Randall & Quilter Investment Holdings Ltd
Annual Report 2019

Plain-text annual report

RANDALL & QUILTER INVESTMENT HOLDINGS LTD. ANNUAL REPORT 2019 DELIVERING ON OUR STRATEGY DELIVERING GROWTH We are a unique global speciality insurance company Program Management and Legacy insurance businesses are both well positioned to capitalise on favourable market dynamics Strong financial track record Market leader in both Program Management and Legacy businesses Sizeable opportunity to grow fee income by managing 3rd party capital, attracted by uncorrelated returns Conservative investment strategy 7 6 8 1 5 4 2 3 Strong secular growth in each business, accelerating post Covid-19 High barriers to entry in both businesses Growing fee-based Program Management business (similar to an insurance broker) Consistent and high returns on capital in Legacy business (a specialty insurer) CONTENTS 2 2019 Highlights STRATEGIC REPORT 6 8 Commentary on the Results for the Year Report of the Executive Directors CORPORATE GOVERNANCE 14 16 24 28 30 32 34 42 Board of Directors Governance Audit Committee Report Remuneration & Nominations Committee Report Risk Committee Report Risk Management Principal Risks and Uncertainties Statement of Directors’ Responsibilities FINANCIAL STATEMENTS 44 48 49 50 51 52 53 98 Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Financial Position Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements Shareholder Information 2 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 2019 HIGHLIGHTS Financial, strategic and operational Group Financial Highlights Continuing business PBT Underlying profit growth of £40.1m 180% 2019 2018 After-tax Profit £38.9m 2019 2018 Earnings per share 21.4p 2019 2018 40.1 14.3 38.9 7.8 After-tax profit growth 399% Investment return 3.6% 21.4 9.2 2019 2018 Net asset value per share 148.1p Cash and investments £832.2m 2019 2018 148.1 139.4 2019 2018 3.6 1.2 832.2 638.7 Operational and post period end highlights • Successfully raised £103.5m of equity in March 2019 • £76.9 million ($100m) of new equity raised in May 2020 to fund further growth • Announced William Spiegel as Executive Director and Deputy Group Chairman in January 2020 • Announced Mike Walker as Head of Legacy Operations in January 2020 • Announced Tom Solomon as Executive Director and Chief Financial Officer in May 2020 • Announced Eamonn Flanagan as Non-Executive Director in May 2020 Outlook • Existing strong pipeline of opportunities in both Program Management and Legacy, enhanced by ‘hard’ market created by Covid-19 Covid-19 • Limited impact on existing business and investment portfolio expected from Covid-19 • Business continuity plan successfully implemented 3 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Program Management Financial Highlights Gross written premium $369.3m Premium growth of 147% 2019 2018 369.3 149.4 Economic EBITDA $1.8m 2019 2018 1.8 (1.9) Economic commission revenue Commission growth of $12.9m 148% 2019 2018 12.9 5.2 Operational • Actioned a Brexit solution through the creation of a UK Branch of our Malta program insurer. Legacy Financial Highlights Growth in reserves Operating return on capital 19.6% 31 (15) 2019 2018 19.6 16.7 31% 2019 2018 All $ shown are US Dollars Operational • 16 transactions completed, including the largest acquisition to date with the purchase of Global Re at a cost of $80.5m. 4 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 STRATEGIC REPORT 6 8 Commentary on the Results for the Year Report of the Executive Directors 6 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Commentary on the Results for the Year 2019 was an outstanding year for R&Q and in 2020 our opportunity set continues to grow. Ken Randall Executive Chairman We are pleased to report that 2019 was a record year for the Group. Our pre-tax profit was £40.1 million, our after-tax profit was £38.9 million and our net asset value per share (including return to shareholders) increased by 13% to 148.1p per share. At £40.1 million, our pre-tax profit was a Group record and almost three times the equivalent result in 2018. This was the result of the continued growth in both our Program Management and Legacy businesses as we successfully executed against our strategy and capitalised on the significant opportunities in both segments. Our Legacy business continued to thrive in 2019 as we completed 16 transactions including executing on two of the largest transactions in R&Q’s history. Our 16 transactions contributed £332.2 million of new cash and investments and £276.2 million of additional net reserves. Moreover, our Legacy Operations team continued to achieve claims and reserve savings from portfolios acquired in prior years, while our investments returned 3.6% on £832.2 million of cash and investments at year end. Our investment portfolio continued to be conservatively managed and at year end 2019, we maintained a high quality (90% investment grade) and short average duration of 1.7 years. In 2019, our Legacy business generated an operating return on capital of 19.6% and over the past three years we are proud to report that our operating return on capital has averaged 17.6%. We believe operating return on capital is one of the most appropriate metrics to measure the profitability and value of our Legacy business. In any given year this metric records the profits on new deals, the reserve changes from prior year deals and the investment income (excluding unrealised gains or losses) associated with our total legacy portfolio. Since late 2016, we have used our Legacy business infrastructure to support the growth of our nascent Program Management business. Program Management is a fee- based annual recurring commission revenue business that is highly scalable. In 2019, our gross premium written grew by 147%, from $149.4 million in 2018 to $369.3 million in 2019. This led to record Economic Commission Revenue which grew by 148% from $5.2 million in 2018 to $12.9 million in 2019. We are pleased to report that in 2019, we achieved a critical milestone as we generated positive Economic EBITDA of $1.8 million compared with an Economic EBITDA Loss of $3.8 million in 2018. We believe Economic Commission Revenue and Economic EBITDA are two of the most important metrics measuring the underlying profitability and value of our Program Management business. During periods of high growth, we focus on economic metrics more than IFRS metrics because they reflect the economic value of business already bound, regardless of the length of the underlying policy period. When growth in our business levels off, economic and IFRS figures will converge. In the first quarter of 2020, our Program Management business continued to expand with growth in our existing programs and the addition of new programs, increasing gross written premium to $478.4 million (on an annualised basis), an increase of 30% from year end 2019. Moreover, in the first quarter of 2020, our Economic Commission Revenue grew to $19.6 million (on an annualised basis), an increase of 51% from year end 2019. Our Program Management business has significant built-in growth with its existing distribution partners with whom we have secured contracts which are expected to generate up to $842 million of contracted premium as of year-end 2019. Program Management is highly scalable, and with its current scale largely absorbing its fixed overhead (on both an Economic and IFRS basis), we expect a large portion of our future commissions from new business to show up as profit in 2020 and beyond. 7 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 2019 2018 49,662 40,125 40,126 38,845 21.4p 1,780,873 832,208 1,072,208 142,693 290,246 3.6% 13.9% 15.9% 124.6p 148.1p 134p 157.5p 9.9p 18,596 14,251 11,693 7,822 5.8p 1,197,573 638,672 699,078 140,243 175,638 1.2% 4.7% 5.4% 123.6p 139.4p 132.6p 148.4p 9.2p In the first quarter of 2020, Covid-19 shut down the world economy likely leading to one of the largest insurance loss events on record. This large capital event is likely to accelerate the strong secular growth we were already seeing in our two specialist businesses, Program Management and Legacy, as these businesses become a core and growing part of the insurance industry. In order to proactively capitalise on the ‘hard’ market in our two business lines, in May 2020, we raised $100 million of new capital. In our Legacy business we are already witnessing increased opportunities from insurance companies seeking to free-up capital by divesting insurance reserves. In our Program Management business we believe we will be able to forge new origination partnerships as existing insurance capacity may not be able to continue to provide capital support. Moreover, due to current market conditions, we are bringing forward our entry into the US Excess & Surplus (E&S) Lines Program Management market, a large addressable market in which we do not presently compete. Over the next few years we expect our Legacy business to continue to provide strong and consistent operating returns on capital. Our key goal for the Legacy business is to add a recurring fee component to its income by managing legacy business on behalf of third parties. There is a growing demand from alternative capital providers, such as pension funds, sovereign wealth funds and family offices, for access to the legacy insurance business we originate and service. The demand is driven because insurance liabilities are generally non- correlated to other securities, such as stocks and bonds. In our Program Management business, which is already largely fee-based, we expect to continue its rapid growth and benefit from its scalable business model to drive a large portion of future commission revenue from new business, straight to the bottom line. Our goals for the Program Management business are by 2022/2023 to have gross written premium of $1.5 billion £000 Group results Operating profit (continuing) Profit before tax (continuing) Profit before tax Profit after tax Earnings per share (basic) Balance sheet information Total assets Cash and investments Total gross reserves Amounts owed to credit institutions Shareholders’ equity Key statistics Investment return Return on equity (average) Return on tangible equity (average) Net tangible assets (closing) per share Net assets value (closing) per share Net tangible assets (closing) + distribution per share Net assets (closing) + distribution per share Distribution per share (including bonus shares) to $2 billion, to achieve approximately 80% pre-tax margins and to generate Economic EBITDA in excess of $50 million. We are excited about the future of both of our businesses and believe we are well positioned to achieve our goals. 2019 was an outstanding year for R&Q and in 2020 our opportunity set continues to grow. We will continue, as is our tradition, to be patient and disciplined as we continue to grow our businesses. Ken Randall Executive Chairman 8 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Report of the Executive Directors Our business has grown consistently year over year, and we are unique as the only program carrier that has an AM Best A- credit rating in the US, the UK and Europe. Ken Randall Executive Chairman William Spiegel Deputy Executive Chairman Alan Quilter Chief Executive Officer revenue earned on gross written premium). Given the scalability of the Program Management business, we expect a large portion of additional commissions from new business to drop to the bottom line. Meanwhile, in 2019, our Legacy business continued to generate high operating returns on capital. In 2019, our Legacy business generated an operating return on capital of 19.6% and over the past three years, it has produced an average operating return on capital of 17.6%. We believe operating return on capital is the most appropriate metric to measure the profitability and value of our Legacy business. In any given year this metric records the profits on new deals, the reserve changes from prior years’ deals and the investment income (excluding unrealised gains or losses) associated with our total Legacy portfolio. Program Management Our Program Management business operates in the US, the UK and Europe under the banner of Accredited. We began developing this business in late 2016 and our first real year of operation was 2017. We identified the importance and demand for program management as we witnessed the growth in the independent Managing General Agents (MGA) channel and the increased demand of reinsurers for premium. At the end of 2019 we produced gross written premium of $369.3 million, up from $3.9 million in 2016, and had established ourselves as a leading program management company. Our business has grown consistently year on year, and we are unique as the only program carrier that has an AM Best A- credit rating in the US, the UK and Europe. In the US we are licensed in all 50 states and in the UK/ Europe we are licensed to write all classes of non-life business. In 2020, we will set up a fully authorised UK branch to facilitate continued access to the large UK market, post Brexit. This branch will get the full benefit of Accredited Malta’s A- rating from AM Best. In the US, in 2019, Accredited (US) was upgraded to an AM Best category IX Financial Strength. This positive endorsement makes Accredited one of the highest rated program managers in the US and positions us well for continued future success. Financial Results 2019 was an exceptional year for R&Q both financially and strategically. Financially, we had our most profitable year ever, increasing pre-tax profits by 180% to £40.1 million, growing earnings per share by 269% to 21.4p and increasing net assets per share (including distributions) by 13% to 148.1p. Importantly, the strategic benefit of focusing on two complementary high growth specialty insurance sectors, Program Management and Legacy, is becoming clear. After three years of our Legacy business infrastructure supporting our rapidly growing fee-based Program Management business, in 2019 we achieved an important milestone as our Program Management business generated an Economic EBITDA of $1.8 million. During periods of rapid growth, we believe Economic EBITDA more accurately reflects the true underlying earnings power of our Program Management business than IFRS EBITDA. Unlike IFRS, Economic EBITDA reflects the economic value of business already written, regardless of the length of the underlying policy period. This result was produced by a 147% growth in gross written premium to $369.3 million for the year ended 2019 and a 148% growth in Economic Commission Revenue (commission 9 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 We are in the process of preparing our first application for an IBT into NLIC, with the business coming from the Excess Casualty Reinsurance Association (ECRA) pool that we manage. The ECRA pool, which we manage exclusively on behalf of the pool members, comprises $1.4 billion of gross liabilities and 150 participants, is ideal for using the IBT process to obtain finality for the ECRA pool participants. We continue to see an increase in deal sizes, which reflects both our increased scale and the breadth of our platform. The deal pipeline remains very healthy and we envisage significant opportunities arising from the current global Covid-19 crisis with companies seeking capital efficiency through the disposal of legacy liabilities. These include commercial carriers or syndicates suffering from investment losses or unexpected claims development, or cash-strapped industrial and commercial business owners with trapped capital in their ‘captive’ insurance subsidiaries. Legacy Operations After our Legacy M&A team completes a transaction, our Legacy Operations team leverages its considerable collective experience to drive value. As well as managing the typical processes necessary in managing insurance businesses, the team provides invaluable support to the M&A team through due diligence, development of claims strategy and extracting additional value. The Legacy Operations team has expertise in managing post acquisition integration and implementing strategies after a transaction is completed. This was illustrated in 2019 following the early May completion of the Global Re acquisition, where we successfully generated significant capital releases of $6 million in 2019 and $6 million in early 2020. Further releases from Global Re are expected in 2020. A similar result occurred following the acquisition of Sandell Re, with $5.4 million released soon after its acquisition. The team consistently reviews its acquired portfolios, identifying areas for reserve releases and strengthening, where appropriate. The Legacy Operations team is working on several other transfer and consolidation projects including the Part VII transfers of the Anglo-French portfolio and preparing the Part VII process for the UK P&I Club’s industrial disease exposures. These benefit from the team’s deep experience of managing such restructuring processes effectively and efficiently. The MGA/broker market in the US, UK and Europe produces over $100 billion of annual premium. In all of these jurisdictions, the independent MGA channel, as a form of insurance distribution, continues to grow. This trend is occurring for a number of reasons. First, insurance product distribution is becoming increasingly specialised. Second, underwriters have been leaving insurance companies to own their own ‘non-regulated’ independent business. Finally, the InsurTech boom has created a number of new tech- enabled distribution companies. While not all of the MGA/broker market is addressable by the program management market, the independent MGA channel has been growing as a percent of the total market. This is occurring because independent MGAs seek stability in their insurance company relationships and working with a program manager, as opposed to a competing insurance company, meets that need. Independent MGAs are finding that partnering with program managers, as opposed to competing insurance companies, provides a powerful way for them to retain more control over their future growth and success. A recent example of the trend is the move by Lloyd’s to cease underwriting certain classes of business, which has resulted in underwriters leaving to join existing MGAs or starting new ones. The other major trend that is increasing demand for program managers is that reinsurers are earning less premium on large programs that are increasingly retained by primary insurers. By working with a program manager, a reinsurer can access premium directly maintaining a good source of premium growth. We partner with many of the world’s largest and most important reinsurers and are pleased to be working in collaboration with such high profile partners. In the fourth quarter of 2016, as we were just launching our Program Management business, we had partnerships with two MGA’s. Over the past three years our business has grown and we now have 30 MGA partnerships in seven countries. In 2020, we expect to add programs in four more countries. As we have added partnerships we have also grown the number of business lines in which we provide coverage. From just two business lines in 2016, we now offer program management for 17 different classes of non- life Property & Casualty business in the US, UK and Europe and we expect to add more classes of business in 2020. Given the size of the market opportunity, we currently face limited competition, in part because of the high barriers to entering the program space. To compete one needs at least an A- rating, a strong capital base, licenses and the ability to execute with both MGA and reinsurance partners. In the US, UK and Europe there are only a small number of well-capitalised program managers with the ratings and financial strength of Accredited. We believe our A- rating, our strong capital base and our reputation for robust due diligence and oversight has given both MGAs and reinsurers confidence in our business. As discussed above, in 2020 we are actively working on the launch of our US E&S Lines Program Management business. Entering the E&S market will complete Accredited’s strategic initiative to be a comprehensive program management solutions provider in all its major global markets. Legacy M&A Legacy business has been at the core of the Group for almost 30 years. Over the last 10 years we have completed 102 transactions in 18 countries (35 different regulatory jurisdictions) and acquired £620 million of reserves, making R&Q a market-leading solutions provider in the legacy insurance market. 2019 was another busy year. We completed 16 transactions, assumed £276.2 million of net reserves and delivered a 19.6% operating return on capital. Deals were executed in Bermuda, Barbados, Ireland, UK, Sweden and several US states and included a wide array of transaction size and structure including: • the Group’s largest deal, the acquisition of Global Re, a New York domiciled carrier which has been in run-off since 2002 • a significant reinsurance deal for two Joint Power Authorities – Northern California Regional Liability Excess Fund and Statewide Association of Community Colleges • a large loss portfolio transfer for a Lloyd’s syndicate. A significant advantage we possess in the legacy market is the breadth of our platform. We offer a full range of solutions to our clients – we have rated and fully licensed carriers in the US, UK and Europe, a Class 3 Bermudian reinsurer, a Bermudian segregated accounts company, a Lloyd’s platform and consolidation vehicles in Guernsey, Isle of Man and Vermont. To broaden our platform we recently launched National Legacy Insurance Company (NLIC) in Oklahoma to benefit from the Insurance Business Transfer (IBT) legislation recently enacted in that state. IBT is similar to the Part VII transfer process that exists in the UK and is an area where we have extensive experience. 10 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Report of the Executive Directors continued The future is bright for R&Q. We are a unique global specialty insurance business that is well positioned for future growth and profit. We remain market leaders in both of our businesses, demand for our services is strong and increasing post Covid-19. Cash and Investments The investment team works closely with the Legacy M&A team, assisting with deal pricing and ensuring that new portfolios are on-boarded and invested as soon as possible after a deal closes. The management of our investment portfolio is outsourced, and during 2019 we completed a consolidation of our investment managers, reducing the number of external managers to three. Our investment portfolio performed well in 2019, generating a net investment return of 3.6% compared with 1.2% for the year ended 2018. We earned this higher return on a larger investment portfolio as our cash and investments increased to £832.2 million at year end 2019 from £638.7 million at the end of 2018. The addition to our investment portfolio was primarily from the 16 legacy deals closed during the year as well as the £103.5 million equity raise in March of 2019. We maintain a conservative portfolio with a minimal allocation to equities and other risk assets. As of year-end 2019, 95% of our portfolio was rated BBB or better (including 62% in AAA rated securities), the average duration was 1.7 years, 78% of the portfolio was US Dollar denominated, the book yield was 2.21% and the Yield to worst was 1.64%. An important investment metric is our investment/equity ratio. This ratio increased slightly over the year to 2.5x at year end 2019 from 2.4x at year end 2018. This conservative positioning of the portfolio helped us weather the market volatility that resulted from the onset of Covid-19. As of 30 April 2020, the year-to-date performance of the portfolio, on a mark to market basis, was a small decline of 1.2%, representing a loss of £8.2 million, driven by unrealised losses of £13.4 million, partially offset by realised gains and income of £5.2 million. We believe we are well positioned to take advantage of opportunities generated by the current Covid-19 crisis, as well as to protect our balance sheet should there be further volatility going forward. External Borrowing In August 2019, in order to support our continued growth, we increased our bank debt facility to £62.5 million, with a five- year maturity. In addition, we also raised subordinated debt, which at year end totalled £89.6 million and matures over the next three to eight years. Return to Shareholders We are pleased to continue our history of paying a return to shareholders, although this year, in light of the wider macro environment and regulatory pressure, our return will be in the form of ordinary shares. The Board is recommending an award to shareholders of 1 ordinary share in the capital of the Group for every 22 ordinary shares already held, to be issued on or around 15 July 2020. Brexit It would be remiss not to mention Brexit and how we have prepared for the UK’s split from the European Union. Accredited Europe, which is domiciled in Malta, has written a considerable volume of UK Program Management business that it would not be able to write after Brexit due to the cessation of the cross-border capabilities afforded under EU membership. In order to continue writing UK business, Accredited has set up freedom of establishment in the UK, effectively a branch operation under EU directives, and an application has been submitted to the PRA for this to become a fully authorised third country branch. This branch will get the full benefit of Accredited Malta’s A- rating from AM Best. Not only will this enable Accredited to continue to write its current UK program business, but it provides opportunities for it to pick up new business from European program managers that have decided not to create a UK branch. With regard to legacy operations, the UK branch provides the platform for Accredited to continue to manage its UK legacy liabilities and utilise its financial strength rating to provide exit solutions for UK businesses that would no longer be able to access European run-off vehicles. Management Succession and Staffing As a leadership team we are focused on addressing management succession. We continue to recruit and attract exceptional talent, which is a sign of our thriving and vibrant business. Our team is filled with strong young insurance leaders who are making us more agile, creative and profitable. In 2019 and 2020, as part of our succession planning, we announced that William Spiegel was joining as Executive Director and Deputy Group Chairman, Mike Walker was joining as Head of Legacy Operations and Tom Solomon was joining as Executive Director and Chief Financial Officer. William, Mike and Tom all have considerable insurance experience in their prior roles and position us well for the future. Notwithstanding our ability to recruit new talent, we want to single out the three longstanding members of our senior management team who are stepping back: Mike Glover, Chief Governance Officer, has been with us for 17 years and will continue to provide consultancy services for a period of time; Pam Hoelsken, President of R&Q America Holdings Inc., will be retiring in June after 21 years; and Mark Langridge, who was previously a board member and Head of Legacy, will after 13 years at R&Q continue in a part-time capacity. We want to thank each of them for their contributions and role in helping shape R&Q. Mike, Pam and Mark have each set a standard of professionalism, ethical behaviour and entrepreneurialism, and that is part of their legacy. Like most people around the world, the lives of all of us at R&Q have been upended over the last few months. We have had to quickly change the way we live – working from home and grappling with the inherent complexities that have arisen in the ‘new normal’. We would like to thank all members of our R&Q family for their unrelenting effort and dedication during this difficult time. With all our offices closed, the resilience of the R&Q team has been tested, and it has passed with flying colours. 11 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 is currently a balance sheet business and it exhibits many of the same qualities of the leading specialty insurance companies – strong non-cyclical growth with high returns on capital. Our Program Management business is a fee business and it shares many of the same attributes as commercial insurance brokerage firms – recurring annual revenue and high pre-tax margins. Over the next few years we expect our Legacy business to continue to provide strong and consistent returns on capital deployed. Our key goal for the Legacy business is to add a recurring fee component to its income by managing legacy business on behalf of third parties. There is a growing demand from alternative capital providers, such as pension funds, sovereign wealth funds and family offices, for access to the legacy insurance business we originate and service. The demand is driven because insurance liabilities are generally non- correlated to other securities, such as stocks and bonds. In our Program Management business, which is already largely fee-based, we expect to continue its rapid growth and benefit from its scalable business model to drive a large portion of future commission revenue from new business, straight to the bottom line. Our goals for the Program Management business are by 2022/2023 to have gross written premium of $1.5 billion to $2 billion, to achieve approximately 80% pre-tax margins and to generate Economic EBITDA in excess of $50 million. We are excited about the future of both of our businesses and believe we are well positioned to achieve our goals. Ken Randall Executive Chairman William Spiegel Deputy Executive Chairman Alan Quilter Chief Executive Officer Outlook and Covid-19 Our success in 2019 was generated without the backdrop of the ‘hard’ market in both our businesses created by Covid-19. Covid-19 has sent shock waves through the insurance market with loss estimates in the $100 billion range, likely making Covid-19 one of the largest insurance loss events on record. Unlike a normal industry loss event, the insured losses from Covid-19 will cut across many lines. In addition to insured losses, insurance companies are suffering investment losses, adding to the magnitude of the capital losses for the insurance industry associated with the pandemic. We believe our businesses are well positioned to withstand the impact of the pandemic. The reason for our confidence is because our existing Legacy books have limited exposure to unexpired risk, our Program Management portfolios are largely reinsured with highly rated counter-parties (93% of our reinsurance is with carriers rated A- or better and 90% is with carriers rated A or better) and our investment portfolio is conservatively positioned with a short average duration and a high quality investment-grade fixed income. The new environment does of course present some risks. We face risks from unanticipated exposure to valid claims in respect of Covid-19, from delays in completing transactions, from reduced economic growth slowing demand for insurance, from dislocations in the capital markets, and finally from our regulators and rating agencies increasing capital requirements for our industry (as was the case in the lending industry after the great Financial Crisis). However, we believe the capital dislocation in the insurance industry will accelerate the significant secular growth we were already seeing in both businesses. It was for this reason that we raised $100 million of new capital in May 2020. The opportunities for growth in each of Program Management and Legacy businesses are outlined below: • Program Management: • Significant embedded growth from our existing 30 partnerships with MGAs. As of 31 December 2019, these MGA partners have told us they expect premium from their programs to reach $842 million annually of which, as of 31 March 2020, $478 million has been written. We anticipate much of the remainder to flow in the next couple of years • Large pipeline of existing US and European business totalling $1 billion of Gross Premium. We continue to witness increasing demand in all our markets given our leadership position and lack of competition in both the US, UK and European markets • Increase in our addressable market by entering the US E&S Lines program management market in late 2020/ early 2021. The US E&S market had approximately $40 billion of written premium in 2019. We will primarily leverage our existing Program Management infrastructure to grow this business • Growth in our UK Program Management business, post Brexit, by creating a UK branch of our European Program Management company • Increase our presence in Italy with the establishment, in June 2020, of an Italian branch • Collaboration with strong MGAs, who, as a direct result of Covid-19, may find their existing capital providers facing capital pressure and unable to support their growth • Increase in commission revenue as insurance premiums increase in the ‘hard’ insurance market. • Legacy: • Growth in the demand for Legacy is being driven by the increased pressure on insurers to seek capital efficiency from the growing regulatory capital pressure on reserves • Growth in demand, particularly post Covid-19, for exit solutions from cash-strapped owners of ‘captive’ insurance companies seeking to free up available liquidity from their captive subsidiaries. R&Q is already the market leader in this field • Increase in the number of legacy opportunities post Covid-19, as the reduced capital position of the industry forces insurance companies to seek access to the Legacy markets to fill capital holes • Opportunity to improve operating returns on capital, post Covid-19, due to the excess demand for Legacy solutions • Increase the size of the opportunities upon which we can complete, by using sidecars and other third-party partnerships. As a manager of third-party capital, we would expect to be paid fees for sourcing and managing these transactions. The future is bright for R&Q. We are a unique global specialty insurance business that is well-positioned for future growth and profit. We remain market leaders in both of our businesses, demand for our services is strong and increasing post Covid-19 and there are high barriers to entering our markets. We are a combination of both a balance sheet business and a fee-based recurring commission business. Our Legacy business 12 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 CORPORATE GOVERNANCE 14 16 24 28 30 32 34 Board of Directors Governance Audit Committee Report Remuneration & Nominations Committee Report Risk Committee Report Risk Management Principal Risks and Uncertainties 42 Statement of Directors’ Responsibilities 14 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Board of Directors There were five regular meetings at which attendance was 94% in 2019. The Board was flexible and responsive to business need and attended additional meetings from time to time during the year. A Audit Committee R Remuneration & Nominations Committee Rx Regulatory Committee Ri Group Risk Committee Re Reinsurance Asset Committee C Group Capital & Investment Committee D Group Disclosure Committee 1 Ken Randall (72) Executive Chairman C D Rx 2 Alan Quilter (69) Chief Executive Officer C D Rx Ri Re William Spiegel (57) 3 Deputy Executive Chairman C Rx Skills & Experience Ken Randall is the Executive Chairman of the Randall & Quilter Group, having stepped back from the position of Chief Executive after 29 years. He has been a pioneer in the acquisition and management of discontinued business. Ken founded Eastgate Group with Alan Quilter in the mid-1990s after leaving the Lloyd’s Market. Over the next eight years they developed Eastgate into the UK’s third-party provider of insurance services with 1,300 employees and a turnover of £80 million per annum. Following the sale of Eastgate to Capita PLC in November 2000, Ken and Alan refocused the Randall & Quilter Group onto the acquisition of non-life legacy run-off portfolios. Ken led the Randall & Quilter Group admission to AIM in 2007 and remains a significant shareholder. He was the driving force in the Group’s new strategic focus in 2017. Ken has worked in the insurance industry for more than 45 years. During the early 1980s, Ken was Head of Market Regulation at Lloyd’s, then a self-regulated institution, before becoming Chief Executive of a leading Lloyd’s Insurance Group. Skills & Experience Alan Quilter is the co-founder of the Randall & Quilter Group and the Chief Executive Officer. A Chartered Accountant, Alan has been a driving force in the development of the Randall & Quilter Group, including the Company’s admission to AIM in 2007. Alan has worked in the London insurance market since 1969. Between 1980 and 1987, he headed the Market Financial Services Group at Lloyd’s before becoming Managing Director of a specialist investment management company focused on investment markets in the UK. Alan joined Ken Randall as Chief Financial Officer of the Eastgate Group, the predecessor company to the Randall & Quilter Group. Alan has led a number of substantial equity and debt fundraises for R&Q which provided the cornerstone for the significant transformation in R&Q’s strategy. He also oversaw the successful sale of a number of non-core operations which realised substantial funds to fuel its growth. Skills & Experience William Spiegel joined R&Q as Executive Group Deputy Chairman in January 2020. William has over 30 years’ experience in the financial services sector with particular expertise in insurance and reinsurance services. He joins from the US private equity firm US Pine Brook where he was a managing partner and which he co-founded in 2006. William was responsible for managing Pine Brook’s financial services investing activities. He was also a member of the firm’s Investment Committee and Management Committee. A significant part of William’s career has focused on building and growing insurance companies in both the US and the UK. He has, through his work in private equity, been a founding investor and/or board member of many successful insurance companies including Catlin Group, Clear Blue Insurance Group, Essent Group, Fidelis Insurance, Global Atlantic Financial Group, Lancashire Group, Montpelier Re, Narraganset Bay Insurance and Third Point Reinsurance. Prior to co-founding Pine Brook, he was with The Cypress Group from its inception in 1994 until 2006, leading its financial services and healthcare investing activities. Prior to Cypress he worked in the Merchant Banking Group at Lehman Brothers. He has served on the board of directors of over 20 companies, including eight publicly traded corporations. William is currently a member of The Polsky Council of The University of Chicago Polsky Center for Entrepreneurship and Innovation, and its Private Equity Council. 1 4 3 6 5 2 4 Joanne Fox (56) Non-Executive Director A R Ri Re 5 Alastair Campbell (75) Non-Executive Director A R 6 Philip Barnes (59) Non- Executive Director A R Ri Skills & Experience Jo Fox is a finance professional with over 30 years’ experience at board and management levels, having qualified as a Chartered Accountant with Arthur Andersen in 1990. Jo has worked in the insurance industry since 1996 when she worked for Liberty Risk Services, and later with International Insurance Company of Hannover and Lancashire Insurance. More recently, Jo was Chair and non-executive director of R&Q Managing Agency Limited, which was acquired by Coverys in 2017. Jo has held five FCA/PRA posts (two European risk carriers, a London Market Intermediary and two Lloyd’s Managing Agents). In addition to her board experience Jo has chaired Audit, Risk and Capital and Compliance Committees and was Chair of the IUA Solvency Working Group from 2014 to 2016. Skills & Experience Alastair Campbell qualified as a Chartered Accountant in 1968 then worked with PKF Littlejohn LLP, becoming a partner in 1970. Between 1984 and 1998 he acted as Senior Partner and Chairman of the firm. Skills & Experience Philip Barnes is a Chartered Accountant and has worked in the insurance industry for the past 35 years. Philip is the President of the representative office of the Jardine Matheson Group of Companies in Bermuda. During his 40 years as a partner, he acted for a wide range of commercial entities, mainly in the service sector. Throughout his career he has been involved in the London insurance market and has extensive experience of advising on acquisitions and disposals, investigation work and giving advice at Board level. Following his retirement in 2010, he has worked as an independent consultant and expert witness on accounting related projects. A Fellow of the Institute of Chartered Accountants in England & Wales, Philip qualified with a national firm of accountants in the UK before continuing his career with Deloitte in Bermuda. He then joined Alexander & Alexander which was subsequently acquired by the global broker Aon. During his 25 year career with Aon, Philip oversaw the growth and development of the Bermuda office into the leading manager of captives and reinsurance companies on the island. Philip has served on various industry and Government advisory committees over the years. He currently holds a number of non-executive directorships of Bermuda insurance and reinsurance companies. Eamonn Flanagan (57) Non-Executive Director Eamonn began his career with Royal Insurance, where he qualified as an actuary, before moving to the capital markets as Director and Head of European Insurance at a leading investment bank. Eamonn co-founded Shore Capital Markets, a respected independent securities business, where he was a director and senior adviser. He was a highly rated insurance analyst and received numerous awards in the London insurance market. Eamonn is to be appointed to the Board in June 2020 and is also a non-executive director of AJ Bell PLC, a technology driven investment platform. Eamonn is a Fellow of the Institute of Actuaries and a Fellow the Institute of Directors. 16 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Governance The Board is committed to upholding high standards of corporate governance, to protect and grow shareholder value, and to engage with the Group’s stakeholders in a fair and transparent manner. Beverley Murphy Group Company Secretary Chairman’s Introduction On behalf of the Board, I am pleased to present the corporate governance report for the year ended 31 December 2019. The report explains how the Board operates and how corporate governance is addressed at R&Q. During the year, the Company continued to follow the Quoted Companies Alliance code for small & mid-sized companies, which we believe remains appropriate to the size and nature of our business. Disclosures required by the QCA code have been made both in this Annual Report and on our website. One of the notable developments in 2019 is the progress made in succession planning and towards my own retirement in 2021. I am delighted that we were able to appoint William Spiegel as my successor as Group Chairman, and Jo Fox as non-executive director, to the Board. These appointments have made a significant contribution to how we maintain a balanced and effective board, as described in more detail on page 18. I am also looking forward to welcoming Eamonn Flanagan to his first meeting of the Board on appointment as non-executive director and to Tom Solomon who is joining us as Chief Financial Officer. We are fully conscious of the ever- increasing interest from investors and other stakeholders in a wide range of stewardship matters including environmental, social and governance (ESG) issues, reflecting matters of concern globally in current times. In the pages that follow, we have described our ethical values and behaviours and how we take into account our stakeholder and social responsibilities in our disclosures against the QCA Code principles. We are giving careful thought on how to move forward with ESG in a way that is appropriate and meaningful for our staff, our business and all our stakeholders. 1. Vision and Strategy The Company’s mission is to deliver on our core strategy of providing program management services to Managing General Agencies and their reinsurers, and of creating legacy solutions to owners of discontinued insurance businesses. By focusing on these high growth markets, we provide our investors with complementary revenue streams, regular and stable fee income from program business and the capital extraction from managing legacy portfolios. Our mission is underpinned by our strategic objectives. The Group’s strategic objectives are: • to acquire or reinsure run-off insurance companies and portfolios in the United States, United Kingdom and European Union to produce attractive book value growth and cash returns • to develop Accredited Surety & Casualty Company, Inc., our A- rated United States carrier, into a fronting platform of choice, generating substantial repeatable fee income • to develop Accredited Insurance (Europe) Limited, our A- rated carrier, into a conduit for niche European and United Kingdom Managing General Agency business to highly rated reinsurers, generating substantial repeatable fee income. The key challenges that the Company faces in the execution of these objectives include: the identification of suitable pipeline opportunities in the core areas; the quality of potential partners; ensuring appropriate due diligence; timely capital raising, and ongoing investment in management bench strength and infrastructure to underpin growth. These and other risk-related matters are continually monitored by the Group’s risk management function which reports regularly to the Group Board via the Group Risk Committee. Ken Randall Executive Chairman 17 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 There have been a number of board appointment changes since our last Annual Report and the Board is now refreshed and in good shape to lead the Group in the next stages of its development. In relation to our employees, we have made significant improvements in reducing the gender pay gap, the gender bonus gap and in increasing the proportion of women receiving an annual bonus in comparison to the previous year. The mean gender pay gap reduced significantly from 37.37% to 29.96%. Although, with fewer than 250 employees at the relevant date, we were not required to publish a gender pay report, we have done so in the interests of full transparency. Other key resources and relationships which are important to our business, and with whom the Group is in frequent communication, include regulatory authorities in various jurisdictions and US States, our joint venture partners, our primary bank the Royal Bank of Scotland, AM Best, and our auditors and external legal advisers to name a few. Due to the nature of the Group’s businesses, the Board considers that its impact on the environment is minimal and of low risk. However, it seeks to minimise environmental impact through good practice such as reducing paper wastage, use of electronic communications and reducing business travel by making maximum use of telephone and video conference arrangements. The Group and its core businesses continue to take risk, in order to attain rewards in an informed and controlled manner. This translates into having regard to both potential upside and downside risk, in the context of the overall Group strategy, that aims to optimise return on equity and shareholder value within the Group’s defined risk appetite. The overall risk strategy is underpinned by a number of core risk objectives which set the boundaries in order to meet the expectations of capital providers and other stakeholders. The core objectives of the Group’s Risk Strategy are as follows: • protect the capital base by supporting the implementation of a Solvency II (or equivalent) compliant framework where appropriate • enhance value creation • support decision making and improve and maintain transparency and accountability for risk throughout the Group by way of comprehensive risk reporting and control • protect R&Q’s reputation and brand. 2. Understanding and Meeting Shareholder Expectations Feedback from investors is obtained through direct interaction with Ken Randall, the Chairman, and also William Spiegel, the Deputy Chairman and Alan Quilter, the Chief Executive Officer. The voting record at the Company’s general meetings is monitored and we are pleased that all resolutions proposed in 2019 were passed by shareholders. There is regular dialogue through the medium of the Company’s corporate brokers, Numis Securities and Shore Capital, and the Company seeks to take the pulse of shareholder expectations and reactions through its retained advisers. To request a meeting please contact secretariat@rqih.com The Company believes that by communicating its strategic and financial objectives on a regular basis, shareholder expectations can be appropriately managed. 3. Stakeholder and Social Responsibilities We are developing our approach to environmental, social and governance responsibilities. Specific activities we have undertaken include: • developing fair and equitable employee practices • minimising environmental impacts through recycling and by reducing reliance on paper documentation in favour of electronic communications • collecting and donating workwear and interview clothing to assist vulnerable, unemployed and low-income men and women to get into employment in the City of London • involvement in community activities and encouraging our employees to give back through volunteering programs associated with, in particular, the insurance sector. The Board is aware of the impact that its business activities have on the communities in which the Group’s businesses operate. The Group’s responsibilities to stakeholders including staff, suppliers, customers and wider society are also recognised through the Group’s policies on, for example, modern slavery, data protection, whistleblowing and diversity. As an insurance business, our key resources are essentially people and capital; the business model recognises the need for access to a skilled employee base, access to skilled intermediaries and a strong capital position. 18 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Governance continued Our employees are key to the continued success of our business and we actively promote their development and ongoing improvement. 4. Embedding Effective Risk Management Our approach to risk management and the principal risks to our business and the actions we take to mitigate them are set out in pages 32 to 41 of our Annual Report. The Chairman of the Group Risk Committee has provided a report on the Committee’s activities during 2019 on pages 30 to 31. The Group has a mature risk management framework and function, led by the Chief Risk Officer who has responsibility for monitoring and reporting on the Group’s principal risks together with their mitigation. The Chief Risk Officer also attends the Board meetings of the Company and each of its key operating subsidiaries. As the Group is entrepreneurial and operates in a multi-jurisdictional and highly regulated environment, the Board, via the Group Risk Committee and the Risk Management function, has embedded effective risk management within the Group’s culture, to underpin and support the execution of its business strategy. The Risk Management section on pages 32 to 33 (incorporated into this governance section by reference) provides an overview of the Group’s risk management framework, including a description of what the Board does to identify, assess and manage risk in addition to the Group’s principal risks and uncertainties, and a description of its risk appetites and its adherence to them. The Board considers that the controls in place during 2019 were and continue to be relevant, proportional and appropriate for the needs of the Group, and in addition are sufficiently flexible to evolve with the changing needs of the business. The Board has ultimate responsibility for the Group’s system of risk management and internal control and has delegated responsibility for overseeing the management of risk to the Group Risk Committee, chaired by an independent non-executive director. Accordingly, the Board ensures that the Group’s risk management framework identifies and addresses all relevant risks in order to execute and deliver strategy. This includes not only the Group and its subsidiary companies but also its extended business, including key outsourcers, its supply chains, and its distribution channels. The Group Risk Committee provides a report of its activities to the Board each quarter. Delivering strategy includes determining the extent of exposure to the identified risks that the Group can bear and/or is willing to take by way of risk tolerance and risk appetite. As mentioned above, the Group’s approach to risk management together with its identified principal risks and uncertainties, their possible consequences and mitigation are set out in the Principal Risks & Uncertainties section. Through the Group Risk Committee, the Board reviews, evaluates and prioritises risks to ensure that appropriate measures are in place to effectively manage and mitigate those identified, so that the Group risk taking activity remains within its stated risk appetite. 5. Board Balance As at 31 May 2020 the Board comprised three non-executive directors and three executive directors. There have been a number of Board appointment changes since our last Annual Report and the Board is now refreshed and in good shape to lead the Group in the next stages of its development. With Ken Randall intending to retire from the Group in 2021, we are continuing with our succession planning and our search for further appointees to enhance the breadth, strength and diversity of the Board. The Chairman of the Board, Ken Randall, leads the Board in the determination of its strategy and in achieving its objectives. He is not considered to be independent. In July 2019, Ken stepped back from his role as Chief Executive Officer as part of initial steps towards his eventual retirement. In January 2020, the Board was delighted to welcome William Spiegel as Deputy Executive Chairman with the intention that William will assume the position of Executive Chairman when Ken steps down. William is focusing on strategic development and expansion of the Group and is gradually taking on more responsibilities from Ken. William brings many years of expertise in managing and growing leading UK and US insurance businesses to the Group as well as his extensive leadership experience. In July 2019, Roger Sellek was appointed to the Board as Joint Chief Executive Officer, sharing the role with Alan Quilter. Following his departure in January 2020, Alan Quilter continues as Chief Executive Officer. 19 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 In May 2019, the Board appointed Jo Fox, our first female board member. She brings considerable experience in syndicates and underwriting business, and Solvency II, as described in more detail on page 15 and complements the overall balance of the Board. Jo is making a positive contribution to the deliberations of the Board and has taken on the role of chairing the Group’s Reinsurance Asset Committee. In December 2019 Mark Langridge stepped down from his position as director and continued in a part-time executive role, and, after many years of service to R&Q, Michael Smith also retired as a director. We will soon welcome Eamonn Flanagan to the Board, who has considerable experience within insurance and capital markets, to be our fourth non-executive director. Tom Solomon, who is joining us as Chief Financial Officer, will also be appointed to the Board. Directors who have been appointed to the Board have been chosen because of the skills and experience they offer. With regard to the non-executive directors, this includes extensive experience in the fields of accountancy and insurance. The skills and experience of each of the directors give them the ability to constructively challenge strategy and to scrutinise performance. The Company has adopted a board diversity policy which seeks to improve the diversity amongst its members, including gender balance, in its future appointments. The Board considers each of the non- executive directors to be fully independent. The Board gives regard to the overall effectiveness of the contribution made by each non-executive director and does not consider a directors’ period of service in isolation to determine their independence. The Senior Independent Director is Alastair Campbell, who took up this appointment in December 2019, following Michael Smith’s retirement. His role is to provide a sounding board for the Chairman, to act as an intermediary for the other directors where necessary and to provide an additional channel for shareholder communication. All of the executive directors work full time for the Company. Directors are expected to attend all meetings of the Board and the Committees on which they sit, and to devote sufficient time to the Company’s affairs to enable them to fulfil their duties. In the event that directors are unable to attend a meeting, their comments on papers to be considered at the meeting will be discussed in advance with the Chairman so that their contribution can be included in the wider board discussion. All of our directors will stand for re-election at our next AGM. 6. Board Skills and Capabilities Directors’ details and biographies are on pages 14 to 15. We encourage all directors to keep their skills and knowledge up-to-date and will provide individual directors with any training they need. Sessions are held between the Board and management during which in-depth presentations covering areas of the Group’s business are made. In 2019, the Board has received briefings or training on: the UK Market Abuse Regulation; the new IFRS17 requirements; cyber risk and security and the opportunities for technological innovation to drive business growth. The Company Secretary provides updates during the year on any significant developments in legal, governance and compliance areas. New directors complete an induction program tailored to their existing knowledge and experience. We have an open and transparent approach to management information, with the Chairman and Chief Executive Officer providing business updates and insights in their regular reports to the Board. This ensures that the directors have a thorough understanding of the Group’s operational activities, the regulatory environment that affects the Group, subsidiary company performance and investor relations. We recently conducted an analysis of the skills and experience of the individual directors on the Board and will use this information in the consideration of future Board candidates. 7. Evaluating Board Performance Having undertaken a board evaluation in 2018, the Board adopted the three actions to be addressed during 2019. The success in implementing these actions is reported in the table below. The Board decided not to conduct a further evaluation in 2019, in view of the recent changes in composition of the Board, to allow time for the new directors to establish themselves in their roles, and to allow the Board to evolve to reflect their combined skills and experience. The timing of the next evaluation will be kept under review. Agreed personal objectives and targets including financial and non-financial metrics are set out each year for the executive directors and performance is measured against those metrics and overseen by the Remuneration and Nominations Committee. 20 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Governance continued Category Board Action Plan for 2019 Outcome IT Keep the significant contribution of IT towards the delivery of the strategic model, and the security of systems, data and information, in the forefront of our thinking. Succession Focus on leadership planning. Focus on People Facilitate employee engagement. The Board received a number of presentations from the IT team during 2019 addressing cyber risk and IT security, IT drivers and goals and the delivery of new business applications to support R&Q’s future needs. This resulted in a number of decisions, particularly in relation to security of data and the decision to make IT innovation a key principle/driver in our business strategy. Leadership succession has been an ongoing priority for the Board and the Remuneration & Nominations Committee throughout 2019. With the appointment of William Spiegel, a clear path towards the eventual retirement of Ken Randall has been established. The Board expects that, in addition to the recent appoint of Tom Soloman as our new Group Chief Financial Officer, a small number of further appointments will be made and that succession planning will continue to be a focus during 2020. A number of opportunities, aligned to the Company’s business model have been introduced to support employee engagement. Most significantly, a management development program, tailored to R&Q’s needs, was created and in 2019 43 employees attended and benefited from this opportunity. Ensuring effective and consistent communication with all staff across the Group’s global locations has been identified as an area for improvement for 2020. 8. Our Values and Behaviours We are committed to ensuring high standards of corporate and social responsibility. Our employees are key to the continued success of our business and we actively promote their development and ongoing improvement. We promote diversity in our workforce and wholly support equal opportunities in employment. Our recruitment, training and promotion processes are all done on a non- discriminatory basis. Our ethical values of fitness and propriety, consistent with our business model, are reflected in our System of Governance and detailed in Group-wide policies including matters such as dignity at work, health and well-being, modern slavery, anti-bribery and whistleblowing. The System of Governance document explains that the Group continues to simplify and streamline its business model to promote a completely open culture where we share ideals and are open in passing information up and down through the Group. The Group accepts that the business model only works with a strong ‘centre’. This centre sets the rules and then delegates their implementation to its subsidiaries (whose boards must include appropriate numbers of group managers and technical specialists) but must also operate global governance processes to ensure that systems and philosophy are being consistently adopted throughout the Group. 21 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Matters Reserved for the Board Category Strategy and management Approval of the Group’s long-term objectives and commercial strategy; approval of the Group’s annual budgets and any material changes to them; extension of the Group’s activities into new business or geographic areas; cessation of the operation of all or any material part of the Group’s business; overseeing the Group’s operations, the risk management strategy, ensuring competent and prudent management, sound planning, and compliance with statutory and regulatory obligations. Structure and capital Changes relating to the Group’s capital structure; major changes to the Group’s corporate or management and control structure; changes to the Company’s listing. Financial reporting and controls Approval of the following: annual report and accounts; preliminary announcements of results; significant changes in accounting policies or practices; treasury policies; material unbudgeted capital or operating expenditure; declaration or recommendation of shareholder distributions. Contracts Contracts of the Company or any subsidiary in the ordinary course of business material strategically or by reason of size (e.g. bank borrowings and material acquisitions or disposals of fixed assets); contracts not in the ordinary course of business; major investments. Communication Approval of resolutions, circulars, prospectuses and press releases concerning matters decided by the Board. Ensuring a satisfactory dialogue with shareholders based on the mutual understanding of objectives. Board membership and other appointments Changes to the structure, size and composition of the Board; ensuring adequate succession planning for the Board and senior management; Board appointments; selection of the Chairman and Chief Executive; appointment of a senior independent director; membership and chairmanship of the Board committees; continuation in office of directors; appointment or removal of the Company Secretary; appointment, reappointment or removal of the external auditor to be put to shareholders for approval. Remuneration Approving the remuneration policy for the non-executive directors, Company Secretary and other senior executives; introduction of new share incentive plans or major changes to existing plans. Delegation of authority Establishing board committees and approving their terms of reference. Receiving reports from the Board committees and their actions. Division of responsibilities between the Chief Executive and other executive officers which should be clearly established, set out in writing and agreed by the Board. Corporate Governance Undertaking any formal and rigorous review of the Board’s own performance, that of its committees and individual directors, and the division of responsibilities; determining the independence of non-executive directors; review of the Group’s overall corporate governance arrangements; authorising conflicts of interest where permitted by the Company’s bye-laws; considering the balance of interests between shareholders, employees, customers and the community; receiving reports on the views of the Company’s shareholders to ensure they are communicated to the Board as a whole. Policies and procedures Approval of all Group-wide policies including those contained in the Group’s System of Governance document, which includes, inter alia, policies related to aspects of the Market Abuse Regulation, anti-bribery policy, whistleblowing policy and health and safety policy. Miscellaneous Oversight of the Group’s overall corporate governance arrangements; the prosecution, defence or settlement of major litigation other than in the ordinary course of business; major changes to the rules of the Group’s pension scheme or change of trustees or changes in the fund management arrangements; approval of the overall levels of insurance for the group (including directors’ & officers’ liability insurance); any changes to this schedule of matters reserved to the Board. The operation of the Board is documented in a formal schedule of matters reserved for its approval, set out above, which was last reviewed in December 2019. 9. Board Structures and Processes The Board is responsible for the Group’s strategy and for its overall management. Our governance structure is designed to help the Board lead the Company within a framework of prudent and effective controls that enable risk to be assessed and managed. In 2019, the Board held five regular meetings and scheduled 13 additional meetings to discuss specific matters such as the 2019 budget, fund raising and M&A opportunities. 22 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Governance continued We promote diversity in our workforce and wholly support equal opportunities in employment. The following table sets out the attendance of the Company’s directors at scheduled board & committee meetings during 2019. Scheduled Board Meetings Audit Committee Remuneration & Nominations Committee Risk Committee Reinsurance Asset Committee Disclosure Committee Capital & Investment Committee Regulatory Committee Executive Directors Ken Randall Alan Quilter Mark Langridge (resigned 13 December 2019) 5/5 5/5 3/5 Roger Sellek (appointed 18 June 2019) 3/3 Non-Executive Directors Philip Barnes Alastair Campbell Michael Smith (resigned 6 September 2019) Joanne Fox (appointed 3 May 2019) 3/4 2/4 2/2 4/4 4/4 4/4 1/1 1/1 1/1 4/4 4/4 4/4 1/2 3/4 3/4 2/3 2/2 5/5 5/5 4/4 5/5 5/5 4/4 5/5 5/5 4/4 3/3 2/2 2/2 2/2 At each meeting, the Board considers directors’ conflicts of interest. The Company’s bye-laws provide for the Board to authorise any actual or potential conflicts of interest. The Board is aware of the other interests and commitments of its directors and changes to these commitments and interests are reported by the directors. A review of directors’ conflicts is conducted annually. The Board has a schedule of regular business, financial and operational matters and each Committee has compiled a schedule of work to ensure that all areas for which the Board has responsibility are addressed and reviewed during the course of the year. The Chairman, aided by the Company Secretary, is responsible for ensuring that the directors receive accurate and timely information. The Company Secretary compiles the Board and Committee papers which are circulated to the directors prior to the meetings. The Company Secretary also ensures that any feedback or suggestions for improvement on board papers is fed back to management. The Company Secretary provides minutes of each meeting and every director is aware of the right to have concerns minuted and to seek independent advice at the Group’s expense where appropriate. The Board considers that the Group’s governance framework is appropriate and in line with its plans for growth. The System of Governance report, which is approved by the Board, is submitted to the Bermuda Monetary Authority on an annual basis. Board Committees The Board delegates certain matters to the Audit, Remuneration & Nominations, Risk, Reinsurance Asset, Capital & Investment, Regulatory and Disclosure Committees as well as to ad hoc committees of the Board authorised to deal with specific matters from time to time according to business need. All Board and Committee members are provided with sufficient resources to undertake their duties, including access to internal and external specialist advice at the Company’s expense. The terms of reference of each committee are available at www.rqih.com/investors/ shareholderinformation/boardcommittees No independent external advice was sought by the Board or its Committees during the period. 23 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Disclosure Committee The Executive Chairman, the Chief Executive Officer and the Company Secretary are the current members of the Disclosure Committee. The Committee’s purpose is to review the operation, adequacy and effectiveness of the Group’s disclosure procedures and to assist the Board in fulfilling its responsibilities under the Market Abuse Regulation, AIM Rules and Disclosure Guidelines and Transparency Rules. The Disclosure Committee met formally on four occasions in 2019. In addition, disclosure matters and share dealing applications were reviewed regularly throughout the year. Regulatory Committee In 2019, this new committee of the Board was established to act on behalf of the Board in relation to regulatory and statutory matters that require acknowledgment, variation, approval or submission by the Company to a competent regulatory body or governmental agency. It also oversees the regulatory relationships between local regulatory authorities and the Company and the subsidiaries within its Group supervision. The Regulatory Committee meets to consider matters within its terms of reference where it is not practical to convene a full meeting of the Board or where a response or submission is required by a Regulator or other statutory body outside of the normal cycle of meetings. The members of the Committee are the executive directors of the Company and the Chief Governance Officer. The Committee held one formal meeting in 2019. 10. Communicating with Stakeholders The Board recognises the importance of effective communication with its shareholders. The Group maintains communication with institutional investors through individual face-to-face meetings with executive directors, particularly following publication of the Group’s interim and full year results. Private shareholders have the opportunity to attend the Annual General Meeting at which questions can be answered. A range of corporate information (including copies of investor presentations and announcements, and an overview of activities of the Group) is available on the Group’s website. The Group lists contact details on its website should shareholders wish to communicate with the Board, or with its brokers Numis Securities and Shore Capital. Reinsurance Asset Committee The Reinsurance Asset Committee (RAC) is chaired by Jo Fox and comprises the Chief Financial Officer, Head of Legacy and the Head of Claims and Reinsurance. The RAC monitors and reports on the Group’s owned insurance company reinsurance assets and recommends actions to protect such assets. The RAC also reviews bad and doubtful debt provisions proposed by the Group’s owned insurance companies, the levels of concentration of risk placed with reinsurance companies/groups and reinsurance litigation/arbitration and commutation activity. The RAC meets at least quarterly and provides a report on its activities to the Board. It met four times in 2019. Capital & Investment Committee The Group Capital & Investment Committee (GCIC) comprises the executive directors and the Chief Actuary. It is chaired by the Chief Financial Officer. The GCIC’s primary purpose is to oversee the Group’s capital management, to monitor Group Solvency requirements and the Group’s investment strategy and implementation. The GCIC also ensures that the necessary financial, legal, regulatory, commercial and personnel due diligence has been undertaken on acquisitions, portfolio transfers and similar investments or structures. The GCIC has a standing agenda for its quarterly meetings and also meets frequently to consider M&A transactions and investment opportunities. During 2019 the Committee reviewed 49 proposed Program Management and Legacy transactions, conducted a review of the Group’s retained investment managers and proposed a new Group investment strategy which was adopted by the Board. It also received regular presentations from its Investment Managers on the performance of the R&Q funds and their views on the market outlook and future positioning. Audit Committee The Audit Committee is chaired by Alastair Campbell and its other members are Philip Barnes and Jo Fox. The Audit Committee has primary responsibility for ensuring that the financial performance of the Group is properly measured and reported on. It receives and reviews reports from the Group’s management and Auditor relating to the annual accounts and the accounting and internal control systems in use throughout the Group. It also advises the Board on the appointment of the Auditor, reviews their fees and discusses the nature, scope and results of the audit with the Auditor. The Audit Committee meets at least four times a year and has unrestricted access to the Group’s Auditor. The Chief Executive Officer and Chief Financial Officer attend the committee meetings by invitation. The Audit Committee Report on pages 24 to 27 contains more detailed information on the Committee’s role. Remuneration & Nominations Committee The Remuneration & Nominations Committee (RemCo) has been chaired by Alastair Campbell since Michael Smith’s retirement at the end of 2019. Its other members are Philip Barnes and Jo Fox. The RemCo reviews the performance of the executive directors and makes recommendations relating to their remuneration and terms of employment. RemCo also has responsibility for senior management succession planning. The Chairman, Deputy Chairman, and the Chief Executive Officer are invited to attend for some parts of the committee meetings where their input is required although they do not take part in any discussion on their own benefits and remuneration. The Remuneration & Nominations Committee Report on pages 28 to 29 contains more detailed information on the Committee’s role. Risk Committee The Risk Committee is chaired by Philip Barnes and its other members are Jo Fox, Alan Quilter and Susan Young, the Chief Risk Officer. The Chief Governance Officer, Chief Actuary and the Head of Internal Audit also attend. The Risk Committee has responsibility for overseeing the management of risk across the Group, and maintaining the effectiveness of the Group’s risk management framework, systems of internal control, risk policies and procedures and adherence to risk appetite. The Committee meets at least quarterly and provides a report on its activity to the Board. The Risk Committee report on pages 30 to 31 contains more detailed information on the Committee’s role. 24 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Audit Committee Report I am pleased to present this report on behalf of the Audit Committee. The report sets out the ways the Committee has discharged its responsibilities and the significant issues it has considered during the year. Alastair Campbell FCA Chair of the Audit Committee Responsibilities and Activities during 2019 The principal responsibility of the Committee is to monitor the integrity of the financial statements of the Group. In addition, the Committee reviews the performance of the external auditors and makes recommendations to the Board on their appointment. It is also responsible for the planning and professional work of the Internal Audit team, and has oversight of the systems of internal control established throughout the Group. The Committee has an oversight role in relation to risk management, whistleblowing, fraud and bribery and corruption. Financial Statements The Year Ended 31 December 2018 The Committee reviewed in detail the financial statements for the year ended 31 December 2018. We were satisfied that they showed a true and fair view of the profit for the year and the financial position at that date. In our review we focused primarily on the main areas of judgement within the financial statements: • we considered the need for impairments of goodwill and intangibles: we received a paper from Finance supporting their view that no impairment was required. Support was gained for this view from the fact that the goodwill subsequently realised in cash from the disposal of the Insurance Services division was sufficient to cover the carrying value in the financial statements The Committee The Committee operates under written terms of reference which were reviewed and updated in November 2019. A copy of the current document is disclosed on the Company’s website at www.rqih. com/investors/shareholderinformation/ boardcommittees Philip Barnes and I served on the Committee for the whole of 2019; Jo Fox was appointed to the Committee on 3 July 2019. In addition, Michael Smith was a member until he stepped down as a director in September 2019. The names, and brief biographical details of the current members are shown on pages 14 to 15. All of the current members of the Committee are qualified chartered accountants. Philip Barnes has been fully involved in the insurance industry largely outside the United Kingdom, Jo Fox has also spent her career largely in finance in the insurance industry. I have spent the great majority of my working life in professional practice as an auditor and adviser involved inter alia in the London insurance market. I believe the members are well qualified to address the scope of the Committee as set out in the terms of reference. The Committee met five times in 2019. Generally at each meeting, the executive directors, including the Executive Chairman, and relevant members of Finance attend by invitation. In addition, other senior management attend from time to time to present specific reports, such as the Chief Actuary, the Head of Internal Audit, the Chief Risk Officer, the Head of Tax and the Head of Information Technology. The Committee reserves the right to meet without management present if required. That did not prove to be necessary in 2019. 25 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 I believe the members are well qualified to address the scope of the Committee as set out in the terms of reference. • we reviewed the evidence to support the carrying values of claims reserves and reinsurance recoveries: we received a detailed presentation from the Chief Actuary covering the entities in the Group which carried the more significant reserves • we received details from Finance of the fair values of assets and liabilities acquired with acquisitions and any negative goodwill arising. Similarly, we considered the fair values arising from legacy reinsurance contracts • we reviewed the accounting policies and satisfied ourselves that they are appropriate for the Group financial statements • we received a detailed report from Finance which supported the decision to adopt the going concern concept when preparing the Group financial statements • we considered a report from the legal department which set out the legal and contractual exposures to warranties, indemnities and guarantees; we concluded that there was no evidence to require any provision or specific disclosure other than as made or stated in the Group financial statements • we reviewed further reports from Finance which supported their view and treatment of various other matters, such as the amount of the deferred tax asset and the adequacy of anticipated future investment income to offset future run off costs • we received a report from the Head of Internal Audit which confirmed that in the course of the work of Internal Audit nothing had come to their attention to suggest that there had been any significant breakdown in the system of internal controls during the year. Finally, we received a detailed report and briefing from the external auditor, PKF Littlejohn LLP (PKF), which set out their findings from their audit work on the Group financial statements. Their report included such matters as their assessment of and audit approach to the key audit areas, the significant risk areas and other areas of audit focus, their work done and their findings, any changes to their audit plan and their confirmation that they were independent in the context of their professional ethics. They confirmed that they intended to report in unmodified terms and were satisfied that the financial statements showed a true and fair view. We considered and approved the letter of representation requested by the auditors to support the financial statements. We approved their fees for their audit work on the 2018 financial statements. We reviewed PKF’s management letter following the 2018 audit and approved management’s responses. The Interim Results to 30 June 2019 We reviewed in detail the interim financial statements for the six months ended on 30 June 2019. We were satisfied that they showed a true and fair view of the result for the period and of the financial position on that date. The nature of our enquiries was similar to the bullet points set out above. In addition, we received a detailed report and briefing from the external auditors which set out their findings from their review work. They confirmed that they intended to report in unmodified terms. We considered and approved the letter of representation requested by the auditors to support the interim financial statements. The Year Ended 31 December 2019 We received a detailed report and presentation from the external auditors on their planning for their audit of the 2019 Group financial statements. We agreed with them their assessment of the key audit matters, the significant risk areas and other areas of audit focus, together with their planned audit responses. We accepted their materiality level for their audit. We approved their letter of engagement and their estimate of the likely audit fees. We discussed with PKF their independence and objectivity and were satisfied by their assurances. We also received a report from Finance setting out their planning for the preparation of the consolidated financial statements. IFRS 17 The Committee is monitoring the progress of the Group towards the introduction of IFRS 17. The introduction of this Standard has recently been deferred to 1 January 2023 which provides a little more time for preparing for this substantial project. This new accounting standard will have a major impact on accounting in the insurance industry and on the Company’s reported results. A high-level briefing was given to the Board at its December meeting which highlighted a number of areas where important judgements will be required in the presentation of financial information. 26 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Audit Committee Report continued Internal Audit enquires into activities and the operation of internal controls across the Group both in the UK and overseas. Copies of each report are seen by the Chair of the Committee and executive summaries are forwarded to other members of the Committee. Copies of the reports or executive summaries are also issued to the executive directors as deemed appropriate by the Chair. An annual work plan is prepared which seeks to review all major areas of the Group every three years. The plan is subject to variation in the light of events only with the approval of the Chair. The plan is based on the principal risk areas of the business, and is prepared following discussions with senior management, chairs of the audit committees throughout the Group and the external auditors. The 2020 plan and the related budget was discussed and approved by the Committee. Taxation The Audit Committee has an oversight role in relation to taxation matters. During the year we received regular reports from the Head of Tax on developments in tax law and practice across the group. Particular attention has been paid to the requirements of the Corporate Criminal Offence legislation to ensure compliance with HMRC guidelines. External Auditors The appointment of PKF as external auditor was last formally considered in 2015 in the context of a rotation of the audit partner. Their re-appointment is considered each year and we recommended to the Board their re-appointment for the 2019 audit. We also reviewed the appointments of other auditors of certain overseas subsidiaries. PKF attended meetings of the Committee three times in the year and presented their audit and review findings and plans as set out above. We review the performance of PKF as the external auditors each year. The review takes the form of an internal questionnaire completed by relevant management and members of the Committee covering all main areas of the audit. We also received from PKF details of their own quality control procedures. In each of the last three years the result of the review has been satisfactory with no significant issues raised. Some minor matters have been discussed with PKF with a view to their resolution. The Committee has reviewed its guidelines in relation to the provision by the external auditor of non-audit services; the general principle continues to be that such work shall be confined to assurance work and that no other work shall be carried out unless the fees involved are small or the work has been approved by the Chair of the Audit Committee. As shown at Note 9 of the financial statements the fee income relating to non-audit services is small. Internal Audit The Company operates an Internal Audit team which is supported by co-source arrangements where they are justified by a need for specialist skills in particular areas. During 2019 the resources of the team were reviewed in the context of the audit plan; the budget and the Committee’s recommendation that, in view of the expansion of the Group’s activities, particularly in the United States, the team should be increased by one person, was accepted by management and implemented. Internal Audit works under a formal, written Charter and reports to the Committee on its professional work. The Head of Internal Audit reports to the Committee four times each year on its activities and on its progress against the annual work plan. Within those reports the Committee receives a status report of the follow up by management of Internal Audit recommendations. The Head of Internal Audit attends meetings of the Committee as required to present his reports and answer questions from the Committee and the Chair regularly meets with him informally to discuss any issues arising. 27 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The Committee also received a report from the Chief Governance Officer which confirmed that no instances had been reported in 2019 relating to whistleblowing, fraud or bribery and corruption. Governance Internal control systems are the responsibility of management and are reviewed by the Risk Committee. The Audit Committee has an oversight role and received a report from the Chief Risk Officer on the activities of the Risk Committee. This confirmed that it had operated effectively and unfettered throughout 2019 and had operated within its terms of reference. There were no issues or areas where there were significant shortcomings to be brought to the attention of this Committee. The Committee also received a report from the Chief Governance Officer which confirmed that no instances had been reported in 2019 relating to whistleblowing, fraud or bribery and corruption. Review of the Committee’s Own Performance During 2019 the Committee carried out a review of its own performance. It scrutinised the range of matters considered and the scope of the work done. The conclusions were favourable. It was felt that the work of the Committee was appropriate and there were no recommendations to widen the scope of the terms of reference or to spend more or less time on particular areas. There was felt to be no need to hold a further review in 2020 but that reviews should continue to be periodic per the Terms of Reference. Planned Activity During 2020 The current plan for 2020 pays continuing attention to the developing Program Management business in order to ensure and give reassurance that an appropriate internal control environment is in place and operating effectively. In addition, the Committee will continue to monitor the Group’s financial and operational plan for the impact of IFRS 17, which will be effective for the first time for the Group in its 2023 financial statements. The Committee will review the financial statements published during 2020 and will consider the other areas as set out above. In particular the Committee will monitor the impact of Covid-19 on the Group’s business and its ability to continue as a going concern. Due to the restrictions imposed as a result of Covid-19 I will be unable to attend our AGM in June, however I will be happy to answer any questions arising from the work of the Committee at any time. Alastair Campbell FCA Chair of the Audit Committee 28 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Remuneration & Nominations Committee Report I am pleased to present this report on behalf of the Remuneration and Nominations Committee. The report sets out the ways the Committee has discharged its responsibilities and the significant issues it has considered during the year. Alastair Campbell FCA Chair of the Remuneration and Nominations Committee The Committee The Committee operates under written terms of reference; they were reviewed and updated in December 2019 and may be seen on the Company’s website at www.rqih.com/ investors/shareholderinformation/board committees Until September 2019 this Committee was chaired by Michael Smith. When he stepped down as a director in September 2019 I was appointed by the Committee as acting chair pending the appointment of a replacement independent director. In addition to Michael and I, two further independent directors were members being Philip Barnes and, from 3 July 2019, Jo Fox. The names and brief biographical details of the current members of the Committee are shown on pages 14 to 15 of the Annual report. I believe the members have a broad experience of business life, particularly in the insurance industry, and are well qualified to address the scope of the Committee’s work as set out in the terms of reference. The Committee has five scheduled meetings each year. In addition, it meets as and when appropriate, usually on specific matters. Ken Randall, the Executive Chairman, attends most meetings by invitation. The Chief Executive Officer also attends meetings by invitation when appropriate, as does the Head of Human Resources. Aims and Duties of the Committee The over-arching aim is to act in the best interests of the Company’s shareholders and the Group’s employees, clients and, where appropriate, other stakeholders with whom it deals such as policyholders, reinsurers and regulators, whilst having regard to the relevant legal and regulatory requirements and to guidance offered by the QCA Code. Remuneration The overall objective in relation to remuneration is to attract, retain and motivate executive management of the quality and experience required to run the Company successfully. This must be done without paying more than necessary, having regard to the interests of shareholders and other stakeholders, the risk appetite of the Company and its long-term strategic goals. Generally, a significant proportion of remuneration should be structured so as to link rewards to corporate and individual performance and sound risk management. Its other objectives are: • to set the overall remuneration policy for the executive directors and senior management. ‘Remuneration’ for this purpose includes salaries, bonuses, pension arrangements, compensation payments, incentive arrangements and all other means of rewarding employees of the Company • to approve the total individual remuneration package of each executive director and the Executive Chairman, and of senior management, in all cases having regard to the international nature of the business and local practices and conditions, and pay and employment arrangements across the Group • to review and approve any performance- related pay or share incentive plans. Nominations In relation to nominations, the Committee keeps under review the structure and membership of the Board, including Committees of the Board, and seeks to ensure effective leadership and succession in the Board and in the senior management team. The main aims and duties of the Committee with regard to nominations may be summarised as follows: • to review the structure, size, composition, skills and experience of the Board, including its knowledge and diversity, and keep under review the leadership and succession needs of the organisation, 29 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 I believe the members have a broad experience of business life, particularly in the insurance industry, and are well qualified to address the scope of the Committee’s work as set out in the terms of reference. both executive and non-executive, with a view to the continued ability of the organisation to compete effectively in the marketplace • to make recommendations as to the reappointment or otherwise of directors at the annual general meeting, the continued appointment of directors having regard to their performance and abilities, and the appointment of non-executive directors to Board and other committees of the Company • to make recommendations to the Board concerning candidates to fill Board vacancies as they arise and specific Board appointments. Significant Activities in 2019 In addition to routine matters, the Committee reviewed its Terms of Reference to ensure they continue to reflect the nature and style of the business and comply with relevant laws and guidance; it also undertook the following specific activities: Remuneration • approved the 2018 bonus arrangements for executive directors and senior management. All bonus arrangements are discretionary and are subject to the recommendation of the Executive Chairman and the approval of the Committee. Performance targets are agreed with each individual which have regard to personal, divisional and Group performance. Maximum bonuses are generally capped at 100% of salary but in some cases at 200%. Bonus payments are phased over three years and are subject to clawback arrangements, and are non-pensionable. The Group does not operate any long-term incentive plan or share option scheme • approved the proposals from the Executive Chairman in the 2019 review of salaries for executive directors and senior management. Nominations • recommended the appointment of Jo Fox as a new independent non- executive director and her appointment to this Committee, the Audit Committee, the Risk Committee and to the Reinsurance Asset Committee. Jo had previously been a non-executive director and chair of the Audit Committee of our former managing agency company and her skills and experience were already well known to us • recommended the appointment of Roger Sellek as a Director and Joint Chief Executive Officer and approved the terms of his employment and his remuneration • approved and monitored the changes to the top management structure effective from July 2019, when Ken Randall stepped down as Chief Executive Officer whilst continuing in the role as Executive Chairman, and Alan Quilter and Roger Sellek were appointed as Joint Chief Executive Officers, including approving their respective job specifications • recommended the appointment of William Spiegel as a Director and Executive Deputy Chairman, and approved the terms of his employment, his remuneration and his job specification • carried out a self-assessment review of the skills and experience of the Board of directors. The review indicated that the Board has good financial and personal skills, and good all-round experience. We will be looking to broaden the range of skills when considering succession and recruiting additional directors; including legal and remuneration committee experience in the non-executive field and underwriting and program business skills in the executive field • monitored progress in the recruitment to fill various senior management positions. Priorities for 2020 Specific matters which have been or will be addressed during 2020 are: • the recruitment of a new chief financial officer to take over that role currently being undertaken by Alan Quilter. The Committee has recently recommended to the Board that Tom Solomon should be appointed to that role • the recruitment of one or more non- executive directors. The Committee has recently recommended to the Board that Eamonn Flanagan should be appointed as a non-executive director. He has extensive experience as an analyst specialising in the insurance industry and brings with it an investor’s viewpoint. More details to be found on page 15 • monitoring the installation and settling in of the new Deputy Executive Chairman together with any consequential changes in senior management responsibilities • monitoring the effects of the Covid-19 pandemic on the management of the Group and the steps being taken to mitigate contingencies and to ensure a safe working environment. Due to the restrictions imposed as a result of Covid-19 I will be unable to attend our AGM in June, however I will be happy to answer any questions arising from the work of the Committee at any time. Alastair Campbell FCA Chair of the Remuneration and Nominations Committee 30 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Risk Committee Report I am pleased to present the Risk Committee report. Once again, I can report a productive year for both the Committee and the Group Risk function as the risk management framework has developed and adapted alongside the evolving risk profile of the Group. Philip Barnes Chair of the Group Risk Committee Role and Responsibilities The Risk Committee is principally responsible for oversight, on behalf of the Board, of the management of risk across the Group and its managed operations and for ensuring that activities are appropriately integrated and aligned. In pursuance of this objective, it ensures that all regulatory and reporting obligations for the management of risk are met. In addition, it ensures that the Group’s risk management framework operates effectively in embedding risk management throughout the Group and its extended business. It identifies and addresses all risks pertinent to the delivery of the Group’s strategy, determines relevant appetites and tolerances for those identified risks, and makes proposals on risk appetite and tolerance to be put forward to the Board for approval. Its responsibilities extend to reviewing Group level summary risk management information, to suggesting and approving modifications and to monitoring the implementation of any remedial action. It formally reviews and approves, on behalf of the Board, appropriate Group-level policies and approves the associated processes, procedures, controls and templates established for the purpose of risk management and internal control. New risks are considered on an ongoing basis, as well as the continuing fitness and relevance of existing statements. The risk appetite framework is reviewed annually for ongoing appropriateness in the context of the Group’s strategic objectives. A detailed description of the Group’s principal risks and uncertainties appears on pages 34 to 41. The report sets out the ways the Committee has discharged its responsibilities and the significant issues it has considered during the year. The Committee The Committee operates under written terms of reference which were reviewed and updated in February 2020. A copy of the current document is disclosed on the Company’s website at www.rqih. com/investors/shareholder information/ boardcommittees The Committee is made up of two non-executive directors, myself and Jo Fox, Alan Quilter and Susan Young. Alan Quilter, Susan Young and I served on the Committee for the whole of 2019; Jo Fox was appointed to the Committee on 3 July 2019. Where relevant, the names and brief biographical details of the current members are shown on pages 14 to 15. All of the Committee members are qualified professionals with extensive experience in the insurance sector blending finance, business, audit, risk management, governance and executive and non-executive expertise. The Committee meetings are also attended by Ken Randall, the Executive Chairman, the Chief Governance Officer, the Group Chief Actuary and the Group Head of Internal Audit. Other non-members are invited to attend all or part of any meeting as and when appropriate. The Committee meets quarterly and provides a report on its activity to the Board, including an overview of its immediate and upcoming risk management priorities. Susan Young, Chief Risk Officer, presents a report which includes a commentary on the Group’s evolving risk profile, which is articulated via a suite of risk appetite and tolerance statements. Each Committee meeting selects a particular topic as an area of focus and conducts a ‘deep dive’ into that area from both a strategic and a risk management perspective. 31 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Each Committee meeting selects a particular topic as an area of focus and conducts a “deep dive” into that area from both a strategic and a risk management perspective. Committee Effectiveness Review Overall, the Committee considered that it operated effectively during 2019. The Committee has considered how best to benchmark itself against emerging best practice and will consider the recently published Risk Coalition guidance, in conjunction with the requirements of the QCA Governance Code. A high-level review against the draft requirements was carried out as part of the formal consultation process for the Risk Coalition guidance and the Committee will look to formalise this in 2020. Structured guidance is expected from the Risk Coalition shortly. Planned Activity for 2020 In 2020, the Committee plans to oversee the further embedding of the emerging risks process and focus on one identified area at each meeting, such as climate change and pandemic risk. We will also be reviewing the Group’s readiness for the adoption of IFRS 17 and the Group’s processes and procedures around the management of strategic and change risk and how this is managed. We will continue to enhance the Group’s risk appetite metrics and alignment with the Group’s risk- based capital models, and later in the year, will consider, in the context of the current Covid–19 pandemic, how the principles outlined in PRA Consultation Paper 29/19 on Operational Resilience have been applied across the Group. Philip Barnes Chair of the Group Risk Committee Activities, Significant Issues and Considerations During 2019 At each meeting, the Committee considered a report from the Chief Risk Officer with an update on the principal risks and uncertainties of the Group, an update on Group Supervision and regulatory matters and an update on strategic priorities from the Chief Executive Officer. During 2019, the Committee reviewed and focused on the following topics: • EU Economic Substance – the Committee reviewed and monitored the EU Economic Substance legislation and its applicability to the Group holding company and its Bermuda domiciled entities and operations • investment and market risk – one of the Group’s key strategic priorities has been to investigate the enhancement of existing yields on its portfolios without taking undue risk, in the ongoing low yield environment. The Committee heard how the overall control environment in this area had been enhanced and improved including realignment of investment managers and reinvestment of available funds • emerging risks – the process for identification, assessment and monitoring of emerging risks was formalised during 2019 and the Committee approved a new framework for this purpose. We heard the output from the inaugural Focus Group meeting covering the identified emerging risks and their applicability to the Group • reinsurance counterparty risk – the Committee reviewed proposals for the enhancement of the processes for the assessment, monitoring and reporting of reinsurance counterparty risk as the reinsurance asset of the Group becomes more significant with the onboarding of new program business. 32 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Risk Management The Group is entrepreneurial and innovative and hence the risk management and internal control framework needs to be dynamic and agile, as well as robust. Susan Young Chief Risk Officer The following overarching process is adopted. Overall Responsibility for Risk Management The Board and senior management appreciate that ongoing success depends upon its collective understanding and management of the Group’s known risks and exposures. The Board has responsibility for ensuring that the Group has an appropriate and proportional approach to risk management and internal control across the Group, and that this approach is both pervasive to the Group’s activities and aligned with the overall corporate strategy. The risks facing the Group continue to evolve and increase or decrease in potential impact and probability of crystallisation over time. The Group is entrepreneurial and innovative and hence the risk management and internal control framework needs to be dynamic and agile as well as robust. This requires the management of risk and uncertainty to be ongoing and iterative and to be able to respond to the emergence, development and crystallisation of both new and existing risks. The Group is responding to the actual and potential impacts on its business, both upside and downside, from the global onset of the Covid-19 pandemic. The Group’s risk management framework and reporting mechanisms have adapted to address these challenges and this is described in more detail both in the Report of the Executive Directors, and later on in this Section. Risk Management Framework and Risk Management Function The Group has a mature risk management framework and risk function headed by the Chief Risk Officer. The Group risk function is responsible for designing, overseeing, implementing and improving the risk management framework. It works closely with Group and senior management, meeting regularly with them to monitor existing identified risks and uncertainties, identify new and emerging risks and to ensure that there are appropriate processes and procedures in place to mitigate these risks. It is also responsible for monitoring that the business meets regulatory expectations around enterprise risk management and reporting on risk to the Board and the Risk Committee. Risk Identification Own Risk and Solvency Assessments Risk Governance Risk Management Process Risk Reporting Risk Owner Risk Appetite Risk Measurement Risk Monitoring Risk Mitigation 33 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Risk Governance Risk governance adopts a three lines of defence model at both Group and individual business unit level Board of Directors Group Executive Committee First line The Business (Risk and Control Owners) Risk Management Second line Direct Assurance Compliance, Legal Third line Independent Assurance (Internal/External Audit, Independent Review etc.) Risk Committee The Risk Committee is a formally constituted Committee of the Board. A report from the Risk Committee Chair on its role, governance, activities, discharging of responsibilities, self-evaluation and plans for 2020 appears on pages 30 to 31. Risk Appetite The risk appetite framework sets the boundaries within which risk taking should remain in order to meet the expectations of the capital providers and other stakeholders. For the Group, it is articulated via a series of quantitative and qualitative statements covering all defined categories of risk. Risk appetite reflects the amount of risk taking, which is acceptable to the Group. Accordingly, risk appetite refers to the Group’s attitude to risk taking and whether it is willing or able to tolerate a high or low level of exposure to specific risks or risk categories. Risk tolerance represents the Group’s ability and willingness to bear risk. When considering this, factors such as the availability of capital, ability to raise capital, strength of underlying operational processes and procedures and strength of the organisation’s operational culture are all relevant. The risk appetite framework, which is set both at the Group level and for each of the key business units, is reviewed annually and/or when there are material changes to the overall risk profile of the Group or its business units. The principal risks and uncertainties on pages 34 to 41 includes, for each principal risk, the title and a brief description of the risk, high level risk appetite statements and key mitigating actions. Own Risk and Solvency Assessments and Equivalents The own risk and solvency assessment (ORSA) or equivalent is defined as; “The entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long term risks a firm faces or may face and to determine the own funds necessary to ensure that overall solvency needs are met at all ties.” The Group’s ORSA and equivalent processes are well embedded within the individual business units and at the Group level. They continue to evolve from the Group’s established risk management and capital assessment processes. These processes comprise the self-evaluation of the risk mitigation and capital resources needed to achieve the Group’s strategic objectives on a current and forward-looking basis, given their risk profiles. Internal Control System The Group’s internal control system comprises the following key elements: • documented governance arrangements continue to evolve along with the overall business strategy • strategic planning process setting priorities for the forthcoming planning horizon, reviewed by the Board periodically to ensure the Group is focusing on its core strengths • detailed planning/budgeting process subject to detailed and ongoing oversight and scrutiny delivering forecasts/targets for Board review and approval • management information systems, including corporate reporting on financial/operating performance • a defined risk appetite framework governing management, control and oversight of key risks and issues • overall Group capital adequacy planning conducted biannually • compliance arrangements throughout the Group • internal audit function providing third line assurance to the Board via the Audit Committee following a risk-based, approved annual Audit Plan, on the effectiveness of the Group’s internal controls in respect of key risks identified • risk management function as described above. The Board considers that the controls in place during 2019 were and continue to be relevant, proportional and appropriate for the needs of the Group, and in addition are sufficiently flexible to evolve with the changing needs of the business. A number of the Group’s subsidiaries are regulated and accordingly are subject to the relevant degree of local regulatory oversight. Members of the Board and senior management regularly meet with the Group’s various regulatory supervisors, conducting the relationship in an open and constructive manner. 34 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Principal Risks and Uncertainties The Group identifies and assesses the key risks which could have a potentially significant impact on execution of its strategy. The Group manages its exposure to those risks by setting and monitoring a risk appetite framework, described earlier. The following table highlights the “top ten” risks and uncertainties facing the Group and receiving senior management attention. This list is not exhaustive and comprises a brief description of those risks and uncertainties that the Board considers to be the major strategic risks it faces, along with a high-level statement of its appetite for taking that risk and the main ongoing mitigating actions in place. Risk Category Risk Title/ Description Risk Appetite Mitigating Action Strategic Management of strategic change and business development and growth The Group fails to effectively manage both the focus on its core competencies and simultaneous initiatives as it develops and grows its key business activities. The Group fails to identify and harness new business opportunities. The Group fails to raise the necessary capital and funds to finance its business growth. The Group’s profitability is impaired following the establishment or acquisition of new business. We have no appetite for any significant deviation from the Group’s published strategic plan as revised from time to time. We have limited appetite to expand and develop the business outside the accepted core competencies or established geographical reach. We have no appetite for an individual business unit accepting underwriting risks that threatens the sustainability of the individual entity or has the potential to result in losses sufficient to create significant strain on the Group. • Management of relationships with external stakeholders involving the Board and members of the senior management team • The Board actively reviews budgets, and current strategic priorities to ensure that the Group continues to focus on core strengths • Active management of cash flow • Review of each new initiative and proposed investment in accordance with its own individual merits and commensurate with our overall risk or return objectives, due diligence criteria, strategic objectives and available sources of capital • Establishment of local risk appetites and tolerances within the context of the Group’s overall risk appetite • Regular oversight and review of program and acquisitions pipeline including an initial screening process involving senior management • Group Capital and Investment Committee approval. 35 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The risk appetite framework, which is set both at the Group level and for each of the key business units, is reviewed annually and/or when there are material changes to the overall risk profile of the Group or its business units. Risk Category Risk Title/ Description Risk Appetite Mitigating Action Group Operational Reputation and stakeholder management Events elsewhere within the Group and individual strategies may be misaligned with the core activities of the Group or may have an adverse effect (notably, but not restricted to, reputational) on the organisation. The Group fails to control and monitor internal and external communication, including regarding its wide range of different stakeholders. We have no appetite for any event leading to a loss in the organisation’s reputation and standing (including inter-Group contagion) including any capital impact. We have no appetite for any negative movements in the public ratings of any company within the Group. • Active process for managing external communications, including disclosure committee for any announcements to the Stock Exchange • Regular liaison with the rating agencies. 36 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Principal Risks and Uncertainties continued Risk Category Risk Title/ Description Risk Appetite Mitigating Action Insurance Credit Exposure management reserving The Group adopts a reserving methodology that produces incorrect reserving. We have no appetite for prospective significant deviations in earnings as a result of actual, expected or possible future reserve deterioration and seek to reserve at a level that achieves this whilst avoiding the tax, regulatory and reputational risks associated with systematic over-reserving. Reinsurance counterparty The Group fails to assess the quality of its program reinsurers prior to onboarding or the reinsurance arrangements fails to “follow the fortunes” of the underlying direct insurance contracts. The Group fails to monitor the growing gross underwriting exposures and reserves and aggregate exposure to reinsurers, following the planned onboarding of new Legacy and Program Management business. We have no appetite for significant deviations in earnings as a result of reinsurance counterparty failure as a Group and additionally, require that our operating entities develop processes that are proportional to their businesses to limit concentration to individual counterparties. Furthermore, we have no appetite for capital erosion from exposure to reinsurance counterparty risk arising from any downgrade of negative outlook to the Group’s credit rating. • Appropriate reserving approach to existing live and run-off portfolios and the performance of extensive due diligence on new run-off portfolios prior to acceptance • Scheduled and ad hoc reviews and benchmarking provided by external actuarial consultancies • Internal use of best estimate for setting reserves, having regard to internal and external advice, and up to-date relevant information in respect of actual or anticipated developments • Use of reinsurance on live underwriting portfolios and through taking over inuring reinsurance treaties on acquired legacy portfolios • Review of all material identified reserve portfolios across the Group • Appropriate monitoring and oversight of case reserves. • Integrated framework to assess potential exposure from new opportunities prior to onboarding • Assessment of exposures and concentrations on inuring treaties during due diligence • Active commutation strategy or retroactive reinsurance on legacy portfolios • Monitoring of credit ratings, concentration levels and sufficiency of collateral on live underwriting reinsurance • Identification of potentially significant concentrations of individual counterparties. Intermediary counterparty The Group fails to monitor, assess and control its exposure to intermediary counterparty default in respect of its live program underwriting activities. We have no appetite for general intermediary default and seek an appropriate degree of quality (as defined by the relevant Committee) and diversification in the spread of intermediaries. • Operating entities engaged in live underwriting to develop processes that are appropriate and proportionate their business, in order to limit and monitor concentrations to individual intermediary counterparties to within acceptable levels. 37 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Risk Category Risk Title/ Description Risk Appetite Mitigating Action Liquidity Management of free funds The Group fails to implement adequate control over cash flow and liquidity leading to financial shortfalls. We have no appetite or tolerance for shortfalls in liquidity preventing the timely settlement of liabilities or forcing the suboptimal sale of assets. We have no appetite for breaching our financial covenants with our bankers. Strategic Regulatory, legal and Group We will maintain capital at a level that provides a suitable margin over that level deemed by our regulators and supervisors as providing an acceptable level of policyholder protection whilst remaining economically viable. Capital and solvency management The Group and relevant subsidiary entities are not Solvency II (or equivalent, e.g. Bermuda Monetary Authority, Malta Financial Services Authority, Prudential Regulation Authority or National Association of Insurance Commissioners) compliant in accordance with local regulatory requirements and expectations. • Dedicated Group cash flow, treasury management and invested assets capability, providing focused effort and a tight control regime • Assessment and setting of Group and entity liquidity margins not less than annually, based on projected payment patterns, reassessed upon the occurrence of a significant event • Funding of new deals and transactions having regard to available sources of funding and collateral requirements • Detailed cash flow reporting and monitoring of adherence to banking covenants • Review of banking covenants for ongoing applicability • Forward-looking monitoring of the Group’s cash flow projecting the likely liquidity position over a twelve-month planning horizon, embedded into the cash flow monitoring mechanism • Active and ongoing seeking of alternative financing options for deal funding • Ongoing and proactive liaison and relationship management with the Group’s bankers. • Active management of relationships with all regulators within whose jurisdictions the Group and relevant subsidiary entities operate • Active involvement of actuarial, risk management, compliance and internal audit functions • Deployment of appropriate sources of capital to underpin strategic objectives, commensurate with capacity to take risk and with prevailing regulatory stipulations in force • Maintenance of capital providing an adequate margin over the Group Solvency Capital Requirement while maintaining local capital which meets or exceeds the relevant local minima. 38 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Principal Risks and Uncertainties continued Risk Category Risk Title/ Description Risk Appetite Mitigating Action Market Investment returns The Group fails to realise an adequate or optimal return on the investment float under its control or experiences a default on investments held. We have no appetite for incurring a loss on investments in any one quarter. We have no appetite for significant aggregate currency mismatches in respect of the Group’s assets and liabilities. We have no appetite for speculative currency trades. We have no appetite for any major regulatory infringement or missed deadline. Regulatory, legal and Group Operational Legislative, economic and regulatory change The Group or one of its subsidiary entities breaches the legal or regulatory requirements of jurisdictions in which it operates. The Group fails to implement or adapt to emerging new regulatory or political or legislative changes (for example General Data Protection Regulations or Modern Slavery). • Group and subsidiary level investment committees and guidelines (where appropriate) and oversight by the relevant entity board • Utilisation of intra-group loans between entities as part of the investment strategy subject to appropriate controls • Holding of surplus funds in sterling except for US entities where surplus funds are held in US Dollars • Dedicated Group cash flow, treasury management and invested assets function to monitor investment concentration and returns • Investments are primarily made in marketable, investment grade-rated, short- and intermediate-term securities. Minimal investment will be made in fixed-rate long-term maturities • Asset and liability matching. • Oversight by the Chief Governance Officer • Deployment of local expertise where needed • Active management of relationships with all local regulators where the Group has a presence • Internal working and steering groups to analyse, interpret and oversee the implementation of all emerging external changes • Active oversight by Group Risk Committee • Maintenance and operation of an effective governance framework that leverages the expertise of the Group and individual entity boards and management • Leverage of specific additional local regulatory and legal expertise as and when appropriate. 39 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Risk Category Risk Title/ Description Risk Appetite Mitigating Action Operational Operational excellence Operational – general. • Identification and assessment of individual risks and associated operational controls carried out as part of the Group risk and control self-assessment process. This is conducted at Group and entity levels. • Development of succession plans and management training at Group and operating entity level • Performance management process for all staff. Operational Operational Operational Operational People The Group is reliant upon the knowledge and expertise of its key directors and staff and fails to adequately plan for succession. We have no appetite for the loss or prolonged absence of a key staff member where the succession plan is insufficient. We have no appetite for significant levels of staff turnover in any one year. Financial reporting The Group fails to manage its expense base. The Group fails to deploy appropriate financial and management reporting mechanisms to inform key business decisions. We have no appetite for any material errors, omissions or misstatements within our financial and management reporting and operational management Information Systems or processes or outputs, either systemic or ’one-off’. • Ongoing strategic expense and cost allocation review • Robust and reliable financial and management reporting and forecasting framework, with appropriate controls around data, outputs and review and oversight • Appropriately skilled and trained staff • Fit for purpose reporting mechanisms. Business disruption The Group suffers a major business discontinuity event. We have no appetite for loss of facilities or failure of key systems or processes which may cause significant business disruption. • Robust business continuity and disaster recovery plans which are regularly tested. Outsourcing risk The Group fails to adequately control its third-party service providers. We have no appetite to enter into an outsourcing contract that does not meet the considerations set out in the Outsourcing Policy. • Outsourcing agreements with all material outsourcers (internal and external • Outsourcing Policy. 40 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Principal Risks and Uncertainties continued The operation of the Group’s risk and control self-assessment process with key functional risk and control owners continues. Risk Category Risk Title/ Description Risk Appetite Mitigating Action Operational Cyber The Group fails to properly protect information compromising the confidentiality, availability or integrity of our data. The Group fails to keep abreast of increasing regulatory scrutiny in this area (for example National Association of Insurance Commissioners model law). We have no appetite for financial losses, business disruption or reputational setbacks arising from a cyber attack. We have no appetite for breaches of our information security policies and procedures. We have no appetite for any breaches of any relevant statutory (Data Protection, US Health Insurance Portability and Accountability Act) requirement in respect of information security or cyber risk. • Dedicated Chief Information Security Officer • Ongoing development of a fit for purpose information security governance structure including corporate information risk policies, and compliance, where practical, with relevant International Organisation for Standardisation or International Electrotechnical Commission 27000 series of standards • Development of security technologies and processes by deploying new tools or techniques keeping pace with the increasing threat from cyber crime • Appropriate levels of cyber liability insurance. We have no appetite or tolerance for any major tax-related infringement or missed deadline. Operational Regulatory, legal and Group Taxation The Group fails to identify its tax exposures arising from emerging UK and overseas legislation (for example UK Corporate Criminal Offences Act, US Foreign Account Tax Compliance Act) and fails to implement appropriate controls and processes to ensure compliance with all relevant laws. • Quarterly review with Head of Tax of the Group’s current tax position and potential future implications of current and emerging legislation and developments • Growth and conduct of the business having regard to the tax implications of doing so • Optimisation of the Group’s cross-jurisdictional tax position and maintenance of a credible tax presence in its various locations. 41 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The Group continues to monitor its material assets and liabilities, emerging claims experience, policy wordings issues and solvency position including appropriate stress and scenario testing with planned management actions to respond as required. The Group continues to monitor its material assets and liabilities, emerging claims experience, policy wordings issues and solvency position including appropriate stress and scenario testing with planned management actions to respond as required. There is regular and ongoing engagement with key stakeholders including investors, customers, regulators and other counterparties. The individual business areas are in contact with their counterparties and distribution channels, such as MGAs and TPAs to ensure that they have appropriate measures in place so that the Group is not exposed to any undue operational risk. The duration of the pandemic and the associated restrictions and impact on operations, staff morale and so forth remains uncertain. When necessary, the Group will consider the potential impact of any new and emerging risk drivers in this regard. Although there are inevitably some short-term impacts being experienced in areas like investment performance, longer term, the Group’s business is expected to be positive. This is described in more detail in the Report of the Executive Directors. Emerging Risks Emerging risks are those risks that are perceived to be potentially significant, but which may not be fully understood or controllable. During 2019, the Group formalised its framework and process for the identification, assessment and reporting of emerging risks. A focus group was established during the year, identifying the following as the principal emerging risks potentially impacting the Group: • changes to trade, tariff and sanctions (arising from Brexit) impacting revenue streams, ability to trade in certain locations and market and asset values • climate change – weather pattern changes impacting strategy, investment decisions and business practices • political uncertainty – changing business practices and regulations impacting strategy execution • civil instability – increase in disruptive events • developing cyber crime – new and faster evolving cyber attacks • IT and telecoms outages – increasing frequency and scale • interruption to infrastructure (power, transport etc) • new and emerging technology – new opportunities and competition risk • changing workforce expectations • global pandemic – see Covid-19 • event driven litigation – securities class actions. These are reviewed continually by the risk management function in conjunction with a biannual review by the focus group and overseen by the Group Risk Committee. Covid-19 The Covid-19 outbreak originated in China and developed during the early months of 2020. It was designated a pandemic by the World Health Organisation on 11th March 2020. As outlined in the previous section, the Group had identified pandemic risk as part of its emerging risks process and the escalating risk and its subsequent crystallisation was recognised at an early stage in 2020. Covid-19 is causing macroeconomic uncertainty and worldwide restrictions in social movement which are directly impacting the markets in which the Group operates. At the time of writing, the Group has invoked its business continuity plans and all staff are working remotely until further notice. The key principal risks and uncertainties of the Group described earlier, and mitigation thereof are unchanged. However, the key drivers and potential short, medium- and longer-term impacts of the pandemic on the Group’s risk profile and operations have been identified and are being regularly monitored. No breaches in risk appetite have been noted and none are anticipated arising from the pandemic. The operation of the Group’s risk and control self-assessment process with key functional risk and control owners continues. This includes an assessment of whether the internal control framework in place remains sufficiently robust to mitigate the evolving risks in remote working, for example increased opportunism in the financial and cyber crime space. 42 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. AIM rules require the Directors to prepare consolidated Financial Statements for each financial year. Under those rules they have elected to prepare the Financial Statements in accordance with International Financial Reporting Standards as adopted by the EU. The Financial Statements are required to give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for the year. In preparing these Financial Statements, the Directors are required to: • select suitable accounting policies and then apply them consistently • make judgements and estimates that are reasonable and prudent • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements • prepare the Financial Statements on the going-concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the Financial Statements comply with the AIM rules. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. 43 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 FINANCIAL STATEMENTS 44 48 49 50 51 52 53 98 Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Financial Position Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements Shareholder Information 44 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Independent auditor’s report to the members of Randall & Quilter Investment Holdings Ltd Opinion We have audited the group financial statements of Randall & Quilter Investment Holdings Ltd (the ‘parent company’) and its subsidiaries (together the ‘group’) for the year ended 31 December 2019 which comprise the consolidated income statement, consolidated statement of comprehensive income, the consolidated statement of changes in equity, consolidated statement of financial position and the consolidated cash flow statement and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (IFRSs) as adopted by the European Union. In our opinion, the group financial statements: • give a true and fair view of the state of the group’s affairs as at 31 December 2019 and its profit for the year then ended; and • have been properly prepared in accordance with IFRSs as adopted by the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter – impact of Covid-19 We draw attention to Note 2 d) of the financial statements, which describes the group’s consideration of the Covid-19 virus outbreak on the group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions, either individually or in aggregate, could reasonably be expected to influence the economic decisions of users that are taken on the basis of the financial statements. Importantly, misstatements below this level will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements. The application of these key considerations gives rise to the following level of materiality, the quantum and purpose of which is tabulated below. Materiality measure How we determined it Key considerations and benchmarks Financial statement materiality 10% of average profit before tax for the current year and the previous two years for continuing operations. In determining our materiality, we have considered financial benchmarks which we believe to be relevant to the primary users of the group’s financial statements. We concluded the profit before tax was the most relevant benchmark to these users. We used the average profit before tax for the current year and previous two years as this benchmark is less distorted by large changes in the profit before tax year on year. Quantum £ 2,200,000 We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £110,000 as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We reassessed materiality at the end of the audit and did not find it necessary to revise our planning materiality. 45 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 An overview of the scope of our audit Our audit approach was developed by obtaining an understanding of the group’s activities, taking into account the geographic structure of the group, the key subjective judgements made by the directors, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain, and the overall control environment. Based on this understanding we assessed those aspects of the group’s transactions and balances which were most likely to give rise to a material misstatement and were most susceptible to irregularities including fraud or error. Specifically, we identified what we considered to be key audit matters and planned our audit approach accordingly. The group operates in a number of overseas locations. In establishing the overall approach to the group audit, we determined the type of work that needed be performed by us, as the group auditors, and the auditors of the overseas subsidiaries. Where the work was performed by auditors of the overseas subsidiaries, we determined the level of involvement we needed as the group auditors to have in the audit work to be able to conclude whether sufficient and appropriate audit evidence had been obtained as a basis for our group opinion on the financial statements as a whole. We carried out detailed reviews of the audit work of the material components in Bermuda, Malta and the United States of America. We also kept in regular communication with those overseas auditors, through discussions and written instructions. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Area Reason Audit response Recognition of program income The group has entered into a number of new programs in the year. Refer to Notes 2 f) and 5 to the group financial statements for disclosures of related accounting policies and balances. In accordance with IFRS, the income arising from these programs should only be recognised as income within the income statement when the performance conditions associated with it have been met. The determination of the performance conditions associated with such income gives rise to significant judgements to be exercised by management. There is a risk that such judgements are not made in accordance with IFRS and thus the accounting for such income is materially misstated in the financial statements. Valuation of insurance contract provisions Refer to Notes 2 h) and 23 to the group financial statements for disclosures of related accounting policies and balances. Total net insurance contract provisions for the year end 31 December 2019 are £600.8 million. The methodologies and assumptions utilised to develop insurance contract provisions involve a significant degree of judgement. The liabilities are based on the estimated ultimate cost of all claims incurred but not settled at a given date, whether reported or not. In addition, classes of business where there is a greater length of time between initial claim event and settlement (such as historic asbestosis and environmental pollution classes) also tend to display greater variability between initial estimates and final settlements. A range of methods may be used to determine these provisions. We focused on this area as the underlying methods include a number of explicit and implicit assumptions relating to the expected settlement amounts and settlement patterns of claims and are subject to complex calculations including application of management’s judgement which can give rise to materially different values. We obtained an understanding and evaluated the design and implementation of controls that the group has established in relation to the recognition of the new program income. We also performed the following procedures: • • Reviewed the underlying program agreements; and Tested, on a sample basis, whether amounts recognised were reasonable and appropriately recorded in the correct accounting period based on the contractual obligations of the insurance agreements. Based on the procedures we performed, we observed that the recognition of the new program income was reasonable and appropriate based on the requirements of IFRS and the nature of the underlying agreements. We evaluated whether the group’s actuarial methodologies were consistent with those used generally in the industry and with prior periods. We also evaluated the governance around the overall group reserving process, including the scrutiny applied by the Group audit and risk committee, as well as group level actuarial reviews. Additionally, we performed the following procedures: • • • • Tested, on a sample basis, the underlying data to source documentation to assess the completeness and accuracy; Reviewed any significant prior year reserve movements by reference to any significant adverse market development; Performed independent re-projections and sensitivity analyses on selected classes of business and compared our re-projected claims reserves to those booked by management, and challenged management to understand any significant differences. Tested the calculations used in identifying reinsurers’ share of any claims. Based on the procedures we performed, we observed that the value of the insurance contract provisions was reasonable and appropriate. 46 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Independent auditor’s report to the members of Randall & Quilter Investment Holdings Ltd continued Key audit matters continued Area Reason Audit response Accounting for the acquisitions made in 2019 The group completed 10 business combinations during the year end 31 December 2019, giving rise to goodwill on bargain purchase of £71.3 million. We evaluated the design and tested the operating effectiveness of controls that the group established in relation to acquisition accounting. Refer to Notes 2 c) and 29 to the group financial statements for disclosures of related accounting policies and balances. The insurance contract provisions assumed on acquisition must be discounted in the fair value assessment. This gives rise to a finite-life intangible asset as a result of the difference between the discounted fair value of the insurance contract provisions and the undiscounted insurance contract provisions measured in accordance with the group’s accounting policy. The intangible asset created by this comparison is amortised over the period of time the insurance contract provisions are expected to be settled. Management applies judgement in the accounting and valuation of the acquired assets and liabilities, particularly relating to the fair value of the insurance contract provisions acquired which can give rise to materially different values of any resulting goodwill on bargain purchase. We carried out the following testing: • • • • • • Performed a walkthrough test of the controls in place within the accounting process to understand management’s process under IFRS 3. Read contracts, agreements and board minutes relating to the acquisitions. Corroborated management’s assumptions by comparing them to relevant available information. In particular, we challenged the discount rates and settlement patterns used to calculate the insurance contract provisions giving rise to the finite-life intangible asset. Validated and challenged key inputs and data used in valuation models by reference to historical data and our expectations. Assessed the completeness of the identification of the assets acquired and the appropriateness of the assets’ useful economic lives using our knowledge of the run-off insurance industry. Evaluated the adequacy of the business combination disclosures made in note 29 to the requirements in IFRS 3. Based on the procedures we performed, we observed that the methodologies and the assumptions applied were reasonable. Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the group financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the group financial statements, the directors are responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. 47 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Use of our report This report is made solely to the parent company’s members, as a body, in accordance with our engagement letter. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed. The engagement partner on the audit resulting in this independent auditor’s report is Ian Cowan. PKF Littlejohn LLP Chartered Accountants and Registered Auditor 15 Westferry Circus Canary Wharf London E14 4HD 31 May 2020 48 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Consolidated Income Statement For the year ended 31 December 2019 2019 2018 Note £000 £000 £000 £000 Continuing operations Gross premiums written Written premiums ceded to reinsurers Net written premiums Change in provision for unearned premiums, gross Change in provision for unearned premiums, reinsurers’ share Net change in provision for unearned premiums Earned premium, net of reinsurance Gross investment income Other income Total income Gross claims paid Proceeds from commutations and reinsurers’ share of gross claims paid Claims paid, net of reinsurance Movement in gross technical provisions Movement in reinsurers’ share of technical provisions after adjusting for commutations Net change in provisions for claims Net claims provisions decrease/(increase) Operating expenses Result of operating activities before goodwill on bargain purchase Goodwill on bargain purchase Amortisation and impairment of intangible assets Result of operating activities Finance costs Profit from continuing operations before income taxes Income tax charge Profit for the year from continuing operations Loss for the period from discontinued operations Profit for the year Attributable to: Shareholders of the parent Non-controlling interests 450,187 (285,033) (94,315) 103,687 7 8 21,993 6,780 (183,438) 111,033 23 (72,405) (125,978) 55,227 (70,751) 9 29 15 10 11 12 6 The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements Earnings per ordinary share from continuing and discontinued operations: Basic Diluted Earnings per ordinary share from continuing operations: Basic Diluted Note 13 13 13 13 183,838 (118,928) 165,154 64,910 (42,044) 40,583 5,430 11,960 (161,360) 106,238 (55,122) 69,579 (3,759) 65,820 9,372 174,526 28,773 203,299 (143,156) (78,651) (18,508) 71,332 (3,162) 49,662 (9,537) 40,125 (1,280) 38,845 – 38,845 39,323 (478) 38,845 2019 21.4p 21.4p 21.4p 21.4p (1,461) 63,449 17,390 80,839 10,698 (77,294) 14,243 5,997 (1,644) 18,596 (4,345) 14,251 (3,946) 10,305 (2,483) 7,822 7,341 481 7,822 2018 5.8p 5.8p 7.8p 7.8p 49 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Consolidated Statement of Comprehensive Income For the year ended 31 December 2019 Other comprehensive income: Items that will not be reclassified to profit or loss: Pension scheme actuarial (losses)/gains Deferred tax on pension scheme actuarial (losses)/gains Items that may be subsequently reclassified to profit or loss: Exchange (losses)/gains on consolidation Other comprehensive income Profit for the year Total comprehensive income for the year Attributable to: Shareholders of the parent Non-controlling interests Total comprehensive income for the year The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements. 2019 £000 2018 £000 (1,698) 51 (1,647) (8,258) (9,905) 38,845 28,940 29,440 (500) 28,940 4,661 (792) 3,869 8,809 12,678 7,822 20,500 19,985 515 20,500 50 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Consolidated Statement of Changes in Equity For the year ended 31 December 2019 Share capital £000 Share premium £000 Notes Foreign currency translation reserve £000 Retained earnings £000 Non- controlling interests £000 Total £000 2,520 51,135 9,273 112,710 175,638 Year ended 31 December 2019 At beginning of year Profit for the year Other comprehensive income Exchange losses on consolidation Pension scheme actuarial losses Deferred tax on pension scheme actuarial losses Total other comprehensive income for the year Total comprehensive income for the year Transactions with owners Share based payments Issue of shares Issue of AB & AC shares – – – – – – – – – – – – – 138 25 1,398 102,047 18,415 (18,415) – 39,323 39,323 (8,236) – – (8,236) (8,236) – (1,698) 51 (1,647) 37,676 – – – – – – – – – – (8,236) (1,698) 51 (9,883) 29,440 138 103,445 – (18,415) – Total £000 175,987 38,845 (8,258) (1,698) 51 (9,905) 28,940 138 103,445 – (18,415) 594 290,689 349 (478) (22) – – (22) (500) – – – – 594 443 Cancellation of AB & AC shares 14 (18,415) Non-controlling interest in subsidiary acquired – – – At end of year 3,918 134,905 1,037 150,386 290,246 Share capital £000 Share premium £000 Notes Foreign currency translation reserve £000 Retained earnings £000 Non- controlling interests £000 Total £000 Total £000 Year ended 31 December 2018 At beginning of year Profit for the year Other comprehensive income Exchange gains on consolidation Pension scheme actuarial gains Deferred tax on pension scheme actuarial gains Total other comprehensive income for the year Total comprehensive income for the year Transactions with owners Share based payments Issue of shares Issue of Z & AA shares 25 2,517 62,257 – – – – – – 3 – – – – – 212 – 11,334 (11,334) Cancellation of Z & AA shares 14 (11,334) – 901 – 8,372 – – 8,372 8,372 – – – – 101,097 166,772 (166) 166,606 7,341 7,341 481 7,822 403 4,661 (792) 4,272 11,613 – – – – 8,775 4,661 (792) 12,644 19,985 212 3 – (11,334) 34 – – 34 515 – – – – 8,809 4,661 (792) 12,678 20,500 212 3 – (11,334) At end of year 2,520 51,135 9,273 112,710 175,638 349 175,987 The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements. 51 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Consolidated Statement of Financial Position For the year ended 31 December 2019 Company Number 47341 Assets Intangible assets Property, plant and equipment Right of use assets Investment properties Financial instruments – Investments (fair value through profit and loss) – Deposits with ceding undertakings Reinsurers’ share of insurance liabilities Deferred tax assets Current tax assets Insurance and other receivables Cash and cash equivalents Total assets Liabilities Insurance contract provisions Financial liabilities – Amounts owed to credit institutions – Lease liabilities – Deposits received from reinsurers Deferred tax liabilities Insurance and other payables Current tax liabilities Pension scheme obligations Total liabilities Equity Share capital Share premium Foreign currency translation reserve Retained earnings Attributable to equity holders of the parent Non-controlling interests in subsidiary undertakings Total equity Total liabilities and equity Notes 15 16 17 18a 18b 4b 23 24 24 19 20 23 22 22 24 21 24 27 25 25 30 2019 £000 46,082 969 3,191 1,480 559,963 19,504 471,412 4,008 1,988 419,535 252,741 1,780,873 2018 £000 19,974 577 – 1,881 395,418 6,331 300,357 3,205 191 232,716 236,923 1,197,573 1,072,208 699,078 142,693 140,243 3,210 1,068 9,465 – 1,139 3,449 253,909 168,488 294 7,337 2,323 6,866 1,490,184 1,021,586 3,918 134,905 1,037 150,386 290,246 443 290,689 1,780,873 2,520 51,135 9,273 112,710 175,638 349 175,987 1,197,573 The Consolidated Financial Statements were approved by the Board of Directors on 31 May 2020 and were signed on its behalf by: K E Randall A K Quilter W Spiegel The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements. 52 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Consolidated Cash Flow Statement For the year ended 31 December 2019 Cash flows from operating activities Profit for the year Tax included in consolidated income statement Finance costs Depreciation and impairment Share based payments Loss on divestment Goodwill on bargain purchase Amortisation and impairment of intangible assets Fair value loss/(gain) on financial assets Loss on revaluation of investment property Loss on disposal of property, plant and equipment Contributions to pension plan Loss/(profit) on net assets of pension schemes Increase in receivables Decrease in deposits with ceding undertakings Increase in payables Increase/(decrease) in net insurance technical provisions Income taxes paid Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of intangible assets Proceeds from sale of intangible assets Proceeds from sale of financial assets Purchase of financial assets Proceeds from disposal of investment properties Acquisition of subsidiary undertakings (offset by cash acquired) Divestment (offset by cash disposed of) Payments to acquire minority interest Net cash from/(used in) investing activities Cash flows from financing activities Repayment of borrowings Proceeds from new borrowing arrangements Interest and other finance costs paid Cancellation of shares Receipts from issue of shares Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange(losses)/ gains on cash and cash equivalents Cash and cash equivalents at end of year Share of Syndicates’ cash restricted funds Other funds Cash and cash equivalents at end of year Notes 10 16 & 17 25 29 15 18 16 16 15 18 10 14 20 2019 £000 38,845 1,280 9,537 2,242 138 – (71,332) 3,162 (6,602) 40 89 (1,400) 173 (145,830) 1,294 72,220 61,379 (2,330) (37,095) (958) – (143) 1,952 68,997 (94,364) 361 (1,615) – (221) (25,991) (34,966) 41,751 (9,537) (18,415) 103,445 82,278 19,192 236,923 (3,374) 252,741 15,320 237,421 252,741 2018 £000 7,822 3,871 4,345 335 212 215 (5,997) 1,644 5,754 903 – – (479) (61,734) 343 69,679 (64,359) – (37,446) (189) 19 (92) – 69,774 (46,023) – (8,972) 13,387 – 27,904 (3,000) 86,170 (4,345) (11,334) 3 67,494 57,952 174,502 4,469 236,923 18,150 218,773 236,923 The accounting policies and accompanying notes are an integral part of the Consolidated Financial Statements. 53 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements For the year ended 31 December 2019 1. Corporate information Randall & Quilter Investment Holdings Ltd. (the Company) is a company incorporated in Bermuda and listed on AIM, a sub-market of the London Stock Exchange. The Company and its subsidiaries (together forming the Group) carry on business worldwide as owners and managers of insurance companies, live and in run-off, as providers of program capacity, as underwriting managers for active insurers and as participators in Lloyd’s Syndicates in the non-life insurance market. The Consolidated Financial Statements were approved by the Board of Directors on 31 May 2020. 2. Accounting policies The principal accounting policies adopted in the preparation of these Consolidated Financial Statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. a. Basis of preparation The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS), endorsed by the European Union, International Financial Reporting Interpretations Committee interpretations and with the Bermuda Companies Act 1981 (as amended). The Consolidated Financial Statements have been prepared under the historical cost convention, except that financial assets (including investment property), financial liabilities (including derivative instruments) and purchased reinsurance receivables are recorded at fair value through profit and loss. All amounts are stated in sterling and thousands, unless otherwise stated. The preparation of the Consolidated Financial Statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the year (Note 3). Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised in the year when the revision is made. New and amended Standards adopted by the Group In the current year, the Group has applied new IFRSs and amendments to IFRSs issued by the IASB that are mandatory for an accounting period that begins on or after 1 January 2019. IFRS 16, Leases. (IASB effective date 1 January 2019). IFRS 16 specifies how to recognise, measure and disclose leases. The Standard replaces IAS 17 Leases and Related Interpretations. The Standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The rental charge in previous Consolidated Income Statements for leases has been replaced in the 2019 reporting year with a depreciation charge for the lease assets and an interest expense for the lease liabilities. Under the Standard the Group has adopted the retrospective modified approach and therefore the comparatives are not restated and continue to be reported under IAS 17 and IFRIC 4. The right-of-use asset recognised in the Consolidated Statement of Financial Position at 31 December 2019 is £3,191k. This asset has given rise to a depreciation charge of £1,776k for the year ending 31 December 2019 and the cost is included in operating expenses in the Consolidated Income Statement. The lease liability is included within Financial liabilities in the Consolidated Statement of Financial Position at 31 December 2019 and amounts to £3,210k. The unwinding of the liability for the year ending 31 December 2019 has created an interest cost of £148k which is included in Finance Costs in the Consolidated Income Statement. IAS 19 Amendments, Plan Amendment, curtailment or settlement. (IASB effective date 1 January 2019). If a defined benefit pension plan amendment, curtailment or settlement occurs, it is now mandatory that the current service cost and the net interest for the period after the re-measurement are determined using the assumptions used for the re-measurement. The amendments had no impact on the Consolidated Financial Statements. IAS 28 Amendments, Long-term interests in Associates and Joint Ventures Sale or contribution of assets between an investor and its associate or joint venture. (IASB effective date 1 January 2019) The amendment outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The amendments had no impact on the Consolidated Financial Statements. IFRS 2015 - 2017 improvement cycle (IASB effective date 1 January 2019). The improvement cycle brought clarification on specific technical points in the following Standards, which due to the content and narrow scope had no impact on the Consolidated Financial Statements: IFRS 3 Business Combinations and IFRS 11 Joint Arrangements. The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it re-measures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not re-measure previously held interests in that business. IAS 12 Income Taxes. The amendments clarify the requirements to recognise the income tax consequences of dividends where the transactions or events that generated distributable profits are recognised. 54 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 2. Accounting policies continued a. Basis of preparation continued IAS 23 Borrowing Costs. The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings. New and amended Standards not yet adopted by the Group A number of new standards and amendments adopted by the EU, as well as standards and interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing the Consolidated Financial Statements. The Group does not plan to adopt these standards early; instead it will apply them from their effective dates as determined by their dates of EU endorsement. The Group continues to review the upcoming standards to determine their impact. IFRS 9, Financial instruments (IASB effective date 1 January 2018) has not been applied under IFRS 4 Amendment option to defer until IFRS 17 comes into effect on 1 January 2023. IFRS 17, Insurance Contracts. (IASB effective date 1 January 2023) IFRS 9, IAS 39 and IFRS 7 Amendments, Interest rate benchmark reform. (IASB effective date 1 January 2020) IAS 1 and IAS 8 Amendments, Definition of material. (IASB effective date 1 January 2020) IFRS 3 Amendments, Business combinations. (IASB effective date 1 January 2020) Of the upcoming accounting standards and amendments, the Group anticipates that IFRS 9 and IFRS 17 will have the most material impact to the Consolidated Financial Statements’ presentation and disclosures. The accounting developments and implementation timelines of these standards are being closely monitored and the impacts of the Standards themselves are being reviewed. Full impact analysis in respect of these standards is in the process of being completed. A brief overview of these standards is provided below: IFRS 9, Financial instruments (IASB effective date 1 January 2018) has not been applied under IFRS 4 Amendment option. IFRS 9 provides a reform of financial instruments accounting to supersede IAS 39 Financial Instruments: Recognition and Measurement. The Standard contains the requirements for a) the classification and measurement of financial instruments; b) a new impairment methodology and c) general hedge accounting. IFRS 4 Amendment, Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts contained an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4. The Group meets the eligibility criteria and has taken advantage of this temporary exemption not to apply this standard until the effective date of IFRS 17. IFRS 17 was issued in May 2017. It will replace IFRS 4 on accounting for insurance contracts and has an effective date of 1 January 2023. The Group expects to adopt the new Standard on this date. Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk. The discount rate will reflect current interest rates. If the present value of future cash flows produces a gain at the time a contract is issued the model also requires a ‘contractual service margin’ to offset the day 1 gain. The contractual service margin will amortise over the life of the contract. There will also be a new income statement presentation for insurance contracts, including a revised definition of revenue, and extensive disclosure requirements. The Group has implemented an IFRS 17 project to plan and develop the required systems and procedural changes. The initial gap analysis comparing the existing systems and data to those required to meet the Standard was completed in November 2019, focusing on the Accredited Insurance Europe Ltd operations as a pilot. Development of procedure and systems changes is expected to be in place by 31 December 2020, with testing taking place in 2021. The project has provided early insight on the potential impact on the Consolidated Financial Statements by comparing key transactions using existing accounting treatment to a restated position under IFRS 17. This confirmed the most significant financial impacts will be the deferral of risk premiums on reinsurance contracts and goodwill gains on business combinations acquired after the effective date, the discounting of risk adjusted insurance and reinsurance liabilities and assets, and the inclusion of future claims handling and directly attributable expense cash flows in the insurance liabilities for all business. b. Selection of accounting policies Judgement, estimates and assumptions are made by the Directors in selecting each Group accounting policy. The accounting policies are selected by the Directors to present Consolidated Financial Statements that they consider provide the most relevant information. In the case of certain accounting policies, there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the Consolidated Financial Statements are presented. In respect of financial instruments, the Group accounting policy is to designate all financial assets as fair value through profit or loss, including purchased reinsurance receivables. c. Consolidation The Consolidated Financial Statements incorporate the Financial Statements of the Company, and entities controlled by the Company (its subsidiaries), for the years ended 31 December 2019 and 2018. Control exists when the Group is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes non-controlling interests to have a deficit balance. 55 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of acquisition directly attributable to the acquisition. Acquisition-related costs are charged to the Consolidated Income Statement in the year in which they are incurred. Certain Group subsidiaries underwrite as corporate members of Lloyd’s on Syndicates managed by Coverys Managing Agency Limited and Capita Managing Agency Limited. In view of the several and direct liability of underwriting members at Lloyd’s for the transactions of Syndicates in which they participate, only attributable shares of transactions, assets and liabilities of those Syndicates are included in the Consolidated Financial Statements. The Group continues to conclude that it remains appropriate to consolidate only its share of the result of these Syndicates. The Group is the sole provider of capacity on Syndicate 1110, and these Consolidated Financial Statements include 100.00% of the economic interest in this Syndicate. For Syndicate 1991, the Group provides 24.21% of the capacity on the 2017 year of account, and 0.04% on the 2018 and 2019 years of account. For Syndicate 3330, the Group provides 100.00% of the capacity on the 2017 year of account and 10% on the 2018 year of account. These Consolidated Financial Statements include the Group’s relevant share of the result for those years and attributable assets and liabilities. Associates are those entities in which the Group has power to exert influence but which it does not control. Investments in associates are accounted for using the equity method of accounting. Under this method the investments are initially measured at cost. Thereafter the Group’s share of post-acquisition profits or losses are recognised in the Consolidated Income Statement and adjusted against the cost of the investment included in the Consolidated Statement of Financial Position. When the Group’s share of losses equals or exceeds the carrying amount of the investment in the associate, the carrying amount is reduced to nil and recognition for the losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. Equity accounting is discontinued when the Group no longer has significant influence over the investment. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated in preparing the Consolidated Financial Statements. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Where necessary, amounts reported by subsidiaries have been adjusted to conform to the Group’s accounting policies. Non-controlling interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the Consolidated Income Statement and Consolidated Statement of Comprehensive Income and within equity in the Consolidated Statement of Financial Position, separately from the equity attributable to the shareholders of the parent. Insurance broking cash, receivables and payables held by subsidiary companies which act as intermediaries, other than any receivable for fees, commissions and interest earned on a transaction, are not included in the Group’s Consolidated Statement of Financial Position as the subsidiaries act as agents for the client in placing the insurable risks of their clients with insurers and as such are not liable as principals for amounts arising from such transactions. d. Going concern The Consolidated Financial Statements have been prepared on a going-concern basis. At the date of signing these Consolidated Financial Statements, the Group’s financial position and forecasts for 2020 and 2021 demonstrate that it has adequate cash resources to meet its liabilities as they fall due. The Group has continued to make advances with its strategy, including the continuation of legacy deals and ongoing development of the Program management business. On the 29 April 2020 the Group announced new capital of £80.3m (US$100m), to further strengthen the Group’s financial resources and provide additional funds to capitalise on opportunities in its Legacy and Program management businesses. Covid-19 impact The Board has considered the potential impact of the recent Covid-19 pandemic and believes that it will have a limited impact on the Group’s existing business. Significant work has been performed by the Group, which confirmed the ability of the Group and its subsidiaries to continue to operate as going concerns. Regulated entities within the Group have performed stress tests to assess going-concern capabilities under various scenarios, which has confirmed the adequacy of their capital bases and ability to continue to meet regulatory capital requirements under these scenarios. Impact on Legacy business Whilst some delays in completing new legacy deals may be experienced, it is believed that the impact of the pandemic on the wider insurance industry will provide future opportunity for the Group. The Group’s existing legacy books have limited exposure to unexpired risks. Given the scale of insurance risk underwritten, diversification across different classes of insurance and levels of highly rated reinsurance protection available in the insurance company subsidiaries; the Group is well protected against the likelihood of any significant future claims. 56 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 2. Accounting policies continued d. Going concern continued Impact on Program business Growth in program premiums may slow with lower levels of economic and business activity anticipated during 2020, however the rapid increase in program premiums written in 2019 will result in significantly increased levels of earned premiums and commissions being achieved during 2020. Impact on investment portfolios The Group has a defensive positioning in its portfolio with 92% of invested assets currently held in BBB or better. As a result, the Group has only seen a 1.2% unrealised loss on the investment portfolio for the period from 1 January 2020 to 30 April 2020. Impact on operations The Group has moved to protect staff by closing all offices in accordance with government guidelines in the countries in which it operates. Group staff and systems have adapted well to remote working with no significant degrading of operations and performance. Given these factors, the Directors have a reasonable expectation that the Group will be able to continue in operational existence for the foreseeable future. For the purposes of these Consolidated Financial Statements, this is considered to be a minimum of 12 months from the signing date. e. Foreign currency translation Functional and presentational currency Items included in the Financial Statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The Consolidated Financial Statements are presented in sterling, which is the Group’s presentational currency. Transactions and balances Transactions in foreign currencies are recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the end of the reporting period; the resulting exchange gain or loss is recognised in the Consolidated Income Statement. Non-monetary items recorded at historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction and are not subsequently restated. Group translation The assets and liabilities of overseas subsidiaries, including associated goodwill, held in functional currencies other than the Group’s presentational currency are translated at the exchange rate as at the period end date. Income and expenses are translated at average rates for the period. All resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve in the Consolidated Statement of Financial Position. On the disposal of foreign operations, cumulative exchange differences previously recognised in other comprehensive income are recognised in the Consolidated Income Statement as part of the gain or loss on disposal. f. Premiums Gross premiums written represent premiums on business commencing in the financial year together with adjustments to premiums written in previous accounting periods and estimates for premiums from contracts entered into during the course of the year. Gross premiums written are stated before deduction of brokerage and commission but net of taxes and duties levied on premiums. Unearned premiums A provision for unearned premiums represents that part of the gross premiums written that is estimated will be earned in the following financial periods. It is calculated on a time apportionment basis having regard, where appropriate, to the incidence of risk. For After the Event (ATE) policies written by the Group, premiums remain unearned until the point at which the claims exposures relating to these policies become crystallised. Reinsurance premium costs are allocated to financial periods to reflect the protection arranged in respect of the business written and earned. Acquisition costs Acquisition costs, which represent commission and other related direct underwriting expenses, are deferred over the period in which the related premiums are earned. Acquisition costs recognised during the period are recorded in operating expenses in the Consolidated Income Statement. g. Claims These include the cost of claims and related expenses paid in the year, together with changes in the provisions for outstanding claims, including provisions for claims incurred but not reported and related expenses, together with any other adjustments to claims from previous years. Where applicable, deductions are made for salvage and other recoveries. These are shown as net claims provisions (increased)/released in the Consolidated Income Statement. h. Insurance contract provisions and reinsurers’ share of insurance liabilities Provisions are made in the insurance company subsidiaries and in the Lloyd’s Syndicates on which the Group participates for the full estimated costs of claims notified but not settled, including claims handling costs, on the basis of the best information available, taking account of inflation and latest trends in court awards. The Directors of the subsidiaries, with the assistance of run-off managers, independent actuaries and internal actuaries, have established such provisions on the basis of their own investigations and their best estimates of insurance payables, in accordance with accounting standards. Legal advice is taken where appropriate. Deductions are made for salvage and other recoveries as appropriate. 57 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The provisions for claims incurred but not reported (IBNR) have been based on a number of factors including previous experience in claims and settlement patterns, the nature and amount of business written, inflation and the latest available information as regards specific and general industry experience and trends. A reinsurance asset (reinsurers’ share of technical provisions) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the outstanding claims reported and IBNR. The amount recoverable from reinsurers is initially valued on the same basis as the underlying claims provision. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the contract. Neither the outstanding claims nor the provisions for IBNR has been discounted. The uncertainties which are inherent in the process of estimating are such that, in the normal course of events, unforeseen or unexpected future developments may cause the ultimate cost of settling the outstanding liabilities to differ materially from that estimated. Any differences between provisions and subsequent settlements are recorded in the Consolidated Income Statement in the year which they arise. Having regard to the significant uncertainty inherent in the business of insurance as explained in Note 3, and in light of the information available, in the opinion of the Directors the provisions for outstanding claims and IBNR in the Consolidated Financial Statements are fairly stated. Provision for future claims handling costs Provision for future run-off costs relating to the Group’s run-off businesses is made to the extent that the estimate of such costs exceeds the estimated future investment income expected to be earned by those businesses. Estimates are made for the anticipated costs of running off the business of those insurance subsidiaries and the Group’s participation in Syndicates which have insurance businesses in run-off. Where insurance company subsidiaries have businesses in run-off and underwrite new business, management estimates the run-off costs and the future investment income relating to the run-off business. Syndicates are treated as being in run-off for the Consolidated Financial Statements where they have ceased writing new business and, in the opinion of management, there is no current probable reinsurer available to close the relevant syndicate year of account. Changes in the estimates of such costs and future investment income are reflected in the year in which the estimates are made. When assessing the amount of any provision to be made, the future investment income and claims handling and all other costs of all the insurance company subsidiaries’ and syndicates’ businesses in run-off are considered in aggregate. The uncertainty inherent in the process of estimating the period of run-off and the pay-out pattern over that period, the anticipated run-off administration costs to be incurred over that period and the level of investment income to be received is such that in the normal course of events unforeseen or unexpected future developments may cause the ultimate costs of settling the outstanding liabilities to differ from that previously estimated. Unexpired risks provision Provisions for unexpired risks are made where the costs of outstanding claims, related expense and deferred acquisition costs are expected to exceed the unearned premium provision carried forward at the end of the reporting period. The provision for unexpired risks is calculated separately by reference to classes of business which are managed together, after taking into account relevant investment return. i. Provisions Provisions, other than insurance provisions, are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as an interest expense. j. Structured settlements Certain of the US insurance company subsidiaries have entered into structured settlements whereby their liability has been settled by the purchase of annuities from third party life insurance companies in favour of the claimants. The subsidiary retains the credit risk in the unlikely event that the life insurance company defaults on its obligations to pay the annuity amounts. Provided that the life insurance company continues to meet the annuity obligations, no further liability will fall on the insurance company subsidiary. The amounts payable to claimants are recognised in liabilities. The amount payable to claimants by the third party life insurance companies are also shown in liabilities as reducing the Group’s liability to nil. In the opinion of the Directors, this treatment reflects the substance of the transaction on the basis that any remaining liability of Group companies under structured settlements will only arise upon the failure of the relevant third party life insurance companies and will be reduced by any available reinsurance cover. Should the Directors become aware of a claim arising from a policy holder that a third party life insurance company responsible for the payment of an annuity under a structured settlement may not be in a position to meet its annuity obligations in full, appropriate provision will be made for any such failure. Disclosure of the position in relation to structured settlements is shown in Note 21. 58 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 2. Accounting policies continued k. Segmental reporting The Group’s business segments are based on the Group’s management and internal reporting structures and represent the level at which financial information is reported to the Board, being the chief operating decision maker as defined in IFRS 8. l. Financial instruments Financial instruments are recognised in the Consolidated Statement of Financial Position at such time that the Group becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognised when the contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred, together with substantially all the risks and rewards of ownership. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire, are discharged or cancelled. Financial assets i) Acquisition On acquisition of a financial asset, the Group is required under IFRS to classify the asset into one of the following categories: ‘financial assets at fair value through profit and loss’, ‘loans and receivables held to maturity’ and ‘available for sale’. The Group does not currently hold assets classified as ‘held to maturity’ and ‘available for sale’. ii) Financial assets at fair value through profit and loss All financial assets, other than cash, loans and receivables, are currently designated as fair value through profit and loss upon initial recognition because they are managed and their performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis to the Group’s key management. The Group’s investment strategy is to invest and evaluate their performance with reference to their fair values. iii) Fair value measurement When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available) and reference to the current fair value of other instruments that are substantially the same or discounted cash flow analyses. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third party market participant would take them into account in pricing a transaction. Upon initial recognition, attributable transaction costs relating to financial instruments at fair value through profit or loss are recognised when incurred in other operating expenses in the Consolidated Income Statement. Financial assets at fair value through profit and loss are measured at fair value, and changes therein are recognised in the Consolidated Income Statement. Net changes in the fair value of financial assets at fair value through profit and loss exclude interest and dividend income, as these items are accounted for separately as set out in the investment income section below. iv) Insurance receivables and payables Insurance receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. Insurance receivables are classified as ‘loans and receivables’ as they are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Insurance receivables are measured at amortised cost less any provision for impairment. Insurance payables are stated at amortised cost. v) Investment income Investment income consists of dividends, interest, realised and unrealised gains and losses and exchange gains and losses on financial assets at fair value through profit and loss. The realised gains or losses on disposal of an investment are the difference between the proceeds and the original cost of the investment. Unrealised investment gains and losses represent the difference between the carrying amount at the reporting date, and the carrying amount at the previous period end or the purchase value during the period. Financial liabilities Borrowings Borrowings are initially recorded at fair value less transaction costs incurred. Subsequently borrowings are stated at amortised cost and interest is recognised in the Consolidated Income Statement over the period of the borrowings. 59 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Senior and subordinated debt Randall & Quilter Investment Holdings Ltd. and Group subsidiaries have issued senior and subordinated debt. At Group level this is treated as a financial liability and interest charges are recognised in the Consolidated Income Statement. Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. The best evidence of fair value of a derivative at initial recognition is the transaction price. The method of recognising the resulting fair value gains or losses depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices in active markets, recent market transactions, and valuation techniques which include discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The Group has not designated any derivatives as fair value hedges, cash flow hedges or net investment hedges. m. Property, plant and equipment All assets included within property, plant and equipment (PPE) are carried at historical cost less depreciation and assessed for impairment. Depreciation is calculated to write down the cost less estimated residual value of motor vehicles, office equipment, IT equipment, freehold property and leasehold improvements by the straight-line method over their expected useful lives. The principal rates per annum used for this purpose are: Motor vehicles Office equipment IT equipment Freehold property Leasehold improvements % 25 8–50 20–25 2 Term of lease The gain or loss arising on the disposal of an item of PPE is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Consolidated Income Statement. n. Leases The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to refurbish the underlying asset, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is reviewed for impairment losses, if any, and adjusted for certain re-measurements of the lease liability. The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets, including IT equipment. The Group recognises the lease payments associated with these leases as an expense to the Consolidated Income Statement on a straight-line basis over the lease term. Right-of-use assets are disclosed under note 17. o. Goodwill The Group uses the acquisition method in accounting for acquisitions. The difference between the cost of acquisition and the fair value of the Group’s share of the identifiable net assets acquired is capitalised and recorded as goodwill. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired the difference is recognised directly in the Consolidated Income Statement as goodwill on bargain purchase. Goodwill acquired in a business combination is initially measured at cost, being the excess of the fair value of the consideration paid for the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at the cash generating unit level, as shown in Note 15, on a biannual basis or if events or changes in circumstances indicate that the carrying amount may be impaired. 60 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 2. Accounting policies continued 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 On acquisition of insurance companies in run-off On acquisitions – other 3–5 years, on a straight-line basis Estimated pattern of run-off Useful life, which may be indefinite Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the Consolidated Income Statement to reduce the carrying amount to the recoverable amount. US insurance authorisation licences US state insurance authorisation licences acquired in business combinations are recognised initially at their fair value. The asset is not amortised, as the Directors consider that economic benefits will accrue to the Group over an indefinite period due to the long-term stability of the US insurance market. The licences are tested annually for impairment. This assumption is reviewed annually to determine whether the asset continues to have an indefinite life. Costs of acquiring new licences are recognised in the year of acquisition. Rights to customer contractual relationships Costs directly attributable to securing the intangible rights to customer contractual relationships are recognised as an intangible asset where they can be identified separately and measured reliably, and it is probable that they will be recovered by directly related future profits. These costs are amortised on a straight-line basis over the useful economic life which is deemed to be 15 years and are carried at cost less accumulated amortisation and impairment losses. q. Employee Benefits The Group makes contributions to defined contribution schemes and a defined benefit scheme. The pension cost in respect of the defined contribution schemes represents the amounts payable by the Group for the year. The funds of the schemes are administered by trustees and are separate from the Group. The Group’s liability is limited to the amount of the contributions. The defined benefit scheme is funded by contributions from a subsidiary company and its assets are held in a separate Trustee administered fund. Pension scheme assets are measured at market value, and liabilities are measured using the projected unit method and discounted at the current rate of return on high quality corporate bonds of equivalent term and currency to the liability. Current service cost, net interest income or cost and any curtailments/settlements are charged to the Consolidated Income Statement. The present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets is recognised and disclosed separately as a net pension liability in the Consolidated Statement of Financial Position. Surpluses are only recognised up to the aggregate of any cumulative unrecognised net actuarial gains and past service costs, and the present value of any economic benefits available in the form of any refunds or reductions in future contributions. Subject to the restrictions relating to the recognition of a pension surplus, all actuarial gains and losses are recognised in full in other comprehensive income in the period in which they occur. r. Cash and cash equivalents For the purposes of the Consolidated Cash Flow Statement, cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less from the date of acquisition, and bank overdrafts which are repayable on demand. s. Finance costs Finance costs comprise interest payable and are recognised in the Consolidated Income Statement in line with the effective interest rate on liabilities. 61 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 t. Operating expenses Operating expenses are accounted for in the Consolidated Income Statement in the period to which they relate. Pre-contract costs Directly attributable pre-contract costs are recognised as an asset when it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows in excess of any amounts recognised as an asset. Pre-contract costs are charged to the Consolidated Income Statement over the shorter of the life of the contract or five years. Onerous contracts Onerous contract provisions are provided for in circumstances where the Group has a present legal or constructive obligation as a result of past events to provide services, the costs of which exceed future income. The costs of providing the services are projected based on management’s assessment of the contract. Arrangement fees Arrangement fees in relation to loan facilities are deducted from the relevant financial liability and amortised over the period of the facility. u. Other income Other income is stated excluding any applicable value added tax and includes the following items: Management fees Management fees are from non-Group customers and are recognised when the right to such fees is established through a contract and to the extent that the services concerned have been performed. Billing follows the supply of service and the consideration is unconditional because only the passage of time is required before the payment is due. Purchased reinsurance receivables The Group accounts for these financial assets at fair value through profit and loss. Fair value is defined as the price at which an orderly transaction would take place between market participants at the reporting date and is therefore an estimate which requires the use of judgement. Insurance commissions from Managing General Agencies Insurance commissions comprise brokerage and profit commission arising from the placement of insurance contracts. Brokerage is recognised at the inception date of the policy, or the date of contractual entitlement, if later. Alterations in brokerage arising from premium adjustments are taken into account as and when such adjustments are notified. To the extent that the Group is contractually obliged to provide services after this date, a suitable proportion of income is deferred and recognised over the life of the relevant contracts to ensure that revenue appropriately reflects the cost of fulfilling those obligations. Profit commission is recognised when the right to such profit commission is established through a contract but only to the extent that a reliable estimate of the amount due can be made. Such estimates are made on a prudent basis that reflects the level of uncertainty involved. v. Share-based payments The Group issues equity settled payments to certain of its employees. The cost of equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense on a straight-line basis over the vesting period. The fair value is measured using the binomial option pricing method, taking into account the terms and conditions on which the awards were granted. 62 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 2. Accounting policies continued w. Current and deferred income tax Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in the Consolidated Statement of Comprehensive Income. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associates operate and generate taxable income. Deferred tax liabilities are provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination and which, at the time of the transaction, affects neither accounting, nor taxable profit or loss, it is not provided for. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred tax assets and liabilities are determined using tax rates that have been enacted or substantively enacted by the period end date and are expected to apply when the related deferred tax asset is realised, or the deferred tax liability is settled. x. Share capital Ordinary shares and Preference A and B shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. y. Distributions Distributions payable to the Company’s shareholders are recognised as a liability in the Consolidated Financial Statements in the period in which the distributions are declared and approved. 3. Estimation techniques, uncertainties and contingencies Estimates and judgements are continually evaluated, and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Significant uncertainty in technical provisions Significant uncertainty exists as to the accuracy of the insurance contract provisions and the reinsurers’ share of insurance liabilities established in the insurance company subsidiaries and the Lloyd’s Syndicates on which the Group participates as shown in the Consolidated Statement of Financial Position. The ultimate costs of claims and the amounts ultimately recovered from reinsurers could vary materially from the amounts established at the year end. In the event that further information were to become available to the Directors of an insurance company subsidiary which gave rise to material additional liabilities, the going concern basis might no longer be appropriate for that company and adjustments would have to be made to reduce the value of its assets to their realisable amount, and to provide for any further liabilities which might arise in that subsidiary. The Group bears no financial responsibility for any liabilities or obligations of any insurance company subsidiary in run-off, except as disclosed. Should any insurance company subsidiary cease to be able to continue as a going concern in the light of further information becoming available, any loss to the Group would thus be restricted to the book value of their investment in and amounts due from that subsidiary and any guarantee liability that may arise. Claims provisions The Consolidated Financial Statements include provisions for all outstanding claims and IBNR, for related reinsurance recoveries and for all costs expected to be incurred to run-off its liabilities. The insurance contract provisions including IBNR are based upon actuarial and other studies of the ultimate cost of liabilities including exposure based and statistical estimation techniques. There are significant uncertainties inherent in the estimation of each insurance company subsidiary’s and Lloyd’s Syndicate’s insurance liabilities and reinsurance recoveries. There are many assumptions and estimation techniques that may be applied in assessing the amount of those provisions which individually could have a material impact on the amounts of liabilities, related reinsurance assets and reported shareholders’ equity funds. Actual experience will often vary from these assumptions, and any consequential adjustments to amounts previously reported will be reflected in the results of the year in which they are identified. Potential adjustments arising in the future could, if adverse in the aggregate, exceed the amount of shareholders’ equity funds of an insurance company subsidiary. Independent external actuaries are contracted to provide a Statement of Actuarial Opinion for the Lloyd’s Syndicates that the Group participates on. This statement confirms that, in the opinion of the actuary, the booked reserves are greater than or equal to their view of best estimate. 63 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 In the case of the Group’s larger insurance companies, independent external actuaries provide a view of best estimate reserves and confirm that the held reserves are within their range of acceptable estimates. The business written by the insurance company subsidiaries consists in part of long-tail liabilities, including asbestos, pollution, health hazard and other US liability insurance. The claims for this type of business are typically not settled until many years after policies have been written. Furthermore, much of the business written by these companies is reinsurance and retrocession of other insurance companies’ business, which lengthens the settlement period. Significant delays occur in the notification and settlement of certain claims and a substantial measure of experience and judgement is involved in making the assumptions necessary for assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the period end date. The gross insurance contract provisions and related reinsurers’ share of insurance liabilities are estimated on the basis of information currently available. Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions and having due regard to collectability. The insurance contract provisions include significant amounts in respect of notified and potential IBNR claims for long-tail liabilities. The settlement of most of these claims is not expected to occur for many years, and there is significant uncertainty as to the timing of such settlements and the amounts at which they will be settled. While many claims are clearly covered under policy wordings and are paid quickly, many other claims are subject to significant disputes, for example over the terms of a policy and the amount of the claim. The provisions for disputed claims are based on the view of the Directors of each insurance company subsidiary as to the expected outcomes of such disputes. Claim types impacted by such disputes include asbestos, pollution and certain health hazards and retrocessional reinsurance claims. Uncertainty is further increased because of the potential for unforeseen changes in the legal, judicial, technological or social environments, which may increase or decrease the cost, frequency or reporting of claims, and because of the potential for new sources or types of claim to emerge. Asbestos, pollution and health hazard claims The estimation of the provisions for the ultimate cost of claims for asbestos, pollution, health hazard and other US liability insurance is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business. As a result it is not possible to determine the future development of asbestos, pollution, health hazard and other US liability insurance with the same degree of reliability as with other types of claims. Consequently, traditional techniques for estimating claims provisions cannot wholly be relied upon. The Group employs further techniques which utilise, where practical, the exposure to these losses by contract to determine the claims provisions. Insurance claims handling expenses The provision for the cost of handling and settling outstanding claims to extinction and all other costs of managing the run-off is based on an analysis of the expected costs to be incurred in run-off activities, incorporating expected savings from the reduction of transaction volumes over time. The period of the run-off may be between 5 and 50 years depending upon the nature of the liabilities within each insurance company subsidiary. Ultimately, the period of run-off is dependent on the timing and settlement of claims and the collection of reinsurance recoveries; consequently similar uncertainties apply to the assessment of the provision for such costs. Reinsurance recoveries Reinsurance recoveries are included in respect of claims outstanding (including IBNR claims) and claims paid after making provision for irrecoverable amounts. The reinsurance recoveries on IBNR claims are estimated based on the recovery rate experienced on notified and paid claims for each class of business. The insurance company subsidiaries are exposed to disputes on contracts with their reinsurers and the possibility of default by reinsurers. In establishing the provision for non-recovery of reinsurance balances, the Directors of each insurance company subsidiary consider the financial strength of each reinsurer, its ability to settle their liabilities as they fall due, the history of past settlements with the reinsurer, and the Group’s own reserving standards and have regard to legal advice regarding the merits of any dispute. Recognition and derecognition of assets and liabilities in run-off In the course of the Group’s business of managing the run-off of insurers and brokers, accounting records are initially recognised in the form provided by previous management. As part of managing run-off the Group carries out extensive enquiries to clarify the assets and liabilities of the run-off and to obtain all available and relevant information. Those enquiries may lead the Group to identify and record additional assets and liabilities relating to that run-off, or to conclude that previously recognised assets and liabilities should be increased or no longer exist and should be derecognised. Where decisions to derecognise 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 derecognised 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. 64 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 3. Estimation techniques, uncertainties and contingencies continued Defined benefit pension scheme The pension assets and post retirement liabilities are calculated in accordance with IAS 19. The assets, liabilities and Consolidated Income Statement charge or credit, calculated in accordance with IAS 19, are sensitive to the assumptions made, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pension fund’s assets with its long-term liabilities, which are calculated using a discount rate in line with yields on high quality bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and equity markets. Litigation, mediation and arbitration The Group in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectorial inquiries in the normal course of its business. The Directors do not believe that, in the aggregate, current litigation, governmental or sectorial inquiries and pending or threatened litigation or dispute is likely to have a material impact on the Group’s financial position. However, if the outcome of any individual dispute differs substantially from expectation, there could be a material impact on the Group’s profit or loss, financial position or cash flows in the year in which that impact is recognised. Changes in foreign exchange rates The Group’s Consolidated Financial Statements are prepared in sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly the Euro and US dollar, into sterling will impact the reported Consolidated Statement of Financial Position, results of operations and cash flows from year to year. These fluctuations in exchange rates will also impact the sterling value of the Group’s investments and the return on its investments. Income and expenses are translated into sterling at average exchange rates. Monetary assets and liabilities are translated at the closing exchange rates at the period end date. Assessment of impairment of intangible assets Goodwill and US insurance authorisation licences are deemed to have an indefinite life as they are expected to have a value in use that does not erode or become obsolete over the course of time. Consequently, they are not amortised but tested for impairment on a biannual basis or if events or changes in circumstances indicate that the carrying amount may be impaired. The impairment tests involve evaluating the recoverable amount of the Group’s cash generating units and comparing them to the relevant carrying amounts. The recoverable amount of each cash generating unit is determined based on cash flow projections. These cash flow projections are based on the financial budgets approved by management covering a five year period. Management also consider the current net asset value and earnings of each cash generating unit for impairment. Provisions Estimates are based on reports provided by recognised specialists as well as the Group’s own internal review. Liabilities may not be settled for many years and significant judgement is involved in making an assessment of these liabilities, the period over which they will be settled and where appropriate the discount rate to be applied to assess the present value of the amounts to be settled. 4. Management of insurance and financial risks The Group’s activities expose it to a variety of insurance and financial risks. The Board is responsible for managing the Group’s exposure to these risks and, where possible, for introducing controls and procedures that mitigate the effects of the exposure to risk. The Group has a Risk Committee which is a formal Committee of the Board. The Committee has responsibility for maintaining the effectiveness of the Group’s Risk Management Framework, systems of internal control, risk policies and procedures and adherence to risk appetite. The following describes the Group’s exposure to the more significant risks and the steps management have taken to mitigate their impact from a quantitative and qualitative perspective. a. Investment risks (including market risk and interest rate risk The Group has a Capital and Investment Committee which is responsible, inter alia, for setting and recommending to the Board an investment strategy for the management of the Group’s assets owned or managed by companies within the Group. The investment of the Group’s financial assets, except certain deposits with ceding undertakings, is managed by external investment managers, appointed by the Group Capital and Investment Committee. The Group Capital and Investment Committee is responsible for setting the policy to be followed by the investment managers. The investment strategy strives to mitigate the impact of interest rate fluctuation and credit risks and to provide appropriate liquidity, in addition to monitoring and managing foreign exchange exposures. The Group Capital and Investment Committee is also responsible for keeping under review the investment control procedures, monitoring and amending (where appropriate) the investment policies and oversight, monitoring Group cash flow, oversight of all banking and other financial commitments and covenants across the Group, as well as any regulatory requirements in relation to Group solvency. The main objective of the investment policy is to maximise return whilst maintaining and protecting the principal value of funds under management. 65 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 2019 £000 188,030 345,296 10,991 15,646 252,741 812,704 % 23.1 42.5 1.4 1.9 31.1 2018 £000 63,228 202,424 24,369 105,397 236,923 632,341 % 10.0 32.0 3.8 16.7 37.5 100.0 100.0 The investment allocation (including surplus cash) at 31 December 2019 and 2018 is shown below: Government and government agencies Corporate bonds Equities Cash-based investment funds Cash and cash equivalents Government and government agencies Corporate bonds Equities Cash-based investment funds Cash and cash equivalents Corporate bonds include asset backed mortgage obligations totalling £10,914k (2018: £6,833k). Based on invested assets at external managers of £559,963k as at 31 December 2019 (2018: £395,418k), a 1 percentage increase/decrease in market values would result in an increase/decrease in the profit before income taxes for the year to 31 December 2019 of £5,600k (2018: £3,954k). (i) Pricing risk The following table shows the fair values of financial assets using a valuation hierarchy; the fair value hierarchy has the following levels: Level 1 – Valuations based on quoted prices in active markets for identical instruments. An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Level 2 – Valuations based on quoted prices in markets that are not active or based on pricing models for which significant inputs can be corroborated by observable market data. Level 3 – Valuations based on inputs that are unobservable or for which there is limited activity against which to measure fair value. 2019 Government and government agencies Corporate bonds Equities Cash-based investment funds Purchased reinsurance receivables (Note 19) Total financial assets measured at fair value 2018 Government and government agencies Corporate bonds Equities Cash-based investment funds Purchased reinsurance receivables (Note 19) Total financial assets measured at fair value Level 1 £000 180,970 342,538 10,991 – – 534,499 Level 1 £000 58,954 200,416 24,369 105,397 – 389,136 Level 2 £000 7,060 2,758 – 15,646 – 25,464 Level 2 £000 4,274 2,008 – – – 6,282 Level 3 £000 – – – – 5,969 5,969 Level 3 £000 – – – – 3,393 3,393 Total £000 188,030 345,296 10,991 15,646 5,969 565,932 Total £000 63,228 202,424 24,369 105,397 3,393 398,811 66 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 4. Management of insurance and financial risks continued a. Investment risks (including market risk and interest rate risk) continued (i) Pricing risk continued The following table shows the movement on Level 3 assets measured at fair value: Opening balance Total net (losses)/gains recognised in the Consolidated Income Statement Acquisitions Disposals Exchange adjustments Closing balance 2019 £000 3,393 (93) 3,528 (692) (167) 5,969 2018 £000 3,750 76 – (614) 181 3,393 Level 3 investments (purchased reinsurance receivables) have been valued using detailed models outlining the anticipated timing and amounts of future receipts. The net losses recognised in the Consolidated Income Statement in other income for the year amounted to £93k (2018: gains £76k). The Group purchased further reinsurance receivables in 2019 of £3,528k (2018: Nil). Short-term delays in the anticipated receipt of these investments will not have a material impact on their valuation. There were no transfers between Level 1 and Level 2 investments during the year under review. The following shows the maturity dates and interest rate ranges of the Group’s debt securities: (ii) Liquidity risk As at 31 December 2019 Maturity date or contractual re-pricing date Total £000 Less than one year £000 After one year but less than two years £000 After two years but less than three years £000 After three years but less than five years £000 More than five years £000 Debt securities 548,971 88,991 91,961 82,285 75,953 209,781 Interest rate ranges (coupon-rates) Debt securities 0.38–8.75 2.38 1.38–2.50 1.50–5.51 3.15–6.88 Less than one year % After one year but less than two years % After two years but less than three years % After three years but less than five years % More than five years % As at 31 December 2018 Maturity date or contractual re-pricing date Total £000 Less than one year £000 After one year but less than two years £000 After two years but less than three years £000 After three years but less than five years £000 More than five years £000 Debt securities 371,049 113,657 81,507 51,758 94,029 30,098 Interest rate ranges (coupon-rates) Less than one year % After one year but less than two years % After two years but less than three years % After three years but less than five years % More than five years % Debt securities 0.59–5.87 0.40–4.74 1.80–4.89 1.89–5.14 0.05–3.63 Liquidity risk is managed by the Group Capital and Investment Committee who monitor the cash position of each entity and for the Group as a whole on a regular basis to ensure that sufficient funds are available to meet liabilities as they fall due. Liquidity risk is also monitored by the Group’s financial planning and treasury function’s established cash flow and liquidity management processes. 67 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 iii) Interest rate risk Fixed income investments represent a significant proportion of the Group’s assets and the Group Capital and Investment Committee continually monitors investment strategy to minimise the risk of a fall in the portfolio’s market value. The fair value of the Group’s investment portfolio of debt and fixed income securities is normally inversely correlated to movements in market interest rates. If market interest rates rise, the fair value of the Group’s debt and fixed income investments would tend to fall and vice versa. Debt and fixed income assets are predominantly invested in high-quality corporate, government and asset-backed bonds. The investments typically have relatively short durations and terms to maturity. The Group is exposed to interest rate risk within the Group’s financial liabilities. This exposure lies predominately with amounts owed to credit institutions and debentures secured over the assets of the Company and its subsidiaries. b. Credit risk Credit risk arises where counterparties fail to meet their financial obligations as they fall due. The most significant area where it arises for the Group is where reinsurers fail to meet their obligations in full as they fall due. In addition, the Group is exposed to the risk of disputes on individual claims presented to its reinsurers or in relation to the contracts entered into with its reinsurers. The ratings used in the below analysis are based upon the published rating of Standard & Poor’s or other recognised ratings agency. As at 31 December 2019 Deposits with ceding undertakings Reinsurers’ share of insurance liabilities Receivables arising out of reinsurance contracts As at 31 December 2018 Deposits with ceding undertakings Reinsurers’ share of insurance liabilities Receivables arising out of reinsurance contracts A rated £000 10,811 374,482 141,715 A rated £000 3,014 231,381 57,319 B rated £000 Less than B £000 183 5,705 1,805 B rated £000 299 4,048 4,742 – – – Less than B £000 – – – Other* £000 2,539 35,038 18,112 Other* £000 1,287 39,686 9,970 Exposures of less than £200k £000 5,971 56,187 50,602 Exposures of less than £200k £000 1,731 25,242 25,275 Total £000 19,504 471,412 212,234 Total £000 6,331 300,357 97,306 * Other includes reinsurers who currently have no credit rating. The reinsurers’ share of insurance liabilities is based upon a best estimate given the profile of the insurance provisions outstanding and the related IBNR. Receivables arising out of reinsurance contracts are included in insurance and other receivables in the Consolidated Statement of Financial Position. The average credit period of receivables arising out of reinsurance contracts is as follows: As at 31 December 2019 Percentage of receivables As at 31 December 2018 Percentage of receivables 0–6 months % 6–12 months % 12–24 months % > 24 months % 47.4 8.5 12.2 31.9 0–6 months % 6–12 months % 12–24 months % > 24 months % 64.9 5.0 8.3 21.8 Part of the Group’s business consists of acquiring debts or companies with debts, which are normally past due. Any further analysis of these debts is not meaningful. The Directors monitor these debts closely and make appropriate provision for impairment. 68 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 4. Management of insurance and financial risks continued b. Credit risk continued Financial assets past due but not impaired As at 31 December 2019 Deposits with ceding undertakings Reinsurers’ share of insurance liabilities Receivables arising out of reinsurance contracts Neither past due nor impaired £000 Past due 1–90 days £000 Past due more than 90 days £000 Assets that have been impaired £000 Carrying value in the balance sheet £000 19,150 431,785 120,666 – 235 – 208 354 39,627 91,125 19,504 471,412 212,234 Financial assets past due but not impaired As at 31 December 2018 Deposits with ceding undertakings Reinsurers’ share of insurance liabilities Receivables arising out of reinsurance contracts Neither past due nor impaired £000 Past due 1–90 days £000 Past due more than 90 days £000 Assets that have been impaired £000 Carrying value in the balance sheet £000 5,877 238,682 80,589 – 235 – 288 454 61,675 16,194 6,331 300,357 97,306 The Directors believe the amounts past due but not impaired are recoverable in full. Credit risk is managed by committees established by the Group, Coverys Managing Agency Limited (Coverys) and Capita PLC (Capita). The Group Board has a Group Reinsurance Asset Committee, chaired by a Non-Executive Director, which meets quarterly. Its function is to monitor and report on the Group’s Syndicate and non-Syndicate reinsurance assets and, where necessary, recommend courses of action to the Group to protect the asset. Coverys and Capita are the Lloyd’s Managing Agents which manage the Syndicates on which the Group participates. Coverys and Capita have established Syndicate Management Committees in relation to each managed syndicate and the Group has representation on each of these committees with the exception of the S1991 Committee on which the Group now only has a nominal participation. The committees are responsible for establishing minimum security levels for all reinsurance purchases by the managed Syndicates by reference to appropriate rating agencies for agreeing maximum concentration levels for individual reinsurers and intermediaries, and for dealing with any other issue relating to reinsurance assets. There are also a number of Key Risk Indicators pertaining to reinsurance security and concentration which have been developed under the auspices of the Group Risk Committee and the Coverys and Capita Risk and Capital Committees, which monitor adherence to predefined risk appetite and tolerance levels. c. Currency risk Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s principal transactions are carried out in sterling and its exposure to foreign exchange risk arises primarily with respect to US Dollar and Euros. This is the same as in the previous year. The Group’s main objective in managing currency risk is to mitigate exposure to fluctuations in foreign exchange rates. There have been no material changes in trading currencies during the year under review. The Group manages this risk by way of matching assets and liabilities by individual entity. Asset and liability matching is monitored by the Group’s financial planning and treasury functions’ established cash flow and liquidity management processes. The Group’s financial assets are primarily denominated in the same currencies as its insurance and investment contract liabilities. This mitigates the foreign currency exchange rate risk for the overseas operations. Thus, the main foreign exchange risk arises from assets and liabilities denominated in currencies other than those in which insurance and investment contract liabilities are expected to be settled. The currency risk is effectively managed by the Group through derivative financial instruments. Forward currency contracts are used to eliminate the currency exposure on individual foreign transactions. The Group will not enter into these forward contracts until a firm commitment is in place. . 69 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The table below summarises the Group’s principal assets and liabilities by major currencies: 31 December 2019 Intangible assets Reinsurers’ share of insurance liabilities Financial instruments Insurance receivables Cash and cash equivalents Insurance liabilities and insurance payables Deferred tax and pension scheme obligations Trade and other (payables)/receivables Total 31 December 2018 Intangible assets Reinsurers’ share of insurance liabilities Financial instruments Insurance receivables Cash and cash equivalents Insurance liabilities and insurance payables Deferred tax and pension scheme obligations Trade and other (payables)/receivables Total Sterling £000 US Dollar £000 1,426 44,501 234,180 215,358 17,298 545,972 178,512 99,092 143,159 151,796 Euro £000 155 21,874 17,676 942 1,853 (495,642) (720,133) (42,299) 768 (29,208) (17,450) (73,133) 6,426 290,070 Sterling £000 12,495 US Dollar £000 7,331 132,807 135,495 67,812 67,019 307,562 95,047 130,839 102,794 (120) (6,331) (6,250) Euro £000 148 32,055 28,256 2,636 3,280 (270,060) (415,514) (59,211) 1,680 (11,637) (358) (157,674) (29,845) (7,360) (15,082) 191,233 (554) Other £000 – – – – – – – – – Other £000 – – – – 10 – – 31 41 Total £000 46,082 471,412 580,946 322,613 252,741 (1,258,074) (16,802) (108,672) 290,246 Total £000 19,974 300,357 403,630 164,702 236,923 (744,785) (10,315) (194,848) 175,638 The analysis that follows is performed for reasonably possible movements in key variables with all other variables held constant, showing the impact on profit before tax and equity due to changes in the fair value of currency sensitive monetary assets and liabilities including insurance contract claim liabilities. The correlation of variables will have a significant effect in determining the ultimate impact on market risk, but to demonstrate the impact due to changes in variables, variables had to be changed on an individual basis. It should be noted that movements in these variables are non–linear. Euro weakening US Dollar weakening Euro strengthening US Dollar strengthening 31 December 2019 31 December 2018 Impact on profit £000 101 4,209 (122) (5,144) Impact on equity* £000 105 (28,965) (127) 35,402 Impact on profit £000 Impact on equity* £000 958 (1,645) (1,176) 1,342 50 (17,385) (62) 21,248 Changes in variables 10% 10% 10% 10% * 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. 70 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 4. Management of insurance and financial risks continued e. Insurance risk (i) Program management business The Group underwrites live business through a network of Managing General Agents (which is largely reinsured). This program underwriting business, is underwritten in the US by Accredited Surety and Casualty Inc. and in Europe by Accredited Insurance (Europe) Limited, both being AM Best A- credit rated risk carriers. The Group guideline is for program underwriting business reinsurers to meet a minimum of the AM Best A credit rating, in order to mitigate risk and provide a high quality reinsurance security. (ii) Syndicate participations The Group participates on Syndicates shown below: Syndicate 1991 1991 1991 1991 1110 1110* 3330 3330 Year of account Syndicate Capacity £000 Group participation £000 Open/closed 2020 2019 2018 2017 2019 2017 2018 2017 126,750 126,750 126,750 126,750 3,000 50 50 50 30,687 3,000 280,000 280,000 3,000 3,500 300 3,500 Open Open Open Closed Open Open Open Closed * Syndicate 1110 2017 year of account benefits from reinsurance arrangements in place with New York Marine and General Insurance Company, which protects the Group from any adverse net claims development. Syndicates 1110 and 3330 are classified by Lloyd’s as run-off Syndicates and their capacity shown above is reflective of this status with Syndicate 1110 now the Group’s platform for legacy transactions at Lloyd’s. The capacity of run-off Syndicates does not represent the level of risk these are able to take on, this is a nominal level set by Lloyd’s, they are able to receive portfolios of risk greater than this nominal capacity. (iii) Underwriting risk Underwriting risk is the primary source of risk in the Group’s live underwriting operations and is reflected in the scope and depth of the risk appetite and monitoring frameworks implemented in those entities. Individual operating entities are responsible for establishing a framework for the acceptance and monitoring of underwriting risk including appropriate consideration of potential individual and aggregate occurrence exposures, adequacy of reinsurance coverage and potential geographical and demographic concentrations of risk exposure. In the event that potential risk concentrations are identified across operating entities, appropriate monitoring is developed to manage the overall Group exposure.. (iv) Reserving risk Reserving risk represents a significant risk to the Group in terms of both driving required capital levels and the threat to volatility of earnings. Reserving risk is managed through the application of an appropriate reserving approach to both live and run-off portfolios and the performance of extensive due diligence on new run-off portfolios and acquisitions prior to acceptance. Reserving exercises undertaken by the in-house actuarial team are supplemented with both scheduled and ad hoc reviews conducted by external actuaries. Reserving risk is also mitigated through the use of reinsurance on live underwriting portfolios and through assuming the inuring reinsurance treaties in place in respect of acquired run-off acquisitions/portfolios. Claims development information is disclosed below in order to illustrate the effect of the uncertainty in the estimation of future claims settlements by the Group. The tables compare the ultimate claims estimates with the payments made to date. Details are presented on an aggregate basis and show the movements on a gross and net basis, and separately identify the effect of the various acquisitions made by the Group since 1 January 2016. 71 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The analysis of claims development in the Group’s run-off insurance entities is as follows: Gross Gross claims at: 1 January/acquisition First year movement Second year movement Third year movement Fourth year movement Gross provision at 31 December 2019 Gross claims at: 1 January/acquisition Exchange adjustments Payments Gross provision at 31 December 2019 (Deficit)/surplus to date Net Net claims at : 1 January/acquisition First year movement Second year movement Third year movement Fourth year movement Net provision at 31 December 2018 Net claims at : 1 January/acquisition Exchange adjustments Payments Net position at 31 December 2018 Surplus/(deficit) to date Group entities at 1 January 2016 £000 Entities acquired by the Group during 2016 £000 Entities acquired by the Group during 2017 £000 Entities acquired by the Group during 2018 £000 Entities acquired by the Group during 2019 £000 452,199 51,718 (78,669) (36,051) (49,561) 339,636 452,199 52,537 (272,586) (339,636) (107,486) 107,121 (2,793) (26,891) (18,423) (15,804) 270,945 (43,749) (63,559) (27,341) 16,842 (1,091) (7,293) 293,422 (30,262) 43,210 136,296 8,458 263,160 107,121 2,287 (50,582) (43,210) 15,616 270,945 (2,506) (132,607) (136,296) (465) 16,842 (5,939) (2,358) (8,458) 88 293,422 (11,895) (13,613) (263,160) 4,754 Group entities at 1 January 2016 £000 Entities acquired by the Group during 2016 £000 Entities acquired by the Group during 2017 £000 Entities acquired by the Group during 2018 £000 Entities acquired by the Group during 2019 £000 273,672 90,270 (44,595) (14,186) (31,502) 273,659 273,672 45,399 (10,384) (273,659) 35,028 42,540 (1,171) (14,444) (1,591) (5,003) 20,331 42,540 (202) (28,222) (20,331) (6,215) 198,513 (45,734) (69,592) (27,516) 16,120 (874) (6,980) 288,141 (25,098) 55,671 8,266 263,043 198,513 (14,420) (97,407) (55,671) 31,015 16,120 (5,830) (2,298) (8,266) (274) 288,141 (11,472) (12,977) (263,043) 649 The above figures include the Group’s participation on Lloyd’s Syndicates treated as being in run-off. Foreign exchange movements shown above are offset by comparable foreign exchange movements in cash and investments held to meet insurance liabilities. Additional information regarding movements in claims reserves are disclosed in note 23. 72 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 5. Segmental information The Group’s segments represent the level at which financial information is reported to the Board, being the chief operating decision maker as defined in IFRS 8. For these financials we have realigned the reporting segments to reflect the Group’s core operating businesses. The reportable segments have been identified as follows:- • Program – the Group delegates underwriting authority to MGAs to provide program capacity through its licensed platforms in the US and Europe • Legacy – acquires legacy portfolios and insurance debt and provides capital support to the Group’s managed Lloyd’s Syndicates • Other – primarily includes the holding company and other non- core subsidiaries which fall outside of the segments above. Segmental results for continuing operations for the year ended 31 December 2019 Earned premium, net of reinsurance Gross investment income External income Internal income Total income Claims paid, net of reinsurance Net change in provision for claims Net insurance claims (increased)/released Operating expenses Result of operating activities before goodwill on bargain purchase Goodwill on bargain purchase Amortisation and impairment of intangible assets Result of operating activities Finance costs Profit/(loss) on ordinary activities before income taxes Income tax (charge)/credit Profit/(loss) for the period Non-controlling interests Attributable to shareholders of parent Segment assets Segment liabilities Program £000 6,099 4,603 1 – Legacy £000 168,427 22,699 58 – 10,703 191,184 (2,831) (3,444) (6,275) (6,325) (1,897) – – (1,897) (309) (2,206) (353) (2,559) – (2,559) (69,390) (65,533) (134,923) (58,548) (2,287) 71,332 (2,579) 66,466 (8,906) 57,560 (10,734) 46,826 515 47,541 412,130 1,586,860 Other £000 – 7,918 6,721 27,046 41,685 (183) (1,775) (1,958) (40,824) (1,097) – (583) (1,680) (13,549) (15,229) 9,807 (5,422) (37) (5,459) 93,420 318,011 1,092,670 391,040 Consolidation adjustments £000 Total £000 – 174,526 (13,227) – (27,046) (40,273) – – – 27,046 (13,227) – – (13,227) 13,227 – – – – – 21,993 6,780 – 203,299 (72,404) (70,752) (143,156) (78,651) (18,508) 71,332 (3,162) 49,662 (9,537) 40,125 (1,280) 38,845 478 39,323 (311,537) (311,537) 1,780,873 1,490,184 73 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Segmental results for continuing operations for the year ended 31 December 2018 Program £000 1,424 1,267 – – 2,691 (644) (1,280) (1,924) (2,455) (1,688) – – (1,688) (306) (1,994) Gross Earned premium, net of reinsurance Gross investment income External income Internal income Total income Claims paid, net of reinsurance Net change in provision for claims Net insurance claims (increased)/released Operating expenses Result of operating activities before goodwill on bargain purchase Goodwill on bargain purchase Amortisation and impairment of intangible assets Result of operating activities Finance costs Profit/(loss) on ordinary activities before income taxes Income tax (charge)/credit Profit/(loss) for the period Non-controlling interests Attributable to shareholders of parent Segment assets Segment liabilities Legacy £000 56,253 3,351 1,830 2,062 63,496 (54,478) 67,100 12,622 Other £000 5,772 16,205 10,130 15,160 47,267 – – – Consolidation adjustments £000 – (15,393) – (17,222) (32,615) – – – (50,053) (42,008) 17,222 26,065 5,640 (1,597) 30,108 (6,132) 23,976 201 (10,266) (1,793) – (1,793) 13,710 (300) 13,410 287,218 1,049,220 5,259 (15,393) 357 (47) – – 5,569 (15,393) (13,300) (7,731) 6,119 (1,612) (181) (1,793) 218,293 15,393 – – – – – 224,229 711,292 443,223 (357,158) (357,158) 1,197,573 1,021,586 Total £000 63,449 5,430 11,960 – 80,839 (55,122) 65,820 10,698 (77,294) 14,243 5,997 (1,644) 18,596 (4,345) 14,251 (3,946) 10,305 (481) 9,824 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. 74 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 5. Segmental information continued Geographical analysis As at 31 December 2019 Gross assets Intercompany eliminations Segment assets Gross liabilities Intercompany eliminations Segment liabilities Revenue from external customers As at 31 December 2018 Gross assets Intercompany eliminations Segment assets Gross liabilities Intercompany eliminations Segment liabilities Revenue from external customers UK £000 North America £000 Europe £000 Total £000 460,617 1,153,071 478,722 2,092,410 (128,640) (132,124) (50,773) (311,537) 331,977 293,176 1,020,947 1,097,367 (55,826) (250,150) 237,350 84,860 847,217 101,989 427,949 1,780,873 411,178 (5,561) 1,801,721 (311,537) 405,617 1,490,184 16,450 203,299 UK £000 463,918 (131,425) 332,493 332,349 (105,813) 226,536 43,192 North America £000 813,038 (169,314) 643,724 834,004 (246,587) 587,417 28,871 Europe £000 277,775 (56,419) 221,356 212,391 (4,758) 207,633 8,776 Total £000 1,554,731 (357,158) 1,197,573 1,378,744 (357,158) 1,021,586 80,839 6. Discontinued operations and disposal groups The sale of Insurance Services and Captive Management Companies On 13 January 2018 the Group completed the sale of its Insurance Services and Captive Management Companies (ISD) to Davies Group, a leading operations management, consultancy and digital solutions provider. The transaction involved the sale of the entire share capital of JMD Specialist Insurance Services Group Limited and its subsidiaries, R&Quiem Limited, John Heath & Company Limited and AM Associates Insurance Services Limited as well as Randall & Quilter Bermuda Holdings Limited and its Quest subsidiaries. The sale is presented within the Consolidated Financial Statements as a discontinued operation as it represented the sale of a major line of business within the Group. Profit for the year from discontinued operations Other income Operating expenses Profit before tax Income tax charge Operating loss Disposal proceeds Net assets of disposal group Loss on discontinued activities Income tax charge on discontinued activities Loss on discontinued activities Loss for the period 2019 £000 – – – – – – – – – – – 2018 £000 (183) (2,310) (2,493) 225 (2,268) 17,216 (17,431) (215) – – (2,483) 75 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Cash flows for the year from discontinued operations Net cash inflows/(outflows) from operating activities Investing activities Net cash inflows The major classes of assets and liabilities forming the ISD disposal group were as follows: Assets Intangible assets Property, plant and equipment Other financial investments Insurance and other receivables Cash and cash equivalents Liabilities Insurance and other payables Current tax liabilities Total net assets of the disposal group No impairment losses were recognised on the reclassification of these operations as held for sale, or at the point of sale. 7. Gross investment income Continuing operations Investment income Realised net gains on financial assets Unrealised gains/(losses) on financial assets 8. Other income Continuing operations Income from contracts with customers Management fees Income from other sources Insurance commissions Interest expense on pension scheme deficit Rental income from investment properties Purchased reinsurance receivables 2019 £000 – – – 2018 £000 (404) 16,511 16,107 ISD On disposal 13 January 2018 £000 14,408 151 62 2,940 705 18,266 835 – 835 17,431 2018 £000 11,184 800 (6,554) 5,430 2018 £000 2019 £000 15,391 4,581 2,021 21,993 2019 £000 4,082 8,444 2,923 (173) 41 (93) 6,780 3,547 (270) 163 76 11,960 Income from contracts with customers is derived from the supply of insurance and administration related management services to third parties. The Group derives this income from the transfer of services over time. Rental income includes revenue from property previously used for the Group’s own use but subsequently reclassified in January 2018 as an investment property following the sale of the ISD business. 76 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 9. Operating expenses Continuing operations Expenses of insurance company subsidiaries Expenses of syndicate participations Employee benefits Other operating expenses 2019 £000 15,654 9,344 41,867 11,786 78,651 The expenses of insurance company subsidiaries represent external expenses borne by subsidiaries of the Group; intragroup charges are removed on consolidation. Auditor remuneration Fees payable to the Group’s auditors for the audit of the parent company and its Consolidated Financial Statements Fees payable for the audit of the Group’s subsidiaries by: – Group auditors – Other auditors Other services under legislative requirements Total The above include the Group’s share of the audit fee payable for Syndicates 1110 and 3330 audits. 10. Finance costs Continuing operations Bank loan and overdraft interest Interest on lease liabilities Subordinated debt interest 11. Profit from continuing operations before income taxes Profit from continuing operations before income taxes is stated after charging: Employee benefits (Note 26) Legacy acquisition costs (including aborted transactions) Depreciation and impairment of fixed assets and right-of-use assets (Note 16 & 17) Short-term and low value lease rental expenditure Amortisation of pre contract costs Amortisation and impairment of intangibles (Note 15) 2018 £000 11,957 20,190 28,568 16,579 77,294 2018 £000 138 534 322 133 1,127 2018 £000 1,346 – 2,999 4,345 2019 £000 153 504 647 131 1,435 2019 £000 4,455 147 4,935 9,537 2019 £000 2018 £000 40,856 28,568 3,169 2,242 57 425 3,162 760 335 1,296 171 1,644 77 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 12. Income tax charge Continuing operations a. Analysis of charge in the year Current tax Current year Adjustments in respect of prior periods Foreign tax Deferred tax Current year Adjustments in respect of prior periods Foreign tax Income tax charge for the year 2019 £000 – 3,870 (6,176) (2,306) 4,389 1,672 (2,475) 1,280 b. Factors affecting tax charge for the year The tax assessed differs from the standard rate of corporation tax in the United Kingdom of 19%. The differences are explained below: Profit on continuing operations before income taxes Profit on ordinary activities at the standard rate of corporation tax in the UK of 19.00% (2018: 19.00%) 2019 £000 40,125 7,624 2018 £000 – 40 (806) (766) 4,777 (65) – 3,946 2018 £000 14,251 2,708 Income not taxable for tax purposes Expenses not deductible for tax purposes Deferred tax not recognised on capital allowances Differences in taxation treatment Unrelieved tax losses carried forward Utilisation of brought forward losses Deferred tax not recognised on foreign tax pool Foreign tax Tax rate differential Adjustments in respect of previous years Income tax charge for the year (14,950) (2,070) 1,740 43 4,478 6,631 (72) 303 (8,651) (1,408) 5,542 1,280 1,396 50 (1,717) 3,129 (181) – (806) 1,462 (25) 3,946 The 2018 comparatives have been re-presented according to the above categorisations for reference. c. Factors that may affect future tax charges In addition to the recognised deferred tax asset, the Group has other trading losses of approximately £118,263k (2018: £109,552k) in various Group companies available to be carried forward against future trading profits of those companies. The recovery of these losses is uncertain and no deferred tax asset has been provided in respect of these losses. Should it become possible to offset these losses against taxable profits in future years, the Group tax charge in those years will be reduced accordingly. The Group has available capital losses of £27,514k (2018: £27,976k). In the Finance Bill 2015, it was announced that the main rate of UK corporation tax would reduce to 19% from 1 April 2017 and to 18% from April 2020. The Bill was substantively enacted on 26 October 2015. In March 2016, it was announced that there would be a further reduction to 17% from 1 April 2020. The Finance Bill 2016 was substantively enacted on 6 September 2016. The Group’s 2019 results are taxed at 19%. In March 2020 the UK Corporation tax rate was increased from 17% to 19% from 1 April 2020. 78 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 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: Profit for the year attributable to ordinary shareholders from: Continued operations Discontinued operations Shares in issue throughout the year Weighted average number of ordinary shares issued in year Weighted average number of ordinary shares Basic earnings per ordinary share for: Continued operations Discontinued operations 2019 £000 39,323 – No. 000’s 125,984 57,469 183,453 21.4p – 2018 £000 9,824 (2,483) No. 000’s 125,876 32 125,908 7.8p (2.0p) b. Diluted earnings per share Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares for conversion of all potentially dilutive ordinary shares. The Group’s earnings per share is diluted by the effects of outstanding share options. Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below: Profit/(loss) for the year attributable to ordinary shareholders Continued operations Discontinued operations Weighted average number of ordinary shares issued in year Dilution effect of options Diluted earnings per ordinary share: Continued operations Discontinued operations c. Net asset value per share Net assets attributable to equity shareholders as at 31 December Ordinary shares in issue as at 31 December Less: shares held in treasury Net asset value per ordinary share 2019 £000 39,323 – No. 000’s 2018 £000 9,824 (2,483) No. 000’s 183,453 125,908 – – 183,453 125,908 21.4p – 2019 £000 290,246 No. 000’s 195,918 – 195,918 148.1p 7.8p (2.0p) 2018 £000 175,638 No. 000’s 125,984 – 125,984 139.4p 79 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 14. Distributions The amounts recognised as distributions to equity holders in the year are: Distribution on cancellation of AB (2018: Z) shares Distribution on cancellation of AC (2018: AA) shares Total distributions to shareholders 15. Intangible assets 2019 £000 10,971 7,444 18,415 2018 £000 6,798 4,536 11,334 US state licences & customer contracts £000 Arising on acquisition £000 Goodwill £000 Other £000 Total £000 Cost As at 1 January 2018 Exchange adjustments Acquisition of subsidiaries Additions Disposals As at 31 December 2018 Exchange adjustments Acquisition of subsidiaries Additions Disposals As at 31 December 2019 Amortisation/impairment As at 1 January 2018 Exchange adjustments Charge for the year As at 31 December 2018 Exchange adjustments Charge for the year Disposals As at 31 December 2019 Carrying amount As at 31 December 2019 As at 31 December 2018 6,321 356 – – – 6,677 (291) 2,654 – (2,703) 6,337 516 39 172 727 (6) 30 (751) – 14,741 428 1,049 – – 16,218 (897) 28,683 – – 18,869 951 – – (913) 18,907 (578) – 819 – 44,004 19,148 2,138 108 1,409 3,655 (153) 2,579 – 6,081 16,728 909 – 17,637 (530) 474 – 17,581 1,567 1,270 6,337 5,950 37,923 12,563 448 40,379 3 – 92 (1) 542 (1) – 143 (23) 661 285 3 63 351 (1) 79 (23) 406 255 191 1,738 1,049 92 (914) 42,344 (1,767) 31,337 962 (2,726) 70,150 19,667 1,059 1,644 22,370 (690) 3,162 (774) 24,068 46,082 19,974 Goodwill acquired through business combinations has been allocated to the Legacy cash generating unit, which is also an operating and reportable segment, for impairment testing. The recoverable amount of this cash generating unit is determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management. 80 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 15. Intangible assets continued Key assumptions used in value in use calculations The calculation of value in use for the units is most sensitive to the following assumptions: • Discount rates, which represent the current market assessment of the risks specific to each cash generating unit, regarding the time value of money and individual risks of the underlying assets which have not been incorporated in the cash flow estimates. The pre-tax discount rate applied to the cash flow projections is 10.0% (2018: 10.0%). The discount rate calculation is based on the specific circumstances of the Group and its operating segments and derived from its weighted average cost of capital (WACC) with uplift for expected increases in interest rates. The WACC takes into account both debt and equity. The cost of equity is derived from the expected investment return. • Growth rate used to extrapolate cash flows beyond the budget period is based on published industry standards. Cash flows beyond the four-year period are extrapolated using a 10% growth rate (2018: 10.0%). The Directors believe that no foreseeable change in any of the above key assumptions would require an impairment of the carrying amount of goodwill. 16. Property, plant and equipment Cost As at 1 January 2018 Exchange adjustments Additions Disposals Acquisition of subsidiaries Reclassification of property to investment property As at 31 December 2018 Exchange adjustments Additions Disposals As at 31 December 2019 Depreciation As at 1 January 2018 Exchange adjustments Charge for the year Disposals Acquisition of subsidiaries Reclassification of property to investment property As at 31 December 2018 Exchange adjustments Charge for the year Disposals As at 31 December 2019 Carrying amount As at 31 December 2019 As at 31 December 2018 Computer equipment £000 Motor vehicles £000 Office equipment £000 Leasehold improvements £000 Freehold Property £000 1,495 85 136 (302) 152 – 1,566 (42) 218 (563) 1,179 1,318 80 170 (283) 101 – 1,386 (39) 274 (560) 1,061 118 180 39 2 – – – – 41 (1) 18 (40) 18 39 2 – – – – 41 – 2 (40) 3 15 – 1,386 26 43 (141) – – 1,314 (12) 261 (491) 1,072 1,116 24 101 (141) – – 1,100 (11) 104 (406) 787 285 214 698 70 10 – – – 778 (48) 461 (10) 1,181 463 68 64 – – – 595 (42) 86 (9) 630 551 183 2,621 – – – – (2,621) – – – – – 268 – – – – (268) – – – – – – – £000 6,239 183 189 (443) 152 (2,621) 3,699 (103) 958 (1,104) 3,450 3,204 174 335 (424) 101 (268) 3,122 (92) 466 (1,015) 2,481 969 577 As at 31 December 2019, the Group had no significant capital commitments (2018: none). The depreciation charge for the year is included in operating expenses. In January 2018 property previously used for the Group’s own use was reclassified as an investment property following the sale of ISD business and the subsequent change in use. 81 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 17. Right-of-use assets Position recognised at 1 January 2019 under IFRS 16 Deprecation charge for the year Exchange adjustment As at 31 December 2019 Property £000 5,048 (1,771) (94) 3,183 Office equipment £000 13 (5) – 8 Total £000 5,061 (1,776) (93) 3,191 The cost of leases with a rental period of less than 12 months or with a contract value of less than £4,000 was £57k for the year and is reflected within expenses in the Consolidated Income Statement. 18. Investment properties and financial assets a. Investment properties As at 1 January Reclassification of property to investment property Exchange adjustment Decrease in fair value during the year Disposal As at 31 December 2019 £000 1,881 – – (40) (361) 1,480 2018 £000 426 2,353 5 (903) – 1,881 The investment properties are measured at fair value derived from the valuation work performed at the balance sheet date by independent property valuers. In January 2018 a property previously used for the Group’s own use was reclassified as an investment property following the sale of ISD business and the subsequent change in use. Rental income from the investment properties for the year was £163k (2018: £163k) and is included in Other Income within the Consolidated Income Statement. b. Financial investment assets at fair value through profit or loss (designated at initial recognition) Equities Debt and fixed interest securities Cash-based investment funds 2019 £000 10,991 533,326 15,646 559,963 2018 £000 24,369 265,652 105,397 395,418 Included in the above amounts are £18,660k (2018: £23,046k) pledged as part of the Funds at Lloyd’s in support of the Group’s underwriting activities in 2019. Lloyd’s has the right to apply these monies in the event the corporate member fails to meet its obligations. These monies are not available to meet the Group’s own working capital requirements and can only be released with Lloyd’s permission. Also included in the above amounts are £90,100k (2018: £84,015k) of funds withheld as collateral for certain of the Group’s reinsurance contracts. 82 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 18. Investment properties and financial assets continued c. Shares in subsidiary and associate undertakings The Company had interests in the following subsidiaries at 31 December 2019: Name of subsidiaries/associate Distinguished Re Ltd. Berda Developments Limited R&Q Bermuda (SAC) Limited R&Q Quest (SAC) Limited R&Q Quest Insurance Limited R&Q Re (Bermuda) Limited RQLM Limited Sandell Holdings Ltd. Sandell Re Ltd. R&Q Risk Services Canada Limited Randall & Quilter Canada Holdings Limited R&Q Quest Management Services (Cayman) Limited Callidus Solutions Ltd. R&Q Alpha Insurance Company SE R&Q Beta Insurance Company SE R&Q Capital No. 1 Limited R&Q Capital No. 6 Limited R&Q Capital No. 7 Limited R&Q Central Services Limited R&Q Commercial Risk Services Limited R&Q Delta Company Limited R&Q Epsilon Insurance Company SE < R&Q Eta Company Limited R&Q Gamma Company Limited R&Q Insurance Services Limited R&Q MGA Limited R&Q Munro MA Limited R&Q Munro Services Company Limited R&Q Oast Limited R&Q Reinsurance Company (UK) Limited R&Quiem Financial Services Limited Randall & Quilter Captive Holdings Limited Randall & Quilter II Holdings Limited Randall & Quilter IS Holdings Limited Randall & Quilter Underwriting Management Holdings Limited RQIH Limited Trilogy Managing General Agents Limited* La Licorne Compagnie de Reassurances SA R&Q Insurance Management (Gibraltar) Limited + Capstan Insurance Company Limited R&Q Ireland Claims Services Limited # R&Q Ireland Company Limited by Guarantee # Hickson Insurance Limited Pender Mutual Insurance Company Limited R&Q Insurance Management (IOM) Limited Accredited Insurance (Europe) Limited FNF Title Company Limited ^ R&Q Insurance (Europe) Limited R&Q Malta Holdings Limited Accredited Bond Agencies Inc. Accredited Group Agency Inc. Accredited Holding Corporation Accredited Surety and Casualty Company, Inc. Excess and Treaty Management Corporation GLOBAL Reinsurance Company % of ordinary shares held via: Country of incorporation/ registration The Company Subsidiary and associate undertakings Overall effective % of share capital held Barbados Bermuda Bermuda Bermuda Bermuda Bermuda Bermuda Bermuda Bermuda Canada Canada Cayman Island England and Wales Malta Malta England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales France Gibraltar Guernsey Ireland Ireland Isle of Man Isle of Man Isle of Man Malta Malta Malta Malta USA USA USA USA USA USA – – – – – – 100 – – – – – – 100 100 – – – – – 100 – – 100 – – – – – – – – – – – 100 – – – – – – – – – – 100 – – – – – – – – 100 100 100 100 100 100 – 100 100 100 100 100 51 – – 100 100 100 100 100 – 100 100 – 100 100 100 100 100 100 100 100 100 100 100 – 80 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 83 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Principal activity and name of subsidiaries/associate Grafton US Holdings Inc.~ ICDC Ltd. LBL Acquisitions, LLC > National Legacy Insurance Company R&Q Healthcare Interests LLC R&Q Quest PCC, LLC R&Q Reinsurance Company R&Q RI Insurance Company R&Q Services Holding Inc. R&Q Solutions LLC Randall & Quilter America Holdings Inc. Randall & Quilter Healthcare Holdings Inc. Randall & Quilter PS Holdings Inc. Requiem America Inc. Risk Transfer Underwriting Inc. RSI Solutions International Inc. Syndicated Services Company Inc. Transport Insurance Company % of ordinary shares held via: Country of incorporation/ registration The Company Subsidiary and associate undertakings Overall effective % of share capital held USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA USA – – – – – – – – – – – – – – – – – – 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 100 60 100 100 100 100 100 100 100 100 100 100 100 80 100 100 100 # has a November year end due to Irish Law Society connection. * Trilogy Managing General Agents Limited was sold to Resolution Underwriting Holdings Limited on 20 February 2020 + In liquidation ^ In liquidation ~ Randall & Quilter America Holdings Inc increased its shareholding in Grafton US Holdings Inc. to 80% by acquiring 20% issued share capital held by Paul Dassenko > Dissolved 19 March 2020 < Redomiciled to Malta 16 March 2020 19. Insurance and other receivables Receivables arising from direct insurance operations Receivables arising from reinsurance operations Insurance receivables Trade receivables/ Receivables arising from contracts with customers Other receivables Purchased reinsurance receivables Prepayments and accrued income Total 2019 £000 110,379 212,234 322,613 4,097 49,933 5,969 36,923 96,922 419,535 2018 £000 67,396 97,306 164,702 5,416 32,085 3,393 27,120 68,014 232,716 Included in purchased reinsurance receivables is £1,513k (2018: £2,922k) which is expected to be received within 12 months. The remainder of the balance is expected to be received after 12 months. Included in receivables arising from contracts with customers are amounts due from customers in relation to the supply of management services which are now unconditionally due. There are no amounts due from contracts with customers which are subject to further performance or conditions before settlement. Since 2015 the Group has entered into retroactive reinsurance contracts as an integral component of its strategy to actively seek commutations of the original ceded Reinsurance Program in respect of R&Q Re US. To date, the Group has received cash proceeds in excess of $190,000k from the R&Q Re commutations strategy. The Group retains oversight and custody of the premiums and investment thereof. Included in receivables arising from reinsurance operations is £78,100k (2018: £64,000k) in respect of amounts due under certain structured reinsurance contracts which are expected to be received after 12 months. The increase arises due to the effect of the commutations strategy, realised investment gains and 2019 USA interest rate rises which have enhanced the amounts recoverable under the policies. The movement of £14,100k (2018: £36,500k) has been included in the £111,033k shown as proceeds from commutations and reinsurers’ share of claims paid in the Consolidated Income Statement. 84 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 19. Insurance and other receivables continued The Group retains the right to recover any surplus assets (experience accounts) remaining when the reinsurance reaches its natural expiry or is terminated by the Group. The estimated value of the experience accounts is reported within receivables arising from reinsurance operations. The valuation of the experience account is sensitive to movements in investment returns; any subsequent movement will be charged or credited to the Consolidated Income Statement in the year in which it arises. An increase or reduction in returns of 0.25% would result in a movement of 0.8% in total Group assets. The carrying amounts disclosed above reasonably approximate their fair values at the period end date. 20. Cash and cash equivalents Cash at bank and in hand 2019 £000 2018 £000 252,741 236,923 Included in cash and cash equivalents is £574k (2018: £581k) being funds held in escrow accounts in respect of guarantees provided to the Institute of London Underwriters. The decrease is due to exchange movements. In the normal course of business, insurance company subsidiaries will have deposited funds in respect of certain contracts which can only be released with the approval of the appropriate regulatory authority. The carrying amounts disclosed above reasonably approximate their fair values at the period end date. 21. Insurance and other payables Structured liabilities Structured settlements Payables arising from reinsurance operations Payables arising from direct insurance operations Insurance payables Trade payables Other taxation and social security Other payables Accruals and deferred income Total 2019 £000 400,910 (400,910) – 118,528 66,271 184,799 2,259 1,633 38,138 27,080 69,110 253,909 2018 £000 425,657 (425,657) – 41,048 3,522 44,570 1,839 4,674 105,543 11,862 123,918 168,488 The carrying amounts disclosed above reasonably approximate their fair values at the period end date. Structured Settlements No new structured settlement arrangements have been entered into during the year. The movement in these structured liabilities during the period is primarily due to exchange movements. Some group subsidiaries have paid for annuities from third party life insurance companies for the benefit of certain claimants. The subsidiary company retains the credit risk in the unlikely event that the life insurance company defaults on its obligations to pay the annuity amounts. In the event that any of these life insurance companies were unable to meet their obligations to these annuitants, any remaining liability may fall upon the respective insurance company subsidiaries. The Directors believe that, having regard to the quality of the security of the life insurance companies together with the reinsurance available to the relevant Group insurance companies, the possibility of a material liability arising in this way is very unlikely. The life companies will settle the liability directly with the claimants and no cash will flow through the Group. These annuities have been shown as reducing the insurance companies’ liabilities to reflect the substance of the transactions and to ensure that the disclosure of the balances does not detract from the users’ ability to understand the Group’s future cash flows. 85 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 2019 £000 142,693 3,210 145,903 2019 £000 37,651 15,500 89,542 142,693 2018 £000 140,243 – 140,243 2018 £000 34,966 14,500 90,777 140,243 22. Financial liabilities Amounts owed to credit institutions Lease liabilities Amounts due to credit institutions are payable as follows: Less than one year Between one to five years Over five years As outlined in Note 31, £55,141k (2018: £46,300k) owed to credit institutions is secured by debentures over the assets of the Company and several of its subsidiaries. The Group has issued the following debt: Issuer Randall & Quilter Investment Holdings Ltd. Accredited Insurance (Europe) Limited Accredited Insurance (Europe) Limited R&Q Re (Bermuda) Limited Principal $70,000k €20,000k €5,000k $20,000k Rate Maturity 6.35% above USD LIBOR 6.7% above EURIBOR 6.7% above EURIBOR 7.75% above USD LIBOR 2028 2025 2027 2023 The Group’s subsidiary, Accredited Holding Corporation provides a full and unconditional guarantee for the payment of principal, interest and any other amounts due in respect of the Notes issued by Randall & Quilter Investments Holding Ltd. Lease liabilities maturity analysis – contractual undiscounted cash flows Less than one year Between one to five years Over five years Total undiscounted lease liabilities at 31 December 2019 £000 1,069 2,058 356 3,483 Reconciliation of liabilities arising from financing activities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from the financing activities are those for which cash flows were, or future cash flows will be, classified in the Group Consolidated Cash Flows Statement as cash flows from financing activities. Balance at 1 January Financing cash flows * Non-cash exchange adjustment Balance at 31 December * Represents the net cash flows from the repayment of borrowings and the proceeds from new borrowing arrangements. 2019 £000 140,243 6,785 (4,335) 142,693 2018 £000 55,889 83,170 1,184 140,243 86 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 23. Insurance contract provisions and reinsurance balances Gross Insurance contract provisions at 1 January 107,304 591,774 699,078 23,717 698,818 722,535 Claims paid (52,996) (130,442) (183,438) (17,635) (143,725) (161,360) 2019 2018 Program £000 Run-off £000 Total £000 Program £000 Run-off £000 Total £000 Increases/(decreases) in provisions arising from the (disposal)/acquisition of subsidiary undertakings and Syndicate participations Increases in provisions arising from acquisition of reinsurance portfolios Increase in claims provisions Increase/(decrease) in unearned premium reserve – – 174,551 174,551 132,234 132,234 144,051 33,131 107,608 (13,293) 177,182 94,315 – – 51,740 (26,282) (26,282) 11,936 28,105 11,936 79,845 42,044 46,443 (4,399) Net exchange differences As at 31 December Reinsurance (6,694) (15,020) (21,714) 3,039 27,321 30,360 299,271 772,935 1,072,208 107,304 591,774 699,078 Reinsurers’ share of insurance contract provisions at 1 January 101,946 198,411 300,357 23,178 230,304 253,482 Proceeds from commutations and reinsurers’ share of gross claims paid (50,165) (60,868) (111,033) (16,992) (89,246) (106,238) Increases/(decreases) in provisions arising from the (disposal)/acquisition of subsidiary undertakings and Syndicate participations Increases in provisions arising from acquisition of reinsurance portfolios Increase in claims provisions Increase/(decrease) in unearned premium reserve Net exchange differences As at 31 December Net – – 18,644 18,644 – – – – (1,440) (1,440) 722 722 137,775 28,485 166,260 104,255 (4,889) (568) (1,614) 103,687 (6,503) 49,816 45,242 51,941 101,757 (4,659) 40,583 702 10,789 11,491 288,922 182,490 471,412 101,946 198,411 300,357 Net insurance contract provisions at 1 January 5,358 393,363 398,721 539 468,514 469,053 Net claims paid (2,831) (69,574) (72,405) (643) (54,479) (55,122) Increases/(decreases) in provisions arising from the (disposal)/acquisition of subsidiary undertakings and Syndicate participations Increases in provisions arising from acquisition of reinsurance portfolios Increase/(decrease) in claims provisions Increase/(decrease) in unearned premium reserve Net exchange differences As at 31 December 155,907 155,907 132,234 132,234 4,646 10,922 – – 6,276 3,353 (12,725) (1,805) (13,406) (9,372) (15,211) – – 1,924 1,201 2,337 (24,842) (24,842) 11,214 11,214 (23,836) (21,912) 260 1,461 16,532 18,869 10,351 590,445 600,796 5,358 393,363 398,721 87 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Gross Claims reserves 2019 2018 Program £000 Run-off £000 Total £000 Program £000 Run-off £000 Total £000 128,286 745,425 873,711 41,575 576,929 618,504 Unearned premiums reserves 170,987 27,510 198,497 65,729 14,845 80,574 As at 31 December Reinsurance Claims reserves Unearned premiums reserves As at 31 December Net Claims reserves Unearned premiums reserves As at 31 December 299,273 772,935 1,072,208 107,304 591,774 699,078 123,404 182,256 305,660 165,518 234 165,752 39,709 62,237 197,758 237,467 653 62,890 288,922 182,490 471,412 101,946 198,411 300,357 4,882 5,469 563,169 568,051 27,276 32,745 1,866 3,492 379,171 381,037 14,192 17,684 10,351 590,445 600,796 5,358 393,363 398,721 The carrying amounts disclosed above reasonably approximate their fair values at the period end date. Assumptions, changes in assumptions and sensitivity The assumptions used in the estimation of provisions relating to insurance contracts are intended to result in provisions which are sufficient to settle the net liabilities from insurance contracts. The amounts presented above include estimates of future reinsurance recoveries expected to arise on the settlement of the gross insurance liabilities, including £90,100k (2018: £84,015k) in respect of the structured reinsurance contract collateralised by the funds withheld disclosed in Note 18 (b). Provision is made at the period end date for the estimated ultimate cost of settling all claims incurred in respect of events and developments up to that date, whether reported or not. As detailed in Note 3, significant uncertainty exists as to the likely outcome of any individual claim and the ultimate costs of completing the run-off of the Group’s insurance operations. The provisions carried by the Group for its insurance liabilities are calculated using a variety of actuarial techniques. The provisions are calculated and reviewed by the Group’s internal actuarial team; in addition the Group periodically commissions independent reviews by external actuaries. The use of external actuaries provides management with additional comfort that the Group’s internally produced statistics and trends are consistent with observable market information and other published data. Provisions for outstanding claims and IBNR are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries. Insurance companies and Syndicates within the Group are covered by a variety of treaty, excess of loss and stop loss reinsurance programs. As detailed in Note 2 (h), when preparing these Consolidated Financial Statements, provision is made for all costs of running off the business of the insurance company subsidiaries to the extent that these costs exceed the estimated future investment return expected to be earned by those subsidiaries. Provision is also made for all costs of running off the underwriting years for those Syndicates treated as being in run-off on which the Group participates. The quantum of the costs of running off the business and the future investment income has been determined through the preparation of cash flow forecasts over the anticipated period of the run-off, using internally prepared budgets and forecasts of expenditure, investment income and actuarially assessed settlement patterns for the gross provisions. The gross costs of running off the business are estimated to be fully covered by the estimated future investment income. The provisions disclosed in the Consolidated Financial Statements are sensitive to a variety of factors including: • Settlement and commutation activity of third party lead reinsurers • Development in the status of settlement and commutation negotiations being entered into by the Group • The financial strength of the Group’s reinsurers and the risk that these entities could, in time, become insolvent or could otherwise default on payments • Future cost inflation of legal and other advisors who assist the Group with the settlement of claims • Changes in statute and legal precedent which could particularly impact provisions for asbestos, pollution and other latent exposures • Arbitration awards and other legal precedents which could particularly impact upon the presentation of both inwards and outwards claims on the Group’s exposure to major catastrophe losses A 1 percent reduction in the net technical provisions would increase net assets by £6,008k (2018: £3,987k). 88 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 24. Current and deferred tax Current tax Current tax assets Current tax liabilities Net current tax assets/(liabilities) 2019 £000 1,988 (294) 1,694 2018 £000 191 (2,323) (2,132) Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using tax rates of 17% for the UK (2018: 17%) and 21% for the US (2018: 21%). Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets where it is probable that these assets will be recovered. The movements in deferred tax assets and liabilities during the year are shown below. The movement in deferred tax is recorded in the income tax charge in the Consolidated Income Statement. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances on a net basis. As at 1 January 2018 Movement in year As at 31 December 2018 Movement in year As at 31 December 2019 The movement on the deferred tax account is shown below: Deferred tax assets £000 Deferred tax liabilities £000 10,907 (7,702) 3,205 803 4,008 (6,890) 3,441 (3,449) (6,016) (9,465) As at 1 January 2018 Movement in year As at 31 December 2018 Movement in year As at 31 December 2019 Accelerated capital allowances £000 Trading losses £000 Pension scheme deficit £000 Other temporary differences £000 (39) – (39) 1 (38) 4,251 5,780 10,031 5,129 15,160 1,906 (739) 1,167 80 1,247 (2,101) (9,302) (11,403) (10,424) (21,827) Movements in the provisions for deferred taxation are disclosed in the Consolidated Financial Statements as follows: Movement in 2018 Movement in 2019 Deferred tax in Consolidated Income Statement £000 (4,712) (3,586) Deferred tax in Consolidated Statement of Comprehensive Income £000 (792) 51 Exchange adjustment £000 1,243 (1,678) Total £000 4,017 (4,261) (244) (5,213) (5,457) Total £000 4,017 (4,261) (244) (5,214) (5,458) Total £000 (4,261) (5,213) 89 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 The analysis of the deferred tax assets relating to tax losses is as follows: Deferred tax assets – relating to trading losses Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months Deferred tax assets 2019 £000 11,038 4,122 15,160 2018 £000 7,533 2,498 10,031 Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Directors have prepared forecasts which indicate that, excluding the deferred tax asset on the pension scheme deficit, the deferred tax assets will substantially reverse over the next six years. The above deferred tax assets arise mainly from temporary differences and losses arising on the Group’s US insurance companies. Under local tax regulations these losses and other temporary differences are available to offset against the US subsidiaries’ future taxable profits in the Group’s US Insurance Services Division as well as any future taxable results that may arise in the US insurance companies. The Group’s total deferred tax asset includes £15,160k (2018: £10,031k) in respect of trading losses carried forward. The tax losses have arisen in individual legal entities and will be used as future taxable profits arise in those legal entities. Substantially all of the unused tax losses for which a deferred tax asset has been recognised arises in the US subgroup. 25. Share capital At 1 January 2018 Issue of ordinary shares Issue of Z-AA shares Redemption/cancellation of Z-AA shares At 31 December 2018 Issue of ordinary shares Share-based payments Issue of AB-AC shares Redemption/cancellation of AB-AC shares At 31 December 2019 Number of shares Ordinary shares £000 Share premium £000 125,876,620 107,660 251,874,994 (251,874,994) 125,984,280 69,858,915 74,373 391,835,136 (391,835,136) 195,917,568 2,517 3 11,334 (11,334) 2,520 1,396 2 18,415 (18,415) 3,918 62,257 212 (11,334) – 51,135 102,047 138 (18,415) – 134,905 Total £000 64,774 215 – (11,334) 53,655 103,443 140 – (18,415) 138,823 On 6 March 2019 the Group issued 69,858,915 of ordinary shares at 153p raising approximately £103.4m. Allotted, called up and fully paid 195,917,568 ordinary shares of 2p each (2018: 125,984,280 ordinary shares of 2p each) 3,918,350 2,520,686 2019 £ 2018 £ 1 Preference A Share of £1 1 Preference B Share of £1 Included in equity 1 1 1 1 3,918.350 2,520,688 2019 £ 2018 £ 195,917,568 ordinary shares of 2p each (2018: 125,984,280 ordinary shares of 2p each) 3,918,350 2,520,686 1 Preference A Share of £1 1 Preference B Share of £1 1 1 1 1 3,918,350 2,520,688 90 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 25. Share capital continued Cumulative Redeemable Preference Shares Preference A and B Shares have rights, inter alia, to receive distributions in priority to ordinary shares of distributable profits of the Company derived from certain subsidiaries: • Preference A Share: one half of all distributions arising from the Company’s investment in R&Q Reinsurance Company up to a maximum of $5,000k. • Preference B Share: one half of all distributions arising from the Company’s investment in R&Q Reinsurance Company (UK) Limited up to a maximum of $10,000k. The Preference A and Preference B Shares have been classified as equity on the basis that redemption dates are not prescribed in the Memorandum and Articles of Association and as such there is no contractual obligation to deliver cash. No distributions have been made since acquisition by either R&Q Reinsurance Company or R&Q Reinsurance Company (UK) Limited. Shares issued During the year the Group issued AB and AC shares (with an aggregate value of £18,415k) (2018: Z and AA shares (with an aggregate value of £11,334k) which were all cancelled. 26. Employees and Directors Employee benefit expense for the Group during the year Wages and salaries Social security costs Pension costs Share-based payment charge Continuing operations Discontinued operations 2019 £000 35,987 3,767 1,102 – 40,856 40,856 – 2018 £000 24,374 2,968 1,014 212 28,568 28,568 – Pension costs are recognised in operating expenses in the Consolidated Income Statement and include £1,102k (2018: £1,014k) in respect of payments to defined contribution schemes. Average number of employees Program Legacy Other Total number of employees at 31 December 2019 was 252 (2018: 276). Remuneration of the Directors and key management Aggregate Director emoluments Aggregate key management emoluments Share-based payments – Directors Share-based payments – Key management Director pension contributions Key management pension contributions Highest paid Director Aggregate emoluments 2019 2018 Number Number 53 110 96 259 2019 £000 5,368 2,061 – 169 – 10 47 115 107 269 2018 £000 2,658 1,961 – 169 – 38 7,608 4,826 2,477 1,029 Key management refers to employees who are Directors of subsidiaries within the Group but not members of the Group’s Board of Directors. 91 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Directors’ emoluments K E Randall A K Quilter A H F Campbell P A Barnes J P Fox (appointed as a Director 3 May 2019) M A Langridge (resigned as a Director 13 December 2019) M G Smith (resigned as a Director 6 September 2019) Dr R Sellek (appointed as a Director 18 June 2019 and resigned 14 January 2020) K E Randall, Dr R Sellek and P A Barnes have been remunerated in US Dollars. Salary £000 Bonus paid £000 Bonus accrued £000 766 519 75 77 46 380 150 217 459 150 – – – 341 – – 1,252 730 – – – 206 – – Total £000 2,477 1,399 75 77 46 927 150 217 Total $000 3,227 – – 100 – – – 284 During the year, a bonus incentive scheme was introduced for Executive Directors and members of the Key Management team. Bonus payments relating to a reporting year are paid in the following three years being 50%, 25% and 25% annually, and reflect the performance of the Group and the individuals. The costs in the 2019 financial year represent the amounts paid in 2019 and provision for costs relating to the 2018 and 2019 reporting years performance, which will be paid in 2020, 2021 and 2022. The provisions are established on a likelihood of the performance and service period criteria being met. 27. Pension scheme obligations The Group operates one defined benefit scheme in the UK. The defined benefit scheme’s assets are held in separate trustee administered funds. The pension cost was assessed by an independent qualified actuary. In the valuation, the actuary used the projected unit method as the scheme is closed to new employees. A full actuarial valuation of the scheme is carried out every three years. On 2 December 2003, the scheme was closed to future accrual although the scheme continues to remain in full force and effect for members at that date. a. Employee benefit obligations – amount disclosed in the Consolidated Statement of Financial Position Fair value of plan assets Present value of funded obligations Net defined benefit liability Related deferred tax asset Net position in the Consolidated Statement of Financial Position 2019 £000 26,003 (33,340) (7,337) 1,247 (6,090) 2018 £000 23,571 (30,437) (6,866) 1,167 (5,699) All actuarial (losses)/gains are recognised in full in the Consolidated Statement of Comprehensive Income in the period in which they occur. 92 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 27. Pension scheme obligations continued b. Movement in the net defined benefit obligation and fair value of plan assets over the year As at 31 December 2018 Interest (expense)/income Remeasurements: Return on plan assets, excluding amounts included in interest expense Gain from changes in financial assumptions Gain from changes in demographic assumptions Gain from new valuation data Experience loss Loss on curtailments Liabilities extinguished on settlements Employer’s contributions Benefit payments from the plan As at 31 December 2019 As at 31 December 2017 Interest (expense)/income Remeasurements: Return on plan assets, excluding amounts included in interest expense Gain from changes in financial assumptions Gain from changes in demographic assumptions Gain from new valuation data Experience loss Loss on curtailments Liabilities extinguished on settlements Employer’s contributions Benefit payments from the plan As at 31 December 2018 Present value of obligation £000 Fair value of plan assets £000 Deficit of funded plan £000 (30,437) (838) (31,275) – (3,642) 554 – – – – (34,363) – 1,023 (33,340) 23,571 665 24,236 1,390 – – – – – – 25,626 1,400 (1,023) 26,003 (6,866) (173) (7,039) 1,390 (3,642) 554 – – – – (8,737) 1,400 – (7,337) Present value of obligation £000 Fair value of plan assets £000 Net defined benefit liability £000 (36,493) (861) (37,354) – 2,207 1,732 1,790 (88) (121) 159 (31,675) – 1,238 (30,437) 25,279 591 25,870 (980) – – – – – – 24,890 (81) (1,238) 23,571 (11,214) (270) (11,484) (980) 2,207 1,732 1,790 (88) (121) 159 (6,785) (81) – (6,866) 93 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 2019 2.0% 3.2% 2.4% 2.4% 3.2% 2019 26.0 28.1 27.6 29.7 2018 2.8% 3.3% 2.5% 2.5% 3.3% 2018 26.6 28.6 28.1 30.2 c. Significant actuarial assumptions i) Financial assumptions Discount rate RPI inflation assumption CPI inflation assumption Pension revaluation in deferment: – CPI, maximum 5% Pension increases in payment: – RPI, maximum 5% ii) Demographic assumptions Assumed life expectancy in years, on retirement at 60 Assumed life expectancy in years, on retirement at 60 Retiring today – Males – Females Retiring in 20 years – Males – Females d. Sensitivity to assumptions The results of the IAS 19 valuation at 31 December 2019 are sensitive to the assumptions adopted. The sensitivities regarding the principal assumptions used to measure the Scheme liabilities are set out below: Assumption Discount rate Rate of inflation Life expectancy Change in assumption Decrease by 0.5% Increase by 0.5% Increase by 1 year Change in liabilities Increase by 8% Increase by 1% Increase by 3% The above sensitivity analyses are based on a change in assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to significant actuarial assumptions has been estimated, based on the average age and the normal retirement age of members and the duration of the Scheme. e. The major categories of plan assets are as follows Cash and cash equivalents Investment funds: – equities – bonds – property – LDI Level 2 921 16,350 2,950 – 5,782 2019 £000 Total 921 16,350 2,950 – 5,782 26,003 26,003 Level 1 – – – – – – Level 1 – – – – – – Level 2 257 14,480 5,962 – 2,872 23,571 2018 £000 Total 257 14,480 5,962 – 2,872 23,571 Definitions of level 1 and Level 2 investments can be found in note 4(a)(i). 94 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 27. Pension scheme obligations continued f. Contributions and present value of defined benefit obligation Funding levels are monitored on an annual basis. As at 31 December 2019 £nil (2018: £1,400k) was held in Escrow by the Group depending on the outcome of the next triennial valuation. £1,400k contributions have been made directly into the scheme during 2019 (2018: nil). A recovery plan has been agreed with the Trustees to reduce the plan deficit starting from 1 January 2020. £795k will be contributed to the plan assets each year for 6 years, ending in 2025. 28. Related party transactions Transactions with subsidiaries Transactions between the Group’s wholly owned subsidiary undertakings, which are related parties, have been eliminated on consolidation and accordingly not disclosed. Transactions with Directors The following Directors and connected parties received distributions during the year as follows: K E Randall and family A K Quilter and family M G Smith 2019 £000 1,222 328 5 2018 £000 1,440 375 3 Transactions with key management service provider. With effect from 1 July 2016 some of the Group compliance services have been provided by a Group subsidiary, Callidus Solutions Limited, of which 49% of the share capital is owned by the Chief Governance Officer Fees charged for compliance services Fees payable to service provider at end of year 2019 £000 284 12 2018 £000 207 13 95 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 29. Business combinations and divestments Business combinations The Group made 10 business combinations during 2019, all of which involve legacy transactions and have been accounted for using the acquisition method of accounting. Legacy entities and businesses The following table shows the fair value of assets and liabilities (and consideration where paid) included in the Consolidated Financial Statements at the date of acquisition of the legacy businesses: Intangible assets £000 Other receivables £000 Cash and investments £000 Other payables £000 Technical provisions £000 Tax and deferred tax £000 Net assets acquired £000 Consideration £000 Gross deal contribution £000 NNIS WCIC Presidio LTT – – 100 15 787 822 – – 3,233 3,235 1,112 764 (156) (32) – – (13) (790) (1,030) (474) – – – (5) Global Holdings 20,997 4,776 150,669 (1,838) (66,187) (1,300) Sandell Holdings Churchill Blossom Lansen 7,585 732 – – Distinguished Re 1,908 34,155 61,878 (8,309) (55,203) – – – – 6,628 257 383 – – – (6,085) (87) – 15,297 (38) (14,049) – – – – – 3,851 3,235 182 300 107,117 40,106 1,275 170 383 3,118 3,071 2,278 – – 62,422 20,251 – – – 383 31,337 40,540 243,456 (10,373) (143,918) (1,305) 159,737 88,405 780 957 182 300 44,695 19,855 1,275 170 383 2,735 71,332 In all instances, goodwill on bargain purchase was recorded on the transactions. Goodwill on bargain purchase arises when the consideration is less than the fair value of the net assets acquired. It is calculated after the alignment of accounting policies and other adjustments to the valuation of assets and liabilities to reflect their fair value at acquisition. The long-tail nature of the liabilities causes significant problems for former owners such as tying up capital and a lack of specialist staff. As a specialist service provider and manager, the Group is more efficient at managing such entities and former owners are prepared to sell at a discount on the fair value of the net assets. In order to disclose the impact on the Group as though the legacy entities had been owned the whole year, assumptions would have to be made about the Group’s ability to manage efficiently the run-off of the legacy liabilities prior to the acquisition. As a result, and in accordance with IAS 8, the Directors believe it is not practicable to disclose revenue and profit before tax as if the entities had been owned for the whole year. Where significant uncertainties arise in the quantification of the liabilities, the Directors have estimated the fair value based on the currently available information and on assumptions which they believe to be reasonable. The Group completed the following business combinations during 2019: NNIS On 28 February 2019, the Group completed the acquisition of the entire issued ordinary shares of Nationale-Nederlanden Internationale Schadeverzekering SE (NNIS), a UK domiciled insurance company which was previously part of the N.N. Group N.V. in the Netherlands. NNIS participated on the 1996 and prior underwriting years of the Dutch Aviation Pool which wrote Aviation Hull and Liability policies. External costs incurred were £7k. WCIC On 29 March 2019, the Group completed the acquisition of the entire issued ordinary shares of Western Captive Insurance Company DAC (WCIC), an Irish domiciled captive insurance company of the Coffey Group. WCIC provided employer’s liability, general liability and public liability policies from 2007 to 2011, and, at the date of acquisition, had one remaining open claim. External costs incurred were £50k. Presidio On 31 March 2019, the Group novated the property, general liability, auto liability and workers’ compensation policies of Presidio Insurance Limited, a Cayman domiciled group captive, to its Travelers cell within R&Q Quest (SAC) Limited. The novated policies covered the period from 31 December 2003 to 28 February 2010. External costs incurred were £17k. LTT On 30 April 2019, the Group completed the assumption of liabilities from The Logistics Trust of Texas (LTT), a self-insured trust in run-off since 2014 which was taken over by the Texas Self-Insurance Group Guaranty Fund in 2016. LTT provided workers’ compensation policies from 2006 to 2014. External costs incurred were £43k. 96 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2019 29. Business combinations and divestments continued Global U.S. Holdings Incorporated On 3 May 2019 the Group completed the acquisition of GLOBAL U.S. Holdings Inc. for a consideration of $80.5m from AXA DBIO, SCA, a subsidiary of investment funds managed by AXA Liabilities Managers SAS (‘AXA LM’). External costs incurred were £181k. GLOBAL U.S. Holdings Incorporated is the 100% parent of GLOBAL Reinsurance Corporation of America (‘Global Re US’). Global Re US is a New York domiciled insurance company in run-off that underwrote predominantly property and casualty pro-rata treaties and facultative business for regional and specialty insurance companies on non-standard automobile, multi-peril and general liability lines in the US. Sandell Holdings Ltd (Provisional) On 7 October 2019, the Group completed the acquisition of Sandell Holdings Ltd and its subsidiary, Sandell Re Ltd, a Bermudian Class 3A segregated accounts company. Sandell Re participated on various reinsurance contracts from 2015 and continuing. External costs incurred were £45k. The fair value included is provisional in respect of the other payables only, which includes an amount of $4.2m (£3.2m) which remains subject to further review. Churchill On 23 October 2019, the Group completed the novation of Churchill Casualty Ltd’s (Churchill) policies to its Travelers segregated account in R&Q Bermuda (SAC) Ltd. Churchill was a Cayman domiciled captive with policies, which were fronted by Zurich, providing Workers’ Compensation, General Liability and Auto Liability coverage from 2001 to 2011. External costs incurred were £107k. Blossom On 19 December 2019, the Group completed the novation of the Workers’ Compensation policies of Blossom to Accredited Surety and Casualty Company Inc. Blossom was a self-insurer which had been providing services to people with disabilities in the Philadelphia area, but which has subsequently ceased business. The policies transferring relate to the 2007 to 2018 years. External costs incurred were £38k. Lansen On 30 December 2019, Accredited Insurance (Europe) Limited completed the novation of Lansen’s aviation hull & liability policies. Lansen was a Swedish based captive insurer of Saab which participated on these policies from 1996 to 2008. Distinguished Re On 31 December 2019, the Group completed the acquisition of Distinguished Re, a Barbados based insurance company in run-off. Distinguished Re participated on US Umbrella policies underwritten by Great American from 2008 to 2017. 30. Non-controlling interests The following table shows the Group’s non-controlling interests and movements in the year: 31 December 2019 Non-controlling interests Equity shares in subsidiaries Share of retained earnings Share of other reserves Movements in the year Balance at 1 January Profit for the year attributable to non-controlling interests Exchange adjustments Comprehensive profit attributable to non-controlling interests Changes in non-controlling interest in subsidiaries Balance at 31 December 2019 £000 3 380 60 443 349 (478) (22) (500) 594 443 2018 £000 6 282 61 349 (166) 481 34 515 – 349 31. Guarantees and indemnities in ordinary course of business The Group has entered into a guarantee agreement and a debenture arrangement with its bankers, along with several of its subsidiaries, in respect of the Group term loan facilities. The total liability to the bank at 31 December 2019 was £55,141k (2018: £46,300k). The Group has given various customary warranties and indemnities in connection with the disposals of RQMA and various ISD entities (to Coverys and Davies respectively). The Group also gives various guarantees in the ordinary course of business. 97 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 32. Foreign exchange rates The Group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into sterling, being the Group’s presentational currency: US Dollar Euro 2019 2018 Average Year end Average Year end 1.28 1.14 1.31 1.17 1.34 1.13 1.27 1.11 33. Events after the reporting date On 13 January 2020, the Group announced Mr W Spiegel as Executive Director and Deputy Group Chairman. As part of his remuneration package, Mr Spiegel has been awarded 5,178,524 restricted ordinary shares at a price of 2p per share. The award represented 2.64% of the shares in issue. The shares will not vest until 10 January 2023, being the third anniversary of the date of hire subject to Mr Spiegel’s continued employment with the Company. Vesting of the award will be accelerated if Mr Spiegel’s employment is terminated prior to the third anniversary by the Company without cause or by Mr Spiegel for good reason or if a change in control of the Company occurs. Mr Spiegel will forfeit the shares if the Company terminates his employment for cause prior to vesting or if he terminates without good reason. On 27 January 2020 the Group completed the acquisition of Vigneron Insurance Company, Inc., a Montana captive insurer purchased from a wholly owned private investment holding company with diverse holdings in a variety of industries, real estate, marketable securities and other investments. On 20 February 2020 Trilogy Managing General Agents Limited was sold to Resolution Underwriting Holdings Limited. On 14 April 2020 the Group completed the acquisition of ICI Insurance Company Limited, a Company incorporated in the Cayman Islands in 2003 and licensed as a Class B (i) Insurer. On 29 April 2020 the Group announced £80.3m ($100m) of new equity investment by way of: • a $80m subscription by Brickell Insurance Holdings LLC, an investment vehicle controlled by 777 Partners, for a new series of preferred stock issued by Randall & Quilter PS Holdings Inc., an indirect wholly owned subsidiary of the Group, which are exchangeable (subject to certain terms and conditions) for ordinary shares in the capital of the Company at a price of £1.35 per Ordinary Share. • a $20m subscription by funds managed by Hudson Structured Capital Management Ltd. for 11,902,318 new Ordinary Shares at a price of £1.35 per Subscription Share. Covid-19 impact Accounting policy note 2 (d) Going Concern provides details of the potential impact of Covid-19 to the Group. 34. Ultimate controlling party The Directors consider that the Group has no ultimate controlling party. 98 Randall & Quilter Investment Holdings Ltd. Annual Report 2019 Shareholder Information Auditors PKF Littlejohn LLP 15 Westferry Circus Canary Wharf London E14 4HD Secretary Beverley Murphy Registered Office Clarendon House 2 Church Street Hamilton HM11 Bermuda Registered Number 47341 Bankers The Royal Bank of Scotland plc 280 Bishopsgate London EC2M 4RB PRINCIPAL WORLDWIDE OFFICE LOCATIONS Bermuda Office Malta Office Head Office FB Perry Building 40 Church Street PO Box HM 2062 Hamilton UK Offices London 71 Fenchurch Street London EC3M 4BS US Offices New York 340 Madison Avenue Suite 1911 New York NY 10173 Pieta Skyway Offices 177/179 Marina Street Pieta PTA 9042 Malta Norwich Floor 3, Lawrence House 5 St Andrews Hill Norwich NR2 1AD Philadelphia 2 Logan Square 100 North 18th Street Suite 600 Philadelphia PA 19103 Orlando 4798 New Broad Street Suite 200 Orlando FL 32814 Atlanta 3565 Piedmont Road Piedmont Center Building 4 Suite 550 Atlanta Georgia GA 30305 RANDALL & QUILTER INVESTMENT HOLDINGS LTD. rqih.com 

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