Interim Results -2-
September 23 2011 - 2:00AM
UK Regulatory
Underwriting run-off and insurance comprises the Group's
insurance subsidiaries in run-off, namely Island Capital, KX
Reinsurance Company Limited ('KX Re'), OX Re and PXRE, together
with the specialist insurer QX Re. The objective for the Group is
to reduce insurance liabilities by accelerating the natural run-off
of the portfolios to enable extraction of capital with regulatory
consent while protecting policyholders' future rights. The
underwriting run-off and insurance profit for the period was $17.1
million. A dividend of $22.8 million was paid by PXRE during the
period (2010 $4.4 million).
Run-off management
Run-off management represents the results of the Group's
providers of run-off management through its subsidiary Tawa
Management Ltd. The revenue comprises income from run-off fees and
expenses recharged within the Group. Profit for the period was $2.1
million (2010 $1.8 million).
Interim results continued
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. Profit for the period was $2.3 million from total
revenues of $24.7 million (2010 $2.4 million from $23.9
million).
Other corporate activities
Other corporate activities summarises acquisition activity, the
Group's investment in its associated undertaking CX Reinsurance
Company Limited ('CX Re'), the change in the deferred consideration
attributable to the sale of 87.35% of the shares of CX Re in March
2006 and the costs of developing the Group's business.
The loss from this discontinued business was $5.3 million. This
arises in our associate CX Re, which was sold to a consortium in
March 2006. Tawa plc is a member of the consortium holding 12.5%
and is due deferred consideration linked to any distributions by CX
Re to its consortium shareholders. The discounted net asset value
of CX Re at the half year was $47.1 million. The economic value of
CX Re depends primarily on the value of receivables from the
consortium members related to the availability of tax losses
surrendered for the 2006 tax year. Of the $47.1 million net asset
value of CX Re at the half year, $33.9 million was held in cash
escrow accounts representing the present net worth to CX Re of the
losses surrendered and is not available for paying claims.
It is understood that presently HMRC has sought to deny the
relief claimed by the consortium beneficiaries but this is under
appeal. HMRC are presently reviewing the position to decide whether
they will litigate on the appeals; however should litigation ensue
it is expected that the process may take upwards of 3 years to
reach a conclusion. Whilst the consortium has the benefit of
positive advice from leading counsel, any litigation is likely to
have a substantial adverse effect on the costs of the CX Re run-off
and continue to restrict its liquidity.
During the interim period CX Re's net assets decreased by $6.1
million to $47.3 million (in the group accounts, $5.3 million loss
from discontinued operations and $0.8 million share of loss of
associate). The principal contributory factors were:
CX Re claims management
Net discounted claims reserves and provision for expenses
reduced in the period from $121.1 million to $112.8 million. During
the period there was a net incurred deterioration on insurance
risks of $4.9 million.
CX Re asset and liability management ("ALM")
The return on investments supporting the liabilities (excluding
the impact of changes in interest rates) was $0.7 million more than
the unwinding of the discount. There was also a favourable movement
on foreign exchange of $0.5 million in the period.
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 $1.5 million, comprising management
fees payable to Tawa Management Limited and staff bonus.
Prospects
Since the half year Tawa has announced two deals which will move
it further along its goal of diversifying the Group's activities.
On 8 September 2011, Tawa entered into a share purchase agreement
which will lead to the acquisition of the Chiltington Group of
companies, subject to regulatory approval. This will give Tawa a
strategically important entry into the continental European market
where Chiltington have a skilled team and strong presence.
On 16 September 2011, as a member of a consortium comprising
Tawa plc, Skuld, and Paraline Group Limited announced a definitive
agreement to acquire Whittington Insurance Markets Limited
("Whittington"), subject to regulatory approval. This transaction
provides Tawa with a platform through which to expand its range of
services to the Lloyd's market. Whittington is the leading
franchise in the Lloyd's agency management market and provides the
Group with real scale as a provider of insurance services to the
live market. This is highly complementary with the range of
consulting and outsourcing services currently provided through
Pro.
Tawa also has advanced plans to provide platforms for
underwriting teams, managing general agencies and brokers looking
for an experienced partner to help them launch new businesses into
the insurance market. In effect the service will provide to the
London market the turnkey concept of Lloyd's.
Interim results continued
Prospects continued
In spite of the positive growth prospects resulting from Group's
acquisitions discussed above, Group shareholders should remain
acutely aware of the continuing volatility of the markets in which
we invest our assets. Foreign exchange, interest rates and
corporate bond spreads, among others, have experienced significant
volatility over the last three months. This will undoubtedly have
an impact upon the Group's risk carriers and CX Re which retains
some exposure to such volatility.
Auditor
Mazars LLP was appointed as the Group's auditor during the
period.
Condensed consolidated income statement For the period ended 30
June 2011
6 months 6 months 12 months
30 Jun 2011 30 Jun 2010 31 Dec 2010
(Unaudited) (Unaudited) (Audited)
Notes $m $m $m
---------------------------- ------ ------------ ------------ ------------
Income from continuing
operations
Insurance premium revenue 57.8 (0.8) (1.3)
Insurance premium ceded to
reinsurers 2.0 0.5 0.3
---------------------------- ------ ------------ ------------ ------------
Net earned premium revenue 59.8 (0.3) (1.0)
Revenue from consultancy,
insurance and run-off
services 17.9 20.1 42.2
Investment return 2.6 6.5 7.7
Interest income 2.9 2.3 5.4
Other income (1.0) 3.2 4.0
---------------------------- ------ ------------ ------------ ------------
Total other income 22.4 32.1 59.3
---------------------------- ------ ------------ ------------ ------------
Total income 82.2 31.8 58.3
---------------------------- ------ ------------ ------------ ------------
Insurance claims and loss
adjustment expenses (43.8) (1.6) (5.3)
Insurance claims and loss
adjustment expenses
recovered from reinsurers 3.0 2.0 2.4
---------------------------- ------ ------------ ------------ ------------
Net insurance claims (40.8) 0.4 (2.9)
Cost of consultancy,
insurance and run-off
services (5.5) (16.7) (13.9)
Administrative expenses (18.0) (4.9) (32.9)
---------------------------- ------ ------------ ------------ ------------
Total expenses 6 (23.5) (21.6) (46.8)
---------------------------- ------ ------------ ------------ ------------
Results of operating
activities before negative
goodwill recognised and
impairment of goodwill 17.9 10.6 8.6
Negative goodwill
recognised 1.5 - 4.9
---------------------------- ------ ------------ ------------ ------------
Results of operating
activities 19.4 10.6 13.5
Share of results of
associate (0.8) (0.9) (0.9)
Finance costs (2.1) (2.0) (4.0)
---------------------------- ------ ------------ ------------ ------------
Profit before taxation 16.5 7.7 8.6
Taxation (0.2) - -
---------------------------- ------ ------------ ------------ ------------
Profit for the period from
continuing operations 16.3 7.7 8.6
Loss for the period from
discontinued operations 7 (5.3) (6.3) (6.8)
------------ ------------ ------------
Profit for the period 11.0 1.4 1.8
---------------------------- ------ ------------ ------------ ------------
Attributable to:
Owners of the Company 11.1 1.4 1.8
Non-controlling interests (0.1) - -
------------ ------------ ------------
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