interim report - randall & quilter investment holdings ltd. · interim report 2015. the...

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Randall & Quilter Investment Holdings Ltd.

Interim Report 2015

The specialist non-life insurance acquirer, service provider and underwriting managerRandall & Quilter Investment Holdings Ltd. has pursued a buy and build strategy to create a comprehensive range of investment activities and services in the global non-life insurance market.

Mission:To continue to make value enhancing insurance acquisitions, to build an underwriting management platform to attract best-in-class underwriting teams and to deliver high levels of service to our ‘live’ and ‘legacy’ insurance market clients.

Overview

Chairman’ statement and Business Review

02 Chairman’s Statement

06 Insurance Investments Division

08 Insurance Services Division

09 Underwriting Management Division

Financial Statements

10 Condensed Consolidated Income Statement

11 Condensed Consolidated Statement of Financial Position

12 Condensed Consolidated Cash Flow Statement

13 Condensed Consolidated Statement of Comprehensive Income

14 Condensed Consolidated Statement of Changes in Equity

16 Notes to the Consolidated Financial Statements

26 Independent Auditors’ Report

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Insurance ManagementWe offer accounting and regulatory compliance services in many captive domiciles worldwide.

Insurance ServicesWe provide a specialist range of claims management, reinsurance collection and premium credit control services to both the live and legacy insurance and reinsurance markets.

Insurance InvestmentsWe have a proven track record in providing exit solutions to discontinued non-life insurance companies, captives and self-insurers. We also provide underwriting capital to our managed Lloyd’s Syndicates and acquire insurance and reinsurance debt positions.

Underwriting ManagementWe manage live and run-off syndicates and own MGAs, providing specialist distribution to third-party syndicates and reinsurers. We also own Accredited, an A- rated US admitted carrier, which will predominantly underwrite on behalf of our live syndicate and other authorised reinsurers.

Underwriting Insurance Insurance

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Chairman’s statement

Overview In line with the guidance given in the 2014 full year results announcement, the Group produced a pre-tax loss during the first 6 months of 2015, primarily as a result of the reasons given at that time; namely delays in the completion of legacy transactions and the customary second half bias in our service operations. Whilst our core operations are performing satisfactorily, slower income development in the US Healthcare and legacy broking units and weakness in investment markets are likely to lead to the full year result being below market expectations. The Board is proposing to maintain distributions for the period at 3.4p per share.

Key highlights:• Pre-tax loss of £4.5m (H1 14 (£0.6m)) –

driven by delays in legacy acquisitions, restructuring and investment costs in US services and a lower investment return

• Positive movements in run-off portfolios with strong net reserve release of £4.3m (H1 14 (£2.3m))

• Considerable progress post period end in the completion of run-off deals, having received change of control approval for the IC Insurance acquisition and having passed a significant milestone in the largest Part VII transfer the Group has embarked upon to date

• Successful completion of sale of R&Q Marine Services Limited (‘RQMS’) to Hiscox at a premium to its carried value

• Continued strong performance in the UK operations of the Insurance Services Division (“ISD”), particularly broker run-off and premium credit control services

• Post period end, awarded a potential turnkey contract for a high profile new Syndicate launch in 2016, pending Lloyd’s approval

• Underwriting Management Division (“UMD”) revenues increased to £12.1m (H1 14 £8.1m) - driven by acquisition of Accredited, S1991 growth and China Re contract

• A satisfactory investment return of 1.1% on the Group’s ‘free’ assets (H1 14 1.9%)

• Balance sheet strengthened through Issue of €20m Tier 2 Capital in R&Q Insurance Malta

• Proposed Distributions per share maintained at 3.4p (H1 14 – 3.4p)

Strategy and business model The overall mission and purpose of the Group is to offer investors a stable cash profit stream from Insurance Services, balance sheet growth/capital extractions from Insurance Investments and growth prospects through a fee focused Underwriting Management business.

Group performance

£000s

6 months ended

30 June 2015£000

6 months ended

30 June 2014£000

Year ended 31 December

2014£000

Group resultsOperating loss * (Group KPI) (4,028) (345)** (799)**

Loss before tax (4,525) (648)** (1,559)**

(Loss)/profit after tax (3,629) 484 (2,746)

Earnings per share (basic) (Group KPI) (4.7)p (0.9)p (6.3)p

Balance sheet informationTotal gross assets 502,765 480,755 537,599

Total net insurance contract provisions 177,917 178,222 191,479

Shareholders’ equity 83,196 95,297 86,296

Key statisticsInvestment return on free assets 1.1% 1.9% 2.4%

Return on tangible equity (5.5)% 0.6% (3.2)%

Net tangible assets per share (Group KPI) 84.3p 109.4p 88.2p

Distribution per share (Group KPI) 3.4p 3.4p 8.4p

* Operating loss is defined as loss before income tax, finance costs and share of loss of associate

** The operating loss and loss before tax are stated before deducting exceptional costs relating to the acquisition of Accredited of £250k (in the six months to 30 June 2014) and £750k (in the year ended 31 December 2014).

Our main strategic objectives are to:

• acquire or reinsure run-off insurance companies and portfolios to produce attractive returns;

• provide specialist insurance services to the live, run-off and captive markets;

• grow our Lloyd’s managing agency business; and

• develop Accredited, our new US admitted carrier, with diversified sources of revenue, including fee-based income.

The Group has developed a strong reputation and good relationships in the global insurance market. The Group benefits from a highly skilled, entrepreneurial and experienced workforce. We use these attributes to source and manage attractive run-off opportunities and to offer expertise in niche insurance services and underwriting management. The aim is to grow tangible book value and increase cash distributions to shareholders.

Group performanceThe Group produced an operating loss of £4.0m and a loss before tax of £4.5m during the first six months of 2015, compared with an operating loss of £0.3m and a pre-tax loss of £0.6m in the prior year period. Basic earnings per share were (4.7)p, after factoring in a tax credit of £0.9m in the period (H1 2014: (0.9)p). As outlined in our 2014 full year results announcement at the end of June, the primary reasons for the weak performance were a delay in the completion of legacy transactions and the customary second half bias in income in our service operations. In addition, the Group’s first half year result was impacted by very weak investment markets during June and a lack of revenue in our US legacy broking operation which had been focused on a large loss portfolio transfer which, against expectations, was not executed.

Favourable movements in the foreign exchange markets and an improvement in the pension deficit mitigated the fall in net tangible assets per share, now 84.3p (Dec 2014: 88.2p), which was otherwise impacted by the trading result during the period.

Distributions per share, subject to customary approvals have been maintained at 3.4p, payable to those shareholders on the register on 27 October 2015 on or around 16 November 2015.

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Financial highlights

Distribution per share

3.4p15

14

3.4p

3.4p

14

13

84.3p

109.4p

Net tangible assets per share

84.3p

15

14

Operating (loss)/profit (£000s)

£(4,028)

Earnings per share (basic)

(4.7)p15

14

(4.7)p

£(4,028)

Divisional overviewInsurance Investments

£000s 30 June 2015 30 June 2014

Live income 7,444 4,716

Run-off Income 4,057 16,677

Total income 11,501 21,393

Result of operating activities (live and run-off) (3,274) 1,375

Key metrics

Net insurance claims released – run-off 4,303 2,344

Claims reserves acquired through portfolio transfers – (7,393)

Total net claims provisions released/(increased) 4,303 (5,049)

Goodwill on bargain purchase – 2,837

Live Syndicates’ contribution to operating profit (814) (1,001)

Increase in fair value of insolvent insurance debt portfolio 243 625

* Investment return on free assets 1.0% 2.0%

* Investment return % is calculated as net investment income over average total investments. Investment return is stated after fees of £303k and £294k in H1 2015 and H1 2014 respectively.

The Insurance Investment Division generated a first half loss of £3.3m in 2015, compared to a profit of £1.4m for the equivalent period in the prior year.

Overall the results were negatively impacted by the delay to the completion of legacy transactions during the period, compared to a contribution from goodwill on bargain purchase arising from three deals amounting to £2.8m and the Aegon retrospective reinsurance transaction which brought in a premium over reserves of just over £3m during the prior year period.

Despite the absence of legacy transactions in the first six months of 2015, there has been considerable progress in the core run-off acquisition activity during the third quarter, and we are pleased to report that contribution from this activity is now anticipated to exceed our original expectations for the year. The impending introduction of Solvency II and other equivalent solvency regimes continues to produce opportunities.

“Despite a first half loss, recent positive developments on large legacy transactions mean we have confidence in delivering a profitable outcome for the full year, which together with stronger expected cash generation to year end, enables us to maintain distributions per share for the period.”

K E RandallChairman and Chief Executive Officer

£(345)

(0.9)p

04

Chairman’s statement continued

Divisional overview continuedInsurance Investments continued

The first half of 2015 saw positive movements in the run-off portfolios with higher reserve releases than the prior year period, especially in the European based run-off portfolios and the Bermuda based captives. Furthermore, the successful resolution of the Kelco arbitration, reported on in the full year results, removed uncertainty from the run-off syndicates and positively impacted Group cash flow.

RQLM’s debt purchase activity and the live syndicate participations performed in-line with expectations.

Investment income on the IID’s ‘free assets’ of £1.6m (1.0%) was satisfactory, having regard to market conditions but considerably lower than the prior year period (£3.4m, 2.0%).

Insurance Services

£000s 30 June 2015 30 June 2014

Total revenue 16,790 15,395

– Of which intercompany 6,477 6,891

– Of which third party 10,313 8,504

Operating profit * 519 3,764

Operating profit margin ** 3.1% 24.4%

*Operating profit is defined as profit before income tax and finance costs

**Operating profit margin is defined as operating profit divided by total income

Revenue in Insurance Services increased strongly in the third party segment against the prior year period, driven by growth in the UK broker and financial services run-off, premium credit control and binding authority management services. The overall result was however impacted by the restructuring costs incurred in US services, continued investment in the US Healthcare initiative and lack of revenue in the US legacy broking unit. The prior year period had also benefited from £2.8m of goodwill on bargain purchase associated with the acquisition of Oval’s financial services run-off company.

Underwriting Management

£000s 30 June 2015 30 June 2014

Total revenue 12,141 8,400

Operating loss * (507) (699)

Operating loss margin ** (4.2)% (8.3)%

Key metrics

Management fee revenue 6,446 5,929

MGA commission revenue 1,232 2,549

Profit commissions 274 (146)

Accredited

– Profit before tax 474 N/A

– Return on net tangible equity 7.3% N/A

*Operating loss is defined as loss before income tax, finance costs and share of loss of associate

** Operating loss margin is defined as operating profit/(loss) divided by total income

Revenue rose strongly in the Underwriting Management division due to the acquisition of Accredited, the growth of Syndicate 1991 and the new China Re contract. Adjusting for the loss of commission income following the sale of RQMS in February 2015, the remaining two MGA businesses grew premium and commissions against the prior year. The profit arising from the sale of RQMS at a premium to book value was credited to the Group’s ‘Other Corporate’ division. Accredited produced profits in line with expectations with all current income being generated from the bail book as the new business will only begin to flow in early 2016 once further state licenses have been granted.

Overall, the operating loss was modestly lower than the prior year period.

Governance We set high standards of corporate governance, with a structure designed to establish, implement and maintain the effective controls essential to the Group’s long-term success. The role of the Board is to set the Group’s strategic objectives, and to oversee and review management performance, ensuring the required resources are available for meeting those objectives. The Board met regularly through the year to debate and conduct these matters.

Our people During the past six months, our staff has continued to make valuable contributions to the success of the Group and I emphasise my gratitude for this. We thank especially those people who have helped in our development but have left the Group as part of an ongoing cost management exercise.

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Outlook We continue to expect a materially better full year result in 2015 compared with 2014, subject to customary actuarial reviews. Despite a sizeable first half loss, recent positive developments on two large legacy transactions mean we have confidence in delivering a profitable outcome for the full year, which together with stronger expected cash generation to year end, has led to in the maintenance of distributions per share at 3.4p per share.

The results of the run-off companies, legacy acquisition activity, UK services and the Underwriting Management operations remain in line or ahead of earlier expectations for 2015. However, in spite of satisfactory performance in these core operations, the combined impact of considerably slower income development in US healthcare, a disappointing performance by our US legacy broking unit and prolonged weakness in investment markets are likely to lead to the full year result being below market expectations.

The Board is fully committed to improving the financial performance of the Group after the recent period of underperformance. We have therefore commenced a review aimed at simplifying the Group’s business model to focus on areas of the business where we have a track record of delivering profitable growth or where we have strong prospects of doing so within a reasonable timeframe.

In those operations where short term income prospects have reduced but where we remain convinced of the ability to generate profitable growth and shareholder value over the longer term, we will consider ways in which we can reduce costs until market conditions improve. At all times, we will maintain the high levels of regulatory compliance, governance and service vital to success in the markets in which we operate. In certain areas of the business, gaining the required scale to deliver sufficiently attractive and sustainable operating margins may lead to strategic partnerships or disposals.

The Board believes that the prospects for the Group’s core operations continue to be attractive. Its traditional run-off and service core look to have profitable opportunities for expansion and our success in these operations is evident. Meanwhile, being chosen as turnkey provider to a potential high profile syndicate start-up should, in the event of securing Lloyd’s approval, give both added scale and profile to our managing agency.

K E RandallChairman and Chief Executive Officer

“The Board is fully committed to improving the financial performance of the Group and has launched a review of the business aimed at simplifying the Group’s business model to focus on core areas of profitable growth.

The Group’s prospects continue to be attractive in our traditional run-off and service core and we wish to capitalise fully on our success in these operations. Having been chosen as the potential turnkey provider for an exciting new syndicate launch would add important scale and profile to our Lloyd’s managing agency.”

06

The first six months to June 30, 2015 saw a reduction in total income and a fall in profitability, when compared to the equivalent period in 2014.

Income rose in the live segment as a direct result of the growth experienced in s1991, which has now begun to see premium levels rise. In the run-off segment, income dropped against the prior year period, primarily as a result of 2014 benefiting from a large retrospective premium associated with the reinsurance of Aegon’s legacy non-life book as well as lower investment income.

Operating losses in the live segment narrowed slightly as higher premium income levels mitigated the expense drag. In the run-off segment, profitability was impacted by the lack of legacy transactions in the period as well as lower investment income.

Net Claims Releases2015 saw stronger net reserve releases from the owned insurance portfolios in run-off than the prior year period. This was most notable in certain of the newly acquired portfolios in Malta as well as in R&Q Re UK, La Licorne and the Bermuda captives, where commutations delivered claims savings and lower than anticipated new claims activity brought down IBNR reserves. The run-off syndicates performed well with redundancy found in the smaller value claims’ reserves. It was of course also pleasing to report a successful resolution to the long-standing dispute concerning the ‘Kelco’ life settlement claim in former Syndicate 102.

Goodwill on bargain purchaseWhilst the Group experienced high transactional activity, no legacy transactions completed during the first half of 2015. This was the main source of negative variance against the prior year result which benefitted from the acquisition of three new entities producing goodwill on bargain purchase of £2.8m and the Aegon retrospective reinsurance, which delivered over £3m of accounting profit.

As has been already commented on, progress in Q3 has however been very pleasing with change of control approval having recently

been received for the acquisition of IC Insurance, allowing completion, and the successful passing of the Court Sanction Hearing in relation to a large UK P&I club Part VII transfer to R&Q Insurance Malta, which after the customary three month policyholder notification period, should be completed before year end. A number of other smaller transactions are well advanced, some of which are likely to be signed imminently, subject to customary approvals in jurisdictions ranging from Liechtenstein, Ireland, Malta and Bermuda to the Cayman Islands. As previously advised, R&Q Malta continues to play an important part in our M&A strategy as an EEA run-off consolidation vehicle. R&Q Malta recently completed a successful Tier 2 (subordinated debt) capital raise. This resulted in additional capital of Euros 20 million, which will be used to support the Group’s EEA based M&A activity and has provided additional statutory capital for R&Q Malta, further bolstering policyholder protection and solvency coverage.

Reduced servicing costs in some of the mature run-offs were offset by an increased number of group entities against the prior year period resulting in overall expenses being relatively unchanged against the year prior.

Insolvent insurance debt portfolio (‘RQLM’)RQLM Limited is our subsidiary in Bermuda that is dedicated to acquiring insurance debt from insolvent estates. The results were in line with expectations as the portfolio continued to run-off to plan. The fair value of debt increased to £12.7m from £10.6m primarily due to the acquisition of a new debt position during the period with our joint venture partner, Phoenix Asset Management. We are also pleased to announce that we have recently received dividends on some existing debt positions, in line with plan, with others likely to follow prior to year-end.

Investments and investment income (including Funds at Lloyd’s)Despite the difficult investment markets at the end of the period, the Group generated a satisfactory investment performance during the first half of 2015 with an average return of 1.0% on IID’s ‘free assets’ of approximately

£160.0m equivalent. The majority of the price declines in the latter part of the first half year occurred in the equity portfolio, though falls were mitigated by our high income, low beta bias. There were also losses from the sale of the ABS portfolio during June, which was done on value grounds and in part to fund claims payments in R&Q Re US. This decision has been vindicated by further weakness in this asset class in Q3. The high yield funds held up well given the manager’s high cash position, hedging strategy and low credit spread duration. The CLO portfolio proved resilient given its relative value and lower tradability.

Other than the ABS realisations which resulted in higher cash allocations at the end of the period, the Group’s asset allocations and credit ratings otherwise remained similar to the end of 2014.

During July, we appointed two new investment managers to manage all of our US and non-US assets respectively. The decision to pool our investments was taken to reduce management costs, improve flexibility, reporting and performance management. In particular, we felt that there would be less friction involved in changing asset allocations according to market conditions.

The low interest rate duration and structured credit focus continues though there have been significant reductions in the ABS portfolio, a cautious increase in duration and higher allocations to cash and corporate credit. The target total return remains at 2.5-3% but a lacklustre July and weak August have led to reduced expectations for the 2015 year.

OutlookDespite the investment income headwinds, the outlook for the division for the remainder of the year and beyond is positive with a higher than expected contribution from legacy acquisition activity and reserve releases for the full year. R&Q Malta is benefiting from its operational flexibility and now has additional capital to help execute its significant pipeline of opportunities. In Bermuda, the North American M&A team expects to close a number of new captive related acquisitions and novations, including some in new domiciles by year end. Consideration is also being given to

Divisional Review Insurance Investments Division (“IID”)

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redomiciling one of the Group’s existing US entities to Rhode Island or establishing a new entity there to take advantage of new recently passed portfolio transfer legislation designed to offer US insurers finality legacy solutions, hitherto not available. The Group is also exploring securing a credit rating for one of its reinsurance carriers to further increase its transactional reach as well as offering loss portfolio solutions to self-insurers with legacy workers’ compensation reserves.

The live syndicate results are running to plan, though still producing small losses. As income continues to grow, with record monthly premium levels now being achieved, expenses will be further mitigated and the bottom line result will improve. The loss ratio continues to be in line or ahead of plan.

We expect our associated Lloyd’s capital requirements to fall significantly by the end of 2015 as early year capital loadings fall away and Syndicate 1991’s track record as regards claims loss ratios is proven. Furthermore, the successful resolution of the Kelco dispute will reduce the capital required to support open year reserves and also remove the capital loading previously levied on this large outstanding claim.

Divisional Performance£000s 30 June 2015 30 June 2014Live income 7,444 4,716

Run-off income 4,057 16,677

Total Income 11,501 21,393

Live operating loss (814) (1,002)

Run-off operating (loss)/profit (2,460) 2,377

Operating (loss)/profit (3,274) 1,375

Net claims releases/(increases)– Europe 2,897 1,658

– US 368 693

– Bermuda 716 –

– Run-off Syndicates 322 (462)

Acquired through portfolio transfers – (7,400)

Total 4,303 (5,511)

Goodwill on bargain purchase– Europe – 916

– Bermuda – 325

– Other – 1,596

Total – 2,837

RQLM– Fair value of debt 12,665 10,597

–Movement in fair value of debt 243 625

Investment return on free assets–Percentage* 1.0% 2.0%

–Net investment income 1,618 3,375

* Investment return % is calculated as net investment income over average total investments. Investment return is stated after fees of £303k and £294k in H1 2015 and H1 2014 respectively.

Investments and investment income (including Funds at Lloyd’s)

Asset ClassShare of Portfolio

30 June 2015 31 December 2014 30 June 2014ABS 0% 20% 30%CLO 23% 24% 27%Bonds/Treasuries 12% 11% 11%Equity 7% 9% 8%Funds 17% 14% 13%Cash/Cash Equivalents 41% 22% 11% 100% 100% 100%

Credit RatingShare of Portfolio

30 June 2015 31 December 2014 30 June 2014Cash 41% 22% 7%AAA 6% 10% 19%AA 18% 18% 22%A 10% 24% 26%BBB 1% 2% –BB 8% 9% 11%Unrated * 16% 15% 15%Total 100% 100% 100%

* ‘Unrated’ includes cash held within our Funds at Lloyd’s

08

Total income grew by approximately 9.0% in the Insurance Services Division. Operating profit however decreased, primarily due to the absence of the large amount of goodwill on bargain purchase which arose on the acquisition of Oval financial services in 2014.

Run-off services continued to perform well during the first half of 2015 with income growth in the external segment more than mitigating reductions in internal income. We expanded the broker service contracts with a number of insurers in the period and whilst credit write backs continued, they were again lower than the prior year, reflecting a further improvement in the quality of income. Operating profit decreased due to the absence of goodwill on bargain purchase and the reduced contribution from maturing internal service contracts, which was group neutral as it reduced expenses in IID by the same amount. The operating margin of almost 20% remained strong.

The first half 2015 income and operating result in live services were impacted again by a weak result in the US, although the operating loss did improve compared to 2014. Overall, despite income increasing in 2015, there was only a marginal improvement in the operating loss due to increased operating expenses associated with the Healthcare initiative, restructuring costs in relation to the US third party service business (now focused on profitable accounting and consultancy contracts), and one-off costs associated with staff changes in the Norwegian captive management business.

The US Healthcare initiative has finally begun to produce income as the first workers’ compensation opioid cases have now been referred by the Group to the University of California Hospitals. Additional staff has been added and further expenses incurred to ensure that marketing channels are optimized. Though there are early signs of good results from this additional investment, income for the remainder of the year is likely to remain very subdued; however we are encouraged by the potential for 2016.

Our US legacy broking suffered from focusing on a large loss portfolio transfer which was not concluded, after considerable work by the team. Elsewhere, the UK credit control operations delivered further income and profit growth, whilst the non-US operating result was impacted by the Norwegian captive manager staff changes and weak performance in our Gibraltar and US captive/insurance

management operations. There were subdued income levels in our MGA audit operations but these have an increasing H2 income bias and look set to perform well during the remainder of the year.

OutlookThe UK services operations on both the run-off and live services continue to perform in line or ahead of expectations with some exciting opportunities for further growth, particularly in premium credit control. The core US third party service business will have much improved performance in the second half after recent cost reductions and a natural income bias in the latter part of the year. The captive management business in Bermuda continues to deliver good margins whilst Norway looks set to have a much better second half year after one-off employment costs impacted the first half result. Achieving sufficient scale in the remaining captive operations remains challenging.

The US Healthcare initiative is now producing income, although much delayed against original expectations. The range of potential revenue and profit outcomes remains considerable but we remain cautiously optimistic with 2016 likely to be a pivotal year. The legacy broking operation is relatively low cost and the pipeline of opportunities is encouraging but execution has proven difficult and slow. The disappointing level of income produced in the current year in both healthcare and legacy broking has impacted the overall Group result against earlier expectations. Given the early stage of development of the former and contingent nature of the latter’s income, the Group will take a much more cautious approach to forecasting the contribution of these operations in the future, until operating performance becomes sufficiently predictable.

Divisional Review Insurance Services Division

Divisional Performance£000s 30 June 2015 30 June 2014Total income 16,790 15,395

– Of which intercompany 6,477 6,891

– Of which third party 10,313 8,504

Operating profit * 519 3,764




Run-off services

£000s 30 June 2015 30 June 2014Total income 10,268 9,704

Operating profit * 1,998 5,587


Operating profit margin excluding goodwill on bargain purchase ** 19.5% 40.1%



Live Services

£000s 30 June 2015 30 June 2014Total income 6,522 5,691

– Of which non-US 4,240 3,532

– Of which US 2,282 2,159

Operating loss * (1,479) (1,823)

– Of which non-US (258) (315)

– Of which US (1,221) (1,508)

Operating profit margin ** (22.7)% (32.0)%



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The Underwriting Management Divisions has seen its income grow significantly, which is a result of the acquisition of Accredited in November 2014 and stronger syndicate management fees arising from the growth of Syndicate 1991 and the inception of the China Re contract.

Overall, the UMD operating loss was slightly lower than that generated in 2014. This was due to the income generated by Accredited being offset by the income lost from the disposal of R&Q Marine Services Limited to Hiscox. This disposal, which was completed in February 2015, generated a profit against carrying value, which has been credited to the ‘Other Corporate’ segment. The Board believed that the future growth of the business would be optimised under new ownership at Hiscox and that the value of this underwriting portfolio was greater to a large carrier, making a sale the most effective means of generating shareholder value. The remaining two MGA business units grew premiums and commission income against the prior year and are broadly tracking to plan despite challenging market conditions.

Last year we announced that we had been selected by XL Catlin to provide back office support for Syndicate 2088, which is managed by XL Catlin and backed by China Re. We continue to provide management and service support. We are also pleased to announce that we have recently been chosen as a potential turnkey provider to a 2016 start-up syndicate supported by a large international insurance group, subject to Lloyd’s approval.

During the first half of 2015, we have been focusing on successfully integrating Accredited into the Group and developing its new expanded business plan. The company’s existing bail book has generated a positive contribution to the Group’s income and operating result, in line with expectations. We anticipate that its contribution will increase as our strategic initiatives take effect during the course of 2016 and beyond. We are in the process of expanding Accredited’s licences nationwide and we are pleased to announce that we have now received approval to write six new major P&C lines in nearly 30 states. This will provide valuable new business flows to Syndicate 1991 and other authorised reinsurer markets, whilst generating a valuable source of commission income for the Group.

Divisional Performance£000s 30 June 2015 30 June 2014

Total income 12,141 8,400

– Of which Accredited 3,874 –

Operating loss * (507) (699)

– Of which Accredited 474 –

Operating loss margin ** (4.2)% (8.3)%

Key metrics

Management fee revenue 6,446 5,929

MGA commission revenue 1,232 2,549

Profit commissions 274 (146)

Accredited

– Profit before tax 474 N/A

– Return on net tangible equity 7.3% N/A

*Operating loss is defined as profit/(loss) before income tax, finance costs and share of loss of associate

** Operating loss margin is defined as operating loss divided by total revenue

Divisional Review Underwriting Management Division

10

Condensed Consolidated Income StatementFor the six months ended 30 June 2015

Note

Six months ended 30 June 2015

(unaudited)£000


(unaudited)£000

Year ended 31 December 2014

(audited)£000

Gross premiums written 13,572 16,786 24,751

Reinsurers’ share of gross premiums 257 (642) (1,285)

Premiums written, net of reinsurance 13,829 16,144 23,466

Change in gross provision for unearned premiums (1,826) (1,479) (3,996)

Change in provision for unearned premiums, reinsurers’ share (495) 487 738

Net change in provision for unearned premiums (2,321) (992) (3,258)

Earned premiums net of reinsurance 11,508 15,152 20,208

Investment income 4 2,301 4,131 5,626

Other income 24,093 16,117 39,560

26,394 20,248 45,186

Total income 3 37,902 35,400 65,394

Gross claims paid (23,059) (25,158) (46,624)

Reinsurers’ share of gross claims paid 7,081 12,436 26,475

Claims paid, net of reinsurance (15,978) (12,722) (20,149)

Movement in gross technical provisions 23,529 15,534 8,705

Movement in reinsurers’ share of technical provisions (7,488) (10,992) 172

Net change in provision for claims 16,041 4,542 8,877

Net insurance claims released/(incurred) 63 (8,180) (11,272)

Operating expenses (41,554) (33,284) (69,859)

Result of operating activities before goodwill on bargain purchase and impairment of intangible assets 3 (3,589) (6,064) (15,737)

Goodwill on bargain purchase – 5,663 14,592

Impairment of intangible assets (439) (194) (404)

Result of operating activities (4,028) (595) (1,549)

Finance costs (435) (275) (649)

Share of loss of associate (62) (28) (111)

Loss on ordinary activities before income taxes (4,525) (898) (2,309)

Income tax credit/(charge) 5 896 1,382 (437)

(Loss)/profit for the period 3 (3,629) 484 (2,746)

Attributable to equity holders of the parent:

Attributable to ordinary shareholders (3,380) (618) (4,509)

Non-controlling interests (249) 1,102 1,763

(3,629) 484 (2,746)

Earnings per ordinary share for the profit attributable to the ordinary shareholders of the Company:

Basic 7 (4.7p) (0.9p) (6.3p)

Diluted 7 (4.7p) (0.9p) (6.3p)

The accompanying notes form an integral part of these Condensed Consolidated Financial Statements.

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Condensed Consolidated Statement of Financial PositionAs at 30 June 2015Company number 47341

Note

30 June 2015(unaudited)

£000

30 June 2014 (unaudited)

£000

31 December 2014 (audited)

£000

Assets

Intangible assets 22,673 16,819 23,090

Investments in associates 56 199 117

Property, plant and equipment 1,101 1,648 1,528

Investment properties 756 985 973

Financial assets 113,951 156,157 167,238

Reinsurers’ share of insurance liabilities 6 160,176 146,084 171,404

Current tax assets 4,731 3,042 3,835

Deferred tax assets 8,883 6,838 7,861

Insurance and other receivables 112,923 98,549 114,783

Cash and cash equivalents 77,515 50,434 46,770

Total assets 502,765 480,755 537,599

Liabilities

Insurance contract provisions 6 338,093 324,306 362,883

Financial liabilities 25,271 19,834 28,636

Deferred tax liabilities 2,952 1,826 3,509

Insurance and other payables 8 36,955 29,094 38,997

Current tax liabilities 5,712 3,998 5,855

Pension scheme obligations 7,689 3,914 8,262

Total liabilities 416,672 382,972 448,142

Equity

Share capital 1,436 1,435 1,435

Other reserves 17,427 19,833 17,252

Retained earnings 64,333 74,029 67,609

Attributable to equity holders of the parent 83,196 95,297 86,296

Non-controlling interests 2,897 2,486 3,161

Total equity 86,093 97,783 89,457

Total liabilities and equity 502,765 480,755 537,599

The Condensed Consolidated Financial Statements were approved by the Board of Directors on 21 September 2015 and were signed on its behalf by:

K E Randall T A Booth


12


(unaudited)£000


(unaudited)£000


(audited)£000

Loss before income taxes (4,525) (898) (2,309)

Finance costs 435 275 649

Depreciation 409 316 676

Share based payments – – 213

Share of losses of associates 62 28 111

Goodwill on bargain purchase – (5,663) (14,592)

Profit on disposal of subsidiary (6,514) – –

Amortisation of intangible assets 439 194 404

Fair value (gain)/loss on financial assets 9 (1,541) (242)

Gain on disposal of investment property (23) – –

(Gain)/loss on net assets of pension schemes (992) 145 217

Decrease/(increase) in receivables 1,068 (2,902) (23,079)

Decrease in deposits with ceding undertakings 183 911 975

(Decrease)/increase in payables (1,286) 4,142 8,701

Decrease in net insurance technical provisions (13,681) (3,550) (5,620)

(24,416) (8,543) (33,896)

Sale of financial assets 54,358 15,327 22,901

Purchase of financial assets (1,497) (14,809) (10,574)

Cash from/(used in) operations 28,445 (8,025) (21,569)

Income taxes repaid – – –

Net cash from/(used in) operating activities 28,445 (8,025) (21,569)

Purchase of property, plant and equipment (64) (535) (704)

Proceeds from sale of property, plant and equipment 78 – –

Purchase of intangible assets (223) (40) (264)

Acquisition of subsidiary undertaking (offset by cash acquired) – 15,806 20,398

Proceeds from sale of subsidiary undertaking (net of cash disposed of) 6,563 – –

Proceeds from sale of investment properties 223 – –

Share of cash from reinsurance of syndicate – – 530

Net cash from investing activities 6,577 15,231 19,960

Repayment of borrowings (4,831) (1,134) (19,328)

New borrowing arrangements 1,465 2,070 28,576

Equity dividends paid – (1,844) (3,011)

Interest and other finance costs paid (435) (275) (649)

Cancellation of shares – (1,745) (3,015)

Purchase of treasury shares – – (403)

Sale of treasury shares – – 53

Net cash (used in)/from financing activities (3,801) (2,928) 2,223

Net increase in cash and cash equivalents 31,221 4,278 614

Cash and cash equivalents at beginning of period 46,770 46,942 46,942

Foreign exchange movement on cash and cash equivalents (476) (786) (786)

Cash and cash equivalents at end of period 77,515 50,434 46,770

Share of Syndicates’ cash restricted funds 1,043 3,250 1,987

Unrestricted funds 76,472 47,184 44,783

Cash and cash equivalents at end of period 77,515 50,434 46,770


Condensed Consolidated Cash Flow StatementFor the six months ended 30 June 2015

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Condensed Consolidated Statement of Comprehensive IncomeFor the six months ended 30 June 2015


(unaudited)£000


(unaudited)£000


(audited)£000

Other comprehensive income:

Items that will not be reclassified to profit or loss:

Pension scheme actuarial gains/(losses) 733 (838) (5,027)

Deferred tax on pension scheme actuarial (gains)/losses (147) 168 1,005

586 (670) (4,022)

Items that may be subsequently reclassified to profit or loss:

Exchange (losses)/gains on consolidation (305) (457) 373

Other comprehensive income 281 (1,127) (3,649)

(Loss)/profit for the period (3,629) 484 (2,746)

Total comprehensive income for the period (3,348) (643) (6,395)

Attributable to:

Equity holders of the parent (3,100) (1,758) (8,185)

Non-controlling interests (248) 1,115 1,790

Total comprehensive income for the period (3,348) (643) (6,395)


14

Share capital£’000

Share option costs £’000

Share premium

£’000

Treasury shares£’000

Retained profit£’000

Total£’000

Non-controlling

interest£’000

Total£’000

Six months ended 30 June 2015 (unaudited)

At beginning of period 1,435 64 17,363 (175) 67,609 86,296 3,161 89,457

Total comprehensive income for the period

Loss for the period – – – – (3,380) (3,380) (249) (3,629)

Other comprehensive income

Exchange gains on consolidation – – – – (306) (306) 1 (305)

Pension scheme actuarial gains – – – – 733 733 – 733

Deferred tax on pension scheme actuarial gains – – – – (147) (147) – (147)

Total other comprehensive income for the period – – – – 280 280 1 281

Total comprehensive income for the period – – – – (3,100) (3,100) (248) (3,348)

Transactions with owners

Non-controlling interest in subsidiary disposed of – – – – – – (16) (16)

Treasury shares 1 – – 175 (176) – – –

At end of period 1,436 64 17,363 – 64,333 83,196 2,897 86,093

Condensed Consolidated Statement of Changes in EquityFor the six months ended 30 June 2015

For the six months ended 30 June 2014



Share premium

£’000



Total£’000

Non-controlling

interest£’000

Total£’000

Six months ended 30 June 2014 (unaudited)

At beginning of period 1,435 84 23,392 (54) 75,787 100,644 1,371 102,015

Total comprehensive income for the period

(Loss)/profit for the period – – – – (618) (618) 1,102 484


Exchange losses on consolidation – – – – (470) (470) 13 (457)

Pension scheme actuarial losses – – – – (838) (838) – (838)

Deferred tax on pension scheme actuarial losses – – – – 168 168 – 168

Total other comprehensive income for the period – – – – (1,140) (1,140) 13 (1,127)

Total comprehensive income for the period – – – – (1,758) (1,758) 1,115 (643)


Issue of P&Q shares 3,589 – (3,589) – – – – –

Cancellation of P Shares (1,844) – – – 1,844 – – –

Cancellation of Q shares (1,745) – – – – (1,745) – (1,745)

Dividends – – – – (1,844) (1,844) – (1,844)

At end of period 1,435 84 19,803 (54) 74,029 95,297 2,486 97,783


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Condensed Consolidated Statement of Changes in EquityFor the year ended 31 December 2014



Share premium

£’000



Total£’000

Non-controlling

interest£’000

Total£’000

Year ended 31 December 2014 (audited)

At beginning of year 1,435 84 23,392 (54) 75,787 100,644 1,371 102,015

Total comprehensive income for the year

Profit for the year – – – – (4,509) (4,509) 1,763 (2,746)


Exchange gains on consolidation – – – – 346 346 27 373

Pension scheme actuarial losses – – – – (5,027) (5,027) – (5,027)

Deferred tax on pension scheme actuarial losses – – – 1,005 1,005 – 1,005

Total other comprehensive income for the year – – – – (3,676) (3,676) 27 (3,649)

Total comprehensive income for the year – – – – (8,185) (8,185) 1,790 (6,395)


Issue of P–S shares 6,029 – (6,029) – – – – –

Cancellation of P&R shares (3,015) – – – – (3,015) – (3,015)

Cancellation of Q&S shares (3,014) – – – 3,014 – – –

Treasury shares – (20) – (121) 4 (137) – (137)

Dividends – – – – (3,011) (3,011) – (3,011)

At end of year 1,435 64 17,363 (175) 67,609 86,296 3,161 89,457


16

Notes to the Condensed Consolidated Financial StatementsFor the six months ended 30 June 2015

1. Basis of preparationThe Condensed Consolidated Financial Statements have been prepared using accounting policies consistent with International Financial Reporting Standards and in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting.

The Condensed Consolidated Financial Statements for the 2015 and 2014 half years are unaudited, but have been subject to review by the Group’s auditors.

Certain insignificant changes have been made to prior year amounts to reclassify line items to conform with current year presentation. There is no impact on the result for the period or total shareholders’ equity.

2. Significant accounting policies The accounting policies adopted in the preparation of the Condensed Consolidated Financial Statements are consistent with those followed in the preparation of the Group’s Consolidated Financial Statements for the year ended 31 December 2014 other than as detailed below. There have been no amendments to accounting policies.

New standards effective from 1 January 2015:

IFRS 1 – First-time adoption of IFRS; IFRS 3 – Business combinations; IFRS 13 – Fair value measurements; and IAS 40 – Investment property

The adoption of these standards has had no material impact on the Group’s accounting policies.

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3. Segmental informationThe Group’s segments represent the level at which financial information is reported to the Board, being the chief operating decision maker as defined in IFRS 8. The reportable segments have been identified as follows:-

• Insurance Investments, which acquires legacy portfolios and insurance debt and provides capital support to the Group’s managed Lloyd’s Syndicates

• Insurance Services, which provides insurance related services (including captive management) to both internal and external clients in the insurance market

• Underwriting Management, which provides management to Lloyd’s Syndicates and operates other underwriting entities including bail bond business

• Other corporate activities, which primarily includes the holding company and other minor subsidiaries which fall outside of the segments above

Segment result for the six months ended 30 June 2015 (unaudited)

Insurance Investments InsuranceServices

£000

UnderwritingManagement

£000

Other Corporate

£000

Consolidation adjustments

£000Total£000

Live£000

Run-off£000

Total£000

Earned premium, net of reinsurance 7,444 341 7,785 – 3,723 – – 11,508

Net investment income – 3,509 3,509 716 228 2,574 (4,726) 2,301

External income – 26 26 10,313 7,218 6,536 – 24,093

Internal income – 181 181 5,761 972 599 (7,513) –

Total income 7,444 4,057 11,501 16,790 12,141 9,709 (12,239) 37,902

Claims paid, net of reinsurance (2,114) (13,857) (15,971) – (7) – – (15,978)

Net change in provision for claims (2,035) 18,165 16,125 – (84) – – 16,041

Net insurance claims (increased)/released (4,149) 4,303 154 – (91) – – 63

Operating expenses (4,109) (10,675) (14,784) (16,208) (12,455) (5,620) 7,513 (41,554)

Result of operating activities before goodwill on bargain purchase (814) (2,315) (3,129) 582 (405) 4,089 (4,726) (3,589)

Goodwill on bargain purchase – – – – – – – –

Amortisation and impairment of intangible assets – (145) (145) (63) (102) (129) – (439)

Result of operating activities (814) (2,460) (3,274) 519 (507) 3,960 (4,726) (4,028)

Finance costs – (694) (694) (843) (267) (3,357) 4,726 (435)

Share of loss of associate – – – – (62) – – (62)

(Loss)/profit on ordinary activities before income taxes (814) (3,154) (3,968) (324) (836) 603 – (4,525)

Income tax (charge)/credit – 811 811 192 (175) 68 – 896

(Loss)/profit for the year (814) (2,343) (3,157) (132) (1,011) 671 – (3,629)

Non-controlling interests – – – 48 201 – – 249

Attributable to shareholders of parent (814) (2,343) (3,157) (84) (810) 671 – (3,380)

Segment assets 13,309 521,993 535,302 89,093 43,265 167,716 (332,611) 502,765

Segment liabilities 18,648 397,741 416,389 86,733 26,223 219,938 (332,611) 416,672

18


3. Segmental information continuedSegment result for the six months ended 30 June 2014 (unaudited)


£000


£000

Other Corporate

£000


£000Total£000

Live£000

Run-off£000

Total£000

Earned premium, net of reinsurance 4,706 10,446 15,152 – – – – 15,152

Net investment income 10 5,218 5,228 451 114 1,239 (2,901) 4,131

External income – 632 632 8,498 6,987 – – 16,117

Internal income – 381 381 6,446 1,299 683 (8,809) –

Total income 4,716 16,677 21,393 15,395 8,400 1,922 (11,710) 35,400

Claims paid, net of reinsurance (1,002) (11,720) (12,722) – – – – (12,722)

Net change in provision for claims (1,667) 6,209 4,542 – – – – 4,542

Net insurance claims (increased)/released (2,669) (5,511) (8,180) – – – – (8,180)


Result of operating activities before goodwill on bargain purchase (1,002) (354) (1,356) 969 (642) (2,134) (2,901) (6,064)

Goodwill on bargain purchase – 2,837 2,837 2,826 – – – 5,663

Amortisation and impairment of intangible assets – (106) (106) (31) (57) – – (194)

Result of operating activities (1,002) 2,377 1,375 3,764 (699) (2,134) (2,901) (595)

Finance costs – (1,005) (1,005) (740) (229) (1,202) 2,901 (275)


(Loss)/profit on ordinary activities before income taxes (1,002) 1,372 370 3,024 (956) (3,336) – (898)

Income tax (charge)/credit – 1,148 1,148 108 38 88 – 1,382

(Loss)/profit for the year (1,002) 2,520 1,518 3,132 (918) (3,248) – 484

Non-controlling interests – (776) (776) (198) (128) – – (1,102)

Attributable to shareholders of parent (1,002) 1,744 742 2,934 (1,046) (3,248) – (618)

Segment assets 13,514 517,136 530,650 82,174 15,233 68,261 (215,563) 480,755


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Segment result for the year ended 31 December 2014 (audited)


£000


£000

Other Corporate

£000


£000Total£000

Live£000

Run-off£000

Total£000

Earned premium, net of reinsurance 10,079 9,333 19,412 – 796 – – 20,208

Net investment income 14 6,158 6,172 954 263 5,702 (7,465) 5,626

External income – 2,198 2,198 21,506 15,856 – – 39,560

Internal income – 776 776 14,439 3,246 1,391 (19,852) –

Total income 10,093 18,465 28,558 36,899 20,161 7,093 (27,317) 65,394

Claims paid, net of reinsurance (2,458) (17,691) (20,149) – – – – (20,149)

Net change in provision for claims (3,781) 12,658 8,877 – – – – 8,877

Net insurance claims (increased)/released (6,239) (5,033) (11,272) – – – – (11,272)


Result of operating activities before goodwill on bargain purchase (2,566) (10,224) (12,790) 4,916 438 (836) (7,465) (15,737)

Goodwill on bargain purchase – 8,609 8,609 3,485 2,498 – – 14,592

Amortisation and impairment of intangible assets – (208) (208) (80) (116) – – (404)

Result of operating activities (2,566) (1,823) (4,389) 8,321 2,820 (836) (7,465) (1,549)

Finance costs – (1,737) (1,737) (1,441) (472) (4,464) 7,465 (649)


(Loss)/profit on ordinary activities before income taxes (2,566) (3,560) (6,126) 6,880 2,237 (5,300) – (2,309)

Income tax (charge)/credit – 1,050 1,050 (985) (85) 1,698 (2,115) (437)

(Loss)/profit for the year (2,566) (2,510) (5,076) 5,895 2,152 (3,602) (2,115) (2,746)

Non-controlling interests – (1,615) (1,615) (2) (146) – – (1,763)

Attributable to shareholders of parent (2,566) (4,125) (6,691) 5,893 2,006 (3,602) (2,115) (4,509)

Segment assets 15,347 548,984 564,331 79,671 25,071 183,954 (315,428) 537,599


Internal income includes fees payable by the insurance companies to the Insurance Services Division in the period, which are contractually committed on an arm’s length basis. External income contains no clients which generate more than 10% of the total external income.

20


3. Segmental information continuedGeographical analysis

As at 30 June 2015UK

£000

North America

£000 Europe

£000 Total £000

Gross assets 274,706 449,798 110,872 835,376

Intercompany eliminations (188,323) (82,291) (61,997) (332,611)

Segment assets 86,383 367,507 48,875 502,765

Gross liabilities 267,208 431,531 50,544 749,283


Segment liabilities 59,787 309,513 47,372 416,672

Segmental income 27,513 9,268 1,121 37,902

As at 30 June 2014UK

£000

North America

£000 Europe

£000 Total £000

Gross assets 263,692 321,046 111,580 696,318


Segment assets 127,895 300,290 52,570 480,755


Intercompany eliminations (140,803) (74,093) (667) (215,563)



As at 31 December 2014UK

£000

North America

£000 Europe

£000 Total £000

Gross assets 284,240 454,693 114,094 853,027


Segment assets 105,782 376,872 54,945 537,599





4. Investment income


£000


£000


£000

Interest income 2,297 2,590 5,384

Realised gains on investments 277 757 1,246

Unrealised (losses)/gains on investments (273) 784 (1,004)

2,301 4,131 5,626

5. Income tax


£000


£000


£000

Tax (credit)/charge (896) (1,382) 437

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6. Insurance contract provisions and reinsurance balancesa) Claims provisions

Gross

Six months ended

30 June 2015 £000

Six months ended

30 June 2014 £000


2014£000

Claims outstanding at 1 January 354,412 319,546 319,546

Claims paid (23,059) (25,158) (46,624)

Increase arising from acquisition of subsidiary and RITC of Syndicates – 6,856 28,082

(Release)/strengthening of reserves (470) 9,624 37,919

Net exchange differences (2,720) 7,736 15,489

As at period end 328,163 318,604 354,412

Reinsurance

Six months ended

30 June 2015 £000

Six months ended

30 June 2014 £000


2014£000

Reinsurers’ share of claims outstanding at 1 January 170,211 157,413 157,413

Reinsurers’ share of gross claims paid (7,081) (12,436) (26,475)

Increase arising from acquisition of subsidiary and RITC of Syndicates – – 3,932


Net exchange differences (3,256) (1,044) 8,694

As at period end 159,467 145,377 170,211

Net

Six months ended

30 June 2015 £000

Six months ended

30 June 2014 £000


2014 £000

Net claims outstanding at 1 January 184,201 162,133 162,133

Net claims paid (15,978) (12,722) (20,149)

Increase arising from acquisition of subsidiary and RITC of Syndicates – 6,856 24,150


Net exchange differences 536 8,779 6,796

As at period end 168,696 173,227 184,201

The assumptions used in the estimation of claims provisions relating to insurance contracts are intended to result in provisions which are sufficient to settle the net liabilities from insurance contracts.

Provision is made at the balance sheet 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. The source of data used as inputs for the assumptions is primarily internal.

Significant uncertainty exists as to the likely outcome of any particular claim and the ultimate costs of completing the run off of the Group’s owned insurance operations.

The Group owns a number of insurance companies in run-off. Significant uncertainty arises in the quantification of technical provisions for all insurance entities under the Group’s control due to the long tail nature of the business underwritten by those entities. 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 several years after policies have been written. Furthermore, much of the business written by these companies is re-insurance and retrocession of other insurance companies, which lengthens the settlement period.

The provisions carried by the Group’s owned insurance companies 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 external actuarial reviews. The use of external advisers provides management with additional comfort that the Group’s internally produced statistics and trends are consistent with observable market information and other published data.

22


6. Insurance contract provisions and reinsurance balances continueda) Claims provisions continued

When preparing these Condensed Consolidated Financial Statements, full provision is made for all costs of running off the business of the insurance subsidiaries to the extent that the provision exceeds the estimated future investment return expected to be earned by those subsidiaries. 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 offs. The gross costs of running off the business are estimated to be fully covered by investment income.

Provisions for outstanding claims and IBNR are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries. Insurance companies within the Group are covered by a variety of treaty, excess of loss and stop loss reinsurance programmes.

b) Unearned premium

Gross

Six months ended

30 June 2015 £000

Six months ended

30 June 2014 £000


2014£000

Gross unearned premium at 1 January 8,471 4,402 4,402

Movement in reserves 1,826 1,478 3,996

Net exchange differences (367) (178) 73

As at period end 9,930 5,702 8,471

Reinsurance

Six months ended

30 June 2015 £000

Six months ended

30 June 2014 £000


2014£000

Reinsurers’ share of unearned premium at 1 January 1,193 269 269

Movement in reserves (495) 487 738

Net exchange differences 11 (49) 186

As at period end 709 707 1,193

Net

Six months ended

30 June 2015 £000

Six months ended

30 June 2014 £000


2014£000

Net unearned premium at 1 January 7,278 4,133 4,133

Movement in reserves 2,321 991 3,258

Net exchange differences (378) (129) (113)

As at period end 9,221 4,995 7,278

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7. Earnings per share


£000


£000


£000

Loss for the period attributable to Ordinary shareholders (3,380) (618) (4,509)

No. 000’s No. 000’s No. 000’s

Weighted average number of Ordinary shares 71,678 71,708 71,680

Effect of dilutive share options – – –

Weighted average number of Ordinary shares for the purposes of diluted earnings per share 71,678 71,708 71,680

Basic earnings per share (4.7p) (0.9p) (6.3p)

Diluted earnings per share (4.7p) (0.9p) (6.3p)

Potentially issuable securities that would result in a loss per share if issued are not considered to have a dilution effect. In 2015, due to the loss incurred, no potentially issuable securities are considered dilutive. As a result, there is no difference between basic and diluted earnings per share.

8. Insurance and other payables


£000


£000


£000

Structured liabilities 345,635 356,188 347,848

Structured settlements (345,635) (356,188) (347,848)

– – –

Other creditors 36,955 29,094 38,997

36,955 29,094 38,997

Structured SettlementsNo new structured settlement arrangements have been entered into during the period. The movement in these structured liabilities during the period is primarily due to exchange movements. The Group has paid for annuities from third party life insurance companies for the benefit of certain claimants. In the event that any of these life insurance companies were unable to meet their obligations to these annuitants, any remaining liability would fall upon the respective insurance company subsidiaries. The subsidiary retains the credit risk in the unlikely event that the life insurance company defaults on its obligations to pay the annuity amounts. The Directors believe that, having regard to the quality of the security of the life insurance companies, 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 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.

Quest – Segregated CellsIn respect of the Quest group, the assets and liabilities of the segregated cells not owned by the Group and the profits and losses of each cell not owned by the Group are not available for use by Quest, nor the Group, and as such these balances are not included in the Condensed Consolidated Statement of Financial Position. The amounts held on behalf of the segregated cells as at 30 June 2015 amounted to £29,251k (31 December 2014: £40,018k).

Insurance broking fiduciary fundsThe Group holds insurance broking fiduciary funds, which are used to pay premiums to underwriters and settle claims to policyholders. As these are not available for use by the Group, they are not included in the Condensed Consolidated Statement of Financial Position. The amounts held as at 30 June 2015 amounted to £21,070k (31 December 2014: £22,994k).

24


9. BorrowingsThe Company has entered into a guarantee agreement and debenture arrangement with its bankers, along with various of its subsidiaries in respect of the Group’s overdraft and term loan facilities. The total liability to the bank at 30 June 2015 is £20,027k (31 December 2014: £24,879k).

As at 30 June 2015, a technical breach occurred in the financial covenants required under the Group’s banking facilities. It was reported to the bank and the bank waived the breach. However, because the waiver was received after the period end date, IAS 10 requires that all interest accrued and outstanding utilisations are disclosed as immediately due and payable on demand.

10. Issued share capitalIssued share capital as at 30 June 2015 amounted to £1,435,969 (31 December 2014: £1,435,524).

11. Contingencies and commitmentsIn connection with certain acquisitions the terms are subject to potential amendment which could give rise to an additional payment of £8,654k (31 December 2014: £8,700k).

12. GoodwillWhen testing for impairment of goodwill, the recoverable amount of each relevant cash generating unit is determined based on cash flow projections. These cash flow projections are based on the financial forecasts approved by management covering a five year period. Management also consider the current net asset value and earnings of each cash generating unit.

No changes to the underlying assumptions have been made in the interim review.

The Group considers the relationship between its market capitalisation and its book value, among other factors, when reviewing for indicators of impairment.

13. DivestmentOn 27 February 2015, the Group completed the sale of its 75% ownership of R&Q Marine Services Limited to Hiscox. The agreed cash consideration was £6,750k, of which £5,063k was for the share owned by the Group. Contingent consideration of up to £2,500k, of which £1,875k is for the share owned by the Group, is receivable in February 2016 depending on the performance of the divested business. The Group’s best estimate of contingent consideration receivable is £1,500k, which is recorded in insurance and other payables in the Condensed Consolidated Statement of Financial Position as at 30 June 2015.

The following table shows the Group’s portion of the impact of the divestment:

£’000

Consideration received 5,063

Contingent consideration 1,500

Total consideration received 6,563

Net assets divested (49)

6,514

Fees on divestment (1,251)

Gain on divestment 5,263

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14. Related party transactionsThe following Officers and connected parties received distributions during the period as follows:


£000


£000


£000

K E Randall and family – 921 1,547

A K Quilter and family – 212 357

T A Booth – 33 60

M G Smith – 1 2

During the period the Group recharged expenses totalling £5,438k to Lloyd’s Syndicates 1991 and 3330 which are managed by the Group (2014: £4,814k to Lloyd’s Syndicates 102, 1897, 1991 and 3330).

15. Foreign exchange ratesThe Group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into Sterling, being the Group’s presentational currency:


£000


£000


£000

Average

US dollar 1.52 1.67 1.65

Euro 1.36 1.22 1.24

Spot

US dollar 1.57 1.70 1.56

Euro 1.40 1.25 1.27

16. Events after the reporting dateAcquisitionAs reported in the Group’s 2014 Consolidated Financial Statements, on 25 May 2015, the Group signed an agreement to acquire, subject to change of control approval from the Prudential Regulation Authority and Financial Conduct Authority, the entire issued share capital of IC Insurance Limited from its indirect owners, AstraZeneca UK Limited and Imperial Chemical Industries Limited. All change of control approvals were received by 21 September 2015, and the acquisition is anticipated to be completed by the 25 September 2015. These Condensed Consolidated Financial Statements do not include any financial impact arising from this acquisition.

The following table shows an estimate of the fair value of assets and liabilities as at the date of acquisition:

IC Insurance £000

Intangible assets 166

Other receivables 232

Cash & Investments 24,277

Other payables (35)

Technical provisions (1,856)

Deferred tax (518)

Net assets/(liabilities) to be acquired 22,266

Consideration payable 17,000

Goodwill on bargain purchase (5,266)

Subordinated debtOn 1 September 2015, a subsidiary of the Group, R&Q Insurance (Malta) Limited, issued €20 million floating rate subordinated notes due for redemption on 5 October 2025.

26

IntroductionWe have been engaged by the Company to review the condensed set of Financial Statements in the interim financial report for the six months ended 30 June 2015 which comprise the condensed consolidated income statement, condensed consolidated statement of financial position, condensed consolidated cash flow statement, condensed consolidated statement of comprehensive income, condensed consolidated statement of changes in equity and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Financial Statements.

Directors’ ResponsibilitiesThe interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with International Accounting Standard 34, “Interim Financial Reporting”, as adopted by the European Union, and the AIM Rules for Companies.

The annual Financial Statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of Financial Statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting”, as adopted by the European Union and the requirements of the AIM Rules for Companies.

Our ResponsibilityOur responsibility is to express to the Company a conclusion on the condensed set of Financial Statements in the interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the AIM Rules for Companies. We do not, in producing this report, accept or assume responsibility for any other purpose to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of ReviewWe conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We also read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Financial Statements. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

ConclusionBased on our review, nothing has come to our attention that causes us to believe that the condensed set of Financial Statements in the interim financial report for the six months ended 30 June 2015 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules for Companies.

PKF Littlejohn LLP Chartered Accountants Registered Auditor

21 September 2015

1 Westferry Circus Canary Wharf London E14 4HD

Independent Review Report to Randall & Quilter Investment Holdings Ltd

For the six months ended 30 June 2015

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UK Offices

London

2 Minster Court London EC3R 7BB

London – Underwriting

130 Fenchurch Street London EC3M 5DJ

Witham

Floor 2, Cofunds House Mayland Road, Witham Essex CM8 2FR

Norwich

Floor 3, Lawrence House 5 St Andrews Hill Norwich NR2 1AD

Principal worldwide office locations

US Offices

New York

340 Madison Avenue Suite 1911 New York NY 10173

Philadelphia

2 Logan Square 100 North 18th Street Suite 600 Philadelphia PA 19103

Orlando

4798 New Broad Street Suite 200 Orlando FL 32814

Bermuda Office

Head Office

FB Perry Building 40 Church Street PO Box HM 2062 Hamilton

www.rqih.com

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