TIDMTAW
RNS Number : 6086D
Tawa PLC
25 March 2011
PRESS RELEASE 25 March 2011
FOR IMMEDIATE RELEASE
FINAL RESULTS ANNOUNCEMENT
Tawa plc
Preliminary results for the year ended 31 December 2010
An active year for Tawa, with the acquisition of Island Capital,
announced acquisition of Oslo Re, launch of STRIPE(R) , further
capital extraction from risk carriers and continued leveraging of
the Tawa/ Pro integration
Tawa plc ("Tawa" or "the Group") today announces preliminary
results for the year ended 31 December 2010.
Financial highlights
-- Profit from continuing operations was $8.6 million (2009:
loss of $0.9 million), whilst there was a loss from discontinued
operations of $6.8m (2009: profit of $12.1 million);
-- Profit for the year attributable to shareholders was $1.8
million (2009: $11.2 million);
-- The Group's net assets are $226.3 million of which $1.3
million derives from non-controlling interest leaving equity
attributable to shareholders of $225 million;
-- Net assets per share in US dollars are $2.00 (GBP1.26) per
share (2009: $2.02; GBP1.27);
-- During the year Tawa extracted $47 million from its risk
carriers. $12 million was used to repay debt on the purchase of
PXRE Reinsurance Company ('PXRE'); and
-- An interim dividend for the year ended 31 December 2010 of
1.25 pence per share will be paid on 1 June 2011 to shareholders on
the register at 13 May 2011. The Directors recommend a final
dividend of 1.25 pence per share. Subject to shareholder approval
at the annual general meeting on 23 June 2011, the dividend will be
payable on 2 December 2011 to shareholders on the register at 4
November 2011.
General activities during 2010
-- Acquired Island Capital which was completed on 22 October
2010;
-- Announced the acquisition of Oslo Reinsurance Company (UK)
Limited on 21 December 2010 and completed on 10 March 2011; and
-- Restructure of businesses to focus on continuing operations,
accelerating the transition of our group from a pure run-off
acquirer model to a more diversified insurance investor model.
Tawa measure capital extraction and free cash flow generation as
its main performance indicators. In this context a $35 million
dividend from KX Reinsurance Company Limited ('KX Re') was received
during the period. This represents the extraction of excess
regulatory capital and is free cash available to Tawa. Tawa also
received approval for $12 million of capital extraction from its
Connecticut domiciled subsidiary PXRE Reinsurance Company ('PXRE').
The $12 million were used to repay part of the acquisition
debt.
Gilles Erulin, Chief Executive Officer of Tawa plc,
commented:
We are in the business of leveraging more than our sole equity,
we are leveraging our people skills in insurance restructuring,
insurance operations and change management to diversify our
investment portfolio and provide services which are value creative
to our clients.
In 2010 we accelerated the transition of our group from a pure
run-off acquirer model to a more diversified insurance investor
model. Pro is definitely providing the Group with a larger
footprint in the market, the benefits of which are now beginning to
show through.
--ENDS-
Enquiries:
Gilles Erulin, Chief Executive, Tawa plc 020 7068 8000
Victoria Sisson or Alexandra Thompson, FWD 020 7623 2368
James Britton, or Guy Wiehahn, Peel Hunt (Nominated
Adviser and Broker) 020 7418 8900
Notes for Editors:
Tawa plc was formed in 2001 with the purpose of acquiring or
developing assets and business in the insurance industry. Tawa is
interested in acquiring run-off portfolios of insurance and
reinsurance companies, companies and businesses providing services
to the insurance industry and in developing its own products to
serve the insurance market as a whole such as STRIPE(R) .
Since its formation, Tawa has acquired CX Reinsurance Company
Limited, KX Reinsurance Company Limited, PXRE Reinsurance Company,
Island Capital Limited, Oslo Reinsurance (UK) Limited and the Pro
group of companies.
The combined Tawa/Pro team of 300 professionals service a number
of the largest insurance businesses in the UK and Europe and
deliver a market-wide third-party servicing capability as Pro
services active underwriters as well as run-offs and cover London's
company and Lloyd's markets as well as Europe and the USA.
In July 2007 Tawa plc was floated on the AIM market.
Further information can be found on the Company's website:
www.tawaplc.co.uk.
Joint statement of the Chairman and Chief Executive Officer
To our Shareholders,
We had a number of successes during 2010. On the servicing side
the successful management of our largest clients' Schemes, the
launch of STRIPE(R) , the securing of a number of consulting and
outsourcing projects and an enhanced relationship with Swiss Re
have partially offset the expected coming to an end of major
contracts, whilst maintaining a good profitability level. On the
investment side, the acquisition of both Island Capital and Oslo Re
(UK), the strategic partnership with Lincoln General in the US, a
deal to transfer the legacy portfolio of a top 50 Lloyd's Broker
and also multiple investments in reinsurance debt (a new activity
using the skills within Pro), show the extended reach of our
teams.
We are indeed leveraging more than our sole equity, we are
leveraging the skills acquired in insurance restructuring and
change management, to diversify our investment portfolio and to
provide services which are value creative to our clients business
and therefore more profitable to us.
This will change the Group's metrics from being cash extraction
driven to a more balanced mix of recurring cash flows with
continued releases of excess regulatory capital from the risk
carriers. In 2010, we extracted $47 million from our run-off
investments after $40 million extracted in 2009. But this year we
also generated $4 million of pre-tax earnings from our servicing
business.
These figures confirm that the acquisition of Pro in 2009 is
already paying off, and is accelerating the transition of our group
from a pure run-off acquirer model to a more diversified insurance
investor model. Pro is providing the Group with a larger footprint
in the market, the benefits of which are now beginning to show
through.
Service business - Pro
Pro is well known for outsourcing and creating seamless
administration solutions. It is less well known for expert
consultancy services.
In order to have a better visibility for both divisions, we now
have a structure built around clearly identified lines of business,
to enhance profitable growth capacity: Consulting and Outsourcing.
The Outsourcing division refers mainly to work we do on behalf of
clients on our platform. Consulting typically refers to work
provided directly for our clients.
Pro's Consulting division is a rapidly growing area. The
creation of a stand-alone division reflects its increasing
importance as a revenue stream. The consulting unit focuses on
specific projects to deliver value and improve organizational
effectiveness. We provide services such as business consultancy
(change management, project management, process improvement,
business analysis and data engineering) as well as (re)insurance
and financial support services.
We plan to move upstream towards providing more high end,
value-added consulting. This year, we are strengthening our team
through refocus and expansion of our technical specialists and
consultants. We are also building on our Swiss Re preferred
supplier status to expand within large organisations across the
world. We continue to enlarge our service offering beyond the
run-off focus by capitalising on our wide ranging industry
expertise and network.
In our Outsourcing division, we provide clients with the
opportunity to leverage the functions outsourced to Pro into a true
value creation tool benefiting their own organizations.
Practically, Pro provides our clients insurance back-office
outsourcing in all its various aspects. Pro also manages Tawa's
existing run-off companies.
In this division, the expected but significant reduction of work
for long standing clients following the successful managing of
their wind down plans meant that whilst we were able to redeploy
significant numbers of employees we had to let some others go. We
want to take this opportunity to thank each of them for their
dedicated efforts for the company and to wish them well for the
future.
To build towards a larger scale we have enhanced Pro external
sales strategy and created a marketing ethos to ensure sales are a
major component of the daily job for each individual across the
organization.
Bearing in mind this rebalancing of client mix, achieving our
service division growth targets will be a challenge. 2010 has been
a transition year which has prepared us to attain our goals. They
require our business and our people to be dynamic, responsive and
outgoing and to maintain their technical excellence at its highest
level. Our aim is to be "best in class", and by some margin,
wherever we operate.
Portfolio acquisitions and investments
In the acquisition arena, we now have an even stronger M&A
team bearing the responsibility of overseeing and implementing any
group investment, whether debt, insurance recoveries, portfolio or
service company acquisitions.
Our strategy remains as it has been for a few years, of not
participating actively in the auction environment but sourcing
acquisition targets where the skill sets and expertise of Tawa's
staff are best deployed. This was evidenced by the acquisitions on
22 October 2010 of 94.3% of the ordinary shares of Island Capital
Ltd and its wholly owned subsidiary Island Capital (Europe) Ltd,
which were specialist trade and credit insurers, and Oslo
Reinsurance (UK) Limited, which completed on 10 March 2011.
While sticking to this disciplined approach, we have seen an
increase in the number of interesting opportunities in the market
and are progressing a number of them. Having achieved further cash
extractions from our risk carriers ($47m this year), we are
investing our capital in the classes of assets we know best which
should both enable us to use our expertise to create value from the
businesses we acquire, as well as providing more clients for our
outsourcing business.
STRIPE(R)
Through the high profile launching of STRIPE(R) , the market is
gaining awareness of how STRIPE(R) matches the most critical needs
of the insurance industry in respect of the automation of claims
processing. STRIPE(R) is a secure internet based solution which
requires little, if any, I.T. infrastructure investment and can
interact with existing claims systems at both ends of a
transaction.
We are seeing the first fruits of our investment in the
development of STRIPE(R) which has the potential to become part of
the fabric of the market.
In conclusion, we would like to thank our shareholders for their
strong support during 2010; it has been a challenging and
interesting year, one where we have laid the foundations and built
the momentum for a stronger and more profitable Group.
We will be proposing dividends equal to the enhanced dividend we
distributed last year, of 2.5p per share, payable as to 1.25p per
share interim dividend in June 2011 and 1.25p per share final in
December 2011, which together represents an approximate 4% yield to
stock price. While we are permanently managing cash flow for future
investment needs, we believe our shareholders should receive value
for holding their shares.
As the Group approaches its 10(th) anniversary, the goal we have
set is that by this time next year we will have moved the group
towards a more broadly based model, focussed on acquisitions and
the development of our service offering. It will bring more depth
and breadth to our services, the companies we own and the
geographies in which we operate. This, whilst retaining what makes
us different from other places, namely our people; people with high
expertise, skills and integrity, working together to achieve our
common purpose in a challenging but supportive work
environment.
Financial review
Introduction to the Group's business
Tawa plc was formed in 2001 with the purpose of acquiring or
developing assets and business in the insurance industry and
services markets in the UK, US, continental Europe, Bermuda and
elsewhere.
Since its formation, Tawa has acquired CX Reinsurance Company
Limited, KX Reinsurance Company Limited, PXRE Reinsurance Company,
Island Capital Limited, the Pro group of companies and, in March
2011, Oslo Re. The future acquisition of additional insurance
entities remains key to Tawa's business model.
From its origins in the run-off space, Tawa has now developed
recognised skills across the insurance third-party service arena,
and as such provides consultancy to live insurance carriers across
the market in areas such as claims management, audits and
litigation, solvent schemes, finance management and post-event
accounting. Tawa's servicing arm, Pro, acquired in 2009 from Swiss
Re, services a number of the largest insurance businesses.
Servicing segment
Founded in 1993 and with over 300 staff, Pro is recognised as
one of the leading providers of run-off management and professional
services to the international insurance and reinsurance industry.
It operates primarily from bases in the UK and USA and clients
include ongoing insurance entities and those in run-off. The
consideration payable to Swiss Re was a cash consideration of GBP5
million and a deferred consideration dependent on Pro's earnings
over the five years to 31 December 2014.
Run-off segment
On 22 October 2010 Tawa closed the transaction to purchase 94.3%
of the ordinary shares of Island Capital Ltd and its wholly owned
subsidiary Island Capital (Europe) Ltd. Island Capital is a Bermuda
insurance company with a specialist underwriting portfolio of trade
credit and political risk insurance business and the acquisition
will give Tawa expertise in this arena.
On the run-off portfolios it has or will acquire, Tawa is in the
business of generating value from run-offs in a variety of ways,
depending on the nature of each run-off entity in question. These
include:
-- Buying net assets at a significant discount to economic value
and accelerating capital extraction;
-- Buying volatile books of business and applying Tawa's
management techniques to create value and reduce volatility;
-- Earning management fees from managing run-offs; and
-- Obtaining synergies and process efficiencies from combining
the management of multiple run-offs.
During the course of a run-off, the Group will be exposed to a
range of risks which need to be identified and managed. These risks
include adverse loss development (insurance risk), liquidity and
operational risks, fluctuating foreign exchange rates and interest
rates and credit risk both in respect of investments and reinsurer
solvency. It is Tawa's expertise to manage and mitigate these
risks.
The assets of a run-off company typically comprise cash,
investments, subrogation recoveries and reinsurance recoveries.
From these assets and any associated investment income the company
must meet the cost of administering and paying all claims that
arise on policies issued prior to the run-off. The residual
balance, if any, will be returned to shareholders once all
liabilities have been repaid or when the regulator is satisfied,
inter alia, that the volatility is reduced to a level where capital
can be released based on estimates as to the appropriate level of
reserves and capital that the business requires to settle all valid
claims.
Summary of 2010 results
-- Profit from continuing operations was $8.6 million (2009:
loss of $0.9 million), whilst there was a loss from discontinued
operations of $6.8m (2009: profit of $12.1 million);
-- Hence, profit for the year attributable to shareholders was
$1.8 million (2009: profit of $11.2 million);
-- Net assets per share assets per share in sterling decreased
from GBP1.27 to GBP1.26; net assets per share in US dollars
decreased from $2.02 to $2.00;
-- The Group's net assets have decreased by $3.4 million to
$226.3 million ($2.00 per share) at 31 December 2010;
-- The Group's net tangible assets are $200.9 million (2009:
$199.2 million);
-- In line with the Group's dividend policy a final dividend for
the year ended 31 December 2009 of 3.75 cents (2.5 pence) per share
was paid in June 2010;
-- The Directors recommend an interim dividend of 1.25 pence per
share and a final dividend of 1.25 pence per share to be paid on 1
June 2011 and 2 December 2011 respectively;
-- A capital extraction of $35 million from KX Reinsurance
Company Limited ('KX Re') was achieved at the end of March 2010.
This represents the extraction of trapped regulatory capital and is
free cash available to Tawa plc. Tawa has also received approval
for cumulative $12 million of capital extraction from its
Connecticut domiciled subsidiary PXRE Reinsurance Company
('PXRE');
-- The Group acquired 94.3% of the ordinary shares of Island
Capital on 22 October 2010 for $7.4 million in cash and $8.4m of
deferred consideration.
Statement of financial position
The Group focuses its business performance analysis on growing
the value of each of its individual assets, which it measures
mainly on their capacity to generate cash to first amortise the
investment made in them and then generate significant cash profits
into Tawa plc.
Another indicator of performance for the group would be the
growth of NAV per share. It is directly linked to the accounting
rules, applied at the time of acquisition and thereafter as to
recognition of profits. It is also sensitive to non cash items
which distort its significance, such as Forex adjustments, or
recognition of future profits. Hence we view its relevance as
secondary to the cash generation analysis described above.
The table below shows the Group's performance over the last four
years. The profit from continuing operations was $8.6 million
(2009: $0.9 million loss), whilst there was a loss from
discontinued operations of $6.8m (2009: $12.1 million profit). The
combined profits for the year of $1.8 million and currency
translation losses of $0.7 million have increased net assets by
$1.1 million. However, the payment of the $4 million 2009 dividend
to shareholders has resulted in an overall net asset decrease of
0.9%.
2010 % 2009 % 2008 % 2007
$m Change $m Change $m Change $m
--------------------- ------ ------- ------ ------- ------ ------- ------
Group's net asset
development 226.3 228.4 214.6 237.1
Percentage
increase/(decrease)
in Group net
assets (0.9)% 6.4% (9.5)%
--------------------- ------ ------- ------ ------- ------ ------- ------
KX Re and PXRE insurance asset and liabilities
The insurance assets and liabilities of KX Re and PXRE have a
mean term in excess of 4 years and so are discounted in accordance
with the Group's accounting policies. At 31 December 2010 KX Re's
portfolios had an average mean term of 10.7 years (2009: 10.97
years) and PXRE's portfolios had an average mean term of 6.2 years
(2009: 4.30 years).
The Group's policy is to discount the insurance liabilities and
the reinsurance assets at the risk-free rate applicable to the
relevant currency at the duration of the liabilities. Currencies
held in the Group are US dollar, sterling and euro. The average
effective rate of investment return used to discount KX Re's net
liabilities is 3.1% (2009: 3.53%). The average effective rate of
investment return used to discount PXRE's net liabilities is 2.52%
(2009: 2.90%).
KX Re's net insurance liabilities before discounting as at 31
December 2010 were $53.8 million (2009: $65.9 million). After
applying a discount of $15.0 million (2009: $19.9 million) they
were $38.8 million (2009: $46.0 million). The discount is unwound
over the life of the portfolio, which represents a charge to the
income statement and actual investment income is measured against
this to ensure that it remains appropriate to continue to discount
at the chosen rate. In 2010 the investment return for KX Re, which
includes the return on the surplus, was $0.9 million above the
discount unwind (2009: $0.1 million less than the discount
unwind).
PXRE's net insurance liabilities before discounting as at 31
December 2010 were $46.7 million (2009: $67.1 million). After
applying a discount of $6.3 million (2009: $7.2 million) they were
$40.4 million (2009: $59.9 million). The discount is unwound over
the life of the portfolio, which represents a charge to the income
statement and actual investment income is measured against this to
ensure that it remains appropriate to continue to discount at the
chosen rate. In 2010 the investment return for PXRE was $0.9
million more than the discount unwind due to the performance of the
corporate bonds held in the investment portfolios (2009: $4.6
million more than the discount unwind).
Cash and investments
The Group's consolidated cash position at 31 December 2010 was
$48.5 million (2009: $30.9 million). Of that amount $33.2 million
(2009: $24.2 million) relates to the Group's insurance subsidiaries
KX Re, PXRE and Island Capital and is not considered to be freely
distributable within the Group. The remainder is available for Tawa
plc either for further distribution to its shareholders or to fund
the equity piece of Tawa's growth strategy.
The Group's investment strategy is to mitigate, in so far as is
possible, the risks relating to changes in interest rates, foreign
exchange rates and liquidity risk, whilst adopting a conservative
approach to credit risk. This mitigation is achieved by broadly
matching the duration and currency of the liabilities and
maintaining a high quality portfolio of fixed income securities.
Within the confines of this strategy and taking into account the
current market turbulence in structured finance investments, the
Group continues to look for opportunities to enhance the return
from its portfolios.
The Group's investments, which are derived from its subsidiaries
KX Re, PXRE and Island Capital, at the end of the year were $229.7
million (2009: $260.7 million). The KX Re portfolio of $52.9
million (2009: $93.4 million) is broadly matched in terms of
foreign exchange exposure and duration and comprises almost
exclusively treasuries and money market deposits. The entire
portfolio is invested in instruments with a credit rating of "A" or
better. The PXRE portfolio of $142.7 million (2009: $167.3 million)
includes $45.8 million (2009: $38.4 million) of securities which
are held in a separate trust account for a single counterparty
which bears the investment risk of these securities. Assets in the
remainder of the portfolio of $96.9 million broadly match the
duration and currency of the underlying net liabilities and
comprise treasuries and cash ($56.7 million - 58.5%) and corporate
bonds and mortgage-backed securities ($40.2 million - 41.5%).
Deferred assets
On 21 March 2006, the Group disposed of 87.35% of its
shareholding in CX Re. The retained shareholding of 12.65% has been
accounted for under the equity method since that date. The initial
consideration for the shares was $1.00, together with a deferred
consideration equal to the purchasers' share of 100% of the amount
of distributions made by CX Re up to $171 million and thereafter
equal to 95% of the distributions made by CX Re.
Deferred assets relate to the consideration outstanding on the
disposal of CX Re and the Group's receipt of a transaction
facilitation fee in respect of the sale following which tax losses
have been surrendered to CX Re's shareholders. The deferred
consideration is accounted for in two ways:
-- Profit/(loss) for the year from discontinued operations in
the income statement arising from adjustment in 87.35% of the
overall net asset value of the Group's associate CX Re; and
-- A transaction facilitation fee due directly to Tawa plc.
The effect of the deferred consideration on the Group's
statement of financial position is as follows:
$m $m
100% 87.35%
-------------------------------- ------ -------
CX Re net assets December 2009 61.2 53.5
CX Re net assets December 2010 53.4 46.6
Movement in CX Re's net assets (7.8) (6.9)
-------------------------------- ------ -------
The drivers behind the Group's decrease in deferred
consideration in respect of CX Re are discussed below in the
section on the income statement.
The transaction facilitation fee is derived from the level of
tax losses surrendered by way of consortium relief to the
associate's shareholders. Deferred consideration in respect of the
Group's transaction facilitation fee amounts to $19.9 million
(2009: $20.8 million).
At 31 December 2010 the total deferred consideration was $66.5
million (2009: $74.3 million).
31 31
Dec Dec
2010 2009
$m $m
---------------------------- ----- ------ ---- ----- ---- ------ -----
Balance at 1 January 74.3 59.9
(Decrease)/increase in CX
Re's surplus (6.9) 12.1
Interest on transaction
facilitation fee 0.1 0.2
Exchange (loss)/gain (1.0) 2.1
Balance at 31 December 66.5 74.3
---------------------------- ------ -----
Insurance liabilities - KX Re and PXRE
The Group's expected loss development is determined by the
Group's internal actuaries based on historical claims analysis and
projected trends. Actual reported losses may vary from expected
loss development. Generally, as an underwriting year matures the
level of newly reported claims decreases.
During the year the Group experienced a deterioration in the
prior year net reserves before discount excluding commutations of
$4.4 million (2009: $0.7 million improvement). This has been driven
by a net deterioration before discount on PXRE of $2.7 million and.
KX Re had a net deterioration before discount of $0.6 million.
After discount, the reduction in net reserves during the year was
$29.4 million (2009: $32.7 million) net of reinsurance and
commutations.
Income statement
The Group's operating segments are:
-- Underwriting run-off - this segment comprises the results
from the Group's acquired run-off companies KX Re, PXRE and Island
Capital. CX Re is not classified as underwriting run-off as it
became an associate on 21 March 2006 when Tawa plc disposed of
87.35% of the shares held;
-- Run-off management - this segment includes results of the
Group's providers of run-off management;
-- Insurance services (Pro) - this segment includes results of
subsidiaries Pro and Pro Inc, provider of insurance services to
internal and external clients; and
-- Other corporate activities - this segment reflects results
from acquisitions, the Group's investment in its associated
undertaking CX Re, the change in the deferred consideration
attributable to the sale of 87.35% of the shares of CX Re on 21
March 2006 and the costs of developing the business.
Underwriting run-off
The underwriting run-off profit for the year was $1.2 million
(2009: $6.0 million).
The business of KX Re comprises a collection of mature
portfolios of long-tail liabilities, including exposure to
asbestos, environmental and other latent claims. The Group's
objective for KX Re is to reduce the company's liabilities by
accelerating the natural run-off of the portfolio to enable the
extraction of capital with regulatory approval. The contribution of
KX Re in 2010 was a profit of $2.9 million. PXRE, which has a
shorter tail and is mainly comprised of catastrophe exposures, made
a loss of $1.7 million.
The Group's strategic principles for its asset and liability
management ("ALM") in the insurance entities are to:
-- Provide liquid funds to finance liability and capital
management;
-- Mitigate exposure to changes in interest and foreign exchange
rates;
-- Assume measured credit risk in line with agreed guidelines;
and
-- Invest the Group's surplus in line with agreed
guidelines.
The ALM return represents the increase in value to the Group
statement of financial position from investment activities after
taking into account the unwinding of the discount and fees. The KX
Re and PXRE ALM return for 2010 was $nil (2009: $4.8 million).
Run-off management
The revenue comprises:
-- Management fees from CX Re and KX Re;
-- Expenses recharged to CX Re, KX Re and PXRE;
-- Income from consultancy services provided to a range of third
party clients; and
-- Expenses recharged to Tawa plc in relation to acquisitions
and business development.
Revenue in 2010 was $6.9 million (2009: $8.6 million) generating
a profit for the year of $4.4 million (2009: $3.1 million).
Insurance services (Pro)
The insurance services segment represents the results of the
Group's subsidiary Pro which is a provider of insurance services to
external clients. The profit before tax for the period was $4.4
million from total revenues of $34.9 million. From 1 January 2010
the Group shares this segments after tax profits with Swiss Re on a
50/50 basis over the five financial years to 31 December 2014
subject to an overall cap of GBP12 million.
Other corporate activities
The loss generated from other corporate activities for the year
was $7.0 million (2009: profit $0.7 million). The main categories
within this division are:
-- Acquisition of subsidiaries;
-- Finance costs; and
-- Share in associate and deferred consideration derived from
the sale of CX Re.
31 Dec 2010 31 Dec 2009
$m $m
-------------------------------------------------- ------------ ------------
Business development and other expenses (5.3) (7.3)
Risk premium released 3.9 3.8
Acquisition of subsidiaries, negative goodwill
recognised 4.9 -
Impairment of Tawa Associates Limited goodwill - (5.0)
Share of results of associate CX Re (0.9) 1.8
Finance costs (4.0) (4.7)
Deferred consideration of CX Re and transaction
facilitation fee (6.8) 12.1
Taxation 1.3 -
(6.9) 0.7
-------------------------------------------------- ------------ ------------
Acquisition of subsidiaries
On 20 November 2009, 100% of the issued share capital of the Pro
group of companies comprising: Pro Insurance Solutions Limited, Pro
IS, Inc and Participant Run-Off (Pro) Iberica, SLU were acquired by
the Company. This transaction has been accounted for by the
purchase method of accounting. The net assets acquired in the
transaction, and the goodwill arising, are as follows:
Provisional
Fair value Fair value on valuation
Book value adjustments acquisition 2009
$m $m $m $m
--------------- ----------- --------------- --------------- --------------
Assets
Intangible
assets
acquired - 2.0 2.0 -
Cash and cash
equivalents 0.1 0.1 0.1
Loans and
receivables
including
insurance
receivables 13.3 - 13.3 13.3
Other Assets 0.8 - 0.8 0.8
Liabilities
Other
liabilities (10.0) (1.5) (11.5) (11.5)
--------------- ----------- --------------- --------------- --------------
4.2 0.5 4.7 2.7
--------------- ----------- --------------- --------------- --------------
Consideration
paid in cash 8.7 8.7
Deferred
consideration
payable 5.8 9.1
---------------
Consideration
paid net of
cash and cash
equivalents 8.6 8.6
--------------- ----------- --------------- --------------- --------------
Goodwill on
acquisition 9.8 15.1
--------------- ----------- --------------- --------------- --------------
The initial accounting for the business combination and amounts
recognised in the 2009 annual financial statements were
provisional. The fair values of the acquired intangible assets were
provisional pending the final valuations of these assets. The fair
value exercise regarding the Pro acquisition has now been
completed.
The deferred consideration of $5.8 million (2009: $9.1 million)
has been taken into account in the calculation of the goodwill and
is included in other liabilities in the statement of financial
position. The Group now also recognises an intangible asset of $2.0
million as part of the acquisition.
On 22 October 2010, 94.3% of the issued ordinary share capital
of the Island Capital group of companies comprising: Island Capital
Limited, and Island Capital (Europe) Limited, were acquired by the
Company. This transaction has been accounted for by the purchase
method of accounting. The net assets acquired in the transaction,
and the negative goodwill arising, are as follows:
Fair value Fair value on
Book value adjustments acquisition
$m $m $m
--------------------- ----------- -------------------- --------------------
Assets
Cash and cash
equivalents 30.4 - 30.4
Loans and
receivables
including insurance
receivables 18.5 - 18.5
Reinsurers' share of
technical
provisions 5.6 5.6
Other Assets 0.1 - 0.1
Liabilities
Creditors arising
out of insurance
operations (3.7) - (3.7)
Technical provisions (11.8) (3.6) (15.4)
Financial
liabilities -
borrowings (10.0) - (10.0)
Other liabilities (3.4) - (3.4)
--------------------- ----------- -------------------- --------------------
25.6 (3.6) 22.0
--------------------- ----------- -------------------- --------------------
Tawa Share 94.3% 20.7
--------------------
Consideration paid
in cash 7.4
Deferred
consideration
payable 8.4
---------------------
Consideration paid
net of cash and
cash equivalents (23.0)
--------------------- ----------- -------------------- --------------------
Negative Goodwill on
acquisition (4.9)
--------------------- ----------- -------------------- --------------------
The initial accounting for the business combination is
incomplete and the amounts recognised in these financial statements
are provisional.
The negative goodwill upon acquisition has been recognised in
the Consolidated income statement for the period. The deferred
consideration of $8.4 million has been taken into account in the
calculation of the negative goodwill and is included in other
liabilities in the statement of financial position and has no
impact on the Group surplus.
Finance costs
At the beginning of the year, the Group had outstanding loan
facilities with Natixis Bank for the purchase of its insurance
subsidiary PXRE. The acquisition of PXRE was financed by a four
year loan of $30 million and a $5 million revolving facility. The
revolving facility became due on 31 March 2010 and was repaid to
Natixis on that date. The Group also repaid a further $7.55 million
of the $30 million loan facility. The outstanding PXRE loan of
$22.45 million is repayable in March 2012.
As part of the acquisition of Island Capital Limited the Group
acquired $10 million of debt repayable in 2035 with an interest
rate of LIBOR +3.75%.
The total group debt at 31 December 2010 is therefore $32.2
million which represents 14.2 % of shareholders' funds
The finance costs in relation to these loans in 2010 were $4.0
million (2009: $4.7 million).
Share in associate and deferred consideration derived from the
sale of CX Re
The Group made a loss of $0.9 million (2009: profit $1.8
million) from its share in associate CX Re. In addition, through
the deferred consideration following the sale of 87.35% of CX Re on
21 March 2006 which is dependent upon the ultimate earn out value
of the Company, the Group's results are affected by changes in the
net assets of CX Re. The change in the deferred consideration for
the year resulted in a loss to the Group of $6.8 million (2009:
profit $12.1 million).
During the year CX Re's net assets decreased by $7.8 million
from $61.2 million to $53.4 million which was mainly driven by the
posting of a $5.6 million ULAE provision and a currency translation
loss on the sterling assets held in tax escrow accounts of $1.6
million. Details of CX Re's performance are discussed below:
-- CX Re asset and liability management;
-- CX Re claims management; and
-- CX Re operating expenses and consortium relief
CX Re asset and liability management
The key principles within the ALM strategy for CX Re continue to
be the mitigation of risks due to:
-- changes in interest rates;
-- changes in foreign exchange rates;
-- illiquidity of assets; and
-- excess credit risk.
To address these risks CX Re has consistently maintained a
portfolio of highly rated, readily realisable assets which broadly
matches the duration and currency of the liabilities. Average
rating of the portfolio remains at AA (2009: AA). The objective
each year is for the investment return to exceed the unwinding of
the discount on the net reserves.
CX Re's asset and liability matching strategy remains unchanged
from previous years. While performance was less spectacular than in
2009 when CX Re benefited from the rebound in the fixed income
markets from the traumas of the financial crisis in 2007 and 2008,
the investment portfolio generated a return of $4 million in excess
of the unwind of the discount on net liabilities and the impact of
changes in interest rates. CX Re's investment managers have
continued the policy of reducing risk within the portfolio and, in
particular, have reduced exposures to commercial mortgage backed
securities, corporate and municipal bonds during the year.
CX Re claims management
Gross claims and run-off expenses paid during the period were
$32.9 million (2009: $39.3 million) and gross undiscounted reserves
were reduced by $24.2 million (2009: $34.6 million), after taking
account of the impact of foreign exchange differences, to $184.4
million (2009: $213.2 million).
Reinsurers' share of claims paid was $2.1 million (2009: $2.1
million) and undiscounted reinsurance on reserves was reduced by
$1.1 million (2009: $2.3 million) to $31.4 million (2009: $32.5
million).
Undiscounted reserves net of reinsurance decreased by 15.3%
(2009: 10.9%) to $153.0 million as at 31 December 2010 (2009:
$180.7 million).
CX Re operating expenses
Net operating expenses, which exclude those costs charged to
unallocated loss adjustment expenses and allocated loss adjustment
expenses in the period were $3.7 million (2009: $3.0 million),
comprising management fees payable to Tawa Management Limited.
Tawa's overall result and future prospects
In 2010 the Group continued to search for acquisition
opportunities in the run-off market. Tawa 's strategy remains as it
has been for a few years, of not participating actively in the
auction environment but sourcing acquisition targets where the
skill sets and expertise of Tawa's staff are best put. This was
evidenced by the acquisition of Island Capital Ltd and its
subsidiary Island Capital (Europe) Ltd which was a specialist trade
and credit insurer. The same goes for the acquisition of Oslo
Reinsurance Limited, announced in December 2010 and completed on 10
March 2011.
With the maturing of its run-off entities releasing trapped
regulatory capital whilst becoming more difficult in the current
economic and regulatory environment remains a prime objective of
the Group. After releasing $40 million from KX RE in 2009 and $47
million from KXRE and PXRE in 2010, Tawa anticipates further
extraction of capital from its risk carriers over the next 3
years.
The investment in the STRIPE(R) system continues and it is now
showing real traction in the market with a number of large
reinsurers either on board or trialling the system. The acquisition
of Pro diversified the Groups operations and it continues to seek
further opportunities in this market.
Consolidated income statement
For the year ended 31 December 2010
Unaudited Audited
31 Dec 2010 31 Dec 2009
$m $m
-------------------------------------------------- ------------ ------------
Income continuing operations
Insurance premium revenue (1.3) (1.2)
Insurance premium ceded to reinsurers 0.3 0.6
-------------------------------------------------- ------------ ------------
Net earned premium revenue (1.0) (0.6)
Revenue from consultancy, insurance and run-off
services 42.2 14.4
Investment return 7.7 2.7
Interest income 5.4 -
Other income 4.0 1.1
-------------------------------------------------- ------------ ------------
Total income 59.3 18.2
Insurance claims and loss adjustment expenses (5.3) 12.2
Insurance claims and loss adjustment expenses
recovered from reinsurers 2.4 (2.3)
-------------------------------------------------- ------------ ------------
Net insurance claims (2.9) 9.9
Cost of consultancy, insurance and run-off
services (13.9) (10.1)
Administrative expenses (32.9) (10.2)
-------------------------------------------------- ------------ ------------
Total expenses (46.8) (20.3)
-------------------------------------------------- ------------ ------------
Results of operating activities before negative
goodwill recognised and impairment of goodwill 8.6 7.2
Negative goodwill recognised 4.9 -
Impairment of goodwill - (5.0)
-------------------------------------------------- ------------ ------------
Results of operating activities 13.5 2.2
Share of results of associate (0.9) 1.8
Finance costs (4.0) (4.9)
-------------------------------------------------- ------------ ------------
Profit/(loss) before taxation 8.6 (0.9)
Taxation - -
-------------------------------------------------- ------------ ------------
Profit/(loss) for the year from continuing
operations 8.6 (0.9)
(Loss)/profit for the year from discontinued
operations (6.8) 12.1
------------ ------------
Profit for the year 1.8 11.2
-------------------------------------------------- ------------ ------------
Attributable to:
Equity holders of the Group 1.8 11.2
-------------------------------------------------- ------------ ------------
Earnings per share
From continuing and discontinued operations
Basic: Ordinary shares ($ per share) 0.0159 0.0991
Diluted: Ordinary shares ($ per share) 0.0150 0.0948
-------------------------------------------------- ------------ ------------
From continuing operations
Basic: Ordinary shares ($ per share) 0.0761 (0.0080)
Diluted: Ordinary shares ($ per share) 0.0719 (0.0076)
-------------------------------------------------- ------------ ------------
Consolidated statement of comprehensive income
For the year ended 31 December 2010
Unaudited Audited
31 Dec 31 Dec
2010 2009
$m $m
--------------------------------------- ---------- --------
Profit for the year 1.8 11.2
Other comprehensive (losses)/income
Currency translation differences (0.7) 2.3
Total comprehensive income for the
year 1.1 13.5
--------------------------------------- ---------- --------
Attributable to:
Equity holders of the Group 1.1 13.5
--------------------------------------- ---------- --------
Consolidated statement of financial position
As at 31 December 2010
Unaudited Audited
31 Dec 2010 31 Dec 2009
$m $m
-------------------------------------------------- ------------ ------------
Assets
Cash and cash equivalents 48.5 30.9
Financial assets - investments 229.6 260.7
Loans and receivables including insurance
receivables 73.9 61.2
Reinsurers' share of technical provisions 29.7 24.7
Property, plant and equipment 1.7 1.6
Deferred assets 66.5 74.3
Interest in associate 6.8 7.7
Other intangible assets 2.3 0.9
Goodwill 23.1 28.3
Total assets 482.1 490.3
-------------------------------------------------- ------------ ------------
Equity
Share capital 22.2 22.2
Share premium 111.4 111.4
Share based payments reserve 3.2 2.5
Own shares (1.1) -
Retained earnings 89.3 92.3
-------------------------------------------------- ------------ ------------
Equity attributable to owners of the company 225.0 228.4
Non-controlling interest 1.3 -
Total equity attributable to equity holders 226.3 228.4
-------------------------------------------------- ------------ ------------
Liabilities
Creditors arising out of insurance operations 68.1 66.8
Other liabilities 33.9 25.5
Financial liabilities - borrowings 32.2 33.3
Technical provisions 121.6 136.3
Total liabilities 255.8 261.9
-------------------------------------------------- ------------ ------------
Total liabilities and equity 482.1 490.3
-------------------------------------------------- ------------ ------------
Consolidated statement of changes in equity
As at 31 December 2010
Share
Share based
Issued premium payments Own Retained Non-controlling Total
capital reserve reserve shares earnings Total interest Equity
$m $m $m $m $m $m $m $m
----------------- -------- -------- --------- ------- --------- ------ ---------------- -------
Balance at 1
January 2009 22.2 111.4 1.3 - 79.7 214.6 - 214.6
Share issue - - - - - - - -
Premium arising
on issue of
equity shares - - - - - - - -
Expenses on
issue of equity
shares - - - - - - - -
Share based
payments - - 1.2 - - 1.2 - 1.2
Dividends paid - - - - (0.9) (0.9) - (0.9)
Total
comprehensive
income for the
year - - - - 13.5 13.5 - 13.5
Balance at 31
December 2009
(Audited) 22.2 111.4 2.5 - 92.3 228.4 - 228.4
----------------- -------- -------- --------- ------- --------- ------ ---------------- -------
Balance at 1
January 2010 22.2 111.4 2.5 - 92.3 228.4 - 228.4
Share based
payments - - 0.7 - - 0.7 - 0.7
Dividends paid - - - - (4.1) (4.1) - (4.1)
Own shares
acquired in the
period - - - (1.1) - (1.1) - (1.1)
Non-controlling
interest at
acquisition - - - - - - 1.3 1.3
Total
comprehensive
income for the
year - - - - 1.1 1.1 - 1.1
Balance at 31
December 2010
(Unaudited) 22.2 111.4 3.2 (1.1) 89.3 225.0 1.3 226.3
----------------- -------- -------- --------- ------- --------- ------ ---------------- -------
Consolidated statement of cash flows
For the year ended 31 December 2010
Unaudited Audited
31 Dec 2010 31 Dec 2009
$m $m
-------------------------------------------------- ------------ ------------
Net cash used in operations (17.8) (13.3)
-------------------------------------------------- ------------ ------------
Investing activities
Cash payments to acquire debt securities (1,021.4) (1,718.4)
Cash receipts from sale of debt securities 1,047.6 1,773.5
Cash transferred from investing activities (1.4) 3.0
Cash receipts from interest 6.2 8.6
Purchases of property, plant and equipment (0.8) (6.7)
Acquisition of subsidiary net of cash and
cash equivalents 23.0 (8.6)
-------------------------------------------------- ------------ ------------
Cash generated by/(used in) investing activities 53.2 51.4
-------------------------------------------------- ------------ ------------
Financing activities
Dividends paid (4.1) (0.9)
Own share purchased (1.1) -
Proceeds from issue of equity shares - -
Proceeds from financial borrowings - 1.7
Repayments of financial borrowings (12.7) (37.0)
-------------------------------------------------- ------------ ------------
Cash flows (used in)/generated from financing
activities (17.9) (36.2)
-------------------------------------------------- ------------ ------------
Net increase/(decrease) in cash and cash
equivalents 17.5 1.9
Cash and cash equivalents at beginning of year 30.9 29.0
Cash and cash equivalents at end of year 48.5 30.9
-------------------------------------------------- ------------ ------------
Notes to the consolidated financial statements
For the year ended 31 December 2010
1 General information
Tawa plc (the "Company") and its subsidiaries (together the
"Group") are engaged in three principal business activities:
-- The acquisition and run-off of insurance companies that have
ceased underwriting;
-- The provision of run-off management services to acquired
insurance companies; and
-- The provision of insurance services to external clients.
The Company is incorporated and domiciled in the United
Kingdom.
The Group acquired 94.3% of the ordinary shares of the Island
Capital group of companies on 22 October 2010. The Island Capital
group of companies comprise: Island Capital Limited and Island
Capital (Europe) Limited.
On 21 March 2006, the Company disposed of 87.35% of its "A"
Shares (carrying the economic rights) and 50.05% of its "B" Shares
(carrying the voting rights) of CX Reinsurance Company Limited ("CX
Re"). As a result of the disposal, the classification of the
Company's 12.65% shareholding in CX Re changed from "subsidiary" to
"associate", as the Group retains 49.95% of the voting power, and
the equity accounting method has been adopted. An initial
consideration was payable with further amounts being payable to the
Company, referenced to future distributions from CX Re to its
shareholders. Deferred consideration related to the disposal has
been recorded in the statement of financial position as an asset
and is dependent on the net asset value of CX Re. Any adjustments
to deferred consideration will be accounted for as adjustments to
the profit on disposal, which is disclosed as "Profit/(loss) for
the year from discontinued operations" in the income statement, in
the years in which the adjustments to the deferred consideration
arise.
The Directors have considered the position of the Group's
investments and assets compared to the technical provisions and
other liabilities. In addition they have assessed the Group's
liquidity with regard to expected future cash flows. They have also
considered the performance of the business, as discussed in the
financial review. The Directors have therefore concluded that it is
appropriate to adopt the going concern basis in preparing the
annual report and accounts.
The financial information set out in the announcement does not
constitute the company's statutory accounts for the years ended 31
December 2010 or 2009. The financial information for the year ended
31 December 2009 is derived from the statutory accounts for that
year which have been delivered to the Registrar of Companies. The
auditors reported on those accounts; their report was unqualified,
did not draw attention to any matters by way of emphasis without
qualifying their report and did not contain a statement under
s498(2) or (3) Companies Act 2006. The audit of the statutory
accounts for the year ended 31 December 2010 is not yet complete.
These accounts will be finalised on the basis of the financial
information presented by the directors in this preliminary
announcement and will be delivered to the Registrar of Companies
following the company's annual general meeting.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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