Goshawk Warns on Profits; Best Lowers Syndicate Ratings

London’s Goshawk Insurance, a specialty insurer and reinsurer, which manages Lloyd’s Syndicate 102, warned that it may not meet profit forecasts for the year due to adverse developments. The news not only sent the company’s shares down 23 percent, but also triggered an announcement from A.M. Best that it has downgraded its syndicate rating to A- (Excellent) from A (Excellent) of Syndicate 102.

“The rating,” said Best, “reflects the financial strength of the Lloyd’s market–currently rated A- (Excellent)–which underpins the security of all Lloyd’s syndicates. The rating action reflects weakened operating performance as a result of deteriorating loss experience in certain accounts. Partially offsetting this is an improving prospective risk profile.”

The insurer’s main problems are the exposure to legal costs from policyholders expenses incurred by The Accident Group, a no win, no fee compensation subsidiary, which is expected to impact the company’s net earnings. Best noted that “the 2001 year of account is expected to return a loss of at least 10% on capacity, largely due to a number of significant loss events during the year but also including prior year deterioration in certain lines of business, particularly certain engineering contracts and participation in an aviation pool (now discontinued).”

It said the Syndicate had also “experienced deterioration in its cargo account, the need for reserve strengthening for contingent cost insurance (following a change in accounting treatment as advised by auditors).” Nevertheless Best indicated that it expected the group to post a return to profitability for 2002 when it files its Syndicate Quarterly Return with Lloyd’s in August, but at a lower level than the rating agency had forecast.

In contrast to Syndicate 102’s problems, Goshawk Re, the company’s reinsurance operation in Bermuda is doing very well, which also has a positive effect on the company. Best noted that “the risk profile of the syndicate is improving due to the reduction in volatility resulting from the transfer of most of its reinsurance business (in particular, property catastrophe) to Goshawk Reinsurance Limited, Bermuda–currently rated A- (Excellent).”

Best also issued a separate comment on Goshawk Re, indicating that the ‘A-‘ rating “continues to reflect Goshawk Re’s stand-alone financial strength.” It has, in Best’s opinion, “a substantial excess of both current and prospective risk adjusted capital relative to the assigned rating.” The bulletin also stated that Best had “given no credit for the USD 65 million capital raised by debt issued at the holding company level,” in calculating the rating level. It added that “Goshawk Re is not exposed to losses arising from syndicate 102’s 2001 and prior years of account. While some deterioration on the 2002 underwriting year may emerge, this is not expected to be material to Goshawk Re.”

Best also added that, following meetings with senior management, it did had found no intention to sell the company. However, the rating agency warned, “in the event that the Board review of the strategic options led to a change in Goshawk Re’s ownership, A.M. Best would review the rating promptly.”