Annual Financial Report

RNS Number : 2259J

Tawa PLC

26 March 2010

 

PRESS RELEASE 26 March 2010

FOR IMMEDIATE RELEASE

PRELIMINARY RESULTS ANNOUNCEMENT

 

 

Tawa plc

 Preliminary results for the twelve months ended 31 December 2009

 

 

Strong profits and successful completion of the acquisition of PRO

 

 

Tawa plc ("Tawa" or "the Group") today announces preliminary results for the year ended 31 December 2009.

 

Highlights

·; Profit for the year attributable to shareholders was $11.2 million (2008: loss of $42.4 million).

·; The Group's net assets have increased by $13.8 million to $228.4 million at 31 December 2009.

·; Net assets per share in US dollars increased from $1.90 to $2.02; net assets per share in sterling at £1.26 (2008:£1.27).

·; The Directors recommend a final dividend of 2.5 (2008: 0.5) pence per share. Subject to shareholder approval at the annual general meeting on 17 June 2010, the dividend will be payable on 1 July 2010 to shareholders on the register at 18 June 2010.

·; The Financial Services Authority has not objected to a $35 million capital reduction in KX Re. The resulting dividend to Tawa plc will represent free cash to the Group.

·; The Group acquired PRO on 20 November 2009 for $8.7 million in cash. PRO's contribution to 2009 profits was $1.4 million. From 1 January 2010 the Group will share profits with Swiss Re on a 50/50 basis over the next five financial years subject to an overall cap of £12 million.

 

 

The full results for the twelve months ended 31 December 2009 will be sent to shareholders shortly and will be available on the Company's website at www.tawaplc.co.uk.

 

Gilles Erulin, Chief Executive, commented: "Our flexible approach to the insurance market has been an important factor in our success in 2009. We were not satisfied with the profitability potential of the run-off acquisitions that we saw so we decided to modify our platform through the acquisition of PRO to gain a profitable income stream, significantly enhanced distribution and an involvement in the live insurance market.

 

"We have also been able to maintain the rate of descaling of our run-off portfolios and are particularly pleased that on 31 March 2010 Tawa plc will be receiving $35m in cash resulting from a capital reduction in KX Re.

 

"We are confident that our current platform puts us in an excellent position to take advantage of opportunities in 2010, both in portfolio acquisition and in providing services to the market, and we look forward to continued success."

 

--ENDS-

 

Enquiries:

 

Gilles Erulin, Chief Executive, Tawa plc	020 7068 8000
Peter Rigby or Alex Parry, Haggie Financial LLP	020 7417 8989
James Britton, or Daniel Harris, KBC Peel Hunt (Nominated Adviser and Broker)	020 7418 8900

 

Note 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 run-off industry and in developing its own products to serve the insurance market as a whole.

 

By creating a diversified portfolio of businesses at different stages of the run-off process Tawa is a consolidator of this specific market in the UK, US, continental Europe, Bermuda, and elsewhere as opportunities arise.

 

Since its formation, Tawa has acquired CX Reinsurance Company Limited, KX Reinsurance Company Limited, PXRE Reinsurance Company and the PRO group of companies.

 

The combined Tawa/PRO team of 350 professionals service a number of the largest insurance businesses in the UK and Europe and deliver a market-wide third-party run-off 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. Tawa also operates as an incubator for new projects and is currently developing the STRIPE® system, a new claims and post-placement transactions processing platform.

 

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.

 

 

In determining our strategy over the past year, we have considered a number of key factors influencing our sector. Financial market instability, forthcoming regulatory changes for insurer solvency requirements and the prospects for a period of inflation have influenced our assessment of our future direction.

 

Since the PXRE acquisition in March 2008, our management team has invested significant efforts in reviewing a substantial number of prospective acquisitions. However, having not been prepared to compromise the Company's internal rate of return and risk reward targets, we have declined opportunities and have not made further acquisitions of run-off portfolios. This discipline has protected the value of our existing business and enables us actively to pursue our quest for new and profitable assets.

 

In response to and in anticipation of the various market conditions discussed above, we made a lateral move during 2009 and completed the acquisition of PRO, a leading service platform in the market. The PRO acquisition is likely to give us more stable future earnings whilst broadening our market presence and access to opportunities to acquire run-off portfolios. The combined Tawa/PRO team of 350 professionals service a number of the largest insurance businesses in the UK and Europe and deliver a dramatically enlarged third-party run-off servicing capability. Through PRO we now also service active underwriters as well as run-offs and cover London's company and Lloyd's markets as well as Europe and the USA.

 

This move, for an initial cash consideration of only $8.7 million, has significantly enhanced Tawa's footprint and service capabilities in the global insurance market and establishes Tawa as part of the fabric of the insurance market - a core aim on which we intend to continue building and capitalising.

 

Today, the significant stream of unlocked equity now being extracted from Tawa's portfolio of stable and mature run-off investments demonstrates the robustness of our acquisition philosophy. We have a solid base from which to grow our expanded servicing capability, with its regular income and wide-ranging contact base and we are under no pressure to acquire portfolios that do not meet our proven investment criteria. Solvency II, which has already created uncertainty in the insurance market generally, is likely to generate an increased stream of new run-offs, although it remains unclear how the run-off industry will cope with its undifferentiated capital requirements.

 

We are focussed on the future challenges of our market and intend to pursue our "signature" approach to the active descaling of our run-off books to match our extraction goals. We believe we need to accelerate the descaling of PXRE and to restructure our UK run-offs to optimise the use of our capital. On the servicing side, we are seeking to widen our market presence, with a special focus on assisting underwriters to meet their goals whilst also working with some of our largest clients on significant deals. The former is quicker to obtain and leverages PRO's wide-ranging expertise. The latter leverages Tawa's well respected restructuring capabilities but takes longer to achieve. Both are necessary for Tawa to deliver the growth which we believe is achievable from our servicing business.

 

We therefore look forward to 2010 with confidence, knowing that Tawa is in good shape to grow in our current changing and unpredictable markets and now has an enlarged capability to do so, both on the portfolio acquisition front and on the servicing front. These two fronts are mutually beneficial and our enlarged range of services and market coverage allows us to keep a robust profitability analysis regarding portfolio acquisitions. While we are by no means immune to competition, we believe that we are now in an even better position to capitalise on opportunities as they occur.

 

Business highlights

 

The landmarks of our business year have been:

 

·; $40 million capital extracted from KX Re in June was used to repay its outstanding acquisition debt, thereby deleveraging the Group's balance sheet.

·; Tawa's conservative investment policy (cash and treasuries account for 72%of funds under management) mitigated losses in 2008 and 2009 and resulted in a significant value recovery later in 2009 as financial markets corrected, enabling Tawa's associate, CX Re, to recover 75% of its mark-to-market losses.

·; Tawa acquired the PRO group of companies from Swiss Re. PRO's turnover since acquisition in November 2009 has been $ 6.2 million and has generated $1.4 million in net profits.

 

Since the year end, Tawa has filed a request for further capital extraction from KX Re as a result of its significant downscaling and reduced volatility. The FSA has confirmed on 23 March 2010 they would not object to a reduction in capital of $35 million, expected to be paid to Tawa plc at the end of March.

 

Net Asset Value and Stock Price

 

The net asset value ("NAV") of our Company has increased from $1.90 to $2.02 (a 6.4% increase) per share, while in sterling it stands at 126 pence per share (2008:127 pence).

 

On 31 December 2009, our stock closed at 63.5 pence. This price, whilst showing a progression of 72% compared to end of year 2008 of 37 pence, reflects neither the intrinsic value of our assets nor the significant progress made both to our business mix and to the de-leveraging of our balance sheet during the year.

 

2009 results

 

On the accounting front for 2009, the Company has returned an after tax consolidated profit of $11.2 million.

 

At the end of 2008 we believed that the mark down in the value of investments, primarily in our associate, CX Re, would reverse over 2009, as the portfolios were of very good overall quality. For this reason the investment assets were retained more or less unchanged; the right decision in light of the market returning to a more normal qualitative and quantitative analysis.

 

As discussed in prior years, our associate, CX Re, holds in escrow a net total of £34 million arising from its reorganisation in 2006 and the surrender of its tax losses to its consortium shareholders. As this money cannot be released until the consortium members' tax returns are agreed, it has been considered prudent for the Company to continue to hold these assets in sterling. This explains a layer of foreign-exchange volatility in our accounts. The strengthening of the US dollar against the sterling cost Tawa $17 million in 2008. In 2009 sterling regained some of its value and Tawa gained $4 million. Since the year end sterling has depreciated back to the levels of the 2008 year end and the $4 million gain in 2009 has unwound.

 

In light of these results it is proposed that the Company pays a final dividend of 2.5 pence (2008: 0.5 pence) per share to all shareholders.

 

Our staff and other stakeholders

 

The acquisition of PRO has led us to reorganise our workforce. On 1 January 2010, most of our staff were transferred to PRO, where they are now part of a 350-person dedicated team focused on servicing third party businesses as well as servicing CX Re, KX Re and PXRE. It is anticipated that this will enable Tawa to enhance the career prospects of its professional and dedicated staff whilst limiting turnover.

 

We also wish to take this opportunity to thank, once again, our shareholders and all our employees for their continuing support over the recent years. We are extremely grateful for the trust they have placed in the Company, which has been a significant factor enabling us to ride the turbulence of 2008 and return this year to much calmer water in an organised and disciplined manner. We look forward to their continuing support in 2010 and future years as we pursue our development.

 

Lastly, but significantly, we believe that the progress achieved during 2009 has significantly reduced the volatility of the Group, as the stability of our insurance reserves tend to demonstrate, and that servicing earnings should prove very beneficial in the future. Still, we remind shareholders that we are in the business of assuming risks. In our view, the Group's descaling strategy and disciplined approach to acquisition investments mitigates but does not eliminate these risks, and it is only through careful assessment and management of those risks that we may earn the level of return our shareholders are expecting.

 

 

 

Introduction to the Group's business

 

Tawa's strategy is to build up a portfolio of diversified insurance related businesses, manage a portfolio of run-off businesses and invest in new innovative products within the insurance market. The acquisition of the PRO group of companies ("PRO") during the year is in line with Tawa's overall strategy of building up a portfolio of diversified insurance related businesses and will strengthen the Group's revenues through recurring fees and improved cash flows. By creating and managing a diversified portfolio of run-off businesses at different stages of the run-off process Tawa can gain economies of scale and enhanced stable earnings. Since its formation, Tawa has acquired CX Reinsurance Company Limited ("CX Re"), KX Reinsurance Company Limited ("KX Re") and PXRE Reinsurance Company ("PXRE") and is successfully managing the run-off of these businesses.

 

On 20 November 2009 the Group acquired PRO from Swiss Re. Prior to the completion of sale Swiss Re received dividends of £20.9 million from the PRO companies. The consideration payable by the Group for PRO was a cash consideration of £5 million and a deferred cash consideration payable of up to £12 million. The deferred cash consideration is dependent on PRO's earnings over five years to 31 December 2014.

 

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.

 

Tawa seeks to generate 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 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 2009 results

 

·; Profit for the year attributable to shareholders was $11.2 million (2008: loss of $42.4 million).

·; The Group's net assets have increased by $13.8 million to $228.4 million ($2.02 per share) at 31 December 2009.

·; Net assets per share in US dollars increased from $1.90 to $2.02; net assets per share in sterling decreased from £1.27 to £1.26.

·; The Directors recommend a final dividend of 2.5 pence per share.

·; The Financial Services Authority has confirmed that they will not object to a $35 million capital reduction in KX Re. KX Re intends to declare and pay an interim dividend of $35 million prior to 31 March 2010.

·; The Group acquired PRO on 20 November 2009 for $8.7 million in cash. PRO's contribution to 2009 profits was $1.4 million. From 1 January 2010 the Group will share profits with Swiss Re on a 50/50 basis over the next five financial years subject to an overall cap of £12 million.

 

Statement of financial position

 

The Group focuses its business performance on growing the net assets per share and aligns its performance rewards to increasing shareholder value through the increase in the overall net asset value. The table below shows the Group's performance over the last four years. The profits for the year of $11.2 million and currency translation gains of $2.3 million have increased net assets by 6.4%.

 

 

KX Re and PXRE statement of financial position

 

Discounting is applied to the Group's consolidated insurance subsidiaries KX Re and PXRE's insurance assets and liabilities with a mean term in excess of 4 years. At 31 December 2009 KX Re's portfolios had an average mean term of 10.97 years (2008: 10.42 years) and PXRE's portfolios had an average mean term of 4.3 years (2008: 4.58 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 3.53% (2008: 2.66%). The average effective rate of investment return used to discount PXRE's net liabilities is 2.9% (2008: 2.01%).

 

KX Re's net insurance liabilities before discounting as at 31 December 2009 were $65.9 million (2008: $68.8 million). After applying a discount of $19.9 million (2008: $14.1 million) they were $46 million (2008: $54.7 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 2009 the investment return for KX Re was $0.1 million less than the discount unwind (2008: $2.0 million in excess of the discount unwind).

 

PXRE's net insurance liabilities before discounting as at 31 December 2009 were $67.1 million (2008: $88.7 million). After applying a discount of $7.2 million (2008: $6.9 million) they were $59.9 million (2008: $81.8 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 2009 the investment return for PXRE was $4.6 million more than the discount unwind due to the performance of the corporate bonds held in the investment portfolios (2008: $1.1m less than the discount unwind).

 

Cash and investments

 

The Group's consolidated cash position at 31 December 2009 was $30.9 million (2008: $29.0 million). Of that amount $24.2 million (2008: $26.8 million) relates to the Group's insurance subsidiaries KX Re and PXRE and is not considered to be freely distributable within the Group. On 23 March 2010 the Financial Services Authority confirmed that it had no objection to a $35 million capital reduction from KX Re.

 

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 and PXRE, at the end of the year were $260.7 million (2008: $322.4 million). The KX Re portfolio of $93.4 million (2008: $146.9 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 $167.3 million (2008: $175.5 million) includes $38.4 million (2008: 42.2 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 $128.9 million broadly match the duration and currency of the underlying net liabilities and comprise treasuries and cash ($101.9 million - 77%) and corporates and mortgage-backed securities ($27.0 million - 23%).

 

 

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:

 

The drivers behind the Group's increase 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 $20.8 million (2008: $18.5 million).

 

At 31 December 2009 the total deferred consideration was $74.3 million (2008: $59.9 million).

										31 Dec 2009 (unaudited)		31 Dec 2008
										$m		$m
Balance at 1 January										59.9		104.3
Increase/(decrease) in CX Re's surplus										12.1		(39.2)
Interest on transaction facilitation fee										0.2		0.4
Exchange gain/(loss)										2.1		(5.6)
Balance at 31 December										74.3		59.9

 

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 an improvement in the prior year net reserves before discount excluding commutations of $0.7 million (2008: $1.2 million improvement). This net improvement has been driven by an improvement before discount on PXRE of $2.6 million. KX Re had a net deterioration before discount of $1.9 million. After discount, the reduction in net reserves during the year was $32.7 million (2008: $4.7 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 and PXRE. 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 and consultancy services;

 

·; Insurance services (PRO) - this segment includes results of subsidiary PRO, provider of insurance services to 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 $6 million (2008: $1.2 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 2009 was a loss of $0.4 million. PXRE, which has a shorter tail and is mainly comprised of catastrophe exposures, made a profit of $6.4 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 2009 was $4.8 million (2008: $0.9 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;

·; Income from inspections performed on behalf of CX Re; and

·; Expenses recharged to Tawa plc in relation to acquisitions and business development.

 

Revenue in 2009 was $8.6 million (2008: $19.8 million) generating a profit for the year of $3.1 million (2008: $4.5 million).

 

Insurance services (PRO)

The Group acquired PRO on 20 November 2009, since acquisition PRO has contributed $1.4 million to Group profits. From 1 January 2010 the Group will share profits with Swiss Re on a 50/50 basis over the next five financial years subject to an overall cap of £12 million.

 

Other corporate activities

The profit generated from other corporate activities for the year was $0.7 million (2008: loss $48.1 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 2009 (unaudited)		31 Dec 2008
										$m		$m
Business development and other expenses										(7.3)		(9.0)
Risk premium released										3.8		3.1
Acquisition of subsidiaries, negative goodwill recognised										-		6.4
Impairment of Tawa Associates Limited goodwill										(5.0)		-
Share of results of associate CX Re										1.8		(5.7)
Finance costs										(4.7)		(4.3)
Deferred consideration of CX Re and transaction facilitation fee										12.1		(39.2)
Taxation										-		0.6
										0.7		(48.1)

 

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:

 

		Book value		Fair value adjustments		Fair value on acquisition
		$m		$m		$m
Assets
Cash and cash equivalents		0.1		-		0.1
Loans and receivables including insurance receivables		13.3		-		13.3
Property, plant and equipment		0.8		-		0.8
Liabilities
Other liabilities		10.0		1.5		11.5
		4.2		(1.5)		2.7
Consideration paid in cash						8.7
Deferred consideration payable						9.1
Consideration paid net of cash and cash equivalents						8.6
Goodwill on acquisition						15.1

 

The initial accounting for the business combination is incomplete and the amounts recognised in these financial statements are provisional. The fair values of the acquired intangible assets are provisional pending the final valuations of these assets.

 

The deferred consideration of $9.1million has been taken into account in the calculation of the 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 two loan facilities, both with Natixis, for the purchases of its insurance subsidiaries KX Re and PXRE. The acquisition of KX Re was financed by a four year loan of $35 million and a $5 million revolving facility. The Group repaid this loan drawn to a total of $37 million on 26 June 2009. The acquisition of PXRE was financed by a four year loan of $30 million and a $5 million revolving facility. $3.3 million of the revolving facility was drawn down in 2009. The PXRE loan facility is repayable in March 2012 and the revolving loan is due to be repaid by 31 March 2010.

 

The finance costs in relation to these loans in 2009 were $4.7 million (2008: $4.3 million).

 

Share in associate and deferred consideration derived from the sale of CX Re

 

The Group made a profit of $1.8 million (2008: loss $5.7 million) from its share in associate CX Re. In addition, through the deferred consideration following the sale 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 profit to the Group of $12.1 million (2008: loss $39.2 million).

 

During the year CX Re's net assets increased by $13.8 million from $47.4 million to $61.2 million which was mainly driven by investment gains in the Company's fixed income bond portfolio and a currency translation gain on the sterling assets held in tax escrow accounts of $3.9 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 (2008: AA+). The objective each year is for the investment return to exceed the unwinding of the discount on the net reserves.

 

The return on investments supporting the liabilities (excluding the impact of changes in interest rates) was $17 million more than the unwinding of the discount. This performance is in line with the recovery in the international bond markets following the exceptional losses during 2007 and 2008. This compares with the $23.1 million losses due to spread-widening reported in 2008. The extent of the recovery within the portfolio has been enabled by retaining a consistent investment strategy and a broadly similar asset allocation as markets have rallied and unrealised losses have been unwound. In addition, the lower levels of payments relating to claims and commutations due to the de-scaling and de-risking of the liabilities and a deliberately more stringent pricing policy for commutations have meant that the Company has avoided forced selling of assets to finance cash outflows.

 

All sectors of CX Re's portfolio of spread products have outperformed Government bonds; however the most significant returns were generated by holdings of CMBS and US corporate bonds and an investment in a fund of European credit. CX Re's asset managers have taken the opportunities created by the market recovery to lower the levels of asset risk by, for example, materially reducing the exposure to CMBS and securities issued by financial institutions.

 

CX Re claims management

 

Gross claims and run-off expenses paid during the period were $39.3 million (2008: $73.1 million) and gross undiscounted reserves were reduced by $34.6 million (2008: $71.4 million), after taking account of the impact of foreign exchange differences, to $213.2 million (2008: $237.5 million).

 

Reinsurers' share of claims paid was $2.1 million (2008: $19.1 million) and undiscounted reinsurance on reserves was reduced by $2.3 million (2008: $19.8 million) to $32.5 million (2008: $34.6 million).

 

Undiscounted reserves net of reinsurance decreased by 10.9% (2008: 26.6%) to $180.7 million as at 31 December 2009 (2008: $202.9 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 $3.0 million (2008: $8.6 million), comprising management fees payable to Tawa Management Limited.

 

Tawa's overall result and future prospects

 

The effects of spread-widening on asset backed securities and corporate bonds continued into the first quarter of 2009 as Lehman Brothers collapsed and the banking crisis generally led to significant uncertainty in the market. After the first quarter the concerted efforts of Governments around the world and the quantitative easing programme adopted by the UK Government led to a significant reduction in the spreads on asset backed securities and corporate bonds. This strong positive movement of financial markets and the enhanced liquidity of the Tawa Group's reinsurance carriers have enabled Tawa to significantly deleverage its balance sheet during the first half of the year by repaying bank debt within the balance sheet.

 

As the bank loan to acquire KX Re has been repaid, the $35 million dividend which KX Re intends to pay represents free cash to the Group.

 

The acquisition of PRO will strengthen the Group's revenues through recurring fees and improved stable cash flows.

 

In addition, the Group continues to invest in new innovative products within the insurance market. The STRIPE project, which is a new claims and post placement transactions processing platform, is a prime example of this and the product is expected to be launched in the market in 2010. 

 

In 2009 the Group continued to search for acquisition opportunities in the run off market. Whilst there were opportunities the Group felt that prices continued to remain high in the auction environment and was not willing to participate. The outlook for 2010 is encouraging but the Group will maintain discipline in relation to price.

 

With the maturing of its run off entities releasing trapped regulatory capital, the investment in STRIPE and the acquisition of PRO the Group has diversified its operations in 2009 and will continue to seek opportunities to invest in the insurance market in 2010.

 

 

 

For the year ended 31 December 2009

 

 

 

 

 

 

As at 31 December 2009

 

 

 

 

 

 

 

As at 31 December 2009

 

 

 

 

 

 

 

As at 31 December 2009

 

 

 

 

 

 

 

For the year ended 31 December 2009

 

 

 

 

 

 

For the year ended 31 December 2009

 

 

 

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 the PRO group of companies ("PRO") from Swiss Reinsurance Group ("Swiss Re") on 20 November 2009. The PRO group of companies comprise: PRO Insurance Solutions Limited, PRO IS, Inc and Participant Run-Off (PRO) Iberica, SLU.

 

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. On 23 March 2010 the Financial Services Authority confirmed that they had no objection to a $35 million capital reduction from subsidiary KX Reinsurance Company Limited. With the KX Reinsurance Company Limited acquisition loan repaid in 2009 this distribution represents liquid funds to the Group. The Directors have therefore concluded that it is appropriate to adopt the going concern basis in preparing the annual report and accounts.

 

The preliminary announcement is based on the Company's financial statements which are being prepared in accordance with International Financial Reporting Standards as adopted for use in the EU.

 

The income statement, balance sheet and cash flow statement are presented in millions of US dollars, rounded to the nearest hundred-thousand. They have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through the income statement.

 

The financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 31 December 2009 or 2008. The financial information for the year ended 31 December 2008 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 and did not contain a statement under s237(2) or (3) Companies Act 1985. The audit of the statutory accounts for the year ended 31 December 2009 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

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