Randall & Quilter (RQIH) - Final Results RNS Number : 6484B Randall & Quilter Inv Hldgs PLC 19 April 2012 Randall & QuilterInvestment Holdings plc ("Randall & Quilter" orthe "Group") Final results for theyearended 31 December 2011 The Board of Randall & Quilter (AIM: RQIH), the specialist non-life insurance investor, service provider and underwriting manager, is pleased to announce the Group's final results for the year ending 31 December 2011. FINANCIAL HIGHLIGHTS • Total Group income of £36.8m (2010: £32.8m), an increase of over 12% • Adjusted* profit before tax of £8.8m (2010: £7.5m) • Return of cash of 4.9p, through a G and H share scheme** , bringing the total cash distribution to shareholders to 8.1p for the year (2010: 7.35p) • Upwards rebasing of the Group’s progressive distribution policy following the completion of a share repurchase and subsequent cancellation of 5 million ordinary shares • Undiscounted net tangible asset value per share of 107.3p (2010: 95.9p), an increase of 11.9% • Tax credit of £4.2m due to UK tax profits being offset by brought forward tax losses, favourable tax treatment of Seaton & Stonewall legal cost recoveries and a recovery of tax paid in prior years by US subsidiaries. * Excludes the goodwill impairment previously announced ** Details of which will be announced shortly DIVISIONAL PERFORMANCE • Insurance Investments Division - A very pleasing result with strong contributions from the non US insurance companies and run-off Syndicate 102, producing an operating profit of £8.3m (2010: £7.4m). • Insurance Services Division - A satisfactory performance following a much stronger second half, with operating profit for the year of £5.6m (2010: £5.8m) • Captives Division - An operating profit prior to the Nordic Venture write-off of £0.3m (2010: £0.2m) again impacted by on-going investment • Underwriting Management Division - Good operational progress but performance impacted by the challenging premium rating environment, preparations for Solvency II and weak trading in our Canadian MGA resulting in an operating loss of £1.1m for the year (2010: £(1.0)m) • An ‘Other Corporate’ charge, which includes parent company overheads, of £2.1m, (2010: £4.5m), reduced by the inclusion of the one-off legal cost recoveries in respect of the Seaton and Stonewall litigation as well as lower acquisition related costs during the year compared to 2010. Commenting on the results,Ken Randall,Chairman andChief Executive Officerof the Group said: "It is pleasing to report a rise in Group profit (prior to goodwill impairment) during the year compared to 2010. Our expectation of a much stronger second half of the year was realised, especially in the Insurance Services Division which benefited from the anticipated increase in profit commission on syndicate 3330 and a second half revenue bias in certain of our operating subsidiaries. The Insurance Investments Division produced an excellent result for the year, driven by a strong performance in the UK portfolios and run-off syndicate 102 and more modest deterioration than we had feared in investment income and adverse loss development in R&Q Re (US). The Underwriting Management Division had a more mixed performance. Whilst operational progress was encouraging, the division generated an operating loss. This was attributable to the continued weak premium rating environment which held back the income development of the MGAs and the costs and business disruption brought about by the preparations for Solvency II. A combination of these factors also impacted our ability to launch new 'Turnkey' syndicates. The outlook is however encouraging with two MGAs added to the Group's portfolio since the beginning of 2012, one of which has a particularly significant renewal book. We are also exploring ways in which we can expand upon our live syndicate management activities. The Captives Division's operating result was subdued once again as the Nordic venture was closed and on-going investment in other jurisdictions impacted the result. We have however laid strong foundations for future profits, which should start to emerge in the current year. Our market presence is also enabling us to identify opportunities to acquire a number of "end of life" Captives. 2011 saw a satisfactory end to the long running Seaton & Stonewall litigation and a recovery of legal costs, which benefited the 'Other Corporate' result. We also carried out an extensive share repurchase programme of 5 million ordinary shares during the summer of 2011 and subsequently rebased the Group's per share progressive distribution policy to benefit all shareholders with immediate effect. We look forward to the future with confidence. Whilst the business and investment environment is still challenging in some areas, the organic growth and improvements to the operational efficiency of our service businesses continue and we are now beginning to reap the benefits of our investment in Captives and Underwriting Management. In the Insurance Investments Division, there is continued potential for further reserve releases in our owned company portfolios but US asbestos still poses a risk and investment returns in high quality fixed income securities remain subdued. Our acquisition of further insurance assets is set to continue with a significantly increased deal pipeline and signs of diminishing competition at the smaller end of the market where we focus. We have internal resources to take advantage of the current pipeline and are exploring asset based financing to increase our capacity further should the prevailing attractive market conditions continue. We also maintain a focus on those opportunities which not only fit our return criteria but from which we can generate good, short to medium cash flow." Enquiries: Company: Randall & Quilter Investment Holdings plc Tom Booth Tel: 020 7780 5895 Nominated Advisor Numis Securities Limited & Joint Broker: Stuart Skinner (Nominated Advisor) Tel: 020 7260 1314 Charlie Farquhar (Broker) Tel: 020 7260 1233 Joint Broker: Shore Capital Stockbrokers Ltd Dru Danford Tel: 020 7408 4090 Stephane Auton Tel: 020 7408 4090 Corporate & FTI Consulting Financial PR: Neil Doyle Tel: 020 7269 7237 Ed Berry Tel: 020 7269 7297 Tom Blackwell Tel: 020 7269 7222 The Chairman's Statement, Business Review andHighlights of Accounts are attached. The full final results for theyearended 31 December 2011 will be sent to shareholders shortly and will be available on the Company's website at www.rqih.com. There will be an analyst presentation at 9:30am on Thursday 19^th April 2012 at FTI Consulting, Holborn Gate, 26 Southampton Buildings, London, WC2A 1PB. Those analysts wishing to attend and who have not registered are asked to contact Tom Blackwell at FTI on +44 20 7269 7222 or at firstname.lastname@example.org. The Company's Annual General Meeting will be held on 27 June 2012 at 11 am at the offices of FTI Consulting. Details of the proposed G and H scheme will be announced shortly. In light of this, the Board will not be recommending a final dividend for the year. Notes to Editors: Since formation, Randall & Quilter has pursued a buy and build strategy to create a comprehensive range of investment activities and services in the global non-life insurance market and is focused on the following four core areas: • Insurance Investments; • Insurance Services; • Underwriting Management; and • Captives The Group currently: • has a team of up to 400 insurance professionals based in the UK, USA, Bermuda, and Continental Europe with wide service capability in both the 'live' and 'run-off' market; • has a portfolio of eleven insurance companies in run-off (from the UK, US and Continental Europe) with net assets of c.£86.5m as at 31 December 2011; • provides 'turnkey' management services to Lloyd's syndicate 1897, manages two RITC ('run-off') syndicates and owns and operates 5 MGAs; and • acquires and manages a portfolio of insurance receivables, with a carrying cost of c. £8.1m as at 31 December 2011; The Group was founded by Ken Randall, Executive Chairman and Chief Executive, and Alan Quilter, Chief Operating Officer, who both have extensive experience in the industry including as Head of Regulation of Lloyd's and as Head of the Market Financial Services Group respectively. FINANCIAL SUMMARY 2011 2010 £000 £000 Group Results Total Income 36,793 32,818 Operating result (before goodwill and interest) 7,851 6,180 Adjusted* Profit on ordinary activities before income taxes 8,801 7,523 * Excludes goodwill impairment Goodwill Impairment (13,458) - (Loss)/Profit on ordinary activities before income taxes (4,657) 7,523 Taxation Credit/(Charge) 4,169 (1,150) (Loss) Profit after tax (488) 6,373 Earnings per share (Basic) (0.9)p 12.2p Total net tangible assets per share 107.3p 95.9p Group income increased by 12% in the year as the full year benefit of acquisitions made during the course of 2010 and organic growth in the operating companies outweighed lower investment income. Operating profit before goodwill on bargain purchase and goodwill impairment rose strongly to £7.9m from £6.2m in the prior year as a result of strong performance in the Insurance Investments Division and a lower 'Other Corporate' charge arising from the one-off Seaton & Stonewall legal cost recovery. Adjusted profit before tax (prior to goodwill impairment) also improved to £8.8m from £7.5m in 2010 despite a higher financing charge following the renewal of the Group's credit facility and a lower contribution from goodwill on bargain purchase. The Group benefited from a substantial tax credit arising from the fact that the majority of the Group's profits were generated in the UK in the year, where the Group has significant tax losses from prior years as well as favourable treatment of the recovered legal costs from the Seaton & Stonewall litigation. In the USA we have also benefitted from a refund of tax paid in prior periods. The goodwill impairment, relating to R&Q Re US was commented on in the Group's recent trading update. The impairment arises due to the continued low market yields on high quality fixed income securities and the acceleration in settlement of known claims during 2011 which resulted in much lower than anticipated cash and investment balances by year end. The impairment has not arisen due to any change in expectations of the performance of any of the Group's operating companies and has not impacted the Group's net tangible asset value per share. The Group does not carry any other goodwill attributable to insurance company subsidiaries in its financial statements. Once again, the Insurance Investments Division performed very well, generating an operating profit of £8.3m (2010: £7.4m), driven by strong net reserve releases in the UK portfolios, especially in R&Q Re (UK), and an excellent first year performance of run-off Syndicate 102, on which we have a 20% economic interest. Our insurance/reinsurance debt acquisition activities also produced a good profit for the year as sizeable dividends were received and announced on existing positions. We also made several purchases, particularly during the latter part of the year, which should benefit future years. We commented in the interim results that we had seen some evidence of a pick-up in asbestos related claims in our US portfolios, but this was in fact mostly contained within our reinsurance programme and there was a more limited impact than expected on net reserves. The major impact was the accelerated cash outflows as claims were settled, resulting in lower funds to invest. The relatively modest net reserve deterioration in R&Q Re (US) in the year arose from other parts of the book, including claim settlements on policies which are part of a developing dispute with the ACE group, which relates back to the acquisition of the company. Whilst investment markets were and remain challenging, percentage returns on funds held by our insurance company subsidiaries remained stable at 3.0% overall (2010: 3.0%), significantly above the Lloyd's market average of 1.9%. Total investment income however fell, reflecting a significant reduction in average balances held. The performance of the Insurance Services Division ('ISD') during the second half of the year was strong both in absolute terms and compared to the same period in 2010, due to the higher profit commission earned in respect of Syndicate 3330, a natural second half revenue bias in certain of our operating subsidiaries as well as some new business income generation. The divisional operating result for the year as a whole of £5.6m ended up being only modestly down (2010: £5.8m), in spite of significant restructuring costs of £0.9m incurred during 2011 relating to a rationalisation of offices and a number of staff redundancies. These redundancies followed a planned review of staffing levels after the integration of the various service businesses acquired in 2010. The planned diversification into the 'live' market, focused on providing specialist services to the London subscription market such as premium credit control, binding authority management and broker/MGA support services, resulted in 'live' service income becoming a significant portion of our total service revenue during the year. The ability to service both run-off and live market business has also increased our penetration of large insurers who favour an outsourced model for specialist projects. Our legacy broker operations and 'broker wrap' product (which offers market participants a full exit solution from servicing legacy claims) also continue to gain traction. The Underwriting Management Division's financial performance during 2011 was below initial expectations. Though the division benefited from a good profit commission on run-off Syndicate 102 in the second half, the substantial costs and associated business disruption relating to preparations for Solvency II, together with a persistently poor underwriting rate environment took their toll. Not only did these factors lead to weaker than anticipated MGA commissions but also a lack of new turnkey syndicate opportunities. Furthermore, our Canadian MGA struggled to gain the distribution channels and market penetration required, exacerbating the problems posed by low premium rates. This resulted in an operating loss in that single entity of £1.0m, which accounted for almost the entire divisional loss. Following a thorough review of market conditions, the potential income growth and our cost base, a decision has been reached to consider our options in Canada. Despite a disappointing divisional financial result, we made good progress in developing the Underwriting Management business. 2011 saw the launch of our first turnkey syndicate on behalf of Skuld, a long established Norwegian P&I club manager. During the early part of 2012, we also added two other UK based Managing General Agents for nominal cost, with significant renewal books of business. Our UK based MGA operations have thus gained necessary scale. Though the pipeline for new 'turnkey' syndicates remains subdued, we are exploring other ways to expand upon our live syndicate management activities. The Captives Division operating result of £0.3m, prior to the Nordic Venture write-off (2010: £0.2m) was below budget in 2011 as a result of the costs of developing the onshore US platform and on-going investment elsewhere. Once again however, R&Q Quest (Bermuda), the division's principal operating company made a good contribution. Strong foundations were also laid for future profit generation, especially in the latter part of 2011 and in the first quarter of this year. We were pleased to complete the acquisition of Triton, Norway's leading captive manager in the summer and to establish R&Q Quest (USA) to which 11 contracts were novated from Camelback, a manager ceasing operations in the US market. We have also recently broadened our activities to include the formation of risk retention groups and captives for specialist industry groups and have been leveraging our contacts and infrastructure to offer full exit solutions to late stage captives or those already in run off. 2012 has begun promisingly as a result and we are confident that with the additional benefit of recent cost reductions, the division will begin to make a more significant contribution to the Group's operating profit. The 'Other Corporate' charge of £2.1m for the year (2010: £4.5m) benefited from a significant one-off recovery in legal costs following the successful resolution of the Seaton & Stonewall litigation as well as lower acquisition related expenses. Since late 2011 we have become increasingly active in the acquisition of legacy insurance assets. In December we acquired Principle Insurance, followed in February by the RITC of former Equity managed Syndicate 1208 on which we have a 50% economic interest, in March by the acquisition of Northern Foods Insurance and by the agreement to acquire Trimac Exit Insurance in Barbados, announced today. Our insurance debt acquisition activities have also grown in scale with five new receivables purchased since December, for an aggregate consideration of $3.5m. In summary, 2011 was generally a good year for the Group with a pleasing underlying performance in the Insurance Investments and Insurance Services Divisions, especially against a background of lower investment income and higher restructuring costs. Whilst the Captives and Underwriting divisions underperformed against initial financial expectations, their operational achievements have been significant, especially during the latter part of 2011 and early 2012. We therefore look forward to these improvements translating into stronger financial contributions in the current year and beyond. The Group completed a share repurchase during 2011 of 5 million ordinary shares which were subsequently cancelled. As well as proving our commitment to active capital management, the share buyback enabled the Group to eliminate a share overhang from certain of the original external shareholders. Directors and family members also participated in the buyback to maintain the free float and liquidity of the shares, resulting in their percentage holding rising only slightly. Furthermore, to provide a benefit to all shareholders, the Group rebased its per share progressive distribution policy to reflect the reduced number of shares in issue. The Group proposes to pay out 4.9p per share in cash to all shareholders through a G/H share scheme bringing the total distributions in respect of the 2011 financial year to 8.1p per share an increase of over 10% compared to 2010. Further details will be announced in due course. The Group has internal resources to take advantage of the current pipeline of legacy insurance acquisition opportunities. The Group is however looking at further asset based borrowing facilities to ensure that it is able to remain active should the current attractive market conditions continue. Outlook Though the underwriting rating and investment markets remain challenging, which inevitably affect parts of our business, the overall outlook for the Group is positive. We are seeing good deal flow on the legacy insurance asset side with opportunities both completed and being worked on in Lloyd's, the insurance company, discontinued captives and insurance debt markets. There are also signs that competition is reducing in the smaller end of the market where we focus. Realisation of the operational and capital benefits we can potentially bring to bear on such acquisitions through portfolio transfers, novations and mergers, has led us to concentrate on funding new deals directly through our own balance sheet but we cannot discount the possibility of partnering with others on larger sized deals through the 'sidecar' structures previously commented on. Such co-investment would be dependent upon the generation of satisfactory overrider fees for the Group. We continue to identify key areas of focus in order to crystallise further reserve savings in our owned insurance company portfolios but US asbestos still poses a risk. Disagreements with Ace relating back to the acquisition of R&Q Re (US) are on-going and may result in further litigation between Ace and Group companies. Our initial view of the recent House of Lord's so-called 'EL Trigger judgement' relating to UK asbestos is that its potential impact on the Group will be limited. Diversification into investing in Lloyd's (in RITC (run-off) and turnkey syndicates), discontinued captives and the growing importance of the insurance debt acquisition activities is also reducing our dependency on finding reserve redundancy in the existing company portfolios. To counteract the challenges of the investment markets, we have repositioned our investment portfolios to insulate our investments from the potential impact of rising interest rates and have focussed on areas of the market that we believe are undervalued, whilst maintaining high credit quality. The costs and uncertainty of Solvency II will continue into 2012 and beyond. We have already seen evidence of the FSA requiring an additional capital buffer beyond the ICA/QIS 5 result to reflect uncertainty over the final solvency rules. As the Solvency II standard model currently stands however, there appears to be no material additional capital requirements compared to the prevailing ICA regime on the portfolios we own. Of more concern is the potential impact on holding company capital obligations, commented on recently by the Prudential Group. The proposed regulations may penalise groups with US subsidiaries and we are still unclear as to whether the FSA will recognise the special circumstances of run-off specialists. We are therefore considering alternative holding company structures to mitigate this risk. On the service side of the business, the diversification into more external contracts and 'live market' niche services is proving successful. The cross-selling of our extensive live and run-off service offering is beginning to gain traction and the development of full exit solutions to the legacy broking market is generating new business opportunities. The benefits of the recent restructuring programme within ISD should also improve operating margins. As has already been mentioned, the outlook for the Captives division is positive with investment in the US onshore platform, the acquisition of Triton, the leading Norwegian captive manager and some cost reduction measures now complete. The plan to broaden out our activities into the establishment of risk retention groups and captives is progressing well and we are also leveraging our infrastructure and contacts successfully to make acquisitions of late stage captives or those already in run-off. Finally, the Underwriting Management Division should benefit during 2012 from profit commission on both run-off Syndicates 102 and 3330 (formerly 1208). Consolidation of the MGAs we have launched or acquired, especially R&Q Marine Services, should also result in the emergence of profitable trading, though the cost of certain options we might pursue in respect of our Canadian MGA and persistent soft underwriting rates are likely to hold back performance. The Lloyd's 'turnkey' pipeline remains relatively inactive due to Solvency II preparations and the poor premium rating environment but we are exploring other expansion routes at Lloyd's and, in any case, believe that prospects will improve in 2013 and beyond. Turnkey capacity in Lloyd's remains a rare commodity and valuations achieved for agencies subject to recent M&A activity show the inherent value of Lloyd's platforms. BUSINESS REVIEW Insurance Investments Division ('IID') This division is engaged in the following activities: • The acquisition and management of solvent insurance companies, captives and portfolios in run-off, typically at a discount to net asset value in the UK, US, Continental Europe, Bermuda and elsewhere; • The provision of capital (Funds at Lloyd's) to Group managed Reinsurance to Close (RITC) run-off syndicates in Lloyd's and new turnkey 'live' syndicates; and • The acquisition of insurance debt due to insurance or corporate creditors from insolvent estates. At 31 December 2011, the portfolio of acquired insurance companies was as follows: Vendor Country of Acquisition NAV* £m NAV* £m Incorporation Date (as at (as at 31/12/11) 31/12/10) La Metropole SA Travelers Belgium 29 Nov 2000 0.3 0.3 ('La Met') Group Transport American USA 30 Nov 2004 8.1 9.2 Insurance Company Financial ('Transport') Group R&Q Reinsurance Ace Group UK 3 July 2006 11.9 3.4 Company (UK) Limited ('R&Q Re (UK)') R&Q Reinsurance Ace Group Belgium 3 July 2006 2.9 3.0 Company (Belgium) ('R&Q Re Belgium)') R&Q Reinsurance Ace Group USA 3 July 2006 16.8 15.7 Company ('R&Q Re (US)') Chevanstell Trygg Forsikring UK 10 Nov 2006 30.7 31.0 Limited ('Chevanstell') R&Q Insurance Deloitte LLP, Guernsey 9 June 2009 1.9 1.8 (Guernsey) Administrators for Limited Woolworths Group plc ('R&Q Guernsey") Goldstreet Sequa Corporation & US 14 Dec 2009 4.1 4.1 Insurance Company Columbia Insurance ('Goldstreet') Company La Licorne S.A. MAAF Assurances France 22 April 2.9** 4.5 2010 ('La Licorne') Principle PICH Ltd UK 29 December 5.9 - Insurance Company 2011 Ltd (Principle') TOTAL 85.5 73.0 *IFRS basis for Group consolidation purposes ** After £2m capital extraction during the year The Group's strategy in the owned insurance company portfolios is to manage actively the claims, reinsurance and investment assets. Part of the claims strategy includes seeking mutually beneficial commutations. This is consistent with our aim of managing down the liabilities to progress the run-off and realise cash profit through capital reductions and dividends. Our recent focus on shorter tail run-off portfolios from which we can extract cash relatively quickly after acquisition was further illustrated in the year by a £2m capital release from La Licorne, purchased only in April 2010. We have also recently received approval from the FSA for an extraction of a further £3m from Chevanstell and a capital extraction of at least another £1m from La Licorne is imminent. There was an aggregate net claimsrelease of £13.4m from our owned insurance companies and syndicate participations during the year (2010: £9.5m), driven once again by the strong performance of the UK portfolios, especially R&Q Re (UK). Only R&Q Re (US) suffered any material net claims strengthening; and this was more modest than feared as the pick-up in asbestos related claims, which we warned about at the interim results stage, was mostly contained within our reinsurance programme. Our internal actuarial team continues to work closely with our external actuaries to enhance and refine our knowledge of the profiles of our insurance company liabilities with the aim of identifying areas where reserves may be appropriately reduced. The Net Asset Values of the owned companies reflect not just net claims releases but also any surplus/deficit of investment income over operating expenses. The US portfolios' Net Asset Values are also affected by exchange rate movements as their assets (and liabilities) are all dollar denominated and are translated into Sterling for Group reporting purposes. In the non-US companies, liabilities and assets are matched by currency and surpluses kept in Sterling. The acquisition of Principle Insurance, a takaful motor insurer in run-off at the end of 2011 for £4.35m resulted in goodwill on bargain purchase of c.£1.5m (2010: £1.7m, relating principally to the acquisition of La Licorne). On a like for like basis, the aggregate Net Asset Values of the owned insurance companies rose strongly during the year to £81.6m from £73.0m at the end of 2010. The key issues in the main insurance company subsidiaries during the year were as follows: Chevanstell There was a significant net reserve release again in Chevanstell during 2011 of £3.3m (2010: £4.9m) emanating primarily from the Marine, Aviation and reinsurance accounts. Due to the poor performance of the bank perpetual securities and prevailing low interest rate environment, the Net Asset Value of the company however remained broadly stable during the year. As is covered in detail below, steps have now been taken to restructure the investment portfolio and we expect investment income and expenses to be much more balanced during the current year and beyond. Work continues to identify further assumed claims accounts where there is reserve redundancy. We are also progressing a number of commutations to further reduce the net insurance liabilities, which were under £14m at year end, resulting in a large surplus over capital requirements under the prevailing Solvency I and ICA regime as well as under QIS 5 (the latest 'prototype' capital model for Solvency II). As a result, we have been successful in gaining approval from the FSA for a capital extraction of £3m but the FSA's additional prudence ahead of the finalisation of the Solvency II regulations has temporarily limited our scope to get approval for the level of capital extractions which we would ordinarily expect. R&Q Re US A number of significant claims settlements were negotiated during the year, especially in the last quarter, with gross claims paid of $75m, a significant part of which has been billed to reinsurers. As a result of this activity, outstanding reinsurance debt rose substantially to over $40m from $17m a year earlier. The affect of this accelerated claims settlement activity has been to reduce investment balances, contributing to the goodwill write-off referred to above. Whilst there was an overall net reserve deterioration of £3.7m in the year, the majority of this was attributable to the non-asbestos accounts. Though the anticipated pick up in asbestos claims materialised, this largely fell to our reinsurers. We have a comprehensive reinsurance programme which provides very effective protection from large losses, which is our current experience. There remains a continued risk from asbestos related claims if we were to experience the unexpected development of a large number of smaller losses across the book. This risk is further ameliorated however by additional (so far unused) reinsurance of up to $35m provided by the Ace group as part of the 2006 acquisition agreement. As has already been commented on above, we have unresolved disputes with Ace arising out of the 2006 acquisition. In spite of the net reserve deterioration, the net assets of R&Q Re (US) rose slightly in the year as a result of a surplus of investment income over expenses and a tax credit. R&Q Re UK R&Q Re (UK)'s external actuaries completed a detailed review of the net reserve position during the year and significant reserve reductions were identified in both the gross and net estimates for Marine and Non-Marine reinsurance exposures. A net reserve release of over £11m was identified overall. This was offset in part by a deficit of investment income against expenses, again primarily due to the decline in value of the perpetual securities but net assets rose sharply by £8.5m to £11.9m during the year. A number of commutations were agreed and settled, especially during the latter part of 2011. As a result of these commutations, we have now eliminated the vast majority of residual exposures to reinsurance claims arising out of the Exxon Valdez and Kuwait Airways losses. Transport Insurance Company There were significant gross claim settlements in Transport in 2011 but these were recoverable from the NICO (Berkshire) retroactive reinsurance agreement. The 2011 external actuarial report showed over $5.5m of reserve redundancy but this simply increased the surplus cover available under the NICO policy and had no impact on the balance sheet. It does however have a positive impact on the regulatory Risk Based Capital test. Disappointingly, we lost the Aerojet litigation in early 2012 but we had already provided fully for this on consolidation in the Group accounts. This write down in the company's own accounts reduced the capital surplus for regulatory capital purposes. Because the state insurance regulations do not allow Transport to take credit for the NICO Retroactive Reinsurance Treaty, we are working with the Ohio Insurance Department to take Transport back above the Authorised Control Level and have provisionally agreed to make Goldstreet Insurance Company its wholly owned subsidiary, thereby increasing Transport's surplus. The Net Asset Value of Transport on an IFRS basis fell by c.£1m during 2011 primarily as a result of a deficiency of investment income to operating expenses. Other Insurance Subsidiaries Our other insurance subsidiaries continue to run-off in line or better than planned with particularly good results from La Licorne following a series of commutations. This allowed a further capital extraction in the year of £2m and a potential for a further release during the current year. R&Q Guernsey also had a good year with a net reserve release and a reduction in required collateral to the fronting companies allowing a repayment of the intragroup loans and positive 'free' cash balances to start generating investment income. Lloyd's Participations For the 2011 underwriting year the Group provided 8.33% of the underwriting capacity for Syndicate 1897 (which it manages under a turnkey basis for Skuld) with capacity of £60m and 20% of the underwriting capacity on RITC (run-off) Syndicate 102. Syndicate 1897 as a whole produced a loss for the year of c.£6m as a result of both the customary expense drag on syndicates during their first year of operation and the significant loss suffered on the KS Endeavour rig explosion. R&Q's 8.33% share of the Syndicate 1897 loss was c. £0.5m. Run-off Syndicate 102 however produced an excellent profit for the year of c.£11.0m and our share, was £2.2m. The aggregate contribution of £1.7m from our Lloyd's participations during 2011 was therefore significant and represented over a 20% return on the £8.3m of Funds-at-Lloyd's ('FAL') we put up as 'regulatory capital' from our wholly owned corporate member, R&Q Capital no.1. For the 2012 underwriting year, we continue to provide the same level of capacity on Syndicate 1897 and Syndicate 102. However, due to the slightly reduced ICA (Capital Requirement) of Syndicate 1897 and the lower reserve level of run-off Syndicate 102, we had a lower total FAL requirement for the year in respect of these syndicates of c. £6.5m. As has already been mentioned, we also wrote the RITC of former run-off Syndicate 1208 during the early part of 2012 and have a 50% net economic interest in this syndicate, having put up additional FAL of just under £3m at the end of February. We are optimistic therefore that our Lloyd's participations will make an even stronger contribution to the divisional result during 2012. Investment Policy and Returns The investment return on funds held by our insurance companies is a key component of the performance of the IID and despite the persistently low level of interest rates during the year and the poor performance of the bank perpetuals following market turmoil in August and September, the overall percentage investment return for the year remained stable at 3.0% and significantly above a benchmark of the Lloyd's market average of 1.9%. Total investment income however fell to £6.3m (2010:£8.5m) as a result of lower average fund balances held, especially in R&Q Re (US) following accelerated claims settlements. For investment management purposes, the assets in our owned company portfolio are divided between the US and UK companies. As at 31 December 2011, the total investments in the externally managed US companies portfolio amounted to $187.0m and in the UK companies portfolio to an equivalent of £63.9m (comprising of £27.7m of Sterling assets and $55.8m of Dollar assets). The investment returns for 2011 were c. 4.0% and 1.1% respectively for the two portfolios . The strong return in the US companies portfolio was due to a high weighting in US Municipals, which delivered the best annual return within the fixed income asset classes during the year. Our returns would have been even higher had we not kept a defensive duration stance. The core fixed income performance in the sterling part of the UK companies portfolio was strong at over 3% but the underperformance of the perpetuals dampened overall performance here and the dollar part of the portfolio was also weak due to some spread widening in corporates, especially financials. At 31 December 2011 the average duration of the US companies portfolio was c. 3.0 years whilst the average duration for UK companies portfolio was c.2.8 years. The fixed income portfolio breakdowns by credit rating and asset class were as follows: Credit Rating: US Companies Portfolio UK Companies Portfolio As at 31 December 2011 Government & Govt Guaranteed 19.1% 2.7% Bonds AAA 16.6% 14.4% AA 32.8% 6.0% A 30.1% 30.3% BBB 1.0% 22.0% BB - 9.5%* P-1 0.4% 3.4% NR (Equities) - 11.7% 100.0% 100.0% * Comprises the step-up perpetuals discussed above Asset Classes: US companies Portfolio UK Companies Portfolio As at 31 December 2011 Government/Agency Bonds 18.8% 2.7% Corporates (ex financials) 5.4% 19.5% Corporates (financials) 21.2% 52.9% Cash 3.7% 1.4% CDs - 2.2% Asset backed - 9.6% Municipals 50.9% - Equities - 11.7% 100.0% 100.0% The Group's overall investment objectives are to: • Pro-actively manage the asset allocation and credit/interest rate strategies but outsource the investing to specialist managers; • Optimise risk adjusted returns through the creation of a diversified portfolio of assets and individual securities; • Maintain the principal value of the investments held; • Keep average duration/maturities relatively short and focus on liquid securities in order to provide funds to pay claims as we manage down liabilities through claims settlements; • Match insurance liabilities in original currencies; • Monitor interest rate risk and use floating rate securities where possible in a rising interest rate environment; and • Take controlled credit risk by limiting spread duration Each of the owned insurance companies invests its funds within guidelines established by its board of directors having regard to recommendations of the Group Investment Committee, applicable insurance regulations and, in the case of R&Q Re (US), the contractual obligations imposed by the surplus maintenance insurance agreement provided by the ACE Group when R&Q Re (US) was acquired. Since year end, in line with the Group's investment objectives, some substantial changes have been made to the UK companies portfolio to minimise interest rate risk and optimise risk adjusted returns. A significant portion of the bank perpetuals have therefore been sold, realising a good profit from the year end values as we took advantage of the rally in risk assets during January and February. The remainder of the fixed income portfolios were also sold, realising a further small profit from year end values. A significant portion of the funds have been reinvested in a portfolio of floating rate Residential Mortgage Backed Securities ("RMBS") with primarily AAA and AA ratings and a weighted average life of c. 2.5 years. In addition, smaller parts of the remaining funds have been invested in a senior secured loan portfolio, a UCITS compliant short duration high yield fund and in high yielding equities. The management of the majority of the portfolio has been transferred to 24 Asset Management, a specialist RMBS manager. We believe that the result of these changes has been highly positive as average credit ratings have increased, interest rate risk has been significantly reduced and yields have risen. We have also increased liquidity for expected claims payments during the year through the use of money market funds. We continue to look at ways of implementing similar strategies in our managed syndicate funds and our US companies portfolio, but are unfortunately more restricted in the latter case by local regulation. The Group's syndicate funds are currently managed by Amundi and investment income reported in the overall syndicate results. Insurance debt acquisition activity As at 31 December 2011, the Group had insurance and reinsurance receivables on its balance sheet from its insurance debt acquisition activities with a carrying value of £8.1m (2010: £1.8m). This increase reflects some significantly enhanced acquisition activity during the year, especially in the second half, which should benefit the current year and beyond as we receive distributions from the closing insolvent insurance companies of which we are now creditors. A good result was generated from this part of the IID activities during 2011 with an operating profit of over £350k (2010: £(157)k), as a result of a significant dividend received during the latter part of Q4 from a US estate, likely to close during 2013. Since early 2012 we have made 3 further acquisitions with another acquisition now agreed (and awaiting completion), for an aggregate consideration of c. $1m. We have also received further dividends of over $1.5m from the existing portfolio in addition to the £1.2m of accrued income, now paid, which was held on the balance sheet as at 31 December 2011. Insurance Services Division The Insurance Services Division performed satisfactorily during 2011 with a much stronger second half resulting from the anticipated additional profit commission on the Syndicate 3330 service contract, some natural second half revenue bias in certain of the operating subsidiaries and new business income. Total revenue rose to £35.2m (2010: £32.6m), primarily as the result of a full year's contribution from the Reinsurance Solutions businesses acquired from Guy Carpenter during late 2010. Operating profit of £5.6m (2010: £5.8m) was satisfactory, especially given the restructuring costs of £0.9m and the significantly lower profit commission on Syndicate 3330 compared to 2010. The Insurance Services Division's activities include: · Claims management · Reinsurance management · Broker services (eg broker replacement) · Audit & Inspection (for coverholders etc) · Accounting Services · Premium credit control & broker performance · Compliance & company secretarial services As well as providing full scale claims and reinsurance management services to the Group's owned company portfolios and managed syndicates, the Group offers a broad range of specialist insurance services to a wide range of clients in both the legacy and 'live' insurance markets. In 2011, external revenue again exceeded internal revenue (£20.6m compared to £13.6m) and live market income accounted for almost a quarter of the total, demonstrating the growing importance of our live market operations, which helps support the organic growth strategy. The Group's strength in live market servicing is focused on providing specialist niche services to the London based subscription market and has followed the successful integration of a number of targeted acquisitions during 2010. Furthermore, the ability to service both run-off and live market business has increased our penetration of large insurers who increasingly favour an outsourced model for specialist projects. The Group has an established reputation and skill base in the London legacy market. R&Q is, for example, one of the leading players in broker replacement, assuming the responsibility for reinsurance collections and claims settlements for legacy insurers. Its unique 'broker wrap' product offers brokers a full exit from servicing legacy accounts for a fixed fee, thereby allowing these businesses to concentrate on repeat income business. 2011 saw the Group add the AJ Gallagher Re run-off to the Carvill run-off acquired during 2010 and there is a further pipeline of further opportunities. The Group also has significant third party orientated service operations in the US in addition to the staff focused on the management of its own portfolios. This follows the acquisition of Reinsurance Solutions Inc. from Guy Carpenter during late 2010, which has a diverse blue chip client base and an increasingly acknowledged expertise in workers compensation claims. The Group is also the manager for the US based ECRA run-off pool with well over $1bn of outstanding claims on behalf of numerous US insurance groups. This activity may offer future potential for providing commutation and other consultancy services to pool members wishing to seek an exit. As has been commented on previously, the Group has undertaken a full-scale review of its cost base. This involved a cost-benefit analysis of certain offices and a look at management and staffing levels, especially in light of the numerous acquisitions in 2010 and their subsequent integration. This resulted in the closure and rationalisation of offices in both the UK and US and, unfortunately, a number of redundancies, across all levels. The costs of these measures in 2011 was c.£0.9m. A further round of staff reductions has recently taken place in the US and to a lesser extent in the UK. This is again regrettable, but necessary, to ensure that the business remains lean and competitive. The net impact of this recent programme is however expected to be positive during the current year with savings outweighing associated redundancy costs. We look forward to the current year and beyond with confidence. With the benefit of a more appropriate cost base and some significant organic growth opportunities from the cross-selling initiatives of our diverse specialist service offering, we expect to increase our operating margins and resume growth in operating profit. Underwriting Management Division The Underwriting Management Division is engaged in the following activities: · Management of RITC (run-off) syndicates · Management of live 'turnkey' syndicates · Delegated underwriting through a number of specialist managing general agents ('MGAs') with niche underwriting accounts The Underwriting Management Division produced significantly higher total revenue of £5.4m during the year (2010: £0.7m) as its operations were successfully expanded. This revenue was generated from income associated with its management of turnkey Syndicate 1897, management fees from both run-off syndicates (S.102 and S.3330), a profit commission on run-off Syndicate 102 and a small amount of commission income from its start-up MGAs. The operating loss of £1.1m (2010: £(1.0)m) was however disappointing; a result of the costs associated with preparations for Solvency II, the weak underwriting rating environment and distribution and capacity issues in our Canadian MGA . The poor underwriting market impacted our ability to grow premiums in the MGAs as quickly as budgeted. It also reduced the attractiveness of launching new syndicates, but our ability to launch further 'turnkey' syndicates was also impacted by the preparations of the Lloyd's market for Solvency II. 2011 however saw R&Q become an established turnkey provider, having launched and managed one of only two syndicates begun in the year. The lack of turnkey capacity in the market positions the Group well for when underwriting rates improve and preparations for Solvency II are finalised. The Group remains positive that the attractiveness of the Lloyd's market, given its unique distribution, global licences and capital and operational efficiency will bring significant management opportunities in the future. The Group is also exploring other ways of expanding its live syndicate management activities. In our MGA business, the Canadian operations did not achieve the market penetration we were targeting, given the high cost base. This was exacerbated by a highly competitive marketplace and the operating loss of £1.0m reflected disappointing written premium figures. Whilst the current year has shown some improvement, we are currently considering our options.. The performance of the UK based MGAs was more in line with expectations, (certainly after adjusting for market conditions) and a positive contribution is anticipated for the current year and beyond. Since the beginning of 2012, we have also added two other UK based MGAs, R&Q Marine Services (to which was transferred a Yacht and Marine Trades portfolio from Underwriting Risk Services Ltd (URSL), a subsidiary of Talbot) and Synergy, an MGA focused on the high net worth market, which we acquired from a private consortium. A description of all of the owned MGAs is provided in the table below. We currently expect to generate c. £50m in aggregate premium income in the current year. Business Scope: R&Q Marine Services (formerly · Yacht and Marine Trade and associated risks Underwriting Risk Services Ltd) account with a focus on super/mega yacht business, with various binding authority facilities · Potential new facilities for Yacht cargo and targeted overseas expansion Commercial Risk Services · Specialises in Commercial Combined, Property Owners, Contracting and Package Business · Established and loyal distribution base of 100 Independent UK Intermediaries Just Underwriting · Specialist wholesale facility focused on liability business produced from specialist brokers · Delegated authorities in niches of leisure market such as Motorsport and Equestrian/ Livestock/ Bloodstock · Additional facilities for Personal Accident and Contingency Altus Management · An 'MGA of MGAs' model focused on accessing specialist regional US and international MGA business · Emphasis on SME Property business written under binding authorities Synergy Insurance · UK emerging and established wealth private client insurance book, including fine art, jewellery and motor · Distributed largely through regional brokers, but an expanding direct book · The business is currently property led but some motor led business is developing. The Group's strategy has been to attract underwriting talent to an entrepreneurial platform, where results are well rewarded. The breadth and scale of our MGA operations has changed considerably over the past 12 months and we are pleased with the quality of the underwriting teams that have joined the Group. The Group owns either 100% or a significant majority share of each MGA and encourages minority ownership by key staff to provide a strong alignment of interests. In order to ensure that the MGAs write business for profit rather than volume, to safeguard their longevity and success, the key underwriters are also entitled to a meaningful portion of any profit commissions earned from the third party capital providers. The Group's own economic model is focused on ensuring that the commissions we generate (typically between 10% and 15%) on the business written will produce satisfactory margins over expenses. As we build scale and as the newly formed MGAs mature, this balance should become more favourable. It has also been helped by the purchase in 2012 (at nominal cost) of established books of business, especially in R&Q Marine Services. An important component of the Underwriting Management Division's activities continues to be the management of run-off syndicates. Indeed, over £20m of profit (before profit commissions) was generated by the run-off syndicates we managed during 2011, primarily for the account of third party capital providers. A significant contribution to the division was made during the year from the profit commission on Syndicate 102, the recovery of costs on both Syndicate 3330 and 102. At the end of 2011, the open years of Syndicate 3330 which had been managed by R&Q on behalf of the Fairfax group for three years were, as anticipated, reinsured to close into a new syndicate managed by Fairfax's own managing agency. During the early part of 2012 however, R&Q reinsured to close the run-off Syndicate 1208 (formerly managed by Equity Syndicate Management) into the 2012 year of account of Syndicate 3330. As well as the continuing management fees that this transaction brings, it provides the opportunity for the Group to earn profit commissions on a further run-off syndicate, which should help bring the Underwriting Management Division to profit during 2012. Captives Division The Captives Division activities include: · Assisting with the establishment and management of captives and cells for corporates and risk-retention groups. Services include accounting and claims handling, completing regulatory returns and helping with broker relationships and reinsurance coverage · Providing a full insurance and risk management service to insurance companies in fiscally attractive jurisdictions · Offering exit solutions to late-stage captives or those already in run-off through novation, amalgamation and portfolio transfer The R&Q Captives operations are currently run from Bermuda, the USA, Gibraltar and Norway. Overall, the division generated income of £4.7m during 2011 (2010: £3.0m), the increase primarily due to the full year absorption of Caledonian and the acquisition of Triton. Operating profit, prior to the Nordic venture write-off, was £0.3m (2010: £0.2m), once again subdued by the costs of ongoing investment, including in R&Q Quest (USA). The core of the business still resides in Bermuda where R&Q Quest (Bermuda) is one of the leading independent captive managers. R&Q Quest has over 85 'Equity' Captive clients as well as 40 'Rent-A-Captive' clients who own cells in R&Q Quest SAC, our cell company subsidiary. Clients include major corporations from the US, Europe, Latin America and even the Pacific Rim as well as a number of trade groups and associations. Bermuda remains the most significant captive domicile in the world and whilst the trend to establish onshore captives in the US has begun to make it less dominant, new markets are opening up, especially in Canada and Latin America. We continue to be satisfied with the operating performance of R&Q Quest (Bermuda), which generated income of £2.9m and an operating profit of over £0.5m during the year, broadly similar to the year prior. Caledonian in Gibraltar, which is predominantly an insurance company manager, performed less well due to delays in new business income and the anticipated fall in revenue from its major insurance company client. Operating profit was very small on turnover of £0.6m. The pipeline for new licence applications and management opportunities however is promising and we remain attracted to the jurisdiction through its attractive tax rate, onshore EEA status and good regulatory access. Triton in Norway, which we acquired in July, is the country's leading captive and insurance company manager and also has claims handling expertise. The company has performed well since acquisition, generating £0.1m in under 6 months on turnover of £0.6m. R&Q Quest USA, the Group's onshore US platform, was established during the year. In December, the business assets of Camelback Captive Services Inc were then acquired for a nominal sum. The 11 small client contracts acquired and the success of the recent initiatives to offer our cell infrastructure (for the retention of certain insurance risks) to members of a farming co-operative and dentist and lawyer groups should enable our US operations to make a positive contribution during 2012 and beyond. The Group's strategy is to build upon these recent initiatives across the division to form other risk retention groups and broaden out the service offering to include programme administration, claims management and other consultancy services. We will, as always, consider profitable expansion into other territories should suitable opportunities arise. The ability to offer exit solutions to late stage captives or those already in run-off has also helped to differentiate R&Q's operations and we expect some significant revenue from this activity during 2012. The captive management infrastructure, especially the cell company in Bermuda, also enables us to bid competitively for the acquisition of dormant captives seeking a sale to avoid the burden of ongoing operating expenses. Overall, we remain positive about the outlook in the division, as well as the ability to make a more significant operating profit, having taken steps to reduce the cost base in a number of the subsidiaries and to launch new revenue initiatives. Litigation The Group's parent ('RQIH') and R&Q Reinsurance Company ('R&Q Re (US)') is currently in arbitration (which has been stayed) and litigation with Horace Mann Insurance Company ("Horace Mann") and a number of ACE Group subsidiaries in a New York State court. The lawsuit, initiated by RQIH and R&Q Re (US), seeks a declaration that R&Q Re (US) is not liable under a reinsurance treaty by which R&Q Re (US) allegedly reinsured Horace Mann because, among other things, that treaty was excluded from the contracts and liabilities acquired by the Group in 2006 as part of its purchase of R&Q Re (US). The dispute with Horace Mann and ACE is part of a wider set of disputes related to the purchase of R&Q Re (US). These disputes may lead to further litigation in due course. Staffing The Group continues to seek high quality individuals to develop existing and new business areas. Whilst Alan Quilter and I still enjoy running the business, we recognise the importance of succession planning and have ensured that the Group has strength and depth in the management team and across the four divisions. During the past year, we were pleased to welcome Justin Mead, who heads up R&Q Quest (USA) as well as Severin Sirnes, Waldemar Rode and colleagues of Triton Management in Norway. Following the transfer of the Yacht and Marine Trades portfolio from Underwriting Risk Services Ltd (URSL) to R&Q Marine Services Ltd (RQMS) in January 2012, we are also pleased to welcome Nick Hales, who has been appointed as Head of the Group's MGA operations, as well as Paul Miller and the remaining staff from the former URSL team. Following the acquisition of Synergy, also in January 2012, we welcome Emma Bennett and colleagues. Finally, we are pleased to welcome Henry Colthurst, who has joined to assist on the run-off of new RITC Syndicate 3330 and other Lloyd's legacy opportunities as well as become a director of the Group's managing agency. During the past year, the staff have continued to make valuable contributions to the success of the Group and I wish to express my gratitude for this. It is of course regrettable that at the same time that we are expanding the number of staff in certain areas of the business, we have to contract in others, to manage the cost base. This in no way reflects on staff performance but merely the difficult and uncertain times in which we live. We continue to reward staff and management based on the Group's financial performance and have begun to formalise incentive structures to retain and attract the best industry talent. Key Performance Indicators In order to focus our delivery to shareholders and facilitate analysis of our progress, we report the following key performance indicators: • Revenue growth and Operating Profit margins in the: - Insurance Services Division - Captive Division • Operating profit in the: - Insurance Investments Division - Underwriting Management Division • Diluted EPS • Distributions per share (i.e dividends and any other capital return to shareholders) • Net Tangible Asset Value per share • Total Shareholder return The tables below show the results: Insurance Services Revenue Growth Operating Profit Margin 2011 8.0% 16.0% 2010 40.0% 17.7% Captives Revenue Growth Operating Profit Margin 2011 58.7% 5.9% 2010 10.6% 7.8% Operating Profit Insurance Investments Underwriting Management 2011 8.3* (1.1) 2010 7.4 (1.0) Key per share indicators Total Shareholder Basic EPS Distributions p/s NTA p/s Return** 2011 (0.9) 8.10 107.3 12.1p 2010 12.2 7.35 95.9 (12.7)p * Excludes goodwill impairment ** Includes change in share price between 1 January and 31 December together with distributions per share relating to that accounting period K E Randall Chairman and Chief Executive Officer 18 April 2012 Risk Management Following on from detailed risk management in the Group's wholly owned Lloyd's managing agency in preparation for Solvency II, the Group has recently created a Group Risk Committee and is compiling detailed risk registers for each division. The committee consists of the Group Chief Financial Officer, the Group Head of Risk Management, the Heads of each of the Group's operating divisions and senior managers of the Group's US operations. The Chairman and one other member of the Committee are independent. The following risks are deemed to be the principal risks facing the Group. Risks relating specifically to the Group's owned insurance entities and service operations are dealt with separately towards the end of this section. Group Risks: Group Cash Flow Risk The Group must actively manage its cash flow to ensure that operating cash flow requirements, debt repayments (together with interest payable) and claims payments can be met and the Group's progressive distribution policy sustained. The Group undergoes a thorough annual budgeting process, which includes a monthly Group cash flow projection, against which actual movements are regularly monitored through, for example, the weekly circulation of the cash balances in each of the Group's entities. The boards of each of the owned insurance companies also carefully consider and monitor the likely liquidity needs (by currency) to meet anticipated claims settlement and fees during the year. This information is relayed to the Group investment committee and investment managers to ensure that funds are kept sufficiently liquid at all times. A similar process takes place with respect to the Group's managed syndicates. Furthermore, the Group strives to match the duration and currencies of its liabilities and keep asset durations lower where it believes that favourable commutation opportunities are likely. The Group also has access to a £2m overdraft facility (currently undrawn) with Clydesdale Bank, with which it has its main £30m credit facility. Any commitment of Group funds (in addition to budgeted amounts) or an increase in the Group's indebtedness, for investing in the Group's existing operations or for the acquisition of a legacy insurance asset or service company is considered in the context of available 'free' cash flow and any available surplus balances in the owned insurance companies. The Group takes a very conservative approach to the forecasting of cash extractions from the IID and to the payback from any investment or service company related acquisition. Capital Management Growth within the Group may be constrained by the availability of capital. As part of the yearly budget process, the Directors work together with the finance team to consider any requirements for capital to expand the Group's existing operations and to fund the likely acquisition pipeline of legacy insurance assets. This is also monitored on an ongoing basis. The visibility of pipeline acquisitions is however limited and the ability to complete transactions on the terms desired uncertain. The Group has traditionally funded acquisitions through drawing down on its main Group credit facility and using 'free' available Group cash balances. The c.£17m of primary funds raised on the Group's IPO on the London Stock Exchange's AIM during late 2007 was used to repay the Group's external debt at that time and enabled the Group to enter into a new £30m credit facility with RBS. During late 2011, this £30m credit facility was refinanced with the Clydesdale bank with a new 5 year term. The amount drawn down under this facility at the end of 2011 was £23.2m. The Group continues and expects to continue to meet all covenant tests in relation to its credit facility but the ability to draw down the full remaining amount under the facility is dependent on being able to demonstrate that any target acquisition can generate a certain increase in EBITDA. The Group is therefore pursuing asset based financing initiatives in parallel to increase its access to leverage, especially for the acquisition of insurance receivables and portfolios with short run-off profiles. The majority of the Group's insurance entities are subject to external risk based or minimum capital requirements. The Directors have overall responsibility for managing the Group's overall capital base and for maintaining sufficient capital within the Group's insurance entities to satisfy external regulatory requirements. The Group receives timely information regarding the levels of capital each entity is required to hold and the prevailing surpluses, which facilitates the Group's active capital management strategy. The Directors have complied with external regulation throughout the period, except in the case of Transport Insurance Company, which as explained in the Business Review above, we are liaising with the Ohio Department of Insurance over our plans to restore its regulatory capital position. The Group's overall solvency position as at 31 December 2011 was in excess of £7m above the Group Capital Adequacy Requirement. A number of the Group's non-US subsidiaries have surpluses available for intra-group lending. The Group regularly monitors these surpluses over all existing and proposed solvency legislation. The Group has previously made use of these surpluses for its investing activities and intends to continue to do so provided that the boards of each entity are satisfied that the loans can be repaid and are on sufficiently attractive terms. Regulatory Risk A number of the companies in the Group are regulated. Failure to comply with applicable regulations and solvency requirements, including Solvency II, could result in an impediment of business development and/or a variety of sanctions. Of particular importance to the Group is its ability to gain and maintain a sufficiently high Solvency II rating for its Lloyd's managing agency. The Directors are responsible for ensuring that best practice is applied to ensure regulatory compliance. There is a risk that compliance with the increased regulations faced by a number of the Group's regulated subsidiaries puts an excessive operational and cost burden on the Group. The Group also faces the risk of a potential onerous Group solvency test under the proposed Solvency II legislation. Should the logical derogations not be granted by the host regulator in relation to the inclusion of the Group's US subsidiaries in any Group Solvency calculation, the Group may be deemed to be insufficiently capitalised. As a result, the Group is looking at ways to mitigate this risk through a potential restructuring and redomicile. Business Growth and Integration Risk The Group's operations have grown significantly in recent years both organically and through acquisition. Where growth occurs without requisite management controls in place there is an increased risk that business objectives may not be aligned, new business targets not met and costs not adequately managed. The Directors seek to mitigate this risk through detailed budgeting, a regular flow of management information, including the preparation and analysis of monthly management accounts, and regular communication within the divisions. In addition to the operation of divisional executive committees, the Group has recently established intermediate holding companies, on which at least two Executive Board members sit to review management information. The Group also has a twice monthly Executive Committee (comprising of the Executive Board members and main divisional Heads) to which full operational and financial updates are given across the Group's activities. The management of the Group's various overseas operations presents additional challenges given the physical distance to the Group's executive management and the different business and regulatory contexts. The Directors seek to mitigate this risk through frequent communication and regular visits to the Group's operations in the US by the Group's CEO and COO especially. The Head of Captives performs a similar role in relation to the Group's Bermudian and European operations. Failure to Deliver Strategic Objectives All operations within the Group are expected to work together to meet strategic divisional and Group objectives. Where there is a lack of understanding, cooperation or potentially even conflict across divisions, there is a risk that these objectives will not be met. The Directors seek to mitigate this risk through regular reporting in the various divisional and Group committees outlined above and through a clearly communicated strategy disseminated across the Group. The group's P.R representatives also help ensure that the full breadth of the business is understood both internally and externally. Key Man Dependency Appropriate succession planning arrangements are considered by the Directors to ensure that business operations are not disrupted by the loss of key staff. The Group has developed strength and depth across its management structures and believes its Human Resource policies are appropriate to retain such staff and recruit any appropriately skilled people required. However, the Group's reputation and standing is still significantly linked to the involvement of its founding directors, Ken Randall and Alan Quilter. A significant amount of knowledge, especially with regard to the terms of acquisition and detail of certain of the insurance company subsidiaries also lies with Ken Randall especially and is not easily replaceable. The Group has however developed strength and breadth across its management structures and believes its Human Resources policies are appropriate to retain such staff and recruit any appropriately skilled people required. Reliance on Group I.T and Communications The Group may be unable to operate efficiently or in a timely manner in the event of a partial or complete failure of the I.T infrastructure and/or telephone systems. This is particularly important for the Group's live underwriting operations. The Group is currently reviewing whether the robustness and performance of its IT and telephone systems is adequate and whether an outsourced support service model might bring advantages in terms of cost and efficiency. The Group has also recently recruited a Business Continuity manager to ensure the Group is adequately geared up to deal with potential business disruption. Litigation Risk The extent and complexity of the legal and regulatory environment in which the Group operates and the products and services the Group offers, mean that many aspects of the business involve substantial risks of liability. Any litigation brought against the Group in the future could have a material adverse effect on the Group and litigation brought against specific Group Insurance Companies may have a material adverse effect on those specific companies. The Group's insurance and/or the insurances of specific companies within the Insurance Investments Division may not necessarily cover any of the claims that policyholders, clients or others may bring against the Group or specific company, or may not be adequate to protect them against all the liability that may be imposed. In addition, litigation may have a material adverse effect upon the Group's business in that legal decisions between third parties may expand the apparent scope of legal liabilities, which in turn could increase the amount of claims which have to be paid by the Group, thereby reducing profits. The Group's owned insurance companies are also exposed to potential tort claims including claims for punitive or exemplary damages that could have a materially adverse effect on profitability. The Group is pursuing litigation against third parties and is subject to litigation by third parties in the normal course of business. The probable outcome of all such litigation is taken into account in compiling the Group's liabilities. However, if the outcome or costs (including potential accrued interest costs) of such litigation is incorrectly estimated, the Group's results could be negatively affected. Environmental Matters Whilst the Directors do not consider that the business of an insurance group has a large adverse impact upon the environment, the Directors of the subsidiary companies are encouraged to have regard for their environmental impact. Risk Management - Insurance Companies The activities of the Group's insurance companies expose each of them to financial and non financial risks. Other than as reported in Note 2a and Note 3, the Company and its other subsidiaries bear no financial responsibility for any liabilities or obligations of individual insurance companies. Should any of the insurance companies cease to be able to continue as a going concern, any loss to the Parent company and its other subsidiaries is restricted to the book value of their investment in that individual insurance company and any intra group balances due by them. Although the Directors strategically manage the risks within the Group, it is the responsibility of the Directors of the insurance companies to adhere to the Group's ethos in managing their company's exposure to these risks and, where possible, introduce controls and procedures that mitigate the effects of the exposure to risk. Insurance Risk The very nature of insurance business is that insurers are exposed to the possibility that claims will arise on business written. The risk attaching to insurance contracts is based on the fortuity that events will occur which will lead to a claim under the contract. The main insurance risks which affect the insurance companies are:- • Reinsurance risk - the risk that the reinsurers of the insurance companies will dispute the coverage of losses • Claims risk - a series of claims in respect of a latent liability that the insurance industry is not currently aware of • Legal risk - changes in statute or legal precedent • Reserving risk - the risk that the provisions established by the companies prove to be inadequate. Credit Risk on Receivables Reinsurance receivables are evaluated each quarter as to credit risk and existing bad debt provisions are evaluated as to adequacy. Currency Risk The insurance companies are potentially exposed to currency risk in respect of liabilities generated through regular trading activity which are denominated in currencies other than Sterling. The most significant foreign currencies to which the companies are exposed are the US Dollar and the Euro. Group policy requires that the Directors seek to mitigate the risk by matching the estimated foreign currency denominated liabilities with assets denominated in the same currency. However, in certain asset classes, much better priced investment opportunities exist in Sterling and Euros rather than US Dollar denominated investments due to an aversion to non-US risk by US investors following the recent credit crisis. In certain of the Group's insurance company portfolios we have therefore put in place rolling foreign exchange hedges to mitigate any FX mismatch between the investments held and the underlying liabilities, rather than directly hold assets and liabilities in the same currency. Reliance on Investment Income The Group's accounting policy in its consolidated financial statemenst, in relation to the insurance company subsidiaries is not to discount insurance reserves and only to take a provision for future run-off operating expenses if estimated investment income is insufficient over the Group as a whole to cover future anticipated operating expenses. Each insurance company is modeled in detail to ascertain the quantum of any provision required, taking into account estimated investment returns, average funds held and operating costs over the expected life of the run-off. The investments held in the insurance company subsidiaries are however subject to market risks, which include interest rate and credit risk, dealt with in detail below. Returns may not therefore meet expectations or losses may materialise. To mitigate these risks the Group has an Investment Committee, formed of all the Executive Directors and one of the Non-Executive Directors which advises the boards of the insurance companies on asset allocation and manager selection. The Investment Committee is also assisted by an independent investment advisor. Timely and accurate performance information is regularly made available to both the Group Investment Committee and insurance company boards to assist active management, which the Group believes is vital in this prolonged period of low interest rates and economic uncertainty. The level of funds held in the insurance company subsidiaries may also decrease faster than anticipated due to accelerated claims payments and this may have an impact on the sufficiency of investment income to meet operating expenses, provided the latter does not reduce proportionately. Interest rate/Credit risk The Group's main exposure to fluctuation in interest rates arises in its effect on the value of funds invested in bonds. In order to mitigate this risk, the Group investment committee and insurance company boards, together with the external investment managers, attempt to anticipate any future interest rate movement and to take appropriate action to mitigate its effect on the value of investments held. Recently, for example, the Group has switched into a number of floating rate securities to protect against likely interest rate rises. The Group is also exposed to credit risk through holding corporate bonds, mortgage backed securities and loans, depending on actual default rate and/or changes in the perceived default rates, which may fluctuate over time. The Group is therefore exposed to absolute loss and mark to market movements in the valuations of these securities. In order to mitigate this risk the vast majority of securities held by the Group are investment grade and credit spread duration is kept low. Liquidity Risk Liquidity risk is the risk that cash may not be available to pay obligations when due. The cash position of each of the insurance companies is monitored on a regular basis to ensurethat sufficient funds are available to meet liabilities as they fall due. Funds required to meetimmediate and short term needs are invested in money market funds or short term deposits. Funds in excess of those required to meet shortterm needs are managed by external fund managers. The investment performance of the fund managers is closely monitoredthroughout the year by the Directors of each insurance company and the investment committee. The cash position of each subsidiary is monitored weekly to ensure that sufficient funds are available to meet liabilities as they fall due. Reserving/Actuarial Risk Failure to adopt the correct reserving techniques exposes the Group to reserving risk and may present liquidity issues. The Directors actively manage this risk through the appointment of both internal and external actuaries to perform all reserve calculations. Litigation Risk This risk as it relates to the insurance companies is dealt with above under Group Risks. Risk Management - Service Companies The activities of the Group's service companies expose each of them to financial and non-financial risks. Although the Directors strategically manage the risks within the Group, it is the responsibility of the Directors of the service companies to adhere to the Group's ethos in managing the companies' exposures to these risks and, where possible, introduce controls and procedures that mitigate the effects of the exposure to risk. Dependence on Clients The service companies derive a significant proportion of their income from management contracts, which vary in length by up to five years. Failure to retain key clients on renewal will have an adverse impact on income. The Group enjoys a diverse client base with no single contract accounting for more than 10% of service income. Liquidity Risk Liquidity risk is the risk that cash may not be available to pay obligations when due. The management contracts within R&Q Insurance Services Limited are typically structured such that fees are payable by clients quarterly or annually in advance, providing the division with sufficient working capital to support the obligations of all companies within the division. The cash position of each of the service companies is monitored on a regular basis to ensurethat sufficient funds are available to meet liabilities as they fall due. Share Capital Details of the changes in the Company's share capital structure, rights and obligations attaching to, and any restrictions on the transfer or voting rights of the Company's shares are given in Note 24 to the Financial Statements. Charitable Donations During the year the Group contributed £559 (2010: £20) for charitable purposes. Employee Involvement Review meetings are held with employees to discuss the financial position and prospects of the Group. Opportunity is given at these meetings for senior executives to be questioned about matters which concern the employees. Employment of Disabled Persons The Company and its subsidiaries have continued their policy of offering equal rights to employment training, career development and promotion to all their employees including disabled employees. Creditor Payment Policy It is the Group's policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions. Events after the reporting period end Events after the reporting period end are disclosed in note 34 to the Consolidated Financial Statements. Purchase of own shares The Group acquired a number of its own ordinary shares in the year. Details of this are disclosed in note 24 to the Consolidated Financial Statements. Disclosure of information to Auditors The Directors who held office at the date of approval of this Report of the Directors confirm that, so far as they are individually aware:- · there is no relevant audit information of which the Company's auditors are unaware; and · each Director has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. Auditors Littlejohn LLP has signified its willingness to continue in office as auditors and a resolution will be proposed at the forthcoming Annual General Meeting. By order of the Board Signed by M L Glover Company Secretary 18 April 2012 Statement of Directors' Responsibilities The Directors are responsible for preparing the Annual Report and the Group and Parent Company Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. Under that law the Directors have elected to prepare the Group Financial Statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union and elected to prepare the Parent Company Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice. Under Company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the profit or loss of the Group for that year. In preparing these Financial Statements the Directors are required to: · select suitable accounting policies and then apply them consistently; · make judgements and estimates that are reasonable and prudent; · state whether the Group Financial Statements have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the Financial Statements; and · state whether the Parent Company Financial Statements have been prepared in accordance with UK Accounting Standards, subject to any material departures disclosed and explained in the Parent Company Financial Statements. The Directors confirm that they have complied with the above requirements in preparing the Financial Statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and which disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Report of the Directors that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the Financial Statements may differ from legislation in other jurisdictions. Independent Auditors' Report to the Shareholders of Randall & Quilter Investment Holdings plc We have audited the Group and Parent Company Financial Statements (the "Financial Statements") of Randall & Quilter Investment Holdings plc for the year ended 31 December 2011 which comprise the Consolidated Income Statement, the Consolidated Statement of Financial Position, the Parent Company Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity and the related notes. These Financial Statements have been prepared under the accounting policies set out therein. The financial reporting framework that has been applied in the preparation of the Group Financial Statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company Financial Statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company's shareholders, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's shareholders those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditors As explained more fully in the Statement of Directors' Responsibilities, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances, and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the Directors, and the overall presentation of the Financial Statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on Financial Statements In our opinion: · the Financial Statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2011 and of the Group's loss for the year then ended; · the Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union; · the Parent Company Financial Statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; · the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006. Independent Auditors' Report to the Shareholders of Randall & Quilter Investment Holdings plc (continued) Emphasis of matter to the Consolidated Financial Statements - significant uncertainty in relation to technical provisions In forming our opinion we have considered the adequacy of the disclosures made in Notes 2(a) and 3 to the Financial Statements. Significant uncertainty arises in the quantification of technical provisions because of the long tail nature of the business underwritten by the Group's insurance company subsidiaries in run-off. If further information becomes available to the Directors of those companies which gives rise to material additional liabilities, the going concern basis might no longer be appropriate for those companies only and adjustments would need to be made to reduce the value of their assets to their realisable amount and to provide for any further liabilities which might arise. Should the going concern basis no longer be appropriate to any insurance company subsidiary this would not necessarily affect the going concern basis for the remaining group. Our opinion is not qualified in this respect. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Report of the Directors for the financial year for which the Consolidated Financial Statements are prepared is consistent with the Financial Statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Company's Act 2006 requires us to report to you if in our opinion: · adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or · the Parent Company Financial Statements are not in agreement with the accounting records and returns; or · certain disclosures of Directors' remuneration specified by law are not made; or · we have not received all the information and explanations we require for our audit. Carmine Papa (Senior Statutory Auditor) Littlejohn LLP Statutory Auditor 1 Westferry Circus Canary Wharf London E14 4HD 18 April 2012 Consolidated Income Statement For the year ended 31 December 2011 2011 2010 Note £000 £000 £000 £000 Gross premiums written 2,290 948 Reinsurers' share of gross (1,080) (230) premiums Net written premiums 1,210 718 Change in gross provision for (871) - unearned premiums Change in provision for unearned premiums, reinsurers' share - - Net change in provision for unearned (871) - premiums Earned premium, net of 339 718 reinsurance Net investment income 6 6,358 8,530 Other income 7 30,096 23,570 ^ 36,454 32,100 Total income 36,793 32,818 Gross claims paid (80,777) (43,863) Reinsurers' share of gross 51,278 30,048 claims paid Claims paid, net of (29,499) (13,815) reinsurance Movement in gross technical 94,000 61,898 provisions Movement in reinsurers' share of (51,135) (38,626) technical provisions Net change in provisions for 42,865 23,272 claims Net insurance provisions 13,366 9,457 released Operating expenses 8 (42,308) (36,095) Result of operating activities before goodwill on bargain purchase 7,851 6,180 Goodwill on bargain purchase 32 1,541 1,701 Impairment of intangible (13,458) - assets Result of operating activities (4,066) 7,881 before finance costs Finance costs 9 (591) (358) (Loss)/Profit on ordinary 10 (4,657) 7,523 activities before income taxes Income tax credit/(charge) 11 4,169 (1,150) (Loss)/Profit for the year (488) 6,373 Attributable to equity holders of the parent Attributable to ordinary (488) 6,559 shareholders Non-controlling interests - (186) (488) 6,373 Earnings per ordinary share for the (loss)/profit attributable to the ordinary shareholders of the Company: Basic 12 (0.9p) 12.2p Diluted 12 (0.9p) 12.0p Consolidated Statement of Financial Position as at 31 December 2011 Company Number 03671097 2011 2010 Note £000 £000 Assets Intangible assets 14 14,510 26,705 Property, plant and equipment 15 1,717 817 Financial instruments - Investment properties 16a 1,022 1,042 - Investments (fair value through profit or loss) 16b 198,012 223,258 - Deposits with ceding undertakings 3,766 4,017 Reinsurers' share of insurance liabilities 22 166,745 216,607 Current tax assets 19 2,769 1,394 Deferred tax assets 23 5,358 2,707 Insurance and other receivables 17 71,298 43,528 Cash and cash equivalents 18 37,183 60,109 Total assets 502,380 580,184 Liabilities Insurance contract provisions 22 362,229 440,095 Financial liabilities - Amounts owed to credit institutions 21 23,224 19,627 - Deposits received from reinsurers 2,291 2,736 Deferred tax liabilities 23 470 840 Insurance and other payables 20 43,392 34,976 Current tax liabilities 601 2,525 Pension scheme obligations 28 2,641 - Total liabilities 434,848 500,799 Equity Share capital 24 1,036 1,135 Shares to be issued 25 254 250 Share premium account 25 8,064 16,029 Capital redemption reserve 25 5,750 1,614 Treasury share reserve 25 (704) (1,334) Retained earnings 25 53,132 61,855 Attributable to equity holders of the parent 67,532 79,549 Non-controlling interest in subsidiary undertakings - (164) Total equity 67,532 79,385 Total liabilities and equity 502,380 580,184 The Financial Statements were approved by the Board of Directors on 18 April 2012 and were signed on its behalf by:- K E Randall T A Booth Consolidated Cash Flow Statement For the year ended 31 December 2011 2011 2010 Note £000 £000 Cash flows from operating activities (Loss)/Profit before income taxes (4,657) 7,523 -0- Apr/19/2012 06:01 GMT
Randall & Quilter RQIH Final Results
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