TIDMRQIH
RNS Number : 3034E
R&Q Insurance Holdings Ltd
29 June 2023
R&Q Insurance Holdings Ltd
Results for the year ended 31 December 2022
Strong growth in Accredited offset by Legacy adverse
development
29 June 2023
R&Q Insurance Holdings Ltd (AIM: RQIH) ("R&Q" or the
"Group"), the leading non-life global specialty insurance company
focusing on the Program Management ("Accredited") and Legacy
Insurance ("R&Q Legacy") businesses, today announces its
results for the year ended 31 December 2022.
Strategic and Governance Update
-- Completed the legal separation of Accredited and R&Q
Legacy and announced exploration of strategic transactions with
third parties as part of the separation
-- Recognition by AM Best of Accredited as an independent rating
unit, with an A- financial strength rating
-- Completed sale of minority stake in Tradesman Program
Managers for $47 million at 10x adjusted EBITDA and 3.7x initial
investment
-- Raised $50m of preferred equity from Scopia Capital, with the
opportunity to raise an additional $10 million to increase the
capital resources of R&Q Legacy
-- Appointed Jeff Hayman as our Independent Non-Executive Chairman
2022 Financial Highlights
Accredited
-- Gross Written Premium of $1.8 billion (2021: $1.0 billion, a 76% increase)
-- Fee Income (excluding MGA stakes) of $80.0 million (2021: $44.9 million, a 78% increase)
-- Pre-Tax Operating Profit of $55.7 million (2021: $20.6 million, a 170% increase)
-- Pre-Tax Operating Profit Margin of 56.8% (2021: 35.7%, a 21.1 percentage point increase)
R&Q Legacy
-- Completed four transactions while exercising discipline in a
soft market with Gross Reserves Acquired of $68.8 million (2021:
$735.0 million)
-- Reserves Under Management of $395.6 million at year-end,
which has increased to over $1 billion with MSA Safety transaction
involving non-insurance liabilities that closed in January 2023
(2021: $417.0 million)
-- Fee Income of $12.1 million (2021: $0 million)
-- Pre-Tax Operating Loss of $56.6 million, which includes $32.0
million of adverse development primarily from older transactions.
The loss, excluding adverse development, reflects the first full
year of a transition to a capital efficient annual recurring,
fee-based revenue model from a balance sheet intensive, Day-1 gain
model
Group
-- Total Fee Income (excluding MGA stakes) of $92.0 million
(2021: $44.9 million, a 105% increase)
-- Pre-Tax Operating Loss of $33.3 million impacted by $32.0
million of adverse development and the transition to a fee-based
revenue model at R&Q Legacy
Non-Recurring Items
-- Significant non-recurring items:
o Non-cash charges of c.$205 million primarily associated
with:
o Unrealised and realised non-economic net investment losses of
$135.8 million; $18 million of realised losses arising primarily
from rebalancing the portfolio for higher returns
o $43 million of non-cash adverse development associated with a
non-core subsidiary, that will become a discontinued operation in
Q1 2023 at which time such charges will be reversed
o Unearned program fee income of $17.0 million in which cash has
already been received
o Net intangible amortisation of past legacy acquisitions of
$9.6 million
-- Extraordinary one-off cash charges of c.$50 million primarily associated with:
o $28 million in one-off historic legal matters associated with
older legacy transactions and discontinued programs
o $14 million in automation spend which should yield meaningful
productivity savings starting in 2024
o $8 million in advisory costs associated with shareholder
activism and sale process
Operational Highlights
-- Continued focus on cost control with Fixed Operating Expenses decreasing 13% year-over-year
-- Operational improvement program underway with c. $15 million
of the total $20 -- 25 million investment deployed since 2021, with
the remainder to be incurred in 2023
-- Investment in automation and technology processes is expected
to generate approximately $10 million of recurring annual cost
efficiencies by 2024
Outlook
-- Focus remains on the separation of R&Q Legacy and Accredited
-- Accredited and R&Q Legacy both with excellent pipelines
Summary Financial Performance (see Notes for definitions)
($m, except where noted) 2022 2021* % Change
Accredited
Gross Written Premium 1.8b 1.0b 76%
Fee Income (1) 80.0 44.9 78%
Pre-Tax Operating Profit 55.7 20.6 170%
Pre-Tax Operating Profit Margin 56.8% 35.7% 21.1 pp
R&Q Legacy
Gross Reserves Acquired (2) 68.8 735.0 (91%)
Reserves Under Management 395.6 417.0 (5%)
Fee Income 12.1 0.0 N/A
Pre-Tax Operating (Loss) (56.6) (6.1) N/A
Corporate / Other
Net Unallocated Expenses (1.9) (13.2) (86%)
Interest Expense (30.5) (22.7) 34%
Group
Fee Income (excl. MGA stakes) 92.0 44.9 105%
Pre-Tax Operating (Loss) (33.3) (21.4) 55%
IFRS (Loss) After Tax (297.0) (127.1) 134%
Est. US GAAP (Loss) After Tax (90.0)-(115.0) -- NA
Operating (Loss) Earnings per
Share (3) (9.9)c (7.5)c 32%
(1) Excludes minority stakes
in MGAs
(2) Gross of cessions to Gibson
Re
(3) On a fully diluted basis
* Restated for change in accounting policy as noted in 2.a. of
the financial statements
William Spiegel, Chief Executive Officer of R&Q,
commented:
"2022 was, without doubt, an eventful year for R&Q. I would
like to start by thanking our shareholders and partners for their
support and our employees for their focus and commitment. During
the year we saw substantial progress with regards to our
Five-Pillar Strategy, which includes significant investment and
change aimed at making R&Q a more modern and efficient company
with a stronger culture. In many ways the changes we are making
represent a multi-year operational turnaround at R&Q and,
although not always easy, they will make us a stronger, more
sustainable and more effective business.
While our Pre-Tax Operating Loss of $33.3 million is driven
primarily by $32 million of adverse development in R&Q Legacy,
at an underlying level our performance reflects two businesses at
different stages of their development. Accredited continued to grow
and reported record results while R&Q Legacy reported a loss
but has shown good execution against its transition plan to become
a more capital efficient business.
We announced in April 2023 that the Board had concluded that it
was in shareholders' best interests to evaluate strategic options
that allowed for a separation of Accredited and R&Q Legacy. We
have two great businesses, but they operate in different parts of
the insurance ecosystem, require different skillsets and expertise,
and have different rating and regulatory needs. We are now in a
position where each has the scale, maturity, and brand strength to
stand on its own. By separating these businesses, we can ensure
both have the right level of management focus and appropriate
capital structures to achieve their full potential.
Looking ahead, we are confident the outlook is strong for
Accredited and R&Q Legacy. Both businesses have excellent
pipelines and, while we remain highly disciplined, we are confident
of growing Gross Written Premium and Reserves Under Management in
each business respectively."
Enquiries to:
R&Q Insurance Holdings Ltd. Tel: 020 7780 5850
William Spiegel
Tom Solomon
Numis Securities Limited (Nominated Advisor & Joint
Broker) Tel: 020 7260 1000
Giles Rolls
Charles Farquhar
Barclays Bank PLC (Joint Broker) Tel: 020 7632 2322
Andrew Tusa
Anusuya Nayar Gupta
FTI Consulting Tel: 020 3727 1051
Tom Blackwell
Notes to financials
Pre-Tax Operating Profit is a measure of how the Group's core
businesses performed adjusted for Unearned Program Fee Income,
intangibles created in Legacy Insurance acquisitions, net realised
and unrealised investment gains on fixed income assets, exceptional
foreign exchange net gains upon consolidation and non-core,
non-recurring costs.
Operating EPS represents Pre-Tax Operating Profit adjusted for
the marginal tax rate, divided by the average number of diluted
shares outstanding in the period.
Tangible Net Asset Value represents Net Asset Value adjusted for
Unearned Program Fee Income, intangibles created in Legacy
Insurance acquisitions, net unrealised investment gains on fixed
income assets and foreign currency translation reserves.
Gross Operating Income represents Pre-Tax Operating Profit
before Fixed Operating Expenses and Interest Expense
Fee Income represents Program Fee Income, Fee Income on Reserves
Under Management and excludes share of earnings from minority
stakes in MGAs.
Program Fee Income represents the full fee income from insurance
policies already bound including Unearned Program Fee Income,
regardless of the length of the underlying policy period. We
believe Program Fee Income is a more appropriate measure of the
revenue of the business during periods of high growth, due to a
larger than normal gap between written and earned premium.
Unearned Program Fee Income represents the portion of Program
Fee Income that has not yet been earned on an IFRS basis.
Underwriting Income represents net premium earned less net
claims costs, acquisition expenses, claims management costs,
premium taxes / levies and the cost of excess of loss coverage.
Investment Income represents income on the investment portfolio
excluding net realised and unrealised investment gains on fixed
income assets.
Fixed Operating Expenses include employment, legal,
accommodation, information technology, Lloyd's syndicate, and other
fixed expenses of ongoing operations, excluding non-core and
exceptional items.
Pre-Tax Operating Profit Margin is R&Q's profit margin on
Gross Operating Income.
Gross Reserves Acquired represent Legacy Insurance reserves
acquired gross of reinsurance to Gibson Re.
Reserves Under Management represent insurance reserves ceded to
Gibson Re and non-insurance liabilities for which R&Q earns
annual recurring fees.
Chairman's Statement
I was pleased to be appointed Independent Non-Executive Chairman
in March 2023. Since joining I have spent time getting to know our
businesses (Legacy Insurance ("R&Q Legacy") and Program
Management ("Accredited")), our people and our shareholders.
Clearly both of R&Q's two businesses have excellent
fundamentals: they are well-established players in attractive
non-life insurance niche segments, enjoy high barriers to entry,
have high quality management teams and employees with strong
technical expertise, and they both have well established
reputations in the market.
However, it is also important to acknowledge 2022's challenges.
These included continued volatility and adverse development in our
older legacy books as well as a number of corporate events that
absorbed significant Board and management time. In addition, the
company oversaw extensive and ongoing internal transformation to
ensure its people, technology, risk management, culture and
governance are appropriate to support R&Q's strategic and
growth ambitions.
On an underlying basis, I believe the picture is encouraging.
Accredited has established itself as a genuine leader with exciting
growth. At the same time R&Q Legacy is building momentum in its
strategic transformation, albeit at a slower pace than originally
envisaged given the need for prudence in a softer legacy market.
The joint venture with Obra Capital, Inc. to acquire MSA Safety
post-period end is also indicative of a meaningful opportunity to
provide solutions for corporate liabilities through partnerships
with third-party capital, adding to what is now a sizeable pool of
reserves managed by R&Q Legacy.
The focus for R&Q therefore needs to be unlocking the value
within both businesses. Doing this will create more opportunity for
our people, stronger counterparties for capital and trading
partners and greater returns for our shareholders.
Although transitioning to a fee-oriented business, R&Q
Legacy has a more volatile earnings profile than Accredited, which
could impact the financial strength rating critical to Accredited.
It is therefore clear to the Board that achieving our objective of
unlocking value in each business is best managed through a
separation of Accredited and R&Q Legacy. William will discuss
this further in his CEO Statement.
My appointment as Non-Executive Chairman has also enabled
R&Q to move to a corporate governance structure that is better
aligned with best market practice. As Executive Chairman, the role
William was undertaking was far closer to that of Group CEO and it
is appropriate that this is now formalised.
Since starting my role, I have been deeply impressed by the
caliber of R&Q's leadership team, many of whom have joined in
the last two to three years. William has assembled a bench with
deep experience across insurance, capital markets and financial
services. This has been particularly important given the extensive
transformation that has taken place within the business to ensure
it has the technology, platforms and processes required to support
the growth of Accredited and R&Q Legacy. This has included
substantial changes to make R&Q a more efficient business,
improve its risk management and governance practices and build a
stronger culture that can attract and retain the talent we
need.
The Board and I are focused on supporting the leadership team as
they continue to drive these essential changes, while also pursuing
the strategic separation of our two businesses. Since coming into
the business, my confidence in the inherent value within R&Q
has only increased. I firmly believe we have the right team and
strategy to realise these objectives.
Chief Executive Officer's Statement
2022 was, without doubt, an eventful year for R&Q. I would
like to start by thanking our shareholders and partners for their
support and our employees for their focus and commitment.
During the year we saw substantial progress with regards to our
strategic pillars, most notably the continued evolution and
transition of R&Q Legacy and significant investment and change
aimed at making R&Q a modern and efficient company with a
strong culture. In many ways these changes represent a multi-year
operational turnaround at R&Q. Turnarounds are difficult; they
take time, focus and resilience in the face of both many obstacles
and outside scrutiny.
In 2022 we were also required to navigate a number of events we
had not anticipated at the start of the year, and which took up
significant management time. In particular, while we were
successful in our defense against the shareholder activism, this
event, including the public attention drawn to it, took a toll on
the mental health of many of our employees who are proud of their
work at R&Q. I have been particularly impressed with the way
our employees responded with continued focus and commitment.
Turning to our performance for 2022, we are disappointed with
our headline operating result, which is a Pre-Tax Operating Loss of
$33.3 million. This loss is larger than expected, primarily driven
by $32 million of adverse development in R&Q Legacy, mainly
from our older legacy transactions. Beyond the adverse development,
and at an underlying level, this result reflects two businesses at
different stages of their development. Accredited continued to grow
and reported record results and a profit of $55.7 million while
R&Q Legacy reported a loss of $56.6 million. If not for the
adverse development, R&Q Legacy would have shown good execution
against its transition plan to become a more capital efficient
business. Our overall loss was also impacted by $32.4 million in
Corporate and Other, which is primarily interest expense. I will
discuss Accredited and R&Q Legacy in more detail shortly.
Accredited has seen remarkable growth in the past five years and
is now the largest program manager in Europe and one of the largest
in the US. It also relies on an 'A' financial strength rating to
conduct its business and, although it has historically relied on
the strength of the broader Group to obtain its financial strength
rating, it now has both the size and scale to achieve a standalone
rating. Conversely, R&Q Legacy, which does not require a
financial strength rating to conduct business, is at an earlier
stage of its strategic journey as it transitions to a fee-oriented
and capital-efficient model that will create a more profitable,
sustainable and valuable business. Therefore, we announced in April
2023 that the Board had concluded that it was in shareholders' best
interests to evaluate strategic options that allowed for a
separation of Accredited and R&Q Legacy. A process is underway
for the sale of Accredited with interest expressed from a number of
parties. In addition, a variety of strategic actions are being
explored in relation to R&Q Legacy.
We have two great businesses, but they operate in different
parts of the insurance ecosystem, require different skillsets and
expertise, and have different rating and regulatory needs. We are
now in a position where each has the scale, maturity, and brand
strength to stand on their own. By separating these businesses, we
can ensure both have the right level of management focus and
appropriate capital structures to achieve their full potential.
Legal separation was successfully completed as planned in Q2 2023
and with the completion of the reorganisation, AM Best announced
the recognition of Accredited as an independent rating unit
(separate from R&Q) and has maintained an A- financial strength
rating pending the completion of the sale process.
We also announced in June 2023 that we have raised $50 million
of preferred equity from Scopia Capital, one of our largest
shareholders, with the opportunity to raise an additional $10
million. This is being used to increase the capital resources of
R&Q Legacy, which is providing reinsurance support to
Accredited, as well as general corporate purposes given that
Accredited will no longer pay intra-group dividends to R&Q as
part of a requirement to secure its financial strength rating from
AM Best.
Turning to corporate governance, I am pleased that we were able
to welcome Jeff Hayman as our Non-Executive Chairman recently.
Jeff's long career in the global insurance sector and Board
experience made him the outstanding candidate and he is already
making a valuable contribution.
Accredited review
Accredited was launched in 2017 and when I joined R&Q in
early 2020, it had circa $370 million in Gross Written Premium
("GWP"). Today that has increased by nearly 550% and, with GWP of
circa $2.0 billion, Accredited is now one of the most important
hybrid carriers globally.
Accredited's results for last year reflect not only outstanding
growth, but a robust, operationally-mature and well-diversified
business. In 2022, we reported a Pre-Tax Operating Profit of $55.7
million and Fee Income (excluding minority stakes in Managing
General Agents("MGAs")) of $80 million, increases of 170% and 78%
respectively. This Pre-Tax Operating Profit included $12 million
that arose from the Group's minority stake in Tradesman Program
Managers ("Tradesman"). In March we announced that we completed the
sale of our 40% minority stake in Tradesman for $47 million or
approximately 10x EBITDA upon adjusting for the maximum contingent
commissions that could become payable to reinsurers should the
program underperform expectations and $67 million of net debt on
Tradesman's balance sheet as at 31 December 2022. Furthermore, our
decision to reduce our exposure to certain Tradesman programs meant
the minority investment was no longer strategic to R&Q; we have
made 3.7x our initial investment in Tradesman of $25 million,
including $46 million of dividends received to date and have
subsequently replaced the GWP from Tradesman's programs with new
MGA partnerships.
We are also now seeing Accredited increasingly benefit from
operational leverage given its meaningful scale with margin
improvement of 21 percentage points over the year, increasing from
36% to 57%. It is not only scale driving this enhanced margin; we
are starting to see benefits emerge from our smart investments in
data and technology to make Accredited a more efficient business.
This has included moving to a cloud-based architecture,
centralising our data, enabling new analytics and reporting,
automating a number of processes and optimising resources. This
remains a core focus, and we expect to drive further operational
improvements in 2023 that will both support growth and enhance our
profitability.
Our overall result was driven by an 76% increase in GWP to $1.8
billion written through our 77 programs and supported by over 250
reinsurance partnerships. As Accredited continues to scale, we
believe this diversification by program, class of business and
reinsurer is particularly important. Supporting this growth is the
consistently strong feedback we get from MGAs on the value they
place in Accredited as a partner.
From an underwriting portfolio perspective, it means we are not
over-exposed to either a single program or specific classes of
business, giving us protection against headwinds in any part of the
market. Furthermore, Accredited employs a rigorous screening
process in order to select only high-quality programs out of a
large pipeline of opportunities. We couple this with highly active
oversight that includes regular audits and reviews and our
technology allows underwriting, actuarial and finance to perform
ongoing monitoring of each program's performance, giving us early
indication of any developing situations, enabling the quality of
performance to be maintained.
From a reinsurer perspective, our diversification gives us
multiple channels for sourcing capacity. It also supports our focus
on managing counterparty credit, something that is critical for any
program manager. We have developed a broad panel of highly-rated
reinsurers to support Accredited. Our focus on due diligence and
active management of our programs is an important differentiator
for these reinsurance partners when providing capacity to
Accredited.
Looking ahead our strategy for Accredited remains unchanged. We
will look to:
-- Partner with high quality MGAs and reinsurers to drive annual, recurring Fee Income.
-- Minimise balance sheet volatility through low retention of
underwriting risk and protecting our retentions with excess of loss
reinsurance.
-- Continue to invest in data to enable better analytics and
automation to support growth and create operating leverage.
-- Make Accredited a destination for talent by empowering our employees.
-- Acting responsibly and embracing ESG practices.
To achieve this, we have set out a number of priorities for
2023:
-- Develop more multi-program, 'super MGAs'. These partnerships,
which are often multi-year partnerships, enable us to bring in
significant new GWP through writing large single programs or
multiple programs with a single MGA, with whom we already have a
partnership. We already have a number of 'super MGA's' as
partners.
-- Upgrade to a smoother speed-to-market process for new
business, making it easier and quicker for new MGAs to onboard
their programs.
-- Keep driving our innovative and client-centric business
model, making Accredited an industry partner of choice. This
includes our two conferences in Florida and Zurich which last year
were attended by over 350 professionals.
Finally, I believe it worth reiterating the attractive
structural tailwinds that give us such confidence in the future for
Accredited. Independent MGA written premium is growing at double
the rate of the overall P&C market, with MGAs becoming the
platforms of choice for more and more entrepreneurial underwriters
and insurance talent. Therefore, it is not surprising that in 2022,
according to Conning, non-affiliated MGAs became a larger part of
the MGA market than affiliated MGAs, a testament to the importance
and growing position of hybrid carriers in the P&C market. We
also think that hybrid carriers like Accredited will continue to
capture an increased proportion of premium (currently the hybrid
carriers collectively write c.10% of the c.$130 billion global MGA
premium) as MGAs look to align with conflict free capacity that can
not only support their ambitions but offer a best-in-class approach
to data and operational excellence. We remain excited about the
future.
R&Q Legacy review
R&Q Legacy is in the process of transitioning to a
fee-oriented model. As we knew when we started this journey, the
transition will take time and this is reflected by our results for
R&Q Legacy. However, we remain firm in our belief that this
will result in a less volatile business that generates more
sustainable and predictable profit and with greater ability to
scale.
R&Q Legacy includes historical transactions which predate
the sidecar reinsurance arrangement with Gibson Re and, as
discussed below, are therefore subject to increased volatility in
earnings over the life of the transaction from any adverse
development. Disappointingly, in 2022, for the second year in a
row, we experienced adverse development of c.3.6% of net reserves
in these books. We are currently exploring solutions to reduce the
volatility arising from pre-Gibson Re transactions.
The softer conditions impacting the legacy market saw us adopt a
more cautious approach to transactions in 2022. While significant
opportunities remain, and our deal team sees a high volume of
these, we have been highly disciplined in our approach to pricing.
In 2022, this saw us complete only four deals with a total of $68
million in Gross Reserves Acquired.
As a result of these factors, R&Q Legacy reported a Pre-Tax
Operating Loss of $56.6 million, including $32 million of net
adverse development. We earned Fee Income of $12.1 million on
$395.6 million of Reserves Under Management.
As we have discussed previously, prior to new accounting rules
effective from 1 January 2023, our previous IFRS accounting regime
allowed "Day-1 gains." This meant that a majority of a
transaction's profits could be recorded upfront upon closing of the
transaction. Any net reserve development after a transaction had
closed therefore created heightened volatility in earnings over the
course of that transaction's lifetime. However, it does not mean
that the underlying returns of a transaction would not meet
expectations when taking into account the Day-1 gain and investment
income. Going forward, neither IFRS 17 nor our new US GAAP
accounting regime allow for Day-1 gains. Furthermore, our
transition to a fee-oriented model will make Underwriting Income a
smaller part of our R&Q Legacy returns, with R&Q now
retaining only 20% of a typical transaction and the remaining 80%
being ceded to Gibson Re.
From an operational perspective, and aligned to our broader
strategy, we are focused on making R&Q Legacy a more efficient
and scalable business. The Legacy team has identified and taken
action on a number of opportunities to reduce expenses, including
simplifying our legal entity structure and rationalising our real
estate footprint. Work is also underway to automate the input of
data we receive from our third party administrators ("TPAs") and
move our internal systems to the cloud. Better use of data is
enabling us to make smarter decisions, quicker, while more
automated processing is reducing duplication and costs. As we have
seen with Accredited, we expect this work to create operational
leverage benefits as we grow our Reserves Under Management. In
addition, we continue to attract strong talent including senior
hires into our Legacy M&A team and our North America Legacy
Claims team.
Looking ahead, we are confident of successfully building our
Reserves Under Management. Our pipeline is healthy with identified
transactions comprising over $1 billion of reserves and we continue
to focus our attention on areas where we have a competitive
advantage which is in the small to medium size range where R&Q
has historically operated.
In addition, shortly after the year-end we announced a landmark
deal to invest alongside Obra Capital to acquire and professionally
manage the non-insurance legacy liabilities of MSA Safety, our
first transaction involving non-insurance liabilities. This
transaction increased our Reserves Under Management to more than $1
billion. Our objective is to identify and execute similar deals
that create compelling finality solutions for corporates in the US,
UK and Europe. This, alongside Gibson Re, will see R&Q Legacy
earn fees from two distinct but complementary pools of liabilities
- traditional insurance reserves, and corporate non-insurance
liabilities - enabling us to realise our vision for R&Q Legacy
as a leading global manager of insurance reserves and non-insurance
legacy liabilities.
Strategic and operational update
A significant focus for the management team in 2022 was driving
forward our strategic pillars, and I am pleased by the progress we
have made across each of these:
-- Increase Fee Income and Capital Efficiency : growing annual
recurring fee income that produces higher returns on equity.
-- Enhance Transparency : putting in place clear metrics to
drive economic decision making that facilitates long-term value
creation.
-- Automate Processes : investing in automation and data to
support growth and create operating leverage.
-- Engage Employees : empowering our employees to execute our
strategy and attracting new talent.
-- Act Responsibly : respecting all our stakeholders and
embedding ESG in our business processes.
I have already touched on the progress we are making in growing
Fee Income and profitability, but less visible is the extensive
work we have undertaken to make R&Q a more modern, technology-
and data-enabled and operationally robust business.
As part of Enhance Transparency we are making R&Q a stronger
and more resilient business by improving our reporting, risk
management, governance and compliance. This has included developing
a more formal reserving committee, an enhanced risk framework
supported by more sophisticated stochastic modelling of risks and
their impact on liquidity and earnings, optimising our investment
portfolio with a focus on asset-liability management and improving
our Treasury function.
As part of Automate Processes we are investing $20-25 million in
operational improvements, with c.$15 million of this deployed to
date. This investment was not optional, but rather it was required
in order for the business to scale and meet reporting requirements.
The good news is that this investment is expected to generate
approximately $10 million of recurring annual productivity
efficiencies by 2024. This investment includes moving to a single
group-wide general ledger, implementing automation tools including
robotics to eliminate extensive manual business processes,
digitising over one million paper documents into a modern document
management solution, implementing a robust cloud-based
infrastructure for our financial and actuarial data and migrating
data to our enterprise warehouse to reduce reliance on legacy
technologies and reduce our application footprint. These tools will
triage emails and documents automatically, eliminate paper costs to
leverage searchable digital documents, and fully automate processes
that took several hours a day of manual processing across multiple
departments.
Our pipeline of automation is very strong. With the proficiency
that we've built over the past two years, we are working on several
new initiatives where we are aiming for another $1 million of
annual run rate savings by further leveraging our cloud automation,
document management system and robotics.
In 2022 Engaging Employees was an important driver for several
actions. We rolled out a much needed brand refresh and, most
notably, we launched R&Q's Purpose and Values. We set out our
Purpose as: "We enable the success of our customers by delivering
tailored, data-driven and innovative insurance solutions that
provide protection and assurance in an uncertain world." Supporting
this are our four values:
-- Operate as One - collaborating across teams and geographies
to deliver our best, while upholding a shared commitment to
integrity.
-- Invest in People - passionately investing energy, attention
and capital into our relationships. This means that we help each
other, our customers, and communities succeed today... and
tomorrow.
-- Own the Next Step - encouraging accountability and
transparency. We want to benefit from the insights and expertise of
everyone at R&Q and we know we see the best results when we
combine our expertise with empowerment, ownership and action.
-- Create Sustainable Value - we are committed to delivering
value for our customers, partners, investors and each other. To
address the needs of the industries we serve, we must be agile and
sustainable with our products and solutions setting the standard
for quality and innovation.
It has been exciting to see the meaningful engagement and
enthusiasm we have seen from our employees, and we are committed to
embedding these values into our behaviours and actions in 2023 and
beyond. We further engaged both our employees and the external
audiences via our brand refresh for RQIH, Accredited and R&Q
Legacy, which provides a more confident and contemporary image to
our clients, customers and partners. This new look and feel of our
brand has helped us to better distinguish ourselves at external
events and conferences and rejuvenate interest in R&Q from
potential new talent.
We introduced changes to make our compensation and goal-setting
more metrics-based to help our people better track their progress
and help ensure tighter alignment with our strategy across the
business. And finally, through a year that had its share of change,
we have continued to enhance the variety of our communications and
respond to feedback from our people, giving them the information
they need to perform and be inspired. We have taken a more
proactive approach to engagement including more regular town halls
and the provision of dedicated briefings for managers to help them
provide context to their teams and answer questions more
effectively.
Our sector remains one where the battle for talent is intense,
and we are confident in our efforts to provide our people with a
dynamic environment where they can contribute and grow their
careers in a meaningful way.
ESG update
We continue to make positive progress in terms of embedding ESG
across our business and this is clearly reflected in our strategic
pillars and refreshed purpose and values. We have developed an ESG
framework, aligned to the guidance provided by Lloyd's and the UN's
Principles for Sustainable Insurance, the latter we are pleased to
have joined as a signatory. We continue to assess potential risks
and opportunities within our business and across our value chain.
As part of these efforts, we have made our initial voluntary TCFD
climate change risk disclosure in this Report.
Outlook
Our immediate focus remains the separation of Accredited and
R&Q Legacy. This process is progressing well, with the legal
separation of these entities achieved in Q2 2023, as planned, and
the recognition by AM Best of Accredited as an independent rating
unit, with an A- financial strength rating We continue to assess
the strategic options for both businesses and expect to provide
further updates over the course of 2023.
We believe the outlook is strong for Accredited and R&Q
Legacy. Both businesses have excellent pipelines and, while we
remain highly disciplined, we are confident of growing GWP and
Reserves Under Management in each business respectively.
Chief Financial Officer Review
We are pleased to report our financial results for the year
ending 31 December 2022, which is the final year we will do so
under IFRS. For future periods, we will report our financial
results in accordance with US GAAP.
Group
Our Key Performance Indicators ('KPIs") measure the economics of
the business and adjust IFRS results to include fully written
Program Fee Income and exclude non-cash intangibles created from
acquisitions at R&Q Legacy, net realised and unrealised
investment gains and losses on fixed income assets, foreign
currency translation reserves, non-core expenses and exceptional
items.
Our Pre-Tax Operating Loss was $33.3 million, primarily due to
adverse reserve development in R&Q Legacy's core reserve
portfolios of $32 million and fewer than expected legacy
transactions completed. One of our KPIs is to grow our Fee Income
which was $92.0 million (excluding minority stakes in MGAs), a 105%
increase compared to 2021.
Tangible Net Asset Value was $301.0 million, a 16% decrease
compared to year-end 2021, primarily as a result of adverse
development in R&Q Legacy and c.$100 million in extraordinary
one-time charges, of which $43 million is associated with a
non-cash charge related to adverse reserve development in a
non-core subsidiary, which will reverse upon deconsolidation from
the Group and movement to discontinued operations in Q1 2023. The
remaining extraordinary one-time expenses include reinsurance
litigation associated with older legacy transactions and
discontinued program businesses ($28 million), automation process
implementation costs ($14 million), which is expected to yield
meaningful productivity savings starting in 2024, advisory costs
associated with last year's unsuccessful sale of the Group and
subsequent shareholder activism ($8 million) and other one-off
costs ($3 million). On a fully diluted basis, our Operating Loss
Per Share was 9.9 cents and our Tangible Net Asset Value Per Share
was 79.7 cents.
Our IFRS Loss After Tax was $297.0 million for the year,
impacted by c.$162 million of non-cash items, including net
unrealised and realised investment losses on fixed income assets of
$135.8m, unearned program fee income of $17.0 million and
amortisation of net intangibles of $9.6 million. Our IFRS Net Asset
Value was $185.2 million, which is impacted by c.$218 million of
non-cash items, including accumulated net unrealised investment
losses on fixed income assets of $111.6 million, unearned program
fee income of $34.9 million and net intangibles of $71.0 million.
On a fully diluted basis, our IFRS Loss Per Share was 91.3 cents
and our IFRS Net Asset Value Per Share was 49.1 cents.
In 2023 we are adopting US GAAP as our accounting standard. US
GAAP has a number of differences from IFRS, namely fair market
value measurement of legacy gross and ceded reserves including a
risk margin, as well as the recognition of unallocated loss
adjustment expenses and current expected credit losses on
reinsurance recoverables. Neither US GAAP nor other accounting
standards, such as IFRS 17, recognise Day-1 gains in legacy
insurance transactions. As a result of these differences, our
unaudited US GAAP Loss After Tax for 2022 was estimated at
c.$90-115 million and our US GAAP Net Asset Value at 31 December
2022 was estimated at c.$225-250 million, significantly different
than IFRS results.
Accredited
The Accredited business continued to grow rapidly in 2022. Our
Gross Written Premium was $1.8 billion, a 76% increase compared to
2021. Our results demonstrate the benefits of scale as we earned a
Pre-Tax Operating Profit of $55.7 million, a 170% increase compared
to 2021, representing a 56.8% margin on Gross Operating Income, an
increase of 21.1 percentage points compared to 2021. This Pre-Tax
Operating Profit includes $12.4 million associated with our
minority stakes in MGAs.
The primary driver of Pre-Tax Operating Profit is our Fee
Income. Fee Income excluding minority stakes in MGAs was $80.0
million, a 78% increase compared to 2021. Program Fees averaged
4.7% of ceded written premium, which is flat compared to 2021, and
we expect Fee Income to generally grow in line with Gross Written
Premium. Underwriting Income represents our c.7% retention of
Program Insurance risk. Our Underwriting result was breakeven
primarily due to the purchase of excess of loss reinsurance above
and beyond the underlying combined ratio of 85% in order to
minimise any balance sheet volatility. Our Investment Income was
$5.6 million, a 108% increase compared to 2020 associated with
higher reinvestment rates. Finally, Fixed Operating Expenses
increased 14% compared to 2021 due to the expansion of our staff
and a higher allocation of corporate expenses.
R&Q Legacy
R&Q Legacy concluded four transactions with Gross Reserves
Acquired of $68 million, a decrease of 91% compared to 2021 due to
extra prudence in a softer pricing market. At year-end 2022, we had
Reserves Under Management of $396 million and during 2022 we
reported Fee Income of $12.1 million compared with none in 2021. We
expect Fee Income to become the predominant driver of Pre-Tax
Operating Profit once we fully deploy capital in our sidecar,
Gibson Re. Our Pre-Tax Operating Loss was $56.6 million, which
included $32 million of adverse reserve development (included in
Underwriting Income). Note that Underwriting Income in 2022 is not
comparable with 2021, which included Day-1 accounting gains on
legacy transactions closed before Q4 that were 100% retained by
R&Q. Our Investment Income was $24.9 million, a 29% increase
compared to 2021 driven by higher reinvestment yields. Finally, our
Fixed Operating Expenses decreased 15% compared to 2021 due to
expense control and foreign exchange rates.
Corporate and other
Our Corporate and Other segment includes unallocated operating
expenses and finance costs. Unallocated operating expenses were
$1.9 million, an 86% decrease compared to 2021 primarily driven by
higher allocations to the two business segments. Interest expense
was $30.5 million, a 34% increase compared to 2021 associated with
higher interest rates.
Cash and investments
Our Cash and Investments at year-end 2022, excluding funds
withheld, was $1.6 billion. We produced a book yield, which
excludes net realised and unrealised gains on fixed income assets,
of 1.9%, an increase of 50 bps compared to 2021, due to the higher
interest rate environment.
We maintain a conservative, liquid investment portfolio so that
we can produce consistent cash flows to meet our liability
obligations, while also earning a reasonable risk-adjusted return.
97% of our portfolio was invested in cash, money market funds, and
fixed income investments. Of our fixed income investments, 95% were
rated investment-grade. After cash, which comprised 20% of our
portfolio, our largest allocations were to corporate bonds (39%),
government and municipal securities (20%), asset-backed securities
(17%) and equities (3%). We have maintained a duration in our
portfolio of 3 years, shorter than that of our liabilities of 6
years.
During 2022, financial markets witnessed a significant increase
in interest rates. As a result, our investment portfolio
experienced unrealised net investment losses of $118 million, which
are included in our IFRS results. Given the high credit quality of
our investment portfolio and the primarily casualty-focused
retained liabilities, we do not expect to realise these
mark-to-market losses other than to rebalance the portfolio for
more attractive reinvestment opportunities, and hence do not
include such movement in our Pre-Tax Operating Profit.
Capital and liquidity
Last year we raised $130 million of equity capital ($121 million
net of fees), of which $60 million was contributed to Funds At
Lloyd's and the rest for general corporate purposes. Since then, we
experienced unexpected adverse development in R&Q Legacy,
primarily in Lloyd's, which requires an even greater amount of
collateral to support such adverse development. We also had $28
million in unexpected one-off historic legal matters associated
with older legacy transaction and discontinued programs. As a
result, our preliminary Group Solvency ratio at 31 December 2022
was 158%, which is above our target level of 150%. Nevertheless,
this adverse development and one-off historic legal matters used up
a material amount of our capital resources, and without the ability
to take dividends from Accredited as part of the planned
separation, required that we raise $50-$60 million of preferred
equity this year. Our total debt at year end 2022 was $344.9
million, which includes a bank facility as well as subordinated
notes. In addition, we have $175.4 million of unsecured letters of
credit that provide security on assumed reinsurance of legacy
exposures, which are guaranteed by the Group.
Consolidated Income Statement
For the year ended 31 December 2022
2022 2021
Note $m $m $m $m
Restated
*
Gross written premiums 1,908.7 1,539.7
Written premiums ceded to reinsurers (1,764.9) (1,463.5)
------------------- ---------
Net written premiums 143.8 76.2
Net change in provision for unearned
premiums (42.5) (12.2)
Earned premium, net of reinsurance 101.3 64.0
Earned fee income 6 75.0 31.8
Gross investment income 7 (97.4) 6.4
Other income 8 2.9 6.6
------------------- ---------
Total fee, investment and other
income (19.5) 44.8
Total income 81.8 108.8
Gross claims paid (651.9) (485.9)
Proceeds from commutations and
reinsurers' share of gross claims
paid 484.5 154.2
------------------- ---------
Claims paid, net of reinsurance (167.4) (331.7)
Net change in provisions for claims 0.3 205.4
------- --------
Net claims provision increase (167.1) (126.3)
Operating expenses 9 (178.9) (166.0)
------- --------
Result of operating activities
before goodwill on bargain purchase (264.2) (183.5)
Goodwill on bargain purchase 29 0.6 49.7
Amortisation and impairment of
intangible assets 15 (9.7) (12.8)
Share of profit of associates 12.4 11.2
------- --------
Result of operating activities (260.9) (135.4)
Finance costs 10 (31.7) (26.5)
------- --------
Loss before income taxes 11 (292.6) (161.9)
Income tax (charge)/credit 12 (4.4) 34.8
------- --------
Loss for the year (297.0) (127.1)
------- --------
Attributable to:-
Shareholders of the parent (297.0) (127.1)
Non-controlling interests 30 - -
------- --------
(297.0) (127.1)
------- --------
The accounting policies and accompanying notes are an integral
part of the Consolidated Financial Statements.
2022 2021
Earnings per share
Basic 13 (91.3)c (46.8)c
Diluted 13 (91.3)c (46.8)c
======= =======
*All restatements in the financial statements relate to the
change in discounting as noted in 2.a.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2022
2022 2021
$m $m
Other comprehensive income: Restated
Items that will not be reclassified to
profit or loss:
Pension scheme actuarial (losses)/gains (4.5) 3.1
Deferred tax on pension scheme actuarial
losses/(gains) 1.1 (0.2)
------------------ ------------------
(3.4) 2.9
Items that may be subsequently reclassified
to profit or loss:
Exchange losses on consolidation (35.7) (3.3)
------------------ ------------------
Other comprehensive income (39.1) (0.4)
Loss for the year (297.0) (127.1)
------------------ ------------------
Total comprehensive income for the year (336.1) (127.5)
Attributable to:
Shareholders of the parent (336.1) (127.5)
Total comprehensive income for the year (336.1) (127.5)
================== ==================
The accounting policies and accompanying notes are an integral
part of the Consolidated Financial Statements.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2022
Foreign currency
Share translation
Notes capital Share premium reserve Retained earnings Total
$m $m $m $m $m
Year ended
31 December
2022
At beginning
of year 7.5 288.3 (15.7) 117.2 397.3
Loss for the
year - - - (297.0) (297.0)
Other
comprehensive
income
Exchange losses
on consolidation - - (35.7) - (35.7)
Pension scheme
actuarial losses - - - (4.5) (4.5)
Deferred tax
on pension scheme
actuarial losses - - - 1.1 1.1
============================================ ============================================ ============================================ ============================================ =======
Total other
comprehensive
income for the
year - - (35.7) (3.4) (39.1)
-------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- -------
Total comprehensive
income for the
year - - (35.7) (300.4) (336.1)
Transactions
with owners
Issue of 25
shares 2.5 121.5 - - 124.0
At end of year 10.0 409.8 (51.4) (183.2) 185.2
============================================ ============================================ ============================================ ============================================ =======
Foreign
currency
Share Share Treasury Convertible translation Retained Sub- Non-controlling
Notes capital premium shares debt reserve earnings total interests Total
$m $m $m $m $m $m $m $m $m
Year ended Restated
31 December
2021
At beginning
of year 6.2 200.9 (0.2) 80.0 (24.7) 267.5 529.7 (0.5) 529.2
Restated 2a - - - - - 0.5 0.5 - 0.5
Functional
currency
revaluation (0.2) 7.2 - 7.2 12.3 (26.6) (0.1) - (0.1)
Loss for the
year (restated) - - - - - (127.4) (127.4) - (127.4)
Other
comprehensive
income
Exchange losses
on
consolidation - - - - (3.3) - (3.3) - (3.3)
Pension scheme
actuarial gains - - - - - 3.1 3.1 - 3.1
Deferred tax
on pension
scheme
actuarial gains - - - - - (0.2) (0.2) - (0.2)
======= ======= ======== =========== =========== ======== ======= =============== ========
Total other
comprehensive
income for the
year - - - - (3.3) 2.9 (0.4) - (0.4)
------- ------- -------- ----------- ----------- -------- ------- --------------- --------
Total
comprehensive
income for the
year - - - - (3.3) (124.2) (127.5) - (127.3)
Transactions
with owners
Share based
payments 0.1 2.6 0.2 - - - 2.9 - 2.9
Issue of
convertible
debt 1.4 85.9 - (87.2) - - 0.1 - 0.1
Purchase of
shares - - - - - - - - -
Dividend 14 - (8.3) - - - - (8.3) - (8.3)
Non-controlling
interest in
disposed
subsidiary - - - - - - - 0.5 0.5
------- ------- -------- ----------- ----------- -------- ------- --------------- --------
At end of year
(restated) 7.5 288.3 - - (15.7) 117.2 397.3 - 397.5
======= ======= ======== =========== =========== ======== ======= =============== ========
The accounting policies and accompanying notes are an integral
part of the Consolidated Financial Statements.
Consolidated Statement of Financial Position
As at 31 December 2022
Company Number 47341 Note 2022 2021
$m $m
Assets Restated
Intangible assets 15 71.0 81.8
Investments in associates 22.4 46.2
Property, plant and equipment 16 1.8 2.1
Right of use assets 17 4.1 6.1
Investment properties 18a - 1.8
Financial instruments
- Investments (fair value through profit
and loss) 18b 1,580.9 1,511.3
- Deposits with ceding undertakings 4b 49.6 21.8
Reinsurers' share of insurance liabilities 23 2,693.2 2,003.1
Deferred tax assets 24 42.2 20.4
Current tax assets 24 7.4 3.6
Insurance and other receivables 19 1,125.4 1,096.3
Cash and cash equivalents 20 316.9 266.3
Total assets 5,914.9 5,060.8
================== ==================
Liabilities
Insurance contract provisions 23 3,811.1 3,100.9
Financial liabilities
- Amounts owed to credit institutions 22 344.9 395.9
- Lease liabilities 22 5.4 7.6
- Deposits received from reinsurers 22 38.2 3.0
Deferred tax liabilities 24 16.6 7.9
Insurance and other payables 21 1,498.3 1,140.1
Current tax liabilities 24 7.3 2.4
Pension scheme obligations 27 7.9 5.7
Total liabilities 5,729.7 4,663.5
------------------ ------------------
Equity
Share capital 25 10.0 7.5
Share premium 25 409.8 288.3
Foreign currency translation reserve (51.4) (15.7)
Retained earnings (183.2) 117.2
------------------ ------------------
Attributable to equity holders of the
parent 185.2 397.3
Non-controlling interests in subsidiary 30
undertakings - -
------------------ ------------------
Total equity 185.2 397.3
------------------ ------------------
Total liabilities and equity 5,914.9 5,060.8
================== ==================
The Consolidated Financial Statements were approved by the Board
of Directors on 28 June 2023 and were signed on its behalf by:
W L Spiegel T S Solomon
The accounting policies and accompanying notes are an integral
part of the Consolidated Financial Statements.
Consolidated Cash Flow Statement
For the year ended 31 December 2022
Cash flows from operating activities 2022 2021
Note $m $m Restated
Loss for the year (297.0) (127.1)
Tax included in consolidated income
statement 4.4 (34.4)
Finance costs 10 31.7 26.5
16 &
Depreciation and impairment 17 2.4 2.9
Share based payments 25 - 2.8
Share of profits of associates (12.4) (11.2)
Profit on divestment - (2.6)
Goodwill on bargain purchase 29 (0.5) (49.7)
Amortisation and impairment of intangible
assets 15 9.7 12.8
Fair value loss on financial assets 135.8 17.7
Contributions to pension plan (2.1) (1.1)
Loss on net assets of pension schemes 0.3 0.1
Increase in receivables (26.7) (409.5)
(Increase)/decrease in deposits with
ceding undertakings (27.8) 158.7
Increase in payables 373.4 705.7
Increase/(decrease) in net insurance
technical provisions 42.2 (193.5)
Net cash from operating activities 233.4 98.1
Cash flows from investing activities
Purchase of property, plant and equipment 16 (0.3) (0.7)
Proceeds from sale of financial assets 269.9 100.8
Purchase of financial assets (531.1) (397.6)
Acquisition of subsidiary undertakings
(offset by cash acquired) 0.6 46.7
Divestment (offset by cash disposed of) 1.7 3.5
Distributions from associate 36.2 10.3
Net cash used in investing activities (223.0) (237.0)
Cash flows from financing activities
Repayment of borrowings (84.5) (42.0)
Proceeds from new borrowing arrangements 44.8 121.7
Dividends paid - (8.3)
Interest and other finance costs
paid 10 (31.7) (26.5)
Receipts from issue of shares 124.0 -
Net cash from financing activities 52.6 44.9
Net increase/(decrease) in cash
and cash equivalents 61.1 (94.0)
Cash and cash equivalents at beginning
of year 266.3 363.5
Exchange (losses)/gains on cash and cash
equivalents (10.5) (3.2)
Cash and cash equivalents at end
of year 20 316.9 266.3
Share of Syndicates' cash restricted
funds 50.7 50.7
Other funds 266.2 215.6
Cash and cash equivalents at end
of year 316.9 266.3
The accounting policies and accompanying notes are an integral
part of the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
For the year ended 31 December 2022
1. Corporate information
R&Q Insurance Holdings Ltd (the 'Company') is a company
incorporated in Bermuda and listed on AIM, a sub-market of the
London Stock Exchange. The Company and its subsidiaries (together
forming the 'Group') carry on business worldwide as owners and
managers of insurance companies, providing program capacity to
managing general agents ('MGAs') and run-off solutions to the
non-life insurance market. The Consolidated Financial Statements
were approved by the Board of Directors on 28 June 2023.
2. Accounting policies
The principal accounting policies adopted in the preparation of
these Consolidated Financial Statements are set out below. These
policies have been consistently applied to all the periods
presented, unless otherwise stated.
a. Basis of preparation
The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards
('IFRS'), endorsed by the European Union, International Financial
Reporting Interpretations Committee interpretations and with the
Bermuda Companies Act 1981 (as amended).
The Consolidated Financial Statements have been prepared under
the historical cost convention, except that financial assets
(including investment property), financial liabilities (including
derivative instruments) and purchased reinsurance receivables are
recorded at fair value through profit and loss account. All amounts
are stated in US dollars and millions, unless otherwise stated.
The preparation of the Consolidated Financial Statements in
conformity with IFRS requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities at the
date of the Consolidated Financial Statements and the reported
amounts of revenues and expenses during the year (Note 3). Although
these estimates are based on management's best knowledge of the
amount, event or actions, actual results may differ from these
estimates. The estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to estimates are recognised in the year
when the revised estimate is made.
Policy change
The Group has opted to apply discounting to portfolios that
would be better represented on a true economic basis by discounting
the claims and IBNR provisions where the liability cash flows are
'fixed and determinable' by nature. For example, where contractual
terms result in no claim payments for several years and with a
known maximum quantum thereafter and Periodic Payment Orders (PPOs)
as they are based on the defined pay out structure of the PPO court
orders. The presented financial statements include the discounting
and restatement of the prior year comparatives accordingly.
The above change results in the following amendments to the 2021
comparatives:
Effect of change
in accounting
As reported policy As restated
$m $m $m
Consolidated
statement of
financial
position
Intangible
Assets 86.2 (4.4) 81.8
Reinsurers'
share of
insurance
liabilities 2,105.6 (102.5) 2,003.1
Insurance
contract
provisions (3,207.5) 106.6 (3,100.9)
Deferred tax
liabilities (9.0) 1.1 (7.9)
Retained
earnings
brought
forward
1 January
2021 267.5 0.5 268.0
Loss for the
year (127.4) 0.3 (127.1)
Consolidated
income
statement
Net claims
provision
increase 205.8 (0.4) 205.4
Amortization
and
impairment of
intangible
assets (13.3) 0.5 (12.8)
Income tax 34.6 0.2 34.8
Basic and
diluted
earnings per
share for the
prior year
have
also been
restated:
Basic (46.9)c (46.8)c
Diluted (46.9)c (46.8)c
New and amended Standards adopted by the Group
The group is adopting US GAAP for the reporting of financial
statements beginning on 1 January 2023. The US GAAP basis of
preparation will result in changes to Consolidated Financial
Statements:
(v) Gross and ceded technical provisions - There are significant
differences in the measurement of gross and ceded reserves under US
GAAP and IFRS as follows:
o Under US GAAP, a provision for unallocated loss adjustment
expenses ('ULAE') is required. This is not required under IFRS
provided the estimated future investment income is sufficient to
cover ULAE.
o Under US GAAP, Program Management reserves are carried at best
estimate on an undiscounted basis with an allowance for expected
credit losses ('CECL') against the reinsurance recoverable. This
allowance is established based on impairment factors provided by AM
Best that take into account the duration and credit rating of the
reinsurance recoverables at a confidence level of 95%.
o Under US GAAP, Legacy Insurance reserves are measured at fair
value. R&Q is adopting this methodology in order to recognise
reinsurance credit for Legacy Insurance reserves ceded to Gibson
Re, which is not recognised under traditional GAAP accounting for
retroactive policies. The Legacy Insurance reserves are carried at
fair value based on a building block model that factors in
discounted cash flows, risk margin and ULAE. On a transaction
close, the fair value of the liabilities are set to the fair value
of the investment assets transferred. Hence, there is no Day 1 gain
recognised under US GAAP and as a result, a higher level of
reserves are created at transaction close due to greater claim
uncertainty compared to a portfolio which has been owned and
managed by the Group for a period of time. Over time, as the
portfolio matures and claim uncertainty reduces, reserves are
adjusted to the best-estimate but no earlier than twelve months
after transaction close.
(ix) Deferred acquisition costs - US GAAP does not allow for the
capitalisation and deferral of internal costs unless they can be
directly attributable to successful acquisition of the
policies.
(x) Goodwill / intangible assets - Under IFRS, Legacy Insurance
acquisitions include the creation of intangible assets associated
with the discounting of technical provisions. Under US GAAP, Legacy
Insurance reserves are already discounted at fair value and thus
intangible assets are not created.
(xi) Deferred taxation - Deferred taxes are temporary
differences between tax and accounting bases. As the accounting
bases of certain assets and liabilities (mainly reserves and
intangibles) will change, with no change in the tax bases, the
temporary differences will also change.
5. Bonus accrual - IFRS does not require accrual of
discretionary bonuses. Under US GAAP, bonuses need to be accrued
when they are probable and can be reasonably estimated.
b. Selection of accounting policies
Judgement, estimates and assumptions are made by the Directors
in selecting each of the Group's accounting policies. The
accounting policies are selected by the Directors to present
Consolidated Financial Statements based on the most relevant
information. In the case of certain accounting policies, there are
different accounting treatments that could be adopted, each of
which would be in compliance with IFRS and would have a significant
influence upon the basis on which the Consolidated Financial
Statements are presented.
In respect of financial instruments, the Group accounting policy
is to designate all financial assets as fair value through profit
or loss, including purchased reinsurance receivables.
c. Consolidation
The Consolidated Financial Statements incorporate the Financial
Statements of the Company, and entities controlled by the Company
(its subsidiaries), for the years ended 31 December 2022 and 2021.
Control exists when the Group is exposed to, or has the right to,
variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity.
In assessing control, the Group takes into consideration potential
voting rights that are currently exercisable. The acquisition date
is the date on which control is transferred to the acquirer. The
financial results of subsidiaries are included in the Consolidated
Financial Statements from the date that control commences until the
date that control ceases. Losses applicable to the non-controlling
interests in a subsidiary are allocated to the non-controlling
interests even if doing so causes non-controlling interests to have
a deficit balance.
The Group uses the acquisition method of accounting to account
for business combinations. The cost of an acquisition is measured
as the fair value of the assets acquired, equity instruments issued
and liabilities incurred or assumed at the date of acquisition.
Acquisition-related costs are charged to the Consolidated Income
Statement in the year in which they are incurred.
Certain Group subsidiaries underwrite as corporate members of
Lloyd's on Syndicates managed by Coverys Managing Agency Limited,
Asta Managing Agency Limited and Capita Managing Agency Limited. In
view of the several and direct liability of underwriting members at
Lloyd's for the transactions of Syndicates in which they
participate, only attributable shares of transactions, assets and
liabilities of those Syndicates are included in the Consolidated
Financial Statements. The Group continues to conclude that it
remains appropriate to consolidate only its share of the result of
these Syndicates. The Group is the sole provider of capacity on
Syndicate 1110, and these Consolidated Financial Statements include
100% of the economic interest in this Syndicate. For Syndicate
1991, the Group provides 0.04% of the capacity on the 2018, 2019
and 2020 years of account. For Syndicate 2689, the Group provides
0.09% on 2023 and 0.07% of the capacity on the 2022 and 2021 year
of account. These Consolidated Financial Statements include the
Group's relevant share of the result for those years and
attributable assets and liabilities.
Associates are those entities in which the Group has power to
exert influence but which it does not control. Investments in
associates are accounted for using the equity method of accounting.
Under this method the investments are initially measured at cost.
Thereafter the Group's share of post-acquisition profits or losses
are recognised in the Consolidated Income Statement and adjusted
against the cost of the investment included in the Consolidated
Statement of Financial Position.
When the Group's share of losses equals or exceeds the carrying
amount of the investment in the associate, the carrying amount is
reduced to nil and recognition for the losses is discontinued
except to the extent that the Group has incurred obligations in
respect of the associate. Equity accounting is discontinued when
the Group no longer has significant influence over the
investment.
Inter-company transactions, balances and unrealised gains on
transactions between Group companies are eliminated in preparing
the Consolidated Financial Statements. Unrealised losses are also
eliminated unless the transaction provides evidence of impairment
of the asset transferred. Where necessary, amounts reported by
subsidiaries have been adjusted to conform to the Group's
accounting policies. Non-controlling interests represent the
portion of profit or loss and net assets not held by the Group and
are presented separately in the Consolidated Income Statement and
Consolidated Statement of Comprehensive Income and within equity in
the Consolidated Statement of Financial Position, separately from
the equity attributable to the shareholders of the parent.
Insurance broking cash, receivables and payables held by
subsidiary companies which act as intermediaries, other than any
receivable for fees, commissions and interest earned on a
transaction, are not included in the Group's Consolidated Statement
of Financial Position as the subsidiaries act as agents for the
client in placing the insurable risks of their clients with
insurers and as such are not liable as principals for amounts
arising from such transactions.
d. Going concern
The Consolidated Financial Statements have been prepared on a
going concern basis, which is conditional on the completion of the
Group strategic review, and this includes the raising of up to $60m
through the issuance of preference shares and the separation and
sale of the Accredited Group from R&Q Legacy. At the date of
signing these Consolidated Financial Statements, the Group has
completed the issuance of the preference shares and has received
interest from a number of bidders and is in the process of
selecting the preferred bidder for the Accredited Group. There is
uncertainty about the timing and completion of the sale of the
Accredited Group however assuming the sale is completed the Group's
financial position and forecasts for 2023 and 2024 demonstrate that
it has adequate cash resources to meet its liabilities as they fall
due.
Given these factors, the Directors have a reasonable expectation
that the Group will be able to continue in operational existence
for the foreseeable future. For the purposes of these Consolidated
Financial Statements, this is considered to be a minimum of 12
months from the date on which these financial statements are
signed.
e. Foreign currency translation
Functional and presentational currency
Items included in the Financial Statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates (the 'functional
currency'). The Consolidated Financial Statements are presented in
US dollars, which is the Group's presentational currency.
Transactions and balances
Transactions in foreign currencies are recorded at the
functional currency rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are retranslated at the functional currency rate of exchange ruling
at the end of the reporting period; the resulting exchange gain or
loss is recognised in the Consolidated Income Statement.
Non-monetary items recorded at historical cost in a foreign
currency are translated using the exchange rate as at the date of
the initial transaction and are not subsequently restated.
Group translation
The assets and liabilities of overseas subsidiaries, including
associated goodwill, held in functional currencies other than the
Group's presentational currency are translated at the exchange rate
as at the period end date. Income and expenses are translated at
average rates for the period. All resulting exchange differences
are recognised in other comprehensive income and accumulated in the
foreign currency translation reserve in the Consolidated Statement
of Financial Position.
On the disposal of foreign operations, cumulative exchange
differences previously recognised in other comprehensive income are
recognised in the Consolidated Income Statement as part of the gain
or loss on disposal.
f. Premiums
Gross written premiums represent premiums on business commencing
in the financial year together with adjustments to premiums written
in previous accounting periods and estimates for premiums from
contracts entered into during the course of the year. Gross written
premiums are stated before deduction of brokerage and commission
but net of taxes and duties levied on premiums.
Unearned premiums
A provision for unearned premiums represents that part of the
gross written premiums that is estimated will be earned in the
following financial periods. It is calculated on a time
apportionment basis having regard, where appropriate, to the
incidence of risk. For After the Event policies written by the
Group, premiums remain unearned until the point at which the claims
exposures relating to these policies become crystallised.
Reinsurance premium costs are allocated to financial periods to
reflect the protection arranged in respect of the business written
and earned.
Acquisition costs
Acquisition costs, which represent commission and other related
direct underwriting expenses, are deferred over the period in which
the related premiums are earned. Acquisition costs recognised
during the period are recorded in operating expenses in the
Consolidated Income Statement.
g. Claims
These include the cost of claims and related expenses paid in
the year, together with changes in the provisions for outstanding
claims, including provisions for claims incurred but not reported
and related expenses, together with any other adjustments to claims
from previous years. Where applicable, deductions are made for
salvage and other recoveries. These are shown as net claims
provisions (increase)/release in the Consolidated Income
Statement.
h. Insurance contract provisions and reinsurers' share of insurance liabilities
Provisions are made in the insurance company subsidiaries and in
the Lloyd's Syndicates on which the Group participates for the full
estimated costs of claims notified but not settled, including
claims handling costs, on the basis of the best information
available, taking account of inflation and latest trends in court
awards. The Directors of the subsidiaries, with the assistance of
run-off managers, independent actuaries and internal actuaries,
have established such provisions on the basis of their own
investigations and their best estimates of insurance payables, in
accordance with accounting standards. Legal advice is taken where
appropriate. Deductions are made for salvage and other recoveries
as appropriate.
The provisions for claims incurred but not reported ('IBNR')
have been based on a number of factors including previous
experience in claims and settlement patterns, the nature and amount
of business written, inflation and the latest available information
as regards specific and general industry experience and trends.
A reinsurance asset (reinsurers' share of technical provisions)
is recognised to reflect the amount estimated to be recoverable
under the reinsurance contracts in respect of the outstanding
claims reported and IBNR. The amount recoverable from reinsurers is
initially valued on the same basis as the underlying claims
provision. The amount recoverable is reduced when there is an event
arising after the initial recognition that provides objective
evidence that the Group may not receive all amounts due under the
contract.
Neither the claims provisions nor the IBNR provisions have been
discounted, other than for long term liabilities with predictable
cashflows.
The uncertainties which are inherent in the process of
estimating are such that, in the normal course of events,
unforeseen or unexpected future developments may cause the ultimate
cost of settling the outstanding liabilities to differ materially
from that estimated. Any differences between provisions and
subsequent settlements are recorded in the Consolidated Income
Statement in the year which they arise.
Having regard to the significant uncertainty inherent in the
business of insurance as explained in Note 3, and in light of the
information available, in the opinion of the Directors the
provisions for outstanding claims and IBNR in the Consolidated
Financial Statements are fairly stated.
Provision for future claims handling costs
Provision for future run-off costs relating to the Group's
run-off businesses is made to the extent that the estimate of such
costs exceeds the estimated future investment income expected to be
earned by those businesses.
Estimates are made for the anticipated costs of running off the
business of those insurance subsidiaries and the Group's
participation in Syndicates which have insurance businesses in
run-off. Where insurance company subsidiaries have businesses in
run-off and underwrite new business, management estimates the
run-off costs and the future investment income relating to the
run-off business. Syndicates are treated as being in run-off for
the Consolidated Financial Statements where they have ceased
writing new business and, in the opinion of management, there is no
current probable reinsurer available to close the relevant
syndicate year of account.
Changes in the estimates of such costs and future investment
income are reflected in the year in which the changes in estimates
are made.
When assessing the amount of any provision to be made, the
future investment income and claims handling and all other costs of
all the insurance company subsidiaries' and syndicates' businesses
in run-off are considered in aggregate.
The uncertainty inherent in the process of estimating the period
of run-off and the pay-out pattern over that period, the
anticipated run-off administration costs to be incurred over that
period and the level of investment income to be received is such
that in the normal course of events unforeseen or unexpected future
developments may cause the ultimate costs of settling the
outstanding liabilities to differ from that previously
estimated.
Unexpired risks provision
Provisions for unexpired risks are made where the costs of
outstanding claims, related expense and deferred acquisition costs
are expected to exceed the unearned premium reserve carried forward
at the end of the reporting period. The provision for unexpired
risks is calculated separately by reference to classes of business
which are managed together, after taking into account relevant
investment return.
i. Provisions
Provisions, other than insurance provisions, are recognised when
the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that the Group will be
required to settle the obligation, and a reliable estimate can be
made of the amount of the obligation.
Provisions are measured at the present value of the expected
expenditure to settle the obligation, using a pre-tax rate that
reflects current market assessments of the time value of money and
the
risks specific to the obligation. The increase in the provision
due to the passage of time is recognised as an interest
expense.
j. Structured settlements
Certain of the US insurance company subsidiaries have entered
into structured settlements whereby their liability has been
settled by the purchase of annuities from third party life
insurance companies in favour of the claimants. The subsidiary
retains the credit risk in the unlikely event that the life
insurance company defaults on its obligations to pay the annuity
amounts. Provided that the life insurance company continues to meet
the annuity obligations, no further liability will fall on the
insurance company subsidiary. The amounts payable to claimants are
recognised in liabilities. The amount payable to claimants by the
third party life insurance companies are also shown in liabilities
as reducing the Group's liability to nil.
In the opinion of the Directors, this treatment reflects the
substance of the transaction on the basis that any remaining
liability of Group companies under structured settlements will only
arise upon the failure of the relevant third party life insurance
companies and will be reduced by any available reinsurance
cover.
Should the Directors become aware of a claim arising from a
policy holder that a third party life insurance company responsible
for the payment of an annuity under a structured settlement may not
be in a position to meet its annuity obligations in full,
appropriate provision will be made for any such failure.
Disclosure of the position in relation to structured settlements
is shown in Note 21.
k. Segmental reporting
The Group's business segments are based on the Group's
management and internal reporting structures and represent the
level at which financial information is reported to the Board,
being the chief operating decision maker as defined in IFRS 8.
l. Financial instruments
Financial instruments are recognised in the Consolidated
Statement of Financial Position at such time that the Group becomes
a party to the contractual provisions of the financial instrument.
A financial asset is derecognised when the contractual rights to
receive cash flows from the financial assets expire, or where the
financial assets have been transferred, together with substantially
all the risks and rewards of ownership. Financial liabilities are
derecognised if the Group's obligations specified in the contract
expire, are discharged or cancelled.
Financial assets
i) Acquisition
On acquisition of a financial asset, the Group is required under
IFRS to classify the asset into one of the following categories:
'financial assets at fair value through profit or loss', 'loans and
receivables held to maturity' and 'available for sale'. The Group
does not currently hold assets classified as 'held to maturity' and
'available for sale'.
ii) Financial assets at fair value through profit and loss
All financial assets, other than cash, loans and receivables,
are currently designated as fair value through profit and loss upon
initial recognition because they are managed and their performance
is evaluated on a fair value basis. Information about these
financial assets is provided internally on a fair value basis to
the Group's key management. The Group's investment strategy is to
invest and evaluate their performance with reference to their fair
values.
iii) Fair value measurement
When available, the Group measures the fair value of an
instrument using quoted prices in an active market for that
instrument.
If a market for a financial instrument is not active, the Group
establishes fair value using a valuation technique. Valuation
techniques include using recent arm's length transactions between
knowledgeable, willing parties (if available) and reference to the
current fair value of other instruments that are substantially the
same or discounted cash flow analyses.
Assets and long positions are measured at a bid price;
liabilities and short positions are measured at an asking price.
Where the Group has positions with offsetting risks, mid-market
prices are used to measure the offsetting risk positions and a bid
or asking price adjustment is applied only to the net open position
as appropriate. Fair values reflect the credit risk of the
instrument and include adjustments to take account of the credit
risk of the Group entity and counterparty where appropriate. Fair
value estimates obtained from models are adjusted for any other
factors, such as liquidity risk or model uncertainties, to the
extent that the Group believes a third party market participant
would take them into account in pricing a transaction.
Upon initial recognition, attributable transaction costs
relating to financial instruments at fair value through profit or
loss are recognised when incurred in other operating expenses in
the Consolidated Income Statement. Financial assets at fair value
through profit or loss are measured at fair value, and changes
therein are recognised in the Consolidated Income Statement. Net
changes in the fair value of financial assets at fair value through
profit and loss exclude interest and dividend income, as these
items are accounted for separately as set out in the investment
income section below.
iv) Insurance receivables and payables
Insurance receivables and payables are recognised when due.
These include amounts due to and from agents, brokers and insurance
contract holders. Insurance receivables are classified as 'loans
and receivables' as they are non-derivative financial assets with
fixed or determinable payments that are not quoted on an active
market. Insurance receivables are measured at amortised cost less
any provision for impairment. Insurance payables are stated at
amortised cost. Insurance receivables and payables are not
discounted.
v) Investment income
Investment income consists of dividends, interest, realised and
unrealised gains and losses and exchange gains and losses on
financial assets at fair value through profit and loss. The
realised gains or losses on disposal of an investment are the
difference between the proceeds and the original cost of the
investment. Unrealised investment gains and losses represent the
difference between the carrying amount at the reporting date, and
the carrying amount at the previous period end or the purchase
value during the period.
Financial liabilities
Borrowings
Borrowings are initially recorded at fair value less transaction
costs incurred. Subsequently borrowings are stated at amortised
cost and interest is recognised in the Consolidated Income
Statement over the period of the borrowings.
Senior and subordinated debt
R&Q Insurance Holdings Ltd and Group subsidiaries have
issued senior and subordinated debt. At Group level this is treated
as a financial liability and interest charges are recognised in the
Consolidated Income Statement.
Derivative financial instruments
Derivatives are initially recognised at fair value on the date
on which a derivative contract is entered into and are subsequently
re-measured at their fair value. The best evidence of fair value of
a derivative at initial recognition is the transaction price. The
method of recognising the resulting fair value gains or losses
depends on whether the derivative is designated as a hedging
instrument and, if so, the nature of the item being hedged. Fair
values are obtained from quoted market prices in active markets,
recent market transactions, and valuation techniques which include
discounted cash flow models. All derivatives are carried as assets
when fair value is positive and as liabilities when fair value is
negative.
The Group has not designated any derivatives as fair value
hedges, cash flow hedges or net investment hedges.
m. Property, plant and equipment
All assets included within property, plant and equipment ('PPE')
are carried at historical cost less depreciation and assessed for
impairment. Depreciation is calculated to write down the cost less
estimated residual value of motor vehicles, office equipment, IT
equipment, freehold property and leasehold improvements by the
straight-line method over their expected useful lives.
The principal rates per annum used for this purpose are:
%
Motor vehicles 25
Office equipment 8 - 50
IT equipment 20 - 25
Freehold property 2
Leasehold improvements Term of lease
The gain or loss arising on the disposal of an item of PPE is
determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in the Consolidated
Income Statement.
n. Leases
The Group recognises a right-of-use asset and a lease liability
at the lease commencement date. The right-of-use asset is initially
measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an
estimate of costs to refurbish the underlying asset, less any lease
incentives received.
The right-of-use asset is subsequently depreciated using the
straight-line method from the commencement date to the earlier of
the end of the useful life of the right-of-use asset or the end of
the lease term. The estimated useful lives of right-of-use assets
are determined on the same basis as those of Property, plant and
equipment. In addition, the right-of-use asset is reviewed for
impairment losses, if any, and adjusted for certain re-measurements
of the lease liability.
The Group has elected not to recognise right-of-use assets and
lease liabilities for short-term leases that have a lease term of
12 months or less and leases of low-value assets, including IT
equipment. The Group recognises the lease payments associated with
these leases as an expense to the Consolidated Income Statement on
a straight-line basis over the lease term.
Right-of-use assets are disclosed under note 17.
o. Goodwill
The Group uses the acquisition method in accounting for
acquisitions. The difference between the cost of acquisition and
the fair value of the Group's share of the identifiable net assets
acquired is capitalised and recorded as goodwill. If the cost of an
acquisition is less than the fair value of the net assets of the
subsidiary acquired the difference is recognised directly in the
Consolidated Income Statement as goodwill on bargain purchase.
Goodwill acquired in a business combination is initially
measured at cost, being the excess of the fair value of the
consideration paid for the business combination over the Group's
interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities. Following initial
recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is tested for impairment at the cash
generating unit level, as shown in Note 15, on a biannual basis or
if events or changes in circumstances indicate that the carrying
amount may be impaired.
p. Other intangible assets
Intangible assets, other than goodwill, that are acquired
separately are stated at cost less accumulated amortisation and
impairment.
Intangible assets acquired in a business combination, and
recognised separately from goodwill, are recognised initially at
fair value at the acquisition date. This includes intangible assets
calculated by measuring the difference between the discounted and
undiscounted fair value of net technical provisions acquired.
Amortisation is charged to operating expenses in the
Consolidated Income Statement as follows:
Purchased IT software 3 - 5 years, on a straight-line
basis
On acquisition of insurance companies Estimated pattern of run-off
in run-off
On acquisitions - other Useful life, which may be indefinite
Assets that are subject to amortisation are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss
is recognised in the Consolidated Income Statement to reduce the
carrying amount to the recoverable amount.
US insurance authorisation licences
US state insurance authorisation licences acquired in business
combinations are recognised initially at their fair value. The
asset is not amortised, as the Directors consider that economic
benefits will accrue to the Group over an indefinite period due to
the long-term stability of the US insurance market. The licences
are tested annually for impairment. This assumption is reviewed
annually to determine whether the asset continues to have an
indefinite life. Costs of acquiring new licences are recognised in
the year of acquisition.
Rights to customer contractual relationships
Costs directly attributable to securing the intangible rights to
customer contractual relationships are recognised as an intangible
asset where they can be identified separately and measured
reliably, and it is probable that they will be recovered by
directly related future profits. These costs are amortised on a
straight-line basis over the useful economic life which is deemed
to be 15 years and are carried at cost less accumulated
amortisation and impairment losses.
q. Employee Benefits
The Group makes contributions to defined contribution schemes
and a defined benefit scheme.
The pension cost in respect of the defined contribution schemes
represents the amounts payable by the Group for the year. The funds
of the schemes are administered by trustees and are separate from
the Group. The Group's liability is limited to the amount of the
contributions.
The defined benefit scheme is funded by contributions from a
subsidiary company and its assets are held in a separate Trustee
administered fund. Pension scheme assets are measured at market
value, and liabilities are measured using the projected unit method
and discounted at the current rate of return on high quality
corporate bonds of equivalent term and currency to the
liability.
Current service cost, net interest income or cost and any
curtailments/settlements are charged to the Consolidated Income
Statement. The present value of the defined benefit obligation at
the end of the reporting period less the fair value of plan assets
is recognised and disclosed separately as a net pension liability
in the Consolidated Statement of Financial Position. Surpluses are
only recognised up to the aggregate of any cumulative unrecognised
net actuarial gains and past service costs, and the present value
of any economic benefits available in the form of any refunds or
reductions in future contributions.
Subject to the restrictions relating to the recognition of a
pension surplus, all actuarial gains and losses are recognised in
full in other comprehensive income in the period in which they
occur.
r. Cash and cash equivalents
For the purposes of the Consolidated Cash Flow Statement, cash
and cash equivalents comprise cash at bank and other short-term
highly liquid investments with a maturity of three months or less
from the date of acquisition, and bank overdrafts which are
repayable on demand.
s. Finance costs
Finance costs comprise interest payable and are recognised in
the Consolidated Income Statement in line with the effective
interest rate on liabilities.
t. Operating expenses
Operating expenses are accounted for in the Consolidated Income
Statement in the period to which they relate.
Pre-contract costs
Directly attributable pre-contract costs are recognised as an
asset when it is virtually certain that a contract will be obtained
and the contract is expected to result in future net cash inflows
in excess of any amounts recognised as an asset.
Pre-contract costs are charged to the Consolidated Income
Statement over the shorter of the life of the contract or five
years.
Onerous contracts
Onerous contract provisions are provided for in circumstances
where the Group has a present legal or constructive obligation as a
result of past events to provide services, the costs of which
exceed future income. The costs of providing the services are
projected based on management's assessment of the contract.
Arrangement fees
Arrangement fees in relation to loan facilities are deducted
from the relevant financial liability and amortised over the period
of the facility.
u. Other income
Other income is stated excluding any applicable value added tax
and includes the following items:
Management fees
Management fees are from non-Group customers and are recognised
when the right to such fees is established through a contract and
to the extent that the services concerned have been performed.
Billing follows the supply of service and the consideration is
unconditional because only the passage of time is required before
the payment is due.
Purchased reinsurance receivables
The Group accounts for purchased reinsurance receivables at fair
value through profit and loss. Fair value is defined as the price
at which an orderly transaction would take place between market
participants at the reporting date and is therefore an estimate
which requires the use of judgement.
Earned fee income
Earned fee income comprises brokerage and profit commission
arising from the placement of insurance contracts. Brokerage is
recognised at the inception date of the policy, or the date of
contractual entitlement, if later. Alterations in brokerage arising
from premium adjustments are taken into account as and when such
adjustments are notified. To the extent that the Group is
contractually obliged to provide services after this date, a
suitable proportion of income is deferred and recognised over the
life of the relevant contracts to ensure that revenue appropriately
reflects the cost of fulfilling those obligations. Profit
commission is recognised when the right to such profit commission
is established through a contract but only to the extent that a
reliable estimate of the amount due can be made. Such estimates are
made on a prudent basis that reflects the level of uncertainty
involved.
v. Share based payments
The Group issues equity settled payments to certain of its
employees.
w. Current and deferred income tax
Tax on the profit or loss for the year comprises current and
deferred tax.
Tax is recognised in the Consolidated Income Statement except to
the extent that it relates to items recognised in other
comprehensive income, in which case it is recognised in the
Consolidated Statement of Comprehensive Income.
The current income tax charge is calculated on the basis of the
tax laws enacted or substantively enacted at the end of the
reporting period in the countries where the Company's subsidiaries
and associates operate and generate taxable income.
Deferred tax liabilities are provided in full, using the
liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the
Consolidated Financial
Statements. However, if the deferred tax arises from initial
recognition of an asset or liability in a transaction other than a
business combination and which, at the time of the transaction,
affects neither accounting, nor taxable profit or loss, it is not
provided for.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profits will be available against
which these temporary differences can be utilised.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets and
liabilities relate to income taxes levied by the same taxation
authority on either the taxable entity or different taxable
entities where there is an intention to settle the balances on a
net basis. Deferred tax assets and liabilities are determined using
tax rates that have been enacted or substantively enacted by the
period end date and are expected to apply when the related deferred
tax asset is realised, or the deferred tax liability is
settled.
x. Share capital
Ordinary shares and Preference A and B shares are classified as
equity. Incremental costs directly attributable to the issue of new
shares or options are shown in equity as a deduction, net of tax,
from the proceeds.
y. Distributions
Distributions payable to the Company's shareholders are
recognised as a liability in the Consolidated Financial Statements
in the period in which the distributions are declared and
approved.
3. Estimation techniques, uncertainties and contingencies
Estimates and judgements are continually evaluated, and are
based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
Significant uncertainty in technical provisions
Significant uncertainty exists as to the accuracy of the
insurance contract provisions and the reinsurers' share of
insurance liabilities established in the insurance company
subsidiaries and the Lloyd's Syndicates on which the Group
participates as shown in the Consolidated Statement of Financial
Position. The ultimate costs of claims and the amounts ultimately
recovered from reinsurers could vary materially from the amounts
established at the year end.
In the event that further information were to become available
to the Directors of an insurance company subsidiary which gave rise
to material additional liabilities, the going concern basis might
no longer be appropriate for that company and adjustments would
have to be made to reduce the value of its assets to their
realisable amount, and to provide for any further liabilities which
might arise in that subsidiary. The Group bears no financial
responsibility for any liabilities or obligations of any insurance
company subsidiary in run-off, except as disclosed. Should any
insurance company subsidiary cease to be able to continue as a
going concern in the light of further information becoming
available, any loss to the Group would thus be restricted to the
book value of their investment in and amounts due from that
subsidiary and any guarantee liability that may arise.
Claims provisions
The Consolidated Financial Statements include provisions for all
outstanding claims and IBNR, for related reinsurance recoveries and
for all costs expected to be incurred to run-off its
liabilities.
The insurance contract provisions including IBNR are based upon
actuarial and other studies of the ultimate cost of liabilities
including exposure based and statistical estimation techniques.
There are significant uncertainties inherent in the estimation of
each insurance company subsidiary's and Lloyd's Syndicate's
insurance liabilities and reinsurance recoveries. There are many
assumptions and estimation techniques that may be applied in
assessing the amount of those provisions which individually could
have a material impact on the amounts of liabilities, related
reinsurance assets and reported shareholders' equity funds. Actual
experience will often vary from these assumptions, and any
consequential adjustments to amounts previously reported will be
reflected in the results of the year in which they are identified.
Potential adjustments arising in the future could, if adverse in
the aggregate, exceed the amount of shareholders' equity funds of
an insurance company subsidiary.
Independent external actuaries are contracted to provide a
Statement of Actuarial Opinion for the Lloyd's Syndicates on which
Group participates. This statement confirms that, in the opinion of
the actuary, the booked reserves are greater than or equal to their
view of best estimate.
In the case of the Group's larger insurance companies,
independent external actuaries provide a view of best estimate
reserves and confirm that the held reserves are within their range
of reasonable estimates.
The business written by the insurance company subsidiaries
consists in part of long-tail liabilities, including asbestos,
pollution, health hazard and other US liability insurance. The
claims for this type of business are typically not settled until
many years after policies have been written. Furthermore, much of
the business written by these companies is reinsurance and
retrocession of other insurance companies' business, which
lengthens the settlement period.
Significant delays occur in the notification and settlement of
certain claims and a substantial measure of experience and
judgement is involved in making the assumptions necessary for
assessing outstanding liabilities, the ultimate cost of which
cannot be known with certainty at the period end date. The gross
insurance contract provisions and related reinsurers' share of
insurance liabilities are estimated on the basis of information
currently available. Provisions are calculated gross of any
reinsurance recoveries. A separate estimate is made of the amounts
that will be recoverable from reinsurers based upon the gross
provisions and having due regard to collectability.
The insurance contract provisions include significant amounts in
respect of notified and potential IBNR claims for long-tail
liabilities. The settlement of most of these claims is not expected
to occur for many years, and there is significant uncertainty as to
the timing of such settlements and the amounts at which they will
be settled.
While many claims are clearly covered under policy wordings and
are paid quickly, many other claims are subject to significant
disputes, for example over the terms of a policy and the amount of
the claim. The provisions for disputed claims are based on the view
of the Directors of each insurance company subsidiary as to the
expected outcomes of such disputes. Claim types impacted by such
disputes include asbestos, pollution and certain health hazards and
retrocessional reinsurance claims.
Uncertainty is further increased because of the potential for
unforeseen changes in the legal, judicial, technological or social
environments, which may increase or decrease the cost, frequency or
reporting of claims, and because of the potential for new sources
or types of claim to emerge.
Asbestos, pollution and health hazard claims
The estimation of the provisions for the ultimate cost of claims
for asbestos, pollution, health hazard and other US liability
insurance is subject to a range of uncertainties that is generally
greater than those encountered for other classes of insurance
business. As a result it is not possible to determine the future
development of asbestos, pollution, health hazard and other US
liability insurance with the same degree of reliability as with
other types of claims. Consequently, traditional techniques for
estimating claims provisions cannot wholly be relied upon. The
Group employs further techniques which utilise, where practical,
the exposure to these losses by contract to determine the claims
provisions.
Insurance claims handling expenses
The provision for the cost of handling and settling outstanding
claims to extinction and all other costs of managing the run-off is
based on an analysis of the expected costs to be incurred in
run-off activities, incorporating expected savings from the
reduction of transaction volumes over time.
The period of the run-off may be between 5 and 50 years
depending upon the nature of the liabilities within each insurance
company subsidiary. Ultimately, the period of run-off is dependent
on the timing and settlement of claims and the collection of
reinsurance recoveries; consequently similar uncertainties apply to
the assessment of the provision for such costs.
Reinsurance recoveries
Reinsurance recoveries are included in respect of claims
outstanding (including IBNR claims) and claims paid after making
provision for irrecoverable amounts. The reinsurance recoveries on
IBNR claims are estimated based on the recovery rate experienced on
notified and paid claims for each class of business.
The insurance company subsidiaries are exposed to disputes on
contracts with their reinsurers and the possibility of default by
reinsurers. In establishing the provision for non-recovery of
reinsurance balances, the Directors of each insurance company
subsidiary consider the financial strength of each reinsurer, its
ability to settle their liabilities as they fall due, the history
of past settlements with the reinsurer, and the Group's own
reserving standards and have regard to legal advice regarding the
merits of any dispute.
Recognition and de-recognition of assets and liabilities in
run-off
In the course of the Group's business of managing the run-off of
insurers and brokers, accounting records are initially recognised
in the form provided by previous management. As part of managing
run-off the Group carries out extensive enquiries to clarify the
assets and liabilities of the run-off and to obtain all available
and relevant information. Those enquiries may lead the Group to
identify and record additional assets and liabilities relating to
that run-off, or to conclude that previously recognised assets and
liabilities should be increased or no longer exist and should be
de-recognised. Where decisions to de-recognise liabilities are
supported by an absence of relevant information there may remain a
remote possibility that a third party may subsequently provide
evidence of its entitlement to such de-recognised liabilities which
may lead to a transfer of economic benefit to settle such
entitlement. The right of a third party to such a settlement will
be recognised in the accounting period in which the position is
clarified.
Defined benefit pension scheme
The pension assets and post retirement liabilities are
calculated in accordance with IAS 19. The assets, liabilities and
Consolidated Income Statement charge or credit, calculated in
accordance with IAS 19, are sensitive to the assumptions made,
including inflation, interest rate, investment return and
mortality. IAS 19 compares, at a given date, the current market
value of a pension fund's assets with its long term liabilities,
which are calculated using a discount rate in line with yields on
high quality bonds of suitable duration and currency. As such, the
financial position of a pension fund on this basis is highly
sensitive to changes in bond rates and equity markets.
Litigation, mediation and arbitration
The Group in common with the insurance industry in general, is
subject to litigation, mediation and arbitration, and regulatory,
governmental and other sectorial inquiries in the normal course of
its business. The Directors do not believe that, in the aggregate,
current litigation, governmental or sectorial inquiries and pending
or threatened litigation or dispute is likely to have a material
impact on the Group's financial position. However, if the outcome
of any individual dispute differs substantially from expectation,
there could be a material impact on the Group's profit or loss,
financial position or cash flows in the year in which that impact
is recognised.
Changes in foreign exchange rates
The Group's Consolidated Financial Statements are prepared in US
dollars. Therefore, fluctuations in exchange rates used to
translate other currencies, particularly the Euro and sterling,
into US dollars will impact the reported Consolidated Statement of
Financial Position, results of operations and cash flows from year
to year. These fluctuations in exchange rates will also impact the
US dollar value of the Group's investments and the return on its
investments. Income and expenses are translated into US dollars at
average exchange rates. Monetary assets and liabilities are
translated at the closing exchange rates at the period end
date.
Assessment of impairment of intangible assets
Goodwill and US insurance authorisation licences are deemed to
have an indefinite life as they are expected to have a value in use
that does not erode or become obsolete over the course of time.
Consequently, they are not amortised but tested for impairment on a
biannual basis or if events or changes in circumstances indicate
that the carrying amount may be impaired.
The impairment tests involve evaluating the recoverable amount
of the Group's cash generating units and comparing them to the
relevant carrying amounts. The recoverable amount of each cash
generating unit is determined based on cash flow projections. These
cash flow projections are based on the financial budgets approved
by management covering a five year period. Management also consider
the current net asset value and earnings of each cash generating
unit for impairment.
Provisions
Estimates are based on reports provided by recognised
specialists as well as the Group's own internal review. Liabilities
may not be settled for many years and significant judgement is
involved in making an assessment of these liabilities, the period
over which they will be settled and, where appropriate, the
discount rate to be applied to assess the present value of the
amounts to be settled.
4. Management of insurance and financial risks
The Group's activities expose it to a variety of insurance and
financial risks. The Board is responsible for managing the Group's
exposure to these risks and, where possible, for introducing
controls and procedures that mitigate the effects of the exposure
to risk.
The Group has a Risk and Compliance Committee which is a formal
Committee of the Board. The Committee has responsibility for
maintaining the effectiveness of the Group's Risk Management
Framework, systems of internal control, risk policies and
procedures and adherence to risk appetite.
The following describes the Group's exposure to the more
significant risks and the steps management have taken to mitigate
their impact from a quantitative and qualitative perspective.
6. Investment risks (including market risk and interest rate risk)
The Group has established a dedicated Investment Committee which
has taken over responsibility from the former Group Capital and
Investment Committee for setting and recommending to the Board a
strategy for the management of the Group's investment assets owned
or managed by companies within the Group within an acceptable level
of risk as set out in the Group's Risk Management Framework. The
investment of the Group's financial assets, except certain deposits
with ceding undertakings, is managed by external investment
managers, appointed by the Investment Committee. The Investment
Committee is responsible for setting the policy to be followed by
the investment managers. The investment strategy strives to
mitigate the impact of interest rate fluctuation and credit risks
and to provide appropriate liquidity, in addition to monitoring and
managing foreign exchange exposures.
The Investment Committee is also responsible for keeping under
review the investment control procedures, monitoring and amending
(where appropriate) the investment policies and oversight of loans
and guarantees between Group companies.
The main objective of the investment policy is to maximise risk
adjusted returns whilst adhering to regulatory and group investment
guidelines together with seeking to optimise the matching of asset
and liability cashflows.
The investment allocation (including surplus cash) at 31
December 2022 and 2021 is shown below:
2022 2021
$m $m
Government and government agencies 395.3 330.9
Corporate bonds 1,079.2 1,055.9
Equities 22.0 11.9
Cash based investment funds 84.4 112.6
Cash and cash equivalents 316.9 266.3
----------------- ----------------
1,897.8 1,777.6
================= ================
% %
Government and government agencies 20.8 18.6
Corporate bonds 56.9 59.4
Equities 1.2 0.7
Cash based investment funds 4.4 2.4
Cash and cash equivalents 16.7 18.9
----------------- ----------------
100.0 100.0
================= ================
Corporate bonds include asset backed mortgage obligations
totalling $28.8m (2021: $45.1m).
Based on invested assets at external managers of $1,580.9m as at
31 December 2022 (2021: $1,511.3m), a 1 percentage
increase/decrease in market values would result in an
increase/decrease in the profit before income taxes for the year to
31 December 2022 of $15.8m (2021: $15.1m).
(i) Pricing risk
The following table shows the fair values of financial assets
using a valuation hierarchy; the fair value hierarchy has the
following levels:
Level 1 - Valuations based on quoted prices in active markets
for identical instruments. An active market is a market in which
transactions for the instrument occur with sufficient frequency and
volume on an ongoing basis such that quoted prices reflect prices
at which an orderly transaction would take place between market
participants at the measurement date.
Level 2 - Valuations based on quoted prices in markets that are
not active or based on pricing models for which significant inputs
can be corroborated by observable market data.
Level 3 - Valuations based on inputs that are unobservable or
for which there is limited activity against which to measure fair
value.
Level Level Level Total
1 2 3
2022 $m $m $m $m
Government and government agencies 395.3 - - 395.3
Corporate bonds 1,062.4 16.8 - 1,079.2
Equities 21.3 0.7 - 22.0
Cash based investment funds - 84.4 - 84.4
Purchased reinsurance receivables
(Note 19) - - 6.6 6.6
---------------- -------------- -------------- -----------------
Total financial assets measured
at fair value 1,479.0 101.9 6.6 1,587.5
================ ============== ============== =================
Level Level Level Total
1 2 3
2021 $m $m $m $m
Government and government agencies 330.9 - - 330.9
Corporate bonds 999.0 56.9 - 1,055.9
Equities 11.6 0.3 - 11.9
Cash based investment funds - 112.6 - 112.6
Purchased reinsurance receivables
(Note 19) - - 6.6 6.6
----------------- ------------- -------------- ------------------
Total financial assets measured
at fair value 1,341.5 169.8 6.6 1,517.9
================= ============= ============== ==================
The following table shows the movement on Level 3 assets
measured at fair value:
2022 2021
$m $m
Opening balance 6.6 6.4
Total net gains recognised in the Consolidated
Income Statement - 0.2
Closing balance 6.6 6.6
============== ===================
Level 3 investments (purchased reinsurance receivables) have
been valued using detailed models outlining the anticipated timing
and amounts of future receipts. The net gains recognised in the
Consolidated Income Statement in other income for the year amounted
to nil (2021: $0.2m). The Group purchased no further reinsurance
receivables in 2022 (2021: nil). Short term delays in the
anticipated receipt of these investments will not have a material
impact on their valuation.
There were no transfers between Level 1 and Level 2 investments
during the year under review.
The following shows the maturity dates and interest rate ranges
of the Group's debt securities:
(ii) Liquidity risk
As at 31 December 2022
Maturity date or contractual re-pricing date
After one After two After three
year but years but years but
Less than less than less than less than More than
Total one year two years three years five years five years
$m $m $m $m $m $m
Debt
securities 1,506.9 224.2 264.8 153.0 275.8 589.1
--------------- --------------------- -------------------- --------------------- --------------------- ---------------------
Interest rate ranges (coupon-rates)
After one After two After three
year but years but years but
Less than less than less than less than More than
one year two years three years five years five years
% % % % %
Debt securities 0.10 - 8.25 0.13 - 9.75 0.05 - 8.88 0.01 - 9.25 0.01 - 9.36
----------- ----------- ------------ ----------- -----------
As at 31 December 2021
Maturity date or contractual re-pricing date
After one After two After three
year but years but years but
Less than less than less than less than More than
Total one year two years three years five years five years
$m $m $m $m $m $m
Debt
securities 1,499.4 258.0 176.2 172.6 235.4 657.2
-------------- -------------------- -------------------- -------------------- ------------------- ------------------
Interest rate ranges (coupon-rates)
After one After two After three
year but years but years but
Less than less than less than less than More than
one year two years three years five years five years
% % % % %
Debt securities 0.13 - 8.25 0 - 8.25 0.10 - 7.38 0.13 - 9.75 0.01 - 9.25
----------- ---------- ------------ ----------- -----------
The Investment Committee determines, implements and reviews
investment strategies for each entity and for the Group as a whole,
having appropriate regard for the duration characteristics of the
liabilities supported by the investments and the specific liquidity
requirements for each entity. Liquidity risk is also monitored by
the Group's financial planning and treasury functions' established
cash flow and liquidity management processes.
(iii) Interest rate risk
Fixed income investments represent a significant proportion of
the Group's assets and the Investment Committee continually
monitors investment strategy to minimise the risk of a fall in the
portfolio's market value.
The fair value of the Group's investment portfolio of debt and
fixed income securities is normally inversely correlated to
movements in market interest rates. If market interest rates rise,
the fair value of the Group's debt and fixed income investments
would tend to fall and vice versa.
Debt and fixed income assets are predominantly invested in
high-quality corporate, government and asset-backed bonds. The
investments typically have relatively short durations and terms to
maturity.
The Group is exposed to interest rate risk within the Group's
financial liabilities. This exposure lies predominately with
amounts owed to credit institutions and debentures secured over the
assets of the Company and its subsidiaries.
b. Credit risk
Credit risk arises where counterparties fail to meet their
financial obligations as they fall due. The most significant area
where it arises for the Group is where reinsurers fail to meet
their obligations in full as they fall due. In addition, the Group
is exposed to the risk of disputes on individual claims presented
to its reinsurers or in relation to the contracts entered into with
its reinsurers.
The Group guideline is for the reinsurers of program management
to meet a minimum of the AM Best's A credit rating or otherwise
fully collateralise the obligation, in order to mitigate
counterparty credit risk.
The ratings used in the analysis below are based upon the
published rating of Standard & Poor's or other recognised
ratings agency.
As at 31 December 2022
Less Exposures
than of less than
A rated B rated B Other * $200k Total
$m $m $m $m $m $m
Deposits with
ceding
undertakings 38.3 1.5 - 9.1 0.7 49.6
Reinsurers'
share
of insurance
liabilities 2,077.1 80.3 - 496.0 39.8 2,693.2
Receivables
arising
out of
reinsurance
contracts 202.0 7.8 - 48.3 3.9 262.0
As at 31 December 2021
Restated
Exposures
Less than Other of less
A rated B rated B * than $200k Total
$m $m $m $m $m $m
Deposits with
ceding
undertakings 16.8 0.6 - 4.0 0.4 21.8
Reinsurers'
share
of insurance
liabilities 1,198.8 50.3 - 729.1 24.9 2,003.1
Receivables
arising
out of
reinsurance
contracts 367.5 14.2 - 87.8 7.0 476.5
* Other includes reinsurers who currently have no credit rating,
but for which the Group endeavours to obtain collateral.
The reinsurers' share of insurance liabilities is based upon a
best estimate given the profile of the insurance provisions
outstanding and the related IBNR. Receivables arising out of
reinsurance contracts are included in insurance and other
receivables in the Consolidated Statement of Financial
Position.
The average credit period of receivables arising out of
reinsurance contracts is as follows:
As at 31 December 0-6 6-12 12-24 > 24
2022 months% months% months% months
%
Percentage of receivables 39.5 11.3 11.8 37.4
As at 31 December 0-6 6-12 12-24 > 24
2021 months% months% months% months
%
Percentage of receivables 93.2 1.2 1.6 4.0
Part of the Group's business consists of acquiring debts or
companies with debts, which are normally past due. Any further
analysis of these debts is not meaningful. The Directors monitor
these debts closely and make appropriate provision for
impairment.
Financial assets past
due but not impaired
==========================================================
As at Past Carrying
31 December due Past due more value in
2022 Neither past 1-90 than 90 days Assets that the balance
due nor impaired days have been sheet
$m $m $m impaired $m $m
============= ============================ ================ ======================================== ============================
Deposits with
ceding
undertakings 47.0 - - 2.6 49.6
============= ============================ ================ ======================================== ============================
Reinsurers'
share
of insurance
liabilities 2,613.4 79.9 2,693.2
============= ============================ ================ ======================================== ============================
Receivables
arising
out of
reinsurance
contracts 220.7 - - 41.3 262.0
============= ============================ ================ ======================================== ============================
Financial assets past
due but not impaired
As at Past Carrying
31 December due Past due more value in
2021 restated Neither past 1-90 than 90 days Assets that the balance
due nor impaired days have been sheet
$m $m $m impaired $m $m
============= ============================= ================ ========================================== ==========================
Deposits with
ceding
undertakings 19.0 - - 2.8 21.8
============= ============================= ================ ========================================== ==========================
Reinsurers'
share
of insurance
liabilities 1,908.7 94.4 2,003.1
============= ============================= ================ ========================================== ==========================
Receivables
arising
out of
reinsurance
contracts 419.5 - - 57.0 476.5
============= ============================= ================ ========================================== ==========================
The Directors believe the amounts past due but not impaired, or
with no provisions provided, are recoverable in full. Where no
provisions have been made, the Directors believe that there are no
merits for a provision to be made and amounts are recoverable in
full. Where there are merits for a provision then such provisions
are made.
Credit risk is managed by committees established by the Group,
R&Q Syndicate Management Limited ('RQSML'), Asta Managing
Agency Limited ('Asta' and Coverys Managing Agency Limited
('Coverys'). RQSML, Asta and Coverys are the Lloyd's Managing
Agents which manage the Syndicates on which the Group participates.
RQSML, Asta and Coverys have established Syndicate Management
Committees in relation to each managed syndicate and the Group has
representation on each of these committees with the exception of
the S1991 and S2689 Committees on which the Group only has a
nominal participation. The committees are responsible for
establishing minimum security levels for all reinsurance purchases
by the managed Syndicates by reference to appropriate rating
agencies, for agreeing maximum concentration levels for individual
reinsurers and intermediaries, and for dealing with any other issue
relating to reinsurance assets.
Reinsurance assets will be overseen by the Group Risk and
Compliance and Audit committees, with some responsibilities now
residing with management.
There are also a number of Key Risk Indicators pertaining to
reinsurance security and concentration which have been developed
under the auspices of the Group Risk and Compliance Committee and
the RQSML, Asta and Coverys Risk and Capital Committees, which
monitor adherence to predefined risk appetite and tolerance
levels.
c. Currency risk
Currency risk is the risk that the fair value of future cash
flows of a financial instrument will fluctuate because of changes
in foreign exchange rates.
The Group's principal transactions are carried out in US dollars
and its exposure to foreign exchange risk arises primarily with
respect to Sterling and Euros.
The Group's main objective in managing currency risk is to
mitigate exposure to fluctuations in foreign exchange rates. There
have been no material changes in trading currencies during the year
under review. The Group manages this risk by way of matching assets
and liabilities by individual entity. Asset and liability matching
is monitored by the Group's financial planning and treasury
functions' established cash flow and liquidity management
processes.
The Group's financial assets are primarily denominated in the
same currencies as its insurance and investment contract
liabilities. This mitigates the foreign currency exchange rate risk
for the overseas operations. Thus, the main foreign exchange risk
arises from assets and liabilities denominated in currencies other
than those in which insurance and investment contract liabilities
are expected to be settled. The currency risk is effectively
managed by the Group through derivative financial instruments.
Forward currency contracts are used to eliminate the currency
exposure on individual foreign transactions. The Group will not
enter into these forward contracts until a firm commitment is in
place.
The table below summarises the Group's principal assets and
liabilities by major currencies:
31 December 2022 Sterling US dollar Euro Total
$m $m $m $m
Intangible assets 35.6 35.3 0.1 71.0
Reinsurers' share
of insurance
liabilities 1,229.2 1,452.6 11.4 2,693.2
Financial instruments 706.5 925.4 21.0 1,652.9
Insurance receivables 563.2 66.7 1.5 631.4
Cash and cash
equivalents 176.5 139.4 1.1 317.0
Insurance liabilities
and insurance payables (2,416.2) (2,524.4) (35.7) (4,976.3)
Deferred tax and
pension scheme
obligations (18.3) (6.1) (0.2) (24.6)
Trade and other
(payables)/receivables (119.0) (58.0) (2.4) (179.4)
------------------------------- ------------------------------- -------------------------- -------------------------------
Total 157.5 30.9 (3.2) 185.2
=============================== =============================== ========================== ===============================
31 December 2021 Sterling US dollar Euro Total
restated $m $m $m $m
Intangible assets 8.1 73.7 - 81.8
Reinsurers' share
of insurance
liabilities 1,054.0 895.3 53.8 2,003.1
Financial instruments 811.9 697.3 71.8 1,581.0
Insurance receivables 301.4 476.0 1.7 779.1
Cash and cash
equivalents 132.9 124.6 8.8 266.3
Insurance liabilities
and insurance payables (1,823.3) (2,071.4) (70.1) (3,964.8)
Deferred tax and
pension scheme
obligations 3.9 (6.0) (0.2) (2.3)
Trade and other
(payables)/receivables (453.0) 151.4 (46.4) (348.0)
------------------------------- ------------------------------- -------------------------- -------------------------------
Total 35.9 340.9 19.4 396.5
=============================== =============================== ========================== ===============================
The analysis that follows is performed for reasonably possible
movements in key variables with all other variables held constant,
showing the impact on profit before tax and equity due to changes
in the fair value of currency sensitive monetary assets and
liabilities including insurance contract claim liabilities. The
correlation of variables will have a significant effect in
determining the ultimate impact on market risk, but to demonstrate
the impact due to changes in variables, variables had to be changed
on an individual basis. It should be noted that movements in these
variables are non-linear.
31 December 2022 31 December 2021
Currency Changes Impact Impact on Impact on Impact on
in on profit equity* profit equity*
variables
$m $m $m $m
Euro weakening 10 % 2.2 0.1 (3.1) (5.9)
Sterling
weakening 10 % (3.8) (17.8) (4.8) (27.4)
Euro
strengthening 10 % (2.4) - 3.8 7.3
Sterling
strengthening 10 % 4.9 22.1 5.8 33.5
* Impact on equity reflects adjustments for tax, where
applicable.
d. Capital management
The Group's objectives with respect to capital sufficiency are
to maintain capital at a level that provides a suitable margin over
that deemed by the Group's regulators and supervisors as providing
an acceptable level of policyholder protection, whilst remaining
economically viable. The Group is regulated in Bermuda by the
Bermuda Monetary Authority ('BMA'). The BMA assesses the capital
and solvency adequacy of the Group and requires that sufficient
capital is in place to meet the Bermuda Solvency Capital
Requirement ('BSCR'). The BSCR generates a risk-based capital
measure by applying capital factors to capital and solvency return
elements, including investments and other assets, premiums and
reserves, operational risk, and insurer-specific catastrophe
exposure measures, in order to establish an overall measure of
capital and surplus for statutory solvency purposes.
The Group maintains a capital level that provides an adequate
margin over the Group's solvency capital requirements whilst
maintaining local capital which meets or exceeds the relevant local
minima including, where appropriate, those relating to maintenance
of external credit ratings. This is monitored by way of a capital
sufficiency assessment by the Group Risk and Compliance
Committee.
e. Insurance risk
7. Program management business
The Group underwrites live business (which is largely reinsured)
through a network of MGAs. This program management business is
underwritten in the US by Accredited Surety and Casualty Inc.
('ASC') and Accredited Speciality Insurance Company ('ASI'), and in
Europe by Accredited Insurance (Europe) Limited ('AIEL'). Each of
these insurance companies is rated A- by AM Best. The Group is
exposed to the risk of its net retention increasing due to
fluctuations in the timing, frequency and severity of insured
events.
9. Syndicate participations
The Group participates on Syndicates shown below:
Syndicate Capacity Group participation
Syndicate Year of account GBPm GBPm Open / closed
2689 2023 52.0 0.1 Open
2689 2022 71.6 0.1 Open
2689 2021 0.1 - Open
1991 2020 110.0 - Open
1991 2019 126.8 0.1 Open
1991 2018 126.8 0.1 Open
1110 2022 3.0 3.0 Open
1110 2020 3.0 3.0 Open
1110 2019 3.0 3.0 Open
1110* 2017 280.0 280.0 Open
*Syndicate 1110 2017 year of account benefits from reinsurance
arrangements in place with New York Marine and General Insurance
Company which protects the Group from and adverse net claims
development
Syndicates 1110, 1991 and 2689 are classified by Lloyd's as
run-off Syndicates and their capacity shown above is reflective of
this status. Syndicate 1110 is the Group's platform for
consolidating legacy transactions at Lloyd's. The capacity of
run-off Syndicates does not represent the level of risk they are
able to take on, but is a nominal level set by Lloyd's; they are
able to receive portfolios of risk greater than this nominal
capacity.
The Group is exposed to the risk of its Syndicate participation
exposures increasing due to fluctuations in the timing, frequency
and severity of insured events.
10. Underwriting risk
Underwriting risk is the primary source of risk in the Group's
program management operations and is reflected in the scope and
depth of the risk appetite and monitoring frameworks implemented in
those entities. Individual operating entities are responsible for
establishing a framework for the acceptance and monitoring of
underwriting risk including appropriate consideration of potential
individual and aggregate occurrence exposures, adequacy of
reinsurance coverage and potential geographical and demographic
concentrations of risk exposure.
In the event that potential risk concentrations are identified
across operating entities, appropriate monitoring is developed to
manage the overall Group exposure.
11. Reserving risk
Reserving risk represents a significant risk to the Group in
terms of both driving required capital levels and the threat to
volatility of earnings.
Reserving risk is managed through the application of an
appropriate reserving approach to both live and run-off portfolios
and the performance of extensive due diligence on new run-off
portfolios and acquisitions prior to acceptance. Reserving
exercises undertaken by the in-house actuarial team are
supplemented with both scheduled and ad hoc reviews conducted by
external actuaries.
Reserving risk is also mitigated through the use of reinsurance
on live underwriting portfolios and through assuming the inuring
reinsurance treaties in place in respect of acquired run-off
acquisitions/portfolios.
Claims development information is disclosed below in order to
illustrate the effect of the uncertainty in the estimation of
future claims settlements by the Group. The tables compare the
ultimate claims estimates with the payments made to date. Details
are presented on an aggregate basis and show the movements on a
gross and net basis, and separately identify the effect of the
various acquisitions made by the Group since 1 January 2019. The
analysis of claims development in the Group's run-off insurance
entities is as follows:
Gross Group Entities Entities Entities Entities
entities acquired acquired acquired acquired
at by by by by
1 January the Group the Group the Group the Group
during during during during
2019 2019 2020 2021 2022
$m $m $m $m $m
Gross claims at:
1
January/acquisition 467.6 374.6 938.0 521.5 68.0
First year movement (77.3) (173.1) 9.2 (10.8) -
Second year movement 150.7 30.5 (131.4) - -
Third year movement (115.4) 13.0 - - -
Fourth year movement (112.5) (2.9) - - -
Gross provision
at 31 December 2022 313.1 242.1 815.8 510.7 68.0
------------------------------- ---------------- -------------------- ---------------------- -------------------
Gross claims at:
1
January/acquisition 467.6 374.6 938.0 521.5 68.0
Exchange adjustments 31.3 (8.2) (13.4) 9.3 (0.6)
Payments (196.3) (8.6) (185.3) (135.1) (10.3)
Gross provision at
31 December 2022 (313.1) (242.1) (815.8) (510.7) (68.0)
------------------------------- ---------------- -------------------- ---------------------- -------------------
Deficit to date (10.5) 115.7 (76.5) (115.0) (10.9)
------------------------------- ---------------- -------------------- ---------------------- -------------------
Net Group Entities Entities Entities Entities
entities acquired acquired acquired acquired
at by by by by
1 January the Group the Group the Group the Group
during during during during
2019 2019 2020 2021 2022
$m $m $m $m $m
Net claims at :
1
January/acquisition 310.8 351.6 642.1 109.8 13.6
First year movement (50.4) (159.9) (6.6) (10.8) -
Second year movement 87.5 18.4 (106.7) - -
Third year movement (157.8) 15.0 - - -
Fourth year movement (155.7) (2.1) - - -
Net provision at
31 December 2022 34.4 223.0 528.8 99.0 13.6
------------------------------- ---------------- -------------------- ---------------------- -------------------
Net claims at:
1
January/acquisition 310.8 351.6 642.1 109.8 13.6
Exchange adjustments (5.5) (8.8) (18.6) 16.1 (0.6)
Payments (186.7) (7.7) (177.7) (119.9) (10.3)
Net position at 31
December 2022 (34.4) (223.0) (528.8) (99.0) (13.6)
------------------------------- ---------------- -------------------- ---------------------- -------------------
(Deficit)/surplus
to date 84.2 112.1 (83.0) (93.0) (10.9)
------------------------------- ---------------- -------------------- ---------------------- -------------------
The above figures include the Group's participation on Lloyd's
Syndicates treated as being in run-off.
Foreign exchange movements shown above are offset by comparable
foreign exchange movements in cash and investments held to meet
insurance liabilities.
Additional information regarding movements in claims reserves is
disclosed in note 23.
5. Segmental information
The Group's segments represent the level at which financial
information is reported to the Board, being the chief operating
decision maker as defined in IFRS 8. The reportable segments have
been identified as follows:-
-- Program Management - delegates underwriting authority to MGAs
to provide program capacity through its licensed platforms in the
US and Europe
-- Legacy Insurance - acquires legacy portfolios and manages the
run-off of claims reserves
-- Corporate / Other - primarily includes the holding company
costs and interest expense on debt
Segmental results for the year ended 31 December 2022
Program Legacy Corporate
Note Management Insurance / Other Total
$m $m $m $m
Underwriting
income (i) 0.1 (22.3) - (22.2)
Fee income (ii) 92.3 12.1 - 104.4
Investment
income (iii) 5.6 24.9 1.2 31.7
======================= ======================= ======================= ===================
Gross operating
income (iv) 98.0 14.7 1.2 113.9
======================= ======================= ======================= ===================
Fixed operating
expenses (v) (42.3) (71.3) (3.1) (116.7)
Interest expense - - (30.5) (30.5)
----------------------- ----------------------- ----------------------- ===================
Pre-tax
operating
profit/(loss) (vi) 55.7 (56.6) (32.4) (33.3)
======================= ======================= ======================= ===================
Unearned
program fee
income (vii) (17.0)
Net intangibles (viii) (9.6)
Net unrealised and
realised
gains/(losses) (135.8)
Non-core and
exceptional
items (ix) (96.9)
-------------------
Loss before tax (292.6)
===================
Segment assets 2,197.0 3,220.6 497.3 5,914.9
======================= ======================= ======================= ===================
Segment liabilities 2,121.0 2,988.6 620.1 5,729.7
======================= ======================= ======================= ===================
Segmental results for the year ended 31 December 2021
Restated
Program Legacy Corporate Total
Note Management Insurance / Other restated
$m $m $m $m
Underwriting
income (i) (1.1) 58.1 - 57.0
Fee income (ii) 56.1 - - 56.1
Investment
income (iii) 2.7 19.3 2.8 24.8
========================== =================== ======================= =================
Gross operating
income (iv) 57.7 77.4 2.8 137.9
========================== =================== ======================= =================
Fixed operating
expenses (v) (37.1) (83.5) (16.0) (136.6)
Interest expense - - (22.7) (22.7)
-------------------------- ------------------- ----------------------- =================
Pre-tax
operating
profit/(loss) (vi) 20.6 (6.1) (35.9) (21.4)
========================== =================== ======================= =================
Unearned program
fee income (vii) (13.2)
Net intangibles (viii) 2.8
Net unrealised and
realised
gains/(losses) (18.4)
Non-core and
exceptional
items (ix) (111.7)
-----------------
Loss before tax (161.9)
=================
Segment assets 1,039.6 4,006.4 14.8 5,060.8
========================== =================== ======================= =================
Segment liabilities 864.1 3,184.5 614.9 4,663.5
========================== =================== ======================= =================
The above key performance indicators used by management measure
the economics of the business and adjust IFRS results to include
fully written Program Fee Income and exclude non-cash intangible
assets created from acquisitions in Legacy Insurance, net realised
and unrealised investment gains on fixed income and lease-based
assets, foreign currency translation reserves, non-core expenses
and exceptional items.
Notes:
12. Underwriting income represents Legacy Insurance tangible day
one gains and reserve development / savings, net of claims costs
and brokerage commissions. Underwriting income also includes
Program Management retained earned premiums, net of claims costs,
acquisition costs, claims handling expenses and premium taxes /
levies.
13. Fee income comprises program fee income from insurance
policies already bound (written), regardless of the amount of
premium earned in the financial period, and earnings from minority
stakes in MGAs.
14. Investment income represents income arising on the
investment portfolio excluding net realised and unrealised
investment gains or losses on fixed income and lease-based
assets.
15. Gross operating income represents pre-tax operating profit
before fixed operating expenses (v) and interest expense.
16. Fixed operating expenses include employment, legal,
accommodation, information technology, Lloyd's Syndicate and other
fixed expenses of ongoing operations, excluding non-core and
exceptional items.
17. Pre-tax operating profit is a measure of how the Group's
core businesses performed adjusted for unearned program fee income
(vii), intangible assets created in Legacy acquisitions and net
realised and unrealised investment gains on fixed income and
lease-based assets.
(vii) Unearned program fee income represents the portion of
program fee income (ii) which has not yet been earned on an IFRS
basis.
(viii) Movement on net intangibles comprises the aggregate of
intangible assets arising on acquisitions in the period less
amortisation on existing intangible assets charged in the
period.
(ix) Non-core and exceptional items comprises the results of
entities which are considered non-core and one-off or exceptional
income and expenditure.
No income from any one client included within the fee income
generated more than 10% of the total external income.
Geographical analysis
As at 31 December 2022
North
UK America Europe Total
$m $m $m $m
Gross assets 1,539.8 3,031.8 1,767.2 6,338.8
Intercompany eliminations (132.3) (229.2) (62.4) (423.9)
================= ================ ================ ================
Segment assets 1,407.5 2,802.6 1,704.8 5,914.9
================= ================ ================ ================
Gross liabilities 1,524.9 2,967.1 1,661.6 6,153.6
Intercompany eliminations (274.6) (82.6) (66.7) (423.9)
================= ================ ================ ================
Segment liabilities 1,250.3 2,884.5 1,594.9 5,729.7
================= ================ ================ ================
Revenue from external
customers 2.1 17.9 61.8 81.8
================= ================ ================ ================
Revenue from external customers represents the Group's total
consolidated income, after elimination of internal revenue.
As at 31 December 2021
Restated
North
UK America Europe Total
$m $m $m $m
Gross assets 1,609.8 2,418.6 1,331.9 5,360.3
Intercompany eliminations (137.4) (103.5) (58.6) (299.5)
================= ================ ================ ===============
Segment assets 1,472.4 2,315.1 1,273.3 5,060.8
================= ================ ================ ===============
Gross liabilities 1,199.6 2,566.5 1,196.9 4,963.0
Intercompany eliminations (238.3) (12.2) (49.0) (299.5)
================= ================ ================ ===============
Segment liabilities 961.3 2,554.3 1,147.9 4,663.5
================= ================ ================ ===============
Revenue from external
customers 7.9 59.6 41.3 108.8
================= ================ ================ ===============
6. Earned fee income
Written fee income for Program Management represents the fee
income from insurance policies written in the period. Earned fee
income adjusts written fee income to reflect the portion of written
free income to be earned in the following financial periods and to
recognise the written fee income written in prior financial periods
earned in this financial period.
2022 2021
$m $m
Written fee income 92.0 45.0
Unearned fee income (17.0) (13.2)
------------ ------------
Earned fee income 75.0 31.8
============ ============
7. Gross investment income
2022 2021
$m $m
Investment income (excluding realised
and unrealised gains and losses) 38.4 24.1
Realised net (losses)/gains on financial
assets (18.8) 3.8
Unrealised losses on financial assets (117.0) (21.5)
============ =============
Investment income (97.4) 6.4
============ =============
8. Other income
2022 2021
$m $m
Income from contracts with customers
Management fees 1.6 3.0
Income from other sources
Insurance commissions - 0.7
Gain on sale of subsidiary 1.1 2.6
Interest expense on pension scheme deficit (0.1) (0.1)
Rental income from investment properties 0.2 0.2
Purchased reinsurance receivables 0.1 0.2
------------- --------------
2.9 6.6
============= ==============
Income from contracts with customers is derived from the supply
of insurance and administration related management services to
third parties. The Group derives this income from the transfer of
services over time.
9. Operating expenses
2022 2021
$m $m
Expenses of insurance company subsidiaries 59.8 58.6
Expenses of Syndicate participations 20.6 24.8
Employee benefits 62.4 59.3
Other operating expenses 36.1 23.3
------------ --------------
178.9 166.0
============ ==============
The expenses of insurance company subsidiaries represent
external expenses borne by subsidiaries of the Group; intragroup
charges are removed on consolidation.
Operating expenses have increased as a result of the organic and
acquisitive growth of the Group's Program Management and Legacy
Insurance (including Syndicate participations) segments.
Auditor remuneration
2022 2021
$m $m
Fees payable to the Group's auditor
for the audit of the parent company
and its Consolidated Financial Statements 0.3 0.3
Fees payable for the audit of the Group's
subsidiaries by:
* Group auditor 1.0 0.9
* Other auditors 0.9 0.8
Other services under legislative requirements 0.1 0.2
--------------- ---------------
Total 2.3 2.2
=============== ===============
Included within fees payable to audit the Group's subsidiaries
is an amount for Group's share of the audit fee payable for
Syndicate audits.
10. Finance costs
2022 2021
$m $m
Bank loan and overdraft interest 12.1 11.1
Interest on lease liabilities 0.3 0.3
Subordinated debt interest 19.3 15.1
------------- ---------------
31.7 26.5
============= ===============
11. (Loss)/Profit before income taxes
(Loss)/Profit before income taxes is stated after charging:
2022 2021
$m $m restated
Employee benefits (Note 26) 62.4 59.3
Legacy acquisition costs (including
aborted transactions) 0.9 4.3
Depreciation and impairment of fixed
assets and right-of-use assets (Notes
16 & 17) 2.4 2.9
Short term and low value lease rental
expenditure 0.1 0.1
Amortisation of pre contract costs 1.2 1.6
Amortisation and impairment of intangibles
(Note 15) 9.7 12.8
12. Income tax charge
a. Analysis of charge in the year
2022 2021
$m $m restated
Current tax
Current year - -
Adjustments in respect of prior periods (0.1) 0.3
Foreign tax 0.8 (7.7)
------------ ---------------
0.7 (7.4)
Deferred tax
Current year (8.6) (27.4)
Adjustments in respect of prior periods 11.9 -
Income tax charge/(credit) for the
year 4.4 (34.8)
============ ===============
b. Factors affecting tax charge for the year
The tax assessed differs from the standard rate of corporation
tax in the United Kingdom of 19%. The differences are explained
below:
2022 2021
$m $m restated
Loss before income taxes (292.6) (161.9)
-------------- ----------------
Loss on ordinary activities at the standard
rate of corporation tax in the UK of
19.00% (2021: 19.00%) (55.6) (30.8)
Income not taxable for tax purposes (1.8) (24.1)
Expenses not deductible for tax purposes 20.6 6.3
Differences in taxation treatment 2.4 (2.0)
Unrelieved tax losses carried forward 18.8 20.0
Utilisation of brought forward losses (2.2) (0.7)
Foreign tax 0.8 (7.7)
Tax rate differential 9.3 3.9
Adjustments in respect of previous years 12.1 0.3
-------------- ----------------
Income tax charge/(credit) for the
year 4.4 (34.8)
============== ================
c. Factors that may affect future tax charges
In addition to the recognised deferred tax asset, the Group has
other trading losses of approximately $322.8m (2021: $366.4m) in
various Group companies available to be carried forward against
future trading profits of those companies. The recovery of these
losses is uncertain and no deferred tax asset has been provided in
respect of these losses. Should it become possible to offset these
losses against taxable profits in future years, the Group tax
charge in those years will be reduced accordingly.
The Group has available capital losses of $34.2m (2021:
$37.9m).
In the Finance Bill 2021, it was announced that the main rate of
UK corporation tax would increase to 25% from 1 April 2023.
13. Earnings and net assets per share
a. Basic earnings per share
Basic earnings per share is calculated by dividing the earnings
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the year.
Reconciliations of the earnings and weighted average number of
shares used in the calculations are set out below:
2022 2021
$m $m restated
Loss for the year attributable to ordinary
shareholders (297.0) (127.1)
============ =============
No. No.
000's 000's
Shares in issue throughout the year 275,211 224,284
Weighted average number of ordinary shares
issued in year 50,031 47,327
Weighted average number of ordinary shares 325,242 271,611
============ =============
Basic earnings per ordinary share (91.3)c (46.8)c
============ =============
b. Diluted earnings per share
Diluted earnings per share is calculated by adjusting the
weighted average number of ordinary shares for conversion of all
potentially dilutive ordinary shares. The Group's earnings per
share is diluted by the effects of outstanding share options.
Reconciliations of the earnings and weighted average number of
shares used in the calculations are set out below:
2022 2021
$m $m restated
Loss for the year attributable to ordinary
shareholders (297.0) (127.1)
============ =============
No. No.
000's 000's
Weighted average number of ordinary shares
in issue in the year 325,242 271,611
Diluted earnings per ordinary share (91.3)c (46.8)c
============ =============
c. Net asset value per share
2022 2021
$m $m restated
Net assets attributable to equity shareholders
as at 31 December 185.2 397.3
============ =============
No. No.
000's 000's
Ordinary shares in issue as at 31 December 377,395 275,211
Net asset value per ordinary share 49.1c 144.4c
============ =============
d. Diluted net asset value per share
2022 2021
$m $m restated
Net assets attributable to equity shareholders
as at 31 December 185.2 397.3
No. No.
000's 000's
Ordinary shares in issue as at 31 December 377,395 275,211
Diluted net asset value per ordinary share 49.1c 144.4c
============ =============
14. Distributions
The amounts recognised as distributions to equity holders in the
year are:
2022 2021
$m $m
Dividend - 8.3
Total distributions to shareholders - 8.3
=============== ===============
15. Intangible assets
US State
licences Arising
& customer on acquisition
contracts restated Goodwill Other Total restated
$m $m $m $m $m
Cost
As at 1 January
2021 5.0 82.8 25.1 0.9 113.8
Exchange adjustments - (1.1) (0.2) - (1.3)
Acquisition of
subsidiaries - 14.6 3.4 - 18.0
Disposals - - - (0.7) (0.7)
As at 31 December
2021 5.0 96.7 28.3 0.2 130.2
Exchange adjustments - (3.7) (0.4) - (4.1)
Additions - - - 1.9 1.9
As at 31 December
2022 5.0 93.0 27.9 2.1 128.0
======================= ======================== ================== ================= ==================
Amortisation/Impairment
As at 1 January
2021 - 12.0 23.9 0.7 36.6
Exchange adjustments - (0.5) - - (0.5)
Charge for the year - 12.3 0.5 - 12.8
Disposals - - - (0.5) (0.5)
----------------------- ------------------------ ------------------ ----------------- ------------------
As at 31 December
2021 - 23.8 24.4 0.2 48.4
Exchange adjustments - (0.9) (0.2) - (1.1)
Charge for the year - 9.7 - - 9.7
As at 31 December
2022 - 32.6 24.2 0.2 57.0
======================= ======================== ================== ================= ==================
Carrying amount
----------------------- ------------------------ ------------------ ----------------- ------------------
As at 31 December
2022 5.0 60.4 3.7 1.9 71.0
======================= ======================== ================== ================= ==================
As at 31 December
2021 5.0 72.9 3.9 - 81.8
======================= ======================== ================== ================= ==================
Goodwill acquired through business combinations has been
allocated to the Legacy insurance business segment, which is also
an operating and reportable segment, for impairment testing.
Intangible assets arising on acquisition are calculated by
measuring the difference between the discounted and undiscounted
fair value of net technical provisions acquired. These intangible
assets are amortised over the estimated pattern of run-off of the
net technical provisions.
The recoverable amount is determined based on a value in use
calculation using cash flow projections from financial budgets
approved by senior management.
Key assumptions used in value in use calculations
The calculation of value in use is most sensitive to the
following assumptions:-
-- Discount rates, which represent the current market assessment
of the risks specific to each cash generating unit, regarding the
time value of money and individual risks of the underlying assets
which have not been incorporated in the cash flow estimates. The
pre-tax discount rate applied to the cash flow projections is 13.4%
(2021: 10.0%). The discount rate calculation is based on the
specific circumstances of the Group and its operating segments and
derived from its weighted average cost of capital ('WACC') with
uplift for expected increases in interest rates. The WACC takes
into account both debt and equity. The cost of equity is derived
from the expected investment return.
-- Growth rate used to extrapolate cash flows beyond the budget
period is based on published industry standards. Cash flows beyond
the four-year period are extrapolated using a 10% growth rate
(2021: 10.0%).
The Directors believe that no reasonably foreseeable change in
any of the above key assumptions would require an impairment of the
carrying amount of goodwill.
16. Property, plant and equipment
Computer Office Leasehold
equipment equipment improvements Total
$m $m $m $m
Cost
As at 1 January 2021 1.3 2.3 1.6 5.2
Exchange adjustments - - - -
Additions 0.1 - 0.6 0.7
Disposals (0.1) (0.4) - (0.5)
------------------ ------------------ ------------------------ -----------------------
As at 31 December
2021 1.3 1.9 2.2 5.4
Exchange adjustments - (0.2) - (0.2)
Additions 0.1 - 0.3 0.4
Disposals (0.2) - (0.2)
------------------ ------------------ ------------------------ -----------------------
As at 31 December
2022 1.4 1.5 2.5 5.4
================== ================== ======================== =======================
Depreciation
As at 1 January 2021 1.2 1.0 0.9 3.1
Exchange adjustments (0.1) - - (0.1)
Charge for the year 0.2 0.3 0.2 0.7
Disposals - (0.4) - (0.4)
------------------ ------------------ ------------------------ -----------------------
As at 31 December
2021 1.3 0.9 1.1 3.3
Exchange adjustments - (0.1) - (0.1)
Charge for the year 0.1 0.3 0.2 0.6
Disposals - (0.2) - (0.2)
------------------ ------------------ ------------------------ -----------------------
As at 31 December
2022 1.4 0.9 1.3 3.6
================== ================== ======================== =======================
Carrying amount
As at 31 December
2022 - 0.6 1.2 1.8
================== ================== ======================== =======================
As at 31 December
2021 - 1.0 1.1 2.1
================== ================== ======================== =======================
As at 31 December 2022, the Group had no significant capital
commitments (2021: none). The depreciation charge for the year is
included in operating expenses.
17. Right-of-use assets
Office
Property equipment Total
$m $m $m
Position recognised at
1 January 2021 5.5 0.1 5.6
Depreciation charge for
the year (2.1) (0.1) (2.2)
Additions in the year 2.7 - 2.7
As at 31 December 2021 6.1 - 6.1
Depreciation charge for
the year (1.8) - (1.8)
As at 31 December 2022 4.1 - 4.1
================== ================= =================
The cost of leases with a rental period of less than 12 months
or with a contract value of less than GBP4,000 was $0.1m for the
year (2021: $0.1m) and is reflected within expenses in the
Consolidated Income Statement.
18. Investment properties and financial assets
2022 2021
$m $m
a. Investment properties
As at 1 January 1.8 1.8
Disposal (1.8) -
-------------- --------------
As at 31 December - 1.8
============== ==============
Rental income from the investment properties for the year was
$0.1m (2021: $0.2m) and is included in Other Income within the
Consolidated Income Statement.
b. Financial instruments
Financial investment assets at fair value through profit or loss
(designated at initial recognition)
2022 2021
$m $m
Equities 22.0 11.9
Debt and fixed interest securities 1,474.5 1,386.8
Cash based investment funds 84.4 112.6
-------------- ---------------
1,580.9 1,511.3
============== ===============
Included in the above amounts are $104.1m (2021: $126.6m)
pledged as part of the Funds at Lloyd's in support of the Group's
underwriting activities. Lloyd's has the right to apply these
monies in the event the corporate member fails to meet its
obligations. These monies are not available to meet the Group's own
working capital requirements and can only be released with Lloyd's
permission. Also included in the above amounts are $50.5m (2021:
$95.6m) of funds withheld as collateral for certain of the Group's
reinsurance contracts.
c. Shares in subsidiary and associate undertakings
The Company had interests in the following subsidiaries and
associates at 31 December 2022:
% of ordinary
shares held
via:
Country of incorporation/ The Company Subsidiary Overall
registration and associate effective
undertakings % of share
capital held
Name of subsidiary/associate
Distinguished Re Ltd Barbados - 100 100
R&Q Services Bermuda
Limited Bermuda - 100 100
R&Q Re (Bermuda) Ltd. Bermuda - 100 100
RQLM Limited Bermuda 100 - 100
Sandell Holdings Ltd. Bermuda - 100 100
Tradesman Program
Managers,
LLC USA - 40 40
R&Q Re (Cayman) Ltd. Cayman Island - 100 100
R&Q Capital No. 1 England and
Limited Wales - 100 100
R&Q Capital No. 6 England and
Limited Wales - 100 100
R&Q Capital No. 7 England and
Limited Wales - 100 100
R&Q Capital No. 8 England and
Limited Wales - 100 100
R&Q Central Services England and
Limited Wales - 100 100
R&Q Delta Company England and
Limited Wales - 100 100
England and
R&Q Eta Company Limited Wales - 100 100
R&Q Gamma Company England and
Limited Wales - 100 100
Inceptum Insurance
Company England and
Limited Wales - 100 100
R&Q Insurance Services England and
Limited Wales - 100 100
England and
R&Q Munro MA Limited Wales - 100 100
R&Q Munro Services
Company England and
Limited Wales - 100 100
England and
R&Q Oast Limited Wales - 100 100
R&Q Overseas Holdings England and
Limited Wales - 100 100
R&Q Reinsurance Company
(UK) England and
Limited Wales - 100 100
R&Quiem Financial
Services England and
Limited Wales - 100 100
Randall & Quilter II
Holdings England and
Limited Wales - 100 100
Randall & Quilter IS
Holdings England and
Limited Wales - 100 100
Randall & Quilter
Underwriting
Management Holdings England and
Limited Wales - 100 100
England and
R&Q UK Holdings Limited Wales 100 - 100
The World Marine &
General England and
Insurance Company PLC Wales - 100 100
Vibe Services Management England and
Limited Wales - 100 100
R&Q Syndicate Management England and
Limited Wales - 100 100
La Licorne Compagnie de
Reassurances
SA France - 100 100
Capstan Insurance
Company
Limited Guernsey - 100 100
R&Q Ireland Claims
Services
Limited # Ireland - 100 100
R&Q Ireland Company
Limited
by Guarantee # Ireland - 100 100
Hickson Insurance
Limited Isle of Man - 100 100
Pender Mutual Insurance
Company
Limited Isle of Man - 100 100
R&Q Insurance Management
(IOM)
Limited Isle of Man - 100 100
R&Q Insurance (IOM)
Limited Isle of Man - 100 100
Accredited Insurance
(Europe)
Limited { Malta - 100 100
R&Q Malta Holdings
Limited Malta - 100 100
Accredited Bond Agencies
Inc. USA - 100 100
Accredited America
Insurance
Holding Corporation USA - 100 100
Accredited Specialty
Insurance
Company USA - 100 100
Accredited Surety and
Casualty
Company, Inc. USA - 100 100
CMAL LLC } USA - - -
Excess and Treaty
Management
Corporation USA - 100 100
GLOBAL Reinsurance
Corporation
of America USA - 100 100
GLOBAL U.S. Holdings
Incorporated USA - 100 100
Grafton US Holdings Inc. USA - 100 100
ICDC Ltd USA - 100 100
National Legacy
Insurance
Company USA - 100 100
R&Q Healthcare Interests
LLC USA - 100 100
R&Q Reinsurance Company USA - 100 100
R&Q Solutions LLC USA - 100 100
Randall & Quilter
America
Holdings Inc USA - 100 100
Randall & Quilter PS
Holdings
Inc USA - 100 100
Risk Transfer
Underwriting
Inc. USA - 100 100
Transport Insurance
Company USA - 100 100
# has a November year end due to Irish Law Society
connection.
{ Has a UK and an Italian Branch
} Membership interest held by R&Q Capital No.1 Limited
19. Insurance and other receivables
2022 2021
$m $m restated
Receivables arising from direct insurance
operations 369.4 302.6
Receivables arising from reinsurance
operations 262.0 476.5
-------------- ------------------
Insurance receivables 631.4 779.1
-------------- ------------------
Trade receivables/ Receivables arising
from contracts with customers 8.5 3.2
Other receivables 218.5 134.3
Purchased reinsurance receivables 6.6 6.6
Prepayments and accrued income 260.4 173.1
-------------- ------------------
494.0 317.2
-------------- ------------------
Total 1,125.4 1,096.3
============== ==================
Of the purchased reinsurance receivables balance $3.6m is
expected to be received after 12 months (2021: After 12 months
$6.6m).
Included in receivables arising from contracts with customers
are amounts due from customers in relation to the supply of
management services which are now unconditionally due. There are no
amounts due from contracts with customers which are subject to
further performance or conditions before settlement.
Prepayments and accrued income includes gross deferred
acquisition costs which have increased in accordance with the
growth of Program Management.
20. Cash and cash equivalents
2022 2021
$m $m
Cash at bank and in hand 316.9 266.3
=========== ===========
Included in cash and cash equivalents is $0.8m (2021: $0.8m)
being funds held in escrow accounts in respect of guarantees
provided to the Institute of London Underwriters.
In the normal course of business, insurance company subsidiaries
will have deposited funds in respect of certain contracts which can
only be released with the approval of the appropriate regulatory
authority.
The carrying amounts disclosed above reasonably approximate
their fair values at the period end date.
21. Insurance and other payables
2022 2021
$m $m
Structured liabilities 504.4 506.2
Structured settlements (504.4) (506.2)
------------------- ----------------
- -
------------------- ----------------
Payables arising from reinsurance
operations 721.8 751.3
Payables arising from direct insurance
operations 405.2 109.7
Insurance payables 1,127.0 861.0
Trade payables 6.2 4.9
Other taxation and social security 43.5 23.4
Other payables 171.5 135.4
Accruals and deferred income 150.1 115.4
371.3 279.1
----------------
Total 1,498.3 1,140.1
================
The carrying amounts disclosed above reasonably approximate
their fair values at the period end date.
Structured Settlements
No new structured settlement arrangements have been entered into
during the year. Some group subsidiaries have paid for annuities
from third party life insurance companies for the benefit of
certain claimants. The subsidiary company retains the credit risk
in the unlikely event that the life insurance company defaults on
its obligations to pay the annuity amounts. In the event that any
of these life insurance companies was unable to meet its
obligations to these annuitants, any remaining liability may fall
upon the respective insurance company subsidiaries. The Directors
believe that, having regard to the quality of the security of the
life insurance companies together with the reinsurance available to
the relevant Group insurance companies, the possibility of a
material liability arising in this way is very unlikely. The life
companies will settle the liability directly with the claimants and
no cash will flow through the Group. These annuities have been
shown as reducing the insurance companies' liabilities to reflect
the substance of the transactions and to ensure that the disclosure
of the balances does not detract from the users' ability to
understand the Group's future cash flows.
22. Financial liabilities
2022 2021
$m $m
Amounts owed to credit institutions 344.9 395.9
Lease liabilities 5.4 7.6
Deposits received from reinsurers 38.2 3.0
-----------------
388.5 406.5
=================
Amounts due to credit institutions are payable
as follows:
2022 2021
$m $m
Less than one year 26.5 8.0
Between one and five years 123.3 188.1
Over five years 195.1 199.8
------------------- -----------------
344.9 395.9
=================
As outlined in Note 31, $103.0m (2021: $153.6m) owed to credit
institutions is secured by debentures over the assets of the
Company and several of its subsidiaries.
The Group has issued the following debt:
Issuer Principal Rate Maturity
R&Q Insurance Holdings Ltd $70.0m 6.35% above USD 2028
LIBOR
R&Q Insurance Holdings Ltd $125.0m 6.75% above USD 2033
LIBOR
Accredited Insurance (Europe) EUR20.0m 6.7% above EURIBOR 2025
Limited
Accredited Insurance (Europe) EUR5.0m 6.7% above EURIBOR 2027
Limited
R&Q Re (Bermuda) Limited $20.0m 7.75% above USD 2023
LIBOR
The Group's subsidiary, Randall & Quilter America Holdings
Corporation (reassigned from Accredited Holding Corporation)
provides a full and unconditional guarantee for the payment of
principal, interest and any other amounts due in respect of the
$70.0m Notes issued by R&Q Insurance Holdings Ltd.
The Group also has $175.4 million of unsecured letters of credit
which are guaranteed by the Group.
Lease liabilities maturity analysis - contractual undiscounted
cash flows
2022 2021
$m $m
Less than one year 2.2 2.2
Between one and five years 3.4 5.5
Over five years - 0.2
Total undiscounted lease liabilities
at 31 December 5.6 7.9
Reconciliation of liabilities arising from financing
activities
The table below details changes in the Group's liabilities
arising from financing activities, including both cash and non-cash
changes. Liabilities arising from the financing activities are
those for which cash flows were, or future cash flows will be,
classified in the Group Consolidated Cash Flow Statement as cash
flows from financing activities.
2022 2021
$m $m
Balance at 1 January 395.9 330.2
Financing cash flows (1) (39.7) 70.5
Non-cash exchange adjustment (11.3) (4.8)
----------------- -----------------
Balance at 31 December 344.9 395.9
=================
1) Represents the net cash flows from the repayment of
borrowings and the proceeds from new borrowing arrangements.
23. Insurance contract provisions and reinsurance balances
2022 2021 restated
Program Legacy Program Legacy
Management Insurance Total Management Insurance Total
$m $m $m $m $m $m
Gross
Insurance contract
provisions at 1
January 1,210.4 1,890.5 3,100.9 682.6 1,613.2 2,295.8
Claims paid (325.2) (326.7) (651.9) (197.1) (288.8) (485.9)
Increases in
provisions
arising from the
acquisition
of subsidiary
undertakings
and Syndicate
participations - 0.5 0.5 - 91.1 91.1
Increases in
provisions
arising from
acquisition
of reinsurance
portfolios - 67.5 67.5 - 430.4 430.4
Increase in claims
provisions 831.9 129.3 961.2 459.3 65.1 524.4
Increase/(decrease)
in unearned premium
reserve 453.4 - 453.4 287.9 (8.6) 279.3
Net exchange
differences (49.6) (70.9) (120.5) (22.3) (11.9) (34.2)
As at 31 December 2,120.9 1,690.2 3,811.1 1,210.4 1,890.5 3,100.9
Reinsurance
Reinsurers' share of
insurance contract
provisions at 1
January 1,151.4 851.7 2,003.1 653.7 424.4 1,078.1
Proceeds from
commutations
and reinsurers' share
of gross claims paid (284.1) (200.4) (484.5) (182.9) 28.7 (154.2)
Increases in
provisions
arising from the
acquisition
of subsidiary
undertakings
and Syndicate
participations - 0.4 0.4 - 164.2 164.2
Increases in
provisions
arising from
acquisition
of reinsurance
portfolios - 54.0 54.0 - 247.5 247.5
Increase/(decrease)
in claims provisions 755.1 52.1 807.2 430.5 (13.6) 416.9
Increase/(decrease)
in unearned premium
reserve 410.9 - 410.9 270.7 (3.7) 267.0
Net exchange
differences (21.3) (76.6) (97.9) (20.6) 4.2 (16.4)
As at 31 December 2,012.0 681.2 2,693.2 1,151.4 851.7 2,003.1
Net
Net insurance contract
provisions at 1
January 59.0 1,038.8 1,097.8 28.9 1,188.8 1,217.7
Net claims paid (41.1) (126.3) (167.4) (14.2) (317.5) (331.7)
Increases/(decreases)
in provisions arising
from the acquisition
of subsidiary
undertakings
and Syndicate
participations - 0.1 0.1 - (73.1) (73.1)
Increases in
provisions
arising from
acquisition
of reinsurance
portfolios - 13.5 13.5 - 182.9 182.9
Increase/(decrease)
in claims provisions 76.8 77.2 154.0 28.8 78.7 107.5
Increase/(decrease)
in unearned premium
reserve 42.5 - 42.5 17.2 (4.9) 12.3
Net exchange
differences (28.3) 5.7 (22.6) (1.7) (16.1) (17.8)
As at 31 December 108.9 1,009.0 1,117.9 59.0 1,038.8 1,097.8
2022 2021
Program Legacy Program Legacy
Management Insurance Total Management Insurance Total
$m $m $m $m $m $m
Gross
Claims
reserves 1,084.1 1,689.6 2,773.7 600.0 1,889.9 2,489.9
Unearned
premium
reserves 1,036.8 0.6 1,037.4 610.4 0.6 611.0
------------------- --------------------
As at 31
December 2,120.9 1,690.2 3,811.1 1,210.4 1,890.5 1,890.5
------------------- --------------------
Reinsurance
Claims
reserves 1,019.5 681.1 1,700.6 572.4 851.6 1,424.0
Unearned
premium
reserves 992.5 0.1 992.6 579.0 0.1 579.1
-------------------- --------------------
As at 31
December 2,012.0 681.2 2,693.2 1,151.4 851.7 851.7
-------------------- --------------------
Net
Claims
reserves 64.6 1,008.5 1,073.1 27.6 1,038.3 1,065.9
Unearned
premium
reserves 44.3 0.5 44.8 31.4 0.5 31.9
---------------------- ----------------------
As at 31
December 108.9 1,009.0 1,117.9 59.0 1,038.8 1,097.8
---------------------- ----------------------
The carrying amounts disclosed above reasonably approximate
their fair values at the period end date.
Assumptions, changes in assumptions and sensitivity
The assumptions used in the estimation of provisions relating to
insurance contracts are intended to result in provisions which are
sufficient to settle the net liabilities from insurance contracts.
The amounts presented above include estimates of future reinsurance
recoveries expected to arise on the settlement of the gross
insurance liabilities.
Provision is made at the period end date for the estimated
ultimate cost of settling all claims incurred in respect of events
and developments up to that date, whether reported or not.
As detailed in Note 3, significant uncertainty exists as to the
likely outcome of any individual claim and the ultimate costs of
completing the run-off of the Group's insurance operations.
The provisions carried by the Group for its insurance
liabilities are calculated using a variety of actuarial techniques.
The provisions are calculated and reviewed by the Group's internal
actuarial team; in addition the Group periodically commissions
independent reviews by external actuaries. The use of external
actuaries provides management with additional comfort that the
Group's internally produced statistics and trends are consistent
with observable market information and other published data.
Provisions for outstanding claims and IBNR are initially estimated
at a gross level and a separate calculation is carried out to
estimate the size of reinsurance recoveries. Insurance companies
and Syndicates within the Group are covered by a variety of treaty,
excess of loss and stop loss reinsurance programs.
As detailed in Note 2 (h), when preparing these Consolidated
Financial Statements, provision is made for all costs of running
off the business of the insurance company subsidiaries to the
extent that these costs exceed the estimated future investment
return expected to be earned by those subsidiaries. Provision is
also made for all costs of running off the underwriting years for
those Syndicates treated as being in run-off on which the Group
participates. The quantum of the costs of running off the business
and the future investment income has been determined through the
preparation of cash flow forecasts over the anticipated period of
the run-off, using internally prepared budgets and forecasts of
expenditure, investment income and actuarially assessed settlement
patterns for the gross provisions. The gross costs of running off
the business are estimated to be fully covered by the estimated
future investment income.
As stated in Note 2 the Group has opted to discount reserves on
long term liabilities with predictable cashflow s.
Other than as described above, insurance liabilities are not
discounted.
The provisions disclosed in the Consolidated Financial
Statements are sensitive to a variety of factors including:
-- Settlement and commutation activity of third party lead reinsurers
-- Development in the status of settlement and commutation
negotiations being entered into by the Group
-- The financial strength of the Group's reinsurers and the risk
that these entities could, in time, become insolvent or could
otherwise default on payments
-- Future cost inflation of legal and other advisors who assist
the Group with the settlement of claims
-- Changes in statute and legal precedent which could
particularly impact provisions for asbestos, pollution and other
latent exposures
-- Arbitration awards and other legal precedents which could
particularly impact upon the presentation of both inwards and
outwards claims on the Group's exposure to major catastrophe
losses
A 1 percent reduction in the net technical provisions would
increase net assets by $11.2m (2021: $11.0m).
24. Current and deferred tax
Current tax
2022 2021
$m $m $000
Current tax assets 7.4 3.6 -
Current tax liabilities (7.3) (2.4) (2,603)
Net current tax assets 0.1 1.2 (2,603)
Deferred tax
Deferred tax is calculated in full on temporary differences
under the liability method using tax rates of 25% for the UK (2021:
25%) and 21% for the US (2021: 21%).
Deferred tax assets have been recognised in respect of all tax
losses and other temporary differences giving rise to deferred tax
assets where it is probable that these assets will be
recovered.
The movements in deferred tax assets and liabilities during the
year are shown below. The movement in deferred tax is recorded in
the income tax charge in the Consolidated Income Statement.
Deferred tax assets and liabilities are only offset where there
is a legally enforceable right of offset and there is an intention
to settle the balances on a net basis.
Deferred Deferred
tax tax Total
assets liabilities restated
$m $m $m
As at 1 January
2021 5.7 (17.1) (11.4)
Movement in year 14.7 9.2 23.9
-------------------
As at 31 December
2021 20.4 (7.9) 12.5
Movement in year 21.8 (8.7) 13.1
-------------------
As at 31 December
2022 42.2 (16.6) 25.6
===================
The movement on the deferred tax account is shown below:
Accelerated Pension Other
capital Trading scheme temporary
allowances losses deficit differences Total restated
$m $m $m $m $m
As at 1 January
2021 (0.1) 18.2 1.9 (31.4) (11.4)
Movement in year - 4.4 (0.5) 20.0 23.9
------------------- ---------------- ------------------
As at 31 December
2021 (0.1) 22.6 1.4 (11.4) 12.5
Movement in year - 7.9 0.5 4.7 13.1
------------------- ---------------- ------------------
As at 31 December
2022 (0.1) 30.5 1.9 (6.7) 25.6
=================== ================ ==================
Movements in the provisions for deferred taxation are disclosed
in the Consolidated Financial Statements as follows:
Deferred
Tax in Consolidated
Deferred Statement
Exchange tax in Consolidated of Comprehensive
Adjustment Income Statement Income Total restated
$m $m $m $m
Movement in
2021 1.3 22.8 (0.2) 23.9
Movement in
2022 8.3 3.7 1.1 13.1
The analysis of the deferred tax assets relating to tax losses
is as follows:
2022 2021
$m $m
Deferred tax assets - relating to trading
losses
Deferred tax assets to be recovered after
more than 12 months 15.9 5.6
Deferred tax assets to be recovered within
12 months 14.6 17.0
Deferred tax assets 30.5 22.6
Deferred tax assets are recognised for tax losses carried
forward to the extent that the realisation of the related tax
benefit through future taxable profits is probable.
The Directors have prepared forecasts which indicate that,
excluding the deferred tax asset on the pension scheme deficit, the
deferred tax assets will substantially reverse over the next six
years.
The above deferred tax assets arise mainly from temporary
differences and losses arising on the Group's US insurance
companies. Under local tax regulations these losses and other
temporary differences are available to offset against the US
subsidiaries' future taxable profits in the Group's US Insurance
Services Division as well as any future taxable results that may
arise in the US insurance companies.
The Group's total deferred tax asset includes $30.5m (2021:
$22.6m) in respect of trading losses carried forward. The tax
losses have arisen in individual legal entities and will be used as
future taxable profits arise in those legal entities. Substantially
all of the unused tax losses for which a deferred tax asset has
been recognised arises in the US subgroup.
25. Share capital
Number of Ordinary Share premium Treasury Total
shares shares share reserve
$m $m $m $m
At 1 January
2021 224,283,759 6.2 200.9 0.2 207.3
Functional
currency
revaluation (0.2) 7.2 - 7.0
Issue of
ordinary
shares 49,772,168 1.4 85.9 - 87.3
Share based
payments 1,043,816 0.1 2.6 - 2.7
Treasury 111,525 - - (0.2) (0.2)
Distribution - - (8.3) - (8.3)
At 31
December
2021 275,211,268 7.5 288.3 - 295.8
Issue of
ordinary
shares 102,183,967 2.5 121.5 - 124.0
At 31
December
2022 377,395,235 10.0 409.8 - 419.8
2022 2021
$m $m
Allotted, called up and fully paid
377,395,235 ordinary shares of 2p each
(2021: 275,211,268 ordinary shares of 2p
each) 10.0 7.4
1 Preference A Share of GBP1 - -
1 Preference B Share of GBP1 - -
------------------- -------------------
10.0 7.4
=================== ===================
Included in Equity 2022 2021
$m $m
377,395,235 ordinary shares of 2p each
(2021: 275,211,268 ordinary shares of 2p
each) 10.0 7.4
1 Preference A Share of GBP1 - -
1 Preference B Share of GBP1 - -
------------------- -------------------
10.0 7.4
=================== ===================
Cumulative Redeemable Preference Shares
Preference A and B Shares have rights, inter alia, to receive
distributions in priority to ordinary shares of distributable
profits of the Company derived from certain subsidiaries:
-- Preference A Share: one half of all distributions arising
from the Company's investment in R&Q Reinsurance Company up to
a maximum of $5.0m.
-- Preference B Share: one half of all distributions arising
from the Company's investment in R&Q Reinsurance Company (UK)
Limited up to a maximum of $10.0m.
The Preference A and Preference B Shares have been classified as
equity on the basis that redemption dates are not prescribed in the
Memorandum and Articles of Association and as such there is no
contractual obligation to deliver cash. No distributions have been
made since acquisition by either R&Q Reinsurance Company or
R&Q Reinsurance Company (UK) Limited.
26. Employees and Directors
Employee benefit expense for the Group during the year
2022 2021
$m $m
Wages and salaries 50.9 46.8
Social security costs 4.4 5.4
Pension costs 1.8 1.8
Share based payment charge 5.3 5.3
-----------------
62.4 59.3
=================
Pension costs are recognised in operating expenses in the
Consolidated Income Statement and include $1.9m (2021: $1.8m) in
respect of payments to defined contribution schemes.
2022 Number 2021
Average number of employees Number
Program Management 168 125
Legacy Insurance 144 154
Other 18 16
330 295
Remuneration of the Directors and key management
2022 2021
$m $m
Aggregate Director emoluments 7.3 11.1
Aggregate key management emoluments 3.5 3.5
Share based payments - Directors 4.7 4.8
Share based payments - Key management 0.5 0.5
16.0 19.9
===================
Highest paid Director
Aggregate emoluments 7.7 6.9
Key management refers to employees who are Directors of
subsidiaries within the Group but not members of the Group's Board
of Directors.
Directors' emoluments
Name Salary Directors' Bonus Movement Share Total
Fees paid in bonus award cost
accrued
$m $m $m $m $m $m
A K
Quilter 0.7 - 0.9 (0.2) - 1.4
W L
Spiegel* 1.5 - 1.5 0.8 3.9 7.7
T S
Solomon 0.5 - 1.0 - 0.8 2.3
A H F
Campbell - 0.1 - - - 0.1
P A
Barnes - 0.2 - - - 0.2
J P Fox - 0.2 - - - 0.2
E M
Flanagan - 0.1 - - - 0.1
R Legget - - - - - -
*Out of $7.7m of total compensation, $3.9m represents the
vesting of the stock award of $12m granted in 2020 at 177.5p, which
vested after three years at 6 7.8p. To satisfy tax liabilities
arising from the vesting William Spiegel sold 2.8m Ordinary Shares
which, in accordance with the share award agreement, have been
purchased by the Group to be held in Treasury.
Bonus payments relating to the reporting year are paid in the
following 3 years being 50%, 25% and 25% annually, and reflect the
performance of the Group and the individuals. The costs in the 2022
financial year represent the amounts paid in 2022 and provision for
costs relating to the 2020, 2021 and 2022 reporting years'
performance, which will be paid in 2022, 2023 and 2024. The
provisions are established on the likelihood of the performance
(financial and personal) and service period criteria being met
based on a board approved scorecard. Where contractual arrangements
supersede the above policy, the contractual arrangements are
included.
27. Pension scheme obligations
The Group operates one defined benefit scheme in the UK. The
defined benefit scheme's assets are held in separate trustee
administered funds. The pension cost is assessed by an independent
qualified actuary. In the valuation, the actuary used the projected
unit method as the scheme is closed to new employees. A full
actuarial valuation of the scheme is carried out every three years,
with the last valuation completed as at 1 January 2021.
On 2 December 2003, the scheme was closed to future accrual
although the scheme continues to remain in full force and effect
for members at that date.
The position and assumptions under IAS 19 as at the reporting
period are as follows.
a. Employee benefit obligations - amount disclosed in the
Consolidated Statement of Financial Position
2022 2021
$m $m
Fair value of plan assets 20.0 36.6
Present value of funded obligations (27.9) (42.3)
Net defined benefit liability (7.9) (5.7)
Related deferred tax asset 2.0 1.4
Net position in the Consolidated Statement
of Financial Position (5.9) (4.3)
All actuarial losses are recognised in full in the Consolidated
Statement of Comprehensive Income in the period in which they
occur.
b. Movement in the net defined benefit obligation and fair value
of plan assets over the year
Present value Fair value Deficit of
of obligation of plan assets funded plan
$m $m $m
As at 31 December 2021 (42.3) 36.6 (5.7)
Interest (expense)/income (0.7) 0.6 (0.1)
(43.0) 37.2 (5.8)
Remeasurements:-
Return on plan assets,
excluding
amounts included in
interest
expense - (14.4) (14.4)
Loss from changes in
financial
assumptions 11.9 - 11.9
Experience gain (2.0) - (2.0)
Loss on curtailments (0.2) - (0.2)
(33.3) 22.8 (10.5)
Employer's contributions - 2.1 2.1
Benefit payments from the
plan 2.5 (2.5) -
Currency revaluation 0.6 (0.8) (0.2)
As at 31 December 2022 (30.2) 21.6 (8.6)
Present value Fair value Deficit of
of obligation of plan assets funded plan
$m $m $m
As at 31 December 2020 (47.6) 37.7 (9.9)
Interest
(expense)/income (0.6) 0.5 (0.1)
(48.2) 38.2 (10.0)
Remeasurements:-
Loss from changes in
financial
assumptions 2.7 - 2.7
Loss from changes in
demographic
assumptions (0.1) - (0.1)
Experience gain 0.5 - 0.5
(45.1) 38.2 (6.9)
Employer's
contributions - 1.1 1.1
Benefit payments from
the plan 2.0 (2.0) -
Currency revaluation 0.8 (0.7) 0.1
As at 31 December 2021 (42.3) 36.6 (5.7)
c. Significant actuarial assumptions
i) Financial assumptions
2022 2021
Discount rate 4.75 % 1.90 %
Pre 2030: 3.20%/Post
RPI inflation assumption 2030: 2.95% 3.50 %
Pre 2030: 2.40%/Post
CPI inflation assumption 2030: 2.85% 3.20 %
Pension revaluation in deferment: Pre 2030: 2.40%/Post
- CPI, maximum 5% 2030: 2.85% 2.70 %
Pension increases in payment: Pre 2030: 3.20%/Post
- RPI, maximum 5% 2.95% 3.50 %
ii) Demographic assumptions
Assumed life expectancy in years, on retirement at 65
2022 2021
Retiring today
- Males 21.7 21.6
- Females 24.2 24.1
Retiring in 20 years
- Males 23.0 22.9
- Females 25.6 25.5
d. Sensitivity to assumptions
The results of the IAS 19 valuation at 31 December 2022 are
sensitive to the assumptions adopted.
The sensitivities regarding the principal assumptions used to
measure the Scheme liabilities are set out below:
Assumption Change in assumption Change in liabilities
Discount rate Increase by 0.1%/Decrease Decrease by GBP238k/Increase
by 0.1% by GBP242k
Rate of inflation Increase by 0.1%/Decrease Increase by GBP56k/Decrease
by 0.1% by GBP55k
Life expectancy Increase by 1 year/Decrease Increase by GBP621k/Decrease
by 1 year by GBP646k
The above sensitivity analyses are based on a change in
assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, and changes in some of the
assumptions may be correlated. The sensitivity of the defined
benefit obligation to significant actuarial assumptions has been
estimated, based on the average age and the normal retirement age
of members and the duration of the Scheme.
e. The major categories of plan assets are as follows
As at 2022 As at 2021
$m $m
Level Level Total Level Level 2 Total
1 2 1
Cash and
cash
equivalents - 2.6 2.6 - 1.6 1.6
Investment
funds:
- equities - 5.1 5.1 - 22.7 22.7
- bonds - 2.0 2.0 - 4.0 4.0
- property - - - - - -
- liability
driven - 10.3 10.3 - 8.3 8.3
- 20.0 20.0 - 36.6 36.6
Definitions of Level 1 and Level 2 investments can be found in
note 4(a)(i).
f. Contributions and present value of defined benefit obligation
Funding levels are monitored on an annual basis. $2.1m of
contributions were made directly into the scheme during 2022 (2021:
$1.1m). In March 2022, a recovery plan was renegotiated and agreed
with the Trustees to eliminate the plan deficit by 31 December
2025. From July 2022, monthly payments increased to provide
annualised payments of $1.9m, and further single annual payments of
$0.8m will be made, finalising in December 2025.
28. Related party transactions
Transactions with subsidiaries
Transactions between the Group's wholly owned subsidiary
undertakings, which are related parties, have been eliminated on
consolidation and accordingly not disclosed.
Transactions with Directors
The following Directors and connected parties were entitled to
the following distributions during the year:-
2022 2021
$m $m
A K Quilter and family - 0.1
W L Spiegel - 0.2
Transactions with associate
On 10 September 2020 the Group invested in Tradesman Program
Managers, LLC which is treated as an investment in associate. The
Group receives income through its Program operations as detailed
below.
2022 2021
$m $m
Written
premium 303.3 245.2
Written
commissions 30.6 12.2
Funds due at
year end 5.5 5.4
The summarised financial information of the amounts presented in
the financial statements of the associate for the full year of the
associate is as follows:
2022 2021
$m $m
Assets 29.7 29.0
Liabilities (97.1) (33.2)
Net assets/(liabilities) (67.4) (4.2)
Income for the year 67.9 63.5
Profit for the year 31.1 29.4
29. Business combinations
Business combinations
During the year, the Group made two business combinations of
run-off portfolios. All of the Group's business combinations
involved Legacy Insurance transactions and have been accounted for
using the acquisition method of accounting.
Legacy entities and businesses
The following table shows the fair value of assets and
liabilities (and consideration where paid) included in the
Consolidated Financial Statements at the date of acquisition of the
legacy businesses:
Tax & Goodwill
Intangible Other Cash Other Technical deferred Net assets on bargain
assets receivables & Investments payables provisions tax acquired Consideration purchase
$m $m $m $m $m $m $m $m $m
La
Vittoria 0.1 - 0.6 - (0.5) (0.1) 0.1 - 0.1
Energia - - 1.4 - - - 1.4 0.9 0.5
0.1 - 2.0 - (0.5) (0.1) 1.5 0.9 0.6
Gross deal contribution represents the net asset value acquired
in excess of any consideration paid, gross of any transaction
expenses or commissions.
Goodwill on bargain purchase arises when the consideration is
less than the fair value of the net assets acquired. It is
calculated after the alignment of accounting policies and other
adjustments to the valuation of assets and liabilities to reflect
their fair value at acquisition. The long-tail nature of the
liabilities causes significant problems for former owners such as
absorbing capital and requiring recruitment of specialist staff. As
a specialist service provider and manager, the Group is more
efficient at managing such entities and former owners are prepared
to sell at a discount on the fair value of the net assets.
In order to disclose the impact on the Group as though the
legacy entities had been owned the whole year, assumptions would
have to be made about the Group's ability to manage efficiently the
run-off of the legacy liabilities prior to the acquisition. As a
result, and in accordance with IAS 8, the Directors believe it is
not practicable to disclose revenue and profit before tax as if the
entities had been owned for the whole year.
Where significant uncertainties arise in the quantification of
the liabilities, the Directors have estimated the fair value based
on the currently available information and on assumptions which
they believe to be reasonable.
30. Non-controlling interests
The following table shows the Group's non-controlling interests
and movements in the year:-
2022 2021
$m $m
Non-controlling interests
Balance at 1 January - (0.5)
Changes in non-controlling interest in subsidiaries - 0.5
Balance at 31 December - -
=============== ================
31. Guarantees and indemnities in ordinary course of business
The Group has entered into a guarantee agreement and a debenture
arrangement with its bankers, along with several of its
subsidiaries, in respect of the Group term loan facilities. The
total liability to the bank at 31 December 2022 was $103.0m (2021:
$153.6m).
The Group also gives various other guarantees in the ordinary
course of business.
32. Foreign exchange rates
The Group used the following exchange rates to translate foreign
currency assets, liabilities, income and expenses into US dollars,
being the Group's presentational currency:-
2022 2021
Average Year end Average Year end
UK Sterling 0.80 0.81 0.73 0.75
Euro 0.95 0.94 0.84 0.88
33. Events after the reporting date
On 6 January 2023, the Group announced that it had acquired a
non-controlling interest in a corporate vehicle which owns
corporate liability exposures (formerly MSI Safety). The Group will
manage the exposures for an annual management fee.
On 17 March 2023, the Group sold its 40% non-controlling
interest in TPM Holdings (Tradesman) for a total consideration of
$47m.
In March 2023, the Group and the Pennsylvania Insurance
Department agreed to proceed with a liquidation of R&Q
Reinsurance Company. As a result of provisions made in the past
this liquidation will not negatively impact the Group's net
assets.
On 4 April 2023, the Group announced the intention to separate
its Program Management business, Accredited, from Legacy Insurance
and in June 2023 received all regulatory consents required.
On 12 June 2023, the Group announced a $50m issuance of
preferred stock to a current shareholder, with the potential to
upsize the transaction to $60m.
On 12 June 2023, the Group announced it was exploring a
potential sale of the Accredited Group. To date the Group has
received a number of bids for this sale.
34. Ultimate controlling party
The Directors consider that the Group has no ultimate
controlling party.
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FR NKFBDKBKBPAB
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