Randall & Quilter Investment : Annual Report 2020

Randall & Quilter Investment Holdings Ltd.

Results for the year ended 31 December 2020

Randall & Quilter Investment Holdings Ltd. (AIM-RQIH), the leading non-life global specialty insurance company focusing on the Program Management and Legacy Insurance businesses, today announces its results for the year ended 31 December 2020.

2020 Highlights

Record Pre-Tax Operating Profit driven by Strong Operating Results Across Business Segments

Accelerated Growth for the Group

• Record Pre-Tax Operating Profit of £16.0 million, an increase of 102%, reflecting a year of accelerated growth across both business segments
• Fee Income of £18.8 million, an increase of 89%, representing 17% of Gross Operating Income
• Operating Earnings per share of 5.9 pence, an increase of 38%
• Profit Before Tax of £30.2 million, a decrease of 21%, reflecting a reduction in net intangibles due to the mix of Legacy Insurance transactions

Breakthrough Year for Program Management

• Program Management was profitable for the first time, earning Pre-Tax Operating Profit of $3.4 million, a 14.3% margin, demonstrating the operating leverage benefits of increased scale
• 18 new programs signed, increasing total programs to 48, driving a 46% increase in Gross Written Premium to $538.9 million; on course to achieve previously announced target of at least $1.5 billion of Gross Written Premium in 2023

Record Year for Legacy Insurance

• Legacy Insurance had a record year, executing on 19 deals and delivering a 46% increase in Pre-Tax Operating Profit to £38.1 million
• Business continues to be written at attractive returns with Operating Return on Tangible Equity of 14.8% and a 5-year average return of 20.2%

Capital and Dividend

• Capital remained strong with a Preliminary Group Solvency Ratio of 202% versus target of 150%
• Final cash dividend of 0.2 pence per share for a total cash distribution for the year of 4 pence per share
• Announcing a new progressive dividend policy with a payout ratio of 25%-50% of Pre-Tax Operating Profit, a proxy of cash earnings, reflecting current growth opportunities and a balance of reinvesting and growing dividends; intend to grow annual dividend from 4 pence per share

Franchise and Platform

• £173 million of capital raised during the year for growth
• Senior leadership strengthened with key hires including Executive Chairman, Group CFO, CEO of US Program Management and Chief Human Resources Officer
• Expanded footprint and capabilities by launching US E&S Program Management business
• Increased exposure to fee-related profits through investment in Tradesman, an MGA to whom we provide Program Management services

Post Period-End Developments

Q1 2021 Update

• Program Management increased Gross Written Premium by 52% to $185.2 million, and Fee Income by 91% to $9.7 million, compared with Q1 2020; launched 5 new programs increasing active programs to 52 and Contracted Premium to $1.4 billion
• Legacy Insurance completed one deal and has five more under exclusivity representing ~£150 million of net reserves; witnessing strong level of activity for a business that is historically busier in second half of the year
• Tradesman EBITDA increased by ~140% to ~$4.8 million, compared with Q1 2020

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Randall & Quilter Investment Holdings Ltd.
Summary Financial Performance (see Notes for definitions)
(£m, except where noted)	2020	2019	Y / Y Change
Group Results
Key Performance Indicators
Pre-Tax Operating Profit	£16.0	£8.0	102%
Fee Income	18.8	10.0	89%
Operating Earnings per Share1	5.9p	4.3p	38%
Tangible Net Asset Value Per Share1	124.4p	125.3p	2%2-
Distribution Per Share	4.0p	3.8p (cash)	5%3
		6.1p (non-cash)
IFRS
Profit Before Tax	30.2	38.1	(21)%
Earnings Per Share1	11.1	20.3	(45)%
Net Asset Value Per Share1	142.4p	147.2p	(1)%2-
Business Segment Metrics
Program Management ($m)
Contracted Premium	1,281.2	841.9	52%
Gross Written Premium	538.9	368.9	46%
Pre-Tax Operating Profit	3.4	(1.8)	NM
Pre-Tax Operating Profit Margin	14.3%	(15.1)%	29.3 pct. pts.
Legacy Insurance
Cash and Investments Acquired	673.7	351.0	92%
Net Reserves Acquired	499.6	276.0	81%
Pre-Tax Operating Profit	38.1	26.1	46%
Operating Return on Tangible Equity	14.8%	10.2%	4.6 pct. pts.

Commenting on the results for the year, Executive Chairman William Spiegel, said:

"2020 was a challenging year and the pandemic tested the resilience of our employees and our business model. Our team responded with agility and confidence in a dynamic market environment and this was demonstrated by our record 2020 operating results.

Since joining R&Q, I have experienced firsthand the esprit de corps that exists between our employees based across our eight global offices. All our employees contribute to the entrepreneurial and pioneering spirit that R&Q is known for and which we demonstrated once again last year. What our 2020 results demonstrate is that the difficulties of last year

• not least the "work from home" phenomenon - did not hamper our ability to deliver on behalf of our clients and ultimately our shareholders.

I believe 2020 at R&Q can best be described as a year of accelerated growth. Our Legacy Insurance business reported its strongest year ever and our Program Management business, after just four years, became profitable. With both of our businesses profitable, we now have the foundation to continue accelerating our growth and delivering sustainable earnings in the years to come. We also added a complementary business to Program Management when we made a 35% investment in Tradesman Program Managers, one of our core MGA program management partners. This investment increases our exposure to fee-related profits and we anticipate exploring further opportunities to emulate this approach with other MGAs to whom we provide program management services.

Very early in 2020 it was clear to us that the pandemic would result in significant structural changes to our markets, and that this would create highly attractive and accretive opportunities for R&Q. In order to execute on these, we raised £173 million ($225 million) of new capital, which we were able to deploy effectively in both the legacy and program markets.

1. On a fully diluted basis
2. Includes 3.8 pence cash distribution paid in 2020.
3. Excludes H2 2019 distribution paid by way of bonus shares.

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We remain in the enviable position of competing in growing markets that offer us the opportunity to reinvest our capital at high rates of return, creating long term shareholder value. With significant growth opportunities in front of us, our business will continue to consume capital over the near term, particularly our Legacy Insurance business. Over time, however, we expect our Program Management business to create enough free cash flow to make us capital self- sufficient.

While we are in growth mode and remain capital consumptive, we are adopting a progressive cash dividend policy with a payout ratio of between 25% and 50% of our Pre-Tax Operating Profit, the best proxy for cash earnings. While the precise payout percentage may vary year on year, we intend to grow the total amount of the annual cash dividend from the FY 2020 level of 4 pence per share. This dividend policy will allow us the flexibility to carefully balance the allocation of our capital between reinvesting in profitable opportunities, providing an attractive and growing dividend to our shareholders and minimising the need to raise external capital.

2020 was a year like no other we have witnessed in our lifetime and it continues into 2021. Yet, despite all this turmoil, it was a very strong year for R&Q. I would like to personally thank Ken Randall and Alan Quilter, the two founders of R&Q, for having confidence in me and guiding and mentoring me over the past 17 months. I also want to thank all our stakeholders for their unwavering support during these unprecedented times: our shareholders, our customers, our regulators, our rating agencies, our board and most importantly our loyal and dedicated employees. I am so proud of what we achieved in 2020 under trying conditions. I cannot wait to see what we can accomplish over the next few years as the world returns to a more normal state."

Investor presentation

Our shareholders presentation is available on our website at:

http://www.rqih.com/investors/shareholder-information/investor-presentations

As part of its commitment to open communication with all of its shareholder base, R&Q will also provide a live presentation and Q&A via the Investor Meet Company platform at 3pm on 24 May 2021. Registration details can be accessed via:

https://www.investormeetcompany.com/randall-quilter-investment-holdings-ltd/register-investor

Questions can be submitted pre-event via the IMC dashboard or at any time during the live presentation via the 'Ask a Question' function.

Enquiries to:
Randall & Quilter Investment Holdings Ltd
William Spiegel	Tel: [phone]
Alan Quilter	Tel: [phone]
Numis Securities Limited (Nominated Advisor and Joint Broker)
Stuart Skinner	Tel: [phone]
Charles Farquhar	Tel: [phone]
Barclays Bank PLC (Joint Broker)
Mark Astaire	Tel: [phone]
Milan Solanki	Tel: [phone]
FTI Consulting	Tel: [phone]
Tom Blackwell

Notes to financials

Pre-Tax Operating Profit is a measure of how our core businesses performed adjusted for Unearned Program Fee Revenue, intangibles created in Legacy Insurance acquisitions and net realised and unrealised investment gains on fixed income and lease-based assets.

Tangible Net Asset Value represents Net Asset Value adjusted for Unearned Program Fee Revenue, intangibles created in Legacy Insurance acquisitions, net unrealised investment gains on fixed income and lease-based assets and foreign

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translation currency reserves.

Gross Operating Income represents Pre-Tax Operating Profit before Fixed Operating Expenses.

Fee Income represents Program Fee Revenue and our share of earnings from minority stakes in MGAs (Associate).

Underwriting Income represents net premium earned less net claims costs, acquisitions expenses, claims management costs and premium taxes / levies.

Investment Income represents income arising on the investment portfolio excluding net realised and unrealised investment gains on fixed income and lease-based assets.

Fixed Operating Expenses include employment, legal, accommodation, information technology, Lloyd's syndicate and other fixed expenses.

Cash and Investments exclude funds withheld trusts for which we do not earn investment income.

Contracted Premium for Program Management is the Gross Premium that our existing distribution partners believe their programs will generate over a period of time. We expect a significant portion of Contracted Premium to become Gross Written Premium.

Program Fee Revenue represents the full fee revenue from insurance policies already bound including Unearned Program Fee Revenue, regardless of the length of the underlying policy period (earned). We believe Program Fee Revenue is a more appropriate measure of the revenue of the business during periods of high growth, due to a larger than normal gap between Gross Written and Gross Earned (IFRS) Premium.

Unearned Program Fee Revenue represents the portion of Program Fee Revenue that has not yet earned on an IFRS basis.

Program Fee represents Program Fee Revenue as a percentage of written premium ceded to reinsurers.

Pre-Tax Operating Profit Margin for Program Management is our profit margin on Gross Operating Income.

Average Operating Tangible Equity for Legacy Insurance is based on the Group's target solvency capital models and includes allocated debt.

Operating Return on Tangible Equity for Legacy Insurance includes allocated interest expense and has been annualised for interim reporting periods.

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Chairman's Statement

2020: A Year in Review

2020 is a year that will live in the memory for a long time. The pandemic and its consequences tested our employees, customers, operations, business model and strategy, just as it did for all companies operating in the global insurance markets.

I am pleased, therefore, to report that we navigated the challenges posed by Covid-19 well, demonstrating the durability and resilience of R&Q and the quality of our people. In particular, the clarity of our model and strategy, built around two specialty businesses in fast-growing insurance sectors, meant that we were able to respond with agility and confidence in a dynamic market environment. This is demonstrated by the excellent results we have reported for 2020.

Accelerated Growth

Our results are examined in more detail in the Financial Review but, in summary, 2020 was a year of accelerated growth. Our Pre-Tax Operating Profit grew 102% to a record £16.0 million and Operating Earnings per share grew 38% to 5.9 pence.

Looking at the key performance metrics for our two core businesses highlights the excellent underlying returns and growth being generated.

• Our Legacy Insurance business recorded its strongest year ever, executing on 19 deals and delivering a Pre- Tax Operating Profit of £38.1 million, an increase of 46% compared to 2019. These results translated into a strong Operating Return on Tangible Equity of 14.8% (5-year average of 20.2%).
• Our Program Management business had a breakthrough year with an increase of 18 programs and robust growth of 89% in Fee Income and 46% in Gross Written Premium, to $24.1 million and $538.9 million, respectively. Most exciting of all is that this business, which we began just four years ago, became profitable for the first time generating a Pre-Tax Operating Profit of $3.4 million.

With both of our businesses profitable, we now have the foundation to continue accelerating our growth and delivering sustainable and growing earnings in the years to come. I think it is also important to note that in 2020 we added a complementary business to Program Management when we made a minority investment in one of our core program partners. This investment increases our exposure to fee-related profits, while locking in the associated program management business.

There are three tried and tested responses to the unexpected difficulties we witnessed in 2020: one, do nothing and hope it will all blow away; two, hunker down, preserve cash and retrench; or, three, use the changed circumstances to think and do differently, accelerate change and seize the opportunity. R&Q decided from an early stage in the pandemic to get on the front foot and embrace the third approach. We did this in a number of ways.

Very early in 2020, it was clear to us that the pandemic would result in significant structural changes to our markets, and create highly attractive and accretive opportunities for R&Q. In order to execute on these opportunities, we took the decision to raise £81 million ($100 million) of new equity in April, being one of the first listed (re)insurers in either the US or Europe to raise capital following the initial Covid-19 shock. We followed our equity raise with a £92 million ($125 million) subordinated debt issue. In total, we raised £173 million ($225 million) of capital in 2020 - an extraordinary achievement for a group of our size and testament to the confidence our investors have in our business and strategy.

We utilised this capital to accelerate the growth opportunities we identified in both the legacy and program markets by injecting it into our operating companies in Bermuda, the US and Europe and for acquisitions. Specifically, Legacy Insurance used ~£145 million to support new transactions, Program Management used ~£20 million to build out its new US platform and our UK branch and we paid a cash distribution to our shareholders of ~£8.5 million.

The growth we achieved in 2020 was quite extraordinary. In our Program Management business, we increased Gross Written Premium by 46%, Fee Income by 89% and the number of programs by 60%, to 48. Our Contracted Premium, the Gross Written Premium we expect to achieve from our MGAs when they achieve scale, ended the year at $1.3 billion, an increase of 52%. We remain on course to achieve our previously announced target of at least $1.5 billion of Gross Written Premium in 2023.

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