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, has today announced its results for the year ended 31 December 2022.
Strategic and Governance Update
· Completed the legal separation of Accredited and R&Q Legacy and announced exploration of strategic transactions with third parties as part of the separation
· Recognition by AM Best of Accredited as an independent rating unit, with an A- financial strength rating
· Completed sale of minority stake in Tradesman Program Managers for $47 million at 10x adjusted EBITDA and 3.7x initial investment
· Raised $50m of preferred equity from Scopia Capital, with the opportunity to raise an additional $10 million to increase the capital resources of R&Q Legacy
· Appointed Jeff Hayman as our Independent Non-Executive Chairman
2022 Financial Highlights
Accredited
· Gross Written Premium of $1.8 billion (2021: $1.0 billion, a 76% increase)
· Fee Income (excluding MGA stakes) of $80.0 million (2021: $44.9 million, a 78% increase)
· Pre-Tax Operating Profit of $55.7 million (2021: $20.6 million, a 170% increase)
· Pre-Tax Operating Profit Margin of 56.8% (2021: 35.7%, a 21.1 percentage point increase)
R&Q Legacy
· Completed four transactions while exercising discipline in a soft market with Gross Reserves Acquired of $68.8 million (2021: $735.0 million)
· Reserves Under Management of $395.6 million at year-end, which has increased to over $1 billion with MSA Safety transaction involving non-insurance liabilities that closed in January 2023 (2021: $417.0 million)
· Fee Income of $12.1 million (2021: $0 million)
· Pre-Tax Operating Loss of $56.6 million, which includes $32.0 million of adverse development primarily from older transactions. The loss, excluding adverse development, 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
Group
· Total Fee Income (excluding MGA stakes) of $92.0 million (2021: $44.9 million, a 105% increase)
· Pre-Tax Operating Loss of $33.3 million impacted by $32.0 million of adverse development and the transition to a fee-based revenue model at R&Q Legacy
Non-Recurring Items
· Significant non-recurring items:
o Non-cash charges of c.$205 million primarily associated with:
o Unrealised and realised non-economic net investment losses of $135.8 million; $18 million of realised losses arising primarily from rebalancing the portfolio for higher returns
o $43 million of non-cash adverse development associated with a non-core subsidiary, that will become a discontinued operation in Q1 2023 at which time such charges will be reversed
o Unearned program fee income of $17.0 million in which cash has already been received
o Net intangible amortisation of past legacy acquisitions of $9.6 million
· Extraordinary one-off cash charges of c.$50 million primarily associated with:
o $28 million in one-off historic legal matters associated with older legacy transactions and discontinued programs
o $14 million in automation spend which should yield meaningful productivity savings starting in 2024
o $8 million in advisory costs associated with shareholder activism and sale process
Operational Highlights
· Continued focus on cost control with Fixed Operating Expenses decreasing 13% year-over-year
· Operational improvement program underway with c. $15 million of the total $20 ‒ 25 million investment deployed since 2021, with the remainder to be incurred in 2023
· Investment in automation and technology processes is expected to generate approximately $10 million of recurring annual cost efficiencies by 2024
Outlook
· Focus remains on the separation of R&Q Legacy and Accredited
· Accredited and R&Q Legacy both with excellent pipelines
Summary Financial Performance (see Notes for definitions)
| ($m, except where noted) | 2022 | 2021* | % Change |
| Accredited | |||
| Gross Written Premium | 1.8b | 1.0b | 76% |
| Fee Income1 | 80.0 | 44.9 | 78% |
| Pre-Tax Operating Profit | 55.7 | 20.6 | 170% |
| Pre-Tax Operating Profit Margin | 56.8% | 35.7% | 21.1 pp |
| R&Q Legacy | |||
| Gross Reserves Acquired2 | 68.8 | 735.0 | (91%) |
| Reserves Under Management | 395.6 | 417.0 | (5%) |
| Fee Income | 12.1 | 0.0 | N/A |
| Pre-Tax Operating (Loss) | (56.6) | (6.1) | N/A |
| Corporate / Other | |||
| Net Unallocated Expenses | (1.9) | (13.2) | (86%) |
| Interest Expense | (30.5) | (22.7) | 34% |
| Group | |||
| Fee Income (excl. MGA stakes) | 92.0 | 44.9 | 105% |
| Pre-Tax Operating (Loss) | (33.3) | (21.4) | 55% |
| IFRS (Loss) After Tax | (297.0) | (127.1) | 134% |
| Est. US GAAP (Loss) After Tax | (90.0)-(115.0) | — | NA |
| Operating (Loss) Earnings per Share3 | (9.9)¢ | (7.5)¢ | 32% |
| 1Excludes minority stakes in MGAs 2Gross of cessions to Gibson Re 3On a fully diluted basis |
* Restated for change in accounting policy as noted in 2.a. of the financial statements
William Spiegel, Chief Executive Officer of R&Q Insurance, commented:
“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.
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.
Looking ahead, we are confident the outlook is strong for Accredited and R&Q Legacy. Both businesses have excellent pipelines and, while we remain highly disciplined, we are confident of growing Gross Written Premium and Reserves Under Management in each business respectively.”
Notes to financials
Pre-Tax Operating Profit is a measure of how the Group’s core businesses performed adjusted for Unearned Program Fee Income, intangibles created in Legacy Insurance acquisitions, net realised and unrealised investment gains on fixed income assets, exceptional foreign exchange net gains upon consolidation 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.
Tangible Net Asset Value represents Net Asset Value adjusted for Unearned Program Fee Income, intangibles created in Legacy Insurance acquisitions, net unrealised investment gains on fixed income assets and foreign currency translation reserves.
Gross Operating Income represents Pre-Tax Operating Profit before Fixed Operating Expenses and Interest Expense
Fee Income represents Program Fee Income, Fee Income on Reserves Under Management and excludes share of earnings from minority stakes in MGAs.
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 an IFRS basis.
Underwriting Income represents net premium earned less net claims costs, acquisition expenses, claims management costs, premium taxes / levies and the cost of excess of loss coverage.
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 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.
Chairman’s Statement
I was pleased to be appointed Independent Non-Executive Chairman in March 2023. Since joining I have spent time getting to know our businesses (Legacy Insurance (“R&Q Legacy”) and Program Management (“Accredited”)), our people and our shareholders.
Clearly both of R&Q’s two businesses have excellent fundamentals: they are well-established players in attractive non-life insurance niche segments, enjoy high barriers to entry, have high quality management teams and employees with strong technical expertise, and they both have well established reputations in the market.
However, it is also important to acknowledge 2022’s challenges. These included continued volatility and adverse development in our older legacy books as well as a number of corporate events that absorbed significant Board and management time. In addition, the company oversaw extensive and ongoing internal transformation to ensure its people, technology, risk management, culture and governance are appropriate to support R&Q’s strategic and growth ambitions.
On an underlying basis, I believe the picture is encouraging. Accredited has established itself as a genuine leader with exciting growth. At the same time R&Q Legacy is building momentum in its strategic transformation, albeit at a slower pace than originally envisaged given the need for prudence in a softer legacy market. The joint venture with Obra Capital, Inc. to acquire MSA Safety post-period end is also indicative of a meaningful opportunity to provide solutions for corporate liabilities through partnerships with third-party capital, adding to what is now a sizeable pool of reserves managed by R&Q Legacy.
The focus for R&Q therefore needs to be unlocking the value within both businesses. Doing this will create more opportunity for our people, stronger counterparties for capital and trading partners and greater returns for our shareholders.
Although transitioning to a fee-oriented business, R&Q Legacy has a more volatile earnings profile than Accredited, which could impact the financial strength rating critical to Accredited. It is therefore clear to the Board that achieving our objective of unlocking value in each business is best managed through a separation of Accredited and R&Q Legacy. William will discuss this further in his CEO Statement.
My appointment as Non-Executive Chairman has also enabled R&Q to move to a corporate governance structure that is better aligned with best market practice. As Executive Chairman, the role William was undertaking was far closer to that of Group CEO and it is appropriate that this is now formalised.
Since starting my role, I have been deeply impressed by the caliber of R&Q’s leadership team, many of whom have joined in the last two to three years. William has assembled a bench with deep experience across insurance, capital markets and financial services. This has been particularly important given the extensive transformation that has taken place within the business to ensure it has the technology, platforms and processes required to support the growth of Accredited and R&Q Legacy. This has included substantial changes to make R&Q a more efficient business, improve its risk management and governance practices and build a stronger culture that can attract and retain the talent we need.
The Board and I are focused on supporting the leadership team as they continue to drive these essential changes, while also pursuing the strategic separation of our two businesses. Since coming into the business, my confidence in the inherent value within R&Q has only increased. I firmly believe we have the right team and strategy to realise these objectives.
Chief Executive Officer’s Statement
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 strategic pillars, most notably the continued evolution and transition of R&Q Legacy and significant investment and change aimed at making R&Q a modern and efficient company with a strong culture. In many ways these changes represent a multi-year operational turnaround at R&Q. Turnarounds are difficult; they take time, focus and resilience in the face of both many obstacles and outside scrutiny.
In 2022 we were also required to navigate a number of events we had not anticipated at the start of the year, and which took up significant management time. In particular, while we were successful in our defense against the shareholder activism, this event, including the public attention drawn to it, took a toll on the mental health of many of our employees who are proud of their work at R&Q. I have been particularly impressed with the way our employees responded with continued focus and commitment.
Turning to our performance for 2022, we are disappointed with our headline operating result, which is a Pre-Tax Operating Loss of $33.3 million. This loss is larger than expected, primarily driven by $32 million of adverse development in R&Q Legacy, mainly from our older legacy transactions. Beyond the adverse development, and at an underlying level, this result reflects two businesses at different stages of their development. Accredited continued to grow and reported record results and a profit of $55.7 million while R&Q Legacy reported a loss of $56.6 million. If not for the adverse development, R&Q Legacy would have shown good execution against its transition plan to become a more capital efficient business. Our overall loss was also impacted by $32.4 million in Corporate and Other, which is primarily interest expense. I will discuss Accredited and R&Q Legacy in more detail shortly.
Accredited has seen remarkable growth in the past five years and is now the largest program manager in Europe and one of the largest in the US. It also relies on an ‘A’ financial strength rating to conduct its business and, although it has historically relied on the strength of the broader Group to obtain its financial strength rating, it now has both the size and scale to achieve a standalone rating. Conversely, R&Q Legacy, which does not require a financial strength rating to conduct business, is at an earlier stage of its strategic journey as it transitions to a fee-oriented and capital-efficient model that will create a more profitable, sustainable and valuable business. Therefore, 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. A process is underway for the sale of Accredited with interest expressed from a number of parties. In addition, a variety of strategic actions are being explored in relation to 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 their 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. Legal separation was successfully completed as planned in Q2 2023 and with the completion of the reorganisation, AM Best announced the recognition of Accredited as an independent rating unit (separate from R&Q) and has maintained an A- financial strength rating pending the completion of the sale process.
We also announced in June 2023 that we have raised $50 million of preferred equity from Scopia Capital, one of our largest shareholders, with the opportunity to raise an additional $10 million. This is being used to increase the capital resources of R&Q Legacy, which is providing reinsurance support to Accredited, as well as general corporate purposes given that Accredited will no longer pay intra-group dividends to R&Q as part of a requirement to secure its financial strength rating from AM Best.
Turning to corporate governance, I am pleased that we were able to welcome Jeff Hayman as our Non-Executive Chairman recently. Jeff’s long career in the global insurance sector and Board experience made him the outstanding candidate and he is already making a valuable contribution.
Accredited review
Accredited was launched in 2017 and when I joined R&Q in early 2020, it had circa $370 million in Gross Written Premium (“GWP”). Today that has increased by nearly 550% and, with GWP of circa $2.0 billion, Accredited is now one of the most important hybrid carriers globally.
Accredited’s results for last year reflect not only outstanding growth, but a robust, operationally-mature and well-diversified business. In 2022, we reported a Pre-Tax Operating Profit of $55.7 million and Fee Income (excluding minority stakes in Managing General Agents(“MGAs”)) of $80 million, increases of 170% and 78% respectively. This Pre-Tax Operating Profit included $12 million that arose from the Group’s minority stake in Tradesman Program Managers (“Tradesman”). In March we announced that we completed the sale of our 40% minority stake in Tradesman for $47 million or approximately 10x EBITDA upon adjusting for the maximum contingent commissions that could become payable to reinsurers should the program underperform expectations and $67 million of net debt on Tradesman’s balance sheet as at 31 December 2022. Furthermore, our decision to reduce our exposure to certain Tradesman programs meant the minority investment was no longer strategic to R&Q; we have made 3.7x our initial investment in Tradesman of $25 million, including $46 million of dividends received to date and have subsequently replaced the GWP from Tradesman’s programs with new MGA partnerships.
We are also now seeing Accredited increasingly benefit from operational leverage given its meaningful scale with margin improvement of 21 percentage points over the year, increasing from 36% to 57%. It is not only scale driving this enhanced margin; we are starting to see benefits emerge from our smart investments in data and technology to make Accredited a more efficient business. This has included moving to a cloud-based architecture, centralising our data, enabling new analytics and reporting, automating a number of processes and optimising resources. This remains a core focus, and we expect to drive further operational improvements in 2023 that will both support growth and enhance our profitability.
Our overall result was driven by an 76% increase in GWP to $1.8 billion written through our 77 programs and supported by over 250 reinsurance partnerships. As Accredited continues to scale, we believe this diversification by program, class of business and reinsurer is particularly important. Supporting this growth is the consistently strong feedback we get from MGAs on the value they place in Accredited as a partner.
From an underwriting portfolio perspective, it means we are not over-exposed to either a single program or specific classes of business, giving us protection against headwinds in any part of the market. Furthermore, Accredited employs a rigorous screening process in order to select only high-quality programs out of a large pipeline of opportunities. We couple this with highly active oversight that includes regular audits and reviews and our technology allows underwriting, actuarial and finance to perform ongoing monitoring of each program’s performance, giving us early indication of any developing situations, enabling the quality of performance to be maintained.
From a reinsurer perspective, our diversification gives us multiple channels for sourcing capacity. It also supports our focus on managing counterparty credit, something that is critical for any program manager. We have developed a broad panel of highly-rated reinsurers to support Accredited. Our focus on due diligence and active management of our programs is an important differentiator for these reinsurance partners when providing capacity to Accredited.
Looking ahead our strategy for Accredited remains unchanged. We will look to:
· Partner with high quality MGAs and reinsurers to drive annual, recurring Fee Income.
· Minimise balance sheet volatility through low retention of underwriting risk and protecting our retentions with excess of loss reinsurance.
· Continue to invest in data to enable better analytics and automation to support growth and create operating leverage.
· Make Accredited a destination for talent by empowering our employees.
· Acting responsibly and embracing ESG practices.
To achieve this, we have set out a number of priorities for 2023:
· Develop more multi-program, ‘super MGAs’. These partnerships, which are often multi-year partnerships, enable us to bring in significant new GWP through writing large single programs or multiple programs with a single MGA, with whom we already have a partnership. We already have a number of ‘super MGA’s’ as partners.
· Upgrade to a smoother speed-to-market process for new business, making it easier and quicker for new MGAs to onboard their programs.
· Keep driving our innovative and client-centric business model, making Accredited an industry partner of choice. This includes our two conferences in Florida and Zurich which last year were attended by over 350 professionals.
Finally, I believe it worth reiterating the attractive structural tailwinds that give us such confidence in the future for Accredited. Independent MGA written premium is growing at double the rate of the overall P&C market, with MGAs becoming the platforms of choice for more and more entrepreneurial underwriters and insurance talent. Therefore, it is not surprising that in 2022, according to Conning, non-affiliated MGAs became a larger part of the MGA market than affiliated MGAs, a testament to the importance and growing position of hybrid carriers in the P&C market. We also think that hybrid carriers like Accredited will continue to capture an increased proportion of premium (currently the hybrid carriers collectively write c.10% of the c.$130 billion global MGA premium) as MGAs look to align with conflict free capacity that can not only support their ambitions but offer a best-in-class approach to data and operational excellence. We remain excited about the future.
R&Q Legacy review
R&Q Legacy is in the process of transitioning to a fee-oriented model. As we knew when we started this journey, the transition will take time and this is reflected by our results for R&Q Legacy. However, we remain firm in our belief that this will result in a less volatile business that generates more sustainable and predictable profit and with greater ability to scale.
R&Q Legacy includes historical transactions which predate the sidecar reinsurance arrangement with Gibson Re and, as discussed below, are therefore subject to increased volatility in earnings over the life of the transaction from any adverse development. Disappointingly, in 2022, for the second year in a row, we experienced adverse development of c.3.6% of net reserves in these books. We are currently exploring solutions to reduce the volatility arising from pre-Gibson Re transactions.
The softer conditions impacting the legacy market saw us adopt a more cautious approach to transactions in 2022. While significant opportunities remain, and our deal team sees a high volume of these, we have been highly disciplined in our approach to pricing. In 2022, this saw us complete only four deals with a total of $68 million in Gross Reserves Acquired.
As a result of these factors, R&Q Legacy reported a Pre-Tax Operating Loss of $56.6 million, including $32 million of net adverse development. We earned Fee Income of $12.1 million on $395.6 million of Reserves Under Management.
As we have discussed previously, prior to new accounting rules effective from 1 January 2023, our previous IFRS accounting regime allowed “Day-1 gains.” This meant that a majority of a transaction’s profits could be recorded upfront upon closing of the transaction. Any net reserve development after a transaction had closed therefore created heightened volatility in earnings over the course of that transaction’s lifetime. However, it does not mean that the underlying returns of a transaction would not meet expectations when taking into account the Day-1 gain and investment income. Going forward, neither IFRS 17 nor our new US GAAP accounting regime allow for Day-1 gains. Furthermore, our transition to a fee-oriented model will make Underwriting Income a smaller part of our R&Q Legacy returns, with R&Q now retaining only 20% of a typical transaction and the remaining 80% being ceded to Gibson Re.
From an operational perspective, and aligned to our broader strategy, we are focused on making R&Q Legacy a more efficient and scalable business. The Legacy team has identified and taken action on a number of opportunities to reduce expenses, including simplifying our legal entity structure and rationalising our real estate footprint. Work is also underway to automate the input of data we receive from our third party administrators (“TPAs”) and move our internal systems to the cloud. Better use of data is enabling us to make smarter decisions, quicker, while more automated processing is reducing duplication and costs. As we have seen with Accredited, we expect this work to create operational leverage benefits as we grow our Reserves Under Management. In addition, we continue to attract strong talent including senior hires into our Legacy M&A team and our North America Legacy Claims team.
Looking ahead, we are confident of successfully building our Reserves Under Management. Our pipeline is healthy with identified transactions comprising over $1 billion of reserves and we continue to focus our attention on areas where we have a competitive advantage which is in the small to medium size range where R&Q has historically operated.
In addition, shortly after the year-end we announced a landmark deal to invest alongside Obra Capital to acquire and professionally manage the non-insurance legacy liabilities of MSA Safety, our first transaction involving non-insurance liabilities. This transaction increased our Reserves Under Management to more than $1 billion. Our objective is to identify and execute similar deals that create compelling finality solutions for corporates in the US, UK and Europe. This, alongside Gibson Re, will see R&Q Legacy earn fees from two distinct but complementary pools of liabilities – traditional insurance reserves, and corporate non-insurance liabilities – enabling us to realise our vision for R&Q Legacy as a leading global manager of insurance reserves and non-insurance legacy liabilities.
Strategic and operational update
A significant focus for the management team in 2022 was driving forward our strategic pillars, and I am pleased by the progress we have made across each of these:
· Increase Fee Income and Capital Efficiency: growing annual recurring fee income that produces higher returns on equity.
· Enhance Transparency: putting in place clear metrics to drive economic decision making that facilitates long-term value creation.
· Automate Processes: investing in automation and data to support growth and create operating leverage.
· Engage Employees: empowering our employees to execute our strategy and attracting new talent.
· Act Responsibly: respecting all our stakeholders and embedding ESG in our business processes.
I have already touched on the progress we are making in growing Fee Income and profitability, but less visible is the extensive work we have undertaken to make R&Q a more modern, technology- and data-enabled and operationally robust business.
As part of Enhance Transparency we are making R&Q a stronger and more resilient business by improving our reporting, risk management, governance and compliance. This has included developing a more formal reserving committee, an enhanced risk framework supported by more sophisticated stochastic modelling of risks and their impact on liquidity and earnings, optimising our investment portfolio with a focus on asset-liability management and improving our Treasury function.
As part of Automate Processes we are investing $20-25 million in operational improvements, with c.$15 million of this deployed to date. This investment was not optional, but rather it was required in order for the business to scale and meet reporting requirements. The good news is that this investment is expected to generate approximately $10 million of recurring annual productivity efficiencies by 2024. This investment includes moving to a single group-wide general ledger, implementing automation tools including robotics to eliminate extensive manual business processes, digitising over one million paper documents into a modern document management solution, implementing a robust cloud-based infrastructure for our financial and actuarial data and migrating data to our enterprise warehouse to reduce reliance on legacy technologies and reduce our application footprint. These tools will triage emails and documents automatically, eliminate paper costs to leverage searchable digital documents, and fully automate processes that took several hours a day of manual processing across multiple departments.
Our pipeline of automation is very strong. With the proficiency that we’ve built over the past two years, we are working on several new initiatives where we are aiming for another $1 million of annual run rate savings by further leveraging our cloud automation, document management system and robotics.
In 2022 Engaging Employees was an important driver for several actions. We rolled out a much needed brand refresh and, most notably, we launched R&Q’s Purpose and Values. We set out our Purpose as: “We enable the success of our customers by delivering tailored, data-driven and innovative insurance solutions that provide protection and assurance in an uncertain world.” Supporting this are our four values:
· Operate as One – collaborating across teams and geographies to deliver our best, while upholding a shared commitment to integrity.
· Invest in People – passionately investing energy, attention and capital into our relationships. This means that we help each other, our customers, and communities succeed today… and tomorrow.
· Own the Next Step – encouraging accountability and transparency. We want to benefit from the insights and expertise of everyone at R&Q and we know we see the best results when we combine our expertise with empowerment, ownership and action.
· Create Sustainable Value – we are committed to delivering value for our customers, partners, investors and each other. To address the needs of the industries we serve, we must be agile and sustainable with our products and solutions setting the standard for quality and innovation.
It has been exciting to see the meaningful engagement and enthusiasm we have seen from our employees, and we are committed to embedding these values into our behaviours and actions in 2023 and beyond. We further engaged both our employees and the external audiences via our brand refresh for RQIH, Accredited and R&Q Legacy, which provides a more confident and contemporary image to our clients, customers and partners. This new look and feel of our brand has helped us to better distinguish ourselves at external events and conferences and rejuvenate interest in R&Q from potential new talent.
We introduced changes to make our compensation and goal-setting more metrics-based to help our people better track their progress and help ensure tighter alignment with our strategy across the business. And finally, through a year that had its share of change, we have continued to enhance the variety of our communications and respond to feedback from our people, giving them the information they need to perform and be inspired. We have taken a more proactive approach to engagement including more regular town halls and the provision of dedicated briefings for managers to help them provide context to their teams and answer questions more effectively.
Our sector remains one where the battle for talent is intense, and we are confident in our efforts to provide our people with a dynamic environment where they can contribute and grow their careers in a meaningful way.
ESG update
We continue to make positive progress in terms of embedding ESG across our business and this is clearly reflected in our strategic pillars and refreshed purpose and values. We have developed an ESG framework, aligned to the guidance provided by Lloyd’s and the UN’s Principles for Sustainable Insurance, the latter we are pleased to have joined as a signatory. We continue to assess potential risks and opportunities within our business and across our value chain. As part of these efforts, we have made our initial voluntary TCFD climate change risk disclosure in this Report.
Outlook
Our immediate focus remains the separation of Accredited and R&Q Legacy. This process is progressing well, with the legal separation of these entities achieved in Q2 2023, as planned, and the recognition by AM Best of Accredited as an independent rating unit, with an A- financial strength rating We continue to assess the strategic options for both businesses and expect to provide further updates over the course of 2023.
We believe the outlook is strong for Accredited and R&Q Legacy. Both businesses have excellent pipelines and, while we remain highly disciplined, we are confident of growing GWP and Reserves Under Management in each business respectively.
Chief Financial Officer Review
We are pleased to report our financial results for the year ending 31 December 2022, which is the final year we will do so under IFRS. For future periods, we will report our financial results in accordance with US GAAP.
Group
Our Key Performance Indicators (‘KPIs”) measure the economics of the business and adjust IFRS results to include fully written Program Fee Income and exclude non-cash intangibles created from acquisitions at R&Q Legacy, net realised and unrealised investment gains and losses on fixed income assets, foreign currency translation reserves, non-core expenses and exceptional items.
Our Pre-Tax Operating Loss was $33.3 million, primarily due to adverse reserve development in R&Q Legacy’s core reserve portfolios of $32 million and fewer than expected legacy transactions completed. One of our KPIs is to grow our Fee Income which was $92.0 million (excluding minority stakes in MGAs), a 105% increase compared to 2021.
Tangible Net Asset Value was $301.0 million, a 16% decrease compared to year-end 2021, primarily as a result of adverse development in R&Q Legacy and c.$100 million in extraordinary one-time charges, of which $43 million is associated with a non-cash charge related to adverse reserve development in a non-core subsidiary, which will reverse upon deconsolidation from the Group and movement to discontinued operations in Q1 2023. The remaining extraordinary one-time expenses include reinsurance litigation associated with older legacy transactions and discontinued program businesses ($28 million), automation process implementation costs ($14 million), which is expected to yield meaningful productivity savings starting in 2024, advisory costs associated with last year’s unsuccessful sale of the Group and subsequent shareholder activism ($8 million) and other one-off costs ($3 million). On a fully diluted basis, our Operating Loss Per Share was 9.9 cents and our Tangible Net Asset Value Per Share was 79.7 cents.
Our IFRS Loss After Tax was $297.0 million for the year, 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. Our IFRS Net Asset Value was $185.2 million, which is impacted by c.$218 million of non-cash items, including accumulated net unrealised investment losses on fixed income assets of $111.6 million, unearned program fee income of $34.9 million and net intangibles of $71.0 million. On a fully diluted basis, our IFRS Loss Per Share was 91.3 cents and our IFRS Net Asset Value Per Share was 49.1 cents.
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.
Accredited
The Accredited business continued to grow rapidly in 2022. Our Gross Written Premium was $1.8 billion, a 76% increase compared to 2021. Our results demonstrate the benefits of scale as we earned a Pre-Tax Operating Profit of $55.7 million, a 170% increase compared to 2021, representing a 56.8% margin on Gross Operating Income, an increase of 21.1 percentage points compared to 2021. This Pre-Tax Operating Profit includes $12.4 million associated with our minority stakes in MGAs.
The primary driver of Pre-Tax Operating Profit is our Fee Income. Fee Income excluding minority stakes in MGAs was $80.0 million, a 78% increase compared to 2021. Program Fees averaged 4.7% of ceded written premium, which is flat compared to 2021, and we expect Fee Income to generally grow in line with Gross Written Premium. Underwriting Income represents our c.7% retention of Program Insurance risk. Our Underwriting result was breakeven primarily due to the purchase of excess of loss reinsurance above and beyond the underlying combined ratio of 85% in order to minimise any balance sheet volatility. Our Investment Income was $5.6 million, a 108% increase compared to 2020 associated with higher reinvestment rates. Finally, Fixed Operating Expenses increased 14% compared to 2021 due to the expansion of our staff and a higher allocation of corporate expenses.
R&Q Legacy
R&Q Legacy concluded four transactions with Gross Reserves Acquired of $68 million, a decrease of 91% compared to 2021 due to extra prudence in a softer pricing market. At year-end 2022, we had Reserves Under Management of $396 million and during 2022 we reported Fee Income of $12.1 million compared with none in 2021. We expect Fee Income to become the predominant driver of Pre-Tax Operating Profit once we fully deploy capital in our sidecar, Gibson Re. Our Pre-Tax Operating Loss was $56.6 million, which included $32 million of adverse reserve development (included in Underwriting Income). Note that Underwriting Income in 2022 is not comparable with 2021, which included Day-1 accounting gains on legacy transactions closed before Q4 that were 100% retained by R&Q. Our Investment Income was $24.9 million, a 29% increase compared to 2021 driven by higher reinvestment yields. Finally, our Fixed Operating Expenses decreased 15% compared to 2021 due to expense control and foreign exchange rates.
Corporate and other
Our Corporate and Other segment includes unallocated operating expenses and finance costs. Unallocated operating expenses were $1.9 million, an 86% decrease compared to 2021 primarily driven by higher allocations to the two business segments. Interest expense was $30.5 million, a 34% increase compared to 2021 associated with higher interest rates.
Cash and investments
Our Cash and Investments at year-end 2022, excluding funds withheld, was $1.6 billion. We produced a book yield, which excludes net realised and unrealised gains on fixed income assets, of 1.9%, an increase of 50 bps compared to 2021, 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. 97% of our portfolio was invested in cash, money market funds, and fixed income investments. Of our fixed income investments, 95% were rated investment-grade. After cash, which comprised 20% of our portfolio, our largest allocations were to corporate bonds (39%), government and municipal securities (20%), asset-backed securities (17%) and equities (3%). We have maintained a duration in our portfolio of 3 years, shorter than that of our liabilities of 6 years.
During 2022, financial markets witnessed a significant increase in interest rates. As a result, our investment portfolio experienced unrealised net investment losses of $118 million, which are included in our IFRS 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
Last year we raised $130 million of equity capital ($121 million net of fees), of which $60 million was contributed to Funds At Lloyd’s and the rest for general corporate purposes. Since then, we experienced unexpected adverse development in R&Q Legacy, primarily in Lloyd’s, which requires an even greater amount of collateral to support such adverse development. We also had $28 million in unexpected one-off historic legal matters associated with older legacy transaction and discontinued programs. As a result, our preliminary Group Solvency ratio at 31 December 2022 was 158%, which is above our target level of 150%. Nevertheless, this adverse development and one-off historic legal matters used up a material amount of our capital resources, and without the ability to take dividends from Accredited as part of the planned separation, required that we raise $50-$60 million of preferred equity this year. Our total debt at year end 2022 was $344.9 million, which includes a bank facility as well as subordinated notes. In addition, we have $175.4 million of unsecured letters of credit that provide security on assumed reinsurance of legacy exposures, which are guaranteed by the Group
