REG - R&Q Insurance Hldgs - Results for the year ended 31 December 2022
29/06/2023 07:00
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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)¢ (7.5)¢ 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
Notes Share Share premium Foreign currency translation reserve Retained earnings Total
capital
$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 shares 25 2.5 121.5 124.0
- -
At end of year (183.2) 185.2
10.0 409.8 (51.4)
Notes Share Share premium Treasury shares Convertible debt Foreign currency translation reserve Retained earnings Sub- total Non-controlling interests Total
capital
$m $m $m $m $m $m $m $m $m
Year ended 31 December 2021 Restated
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 undertakings 30 - -
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
Depreciation and impairment 16 & 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:
As reported Effect of change in accounting 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 in run-off Estimated pattern of 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 1 Level 2 Level 3 Total
$m
$m
2022 $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 1 Level 2 Level 3 Total
$m
$m
2021 $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
Total Less than one year After one After two years but After three years but More than five years
year but less than less than
less than three years five years
two 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)
Less than one year After one After two years but After three years but More than five years
year but less than less than
less than three years five years
two 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
Total Less than one year After one After two years but After three years but More than five years
year but less than less than
less than three years five years
two 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)
Less than one year After one After two years but After three years but More than five years
year but less than less than
less than three years five years
two 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
A rated B rated Less than B Other * Exposures of less than $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
A rated B rated Less than B Other * Exposures of less 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 2022 0-6 months% 6-12 months% 12-24 months% > 24 months
%
Percentage of receivables 39.5 11.3 11.8 37.4
As at 31 December 2021 0-6 months% 6-12 months% 12-24 months% > 24 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 Neither past due nor impaired Past due Past due more than 90 days Assets that have been impaired $m Carrying value in the balance sheet
31 December 2022 $m 1-90 days $m
$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 Neither past due nor impaired Past due Past due more than 90 days Assets that have been impaired $m Carrying value in the balance sheet
31 December 2021 restated $m 1-90 days $m
$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 restated Sterling US dollar Euro Total
$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 151.4
(453.0) (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 in variables Impact on profit Impact on equity* Impact on profit Impact on equity*
$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 Year of account Syndicate Capacity Group participation Open / closed
£m £m
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 at acquired by acquired by acquired by acquired by
1 January the Group the Group the Group the Group
2019 during 2019 during 2020 during 2021 during 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 at acquired by acquired by acquired by acquired by
1 January the Group the Group the Group the Group
2019 during 2019 during 2020 during 2021 during 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
Note Program Management Legacy Insurance Corporate / 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
Note Program Management Legacy Insurance Corporate / Other Total 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
UK North Europe Total
America
$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
UK North Europe Total
America
$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 0.3 0.3
and its Consolidated Financial Statements
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 2.4 2.9
& 17)
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 (55.6) (30.8)
of 19.00% (2021: 19.00%)
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 & customer contracts Arising on acquisition 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 equipment Office equipment Leasehold 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
Property Office Total
equipment
$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 £4,000 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/ registration The Company Subsidiary and associate undertakings Overall effective % 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 Limited England and Wales - 100 100
R&Q Capital No. 6 Limited England and Wales - 100 100
R&Q Capital No. 7 Limited England and Wales - 100 100
R&Q Capital No. 8 Limited England and Wales - 100 100
R&Q Central Services Limited England and Wales - 100 100
R&Q Delta Company Limited England and Wales - 100 100
R&Q Eta Company Limited England and Wales - 100 100
R&Q Gamma Company Limited England and Wales - 100 100
Inceptum Insurance Company Limited England and Wales - 100 100
R&Q Insurance Services Limited England and Wales - 100 100
R&Q Munro MA Limited England and Wales - 100 100
R&Q Munro Services Company Limited England and Wales - 100 100
R&Q Oast Limited England and Wales - 100 100
R&Q Overseas Holdings Limited England and Wales - 100 100
R&Q Reinsurance Company (UK) Limited England and Wales - 100 100
R&Quiem Financial Services Limited England and Wales - 100 100
Randall & Quilter II Holdings Limited England and Wales - 100 100
Randall & Quilter IS Holdings Limited England and Wales - 100 100
Randall & Quilter Underwriting Management Holdings Limited England and Wales - 100 100
R&Q UK Holdings Limited England and Wales 100 - 100
The World Marine & General Insurance Company PLC England and Wales - 100 100
Vibe Services Management Limited England and Wales - 100 100
R&Q Syndicate Management Limited England and 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 LIBOR 2028
R&Q Insurance Holdings Ltd $125.0m 6.75% above USD LIBOR 2033
Accredited Insurance (Europe) Limited €20.0m 6.7% above EURIBOR 2025
Accredited Insurance (Europe) Limited €5.0m 6.7% above EURIBOR 2027
R&Q Re (Bermuda) Limited $20.0m 7.75% above USD LIBOR 2023
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 Management Legacy Insurance Total Program Management Legacy 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 - 0.5 0.5 - 91.1 91.1
undertakings and Syndicate participations
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 - 0.4 0.4 - 164.2 164.2
undertakings and Syndicate participations
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 - 0.1 0.1 - (73.1) (73.1)
undertakings and Syndicate participations
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 Management Legacy Insurance Total Program Management Legacy 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 cashflows.
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 $000
$m $m
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 tax Deferred Total restated
assets tax
liabilities
$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 Trading Pension Other Total restated
capital losses scheme temporary
allowances deficit differences
$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:
Exchange Adjustment Deferred tax in Consolidated Income Statement Deferred Tax in Consolidated Statement of Comprehensive Total restated
Income
$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 shares Ordinary shares Share premium Treasury share reserve Total
$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 10.0 7.4
(2021: 275,211,268 ordinary shares of 2p each)
1 Preference A Share of £1 - -
1 Preference B Share of £1 - -
10.0 7.4
Included in Equity 2022 2021
$m $m
377,395,235 ordinary shares of 2p each 10.0 7.4
(2021: 275,211,268 ordinary shares of 2p each)
1 Preference A Share of £1 - -
1 Preference B Share of £1 - -
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' Fees Bonus paid Movement in bonus accrued Share award cost Total
$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
67.8p. 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 of obligation Fair value of plan assets Deficit of 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 of obligation Fair value of plan assets Deficit of 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 %
RPI inflation assumption Pre 2030: 3.20%/Post 2030: 2.95% 3.50 %
CPI inflation assumption Pre 2030: 2.40%/Post 2030: 2.85% 3.20 %
Pension revaluation in deferment: Pre 2030: 2.40%/Post 2030: 2.85% 2.70 %
- CPI, maximum 5%
Pension increases in payment: Pre 2030: 3.20%/Post 2.95% 3.50 %
- RPI, maximum 5%
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 by 0.1% Decrease by £238k/Increase by £242k
Rate of inflation Increase by 0.1%/Decrease by 0.1% Increase by £56k/Decrease by £55k
Life expectancy Increase by 1 year/Decrease by 1 year Increase by £621k/Decrease by £646k
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 1 Level 2 Total Level 1 Level 2 Total
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:
Intangible assets Other receivables Cash & Investments Other payables Technical provisions Tax & deferred tax Net assets acquired Consideration Goodwill on bargain 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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