Goshawk blames profits blow on Accident Group

Goshawk Insurance, the Lloyd's of London underwriter which provided legal cover insurance toThe Accident Group's customers, yesterday warned that TAG's failure would hit its profits and may lead to Goshawk's being sold.

It warned its 2003 profits would fall short of expectations by up to 40 per cent because of underwriting losses in its London syndicate and an increase in reserves to cover insurance policies provided to TAG customers.

Goshawk is now reckoned to report pre-tax profits of no more than £17m - down from expectations of £28m - and it said it had appointed Numis Securities and Dresdner Kleinwort Wasserstein to review "all strategic options" for the group which might include a sale of the business or the scaling back of its London underwriting operations. Shares dropped 25.24 per cent during the day to close at 78.5p.

Goshawk's package - which carried a premium of around £900 - paid out if TAG's customers lost their claims - and since TAG's going into administration in May, insurers who provided legal expenses cover to TAG's customers have been assessing the quality of its client base and how cases were vetted before action was taken. There are concerns that TAG was taking forward weak cases and around 50 per cent of TAG cases lost their claim in court. This meant the insurers have had to pay out on legal expenses policies more often than was expected.

Goshawk now believes its legal expense book will make a loss and it has increased its reserves. "TAG had a vetting criterion agreed with us to assess the likelihood of whether the case should go to court. We are now looking at whether there was misrepresentation as to whether or not the correct criterion was applied," Chris Fagan, chief executive of Goshawk, said.

Around six insurers provided legal expenses insurance to TAG, which are also now reviewing their cases.

As well as the uncertainties from TAG, Goshawk is also suffering from an increased number of claims on cargo insurance. This has not been as sound as hoped and reserves now have to be increased to cover the additional costs.

Goshawk pre-tax profits will still be up on last year's £10m as its other business lines have enjoyed spiralling premium rates. Mr Fagan added that Goshawk Re, the comapny's reinsurance division, was enjoying "very favourable trading conditions".