UPDATE 2-Kingsway Financial shares slump after Q3 loss

* Loss of $0.32/shr vs expected EPS $0.14

* Investment income down 8 pct

* Combined ratio rises to 113.6 pct

* Stock falls 18 pct on TSX to C$7.25 (Adds details, stock price. In U.S. dollars unless noted)

TORONTO, Nov 5 (Reuters) - Shares of property and casualty insurer Kingsway Financial Services (KFS.TO) fell sharply on Wednesday after the company posted a third-quarter loss on poor underwriting results and lower investment income.

Kingsway, which sells insurance to risky auto drivers as well as truck and taxi fleets, said it lost $17.4 million, or 32 cents a share, in the three months ended Sept. 30. The company earned $23.6 million, or 42 cents a share, a year earlier.

Analysts had expected profit of 14 cents a share before items, according to Reuters Estimates.

"Overall, a disappointing quarter from KFS but it reflects the current operating environment," BMO Capital markets analyst John Reucassel said in a brief research note.

Kingsway stock fell 18.2 percent to close at C$7.24 a share on the Toronto Stock Exchange.

"The weak underwriting results and substantial impairment of investment portfolios at many leading insurers and reinsurers throughout the world will lead to a reduction of available capital at a time when premium rates need to be increased," Chief Executive Shaun Jackson said in a statement.

He added that this should lead to "firmer pricing" and bring opportunities to improve the company's results.

Kingsway, which operates in the United States and Canada, said its underwriting loss was $50.6 million, versus a loss of $9.3 million a year earlier.

The combined ratio for continuing operations rose to 113.6 percent, from 102.1 percent in the same 2007 period. This number indicates how much was spent on claims and expenses for each dollar of premium received. A figure over 100 indicates that underwriting was unprofitable.

Net premiums earned fell 18 percent to $371.1 million.

Gross premiums written from continuing operations fell 26 percent $354.5 million, primarily due to weak trucking markets and the termination of some business at U.S. insurer Lincoln General, its largest subsidiary.

Investment income fell 8 percent to $33.1 million in the third quarter on lower short-term bond yields and the sale of some investments to repay debt, the company said. (Reporting by Anurag Kotoky in Bangalore and Lynne Olver in Toronto; editing by Rob Wilson)