Final results for the year ended 31 December 2019

RNS Number : 4512O

Randall & Quilter Inv Hldgs Ltd

01 June 2020

 

1 June 2020

Randall & Quilter Investment Holdings Ltd.

("R&Q", or the "Company")

Final results for the year ended 31^st December 2019

The Board of Randall & Quilter Investment Holdings Ltd. (AIM-RQIH), the leading non-life global specialty insurance company focusing on the Program Management and Legacy Insurance businesses, announces the Group's final results for the year ended 31 December 2019.

2019 Highlights

· Group

§ Pre-Tax Profit up 180% to £40.1 million (2018: £14.3 million) (continuing operations)

§ After-Tax Profit up 399% to £38.9 million (2018: £7.8 million)

§ 13% growth in Net Asset Value per Share (including return to shareholders) (2018: 12%)¹

§ Net Asset Value per Share of 148.1p (2018: 139.4p)

§ Earnings per Share (basic) up 269% to 21.4p (2018: 5.8p)

§ Bonus shares to be issued of 1 share for every 22 existing shares which brings the total distribution to approximately 9.9p per share (2018: 9.2p)

§ £103.4 million of equity raised in March 2019

· Program Management

§ 147% increase in Gross Written Premium to $369.3 million (2018: $149.4 million)

§ 148% growth in Economic Commission Revenue to $12.9 million (2018: $5.2 million)

§ Achieved Economic EBITDA of $1.8 million (2018: loss of $3.8 million)

§ Establishment of a "Brexit" solution through the creation of a UK branch of our Malta program insurer

· Legacy

§ 31% growth in Gross Reserves (2018: decline of 15%)

§ Operating Return on Capital of 19.6% (2018: 16.7%)⁴

§ 16 transactions completed, including the largest acquisition to date with the purchase of Global Re at a cost of $80.5 million

§ Appointed Mike Walker as Head of Legacy Operations

· Post Period End

§ $100 million of new capital raised in May 2020 to fund further growth

§ In 2020, announced William Spiegel as Executive Director and Deputy Group Chairman in January, Tom Solomon as Executive Director and Chief Financial Officer and Eamonn Flanagan as Non-Executive Director in May, as part of succession planning

· Outlook and Covid-19

§ Business continuity plan successfully implemented

§ Limited impact on existing business and investment portfolio from Covid-19

§ Existing strong pipeline of opportunities in both Program Management and Legacy, enhanced by "hard" market created by Covid-19

Summary Financial Performance

Income Statement

	2019	2018
Pre-tax profit (continuing)	£40,125k	£14,251k
After-Tax Profit	£38,845k	£7,822k
Earnings per Share (basic)	21.4p	5.8p

Balance Sheet

	2019	2018
Cash and Investments	£832,208k	£638,672k
Gross Reserves	£1,072,208k	£699,078k
Amounts Owed to Credit Institutions	£142,693k	£140,243k
Shareholders' Equity (Net Asset Value)	£290,246k	£175,638k

Key Metrics  

	2019	2018
Investment Return	3.6%	1.2%
Net Asset Value per Share	148.1p	139.4p
Growth in Net Asset Value per Share (plus distributions)	13.0%	12.0%
Distribution per Share - including bonus shares	9.9p	9.2p

Business Line Metrics

Program Management

	2019	2018
Gross Written Premium	$369.3m	$149.4m
Economic Commission Revenue2	$12.9m	$5.2m
Economic EBITDA	$1.8m	$(3.8)m

Legacy

	2019	2018
Operating Return on Equity	24.2%	20.5%
Operating Return on Capital	19.6%	16.7%
Allocated Capital	£337,778k	£209,921k
Gross Reserves	£772,935k	£591,774k

Commenting on the results for the year, Ken Randall, Alan Quilter and William Spiegel, said:

"We are pleased to report that 2019 was a record year for the Group. Our Pre-Tax Profit was £40.1 million, our After-Tax Profit was £38.9 million and our Net Asset Value per Share (including return to shareholders) increased by 13% to 148.1p per share. 

At £40.1 million, our Pre-Tax Profit was a Group record and almost three times the equivalent result in 2018. This was the result of the continued growth in both our Program Management and Legacy businesses as we successfully executed against our strategy and capitalized on the significant opportunities in both segments.

Our Legacy business continued to thrive in 2019 as we completed 16 transactions including executing on two of the largest transactions in R&Q's history. Our 16 transactions contributed £332.2 million of new cash and investments and £276.2 million of additional net reserves. Moreover, our Legacy Operations team continued to achieve claims and reserve savings from portfolios acquired in prior years, while our investments returned 3.6% on £832.2 million of Cash and Investments at year-end. Our investment portfolio continued to be conservatively managed and at year end 2019, we maintained a high quality (90% investment grade) and short average duration of 1.7 years. In 2019, our Legacy business generated an Operating Return on Capital of 19.6% and over the past three years we are proud to report that our Operating Return on Capital has averaged 17.6%. We believe Operating Return on Capital is one of the most appropriate metrics to measure the profitability and value of our Legacy business. In any given year this metric records the profits on new deals, the reserve changes from prior year deals and the investment income (excluding unrealized gains or losses) associated with our total legacy portfolio.

Since late 2016, we have used our Legacy business infrastructure to support the growth of our nascent Program Management business. Program Management is a fee-based annual recurring commission revenue business that is highly scalable. In 2019, our Gross Premium Written grew by 147%, from $149.4 million in 2018 to $369.3 million in 2019. This led to record Economic Commission Revenue which grew by 148% from $5.2 million in 2018 to $12.9 million in 2019. We are pleased to report that in 2019, we achieved a critical milestone as we generated positive Economic EBITDA of $1.8 million compared with an Economic EBITDA Loss of $3.8 million in 2018. We believe Economic Commission Revenue and Economic EBITDA are two of the most important metrics measuring the underlying profitability and value of our Program Management business. During periods of high growth, we focus on Economic metrics more than IFRS metrics because they reflect the economic value of business already bound, regardless of the length of the underlying policy period. When growth in our business levels off, Economic and IFRS figures will converge.

In the first quarter of 2020, our Program Management business continued to expand with growth in our existing programs and the addition of new programs, increasing Gross Written Premium to $478.4 million (on an annualised basis), an increase of 30% from year end 2019. Moreover, in the first quarter of 2020, our Economic Commission Revenue grew to $19.6 million (on an annualised basis), an increase of 51% from year end 2019. Our Program Management business has significant built-in growth with its existing distribution partners with whom we have secured contracts which are expected to generate up to $842 million of Contracted Premium as of year-end 2019. Program Management is highly scalable, and with its current scale largely absorbing its fixed overhead (on both an Economic and IFRS basis), we expect a large portion of our future Commissions from new business to show up as profit in 2020 and beyond.

In the first quarter of 2020, Covid-19 shut down the world economy likely leading to one of the largest insurance loss events on record. This large capital event is likely to accelerate the strong secular growth we were already seeing in our two specialist businesses, Program Management and Legacy, as these businesses become a core and growing part of the insurance industry. In order to proactively capitalise on the "hard market" in our two business lines, in May 2020, we raised $100 million of new capital. In our Legacy business we are already witnessing increased opportunities from insurance companies seeking to free-up capital by divesting insurance reserves. In our Program Management Business we believe we will be able to forge new origination partnerships as existing insurance capacity may not be able to continue to provide capital support. Moreover, due to current market conditions, we are bringing forward our entry into the US Excess & Surplus ("E&S") Lines Program Management market, a large addressable market in which we do not presently compete.

Over the next few years we expect our Legacy business to continue to provide strong and consistent Operating Returns on Capital. Our key goal for the Legacy business is to add a recurring fee component to its income by managing legacy business on behalf of third parties. There is a growing demand from alternative capital providers, such as pension funds, sovereign wealth funds and family offices, for access to the legacy insurance business we originate and service. The demand is driven because insurance liabilities are generally non-correlated to other securities, such as stocks and bonds. In our Program Management business, which is already largely fee-based, we expect to continue its rapid growth and benefit from its scalable business model to drive a large portion of future commission revenue from new business, straight to the bottom line. Our goals for the Program Management business are by 2022/2023 to have Gross Written Premium of $1.5 billion to $2 billion, to achieve approximately 80% pre-tax margins and to generate Economic EBITDA in excess of $50 million. We are excited about the future of both of our businesses and believe we are well positioned to achieve our goals.

2019 was an outstanding year for R&Q and in 2020 our opportunity set continues to grow. We will continue, as is our tradition, to be patient and disciplined as we continue to grow our businesses."

Our shareholders presentation is available on our website at http://www.rqih.com/investors/shareholder-information/investorpresentations

Enquiries to: Randall & Quilter Investment Holdings Ltd. Ken Randall William Spiegel	www.rqih.com [phone] +001 917 826 5877
Numis Securities Limited (Nominated Adviser and Broker) Stuart Skinner Charles Farquhar Shore Capital Stockbrokers Limited (Joint Broker) Stephane Auton James Thomas	[phone] [phone]
FTI Consulting Edward Berry Tom Blackwell	[phone]

Notes

¹ Growth in Net Asset Value per Share (including return to shareholders) is a measure of how the Group's Net Asset Value per Share has grown over the past year. The calculation includes distributions or dividends to shareholders during the year.

² Economic Commission Revenue represents the Commission Revenue from insurance policies already bound (written), regardless of the length of the underlying policy period (earned). We believe Economic Commission Revenue is a more appropriate measure of the Revenue of the business during periods of high growth, due to larger than normal gap between Gross Written and Gross Earned (IFRS) Premium, and the corresponding fees.

³ Economic EBITDA for Program Management is equal to IFRS EBITDA plus Unearned Commission Revenue (the difference between Economic Commission Revenue and Commission Revenue Earned (IFRS). Commission Revenue as a function of Gross Written Premium, shows the economic value of the business already bound regardless of the length of the underlying policy period. We believe Economic EBITDA is a more appropriate measure of the profit embedded in the Program Management business during periods of high growth, due to a larger than normal gap between Gross Written and Gross Earned (IFRS) Premium.  In 2019, IFRS EBITDA was a loss of $1.9 million and in 2018 it was a loss of $5.6 million.

⁴ Operating Return on Equity for Legacy reflects the Pre-Tax Return on Equity allocated to the Legacy business. Pre-Tax Profit excludes any unrealized gains or losses on investments.

Operating Return on Capital for Legacy reflects the un-leveraged Pre-Tax Return on Capital allocated to the Legacy business. Pre-Tax Profit is adjusted for Group interest expense allocated to Legacy and excludes any unrealized gains or losses on investments. 85% of Group capital is allocated to Legacy and is determined based on the Group's economic capital models.ⁱ

⁵ Contracted Premium is the Gross Premium that our existing distribution partners believe their programs will generate over a period of time. We expect a significant portion of Contracted Premium to become Gross Premium Written.

REPORT OF THE EXECUTIVE DIRECTORS

Financial Results

2019 was an exceptional year for R&Q both financially and strategically. Financially, we had our most profitable year ever, increasing Pre-Tax Profits by 180% to £40.1 million, growing Earnings per Share by 269% to 21.4p and increasing Net Assets per Share (including distributions) by 13% to 148.1p.

Importantly, the strategic benefit of focusing on two complementary high growth specialty insurance sectors, Program Management and Legacy, is becoming clear. After three years of our Legacy business infrastructure supporting our rapidly growing fee-based Program Management business, in 2019 we achieved an important milestone as our Program Management business generated an Economic EBITDA of $1.8 million. During periods of rapid growth, we believe Economic EBITDA more accurately reflects the true underlying earnings power of our Program Management business than IFRS EBITDA. Unlike IFRS, Economic EBITDA reflects the economic value of business already written, regardless of the length of the underlying policy period. This result was produced by a 147% growth in Gross Written Premium to $369.3 million for the year ended 2019 and a 148% growth in Economic Commission Revenue (Commission Revenue earned on Gross Written Premium). Given the scalability of the Program Management business, we expect a large portion of additional commissions from new business to drop to the bottom line. Meanwhile, in 2019, our Legacy business continued to generate high operating returns on capital. In 2019, our Legacy business generated an Operating Return on Capital of 19.6% and over the past three years, it has produced an average Operating Return on Capital of 17.6%. We believe Operating Return on Capital is the most appropriate metric to measure the profitability and value of our Legacy business. In any given year this metric records the profits on new deals, the reserve changes from prior years deals and the investment income (excluding unrealised gains or losses) associated with our total Legacy portfolio.

Program Management

Our Program Management business operates in the US, the UK and Europe under the banner of Accredited. We began developing this business in late 2016 and our first real year of operation was 2017. We identified the importance and demand for program management as we witnessed the growth in the independent Managing General Agents ("MGA") channel and the increased demand of reinsurers for premium. At the end of 2019 we produced Gross Written Premium of $369.3 million, up from $3.9 million in 2016, and had established ourselves as a leading program management company.

Our business has grown consistently year on year, and we are unique as the only program carrier that has an AM Best A- credit rating in the US, the UK and Europe. In the US we are licensed in all 50 states and in the UK/ Europe we are licensed to write all classes of non-life business. In 2020, we will set up a fully authorised UK branch to facilitate continued access to the large UK market, post Brexit. This branch will get the full benefit of Accredited Malta's A- rating from AM Best. In the US, in 2019, Accredited (US) was upgraded to an AM Best category IX Financial Strength. This positive endorsement makes Accredited one of the highest rated program managers in the US and positions us well for continued future success.

The MGA/broker market in the US, UK and Europe produces over $100 billion of annual premium. In all of these jurisdictions, the independent MGA channel, as a form of insurance distribution, continues to grow. This trend is occurring for a number of reasons. First, insurance product distribution is becoming increasingly specialised. Second, underwriters have been leaving insurance companies to own their own "non-regulated" independent business. Finally, the InsurTech boom has created a number of new tech-enabled distribution companies. While not all of the MGA/broker market is addressable by the program management market, the independent MGA channel has been growing as a percent of the total market. This is occurring because independent MGAs seek stability in their insurance company relationships and working with a program manager, as opposed to a competing insurance company, meets that need. Independent MGAs are finding that partnering with program managers, as opposed to competing insurance companies, provides a powerful way for them to retain more control over their future growth and success. A recent example of the trend is the move by Lloyd's to cease underwriting certain classes of business, which has resulted in underwriters leaving to join existing MGAs or starting new ones.

The other major trend that is increasing demand for program managers is that reinsurers are earning less premium on large programs that are increasingly retained by primary insurers.  By working with a program manager, a reinsurer can access premium directly maintaining a good source of premium growth. We partner with many of the world's largest and most important reinsurers and are pleased to be working in collaboration with such high profile partners.

In the fourth quarter of 2016, as we were just launching our Program Management business, we had partnerships with two MGA's. Over the past three years our business has grown and we now have 30 MGA partnerships in seven countries. In 2020, we expect to add programs in four more countries. As we have added partnerships we have also grown the number of business lines in which we provide coverage. From just two business lines in 2016, we now offer program management for 17 different classes of non-life Property & Casualty business in the US, UK and Europe and we expect to add more classes of business in 2020.

Given the size of the market opportunity, we currently face limited competition, in part because of the high barriers to entering the program space. To compete one needs at least an A- rating, a strong capital base, licenses and the ability to execute with both MGA and reinsurance partners. In the US, UK and Europe there are only a small number of well capitalised program managers with the ratings and financial strength of Accredited. We believe our A- rating, our strong capital base and our reputation for robust due diligence and oversight has given both MGAs and reinsurers confidence in our business.

As discussed above, in 2020 we are actively working on the launch of our US E&S Lines Program Management business. Entering the E&S market will complete Accredited's strategic initiative to be a comprehensive program management solutions provider in all its major global markets.

Legacy M&A

Legacy business has been at the core of the Group for almost 30 years. Over the last 10 years we have completed 102 transactions in 18 countries (35 different regulatory jurisdictions) and acquired £620 million of reserves, making R&Q a market leading solutions provider in the legacy insurance market.

2019 was another busy year. We completed 16 transactions, assumed £276.2 million of net reserves and delivered a 19.6% Operating Return on Capital. Deals were executed in Bermuda, Barbados, Ireland, UK, Sweden and several US states and included a wide array of transaction size and structure including:

§ the Group's largest deal, the acquisition of Global Re, a New York domiciled carrier which has been in run-off since 2002

§ a significant reinsurance deal for two Joint Power Authorities - Northern California Regional Liability Excess Fund and Statewide Association of Community Colleges

§ a large loss portfolio transfer for a Lloyd's syndicate.

A significant advantage we possess in the legacy market is the breadth of our platform. We offer a full range of solutions to our clients - we have rated and fully licensed carriers in the US, UK and Europe, a Class 3 Bermudian reinsurer, a Bermudian segregated accounts company, a Lloyd's platform and consolidation vehicles in Guernsey, Isle of Man and Vermont. To broaden our platform we recently launched National Legacy Insurance Company ("NLIC") in Oklahoma to benefit from the Insurance Business Transfer ("IBT") legislation recently enacted in that state. IBT is similar to the Part VII transfer process that exists in the UK and is an area where we have extensive experience. We are in the process of preparing our first application for an IBT into NLIC, with the business coming from the Excess Casualty Reinsurance Association ("ECRA") pool that we manage.  The ECRA pool, which we manage exclusively on behalf of the Pool Members, comprises $1.4 billion of gross liabilities and 150 participants, is ideal for using the IBT process to obtain finality for the ECRA pool participants.

We continue to see an increase in deal sizes, which reflects both our increased scale and the breadth of our platform. The deal pipeline remains very healthy and we envisage significant opportunities arising from the current global Covid-19 crisis with companies seeking capital efficiency through the disposal of legacy liabilities. These include commercial carriers or syndicates suffering from investment losses or unexpected claims development, or cash-strapped industrial and commercial business owners with trapped capital in their "captive" insurance subsidiaries.

Legacy Operations

After our Legacy M&A team completes a transaction, our Legacy Operations team leverages its considerable collective experience to drive value. As well as managing the typical processes necessary in managing insurance businesses, the team provides invaluable support to the M&A team through due diligence, development of claims strategy and extracting additional value.

The Legacy Operations team has expertise in managing post acquisition integration and implementing strategies after a transaction is completed. This was illustrated in 2019 following the early May completion of the Global Re acquisition, where we successfully generated significant capital releases of $6 million in 2019 and $6 million in early 2020.  Further releases from Global Re are expected in 2020. A similar result occurred following the acquisition of Sandell Re, with $5.4 million released soon after its acquisition. The team consistently reviews its acquired portfolios, identifying areas for reserve releases and strengthening, where appropriate. The Legacy Operations team is working on several other transfer and consolidation projects including the Part VII transfers of the Anglo-French portfolio and preparing the Part VII process for the UK P&I Club's industrial disease exposures. These benefit from the team's deep experience of managing such restructuring processes effectively and efficiently. 

Cash and Investments

The investment team works closely with the Legacy M&A team, assisting with deal pricing and ensuring that new portfolios are on-boarded and invested as soon as possible after a deal closes. The management of our investment portfolio is outsourced, and during 2019 we completed a consolidation of our investment managers, reducing the number of external managers to three.

Our investment portfolio performed well in 2019, generating a net investment return of 3.6% compared with 1.2% for the year ended 2018. We earned this higher return on a larger investment portfolio as our Cash and Investments increased to £832.2 million at year end 2019 from £638.7 million at the end of 2018. The addition to our investment portfolio was primarily from the 16 legacy deals closed during the year as well as the £103.5 million equity raise in March of 2019.

We maintain a conservative portfolio with a minimal allocation to equities and other risk assets. As of year-end 2019, 95% of our portfolio was rated BBB or better (including 62% in AAA rated securities), the average duration was 1.7 years, 78% of the portfolio was U.S. dollar denominated, the Book Yield was 2.21% and the Yield to Worst was 1.64%.  An important investment metric is our Investment/Equity ratio. This ratio increased slightly over the year to 2.5x at year end 2019 from 2.4x at year end 2018.

This conservative positioning of the portfolio helped us weather the market volatility that resulted from the onset of Covid-19. As of 30 April 2020, the year to date performance of the portfolio, on a mark to market basis, was a small decline of 1.2%, representing a loss of £8.2 million, driven by unrealised losses of £13.4 million, partially offset by realised gains and income of £5.2 million. We believe we are well positioned to take advantage of opportunities generated by the current Covid-19 crisis, as well as to protect our balance sheet should there be further volatility going forward.

External Borrowing

In August 2019, in order to support our continued growth, we increased our bank debt facility to £62.5 million, with a five-year maturity. In addition, we also raised subordinated debt, which at year end totalled £89.6 million and matures over the next three to eight years.

Return to Shareholders

We are pleased to continue our history of paying a return to shareholders, although this year, in light of the wider macro environment and regulatory pressure, our return will be in the form of ordinary shares. The Board is recommending an award to shareholders of 1 ordinary share in the capital of the Group for every 22 ordinary shares already held, to be issued on or around 6 July 2020.

Brexit

It would be remiss not to mention Brexit and how we have prepared for the UK's split from the European Union.  Accredited Europe, which is domiciled in Malta, has written a considerable volume of UK Program Management business that it would not be able to write after Brexit due to the cessation of the cross-border capabilities afforded under EU membership.  In order to continue writing UK business, Accredited has set up freedom of establishment in the UK, effectively a branch operation under EU directives, and an application has been submitted to the PRA for this to become a fully authorised third country branch.  This branch will get the full benefit of Accredited Malta's A- rating from AM Best.  Not only will this enable Accredited to continue to write its current UK program business, but it provides opportunities for it to pick up new business from European program managers that have decided not to create a UK branch.  With regard to legacy operations, the UK branch provides the platform for Accredited to continue to manage its UK legacy liabilities and utilise its financial strength rating to provide exit solutions for UK businesses that would no longer be able to access European run-off vehicles.

Management Succession and Staffing

As a leadership team we are focused on addressing management succession. We continue to recruit and attract exceptional talent, which is a sign of our thriving and vibrant business. Our team is filled with strong young insurance leaders who are making us more agile, creative and profitable.

In 2019 and 2020, as part of our succession planning, we announced that William Spiegel was joining as Executive Director and Deputy Group Chairman, Mike Walker was joining as Head of Legacy Operations and Tom Solomon was joining as Executive Director and Chief Financial Officer. William, Mike and Tom all have considerable insurance experience in their prior roles and position us well for the future.

Notwithstanding our ability to recruit new talent, we want to single out the three longstanding members of our senior management team who are stepping back: Mike Glover, Chief Governance Officer, has been with us for 17 years and will continue to provide consultancy services for a period of time; Pam Hoelsken, President of R&Q America Holdings Inc., will be retiring in June after 21 years; and Mark Langridge, who was previously a board member and Head of Legacy, will after 13 years at R&Q continue in a part time capacity. We want to thank each of them for their contributions and role in helping shape R&Q. Each of Mike, Pam and Mark have set a standard of professionalism, ethical behavior and entrepreneurialism, and that is part of their legacy.

Like most people around the world, the lives of all of us at R&Q have been upended over the last few months. We have had to quickly change the way we live - working from home and grappling with the inherent complexities that have arisen in the "new normal". We would like to thank all members of our R&Q family for their unrelenting effort and dedication during this difficult time. With all our offices closed, the resilience of the R&Q team has been tested, and it has passed with flying colours.

Outlook and Covid-19

Our success in 2019 was generated without the backdrop of the "hard market" in both our businesses created by Covid-19. Covid-19 has sent shock waves through the insurance market with loss estimates in the $100 billion range, likely making Covid-19 one of the largest insurance loss events on record. Unlike a normal industry loss event, the insured losses from Covid-19 will cut across many lines. In addition to insured losses, insurance companies are suffering investment losses, adding to the magnitude of the capital losses for the insurance industry associated with the pandemic.

We believe our businesses are well positioned to withstand the impact of the pandemic. The reason for our confidence is because our existing Legacy books have limited exposure to unexpired risk, our Program Management portfolios are largely reinsured with highly rated counter-parties (93% of our reinsurance is with carriers rated A- or better and 90% is with carriers rated A or better) and our investment portfolio is conservatively positioned with a short average duration and a high quality investment grade fixed income.

The new environment does of course present some risks. We face risks from unanticipated exposure to valid claims in respect of Covid-19, from delays in completing transactions, from reduced economic growth slowing demand for insurance, from dislocations in the capital markets, and finally from our regulators and rating agencies increasing capital requirements for our industry (as was the case in the lending industry after the Great Financial Crisis).

However, we believe the capital dislocation in the insurance industry will accelerate the significant secular growth we were already seeing in both businesses. it was for this reason that we raised $100 million of new capital in May 2020. The opportunities for growth in each of Program Management and Legacy businesses are outlined below:

o  Program Management:

o  Significant embedded growth from our existing 30 partnerships with MGAs. As of 31 December 2019, these MGA partners have told us they expect premium from their programs to reach $842 million annually of which, as of 31 March 2020, $478 million has been written. We anticipate much of the remainder to flow in the next couple of years

o  Large pipeline of existing US and European business totalling $1 billion of Gross Premium. We continue to witness increasing demand in all our markets given our leadership position and lack of competition in both the US, UK and European markets

o  Increase in our addressable market by entering the US E&S Lines program management market in late 2020/early 2021. The US E&S market had approximately $40 billion of written premium in 2019. We will primarily leverage our existing Program Management infrastructure to grow this business

o  Growth in our UK Program Management business, post Brexit, by creating a UK branch of our European Program Management company

o  Increase our presence in Italy with the establishment, in June 2020, of an Italian branch

o  Collaboration with strong MGAs, who, as a direct result of Covid-19, may find their existing capital providers facing capital pressure and unable to support their growth

o  Increase in Commission Revenue as insurance premiums increase in the "hard insurance" market.

o  Legacy:

o  Growth in the demand for Legacy is being driven by the increased pressure on insurers to seek capital efficiency from the growing regulatory capital pressure on reserves

o  Growth in demand, particularly post Covid-19, for exit solutions from cash-strapped owners of "captive" insurance companies seeking to free up available liquidity from their captive subsidiaries.  R&Q is already the market leader in this field

o  Increase in the number of legacy opportunities post Covid-19, as the reduced capital position of the industry forces insurance companies to seek access to the Legacy markets to fill capital holes

o  Opportunity to improve operating returns on capital, post Covid-19, due to the excess demand for Legacy solutions, and

o  Increase the size of the opportunities upon which we can complete, by using sidecars and other third-party partnerships.  As a manager of third party capital, we would expect to be paid fees for sourcing and managing these transactions.

The future is bright for R&Q. We are a unique global specialty insurance business that is well positioned for future growth and profit. We remain market leaders in both of our businesses, demand for our services is strong and increasing post Covid-19 and there are high barriers to entering our markets. We are a combination of both a balance sheet business and a fee-based recurring commission business. Our Legacy business is currently a balance sheet business and it exhibits many of the same qualities of the leading specialty insurance companies - strong non-cyclical growth with high returns on capital. Our Program Management business is a fee business and it shares many of the same attributes as commercial insurance brokerage firms - recurring annual revenue and high pre-tax margins.

Over the next few years we expect our Legacy business to continue to provide strong and consistent Returns on Capital deployed. Our key goal for the Legacy business is to add a recurring fee component to its income by managing Legacy business on behalf of third parties. There is a growing demand from alternative capital providers, such as pension funds, sovereign wealth funds and family offices, for access to the Legacy insurance business we originate and service. The demand is driven because insurance liabilities are generally non-correlated to other securities, such as stocks and bonds. In our Program Management business, which is already largely fee-based, we expect to continue its rapid growth and benefit from its scalable business model to drive a large portion of future commission revenue from new business, straight to the bottom line. Our goals for the Program Management business are by 2022/2023 to have Gross Written Premium of $1.5 billion to $2 billion, to achieve approximately 80% pre-tax margins and to generate Economic EBITDA in excess of $50 million. We are excited about the future of both of our businesses and believe we are well positioned to achieve our goals.

Ken Randall, Alan Quilter, William Spiegel

Consolidated Income Statement

For the year ended 31 December 2019

			2019			2018
	Note		£000	£000		£000		£000
Continuing operations
Gross written premiums			450,187			183,838
Written premiums ceded to reinsurers			(285,033)			(118,928)
Net written premiums				165,154				64,910
Change in provision for unearned premiums, gross			(94,315)			(42,044)
Change in provision for unearned premiums, reinsurers' share			103,687			40,583
Net change in provision for unearned premiums				9,372				(1,461)
Earned premium, net of reinsurance				174,526				63,449
Gross investment income	7		21,993			5,430
Other income	8		6,780			11,960
				28,773				17,390
Total income				203,299				80,839
Gross claims paid			(183,438)			(161,360)
Proceeds from commutations and reinsurers' share of gross claims paid	19		111,033			106,238
Claims paid, net of reinsurance			(72,405)			(55,122)
Movement in gross technical provisions			(125,978)			69,579
Movement in reinsurers' share of technical provisions after adjusting for commutations			55,227			(3,759)
Net change in provisions for claims			(70,751)			65,820
Net claims provisions (increase)/decrease				(143,156)					10,698
Operating expenses	9			(78,651)					(77,294)
Result of operating activities before goodwill on bargain purchase				(18,508)					14,243
Goodwill on bargain purchase	29			71,332					5,997
Amortisation and impairment of intangible assets	15			(3,162)					(1,644)
Result of operating activities				49,662					18,596
Finance costs	10			(9,537)					(4,345)
Profit from continuing operations before income taxes	11			40,125					14,251
Income tax charge	12			(1,280)					(3,946)
Profit for the year from continuing operations				38,845					10,305
Loss for the year from discontinued operations	6			-					(2,483)
Profit for the year				38,845					7,822
Attributable to:-
Shareholders of the parent				39,323					7,341
Non-controlling interests				(478)					481
				38,845					7,822

The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.

2019

2018

Earnings per ordinary share from continuing and discontinued operations:-

Basic

13

21.4p

5.8p

Diluted

13

21.4p

5.8p

Earnings per ordinary share from continuing operations:-

Basic

13

21.4p

7.8p

Diluted

13

21.4p

7.8p

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2019

			2019  £000		2018  £000
Other Comprehensive Income:
Items that will not be reclassified to profit or loss:
Pension scheme actuarial (losses)/gains			(1,698)		4,661
Deferred tax on pension scheme actuarial (losses)/gains			51		(792)
			(1,647)		3,869
Items that may be subsequently reclassified to profit or loss:
Exchange (losses)/gains on consolidation			(8,258)		8,809
Other comprehensive income			(9,905)		12,678
Profit for the year			38,845		7,822
Total comprehensive income for the year			28,940		20,500
Attributable to:
Shareholders of the parent			29,440		19,985
Non-controlling interests			(500)		515
Total comprehensive income for the year			28,940		20,500

The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.

Consolidated Statement of Changes in Equity

For the year ended 31 December 2019 

	Notes	Share   capital	Share premium		Foreign currency translation reserve	Retained earnings	Total	Non-controlling interests	Total
		£000	£000		£000	£000	£000	£000	£000
Year ended 31 December 2019
At beginning of year		2,520	51,135		9,273	112,710	175,638	349	175,987
Profit for the year		-	-		-	39,323	39,323	(478)	38,845
Other comprehensive income
Exchange losses on consolidation		-	-		(8,236)	-	(8,236)	(22)	(8,258)
Pension scheme actuarial losses		-	-		-	(1,698)	(1,698)	-	(1,698)
Deferred tax on pension scheme actuarial losses		-	-		-	51	51	-	51
Total other comprehensive income for the year		-	-		(8,236)	(1,647)	(9,883)	(22)	(9,905)
Total comprehensive income for the year		-	-		(8,236)	37,676	29,440	(500)	28,940
Transactions with owners
Share based payments		-	138		-	-	138	-	138
Issue of shares	25	1,398	102,047		-	-	103,445	-	103,445
Issue of AB & AC shares		18,415	(18,415)		-	-	-	-	-
Cancellation of AB & AC shares	14	(18,415)	-		-	-	(18,415)	-	(18,415)
Non-controlling interest in subsidiary acquired		-	-		-	-	-	594	594
At end of year		3,918	134,905		1,037	150,386	290,246	443	290,689

	Notes	Share   capital		Share premium		Foreign currency translation reserve		Retained earnings	Total		Non-controlling interests		Total
		£000		£000		£000		£000	£000		£000		£000
Year ended 31 December 2018
At beginning of year		2,517		62,257		901		101,097	166,772		(166)		166,606
Profit for the year		-		-		-		7,341	7,341		481		7,822
Other comprehensive income
Exchange gains on consolidation		-		-		8,372		403	8,775		34		8,809
Pension scheme actuarial gains		-		-		-		4,661	4,661		-		4,661
Deferred tax on pension scheme actuarial gains		-		-		-		(792)	(792)		-		(792)
Total other comprehensive income for the year		-		-		8,372		4,272	12,644		34		12,678
Total comprehensive income for the year						8,372		11,613	19,985		515		20,500
Transactions with owners
Share based payments		-		212		-		-	212		-		212
Issue of shares	25	3		-		-		-	3		-		3
Issue of Z & AA shares		11,334		(11,334)		-		-	-		-		-
Cancellation of Z & AA shares	14	(11,334)		-		-		-	(11,334)		-		(11,334)
At end of year		2,520		51,135		9,273		112,710		175,638		349		175,987

The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.

Consolidated Statement of Financial Position

As at 31 December 2019

Company Number 47341	Note		2019  £000	2018  £000
Assets
Intangible assets	15		46,082		19,974
Property, plant and equipment	16		969		577
Right of use assets	17		3,191		-
Investment properties	18a		1,480		1,881
Financial instruments
- Investments (fair value through profit and loss)	18b		559,963		395,418
- Deposits with ceding undertakings	4b		19,504		6,331
Reinsurers' share of insurance liabilities	23		471,412		300,357
Deferred tax assets	24		4,008		3,205
Current tax assets	24		1,988		191
Insurance and other receivables	19		419,535		232,716
Cash and cash equivalents	20		252,741		236,923
Total assets			1,780,873		1,197,573
Liabilities
Insurance contract provisions	23		1,072,208		699,078
Financial liabilities
- Amounts owed to credit institutions	22		142,693		140,243
- Lease liabilities	22		3,210		-
- Deposits received from reinsurers			1,068		1,139
Deferred tax liabilities	24		9,465		3,449
Insurance and other payables	21		253,909		168,488
Current tax liabilities	24		294		2,323
Pension scheme obligations	27		7,337		6,866
Total liabilities			1,490,184		1,021,586
Equity
Share capital	25		3,918		2,520
Share premium	25		134,905		51,135
Foreign currency translation reserve			1,037		9,273
Retained earnings			150,386		112,710
Attributable to equity holders of the parent			290,246		175,638
Non-controlling interests in subsidiary undertakings	30		443		349
Total equity			290,689		175,987
Total liabilities and equity			1,780,873		1,197,573

The Consolidated Financial Statements were approved by the Board of Directors on 31 May 2020 and were signed on its behalf by:

K E Randall  A K Quilter   W Spiegel

The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.

Consolidated Cash Flow Statement

For the year ended 31 December 2019   

Cash flows from operating activities	Note		2019  £000		2018  £000
Profit for the year			38,845		7,822
Tax included in consolidated income statement			1,280		3,871
Finance costs	10		9,537		4,345
Depreciation and impairment	16 & 17		2,242		335
Share based payments	25		138		212
Loss on divestment			-		215
Goodwill on bargain purchase	29		(71,332)		(5,997)
Amortisation and impairment of intangible assets	15		3,162		1,644
Fair value (gain)/loss on financial assets			(6,602)		5,754
Loss on revaluation of investment property	18		40		903
Loss on disposal of property, plant and equipment			89		-
Contributions to pension plan			(1,400)		-
Loss/(profit) on net assets of pension schemes			173		(479)
Increase in receivables			(145,830)		(61,734)
Decrease in deposits with ceding undertakings			1,294		343
Increase in payables			72,220		69,679
Increase/(decrease) in net insurance technical provisions			61,379		(64,359)
Income taxes paid			(2,330)		-
Net cash used in operating activities			(37,095)		(37,446)
Cash flows from investing activities
Purchase of property, plant and equipment	16		(958)		(189)
Proceeds from sale of property, plant and equipment	16		-		19
Purchase of intangible assets	15		(143)		(92)
Proceeds from sale of intangible assets			1,952		-
Proceeds from sale of financial assets			68,997		69,774
Purchase of financial assets			(94,364)		(46,023)
Proceeds from disposal of investment properties	18		361		-
Acquisition of subsidiary undertakings (offset by cash acquired)			(1,615)		(8,972)
Divestment (offset by cash disposed of)			-		13,387
Payments to acquire minority interest			(221)		-
Net cash (used in)/from investing activities			(25,991)		27,904
Cash flows from financing activities
Repayment of borrowings			(34,966)		(3,000)
Proceeds from new borrowing arrangements			41,751		86,170
Interest and other finance costs paid	10		(9,537)		(4,345)
Cancellation of shares	14		(18,415)		(11,334)
Receipts from issue of shares			103,445		3
Net cash from financing activities			82,278		67,494
Net increase in cash and cash equivalents			19,192		57,952
Cash and cash equivalents at beginning of year			236,923		174,502
Exchange(losses)/ gains on cash and cash equivalents			(3,374)		4,469
Cash and cash equivalents at end of year	20		252,741		236,923
Share of Syndicates' cash restricted funds			15,320		18,150
Other funds			237,421		218,773
Cash and cash equivalents at end of year			252,741		236,923

The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.

Independent auditor's report to the members of Randall & Quilter Investment Holdings Ltd

For the year ended 31 December 2019

1.  Corporate information

Randall & Quilter Investment Holdings Ltd. (the "Company") is a company incorporated in Bermuda and listed on AIM, a sub-market of the London Stock Exchange. The Company and its subsidiaries (together forming the "Group") carry on business worldwide as owners and managers of insurance companies, live and in run-off, as providers of program capacity, as underwriting managers for active insurers and as participators in Lloyd's Syndicates in the non-life insurance market. The Consolidated Financial Statements were approved by the Board of Directors on 31 May 2020.

2.  Accounting policies

The principal accounting policies adopted in the preparation of these Consolidated Financial Statements are set out below.  These policies have been consistently applied to all the periods presented, unless otherwise stated.

a.  Basis of preparation

The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), endorsed by the European Union, International Financial Reporting Interpretations Committee interpretations and with the Bermuda Companies Act 1981 (as amended).

The Consolidated Financial Statements have been prepared under the historical cost convention, except that financial assets (including investment property), financial liabilities (including derivative instruments) and purchased reinsurance receivables are recorded at fair value through profit and loss.  All amounts are stated in sterling and thousands, unless otherwise stated.

The preparation of the Consolidated Financial Statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the year (Note 3).  Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may differ from these estimates.  The estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to estimates are recognised in the year when the revision is made.

New and amended Standards adopted by the Group

In the current year, the Group has applied new IFRSs and amendments to IFRSs issued by the IASB that are mandatory for an accounting period that begins on or after 1 January 2019.

IFRS 16, Leases. (IASB effective date 1 January 2019). IFRS 16 specifies how to recognise, measure and disclose leases.  The Standard replaces IAS 17 Leases and Related Interpretations.  The Standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The rental charge in previous Consolidated Income Statements for leases has been replaced in the 2019 reporting year with a depreciation charge for the lease assets and an interest expense for the lease liabilities. Under the Standard the Group has adopted the retrospective modified approach and therefore the comparatives are not restated and continue to be reported under IAS 17 and IFRIC 4.

The right-of-use asset recognised in the Consolidated Statement of Financial Position at 31 December 2019 is £3,191k.  This asset has given rise to a depreciation charge of £1,776k for the year ending 31 December 2019 and the cost is included in operating expenses in the Consolidated Income Statement.

The lease liability is included within Financial liabilities in the Consolidated Statement of Financial Position at 31 December 2019 and amounts to £3,210k. The unwinding of the liability for the year ending 31 December 2019 has created an interest cost of £148k which is included in Finance Costs in the Consolidated Income Statement.

IAS 19 Amendments, Plan Amendment, curtailment or settlement.  (IASB effective date 1 January 2019).  If a defined benefit pension plan amendment, curtailment or settlement occurs, it is now mandatory that the current service cost and the net interest for the period after the re-measurement are determined using the assumptions used for the re-measurement. The amendments had no impact on the Consolidated Financial Statements.

IAS 28 Amendments, Long-term interests in Associates and Joint Ventures Sale or contribution of assets between an investor and its associate or joint venture. (IASB effective date 1 January 2019) The amendment outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The amendments had no impact on the Consolidated Financial Statements.

IFRS 2015 - 2017 improvement cycle (IASB effective date 1 January 2019).  The improvement cycle brought clarification on specific technical points in the following Standards, which due to the content and narrow scope had no impact on the Consolidated Financial Statements:

IFRS 3 Business Combinations and IFRS 11 Joint Arrangements.  The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it re-measures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not re-measure previously held interests in that business.

IAS 12 Income Taxes.  The amendments clarify the requirements to recognise the income tax consequences of dividends where the transactions or events that generated distributable profits are recognised.

IAS 23 Borrowing Costs.  The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

New and amended Standards not yet adopted by the Group

A number of new standards and amendments adopted by the EU, as well as standards and interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing the Consolidated Financial Statements.

The Group does not plan to adopt these standards early; instead it will apply them from their effective dates as determined by their dates of EU endorsement.  The Group continues to review the upcoming standards to determine their impact.

IFRS 9, Financial instruments (IASB effective date 1 January 2018) has not been applied under IFRS 4 Amendment option to defer until IFRS 17 comes into effect on 1 January 2023.

IFRS 17, Insurance Contracts. (IASB effective date 1 January 2023)

IFRS 9, IAS 39 and IFRS 7 Amendments, Interest rate benchmark reform. (IASB effective date 1 January 2020)

IAS 1 and IAS 8 Amendments, Definition of material. (IASB effective date 1 January 2020)

IFRS 3 Amendments, Business combinations. (IASB effective date 1 January 2020)

Of the upcoming accounting standards and amendments, the Group anticipates that IFRS 9 and IFRS 17 will have the most material impact to the Consolidated Financial Statements' presentation and disclosures.  The accounting developments and implementation timelines of these standards are being closely monitored and the impacts of the Standards themselves are being reviewed.  Full impact analysis in respect of these standards is in the process of being completed.  A brief overview of these standards is provided below:

IFRS 9, Financial instruments (IASB effective date 1 January 2018) has not been applied under IFRS 4 Amendment option. IFRS 9 provides a reform of financial instruments accounting to supersede IAS 39 Financial Instruments: Recognition and Measurement .  The Standard contains the requirements for a) the classification and measurement of financial instruments; b) a new impairment methodology and c) general hedge accounting. IFRS 4 Amendment, Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts contained an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4.  The Group meets the eligibility criteria and has taken advantage of this temporary exemption not to apply this standard until the effective date of IFRS 17.

IFRS 17 was issued in May 2017.  It will replace IFRS 4 on accounting for insurance contracts and has an effective date of 1 January 2023.  The Group expects to adopt the new Standard on this date. Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk.  The discount rate will reflect current interest rates.  If the present value of future cash flows produces a gain at the time a contract is issued the model also requires a "contractual service margin" to offset the day 1 gain.  The contractual service margin will amortise over the life of the contract.  There will also be a new income statement presentation for insurance contracts, including a revised definition of revenue, and extensive disclosure requirements.

The Group has implemented an IFRS 17 project to plan and develop the required systems and procedural changes. The initial gap analysis comparing the existing systems and data to those required to meet the Standard was completed in November 2019, focusing on the Accredited Insurance Europe Ltd operations as a pilot. Development of procedure and systems changes is expected to be in place by 31 December 2020, with testing taking place in 2021. The project has provided early insight on the potential impact on the Consolidated Financial Statements by comparing key transactions using existing accounting treatment to a restated position under IFRS 17. This confirmed the most significant financial impacts will be the deferral of risk premiums on reinsurance contracts and goodwill gains on business combinations acquired after the effective date, the discounting of risk adjusted insurance and reinsurance liabilities and assets, and the inclusion of future claims handling and directly attributable expense cash flows in the insurance liabilities for all business.

b.  Selection of accounting policies

Judgement, estimates and assumptions are made by the Directors in selecting each Group accounting policy.  The accounting policies are selected by the Directors to present Consolidated Financial Statements that they consider provide the most relevant information.  In the case of certain accounting policies, there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the Consolidated Financial Statements are presented.

In respect of financial instruments, the Group accounting policy is to designate all financial assets as fair value through profit or loss, including purchased reinsurance receivables.

c.  Consolidation

The Consolidated Financial Statements incorporate the Financial Statements of the Company, and entities controlled by the Company (its subsidiaries), for the years ended 31 December 2019 and 2018.  Control exists when the Group is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.  In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer.  The financial results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases.  Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes non-controlling interests to have a deficit balance.

The Group uses the acquisition method of accounting to account for business combinations.  The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of acquisition directly attributable to the acquisition.  Acquisition-related costs are charged to the Consolidated Income Statement in the year in which they are incurred.

Certain Group subsidiaries underwrite as corporate members of Lloyd's on Syndicates managed by Coverys Managing Agency Limited and Capita Managing Agency Limited.  In view of the several and direct liability of underwriting members at Lloyd's for the transactions of Syndicates in which they participate, only attributable shares of transactions, assets and liabilities of those Syndicates are included in the Consolidated Financial Statements.  The Group continues to conclude that it remains appropriate to consolidate only its share of the result of these Syndicates. The Group is the sole provider of capacity on Syndicate 1110, and these Consolidated Financial Statements include 100.00% of the economic interest in this Syndicate.   For Syndicate 1991, the Group provides 24.21% of the capacity on the 2017 year of account , and 0.04% on the 2018 and 2019 years of account.  For Syndicate 3330, the Group provides 100.00% of the capacity on the 2017 year of account and 10% on the 2018 year of account.  These Consolidated Financial Statements include the Group's relevant share of the result for those years and attributable assets and liabilities. 

Associates are those entities in which the Group has power to exert influence but which it does not control.  Investments in associates are accounted for using the equity method of accounting.  Under this method the investments are initially measured at cost.  Thereafter the Group's share of post-acquisition profits or losses are recognised in the Consolidated Income Statement and adjusted against the cost of the investment included in the Consolidated Statement of Financial Position.

When the Group's share of losses equals or exceeds the carrying amount of the investment in the associate, the carrying amount is reduced to nil and recognition for the losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.

Equity accounting is discontinued when the Group no longer has significant influence over the investment. 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated in preparing the Consolidated Financial Statements.  Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred.  Where necessary, amounts reported by subsidiaries have been adjusted to conform to the Group's accounting policies. Non-controlling interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the Consolidated Income Statement and Consolidated Statement of Comprehensive Income and within equity in the Consolidated Statement of Financial Position, separately from the equity attributable to the shareholders of the parent.

Insurance broking cash, receivables and payables held by subsidiary companies which act as intermediaries, other than any receivable for fees, commissions and interest earned on a transaction, are not included in the Group's Consolidated Statement of Financial Position as the subsidiaries act as agents for the client in placing the insurable risks of their clients with insurers and as such are not liable as principals for amounts arising from such transactions.

d.  Going concern

The Consolidated Financial Statements have been prepared on a going concern basis. At the date of signing these Consolidated Financial Statements, the Group's financial position and forecasts for 2020 and 2021 demonstrate that it has adequate cash resources to meet its liabilities as they fall due.  The Group has continued to make advances with its strategy, including the continuation of legacy deals and ongoing development of the Program management business. 

On the 29 April 2020 the Group announced new capital of £80.3m (US$100m), to further strengthen the Group's financial resources and provide additional funds to capitalise on opportunities in its Legacy and Program management businesses. 

COVID-19 impact

The Board has considered the potential impact of the recent COVID-19 pandemic and believe that it will have a limited impact on the Group's existing business.  Significant work has been performed by the Group, which confirmed the ability of the Group and its subsidiaries to continue to operate as going concerns. Regulated entities within the Group have performed stress tests to assess going concern capabilities under various scenarios, which has confirmed the adequacy of their capital bases and ability to continue to meet regulatory capital requirements under these scenarios.

Impact on Legacy business

Whilst some delays in completing new legacy deals may be experienced, it is believed that the impact of the pandemic on the wider insurance industry will provide future opportunity for the Group.

The Group's existing legacy books have limited exposure to unexpired risks.  Given the scale of insurance risk underwritten, diversification across different classes of insurance and levels of highly rated reinsurance protection available in the insurance company subsidiaries; the Group is well protected against the likelihood of any significant future claims.

Impact on Program business

Growth in program premiums may slow with lower levels of economic and business activity anticipated during 2020, however the rapid increase in program premiums written in 2019 will result in significantly increased levels of earned premiums and commissions being achieved during 2020. 

Impact on investment portfolios

The Group has a defensive positioning in its portfolio with 92% of invested assets currently held in BBB or better.  As a result, the Group has only seen a 1.2% unrealised loss on the investment portfolio for the period from 1 January 2020 to 30 April 2020. 

Impact on operations

The Group has moved to protect staff by closing all offices in accordance with government guidelines in the countries in which it operates. Group staff and systems have adapted well to remote working with no significant degrading of operations and performance.

Given these factors, the Directors have a reasonable expectation that the Group will be able to continue in operational existence for the foreseeable future. For the purposes of these Consolidated Financial Statements, this is considered to be a minimum of 12 months from the signing date.

e.  Foreign currency translation

Functional and presentational currency

Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency").  The Consolidated Financial Statements are presented in sterling, which is the Group's presentational currency.

Transactions and balances

Transactions in foreign currencies are recorded at the functional currency rate ruling at the date of the transaction.  Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the end of the reporting period; the resulting exchange gain or loss is recognised in the Consolidated Income Statement. Non-monetary items recorded at historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction and are not subsequently restated.

Group translation

The assets and liabilities of overseas subsidiaries, including associated goodwill, held in functional currencies other than the Group's presentational currency are translated at the exchange rate as at the period end date. Income and expenses are translated at average rates for the period.  All resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve in the Consolidated Statement of Financial Position.

On the disposal of foreign operations, cumulative exchange differences previously recognised in other comprehensive income are recognised in the Consolidated Income Statement as part of the gain or loss on disposal.

f.  Premiums

Gross premiums written represent premiums on business commencing in the financial year together with adjustments to premiums written in previous accounting periods and estimates for premiums from contracts entered into during the course of the year.  Gross premiums written are stated before deduction of brokerage and commission but net of taxes and duties levied on premiums.

Unearned premiums  

A provision for unearned premiums represents that part of the gross premiums written that is estimated will be earned in the following financial periods.  It is calculated on a time apportionment basis having regard, where appropriate, to the incidence of risk.  For After the Event (ATE) policies written by the Group, premiums remain unearned until the point at which the claims exposures relating to these policies become crystallised.

Reinsurance premium costs are allocated to financial periods to reflect the protection arranged in respect of the business written and earned.

Acquisition costs

Acquisition costs, which represent commission and other related direct underwriting expenses, are deferred over the period in which the related premiums are earned.  Acquisition costs recognised during the period are recorded in operating expenses in the Consolidated Income Statement.

g.  Claims

These include the cost of claims and related expenses paid in the year, together with changes in the provisions for outstanding claims, including provisions for claims incurred but not reported and related expenses, together with any other adjustments to claims from previous years.  Where applicable, deductions are made for salvage and other recoveries. These are shown as net claims provisions (increased)/released in the Consolidated Income Statement.

h.  Insurance contract provisions and reinsurers' share of insurance liabilities

Provisions are made in the insurance company subsidiaries and in the Lloyd's Syndicates on which the Group participates for the full estimated costs of claims notified but not settled, including claims handling costs, on the basis of the best information available, taking account of inflation and latest trends in court awards.  The Directors of the subsidiaries, with the assistance of run-off managers, independent actuaries and internal actuaries, have established such provisions on the basis of their own investigations and their best estimates of insurance payables, in accordance with accounting standards.  Legal advice is taken where appropriate.  Deductions are made for salvage and other recoveries as appropriate.

The provisions for claims incurred but not reported ("IBNR") have been based on a number of factors including previous experience in claims and settlement patterns, the nature and amount of business written, inflation and the latest available information as regards specific and general industry experience and trends.

A reinsurance asset (reinsurers' share of technical provisions) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the outstanding claims reported and IBNR.  The amount recoverable from reinsurers is initially valued on the same basis as the underlying claims provision.  The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the contract. 

Neither the outstanding claims nor the provisions for IBNR has been discounted.

The uncertainties which are inherent in the process of estimating are such that, in the normal course of events, unforeseen or unexpected future developments may cause the ultimate cost of settling the outstanding liabilities to differ materially from that estimated.  Any differences between provisions and subsequent settlements are recorded in the Consolidated Income Statement in the year which they arise. 

Having regard to the significant uncertainty inherent in the business of insurance as explained in Note 3, and in light of the information available, in the opinion of the Directors the provisions for outstanding claims and IBNR in the Consolidated Financial Statements are fairly stated.

Provision for future claims handling costs  

Provision for future run-off costs relating to the Group's run-off businesses is made to the extent that the estimate of such costs exceeds the estimated future investment income expected to be earned by those businesses.

Estimates are made for the anticipated costs of running off the business of those insurance subsidiaries and the Group's participation in Syndicates which have insurance businesses in run-off. Where insurance company subsidiaries have businesses in run-off and underwrite new business, management estimates the run-off costs and the future investment income relating to the run-off business.  Syndicates are treated as being in run-off for the Consolidated Financial Statements where they have ceased writing new business and, in the opinion of management, there is no current probable reinsurer available to close the relevant syndicate year of account. 

Changes in the estimates of such costs and future investment income are reflected in the year in which the estimates are made.

When assessing the amount of any provision to be made, the future investment income and claims handling and all other costs of all the insurance company subsidiaries' and syndicates' businesses in run-off are considered in aggregate.

The uncertainty inherent in the process of estimating the period of run-off and the pay-out pattern over that period, the anticipated run-off administration costs to be incurred over that period and the level of investment income to be received is such that in the normal course of events unforeseen or unexpected future developments may cause the ultimate costs of settling the outstanding liabilities to differ from that previously estimated.

Unexpired risks provision  

Provisions for unexpired risks are made where the costs of outstanding claims, related expense and deferred acquisition costs are expected to exceed the unearned premium provision carried forward at the end of the reporting period.  The provision for unexpired risks is calculated separately by reference to classes of business which are managed together, after taking into account relevant investment return. 

i.  Provisions

Provisions, other than insurance provisions, are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.  The increase in the provision due to the passage of time is recognised as an interest expense.

j.  Structured settlements

Certain of the US insurance company subsidiaries have entered into structured settlements whereby their liability has been settled by the purchase of annuities from third party life insurance companies in favour of the claimants.  The subsidiary retains the credit risk in the unlikely event that the life insurance company defaults on its obligations to pay the annuity amounts.  Provided that the life insurance company continues to meet the annuity obligations, no further liability will fall on the insurance company subsidiary.  The amounts payable to claimants are recognised in liabilities.  The amount payable to claimants by the third party life insurance companies are also shown in liabilities as reducing the Group's liability to nil.

In the opinion of the Directors, this treatment reflects the substance of the transaction on the basis that any remaining liability of Group companies under structured settlements will only arise upon the failure of the relevant third party life insurance companies and will be reduced by any available reinsurance cover.

Should the Directors become aware of a claim arising from a policy holder that a third party life insurance company responsible for the payment of an annuity under a structured settlement may not be in a position to meet its annuity obligations in full, appropriate provision will be made for any such failure.

Disclosure of the position in relation to structured settlements is shown in Note 21.

k.  Segmental reporting

The Group's business segments are based on the Group's management and internal reporting structures and represent the level at which financial information is reported to the Board, being the chief operating decision maker as defined in IFRS 8.

l.  Financial instruments

Financial instruments are recognised in the Consolidated Statement of Financial Position at such time that the Group becomes a party to the contractual provisions of the financial instrument.  A financial asset is derecognised when the contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred, together with substantially all the risks and rewards of ownership.  Financial liabilities are derecognised if the Group's obligations specified in the contract expire, are discharged or cancelled.

Financial assets

i) Acquisition

On acquisition of a financial asset, the Group is required under IFRS to classify the asset into one of the following categories: 'financial assets at fair value through profit and loss', 'loans and receivables held to maturity' and 'available for sale'. The Group does not currently hold assets classified as 'held to maturity' and 'available for sale'.

ii) Financial assets at fair value through profit and loss

All financial assets, other than cash, loans and receivables, are currently designated as fair value through profit and loss upon initial recognition because they are managed and their performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis to the Group's key management. The Group's investment strategy is to invest and evaluate their performance with reference to their fair values.

iii) Fair value measurement

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. 

If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available) and reference to the current fair value of other instruments that are substantially the same or discounted cash flow analyses.

Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third party market participant would take them into account in pricing a transaction.

Upon initial recognition, attributable transaction costs relating to financial instruments at fair value through profit or loss are recognised when incurred in other operating expenses in the Consolidated Income Statement. Financial assets at fair value through profit and loss are measured at fair value, and changes therein are recognised in the Consolidated Income Statement. Net changes in the fair value of financial assets at fair value through profit and loss exclude interest and dividend income, as these items are accounted for separately as set out in the investment income section below.

iv) Insurance receivables and payables

Insurance receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders.  Insurance receivables are classified as 'loans and receivables' as they are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market.  Insurance receivables are measured at amortised cost less any provision for impairment.  Insurance payables are stated at amortised cost.

v) Investment income

Investment income consists of dividends, interest, realised and unrealised gains and losses and exchange gains and losses on financial assets at fair value through profit and loss.  The realised gains or losses on disposal of an investment are the difference between the proceeds and the original cost of the investment.  Unrealised investment gains and losses represent the difference between the carrying amount at the reporting date, and the carrying amount at the previous period end or the purchase value during the period.

Financial liabilities

Borrowings

Borrowings are initially recorded at fair value less transaction costs incurred.  Subsequently borrowings are stated at amortised cost and interest is recognised in the Consolidated Income Statement over the period of the borrowings.

Senior and subordinated debt

Randall & Quilter Investment Holdings Ltd. and Group subsidiaries have issued senior and subordinated debt.  At Group level this is treated as a financial liability and interest charges are recognised in the Consolidated Income Statement.

Derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. The best evidence of fair value of a derivative at initial recognition is the transaction price. The method of recognising the resulting fair value gains or losses depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices in active markets, recent market transactions, and valuation techniques which include discounted cash flow models.  All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The Group has not designated any derivatives as fair value hedges, cash flow hedges or net investment hedges.

m .    Property, plant and equipment

All assets included within property, plant and equipment ("PPE") are carried at historical cost less depreciation and assessed for impairment. Depreciation is calculated to write down the cost less estimated residual value of motor vehicles, office equipment, IT equipment, freehold property and leasehold improvements by the straight-line method over their expected useful lives. 

The principal rates per annum used for this purpose are:

	%
Motor vehicles	25
Office equipment	8 - 50
IT equipment	20 - 25
Freehold property	2
Leasehold improvements	Term of lease

The gain or loss arising on the disposal of an item of PPE is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Consolidated Income Statement .

n.  Leases

The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to refurbish the underlying asset, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.  The estimated useful lives of right-of-use assets are determined on the same basis as those of Property, plant and equipment. In addition, the right-of-use asset is reviewed for impairment losses, if any, and adjusted for certain re-measurements of the lease liability.

The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets, including IT equipment. The Group recognises the lease payments associated with these leases as an expense to the Consolidated Income Statement on a straight-line basis over the lease term.

Right-of-use assets are disclosed under note 17.

o.  Goodwill

The Group uses the acquisition method in accounting for acquisitions. The difference between the cost of acquisition and the fair value of the Group's share of the identifiable net assets acquired is capitalised and recorded as goodwill.  If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired the difference is recognised directly in the Consolidated Income Statement as goodwill on bargain purchase.

Goodwill acquired in a business combination is initially measured at cost, being the excess of the fair value of the consideration paid for the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities.  Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.  Goodwill is tested for impairment at the cash generating unit level, as shown in Note 15, on a biannual basis or if events or changes in circumstances indicate that the carrying amount may be impaired.

p.  Other intangible assets

Intangible assets, other than goodwill, that are acquired separately are stated at cost less accumulated amortisation and impairment. 

Intangible assets acquired in a business combination, and recognised separately from goodwill, are recognised initially at fair value at the acquisition date.

Amortisation is charged to operating expenses in the Consolidated Income Statement as follows:

Purchased IT software	3 - 5 years, on a straight-line basis
On acquisition of insurance companies in run-off	Estimated pattern of run-off
On acquisitions - other	Useful life, which may be indefinite

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  An impairment loss is recognised in the Consolidated Income Statement to reduce the carrying amount to the recoverable amount.

US insurance authorisation licences

US state insurance authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Directors consider that economic benefits will accrue to the Group over an indefinite period due to the long-term stability of the US insurance market. The licences are tested annually for impairment. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life. Costs of acquiring new licences are recognised in the year of acquisition.

Rights to customer contractual relationships

Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably, and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be 15 years and are carried at cost less accumulated amortisation and impairment losses.

q.  Employee Benefits

The Group makes contributions to defined contribution schemes and a defined benefit scheme.

The pension cost in respect of the defined contribution schemes represents the amounts payable by the Group for the year.  The funds of the schemes are administered by trustees and are separate from the Group.  The Group's liability is limited to the amount of the contributions.

The defined benefit scheme is funded by contributions from a subsidiary company and its assets are held in a separate Trustee administered fund.  Pension scheme assets are measured at market value, and liabilities are measured using the projected unit method and discounted at the current rate of return on high quality corporate bonds of equivalent term and currency to the liability.

Current service cost, net interest income or cost and any curtailments/settlements are charged to the Consolidated Income Statement .  The present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets is recognised and disclosed separately as a net pension liability in the Consolidated Statement of Financial Position.  Surpluses are only recognised up to the aggregate of any cumulative unrecognised net actuarial gains and past service costs, and the present value of any economic benefits available in the form of any refunds or reductions in future contributions.

Subject to the restrictions relating to the recognition of a pension surplus, all actuarial gains and losses are recognised in full in other comprehensive income in the period in which they occur.

r.  Cash and cash equivalents

For the purposes of the Consolidated Cash Flow Statement, cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less from the date of acquisition, and bank overdrafts which are repayable on demand.

s.  Finance costs

Finance costs comprise interest payable and are recognised in the Consolidated Income Statement in line with the effective interest rate on liabilities.  

t.  Operating expenses

Operating expenses are accounted for in the Consolidated Income Statement in the period to which they relate .

Pre-contract costs

Directly attributable pre-contract costs are recognised as an asset when it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows in excess of any amounts recognised as an asset.

Pre-contract costs are charged to the Consolidated Income Statement over the shorter of the life of the contract or five years.

Onerous contracts

Onerous contract provisions are provided for in circumstances where the Group has a present legal or constructive obligation as a result of past events to provide services, the costs of which exceed future income.  The costs of providing the services are projected based on management's assessment of the contract. 

Arrangement fees

Arrangement fees in relation to loan facilities are deducted from the relevant financial liability and amortised over the period of the facility.

u.  Other income

Other income is stated excluding any applicable value added tax and includes the following items:

Management fees

Management fees are from non-Group customers and are recognised when the right to such fees is established through a contract and to the extent that the services concerned have been performed.  Billing follows the supply of service and the consideration is unconditional because only the passage of time is required before the payment is due.

Purchased reinsurance receivables

The Group accounts for these financial assets at fair value through profit and loss. Fair value is defined as the price at which an orderly transaction would take place between market participants at the reporting date and is therefore an estimate which requires the use of judgement. 

Insurance commissions from Managing General Agencies

Insurance commissions comprise brokerage and profit commission arising from the placement of insurance contracts.  Brokerage is recognised at the inception date of the policy, or the date of contractual entitlement, if later.  Alterations in brokerage arising from premium adjustments are taken into account as and when such adjustments are notified.  To the extent that the Group is contractually obliged to provide services after this date, a suitable proportion of income is deferred and recognised over the life of the relevant contracts to ensure that revenue appropriately reflects the cost of fulfilling those obligations. Profit commission is recognised when the right to such profit commission is established through a contract but only to the extent that a reliable estimate of the amount due can be made.  Such estimates are made on a prudent basis that reflects the level of uncertainty involved.

v.  Share based payments

The Group issues equity settled payments to certain of its employees.

The cost of equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense on a straight-line basis over the vesting period.  The fair value is measured using the binomial option pricing method, taking into account the terms and conditions on which the awards were granted.

w.  Current and deferred income tax

Tax on the profit or loss for the year comprises current and deferred tax.

Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in the Consolidated Statement of Comprehensive Income.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries and associates operate and generate taxable income.

Deferred tax liabilities are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements.  However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination and which, at the time of the transaction, affects neither accounting, nor taxable profit or loss, it is not provided for.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised. 

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred tax assets and liabilities are determined using tax rates that have been enacted or substantively enacted by the period end date and are expected to apply when the related deferred tax asset is realised, or the deferred tax liability is settled.

x.  Share capital

Ordinary shares and Preference A and B shares are classified as equity.  Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

y.  Distributions

Distributions payable to the Company's shareholders are recognised as a liability in the Consolidated Financial Statements in the period in which the distributions are declared and approved.

3.  Estimation techniques, uncertainties and contingencies

Estimates and judgements are continually evaluated, and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Significant uncertainty in technical provisions

Significant uncertainty exists as to the accuracy of the insurance contract provisions and the reinsurers' share of insurance liabilities established in the insurance company subsidiaries and the Lloyd's Syndicates on which the Group participates as shown in the Consolidated Statement of Financial Position. The ultimate costs of claims and the amounts ultimately recovered from reinsurers could vary materially from the amounts established at the year end.

In the event that further information were to become available to the Directors of an insurance company subsidiary which gave rise to material additional liabilities, the going concern basis might no longer be appropriate for that company and adjustments would have to be made to reduce the value of its assets to their realisable amount, and to provide for any further liabilities which might arise in that subsidiary.  The Group bears no financial responsibility for any liabilities or obligations of any insurance company subsidiary in run-off, except as disclosed.  Should any insurance company subsidiary cease to be able to continue as a going concern in the light of further information becoming available, any loss to the Group would thus be restricted to the book value of their investment in and amounts due from that subsidiary and any guarantee liability that may arise.

Claims provisions

The Consolidated Financial Statements include provisions for all outstanding claims and IBNR, for related reinsurance recoveries and for all costs expected to be incurred to run-off its liabilities.

The insurance contract provisions including IBNR are based upon actuarial and other studies of the ultimate cost of liabilities including exposure based and statistical estimation techniques.  There are significant uncertainties inherent in the estimation of each insurance company subsidiary's and Lloyd's Syndicate's insurance liabilities and reinsurance recoveries.  There are many assumptions and estimation techniques that may be applied in assessing the amount of those provisions which individually could have a material impact on the amounts of liabilities, related reinsurance assets and reported shareholders' equity funds.  Actual experience will often vary from these assumptions, and any consequential adjustments to amounts previously reported will be reflected in the results of the year in which they are identified.  Potential adjustments arising in the future could, if adverse in the aggregate, exceed the amount of shareholders' equity funds of an insurance company subsidiary.

Independent external actuaries are contracted to provide a Statement of Actuarial Opinion for the Lloyd's Syndicates that the Group participates on. This statement confirms that, in the opinion of the actuary, the booked reserves are greater than or equal to their view of best estimate.

In the case of the Group's larger insurance companies, independent external actuaries provide a view of best estimate reserves and confirm that the held reserves are within their range of acceptable estimates.  

The business written by the insurance company subsidiaries consists in part of long-tail liabilities, including asbestos, pollution, health hazard and other US liability insurance.  The claims for this type of business are typically not settled until many years after policies have been written.  Furthermore, much of the business written by these companies is reinsurance and retrocession of other insurance companies' business, which lengthens the settlement period.

Significant delays occur in the notification and settlement of certain claims and a substantial measure of experience and judgement is involved in making the assumptions necessary for assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the period end date.  The gross insurance contract provisions and related reinsurers' share of insurance liabilities are estimated on the basis of information currently available. Provisions are calculated gross of any reinsurance recoveries.  A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions and having due regard to collectability.

The insurance contract provisions include significant amounts in respect of notified and potential IBNR claims for long-tail liabilities.  The settlement of most of these claims is not expected to occur for many years, and there is significant uncertainty as to the timing of such settlements and the amounts at which they will be settled.

While many claims are clearly covered under policy wordings and are paid quickly, many other claims are subject to significant disputes, for example over the terms of a policy and the amount of the claim.  The provisions for disputed claims are based on the view of the Directors of each insurance company subsidiary as to the expected outcomes of such disputes. Claim types impacted by such disputes include asbestos, pollution and certain health hazards and retrocessional reinsurance claims.

Uncertainty is further increased because of the potential for unforeseen changes in the legal, judicial, technological or social environments, which may increase or decrease the cost, frequency or reporting of claims, and because of the potential for new sources or types of claim to emerge.

Asbestos, pollution and health hazard claims

The estimation of the provisions for the ultimate cost of claims for asbestos, pollution, health hazard and other US liability insurance is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business.  As a result it is not possible to determine the future development of asbestos, pollution, health hazard and other US liability insurance with the same degree of reliability as with other types of claims.  Consequently, traditional techniques for estimating claims provisions cannot wholly be relied upon.  The Group employs further techniques which utilise, where practical, the exposure to these losses by contract to determine the claims provisions.

Insurance claims handling expenses

The provision for the cost of handling and settling outstanding claims to extinction and all other costs of managing the run-off is based on an analysis of the expected costs to be incurred in run-off activities, incorporating expected savings from the reduction of transaction volumes over time.

The period of the run-off may be between 5 and 50 years depending upon the nature of the liabilities within each insurance company subsidiary.  Ultimately, the period of run-off is dependent on the timing and settlement of claims and the collection of reinsurance recoveries; consequently similar uncertainties apply to the assessment of the provision for such costs.

Reinsurance recoveries

Reinsurance recoveries are included in respect of claims outstanding (including IBNR claims) and claims paid after making provision for irrecoverable amounts.

The reinsurance recoveries on IBNR claims are estimated based on the recovery rate experienced on notified and paid claims for each class of business.

The insurance company subsidiaries are exposed to disputes on contracts with their reinsurers and the possibility of default by reinsurers.  In establishing the provision for non-recovery of reinsurance balances, the Directors of each insurance company subsidiary consider the financial strength of each reinsurer, its ability to settle their liabilities as they fall due, the history of past settlements with the reinsurer, and the Group's own reserving standards and have regard to legal advice regarding the merits of any dispute.

Recognition and de-recognition of assets and liabilities in run-off

In the course of the Group's business of managing the run-off of insurers and brokers, accounting records are initially recognised in the form provided by previous management.  As part of managing run-off the Group carries out extensive enquiries to clarify the assets and liabilities of the run-off and to obtain all available and relevant information.  Those enquiries may lead the Group to identify and record additional assets and liabilities relating to that run-off, or to conclude that previously recognised assets and liabilities should be increased or no longer exist and should be de-recognised.  Where decisions to de-recognise liabilities are supported by an absence of relevant information there may remain a remote possibility that a third party may subsequently provide evidence of its entitlement to such de-recognised liabilities which may lead to a transfer of economic benefit to settle such entitlement.  The right of a third party to such a settlement will be recognised in the accounting period in which the position is clarified.

Defined benefit pension scheme

The pension assets and post retirement liabilities are calculated in accordance with IAS 19.  The assets, liabilities and Consolidated Income Statement charge or credit, calculated in accordance with IAS 19, are sensitive to the assumptions made, including inflation, interest rate, investment return and mortality.  IAS 19 compares, at a given date, the current market value of a pension fund's assets with its long term liabilities, which are calculated using a discount rate in line with yields on high quality bonds of suitable duration and currency.  As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and equity markets.

Litigation, mediation and arbitration

The Group in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectorial inquiries in the normal course of its business.  The Directors do not believe that, in the aggregate, current litigation, governmental or sectorial inquiries and pending or threatened litigation or dispute is likely to have a material impact on the Group's financial position. However, if the outcome of any individual dispute differs substantially from expectation, there could be a material impact on the Group's profit or loss, financial position or cash flows in the year in which that impact is recognised.

Changes in foreign exchange rates

The Group's Consolidated Financial Statements are prepared in sterling.  Therefore, fluctuations in exchange rates used to translate other currencies, particularly the Euro and US dollar, into sterling will impact the reported Consolidated Statement of Financial Position, results of operations and cash flows from year to year.  These fluctuations in exchange rates will also impact the sterling value of the Group's investments and the return on its investments.  Income and expenses are translated into sterling at average exchange rates.  Monetary assets and liabilities are translated at the closing exchange rates at the period end date.

Assessment of impairment of intangible assets

Goodwill and US insurance authorisation licences are deemed to have an indefinite life as they are expected to have a value in use that does not erode or become obsolete over the course of time.  Consequently, they are not amortised but tested for impairment on a biannual basis or if events or changes in circumstances indicate that the carrying amount may be impaired. 

The impairment tests involve evaluating the recoverable amount of the Group's cash generating units and comparing them to the relevant carrying amounts.  The recoverable amount of each cash generating unit is determined based on cash flow projections.  These cash flow projections are based on the financial budgets approved by management covering a five year period. Management also consider the current net asset value and earnings of each cash generating unit for impairment.

Provisions

Estimates are based on reports provided by recognised specialists as well as the Group's own internal review. Liabilities may not be settled for many years and significant judgement is involved in making an assessment of these liabilities, the period over which they will be settled and where appropriate the discount rate to be applied to assess the present value of the amounts to be settled.

4.  Management of insurance and financial risks

The Group's activities expose it to a variety of insurance and financial risks.  The Board is responsible for managing the Group's exposure to these risks and, where possible, for introducing controls and procedures that mitigate the effects of the exposure to risk. 

The Group has a Risk Committee which is a formal Committee of the Board. The Committee has responsibility for maintaining the effectiveness of the Group's Risk Management Framework, systems of internal control, risk policies and procedures and adherence to risk appetite.

The following describes the Group's exposure to the more significant risks and the steps management have taken to mitigate their impact from a quantitative and qualitative perspective.

a.  Investment risks (including market risk and interest rate risk)

The Group has a Capital and Investment Committee which is responsible, inter alia, for setting and recommending to the Board an investment strategy for the management of the Group's assets owned or managed by companies within the Group.  The investment of the Group's financial assets, except certain deposits with ceding undertakings, is managed by external investment managers, appointed by the Group Capital and Investment Committee.  The Group Capital and Investment Committee is responsible for setting the policy to be followed by the investment managers.  The investment strategy strives to mitigate the impact of interest rate fluctuation and credit risks and to provide appropriate liquidity, in addition to monitoring and managing foreign exchange exposures.

The Group Capital and Investment Committee is also responsible for keeping under review the investment control procedures, monitoring and amending (where appropriate) the investment policies and oversight, monitoring Group cash flow, oversight of all banking and other financial commitments and covenants across the Group, as well as any regulatory requirements in relation to Group solvency.

The main objective of the investment policy is to maximise return whilst maintaining and protecting the principal value of funds under management.

The investment allocation (including surplus cash) at 31 December 2019 and 2018 is shown below:

		2019  £000		2018  £000
Government and government agencies		188,030		63,228
Corporate bonds		345,296		202,424
Equities		10,991		24,369
Cash based investment funds		15,646		105,397
Cash and cash equivalents		252,741		236,923
		812,704		632,341
		%		%
Government and government agencies		23.1		10.0
Corporate bonds		42.5		32.0
Equities		1.4		3.8
Cash based investment funds		1.9		16.7
Cash and cash equivalents		31.1		37.5
		100.0		100.0

Corporate bonds include asset backed mortgage obligations totalling £10,914k (2018: £6,833k).

Based on invested assets at external managers of £559,963k as at 31 December 2019 (2018: £395,418k), a 1 percentage increase/decrease in market values would result in an increase/decrease in the profit before income taxes for the year to 31 December 2019 of £5,600k (2018: £3,954k).

(i) Pricing risk

The following table shows the fair values of financial assets using a valuation hierarchy; the fair value hierarchy has the following levels:

Level 1 - Valuations based on quoted prices in active markets for identical instruments.  An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date.

Level 2 - Valuations based on quoted prices in markets that are not active or based on pricing models for which significant inputs can be corroborated by observable market data.

Level 3 - Valuations based on inputs that are unobservable or for which there is limited activity against which to measure fair value.

2019		Level 1 £000		Level 2 £000		Level 3 £000		Total £000
Government and government agencies		180,970		7,060		-		188,030
Corporate bonds		342,538		2,758		-		345,296
Equities		10,991		-		-		10,991
Cash based investment funds		-		15,646		-		15,646
Purchased reinsurance receivables (Note 19)		-		-		5,969		5,969
Total financial assets measured at fair value		534,499		25,464		5,969		565,932

2018		Level 1 £000		Level 2 £000		Level 3 £000		Total £000
Government and government agencies		58,954		4,274		-		63,228
Corporate bonds		200,416		2,008		-		202,424
Equities		24,369		-		-		24,369
Cash based investment funds		105,397		-		-		105,397
Purchased reinsurance receivables (Note 19)		-		-		3,393		3,393
Total financial assets measured at fair value		389,136		6,282		3,393		398,811

The following table shows the movement on Level 3 assets measured at fair value:

	2019		2018
	£000		£000
Opening balance	3,393		3,750
Total net (losses)/gains recognised in the Consolidated Income Statement	(93)		76
Acquisitions	3,528		-
Disposals	(692)		(614)
Exchange adjustments	(167)		181
Closing balance	5,969		3,393

Level 3 investments (purchased reinsurance receivables) have been valued using detailed models outlining the anticipated timing and amounts of future receipts. The net losses recognised in the Consolidated Income Statement in other income for the year amounted to £93k (2018: gains £76k).  The Group purchased further reinsurance receivables in 2019 of £3,528k (2018: Nil).  Short term delays in the anticipated receipt of these investments will not have a material impact on their valuation.

There were no transfers between Level 1 and Level 2 investments during the year under review.

The following shows the maturity dates and interest rate ranges of the Group's debt securities:

(ii) Liquidity risk

As at 31 December 2019

Maturity date or contractual re-pricing date

	Total		Less than one year		After one  year but  less than two years		After two years but  less than three years		After three years but  less than five years		More than five years
	£000		£000		£000		£000		£000		£000
Debt securities	548,971		88,991		91,961		82,285		75,953		209,781

Interest rate ranges (coupon-rates)

			Less than one year		After one  year but  less than two years		After two years but  less than three years		After three years but  less than five years		More than five years
			%		%		%		%		%
	Debt securities		0.38-8.75		2.38		1.38-2.50		1.50-5.51		3.15-6.88

  As at 31 December 2018

Maturity date or contractual re-pricing date

	Total		Less than one year		After one  year but  less than two years		After two years but  less than three years		After three years but  less than five years		More than five years
	£000		£000		£000		£000		£000		£000
Debt securities	371,049		113,657		81,507		51,758		94,029		30,098

Interest rate ranges (coupon-rates)

			Less than one year		After one  year but  less than two years		After two years but  less than three years		After three years but  less than five years		More than five years
			%		%		%		%		%
	Debt securities		0.59-5.87		0.40-4.74		1.80-4.89		1.89-5.14		0.05-3.63

Liquidity risk is managed by the Group Capital and Investment Committee who monitor the cash position of each entity and for the Group as a whole on a regular basis to ensure that sufficient funds are available to meet liabilities as they fall due.  Liquidity risk is also monitored by the Group's financial planning and treasury function's established cash flow and liquidity management processes.

(iii) Interest rate risk

Fixed income investments represent a significant proportion of the Group's assets and the Group Capital and Investment Committee continually monitors investment strategy to minimise the risk of a fall in the portfolio's market value.

The fair value of the Group's investment portfolio of debt and fixed income securities is normally inversely correlated to movements in market interest rates. If market interest rates rise, the fair value of the Group's debt and fixed income investments would tend to fall and vice versa.

Debt and fixed income assets are predominantly invested in high-quality corporate, government and asset-backed bonds.  The investments typically have relatively short durations and terms to maturity.

The Group is exposed to interest rate risk within the Group's financial liabilities. This exposure lies predominately with amounts owed to credit institutions and debentures secured over the assets of the Company and its subsidiaries.

b.  Credit risk

Credit risk arises where counterparties fail to meet their financial obligations as they fall due.  The most significant area where it arises for the Group is where reinsurers fail to meet their obligations in full as they fall due.  In addition, the Group is exposed to the risk of disputes on individual claims presented to its reinsurers or in relation to the contracts entered into with its reinsurers.

The ratings used in the below analysis are based upon the published rating of Standard & Poor's or other recognised ratings agency.

As at 31 December 2019
	A rated		B rated	Less than  B		Other *		Exposures of less than £200k		Total
	£000		£000		£000		£000		£000		£000
Deposits with ceding undertakings	10,811		183		-		2,539		5,971		19,504
Reinsurers' share of insurance liabilities	374,482		5,705		-		35,038		56,187		471,412
Receivables arising out of reinsurance contracts	141,715		1,805		-		18,112		50,602		212,234

As at 31 December 2018
	A rated		B rated	Less than  B		Other *		Exposures of less than £200k		Total
	£000		£000		£000		£000		£000		£000
Deposits with ceding undertakings	3,014		299		-		1,287		1,731		6,331
Reinsurers' share of insurance liabilities	231,381		4,048		-		39,686		25,242		300,357
Receivables arising out of reinsurance contracts	57,319		4,742		-		9,970		25,275		97,306

* Other includes reinsurers who currently have no credit rating.

The reinsurers' share of insurance liabilities is based upon a best estimate given the profile of the insurance provisions outstanding and the related IBNR.  Receivables arising out of reinsurance contracts are included in insurance and other receivables in the Consolidated Statement of Financial Position.

The average credit period of receivables arising out of reinsurance contracts is as follows:

As at 31 December 2019					0-6 months%		6-12 months%		12-24 months%		> 24 months %
Percentage of receivables					47.4		8.5		12.2		31.9
As at 31 December 2018					0-6 months%		6-12 months%		12-24 months%		> 24 months%
Percentage of receivables					64.9		5.0		8.3		21.8

Part of the Group's business consists of acquiring debts or companies with debts, which are normally past due.  Any further analysis of these debts is not meaningful.  The Directors monitor these debts closely and make appropriate provision for impairment.

		Financial assets past due but not impaired
As at 31 December 2019	Neither past due nor impaired £'000	Past due 1-90 days £'000	Past due more than 90 days £'000	Assets that have been impaired £'000	Carrying value in the balance sheet  '000
Deposits with ceding undertakings	19,150	-	-	354	19,504
Reinsurers' share of insurance liabilities	431,785			39,627	471,412
Receivables arising out of reinsurance contracts	120,666	235	208	91,125	212,234

		Financial assets past due but not impaired
As at 31 December 2018	Neither past due nor impaired £'000	Past due 1-90 days £'000	Past due more than 90 days £'000	Assets that have been impaired £'000	Carrying value in the balance sheet  '000
Deposits with ceding undertakings	5,877	-	-	454	6,331
Reinsurers' share of insurance liabilities	238,682			61,675	300,357
Receivables arising out of reinsurance contracts	80,589	235	288	16,194	97,306

The Directors believe the amounts past due but not impaired are recoverable in full.

Credit risk is managed by committees established by the Group, Coverys Managing Agency Limited (Coverys) and Capita PLC (Capita).

The Group Board has a Group Reinsurance Asset Committee, chaired by a Non-Executive Director, which meets quarterly. Its function is to monitor and report on the Group's Syndicate and non-Syndicate reinsurance assets and, where necessary, recommend courses of action to the Group to protect the asset.

Coverys and Capita are the Lloyd's Managing Agents which manage the Syndicates on which the Group participates. Coverys and Capita have established Syndicate Management Committees in relation to each managed syndicate and the Group has representation on each of these committees with the exception of the S1991 Committee on which the Group now only has a nominal participation. The committees are responsible for establishing minimum security levels for all reinsurance purchases by the managed Syndicates by reference to appropriate rating agencies for agreeing maximum concentration levels for individual reinsurers and intermediaries, and for dealing with any other issue relating to reinsurance assets.

There are also a number of Key Risk Indicators pertaining to reinsurance security and concentration which have been developed under the auspices of the Group Risk Committee and the Coverys and Capita Risk and Capital Committees, which monitor adherence to predefined risk appetite and tolerance levels.

c.  Currency risk

Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Group's principal transactions are carried out in sterling and its exposure to foreign exchange risk arises primarily with respect to US dollar and Euros.  This is the same as in the previous year.

The Group's main objective in managing currency risk is to mitigate exposure to fluctuations in foreign exchange rates.  There have been no material changes in trading currencies during the year under review.  The Group manages this risk by way of matching assets and liabilities by individual entity.  Asset and liability matching is monitored by the Group's financial planning and treasury functions' established cash flow and liquidity management processes.

The Group's financial assets are primarily denominated in the same currencies as its insurance and investment contract liabilities.  This mitigates the foreign currency exchange rate risk for the overseas operations.  Thus, the main foreign exchange risk arises from assets and liabilities denominated in currencies other than those in which insurance and investment contract liabilities are expected to be settled.  The currency risk is effectively managed by the Group through derivative financial instruments.  Forward currency contracts are used to eliminate the currency exposure on individual foreign transactions.  The Group will not enter into these forward contracts until a firm commitment is in place.

The table below summarises the Group's principal assets and liabilities by major currencies:

31 December 2019	Sterling  £000	US dollar  £000	Euro  £000	Other  £000	Total  £000
Intangible assets	1,426	44,501	155	-	46,082
Reinsurers' share of insurance liabilities	234,180	215,358	21,874	-	471,412
Financial instruments	17,298	545,972	17,676	-	580,946
Insurance receivables	178,512	143,159	942	-	322,613
Cash and cash equivalents	99,092	151,796	1,853	-	252,741
Insurance liabilities and insurance payables	(495,642)	(720,133)	(42,299)	-	(1,258,074)
Deferred tax and pension scheme obligations	768	(17,450)	(120)	-	(16,802)
Trade and other (payables)/receivables	(29,208)	(73,133)	(6,331)	-	(108,672)
Total	6,426	290,070	(6,250)	-	290,246
31 December 2018	Sterling  £000	US dollar  £000	Euro  £000	Other  £000	Total  £000
Intangible assets	12,495	7,331	148	-	19,974
Reinsurers' share of insurance liabilities	132,807	135,495	32,055	-	300,357
Financial instruments	67,812	307,562	28,256	-	403,630
Insurance receivables	67,019	95,047	2,636	-	164,702
Cash and cash equivalents	130,839	102,794	3,280	10	236,923
Insurance liabilities and insurance payables	(270,060)	(415,514)	(59,211)	-	(744,785)
Deferred tax and pension scheme obligations	1,680	(11,637)	(358)	-	(10,315)
Trade and other (payables)/receivables	(157,674)	(29,845)	(7,360)	31	(194,848)
Total	(15,082)	191,233	(554)	41	175,638

The analysis that follows is performed for reasonably possible movements in key variables with all other variables held constant, showing the impact on profit before tax and equity due to changes in the fair value of currency sensitive monetary assets and liabilities including insurance contract claim liabilities.  The correlation of variables will have a significant effect in determining the ultimate impact on market risk, but to demonstrate the impact due to changes in variables, variables had to be changed on an individual basis.  It should be noted that movements in these variables are non-linear.

		31 December 2019		31 December 2018
Currency	Changes in variables	Impact on profit	Impact on equity*	Impact on profit	Impact on equity*
		£000	£000	£000		£000
Euro weakening	10%	101	105	958		50
US dollar weakening	10%	4,209	(28,965)	(1,645)		(17,385)
Euro strengthening	10%	(122)	(127)	(1,176)		(62)
US dollar strengthening	10%	(5,144)	35,402	1,342		21,248

* Impact on equity reflects adjustments for tax, where applicable.

  d.   Capital management

The Group's objectives with respect to capital sufficiency are to maintain capital at a level that provides a suitable margin over that deemed by the Group's regulators and supervisors as providing an acceptable level of policyholder protection, whilst remaining economically viable. The Group is regulated in Bermuda by the Bermuda Monetary Authority ('BMA'). The BMA assesses the capital and solvency adequacy of the Group and requires that sufficient capital is in place to meet the Bermuda Solvency Capital Requirement ('BSCR').  The BSCR generates a risk-based capital measure by applying capital factors to capital and solvency return elements, including investments and other assets, premiums and reserves, operational risk, and insurer-specific catastrophe exposure measures, in order to establish an overall measure of capital and surplus for statutory solvency purposes.

The Group maintains a capital level that provides an adequate margin over the Group's solvency capital requirements whilst maintaining local capital which meets or exceeds the relevant local minima including, where appropriate, those relating to maintenance of external ratings. This is monitored by way of a capital sufficiency assessment by the Group Risk Committee.

  e.  Insurance risk

(i)  Program management business

The Group underwrites live business through a network of Managing General Agents (which is largely reinsured). This program underwriting business, is underwritten in the US by Accredited Surety and Casualty Inc. and in Europe by Accredited Insurance (Europe) Limited, both being AM Best A- credit rated risk carriers.

The Group guideline is for program underwriting business reinsurers to meet a minimum of the AM Best A credit rating, in order to mitigate risk and provide a high quality reinsurance security.

(ii)  Syndicate participations

  The Group participates on Syndicates shown below:

Syndicate	Year of account	Syndicate Capacity £000	Group participation  000	Open / closed
1991	2020	126,750	50	Open
1991	2019	126,750	50	Open
1991	2018	126,750	50	Open
1991	2017	126,750	30,687	Closed
1110	2019	3,000	3,000	Open
1110*	2017	280,000	280,000	Open
3330	2018	3,000	300	Open
3330	2017	3,500	3,500	Closed

* Syndicate 1110 2017 year of account benefits from reinsurance arrangements in place with New York Marine and General Insurance Company, which protects the Group from any adverse net claims development.

Syndicates 1110 and 3330 are classified by Lloyd's as run-off Syndicates and their capacity shown above is reflective of this status with Syndicate 1110 now the Group's platform for legacy transactions at Lloyd's. The capacity of run-off Syndicates does not represent the level of risk these are able to take on, this is a nominal level set by Lloyd's, they are able to receive portfolios of risk greater than this nominal capacity.

(iii)  Underwriting risk

Underwriting risk is the primary source of risk in the Group's live underwriting operations and is reflected in the scope and depth of the risk appetite and monitoring frameworks implemented in those entities. Individual operating entities are responsible for establishing a framework for the acceptance and monitoring of underwriting risk including appropriate consideration of potential individual and aggregate occurrence exposures, adequacy of reinsurance coverage and potential geographical and demographic concentrations of risk exposure.

In the event that potential risk concentrations are identified across operating entities, appropriate monitoring is developed to manage the overall Group exposure.

(iv)  Reserving risk

Reserving risk represents a significant risk to the Group in terms of both driving required capital levels and the threat to volatility of earnings.

Reserving risk is managed through the application of an appropriate reserving approach to both live and run-off portfolios and the performance of extensive due diligence on new run-off portfolios and acquisitions prior to acceptance. Reserving exercises undertaken by the in-house actuarial team are supplemented with both scheduled and ad hoc reviews conducted by external actuaries.

Reserving risk is also mitigated through the use of reinsurance on live underwriting portfolios and through assuming the inuring reinsurance treaties in place in respect of acquired run-off acquisitions/portfolios.

Claims development information is disclosed below in order to illustrate the effect of the uncertainty in the estimation of future claims settlements by the Group.  The tables compare the ultimate claims estimates with the payments made to date.  Details are presented on an aggregate basis and show the movements on a gross and net basis, and separately identify the effect of the various acquisitions made by the Group since 1 January 2016.

 

The analysis of claims development in the Group's run-off insurance entities is as follows:

Gross	Group	Entities	Entities	Entities	Entities
	entities at	acquired by	acquired by	acquired by	acquired by
	1 January	the Group	the Group	the Group	the Group
	2016	during 2016	during 2017	during 2018	during 2019
	£000	£000	£000	£000	£000
Gross claims at:
1 January/acquisition	452,199	107,121	270,945	16,842	293,422
First year movement	51,718	(2,793)	(43,749)	(1,091)	(30,262)
Second year movement	(78,669)	(26,891)	(63,559)	(7,293)
Third year movement	(36,051)	(18,423)	(27,341)
Fourth year movement	(49,561)	(15,804)
Gross provision at 31 December 2019	339,636	43,210	136,296	8,458	263,160
Gross claims at:
1 January/acquisition	452,199	107,121	270,945	16,842	293,422
Exchange adjustments	52,537	2,287	(2,506)	(5,939)	(11,895)
Payments	(272,586)	(50,582)	(132,607)	(2,358)	(13,613)
Gross provision at 31 December 2019	(339,636)	(43,210)	(136,296)	(8,458)	(263,160)
(Deficit)/surplus to date	(107,486)	15,616	(465)	88	4,754
Net	Group	Entities	Entities	Entities	Entities
	entities at	acquired by	acquired by	acquired by	acquired by
	1 January	the Group	the Group	the Group	the Group
	2016	during 2016	during 2017	during 2018	during 2019
	£000	£000	£000	£000	£000
Net claims at :
1 January/acquisition	273,672	42,540	198,513	16,120	288,141
First year movement	90,270	(1,171)	(45,734)	(874)	(25,098)
Second year movement	(44,595)	(14,444)	(69,592)	(6,980)
Third year movement	(14,186)	(1,591)	(27,516)
Fourth year movement	(31,502)	(5,003)
Net provision at 31 December 2019	273,659	20,331	55,671	8,266	263,043
Net claims at:
1 January/acquisition	273,672	42,540	198,513	16,120	288,141
Exchange adjustments	45,399	(202)	(14,420)	(5,830)	(11,472)
Payments	(10,384)	(28,222)	(97,407)	(2,298)	(12,977)
Net position at 31 December 2019	(273,659)	(20,331)	(55,671)	(8,266)	(263,043)
Surplus/(deficit) to date	35,028	(6,215)	31,015	(274)	649

The above figures include the Group's participation on Lloyd's Syndicates treated as being in run-off.

Foreign exchange movements shown above are offset by comparable foreign exchange movements in cash and investments held to meet insurance liabilities.

Additional information regarding movements in claims reserves are disclosed in note 23.

5.    Segmental information

The Group's segments represent the level at which financial information is reported to the Board, being the chief operating decision maker as defined in IFRS 8.  For these financials we have realigned the reporting segments to reflect the Group's core operating businesses.  The reportable segments have been identified as follows:-

• Program - the Group delegates underwriting authority to MGAs to provide program capacity through its licensed platforms in the US and Europe

• Legacy - acquires legacy portfolios and insurance debt and provides capital support to the Group's managed Lloyd's Syndicates

• Other - primarily includes the holding company and other non- core subsidiaries which fall outside of the segments above

Segmental results for continuing operations for the year ended 31 December 2019

	Program	Legacy	Other	Consolidation adjustments	Total
	£000	£000	£000	£000	£000
Earned premium, net of reinsurance	6,099	168,427	-	-	174,526
Gross investment income	4,603	22,699	7,918	(13,227)	21,993
External income	1	58	6,721	-	6,780
Internal income	-	-	27,046	(27,046)	-
Total income	10,703	191,184	41,685	(40,273)	203,299
Claims paid, net of reinsurance	(2,831)	(69,390)	(183)	-	(72,404)
Net change in provision for claims	(3,444)	(65,533)	(1,775)	-	(70,752)
Net insurance claims (increased)/released	(6,275)	(134,923)	(1,958)	-	(143,156)
Operating expenses	(6,325)	(58,548)	(40,824)	27,046	(78,651)
Result of operating activities before goodwill on bargain purchase	(1,897)	(2,287)	(1,097)	(13,227)	(18,508)
Goodwill on bargain purchase	-	71,332	-	-	71,332
Amortisation and impairment of intangible assets	-	(2,579)	(583)	-	(3,162)
Result of operating activities	(1,897)	66,466	(1,680)	(13,227)	49,662
Finance costs	(309)	(8,906)	(13,549)	13,227	(9,537)
Profit/(loss) on ordinary activities before income taxes	(2,206)	57,560	(15,229)	-	40,125
Income tax (charge)/credit	(353)	(10,734)	9,807	-	(1,280)
Profit/(loss) for the period	(2,559)	46,826	(5,422)	-	38,845
Non-controlling interests	-	515	(37)	-	478
Attributable to shareholders of parent	(2,559)	47,541	(5,459)	-	39,323
Segment assets	412,130	1,586,860	93,420	(311,537)	1,780,873
Segment liabilities	318,011	1,092,670	391,040	(311,537)	1,490,184

 

Segmental results for continuing operations for the year ended 31 December 2018

	Program	Legacy	Other	Consolidation adjustments	Total
	£000	£000	£000	£000	£000
Earned premium, net of reinsurance	1,424	56,253	5,772	-	63,449
Gross investment income	1,267	3,351	16,205	(15,393)	5,430
External income	-	1,830	10,130	-	11,960
Internal income	-	2,062	15,160	(17,222)	-
Total income	2,691	63,496	47,267	(32,615)	80,839
Claims paid, net of reinsurance	(644)	(54,478)	-	-	(55,122)
Net change in provision for claims	(1,280)	67,100	-	-	65,820
Net insurance claims (increased)/released	(1,924)	12,622	-	-	10,698
Operating expenses	(2,455)	(50,053)	(42,008)	17,222	(77,294)
Result of operating activities before goodwill on bargain purchase	(1,688)	26,065	5,259	(15,393)	14,243
Goodwill on bargain purchase	-	5,640	357	-	5,997
Amortisation and impairment of intangible assets	-	(1,597)	(47)	-	(1,644)
Result of operating activities	(1,688)	30,108	5,569	(15,393)	18,596
Finance costs	(306)	(6,132)	(13,300)	15,393	(4,345)
Profit/(loss) on ordinary activities before income taxes	(1,994)	23,976	(7,731)	-	14,251
Income tax (charge)/credit	201	(10,266)	6,119	-	(3,946)
Profit/(loss) for the period	(1,793)	13,710	(1,612)	-	10,305
Non-controlling interests	-	(300)	(181)	-	(481)
Attributable to shareholders of parent	(1,793)	13,410	(1,793)	-	9,824
Segment assets	287,218	1,049,220	218,293	(357,158)	1,197,573
Segment liabilities	224,229	711,292	443,223	(357,158)	1,021,586

Internal income includes fees payable by the insurance companies to the Insurance Services Division in the period. These are contractually committed on an arm's length basis.

No income from any one client included within the external income generated more than 10% of the total external income.

Geographical analysis

As at 31 December 2019
	UK		North  America		Europe		Total
		£000		£000		£000		£000
Gross assets		460,617		1,153,071		478,722		2,092,410
Intercompany eliminations		(128,640)		(132,124)		(50,773)		(311,537)
Segment assets		331,977		1,020,947		427,949		1,780,873
Gross liabilities		293,176		1,097,367		411,178		1,801,721
Intercompany eliminations		(55,826)		(250,150)		(5,561)		(311,537)
Segment liabilities		237,350		847,217		405,617		1,490,184
Revenue from external customers		84,860		101,989		16,450		203,299

As at 31 December 2018
	UK		North  America		Europe		Total
		£000		£000		£000		£000
Gross assets		463,918		813,038		277,775		1,554,731
Intercompany eliminations		(131,425)		(169,314)		(56,419)		(357,158)
Segment assets		332,493		643,724		221,356		1,197,573
Gross liabilities		332,349		834,004		212,391		1,378,744
Intercompany eliminations		(105,813)		(246,587)		(4,758)		(357,158)
Segment liabilities		226,536		587,417		207,633		1,021,586
Revenue from external customers		43,192		28,871		8,776		80,839

6.  Discontinued operations and disposal groups

The sale of Insurance Services and Captive Management Companies

On 13 January 2018 the Group completed the sale of its Insurance Services and Captive Management Companies ('ISD') to Davies Group, a leading operations management, consultancy and digital solutions provider. The transaction involved the sale of the entire share capital of JMD Specialist Insurance Services Group Limited and its subsidiaries, R&Quiem Limited, John Heath & Company Limited and AM Associates Insurance Services Limited as well as Randall & Quilter Bermuda Holdings Limited and its Quest subsidiaries. The sale is presented within the Consolidated Financial Statements as a discontinued operation as it represented the sale of a major line of business within the Group.

Profit for the year from discontinued operations

			2019  000			2018  000
Other Income			-			(183)
Operating expenses			-			(2,310)
Profit before tax			-			(2,493)
Income tax charge			-			225
Operating loss			-			(2,268)
Disposal proceeds			-			17,216
Net assets of disposal group			-			(17,431)
Loss on discontinued activities			-			(215)
Income tax charge on discontinued activities			-			-
Loss on discontinued activities			-			-
Loss for the period			-			(2,483)

Cash flows for the year from discontinued operations
2019  000			2018  000
Net cash inflows/(outflows) from operating activities	-			(404)
investing activities	-			16,511
Net cash inflows	-			16,107

The major classes of assets and liabilities forming the ISD disposal group were as follows:

		ISD On disposal  13 January 2018
		£000
Assets
Intangible assets		14,408
Property, plant & equipment		151
Other financial investments		62
Insurance and other receivables		2,940
Cash and cash equivalents		705
		18,266
Liabilities
Insurance and other payables		835
Current tax liabilities		-
		835
Total net assets of the disposal group		17,431

No impairment losses were recognised on the reclassification of these operations as held for sale, or at the point of sale.

7.  Gross investment income

  Continuing operations

		2019  £000		2018  £000
Investment income		15,391		11,184
Realised net gains on financial assets		4,581		800
Unrealised gains/(losses) on financial assets		2,021		(6,554)
		21,993		5,430

8.  Other income

Continuing operations		2019  £000		2018  £000
Income from contracts with customers
Management fees		4,082		8,444
Income from other sources
Insurance commissions		2,923		3,547
Interest expense on pension scheme deficit		(173)		(270)
Rental income from investment properties		41		163
Purchased reinsurance receivables		(93)		76
		6,780		11,960

Income from contracts with customers is derived from the supply of insurance and administration related management services to third parties. The Group derives this income from the transfer of services over time.

Rental income includes revenue from property previously used for the Group's own use but subsequently reclassified in January 2018 as an investment property following the sale of the ISD business.   

9.  Operating expenses

Continuing operations		2019  £000		2018  £000
Expenses of insurance company subsidiaries		15,654		11,957
Expenses of syndicate participations		9,344		20,190
Employee benefits		41,867		28,568
Other operating expenses		11,786		16,579
		78,651		77,294

The expenses of insurance company subsidiaries represent external expenses borne by subsidiaries of the Group; intragroup charges are removed on consolidation.

Auditor remuneration

		2019 £000		2018 £000
Fees payable to the Group's auditors for the audit of the parent company and its Consolidated Financial Statements		153		138
Fees payable for the audit of the Group's subsidiaries by:
-  Group auditors		504		534
-  Other auditors		647		322
Other services under legislative requirements		131		133
Total		1,435		1,127

The above include the Group's share of the audit fee payable for syndicates 1110 and 3330 audits.

10.  Finance costs

Continuing operations		2019  £000		2018  £000
Bank loan and overdraft interest		4,455		1,346
Interest on lease liabilities		147		-
Subordinated debt interest		4,935		2,999
		9,537		4,345

11.  Profit from continuing operations before income taxes

Profit from continuing operations before income taxes is stated after charging:

		2019  £000		2018  £000
Employee benefits (Note 26)		40,856		28,568
Legacy acquisition costs (including aborted transactions)		3,169		760
Depreciation and impairment of fixed assets and right-of-use assets (Note 16 &17)		2,242		335
Short term and low value lease rental expenditure		57		1,296
Amortisation of pre contract costs		425		171
Amortisation and impairment of intangibles (Note 15)		3,162		1,644

12.  Income tax charge

  Continuing operations

a.  Analysis of charge in the year

			2019  £000		2018 £000
	Current tax
	Current year		-		-
	Adjustments in respect of prior periods		3,870		40
	Foreign tax		(6,176)		(806)
			(2,306)		(766)
	Deferred tax
	Current year		4,389		4,777
	Adjustments in respect of prior periods		1,672		(65)
	Foreign tax		(2,475)		-
	Income tax charge for the year		1,280		3,946

b.  Factors affecting tax charge for the year

The tax assessed differs from the standard rate of corporation tax in the United Kingdom of 19%. The differences are explained below:

			2019  £000		2018  £000
	Profit on continuing operations before income taxes		40,125		14,251
	Profit on ordinary activities at the standard rate of corporation tax in the UK of 19.00% (2018: 19.00%)		7,624		2,708
	Income not taxable for tax purposes		(14,950)		(2,070)
	Expenses not deductible for tax purposes		1,740		1,396
	Deferred tax not recognised on capital allowances		43		50
	Differences in taxation treatment		4,478		(1,717)
	Unrelieved tax losses carried forward		6,631		3,129
	Utilisation of brought forward losses		(72)		(181)
	Deferred tax not recognised on foreign tax pool		303		-
	Foreign tax		(8,651)		(806)
	Tax rate differential		(1,408)		1,462
	Adjustments in respect of previous years		5,542		(25)
	Income tax charge for the year		1,280		3,946

  The 2018 comparatives have been re-presented according to the above categorisations for reference.

c.  Factors that may affect future tax charges

In addition to the recognised deferred tax asset, the Group has other trading losses of approximately £118,263k (2018: £109,552k) in various Group companies available to be carried forward against future trading profits of those companies.  The recovery of these losses is uncertain and no deferred tax asset has been provided in respect of these losses.  Should it become possible to offset these losses against taxable profits in future years, the Group tax charge in those years will be reduced accordingly.

The Group has available capital losses of £27,514k (2018: £27,976k).

In the Finance Bill 2015, it was announced that the main rate of UK corporation tax would reduce to 19% from 1 April 2017 and to 18% from April 2020. The Bill was substantively enacted on 26 October 2015. In March 2016, it was announced that there would be a further reduction to 17% from 1 April 2020. The Finance Bill 2016 was substantively enacted on 6 September 2016.  The Group's 2019 results are taxed at 19%. In March 2020 the UK Corporation tax rate was increased from 17% to 19% from 1 April 2020.

13.  Earnings and net assets per share

a.   Basic earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:

		2019  £000		2018  £000
Profit for the year attributable to ordinary shareholders from:
Continued operations		39,323		9,824
Discontinued operations		-		(2,483)
		No.  000's		No.  000's
Shares in issue throughout the year		125,984		125,876
Weighted average number of ordinary shares issued in year		57,469		32
Weighted average number of ordinary shares		183,453		125,908
Basic earnings per ordinary share for:
Continued operations		21.4p		7.8p
Discontinued operations		-		(2.0p)

b.   Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares for conversion of all potentially dilutive ordinary shares.  The Group's earnings per share is diluted by the effects of outstanding share options.

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:

		2019  £000		2018  £000
Profit/(loss) for the year attributable to ordinary shareholders
Continued operations		39,323		9,824
Discontinued operations		-		(2,483)
		No.  000's		No.  000's
Weighted average number of ordinary shares in issue in the year		183,453		125,908
Dilution effect of options		-		-
		183,453		125,908
Diluted earnings per ordinary share:-
Continued operations		21.4p		7.8p
Discontinued operations		-		(2.0p)

c.  Net asset value per share

		2019  £000		2018  £000
Net assets attributable to equity shareholders as at 31 December		290,246		175,638
		No.  000's		No.  000's
Ordinary shares in issue as at 31 December		195,918		125,984
Less: shares held in treasury		-		-
		195,918		125,984
Net asset value per ordinary share		148.1p		139.4p

14.  Distributions

The amounts recognised as distributions to equity holders in the year are:

		2019  £000		2018  £000
Distribution on cancellation of AB(2018: Z) shares		10,971		6,798
Distribution on cancellation of AC(2018: AA) shares		7,444		4,536
Total distributions to shareholders		18,415		11,334

15.  Intangible assets

	US state licences & customer contracts			Arising on acquisition	Goodwill		Other		Total
		£000		£000		£000		£000		£000
Cost
As at 1 January 2018		6,321		14,741		18,869		448		40,379
Exchange adjustments		356		428		951		3		1,738
Acquisition of subsidiaries		-		1,049		-		-		1,049
Additions		-		-		-		92		92
Disposals		-		-		(913)		(1)		(914)
As at 31 December 2018		6,677		16,218		18,907		542		42,344
Exchange adjustments		(291)		(897)		(578)		(1)		(1,767)
Acquisition of subsidiaries		2,654		28,683		-		-		31,337
Additions		-		-		819		143		962
Disposals		(2,703)		-		-		(23)		(2,726)
As at 31 December 2019		6,337		44,004		19,148		661		70,150
Amortisation/Impairment
As at 1 January 2018		516		2,138		16,728		285		19,667
Exchange adjustments		39		108		909		3		1,059
Charge for the year		172		1,409		-		63		1,644
As at 31 December 2018		727		3,655		17,637		351		22,370
Exchange adjustments		(6)		(153)		(530)		(1)		(690)
Charge for the year		30		2,579		474		79		3,162
Disposals		(751)		-				(23)		(774)
As at 31 December 2019		-		6,081		17,581		406		24,068
Carrying amount
As at 31 December 2019		6,337		37,923		1,567		255		46,082
As at 31 December 2018		5,950		12,563		1,270		191		19,974

Goodwill acquired through business combinations has been allocated to the Legacy cash generating unit, which is also an operating and reportable segment, for impairment testing.,

The recoverable amount of this cash generating unit is determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management. 

Key assumptions used in value in use calculations

The calculation of value in use for the units is most sensitive to the following assumptions:-

· Discount rates, which represent the current market assessment of the risks specific to each cash generating unit, regarding the time value of money and individual risks of the underlying assets which have not been incorporated in the cash flow estimates. The pre-tax discount rate applied to the cash flow projections is 10.0% (2018: 10.0%).  The discount rate calculation is based on the specific circumstances of the Group and its operating segments and derived from its weighted average cost of capital ("WACC") with uplift for expected increases in interest rates. The WACC takes into account both debt and equity. The cost of equity is derived from the expected investment return. 

· Growth rate used to extrapolate cash flows beyond the budget period is based on published industry standards.  Cash flows beyond the four-year period are extrapolated using a 10% growth rate (2018: 10.0%).

The Directors believe that no foreseeable change in any of the above key assumptions would require an impairment of the carrying amount of goodwill.

16.  Property, plant and equipment

		Computer equipment		Motor  vehicles			Office  equipment				Leasehold improvements					Freehold Property
		£000			£000				£000			£000				£000				£000
Cost
As at 1 January 2018		1,495			39				1,386			698				2,621				6,239
Exchange adjustments		85			2				26			70				-				183
Additions		136			-				43			10				-				189
Disposals		(302)			-				(141)			-				-				(443)
Acquisition of subsidiaries		152			-				-			-				-				152
Reclassification of property to investment property		-			-				-			-				(2,621)				(2,621)
As at 31 December 2018		1,566			41				1,314			778				-				3,699
Exchange adjustments		(42)			(1)				(12)			(48)				-				(103)
Additions		218			18				261			461				-				958
Disposals		(563)			(40)				(491)			(10)				-				(1,104)
As at 31 December 2019		1,179			18				1,072			1,181				-				3,450
Depreciation
As at 1 January 2018		1,318			39				1,116			463				268				3,204
Exchange adjustments		80			2				24			68				-				174
Charge for the year		170			-				101			64				-				335
Disposals		(283)			-				(141)			-				-				(424)
Acquisition of subsidiaries		101			-				-			-				-				101
Reclassification of property to investment property		-			-				-			-				(268)				(268)
As at 31 December 2018		1,386			41				1,100			595				-				3,122
Exchange adjustments		(39)			-				(11)			(42)				-				(92)
Charge for the year		274			2				104			86				-				466
Disposals		(560)			(40)				(406)			(9)				-				(1,015)
As at 31 December 2019		1,061			3				787			630				-				2,481
Carrying amount
As at 31 December 2019		118			15				285			551				-				969
As at 31 December 2018		180			-				214			183				-				577

As at 31 December 2019, the Group had no significant capital commitments (2018: none).  The depreciation charge for the year is included in operating expenses.

In January 2018 property previously used for the Group's own use was reclassified as an investment property following the sale of ISD business and the subsequent change in use. 

17.  Right-of-use assets

	Property		Office  equipment		Total
		£000		£000		£000
Position recognised at 1 January 2019 under IFRS 16		5,048		13		5,061
Deprecation charge for the year		(1,771)		(5)		(1,776)
Exchange adjustment		(94)		-		(94)
As at 31 December 2019		3,183		8		3,191

The cost of leases with a rental period of less than 12 months or with a contract value of less than £4,000 was £57k for the year and is reflected within expenses in the Consolidated Income Statement.

18.  Investment properties and financial assets

			2019  £000		2018  £000
a.	Investment properties
	As at 1 January		1,881		426
	Reclassification of property to investment property		-		2,353
	Exchange adjustment		-		5
	Decrease in fair value during the year		(40)		(903)
	Disposal		(361)		-
	As at 31 December		1,480		1,881

The investment properties are measured at fair value derived from the valuation work performed at the balance sheet date by independent property valuers.

In January 2018 a property previously used for the Groups own use was reclassified as an investment property following the sale of ISD business and the subsequent change in use. 

Rental income from the investment properties for the year was £163k (2018: £163k) and is included in Other Income within the Consolidated Income Statement.

b.  Financial investment assets at fair value through profit or loss (designated at initial recognition)

		2019  £000		2018  £000
Equities		10,991		24,369
Debt and fixed interest securities		533,326		265,652
Cash based investment funds		15,646		105,397
		559,963		395,418

Included in the above amounts are £18,660k (2018: £23,046k) pledged as part of the Funds at Lloyd's in support of the Group's underwriting activities in 2019.  Lloyd's has the right to apply these monies in the event the corporate member fails to meet its obligations.  These monies are not available to meet the Group's own working capital requirements and can only be released with Lloyd's permission.  Also included in the above amounts are £90,100k (2018: £84,015k) of funds withheld as collateral for certain of the Group's reinsurance contracts.

c.  Shares in subsidiary and associate undertakings

The Company had interests in the following subsidiaries at 31 December 2019:

			% of ordinary shares held via:
	Country of incorporation/ registration	The Company		Subsidiary  and associate undertakings		Overall effective % of share capital held
Name of subsidiaries/associate
Distinguished Re Ltd	Barbados	-		100		100
Berda Developments Limited	Bermuda	-		100		100
R&Q Bermuda (SAC) Limited	Bermuda	-		100		100
R&Q Quest (SAC) Limited	Bermuda	-		100		100
R&Q Quest Insurance Limited	Bermuda	-		100		100
R&Q Re (Bermuda) Limited	Bermuda	-		100		100
RQLM Limited	Bermuda	100		-		100
Sandell Holdings Ltd.	Bermuda	-		100		100
Sandell Re Ltd.	Bermuda	-		100		100
R&Q Risk Services Canada Limited	Canada	-		100		100
Randall & Quilter Canada Holdings Limited	Canada	-		100		100
R&Q Quest Management Services (Cayman) Limited	Cayman Island	-		100		100
Callidus Solutions Ltd	England and Wales	-		51		51
R&Q Alpha Insurance Company SE	Malta	100		-		100
R&Q Beta Insurance Company SE	Malta	100		-		100
R&Q Capital No. 1 Limited	England and Wales	-		100		100
R&Q Capital No. 6 Limited	England and Wales	-		100		100
R&Q Capital No. 7 Limited	England and Wales	-		100		100
R&Q Central Services Limited	England and Wales	-		100		100
R&Q Commercial Risk Services Limited	England and Wales	-		100		100
R&Q Delta Company Limited	England and Wales	100		-		100
R&Q Epsilon Insurance Company SE <	England and Wales	-		100		100
R&Q Eta Company Limited	England and Wales	-		100		100
R&Q Gamma Company Limited	England and Wales	100		-		100
R&Q Insurance Services Limited	England and Wales	-		100		100
R&Q MGA Limited	England and Wales	-		100		100
R&Q Munro MA Limited	England and Wales	-		100		100
R&Q Munro Services Company Limited	England and Wales	-		100		100
R&Q Oast Limited	England and Wales	-		100		100
R&Q Reinsurance Company (UK) Limited	England and Wales	-		100		100
R&Quiem Financial Services Limited	England and Wales	-		100		100
Randall & Quilter Captive Holdings Limited	England and Wales	-		100		100
Randall & Quilter II Holdings Limited	England and Wales	-		100		100
Randall & Quilter IS Holdings Limited	England and Wales	-		100		100
Randall & Quilter Underwriting Management Holdings Limited	England and Wales	-		100		100
RQIH Limited	England and Wales	100		-		100
Trilogy Managing General Agents Limited*	England and Wales	-		80		80
La Licorne Compagnie de Reassurances SA	France	-		100		100
R&Q Insurance Management (Gibraltar) Limited +	Gibraltar	-		100		100
Capstan Insurance Company Limited	Guernsey	-		100		100
R&Q Ireland Claims Services Limited #	Ireland	-		100		100
R&Q Ireland Company Limited by Guarantee #	Ireland	-		100		100
Hickson Insurance Limited	Isle of Man	-		100		100
Pender Mutual Insurance Company Limited	Isle of Man	-		100		100
R&Q Insurance Management (IOM) Limited	Isle of Man	-		100		100
Accredited Insurance (Europe) Limited	Malta	-		100		100
FNF Title Company Limited ^	Malta	100		-		100
R&Q Insurance (Europe) Limited	Malta	-		100		100
R&Q Malta Holdings Limited	Malta	-		100		100
Accredited Bond Agencies Inc.	USA	-		100		100
Accredited Group Agency Inc.	USA	-		100		100
Accredited Holding Corporation	USA	-		100		100
Accredited Surety and Casualty Company, Inc.	USA	-		100		100
Excess and Treaty Management Corporation	USA	-		100		100
GLOBAL Reinsurance Company	USA	-		100		100
Grafton US Holdings Inc.~	USA	-		80		80
ICDC Ltd	USA	-		100		100
LBL Acquisitions, LLC >	USA	-		100		60
National Legacy Insurance Company	USA	-		100		100
R&Q Healthcare Interests LLC	USA	-		100		100
R&Q Quest PCC, LLC	USA	-		100		100
R&Q Reinsurance Company	USA	-		100		100
R&Q RI Insurance Company	USA	-		100		100
R&Q Services Holding Inc	USA	-		100		100
R&Q Solutions LLC	USA	-		100		100
Randall & Quilter America Holdings Inc	USA	-		100		100
Randall & Quilter Healthcare Holdings Inc.	USA	-		100		100
Randall & Quilter PS Holdings Inc	USA	-		100		100
Requiem America Inc	USA	-		100		100
Risk Transfer Underwriting Inc.	USA	-		100		80
RSI Solutions International Inc	USA	-		100		100
Syndicated Services Company Inc	USA	-		100		100
Transport Insurance Company	USA	-		100		100

# has a November year end due to Irish Law Society connection.

* Trilogy Managing General Agents Limited was sold to Resolution Underwriting Holdings Limited on 20 February 2020

+ In liquidation

^ In liquidation

~ Randall & Quilter America Holdings Inc increased its shareholding in Grafton US Holdings Inc. to 80% by acquiring 20% issued share capital held by Paul Dassenko

> Dissolved 19 March 2020

< Redomiciled to Malta 16 March 2020

 19.  Insurance and other receivables

		2019  £000		2018  £000
Receivables arising from direct insurance operations		110,379		67,396
Receivables arising from reinsurance operations		212,234		97,306
Insurance receivables		322,613		164,702
Trade receivables/ Receivables arising from contracts with customers		4,097		5,416
Other receivables		49,933		32,085
Purchased reinsurance receivables		5,969		3,393
Prepayments and accrued income		36,923		27,120
		96,922		68,014
Total		419,535		232,716

Included in purchased reinsurance receivables is £1,513k (2018: £2,922k) which is expected to be received within 12 months.  The remainder of the balance is expected to be received after 12 months.

Included in receivables arising from contracts with customers are amounts due from customers in relation to the supply of management services which are now unconditionally due. There are no amounts due from contracts with customers which are subject to further performance or conditions before settlement.

Since 2015 the Group has entered into retroactive reinsurance contracts as an integral component of its strategy to actively seek commutations of the original ceded Reinsurance Program in respect of R&Q Re US.  To date, the Group has received cash proceeds in excess of $190,000k from the R&Q Re commutations strategy.  The Group retains oversight and custody of the premiums and investment thereof.

Included in receivables arising from reinsurance operations is £78,100k (2018: £64,000k) in respect of amounts due under certain structured reinsurance contracts which are expected to be received after 12 months. The increase arises due to the effect of the commutations strategy, realised investment gains and 2019 USA interest rate rises which have enhanced the amounts recoverable under the policies. The movement of £14,100k (2018: £36,500k) has been included in the £111,033k shown as proceeds from commutations and reinsurers' share of claims paid in the Consolidated Income Statement.

The Group retains the right to recover any surplus assets ("experience accounts") remaining when the reinsurance reaches its natural expiry or is terminated by the Group.  The estimated value of the experience accounts is reported within receivables arising from reinsurance operations. The valuation of the experience account is sensitive to movements in investment returns; any subsequent movement will be charged or credited to the Consolidated Income Statement in the year in which it arises.  An increase or reduction in returns of 0.25% would result in a movement of 0.8% in total Group assets.

The carrying amounts disclosed above reasonably approximate their fair values at the period end date.

20.  Cash and cash equivalents

		2019  £000		2018  £000
Cash at bank and in hand		252,741		236,923

Included in cash and cash equivalents is £574k (2018: £581k) being funds held in escrow accounts in respect of guarantees provided to the Institute of London Underwriters. The decrease is due to exchange movements.

In the normal course of business, insurance company subsidiaries will have deposited funds in respect of certain contracts which can only be released with the approval of the appropriate regulatory authority. 

The carrying amounts disclosed above reasonably approximate their fair values at the period end date.

21.  Insurance and other payables

		2019  £000		2018  £000
Structured liabilities		400,910		425,657
Structured settlements		(400,910)		(425,657)
		-		-
Payables arising from reinsurance operations		118,528		41,048
Payables arising from direct insurance operations		66,271		3,522
Insurance payables		184,799		44,570
Trade payables		2,259		1,839
Other taxation and social security		1,633		4,674
Other payables		38,138		105,543
Accruals and deferred income		27,080		11,862
		69,110		123,918
Total		253,909		168,488

The carrying amounts disclosed above reasonably approximate their fair values at the period end date.

Structured Settlements

No new structured settlement arrangements have been entered into during the year.  The movement in these structured liabilities during the period is primarily due to exchange movements.  Some group subsidiaries have paid for annuities from third party life insurance companies for the benefit of certain claimants.  The subsidiary company retains the credit risk in the unlikely event that the life insurance company defaults on its obligations to pay the annuity amounts.  In the event that any of these life insurance companies were unable to meet their obligations to these annuitants, any remaining liability may fall upon the respective insurance company subsidiaries.  The Directors believe that, having regard to the quality of the security of the life insurance companies together with the reinsurance available to the relevant Group insurance companies, the possibility of a material liability arising in this way is very unlikely. The life companies will settle the liability directly with the claimants and no cash will flow through the Group. These annuities have been shown as reducing the insurance companies' liabilities to reflect the substance of the transactions and to ensure that the disclosure of the balances does not detract from the users' ability to understand the Group's future cash flows.

22.  Financial liabilities

		2019  £000		2018  £000
Amounts owed to credit institutions		142,693		140,243
Lease liabilities		3,210		-
		145,903		140,243
Amounts due to credit institutions are payable as follows:
		2019  £000		2018  £000
Less than one year		37,651		34,966
Between one to five years		15,500		14,500
Over five years		89,542		90,777
		142,693		140,243

As outlined in Note 31, £55,141k (2018: £46,300k) owed to credit institutions is secured by debentures over the assets of the Company and several of its subsidiaries.

The Group has issued the following debt:

Issuer	Principal	Rate	Maturity
Randall & Quilter Investment Holdings Ltd.	$70,000k	6.35% above USD LIBOR	2028
Accredited Insurance (Europe) Limited	€20,000k	6.7% above EURIBOR	2025
Accredited Insurance (Europe) Limited	€5,000k	6.7% above EURIBOR	2027
R&Q Re (Bermuda) Limited	$20,000k	7.75% above USD LIBOR	2023

The Group's subsidiary, Accredited Holding Corporation provides a full and unconditional guarantee for the payment of principal, interest and any other amounts due in respect of the Notes issued by Randall & Quilter Investments Holding Ltd.

  Lease liabilities maturity analysis - contractual undiscounted cash flows

		2019  £000
Less than one year		1,069
Between one to five years		2,058
Over five years		356
Total undiscounted lease liabilities at 31 December		3,483

Reconciliation of liabilities arising from financing activities

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from the financing activities are those for which cash flows were, or future cash flows will be, classified in the Group Consolidated Cash Flows Statement as cash flows from financing activities.

		2019  £000		2018  £000
Balance at 1 January		140,243		55,889
Financing cash flows (1)		6,785		83,170
Non-cash exchange adjustment		(4,335)		1,184
Balance at 31 December		142,693		140,243

1) Represents the net cash flows from the repayment of borrowings and the proceeds from new borrowing arrangements.

23.  Insurance contract provisions and reinsurance balances

		2019				2018
	Program	Run-off	Total		Program	Run-off	Total
	£000	£000	£000		£000	£000	£000
Gross
Insurance contract provisions at 1 January	107,304	591,774	699,078		23,717	698,818	722,535
Claims paid	(52,996)	(130,442)	(183,438)		(17,635)	(143,725)	(161,360)
Increases/(Decreases) in provisions arising from the (disposal)/acquisition of subsidiary undertakings and Syndicate participations	-	174,551	174,551		-	(26,282)	(26,282)
Increases in provisions arising from acquisition of reinsurance portfolios	-	132,234	132,234		-	11,936	11,936
Increase in claims provisions	144,051	33,131	177,182		51,740	28,105	79,845
Increase/(decrease) in unearned premium reserve	107,608	(13,293)	94,315		46,443	(4,399)	42,044
Net exchange differences	(6,694)	(15,020)	(21,714)		3,039	27,321	30,360
As at 31 December	299,271	772,935	1,072,208		107,304	591,774	699,078
Reinsurance
Reinsurers' share of insurance contract provisions at 1 January	101,946	198,411	300,357		23,178	230,304	253,482
Proceeds from commutations and reinsurers' share of gross claims paid	(50,165)	(60,868)	(111,033)		(16,992)	(89,246)	(106,238)
Increases/(Decreases) in provisions arising from the (disposal)/acquisition of subsidiary undertakings and Syndicate participations	-	18,644	18,644		-	(1,440)	(1,440)
Increases in provisions arising from acquisition of reinsurance portfolios	-	-	-		-	722	722
Increase in claims provisions	137,775	28,485	166,260		49,816	51,941	101,757
Increase/(decrease) in unearned premium reserve	104,255	(568)	103,687		45,242	(4,659)	40,583
Net exchange differences	(4,889)	(1,614)	(6,503)		702	10,789	11,491
As at 31 December	288,922	182,490	471,412		101,946	198,411	300,357
Net
Net insurance contract provisions at 1 January	5,358	393,363	398,721		539	468,514	469,053
Net claims paid	(2,831)	(69,574)	(72,405)		(643)	(54,479)	(55,122)
Increases/(Decreases) in provisions arising from the (disposal)/acquisition of
subsidiary undertakings and Syndicate participations	-	155,907	155,907		-	(24,842)	(24,842)
Increases in provisions arising from acquisition of reinsurance portfolios	-	132,234	132,234		-	11,214	11,214
Increase/(decrease) in claims provisions	6,276	4,646	10,922		1,924	(23,836)	(21,912)
Increase/(decrease) in unearned premium reserve	3,353	(12,725)	(9,372)		1,201	260	1,461
Net exchange differences	(1,805)	(13,406)	(15,211)		2,337	16,532	18,869
As at 31 December	10,351	590,445	600,796		5,358	393,363	398,721

		2019				2018
	Program	Run-off	Total		Program	Run-off	Total
	£000	£000	£000		£000	£000	£000
Gross
Claims reserves	128,286	745,425	873,711		41,575	576,929	618,504
Unearned premiums reserves	170,987	27,510	198,497		65,729	14,845	80,574
As at 31 December	299,273	772,935	1,072,208		107,304	591,774	699,078

Reinsurance
Claims reserves	123,404	182,256	305,660		39,709	197,758	237,467
Unearned premiums reserves	165,518	234	165,752		62,237	653	62,890
As at 31 December	288,922	182,490	471,412		101,946	198,411	300,357

Net
Claims reserves	4,882	563,169	568,051		1,866	379,171	381,037
Unearned premiums reserves	5,469	27,276	32,745		3,492	14,192	17,684
As at 31 December	10,351	590,445	600,796		5,358	393,363	398,721

The carrying amounts disclosed above reasonably approximate their fair values at the period end date.

Assumptions, changes in assumptions and sensitivity

The assumptions used in the estimation of provisions relating to insurance contracts are intended to result in provisions which are sufficient to settle the net liabilities from insurance contracts. The amounts presented above include estimates of future reinsurance recoveries expected to arise on the settlement of the gross insurance liabilities, including £90,100k (2018: £84,015k) in respect of the structured reinsurance contract collateralised by the funds withheld disclosed in Note 18 (b).

Provision is made at the period end date for the estimated ultimate cost of settling all claims incurred in respect of events and developments up to that date, whether reported or not.

As detailed in Note 3, significant uncertainty exists as to the likely outcome of any individual claim and the ultimate costs of completing the run-off of the Group's insurance operations.

The provisions carried by the Group for its insurance liabilities are calculated using a variety of actuarial techniques. The provisions are calculated and reviewed by the Group's internal actuarial team; in addition the Group periodically commissions independent reviews by external actuaries. The use of external actuaries provides management with additional comfort that the Group's internally produced statistics and trends are consistent with observable market information and other published data.  Provisions for outstanding claims and IBNR are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries.  Insurance companies and Syndicates within the Group are covered by a variety of treaty, excess of loss and stop loss reinsurance programs.

As detailed in Note 2 (h), when preparing these Consolidated Financial Statements, provision is made for all costs of running off the business of the insurance company subsidiaries to the extent that these costs exceed the estimated future investment return expected to be earned by those subsidiaries. Provision is also made for all costs of running off the underwriting years for those Syndicates treated as being in run-off on which the Group participates.  The quantum of the costs of running off the business and the future investment income has been determined through the preparation of cash flow forecasts over the anticipated period of the run-off, using internally prepared budgets and forecasts of expenditure, investment income and actuarially assessed settlement patterns for the gross provisions. The gross costs of running off the business are estimated to be fully covered by the estimated future investment income. 

The provisions disclosed in the Consolidated Financial Statements are sensitive to a variety of factors including:

• Settlement and commutation activity of third party lead reinsurers

• Development in the status of settlement and commutation negotiations being entered into by the Group

• The financial strength of the Group's reinsurers and the risk that these entities could, in time, become insolvent or could otherwise default on payments

• Future cost inflation of legal and other advisors who assist the Group with the settlement of claims

• Changes in statute and legal precedent which could particularly impact provisions for asbestos, pollution and other latent exposures

• Arbitration awards and other legal precedents which could particularly impact upon the presentation of both inwards and outwards claims on the Group's exposure to major catastrophe losses

A 1 percent reduction in the net technical provisions would increase net assets by £6,008k (2018: £3,987k).

24.  Current and deferred tax

Current tax					2019		2018
						£000		£000
Current tax assets						1,988		191
Current tax liabilities						(294)		(2,323)
Net current tax assets/(liabilities)						1,694		(2,132)

Deferred tax

Deferred tax is calculated in full on temporary differences under the liability method using tax rates of 17% for the UK (2018: 17%) and 21% for the US (2018: 21%).

Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets where it is probable that these assets will be recovered.

The movements in deferred tax assets and liabilities during the year are shown below. The movement in deferred tax is recorded in the income tax charge in the Consolidated Income Statement.

Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances on a net basis.

						Deferred tax  assets			Deferred tax  liabilities		Total
						£000			£000		£000
As at 1 January 2018						10,907			(6,890)		4,017
Movement in year						(7,702)			3,441		(4,261)
As at 31 December 2018						3,205			(3,449)		(244)
Movement in year						803			(6,016)		(5,213)
As at 31 December 2019						4,008			(9,465)		(5,457)

The movement on the deferred tax account is shown below:

Accelerated  capital    allowances		Trading  losses		Pension  scheme  deficit		Other   temporary  differences		Total
	£000		£000		£000		£000		£000
As at 1 January 2018	(39)		4,251		1,906		(2,101)		4,017
Movement in year	-		5,780		(739)		(9,302)		(4,261)
As at 31 December 2018	(39)		10,031		1,167		(11,403)		(244)
Movement in year	1		5,129		80		(10,423)		(5,213)
As at 31 December 2019	(38)		15,160		1,247		(21,826)		(5,457)

Movements in the provisions for deferred taxation are disclosed in the Consolidated Financial Statements as follows:

		Exchange  adjustment		Deferred tax in    Consolidated Income  Statement		Deferred tax in  Consolidated Statement of Comprehensive Income			Total
			£000		£000		£000		£000
Movement in 2018			1,243		(4,712)		(792)		(4,261)
Movement in 2019			(1,678)		(3,586)		51		(5,213)

The analysis of the deferred tax assets relating to tax losses is as follows:

					2019			2018
						£000		£000
Deferred tax assets - relating to trading losses
Deferred tax assets to be recovered after more than 12 months						11,038		7,533
Deferred tax assets to be recovered within 12 months						4,122		2,498
Deferred tax assets						15,160		10,031

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable.

The Directors have prepared forecasts which indicate that, excluding the deferred tax asset on the pension scheme deficit, the deferred tax assets will substantially reverse over the next six years.

The above deferred tax assets arise mainly from temporary differences and losses arising on the Group's US insurance companies.  Under local tax regulations these losses and other temporary differences are available to offset against the US subsidiaries' future taxable profits in the Group's US Insurance Services Division as well as any future taxable results that may arise in the US insurance companies.

The Group's total deferred tax asset includes £15,160k (2018: £10,031k) in respect of trading losses carried forward.  The tax losses have arisen in individual legal entities and will be used as future taxable profits arise in those legal entities.  Substantially all of the unused tax losses for which a deferred tax asset has been recognised arises in the US subgroup.

25.  Share capital

	Number of shares	Ordinary shares	Share premium	Total
		£000	£000	£000
At 1 January 2018	125,876,620	2,517	62,257	64,774
Issue of ordinary shares	107,660	3	212	215
Issue of Z-AA shares	251,874,994	11,334	(11,334)	-
Redemption/Cancellation of Z-AA shares	(251,874,994)	(11,334)	-	(11,334)
At 31 December 2018	125,984,280	2,520	51,135	53,655
Issue of ordinary shares	69,858,915	1,396	102,047	103,443
Share based payments	74,373	2	138	140
Issue of AB-AC shares	391,835,136	18,415	(18,415)	-
Redemption/Cancellation of AB-AC shares	(391,835,136)	(18,415)	-	(18,415)
At 31 December 2019	195,917,568	3,918	134,905	138,823

On 6 March 2019 the Group issued 69,858,915 ordinary shares at 153p raising approximately £103.4m (£102m after costs).

	2019  £		2018  £
Allotted, called up and fully paid
195,917,568 ordinary shares of 2p each   (2018: 125,984,280 ordinary shares of 2p each)	3,918,350		2,520,686
1 Preference A Share of £1	1		1
1 Preference B Share of £1	1		1
	3,918.350		2,520,688
Included in Equity	2019  £		2018  £
195,917,568 ordinary shares of 2p each   (2018: 125,984,280 ordinary shares of 2p each)	3,918,350		2,520,686
1 Preference A Share of £1	1		1
1 Preference B Share of £1	1		1
	3,918,350		2,520,688

Cumulative Redeemable Preference Shares

Preference A and B Shares have rights, inter alia, to receive distributions in priority to ordinary shares of distributable profits of the Company derived from certain subsidiaries:

• Preference A Share: one half of all distributions arising from the Company's investment in R&Q Reinsurance Company up to a maximum of $5,000k.

• Preference B Share: one half of all distributions arising from the Company's investment in R&Q Reinsurance Company (UK) Limited up to a maximum of $10,000k.

The Preference A and Preference B Shares have been classified as equity on the basis that redemption dates are not prescribed in the Memorandum and Articles of Association and as such there is no contractual obligation to deliver cash.  No distributions have been made since acquisition by either R&Q Reinsurance Company or R&Q Reinsurance Company (UK) Limited.

Shares issued

During the year the Group issued AB and AC shares (with an aggregate value of £18,415k) (2018: Z and AA shares (with an aggregate value of £11,334k) which were all cancelled. 

26.  Employees and Directors

Employee benefit expense for the Group during the year

		2019  £000		2018  £000
Wages and salaries		35,987		24,374
Social security costs		3,767		2,968
Pension costs		1,102		1,014
Share based payment charge		-		212
		40,856		28,568
Continuing operations		40,856		28,568
Discontinued operations		-		-

Pension costs are recognised in operating expenses in the Consolidated Income Statement and include £1,102k (2018: £1,014k) in respect of payments to defined contribution schemes.

Average number of employees		2019  Number		2018  Number
Program Legacy Other		53 110 96		47 115 107
		259		269

Total number of employees at 31 December 2019 was 252 (2018: 276).

Remuneration of the Directors and key management

		2019  £000		2018  £000
Aggregate Director emoluments		5,368		2,658
Aggregate key management emoluments		2,061		1,961
Share based payments - Directors		-		-
Share based payments - Key management		169		169
Director pension contributions		-		-
Key management pension contributions		10		38
		7,608		4,826
Highest paid Director
Aggregate emoluments		2,477		1,029

Key management refers to employees who are Directors of subsidiaries within the Group but not members of the Group's Board of Directors.

Directors' emoluments

Name	Salary	Bonus paid	Bonus accrued	Total	Total
	£000	£000	£000	£000	$000
K E Randall	766	459	1,252	2,477	3,227
A K Quilter	519	150	730	1,399	-
A H F Campbell	75	-	-	75	-
P A Barnes	77	-	-	77	100
J P Fox (appointed as a Director 3 May 2019)	46	-	-	46	-
M A Langridge (resigned as a Director 13 December 2019)	380	341	206	927	-
M G Smith (resigned as a Director 6 September 2019)	150	-	-	150	-
Dr R Sellek  (appointed as a Director 18 June 2019 and resigned 14 January 2020)	217	-	-	217	284

K E Randall, Dr R Sellek and P A Barnes have been remunerated in US dollars.

During the year, a bonus incentive scheme was introduced for Executive Directors and members of the Key Management team.  Bonus payments relating to a reporting year are paid in the following 3 years being 50%, 25% and 25% annually, and reflect the performance of the Group and the individuals.  The costs in the 2019 financial year represent the amounts paid in 2019 and provision for costs relating to the 2018 and 2019 reporting years performance, which will be paid in 2020, 2021 and 2022.  The provisions are established on a likelihood of the performance and service period criteria being met.

27.  Pension scheme obligations

The Group operates one defined benefit scheme in the UK.  The defined benefit scheme's assets are held in separate trustee administered funds. The pension cost was assessed by an independent qualified actuary.  In the valuation, the actuary used the projected unit method as the scheme is closed to new employees.  A full actuarial valuation of the scheme is carried out every three years.

On 2 December 2003, the scheme was closed to future accrual although the scheme continues to remain in full force and effect for members at that date.

a.   Employee benefit obligations - amount disclosed in the Consolidated Statement of Financial Position

	2019  £000		2018  £000
Fair value of plan assets	26,003		23,571
Present value of funded obligations	(33,340)		(30,437)
Net defined benefit liability	(7,337)		(6,866)
Related deferred tax asset	1,247		1,167
Net position in the Consolidated Statement of Financial Position	(6,090)		(5,699)

All actuarial (losses)/gains are recognised in full in the Consolidated Statement of Comprehensive Income in the period in which they occur.

b.   Movement in the net defined benefit obligation and fair value of plan assets over the year

	Present value of obligation	Fair value of plan assets	Deficit of funded plan
	£000	£000	£000
As at 31 December 2018	(30,437)	23,571	(6,866)
Interest (expense)/income	(838)	665	(173)
	(31,275)	24,236	(7,039)
Remeasurements:-
Return on plan assets, excluding amounts included in interest expense	-	1,390	1,390
Gain from changes in financial assumptions	(3,642)	-	(3,642)
Gain from changes in demographic assumptions	554	-	554
Gain from new valuation data	-	-	-
Experience loss	-	-	-
Loss on curtailments	-	-	-
Liabilities extinguished on settlements	-	-	-
	(34,363)	25,626	(8,737)
Employer's contributions	-	1,400	1,400
Benefit payments from the plan	1,023	(1,023)	-
As at 31 December 2019	(33,340)	26,003	(7,337)

	Present value of obligation	Fair value of plan assets	Deficit of funded plan
	£000	£000	£000
As at 31 December 2017	(36,493)	25,279	(11,214)
Interest (expense)/income	(861)	591	(270)
	(37,354)	25,870	(11,484)
Remeasurements:-
Return on plan assets, excluding amounts included in interest expense	-	(980)	(980)
Gain from changes in financial assumptions	2,207	-	2,207
Gain from changes in demographic assumptions	1,732	-	1,732
Gain from new valuation data	1,790	-	1,790
Experience loss	(88)	-	(88)
Loss on curtailments	(121)	-	(121)
Liabilities extinguished on settlements	159	-	159
	(31,675)	24,890	(6,785)
Employer's contributions	-	(81)	(81)
Benefit payments from the plan	1,238	(1,238)	-
As at 31 December 2018	(30,437)	23,571	(6,866)

c.   Significant actuarial assumptions

  i) Financial assumptions

	2019	2018
Discount rate	2.0%	2.8%
RPI inflation assumption	3.2%	3.3%
CPI inflation assumption	2.4%	2.5%
Pension revaluation in deferment: - CPI, maximum 5%	2.4%	2.5%
Pension increases in payment: - RPI, maximum 5%	3.2%	3.3%

ii) Demographic assumptions

  Assumed life expectancy in years, on retirement at 60

	2019	2018
Retiring today
- Males	26.0	26.6
- Females	28.1	28.6
Retiring in 20 years
- Males	27.6	28.1
- Females	29.7	30.2

d.   Sensitivity to assumptions

  The results of the IAS 19 valuation at 31 December 2019 are sensitive to the assumptions adopted.

  The sensitivities regarding the principal assumptions used to measure the Scheme liabilities are set out below:

Assumption	Change in assumption	Change in liabilities
Discount rate	Decrease by 0.5%	Increase by 8%
Rate of inflation	Increase by 0.5%	Increase by 1%
Life expectancy	Increase by 1 year	Increase by 3%

The above sensitivity analyses are based on a change in assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to significant actuarial assumptions has been estimated, based on the average age and the normal retirement age of members and the duration of the Scheme.

e.   The major categories of plan assets are as follows

			As at 2019				As at 2018
			£000				£000
	Level 1	Level 2	Total		Level 1	Level 2	Total
Cash and cash equivalents	-	921	921		-	257	257
Investment funds:
- equities	-	16,350	16,350		-	14,480	14,480
- bonds	-	2,950	2,950		-	5,962	5,962
- property	-	-	-		-	-	-
- LDI	-	5,782	5,782		-	2,872	2,872
	-	26,003	26,003		-	23,571	23,571

Definitions of level 1 and Level 2 investments can be found in note 4(a)(i).

f.   Contributions and present value of defined benefit obligation

Funding levels are monitored on an annual basis.  As at 31 December 2019 £nil (2018: £1,400k) was held in Escrow by the Group depending on the outcome of the next triennial valuation.  £1,400k contributions have been made directly into the scheme during 2019 (2018: nil).  A recovery plan has been agreed with the Trustees to reduce the plan deficit starting form 1 January 2020. £795k will be contributed to the plan assets each year for 6 years, ending in 2025.

28.  Related party transactions

Transactions with subsidiaries

Transactions between the Group's wholly owned subsidiary undertakings, which are related parties, have been eliminated on consolidation and accordingly not disclosed.

Transactions with Directors

The following Directors and connected parties received distributions during the year as follows:-

	2019	2018
	£000	£000
K E Randall and family	1,222	1,440
A K Quilter and family	328	375
M G Smith	5	3

Transactions with key management service provider.

With effect from 1 July 2016 some of the Group compliance services have been provided by a Group subsidiary, Callidus Solutions Limited, of which 49% of the share capital is owned by the Chief Governance Officer.

	2019		2018
	£000		£000
Fees charged for compliance services	284		207
Fees payable to service provider at end of year		12	13

29.  Business combinations and divestments

Business combinations

The Group made 10 business combinations during 2019, all of which involve legacy transactions and have been accounted for using the acquisition method of accounting.

Legacy entities and businesses 

The following table shows the fair value of assets and liabilities (and consideration where paid) included in the Consolidated Financial Statements at the date of acquisition of the legacy businesses:

	Intangible assets	Other receivables	Cash & Investments	Other payables	Technical provisions	Tax & deferred tax	Net assets acquired	Consideration	Gross Deal Contribution
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
NNIS	-	787	3,233	(156)	(13)	-	3,851	3,071	780
WCIC	-	822	3,235	(32)	(790)	-	3,235	2,278	957
Presidio	100	-	1,112	-	(1,030)	-	182	-	182
LTT	15	-	764	-	(474)	(5)	300	-	300
Global Holdings	20,997	4,776	150,669	(1,838)	(66,187)	(1,300)	107,117	62,422	44,695
Sandell Holdings	7,585	34,155	61,878	(8,309)	(55,203)	-	40,106	20,251	19,855
Churchill	732	-	6,628	-	(6,085)	-	1,275	-	1,275
Blossom	-	-	257	-	(87)	-	170	-	170
Lansen	-	-	383	-	-	-	383	-	383
Distinguished Re	1,908	-	15,297	(38)	(14,049)	-	3,118	383	2,735
	31,337	40,540	243,456	(10,373)	(143,918)	(1,305)	159,737	88,405	71,332

In all instances, goodwill on bargain purchase was recorded on the transactions.  Goodwill on bargain purchase arises when the consideration is less than the fair value of the net assets acquired.  It is calculated after the alignment of accounting policies and other adjustments to the valuation of assets and liabilities to reflect their fair value at acquisition.  The long-tail nature of the liabilities causes significant problems for former owners such as tying up capital and a lack of specialist staff.  As a specialist service provider and manager, the Group is more efficient at managing such entities and former owners are prepared to sell at a discount on the fair value of the net assets.

In order to disclose the impact on the Group as though the legacy entities had been owned the whole year, assumptions would have to be made about the Group's ability to manage efficiently the run-off of the legacy liabilities prior to the acquisition.  As a result, and in accordance with IAS 8, the Directors believe it is not practicable to disclose revenue and profit before tax as if the entities had been owned for the whole year.

Where significant uncertainties arise in the quantification of the liabilities, the Directors have estimated the fair value based on the currently available information and on assumptions which they believe to be reasonable. 

The Group completed the following business combinations during 2019:

NNIS

On 28 February 2019, the Group completed the acquisition of the entire issued ordinary shares of Nationale-Nederlanden Internationale Schadeverzekering SE ("NNIS"), a UK domiciled insurance company which was previously part of the N.N. Group N.V. in the Netherlands. NNIS participated on the 1996 and prior underwriting years of the Dutch Aviation Pool which wrote Aviation Hull and Liability policies. External costs incurred were £7k.

WCIC

On 29 March 2019, the Group completed the acquisition of the entire issued ordinary shares of Western Captive Insurance Company DAC ("WCIC"), an Irish domiciled captive insurance company of the Coffey Group. WCIC provided employer's liability, general liability and public liability policies from 2007 to 2011, and, at the date of acquisition, had one remaining open claim. External costs incurred were £50k

Presidio

On 31 March 2019, the Group novated the property, general liability, auto liability and workers' compensation policies of Presidio Insurance Limited, a Cayman domiciled group captive, to its Travelers cell within R&Q Quest (SAC) Limited. The novated policies covered the period from 31 December 2003 to 28 February 2010. External costs incurred were £17k.

LTT

On 30 April 2019, the Group completed the assumption of liabilities from The Logistics Trust of Texas ("LTT"), a self-insured trust in run-off since 2014 which was taken over by the Texas Self-Insurance Group Guaranty Fund in 2016. LTT provided workers' compensation policies from 2006 to 2014. External costs incurred were £43k.

Global U.S. Holdings Incorporated

On 3 May 2019 the Group completed the acquisition of GLOBAL U.S. Holdings Inc. for a consideration of $80.5m from AXA DBIO, SCA, a subsidiary of investment funds managed by AXA Liabilities Managers SAS ('AXA LM'). External costs incurred were £181k.

GLOBAL U.S. Holdings Incorporated is the 100% parent of GLOBAL Reinsurance Corporation of America ('Global Re US'). Global Re US is a New York domiciled insurance company in run-off that underwrote predominantly property and casualty pro-rata treaties and facultative business for regional and specialty insurance companies on non-standard automobile, multi-peril and general liability lines in the US.

Sandell Holdings Ltd (Provisional)

On 7 October 2019, the Group completed the acquisition of Sandell Holdings Ltd and its subsidiary, Sandell Re Ltd, a Bermudian Class 3A segregated accounts company. Sandell Re participated on various reinsurance contracts from 2015 and continuing. External costs incurred were £45k.  The fair value included is provisional in respect of the other payables only, which includes an amount of $4.2m (£3.2m) which remains subject to further review.

Churchill

On 23 October 2019, the Group completed the novation of Churchill Casualty Ltd's ("Churchill") policies to its Travelers segregated account in R&Q Bermuda (SAC) Ltd. Churchill was a Cayman domiciled captive with policies, which were fronted by Zurich, providing Workers' Compensation, General Liability and Auto Liability coverage from 2001 to 2011. External costs incurred were £107k.

Blossom

On 19 December 2019, the Group completed the novation of the Workers' Compensation policies of Blossom to Accredited Surety and Casualty Company Inc. Blossom was a self-insurer which had been providing services to people with disabilities in the Philadelphia area, but which has subsequently ceased business. The policies transferring relate to the 2007 to 2018 years. External costs incurred were £38k.

Lansen

On 30 December 2019, Accredited Insurance (Europe) Limited completed the novation of Lansen's aviation hull & liability policies. Lansen was a Swedish based captive insurer of Saab which participated on these policies from 1996 to 2008.

Distinguished Re

On 31 December 2019, the Group completed the acquisition of Distinguished Re, a Barbados based insurance company in run-off. Distinguished Re participated on US Umbrella policies underwritten by Great American from 2008 to 2017.

30.  Non-controlling interests

The following table shows the Group's non-controlling interests and movements in the year:-

31 December 2019	2019		2018
	£000		£000
Non-controlling interests
Equity shares in subsidiaries	3		6
Share of retained earnings	380		282
Share of other reserves	60		61
	443		349
Movements in the year
Balance at 1 January	349		(166)
Profit for the year attributable to non-controlling interests	(478)		481
Exchange adjustments	(22)		34
Comprehensive profit attributable to non-controlling interests	(500)		515
Changes in non-controlling interest in subsidiaries	594		-
Balance at 31 December	443		349

31.  Guarantees and Indemnities in Ordinary Course of Business

The Group has entered into a guarantee agreement and a debenture arrangement with its bankers, along with several of its subsidiaries, in respect of the Group term loan facilities. The total liability to the bank at 31 December 2019 was £55,141k (2018: £46,300k).

The Group has given various customary warranties and indemnities in connection with the disposals of RQMA and various ISD entities (to Coverys and Davies respectively). 

The Group also gives various guarantees in the ordinary course of business.  

32.  Foreign exchange rates

The Group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into sterling, being the Group's presentational currency:-

		2019		2018
	Average		Year end	Average	Year end
US dollar	1.28		1.31	1.34	1.27
Euro	1.14		1.17	1.13	1.11

33.  Events after the reporting date

On 13 January 2020, the Group announced Mr W Spiegel as Executive Director and Deputy Group Chairman.

As part of his remuneration package, Mr Spiegel has been awarded 5,178,524 restricted ordinary shares at a price of 2p per share. The award represented 2.64% of the shares in issue.

The shares will not vest until 10 January 2023, being the third anniversary of the date of hire subject to Mr Spiegel's continued employment with the Company. Vesting of the award will be accelerated if Mr Spiegel's employment is terminated prior to the third anniversary by the Company without cause or by Mr Spiegel for good reason or if a change in control of the Company occurs. Mr Spiegel will forfeit the shares if the Company terminates his employment for cause prior to vesting or if he terminates without good reason.

On 27 January 2020 the Group completed the acquisition of Vigneron Insurance Company, Inc., a Montana captive insurer purchased from a wholly owned private investment holding company with diverse holdings in a variety of industries, real estate, marketable securities and other investments.

On 20 February 2020 Trilogy Managing General Agents Limited was sold to Resolution Underwriting Holdings Limited.

On 14 April 2020 the Group completed the acquisition of ICI Insurance Company Limited, a Company incorporated in the Cayman Islands in 2003 and licensed as a Class B (i) Insurer.

On 29 April 2020 the Group announced £80.3m ($100m) of new equity investment by way of:

• a $80m subscription by Brickell Insurance Holdings LLC, an investment vehicle controlled by 777 Partners, for a new series of preferred stock issued by Randall & Quilter PS Holdings Inc., an indirect wholly owned subsidiary of the Group, which are exchangeable (subject to certain terms and conditions) for ordinary shares in the capital of the Company at a price of £1.35 per Ordinary Share.

• a $20m subscription by funds managed by Hudson Structured Capital Management Ltd. for 11,902,318 new Ordinary Shares at a price of £1.35 per Subscription Share.

COVID-19 impact

Accounting policy note 2 (d) Going Concern provides details of the potential impact of COVID-19 to the Group

34.  Ultimate controlling party

The Directors consider that the Group has no ultimate controlling party.

 

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END

 

 

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