss are increases in Lincoln’s provisions for estimated unpaid claim reserves to maintain the gross provision for unpaid claims (net of salvage and subrogation) at or above the point estimate as recommended by the independent appointed external actuary. The largest increase is attributable to Lincoln’s terminated artisan contractors’ general liability book of business which accounted for approximately US$42 million of Lincoln’s estimated unfavourable reserve development for prior accident years. A portion of that increase related to costs incurred to bring the claims in-house during the fourth quarter of 2008. Lincoln’s provision for estimated unfavourable reserve development for the fourth quarter is approximately US$70 million.

As a result of this underwriting loss and other factors, Kingsway has made an initial assessment that the goodwill asset will be impaired as well as that a further valuation allowance will be recorded against the future tax asset. The company estimates that these non-cash related charges will be in a range of US$184 million to US$204 million.

Net realized losses from the securities portfolio, including write-downs of fixed income and equity investments that are considered to be other than temporarily impaired will result in a net realized loss of approximately US$114 million in the quarter. This includes a write-down of all of the unrealized losses on the common share equity portfolio as of Dec. 31, 2008 as a result of the Kingsway’s intent to divest of this portfolio.

It is expected that the impact of these items will increase Kingsway’s net loss for the quarter to approximately US$324 million to US$344 million, or approximately US$5.88 to US$6.24 loss per share.

IE