RNS Number:2084Q
Goshawk Insurance Holdings PLC
26 September 2003
GoshawK Insurance Holdings plc
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2003
Financial and Operational Summary
* Group loss after tax of #30.8 million (2002: profit of #6.3 million)
* GoshawK Re operating profit of #14.2 million
* Significant increase in GoshawK Syndicate 102's reserves
* Strategic and underwriting reviews completed
* Key appointments to senior management team
* Robust investment return in difficult market conditions
London Bermuda Total
Operations Operations Group
2003 2002 2003 2002 2003 2002
#m #m #m #m #m #m
Gross Written Premium 118.5 204.5 52.5 36.4 171.0 240.9
Net Earned Premium 52.6 96.2 58.5 3.5 111.1 99.7
Operating (loss) / profit (44.8) 14.2 (30.6) 4.3
Profit after tax (45.0) 14.2 (30.8) 6.3
Combined ratios 158% 95% 86% 72% 121% 90%
(Loss) / Earnings per share (p) (17.5) 3.6
Net assets per share (p) 76.3 95.4
All figures are for the six months ended 30 June
Chris Fagan, Chief Executive commented:
"Considerable pain has been taken in this set of results and the board is now
confident of Goshawk's ability to trade profitably on its continuing business
during the second half of 2003 subject to normal levels of loss experience.
Goshawk Re, the Group's Bermudian reinsurance operation, has capitalized on its
excellent start last year and recorded results ahead of our expectations".
26th September 2003
For further information, please contact:
Goshawk Insurance Holdings plc
Chris Fagan Chief Executive 020 7621 0777
Andrew Castell Finance Director
College Hill Associates
James Henderson 020 7457 2020
Phil Wilson-Brown
GoshawK Insurance Holdings plc
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2003
Chief Executive's Statement
GoshawK's performance has been overshadowed in the year to date by the need for
reserve strengthening in Syndicate 102, the Group's wholly owned business at
Lloyd's. The increase in reserves follows an independent actuarial review
carried out by Tillinghast Towers Perrin ("Tillinghast"). We believe that this
is a very positive step in creating confidence in the Syndicate's reserves and
will be a basis from which to move forward.
GoshawK's business in the first half of 2003 has continued to enjoy very
favourable trading conditions. Rates remain firm and the ability to secure good
terms has been a dominant feature of the first half of the year. GoshawK Re,
the Group's Bermudian reinsurance operation, has capitalised on its excellent
start last year and recorded results ahead of our expectations. Syndicate 102
has experienced a sharp contrast in fortunes. Reserve strengthening required
across many lines of business identified by Tillinghast, as well as the specific
consequences of the failure of The Accident Group ("TAG") and additional
reserving required in respect of contingent cost insurance ("CCI") have all
adversely affected performance. However the reserves of Syndicate 102 are now
much stronger than they have been for some time.
Financial Results and Dividend
The loss before tax for the six months to 30 June 2003 is #30.6 million. The
London operations recorded a loss of #44.8 million and the Bermudian operations
recorded a profit of #14.2 million. After tax, the loss is #30.8 million or
17.5p per share compared with a profit of #6.3 million or 3.6p per share for the
six months to 30 June 2002.
Gross premium written of #171.0 million for the period compares with #240.9
million written in the first half of 2002. Net written premium of #84.2 million
compares with #120.1 million in the first half of 2002. This reduction is a
direct reflection of the reinstatement premiums received in the 2001
underwriting year as a result of the WTC disaster which inflated the 2002
financial year figures and have not been repeated. Otherwise the Group's trend
of premium written remains upwards.
No interim dividend is proposed.
GoshawK Re in Bermuda
GoshawK Re has made significant progress in the first half of 2003 in
consolidating its position as a profitable player within the increasingly
important Bermuda reinsurance market. We have been successful in developing our
marine and non marine catastrophe portfolios which are the core of our business.
We achieved significant growth into a well balanced book which continues to
enjoy a very low incidence of loss.
Russell Brooke has joined us as Chief Executive and Chief Underwriting Officer
from his previous role as Chief Underwriting Officer at ACE Tempest Re. Russell
is a well established and successful short tail catastrophe underwriter and his
arrival will help us to develop this core area of our business.
Gross written premiums have risen by 44% over the same period in 2002, but both
gross and net earned premiums have risen by over ten times the equivalent figure
for 2002. This is partly because the premiums written in 2002 are now coming
through as earnings for this year. The resulting contribution to profit from
underwriting is $15.4 million compared to $1.2 million in the first half of
2002.
The SCPIE run off portfolio continues to perform in line with our expectations.
A limited number of contracts within the run off portfolio have been renewed but
the business is focused more on short tail excess of loss catastrophe covers
this year and less on pro rata business acquired as quota shares of other
insurers.
The combined ratio for the first half of 2003 is 86%.
Capital and surplus stands at $261 million. This is important for GoshawK Re
not only because the larger capital base allows for increased line sizes which
in turn help to attract business, but the milestone of $250 million of capital
and surplus is now allowing us access to a wider showing of business.
Catastrophes and Major Losses
2003 to date has recorded a very low level of catastrophes. Although at the
time of writing we have experienced hurricanes Fabian and Isabel, neither will
have resulted in significant losses for Syndicate 102 or GoshawK Re.
The continued low level of major losses has afforded us the opportunity to build
our capital base in Bermuda.
Syndicate 102 was involved in the space shuttle Columbia disaster through its
cargo account. The SpaceHab laboratory, carried in the cargo bay of Columbia,
was led by Syndicate 102 and the resulting gross loss was $10 million. This
loss to the Syndicate was only marginally reduced at the net level due to
limited reinsurance recovery.
Syndicate 102 at Lloyd's
Syndicate 102 has incurred significant losses on the 2001 year of account which
are recognised in these Group accounts. The forecast result for the 2002
underwriting year is in the range of -7.5% to +2.5% return on capacity. These
are disappointing results in one of the best underwriting environments of recent
years.
The poor performance of the CCI and legal expenses accounts is a key component
of this poor result. CCI, which had been written since 1999, and legal
expenses, written since 2000, were both new lines of business entered into in
soft market conditions when the Syndicate was searching for more productive uses
for its capacity. Both classes exposed the Syndicate to systemic risks which
were inadequately researched. The level of aggregate assumed without the
benefit of reinsurance cover then caused the damage.
GoshawK's World Trade Center ("WTC") gross and net loss estimates of #72 million
and #21 million respectively have now remained substantially unchanged for over
a year. Gross incurred losses now stand at #51 million and have increased #7
million over the last six months. There has been considerably more development
in paid claims which have moved from #9 million to #23 million over the last six
months. Based on the existing development pattern we remain confident that the
Syndicate is prudently reserved for WTC losses.
Actuarial Review of Reserves in Syndicate 102
Tillinghast was asked to undertake an independent actuarial review of Syndicate
102's reserves as at 30 June 2003 and their review, together with the
conclusions of the internal actuarial review, has lead the Board to make a
material strengthening of reserves. The Syndicate is reserved at Tillinghast's
actuarial best estimate for all business other than CCI.
CCI, which is also known as viatical or life settlement business, was written
between 1999 and early this year. At 31 December 2002 a reserve of #29.6
million had been established which represented 100% of premiums written, plus a
specific reserve for the only claim experienced. The claims reserve has been
increased to #38.1 million as at 30 June 2003, which represents expected
ultimate losses of 150% of the premiums written. Tillinghast's findings
indicate a wide range of possible outcomes which suggest ultimate loss ratios of
between 144% and 373% of the premiums written. However, Tillinghast's view is
that there is material uncertainty as to the eventual outcome.
Data relating to CCI business is in short supply making it difficult to form
reliable estimates of the ultimate outcome. GoshawK is progressing, but has yet
to complete, a data gathering exercise that should allow it resolve some of the
uncertainties that have complicated this analysis. We will focus closely on the
under reporting of mortalities, which we believe occurs because there is no
incentive to report, and this is distorting the data. Further steps are also
being taken to reduce the Group's ultimate exposure which have not been factored
into the actuarial work as at the half year.
The ultimate outcome for TAG is also uncertain. A number of issues surrounding
the collapse of TAG are expected to impact on the ultimate outcome and whilst
the level of uncertainty is being reduced as we work through the issues it
remains too early to predict the final resolution with any level of certainty.
Tillinghast's best estimate reserves for TAG are based on the Syndicate's
assessment of current reasonable expectations.
Underwriting Review of Syndicate 102
KPMG was retained to undertake a review of Syndicate 102 with a specific brief
to look at how the Syndicate assumes and manages underwriting risk and the basis
on which this is directed, overseen and controlled by the Syndicate's and the
Group's management. KPMG has now concluded this review and reported to the
Boards of both GoshawK and GoshawK Syndicate Management Limited. Their
observations and recommendations have been accepted fully. These have shed
light on the genesis of some of the Syndicate's recent problems and suggested
practical means of addressing the structural and procedural issues that may have
given rise to, or exacerbated those problems. GoshawK worked closely with KPMG
during the review and has already implemented some of KPMG's recommendations,
and continues to work on implementation of all others.
As a result of the underwriting review Syndicate 102 will reduce the number of
classes of business in which it is involved for the remainder of 2003 and for
2004. The Syndicate has already ceased to underwrite CCI and after the event
legal expenses insurance, such as TAG. We have also decided to exit the
satellite market as results over the years have been volatile and not
consistently profitable enough to justify the level of capital required.
Syndicate 102 will focus on property, personal accident, professional indemnity,
kidnap and ransom, creditor and contingency in its non marine account and on
hull, liability and cargo in its marine account. This is subject to approval by
Lloyd's.
Reinsurance Programme
Syndicate 102 has consistently bought an extensive reinsurance program as part
of its core business strategy to maintain aggregate risk assumed within the
Board's risk appetite. This program is focused on aggregate management and is
therefore effective when a disaster strikes, as was shown by the effective
recoveries in connection with the WTC disaster. It is the areas written without
the benefit of reinsurance cover including CCI and legal expenses which have
caused most damage to syndicate reserves.
GoshawK has a policy of providing for reinsurance bad debt based on Standard &
Poor's and/or A M Best credit ratings of reinsurers. The continued decline in
the credit rating of many reinsurers over recent years has resulted in an
increase in our overall provision against reinsurance debtors. An increase of
#1.2 million in the first half of 2003 takes the provision in Syndicate 102 to
#5.3 million. This issue is not specific to GoshawK but common across the
industry. The credit quality of reinsurers on the GoshawK programme remains
high with 84% of outstanding recoverables rated A and above, or secured by
Letters of Credit.
Investment Income
GoshawK's investments performed exceptionally well in the six months to 30 June
2003. The overall return, shown below, is only marginally below the long term
rate of return assumptions which remain unchanged at 5.8% for fixed income and
7.5% for equities and alternatives. Asset allocation remains largely unchanged
from the year end and is set out below. In particular, the performance of
GoshawK's alternative investments held by GoshawK Re has been pleasing, yielding
an annualised return of 13.6% for the period, with little volatility. The high
yield fixed income investments made late in 2002 have also provided some
particularly good returns.
Investment Return London Funds London Syndicate Bermuda Total
at Lloyd's
#m #m #m #m
Long Term Rate of Returns 1.52 2.41 5.61 9.54
Actual 1.55 1.24 6.38 9.17
0.03 (1.17) 0.77 (0.37)
Asset Allocation Funds at London Syndicate Bermuda Total
Lloyd's
#m #m #m #m
Fixed income 32.7 62.0 104.9 199.6
High yield fixed income 20.1 20.1
Equities 15.6 10.1 25.7
Alternatives 10.6 10.6
Cash 10.5 32.4 37.8 80.7
58.8 94.4 183.5 336.7
A significant rise in US dollar fixed income yields in July has led to some of
the Group's gains to 30 June being taken back. However these in turn have been
largely offset by gains in Euro and Sterling denominated securities held in
GoshawK Re which have gained in value as the dollar has weakened. We believe
that this demonstrates the balanced and hedged nature of the Group's investment
portfolio.
Asset Management
GHK Asset Management Ltd, the Group's wholly owned asset management business,
manages GHK First Equity Limited, an absolute return fund listed on the Irish
Stock Exchange which invests in UK equities. GHK First Equity Limited now has a
track record of twelve months during which time it has shown a positive return
and outperformed the FTSE All Share index whilst recording lower volatility.
James Fox has joined the Board of GHK Asset Management Ltd as a non executive
director. Until his retirement in May this year James was Managing Director of
Deutsche Investment Trust Managers and Investment Manager of Anglo & Overseas
Trust their successful global investment trust. Prior to joining Deutsche he
was a director of Warburg Investment Management and a director and Chief
Investment Officer of Hill Samuel Investment Management.
Capital and Banking Covenants
The Group had #119.7 million of net assets less intangible assets and #195.4
million of capital employed as at 30 June 2003, including letters of credit
supporting funds at Lloyd's of #35 million, of which #15.0 million is provided
with no recourse to the Group balance sheet. Total borrowings and letters of
credit supported by the Group's balance sheet amount to #61.0 million, or
gearing of 45%.
In an announcement made to the London Stock Exchange on 18 September we
indicated that the Group might be in breach of its banking covenants. The loss
generated in the first half of this year and the resulting reduction in net
assets less intangible assets to #119.7 million (or 68.0p per share) has
resulted in a breach of the Group's net worth covenant as at 30 June 2003. The
Group's lending banks have agreed to a suspension of the relevant covenants
whilst we work with them to affect the necessary changes to the facility.
Board and Management
Paul Spencer is appointed Non Executive Chairman of the Group today. He is a
non executive director of Britannic Group plc, National Savings & Investments,
State Street Managed Pension Funds and various private businesses. Prior to his
current non executive roles he was Chief Executive of the Royal & Sun Alliance
UK businesses from 1999 to 2002, Group Finance Director of Royal & Sun Alliance
plc from 1996 to 1999 and before that worked as the Group Treasurer for Rolls
Royce plc and Hanson plc.
David Hooker is now stepping down as Chairman but will remain available until
the end of the year to help in the handover process after which he will retire.
The Board would like to record its thanks to David who has made a significant
contribution to the Group.
We have already announced that Russell Brooke joined the Group as Chief
Executive and Chief Underwriting Officer to run GoshawK Re. Russell has an
exceptional underwriting record and reputation from his time at ACE Tempest Re,
where he was most recently Chief Underwriting Officer for international
business. Russell's arrival has freed up Andrew Gammell's time which will allow
him to focus on his role at Syndicate 102 as Underwriting Director.
Strategic Review
In an announcement made on 3 July 2003 we indicated that a review of GoshawK's
strategic options would be undertaken by the joint advisers Dresdner Kleinwort
Wasserstein and Numis Securities. The review has considered a number of options
open to the Group including the possibility of a sale of all or part of the
Group.
Following the 18 September trading statement the scope of the strategic review
has been broadened to assess available options to provide the necessary capital
for the Group to trade in line with its revised business plan.
Outlook
GoshawK's business prospects and outlook appear at first sight divided between
Bermuda and London. Syndicate 102 has declared losses over recent years after a
long and uninterrupted period of profitability. Considerable pain has been
taken in this set of results and the Board is now confident of GoshawK's ability
to trade profitably on its continuing business during the second half of 2003
subject to normal levels of loss experience.
We are no longer expecting reinsurance rates to increase and in some areas, most
notably US property catastrophe, they have started to fall albeit only
marginally. However rates for all classes of reinsurance are high and do not
need to rise for GoshawK Re to continue to provide a very attractive return on
capital. Rates in most classes of insurance written by the Syndicate are
continuing to increase. We expect rates to remain firm across most classes of
business throughout 2004.
The Board will continue actively to pursue all options to recover and then
maximise shareholder value.
Chris Fagan
Chief Executive
September 2003
GoshawK Insurance Holdings plc
Summary Consolidated Profit and Loss Account
For the Half Year Ended 30 June 2003 (unaudited)
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
Notes #'000 #'000 #'000
(audited)
GROSS WRITTEN PREMIUM
- continuing operations 2 170,973 240,945 456,464
- discontinued operations - - 74
Balance on technical account - general business
- continuing operations (26,067) 696 14,050
- discontinued operations - - -
Net investment return 6 9,292 9,876 18,485
Allocated investment return transferred to
technical account 6 (9,541) (3,145) (15,370)
Other income 577 492 1,194
Other charges (including amortisation) (4,917) (3,660) (8,271)
Operating (loss) / profit (30,656) 4,259 10,088
Comprising:
Operating (loss) / profit (based on longer term
investment return) (30,282) 294 7,610
Short term fluctuations in investment return 6 (374) 3,965 2,478
(LOSS) / PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION 2 (30,656) 4,259 10,088
Taxation on (loss) / profit on ordinary 3 (163) 2,071 4,626
activities
(LOSS) / PROFIT ON ORDINARY ACTIVITIES AFTER
TAXATION (30,819) 6,330 14,714
Dividends - (1,729) (5,184)
(LOSS) / PROFIT RETAINED FOR THE FINANCIAL
PERIOD (30,819) 4,601 9,530
Transfer (to) other reserves (4,417) (5,787) (3,010)
Transfer (from) / to profit and loss account (35,236) (1,186) 6,520
(Loss) / earnings per share 5 (17.5)p 3.6p 8.4p
Diluted (loss) / earnings per share 5 (17.5)p 3.6p 8.3p
Dividend per share 0.0p 1.0p 3.0p
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
(Loss) / profit for the period (30,819) 6,330 14,714
Exchange differences on retranslation of
foreign net assets (632) (5,355) (10,505)
Prior year adjustments - - (1,970)
(31,451) 975 2,239
GoshawK Insurance Holdings plc
Summary Consolidated Balance Sheet
As at 30 June 2003 (unaudited)
As at As at As at
30 June 30 June 31 December
2003 2002 2002
Notes #'000 #'000 #'000
(audited)
ASSETS
Intangible assets 14,639 15,538 15,090
Investments 256,028 171,832 228,093
Reinsurer's share of technical provisions 256,784 201,456 237,779
Debtors 311,989 253,725 279,763
Tangible assets 625 247 403
Cash at bank and in hand 80,700 75,071 78,988
Other 7,282 7,501 6,321
Prepayments and accrued income 35,596 31,136 44,156
TOTAL ASSETS 963,643 756,506 890,593
LIABILITIES
CAPITAL AND RESERVES
Called up share capital 8,796 8,792 8,793
Share premium account 158,427 158,377 158,390
Other reserves 6,892 (14) 2,564
Profit and loss account (39,840) 708 (4,061)
SHAREHOLDERS' FUNDS ATTRIBUTABLE TO EQUITY
INTEREST 10 134,275 167,863 165,686
Technical provisions 585,362 495,319 551,220
Creditors 212,873 66,889 143,864
Accruals and deferred income 31,133 26,435 29,823
TOTAL LIABILITIES 963,643 756,506 890,593
Net assets per share 4 76.3p 95.4p 94.2p
GoshawK Insurance Holdings plc
Summary Consolidated Statement of Cash Flow
For the Half Year Ended 30 June 2003 (unaudited)
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
Notes #'000 #'000 #'000
(audited)
Net cash inflow from operating activities 7 21,647 1,366 39,235
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (922) (150) (300)
TAXATION - 199 (270)
CAPITAL EXPENDITURE
Purchase of tangible fixed assets (342) (183) (483)
EQUITY DIVIDENDS PAID (3,455) - (1,728)
FINANCING
Share options exercised 40 21 35
Increase in bank loans 14,581 - 24,584
31,549 1,253 61,073
Cash flows were invested as follows:
INCREASE / (DECREASE) IN CASH HOLDINGS 8 1,712 (61,420) (57,503)
NET PORTFOLIO INVESTMENT
Purchase of equity investments 26,524 15,391 25,042
Purchase of gilt investments 126,697 128,950 297,865
Sale of equity investments (6,180) (1,273) (3,009)
Sale of gilt investments (111,984) (81,501) (220,505)
Change in deposits (5,220) 1,106 19,183
8 29,837 62,673 118,576
NET INVESTMENT OF CASH FLOWS 31,549 1,253 61,073
GoshawK Insurance Holdings plc
Notes to the Interim Accounts (unaudited)
1. PRINCIPAL ACCOUNTING POLICIES
The Interim Statement has been prepared on the same basis as set out in the
financial statements for the year ended 31 December 2002 and in accordance with
applicable accounting standards in the United Kingdom. The financial
information contained in this interim statement does not constitute statutory
accounts as defined in section 240 of the Companies Act 1985. The figures for
the year ended 31 December 2002 are taken from the Group's published financial
statement for that year, which received an unqualified audit report and have
been filed with the Registrar of Companies. A summary of the principal
accounting policies, is set out below:
(a) Basis of Accounting and Consolidation
The Group accounts consolidate the accounts of GoshawK Insurance Holdings plc
and all its subsidiary undertakings drawn up to 31 December. No profit and loss
account is presented for GoshawK Insurance Holdings plc as permitted by Section
230 of the Companies Act 1985.
GoshawK Dedicated Limited, a wholly owned subsidiary company, underwrote as a
corporate member of Lloyd's on syndicates managed by the Group (managed
syndicates) until the 2000 year of account and participated until the 1999 year
of account on non managed syndicates. The capacity for Syndicate 102 was
transferred from GoshawK Dedicated Limited to GoshawK Dedicated (No.2) Limited
for the 2001 and subsequent years of account. The Group's share of transactions
of managed syndicates has been included on an annual accounting basis.
Transactions between Group companies, and between those companies and the
managed syndicates, to the extent of the Group's participations, are eliminated
on consolidation.
(b) Managed Syndicate Participations
i Premiums
Gross premiums written represent premiums on business incepting during the year
together with adjustments to premiums written in previous accounting periods and
estimates for "pipeline" premiums. Gross premiums written are stated before
deduction of commissions but net of taxes, duties levied on premiums and other
deductions.
Outward reinsurance premiums are accounted for in the same accounting period as
the related direct or inwards reinsurance business.
ii Unearned Premiums
The provision for unearned premiums represents that part of gross
premiums written and the reinsurers' share that is estimated to be earned after
the balance sheet date.
iii Deferred Acquisition Costs
Acquisition costs represent the expenses, both direct and indirect, of
acquiring insurance policies written during the financial period. Acquisition
costs are deferred and amortised over the period in which the premium is earned.
Deferred acquisition costs represent the proportion of acquisition costs
incurred in respect of unearned premiums at the balance sheet date.
iv Claims
Claims incurred comprise claims and settlement expenses (both internal and
external) paid in the year and the movement in provision for outstanding claims
and settlement expenses, including an allowance for the cost of claims incurred
by the balance sheet date but not reported until after the year end.
The provision for claims comprises amounts set aside for claims notified and
claims incurred but not yet reported (IBNR). An external actuarial review has
been undertaken.
The methods employed include extrapolation of the development of premiums, and
paid and incurred claims for each year, based upon the observed development of
earlier years and expected loss ratios. The main assumption underlying these
techniques is that past claims experience can be used to project ultimate claims
costs and that no changes to past trends, such as public attitudes to claiming
or inflation occur. The approach adopted takes into account the nature and
materiality of the business and the type of data available. Additional
qualitative input, such as allowance for one off occurrences or changes in
legislation, policy conditions or portfolio mix, is also used in arriving at the
estimated ultimate cost of claims, in order that it represents the most likely
outcome taking account of all uncertainties involved.
Provisions are calculated allowing for reinsurance recoveries and a separate
asset is recorded for reinsurers' share, having regard to collectability based
on the credit ratings of reinsurers.
While the directors consider that the provisions for claims outstanding are
fairly stated on the basis of the information available to them at the date of
these accounts, the ultimate liability will vary as a result of subsequent
information and events and may result in significant adjustments to the losses
foreseen. Adjustments to the amounts of the provisions are reflected in the
accounts for the period in which the adjustments are made.
The amount of salvage and subrogation recoveries is separately identified, and
where material, reported as an asset.
v Unexpired Risk Provisions
A provision for unexpired risks is made when it is anticipated that unearned
premiums will be insufficient to meet future claims and claims settlement
expenses of business in force at the period end. The provision for unexpired
risks is included within technical provisions in the balance sheet. No account
is taken of future investment income.
(c) Exchange Rates
i Group
The financial statements of overseas subsidiary undertakings are translated at
the rate of exchange ruling at the balance sheet date. The exchange differences
arising on retranslation of opening net assets is taken directly to reserves.
All other translation differences are taken to the profit and loss account with
the exception of differences on foreign currency borrowings to the extent that
they are used to finance or provide a hedge against group equity investments in
foreign enterprises, which are taken directly to reserves together with the
exchange difference on the net investment in these enterprises. Tax charges and
credits attributable to exchange differences on those borrowings are also dealt
with in reserves,
(d) Investments
Listed investments are shown at market value. The Company's unlisted
investments are shown at directors' valuation. Investments in own shares held
under trust are shown at cost less amortisation written off to the profit and
loss account. The cost is amortised evenly over 3 years, to match the early
vesting period under the LTIP rules.
All of the investment returns arising in the year are reported in the
non-technical account. In accordance with the ABI 'SORP' a transfer is made from
the non-technical account to the technical account representing the longer term
return on investments supporting the technical provisions. The longer term
investment return is an estimate of the expected return over time for each
category of investments having regard to past performance, current trends and
future expectations.
(e) Intangible Assets
Syndicate participations at Lloyd's acquired by offers to syndicate names or at
auction are carried in these accounts at cost less amortisation. In accordance
with Technical Release 1/99, Accounting by Lloyd's Corporate Capital Vehicles,
issued by the ICAEW, the acquired capacity will be amortised on a straight line
basis over the estimated useful life. This life is estimated to be 20 years.
In accordance with the Technical Release, acquired capacity is reviewed for
impairment at the end of the first full financial year following acquisition and
in other periods if events or changes in circumstances indicate that the
carrying value may not be recoverable.
(f) Goodwill
Goodwill arising on acquisitions prior to 31 December 1997 was set off directly
against reserves. Goodwill previously eliminated against reserves has not been
reinstated on implementation of FRS10. If the acquisitions are disposed of in
the future, this goodwill will be recognised through the profit and loss account
at that point.
Positive goodwill arising on acquisitions since 1 January 1998 is capitalised,
classified as an asset on the balance sheet and amortised on a straight line
basis over its useful economic life up to a presumed maximum of 20 years. It is
reviewed for impairment at the end of the first full financial year following
the acquisition and in other periods if events or changes in circumstances
indicate that the carrying value may not be recoverable.
(g) Investment Income
Syndicate investments and cash are held on a pooled basis, the return from which
is allocated to underwriting years of account proportionately to the funds
constituted by the year of account.
Investment income and all investment gains and losses (realised and unrealised)
relating to investments and cash held by the Syndicate and GoshawK Re are
included in the non-technical account and transferred to the technical account.
Investment income from Group owned investments other than those held by GoshawK
Re and those charged to Lloyd's in respect of underwriting activities (including
realised gains and losses) is included in the non-technical account.
Realised gains and losses are calculated as the difference between the net sales
proceeds and their purchase price in the financial year or their valuation at
the commencement of the year. Unrealised gains and losses on Group owned
investments are calculated as the difference between the valuation of
investments at the end of the financial year and their purchase price in the
financial year or valuation at the commencement of the year. Unrealised gains
and losses are recognised in the profit and loss account and are then
transferred to a capital reserve.
(h) Other Income
Other income comprises consortium management, consultancy and asset management
fees. These are credited to the profit and loss account as they become due.
(i) Operating Expenses
Operating expenses include the Group's share of syndicate operating expenses.
The Group's underwriting expenses, which include items such as Lloyd's
subscriptions and Central Fund contributions, are charged to the technical
account.
(j) Deferred Taxation
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transaction or
events have occurred at that date that will result in an obligation to pay more,
or a right to pay less or to receive more, tax, with the following exceptions:
* provision is made for deferred tax that would arise on remittance of
the retained earnings of overseas subsidiaries only to the extent that, at the
balance sheet date, dividends have been accrued as receivable;
* deferred tax assets are recognised only to the extent that the
directors consider that is more likely than not that there will be suitable
taxable profits from which the future reversal of the underlying timing
differences can be deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that are
expected to apply in the periods in which timing differences reverse, based on
tax rates and laws enacted or substantively enacted at the balance sheet date.
This represents a change in accounting policy, in accordance with FRS 19. This
effect of this change is disclosed in the Statement of Total Recognised Gains
and Losses
(k) Derivative Instruments
The Group used forward foreign exchange contracts in the year. The effect of
the realised currency movements on these contracts has been treated as an
exchange difference in the profit and loss account.
2. SEGMENTAL ANALYSIS
Six Six Year
months to months to ended
30 30 31
June June December
2003 2002 2002
#'000 #'000 #'000
Gross written premiums:
UK 118,503 204,544 330,472
Other - Bermuda 52,470 36,401 126,066
Gross written premiums 170,973 240,945 456,538
(Loss) / Profit before taxation:
UK (44,878) (3,176) (12,671)
Other - Bermuda 14,222 7,435 22,759
(Loss) / Profit before taxation (30,656) 4,259 10,088
Net Assets:
UK (23,973) 68,596 31,126
Other - Bermuda 158,248 99,267 134,560
134,275 167,863 165,686
All turnover from the participations as a corporate member arises from
underwriting business in the United Kingdom in the Lloyd's Insurance Market,
which has been treated as one geographical element for the purposes of Statement
of Standard Accounting Practice No. 25.
Group debt of #39.1 million has been allocated against the net assets of the UK
Operations.
3. TAXATION
Six Six Year
months to months to ended
30 30 31
June June December
2003 2002 2002
#'000 #'000 #'000
UK corporation tax - - -
Tax overprovided in previous years - (1,200) (1,200)
Movement in deferred taxation 163 (871) (3,426)
Total tax charge / (credit) 163 (2,071) (4,626)
Taxable losses generated from UK operations in 2003 and 2002 will be offset
against future profits of the Group. There has been no increase in the deferred
tax asset carried on the Group's balance sheet in accordance with the accounting
treatment laid out in FRS 19. Profits generated from Bermudian operations are
not subject to UK corporation tax other than to the extent that they are
remitted to the UK. The overprovision of tax follows the resolution of
discussions with the Inland Revenue regarding a possible breach of investment
trust status.
4. NET ASSETS PER SHARE
The calculation of net assets per share is based on shareholders funds at 30
June 2003, 30 June 2002, and 31 December 2002 and calculated on 175,924,079
shares (30 June 2002 - 175,849,079 and 31 December 2002 - 175,849,079 shares) in
issue.
5. EARNINGS PER SHARE
The calculation of basic earnings per share is based on the loss on ordinary
activities after taxation available for ordinary shareholders of #30,819,894 (30
June 2002 - profit #6,330,032 and 31 December 2002 - profit #14,714,137) and
calculated on the average number of shares in issue of 175,854,467 shares (30
June 2002 - 175,831,800 and 31 December 2002 - 175,842,053). The calculation of
diluted earnings per share is based on 175,854,467 shares in issue (30 June 2002
- 177,650,215 and 31 December 2002 - 178,135,207 shares). The loss attributable
to ordinary shareholders and weighted average number of ordinary shares for the
purpose of calculating the diluted earnings per ordinary share are identical to
those used for basic earnings per ordinary share apart from 31 December 2002.
This is because the exercise of share options would have the effect of reducing
the loss per ordinary share and is therefore not dilutive under the terms of FRS
14.
6. INVESTMENT RETURN
Six months to Six months to Year ended
30 30 31
June June December
2003 2002 2002
#'000 #'000 #'000
Investment Income 3,825 4,373 9,811
Realised gains / (losses) 958 (208) 6,340
Unrealised gains 4,822 5,806 2,569
Investment expenses (313) (95) (235)
TOTAL INVESTMENT RETURN 9,292 9,876 18,485
Analysed as:
Investment return from:
Syndicates 2,411 1,906 5,169
Corporate Funds at Lloyd's 1,518 1,239 2,522
Bermudian Operation 5,612 - 7,679
Transferred to the technical account 9,541 3,145 15,370
Other Corporate funds - 2,428 -
Non-underwriting investment return 125 338 637
Net investment return 9,666 5,911 16,007
Short term fluctuations in investments (374) 3,965 2,478
TOTAL INVESTMENT RETURN 9,292 9,876 18,485
The transfer to the technical account represents the estimated long term rate of return, as indicated
below, applied to the Group's share of assets of the syndicates and assets held at Lloyd's and
underwriting assets held in Bermuda.
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
LONG TERM RATE OF RETURN
UK and overseas equities 7.5% 7.5% 7.5%
UK and overseas bonds 5.8% 5.8% 5.8%
The rates were applied to the average bond and equity components of the underwriting investment
assets of the corporate and aligned syndicates.
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
#'000 #'000 #'000
Syndicate assets 61,973 64,981 67,934
Funds at Lloyd's 50,437 41,878 40,654
Bermudian assets 156,196 64,657 100,086
7. RECONCILIATION OF OPERATING (LOSS) / PROFIT TO NET CASH INFLOW FROM
OPERATING ACTIVITIES
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
#'000 #'000 #'000
(Loss) / profit on ordinary activities before
taxation (30,656) 4,259 10,088
Interest payable 922 150 300
Depreciation of tangible fixed assets 120 87 233
Amortisation of intangible assets 449 449 899
Amortisation of long term incentive plan 293 215 413
(Increase) in debtors and accrued income (28,894) (143,330) (155,895)
Increase in creditors 59,367 32,092 86,452
Increase in insurance technical provisions 25,441 115,066 110,977
(Profit) / loss from sales of investments (273) 202 (6,340)
(Profit) / loss from revaluation of
investments (4,490) (2,469) 2,613
Movement on foreign exchange (632) (5,355) (10,505)
NET CASH INFLOW FROM OPERATING ACTIVITIES 21,647 1,366 39,235
8. MOVEMENT IN CASH, PORTFOLIO INVESTMENTS AND FINANCING
At Changes At
1 January Cash To market 30 June
2003 Flow Value Other 2003
#'000 #'000 #'000 #'000 #'000
Cash at bank and in hand 78,988 1,712 - 80,700
Ordinary shares 27,645 20,344 1,783 (292) 49,480
Fixed income securities 169,893 14,713 (3,393) 181,213
Deposits with credit Institutions 30,555 (5,220) - 25,335
307,081 31,549 (1,610) (292) 336,728
Borrowings (24,584) (14,581) - - (39,165)
Total 282,497 16,968 (1,610) (292) 297,563
9. MOVEMENT IN OPENING AND CLOSING PORTFOLIO INVESTMENTS NET OF FINANCING
Six months to Six months to Year ended
30 June 30 June 31 December
2003 2002 2002
#'000 #'000 #'000
Net cash inflow / (outflow) for the period 1,712 (61,420) (57,503)
Cash flow:
Portfolio investments net 15,256 62,673 93,992
Movements arising from cash flows 16,968 1,253 36,489
Changes in market values and exchange rate
effects (1,610) 2,267 3,727
Other (292) (403) (413)
Total movement in portfolio investments of net
financing 15,066 3,117 39,803
Portfolio investments net of financing at 1
January 282,497 235,632 242,694
Portfolio investments net of financing at 30 June
/ 31 December 297,563 238,749 282,497
10. SHAREHOLDERS FUNDS
Share Share Other Profit and
Capital Premium Reserves Loss Account Total
#'000 #'000 #'000 #'000 #'000
At 1 January 2003 8,793 158,390 2,564 (4,061) 165,686
(Loss) for the year - - - (30,819) (30,819)
Share options exercised 3 37 - - 40
Transfer from other reserves - - 4,417 (4,417) -
Retranslation of foreign currency (89) (543) (632)
net assets
At 30 June 2003 8,796 158,427 6,892 (39,840) 134,275
11. WORLD TRADE CENTER US TERROR ATTACKS ("WTC")
(i) Gross and Net Loss to the Group
Our estimate of the Group's gross exposure to WTC is #71.8 million. Net
estimated losses are #20.8 million.
Ignoring the impact of exchange rate movements, there has been no significant
movement in the gross exposure from the last reported position at 31 December
2002. The net exposure has increased by #2.6 million. WTC is one of four large
claims impacting on the 2001 year of account, the others being Petrobras P-36,
Air Lanka and Toulouse. The order in which these losses are settled will impact
on the amount collectable for each loss. Overall, the aggregate expected
recoveries for the excess of loss account have not changed significantly.
These figures do not take into account the original premium income on polices
which have given rise to the WTC claims. Accordingly, these estimates are not
estimates of the Group's financial position resulting from these policies. In
providing an estimate of these losses, the Group does not make any admission of
liability.
(ii) Assumptions
The following assumptions were used for the purposes of calculating the amount
of the Group's expected losses arising from WTC:
* There were four separate aircraft losses: two at the World Trade Center
and one arising from each of the Pittsburgh and Pentagon crashes.
* The losses arising from the attacks on the World Trade Center and to the
surrounding properties have arisen from a single occurrence.
* There will be no UK/US Government financial support or intervention
benefiting the Group;
* Reinsurance protection available will respond to notifications made under
each policy. An appropriate provision for reinsurance security failure has been
made.
* No subrogation recoveries will be made by the Group.
* An exchange rate of US$1.65: #1 (the rate prevailing at 30 June 2003).
(iii) Methodology
* Classes of business which had potential exposure to losses arising out of
WTC were identified and where appropriate reviewed on a risk by risk basis.
* An estimate of gross and inward reinstatement premiums for each risk was
established using information from placing brokers and where possible assureds,
combined with the groups own judgement.
* Reinsurance protections were reviewed in order to calculate the
anticipated reinsurance recoveries and outwards reinstatement premiums. Due
regard was given to co-insurance, coverage restrictions and previous reinsurance
erosion from earlier events.
* The security underlying the reinsurance protection was assessed, and a
provision for bad debt was calculated based upon the latest available security
rating information.
(iv) Material Sensitivities
WTC is expected to give rise to the most complex interaction of possible claims
which the insurance market has ever seen. There can, therefore, be no certainty
as to the ultimate losses which will result to the Group. The position is being
regularly reviewed, but it could be a long time before the true nature, scale
and payment date of the claims will be known.
The Group has assumed that the losses arising from the attacks on the World
Trade Center and to the surrounding properties have arisen from a single
occurrence. This means that an insurer or reinsurer with exposure to losses
arising out of the attacks may only recover from its reinsurers on one occasion
in respect of the ensuing losses.
Some 88% of reinsurance security relating to our current estimate of the World
Trade Center loss is rated as A or better by Standard & Poor's and/or A M Best
Company. The Group has provided for security failure based upon the latest
available security rating information. An adverse change in the security rating
of these reinsurers may result in an increase in the net loss arising from WTC.
The losses arising from WTC are predominately payable in US dollars. The Group,
in estimating its net losses, has assumed an exchange rate of US$1.65 : #1. An
adverse change in the dollar exchange rate may result in an increase in the net
loss arising from WTC.
12. CONTINGENT COST INSURANCE ("CCI")
The claims provision includes amounts in respect of potential claims relating to
CCI. This class of business involves the insurance of viatical business in the
USA whereby a viatical company pays a lump sum to an individual in return for
the assignment of the rights and obligations of a life insurance policy. For a
premium, GoshawK have agreed to pay the viatical company if an individual, or
group of individuals, on the Viatical company's books live longer than a
specified date; in addition, GoshawK would take on the liability for the related
premiums on the life insurance policy underpinning the Viatical business and
would receive the maturity value on the individual's death.
These claims have the potential to settle over many years and there is
considerable uncertainty as to the amount and timing of the potential
settlements. The quantum and timing of potential settlements are dependent on a
number of variables which include:
* The mortality experience of the individuals lives which underpin this
insurance.
* The availability of internal funds available to finance the advancing of
monies to the insured viatical and relevant life assurance premiums, pending
collection by GoshawK from the related life assurance policies.
* The cost of capital charged on external funding.
* The maturity value of the underlying life assurance policies.
Whilst the Directors consider that the provision for claims is fairly stated on
the basis of information currently available, the ultimate liability will vary
as a result of subsequent information and events and may result in significant
adjustments to the amount provided. Any difference between provisions at the
balance sheet data and settlement and provisions in the following year is
included in the underwriting result for that year.
13. THE ACCIDENT GROUP ("TAG")
The claims provision includes amounts in respect of potential claims relating to
after the event legal expenses insurance written by Syndicate 102 through TAG.
The potential settlement amounts are dependent on a number of variables and
there is considerable uncertainty as to the amounts of the potential
settlements.
The variables, some of which are interdependent, include:
* The outcome of possible contractual disputes between the insured and
other parties which will impact the syndicate's obligations under the policies;
* The failure rate of legal cases brought by insureds to claim
compensation.
* The cost of individual claims.
* The outcome of the expected liquidation of TAG, which may involve
disputes between the liquidator and the syndicate in respect of monies owed or
owing.
The determination of the impact of the variables could be decided by legal
action in the future, the results of which are uncertain. Whilst the Directors
consider that the provision for claims is fairly stated on the basis of
information currently available, the ultimate liability will vary as a result of
subsequent information and events and may result in significant adjustments to
the amount provided. Any difference between provisions at the balance sheet
data and settlement and provisions in the following year is included in the
underwriting result for that year.
14. GOING CONCERN
The Group has applied for a suspension of loan covenants provisions attached to
the term loan facility and letters of credit provided by the Group's bankers. A
period has been agreed with the Group's lending banks during which the Group and
the banks will work to resolve its financial position.
Dependent upon the outcome of the uncertain matters referred to in Notes 12 and
13, the Group may have to explore solutions to alleviate any cash strain that
might arise. Such solutions could include:
* The release of monies in GoshawK Reinsurance Limited representing that
company's capital surplus.
* Actions to realise the value from the Group's investment in GoshawK
Reinsurance Limited.
* Renegotiation of the Group's banking arrangements.
Despite the uncertainty arising from the above noted matters, the directors are
confident that the Group is currently a going concern and that the preparation
of these interim accounts on that basis is appropriate.
If the financial statements had not been prepared on a going concern basis it
would have been necessary to write down the intangible and tangible assets of
the Group to a recoverable amount . Provisions would be required in relation to
the costs of running off the insurance portfolio. It would also be necessary to
accrue for winding up costs.
15. DERIVATIVE INSTRUMENTS
The Group has entered into two foreign exchange option contracts in the year.
These contracts were constructed as an effective hedge against translation
exposures resulting from movements in the US$:# exchange rate in relation to the
Group's US$ denominated net assets held by GoshawK Re. These transactions have
been accounted for using hedge accounting concepts. The two options have been
treated as a single hedge transaction, therefore the premium received and paid
is offset in the profit and loss account. The realised movements are posted to
the statement of recognised gains and losses to offset the movement which will
arise on the retranslation of the Group's US$ denominated assets at the balance
sheet date.
GoshawK Insurance Holdings plc
Independent Review Report to GoshawK Insurance Holdings Plc
For six months ended 30 June 2003
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2003 which comprises the Consolidated Profit and
Loss Account, Consolidated Balance Sheet, Consolidated Cash Flow Statement,
Consolidated Statement of Total Recognised Gains and Losses and the related
notes 1 to 15. We have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and based thereon, assessing whether the accounting policies and presentation
have been consistently applied, unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not
express an audit opinion on the financial information.
Fundamental uncertainty - The Accident Group and Contingent Cost Insurance
In arriving at our review conclusion, we have considered the adequacy of
disclosures made in notes 12 and 13 of the financial information regarding the
exposure of the Group to claims and other losses arising from the legal expenses
business written through The Accident Group and the Contingent Cost Insurance
class of business. Considerable uncertainty exists as to the ultimate cost to
the Group of these issues and material adjustments to the Group's technical
reserves may be required, dependent upon subsequent events and information
received. It is not possible to quantify the potential effects of the
resolution of these uncertainties.
Fundamental uncertainty - going concern
In arriving at our review conclusion, we have considered the adequacy of the
disclosures made in note 14 to the financial statements concerning the
uncertainty over the Group's ability to continue as a going concern. The
financial statements do not contain adjustments that would be required if the
Group were no longer considered a going concern.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2003.
Ernst & Young LLP
London
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