GoshawK Insurance Holdings plc
Year ended 31 December 2004
Chairman's Statement
After the turmoil of 2003, GoshawK entered 2004 in a financial position that
allowed it to trade forward through its Bermuda-based reinsurance operation,
Rosemont Re. Notwithstanding this, the difficulties caused by the closure of
GoshawK's former Lloyd's operation, Syndicate 102, in late 2003 left an
operational overhang on the business in relation to its market profile and its
rating. Your directors expected that 2004 would be a transitional period
during which the main operational goals were to build a new, highly focused
portfolio of short-tail reinsurance business and to improve the group's market
profile. These goals have been achieved, but results have been negatively
impacted by the unprecedented number of natural catastrophes in 2004 and
deterioration in the reserves for reinsurance exposures to Syndicate 102.
GoshawK is reporting an after tax loss of $3 million.
Reinsurance is a relationship-driven business. In a healthy reinsurance
relationship, strong and lasting bonds are created between clients, brokers and
reinsurers. The relationship between client and reinsurer is built on financial
security and utmost good faith. The events leading to the closure of Syndicate
102 created a stigma that impinged on Rosemont Re's business relationships and
left its rating on negative outlook throughout most of 2004.
From such a difficult starting point, I am pleased to say that the management
team was successful in improving market profile and building a portfolio of
business consistent with the new strategy. This included rebranding the
Bermuda-based reinsurance subsidiary as Rosemont Re, as well as a large number
of meetings all over the world with clients, brokers and other stakeholders to
explain the company's new strategy. Both the rebranding and the focused
strategy were very well received and helped our stakeholders understand that the
company's plan was targeted on building for the future while repairing the past.
This effort culminated in Rosemont Re being placed back on a stable outlook by
rating agency A.M. Best.
The risk profile of Rosemont Re's core business subjects the company to losses
from major natural catastrophes as they impact property and marine interests in
the industrialised world. We witnessed an extraordinary number of natural
catastrophes in 2004, including the awful human tragedy caused by the major
earthquake and following tsunami in South East Asia, as well as record numbers
of windstorms in both the Atlantic and Pacific. Rosemont Re's losses from the
tsunami will be minimal, as the region is not a core territory. However, the
hurricanes and typhoons that caused severe damage in Florida, the Caribbean, the
Gulf of Mexico and in Japan during the second half of 2004 created net losses of
approximately $40 million to Rosemont Re. In considering this result, we
should not forget that 2004 was the worst year ever recorded for losses caused
by natural catastrophes. We are disappointed that the new strategy did not
produce a good return in its first year, but the management team has done a good
job in protecting shareholders against any major reduction in the group's
capital base against such a backdrop.
While we build a business for the future, we continue to manage the ongoing
assets and liabilities created by the previous strategy. In August 2004,
Lloyd's called GoshawK's Funds at Lloyd's in full and confirmed to GoshawK that
this represented the final step in the company's capital commitment to Lloyd's.
GoshawK had already fully provided for this event in the 2003 year end balance
sheet and therefore the withdrawal had no impact on shareholders' funds. As
previously stated, Rosemont Re does retain some reinsurance exposures to
Syndicate 102. We understand that there has been significant deterioration in
the reserve position of Syndicate 102 during 2004. This relates mainly to the
viatical settlements business. Rosemont Re will receive a share of this
deterioration but, as previously reported, the small shares retained in this
business and the fact that Rosemont Re did not participate in all underwriting
years, mean that the overall balance sheet impact to the group is $7 million.
Further details on the run-off of the other components of non-core business are
given in the Operating and Financial Review.
After many months of difficult negotiation and subsequent to the year end,
GoshawK sold GoshawK Dedicated (No.2) Ltd. ('GD2'), the corporate member ofSyndicate 102, to a consortium. This transaction demonstrates our commitment to
streamline the group through an orderly exit from non-core businesses. GoshawK
estimates, subject to contingencies explained in the Operating and Financial
Review, its share of the proceeds from this transaction during 2005 and 2006 to
be at least $12 million (7 cents per share). This incremental value is not
included on the group's balance sheet at year end, but will be recognised based
on the amounts placed in escrow by the purchasers, commencing in mid-2005. A
second important benefit from this transaction is that it creates mitigation for
the group against further reserve deterioration in Syndicate 102. Increases in
the syndicate's reserves as described earlier create further operating losses
that can be utilised by the purchasers in their tax computations creating
additional proceeds payable under the terms of the sale.
During 2004, your directors, in conjunction with the group's advisors,
instigated a review to consider possible options to create value for
shareholders. The main thrust of this effort focused on two elements: providing
resources for organic value growth under the current strategy or a sale. A
number of parties indicated interest in acquiring all or part of the group
during the year. Your directors fully and seriously considered all approaches
that were made. We remain fully committed to the current strategy and
management team.
Due to the transitional nature of 2004 and the impact of the losses from natural
catastrophes during the year, your board does not consider it appropriate to
propose a dividend. The board is committed to returning the company to a
position where it can resume a dividend policy based on the group's overall
capital requirements and prevailing underwriting conditions.
Looking forward to 2005, I am confident that we will continue to reduce the
non-core liabilities and that the new strategy we have chosen will prove
fruitful. We have invested in both the team and the technology at Rosemont Re
to create a platform from which to execute the predominantly catastrophe risk
based strategy that is so well suited to the Bermuda jurisdiction. We have had
an excellent 1 January 2005 renewal season. The addition of Steve Velotti as
our US Property Underwriter has significantly increased our penetration in the
largest market in the world and we have also seen increases in premiums written
in the International Property and Marine businesses, resulting in 39% premium
growth in 2005 compared to the same period in 2004. Pricing in the catastrophe
impacted territories has increased between 10% and 30%, while our Marine book
has also seen price increases of 18% on average. Internationally, pricing has
been mixed, with pressure on rates in the UK, continental Europe and Australia.
Indeed, we have cut back our lines significantly in both the UK and Scandinavia
due to inadequacy of margins. We ended the January 2005 renewal period with a
larger and better diversified portfolio. We will take this positive momentum
into the major renewal seasons in Japan in April and in the US in July, and I
believe that we are in a position to produce an excellent result providing that
catastrophe activity is limited.
Finally, I would like to thank Russell Brooke, Jon Beck and the team in Bermuda
for the enormous effort they have expended in keeping their focus and turning
the company around. I should also like to thank your non-executives Simon
Miller, George Robb and Richard Titley, along with Jens Juul as Rosemont Re's
Bermuda-based non-executive, for their guidance and support during the year.
2005 is the beginning of an exciting period for GoshawK. The core strategy is
well accepted by our stakeholders and its transparent nature gives us an
advantage that we intend to capitalise on. As we move the company forward and
the positive momentum continues to build, we have confidence in the group's
prospects.
Paul Spencer
Chairman
GoshawK Insurance Holdings plc
Year ended 31 December 2004
Operating and Financial Review
Summary
In 2004 we witnessed the worst year ever recorded for natural catastrophes.
Aside from the human tragedy, most painfully felt in South East Asia, the
economic cost of these events is on an unprecedented scale.
GoshawK, through its Bermuda-based reinsurance operation, Rosemont Re, chose a
strategy that underwrote the occurrence of such events and has fully supported
its clients during this period. The outlook for this strategy remains positive
and the company will continue to maintain its focus and discipline. The group
has preserved its capital at a level approximate to where it began 2004 and
sufficient to attract good business, as proven by the 1 January 2005 renewal
season.
The 1 January 2005 renewal season has allowed us to grow our portfolio by 39%
and improve both its quality and diversity. The outlook for the rest of 2005 is
encouraging, with increasing market acceptance in the U.S. Our strong market
penetration internationally allows us to access our target business and the
ability to decline it where margins are inadequate.
Financial Result
GoshawK is reporting a loss after tax of $3 million (2 cents per share) for the
year ended 31 December 2004 compared to a loss after tax of $108 million (63
cents per share) for the year ended 31 December 2003. Together with reserve
movements of $4 million, this represents a decrease of $7 million in net assets
which now stand at $172 million. Fully diluted net asset value per share at the
year end was $1.00 (52 pence) compared to $1.03 (57 pence) at 31 December 2003.
The result for the year comprised operating profits at Rosemont Re of $4
million, less central overheads, including interest expense, of $11 million,
together with non-recurring income in discontinued operations of $4 million.
Rosemont Re's performance was detrimentally impacted by approximately $40
million (23 cents per share) due to losses from the unprecedented number of
medium-sized natural catastrophes in the Atlantic and Pacific during the year.
In addition, reserve strengthening at Syndicate 102 relating to the viatical
business it underwrote in prior years contributed an increase in reserves at
Rosemont Re of $7 million (4 cents per share).
In our long term assumptions, we provide for approximately $20 million of
catastrophe loss in any one year. Excluding 2004 catastrophe activity in excess
of this amount, the group would have returned a profit of $17 million (10 cents
per share), equating to a 10% return on equity.
The group produced a $10 million profit in the first half of 2004 and a $13
million loss in the second half. The loss in the second half comprised an
operating loss at Rosemont Re of $4 million, central overheads, including
interest, of $6 million and a currency loss of $3 million on net sterling
liabilities. The loss at Rosemont Re in the second half was primarily as a
result of the impact of the natural catastrophes, while the currency loss was
caused by the revaluation of a £15 million loan facility. A matching sterling
asset is held within Rosemont Re, therefore a matching gain is included within
the Rosemont Re operating loss. Central overheads were approximately the same
in the second half as in the first, but are expected to be lower in 2005,
depending on interest rates in the U.S. and U.K.
2004 Commentary
(a) Change in strategy
GoshawK began 2004 with a mission to transform its business from a Lloyd's-style
multi-class underwriter to a Bermuda-based short-tail reinsurance underwriter
focused on core competencies.
Almost two thirds, or approximately $65 million, of the expiring portfolio from
2003 was not renewed in 2004 and a new core portfolio built from scratch. In
normal circumstances, this would have been difficult enough, but the operational
overhang on the business from the demise of Syndicate 102 made the task
extremely challenging. The fact that the new portfolio was built and has since
been expanded in 2005, both in quality and quantity, speaks volumes for the
efforts of our underwriting team.
The success in implementation of the new strategy was also assisted by the
rebranding of GoshawK Re as Rosemont Re in the first half of 2004. This helped
differentiate the ongoing Bermuda reinsurance operation from the group's history
as a corporate capital provider at Lloyd's.
(b) Enhancement of team and technology
In order to execute the new strategy, Rosemont Re hired a new U.S. underwriter,
Steve Velotti, along with additional staff to enhance the analytical and finance
teams. Steve's hire was particularly important to complete the underwriting
team and add a resource with existing business relationships in the U.S. market
to complement our International property team. In addition, investment was made
in technology to provide the quantitative resources to properly price and manage
risk. These investments are generally fixed in terms of annual cost and
therefore allow for future increases in business scale with minimal increase in
cost.
(c) Rating
Rosemont Re began the year with a negative outlook on its 'A-' rating from A.M.
Best. The outlook was assigned based on the perceived negative market profile
that was generated by the group's Lloyd's syndicate going into run-off. The
main concern was that Rosemont Re would be selected against, but we view
selection as an underwriting decision and have not allowed that to happen. A.M.
Best reassessed the company's rating late in 2004 and enhanced the outlook from
negative to stable in recognition of the success of this strategy. This
provided a timely boost immediately prior to the 2005 renewals.
(d) Funds at Lloyd's ('FAL')In August 2004, Lloyd's drew down all of GoshawK's FAL. This call had been
fully provided for in the 2003 year end results and hence had no impact on
shareholders' funds. The FAL comprised £43.2 million of cash, a £20 million
letter of credit provided by Barclays and a £15 million letter of credit
provided by third party reinsurer. The letter of credit provided by the third
party reinsurer has no recourse to GoshawK's balance sheet.
The cash call ended any capital participation by GoshawK at Lloyd's. The £20
million letter of credit provided by Barclays was partially repaid by £5 million
of the Group's cash resources. The balance of £15 million became an
interest-bearing loan, repayable in equal instalments in 2008 and 2009, pursuant
to a renegotiation of the Group's debt facilities in December 2003.
(e) Tax
Subsequent to the year end, GoshawK completed a transaction to sell GoshawK
Dedicated (No.2) Limited ('GD2') to a consortium. The transaction was completedin two parts, with a sale of 80% of the company in early February 2005, and a
sale of the remaining 20% in late February 2005. The transaction was a major
step in GoshawK's strategy to conduct an orderly exit from non-core businesses.
GD2 was the corporate member of Syndicate 102 and therefore bore the
underwriting losses generated by the syndicate. The underwriting losses were
taxable in the United Kingdom and were available to be carried forward by the
group for a period of time to offset future taxable profits. The board
concluded that, in addition to the orderly exit from the Lloyd's market, this
transaction generates value for the tax losses in the near term rather than
retaining ownership of the company. Provided that prevailing legislation does
not change, the purchasers will be able to utilise the brought forward tax
losses within GD2 to offset their own groups' future taxable profits.
The terms of the transaction are that the purchasers will pay a share of the tax
losses as they utilise them. The payments will be placed in escrow pending the
approval of the purchaser's tax returns by the Inland Revenue. Funds will not
be released from escrow until at least 2008, however GoshawK will accrue the
proceeds when they are placed in escrow, expected to commence in mid-2005. In
addition, GoshawK has provided certain tax indemnities to the purchasers in
regard to future taxable income arising from any future profits generated by the
syndicate.
Since the underwriting losses of Syndicate 102 are financed by both GoshawK and
Lloyd's and since neither GoshawK nor Lloyd's could receive benefit for the
transaction without the consent of the other, the proceeds are split between
GoshawK and Lloyd's roughly based on the funding of the losses by each party.
GoshawK provides an indemnity to Lloyd's for any U.S. tax liability arising as a
result of the change of control up to a limit of $3 million.
If tax legislation does not change in 2005 and 2006 (nor retrospectively
thereafter in regard to those years), the net share of proceeds after
transaction costs to GoshawK will be at least £7 million ($12 million) or 4p (7
cents) per share, with potentially higher proceeds depending on the total volume
of tax losses generated by the syndicate.
(f) Syndicate 102 reserving
GoshawK has been made aware that there is likely to be significant reserve
strengthening at Syndicate 102 for the year ended 31 December 2004. The reserve
strengthening relates mainly to the reserves for the contingent cost (viatical)
insurance business written by the syndicate which contributed to it being placed
into run-off.
As previously announced, Rosemont Re had provided certain reinsurances of
Syndicate 102 for underwriting years 2001, 2002 and 2003. In particular it
provided indirect Qualifying Quota Share coverage for those years in shares of
2.40%, 6.85% and 7.69% respectively. Rosemont Re has assessed the impact to
those years from the reserve strengthening and increased its 2004 year end
reserve position on these contracts by $7 million. The reserve strengthening
has been reviewed by our independent external actuaries and is included in their
assessment of GoshawK's reserve position at the year end.
It should be noted that the execution of the tax loss transaction, described
above, mitigates this, and any future, reserve strengthening relating to these
reinsurances. As losses at the syndicate increase, so do the amount of tax
losses and hence future proceeds payable to GoshawK.
(g) Catastrophe losses
As previously announced, Rosemont Re has incurred losses related to the
hurricane activity in Florida and the Gulf of Mexico and the record typhoon
activity in Japan. The total impact of these losses, net of reinsurance and
reinstatements is approximately $40 million. Rosemont Re continues to monitor
these losses and relies on timely and accurate reporting from its clients. In
many cases, original loss estimates from clients have changed significantly.
This was caused by complexities in relation to application of deductibles,
demand surge and consequential losses, such as mould. The levels of property
loss in Japan and in the marine book have penetrated Rosemont Re's retrocession
program, limiting further impact in those zones. Both the U.S. and Japan remain
core to our strategy and we believe that these losses will spur growth in our
portfolio at attractive margins.
The company was not exposed to material losses from either of the South East
Asia earthquake and tsunami or to the winter storm Erwin that hit northern
Europe in January 2005. In both of these territories Rosemont Re has minimal
exposure due to the unattractive pricing environment.
(h) Other reserving matters
The company announced in September that it had exposure to losses related to a
bail bond reinsurance contract that had originated via the SCPIE portfolio.
Management feels that there is an extremely strong argument to contest the
validity of the claims and has entered into the process of arbitration. Despite
the strength of the case, management felt that setting a reserve based on a
factor of the estimated exposure was prudent and has done so. It is likely that
the arbitration process will take at least a year. The company continues to
monitor these exposures, but cannot provide further detail due to the
commercially sensitive nature of the dispute. Although arbitrations and
disputes are becoming increasingly common in our industry, this is the only
arbitration that the company is involved in at this time.
As always, GoshawK's total reserves were subject to internal and external
actuarial review. External reviews are carried out by an independent firm of
actuaries. At the year end, the company's reserves were approximately 5% in
excess of the external actuarial firm's best estimate.
(i) Investments
GoshawK's conservative asset management strategy produced returns below long
term return hurdles. This was principally due to low interest rates in the U.S.
and to the short duration nature of the fixed income portfolio. Within Rosemont
Re, the investment return for the portfolio, based on average balances, was 3.5%
for the year, which was split 2.8% fixed income and 7.5% alternatives. The
investment return for the rest of the group was not material since all balances
were held in cash. The investment return for the year represented a $1.2
million negative short term movement against long term benchmarks.
At the year end, 86% of the portfolio was invested in cash and fixed income
securities, while 14% was invested in alternatives. The fixed income portfolio
had a duration of approximately 1.5 years and an average credit quality of AA+.
Alternatives comprise a $21 million investment in the GHK First Equity fund, a
long short equity fund, and $33 million in a fund of funds managed by Wellington
Management.
During the year, GoshawK consolidated the bulk of its investment management
requirements with Wellington Management in Boston and BlackRock in New York. At
the year end, the two companies managed $327 million of GoshawK's cash and
investments.
The drawing of GoshawK's FAL balance, described in (d) above, reduced the
company's asset base and therefore interest income on the cash element of the
FAL was foregone in the second half of the year.
(j) Capital and financing
GoshawK's year end capital position was $172 million compared to $179 million at
the end of 2003. The net asset value per share at year end was $1.00 compared
to $1.03 at the end of 2003. The loss after tax together with the decline in
value of the dollar against sterling reduced the group's net asset value per
share in sterling terms to 52p from 57p at the end of 2003. At the balance
sheet date, the group's share price was trading at a 23% discount to net asset
value.
GoshawK's debt facilities have changed during the year with the draw on the
group's FAL as described in (d) above. Gearing ratios previously announced had
always assumed that the letter of credit pledged as FAL would be drawn. An
instalment of $13 million on the term facility was repaid in December 2004 as
scheduled. All principal, interest and fee payments under the debt facilities
have been paid as scheduled. The group's gearing ratio is 39% at the year end
compared to 48.5% at the end of 2003.
In late 2003, GoshawK's lenders were issued with warrants with a strike price of
35.25p over 5,277,722 GoshawK shares, pursuant to renegotiations of the group's
debt facilities. In the event that the debt was not repaid in full by 1 January
2005, the agreement provided for the issue of a further 1,759,240 warrants.
GoshawK has not repaid the facilities in full and, accordingly, the lenders were
issued with 1,759,240 warrants over GoshawK shares. The lenders now hold
warrants over 7,036,962 shares, representing 4% of issued share capital. A
further 1,759,240 warrants will be issued to the lenders if the debt is not
repaid in full by 1 January 2006. The warrants expire on 23 January 2008.
(k) Balance sheet
The multiple reviews of reserves, along with the increasing effect of the short
tail business strategy, mean that, while there is always some uncertainty, the
potential volatility in the balance sheet reserve provision is reducing. In
addition, the low level of reinsurance recoverables, high credit quality/low
volatility investment portfolio and lack of receivables problems mean that the
asset side of the balance sheet has improved in quality.
Since the majority of GoshawK's trading is based in U.S. dollars, the company
decided to change its reporting currency to U.S. dollars from sterling. This
change was effective for the 2004 interim financial statements. GoshawK's
shares continue to be traded in sterling.
GoshawK does not expect that International Financial Reporting Standards will
have a significant impact on the reporting of the group's results or on the net
asset position. There will be differences in the format of statements and in
reporting of some share based employee benefits, but the nature of the group's
traditional reinsurance business means that the reporting of its core business
will not be changed in Phase 1 (i.e. the rules promulgated to come into force
for reporting periods beginning in 2005). However, there will be significantly
increased disclosure requirements.
January 2005 renewals
The January 2005 renewals proved successful for Rosemont Re. The portfolio grew
by almost 40% over the January 2004 renewals. On average, price increases were
seen across the portfolio which continues to underline selection of markets
where adequate margins exist. The quality of the portfolio was increased, with
a number of pro rata accounts being replaced with excess of loss business and
the diversity of the portfolio was improved. Provided that catastrophe
activity in 2005 is at or below average, this portfolio should allow excellent
progress to be made.
The size of the U.S. Property portfolio has been significantly increased and has
also added penetration, with exposures in more zones within the U.S. This has
improved the diversity of the U.S. portfolio exposure which last year was
distributed among the main Florida, North East and California zones.
The International Property portfolio has also grown both in number of contracts
and average pricing. Territories that suffered catastrophe losses in 2004 have
seen price increases of up to 30%. Where prices have increased to attractive
levels we have grown the business, and will continue to do so. Conversely, in
other regions, such as the United Kingdom and Scandinavia we have seen prices
fall. Rosemont Re's underwriters reduced exposure in these territories as a
result.
The Marine portfolio has also grown, mostly as a result of price increases
averaging 18% across the book. Marine reinsurance pricing has remained robust
principally due to the losses caused by hurricane Ivan in the offshore energy
market.
Outlook
The GoshawK group, through Rosemont Re, continues to progress towards the
maximisation of shareholder value through the execution of a transparent, short
tail strategy. 2004 was our year of transition from a multi-line company to a
focused specialist short-tail reinsurer. 2005 is about cementing and building
on this strategy.
Management continues to explore many avenues to seek closure on non-core
exposures and operations and will implement solutions where it is economically
beneficial. The monetising of the tax losses is the first meaningful step
towards this goal in 2005. Furthermore, a significant component of the SCPIE
portfolio has now expired and the final results will be reported to us around
mid-year, eliminating another area of potential uncertainty.
We believe that the company is now an improved and more readily understood
proposition for investors and clients. The growth of our portfolio has
provided a very positive start to the year and we believe that we will maintain
this momentum as the year progresses.
Russell Brooke Jonathan Beck
Chief Executive Finance Director
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the year ended 31 December 2004
31 December 2004 31 December 2003
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
TECHNICAL ACCOUNT $'000 $'000 $'000 $'000 $'000 $'000
- GENERAL BUSINESS Notes
Earned premiums, net of
reinsurance
Gross premiums written: 2 147,022 109 147,131 200,181 280,600 480,781
Outward reinsurance premium (15,160) (21) (15,181) (24,607) (87,977) (112,584)
Net premiums written 131,862 88 131,950 175,574 192,623 368,197
Change in the gross provision for
unearned premiums 17,580 - 17,580 52,322 61,631 113,953
Change in the provision for
unearned
premiums-reinsurers' share 314 - 314 5,159 (23,735) (18,576)
Net premiums earned 149,756 88 149,844 233,055 230,519 463,574
Allocated investment return
transferred
from the Non-technical account 3 15,969 21 15,990 26,395 8,905 35,300
Total technical income 165,725 109 165,834 259,450 239,424 498,874
Claims incurred, net of
reinsurance
Claims paid:
Gross amount (35,949) (547) (36,496) (80,394) (269,868) (350,262)
Reinsurers' share - 57 57 - 132,496 132,496
(35,949) (490) (36,439) (80,394) (137,372) (217,766)
Change in provision for claims:
Gross amount (90,852) 359 (90,493) (98,312) (192,427) (290,739)
Reinsurers' share (1,339) (45) (1,384) 3,090 (47,989) (44,899)
(92,191) 314 (91,877) (95,222) (240,416) (335,638)
Net claims incurred (128,140) (176) (128,316) (175,616) (377,788) (553,404)
37,585 (67) 37,518 83,834 (138,364) (54,530)
Net operating expenses (32,620) (152) (32,772) (44,507) (104,718) (149,225)
Investment expenses and charges - - - (183) (183)
Balance on technical account
- general business 4,965 (219) 4,746 39,327 (243,265) (203,938)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the year ended 31 December 2004
31 December 2004 31 December 2003
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
NON-TECHNICAL ACCOUNT $'000 $'000 $'000 $'000 $'000 $'000
Notes
Balance on technical account
- general business 4,965 (219) 4,746 39,327 (243,265) (203,938)
Investment return 3 24,138 2,428 26,566 14,751 4,033 18,784
Unrealised (losses)/gains on 3 (10,808) (198) (11,006) 17,363 - 17,363
investments
Investment expenses and charges 3 (844) (1) (845) (866) - (866)
Net investment return 3 12,486 2,229 14,715 31,248 4,033 35,281
Net longer term investment return 3 (15,969) (21) (15,990) (26,395) (8,906) (35,301)
transferred
Other income 208 4,977 5,185 150 1,678 1,828
Other charges before amortisation of (11,607) (268) (11,875) (16,185) (23,406) (39,591)
goodwill
Amortisation of goodwill and
syndicate capacity - - - - (27,009) (27,009)
Operating (loss)/profit (9,917) 6,698 (3,219) 28,145 (296,875) (268,730)
Comprising:
Operating (loss)/profit based on long
term rate of return (8,704) 6,698 (2,006) 23,612 (292,006) (268,393)
Short term fluctuations in investment 3 (1,213) - (1,213) 4,533 (4,869) (337)
return
Gain on termination of Lloyd's - - - - 165,802 165,802
operations
(Loss)/profit on ordinary activities 2 (9,917) 6,698 (3,219) 28,145 (131,073) (102,928)
before tax
Tax on profit on ordinary activities 4 - (5,354)
(Loss) on ordinary activities after (3,219) (108,282)
taxation
Dividends paid and proposed - -
(Loss) retained (3,219) (108,282)
Transfer from/(to) capital reserve 8,644 (16,754)
Transfer to profit and loss account 5,425 (125,036)
(Loss) per share 6 (2) cents (63)
cents
Diluted (loss) per share 6 (2) cents (63)
cents
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
2004 2003
$'000 $'000
(Loss) for the financial year (3,219) (108,282)
Exchange differences on retranslation of foreign currency net assets (3,299) 21,723
Total recognised losses arising in the year (6,518) (86,559)
Prior year adjustment (see note 8) (2,296) -
Total recognised losses since last Annual Report (8,814) (86,559)
CONSOLIDATED BALANCE SHEET
at 31 December 2004
Restated
2004 2003
ASSETS Notes $'000 $'000
Investments
Other financial investments 11 343,986 334,436
343,986 334,436
Reinsurers' share of technical provisions
Provisions for unearned premiums 5,860 5,545
Claims outstanding 5,485 6,824
11,345 12,369
Debtors
Debtors arising out of reinsurance operations 110,448 80,745
Other debtors 1,127 4,867
111,575 85,612
Other assets
Tangible assets 1,025 800
Cash at bank and in hand 11 49,153 109,281
50,178 110,081
Prepayments and accrued income
Deferred acquisition costs 3,385 6,621
Other prepayments and accrued income 2,701 497
6,086 7,118
Total assets 523,170 549,616
CONSOLIDATED BALANCE SHEET
at 31 December 2004
Restated
2004 2003
LIABILITIES Notes $'000 $'000
Capital and reserves
Called up share capital 8 15,745 15,745
Share premium account 8 283,584 283,584
Reserve for own shares 8 (1,687) (1,825)
Other reserves 8 12,635 20,583
Profit and loss account 8 (138,012) (139,394)
Shareholders' funds attributable to equity interest 2/8 172,265 178,693
Technical provisions
Provision for unearned premiums 17,773 35,353
Claims outstanding 251,988 153,845
269,761 189,198
Provisions for other risks and charges - 116,678
Creditors
Amount due to credit institutions 9 67,647 51,663
Creditors arising out of reinsurance operations 1,333 2,236
Other creditors 4,336 2,780
Net amount due to Syndicate participations 2,493 5,429
75,809 62,108
Accruals and deferred income 5,335 2,939
Total liabilities 523,170 549,616
Net assets per share 7 $1.00 $1.03
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2004
2004 2003
Notes $'000 $'000
Net cash flow from operating activities 10 (64,979) 53,473
Servicing of finance
Interest paid (4,162) (2,946)
Taxation refunded 914 39
Capital expenditure
Purchase of tangible fixed assets (1,549) (648)
Sale of tangible fixed assets 16 -
(69,760) 49,918
Equity dividends paid - (6,186)
Financing
Repayment of bank loans 9 (13,000) (13,000)
Increase in bank loans 9 26,993 25,000
Exercise of share options - 73
Currency option gain - 8,569
(55,767) 64,374
Cash flows were invested as follows:
Decrease in cash holdings 11/12 (60,128) (2,669)
Net portfolio investment
Purchase of equity investments 31,000 57,327
Purchase of fixed income investments 724,778 469,460
Sale of equity investments (63,942) (35,909)
Sale of fixed income investments (601,167) (462,418)
Change in deposits (86,308) 38,583
4,361 67,043
Net investment of cash flows (55,767) 64,374
1. ACCOUNTING POLICIES
The consolidated financial statements of the group have been prepared in
compliance with section 255A, Schedule 9A and other requirements of the
Companies Act 1985 and in accordance with applicable accounting standards. The
recommendations of the Statement of Recommended Practice on Accounting for
Insurance Business issued by Association of British Insurers in November 2003
(the 'ABI SORP') have been adopted.
The comparatives for the year ended 31 December 2003 have been restated to
reflect a change in reporting currency to United States dollars, further details
of which are set out in notes 1(a) and 1(c) below, and to reflect the adoption
of UITF Abstract 38 as detailed in note 1(h).
The company's accounts have been prepared under the historical cost convention,
modified to include the revaluation of fixed asset investments, in accordance
with Section 226 Schedule 4 to the Companies Act 1985.
a) Basis of Accounting and Consolidation
The group accounts consolidate the accounts of GoshawK Insurance Holdings plc
and all its subsidiary undertakings, with the exception of GoshawK Dedicated
(No.2) Limited, 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) and participated in 1999 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. GoshawK
Dedicated (No.2) Limited has been excluded from consolidation with effect from
31 October 2003 on the basis that from that date there have been severe long
term restrictions that substantially hinder the exercise of the rights of the
parent company over the assets and management of GoshawK Dedicated (No.2)
Limited.
The accounting information in respect of the non-managed open Syndicates on
which GoshawK Dedicated Limited participates, is provided by the respective
managing agent through an information exchange facility operated by Lloyd's.
This information is reported on a three year accounting basis in accordance with
the Lloyd's Syndicate Accounting Bye-laws.
Following the closure of the London operations at the end of 2003, the directors
are of the opinion that the local currency of the holding company is now United
States dollars. Since the Group's continuing operations are almost wholly
conducted in United States dollars, the directors have also changed the Group
reporting currency from United Kingdom sterling to United States dollars,
effective 1 January 2004. Comparatives have been restated to reflect the change
in reporting currency.
b) Reinsurance Operations
GoshawK Reinsurance Limited, the Bermudian reinsurance subsidiary of the
Company, was renamed Rosemont Reinsurance Ltd. on 23 April 2004.
i) Premiums
Gross premiums written represent premiums on business incepting during the year.
Gross premiums written on non-proportional business are accounted for on the
basis of the contractually stated minimum and deposit premium, which is then
adjusted upon contractual terms in later years. Gross premiums written on
proportional business are accounted for when reported to the company by the
cedant or broker. Gross premiums written are stated before deduction of known
commissions, taxes, duties levied on premiums and other deductions.
Outward reinsurance premiums are accounted for in the same accounting year 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 year. Acquisition costs are
deferred and amortised over the year 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.
1. ACCOUNTING POLICIES continued
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
to the balance sheet date but not reported until after the balance sheet date.
The provision for claims outstanding includes amounts set aside for reported
unpaid claims and claims incurred but not yet reported (IBNR). The provision
for reported unpaid claims is established by the underwriter and management
based on amounts reported from ceding companies, and represents the estimated
ultimate cost of events that have been reported to the Company.
The provision for claims incurred but not yet reported is estimated by
management and the underwriter based on an expectation of the ultimate result.
The Company's actuary verifies the provision using statistical techniques of
estimation and review on a quarterly basis. The reserves are also subject to
review twice yearly by external consulting actuaries.
Actuarial methods extrapolate 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.
Where there is limited past claims experience available to the Company, market
benchmarks are used. 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 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 year in which the adjustments are made.
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 year end. The provision for unexpired
risks is included within technical provisions in the balance sheet.
c) Non-Managed Syndicate Participations
Non-managed syndicate participations are accounted for on a three year funded
basis and therefore the accounting policies referred to in c) i-v above differ
for non managed syndicate participations. The material accounting policies are
as follows:
i) Premiums
Gross premiums written represent premiums receivable on business incepting
during the underwriting year of account together with adjustments to premiums
written in previous underwriting years of account and including estimates for '
pipeline' premiums. Gross written premiums 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 insurance contracts or reinsurance contracts except in
relation to excess of loss contracts, where the initial premium is charged when
due.
There is no deferral of either gross written or outward reinsurance premiums.
ii) Acquisition Costs
Acquisition costs represent the expenses, both direct and indirect, of acquiring
insurance policies written during the financial year. There is no deferral of
these costs.
1. ACCOUNTING POLICIES continued
iii) Claims
Claims incurred comprise claims and expenses 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. Included in the provision is an estimate of
the cost of handling the outstanding claims. Provisions for claims outstanding
are based on information available to the directors and the eventual outcome may
vary from the original assessment. The amount of salvage and subrogation
recoveries is separately identified, and where material, reported as an asset.
iv) Technical Provisions
The underwriting accounts for all classes of business are prepared on a three
year basis, in accordance with Lloyd's normal practice. The excess of premiums
written and syndicate investment income over the claims and syndicate expenses
paid in respect of business incepting in an underwriting year is carried forward
for two years in a fund and no profit is recognised until the end of the third
year following the start of each underwriting year. The fund is included as
part of outstanding claims. At the end of the third year and thereafter,
provision is made for the estimated cost of claims notified but not settled at
the balance sheet date together with the estimated cost of claims incurred but
not reported at that date and claims handling costs.
Where appropriate a provision for losses is made in respect of the open
underwriting years by each spread vehicle on which the group participates.
While the directors make every effort to ensure that adequate provision is made
for losses on open years of account and years in run-off, their view of the
ultimate loss may vary in later periods as a result of subsequent information
and events. This in turn may necessitate adjustment of the original provisions.
Such adjustments are reflected and disclosed in the financial statements for
the period in which the related adjustments are made.
d) Exchange Rates
i) Change in Group reporting currency
As stated in note 1(a) above, the Group's reporting currency has been changed to
United States dollars. The prior period's financial statements have been
restated to reflect the change in reporting currency. The share capital and
share premium accounts of the holding company have been translated at the
exchange rate ruling at 1 January 2004, representing the date at which the
change in the holding company's local currency was effective.
The financial statements of Group undertakings, whose functional currency is not
U.S. dollars, have been translated at the rate of exchange ruling at the balance
sheet date. Exchange differences arising on translation of opening net assets
are taken directly to reserves. All other exchange differences are recognised
in the profit and loss account.
ii) Company
Assets, liabilities, revenues and costs denominated in foreign currencies are
recorded at the rates of exchange ruling at the dates of transactions. At the
balance sheet date, monetary assets and liabilities are translated at the year
end rates of exchange. Exchange profits or losses arising from transactions are
taken to the profit and loss account.
iii) Group
The financial statements of 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
exchange 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.
iv) Operating subsidiary foreign currency translation
Within each subsidiary undertaking's accounts, foreign currency transactions are
translated at exchange rates ruling at the date of the transaction. Foreign
currency monetary balances are translated at exchange rates ruling at the
balance sheet date with exchange differences arising being recognized in the
profit and loss account. To the extent that unrealised currency gains or losses
have arisen on investments, these are then transferred to a capital reserve.
e) Investments
Listed investments are shown at market value. The company's unlisted
investments are shown at directors' valuation.
1. ACCOUNTING POLICIES continued
f) Investment Income
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 group's reinsurance operations. 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.
Investment income from investments not supporting the group's reinsurance
operations (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 amortised cost at the date of sale. Unrealised gains and
losses on 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 include adjustments in respect of unrealised gains and losses
recorded in prior years which have been realised during the year and are
reported as realised gains and losses in the current year's profit and loss
account. Unrealised gains and losses are recognised in the profit and loss
account and are then transferred to a capital reserve.
g) Derivative Instruments
The Group uses certain derivative instruments, such as interest rate futures, to
manage the duration of its fixed income investments. Such instruments are marked
to market at the balance sheet date and gains or losses thereon are recognised
in the profit and loss account.
h) Own Shares
The company has adopted the accounting treatment required by UITF Abstract 38
for shares held in an Employee Benefit Trust. In accordance with the Abstract,
the consideration paid for own shares is deducted in arriving at shareholders'
funds. No gain or loss is recognised in the profit and loss account or statement
of total recognised gains and losses on the purchase, sale or cancellation of
own shares. Compensation costs are based, as a minimum, on the market price of
the shares at the time of grant, less any amounts paid or payable by the
employees in respect of these awards. These costs are charged to the profit and
loss account over the periods during which the share awards are earned.
Consideration paid or received for the purchase or sale of own shares is shown
as separate amounts in the reconciliation of movements in shareholders' funds.
i) Other Income
Other income comprises consortium management, commissions, consultancy and asset
management fees. These are credited to the profit and loss account as they
become due.
j) Operating Expenses
The group's underwriting expenses are charged to the technical account.
k) 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.
l) Depreciation
Depreciation is provided on all tangible assets at rates calculated to write off
the cost less estimated residual value, of each asset evenly over its expected
useful life as follows:
Furniture, computer equipment and leasehold improvements 3 years
Software licences 1 year
1. ACCOUNTING POLICIES continued
The carrying values of tangible assets are reviewed for impairment in periods if
events or changes in circumstances indicate the carrying value may not be
recoverable.
m) Pension Costs
The group operates a defined contribution pension scheme. Contributions are
charged to the profit and loss account as they become payable in accordance with
the rules of the scheme.
n) Operating leases
Rentals payable under operating leases are charged on a straight line basis over
the term of the lease.
2. SEGMENTAL ANALYSIS
Since the only remaining underwriting operations of the Group are based in
Bermuda and all continuing activities and net assets support the Bermuda
reinsurance operations, the directors consider that the Group is a single
segment.
All revenue generated by the reinsurance business arose from underwriting in
Bermuda. This has been treated as both a single geographic and business
segment.
In 2003 all turnover from the participations as a corporate member arises from
underwriting business in the United Kingdom in the Lloyd's Insurance Market.
This has been treated as both a single geographic and business segment. The
table below gives details of the geographic split.
2004 2003
$'000 $'000
Gross written premiums:
UK 109 280,600
Bermuda 147,022 200,181
Gross written premiums 147,131 480,781
(Loss)/profit before taxation:
UK (6,971) (141,693)
Bermuda 3,752 38,765
(Loss)/profit before taxation (3,219) (102,928)
Net assets:
UK (69,457) (81,026)
Bermuda 241,722 259,719
Net assets 172,265 178,693
3. INVESTMENT RETURN
2004 2003
$'000 $'000
Investment income 12,805 17,724
Realised gains 13,761 1,060
Unrealised (losses)/gains (11,006) 17,363
Investment expenses (845) (866)
Total investment return 14,715 35,281
Analysed as:
Investment return from:
Syndicates 21 8,906
Corporate Funds at Lloyd's - 4,213
Reinsurance operations 15,969 22,182
Transferred to the technical account 15,990 35,301
Non-underwriting investment return (62) 317
Net investment return 15,928 35,618
Short term fluctuations in investment return (1,213) (337)
Total investment return 14,715 35,281
The transfer to the technical account represents the estimated long term rate of
return, as indicated below, applied to the assets supporting reinsurance
operations.
The following long term rates of return have been applied to the group's
investments. The long term rates of return are based on an estimate of the
historical asset performance, current and prospective bond yields, and the risk
premium for holding equity investments.
Long term rate of return 2004 2003
Equities and alternative investments 6.5% 7.5%
Fixed interest securities 4.0% 5.8%
The long term rates of return were changed effective 1 January 2004 to better
reflect the directors' outlook for US dollar denominated equities and bonds over
a market cycle. The rates were applied to the average bond and equity
components of the underwriting investment assets of the Group. The assets held
as Funds at Lloyd's during the year were all held in cash and cash equivalents,
and therefore were not included in the long term rate of return calculation.
4. TAXATION
a) Taxation charge
The tax charge is made up as follows:
2004 2003
$'000 $'000
Movement in deferred taxation - 6,263
Over provision on prior year's tax charge - (909)
Total tax charge - 5,354
b) Factors affecting the tax credit charge during the year
The tax credit based on the (loss) / profit for the year comprises:
2004 2003
$'000 $'000
Group (loss) / profit on ordinary activities before tax (3,219) (102,928)
Tax recoverable @ 30% (966) (30,879)
Effects of:
Profits arising overseas not subject to UK tax (1,125) (11,623)
Current year's losses not available for offset 2,091 42,502
Over provision on prior years' tax charge - (909)
- (909)
It may be possible to utilise the tax losses generated from the UK operations in
2004 and 2003 to the extent that there are future taxable profits in the UK
Group against which the losses can be set. No deferred tax asset is carried on
the Group's balance sheet in accordance with the accounting policy set out in
Note 1(k). Profits generated from Bermudian operations are not subject to UK
corporation tax other than to the extent that they are remitted to the UK.
5. DIVIDENDS
No dividends were declared in either 2004 or 2003.
6. EARNINGS PER ORDINARY SHARE
The calculation of basic earnings per share is based on the loss from ordinary
activities after taxation available for ordinary shareholders of $3,219,000
(2003 loss: $108,282,000) and the weighted average number of shares in issue of
172,781,596 (2003: 172,884,048). The calculation of diluted earnings per share
is based on shares of 172,781,596 (2003: 172,884,048). For 2004, the loss
attributable to ordinary shareholders and weighted average number of ordinary
shares for the purpose of calculating the diluted earnings per ordinary share
were identical to those used for basic earnings per ordinary share. This is
because the exercise of share options and warrants would have the effect of
reducing the loss per ordinary share and is therefore not dilutive under the
terms of FRS 14.
Shares held in the employee benefit trust have been excluded from the
calculations in accordance with UITF Abstract 38.
2004 2003
No. of shares No. of shares
'000 '000
Basic weighted average 172,782 172,884
Dilutive potential ordinary shares
- employee share options - -
- warrants - -
172,782 172,884
7. NET ASSETS PER SHARE
The calculation of net assets per share is based on shareholders funds at 31
December 2004 and 31 December 2003 and calculated on 172,781,596 shares (31
December 2003 - 172,781,596 shares) in issue. Shares held in the employee
benefit trust have been excluded from the calculation in accordance with UITF
Abstract 38.
8. SHAREHOLDER FUNDS
For the year ended 31 December 2004
Reserve for
own shares
Share Share premium Other Profit & Loss
capital reserves
Total
$'000 $'000 $'000 $'000 $'000 $'000
At 1 January 2004 15,745 283,584 20,583 - (139,394) 180,518
Prior year restatement - - - (1,825) - (1,825)
At 1 January 2004 restated 15,745 283,584 20,583 (1,825) (139,394) 178,693
Loss for the year (3,219) (3,219)
Share based expense
recognised in the profit and
loss account 90 90
Transfer to other reserves (8,644) 8,644 -
Retranslation of foreign
currency net assets 696 48 (4,043) (3,299)
At 31 December 2004 15,745 283,584 12,635 (1,687) (138,012) 172,265
For the year ended 31 December 2003
Reserve for
own shares
Share Share Other Profit & Loss
capital premium reserves
Total
$'000 $'000 $'000 $'000 $'000 $'000
At 1 January 2003 15,739 283,518 4,128 - (36,631) 266,754
Prior year restatement (2,296) (2,296)
At 1 January 2003 restated 15,739 283,518 4,128 (2,296) (36,631) 264,458
Loss for the year (108,282) (108,282)
Share based expense
recognised in the profit
and loss account 985 985
Additional shares purchased
for Employee Benefit Trust (263) (263)
Share options exercised 6 66 72
Transfer to other reserves 16,754 (16,754) -
Retranslation of foreign
currency net assets (299) (251) 22,273 21,723
At 31 December 2003 15,745 283,584 20,583 (1,825) (139,394) 178,693
Prior Year Restatement
The company was required to adopt UITF Abstract 38 relating to own shares held
in an Employee Benefit Trust. In order to comply with the Abstract, it was
necessary to make an adjustment to the opening reserves, including the creation
of a separate reserve within shareholders' funds, and to restate the 2003 profit
and loss account and closing balance sheet for 2003. The impact of these
adjustments is to decrease opening shareholders funds for the year ended 31
December 2003 by $2,296,000. The impact on the profit and loss account and other
reserves for the year ended 31 December 2003 is to increase profits by $985,000
for the year. The reserve for own shares was also debited by $263,000 in respect
of the purchase of additional shares during 2003. The cumulative net impact on
opening shareholders' funds for 2004 is a reduction of $1,825,000.
• The impact of the adjustment on 2003's basic earnings per share and
net asset value per share is negligible, and thus has not been disclosed.
• The restatement has been made in respect of 3,142,483 own shares
held at 31 December 2003 in an Employee Benefit Trust. At 31 December 2004 the
number of own shares held was 3,142,483.
9. DUE TO CREDIT INSTITUTIONS
2004 2003
$'000 $'000
Amounts falling due:
In less than one year 13,000 13,000
In more than one year but not more than two years 13,000 13,000
In more than two years but not more than five years 41,890 26,000
67,890 52,000
Less: Issue costs (243) (337)
67,647 51,663
On 1 January 2002 a Letter of Credit for £20 million was provided by Barclays
Bank plc, in favour of Lloyd's in respect of subsidiary companies of GoshawK
Insurance Holdings plc underwriting as corporate members. The Letter of Credit
was secured by a charge over a £5 million cash deposit, by a guarantee and a
debenture from GoshawK Insurance Holdings plc, and all subsidiary companies with
the exception of Rosemont Reinsurance Ltd. and GoshawK Security Insurance Ltd in
respect of all the obligations of the Company to the Bank in respect of the
Letter of Credit.
On 24 December 2002 Barclays Bank plc made available to the company a syndicated
Term Loan Facility for $40 million. The facility was secured by a guarantee and
a debenture from GoshawK Insurance Holdings plc and all subsidiary companies
with the exception of Rosemont Reinsurance Ltd., GoshawK Services Ltd and
GoshawK Security Insurance Ltd. On 2 April 2003 Credit Lyonnais SA joined the
Syndicate and made available a further $25 million. Two scheduled principal
repayments on the Term Facility of $13 million have been made in December 2003
and December 2004. The outstanding principal of $39 million falls to be repaid
in three further instalments of $13 million in December 2005, 2006 and 2007.
On 19 December 2003, following Syndicate 102 being placed into run-off on 30
October 2003, GoshawK Insurance Holdings plc reached agreement with Barclays
Bank and Credit Lyonnais to restructure the Letter of Credit facility, whereby,
in the event of a drawdown, the obligation will be met through the conversion of
the Letter of Credit into a loan repayable in two equal annual instalments in
2008 and 2009. GoshawK made full provision against drawings by Lloyd's on the
Letters of Credit at 31 December 2003.
On 6 August 2004, following a cash call by Syndicate 102, the Funds at Lloyd's
held under a covenant and charge by GoshawK Insurance Holdings plc to support
the underwriting of its corporate member subsidiaries were released in their
entirety to Lloyd's in settlement of the cash call. In addition the £20 million
Letter of Credit Facility was also drawn down by Lloyd's. The borrowing in
respect of the LOC was £15 million, the balance of £5 million having been
collateralised from GoshawK Insurance Holdings plc's resources. Borrowings
under the Letter of Credit are to be repaid by not later than the end of 2009.
At 31 December 2004 this amounted to $28.9 million.
10. RECONCILIATION OF OPERATING (LOSS) TO NET CASH (OUTFLOW)/INFLOW FROM
OPERATING ACTIVITIES
2004 2003
$'000 $'000
(Loss) on ordinary activities before taxation (3,219) (268,730)
Funds at Lloyd's provided against on deconsolidation of subsidiary and
restructuring provision - (113,098)
Loss in subsidiary to date of deconsolidation - 273,333
Interest payable 4,162 2,946
Depreciation of tangible fixed assets 1,046 575
Amortisation of intangible assets - 27,011
Share based expense 90 985
(Increase) in other assets - (2,556)
Increase in technical provisions 81,587 321,971
Decrease/(increase) in debtors and prepayments (24,933) 198,527
Release of provision for other risks and charges (116,678) -
(Decrease)/increase in creditors and accruals 115 (98,921)
Profits from sales of investment (13,345) (1,060)
Loss/(profit) from revaluation of investments 9,391 (14,476)
Other non-cash transactions (4,407) -
Exchange movements 1,212 5,866
Net liabilities of deconsolidated subsidiary - (278,900)
Net cash (outflow)/inflow from operating activities (64,979) 53,473
11. MOVEMENT IN CASH, PORTFOLIO INVESTMENTS AND FINANCING
At 1 January Changes to market At 31 December
2004 value 2004
Cashflow
$'000 $'000 $'000 $'000
Cash at bank and in hand 109,281 (60,128) - 49,153
Equity securities 81,452 (32,942) 5,442 53,952
Fixed income securities 166,676 123,611 (253) 290,034
Deposits with credit institutions 86,308 (86,308) - -
443,717 (55,767) 5,189 393,139
Borrowings (51,663) (13,993) (1,991) (67,647)
Total 392,054 (69,760) 3,198 325,492
12. MOVEMENT IN OPENING AND CLOSING PORTFOLIO INVESTMENTS NET OF FINANCING
2004 2003
$'000 $'000
Net cash inflow for the period
Cash flow (60,128) (2,669)
Portfolio investments net of financing (9,632) 55,044
Movement arising from cash flows (69,760) 52,375
Changes in market values and exchange rate effects 3,198 (7,731)
Other - (1,033)
Deconsolidation adjustment - (155,401)
Total movement in portfolio investments net of financing (66,562) (111,790)
Portfolio investments net of financing at 1 January 392,054 505,669
Portfolio investments net of financing at 31 December 325,492 393,879
Prior year restatement for UITF Abstract 38 - (1,825)
325,492 392,054