Costs related to its transformation program boosted losses in the first quarter for specialty insurer Kingsway Financial Services Inc., the company said Friday.

The net loss for the quarter ended March 31 was US$58.3 million, or US$1.06 a share diluted. That compared with a net loss of US$34.4 million, or US62¢ a share, in the first quarter of 2008.

The loss primarily reflects transition costs related to the company’s transformation program, in addition to a significant drop in trucking premiums on both sides of the border and a reduced return on investments, Kingsway said.

“Our Q1 results clearly indicate we need to move faster to exit unprofitable lines of business, reduce organization complexity and cost.” said Colin Simpson, president and CEO, in a release.

“Yesterday we announced our intent to exit the Canadian cross-border trucking business effective July 1 and made further staff reductions. Including yesterday’s announcement we have already taken action that has reduced our run-rate headcount by 445 since the beginning of this year,” Simpson stated.

“We also submitted our plans to put all but the strongest of Lincoln’s programs into run-off to the Pennsylvania Insurance Department. Based on success to date in the transformation work announced in February, we are confident that we can increase the overall target for savings delivered through this initiative to a run-rate of US$120 million by the end of 2010 from the previously announced US$80 million,” Simpson said.

Lincoln General submitted its proposed regulatory action plan on May 7. The plan is subject to approval of the Pennsylvania Insurance Department.

Gross premiums written decreased 40% to US$259.0 million in the quarter compared to US$431.0 million in the same quarter a year ago.

In the U.S., premiums written were down 42%, with most of the decline attributable to Lincoln General due to the majority of its business being placed into run-off in early 2009. Non-standard automobile premiums in the U.S. declined 26% predominantly as a result of the planned premium reduction at Southern United. Excluding Lincoln General, except for the exclusively managed business, gross premiums written were down 26% from a year ago.

In Canada, gross premiums written were down 33% in U.S. dollars, however were down only 17% in Canadian dollars. The decline was mainly attributable to the trucking line of business, which fell 47% due to planned premium reductions in this line of business where profits have been eroded due to aggressive pricing. For the quarter, U.S. operations accounted for 76% of gross premiums, down from 78% a year ago.

Kingsway’s combined ratio for continuing operations was 120.7%, compared with 132.6% in the fourth quarter of 2008 and 116% a year ago. Excluding Lincoln General, except for the exclusively managed business, U.S. operations had a combined ratio of 105.0% while Canadian operations had a combined ratio of 119.3%.

Investment income decreased 25% to US$27.0 million from US$36.2 million in the same quarter of 2008 primarily due to lower yields, the reduction in the size of the portfolio as a result of the repayment of the company’s bank debt and sale of York Fire later in 2008, and the impact of reduced premium volume. There was a net realized loss on investments of US$19.6 million, resulting mainly from an additional realized loss of US$18.2 million from the liquidation for strategic reasons of the common share equity portfolio, as announced in February 2009 and largely written down in fiscal 2008.

The Board of Directors has delegated to the Capital Committee of the Board the authority to repurchase debt of the Company up to a maximum of US$40 million subject to an assessment of liquidity levels, market conditions and any costs related to the unwinding of hedges and other related financial instruments.

Kingsway also announced the retirement of Jack Sullivan from the board of directors.

IE