High-risk auto insurer Kingsway Financial Service Inc. (TSX:KFS) announced a settlement Monday in its dispute with Pennsylvania regulators over its divestiture of two financially troubled insurers.

The settlement, which follows extended litigation and almost a year of negotiations, involves Kingsway’s divestiture of its 100 interest in Walshire General Assurance Co. — sole shareholder of high-risk U.S. insurer Lincoln General Insurance Co. — to a number of charities.

The move was challenged as a “sham transaction” by the Pennsylvania Department of Insurance, which filed a court complaint aimed at forcing the company to unwind the donations.

The department argued that, if allowed to stand, the divestiture would “undermine the web of laws that protect insurance companies against abandonment by their parent holding companies.”

A lower court ruled in Kingsway’s favour in April 2010, but the department appealed to the Pennsylvania Supreme Court.

Under the settlement, the two parties dismiss all claims against each other, but Kingsway takes a renewed minority ownership in the companies under LGIC Holdings LLC.

LGIC Holdings is a joint endeavour between Kingsway, with a 49% interest, and U.K.-based Tawa plc, with 51%.

Day-to-day management of Walshire and Lincoln General will be performed by the Tawa group subject to the oversight of the companies’ boards of directors, Kingsway said.

As a minority and non-controlling investor, Kingsway will not consolidate Walshire or Lincoln General but will account for its investment using the equity accounting method, the company said.

Kingsway also obtained releases from Walshire, Lincoln General and the 20 charities.

Kingsway Financial’s primary businesses is providing auto insurance to drivers who do not meet the criteria for coverage by standard automobile insurers.

The company’s stock was down six cents, or 7.69%, at 72 cents Monday on the Toronto Stock Exchange.