Enormous pre-tax and WTC losses crippled Cox and then killed it. But the giant seems to be rising from the underwriting ashes. Jason Woolfe reports

The giant that once dabbled in everything from marine, reinsurance and political risks to power has gone.

Haemorrhaging millions due to disastrous commercial underwriting, the dying giant disappeared to be replaced by an ambitious motor specialist. How did that happen?

What will it do next?

Other than pulling a rabbit out of a hat in the middle of Leadenhall Street, chairman Peter Owen could hardly have executed a sharper conjuring trick. He didn't do it alone.

Luckily for Cox, the first listed integrated Lloyd's vehicle, the Lloyd's Market was there to provide a convenient puff of legal smoke.

Two hugely advantageous deals with Lloyd's, together with the strength of Cox's retail business, are setting it up for a potentially amazing escape from beneath a mountain of debt.

The group reported an eye-watering pre-tax loss of £240m for last year, with WTC losses booked at a whopping £125m, wiping out the retail side's impressive 70% increase in operating profits to £36.7m.

The agreement by Lloyd's to ring-fence Cox's past losses in return for the rights to the assets that supported its old underwriting has been well reported.This legally binding deal gives Cox's retail side the chance to sail ahead, selling only retail cover and without having to worry about the shocking losses from the commercial book.

But Lloyd's was also generous enough to give the new Cox a hefty push to get it going. It is allowing Cox to write £240m of premium based on £50m of capital - the result of a planned £73m fundraising after taking off costs, debt repayments and working capital.

This has the effect of slashing the solvency margin requirements to about 21%, when closer to 35% could be considered normal.

It allows Cox to stretch its money very efficiently, but its competitors complain privately that they are not competing on a level playing field.

"It just shows how desperate they were to make sure Cox stays in the Lloyd's Market," says one.

"If Cox left Lloyd's, its franchise as a motor market would be substantially reduced."

Cox retail chief executive Neil Utley acknowledges that Cox's solvency ratio is now "probably the best in the market".

If any of Cox's syndicates were to fail, such stretching of resources could ultimately lead to calls being made on the Lloyd's central fund.

For the safety net, Utley points to reinsurance that limits Cox's liability to £500,000 - at least half of which is AA or higher rated reinsurers.

So this helps set up Cox to increase its retail underwriting from last year's £476m of gross premium to about £600m this year.

Utley argues that with a 34-year run of unbroken profits and a motor combined ratio of 92% last year, down from 97% in 2000, Cox's prospects are rosy and that the shift makes perfect sense.

Sure enough, Equity Red Star, the trading name for Cox's Syndicate 218, covers one in four motorbikes in the UK. It makes Cox a top ten motor insurer with one million customers and 2,000 staff.

Its 6,000 high street brokers are well established and profitable - retail broking profits increased by 27% to £8m in 2001, up from £6.3m in 2000.

But Cox only bought Christopher-son Heath, the personal lines insurer that included the management of Syndicate 218, in 1996.

This time last year, then chairman Duncan Clegg was envisaging growing the business rather than closing Cox's disastrous commercial side.

It is also worth bearing in mind that Cox's underwriting earnings from 2002 and before could be used to pay off debts from the past.

So in the worst case, new Cox may have to run largely on the profits made by its distribution businesses, managing agency and investments.

If there's a contradiction at the heart of the strategy, it is exposed by the 50% projected growth figure - and Utley's repetition of the current mantra: "We will not be underwriting for market share."

The danger is that Cox will give in to the temptation to offer softer rates in order to meet its ambition to become a top five motor insurer.

With its brilliant deals with Lloyd's behind it, offering soft rates and taking on too much risk could be a recipe for disaster.

In a presentation to institutional investors, Cox set out its retail strategy of achieving "scale to drive cost economies". It is difficult to see much slack in the existing system to find the cost economies.

Utley predicts the retail headcount of 2,000 will stay about the same and although he suggests there could be room to pare down the £100m costs bill, the expense ratio of 8.6% is already in the top quartile. The £6m IT investment bill is not expected to increase.

Some growth will come from Cox's December deal to run off Crowe's motor portfolio for renewal rights and a £40m fee, but Utley expects to renew only about half of Crowe's £150m of premium.

"If we don't think the business is right we won't take it on," he says.

Utley predicts UK motor rates rising below claims inflation in 2003 so it is not going to sustain anything like the 110% profit growth from underwriting it achieved from 2000 to 2001.

Utley's experience suggests he can keep underwriting under control. He spent four years as chief executive at Privilege, part of the Direct Line group, and his friendship with Direct Line founder Peter Wood helped seal Wood's deal to buy a 1.3% stake in Cox last month.

Utley says if he must choose between missing his growth ambition and turning a profit for shareholders, the shareholders will win.

Success has rewarded him handsomely in the past. His bonuses outstripped those of his fellow directors in 1999 and 2000. A £150,000 golden hello at Cox in 1999 helped push his total remuneration to £509,303 when then chief executive Michael Dawson was on £377,417. On a personal level, Utley's operation is the one to watch and Dawson will oversee the now largely defunct commercial arm.

Directors did not receive bonuses at all last year and Utley knows investors, brokers and jealous competitors will be watching very carefully over coming months to see if the new Cox can avoid overstretching itself and thrive in the way the old Cox failed to do.

Listen carefully and you may just hear: "Cox is dead, long live Cox."