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R&Q sees FY 2022 operating loss of $33m, cites adverse Legacy development

29th June 2023 - Author: Kane Wells

Despite seeing strong growth in its Accredited business in 2022, R&Q Insurance Holdings has reported a pre-tax operating loss of $33.3 million, impacted by $32 million of adverse development and the transition to a fee-based revenue model at R&Q Legacy.

R&Q Insurance Holdings logoR&Q’s Accredited business saw Gross Written Premiums of $1.8 billion in 2022, a 76% increase from the previous year. Meanwhile, fee income (excluding MGA stakes) in the Accredited business was $80 million, which marked a 78% increase from 2021.

Accredited also saw a pre-tax operating profit of $55.7 million, a 170% increase from 2021, and a pre-tax operating profit margin of 56.8%.

However, offsetting these numbers, R&Q’s Legacy business fell to a pre-tax operating loss of $56.6 million, which includes $32 million of adverse development primarily from older transactions.

According to R&Q, excluding adverse development, the loss reflects the first full year of a transition to a capital-efficient annual recurring, fee-based revenue model from a balance sheet intensive, Day-1 gain model.

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This is not the first time R&Q has reported adverse development in its Legacy book of business, as reported here in June 2022.

Elsewhere, R&Q revealed its Legacy business completed four transactions in 2022 “while exercising discipline in a soft market” with Gross Reserves Acquired of $68.8 million (2021: $735.0 million).

Reserves Under Management for the Legacy business stood at $395.6 million at the end of 2022, which has increased to over $1 billion with an MSA Safety transaction involving non-insurance liabilities that closed in January 2023.

Meanwhile, fee income in R&Q’s legacy business was $12.1 million.

Group-wide, total fee income (excluding MGA stakes) was $92 million, a 105% increase from 2021.

R&Q’s IFRS loss after tax was substantial at $297 million for the year, which the firm said was impacted by c.$162 million of non-cash items, including net unrealised and realised investment losses on fixed income assets of $135.8m, unearned program fee income of $17.0 million and amortisation of net intangibles of $9.6 million.

Commenting on this, R&Q said, “In 2023 we are adopting US GAAP as our accounting standard. 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 on reinsurance recoverables.

“Neither US GAAP nor other accounting standards, such as IFRS 17, recognise Day-1 gains in legacy insurance transactions.

“As a result of these differences, our unaudited US GAAP Loss After Tax for 2022 was estimated at c.$90-115 million and our US GAAP Net Asset Value at 31 December 2022 was estimated at c.$225-250 million, significantly different than IFRS results.”

William Spiegel, Chief Executive Officer of R&Q, noted, “2022 was, without doubt, an eventful year for R&Q. I would like to start by thanking our shareholders and partners for their support and our employees for their focus and commitment.

“During the year we saw substantial progress with regards to our Five-Pillar Strategy, which includes significant investment and change aimed at making R&Q a more modern and efficient company with a stronger culture.

“In many ways the changes we are making represent a multi-year operational turnaround at R&Q and, although not always easy, they will make us a stronger, more sustainable and more effective business.

Spiegel continued, “While our Pre-Tax Operating Loss of $33.3 million is driven primarily by $32 million of adverse development in R&Q Legacy, at an underlying level our performance reflects two businesses at different stages of their development.

“Accredited continued to grow and reported record results while R&Q Legacy reported a loss but has shown good execution against its transition plan to become a more capital-efficient business.

“We announced in April 2023 that the Board had concluded that it was in shareholders’ best interests to evaluate strategic options that allowed for a separation of Accredited and R&Q Legacy.

“We have two great businesses, but they operate in different parts of the insurance ecosystem, require different skillsets and expertise, and have different rating and regulatory needs. We are now in a position where each has the scale, maturity, and brand strength to stand on its own.

“By separating these businesses, we can ensure both have the right level of management focus and appropriate capital structures to achieve their full potential.”

Earlier this month, R&Q announced it is raising up to $60 million in new equity through a preferred arrangement with one of its shareholders, Scopia Capital Management, while also having announced the completion of an internal separation of its Program Management business, Accredited, and its Legacy Insurance business.

In the past week, R&Q announced that AM Best has recognised Accredited as an independent ratings unit, distinct from R&Q.

AM Best has maintained the Financial Strength Rating of A- (Excellent) of Accredited Specialty Insurance Company (ASI), Accredited Surety and Casualty Company, Inc. (ASC) and Accredited Insurance (Europe) Limited (AIEL).

While providing the ratings, AM Best highlighted Accredited’s balance sheet strength, which the rating agency assessed as ‘very strong.’

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