R&Q Insurance Holdings Ltd (LON:RQIH), the leading non-life global specialty insurance company focusing on the Program Management (“Accredited”) and Legacy Insurance (“R&Q Legacy”) businesses, today announced its results for the half year ended 30 June 2023.
H1 2023 Financial Highlights
Accredited
· Gross Written Premium (“GWP”) of $1.1 billion (H1 2022: $0.8 billion, a 34% increase)
· Fee Income of $46.2 million (H1 2022: $39.1 million, an 18% increase)
· Pre-Tax Operating Profit of $28.6 million (H1 2022: $15.4 million, an 86% increase)
· Pre-Tax Operating Profit Margin of 57.0% (H1 2022: 43.6%, a 13.4 percentage point increase)
R&Q Legacy
· Completed MSA Safety transaction involving non-insurance liabilities in an otherwise seasonally quiet market with Gross Reserves Acquired of $695.0 million (H1 2022: $5.3 million)
· Reserves Under Management of $1.1 billion (30 June 2022: $0.4 billion, a 172% increase)
· Fee Income of $9.7 million (H1 2022: $8.8 million, a 10% increase), with MSA Safety carrying a lower fee than Gibson Re on Reserves Under Management due to no tail risk exposure
· Pre-Tax Operating Loss before adverse reserve development of $24.2 million and a loss of $64.2 million including $40.0 million of adverse reserve development primarily from older transactions in Lloyd’s
Group
· Total Fee Income of $55.9 million (H1 2022: $47.9 million, a 17% increase)
· Pre-Tax Operating Loss of $18 million prior to R&Q Legacy adverse development and a loss of $58.0 million including the $40.0 million of R&Q Legacy adverse reserve development
Non-Recurring Items
· Non-cash income of $1.8 million primarily associated with net unrealised investment gains net of fair market value impact on legacy reserves
· Extraordinary cash income of $4.1 million
Operational Highlights
· Continued focus on cost control with R&Q Legacy Fixed Operating Expenses decreasing 8% year-over-year
· Operational improvement program in full flight with ~$20 million of the planned total $20 ‒ $25 million investment deployed since 2021, with the remainder to be incurred in H2 2023
· Investment in automation and technology processes is expected to generate significant productivity efficiencies by end of 2024
Outlook
· Focus remains on the separation of R&Q Legacy and Accredited
o Advanced discussions regarding the potential sale of Accredited as announced on 22nd September
· Post period end, Accredited approved five programs with ~$227 million in annualised GWP
· R&Q Legacy has three deals in advanced stages with over $100 million in reserves and an identified pipeline of ~$800 million in reserves
Summary Financial Performance (see Notes for definitions)
| ($m, except where noted) | H1 2023 | H1 2022* | % Change |
| Accredited | |||
| Gross Written Premium | 1.1b | 0.8b | 34% |
| Fee Income | 46.2 | 39.1 | 18% |
| Pre-Tax Operating Profit | 28.6 | 15.4 | 86% |
| Pre-Tax Operating Profit Margin | 57.0% | 43.6% | 13.4 pp |
| R&Q Legacy | |||
| Gross Reserves Acquired | 695.0 | 5.3 | NM |
| Reserves Under Management | 1.1b | 0.4b | 172% |
| Fee Income | 9.7 | 8.8 | 10% |
| Pre-Tax Operating Loss | (64.2) | (26.7) | 140% |
| Corporate / Other | |||
| Net Unallocated Expenses | (6.5) | (6.7) | (3%) |
| Interest Expense | (15.9) | (14.2) | 12% |
| Minority Stake in Tradesman | — | 5.2 | (100%) |
| Group | |||
| Fee Income | 55.9 | 47.9 | 17% |
| Pre-Tax Operating Loss | (58.0) | (27.0) | 115% |
| US GAAP Loss After Tax | (53.1) | (2.2) | NM |
| Operating Loss per Share | (13.9)¢ | (8.9)¢ | 56% |
* Restated for change to US GAAP effective in 2023 for comparison purposes
William Spiegel, Chief Executive Officer of R&Q, commented:
“As we said in our 2022 full year results announcement, R&Q is undergoing a multi-year operational turnaround aimed at creating a stronger, sustainable and more efficient business. We are well underway with this program and continued to make good progress in the first half of 2023. A key part of this is to become a simpler and more focused company with a more appropriate capital structure. Separating the ownership of R&Q Legacy and Accredited is an important step in accomplishing this and, as announced on 22 September 2023, we are in advanced discussions with a party regarding the potential sale of Accredited.
Both Accredited and R&Q Legacy have delivered well against their respective strategic objectives in the first half of 2023. Accredited successfully grew GWP, Fee Income and Pre-Tax Operating Profit and continues to be a leading trans-Atlantic program manager, with five further programs approved post this reporting period. R&Q Legacy now has Reserves under Management in excess of $1 billion, most notably executing its first corporate liabilities transaction through the formation of our joint venture with Obra to manage the non-insurance legacy exposures of MSA Safety. While H1 is seasonally quieter, R&Q Legacy continues to have an active pipeline with three deals in advanced stages and over $800 million in reserves identified as opportunities. We remain laser-focused on expense discipline in R&Q Legacy and have reduced Fixed Operating Expenses by 8% year-over-year.
As we detailed when we set out our plan to transition R&Q Legacy to a more capital efficient recurring fee-based model, our earnings needed go through a valley as we implemented this strategy. While we are pleased with how R&Q Legacy is executing against its strategy, we are disappointed to have witnessed further adverse reserve development. Excluding this, we would have reported a Group Pre-Tax Operating Loss of $18 million, an improvement on last year’s equivalent, that highlights Accredited’s continued profitable growth and R&Q Legacy’s increased fee income and strong expense management. We are focused on trying to minimize future reserve volatility as well as driving improved underlying performance of the Group through better automation and expense management.
Looking ahead, we continue to focus on maximizing value for our shareholders and other stakeholders. Both of our businesses have bright futures, and our strategic objective is to give each the footing it needs to pursue its business model with confidence.”
Notes to financials
Pre-Tax Operating Profit is a measure of how the Group’s core businesses performed adjusted for Unearned Program Fee Income, fair market value impact associated with change in discount rate on Legacy Insurance reserves, net realised and unrealised investment gains on fixed income assets and non-core, non-recurring costs.
Operating EPS represents Pre-Tax Operating Profit adjusted for the marginal tax rate, divided by the average number of diluted shares outstanding in the period.
Gross Operating Income represents Pre-Tax Operating Profit before Fixed Operating Expenses and Interest Expense
Fee Income represents Program Fee Income and Fee Income on Reserves Under Management.
Program Fee Income represents the full fee income from insurance policies already bound including Unearned Program Fee Income, regardless of the length of the underlying policy period. We believe Program Fee Income is a more appropriate measure of the revenue of the business during periods of high growth, due to a larger than normal gap between written and earned premium.
Unearned Program Fee Income represents the portion of Program Fee Income that has not yet been earned on a US GAAP basis.
Underwriting Income represents net premium earned less net claims costs, acquisition expenses, claims management costs, premium taxes / levies, licensing fees and the cost of excess of loss coverage to protect the balance sheet.
Investment Income represents income on the investment portfolio excluding net realised and unrealised investment gains on fixed income assets.
Fixed Operating Expenses include employment, legal, accommodation, information technology, Lloyd’s syndicate, and other fixed expenses of ongoing operations, excluding non-core and exceptional items.
Pre-Tax Operating Profit Margin is R&Q’s profit margin on Gross Operating Income.
Gross Reserves Acquired represent Legacy Insurance reserves and non-insurance liabilities acquired gross of reinsurance to Gibson Re.
Reserves Under Management represent insurance reserves ceded to Gibson Re and non-insurance liabilities for which R&Q earns annual recurring fees.
Chief Financial Officer Review
We are pleased to report our financial results for the six months ending 30 June 2023, which is the first period we have reported our financial results in accordance with US GAAP. US GAAP has a number of differences from IFRS, namely fair market value measurement of legacy gross and ceded reserves including a risk margin, as well as the recognition of unallocated loss adjustment expenses and current expected credit losses (CECL) on reinsurance recoverables. Neither US GAAP nor other accounting standards such as IFRS 17, recognise Day-1 gains in legacy insurance transactions.
Group
Our Key Performance Indicators (‘KPIs”) measure the economics of the business and adjust US GAAP results to include fully written Program Fee Income and exclude the impact on fair market value of R&Q Legacy reserves due to changes in discount rates, net realised and unrealised investment gains and losses on fixed income assets, non-core expenses and exceptional items.
Our Pre-Tax Operating Loss of $58.0 million was primarily due to adverse reserve development in R&Q Legacy reserves of $40 million. One of our strategic objectives is to grow our Fee Income, which was $55.9 million, a 17% increase compared to H1 2022. Net Asset Value was $252.2 million, a 5% increase compared to year-end 2022, primarily as a result of our $55 million capital raise of preferred equity being partially offset by adverse reserve development in R&Q Legacy. On a fully diluted basis, our Operating Loss Per Share was 13.9 cents and our Net Asset Value Per Share was 67.3 cents.
Our US GAAP Loss After Tax was $53.0 million impacted by $1.8 million of non-cash income and $4.1 million of extraordinary cash income before tax. Non-cash income included net unrealised and realised investment gains on fixed income assets of $3.3 million net of the impact on fair market value of R&Q Legacy reserves of $1.5 million due to changes in discount rates. Extraordinary cash income included a $25.4 million gain on the sale of our 40% minority stake in Tradesman Program Managers net of an $11.1 million charge associated with an older transaction in Lloyd’s that had carried a debtor on its books since 2017, which was subsequently written off upon reconciliation, $3.7 million in automation spend which should yield meaningful productivity savings starting in 2024, $3.0 million in senior management retention compensation associated with the separation of Accredited and R&Q Legacy and the pending strategic options with 3rd parties and $3.5 million in other extraordinary items. On a fully diluted basis, our US GAAP Loss Per Share was 14.2 cents.
Accredited
Accredited continued to grow rapidly in H1 2023. Our Gross Written Premium was $1.1 billion, a 34% increase compared to H1 2022. Our results demonstrate the benefits of scale as we earned a Pre-Tax Operating Profit of $28.6 million, an 86% increase compared to H1 2022, representing a 57.0% margin on Gross Operating Income, an increase of 13.4 percentage points compared to H1 2022. Accredited’s Pre-Tax Operating Profit excludes our minority 40% stake in Tradesman Program Managers, which was sold in H1 2023 and has been included in Corporate and Other.
The primary driver of Pre-Tax Operating Profit is Fee Income. Fee Income was $46.2 million, an 18% increase compared to H1 2022. We expect Fee Income to generally grow in line with Gross Written Premium, however it is impacted by select programs with minimum fixed fees until such programs build to scale. Underwriting Income represents our c.7% retention of Program Insurance risk. Our Underwriting result was approximately breakeven primarily due to the purchase of excess of loss reinsurance in order to minimise any balance sheet volatility as well as a provision for CECL on reinsurance recoverables. Our Investment Income was $4.7 million, a 370% increase compared to H1 2022 associated with higher reinvestment rates. Finally, Fixed Operating Expenses were $21.6 million, a 9% increase compared to H1 2022 due to the expansion of our staff and a higher allocation of corporate expenses.
R&Q Legacy
R&Q Legacy concluded one transaction during the period, MSA Safety, which included non-insurance liabilities of $695 million, in an otherwise seasonally quiet period for legacy insurance transactions. At 30 June 2023, we had Reserves Under Management of $1.1 billion, a 172% increase compared to 30 June 2022, and during H1 2023 we reported Fee Income of $9.7 million, a 10% increase compared to H1 2022. MSA Safety carries a lower fee on Reserves Under Management than that of our sidecar, Gibson Re due to no tail risk exposure. We expect Fee Income to become the predominant driver of Pre-Tax Operating Profit once we fully deploy capital in Gibson Re. Our Pre-Tax Operating Loss was $62.2 million, which included $40 million of adverse reserve development (included in Underwriting Income), primarily from older transactions including Lloyd’s, where we have experienced higher than expected claim volume emanating from a COVID-related backlog of filings and higher than expected claims severity. Our Investment Income was $16.4 million, a 144% increase compared to H1 2022 driven by higher reinvestment yields. Finally, Fixed Operating Expenses were $35.6 million, an 8% decrease compared to H1 2022 due to expense control.
Corporate and other
Our Corporate and Other segment includes unallocated operating expenses and interest costs. Unallocated operating expenses were $6.5 million, a 3% decrease compared to H1 2022 primarily driven by higher allocations to the two business segments. Interest expense was $15.9 million, a 12% increase compared to H1 2022 associated with higher interest rates on floating rate debt. We have reallocated the $5.2 million of earnings in H1 2022 from our 40% minority stake in Tradesman from Accredited segment earnings to Corporate and Other due to the sale of this stake in H1 2023.
Cash and investments
Our Cash and Investments at 30 June 2023, excluding funds withheld, was $1.5 billion. We produced a book yield, which excludes net realised and unrealised gains on fixed income assets, of 2.8%, an increase of 80 bps compared to H1 2022, due to the higher interest rate environment.
We maintain a conservative, liquid investment portfolio so that we can produce consistent cash flows to meet our liability obligations, while also earning a reasonable risk-adjusted return. 96% of our portfolio was invested in cash, money market funds, and fixed income investments. Of our fixed income investments, 98% were rated investment-grade. After cash, which comprised 24% of our portfolio, our largest allocations were to corporate bonds (41%), government and municipal securities (20%), asset-backed securities (12%) and equities (3%). We have maintained a duration in our portfolio of 3 years, shorter than that of our liabilities of 6 years.
During H1 2023, our investment portfolio had cumulative unrealised net investment losses of $104 million, which are included in our US GAAP results. Given the high credit quality of our investment portfolio and the primarily casualty-focused retained liabilities, we do not expect to realise these mark-to-market losses other than to rebalance the portfolio for more attractive reinvestment opportunities, and hence do not include such movement in our Pre-Tax Operating Profit.
Capital and liquidity
In June 2023, we raised $55 million of preferred equity, which was used to capitalise R&Q Legacy in order to provide reinsurance coverage to Accredited under the legal separation that was required to maintain the AM Best rating as well as for general corporate purposes. As a result, our Group Solvency ratio at 30 June 2023 was 169%, which is above our target level of 150%. Our total debt at 30 June 2023 was $333.3 million, which includes a bank facility as well as subordinated notes. In addition, we have $188.8 million of unsecured letters of credit that provide security on assumed reinsurance of legacy exposures, which are guaranteed by the Group.
