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| 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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 2.80 | 2.80 | 3.10 | 345,719 | 09:28:33 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Title Insurance | 82.8M | -297M | -0.7929 | -0.04 | 10.49M |
From Apr 2019 to Apr 2024
TIDMRQIH
RNS Number : 4752M
Randall & Quilter Inv Hldgs Ltd
30 April 2018
Randall & Quilter Investment Holdings Ltd.
("R&Q" or "The Group")
Full year results for the 12 months ended 31 December 2017
30 April 2018
The Board of Randall & Quilter (AIM: RQIH), the Bermuda based legacy acquisitions and global program underwriting management specialist, announces the Group's full year results for the 12 months ended 31 December 2017
Financial Highlights
-- Pre-tax profit GBP23.5m * (2016 GBP8.5m) -- Underlying profit growth of 38% -- EPS 25.4p * (2016 11.7p)
-- Total Distributions per share of 8.9p (2016 8.6p) including a final proposed distribution of 5.4p (2016 5.2p) payable on or around 18 June 2018
-- Return on tangible equity 17.3% (2016 13.5%) -- Investment return 1.6% on invested assets (2016 2.7%)
-- Book value per share excluding goodwill 120.8p (2016: 107.4p), increasing to 132.1p upon conversion of goodwill on sale of Insurance Services business in January 2018.
-- Cash and investments GBP602.8m (2016 GBP393.0m)
*Including profit on disposal of R&Q's Lloyd's managing agency of GBP11.8m (net of costs)
Operational Highlights
Delivered on the strategy of creating a streamlined and focused business centred around two core offerings: legacy acquisitions and program underwriting management.
-- Sale of R&Q's Lloyd's managing agency (November 2017) and Insurance Services businesses (completed January 2018) to allow the Group to focus on its chosen core business activities.
-- Excellent contribution from 19 completed legacy transactions, with especially strong growth in North America
-- Two successful share offerings in the year raising a total of GBP65m of new capital. All GBP47m proceeds of funds raised in October 2017 have now been injected into our US and European insurance companies, Accredited Surety & Casualty Company, Inc. ("Accredited") and R&Q Insurance (Malta) Limited ("R&Q Malta")
-- A.M. Best adjusted Accredited's A- (excellent) financial strength rating upwards from VI to VII and awarded R&Q Malta A- (excellent) financial strength rating giving partners and counter-parties greater confidence in the financial strength of the business
Group summary financial performance
Group Performance 12 months 12 months GBP'000 2017 2016 Group results Operating profit 27,949 10,386 Profit before tax 23,461 8,479 Underlying Profit before tax 11,661 8,479 Profit after tax 22,970 8,315 Earnings per share (basic) 25.4p 11.7p Balance sheet information Total assets 1,065,791 786,212 Cash and Investments 602,753 392,978 Total insurance claims gross reserves 722,535 553,726 Shareholders' equity 166,772 94,368 Key statistics Investment return on invested assets 1.6% 2.7% Return on tangible equity 17.3% 13.5% NTA per share 105.3p 85.1p Book value per share excluding goodwill 120.8p 107.4p Distribution per share 8.9p 8.6p --------------------------- ------ ---------- ----------
Ken Randall, Group Chairman and CEO, commented: "2017 was a year of transformation for Randall & Quilter as we refocussed and simplified the business around legacy acquisitions and insurance program underwriting management. However, this did not divert the business from delivering strong underlying earnings growth of 38%. Pre-tax profits for the year were GBP23.5m including an GBP11.8m net profit from the sale of our Lloyd's Managing Agency.
As planned, the additional GBP47m net capital raised from new and existing shareholders in October has now been fully deployed by increasing the capital of Accredited Surety and Casualty Company Inc. and R&Q Malta. The resulting improvement in Accredited's A.M. Best credit rating and achieving a new A.M. Best A- (excellent) rating for R&Q Malta has enhanced the range of opportunities available and enabled us to secure increased commission rates.
I am pleased to report that we have an excellent pipeline of new business in both program underwriting management and legacy acquisitions. 2017 saw a further increase in the profit contribution from legacy acquisitions. Program underwriting management business has been building steadily, especially towards the end of the year and we anticipate strong future profit growth from this business area, as commission earnings from new program launches gain momentum from the end of 2018 and beyond.
In 2018 and 2019 we should finally see a positive contribution from our residual participation on Lloyd's Syndicate 1991. There is also potential for an increase in investment earnings as we continue to build our "float" of cash and investments in an expected rising interest rate environment. In this regard, our float has more than doubled since 2015 and now totals over GBP600m. We shall continue to actively manage our investment portfolios in high quality, fixed income securities with overriding emphasis on protecting capital values whilst benefiting from the anticipated rises in global interest rates.
As a Group we have always seized upon opportunities which inevitably come from market turbulence and this is certainly true today as we witness major upheavals in the global insurance industry - especially those arising out of the challenges posed by Brexit and the emergence of new technologies.
We are progressing with the possible launches of a small number of "Fintech" program underwriting management initiatives and see long term growth potential through using our extensive insurance licences in the USA and Europe to deliver "disruptive" technologies to the market.
The business continues to deliver strong distributions to shareholders. The Board regularly reviews its distribution approach, and after due consideration it has decided to adopt the "return of capital" approach for the next distribution.
In summary, I believe the business is in good shape. With a strong and energised management team, we are very well placed to develop and profit from the multiple opportunities in our chosen business segments. "
Strategy and business model
The overall mission and purpose of the Group is to:
-- Offer investors profits and capital extractions from legacy insurance and reinsurance acquisitions, and
-- Generate fee and commission income from its licenced US and European carriers by selective delegation of underwriting to MGA's with niche and profitable business with support from high quality (re)insurance capital providers.
We have listened to our stakeholders and we have carefully watched the changing nature and requirements of the global insurance business. From this we have determined that our focus should be on two core areas that provide strong growth opportunities - arguably two of the strongest growth sectors in the global P&C insurance market - where our expertise and infrastructure gives us a competitive advantage.
Industry dynamics are fuelling this strong demand for legacy solutions and program underwriting management services. They combine to provide R&Q shareholders with distinct but complementary earnings: the potential of capital extraction and income generation from legacy acquisitions and regular fee income from program underwriting management.
We have retained a nominal participation on Syndicate 1991 for the 2018 Lloyd's year of account. The participations of the Group on the 2016 and 2017 years of account are finally expected to produce a profit for the Group in 2018 and 2019.
Legacy Acquisitions
Providing creative finality solutions to owners of discontinued ("run-off") insurance business has been at the heart of the R&Q Group and its predecessor companies for over twenty-five years.
Hot Features
Premium
12 months 12 months
Divisional Key Metrics GBP'000 2017 2016
Result of operating
activities (live & run-off) 25,356 23,515
Key metrics
Goodwill on bargain
purchase 24,666 16,281
Loss on Syndicate 1991
participation (2,824) (2,088)
Investment return on
invested assets 1.6% 2.7%
--------------------------------- ---------- ----------
We have always taken pride in being nimble and creative in applying solutions to owners of run-off businesses. In the past, this was often insurers who had ceased underwriting and we have already seen in Q1 2018 that this pattern continues with the recent announcements by the New Zealand insurance group CBL and the Danish insurer Alpha to stop underwriting.
But there are now many other reasons why owners of insurance businesses decide to free themselves of their liabilities. The European-wide Solvency II regulations and the associated equivalence regime means legacy business can lead to onerous capital and reporting obligations. In addition the recent US tax reforms and OECD tax policies could have a significant impact on some self-insurance entities, not least those that are off-shore.
There are also increasing opportunities emerging from industry M&A where acquirers of business decide to sell "run-off" books with a view to freeing up capital. Again, Solvency II and the wider recognition of effective capital management are fuelling this interest.
We continue to deliver a wide range of exit solutions to the captive and self insured sector, especially through the use of Accredited's statewide licences. Aside from regular captive and cell structures, deals have also been successfully completed with risk retention groups, self insured funds and corporate deductible buyback programs.
Finally, we see renewed opportunities in Lloyd's run off business and our expertise in this sector was reflected through the successful completion of two new Reinsurance to Close ("RITC") transactions: Prosight's Syndicate 1110 corporate members (effective from 1 July 2017) and Hamilton/Sportscover Syndicate 3334 in conjunction with AXA Liabilities Managers S.A.S. which completed on 1 January 2018.
In total, we completed 19 legacy deals in 2017 (15 in 2016) and 64 since 2009. Our range of solutions was reflected in the different types of transactions: 5 acquisitions, 6 novations, 6 loss portfolio transfers, 1 transfer and 2 run-offs at Lloyd's (one of which was effective on 1 January 2018).
2017 was the year that R&Q capitalised on its long-standing expertise and infrastructure to demonstrate its superior legacy offering. With an extensive pipeline of opportunities and the industry dynamics, we have every confidence in the future.
Legacy acquisition highlights
-- 19 transactions in 2017 -- Two new Lloyd's "RITC" deals (one of which was effective on 1 January 2018) -- 2017 fundraisings providing additional balance sheet strength -- New drivers for legacy disposals including M&A and Solvency II
Program Underwriting Management
Our other core business is program underwriting management where R&Q uses its infrastructure - including A.M. Best A- rated insurers in the US and Europe - working with MGAs/MGUs and reinsurers to earn fee income for being their partner and insurance conduit which is mostly re-insured.
A.M. Best has adjusted Accredited's A- (excellent) financial strength rating to the next category, from VI to VII to reflect the higher capital in the business and has recently affirmed our rating with a stable outlook. Again, this move has been well received by our existing clients and prospects. In addition, Accredited is US Treasury Listed to write Federal Bonds (one of the few national program managers that has a T listing).
Encouragingly, the program underwriting management pipeline is strong and we anticipate a lot of new activity in 2018 in both Europe and the US. Earlier this year, A.M. Best awarded R&Q Malta A- (excellent) financial strength rating, the same as Accredited, and this gives our partners and counter-parties greater confidence in our financial strength and enables us to compete in new business lines where rated capacity is important.
Market disruption and the apparent retrenchment of some existing US providers is also providing R&Q with new opportunities in the US and the typical size of transactions we are negotiating is increasing significantly.
In Europe, Solvency II has exposed a number of undercapitalised fronting specialists. "Brexit", and the current uncertainty over how it will impact financial services is creating new opportunities for R&Q which owns a European insurer, R&Q Malta licenced to operate across the European Union and which will continue to do so after "Brexit".
As with legacy acquisitions, the industry dynamics are encouraging for the continued growth of program underwriting management and we believe R&Q is well-positioned to capitalise on the growing demand.
New Fintech/InsureTech initiatives are creating a disruptive force that is encouraging industry entrepreneurs to establish new platforms and ways of writing business. Typically, this is in the form of MGAs and R&Q's insurance platforms can provide the infrastructure to support these new businesses and act as a conduit between them and their (re)insurance capital.
In addition to the encouraging industry dynamics, R&Q has built a superior offering in both the US and Europe.
We provide high-quality, A.M. Best A- (excellent) rated insurance paper to our underwriting partners in both the US and Europe. Our US platform, Accredited, successfully expanded its nationwide P&C licences in 2017 which means we are now able to provide for nearly every type of P&C cover on behalf of our partners.
Unlike some of our competitors, we do not have any direct "channel conflicts" because we do not also participate in direct live underwriting and we select our underwriting partners carefully to ensure we can provide an exclusive service in their area of expertise.
In 2017, we signed 3 program partnerships in Europe and 5 in the US. In 2018, we anticipate signing a further 6 partnerships in Europe and a further 6 in the US.
R&Q typically earns commission revenues from program underwriting management partnerships. While this means it requires a lot of work by R&Q before we begin to earn fee income from new programs, the quality of revenue is very attractive because it is consistent and reliable. Our rated capacity and growing reputation in this field also enables us to compete and win new, more complex accounts where commission rates are often higher. Revenues from our program underwriting management business will be significantly higher in 2018.
Program Underwriting Management highlights
-- 8 new programs signed in 2017 (5 in US; 3 in Europe) -- 12 new programs expected in 2018 in US and Europe -- Market disruption in both US and Europe fuelling strong demand and activity -- Positive A.M. Best rating actions underpinning the R&Q offering
Insurance Services
The Insurance Services and Captive Management operations were sold in January 2018 to The Davies Group for GBP20m (GBP18.6m net).
Total Income for the year to 31(st) December 2017 was GBP29.7m (GBP29.5m 2016), this included third party income of GBP19m (GBP20m 2016) and the operating profit for 2017 was GBP1.7m (GBP2m 2016). The net proceeds of GBP18.6m have now been used to improve the balance sheets of both Accredited and R&Q Malta along with the proceeds from the capital raise in October 2017.
Underwriting Management
The Lloyd's Managing Agency business was sold to Coverys Group in November 2017. The remaining businesses in this division comprise Accredited Surety and Casualty Company, Inc. based in Florida, and, R&Q Commercial Risk Services Limited and Trilogy Managing General Agents Limited in London, which earn fees from underwriting SME commercial insurance risks on behalf of Lloyd's and other insurers. Going forward we expect these MGA's to provide additional business inflows to R&Q Malta.
Governance
We set high standards of corporate governance, with a structure designed to establish, implement and maintain effective controls essential to the Group's long term success. The role of the Board is to set the Groups' strategic objectives, and to oversee and review management performance, ensuring the required resources are available for meeting those objectives. The Board meets regularly throughout the year to debate and conduct these matters.
Our people
As a result of the successful completion of the streamlining of the business our headcount is down significantly from 411 as at the 31 December 2016 to 234 in February 2018. We have also progressed a significant number of management changes to reflect the strategic changes we have made. This includes the expansion of our Executive Committee and promotion of experienced individuals from within the business to create an empowered Senior Management team.
-- Mark Langridge, who has been with the Group for 9 years, has joined the main board and became Group-wide head of legacy acquisitions and run off management
-- Todd Campbell, who has been with the Group for 2 years was appointed President of Accredited. Todd heads our program underwriting management business for the USA.
-- Paul Corver, now heads up the Group's Legacy M&A activities -- Carrie Hewitt has been appointed Group Actuary and Head of Capital Management
-- Colin Johnson, who has been with the Group for 10 years, has been appointed CEO of UK and European Program Underwriting Management
-- Sangeeta Johnson, is now Head of Operations
Co-founder Alan Quilter has returned to his role as CFO in addition to having Board responsibility for the growing program business.
Former CFO Tom Booth leaves the Group in 2018 and we wish him well in his future endeavours.
I would like to pay tribute to the hard work and dedication of all R&Q staff over the past year. Without their energy and commitment it would not have been possible to achieve the momentum and strategic delivery across business which provides the platform for our future growth.
Succession Planning
We have excellent bench strength throughout our senior and middle management and the Board continues to focus on ensuring there is a credible long-term succession plan in place for the future leadership of the Business.
Outlook
2017 was a successful year for the Group. We were pleased with the underlying improvement in financial performance but the wider story is that it was the year that R&Q has transformed itself into a business with a platform able to capitalise on our existing expertise and infrastructure.
I believe the Group is well positioned to benefit financially from the significant transformation achieved in 2017 and has a strong pipeline of potential new business both in legacy acquisitions and program management. The exact timing of legacy acquisitions can be uncertain, especially where regulatory approval is required. Our expectations for the full year remain unchanged, noting that the Group typically experiences a stronger trading result in the second half year. In 2018 this second half earnings bias will also reflect the delayed earnings pattern on commission received from our rapidly developing program underwriting partnerships where we anticipate significant growth in the second half year.
In summary, today's R&Q is a simpler business focussed around two core operations that provide strong long-term growth prospects and complementary earnings patterns.
We will continue to build on the improved financial performance of the Group in 2017 and look forward to 2018 and beyond with optimism.
Ken Randall
Chairman
Enquiries to:
Randall & Quilter Investment www.rqih.com
Holdings Ltd.
Ken Randall Tel: 020 7780
5945
Numis Securities Limited
Stuart Skinner (Nominated Tel: 020 7260
Adviser) 1000
Charles Farquhar (Broker) Tel: 020 7260
1000
Shore Capital Stockbrokers Limited
Dru Danford / Stephane Auton Tel: 020 7408
4090
FTI Consulting
Edward Berry/Tom Blackwell Tel: 020 3727
1046
Notes to Editors:
About R&Q
The overall mission of the Bermuda based Group is to:
-- Generate profits and capital extractions from expert management of legacy non-life insurance acquisitions/reinsurances, including in Lloyd's; and
-- Grow commission income from its licensed (and rated) carriers in the US and EU/UK, writing niche and profitable programme business, largely on behalf of highly rated reinsurers.
Our aim is to continue to grow sustainable profit streams to support our business model and increase book value and cash distributions to shareholders.
The Group was founded by Ken Randall and Alan Quilter in 1991.
Legal Entity Identifier (LEI): 2138006K1U38QCGLFC94
Website: www.rqih.com
Consolidated Income Statement
For the year ended 31 December 2017
2017 2016
Note GBP000 GBP000 GBP000 GBP000
Continuing operations
Gross premiums written 187,947 53,377
Written premiums ceded
to reinsurers (39,255) (3,597)
---------- ----------
Net written premiums 148,692 49,780
Change in provision for unearned
premiums, gross 16,553 (6,065)
Change in provision for unearned
premiums, reinsurers' share 3,425 2,360
---------- ----------
Net change in provision for
unearned premiums 19,978 (3,705)
---------- ---------
Earned premium, net of
reinsurance 168,670 46,075
Gross investment income 7 8,187 7,972
Other income 8 8,154 6,838
---------- ----------
16,341 14,810
Total income 185,011 60,885
Gross claims paid (142,013) (59,430)
Proceeds from commutations
and reinsurers' share
of gross claims paid 60,585 113,599
---------- ----------
Claims paid, net of reinsurance (81,428) 54,169
Movement in gross technical
provisions (10,765) (2,317)
Movement in reinsurers' share
of technical provisions after
adjusting for commutations (16,839) (63,880)
---------- ----------
Net change in provisions for
claims (27,604) (66,197)
---------- ----------
Net claims provisions
increased (109,032) (12,028)
Operating expenses 9 (84,418) (56,096)
Result of operating activities
before goodwill on bargain
purchase (8,439) (7,239)
Goodwill on bargain purchase 29 24,666 16,281
Amortisation and impairment
of intangible assets 15 (1,909) (779)
Result of operating activities 14,318 8,263
Finance costs 10 (4,204) (1,889)
Share of loss of associate (284) (18)
---------- -----------
Profit from continuing
operations before income
taxes 11 9,830 6,356
Income tax (charge)/credit 12 (313) 684
Profit for the year from
continuing operations 9,517 7,040
Profit for the period
from discontinued operations 6 13,453 1,275
---------- -----------
Profit for the year 22,970 8,315
========== ===========
Attributable to:-
Shareholders of the parent 22,914 8,414
Non-controlling interests 56 (99)
---------- -----------
22,970 8,315
========== ===========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
2017 2016
Earnings per ordinary
share from continuing
and discontinued operations:-
Basic 13 25.4p 11.7p
Diluted 13 25.4p 11.7p
======= ======
Earnings per ordinary
share from continuing
operations:-
Basic 13 10.5p 9.9p
Diluted 13 10.5p 9.9p
======= ======
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
2017 2016
GBP000 GBP000
Other Comprehensive Income:
Items that will not be reclassified
to profit or loss:
Pension scheme actuarial losses (1,002) (4,168)
Deferred tax on pension scheme
actuarial losses 170 709
-------- --------
(832) (3,459)
Items that may be subsequently
reclassified to profit or loss:
Exchange (losses)/gains on
consolidation (7,416) 8,742
Other comprehensive income (8,248) 5,283
Profit for the year 22,970 8,315
Total comprehensive income
for the year 14,722 13,598
======== ========
Attributable to:
Shareholders of the parent 14,698 13,649
Non-controlling interests 24 (51)
Total comprehensive income
for the year 14,722 13,598
======== ========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Foreign
Share currency
Share option Share translation Retained Non-controlling
Notes capital costs premium reserve earnings Total interests Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Year ended
31 December
2017
At beginning
of year 1,441 64 5,563 8,285 79,015 94,368 6 94,374
Profit for
the year - - - - 22,914 22,914 56 22,970
Other
comprehensive
income
Exchange losses
on
consolidation - - - (7,384) - (7,384) (32) (7,416)
Pension scheme
actuarial
losses - - - - (1,002) (1,002) - (1,002)
Deferred tax
on pension
scheme
actuarial
losses - - - - 170 170 - 170
-------- ------- -------- ------------ --------- -------- ---------------- --------
Total other
comprehensive
income for
the year - - - (7,384) (832) (8,216) (32) (8,248)
-------- ------- -------- ------------ --------- -------- ---------------- --------
Total
comprehensive
income for
the year - - - (7,384) 22,082 14,698 24 14,722
Transactions
with owners
Share based
payments - (64) - - - (64) - (64)
Issue of shares 24 1,076 - 64,308 - - 65,384 - 65,384
Issue of X
& Y shares 7,614 - (7,614) - - - - -
Cancellation
of X & Y shares 14 (7,614) - - - - (7,614) - (7,614)
Non-controlling
interest in
subsidiary
acquired 30 - - - - - - (196) (196)
At end of
year 2,517 - 62,257 901 101,097 166,772 (166) 166,606
======== ======= ======== ============ ========= ======== ================ ========
Attributable to equity holders
of the parent
Foreign
Share currency
Share option Share translation Retained Non-controlling
Notes capital costs premium reserve earnings Total interests Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Year ended
31 December
2016
At beginning
of year 1,437 64 11,369 (409) 74,060 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 - - - 8,694 (3,459) 5,235 48 5,283
-------- ------- -------- ------------ --------- -------- ---------------- --------
Total
comprehensive
income for
the year - - - 8,694 4,955 13,649 (51) 13,598
Transactions
with owners
Issue of shares 24 4 - 247 - - 251 - 251
Issue of V
& W shares 6,053 - (6,053) - - - - -
Cancellation
of V & W shares 14 (6,053) - - - - (6,053) - (6,053)
At end of
year 1,441 64 5,563 8,285 79,015 94,368 6 94,374
======== ======= ======== ============ ========= ======== ================ ========
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Statement of Financial Position
As at 31 December 2017
Company Number 47341 2017 2016
Note GBP000 GBP000
Assets
Intangible assets 15 20,712 32,966
Property, plant and equipment 16 3,035 3,396
Investment properties 17a 426 407
Financial instruments
- Investments (fair value
through profit and loss) 17b 405,516 245,744
- Deposits with ceding undertakings 4b 6,674 5,578
Reinsurers' share of insurance
liabilities 22 253,482 202,732
Deferred tax assets 23 10,907 6,344
Current tax assets 23 2,411 3,014
Insurance and other receivables 18 170,273 144,375
Cash and cash equivalents 19 173,393 141,656
Assets held for sale 6 18,962 -
---------- --------
Total assets 1,065,791 786,212
========== ========
Liabilities
Insurance contract provisions 22 722,535 553,726
Financial liabilities
- Amounts owed to credit institutions 21 55,889 65,931
- Deposits received from reinsurers 1,170 1,354
Deferred tax liabilities 23 6,890 2,893
Insurance and other payables 20 92,269 50,410
Current tax liabilities 23 7,426 7,656
Pension scheme obligations 26 11,214 9,868
Liabilities held for sale 6 1,792 -
---------- --------
Total liabilities 899,185 691,838
---------- --------
Equity
Share capital 24 2,517 1,441
Share option costs - 64
Share premium 24 62,257 5,563
Foreign currency translation
reserve 901 8,285
Retained earnings 101,097 79,015
---------- --------
Attributable to equity holders
of the parent 166,772 94,368
Non-controlling interests in
subsidiary undertakings 30 (166) 6
---------- --------
Total equity 166,606 94,374
---------- --------
Total liabilities and equity 1,065,791 786,212
========== ========
The Financial Statements were approved by the Board of Directors on 27 April 2018 and were signed on its behalf by:
K E Randall A K Quilter
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Cash Flow Statement
For the years ended 31 December 2017
2017 2016
Cash flows from operating activities Note GBP000 GBP000
Profit for the year 22,970 8,315
Tax included in consolidated
income statement 491 163
Finance costs 10 4,204 1,889
Depreciation and impairments 16 625 617
Share based payments 24 419 251
Share of loss of associate 284 18
Profit on divestment (15,190) (625)
Goodwill on bargain purchase 29 (24,666) (16,281)
Amortisation and impairment
of intangible assets 15 1,909 943
Fair value gain on financial
assets (2,728) (3,848)
Loss on revaluation of investment
property 17 - 65
Loss on net assets of pension
schemes 514 1,012
Decrease in receivables 8,121 6,315
Increase in deposits with ceding
undertakings (1,096) (469)
Increase in payables 22,256 11,999
Increase in net insurance technical
provisions 7,626 69,902
---------- ---------
Cash generated from operations 25,739 80,266
Income taxes paid - (234)
Income taxes repaid - 225
---------- ---------
Net cash generated from operating
activities 25,739 80,257
---------- ---------
Cash flows from investing activities
Purchase of property, plant
and equipment 16 (471) (3,085)
Proceeds from sale of property,
plant and equipment 17 - 61
Proceeds from sales of investment
properties - 359
Purchase of intangible assets 15 (419) (288)
Sale of financial assets 6,133 19,177
Purchase of financial assets (161,010) (85,312)
Acquisition of subsidiary undertakings
(offset by cash acquired) 106,186 39,341
Divestment (offset by cash disposed
of) 17,773 625
Net cash used in investing
activities (31,808) (29,122)
---------- ---------
Cash flows from financing activities
Repayment of borrowings (62,772) (5,999)
Proceeds from new borrowing
arrangements 54,537 30,677
Interest and other finance
costs paid 10 (4,204) (1,889)
Cancellation of shares 14 (7,614) (6,053)
Receipts from issue of shares 64,901 -
Net cash from financing activities 44,848 16,736
---------- ---------
Net increase in cash and cash
equivalents 38,779 67,871
Cash and cash equivalents at
beginning of year 141,656 69,325
Exchange (losses)/gains on cash
and cash equivalents (5,933) 4,460
---------- ---------
Cash and cash equivalents at
end of year 19 174,502 141,656
========== =========
Share of Syndicates' cash restricted
funds 43,898 7,119
Other funds 129,495 134,537
---------- ---------
Cash and cash equivalents relating
to continuing operations 173,393 141,656
Cash and cash equivalents relating 1,109 -
to discontinued operations
---------- ---------
Cash and cash equivalents at
end of year 174,502 141,656
========== =========
In 2017 cash flows relating to the sale and purchase of financial assets, which were previously included within cash flows from operating activities, have been included within cash flows from investing activities. The 2016 comparative figures have been adjusted accordingly. This more appropriately reflects the Group's operating and investing activities.
The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
For the year ended 31 December 2017
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 in 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 27 April 2018.
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 year when the revision is made.
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 mandatory for an accounting period that begins on or after 1 January 2017.
IAS 7 Amendment: Disclosure initiative.
IAS 12 Amendment: Recognition of deferred tax assets for unrealised losses.
IFRS 2014-2016 annual improvement cycle, IFRS 12 Disclosure of Interests in Other Entities.
IAS 7 Amendment, Disclosure initiative.
The amendments to IAS 7, Statement of Cash Flows, which form part of the IASB's Disclosure Initiative, require disclosure of the movements in liabilities arising from financing activities with cash and non-cash changes presented separately. The adoption of this amendment has given rise to an additional Consolidated Cash Flow Statement disclosure within note 21.
IAS 12 Amendment, Recognition of deferred tax assets for unrealised losses.
The revisions to IAS 12 Income Taxes clarify the accounting for deferred tax assets on unrealised losses and states that deferred tax assets should be recognised when a debt instrument is measured at fair value and that fair value is below the asset's tax base. It also provides further clarification on the estimation of probable future taxable profits that may support the recognition of deferred tax assets. The adoption of this amendment has not impacted on the consolidated financial statements as the clarifications to IAS 12 are consistent with Group existing interpretation and practice.
IFRS 2014-2016 annual improvement cycle
These improvements consist of amendments to the following IFRS.
IFRS 12 Disclosure of Interests in Other Entities. The amendments state that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as" held for sale". The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests.
A number of new standards and interpretations adopted by the EU which are not mandatory, 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 continues to review 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 17, Insurance Contracts (IASB effective date 1 January 2021)
IFRS 2 Amendment. Classification and Measurement of Share-based Payment Transactions. (IASB effective date 1 January 2018)
IFRS 4 Amendment, Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (IASB effective date 1 January 2018)
IFRS 10 and IAS28 Amendments, Sale or contribution of assets between an investor and its associate or joint venture. (IASB have deferred the effective date)
IAS 40 Amendment, Transfer of Investment Property (IASB effective date 1 January 2018)
IFRS 2014 - 2016 improvement cycle (IASB effective date 1 January 2018). Amendments to IFRS 1, First-Time Adoption of International Financial Reporting Standards and IAS 28, Investments in Associates and Joint Ventures.
Of the upcoming accounting standard changes, the Group anticipates that IFRS 16 and IFRS 17 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 in the process of being completed. A brief overview of these standards is provided below:
IFRS 9 provides a reform of financial instruments accounting to supersede IAS 39 financial instruments: recognition and measurement. The standard contains the requirements for a) the classification and measurement of financial instruments; b) a new impairment methodology and c) general hedge accounting. IFRS 4 Amendment, Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts contains an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4. The Group meets the eligibility criteria and intends to take advantage of this temporary exemption and not apply this standard until the effective date of IFRS 17.
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 apply the new revenue recognition standard to non-insurance contracts. Furthermore, the Group will 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. The Group will adopt this standard on 1 January 2018 and the current assessment of IFRS 15 is that it will be immaterial to the Group.
IFRS 16 "Leases" specifies how an IFRS reporter will recognise, measure, prepare and disclose leases. The standard replaces IAS 17 'Leases' and related interpretations. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors will continue to classify leases as operating or finance, with IFRS 16's approach to lessor accounting being substantially unchanged from its predecessor IAS 17. Additionally, the current rental charge in the consolidated income statement will be replaced with a depreciation charge for the lease assets and an interest expense for the lease liabilities. 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.
IFRS 17 was issued in May 2017. It will replace IFRS 4 on accounting for insurance contracts and has an effective date of 1 January 2021. The Group expects to adopt the new standard on this date. Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk. The discount rate will reflect current interest rates. If the present value of future cash flows would produce a gain at the time a contract is issued the model would also require a "contractual service margin" to offset the day 1 gain. The contractual service margin would amortise over the life of the contract. There would also be a new income statement presentation for insurance contracts, including a revised definition of revenue, and additional disclosure requirements.
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 2017 and 2016. Control exists when the Group is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes non-controlling interests to have a deficit balance.
The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of acquisition directly attributable to the acquisition. Acquisition-related costs are charged to the Consolidated Income Statement in the year in which they are incurred.
Certain Group subsidiaries underwrite as corporate members of Lloyd's on Syndicates managed by Coverys Managing Agency Limited. 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 and Syndicate 1110, these Financial Statements include 100.00% of the economic interest in those Syndicates. For Syndicate 1991, the Group provides 13.61% of the capacity on the 2015 year of account, 13.61% on the 2016 year of account and 16.96% on the 2017 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. Where necessary, amounts reported by subsidiaries have been adjusted to conform to the group's accounting policies. Non-controlling interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the Consolidated Income Statement and Consolidated Statement of Comprehensive Income and within equity in the Consolidated Statement of Financial Position, separately from the equity attributable to the shareholders of the parent.
Insurance broking cash, receivables and payables held by subsidiary companies, 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 of a claim arising from a policy holder that a third party life insurance company responsible for the payment of an annuity under a structured settlement may not be in a position to meet its annuity obligations in full, appropriate provision will be made for any such failure.
Disclosure of the position in relation to structured settlements is shown in Note 20.
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 impairment. Insurance payables are stated at amortised cost.
v) Investment income
Investment income consists of dividends, interest, realised and unrealised gains and losses and exchange gains and losses on financial assets at fair value through profit and loss. The realised gains or losses on disposal of an investment are the difference between the proceeds and the original cost of the investment. Unrealised investment gains and losses represent the difference between the carrying amount at the reporting date, and the carrying amount at the previous period end or the purchase value during the period.
Financial liabilities
Borrowings
Borrowings are initially recorded at fair value less transaction costs incurred. Subsequently borrowings are stated at amortised cost and interest is recognised in the Consolidated Income Statement over the period of the borrowings.
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. 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.
n. Property, plant and equipment
All assets included within property, plant and equipment ("PPE") are carried at historical cost less depreciation and assessed for impairment. Depreciation is calculated to write down the cost less estimated residual value of motor vehicles, office equipment, IT equipment, freehold property and leasehold improvements by the straight-line method over their expected useful lives.
The principal rates per annum used for this purpose are:
%
Motor vehicles 25
Office equipment 8 - 50
IT equipment 20 - 25
Freehold property 2
Leasehold improvements Term of lease
The gain or loss arising on the disposal of an item of PPE is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Consolidated Income Statement.
o. Goodwill
The Group uses the acquisition method in accounting for acquisitions. The difference between the cost of acquisition and the fair value of the Group's share of the identifiable net assets acquired is capitalised and recorded as goodwill. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired the difference is recognised directly in the Consolidated Income Statement as goodwill on bargain purchase.
Goodwill acquired in a business combination is initially measured at cost, being the excess of the fair value of the consideration paid for the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at the cash generating unit level, as shown in Note 15, on a biannual basis or if events or changes in circumstances indicate that the carrying amount may be impaired.
p. Other intangible assets
Intangible assets, other than goodwill, that are acquired separately are stated at cost less accumulated amortisation and impairment.
Intangible assets acquired in a business combination, and recognised separately from goodwill, are recognised initially at fair value at the acquisition date.
Amortisation is charged to operating expenses in the Consolidated Income Statement as follows:
Purchased IT software 3 - 5 years, on a straight-line
basis
On acquisition of insurance 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.
q. Employee Benefits
The Group makes contributions to defined contribution schemes and a defined benefit scheme.
The pension cost in respect of the defined contribution schemes represents the amounts payable by the Group for the year. The funds of the schemes are administered by trustees and are separate from the Group. The Group's liability is limited to the amount of the contributions.
The defined benefit scheme is funded by contributions from a subsidiary company and its assets are held in a separate Trustee administered fund. Pension scheme assets are measured at market value, and liabilities are measured using the projected unit method and discounted at the current rate of return on high quality corporate bonds of equivalent term and currency to the liability.
Current service cost, net interest income or cost and any curtailments/settlements are charged to the Consolidated Income Statement. The present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets is recognised and disclosed separately as a net pension liability in the Consolidated Statement of Financial Position. Surpluses are only recognised up to the aggregate of any cumulative unrecognised net actuarial gains and past service costs, and the present value of any economic benefits available in the form of any refunds or reductions in future contributions.
Subject to the restrictions relating to the recognition of a pension surplus, all actuarial gains and losses are recognised in full in other comprehensive income in the period in which they occur.
r. Cash and cash equivalents
For the purposes of the Consolidated Cash Flow Statement, cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less from the date of acquisition, and bank overdrafts which are repayable on demand.
s. Finance costs
Finance costs comprise interest payable and are recognised in the Consolidated Income Statement in line with the effective interest rate on liabilities.
t. Operating expenses
Operating expenses are accounted for in the Consolidated Income Statement in the period to which they relate.
Pre-contract costs
Directly attributable pre-contract costs are recognised as an asset when it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows in excess of any amounts recognised as an asset.
Pre-contract costs are charged to the Consolidated Income Statement over the shorter of the life of the contract or five years.
Onerous contracts
Onerous contract provisions are provided for in circumstances where the Group has a present legal or constructive obligation as a result of past events to provide services, the costs of which exceed future income. The costs of providing the services are projected based on management's assessment of the contract.
Arrangement fees
Arrangement fees in relation to loan facilities are deducted from the relevant financial liability and amortised over the period of the facility.
u. Other income
Other income is stated excluding any applicable value added tax and includes the following items:
Management fees
Management fees are from non-Group customers and are recognised when the right to such fees is established through a contract and to the extent that the services concerned have been performed.
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. Such adjustments are made on a prudent basis that reflects the level of uncertainty involved.
Insurance commissions from Managing General Agencies
Insurance commissions comprise brokerage and profit commission arising from the placement of insurance contracts. Brokerage is recognised at the inception date of the policy, or the date of contractual entitlement, if later. Alterations in brokerage arising from premium adjustments are taken into account as and when such adjustments are notified. To the extent that the Group is contractually obliged to provide services after this date, a suitable proportion of income is deferred and recognised over the life of the relevant contracts to ensure that revenue appropriately reflects the cost of fulfilling those obligations. Profit commission is recognised when the right to such profit commission is established through a contract but only to the extent that a reliable estimate of the amount due can be made. Such estimates are made on a prudent basis that reflects the level of uncertainty involved.
v. Share based payments
The Group issues equity settled payments to certain of its employees.
The cost of equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense on a straight-line basis over the vesting period. The fair value is measured using the binomial option pricing method, taking into account the terms and conditions on which the awards were granted.
w. Current and deferred income tax
Tax on the profit or loss for the year comprises current and deferred tax.
Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in the Consolidated Statement of Comprehensive Income.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries and associates operate and generate taxable income.
Deferred tax liabilities are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination and which, at the time of the transaction, affects neither accounting nor taxable profit or loss, it is not provided for.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred tax assets and liabilities are determined using tax rates that have been enacted or substantively enacted by the period end date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
x. Share capital
Ordinary shares and Preference A and B shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
y. Distributions
Distributions payable to the Company's shareholders are recognised as a liability in the Consolidated Financial Statements in the period in which the distributions are declared and 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 in that subsidiary. The Group 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 Group would thus be restricted to the book value of their investment in and amounts due from that subsidiary and any guarantee liability that may arise.
Claims provisions
The 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 view of best estimate reserves and confirm that the held reserves are within their range of acceptable estimates.
The business written by the insurance company subsidiaries consists in part of long-tail liabilities, including asbestos, pollution, health hazard and other US liability insurance. The claims for this type of business are typically not settled until many years after policies have been written. Furthermore, much of the business written by these companies is reinsurance and retrocession of other insurance companies' business, which lengthens the settlement period.
Significant delays occur in the notification and settlement of certain claims and a substantial measure of experience and judgement is involved in making the assumptions necessary for assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the period end date. The gross insurance contract provisions and related reinsurers' share of insurance liabilities are estimated on the basis of information currently available. Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions and having due regard to collectability.
The insurance contract provisions include significant amounts in respect of notified and potential IBNR claims for long-tail liabilities. The settlement of most of these claims is not expected to occur for many years, and there is significant uncertainty as to the timing of such settlements and the amounts at which they will be settled.
While many claims are clearly covered under policy wordings and are paid quickly, many other claims are subject to significant disputes, for example over the terms of a policy and the amount of the claim. The provisions for disputed claims are based on the view of the Directors of each insurance company subsidiary as to the expected outcomes of such disputes. Claim types impacted by such disputes include asbestos, pollution and certain health hazards and retrocessional reinsurance claims.
Uncertainty is further increased because of the potential for unforeseen changes in the legal, judicial, technological or social environments, which may increase or decrease the cost, frequency or reporting of claims, and because of the potential for new sources or types of claim to emerge.
Asbestos, pollution and health hazard claims
The estimation of the provisions for the ultimate cost of claims for asbestos, pollution, health hazard and other US liability insurance is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business. As a result it is not possible to determine the future development of asbestos, pollution, health hazard and other US liability insurance with the same degree of reliability as with other types of claims. Consequently, traditional techniques for estimating claims provisions cannot wholly be relied upon. The Group employs further techniques which utilise, where practical, the exposure to these losses by contract to determine the claims provisions.
Insurance claims handling expenses
The provision for the cost of handling and settling outstanding claims to extinction and all other costs of managing the run-off is based on an analysis of the expected costs to be incurred in run-off activities, incorporating expected savings from the reduction of transaction volumes over time.
The period of the run-off may be between 5 and 50 years depending upon the nature of the liabilities within each insurance company subsidiary. Ultimately, the period of run-off is dependent on the timing and settlement of claims and the collection of reinsurance recoveries; consequently similar uncertainties apply to the assessment of the provision for such costs.
Reinsurance recoveries
Reinsurance recoveries are included in respect of claims outstanding (including IBNR claims) and claims paid after making provision for irrecoverable amounts.
The reinsurance recoveries on IBNR claims are estimated based on the recovery rate experienced on notified and paid claims for each class of business.
The insurance company subsidiaries are exposed to disputes on contracts with their reinsurers and the possibility of default by reinsurers. In establishing the provision for non-recovery of reinsurance balances, the Directors of each insurance company subsidiary consider the financial strength of each reinsurer, its ability to settle their liabilities as they fall due, the history of past settlements with the reinsurer, and the Group's own reserving standards and have regard to legal advice regarding the merits of any dispute.
Recognition and de-recognition of assets and liabilities in run offs
In the course of the Group's business of managing the runoff 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 20 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 the amounts to be settled.
4. Management of insurance and financial risks
The Group's activities expose it to a variety of insurance and financial risks. The Board is responsible for managing the Group's exposure to these risks and, where possible, for introducing controls and procedures that mitigate the effects of the exposure to risk.
The Group has a Risk Committee which is a formal Committee of the Board. The Committee has responsibility for maintaining the effectiveness of the Group's Risk Management Framework, systems of internal control, risk policies and procedures and adherence to risk appetite.
The following describes the Group's exposure to the more significant risks and the steps management have taken to mitigate their impact from a quantitative and qualitative perspective.
a. Investment risks (including market risk and interest rate risk)
The Group has a Capital and Investment Committee which is responsible, inter alia, for setting and recommending to the Board an investment strategy for the management of the Group's assets owned or managed by companies within the Group. The investment of the Group's financial assets, except certain deposits with ceding undertakings, is managed by external investment managers, appointed by the 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 2017 and 2016 is shown below:
2017 2016
GBP000 GBP000
Government and government
agencies 141,278 28,530
Corporate bonds 159,961 165,043
Equities 21,146 9,382
Cash based investment funds 83,131 42,789
Cash and cash equivalents 173,393 141,656
578,909 387,400
======== ========
% %
Government and government
agencies 24.4 7.4
Corporate bonds 27.6 42.6
Equities 3.7 2.4
Cash based investment funds 14.3 11.0
Cash and cash equivalents 30.0 36.6
100.0 100.0
======== ========
Corporate bonds include asset backed mortgage obligations totalling GBP8,905k (2016: GBP20,832k).
Based on invested assets at external managers of GBP405,516k as at 31 December 2017 (2016: GBP245,744k), 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 2017 of GBP4,055k (2016: GBP2,457k).
(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
2017 1 2 3 GBP000
GBP000 GBP000 GBP000
Government and government
agencies - 141,278 - 141,278
Corporate bonds - 159,961 - 159,961
Equities 19,314 1,832 - 21,146
Cash based investment
funds 83,131 - - 83,131
Purchased reinsurance
receivables (Note 18) - - 3,750 3,750
-------- -------- -------- --------
Total financial assets
measured at fair value 102,445 303,071 3,750 409,266
======== ======== ======== ========
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 18) - - 5,585 5,585
-------- -------- -------- --------
Total financial assets
measured at fair value 56,725 188,950 5,654 251,329
======== ======== ======== ========
The following table shows the movement on Level 3 assets measured at fair value:
2017 2016
GBP000 GBP000
Opening balance 5,654 9,624
Total net gains recognised in
the Consolidated Income Statement 452 522
Purchases - 354
Disposals (1,905) (6,193)
Exchange adjustments (451) 1,347
Closing balance 3,750 5,654
======== ========
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 GBP452k (2016: GBP522k). The Group did not purchase further reinsurance receivables in 2017 (2016: purchases of GBP354k). 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.
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 2017
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 384,370 109,554 56,340 38,225 52,422 127,829
======== ========== =========== =========== ======= ========
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 0.49-8.25 0.05-7.50 0.40-4.95 1.43-5.88 1.01-7.68
====================== =========== =========== ========== ==========
As at 31 December 2016
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 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
====================== =========== =========== ========== ==========
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 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
2017
Exposures
Less of less
than Other than
A rated B rated B * GBP200k Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Deposits with
ceding undertakings 2,911 300 - 1,655 1,808 6,674
Reinsurers'
share of insurance
liabilities 173,629 3,228 - 40,608 36,017 253,482
Receivables
arising out
of reinsurance
contracts 40,971 2,545 - 9,443 10,159 63,118
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
* 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 2017 months% months% months% months% Percentage of receivables 69.6 3.1 5.5 21.8 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
Part of the Group's business consists of acquiring debts or companies with debts, which are normally past due. Any further analysis of these debts is not meaningful. The Directors monitor these debts closely and make appropriate provision for impairment.
Financial assets
past due but not
impaired
------------------------- --------------------------
As at Carrying
31 December Past value
2017 Neither due Past due more Assets in the
past due 1-90 than 90 days that have balance
nor impaired days been impaired sheet
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- -------------- --------- -------------- --------------- ---------
Deposits
with ceding
undertakings 6,278 - - 396 6,674
--------------- -------------- --------- -------------- --------------- ---------
Reinsurers'
share of
insurance
liabilities 163,809 89,673 253,482
--------------- -------------- --------- -------------- --------------- ---------
Receivables
arising
out of
reinsurance
contracts 21,004 235 288 41,591 63,118
--------------- -------------- --------- -------------- --------------- ---------
Financial assets
past due but not
impaired
------------------------- --------------------------
As at Carrying
31 December Past value
2016 Neither due Past due more Assets in the
past due 1-90 than 90 days that have balance
nor impaired days been impaired sheet
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- -------------- --------- -------------- --------------- ---------
Deposits
with ceding
undertakings 5,039 - - 539 5,578
--------------- -------------- --------- -------------- --------------- ---------
Reinsurers'
share of
insurance
liabilities 81,520 121,212 202,732
--------------- -------------- --------- -------------- --------------- ---------
Receivables
arising
out of
reinsurance
contracts 22,004 - 100 49,888 71,992
--------------- -------------- --------- -------------- --------------- ---------
The Directors believe the amounts past due but not impaired are recoverable in full.
Credit risk is managed at the committees established by the Group and Coverys Managing Agency Limited (Coverys):
The Group Board has a Group Reinsurance Asset Committee, chaired by a Non-Executive Director, which meets quarterly. Its function is to monitor and report on the Group's Syndicate and non-Syndicate reinsurance assets and, where necessary, recommend courses of action to the Group to protect the asset.
Coverys is the Lloyd's Managing Agent which manages the Syndicates on which the Group participates historically and for the 2018 Year of account. Coverys has established Syndicate Management Committees in relation to each managed syndicate and the Group has representation on each of these committees with the exception of the S1991 Committee on which the Group now only has a nominal participation. The committees are responsible for establishing minimum security levels for all reinsurance purchases by the managed Syndicates by reference to appropriate rating agencies for agreeing maximum concentration levels for individual reinsurers and intermediaries, and for dealing with any other issue relating to reinsurance assets.
There are also a number of Key Risk Indicators pertaining to reinsurance security and concentration which have been developed under the auspices of the Group Risk Committee and the Coverys 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 2017 Sterling US dollar Euro Other Total
GBP000 GBP000 GBP000 GBP000 GBP000
Intangible assets 11,236 9,159 317 - 20,712
Reinsurers' share
of insurance liabilities 110,573 92,167 50,742 - 253,482
Financial instruments 68,885 313,721 29,562 448 412,616
Insurance receivables 51,489 51,172 2,758 - 105,419
Cash and cash equivalents 105,141 65,223 2,994 35 173,393
Net assets held for
sale in disposal group 10,228 6,942 - - 17,170
Insurance liabilities
and insurance payables (294,338) (387,819) (81,817) - (763,974)
Deferred tax and pension
scheme obligations (11,436) (6,278) (390) - (18,104)
Trade and other (payables)/receivables (6,372) (22,084) (5,102) (384) (33,942)
---------- ---------- --------- -------- ----------
Total 45,406 122,203 (936) 99 166,772
---------- ---------- --------- -------- ----------
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 18,351 200,032 32,764 582 251,729
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
and insurance payables (99,051) (371,370) (94,770) - (565,191)
Deferred tax and pension
scheme obligations (10,139) (2,207) (415) - (12,761)
Trade and other (payables)/receivables (19,596) (17,154) (10,515) (739) (48,004)
---------- ---------- --------- -------- ----------
Total 20,677 77,332 (4,094) 453 94,368
---------- ---------- --------- -------- ----------
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 2017 31 December 2016
Currency Changes Impact Impact Impact Impact
in variables on profit on equity* on profit on equity*
GBP000 GBP000 GBP000 GBP000
Euro weakening 10% 687 85 291 379
US dollar
weakening 10% (3,626) (11,109) (901) (7,060)
Euro strengthening 10% (841) (104) (357) (463)
US dollar
strengthening 10% 4,436 13,578 1,098 8,629
* Impact on equity reflects adjustments for tax, where applicable.
d. Capital management
The Group's objectives with respect to capital sufficiency are to maintain capital at a level that provides a suitable margin over that deemed by the Group's regulators and supervisors as providing an acceptable level of policyholder protection, whilst remaining economically viable. The Group is regulated in Bermuda by the Bermuda Monetary Authority ('BMA'). The BMA assesses the capital and solvency adequacy of the Group and requires that sufficient capital is in place to meet the Bermuda Solvency Capital Requirement ('BSCR'). The BSCR generates a risk-based capital measure by applying capital factors to capital and solvency return elements, including investments and other assets, premiums and reserves, operational risk, and insurer-specific catastrophe exposure measures, in order to establish an overall measure of capital and surplus for statutory solvency purposes.
The Group maintains a capital level that provides an adequate margin over the Group's solvency capital requirements whilst maintaining local capital which meets or exceeds the relevant local minima including, where appropriate, those relating to maintenance of external ratings. This is monitored by way of a capital sufficiency assessment by the Group Risk Committee.
e. Insurance risk
The Group underwrites live business, providing market access to reinsurers through a network of managing general agents. This program underwriting business, is underwritten in the USA by Accredited Surety and Casualty Inc. and in Europe by R&Q Insurance (Malta) Limited, both being A- credit rated risk carriers. The exposure to the Group is limited, to the credit risk of the reinsurers and the limited retentions on select lines of business program.
Annualised
Entity Premiums
GBP000
Europe 85,559
US 45,651
The Group participates on Syndicates shown below:
Syndicate
Year of Capacity Group participation
Syndicate account GBP000 GBP000 Open / closed
1991 2018 126,750 50 Open
1991 2017 126,750 30,687 Open
1991 2016 129,740 17,693 Open
1991 2015 146,218 19,900 Closed
1110 2017 280,000 280,000 Open
1110 2016 210,000 210,000 Open
1110 2015 210,000 210,000 Closed
3330 2018 3,000 300 Open
3330 2017 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 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 2014.
The reserve movements in 2014 arise principally from new business being written in 2017 in Accredited.
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
2014 2014 2015 2016 2017
GBP000 GBP000 GBP000 GBP000 GBP000
Gross claims at
:
1 January/acquisition 315,843 28,082 12,147 107,121 210,979
First year movement 7,425 (4,656) 26 (2,793) (32,808)
Second year movement (1,300) (8,667) 1,222 (26,891)
Third year movement 43,440 13,043 (816)
Fourth year movement (43,781) 52,744
Gross provision
at 31 December
2017 321,627 80,546 12,579 77,437 178,171
---------- --------- --------- --------- ----------
Gross claims at
:
1 January/acquisition 315,843 28,082 12,147 107,121 210,979
Exchange adjustments 70,268 (521) 77 (7,507) (2,324)
Payments (193,401) (27,315) (1,500) (21,801) (26,717)
Gross provision
at 31 December
2017 (321,627) (80,546) (12,579) (77,437) (178,171)
(Deficit)/surplus
to date (128,917) (80,300) (1,855) 376 3,767
---------- --------- --------- --------- ----------
Gross claims provisions
- live business - - 24,873 23,188 4,114
---------- --------- --------- --------- ----------
Total gross insurance
contract provisions
(Note 22) 321,627 80,546 37,452 100,625 182,285
========== ========= ========= ========= ==========
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
2014 2014 2015 2016 2017
GBP000 GBP000 GBP000 GBP000 GBP000
Net claims at :
1 January/acquisition 158,655 24,150 11,283 42,540 138,547
First year movement (1,649) (3,940) 9 (1,171) (34,793)
Second year movement (7,200) (7,177) 1,037 (14,444)
Third year movement 81,902 13,174 (656)
Fourth year movement (28,534) 47,478
Net provision at
31 December 2017 203,174 73,685 11,673 26,925 103,754
---------- --------- --------- --------- ----------
Net claims at :
1 January/acquisition 158,655 24,150 11,283 42,540 138,547
Exchange adjustments 36,699 6,125 103 (2,641) (1,999)
Payments 12,786 (25,172) (1,488) (12,413) (18,205)
Net position at
31 December 2017 (203,174) (73,685) (11,673) (26,925) (103,754)
Surplus/(deficit)
to date 4,966 (68,582) (1,775) 561 14,589
---------- --------- --------- --------- ----------
Net claims provisions
- live business - - 23,817 22,076 3,949
---------- --------- --------- --------- ----------
Total net insurance
contract provisions
(Note 22) 203,174 73,685 35,490 49,001 107,703
========== ========= ========= ========= ==========
The above figures include the Group's participation on Lloyd's Syndicates treated as being in run-off.
Foreign exchange movements shown above are offset by comparable foreign exchange movements in cash and investments held to meet insurance liabilities.
Additional information regarding movements in claims reserves are disclosed in note 22.
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:-
-- The segmental analysis relates to continuing operations with the discontinued operations disclosed in Note 6.
-- 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 operates 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 continuing operations for the year ended 31 December 2017
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 32,160 54,266 86,426 - 82,244 - - 168,670
Net investment
income 116 12,243 12,359 1,297 1,521 5,700 (12,690) 8,187
External
income - 498 498 5,180 1,750 726 - 8,154
Internal
income - 887 887 8,622 233 6,601 (16,343) -
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Total income 32,276 67,894 100,170 15,099 85,748 13,027 (29,033) 185,011
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Claims paid,
net of reinsurance (9,873) (50,418) (60,291) - (21,137) - - (81,428)
Net change
in provision
for claims (10,092) 28,994 18,902 - (46,506) - - (27,604)
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Net insurance
claims
(increased)/released (19,965) (21,424) (41,389) - (67,643) - - (109,032)
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Operating
expenses (15,135) (41,842) (56,977) (15,170) (12,407) (16,207) 16,343 (84,418)
Result of
operating
activities
before goodwill
on bargain
purchase (2,824) 4,628 1,804 (71) 5,698 (3,180) (12,690) (8,439)
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Goodwill
on bargain
purchase - 24,666 24,666 - - - - 24,666
Amortisation
and impairment
of intangible
assets - (1,114) (1,114) - (773) (22) - (1,909)
Result of
operating
activities (2,824) 28,180 25,356 (71) 4,925 (3,202) (12,690) 14,318
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Finance costs - (5,316) (5,316) (1,777) (220) (9,581) 12,690 (4,204)
Share of
loss of associate - - - - (284) - - (284)
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Profit/(loss)
on ordinary
activities
before income
taxes (2,824) 22,864 20,040 (1,848) 4,421 (12,783) - 9,830
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Income tax
(charge)/credit - 976 976 (856) (1,224) 791 - (313)
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Profit/(loss)
for the year (2,824) 23,840 21,016 (2,704) 3,197 (11,992) - 9,517
--------- ---------- ---------- ---------- ------------- ---------- -------------- ----------
Non-controlling
interests - (179) (179) 114 9 - - (56)
Attributable
to shareholders
of parent (2,824) 23,661 20,837 (2,590) 3,206 (11,992) - 9,461
========= ========== ========== ========== ============= ========== ============== ==========
Segment assets 46,929 1,021,409 1,068,338 51,666 135,505 301,453 (510,133) 1,046,829
========= ========== ========== ========== ============= ========== ============== ==========
Segment liabilities 53,962 792,254 846,216 65,888 90,591 404,831 (510,133) 897,393
========= ========== ========== ========== ============= ========== ============== ==========
Segmental results for continuing operations 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 1,033 694 4,042 (8,052) 7,972
External
income - 456 456 4,491 1,623 268 - 6,838
Internal
income - 1,777 1,777 8,528 335 6,903 (17,543) -
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Total income 28,481 22,790 51,271 14,052 9,944 11,213 (25,595) 60,885
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
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) (14,075) (11,893) (16,337) 17,543 (56,096)
Result of
operating
activities
before goodwill
on bargain
purchase (2,088) 9,888 7,800 (23) (1,840) (5,124) (8,052) (7,239)
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Goodwill
on bargain
purchase - 16,281 16,281 - - - - 16,281
Amortisation
and impairment
of intangible
assets - (566) (566) - (193) (20) - (779)
Result of
operating
activities (2,088) 25,603 23,515 (23) (2,033) (5,144) (8,052) 8,263
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
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 (1,317) (2,335) (11,422) - 6,356
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Income tax
(charge)/credit - (1,904) (1,904) 1,506 602 480 - 684
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Profit/(loss)
for the year (2,088) 21,614 19,526 189 (1,733) (10,942) - 7,040
--------- --------- --------- ---------- ------------- ---------- -------------- ---------
Non-controlling
interests - (350) (350) 449 - - - 99
Attributable
to shareholders
of parent (2,088) 21,264 19,176 638 (1,733) (10,942) - 7,139
========= ========= ========= ========== ============= ========== ============== =========
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
========= ========= ========= ========== ============= ========== ============== =========
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
2017
North
UK America Europe Total
GBP000 GBP000 GBP000 GBP000
Gross assets 560,629 780,277 235,018 1,575,924
Intercompany eliminations (267,377) (190,816) (51,940) (510,133)
Segment assets 293,252 589,461 183,078 1,065,791
========== ========== ========= ==========
Gross liabilities 510,877 717,080 181,361 1,409,318
Intercompany eliminations (229,871) (275,139) (5,123) (510,133)
Segment liabilities 281,006 441,941 176,238 899,185
========== ========== ========= ==========
Revenue from external
customers 52,335 118,548 14,128 185,011
========== ========== ========= ==========
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 28,727 15,754 16,404 60,885
========== ========== ========= ==========
6. Discontinued operations and disposal groups
a) The sale of R&Q Managing Agency Limited.
On 23 June 2017 the Group announced that it had reached agreement to sell the entire share capital of its Lloyd's managing agency, R&Q Managing Agency Limited ('RQMA') to Coverys, a leading provider of medical professional liability insurance based in Boston, Massachusetts. The sale received regulatory change of control approval by Lloyd's and the PRA, and was completed on 30 November 2017. RQMA is presented within these financial statements as a discontinued operation for the year ending 31 December 2017 and for previous period comparatives, as it represented the sale of a major line of business within the R&Q Group.
b) The sale of Insurance Services and Captive Management Divisions
On 13 January 2018 the Group completed the sale of its Insurance Services and Captive Management Operations ('ISD') to Davies Group ("Davies") a leading operations management, consultancy and digital solutions provider. The transaction involves the sale of the entire share capital of JMD Specialist Insurance Services Group Limited and its subsidiaries, R&Quiem Limited, John Heath & Company Limited and AM Associates Insurance Services Limited as well as Randall & Quilter Bermuda Holdings Limited and its Quest subsidiaries. The sale is presented within these financial statements as a discontinued operation for the year-ending 31 December 2017 and for previous period comparatives, as it represented the sale of a major line of business within the R&Q Group.
Profit for the year from discontinued operations
For the year ended RQMA ISD Total RQMA ISD Total
31 December 2017 2017 2017 2016 2016 2016
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Other Income 10,586 14,391 24,977 11,423 15,490 26,913
Operating expenses (13,909) (12,630) (26,539) (11,345) (13,445) (24,790)
--------- --------- --------- --------- --------- ---------
Profit from discontinued
operations before
tax (3,323) 1,761 (1,562) 78 2,045 2,123
Income tax charge (30) (148) (178) (72) (776) (848)
--------- --------- --------- --------- --------- ---------
Operating profit/(loss) (3,353) 1,613 (1,740) 6 1,269 1,275
Disposal proceeds 16,799 - 16,799 - - -
Net assets disposed
of 1,606 - 1,606 - - -
--------- --------- --------- --------- --------- ---------
Gain on disposal 15,193 - 15,193 - - -
Income tax charge
on disposal - - - - - -
--------- --------- --------- --------- --------- ---------
Profit on disposals 15,193 - 15,193 - - -
Profit for the year
from discontinued
operations 11,840 1,613 13,453 6 1,269 1,275
========= ========= ========= ========= ========= =========
Cash flows for the year from discontinued operations
For the year ended RQMA ISD Total RQMA ISD Total
31 December 2017 2017 2017 2016 2016 2016
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Net cash inflows/(outflows)
from operating activities (158) 166 8 172 (302) (130)
Net cash inflows
from investing activities 16,799 - 16,799 - - -
------- ------- -------- ------- ------- -------
Net cash inflows/(outflows) 16,641 166 16,807 172 (302) (130)
======= ======= ======== ======= ======= =======
The major classes of assets and liabilities forming the RQMA disposal group were as follows:
On disposal
30 November
2017
GBP000
Assets
Intangible assets 872
Insurance and other receivables 1,524
Cash and cash equivalents 14
-------------
2,410
Liabilities
Insurance and other payables 804
Current tax liabilities -
804
=============
Total net assets of the disposal
group 1,606
=============
No impairment losses were recognised on the reclassification of these operations as held for sale, or at the point of sale, as the sale proceeds exceeded the carrying amounts.
The major classes of assets and liabilities of the Insurance Services and Captive Management Divisions disposal group held for sale are as follows:
Year ended
31 December
2017
GBP000
Assets classified as held
for sale:
Intangible assets 13,496
Insurance and other receivables 4,357
Cash and cash equivalents 1,109
-------------
18,962
Liabilities directly associated
with assets held for sale:
Insurance and other payables 1,792
Current tax liabilities -
1,792
=============
Total net assets of the disposal
group 17,170
=============
No impairment losses were recognised on the reclassification of these operations as held for sale, as the sale proceeds exceeded the carrying amounts.
7. Gross investment income
Continuing operations
2017 2016
GBP000 GBP000
Investment income 5,459 4,123
Realised net gains on financial
assets 1,191 3,191
Unrealised gains on financial
assets 1,537 658
8,187 7,972
======== ========
8. Other income
Continuing operations 2017 2016
GBP000 GBP000
Management fees 6,275 4,533
Insurance commissions 1,687 1,371
Profit on divestment (note
29) (3) 625
Interest expense on pension
scheme deficit (257) (213)
Purchased reinsurance receivables 452 522
8,154 6,838
======== ========
9. Operating expenses
Continuing operations 2017 2016
GBP000 GBP000
Costs of insurance company
subsidiaries 9,745 9,080
Costs of syndicate participations 31,800 12,891
Pre-contract costs 226 244
Employee benefits 30,751 27,934
Other operating expenses 11,896 5,947
84,418 56,096
======== ========
The costs of insurance company subsidiaries represent external costs borne by subsidiaries of the Group; intragroup charges are removed on consolidation.
Auditor remuneration
2017 2016
GBP000 GBP000
Fees payable to the Group's
auditors for the audit of
the parent company and its
Consolidated Financial Statements 120 110
Fees payable for the audit
of the Group's subsidiaries
by:
* Group auditors 502 403
* Other auditors 341 431
Advice on financial and accountancy
matters 74 4
Other services under legislative
requirements 123 130
-------- --------
Total 1,160 1,078
======== ========
The above includes the Group's share of the audit fee payable for syndicates 1110, 1991 and 3330 audits.
Fees payable included in the above table relating to the audit of the Group's discontinued operations for 2017 amount to GBP115k (2016: 97k)
10. Finance costs
Continuing operations 2017 2016
GBP000 GBP000
Bank loan and overdraft interest 1,419 712
Subordinated debt interest 2,785 1,177
-------- --------
4,204 1,889
======== ========
11. Profit/(loss) on ordinary activities before taxation
Profit/(loss) for continuing operations before taxation is stated after charging/(crediting):
2017 2016
GBP000 GBP000
Employee benefits (Note 26) 30,751 27,934
Legacy acquisition costs
(including aborted transactions) 2,831 1,115
Depreciation and impairment
of fixed assets (Note 16) 625 617
Operating lease rental expenditure 1,929 2,359
Amortisation of pre contract
costs 226 244
Amortisation and impairment
of intangibles (Note 15) 1,909 943
12. Income tax charge
Continuing operations
a. Analysis of charge in the year
2017 2016
GBP000 GBP000
Current tax
Current year 124 (575)
Adjustments in respect of
previous years 208 (841)
Foreign tax 336 769
-------- --------
668 (647)
Deferred tax (355) (37)
-------- --------
Income tax charge/(credit) 313 (684)
======== ========
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:
2017 2016
GBP000 GBP000
Profit on continuing operations
before taxation 9,830 6,356
-------- --------
Profit on ordinary activities
at the standard rate of corporation
tax in the UK of 19.25% (2016:
20%) 1,892 1,271
Temporary differences (6,219) (5,670)
Capital allowances in excess
of depreciation 71 57
Utilisation of tax losses 549 (49)
Timing differences in respect
of pension schemes (58) 63
Unrelieved losses 5,663 1,964
Foreign tax rate differences (1,793) 2,521
Adjustments to the tax charge
in respect of prior years 208 (841)
--------
Income tax charge/(credit)
for the year 313 (684)
======== ========
c. Factors that may affect future tax charges
In addition to the recognised deferred tax asset, the Group has other trading losses of approximately GBP84,566k (2016: GBP47,153k) in various Group companies available to be carried forward against future trading profits of those companies. The increase is materially due to acquisitions in the year. 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 GBP28,001k (2016: GBP27,461k).
13. Earnings and net assets per share a. Basic earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.
Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:
2017 2016
GBP000 GBP000
Profit for the year attributable
to ordinary shareholders from:
Continued operations 9,461 7,139
Discontinued operations 13,453 1,275
======== ========
No. No.
000's 000's
Shares in issue throughout the
year 72,118 71,835
Weighted average number of ordinary
shares issued 18,016 169
Weighted average number of ordinary
shares 90,134 72,004
======== ========
Basic earnings per ordinary share
for:
Continued operations 10.5p 9.9p
Discontinued operations 14.9p 1.8p
======== ========
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:
2017 2016
GBP000 GBP000
Profit for the year attributable
to ordinary shareholders
Continued operations 9,461 7,139
Discontinued operations 13,453 1,275
======== ========
No. No.
000's 000's
Weighted average number of ordinary
shares in issue in the year 90,134 72,004
Dilution effect of options - 95
90,134 72,099
======== ========
Diluted earnings per ordinary
share:
Continued operations 10.5p 9.9p
Discontinued operations 14.9p 1.8p
======== ========
c. Net asset value per share
2017 2016
GBP000 GBP000
Net assets attributable to equity
shareholders as at 31 December 166,772 94,368
======== ========
No. No.
000's 000's
Ordinary shares in issue as at
31 December 125,876 72,118
Less: shares held in treasury - -
-------- --------
125,876 72,118
======== ========
Net asset value per ordinary
share 132.5p 130.9p
======== ========
14. Distributions
The amounts recognised as distributions to equity holders in the year are:
2017 2016
GBP000 GBP000
Distribution on cancellation
of X/V shares 4,545 3,603
Distribution on cancellation
of Y/W shares 3,069 2,450
Total distributions to shareholders 7,614 6,053
======== ========
15. Intangible assets
US state
licences
& customer Arising
contracts on acquisition Goodwill Other Total
GBP000 GBP000 GBP000 GBP000 GBP000
Cost
As at 1 January
2016 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
Exchange adjustments (528) (352) (1,768) (4) (2,652)
Acquisition
of subsidiaries - 5,256 572 - 5,828
Additions - - - 419 419
Disposals - (140) (1,806) (37) (1,983)
Transfer to
discontinued
operations - - (12,561) (1,212) (13,773)
------------ ---------------- --------- -------- ---------
As at 31 December
2017 6,321 14,741 18,869 448 40,379
============ ================ ========= ======== =========
Amortisation/Impairment
As at 1 January
2016 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
Exchange adjustments (35) (12) (1,348) (4) (1,399)
Charge for the
year 178 1,094 572 65 1,909
Disposals - (140) - - (140)
Transfer to
discontinued
operations - - - (277) (277)
As at 31 December
2017 516 2,138 16,728 285 19,667
============ ================ ========= ======== =========
Carrying amount
------------ ---------------- --------- -------- ---------
As at 31 December
2017 5,805 12,603 2,141 163 20,712
============ ================ ========= ======== =========
As at 31 December
2016 6,476 8,781 16,928 781 32,966
============ ================ ========= ======== =========
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.
2017 2016
Cash generating units GBP000 GBP000
Insurance Investments Division 474 474
Insurance Services Division
("ISD") 14,228 15,583
Underwriting Management Division
("UMD") - 871
-------- --------
Total 14,702 16,928
======== ========
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.
In November 2017 the Group disposed of RQMA and DTW1991 to Coverys. As a result the goodwill relating to the UMD cash generating unit has been impaired.
Early in 2018 most of the ISD entities were sold to the Davies Group, the net sale proceeds exceed the carrying value of goodwill above. As a result of the analysis, no impairment was required for these cash generating units at 31 December 2017.
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% (2016: 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 (2016: 10.0%).
The Directors believe that no foreseeable change in any of the above key assumptions would require an impairment of the carrying amount of goodwill.
16. Property, plant and equipment
Computer Motor Office Leasehold Freehold
equipment vehicles equipment improvements Property
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Cost
As at 1 January
2016 1,833 36 1,875 418 - 4,162
Exchange adjustments 253 5 84 236 - 578
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
----------- ---------- ----------- -------------- ---------- --------
Exchange adjustments (119) (2) (38) (105) - (264)
Additions 96 - 75 165 135 471
Disposals (112) - (300) - - (412)
Transferred
to discontinued
operations (85) - (28) (15) - (128)
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2017 1,495 39 1,386 698 2,621 6,239
=========== ========== =========== ============== ========== ========
Depreciation
As at 1 January
2016 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
----------- ---------- ----------- -------------- ---------- --------
Exchange adjustments (116) (2) (36) (95) - (249)
Charge for the
year 156 - 137 64 52 409
Impairment - - - - 216 216
Disposals (86) - (148) - - (234)
Transferred
to discontinued
operations (72) - (27) (15) - (114)
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2017 1,318 39 1,116 463 268 3,204
=========== ========== =========== ============== ========== ========
Carrying amount
----------- ---------- ----------- -------------- ---------- --------
As at 31 December
2017 177 - 270 235 2,353 3,035
=========== ========== =========== ============== ========== ========
As at 31 December
2016 279 - 487 144 2,486 3,396
=========== ========== =========== ============== ========== ========
As at 31 December 2017, the Group had no significant capital commitments (2016: none). The depreciation charge for the year is included in operating expenses.
17. Investment properties and financial assets
2017 2016
GBP000 GBP000
a. Investment properties
As at 1 January 407 770
Exchange adjustment 19 61
Decrease in fair value during
the year - (65)
Disposals - (359)
-------- --------
As at 31 December 426 407
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 (2016: GBP15k) 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)
2017 2016
GBP000 GBP000
Equities 21,146 9,313
Debt securities - fixed
interest rate 384,370 236,431
405,516 245,744
======== ========
Included in the above amounts are GBP12,701k (2016: GBP13,744k) pledged as part of the Funds at Lloyd's in support of the Group's underwriting activities in 2017. 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 GBP55,629k (2016 - GBP60,986k) of funds withheld as collateral for certain of the Group's reinsurance contracts.
c. Shares in subsidiary and associate undertakings
The Company had interests in the following subsidiaries at 31 December 2017:
% 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
Berda Developments Limited Bermuda - 100 100
Capstan Insurance Company
Limited Guernsey - 100 100
Constantia Insurance Company
(Guernsey) 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
Pender Mutual Insurance
Company Limited Isle of Man - 100 100
England and
R&Q Alpha Company Limited Wales 100 - 100
England and
R&Q Beta 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
England and
R&Q Capital No. 6 Limited Wales - 100 100
England and
R&Q Capital No. 7 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 - 100 100
R&Q RI Insurance Company
Limited USA - 100 100
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 Ltd ^ 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
ICDC Ltd USA - 100 100
JMD Market Services Limited England and
^ Wales - 100 100
JMD Specialist Insurance
Services Group Limited England and
^ 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
R&Q Archive Services Limited England and
Wales - 100 100
R&Q Broker Services Limited England and
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
R&Q KMS Management Limited England and
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 Island - 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&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
Reinsurance Solutions Limited England and
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
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
R&Q Commercial Risk Services England and
Limited Wales - 100 100
England and
R&Q MGA Limited Wales - 100 100
R&Q Risk Services Canada
Limited Canada - 100 100
England and
R&Q SIS Limited Wales - 100 100
Trilogy Managing General England and
Agents Limited * Wales - 80 80
Others
Octagon Insurance Group
Ltd. Cayman Island - 100 100
England and
RQIH Limited Wales 100 - 100
England and
R&Q Oast Limited Wales - 100 100
R&Q Secretaries Limited England and
Wales - 100 100
# has a November year end due to Irish Law Society connection.
* has an April year end as acquired during the year, will be aligned in 2018.
dissolved in 2018
^ disposed of in 2018
18. Insurance and other receivables
2017 2016
GBP000 GBP000
Receivables arising from direct
insurance operations 42,301 19,249
Receivables arising from reinsurance
operations 63,118 71,992
-------- --------
Insurance receivables 105,419 91,241
-------- --------
Trade receivables 5,995 4,117
Other receivables 35,412 28,509
Purchased reinsurance receivables 3,751 5,585
Prepayments and accrued income 19,696 14,923
-------- --------
64,854 53,134
Total 170,273 144,375
======== ========
Included in receivables arising from reinsurance operations is GBP11,220k (2016: GBP9,664k) in respect of amounts due under certain reinsurance contracts which are expected to be received after 12 months.
Included in purchased reinsurance receivables is GBP2,550k (2016: GBP4,271k) which is expected to be received within 12 months. The remainder of the balance is expected to be received after 12 months.
The carrying amounts disclosed above reasonably approximate their fair values at the period end date.
19. Cash and cash equivalents
2017 2016
GBP000 GBP000
Cash at bank and in hand 173,393 141,656
======== ========
Included in cash and cash equivalents is GBP561k (2016: GBP608k) being funds held in escrow accounts in respect of guarantees provided to the Institute of London Underwriters. The decrease is due to exchange movements.
Included in cash and cash equivalents is an amount of GBP1,400k (2016: GBP840k) held in respect of the defined benefit scheme.
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.
20. Insurance and other payables
2017 2016
GBP000 GBP000
Structured liabilities 399,252 436,927
Structured settlements (399,252) (436,927)
---------- ----------
- -
---------- ----------
Payables arising from reinsurance
operations 36,544 7,003
Payables arising from direct
insurance operations 3,171 3,108
---------- ----------
Insurance payables 39,715 10,111
---------- ----------
Trade payables 1,859 1,437
Other taxation and social
security 1,424 871
Other payables 43,252 28,908
Accruals and deferred income 6,019 9,083
---------- ----------
52,554 40,299
---------- ----------
Total 92,269 50,410
========== ==========
The carrying amounts disclosed above reasonably approximate their fair values at the period end date.
Included in other payables is GBP1,052k (2016: GBP1,429k) 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 GBP13,900k (2016: GBP15,061k). The decrease is due to exchange movements.
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.
21. Financial liabilities
2017 2016
GBP000 GBP000
Amounts owed to credit institutions 55,889 65,931
======== ========
Amounts due to credit institutions
are payable as follows:
2017 2016
GBP000 GBP000
Less than one year 4,104 21,697
Between one to five years 15,500 11,373
Over five years 36,285 32,861
55,889 65,931
======== ========
As outlined in Note 31, GBP18,500k (2016: GBP31,874k) owed to credit institutions is secured by debentures over the assets of the Company and several of its subsidiaries.
A subsidiary has issued subordinated debt for EUR25m at a margin of 6.7% above EURIBOR and is repayable in 2025.
A subsidiary has issued subordinated debt for $20m at a margin of 7.75% above LIBOR and is repayable in 2023.
Reconciliation of liabilities arising from financing activities
The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from the financing activities are those for which cash flows were, or future cash flows will be, classified in the Group Consolidated Cash Flows Statement as cash flows from financing activities.
2017 2016
GBP000 GBP000
Balance at 1 January 65,931 37,492
Financing cash flows (1) (8,235) 24,678
Non-cash exchange adjustment (1,807) 3,671
Balance at 31 December 55,889 65,931
======== ========
1) Represents the net cash flows from the repayment of borrowings and the proceeds from new borrowing arrangements.
22. Insurance contract provisions and reinsurance balances
2017 2016
Live Run-off Total Live Run-off Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Gross
Insurance contract
provisions at
1 January 42,793 510,933 553,726 27,902 348,900 376,802
Claims paid (10,223) (131,790) (142,013) (6,095) (53,335) (59,430)
Increases in provisions
arising from the
acquisition of
subsidiary undertakings
and Syndicate
participations - 210,979 210,979 - 107,121 107,121
Increases in provisions
arising from acquisition
of reinsurance
portfolios - 84,498 84,498 - 24,775 24,775
Increase/(decrease)
in claims provisions 19,417 48,863 68,280 17,785 19,187 36,972
Increase/(decrease)
in unearned premium
reserve 4,039 (20,592) (16,553) 3,093 2,972 6,065
Net exchange differences (3,850) (32,532) (36,382) 108 61,313 61,421
As at 31 December 52,176 670,359 722,535 42,793 510,933 553,726
--------- ---------- ---------- -------- ---------- ----------
Reinsurance
Reinsurers' share
of insurance contract
provisions at
1 January 3,412 199,320 202,732 2,442 174,769 177,211
Proceeds from
commutations and
reinsurers' share
of gross claims
paid 350 (60,935) (60,585) - (113,599) (113,599)
Increases in provisions
arising from the
acquisition of
subsidiary undertakings
and Syndicate
participations - 72,432 72,432 - 64,581 64,581
Increases in provisions
arising from acquisition
of reinsurance
portfolios - 771 771 - 2,635 2,635
Increase/(decrease)
in claims provisions (548) 43,523 42,975 951 46,133 47,084
Increase/(decrease)
in unearned premium
reserve 224 3,201 3,425 163 2,197 2,360
Net exchange differences (1,104) (7,164) (8,268) (144) 22,604 22,460
As at 31 December 2,334 251,148 253,482 3,412 199,320 202,732
--------- ---------- ---------- -------- ---------- ----------
Net
Net insurance
contract provisions
at 1 January 39,381 311,613 350,994 25,460 174,131 199,591
Net (claims paid)/commutation
proceeds (10,573) (70,855) (81,428) (6,095) 60,264 54,169
Increases in provisions
arising from the
acquisition of
subsidiary undertakings
and Syndicate
participations - 138,547 138,547 - 42,540 42,540
Increases in provisions
arising from acquisition
of reinsurance
portfolios - 83,727 83,727 - 22,140 22,140
Increase/(decrease)
in claims provisions 19,965 5,340 25,305 16,834 (26,946) (10,112)
Increase/(decrease)
in unearned premium
reserve 3,815 (23,793) (19,978) 2,930 775 3,705
Net exchange differences (2,746) (25,368) (28,114) 252 38,709 38,961
As at 31 December 49,842 419,211 469,053 39,381 311,613 350,994
--------- ---------- ---------- -------- ---------- ----------
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 GBP77,507k (2016 - GBP78,755k) in respect of the reinsurance contract collateralised by the funds withheld disclosed in Note 17 (b).
Provision is made at the period end date for the estimated ultimate cost of settling all claims incurred in respect of events and developments up to that date, whether reported or not.
As detailed in Note 3, significant uncertainty exists as to the likely outcome of any individual claim and the ultimate costs of completing the run off of the Group's insurance operations.
The provisions carried by the Group for its insurance liabilities are calculated using a variety of actuarial techniques. The provisions are calculated and reviewed by the Group's internal actuarial team; in addition the Group periodically commissions independent reviews by external actuaries. The use of external actuaries provides management with additional comfort that the Group's internally produced statistics and trends are consistent with observable market information and other published data. Provisions for outstanding claims and IBNR are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries. Insurance companies and Syndicates within the Group are covered by a variety of treaty, excess of loss and stop loss reinsurance programs.
As detailed in Note 2 (h), when preparing these Consolidated Financial Statements, provision is made for all costs of running off the business of the insurance company subsidiaries to the extent that these costs exceed the estimated future investment return expected to be earned by those subsidiaries. Provision is also made for all costs of running off the underwriting years for those Syndicates treated as being in run-off on which the Group participates. The quantum of the costs of running off the business and the future investment income has been determined through the preparation of cash flow forecasts over the anticipated period of the run-off, using internally prepared budgets and forecasts of expenditure, investment income and actuarially assessed settlement patterns for the gross provisions. The gross costs of running off the business are estimated to be fully covered by the estimated future investment income.
The provisions disclosed in the Consolidated Financial Statements are sensitive to a variety of factors including:
-- Settlement and commutation activity of third party lead reinsurers
-- Development in the status of settlement and commutation negotiations being entered into by the Group
-- The financial strength of the Group's reinsurers and the risk that these entities could, in time, become insolvent or could otherwise default on payments
-- Future cost inflation of legal and other advisors who assist the Group with the settlement of claims
-- Changes in statute and legal precedent which could particularly impact provisions for asbestos, pollution and other latent exposures
-- Arbitration awards and other legal precedents which could particularly impact upon the presentation of both inwards and outwards claims on the Group's exposure to major catastrophe losses
A 1 percent reduction in the net technical provisions would increase net assets by GBP4,691k (2016: GBP3,510k).
23. Current and deferred tax
Current tax 2017 2016
GBP000 GBP000
Current tax assets 2,411 3,014
Current tax liabilities (7,426) (7,656)
-------- --------
Net current tax liabilities (5,015) (4,642)
======== ========
Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using tax rates of 17% for the UK (2016: 17%) and 21% for the US (2016: 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
2016 5,840 (2,827) 3,013
Movement in
year 504 (66) 438
---------- ------------- -------
As at 31 December
2016 6,344 (2,893) 3,451
Movement in
year 4,563 (3,997) 566
---------- ------------- -------
As at 31 December
2017 10,907 (6,890) 4,017
========== ============= =======
The movement on the deferred tax account is shown below:
Accelerated Pension Other
capital Trading scheme temporary
allowances losses deficit differences Total
GBP000 GBP000 GBP000 GBP000 GBP000
As at 1 January
2016 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
Movement in
year - 1,042 228 (704) 566
------- -------- --------- ------------- ---------
As at 31 December
2017 (39) 4,251 1,906 (2,101) 4,017
======= ======== ========= ============= =========
Movements in the provisions for deferred taxation are disclosed in the Consolidated Financial Statements as follows:
Deferred
tax
Deferred in statement
tax of
Exchange in income comprehensive
adjustment statement income Total
GBP000 GBP000 GBP000 GBP000
Movement in
2016 912 (1,183) 709 438
============ =========== =============== =======
Movement in
2017 (238) 634 170 566
============ =========== =============== =======
The analysis of the deferred tax assets relating to tax losses is as follows:
2017 2016
GBP000 GBP000
Deferred tax assets - relating
to trading losses
Deferred tax assets to be recovered
after more than 12 months 1,706 2,003
Deferred tax assets to be recovered
within 12 months 2,545 1,206
Deferred tax
assets 4,251 3,209
======= =======
Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable.
The Directors have prepared forecasts which indicate that, excluding the deferred tax asset on the pension scheme deficit, the deferred tax assets will substantially reverse over the next six years.
The above deferred tax assets arise mainly from temporary differences and losses arising on the Group's US insurance companies. Under local tax regulations these losses and other temporary differences are available to offset against the US subsidiaries' future taxable profits in the Group's US Insurance Services Division as well as any future taxable results that may arise in the US insurance companies.
The Group's total deferred tax asset includes GBP4,251k (2016: GBP3,209k) 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.
24. Share capital
Number Ordinary Share Treasury Total
of shares shares premium shares*
GBP000 GBP000 GBP000 GBP000
At 1 January
2016 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
============== ========= ========= ========= ========
Issue of ordinary
shares 53,758,664 1,076 64,308 - 65,384
Issue of X-Y
shares 175,079,030 7,614 (7,614) - -
Redemption/Cancellation
of X-Y shares (175,079,030) (7,614) - - (7,614)
At 31 December
2017 125,876,620 2,517 62,257 - 64,774
============== ========= ========= ========= ========
2017 2016
GBP GBP
Allotted, called up and fully
paid
125,875,620 ordinary shares of
2p each
(2016: 72,117,956 ordinary shares
of 2p each) 2,517,512 1,441,359
1 Preference A Share of GBP1 1 1
1 Preference B Share of GBP1 1 1
---------- ----------
2,517,514 1,441,361
========== ==========
2017 2016
Included in Equity GBP GBP
125,875,600 ordinary shares of
2p each
(2016: 72,117,956 ordinary shares
of 2p each) 2,517,512 1,441,359
1 Preference A Share of GBP1 1 1
1 Preference B Share of GBP1 1 1
---------- ----------
2,517,514 1,441,361
========== ==========
Cumulative Redeemable Preference Shares
Preference A and B Shares have rights, inter alia, to receive distributions in priority to ordinary shares of distributable profits of the Company derived from certain subsidiaries:
-- Preference A Share: one half of all distributions arising from the Company's investment in R&Q Reinsurance Company up to a maximum of $5,000k.
-- Preference B Share: one half of all distributions arising from the Company's investment in R&Q Reinsurance Company (UK) Limited up to a maximum of $10,000k.
The Preference A and Preference B Shares have been classified as equity on the basis that redemption dates are not prescribed in the Memorandum and Articles of Association and as such there is no contractual obligation to deliver cash. No distributions have been made since acquisition by either R&Q Reinsurance Company or R&Q Reinsurance Company (UK) Limited.
Shares issued
During the year the Group issued 15,278,291 additional shares at 117p and 38,192,837 additional shares at 127p.
During the year the Group issued X and Y shares (with an aggregate value of GBP7,614k) (2016: V and W shares (with an aggregate value of GBP6,053k) which were all cancelled.
Share options
The Group historically operated a long term incentive plan "LTIP" which has now closed.
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 2017 exercise 2016
2017 price
pence 2016
pence
Outstanding at
1 January 68.4 95,000 56.5 135,000
Exercised 20.5 (340,132) 5.2 (323,117)
Granted 2.0 245,132 2.0 283,117
At 31 December - - 68.4 95,000
===== ============ ========== ============
The total number of options in issue during the year has given rise to a charge to the Consolidated Income Statement of GBP366k (2016: GBP261k) 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
Weighted average fair 68.4 pence
value
Weighted average share 108.0 pence
price
Exercise price 68.4 pence
Expiry date 10 years after
granting
Vesting period 3 years
Volatility 21.0%
Dividend yield 8.5%
Expected option life 3 years
Annual risk free interest
rate 0.91%
No options were outstanding at 31 December 2017.
25. Employees and Directors
Employee benefit expense for the Group during the year
2017 2016
GBP000 GBP000
Wages and salaries 38,433 36,605
Social security costs 4,021 3,528
Pension costs 1,384 1,632
Share based payment charge 366 261
-------- --------
44,204 42,026
======== ========
Continuing operations 30,751 27,934
Discontinued operations 13,453 14,092
Pension costs are recognised in operating expenses in the Consolidated Income Statement and include GBP1,384k (2016: GBP1,632k) in respect of payments to defined contribution schemes.
2017 2016
Average number of employees Number Number
Group executives & support
services 94 91
Insurance Services Division 198 205
Insurance Investments Division 19 11
Underwriting Management
Division 111 106
422 413
======== ========
Total number of employees as 31 December 2017 was 366 (2016: 411). The total number of employees has reduced in 2017 due to the sale of R&Q Managing Agency Limited.
Remuneration of the Directors and key management
2017 2016
GBP000 GBP000
Aggregate Director emoluments 1,780 1,841
Aggregate key management
emoluments 2,398 1,674
Share based payments - Directors 331 225
Director pension contributions 43 10
Key management pension contributions 37 85
4,589 3,835
======== ========
Highest paid Director
Aggregate emoluments 1,160 1,015
======== ========
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 387 - - - - 387 500
A K Quilter 262 43 - - - 305 -
T A Booth 373 - 331 331 125 1,160 1,499
M G Smith 150 - - - - 150 -
A H F Campbell 75 - - - - 75 -
P A Barnes 77 - - - - 77 100
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 (2016: One). In the year, T A Booth was granted share options in respect of qualifying services under a long term incentive plan over 245,132 shares with a fair value of GBP331k (2016: 213,117 shares with a fair value of GBP225k) and the expense has been charged to the Consolidated Income Statement over the course of the vesting period.
26. 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
2017 2016
GBP000 GBP000
Fair value of plan assets 25,279 25,749
Present value of funded obligations (36,493) (35,617)
--------- ---------
Net defined benefit liability (11,214) (9,868)
Related deferred tax asset 1,906 1,678
--------- ---------
Net position in the Consolidated
Statement of Financial Position (9,308) (8,190)
========= =========
308
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 2016 (35,617) 25,749 (9,868)
Interest (expense)/income (907) 650 (257)
------------ ----------- -----------
(36,524) 26,399 (10,125)
------------ ----------- -----------
Remeasurements:-
Return on plan assets,
excluding amounts included
in interest expense - 396 396
Loss from changes in
financial assumptions (1,932) - (1,932)
Experience gain 534 - 534
------------ ----------- -----------
(37,922) 26,795 (11,127)
------------ ----------- -----------
Employer's contributions - (87) (87)
Benefit payments from
the plan 1,429 (1,429) -
------------ ----------- -----------
As at 31 December 2017 (36,493) 25,279 (11,214)
============ =========== ===========
Present Fair value Net defined
value of of plan benefit
obligation assets liability
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)
============ =========== ============
c. Significant actuarial assumptions
i) Financial assumptions
2017 2016
Discount rate 2.4% 2.6%
RPI inflation assumption 3.4% 3.4%
CPI inflation assumption 2.6% 2.6%
Pension revaluation
in deferment:
- CPI, maximum 5% 2.6% 2.6%
Pension increases
in payment:
- RPI, maximum 5% 3.4% 3.4%
ii) Demographic assumptions
Assumed life expectancy in years, on retirement at 60
2017 2016
Retiring today
- Males 27.6 27.4
- Females 30.1 30.0
Retiring in 20 years
- Males 29.0 28.9
- Females 31.6 31.5
d. Sensitivity to assumptions
The results of the IAS 19 valuation at 31 December 2017 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
2017 2016
GBP000 GBP000
Level Level Total Level Level Total
1 2 1 2
Cash and cash
equivalents - 582 582 - 264 264
Investment
funds:
- equities - 15,232 15,232 - 4,707 4,707
- bonds - 6,230 6,230 - 18,754 18,754
- other - 3,236 3,236 - - -
- cash - - - - 2,024 2,024
------- ------- ------- ------ ------- -------
- 25,279 25,279 - 25,749 25,749
----------------------- ------- ------- ------ ------- -------
Definitions of level 1 and Level 2 investments can be found in note 4(a)(i).
f. Contributions and present value of defined benefit obligation
Funding levels are monitored on an annual basis. For the period 1 January 2015 to 31 December 2025, GBP280,000 per annum is being deposited into an 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 2017. 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 16 years as at 31 December 2017.
27. 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 Lloyds Syndicate 1991
The Group participates on Syndicate 1991 which is managed by Coverys Managing Agency Limited (CMA), formerly known as R&Q Managing Agency Limited, which was a member of the Group until its disposal on 30 November 2017. CMA charges 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 CMA and Syndicate 1991 up to date of disposal
Transactions in Balances outstanding
the income statement (payable) at
ending 31 December 31 December
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
CMA 8,652 9,001 - 94
Transactions with Directors
The following Directors and connected parties received distributions during the year as follows:-
2017 2016
GBP000 GBP000
K E Randall and family 1,483 1,540
A K Quilter and family 374 364
T A Booth 112 96
M G Smith 3 2
Transactions with key management service provider.
With effect from 1 July 2016 some of the Group compliance services have been provided by a Group subsidiary, Callidus Solutions Limited, of which 49% of the share capital is owned by the Chief Governance Officer.
2017 2016
GBP000 GBP000
Fees charged for compliance
services 426 253
Fees payable to service
provider at end of year 13 3
28. 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:
2017 2016
GBP000 GBP000
Land and buildings
No later than one year 1,832 1,847
Later than one year but
no later than five years 2,115 4,027
Later than five years - -
29. Business combinations and divestments
Business combinations
The Group made 13 business combinations during 2017, 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:
Tax
Cash & Net Gross
Intangible Other & Other Technical deferred assets Deal
assets receivables Investments payables provisions tax acquired Consideration Contribution
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
ICDC 154 191 9,433 (446) (2,022) (296) 7,014 4,759 2,255
Linco - 31 283 (15) - - 299 120 179
Typroth - - 400 - - - 400 - 400
Octagon - 85 3,903 (95) - - 3,893 3,469 424
AZICO - 770 20,705 (415) (1) - 21,059 18,159 2,900
Affinity 1,146 - 16,018 - (13,082) - 4,082 - 4,082
Genesis 2,074 39 24,032 - (18,545) - 7,600 3,964 3,636
S1110 - 34,567 72,376 (19,298) (82,595) - 5,050 - 5,050
Allied - - 1,543 - (953) - 590 - 590
Wescap 510 2 2,639 - (2,317) - 834 308 526
Dura 87 - 1,812 - (1,342) - 557 - 557
Constantia 1,264 6 22,676 (2,728) (16,515) - 4,703 1,466 3,237
CompPAC 15 - 1,346 - (850) (38) 473 - 473
MTT 6 - 696 - (325) (20) 357 - 357
----------- ------------ ------------ --------- ----------- --------- --------- --------------
5,256 35,691 177,862 (22,997) (138,547) (354) 56,911 32,245 24,666
=========== ============ ============ ========= =========== =========
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 2017:
ICDC
On 16 March 2017, the Group purchased the entire issued share capital of ICDC Ltd, a company incorporated in Vermont USA. It reinsured workers' compensation, commercial general liability, auto liability and auto physical damage and property risks in respect of a large US engine manufacturer.
Linco
On 30 March 2017, the Group purchased the entire issued capital of Linco Limited. The Company is domiciled in Bermuda and provided reinsurance coverage for worker's compensation, general and automotive liability to linen supply companies.
Typroth
On 30 June 2017, the Group contracted to purchase the entire issued share capital of Octagon Insurance Group, a captive domiciled in the Cayman Islands and completed 31 August. Octagon wrote forced placed mortgage insurance for a US based bank from 1999 to 2017. As at the date of acquisition there were no outstanding insurance liabilities.
Octagon
On 31 August 2017, the Group purchased the entire issued share capital of Octagon Insurance Group, a captive domiciled in the Cayman Islands. Octagon wrote forced placed mortgage insurance for a US based bank from 1999 to 2017. As at the date of acquisition there were no outstanding insurance liabilities. External costs incurred were GBP41k.
AZICO
On 30 June 2017, the Group purchase the entire issued share capital of AstraZeneca Insurance Company Limited, a company incorporated in England and Wales. The Company's technical reserves relate primarily to UK Employers Liability claims in respect of policies written from 1994 to 2004. External costs incurred were GBP194k.
Affinity
On 11 August 2017, the Group novated the insurance liabilities from Affinity Insurance Ltd., a Cayman Islands domiciled group captive. The liabilities novated were fronted by AIG from 2006-2011 and consist of workers' compensation, general liability, auto liability and product liability exposures.
Genesis
On 31 August 2017, the Group novated the insurance liabilities from Genesis Healthcare Inc., a Delaware incorporation. The liabilities novated were fronted by Liberty Mutual Insurance Company from 1988-2012 and consist of workers' compensation and employers' liability exposures. External costs incurred were GBP121k.
S1110
On the 27 October 2017, the Group purchased the entire issued share capital of the Corporate members that participate on the S1110 Syndicate 100% from Prosight. External costs incurred were GBP461k.
Allied Premier
On 15 December 2017, the Group entered into an assumption agreement with Allied Premier Insurance, a Connecticut domiciled risk retention group, in respect of its auto liability exposures arising from policies written in 2015 and 2016.
Wescap
On 15 December 2017, the Group purchased the entire issued share capital of Wescap Insurance Company, a company domiciled in Vermont. Wescap provided multi-peril coverage to welding supply distributors from 1977 to 1988. Only product liability claims remain open due to welding supply companies being named in asbestos litigation.
Dura
On 21 December 2017, the Group entered into an assumption agreement with Dura Automotive Systems, LLC, a company domiciled in Michigan, in respect of its large deductible workers' compensation liabilities. The liabilities were fronted by Travelers from 1994 to 2016.
Constantia
On 29 December 2017, the Group purchased the entire issued share capital of Constantia Insurance Company (Guernsey) Limited, the Guernsey domiciled captive of Old Mutual plc. Constantia provided professional indemnity and crime coverage from 2003 to 2017 to the Old Mutual group. External costs incurred were GBP35k.
CompPAC & MTT
On 31 December 2017, the Group entered into agreements with The CompPAC Trust of Texas and The Mercantile Trust of Texas, to assume workers' compensation liabilities of both trusts provided from 2004 to 2017. Whilst separate legal agreements exist for each transaction, the two were appraised as if they were a single transaction due to the commonality of the liabilities and structures. External costs incurred were GBP47k.
Trilogy
During the year the Group purchased a further 50% of Trilogy Managing General Agents Limited share capital to bring the total ownership to 80%. Consequently the entity has been transferred from an associate to subsidiary. Goodwill of GBP572k arose on acquisition and was impaired.
Divestment
On 30 June 2017 the Group completed the sale of the entire share capital of R&Q Triton AS to Gabler AS.
On 30 November 2017 the Group completed the sale of the entire share capital of its Lloyd's managing agency, R&Q Managing Agency Ltd to Coverys, a leading provider of medical professional liability insurance based in Boston, Massachusetts.
30. Non-controlling interests
The following table shows the Group's non-controlling interests and movements in the year:-
31 December 2017 2017 2016
GBP000 GBP000
Non-controlling interests
Equity shares in subsidiaries 6 6
Share of retained earnings (233) 637
Share of other reserves 61 (637)
(166) 6
Movements in the year
Balance at 1 January 6 57
Loss for the year attributable to non-controlling interests 56 (99)
Exchange adjustments (32) 48
Comprehensive loss attributable to non-controlling interests 24 (51)
Non-controlling interests' share of dividends declared in the year - -
Changes in non-controlling interest in subsidiaries (196) -
Balance at 31 December (166) 6
31. 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 2017 was GBP18,500k (2016: GBP31,874k).
The Group has given various customary warranties and indemnities in connection with the disposals of RQMA and various ISD entities (to Coverys and Davies respectively).
The Group also gives various guarantees in the ordinary course of business.
32. 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, 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 has now been lifted and the Company is in the process of finalising the small number of compensation payments that were affected. It is envisaged that this exercise will be largely completed during 2018. Whilst uncertainty still exists for the ultimate amounts payable, provision has been made for the Groups best estimate of the amounts that are expected to be paid.
33. 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:-
2017 2016
Average Year end Average Year end
US dollar 1.29 1.34 1.36 1.23
Euro 1.15 1.13 1.23 1.18
34. Events after the reporting date
On 13 January 2018 the Group completed the sale of its Insurance Services and Captive Management Operations to Davies Group ("Davies"), a leading operations management, consultancy and digital solutions provider, as outlined in note 6. The transaction involves the sale of the entire share capital of JMD Specialist Insurance Services Group Limited and its subsidiaries, R&Quiem Limited, John Heath & Company Limited and AM Associates Insurance Services Limited as well as Randall & Quilter Bermuda Holdings Limited and its Quest subsidiaries.
On 29 March 2018 the Group acquired the entire share capital of Prosight Specialty Underwriters Limited and Prosight Specialty Managing Agency Limited. The Group will pay the equivalent of the net assets within the companies.
35. 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 ZMGZDKLKGRZM
(END) Dow Jones Newswires
April 30, 2018 02:01 ET (06:01 GMT)
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