Despite seeing strong growth in its Accredited business in H1 of 2023, R&Q Insurance Holdings has reported a pre-tax operating loss of $58 million, primarily due to adverse reserve development in R&Q Legacy reserves of $40 million.
R&Q noted that one of its strategic objectives for H1 was to grow Fee Income, which expanded by 17% to $55.9 million compared to H1 of 2022.
Meanwhile, Net Asset Value was $252.2 million, a 5% increase compared to year-end 2022.
According to the firm, this was primarily a result of its $55 million capital raise of preferred equity being partially offset by adverse reserve development in R&Q Legacy.
R&Q’s US GAAP Loss After Tax was $53 million impacted by $1.8 million of non-cash income and $4.1 million of extraordinary cash income before tax.
The firm’s 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.
Elsewhere, R&Q noted that 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.”
Looking at the aforementioned lines of business through a separate lens, Accredited saw Gross Written Premiums reach $1.1 billion in H1, a 34% increase compared to the same period last year.
Commenting on the Accredited business, R&Q said, “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% margin on Gross Operating Income, an increase of 13.4 percentage points compared to H1 2022.”
Accredited’s Pre-Tax Operating Profit excludes the minority 40% stake in Tradesman Program Managers.
Meanwhile, R&Q Legacy completed an MSA Safety transaction involving non-insurance liabilities “in an otherwise seasonally quiet market with Gross Reserves Acquired of $695 million.”
R&Q Legacy Reserves Under Management were $1.1 billion in H1, a massive 172% increase from the same period last year. Fee Income was $9.7 million, a 10% increase from H1 of 2022, with MSA Safety “carrying a lower fee than Gibson Re on Reserves Under Management due to no tail risk exposure.”
The Legacy business Pre-Tax Operating Loss was $62.2 million, which, as mentioned, included $40 million of adverse reserve development, primarily from older transactions including Lloyd’s, where R&Q said it has experienced higher-than-expected claim volume emanating from a COVID-related backlog of filings and higher than expected claims severity.
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.”
Spiegel continued, “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 to 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.”
Spiegel concluded, “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.”
