We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register to chat with like-minded investors on our interactive forums.
| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| R&q Insurance Holdings Ltd | LSE:RQIH | London | Ordinary Share | BMG7371X1065 | ORD 2P (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.155 | 5.45% | 3.00 | 2.50 | 3.49 | 742,939 | 16:35:20 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Title Insurance | 82.8M | -297M | -0.7929 | -0.04 | 10.64M |
From Apr 2019 to Apr 2024
TIDMRQIH
RNS Number : 7962C
Randall & Quilter Inv Hldgs Ltd
20 April 2017
Randall & Quilter Investment Holdings Ltd.
("R&Q" or the "Group")
Full year results for the 12 months ended 31 December 2016
The Board of Randall & Quilter (AIM:RQIH), the Bermuda based specialist non-life insurance investor, service provider and underwriting manager, announces the Group's full year results for the 12 months ended 31 December 2016.
Financial Highlights:
Pre-tax profit GBP8.5m (2015: GBP2.8m)
Further net reserve release in run-off insurance companies of GBP7.9m (2015: GBP8.3m)
EPS 11.7p (2015: 4.2p)
Proposed Distributions per share 8.6p (2015: 8.4p) with a final proposed distribution of 5.2p (2015: 5.0p) payable on or around June 8, 2017
Return on tangible equity 13.5% (2015: 4.4%)
Investment return 2.7% on the Group's investments (excluding intercompany loans) (2015: 1.1%)
Book value per share excluding goodwill 107.4p (2015: 98.5p)
Operational Highlights:
Excellent contribution from 15 completed legacy transactions, with especially strong growth in North America
Continued good performance in the UK operations of the Insurance Services Division but widening losses in the US as a result of further investment in the Healthcare initiative
Successful sale of the Synergy book to Plum Underwriting during early 2016, part of the Group's renewed focus on its core business areas
Issue of $20m Tier 2 Capital in December from R&Q Re (Bermuda) to fund further legacy growth in North America
Group summary financial performance
GBP000s 2016 2015 -------------------------------- -------- -------- Group results -------------------------------- -------- -------- Operating profit * (Group KPI) 10,385 4,083 -------------------------------- -------- -------- Profit before tax 8,478 2,829 -------------------------------- -------- -------- Profit after tax 8,315 2,757 -------------------------------- -------- -------- Earnings per share (basic) (Group KPI) 11.7p 4.2p -------------------------------- -------- -------- Balance sheet information -------------------------------- -------- -------- Total gross assets 786,212 549,262 -------------------------------- -------- -------- Total net insurance contract provisions 350,994 199,591 -------------------------------- -------- -------- Shareholders' equity 94,368 86,521 -------------------------------- -------- -------- Key statistics -------------------------------- -------- -------- Investment return on free assets 2.7% 1.1% -------------------------------- -------- -------- Return on tangible equity 13.5% 4.4% -------------------------------- -------- -------- Net tangible assets per share 85.1p 83.7p -------------------------------- -------- -------- Book value per share excluding goodwill (Group KPI) 107.4p 98.5p -------------------------------- -------- -------- Distribution per share (Group KPI) 8.6p 8.4p -------------------------------- -------- --------
*Operating profit is defined as profit before income tax, finance costs and share of loss of associate
Ken Randall Chairman and Chief Executive Officer commented: "I am pleased to report that, as indicated in the recent placing announcement, the Group traded very well in the second half of 2016 with full year profits ahead of Board expectations and significantly higher than the prior year. In addition, the balance sheet was boosted by further foreign exchange related gains, partly offset by adverse movements in the IFRS calculation of the pension deficit. Completion of 15 legacy transactions during the year and further net reserve releases from the insurance companies in run-off were the primary drivers.
This profitable trading means that proposed distributions per share have been increased for the first time since 2012 to 8.6p for the full year, a demonstration of the board's confidence in the Group's trading and prospects. The Board proposes a final payment of 5.2p per share due on or around June 8, subject to customary approvals.
The simplification of the Group's business model continues, with certain non-core operations identified for disposal. This will enable a renewed focus on our core business areas where we believe there is exciting growth potential, the likes of which we have not seen for some time. These areas include the acquisition/assumption of run-off portfolios and building recurring commission revenue from using our licensed carriers in the US and EU to write niche and profitable books of property and casualty business, largely ceded to highly rated reinsurers.
The Board has a positive outlook for the current year and was delighted with the support it received from the Group's shareholders in the recent placing to help fund our growth. The pipeline of potential legacy transactions is outstanding with a diverse range of small to mid-sized opportunities. This is especially the case in North America, where we are reaping the rewards from the expansion of our product offering and stronger distribution.
The continued growth in virtual insurers such as MGAs, looking for carriers backed with reinsurance or alternative capital is highly supportive of the commission based business model being deployed in Accredited, our A- rated carrier in the US. A similar model is now being finalised in R&Q Insurance Malta, which has the added benefit of having secure EU wide licenses in a post-Brexit world. The pipeline of programs for both carriers is extremely strong with underwriting on a number of these expected to commence in coming months, the financial benefits of which will be particularly notable during 2018 once a full year's earning pattern is established.
Strategy and business model
The overall mission and purpose of the Group is to offer investors profits and capital extractions from legacy non-life insurance acquisitions/reinsurances and grow service revenue and commission income from its licensed carriers in the US and EU/UK writing niche and profitable business, largely on behalf of highly rated reinsurers.
Our main strategic objectives are to:
-- acquire or reinsure run-off insurance companies/portfolios to produce attractive cash returns;
-- generate repeatable and growing commission income from Accredited and R&Q Insurance Malta, fast developing as attractive conduits for niche books of MGA business to highly rated reinsurers; and
-- provide specialist insurance services to the live, run-off and captive markets.
The Group has developed a strong reputation and excellent relationships in the global insurance market and benefits from a skilled and entrepreneurial team. We use these attributes to source and manage attractive run-off opportunities and to offer expertise in niche insurance services and underwriting management. The aim is to generate strong cash flows to support our business model, grow book value and increase cash distributions to shareholders.
Divisional overview
Insurance Investments
Hot Features
Premium
GBP000s 2016 2015
------------------------------------- -------- --------
Live income 28,481 17,848
------------------------------------- -------- --------
Run-off Income 22,790 7,462
------------------------------------- -------- --------
Total income 51,271 25,310
------------------------------------- -------- --------
Result of operating activities
(live and run-off) 23,515 6,039
------------------------------------- -------- --------
Key metrics
------------------------------------- -------- --------
Net claims releases/(increases)
------------------------------------- -------- --------
* Insurance Companies 7,915 8,279
------------------------------------- -------- --------
* Run-off Syndicates (3,218) 1,267
------------------------------------- -------- --------
4,697 9,546
------------------------------------- -------- --------
Goodwill on bargain purchase 16,281 14,851
------------------------------------- -------- --------
Live Syndicates' contribution
to operating profit (2,088) (2,416)
------------------------------------- -------- --------
Increase in fair value of insolvent
insurance debt portfolio 522 205
------------------------------------- -------- --------
Investment return on free assets 2.7% 1.1%
------------------------------------- -------- --------
-- Investment return % is calculated as net investment income over average total investments. Investment return is stated after fees of GBP912k and GBP450k in 2016 and 2015 respectively.
The Insurance Investments Division performed extremely well during 2016 with a highly profitable final 6 months of trading. There was a very strong contribution from 15 legacy transactions completed in the year (6 acquisitions, 5 transfers/novations and 4 retrospective (re)insurances) with goodwill on bargain purchase of over GBP16.2m and additional related profit of GBP3.1m coming through premium income. The deals completed were diverse by type and geography, with a much increased contribution from North American based activity. The most notable transactions of the year included the acquisition of Royal London's UK insurer and USA Swimming's DC based captive, the Part VII transfer of AEGON's non-life insurance book, the novation of the Coca Cola Bottlers' Associations' high deductible program of largely workers' compensation claims and the reinsurance of SIMIA, a UK solicitor's Professional Indemnity mutual. New types of legacy covers were also executed during the year as a result of being able to use Accredited, our A- rated and licensed US carrier. These included a novation/assumption of policies from a self-insurer, providing it much sought after finality and the writing of a deductible reimbursement policy covering the legacy workers' compensation claims of a large US based manufacturer.
R&Q Insurance Malta ('RQIM') continues to grow its balance sheet, benefiting from its flexible and well-priced exit solutions to a growing number of interested parties in the UK and rest of Europe looking to divest run-off books which are attracting increased capital charges and operational costs following the implementation of Solvency II. As discussed above, we are also beginning to use RQIM's wide licensing to write quality books of business, largely reinsured to highly rated counterparties, thereby developing a fast growing additional commission stream. The acquisition of Clariant, a Liechtenstein insurer was immediately followed by a redomicile to Malta, where that company is now known as R&Q Insurance (Europe) and will act as a likely transferee of certain UK and EU run-off business.
Meanwhile, our Bermuda based M&A team continues to develop and expand the Group's infrastructure and we are now able to offer fully licensed and 'A' rated paper for loss portfolio transfers and novations in the US, supported by R&Q Re (Bermuda), an increasingly central carrier to the Group, writing intra-group adverse development covers and excess of loss covers on our North American legacy transactions.
The Group is also in the process of making an application to form a Rhode Island based insurer where new Part VII type legislation has been enacted and intends to commence an Insurance Business Transfer of a small book of General Liability reinsurance business which it currently reinsures, with the aim of giving the counterparty its sought after finality. The demand for such a solution in the USA is substantial and 2017 will see a concerted strategic effort in this area by the Group.
Both as a result of the Group's impressive track record of completing deals on both sides of the Atlantic, combined with a sustained marketing campaign means the pipeline of transactions for 2017 is considerably stronger than at this point last year. In the current year to date we have acquired a Bermuda based captive with small US GL exposures, a Vermont based captive of a Fortune 500 engineering company which wrote low layer workers' compensation ('WC') and general liability ('GL') business and assumed the deductible liabilities of a US REIT's WC, GL and auto liability program.
It is anticipated that a number of other transactions will complete before June 30, including the previously announced acquisition of Astra Zeneca's UK insurer, currently awaiting change of control approval, a UK Part VII transfer, some significant sized loss portfolio transfers in the US as well as further captive acquisitions/novations from self-insurers. We are confident that the first half of the year will see a markedly higher contribution from legacy transactional activity than in previous years with the full year showing a similar trend.
There were further net reserve releases from the run-off insurance companies. R&Q Re (US), Westland and APIC (the latter two only having been acquired during 2016) were all significant contributors to the net positive reserve development in the period. These releases arose from a combination of positive settlements from our proactive claims management strategy, profitable commutation activity on both inwards and outwards contracts and favourable reserve reassessments. The commutation of the ACE Surplus Maintenance Agreement at the end of 2015 removed certain operational constraints which had impeded the Group's claims management strategy and curtailed the universe of investible assets within R&Q Re (US). This has been especially beneficial in increasing the invested balances and yields and facilitating the purchase of further whole account reinsurance cover.
The Division delivered a much stronger investment return of 2.7% in markets which were generally supportive of credit strategies. Once again, our diversification and pro-active management delivered returns which compared favourably with our peers.
As at 31/12/16:
Asset Class Share of Portfolio
----------------------- -------------------
ABS 11%
----------------------- -------------------
CLO 7%
----------------------- -------------------
Bonds/Treasuries 32%
----------------------- -------------------
Equity 2%
----------------------- -------------------
Funds 11%
----------------------- -------------------
Cash/Cash Equivalents 37%
----------------------- -------------------
100%
----------------------- -------------------
Credit Rating Share of Portfolio
--------------- -------------------
Cash 37%
--------------- -------------------
AAA 17%
--------------- -------------------
AA 5%
--------------- -------------------
A 25%
--------------- -------------------
BBB 9%
--------------- -------------------
BB 4%
--------------- -------------------
B 1%
--------------- -------------------
Unrated 2%
--------------- -------------------
Total 100%
--------------- -------------------
The Group's asset allocations and credit ratings changed somewhat during the year with lower allocations to structured credit and higher allocations to corporate bonds. Our two investment managers performed well, within the guidelines set. We continue to deploy a largely low interest rate duration and credit focused strategy with a small allocation to high yielding equities/US bonds. The average yield to worst is c. 2.6% gross of fees. The first quarter of 2017 has seen overall performance in line with expectations despite the rising rate environment in the US, which is at least beginning to increase portfolio yields. We have also begun to take advantage of the large illiquidity premium to invest in high yielding but still highly rated securities to match a portion of our longest dated liabilities. We are also working on securing mutually beneficial relationships with counterparties able to work our invested assets more effectively than traditional managers whilst ensuring our principal is fully secured.
The live syndicate participations continued to be impacted by slow development of premium as well as some small value non-US casualty claims. However, the US book continued to see very low loss activity despite Hurricane Matthew. There have also been positive recent developments on claims across the book and premium levels continue to build with a close to break-even GAAP result anticipated in 2017 and profits beyond. We broadly maintained our underwriting commitment for the 2017 year of account but the Group believes that a focus on management and fee income rather than the deployment of significant levels of underwriting capital will generate better returns for shareholders going forward.
The joint venture with Phoenix Asset Management Partners Limited continues with the distressed insurance debt portfolio performing to plan, with a positive contribution during the year.
Insurance Services
GBP000s 2016 2015 ------------------------------ ------- ------- Total revenue 29,542 39,090 ------------------------------ ------- ------- * Of which intercompany 9,537 16,179 ------------------------------ ------- ------- * Of which third party 20,005 22,911 ------------------------------ ------- ------- Operating profit * 2,021 5,000 ------------------------------ ------- ------- Operating profit margin ** 6.8% 12.8% ------------------------------ ------- -------
*Operating profit is defined as profit before income tax and finance costs.
**Operating profit margin is defined as operating profit divided by total revenue
Total income in the Insurance Services Division fell in 2016, primarily due to a drop in intercompany revenue as owned portfolios were further consolidated and operating efficiencies brought in. Operating profit was lower than in the prior year, mostly due to the widening losses in the US from additional investment in the healthcare unit. There was a good performance again in run-off services, in the UK broker services unit (despite a reduced level of credit write backs) as well as the UK claims and reinsurance management unit. The premium credit control and binder management operations grew revenue and profits whilst captive management produced significantly better results than in 2015, primarily due to a much improved result in the Norwegian unit. The operating margin in the core businesses was close to the targeted 20% but the aggregate figure was lowered by the lack of revenue in the healthcare and US legacy broking units.
Run-off services
GBP000s 2016 2015 ------------------------- ------- ------- Total income 13,406 21,209 ------------------------- ------- ------- Operating profit * 3,198 5,269 ------------------------- ------- ------- Operating profit margin ** 23.9% 24.8% ------------------------- ------- -------
*Operating profit is defined as profit before income tax and finance costs.
**Operating profit margin is defined as operating profit divided by total revenue
Run-off services performed well during 2016. The operating margin remained high as income reductions in internal as well as certain external contracts were offset by reductions in personnel costs and other associated operating expenses. Our broker services in the UK continued to perform well with an operating margin comfortably above 20%.
Live Services
GBP000s 2016 2015 ------------------------ -------- ------- Total income 16,136 17,881 ------------------------ -------- ------- * Of which non-US 10,620 9,755 ------------------------ -------- ------- * Of which US 5,516 8,126 ------------------------ -------- ------- Operating loss * (1,177) (269) ------------------------ -------- ------- * Of which non-US 1,170 334 ------------------------ -------- ------- * Of which US (2,347) (603) ------------------------ -------- ------- Operating margin ** (7.3)% (1.5)% ------------------------ -------- -------
*Operating loss is defined as loss before income tax and finance costs
**Operating margin is defined as operating loss divided by total revenue
The live services operations had a mixed performance during 2016. Non-US business saw an increase in revenue and profitability, especially in the premium credit control/binder management and captive management units. The US business generated higher operating losses due primarily to further investment in the healthcare unit.
Underwriting Management
GBP000s 2016 2015 ----------------------------------- -------- ------- Total revenue 21,367 23,977 ----------------------------------- -------- ------- Operating loss * (1,955) (476) ----------------------------------- -------- ------- Operating margin ** (9.1)% (2.0%) ----------------------------------- -------- ------- Key metrics ----------------------------------- -------- ------- Management fee revenue 11,041 9,906 ----------------------------------- -------- ------- MGA commission revenue 1,547 2,071 ----------------------------------- -------- ------- Profit commissions 206 74 ----------------------------------- -------- ------- Accredited *** ----------------------------------- -------- ------- * Profit before tax 1,521 1,603 ----------------------------------- -------- ------- * Return on statutory equity 10.7% 12.2% ----------------------------------- -------- -------
*Operating loss is defined as loss before income tax, finance costs and share of loss of associate
** Operating margin is defined as operating loss divided by total revenue
*** Accredited, Surety and Casualty Company Inc., the carrier.
The Underwriting Management result was once again weak for the year. The management fee revenue was flat with the growth of s.1991 being offset by a reduction in fees relating to the run-off syndicate. MGA commissions fell due to the absence of R&Q Marine Services Limited, sold during 2015, and the sale of Synergy in early 2016. CRS commissions however continued to grow by over 10% against the prior year despite the competitive underwriting environment. Profit commissions were subdued though there were some positive prior year PC adjustments on the Marine MGA. Income from consultancy work on a pipeline turnkey contract failed to materialise due to a protracted delay in its launch but a new attractive opportunity has recently come to the fore and is being progressed.
Turning to Accredited, the bail book saw some reductions in income due to the challenging political conditions and market pressures. The bond agency also saw some further write downs of debt from two agents who wrote and indemnified two large forfeited bonds. These agents have since been cancelled. Meanwhile, we continued to expand Accredited's licences through the year to enable it to write most P&C business across the US. Two surety programs were signed up and underwriting commenced, with Accredited retaining 10% of the books alongside a high quality reinsurance panel. We expect to execute a significant pipeline of additional programs ranging from transportation, accident and health, medical professional liability to credit over the coming months, firmly establishing Accredited as a writer of quality program business, largely ceded to 'A' rated reinsurance markets. 2016 also saw Accredited writing loss portfolio transfers and novations for legacy business, protected by affiliate reinsurance. This activity leverages the Group's core expertise in run-off and has broadened its range of activity and sources of profit, with substantial growth anticipated here in the current year and beyond.
2017 is set to be a better year overall for the division. The full year benefit of growth at Accredited from both writing program business and legacy deals, pipeline turnkey income, and senior personnel reductions outside of the agency are expected to be the key drivers.
Governance
We set high standards of corporate governance, with a structure designed to establish, implement and maintain the effective controls essential to the Group's long-term success. The role of the Board is to set the Group's strategic objectives, and to oversee and review management performance, ensuring the required resources are available for meeting those objectives. The Board met regularly through the year to debate and conduct these matters.
The Group is committed to ensuring that modern slavery does not exist within our supply chains or in any part of our business. Given the nature of our business, we believe there is a very low risk of this however we will be implementing a number of processes and controls to reduce the risk of modern slavery and human trafficking within our organisation. For further details please view the Group's full statement at www.rqih.com.
Our people
During the past year, our staff has continued to make valuable contributions to the success of the Group and I emphasise my gratitude for this. We continue to identify and recruit high-quality individuals to develop existing and new business areas, and we demonstrate strength and depth in the management team across the three divisions. At the same time, we have had to reduce headcount in certain areas of the business to ensure a focus on operating margin and profitable growth.
Outlook
2017 is expected to be a year characterised by further profit growth and strong strategic focus.
The Group is confident in further increasing the contribution from its legacy acquisition activity. The existing legacy portfolios continue to run-off satisfactorily and more certainty has been brought to R&Q Re (US) through active claims management and yield increases on the substantially higher invested balances following recent commutation activity.
Meanwhile, consistent with earlier comments, as part of the simplification of our business model, the Group continues to look to rebalance its live underwriting commitment and dispose of certain non-core businesses. This will help simplify the Group's operations and reduce the substantial overhead expense.
The recent placing, raising c. GBP17.9m allows the deployment of additional capital in legacy transactions, where returns continue to be attractive. Part of the proceeds will also be used to grow the balance sheets of Accredited and R&Q Insurance Malta where we have excellent prospects for generating fast growing commissions from writing program business primarily ceded to highly rated reinsurers.
Legacy broking and premium credit control services in the UK offer promising avenues of profitable growth in Insurance Services whilst turnkey prospects and cost reductions outside the managing agency should lead to improving results in Underwriting Management.
Investment yields still remain low but are beginning to rise, which bodes well for future returns.
We believe the Group is well positioned to benefit from some of the most promising growth areas in the non-life insurance market, namely legacy and the provision of licensed paper to write program (MGA) business. We look forward to 2017 and beyond with significant confidence, having delivered a strong improvement in the financial performance of the Group during the past year.
Ken Randall
Chairman
Randall & Quilter Investment Holdings Ltd.
Consolidated Income Statement
For the year ended 31 December 2016
2016 2015
Note GBP000 GBP000 GBP000 GBP000
Gross premiums written 53,377 29,253
Written premiums ceded
to reinsurers (3,597) 790
---------- ----------
Net written premiums 49,780 30,043
Change in provision for unearned
premiums, gross (6,065) (3,920)
Change in provision for unearned
premiums, reinsurers' share 2,360 (329)
---------- ----------
Net change in provision for
unearned premiums (3,705) (4,249)
--------- ---------
Earned premium, net of
reinsurance 46,075 25,794
Gross investment income 6 7,976 2,166
Other income 7 33,747 43,954
---------- ----------
41,723 46,120
Total income 87,798 71,914
Gross claims paid (59,430) (46,095)
Proceeds from commutation
and reinsurers' share
of gross claims paid 113,599 26,214
---------- ----------
Claims paid, net of reinsurance 54,169 (19,881)
Movement in gross technical
provisions (2,317) 18,204
Movement in reinsurers' share
of technical provisions after
adjusting for commutations (63,880) 377
---------- ----------
Net change in provisions for
claims (66,197) 18,581
---------- ----------
Net claims provisions
increased (12,028) (1,300)
Operating expenses 8 (80,723) (80,643)
Result of operating activities
before goodwill on bargain
purchase (4,953) (10,029)
Goodwill on bargain purchase 28 16,281 14,851
Amortisation and impairment
of intangible assets 14 (943) (739)
Result of operating activities 10,385 4,083
Finance costs 9 (1,889) (1,150)
Share of loss of associate (18) (104)
--------- -----------
Profit on ordinary activities
before income taxes 10 8,478 2,829
Income tax charge 11 (163) (72)
Profit for the year 8,315 2,757
========= ===========
Attributable to:-
Shareholders of the parent 8,414 2,986
Non-controlling interests (99) (229)
--------- -----------
8,315 2,757
========= ===========
Earnings per ordinary share
for the profit attributable
to the ordinary shareholders
of the Company:
Basic 12 11.7p 4.2p
Diluted 12 11.7p 4.2p
========= ===========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Randall & Quilter Investment Holdings Ltd.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2016
2016 2015
GBP000 GBP000
Other Comprehensive Income:
Items that will not be reclassified
to profit or loss:
Pension scheme actuarial (losses)/gains (4,168) 3,209
Deferred tax on pension scheme
actuarial losses/(gains) 709 (578)
-------- --------
(3,459) 2,631
Items that may be subsequently
reclassified to profit or loss:
Exchange gains on consolidation 8,742 480
Other comprehensive income 5,283 3,111
Profit for the year 8,315 2,757
Total comprehensive income
for the year 13,598 5,868
======== ========
Attributable to:
Shareholders of the parent 13,649 6,095
Non-controlling interests (51) (227)
Total comprehensive income
for the year 13,598 5,868
======== ========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Randall & Quilter Investment Holdings Ltd.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2016
Share
Share option Share Retained Non-controlling
Notes capital costs premium earnings Total interests Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Year ended
31 December
2016
At beginning
of year 1,437 64 11,369 73,651 86,521 57 86,578
Profit/(loss)
for the year - - - 8,414 8,414 (99) 8,315
Other comprehensive
income
Exchange profits
on consolidation - - - 8,694 8,694 48 8,742
Pension scheme
actuarial
losses - - - (4,168) (4,168) - (4,168)
Deferred tax
on pension
scheme actuarial
losses - - - 709 709 - 709
--------- -------- --------- ---------- -------- ---------------- --------
Total other
comprehensive
income for
the year - - - 5,235 5,235 48 5,283
--------- -------- --------- ---------- -------- ---------------- --------
Total comprehensive
income for
the year - - - 13,649 13,649 (51) 13,598
Transactions
with owners
Issue of shares 23 4 - 247 - 251 - 251
Issue of V
& W shares 6,053 - (6,053) - - - -
Cancellation
of V & W shares 13 (6,053) - - - (6,053) - (6,053)
At end of
year 1,441 64 5,563 87,300 94,368 6 94,374
========= ======== ========= ========== ======== ================ ========
Attributable to equity holders
of the parent
Share
Share option Share Treasury Retained Non-controlling
Notes capital costs premium shares earnings Total interests Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Year ended
31 December
2015
At beginning
of year 1,435 64 17,363 (175) 67,609 86,296 3,161 89,457
Profit/(loss)
for the year - - - - 2,986 2,986 (229) 2,757
Other
comprehensive
income
Exchange profits
on consolidation - - - - 478 478 2 480
Pension scheme
actuarial
gains - - - - 3,209 3,209 - 3,209
Deferred tax
on pension
scheme actuarial
gains - - - - (578) (578) - (578)
-------- ------- -------- --------- --------- -------- ---------------- --------
Total other
comprehensive
income for
the year - - - - 3,109 3,109 2 3,111
-------- ------- -------- --------- --------- -------- ---------------- --------
Total
comprehensive
income for
the year - - - - 6,095 6,095 (227) 5,868
Transactions
with owners
Issue of shares 2 - 37 - - 39 - 39
Issue of T
& U shares 6,031 - (6,031) - - - - -
Cancellation
of T & U shares 13 (6,031) - - - - (6,031) - (6,031)
Treasury shares - - - 175 (53) 122 - 122
Dividends
paid to
non-controlling
interest - - - - - - (2,861) (2,861)
Disposal of
non-controlling
interest - - - - - - (16) (16)
At end of
year 1,437 64 11,369 - 73,651 86,521 57 86,578
======== ======= ======== ========= ========= ======== ================ ========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Randall & Quilter Investment Holdings Ltd.
Consolidated Statement of Financial Position
As at 31 December 2016
Company Number 47341 2016 2015
Note GBP000 GBP000
Assets
Intangible assets 14 32,966 26,397
Investment in associate - 13
Property, plant and equipment 15 3,396 940
Investment properties 16a 407 770
Financial instruments
- Investments (fair value
through profit and loss) 16b 245,744 139,604
- Deposits with ceding undertakings 4b 5,578 4,733
Reinsurers' share of insurance
liabilities 21 202,732 177,211
Deferred tax assets 22 6,344 5,840
Current tax assets 22 3,014 4,569
Insurance and other receivables 17 144,375 119,860
Cash and cash equivalents 18 141,656 69,325
-------- --------
Total assets 786,212 549,262
======== ========
Liabilities
Insurance contract provisions 21 553,726 376,802
Financial liabilities
- Amounts owed to credit institutions 20 65,931 37,492
- Deposits received from reinsurers 1,354 1,429
Deferred tax liabilities 22 2,893 2,827
Insurance and other payables 19 50,410 30,794
Current tax liabilities 22 7,656 7,943
Pension scheme obligations 25 9,868 5,397
-------- --------
Total liabilities 691,838 462,684
-------- --------
Equity
Share capital 23 1,441 1,437
Share option costs 64 64
Share premium 23 5,563 11,369
Retained earnings 87,300 73,651
-------- --------
Attributable to equity holders
of the parent 94,368 86,521
Non-controlling interests in
subsidiary undertakings 29 6 57
-------- --------
Total equity 94,374 86,578
-------- --------
Total liabilities and equity 786,212 549,262
======== ========
The Financial Statements were approved by the Board of Directors on 19 April 2017 and were signed on its behalf by:
K E Randall T A Booth
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Randall & Quilter Investment Holdings Ltd.
Consolidated Cash Flow Statement
For the years ended 31 December 2016
2016 2015
Cash flows from operating activities Note GBP000 GBP000
Profit on ordinary activities
before income taxes 8,478 2,829
Finance costs 9 1,889 1,150
Depreciation 15 617 719
Share based payments 23 251 159
Share of loss of associate 18 104
Profit on divestment (625) (6,024)
Goodwill on bargain purchase 28 (16,281) (14,851)
Amortisation and impairment
of intangible assets 14 943 739
Fair value (gain)/loss on financial
assets (3,848) 2,329
Gain on disposal of investment
property - (23)
Loss on revaluation of investment
property 16 65 -
Loss on disposal of property,
plant and equipment - 1
Loss on disposal of intangible
assets - 48
Loss on net assets of pension
schemes 1,012 344
Decrease in receivables 6,315 883
(Increase)/decrease in deposits
with ceding undertakings (469) 164
Increase/(decrease) in payables 11,999 (5,379)
Increase/(decrease) in net
insurance technical provisions 69,902 (14,332)
--------- ---------
80,266 (31,140)
Sale of financial assets 19,177 62,318
Purchase of financial assets (85,312) (16,370)
--------- ---------
Cash generated from operations 14,131 14,808
Income taxes paid (234) (184)
Income taxes repaid 225 26
--------- ---------
Net cash generated from operating
activities 14,122 14,650
--------- ---------
Cash flows from investing activities
Purchase of property, plant
and equipment 15 (3,085) (201)
Proceeds from sale of property,
plant and equipment 16 61 78
Proceeds from sales of investment
properties 359 223
Purchase of intangible assets 14 (288) (550)
Acquisition of subsidiary undertakings
(offset by cash acquired) 39,341 2,697
Divestment (offset by cash disposed
of) 625 6,073
Dividends paid to minority shareholders - (2,861)
Net cash generated from investing
activities 37,013 5,459
--------- ---------
Cash flows to financing activities
Repayment of borrowings (5,999) (19,149)
Proceeds from new borrowing
arrangements 30,677 29,252
Interest and other finance
costs paid 9 (1,889) (1,150)
Cancellation of shares 13 (6,053) (6,031)
Net cash from financing activities 16,736 2,922
--------- ---------
Net increase in cash and cash
equivalents 67,871 23,031
Cash and cash equivalents at
beginning of year 69,325 46,770
Exchange losses on cash and cash
equivalents 4,460 (476)
--------- ---------
Cash and cash equivalents at
end of year 18 141,656 69,325
========= =========
Share of Syndicates' cash restricted
funds 7,119 5,812
Other funds 134,537 63,513
--------- ---------
Cash and cash equivalents at
end of year 141,656 69,325
========= =========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Randall & Quilter Investment Holdings Ltd.
Notes to the Consolidated Financial Statements
For the year ended 31 December 2016
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 underwriting managers for active insurers, as participators and managers of Lloyd's Syndicates, as purchasers of insurance receivables and as service providers to the non-life insurance market. The Consolidated Financial Statements were approved by the Board of Directors on 19 April 2017.
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 Group 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 current and future years depending on when the revision is made and the year it affects.
New and amended standards adopted by the Group
In the current year, the Group has applied amendments to IFRSs issued by the IASB that are mandatorily effective for an accounting period that begins on or after 1 January 2016.
IFRS 10: Amendment: Applying the consolidation exception
IFRS 11: Amendment: Accounting for acquisitions of interests in a joint operations
IFRS12: Amendment: Applying the consolidation exception
IAS 1: Amendment: Disclosure Initiative
IAS 16: Amendment: Clarification of acceptable methods of depreciation and amortisation
IAS 19: Amendment: Employee benefits and employee contributions
IAS 27: Amendment: Equity method in separate financial statements
IAS 28: Amendment: Applying the consolidation exception
IAS 38: Amendment: Clarification of acceptable methods of depreciation and amortisation
IFRS 2010-2012 annual improvement cycle
IFRS 2012-2014 annual improvement cycle
IFRS10, IFRS 12 and IAS28 Amendments, Applying the consolidation exception
These narrow scope amendments clarify the application of the requirements for investment entities to measure subsidiaries at fair value instead of consolidating them. There are no implications for the Group's consolidated financial statements as the Group does not meet the definition of an investment entity.
IFRS11 Amendment, Accounting for acquisitions of interests in joint operations
This amendment clarifies that the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11. The Group does not participate in joint operations which constitute a business and is not affected by the amendment.
IAS 1 Amendment, Disclosure initiative
These amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendments form part of the IASB's Disclosure Initiative, which explores how financial statement disclosures can be improved. The adoption of these amendments has no impact on the Group's profit or loss or equity.
IAS 16 and IAS 38 Amendments, Clarification of acceptable methods of depreciation and amortisation
These amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. The amendments to IAS 16 and IAS 38 prohibit the use of revenue-based depreciation for property, plant and equipment and significantly limit the use of revenue-based amortisation for intangible assets.
The adoption of these amendments has no impact for the Group's consolidated financial statements as the Group does not apply revenue based depreciation or amortisation.
IAS 19, Employee benefits and employee contributions
These narrow scope amendments simplify accounting for defined benefit plans that require contributions from employees or third parties. The adoption of the amendments has no impact on the Group's consolidated financial statements as the Group does not have defined benefit plans that require employees or third parties to contribute to the cost of the plan.
IAS 27 Amendments, Equity method in separate financial statements
The amendments to IAS 27 allow investments in subsidiaries to be accounted for using the equity method within the Company's financial statements. The Company does not intend to use the equity method in its separate financial statements.
IFRS 2010-2012 annual improvement cycle
These improvements consist of amendments to the following IFRS.
IFRS 2 Share Based Payments. Amendment to the definition on "vesting conditions"
IFRS 3 Business Combinations. Clarification that contingent consideration that is classified as an asset or a liability is measured at fair value.
IFRS 8 Operating Segments. Requires an entity to disclose the judgements made by management in applying the aggregation criteria to operating segments and clarification regarding when the disclosure of the reconciliation of reportable segments should be disclosed.
IFRS 13 Fair value measurement. Clarifies that issuing IFRS 13 and amending IFRS 9 and IAS 39 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting if the effect of not discounting is immaterial.
IAS 16 Property, Plant and Equipment. IAS 38 Intangible Assets. To clarify that, when revaluing property, plant and equipment and intangible assets, the restatement of the accumulated depreciation or amortisation need not be proportionate to the change in the gross carrying amount of the asset.
IAS 24 Related Party Disclosures. Clarifies that an entity providing key management personnel services to the reporting entity or to the parent of the reporting entity is a related party of the reporting entity.
The amendments clarify existing guidance and the adoption of these amendments has not had a significant impact on the Group's consolidated financial statements.
IFRS 2012-2014 annual improvement cycle
These improvements consist of amendments to the following IFRS.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Provides disclosure guidance when an asset is reclassified as held for distribution and vice versa.
IFRS 7 Financial Instruments. Clarification on whether a servicing contracts is continuing involvement in a transferred asset for the purpose of disclosure requirements. Clarifies the disclosure requirements of financial asset and liability offsetting in respect of condensed interim financial statements.
IAS 19 Employee Benefits. Clarification on what discount rate should apply based on the currency in which the obligation is denominated.
IAS 34 Interim Financial Reporting. Clarification on the term "elsewhere in the interim financial report"
The amendments clarify existing guidance and the adoption of these amendments has not had a significant impact on the Group's consolidated financial statements.
A number of new standards and interpretations adopted by the EU which are not mandatorily effective, as well as standards and interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing these 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 is still reviewing the upcoming standards to determine their impact.
IFRS 9, Financial instruments (IASB effective date 1 January 2018)
IFRS 14, Regulatory deferral accounts (IASB effective date 1 January 2016)
IFRS 15, Revenue from contracts with customers (IASB effective date 1 January 2018)
IFRS 16, Leases (IASB effective date 1 January 2019)
IFRS 10 Amendment, Sale or contribution of assets between an investor and its associate or joint venture. (IASB have deferred the effective date)
IAS 7 Amendment, Disclosure initiative (IASB effective date 1 January 2017)
IAS 12 Amendment, Recognition of deferred tax assets for unrealised losses. (IASB effective date 1 January 2017)
IAS 28 Amendment, Sale or contribution of assets between an investor and its associate or joint venture. (IASB have deferred the effective date)
Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 4 Phase II, IFRS 9 and IFRS 15 will have the most material impact to the 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 expected to be completed at least 12 months prior to the effective date of each standard. A brief overview of these standards is provided below:
IFRS 4 Phase II will replace IFRS 4 Phase I (an interim standard that allows insurers to continue to use various accounting practices already in place) with a single principle based accounting framework applicable to all types of insurance contracts (including reinsurance contracts);
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 liabilities; b) a new impairment methodology and c) general hedge accounting. EU endorsement of IFRS 9 may continue to be delayed for insurers to align better with the release and adoption of IFRS 4 Phase II; and
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue from contracts with customers. Revenue from contracts accounted for under IFRS 4 is outside the scope of IFRS 15 however the Group will have to apply the new revenue recognition standard to non-insurance contracts. Furthermore, the Group may have to apply the new standard to non-insurance components of contracts traditionally considered to be insurance contracts. The new standard's requirement for accounting for variable consideration could change the timing of revenue recognition for non-insurance contracts issued by the Group.
IFRS 16 "Leases" specifies how an IFRS reporter will recognise, measure, prepare and disclose leases. 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. Lessors continue to classify leases as operating or finance, with IFRS 16's approach to lessor accounting substantially unchanged from its predecessor IAS 17. The standard replaces IAS 17 'Leases' and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019, with earlier adoption permitted if IFRS 15 'Revenue from contracts with customers' has also been applied (subject to EU endorsement).
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 2016 and 2015. 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 R&Q 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 its share of the result of these Syndicates and accordingly, as the Group is the sole provider of capacity on Syndicate 3330, these Financial Statements include 100.00% of the economic interest in that Syndicate. For Syndicate 1991, the Group provides 20.01% on the 2014 year of account, 13.61% on the 2015 year of account and 13.61% on the 2016 year of account. These Consolidated Financial Statements include its 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. Therefore, the cumulative post-acquisition movements in the associates' net assets are adjusted against the cost of the investment.
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. 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, other than the 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. The Directors have assessed the position of the Group and have concluded that the Group has adequate cash resources to meet its liabilities as they fall due. On this basis, the Directors have a reasonable expectation that the Group will be able to continue in operational existence for the foreseeable future.
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 retained earnings and other reserves 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.
Reinsurance premium costs are allocated to reflect the protection arranged in respect of the business written and earned.
Acquisition costs
Acquisition costs, which represent commission and other related expenses, are deferred over the period in which the related premiums are earned. Acquisition costs incurred 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 have 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 presently 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 presently 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 Group 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 payout 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 are 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 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 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, provision will be made for any such failure.
Disclosure of the position in relation to structured settlements is shown in Note 19.
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 make use of the 'held to maturity' and 'available for sale' classifications.
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 impairments. 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.
Subordinated debt
Group subsidiaries have issued 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 remeasured 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. Treasury shares
The Employee Benefit Trust was closed on 23 December 2015. There are no shares held in Treasury.
n. Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classed as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the Consolidated Income Statement on a straight-line basis over the period of the lease.
o. Property, plant and equipment
All assets included within property, plant and equipment ("PPE") are carried at historical cost less depreciation. 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.
p. 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 14, on a biannual basis or if events or changes in circumstances indicate that the carrying amount may be impaired.
q. 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 Estimated pattern of run-off
companies in run off
On acquisitions - other Useful life, which may be
indefinite
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the Consolidated Income Statement to reduce the carrying amount to the recoverable amount.
US insurance authorisation licences
US state insurance authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Directors consider that economic benefits will accrue to the Group over an indefinite period due to the 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.
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.
r. 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.
s. 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.
t. Finance costs
Finance costs comprise interest payable and are recognised in the Consolidated Income Statement in line with the effective interest rate on liabilities.
u. 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.
v. 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.
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.
Profit commission on managed Lloyd's Syndicates
Profit commission from managed Syndicates is earned as the related underwriting profits are recognised. Profit commission receivable on open underwriting years may be subject to further adjustment (up or down) as the results are reported prior to closure of the account in accordance with Lloyd's Reinsurance to Close arrangements.
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.
w. 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.
x. 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 tax assets and liabilities are not discounted.
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.
y. 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.
z. 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 appropriately 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. However, should this occur it will not impact on the going concern basis applicable to the Group.
The Company bears no financial responsibility for any liabilities or obligations of any insurance company subsidiary in run off. 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 Company and its other subsidiaries 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 Group participates on a number of syndicates and owns a number of insurance companies in run-off. 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.
The Group also contracts with independent external actuaries to obtain a Statement of Actuarial Opinion for the Lloyd's Syndicates that it participates on. This statement shows that the booked reserves are greater than or equal to their view of best estimate. In the case of the Group's larger insurance companies in run off, independent external actuaries provide a range of acceptable estimates. The Group sets its reserves to lie within this acceptable range.
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 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 offs
In the course of the Group's business of managing runoffs of insurers and brokers, accounting records are initially recognised in the form provided by previous management. As part of managing runoffs 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 runoff, 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 'AA' rated 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
Included in Other payables in Note 19 is the Directors' estimate of the Group's exposure to the various liabilities of the Southern Illinois Land Company.
These estimates have been based on reports provided by recognised specialists as well as the Group's own internal review. These 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 these 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 Capital and Investment Committee. The 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 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 2016 and 2015 is shown below:
2016 2015
GBP000 GBP000
Government and government
agencies 28,530 18,157
Corporate bonds 165,043 73,476
Equities 9,382 13,551
Cash based investment funds 42,789 34,420
Cash and cash equivalents 141,656 69,325
387,400 208,929
======== ========
% %
Government and government
agencies 7.4 8.7
Corporate bonds 42.6 35.1
Equities 2.4 6.5
Cash based investment funds 11.0 16.5
Cash and cash equivalents 36.6 33.2
100.0 100.0
======== ========
Corporate bonds include asset backed mortgage obligations totalling GBP20,832k (2015: GBP18,752k).
Based on invested assets at external managers of GBP245,744k as at 31 December 2016 (2015: GBP139,604k), 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 2016 of GBP2,457k (2015: GBP1,396k).
(i) Pricing risk
The following table shows the fair values of financial assets using a valuation hierarchy; the fair value hierarchy has the following levels:
Level 1 - Valuations based on quoted prices in active markets for identical instruments. An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date.
Level 2 - Valuations based on quoted prices in markets that are not active or based on pricing models for which significant inputs can be corroborated by observable market data.
Level 3 - Valuations based on inputs that are unobservable or for which there is limited activity against which to measure fair value.
Level Level Level Total
2016 1 2 3 GBP000
GBP000 GBP000 GBP000
Government and government
agencies 4,241 24,289 - 28,530
Corporate bonds 382 164,661 - 165,043
Equities 9,313 - 69 9,382
Cash based investment
funds 42,789 - - 42,789
Purchased reinsurance
receivables (Note 17) - - 5,585 5,585
-------- -------- -------- --------
Total financial assets
measured at fair value 56,725 188,950 5,654 251,329
======== ======== ======== ========
Level Level Level Total
2015 1 2 3 GBP000
GBP000 GBP000 GBP000
Government and government
agencies 5,266 12,891 - 18,157
Corporate bonds 72,746 - 730 73,476
Equities 10,654 - 2,897 13,551
Cash based investment
funds 34,420 - - 34,420
Purchased reinsurance
receivables (Note 17) - - 5,997 5,997
-------- -------- -------- --------
Total financial assets
measured at fair value 123,086 12,891 9,624 145,601
======== ======== ======== ========
The following table shows the movement on Level 3 assets measured at fair value:
2016 2015
GBP000 GBP000
Opening balance 9,624 10,629
Total net gains recognised in
the Consolidated Income Statement 522 205
Purchases 354 5,372
Disposals (6,193) (6,802)
Exchange adjustments 1,347 220
Closing balance 5,654 9,624
======== ========
Level 3 investments (purchased reinsurance receivables) have been valued using detailed models outlining the anticipated timing and amounts of future receipts. The net gains recognised in the Consolidated Income Statement in other income for the year amounted to GBP522k (2015: GBP205k). During the year the Group purchased further reinsurance receivables at a cost of GBP354k (2015: GBP1,745k). Short term delays in the anticipated receipt of these investments will not have a material impact on their valuation.
Level 3 investments (equities) related to equity investments included on an acquisition in 2015, the valuation is calculated based on the fair value of the underlying assets and liabilities.
Level 3 investments (corporate bonds) relate to mortgages and are held at their principal balance.
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 2016
Maturity date or contractual re-pricing date
After
After After three
one two years years
year but but
but less less More
Less less than than than
than than three five five
Total one year two years years years years
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Debt securities 236,362 38,922 30,645 42,124 23,417 101,254
======== ========== =========== =========== ======= ========
Interest rate ranges (coupon-rates)
After
After After three
one two years years
year but but
but less less More
Less less than than than
than than three five five
one year two years years years years
% % % % %
Debt securities 0.5-1.75 1.375-7.62 0.875-6.9 1.34-5.75 1.233-6.3
====================== =========== =========== ========== ==========
As at 31 December 2015
Maturity date or contractual re-pricing date
After
After three
one years
year but
but After two less More
Less less years but than than
than than less than five five
Total one year two years three years years years
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Debt securities 126,053 8,158 7,611 8,390 39,494 62,400
======== ========== =========== ============= ======= =======
Interest rate ranges (coupon-rates)
After
After After three
one two years years
year but but
but less less More
Less less than than than
than than three five five
one year two years years years years
% % % % %
Debt securities 0.45-5.5 0.88-6 0.88-5.75 1.64-5 0.67-4.11
======================== =========== =========== ======= ==========
Liquidity risk is managed by the 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 managed by reference to the Group's overall tolerance for potential liquidity shortfalls, which is 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 & 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
2016
Exposures
Less of less
than Other than
A rated B rated B * GBP200k Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Deposits with
ceding undertakings 2,973 286 - - 2,319 5,578
Reinsurers'
share of insurance
liabilities 144,244 3,623 371 34,337 20,157 202,732
Receivables
arising out
of reinsurance
contracts 45,987 2,261 269 9,134 14,341 71,992
As at 31 December
2015
Exposures
Less of less
than Other than
A rated B rated B * GBP200k Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Deposits with
ceding undertakings 2,692 245 - - 1,796 4,733
Reinsurers'
share of insurance
liabilities 124,903 9,782 317 30,366 11,843 177,211
Receivables
arising out
of reinsurance
contracts 38,092 3,068 231 4,897 11,057 57,345
* 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 are as follows:
As at 31 December 0-6 6-12 12-24 > 24 2016 months% months% months% months% Percentage of receivables 65.3 3.9 6.5 24.3 As at 31 December 0-6 6-12 12-24 > 24 2015 months% months% months% months% Percentage of receivables 69.3 3.2 6.1 21.4
A substantial 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.
The Directors believe the amounts past due but not impaired are recoverable in full.
Credit risk is managed at the Group level by way of two Committees which have been established specifically with this in mind.
The first is the Group Reinsurance Asset Committee, which is chaired by a Non-Executive Director and meets quarterly. This is a Committee of the Group Board and its function is to monitor and report on the Group's non-Syndicate reinsurance assets and, where necessary, recommend action to protect the asset.
The second is the Syndicate Management Committee of R&Q Managing Agency Limited ("RQMA") (a Committee of the RQMA Board), which is 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 RQMA Risk and Capital Committee, 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 2016 Sterling US dollar Euro Other Total
GBP000 GBP000 GBP000 GBP000 GBP000
Intangible assets 17,735 14,729 481 21 32,966
Reinsurers' share of insurance
liabilities 24,932 114,144 63,656 - 202,732
Financial instruments 18,350 200,032 32,764 582 251,728
Insurance receivables 28,624 60,506 2,111 - 91,241
Cash and cash equivalents 59,821 78,652 2,594 589 141,656
Insurance liabilities
including provisions (99,052) (371,370) (94,770) - (565,192)
Other provisions (10,139) (2,207) (415) - (12,761)
Trade and other (payables)/receivables (19,594) (17,154) (10,515) (739) (48,002)
--------- ---------- --------- -------- ----------
Total 20,677 77,332 (4,094) 453 94,368
--------- ---------- --------- -------- ----------
31 December 2015 Sterling US dollar Euro Other Total
GBP000 GBP000 GBP000 GBP000 GBP000
Intangible assets 13,507 12,308 582 - 26,397
Reinsurers' share of insurance
liabilities 7,614 168,132 1,465 - 177,211
Financial instruments 4,041 119,311 21,299 469 145,120
Insurance receivables 23,748 47,188 854 - 71,790
Cash and cash equivalents 47,717 20,430 923 255 69,325
Insurance liabilities
including provisions (77,284) (292,475) (14,766) - (384,525)
Other provisions (5,590) (2,257) (377) - (8,224)
Trade and other (payables)/receivables 15,179 (11,946) (13,072) (734) (10,573)
--------- ---------- --------- -------- ----------
Total 28,932 60,691 (3,092) (10) 86,521
--------- ---------- --------- -------- ----------
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 2016 31 December 2015
Currency Changes Impact Impact Impact Impact
in variables on profit on equity* on profit on equity*
GBP000 GBP000 GBP000 GBP000
Euro weakening 10% 291 379 (79) 282
US dollar
weakening 10% (901) (7,060) 501 (5,517)
Euro strengthening 10% (357) (463) 94 (344)
US dollar
strengthening 10% 1,098 8,629 (611) 6,743
* 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. At Group level, this currently translates as maintaining Group capital at a 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
The Group participates on Syndicates shown below:
Year of Capacity Group capacity
Syndicate account GBP000 GBP000 Open / closed
1991 2016 129,740 17,693 Open
1991 2015 146,218 19,900 Open
1991 2014 150,000 30,019 Closed
3330 2014 3,500 3,500 Open
(i) 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 for risk concentrations are identified across operating entities, appropriate monitoring is developed to manage the overall Group exposure.
(ii) 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.
Where appropriate, reserving risk is mitigated through the use of adverse loss development cover.
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 2013.
The analysis of claims development in the Group's run-off insurance entities is as follows:
Gross Group Entities Entities Entities Entities
entities acquired acquired acquired acquired
at by by by by
the the the
1 January Group Group Group the Group
during during during during
2013 2013 2014 2015 2016
GBP000 GBP000 GBP000 GBP000 GBP000
Gross claims at
:
1 January/acquisition 392,778 13,296 28,082 12,147 107,121
First year movement (89,626) (605) (4,656) 26 (2,793)
Second year movement 9,994 (2,569) (8,667) 1,222
Third year movement 1,683 (2,983) 13,043
Fourth year movement 42,208 1,232
Gross provision
at 31 December
2016 357,037 8,371 27,802 13,395 104,328
---------- --------- --------- --------- ----------
Gross claims at
:
1 January/acquisition 392,778 13,296 28,082 12,147 107,121
Exchange adjustments 73,939 622 2,560 109 (3,314)
Payments (250,023) (3,512) (3,049) (999) (1,075)
Gross provision
at 31 December
2016 (357,037) (8,371) (27,802) (13,395) (104,328)
(Deficit)/surplus
to date (140,343) 2,035 (209) (2,138) (1,596)
---------- --------- --------- --------- ----------
Gross claims provisions
- live business - - 19,905 19,848 3,040
---------- --------- --------- --------- ----------
Total gross insurance
contract provisions
(Note 21) 357,037 8,371 47,707 33,243 107,368
========== ========= ========= ========= ==========
Net Group Entities Entities Entities Entities
entities acquired acquired acquired acquired
at by by by by
the the the
1 January Group Group Group the Group
during during during during
2013 2013 2014 2015 2016
GBP000 GBP000 GBP000 GBP000 GBP000
Net claims at :
1 January/acquisition 223,349 11,571 24,150 11,283 42,540
First year movement (75,827) (438) (3,940) 9 (1,171)
Second year movement 459 (2,108) (7,177) 1,037
Third year movement (4,490) (2,710) 13,174
Fourth year movement 80,949 953
Net provision at
31 December 2016 224,440 7,268 26,207 12,329 41,369
---------- --------- --------- --------- ----------
Net claims at :
1 January/acquisition 223,349 11,571 24,150 11,283 42,540
Exchange adjustments 45,503 7 2,363 100 629
Payments (10,962) (1,896) (1,224) (999) (846)
Net position at
31 December 2016 (224,440) (7,268) (26,386) (12,329) (41,369)
Surplus/(deficit)
to date 33,450 2,414 (1,097) (1,945) 954
---------- --------- --------- --------- ----------
Net claims provisions
- live business - - 17,455 18,985 2,941
---------- --------- --------- --------- ----------
Total net insurance
contract provisions
(Note 21) 224,440 7,268 43,662 31,314 44,310
========== ========= ========= ========= ==========
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 favourable foreign exchange movements in cash and investments held to meet insurance liabilities.
5. Segmental information
The Group's segments represent the level at which financial information is reported to the Board, being the chief operating decision maker as defined in IFRS 8. The reportable segments have been identified as follows:-
-- Insurance Investments, which acquires/assumes legacy portfolios and insurance debt and provides capital support to the Group's managed Lloyd's Syndicates
-- Insurance Services, which provides insurance related services (including captive management) to both internal and external clients in the insurance market
-- Underwriting Management, which provides management to Lloyd's Syndicates and operates other underwriting entities
-- Other corporate activities, which primarily includes the Group holding company and other minor subsidiaries which fall outside of the segments above
Segmental results for the year ended 31 December 2016
Insurance Investments Insurance Underwriting Other Consolidation
Live Run-off Total Services Management Corporate adjustments Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Earned premium,
net of reinsurance 28,458 10,325 38,783 - 7,292 - - 46,075
Net investment
income 23 10,232 10,255 1,037 694 4,042 (8,052) 7,976
External
income - 456 456 19,977 13,046 268 - 33,747
Internal
income - 1,777 1,777 8,528 335 6,903 (17,543) -
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Total income 28,481 22,790 51,271 29,542 21,367 11,213 (25,595) 87,798
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Claims paid,
net of reinsurance (6,095) 49,484 43,389 - 10,780 - - 54,169
Net change
in provision
for claims (10,739) (44,787) (55,526) - (10,671) - - (66,197)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Net insurance
claims
(increased)/released (16,834) 4,697 (12,137) - 109 - - (12,028)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Operating
expenses (13,735) (17,599) (31,334) (27,357) (23,238) (16,337) 17,543 (80,723)
Result of
operating
activities
before goodwill
on bargain
purchase (2,088) 9,888 7,800 2,185 (1,762) (5,124) (8,052) (4,953)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Goodwill
on bargain
purchase - 16,281 16,281 - - - - 16,281
Amortisation
and impairment
of intangible
assets - (566) (566) (164) (193) (20) - (943)
Result of
operating
activities (2,088) 25,603 23,515 2,021 (1,955) (5,144) (8,052) 10,385
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Finance costs - (2,085) (2,085) (1,294) (284) (6,278) 8,052 (1,889)
Share of
loss of associate - - - - (18) - - (18)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Profit/(loss)
on ordinary
activities
before income
taxes (2,088) 23,518 21,430 727 (2,257) (11,422) - 8,478
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Income tax
(charge)/credit - (1,904) (1,904) 730 531 480 - (163)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Profit/(loss)
for the year (2,088) 21,614 19,526 1,457 (1,726) (10,942) - 8,315
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Non-controlling
interests - (350) (350) 449 - - - 99
Attributable
to shareholders
of parent (2,088) 21,264 19,176 1,906 (1,726) (10,942) - 8,414
========= ========= ========= ========== ============= ========== ============== =========
Segment assets 37,351 811,784 849,135 96,887 46,020 196,522 (402,352) 786,212
========= ========= ========= ========== ============= ========== ============== =========
Segment liabilities 44,349 623,878 668,227 91,292 36,579 298,092 (402,352) 691,838
========= ========= ========= ========== ============= ========== ============== =========
Segmental results for the year ended 31 December 2015
Insurance Investments Insurance Underwriting Other Consolidation
Live Run-off Total Services Management Corporate adjustments Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Earned premium,
net of reinsurance 17,847 912 18,759 - 7,035 - - 25,794
Net investment
income 1 5,470 5,471 1,585 473 4,783 (10,146) 2,166
External
income - 567 567 22,906 14,431 6,050 - 43,954
Internal
income - 513 513 14,599 2,038 1,472 (18,622) -
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Total income 17,848 7,462 25,310 39,090 23,977 12,305 (28,768) 71,914
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Claims paid,
net of reinsurance (4,372) (15,411) (19,783) - (98) - - (19,881)
Net change
in provision
for claims (6,439) 24,957 18,518 - 63 - - 18,581
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Net insurance
claims
(increased)/released (10,811) 9,546 (1,265) - (35) - - (1,300)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Operating
expenses (9,453) (23,142) (32,595) (33,952) (24,079) (8,639) 18,622 (80,643)
Result of
operating
activities
before goodwill
on bargain
purchase (2,416) (6,134) (8,550) 5,138 (137) 3,666 (10,146) (10,029)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Goodwill
on bargain
purchase - 14,851 14,851 - - - - 14,851
Amortisation
and impairment
of intangible
assets - (262) (262) (138) (339) - - (739)
Result of
operating
activities (2,416) 8,455 6,039 5,000 (476) 3,666 (10,146) 4,083
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Finance costs - (1,831) (1,831) (1,851) (579) (7,035) 10,146 (1,150)
Share of
loss of associate - - - - (104) - - (104)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Profit/(loss)
on ordinary
activities
before income
taxes (2,416) 6,624 4,208 3,149 (1,159) (3,369) - 2,829
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Income tax
(charge)/credit - (2,612) (2,612) 12 344 2,184 - (72)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Profit/(loss)
for the year (2,416) 4,012 1,596 3,161 (815) (1,185) - 2,757
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Non-controlling
interests - - - 28 201 - - 229
Attributable
to shareholders
of parent (2,416) 4,012 1,596 3,189 (614) (1,185) - 2,986
========= ========= ========= ========== ============= ========== ============== =========
Segment assets 23,914 515,739 539,653 51,760 40,883 174,703 (257,737) 549,262
========= ========= ========= ========== ============= ========== ============== =========
Segment liabilities 30,974 389,777 420,751 43,871 23,046 232,753 (257,737) 462,684
========= ========= ========= ========== ============= ========== ============== =========
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
2016
North
UK America Europe Total
GBP000 GBP000 GBP000 GBP000
Gross assets 312,688 640,129 235,747 1,188,564
Intercompany eliminations (206,717) (134,274) (61,361) (402,352)
Segment assets 105,971 505,855 174,386 786,212
========== ========== ========= ==========
Gross liabilities 293,504 620,388 180,298 1,094,190
Intercompany eliminations (200,497) (191,832) (10,023) (402,352)
Segment liabilities 93,007 428,556 170,275 691,838
========== ========== ========= ==========
Revenue from external
customers 51,943 19,451 16,404 87,798
========== ========== ========= ==========
As at 31 December
2015
North
UK America Europe Total
GBP000 GBP000 GBP000 GBP000
Gross assets 202,865 466,941 137,193 806,999
Intercompany eliminations (110,281) (97,063) (50,393) (257,737)
Segment assets 92,584 369,878 86,800 549,262
========== ========== ========= ==========
Gross liabilities 180,650 461,663 78,108 720,421
Intercompany eliminations (117,521) (137,613) (2,603) (257,737)
Segment liabilities 63,129 324,050 75,505 462,684
========== ========== ========= ==========
Revenue from external
customers 21,278 26,785 23,851 71,914
========== ========== ========= ==========
6. Gross investment income
2016 2015
GBP000 GBP000
Investment income 4,127 4,044
Realised net gains on financial
assets 3,191 136
Unrealised gains/(losses)
on financial assets 658 (2,014)
7,976 2,166
======== ========
7. Other income
2016 2015
GBP000 GBP000
Management fees 31,442 33,418
Profit commission on managed
Lloyd's Syndicates - 237
Insurance commissions 1,371 3,127
Profit on divestment (note
28) 625 6,024
Interest expense on pension
scheme deficit (213) (282)
Purchased reinsurance receivables 522 1,430
33,747 43,954
======== ========
8. Operating expenses
2016 2015
GBP000 GBP000
Costs of insurance company
subsidiaries 9,080 11,652
Pre-contract costs 244 191
Employee benefits 42,026 38,240
Other operating expenses 29,373 30,560
80,723 80,643
======== ========
The costs of insurance company subsidiaries represent external costs borne by subsidiaries of the Group; intragroup charges are removed on consolidation.
Auditor remuneration
2016 2015
GBP000 GBP000
Fees payable to the Group's
auditors for the audit of
the parent company and its
Consolidated Financial Statements 110 110
Fees payable for the audit
of the Group's subsidiaries
by:
* Group auditors 403 418
* Other auditors 431 403
Advice on financial and accountancy
matters 4 4
Other services under legislative
requirements 130 107
-------- --------
Total 1,078 1,042
======== ========
9. Finance costs
2016 2015
GBP000 GBP000
Bank loan and overdraft interest 712 805
Subordinated debt interest 1,177 345
-------- --------
1,889 1,150
======== ========
As described in note 20, during 2015 a subsidiary issued subordinated debt for EUR20m at a margin of 6.7% above EURIBOR and is repayable in 2025. During the year a subsidiary issued subordinated debt for $20m at a margin of 7.75% above LIBOR and is repayable in 2023.
10. Profit/(loss) on ordinary activities before taxation
Profit/(loss) on ordinary activities before taxation is stated after charging/(crediting):
2016 2015
GBP000 GBP000
Employee benefits (Note 24) 42,026 38,240
Legacy acquisition costs
(including aborted transactions) 1,115 828
Depreciation of fixed assets
(Note 15) 617 719
Operating lease rental expenditure 2,359 1,898
Operating lease rental income - (10)
Amortisation of pre contract
costs 244 191
Amortisation and impairment
of intangibles (Note 14) 943 739
11. Income tax charge
a. Analysis of charge in the year
2016 2015
GBP000 GBP000
Current tax
Current year 27 (176)
Adjustments in respect of
previous years (849) (966)
Foreign tax 714 1,883
-------- --------
(108) 741
Deferred tax 271 (669)
-------- --------
Income tax charge 163 72
======== ========
b. Factors affecting tax charge for the year
The tax assessed differs from the standard rate of corporation tax in the United Kingdom. The differences are explained below:
2016 2015
GBP000 GBP000
Profit on ordinary activities
before taxation 8,478 2,829
-------- --------
Profit on ordinary activities
at the standard rate of corporation
tax in the UK of 20% (2015:
20.25%) 1,696 573
Temporary differences (5,247) (495)
Capital allowances in excess
of depreciation 111 (21)
Utilisation of tax losses (82) (17)
Tax losses carried back - 67
Timing differences in respect
of pension schemes 63 173
Unrelieved losses 1,964 33
Foreign tax rate differences 2,507 725
Adjustments to the tax charge
in respect of prior years (849) (966)
--------
Income tax charge for the
year 163 72
======== ========
c. Factors that may affect future tax charges
In addition to the recognised deferred tax asset, the Group has other trading losses of approximately GBP47,153k (2015: GBP43,824k) 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 GBP27,461k (2015: GBP29,776k).
12. 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:
2016 2015
GBP000 GBP000
Profit for the year attributable
to ordinary shareholders 8,414 2,986
======== ========
No. No.
000's 000's
Shares in issue throughout the
year 71,835 71,676
Weighted average number of ordinary
shares issued 169 67
Weighted average number of ordinary
shares 72,004 71,743
======== ========
Basic earnings per ordinary share 11.7p 4.2p
======== ========
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:
2016 2015
GBP000 GBP000
Profit for the year attributable
to ordinary shareholders 8,414 2,986
======== ========
No. No.
000's 000's
Weighted average number of ordinary
shares in issue in the year 72,004 71,743
Dilution effect of options 95 114
72,099 71,857
======== ========
Diluted earnings per ordinary
share 11.7p 4.2p
======== ========
c. Net asset value per share
2016 2015
GBP000 GBP000
Net assets attributable to equity
shareholders as at 31 December 94,368 86,521
======== ========
No. No.
000's 000's
Ordinary shares in issue as at
31 December 72,118 71,835
Less: shares held in treasury - -
-------- --------
72,118 71,835
======== ========
Net asset value per ordinary
share 130.9p 120.4p
======== ========
13. Distributions
The amounts recognised as distributions to equity holders in the year are:
2016 2015
GBP000 GBP000
Distribution on cancellation
of V/T shares 3,603 3,590
Distribution on cancellation
of W/U shares 2,450 2,441
Total distributions to shareholders 6,053 6,031
======== ========
14. Intangible assets
US state
licences
& customer Arising
contracts on acquisition Goodwill Other Total
GBP000 GBP000 GBP000 GBP000 GBP000
Cost
As at 1 January
2015 5,411 2,000 29,585 569 37,565
Exchange adjustments 245 (65) 668 2 850
Acquisition
of subsidiaries - 3,297 - - 3,297
Additions - - - 550 550
Disposals - (323) - (135) (458)
As at 31 December
2015 5,656 4,909 30,253 986 41,804
Exchange adjustments 1,193 358 4,179 8 5,738
Acquisition
of subsidiaries - 4,710 - - 4,710
Additions - - - 288 288
Disposals - - - - -
------------ ---------------- --------- ------- -------
As at 31 December
2016 6,849 9,977 34,432 1,282 52,540
============ ================ ========= ======= =======
Amortisation/Impairment
As at 1 January
2015 - 510 13,830 135 14,475
Exchange adjustments 4 (29) 627 1 603
Charge for the
year 150 372 - 217 739
Disposals - (322) - (88) (410)
------------ ---------------- --------- ------- -------
As at 31 December
2015 154 531 14,457 265 15,407
Exchange adjustments 49 119 3,047 9 3,224
Charge for the
year 170 546 - 227 943
Disposals - - - - -
As at 31 December
2016 373 1,196 17,504 501 19,574
============ ================ ========= ======= =======
Carrying amount
------------ ---------------- --------- ------- -------
As at 31 December
2016 6,476 8,781 16,928 781 32,966
============ ================ ========= ======= =======
As at 31 December
2015 5,502 4,378 15,796 721 26,397
============ ================ ========= ======= =======
Goodwill acquired through business combinations has been allocated to cash generating units, (which are also operating and reportable segments) for impairment testing as shown in the table below, including the carrying amount for each unit.
2016 2015
Cash generating units GBP000 GBP000
Insurance Investments Division 474 474
Insurance Services Division
("ISD") 15,583 14,451
Underwriting Management Division 871 871
-------- --------
Total 16,928 15,796
======== ========
The recoverable amount of these cash generating units is determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management. As a result of the analysis, no impairment was required for these cash generating units.
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% (2015: 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.
-- Reductions in operating expenses, which are linked to management expectations of the run-off of the insurance business managed by ISD.
-- Growth rate used to extrapolate cash flows beyond the budget period, based on published industry standards. Cash flows beyond the four-year period are extrapolated using a 10.0% growth rate (2015: 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.
15. Property, plant and equipment
Computer Motor Office Leasehold Freehold
equipment vehicles equipment improvements Property
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Cost
As at 1 January
2015 1,981 35 2,145 358 - 4,519
Exchange adjustments 61 1 (16) 58 - 104
Acquisition
of subsidiaries - - - - - -
Additions 121 - 78 2 - 201
Disposals (330) - (332) - - (662)
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2015 1,833 36 1,875 418 - 4,162
----------- ---------- ----------- -------------- ---------- --------
Exchange adjustments 253 5 84 236 - 578
Acquisition
of subsidiaries - - - - - -
Additions 111 - 488 - 2,486 3,085
Disposals (482) - (770) (1) - (1,253)
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2016 1,715 41 1,677 653 2,486 6,572
=========== ========== =========== ============== ========== ========
Depreciation
As at 1 January
2015 1,259 23 1,572 137 - 2,991
Exchange adjustments 39 - 17 39 - 95
Charge for the
year 324 8 321 66 - 719
Disposals (251) - (332) - - (583)
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2015 1,371 31 1,578 242 - 3,222
----------- ---------- ----------- -------------- ---------- --------
Exchange adjustments 240 5 82 203 - 530
Charge for the
year 258 5 289 65 - 617
Disposals (433) - (759) (1) - (1,193)
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2016 1,436 41 1,190 509 - 3,176
=========== ========== =========== ============== ========== ========
Carrying amount
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2016 279 - 487 144 2,486 3,396
=========== ========== =========== ============== ========== ========
As at 31 December
2015 462 5 297 176 - 940
=========== ========== =========== ============== ========== ========
As at 31 December
2014 722 12 573 221 - 1,528
=========== ========== =========== ============== ========== ========
As at 31 December 2016, the Group had no significant capital commitments (2015: none). The depreciation charge for the year is included in operating expenses.
16. Investment properties and financial assets
2016 2015
GBP000 GBP000
a. Investment properties
As at 1 January 770 973
Exchange adjustment 61 (3)
Decrease in fair value during
the year (65) -
Disposals (359) (200)
-------- --------
As at 31 December 407 770
The investment properties are measured at fair value derived from the valuation work performed at the balance sheet date by an independent property valuer. Properties that are under contract for sale have been valued at the agreed sale price.
Rental income from the investment properties for the year was GBP15k (2015: GBP32k) and is included in Other Income with the Consolidated Income Statement.
b. Financial investment assets at fair value through profit or loss (designated at initial recognition)
2016 2015
GBP000 GBP000
Equities 9,313 13,551
Debt securities - fixed
interest rate 236,431 126,053
245,744 139,604
======== ========
Included in the above amounts are GBP13,744k (2015: GBP15,389k) pledged as part of the Funds at Lloyd's in support of the Group's underwriting activities in 2016. 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 GBP60,986k (2015 - GBP24,767k) of funds withheld as collateral for certain of the Group's reinsurance contracts.
c. Shares in subsidiary and associate undertakings
The Company had interests in the following subsidiaries and associate at 31 December 2016:
% of ordinary
shares
held via:
Country of The Subsidiary Overall
incorporation/ Company and associate effective
registration undertakings % of share
capital
held
Principal activity and
name of subsidiaries/associate
Insurance Investments Division
Randall & Quilter II Holdings England and
Limited Wales - 100 100
Agency Program Insurance
Company (SAC) Limited Bermuda - 100 100
Alma Vakuutus OY Finland - 100 100
Armitage International
Insurance Company, Ltd Bermuda - 100 100
Berda Developments Limited Bermuda - 100 100
Capstan Insurance Company
Limited Guernsey - 100 100
FNF Title Company Limited Malta 100 - 100
Goldstreet Insurance Company USA - 100 100
Hickson Insurance Limited Isle of Man - 100 100
La Licorne Compagnie de
Reassurances SA France - 100 100
La Metropole Compagnie
Belge d'Assurance SA Belgium - 100 100
Pender Mutual Insurance
Company Limited Isle of Man - 100 100
England and
R&Q Alpha Company Limited Wales 100 - 100
England and
R&Q Capital No. 1 Limited Wales - 100 100
England and
R&Q Capital No. 2 Limited Wales - 100 100
England and
R&Q Capital No. 4 Limited Wales 100 - 100
England and
R&Q Capital No. 5 Limited Wales 100 - 100
R & Q Cyprus Ltd Cyprus 100 - 100
England and
R&Q Delta Company Limited Wales 100 - 100
England and
R&Q Gamma Company Limited Wales 100 - 100
R&Q Insurance (Europe)
Limited Malta - 100 100
R&Q Insurance (Malta) Limited Malta - 100 100
R&Q Ireland Claims Services
Limited Ireland - 100 100
R&Q Ireland Company Limited
by Guarantee Ireland - 100 100
R&Q Liquidity Management England and
Limited Wales - 100 100
R&Q Malta Holdings Limited Malta - 100 100
R&Q Re (Bermuda) Limited Bermuda - 100 100
R&Q Reinsurance Company USA - 100 100
R&Q Reinsurance Company England and
(UK) Limited Wales - 100
RQLM Limited Bermuda 100 - 100
Southern Illinois Land
Company USA - 100 60
Transport Insurance Company USA - 100 100
United States Sports Insurance
(Company) LLC USA - 100 100
Insurance Services Division
Randall & Quilter IS Holdings England and
Limited Wales - 100 100
Randall & Quilter Captive England and
Holdings Limited Wales - 100 100
A. M. Associates Insurance
Services Limited Canada - 100 100
England and
Callidus Solutions Ltd Wales - 51 51
England and
R&Q CalSol Limited Wales - 100 100
Excess and Treaty Management
Corporation USA - 100 100
Grafton US Holdings Inc. USA - 60 60
JMD Specialist Insurance England and
Services Group Limited Wales - 100 100
JMD Specialist Insurance England and
Services Limited Wales - 100 100
John Heath & Company Inc USA - 100 100
LBL Acquisitions, LLC USA - 100 60
England and
R&Q Archive Services Limited Wales - 100 100
England and
R&Q Broker Services Limited Wales - 100 100
R&Q Captive Management
LLC USA - 100 100
England and
R&Q Central Services Limited Wales - 100 100
England and
R&Q CG Limited Wales - 100 100
R&Q Healthcare Interests
LLC USA - 100 100
R&Q Insurance Management
(Gibraltar) Limited Gibraltar 100 100
R&Q Insurance Management
(IOM) Limited Isle of Man - 100 100
R&Q Insurance Services England and
Limited Wales - 100 100
R&Q Intermediaries (Bermuda)
Limited Bermuda - 100 100
England and
R&Q KMS Management Limited Wales - 100 100
England and
R&Q Market Services Limited Wales - 100 100
R&Q Quest (SAC) Limited Bermuda - 100 100
R&Q Quest Insurance Limited Bermuda - 100 100
R&Q Quest Management Services
(Cayman) Limited Cayman Isl. - 100 100
R&Q Quest Management Services
Limited Bermuda - 100 100
R&Q Quest PCC, LLC USA - 100 100
R&Q Services Holding Inc USA - 100 100
R&Q Solutions LLC USA - 100 100
R&Q Triton AS Norway - 100 100
R&Quiem Financial Services England and
Limited Wales - 100 100
England and
R&Quiem Limited Wales - 100 100
Randall & Quilter America
Holdings Inc USA - 100 100
Randall & Quilter Bermuda
Holdings Limited Bermuda - 100 100
Randall & Quilter Canada
Holdings Limited Canada - 100 100
Randall & Quilter Healthcare
Holdings Inc. USA - 100 100
England and
Reinsurance Solutions Limited Wales - 100 100
Requiem America Inc USA - 100 100
Risk Transfer Underwriting
Inc. USA - 100 60
RSI Solutions International
Inc USA - 100 100
Syndicated Services Company
Inc USA - 100 100
The Handling-Norge Group
AS Norway - 100 100
Underwriting Management
Randall & Quilter Underwriting England and
Management Holdings Limited Wales - 100 100
Accredited Holding Corporation USA - 100 100
Accredited Surety & Casualty
Company, Inc. USA - 100 100
Accredited Group Agency
Inc. USA - 100 100
Accredited Bond Agencies
Inc. USA - 100 100
England and
DTW 1991 Underwriting Limited Wales - 100 100
R&Q Commercial Risk Services England and
Limited Wales - 100 100
England and
R&Q Managing Agency Limited Wales - 100 100
England and
R&Q MGA Limited Wales - 100 100
R&Q Risk Services Canada
Limited Canada - 100 100
Synergy Insurance Services England and
(UK) Limited Wales - 100 100
Trilogy Managing General England and
Agents Limited Wales - 30 30
Others
England and
RQIH Limited Wales 100 - 100
England and
R&Q Oast Limited Wales - 100 100
England and
R&Q Secretaries Limited Wales - 100 100
17. Insurance and other receivables
2016 2015
GBP000 GBP000
Receivables arising from direct
insurance operations 19,249 14,444
Receivables arising from reinsurance
operations 71,992 57,345
-------- --------
Insurance receivables 91,241 71,789
-------- --------
Trade receivables 4,117 5,221
Other receivables 28,509 23,288
Purchased reinsurance receivables 5,585 5,997
Prepayments and accrued income 14,923 13,565
-------- --------
53,134 48,071
Total 144,375 119,860
======== ========
Included in receivables arising from reinsurance operations is GBP9,664k (2015: GBP4,063k) in respect of amounts due under certain reinsurance contracts which are not expected to be received within 12 months.
Included in purchased reinsurance receivables is GBP4,271k (2015: GBP2,656k) which is expected to be received within 12 months. The remainder of the balance is expected to be received after 12 months.
Included in other receivables is an amount of GBP840k (2015: GBP560k) held in escrow in respect of the defined benefit scheme.
The carrying amounts disclosed above reasonably approximate their fair values at the period end date.
18. Cash and cash equivalents
2016 2015
GBP000 GBP000
Cash at bank and in hand 141,656 69,325
========= ========
Included in cash and cash equivalents is GBP608k (2015: GBP502k) being funds held in escrow accounts in respect of guarantees provided to the Institute of London Underwriters. The increase 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.
Insurance broking fiduciary funds of GBP12,988k (2015: GBP15,427k), which are used to pay premiums to underwriters and settle claims to policy holders, are not included in the above cash balances.
19. Insurance and other payables
2016 2015
GBP000 GBP000
Structured liabilities 436,927 357,802
Structured settlements (436,927) (357,802)
---------- ----------
- -
---------- ----------
Payables arising from reinsurance
operations 7,003 5,402
Payables arising from direct
insurance operations 3,108 893
---------- ----------
Insurance payables 10,111 6,295
---------- ----------
Trade payables 1,437 998
Other taxation and social
security 871 1,077
Other payables 28,908 16,802
Accruals and deferred income 9,083 5,622
---------- ----------
40,299 24,499
---------- ----------
Total 50,410 30,794
========== ==========
The carrying amounts disclosed above reasonably approximate their fair values at the period end date.
Included in other payables is GBP1,429k (2015: GBP1,363k) in respect of various liabilities arising in the Southern Illinois Land Company in respect of potential subsidence and workers compensation claims. The subsidence claims have been discounted and the potential undiscounted amount of all future payments is GBP15,061k (2015: 12,439k).
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. The Group has paid for annuities from third party life insurance companies for the benefit of certain claimants. In the event that any of these life insurance companies were unable to meet their obligations to these annuitants, any remaining liability would fall upon the respective insurance company subsidiaries. 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. 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.
Segregated Cells
R&Q Quest (SAC) Limited ("Quest") is a segregated cell company in which assets and liabilities are held separately in segregated cells. The assets and liabilities of the segregated cells and the profits and losses of each cell are not available for use by Quest and as such only the assets and liabilities of the Group-owned cells are included in the Consolidated Statement of Financial Position. Excluding Group-owned cells, the amounts held on behalf of the segregated cells as at 31 December 2016 amount to GBP27,432k (2015: GBP28,017k).
RQLM Limited is a segregated cell company in which assets and liabilities are held separately in segregated cells. The assets and liabilities of the segregated cells and the profits and losses of each are not available for use by the Group and as such only the assets and the liabilities of the Groups share of cells are included in the Consolidated Statement of Financial Position. The amounts held on behalf of the third parties as at 31 December 2016 amount to GBP7,561k.
20. Financial liabilities
2016 2015
GBP000 GBP000
Amounts owed to credit institutions 65,931 37,492
======== ========
Amounts due to credit institutions
are payable as follows:
2016 2015
GBP000 GBP000
Less than one year 21,697 6,949
Between one to five years 11,373 16,284
Over five years 32,861 14,259
65,931 37,492
======== ========
As outlined in Note 30, GBP31,874k (2015: GBP19,953k) owed to credit institutions is secured by debentures over the assets of the Company and several of its subsidiaries. GBP8,000k was due to a short term bridge facility to fund acquisitions, which was repaid in January 2017.
In the prior year a subsidiary issued subordinated debt for EUR20m at a margin of 6.7% above EURIBOR and is repayable in 2025.
During the year a subsidiary issued subordinated debt for $20m at a margin of 7.75% above LIBOR and is repayable in 2023.
21. Insurance contract provisions and reinsurance balances
2016 2015
Live Run-off Total Live Run-off Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Gross
Insurance contract
provisions at
1 January 27,902 348,900 376,802 16,189 346,694 362,883
Claims paid (6,095) (53,335) (59,430) (4,664) (41,431) (46,095)
Increases in provisions
arising from the
acquisition of
subsidiary undertakings
and Syndicate
participations - 107,121 107,121 - 12,147 12,147
Increase/(decrease)
in claims provisions 17,785 43,962 61,747 12,018 15,873 27,891
Increase/(decrease)
in unearned premium
reserve 3,093 2,972 6,065 4,012 (92) 3,920
Net exchange differences 108 61,313 61,421 347 15,709 16,056
As at 31 December 42,793 510,933 553,726 27,902 348,900 376,802
-------- ---------- ---------- -------- --------- ---------
Reinsurance
Reinsurers' share
of insurance contract
provisions at
1 January 2,442 174,769 177,211 1,926 169,478 171,404
Proceeds from
commutations and
reinsurers' share
of gross claims
paid - (113,599) (113,599) (292) (25,922) (26,214)
Increases in provisions
arising from the
acquisition of
subsidiary undertakings
and Syndicate
participations - 64,581 64,581 - 864 864
Increase/(decrease)
in claims provisions 951 48,768 49,719 1,208 25,383 26,591
Increase/(decrease)
in unearned premium
reserve 163 2,197 2,360 (410) 81 (329)
Net exchange differences (144) 22,604 22,460 10 4,885 4,895
As at 31 December 3,412 199,320 202,732 2,442 174,769 177,211
-------- ---------- ---------- -------- --------- ---------
Net
Net insurance
contract provisions
at 1 January 25,460 174,131 199,591 14,263 177,216 191,479
Net (claims paid)/commutation
proceeds (6,095) 60,264 54,169 (4,372) (15,509) (19,881)
Increases in provisions
arising from the
acquisition of
subsidiary undertakings
and Syndicate
participations - 42,540 42,540 - 11,283 11,283
Increase/(decrease)
in claims provisions 16,834 (4,806) 12,028 10,810 (9,510) 1,300
Increase/(decrease)
in unearned premium
reserve 2,930 775 3,705 4,422 (173) 4,249
Net exchange differences 252 38,709 38,961 337 10,824 11,161
As at 31 December 39,381 311,613 350,994 25,460 174,131 199,591
-------- ---------- ---------- -------- --------- ---------
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 GBP78,755k (2015 - GBP30,792k) in respect of the reinsurance contract collateralised by the funds withheld disclosed in Note 16 (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.
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. 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 programmes.
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 GBP3,510k (2015: GBP1,996k).
22. Current and deferred tax
Current tax 2016 2015
GBP000 GBP000
Current tax assets 3,014 4,569
Current tax liabilities (7,656) (7,943)
-------- --------
Net current tax liabilities (4,642) (3,374)
======== ========
Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using tax rates of 17% for the UK (2015: 18%) and 34% for the US (2015: 34%).
Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets where it is probable that these assets will be recovered.
The movements in deferred tax assets and liabilities during the year are shown below. The movement in deferred tax is recorded in the income tax charge in the Consolidated Income Statement.
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances on a net basis.
Deferred Deferred
tax tax
assets liabilities Total
GBP000 GBP000 GBP000
As at 1 January
2015 7,861 (3,509) 4,352
Movement in
year (2,021) 682 (1,339)
---------- ------------- --------
As at 31 December
2015 5,840 (2,827) 3,013
Movement in
year 504 (66) 438
---------- ------------- --------
As at 31 December
2016 6,344 (2,893) 3,451
========== ============= ========
The movement on the deferred tax account is shown below:
Accelerated Pension Other Total
capital Trading scheme temporary
allowances losses deficit differences
GBP000 GBP000 GBP000 GBP000 GBP000
As at 1 January
2015 34 4,255 1,652 (1,589) 4,352
Movement in
year 30 1,145 (681) (1,833) (1,339)
------- -------- --------- ------------- ------------
As at 31 December
2015 64 5,400 971 (3,422) 3,013
Movement in
year (103) (2,191) 707 2,025 438
------- -------- --------- ------------- ------------
As at 31 December
2016 (39) 3,209 1,678 (1,397) 3,451
======= ======== ========= ============= ============
Movements in the provisions for deferred taxation are disclosed in the Consolidated Financial Statements as follows:
Deferred
tax
Deferred in statement
tax of
On acquisition Exchange in income comprehensive
of subsidiary adjustment statement income Total
GBP000 GBP000 GBP000 GBP000 GBP000
Movement in
2015 (1,431) 333 336 (577) (1,339)
======== ============ =========== =============== ========
Movement in
2016 - 912 (1,183) 709 438
======== ============ =========== =============== ========
The analysis of the deferred tax assets relating to tax losses is as follows:
2016 2015
GBP000 GBP000
Deferred tax assets - relating
to trading losses
Deferred tax assets to be recovered
after more than 12 months 2,003 5,071
Deferred tax assets to be recovered
within 12 months 1,206 329
Deferred tax
assets 3,209 5,400
======= =======
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 in run-off. 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 in run-off.
The Group's total deferred tax asset includes GBP3,209k (2015: GBP5,400k) 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, though substantially all of the unused tax losses for which a deferred tax asset has been recognised arises in the US subgroup.
The deferred tax assets are not wholly recoverable within 12 months.
23. Share capital
Number Ordinary Share Treasury Total
of shares shares premium shares*
GBP000 GBP000 GBP000 GBP000
At 1 January
2015 71,776,080 1,435 17,363 (175) 18,623
Issue of ordinary
shares 58,759 2 37 - 39
Issue of T-U
shares 143,596,678 6,031 (6,031) - -
Redemption/Cancellation
of T-U shares (143,596,678) (6,031) - - (6,031)
Movement in
treasury shares - - - 175 175
-------------- --------- --------- --------- --------
At 31 December
2015 71,834,839 1,437 11,369 - 12,806
============== ========= ========= ========= ========
Issue of ordinary
shares 283,117 4 247 - 251
Issue of V-W
shares 143,835,277 6,053 (6,053) - -
Redemption/Cancellation
of V-W shares (143,835,277) (6,053) - - (6,053)
At 31 December
2016 72,117,956 1,441 5,563 - 7,004
============== ========= ========= ========= ========
2016 2015
GBP GBP
Allotted, called up and fully
paid
72,117,956 ordinary shares of
2p each
(2015: 71,834,839 ordinary shares
of 2p each) 1,441,359 1,436,695
1 Preference A Share of GBP1 1 1
1 Preference B Share of GBP1 1 1
---------- ----------
1,441,361 1,436,697
========== ==========
2016 2015
Included in Equity GBP GBP
72,117,956 ordinary shares of
2p each
(2015: 71,834,839 ordinary shares
of 2p each) 1,441,359 1,436,695
1 Preference A Share of GBP1 1 1
1 Preference B Share of GBP1 1 1
---------- ----------
1,441,361 1,436,697
========== ==========
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 to date by either R&Q Reinsurance Company or R&Q Reinsurance Company (UK) Limited.
Shares issued
During the year the Group issued V and W shares (with an aggregate value of GBP6,053k) (2015: T and U shares (with an aggregate value of GBP6,031k)) which were all cancelled.
Share options
The Group historically operated a long term incentive plan "LTIP" which has now closed. However a small number of options continue to exist under this plan. The options have all vested but lapse on the tenth anniversary of the date of grant, or the holder ceasing to be an employee of the Group.
Notwithstanding the above the Group has granted options from time to time that are not part of any formal scheme although the terms of the grants do closely follow the terms of the predecessor Unapproved scheme which formed part of the LTIP referred to above.
Neither the Company nor the Group has any legal or constructive obligation to settle or repurchase the options in cash.
Movements in the number of share options and their related exercise price are as follows:
Weighted Number Weighted Number
average of options average of options
exercise price 2016 exercise 2015
2016 price
pence 2015
pence
Outstanding at
1 January 56.5 135,000 66.0 115,000
Exercised 5.2 (323,117) 2.0 (122,449)
Granted 2.0 283,117 2.0 142,449
At 31 December 68.4 95,000 56.5 135,000
===== ============ ========== ============
The total number of options in issue during the year has given rise to a charge to the Consolidated Income Statement of GBP261k (2015: GBP159k) based on the fair values at the time the options were granted.
The fair value of the share options was determined using the Binomial option pricing method. The parameters used are detailed below. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of the daily share price over a 100 day period.
2016 options 2015 options
Weighted average fair 68.4 pence 57.3 pence
value
Weighted average share 108.0 pence 113.8 pence
price
Exercise price 68.4 pence 56.5 pence
Expiry date 10 years after 10 years after
granting granting
Vesting period 3 years 3 years
Volatility 21.0% 21.0%
Dividend yield 8.5% 8.5%
Expected option life 3 years 3 years
Annual risk free interest
rate 0.91% 0.91%
The options outstanding at 31 December 2016 are all exercisable and had a weighted average remaining contractual life of 3.0 (2015: 4.0) years.
The range of prices on the outstanding share options is 40.0 pence to 70.0 pence.
24. Employees and Directors
Employee benefit expense for the Group during the year
2016 2015
GBP000 GBP000
Wages and salaries 36,605 33,057
Social security costs 3,528 3,085
Pension costs 1,632 1,948
Share based payment charge 261 150
-------- --------
42,026 38,240
======== ========
Pension costs are recognised in operating expenses in the Consolidated Income Statement and include GBP1,632k (2015: GBP1,948k) in respect of payments to defined contribution schemes.
2016 2015
Average number of employees Number Number
Group executives & support
services 91 79
Insurance Services Division 205 206
Insurance Investments Division 11 12
Underwriting Management
Division 106 148
413 445
======== ========
Total number of employees as 31 December 2016 was 411 (2015: 436).
Remuneration of the Directors and key management
2016 2015
GBP000 GBP000
Aggregate Director emoluments 1,841 1,417
Aggregate key management
emoluments 1,674 1,418
Share based payments - Directors 225 150
Director pension contributions 10 38
Key management pension contributions 85 42
3,835 3,065
======== ========
Highest paid Director
Aggregate emoluments 1,015 727
======== ========
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 Pension Bonus Share Overseas Total Total
options living
expenses
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 $000
K E Randall 405 - - - - 405 500
A K Quilter 262 - 88 - - 350 -
T A Booth 344 10 269 225 167 1,015 1,253
M G Smith 150 - - - - 150 -
A H F Campbell 75 - - - - 75 -
P A Barnes 81 - - - - 81 100
T A Booth, K E Randall and P A Barnes have been remunerated in US dollars.
One Director has retirement benefits accruing under money purchase pension schemes (2015: One). In the year, T A Booth was granted share options in respect of qualifying services under a long term incentive plan over 213,117 shares with a fair value of GBP225k (2015: 122,449 shares with a fair value of GBP150k) and the expense has been charged to the Consolidated Income Statement over the course of the vesting period.
25. Pension commitments
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 his valuation, the actuary used the projected unit method as the scheme is closed to new employees. A full valuation of the scheme was completed as at 1 January 2015 by a qualified independent actuary.
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
2016 2015
GBP000 GBP000
Fair value of plan assets 25,749 23,490
Present value of funded obligations (35,617) (28,887)
--------- ---------
Net defined benefit liability (9,868) (5,397)
Related deferred tax asset 1,678 971
--------- ---------
Net position in the Consolidated
Statement of Financial Position (8,190) (4,426)
========= =========
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 Fair value Deficit
value of of plan of funded
obligation assets plan
GBP000 GBP000 GBP000
As at 31 December 2015 (28,887) 23,490 (5,397)
Interest (expense)/income (1,108) 895 (213)
------------ ----------- -----------
(29,995) 24,385 (5,610)
------------ ----------- -----------
Remeasurements:-
Return on plan assets,
excluding amounts included
in interest expense - 2,384 2,384
Loss from changes in
financial assumptions (7,023) - (7,023)
Experience gain 471 - 471
------------ ----------- -----------
(36,547) 26,769 (9,778)
------------ ----------- -----------
Employer's contributions - (90) (90)
Benefit payments from
the plan 930 (930) -
------------ ----------- -----------
As at 31 December 2016 (35,617) 25,749 (9,868)
============ =========== ===========
Present Fair value Net defined
value of of plan benefit
obligation assets liability
GBP000 GBP000 GBP000
As at 31 December
2014 (33,434) 25,172 (8,262)
Interest (expense)/income (1,113) 831 (282)
------------ ----------- ------------
(34,547) 26,003 (8,544)
------------ ----------- ------------
Remeasurements:-
Return on plan assets,
excluding amounts included
in interest expense - (1,075) (1,075)
Gain from changes in
demographic assumptions 2,513 - 2,513
Gain from changes in
financial assumptions 2,496 - 2,496
Experience loss (725) - (725)
------------ ----------- ------------
(30,263) 24,928 (5,335)
------------ ----------- ------------
Employer's contributions - (62) (62)
Benefit payments
from the plan 1,376 (1,376) -
------------ ----------- ------------
As at 31 December
2015 (28,887) 23,490 (5,397)
============ =========== ============
c. Significant actuarial assumptions
i) Financial assumptions
2016 2015
Discount rate 2.6% 3.9%
RPI inflation assumption 3.4% 3.1%
CPI inflation assumption 2.6% 2.3%
Pension revaluation
in deferment:
- CPI, maximum 5% 2.6% 2.3%
Pension increases
in payment:
- RPI, maximum 5% 3.4% 3.1%
ii) Demographic assumptions
Assumed life expectancy in years, on retirement at 60
2016 2015
Retiring today
- Males 27.4 27.4
- Females 30.0 29.9
Retiring in 20 years
- Males 28.9 28.8
- Females 31.5 31.4
d. Sensitivity to assumptions
The results of the IAS 19 valuation at 31 December 2016 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 Change in
assumption liabilities
Discount rate Decrease by Increase by
0.5% 9%
Rate of inflation Increase by Increase by
0.5% 3%
Life expectancy Increase by Increase by
1 year 2%
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 As at
2016 2015
GBP000 GBP000
Quoted Un-quoted Total Quoted Un-quoted Total
Cash and cash
equivalents - 264 264 - 297 297
Investment
funds:
- equities - 4,707 4,707 - 4,240 4,240
- bonds - 18,754 18,754 - 17,408 17,408
- property - - - - - -
- cash - 2,024 2,024 - 1,545 1,545
-------- ---------- ------- ------- ---------- -------
- 25,749 25,749 - 23,490 23,490
------------------------ ---------- ------- ------- ---------- -------
f. Contributions and present value of defined benefit obligation
Funding levels are monitored on an annual basis. For the period 1 January 2015 to 31 December 2025, GBP280,000 per annum is being deposited into an Escrow account based on the latest triennial valuation as at 1 January
2015. No contributions are made directly into the scheme.
The present value of the defined benefit obligation has been estimated by projecting the results of the last full actuarial valuation as at 1 January 2015 forward to 31 December 2016. The table below shows an analysis by term to retirement of Scheme membership and past service liability as at the date of the last full actuarial valuation, 1 January 2015.
Term to retirement
Pensioners 0-5 6-10 11-15 16-20 21-25 26+
years years years years years years
Proportion
of total liabilities
(funding basis) 47.8% 21.6% 17.9% 10.6% 2.1% 0.0% 0.0%
Number of
members 126 42 39 33 18 - -
The duration of the liabilities of the Scheme is approximately 17 years as at 31 December 2016.
26. 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 associate Trilogy Managing General Agents Limited
The Group conducts insurance business with the associate. These transactions arise in the normal course of underwriting risk and payment of brokerage for the acquisition of business.
2016 2015
GBP000 GBP000
Gross premium income achieved
via associate 8,345 6,969
Commission expense charged
by associate 896 724
Amounts due from associate
at end of year 1,057 976
Transactions with Lloyds Syndicate 1991
The Group manages the Lloyd's syndicate through R&Q Managing Agency Limited (RQMA). RQMA recharges expenses to the Syndicate for management services provided. The Group has an underwriting participation through R&Q Capital No. 1 Limited and R&Q Capital No. 2 Limited.
Related party balances between Group companies and Syndicate 1991
Transactions in Balances outstanding
the income statement (payable) at
ending 31 December 31 December
2016 2015 2016 2015
GBP000 GBP000 GBP000 GBP000
R&Q Managing Agency
Ltd 9,001 8,954 94 620
Transactions with Directors
The following Directors and connected parties received distributions during the year as follows:-
2016 2015
GBP000 GBP000
K E Randall and family 1,540 1,547
A K Quilter and family 364 357
T A Booth 96 78
M G Smith 2 2
Transactions with key management service provider.
The Group compliance services have been outsourced and provided by Callidus Solutions Limited with effect from 1(st) July 2016.
2016
GBP000
Fees charged for compliance
services 253
Fees payable to service
provider at end of
year 3
27. Operating lease commitments
The Group leases a number of premises under operating leases, the total future minimum lease payments payable over the remaining terms of non-cancellable operating leases are:
2016 2015
GBP000 GBP000
Land and buildings
No later than one year 1,847 961
Later than one year but
no later than five years 4,027 1,100
Later than five years - -
28. Business combinations and divestments
Business combinations
The Group made 11 business combinations during 2016, 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 included in the Consolidated Financial Statements at the date of acquisition of the legacy businesses:
In all instances, goodwill on bargain purchase was recorded on the transactions. Goodwill on bargain purchase 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. It arises because 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 2016:
-- On 24 March 2016, the Group purchased the entire issued share capital of Rank Insurance Limited ("Rank"), a company incorporated in Guernsey. Rank wrote employers' and public liabilities and has been in run-off since 2004. External costs incurred in acquiring Rank were GBP10k. Post-acquisition Rank has been amalgamated into Capstan.
-- On 26 May 2016, the Group novated liabilities from Westland Insurance Company, a Cayman Islands domiciled captive. The liabilities transferred related to workers compensation policies. External costs incurred in novating the policies were GBP12k.
-- On 30 June 2016 the Group purchased the entire issued share capital of Agency Program Insurance Company (SAC), Limited, a segregated cell captive company incorporated in Bermuda and the cells operated by it. APIC has 28 separate cells which reinsured various insurance companies for workers compensation, general, commercial auto, auto, property and inland marine liabilities. External costs incurred in the acquisition were nil.
-- On 8 September 2016, the Group completed the Part VII (FSMA 2000) transfer in respect of AEGON's non-life insurance liabilities which were previously subject to a retrospective reinsurance policy. External costs incurred in the transfer were GBP172k.
-- On 23 September 2016, the Group purchased the entire issued share capital of United States Sports Insurance Company, LLC, the captive insurer of USA Swimming, domiciled in Washington D.C., USA. External costs incurred in the acquisition amounted to GBP251k.
-- On 3 November 2016, the Group acquired Solicitors Mutual Defence Fund ("SMDF"), a company limited by guarantee in Ireland. SMDF provided professional indemnity protection for solicitors practising in Ireland. External costs incurred in relation to acquiring SMDF were GBP156k.
-- On 7 November 2016, the Group novated liabilities from Maryland Motor Truck Association Workers' Compensation Self Insurance Group, a Maryland domiciled self-insurance group. External costs incurred in the novation were nil.
-- On 27 December 2016, the Group novated the workers' compensation, general liability, auto liability and auto property damages reinsurance policies from Georgia Atlantic Insurance, Ltd., a wholly-owned Bermuda based captive of the Coca-Cola Bottlers' Association, Inc. External costs incurred in novating the policies were GBP157k.
-- On 29 December 2016, the Group acquired The Royal London General Insurance Company Limited ("RLGI"), a company incorporated in England and Wales. RLGI underwrote non-life insurance from 1985 to 1999; the remaining liabilities relate to employers' liability. External costs incurred in acquiring RLGI were GBP29k.
-- On 29 December 2016, the Group novated liabilities for policy years 2001 to 2011 from PacWest Captive Insurance Company, Inc, an Arizona, U.S. domiciled company. The liabilities transferred relate to workers' compensation policies. External costs incurred in the novation were nil.
-- On 30 December 2016, the Group acquired the entire issued share capital of Clariant Insurance AG "(Clariant"), a Liechtenstein domiciled captive insurer. Clariant primarily wrote the high layer excess products and general liability protections for the worldwide Clariant group. External costs incurred in the acquisition were GBP173k.
Divestment
On 26 February 2016, the Group completed the sale of the Synergy business to Plum Underwriting. The cash consideration was GBP625k.
29. Non-controlling interests
The following table shows the Group's non-controlling interests and movements in the year:-
31 December 2016 2016 2015
GBP000 GBP000
Non-controlling interests
Equity shares in subsidiaries 6 5
Share of retained earnings 637 589
Share of other reserves (637) (537)
6 57
======= ========
Movements in the year
Balance at 1 January 57 3,161
Loss for the year attributable to
non-controlling interests (99) (229)
Exchange adjustments 48 2
------- --------
Comprehensive loss attributable
to non-controlling interests (51) (227)
Non-controlling interests' share
of dividends declared in the year - (2,861)
Changes in non-controlling interest
in subsidiaries - (16)
Balance at 31 December 6 57
======= ========
30. Guarantees and debentures
The Company, along with several of its subsidiaries, has entered into a guarantee agreement and debenture arrangement with the Group's bankers, in respect of the Group term loan facilities. The total liability to the bank at 31 December 2016 is GBP31,874k (2015: GBP19,953k).
Guarantees and Indemnities in Ordinary Course of Business
The Group has entered into a guarantee agreement and 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 2016 is GBP31,874k (2015: GBP19,953k).
The Group has the following external guarantees provided through subsidiaries:-
-- R&Q Reinsurance Company (UK) Limited guarantee to MAAF Assurances in respect of La Reassurance Intercontinentale (now part of La Licorne Compagnie de Reassurances SA) up to EUR1,600k.
-- In December 2013, the Group entered into a guarantee with the Institute of London Underwriters in respect of old policy liabilities which had previously been guaranteed by Tryg Forsikring AS and subsequently indemnified by Chevanstell Limited (transferred into R&Q Insurance Malta Limited in December 2013). The limit of this guarantee is GBP1,500k.
31. Contingent liabilities
Prior to its acquisition by the Group during 2014, a subsidiary undertook projects to advise members of defined benefit pension schemes where the members received incentivised transfer offers from their employer. Following the conclusion of an internal review earlier in the year, work continued on finalising the quantum of loss that clients of the subsidiary may have suffered and the amount of compensation that they might be entitled to, calculated actuarially, by reference to Financial Ombudsman Service guidelines. In 2016, the Financial Conduct Authority requested affected firms to suspend the payment of compensation amounts until further notice pending the outcome of an industry wide review. This suspension is still in force. However, as a result of the initial review work, the small number of cases affected by the suspension, and having regard to the warranties, indemnities and indemnity insurance in place at the time of acquisition, the Directors have concluded no additional provision is required.
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:-
2016 2015
Average Year end Average Year end
US dollar 1.36 1.23 1.53 1.49
Euro 1.23 1.18 1.37 1.38
33. Events after the reporting date
On 28 March 2017 the Group placed 15,278,291 additional shares at 117p raising approximately GBP17.9 million.
The Group has acquired the following legacy entities and business after the reporting date:
-- On 16 March 2017, the Group acquired the entire issued share capital of ICDC, Ltd.("ICDC"), a Vermont, U.S. captive insurance company. ICDC reinsured workers' compensation, commercial general liability, business auto liability, business auto physical damage and property risks of the parent. Consideration amounted to GBP4,846k, the provisional estimate of goodwill on bargain purchase is GBP1,589k
-- On 30 March 2017, the Group acquired the entire issued share capital of LinCo Limited, a wholly-owned Bermuda domiciled captive insurer of Ameripride Services Inc. and Alsco Inc. Consideration amounted to GBP120k, the provisional estimate of goodwill on bargain purchase is GBP189k
These Consolidated Financial Statements do not include any financial impact arising from these acquisitions.
34. Ultimate controlling party
The Directors consider that the Group has no ultimate controlling party.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FMGMDZLNGNZZ
(END) Dow Jones Newswires
April 20, 2017 02:00 ET (06:00 GMT)
1 Year R&q Insurance Chart |
1 Month R&q Insurance Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
