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 thisis 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 additionalreserving required in respect of contingent cost insurance ('CCI') have alladversely 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 millionand £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