R&Q Insurance Regulatory News (RQIH)

Randall & Quilter Investment Holdings plc

("Randall & Quilter" or the "Group")

Final results for the year ended 31 December 2012

The Board of Randall & Quilter (AIM: RQIH), the specialist non-life insurance investor, service provider and underwriting manager, is pleased to announce the Group's final results for the year ending 31 December 2012.

FINANCIAL HIGHLIGHTS

• Total Group income of £52.0m (2011: £36.8m), an increase of over 41%

• Profit before tax of £10.7m1 (2011: £8.8m)2, an increase of 22%

• Earnings per share of 20.4p (2011: (0.9p))

• Total cash distribution to shareholders increased to 8.4p3 per share for the year (2011: 8.1p)

• Undiscounted net tangible asset value per share of 114.4p (2011: 107.3p4), an increase of 6.6%

• Acquisition momentum continued with 6 deals completed in 2012

• Successful launch of Group's own managed specialist active Lloyd's syndicate (Syndicate 1991)

1 After deduction of Minority Interests

2 Excludes goodwill impairment

3 Final distribution of 5p per share approved in a General Meeting on 3 April 2013 and expected to to be paid on or around 3 May 2013

4 Adjusted for Share Cancellation

STRATEGIC INITIATIVES

·; Successful placing of new ordinary shares, raising gross proceeds of £25.0 (£24.1m net of expenses), subject to shareholder approval. The new capital will be used to support the Group's growing Lloyd's syndicate participations particularly on Syndicate 1991 and help finance new legacy acquisitions (see separate announcement).

·; Following the proposed placing, total distributions to shareholders will be maintained at 8.4p per share for 2013, absent unforeseen circumstances. The Group will thereafter follow a standard progressive distribution policy and remains committed to providing strong cash returns to shareholders.

·; New insurance company consolidator for EEA based run-off insurers to be established in Malta. This company should significantly enhance operational and capital efficiencies and provide a beneficial regulatory framework for the acquisition and transfer of future run-off portfolios.

·; The Group proposes to redomicile its parent company to Bermuda in July, subject to shareholder and regulatory approvals. The move is being considered for regulatory, operational and commercial reasons. The parent company intends to maintain its tax domicile in the UK (see separate announcement).

DIVISIONAL PERFORMANCE

• Insurance Investments Division - A strong result with an operating profit of £9.9m (2011: £8.3m2) driven by positive claims settlements and reserve releases on the Group's two run-off syndicates and R&Q Re (UK) and strong investment returns.

• Insurance Services Division (now incorporating the formerly separate Captives Division) - A satisfactory core result with a much improved performance from captive management. This outturn, together with exceptional levels of credit write backs predominantly from certain US service operations resulted in a significantly higher operating profit for the year of £10.3m (2011: £5.8m).

• Underwriting Management Division - Revenues doubled to £11.6m (2011: £5.4m), highlighting the significant progress in expanding its operations during the year. An operating loss of £1.5m was reported (2011: loss of £1.1m). Excluding the operating loss and closure costs of the now discontinued Canadian MGA, the operating loss of the continuing operations was £0.5m. Costs associated with Solvency II and the scaling up of the Division adversely impacted the result, as did slower than anticipated premium development in certain of the other fledgling coverholder operations. The division however enters 2013 with much improved scale and good prospects for future profitable growth.

Commenting on the results Ken Randall, Executive Chairman and CEO, said:

"We are pleased to announce another strong set of results for R&Q, as evidenced by the growth in income and profit during 2012. We are also excited to announce a number of notable strategic initiatives including raising gross proceeds of £25.0m (subject to shareholder approval), a proposed redomicile to Bermuda and the creation of a Malta based insurance company consolidation vehicle for our European run-offs. These measures will position the Group well for the next stage of its growth strategy.

Performance was good in both our Insurance Investment and Insurance Service Divisions. The scaling up of the Underwriting Management Division and the launch of Syndicate 1991 particularly brings significant opportunities for profitable growth. The acquisition pipeline for new legacy assets is also strong. We believe that the outlook for the Group is good and look forward to the future with confidence."

Enquiries:

Company: Randall & Quilter Investment Holdings plc

Tom Booth Tel: 020 7780 5895

Nominated Advisor Numis Securities Limited

& Joint Broker: Stuart Skinner/Robert Bruce (Nominated Advisor)

Tel: 020 7260 1314

Charlie Farquhar (Broker) Tel: 020 7260 1233

Joint Broker: Shore Capital Stockbrokers Ltd

Dru Danford Tel: 020 7408 4090

Stephane Auton Tel: 020 7408 4090

Corporate & FTI Consulting

Financial PR: Neil Doyle Tel: 020 7269 7237

Ed Berry Tel: 020 7269 7297

Tom Blackwell Tel: 020 7269 7222

The Chairman's Statement, Business Review and Highlights of Accounts are attached. The full final results for the year ended 31 December 2012 will be sent to shareholders shortly and will be available on the Company's website at www.rqih.com.

There will be an analyst presentation at 8:30am on Thursday 25th April 2013 at the Company's registered offices. Those analysts wishing to attend and who have not registered are asked to contact Tom Blackwell at FTI on +44 20 7269 7222 or at tom.blackwell@fticonsulting.com.

Notes to Editors:

Since formation, Randall & Quilter has pursued a buy and build strategy to create a comprehensive range of investment activities and services in the global non-life insurance market and is focused on the following three core areas:

·; Insurance Investments;

·; Insurance Services; and

·; Underwriting Management

The Group:

·; has a team of up to 400 insurance professionals based in the UK, USA, Bermuda, and Continental Europe with wide service capability in both the 'live' and 'run-off' market;

·; has a current portfolio of 12 insurance companies in run-off (from the UK, US and Continental Europe) with net assets of c.£91.3m as at 31 December 2012

·; owns a Bermuda Class 3A insurance company which currently supports the Group's four syndicate participations;

·; has launched Syndicate 1991 which commenced underwriting from January 1, 2013 with a Capacity of £77m for 2013, provides 'turnkey' management services to Lloyd's syndicate 1897, manages two RITC ('run-off') syndicates and owns and operates 3 MGA business units; and

·; acquires and manages a portfolio of insurance receivables, with a carrying cost of c.£6.5m as at 31 December 2012.

The Group was founded by Ken Randall, Executive Chairman and Chief Executive, and Alan Quilter, Chief Operating Officer.

Highlights and Summary of Results

For the year ended 31 December 2012

Summary of Results

Divisional Performance

1 After deduction of Minority Interests

2 Prior to goodwill write-off

Chairman's Statement and Business Review

For the year ended 31 December 2012

Chairman's Statement

The Group has delivered strong income and profit growth during 2012 whilst achieving important operational milestones, including the establishment of its own specialist active Lloyd's syndicate and the expansion of its investing activities into areas such as discontinued captives. These operational developments, together with the formation in Malta of a new insurance company consolidation vehicle for our EEA based run-off insurers, provide the Group with significant new growth opportunities and we are therefore delighted to announce today a successful placing of new ordinary shares, raising £24.1m, net of expenses, subject to shareholder approval. The new capital raised will be used to finance the Group's growing Lloyd's syndicate participations, the acquisition of additional legacy insurance companies, captives and insurance portfolios in run-off and insurance debt. Further details are included in the accompanying announcement relating to the proposed placing and in the circular which is being sent to shareholders today.

It is proposed to redomicile the parent company to Bermuda in July through a UK Court approved Scheme of Arrangement, which will result in the new parent company being readmitted to AIM and shareholders receiving equivalent number of shares in the new Bermudian company. The Scheme and readmission are subject to shareholder approval. A circular detailing the proposals, together with a document required by the AIM rules providing detail on the new Group and its structure will be sent to shareholders on 18 May 2013. The redomicile is being proposed for regulatory, operational and commercial reasons. In particular, the move to Bermuda will alleviate uncertainty as regards the timing and nature of future regulatory capital requirements for the Group in the context of the continuing delays in the implementation of Solvency II in the UK and the rest of the EEA. The new parent company intends to maintain its tax domicile in the UK.

The strong 2012 pre-tax profits1 of £10.7m were due primarily to: (i) the excellent results from the run-off syndicates and UK insurance companies together with higher than anticipated investment income in the Insurance Investments Division; and (ii) the beneficial impact of an exceptional level of credit write-backs predominantly from certain US operations. Whilst the Underwriting Management Division produced an operating loss during the year, a significant portion of this loss was attributable to now discontinued activities and on-going investment. The launch of Syndicate 1991 brings both scale and exciting growth potential to the division and the wider Group and represents a significant broadening of operations.

Distributions of 8.4p per share for the year were broadly in line with our former distribution policy (2011: 8.1p). In the light of the proposed placing and the substantial investment opportunities open to the Group, we have decided to amend slightly our distribution policy from the current year by maintaining the target distribution level at 8.4p per share for 2013. Thereafter we will adopt a standard progressive distribution policy, which will reflect the Group's financial performance, rather than committing to future distribution growth of at least 5% p.a.

Net tangible assets per share grew by 6.6% to 114.4p even after significant cash distributions to shareholders during the year.

DIVISIONAL PERFORMANCE

Insurance Investments Division

The Insurance Investments Division produced an excellent result for the year, driven by a strong performance in the run-off syndicates and R&Q Re (UK) from successful commutation activity and reserve redundancy. Investment income was also much higher than anticipated following capital gains arising from credit spread tightening, especially in the structured securities and high yield parts of the portfolio. The evidence of a pick-up in asbestos related claims in the US, which we have commented on for some time, resulted in a reversal of the first half reserve releases in R&Q Re (US) but the impact was relatively contained given substantial reinsurance coverage. The resolution of the legal disputes with the ACE Group during the latter part of the year as regards R&Q Re (US) also removed a significant source of uncertainty.

Once again, we managed to extract a significant amount of capital from the Group's legacy insurance assets with £8m of dividends and capital reductions during the year across the owned insurance companies and discontinued captives.

Having assumed a reinsurance to close of the open years of former Syndicate 1208, the acquisition of 5 captives (in Guernsey and Barbados), a Finnish reinsurance company in run-off and 10 new insurance receivable positions, 2012 was one of the most active years for the Group's legacy acquisition activity for some time. 2013 has already seen two new transactions relating to discontinued captives and the acquisition pipeline remains very strong. We are currently progressing a number of new opportunities to acquire attractively priced insurance companies, captives and portfolios in run-off in a variety of domiciles, some of which are more substantial in size than recently announced transactions. We are also pleased to have successfully received in principle approval to establish a new insurance company consolidator for our EEA run-off portfolios in Malta in recent weeks. This should optimise the capital and operational efficiency of the division, provide enhanced regulatory access and act as a superior fully licensed vehicle to merge in, portfolio transfer and reinsure other third party legacy business in a less onerous manner than before.

Insurance Services Division

A solid performance from the core insurance services business was significantly enhanced by exceptional levels of credit write backs predominantly from certain US operations. The captive management operations now incorporated into this division also performed strongly in the year, following the recent investment and product expansion. The UK business continued to expand its range of contracted services to certain large insurance groups with the niche credit control, broker-wrap products and the provision of a full back office service to live businesses in particular gaining further traction. Our US third party business won some new consultancy contracts during 2012, whilst there has been active cost management designed to improve future operating margins.

Underwriting Management Division

The Underwriting Management Division, which we view as a significant engine for future growth, again generated an operating loss, mainly arising from the substantial closure costs of the now discontinued Canadian MGA. Certain of the Group's other coverholders also grew premium at a lower rate than anticipated, mainly through capacity related and distribution issues which have now been resolved. The year also bore substantial costs associated with Solvency II and the scaling up of the division's operations.

Following the significant restructuring and investment in the division, the outlook is highly encouraging. A substantial organic growth opportunity exists from Syndicate 1991, a new specialist property and liability syndicate successfully launched by the Group from 1 January 2013. This syndicate accepts business on an exclusive basis from a highly selective number of coverholders and is headed up by an experienced underwriting team, formerly with Axis Capital. The launch of the syndicate, backed with a mixture of our own, traditional Lloyd's Names and industry capital, has given the division's Lloyd's managing agency operations both scale and prominence.

The turnkey market is also more active as Lloyd's appears receptive once again, following its Solvency II preparations, to support new syndicates provided they have high quality and accretive underwriting plans. This change of attitude by Lloyd's should bring further opportunities to expand out the number of syndicates managed by the Group with consequential revenue and profit growth potential.

Outlook

We have invested very heavily in the development of the Underwriting Management Division over the last three years; 2013 should see the Division move firmly into profit. The business is well positioned to benefit from the substantial growth opportunities offered by the expansion of newly launched Syndicate 1991 and from the management of new third party syndicates wishing to use the Lloyd's platform.

Furthermore, the Group has an exciting pipeline of attractive acquisition opportunities. The proceeds from the proposed placing, together with our innovation and improved infrastructure following the establishment of the EEA insurance company consolidation vehicle in Malta should ensure we are able to turn a number of these opportunities into completed transactions and continue to monetise our existing assets.

The service business should benefit from the focus we have placed on improving operational efficiency and our niche offering. Expansion into the active market is also expected to compensate for the relative scarcity of traditional large run-off service opportunities. Our captive management business is growing steadily and we remain focused on continuing to develop the platform in line with the healthy pipeline of opportunities.

The proposed redomicile of the Group's parent to Bermuda should greatly alleviate the regulatory uncertainties faced by the Group following the further delays in solvency legislation in Europe and assist long term planning and capital allocation. It also provides the Group with a base in a premier insurance domicile with excellent access to the US markets. The move should present new business opportunities through improved access to the Bermuda and US markets, especially in the growing Insurance Linked Securities ("ILS") market. R&Q intends to maintain the tax residency of the parent company in the UK following the move.

The global investment markets remain challenging with ultra low interest rates persisting and ever tightening credit spreads but we remain pro-active in ensuring that our portfolios are well diversified and optimised in terms of risk-reward.

Overall, we look forward to the future with confidence.

Chairman's Statement and Business Review

For the year ended 31 December 2012

DETAILED BUSINESS REVIEW

Further detail on the financial and operating performance of the divisions is provided below:

Insurance Investments Division

This division is engaged in the following activities:

• The acquisition of solvent insurance companies, captives and insurance portfolios in run-off, typically at a discount to net asset value in the UK, US, Continental Europe, Bermuda and elsewhere;

• The provision of capital ('Funds-at-Lloyd's') to both Group managed active syndicates and Reinsurance to Close (RITC) run-off syndicates in Lloyd's; and

• The acquisition of insurance debt due to insurance or corporate creditors from insolvent estates ('RQLM').

1 Insurance companies only (ie excludes Syndicates)

2 Excludes goodwill impairment

3 After deduction of Minority Interests relating to Syndicate 3330

The Insurance Investment Division's performance was very strong in the year, producing an operating profit of £9.9m3 (2011: £8.3m2).

Investment income of £12.6m for the insurance companies represented a 5.9% return (2011: £5.4m, 2.5%), which was outstanding and largely achieved by careful portfolio positioning in credit, where spreads tightened significantly. A more detailed analysis of performance and holdings is provided below.

RQLM's income, which is mostly related to the acquisition and management of claims against insolvent insurance companies, was £0.6m, representing our gross profit on the dividends we received on a number of our existing insurance debt positions. As a result, the carrying value (at cost) of insurance debt at the year end was down slightly at £6.6m, after additional small claims purchases during the year. The pipeline for new acquisitions continues to look positive both from estates where we currently hold positions and from new maturing estates. We also expect a significant portion of the current portfolio to run-off during 2013, bringing a strong income and profit contribution to the division.

At 31 December 2012, the owned run-off insurance company portfolio was as follows:

* IFRS basis

** After capital extraction during the period

We managed to successfully extract c.£8m of capital from the Group's owned insurance companies during the year, from Chevanstell, R&Q (Guernsey) and a number of the captives we acquired in the period. The net assets of the 13 owned insurance companies at 31 December 2012 was £91.3m, against £85.5m as at 31 December 2011.

The reserve releases were the result of a combination of significant commutation activity and other reserve redundancies, primarily in the UK companies. There were further releases from a number of the smaller owned portfolios, including R&Q Insurance (Guernsey), R&Q Re (Belgium) and Goldstreet where there was commutation activity and general IBNR release. In R&Q Re (UK), the significant net claims release arose predominantly as a result of a large commutation which generated savings on held reserves in the marine, asbestosis and general books of business. The effect of this commutation was to reduce the company's reserves by c.60%. In Chevanstell, there were continuing improvements to the incurred claims position over a number of different classes with a good overall net claims release.

The pick-up in asbestos related claims in the US, which we have commented on for some time, resulted in a significant gross and net reserve strengthening in R&Q Re (US). However, the net impact on the Group was mitigated by a recovery that is now triggered under the surplus maintenance reinsurance agreement with ACE. The resolution of the various disputes with the ACE group in respect of R&Q Re (US) has also eliminated an area of uncertainty for the Group. Our active claims management in this company continued with the settlement of over $43m of gross claims during the year. We have also made good progress on the reinsurance collections following significant recent claims settlement activity.

We believe that further commutation and settlement activity, particularly in our non US portfolios should produce additional releases in 2013 and that the substantial asbestos related reserve strengthening in R&Q Re (US) should prove adequate or be strongly mitigated by the company's extensive reinsurance programme and the surplus maintenance reinsurance.

Operating expenses rose considerably during the year as a result of: (i) the establishment of the new intermediate holding company for the division and the transfer into it of the costs of the acquisition team, including their annual bonuses and options; (ii) the substantial legal costs incurred in the US companies relating to specific claims disputes and the recent ACE settlement, (iii) the higher expenses associated with the expanded syndicate participations (s.3330) and new company and captive acquisitions; and (iv) the additional expenses relating to special claims projects in certain of the owned insurance companies.

There was 'goodwill on bargain purchase' of £2m during the year relating to the acquisitions of Capstan, RAB and Linpac (Guernsey captives in run-off now all amalgamated into Capstan, collapsing the operating expenses and potentially leading to further NAV releases and reserve savings), Northern Foods (a Guernsey captive in run-off now amalgamated into R&Q Insurance (Guernsey)) and Alma Insurance (a Finnish reinsurer in run-off, which we are expecting to be able to transfer to our new EEA run-off consolidation vehicle in Malta, reducing the required incremental solvency margin and effecting potential reserve redundancies). Trimac (a now wound-up Barbados captive, the business of which has been transferred to our Bermudian cell company) was also completed during the year but the small discount to net assets was treated as income due to the transaction structure.

This significant number of deals is proof of our ability to convert the strong acquisition pipeline which we have been referring to for some time. In particular, our captive exit solutions have attracted much interest, especially in the Guernsey market where we have seen a significant number of new opportunities, but potentially in other domiciles such as Bermuda and the Cayman Islands. We are also pursuing opportunities to acquire insurance companies in run-off, legacy opportunities in Lloyd's including partial account reinsurances, syndicate RITCs and acquisitions or capital replacement of third party corporate members supporting open years. We are in negotiations on a number of European acquisitions and the creation of our new insurance company consolidatior in Malta for our EEA run-off insurers will create an improved execution platform and significantly help to unlock capital. Through our proposed move to Bermuda we are exploring an opportunity to enter the Insurance Linked Securities market ("collateralised insurance contracts supported by capital markets investors") where we believe we can provide attractive exit solutions to capital market investors looking for liquidity in the event of a claim. We are currently working with a potential new ILS fund in Bermuda to offer exits/liquidity to investors in the event of a claim.

The overall result from our three syndicate participations (the 8.3% line on turnkey Syndicate 1897, the 20% line on RITC Syndicate 102 and the effective 55% line on RITC Syndicate 3330) was excellent with an operating profit of over £5.2m (2011: £1.7m). Our participation on run-off Syndicate 3330 (which reinsured the former open years of 1208 Syndicate) was especially strong following the partial release of the risk premium as well as specific reserve savings, especially relating to World Trade Center claims. There was also a good contribution from run-off Syndicate 102, mostly relating to recoveries on certain viatical claims which we had been pursuing through the US legal system for some time. Our share of turnkey Syndicate 1897 produced a loss as the syndicate had a small number of significant marine and energy losses and a subdued level of earned premium during the period. Our increased syndicate participations required the Group to put up c.£11m of 'Funds-at-Lloyd's' during 2012, which increased further to over £20m for the 2013 underwriting year to support our 22.8% participation on our new active syndicate, with total capacity of £77m. Our FAL requirements are significantly lowered due to the diversity credits which we gain from partially non-correlating participations on active and run-off syndicates. As is customary under insurance annual accounting, we do not anticipate generating profits in the 2013 calendar year on this start-up syndicate participation due to the natural lag in recognition of earned premium but from 2014 and especially for 2015, we expect strong returns in line with the underwriting team's historic track record.

Operationally, we are pleased to have received the in principle licence to establish an insurance company consolidator in Malta, into which we intend to merge and portfolio transfer, subject to regulatory approval, certain of our EEA insurance company run-offs during the next 12 months beginning with Chevanstell through a UK Court sanctioned Part VII transfer and Alma, the recently acquired Finnish portfolio. Establishing this company will help operational and capital efficiency. Furthermore, we will have a better capitalised vehicle with on-going licences and good regulatory access to bring in future run-off portfolios from third party insurers in the EEA.

Investment Income

Investment income of £12.6m (representing a return of 5.9%) from the insurance company portfolios and 'Funds-at-Lloyd's' was an excellent result and achieved during a period when we implemented investment strategies to reduce interest rate duration significantly and increase asset diversification. We also generated £0.8m of investment income relating to our syndicate participations.

A substantial part of the return came from capital gains from the portfolio's debt securities, especially the structured products such as UK/Dutch Residential Mortgage Backed Securities. The high yield corporate bond and senior secured loans funds and high yielding equities also performed well. The Group further benefited from the realisation of all of its bank perpetuals at prices above the year end 2011 values.

The overall Group insurance company* investment allocation by asset class at 31 December 2012 was as follows: * excludes syndicates

Invested funds totalled £212m equivalent, comprising of US$233m, £49m, €16m and Aus$5m. The non-sterling assets matched the currencies of the net insurance liabilities.

The credit rating of the debt securities held by the Group at 31 December 2012 was as follows:

Overall the duration of the investment portfolio is now under one year given that a significant portion of the assets are now invested in floating rate securities.

The Group has worked hard during the year to ensure that its investment portfolios are well positioned and optimised from a risk-reward perspective, whilst always maintaining high overall credit quality and good liquidity. Whist the portfolios and funds are managed externally by carefully selected professional investment managers, the Group Investment Committee makes frequent reviews of the asset allocations, investment strategies and guidelines with the assistance of IIA, a specialist investment consultancy. This has resulted in a much more active management strategy by the Group of its investments, which we believe is necessary in a persistently low yielding environment.

The Group's running investment yield at year end was c.2.5% but subsequent portfolio repositioning has brought this back towards 3%. Whilst we have mitigated interest rate risk substantially through portfolio restructuring, we are still exposed to credit spread movements. We have however kept maturities short in the main and increased asset diversification to lessen the potential impact of this volatility. The 2013 year to date performance has been encouraging once again with capital gains adding to overall returns.

Insurance Services Division

The Insurance Services Division's activities include:

·; Claims management

·; Reinsurance management

·; Broker services (eg broker replacement and run-off, active back office support)

·; Premium credit control, bordereau management & broker performance monitoring

·; Captive and cell management for corporates and risk-retention groups

·; Audit & Inspection of delegated underwriting facilities (for coverholders)

·; Accounting Services

·; Compliance & company secretarial services

As well as providing full scale claims and reinsurance management services to the Group's owned company portfolios and managed syndicates, the Group offers a broad range of specialist insurance services to a wide range of clients in both the legacy and active insurance markets.

The Insurance Services Division's operating profit of £10.3m (2011: £5.8m), reflected a good core performance in UK services, especially in the claims and reinsurance management area, a much improved result in captive management (previously reported as a separate division) and a satisfactory core performance in US Services, which was boosted by exceptional levels of credit write-backs during the period.

Total Income increased to £45.0m (2011: £40.0m) with a reduction in third party income in the UK claims and reinsurance services and in US services being compensated for by increases in income from Liquidity Management and Captive Management as well as higher internal revenue.

In UK Broker Services revenue was broadly flat as was operating profit with the back office support of active businesses a significant contributor. The broker run-offs we have acquired continue to perform well and we have scale and efficiency in this area. We are also creating new solutions to support the recent regulations on broker solvency, which should bring additional income opportunities.

In UK Claims and Reinsurance Management Services, revenue fell due to the absence of the substantial profit commission on the now discontinued Advent syndicate run-off contract which benefited the 2011 figures and the move of the full syndicate servicing to the Underwriting Management Division. Outside of this, success was achieved with cross-selling the Group's niche services to the larger UK based insurance groups, focused on reducing costs by outsourcing specialist work. Traditional run-off portfolio management contracts remain scarce however given the acquisition of such portfolios by specialist groups with in-house resource and the prevalence of solvent schemes. The contraction in potential run-off contracts further supports our recent diversification strategy into the active market, where our liquidity management operations increased revenues substantially. We continue to focus on subscription market business, especially Lloyd's, where our services offer a highly cost effective alternative to internal resourcing by individual syndicate managers.

The operating profit of £4.5m in the core UK claims and reinsurance management operations was considerably higher than 2011 (£3.5m) and represented a 25% operating margin. This showed the clear benefit of recent cost reduction measures which should continue to filter through during the current year.

The core US services operations suffered from the expected reduction in work on a number of significant existing third party run-off contracts, delayed new business income as well as the impact of restructuring costs. The total income and overall operating result were however boosted by an exceptional level of credit write-backs during the year. Focus continues on improving the sustainability of revenue by securing multi-year assignments and building on our expertise in workers' compensation loss mitigation and medical malpractice portfolio management.

Captive management, now incorporated into the Insurance Services Division, performed well during the period with a significantly higher level of operating profits of £0.7m (2011: £0.1m) on income of £5.8m (2011: £4.7m). There was a strong operating performance from the Bermuda based operations at R&Q Quest due to revenue from the growing captive exit solutions as well as new client wins. 2012 also benefited from a full year contribution from the Norwegian business, Triton, which continues to perform well. The income from the management contracts transferred to our new US captive management business also contributed to top line growth but slower progress in our US farming co-operative initiative due to unusual weather conditions and delays in the medical related risk retention group project dampened new business income and led to a broadly break-even result. R&Q's Gibraltar operations had a broadly similar year's trading to 2011 but the pipeline of new business is improving. The Group also established a small presence in two additional key captive domiciles during the year; the Cayman Islands and the Isle of Man. This broadens the operational platform further in a cost controlled manner whilst improving the access to local captive exit opportunities.

The outlook in captive management for 2013 and beyond looks positive and we are pleased that recent investment is now delivering an improving operational performance. We are assessing further opportunities to expand through widening our product offering and expanding geographically or within our existing domiciles by acquisition or people hires. The operations continue to capitalise on the successful joint marketing initiative with the Insurance Investments Division to provide captives with an array of exit solutions.

Overall in the Insurance Services Division, our scale and expertise in niches such as broker run-off, liquidity management, captive management, and in medical malpractice and workers' compensation claims (in the US), provide good income growth opportunities but there remains a relative scarcity of sizeable traditional third party run-off contracts. Sustaining or growing the internal service revenue and profits is also dependent on new portfolio acquisitions as the existing ones mature but there are encouraging signs emerging here as discussed in the Insurance Investments Division above. We continue moreover to focus on the consolidation and re-engineering of the division's operations and on cost control.

Underwriting Management Division

The Underwriting Management division is engaged in the following activities:

·; Management of the Group's own active syndicate and 'turnkey' syndicate

·; Management of RITC (run-off) syndicates

·; Delegated underwriting through a number of specialist managing general agents ('MGAs') with niche underwriting accounts

The Underwriting Management Division generated an operating loss of £1.5m on revenue of £11.6m (2011: (£1.1m), £5.4m). Adjusting for the operating losses and closure costs of the Canadian MGA, the division made a significantly reduced operating loss of £0.5m. The financial result was nonetheless weaker than originally anticipated due to: (i) slower premium development in certain of the new coverholder operations, where capacity and distribution issues were only resolved later in the year; (ii) the costs associated with the Solvency II project; and (iii) the costs associated with the scaling up of the underwriting management operations. The division however is now well positioned for substantial growth, especially following the launch of R&Q Syndicate 1991, which is expected at least to double premiums across the 2013-2015 underwriting years. The division is therefore expected to make a positive contribution to the Group's operating result during 2013 and beyond.

The Group's Lloyd's managing agency operations had a good year with strong fee income growth following the transfer of certain services previously provided to the Group's managed syndicates from the Insurance Services Division and the addition of Syndicate 3330 following the Reinsurance-to-Close ('RITC') of the open years of former Syndicate 1208. Profit commission of £2.1m was generated from the two run-off syndicates and was significantly higher than the year prior (£1.0m). These contributions resulted in an operating profit of £2.4m (2011: £1.7m).

The MGA commission income was significantly higher than during 2011 at £3.6m (2011: £0.7m) as a result primarily of the addition of R&Q Marine Services, the new Yachts and Marine Trades MGA, which traded very well during its first year at R&Q. The acquisition of Synergy, the high net worth MGA, together with organic growth in Commercial Risk Services, the UK SME Commercial MGA, also added new revenue. After excluding Canada, there was still an operating loss in the MGA operations due primarily to significant losses at Synergy which was impacted by legacy costs and capacity issues, which were only resolved later in the year. JUST, the specialist sports, leisure and entertainment MGA has had its business transferred to the R&Q syndicate from 2013 and any non-Lloyd's business transferred to Commercial Risk Services.

2013 should see a much improved operational result in the MGA operations now that R&Q's Canada MGA operations have been discontinued and as capacity improvements, product expansion and improved distribution in the other MGAs bring further benefits. Strong competition in the high net worth market and our commitment to underwriting discipline are affecting Synergy's income, which may consequently take longer to reach break-even, reducing the overall contribution of the MGA activities during the current year. Additional underwriting hires and re-engineering initiatives should improve performance over time and we remain open to other opportunities to bring further scale to our specialist MGA operations.

As has already been commented on, the division was impacted again by costs associated with compliance with the Lloyd's Solvency II project but much of that preparatory work has now been completed. Whilst the maintenance of the increased risk management, actuarial, operational and governance standards brings on-going costs, it is less burdensome than the initial model creation and the expected increase in our agency operations should reduce the residual costs retained by the agency.

A significant amount of energy and resource was expended in ensuring Syndicate 1991 was approved and fully operational for a 1 January 2013 start. The launch of Syndicate 1991 is an exciting development for the division's agency operations. In addition to providing scale and bringing additional cost recoveries, the syndicate offers significant organic growth prospects for fee income and profit commissions in the years to come as well as raising the profile and standing of R&Q within the active Lloyd's market. The underwriting team, previously from Axis, has an excellent track record and has a focused and specialist approach to property and liability delegated authority selection and management, with real-time data monitoring and specialist claims handling.

The syndicate attracted an excellent mix of capital support from traditional Lloyd's Names (private individuals), industry capital from Bermuda and Europe (including SCOR and XL Group) and R&Q itself (22.8%). The syndicate capacity for 2013 is £77m, with the aim of steadily growing capacity to more than two times current level by the 2015 year of account. Whilst start-up syndicates, as has been mentioned above, rarely make underwriting profits in their first calendar year of operation, due to the slow recognition of earned premium, we expect the team to deliver strong underwriting results in years to come as the book matures and grows, potentially bringing sizeable profit commissions to the division.

The turnkey market appears to be improving with an increased number of enquiries from international insurance groups looking to enter the Lloyd's market. Provided the business is accretive and the team has a strong underwriting track record, Lloyd's has been generally supportive. The Group is well placed in the turnkey market to support and manage such ventures but the lead time to launch tends to be considerable and our current pipeline is probably more likely to convert during 2014 than the current year. We remain fully committed to managing new turnkey syndicates, which should bring additional consultancy revenue, fee income, cost recovery and profit commissions over time. We are also exploring other opportunities to expand the agency by taking over the management of existing active or run-off syndicates.

Overall, we are excited about the prospects for the division. A much improved operating result is expected in 2013 and potentially strong contributions to the Group's profit in the future, especially from 2015.

Return of Cash via an L/M Share Scheme and Distribution Policy

The Return of Value, details of which were outlined in a circular posted to shareholders on 14 March 2013, gave shareholders the option of receiving their payment as capital or income and provided a more flexible and efficient mechanism of returning capital. The payment of 5.0p per share is expected to be made through the scheme on 3 May 2013 to those shareholders on the register at 5.00 p.m. on 2 April 2013, bringing total cash distributions to shareholders in respect of the 2012 financial year to 8.4p.

The return of cash to shareholders through an L/M share scheme came in a period when once again the Group successfully managed to release capital from a number of our insurance investments.

The Return of Value was in place of the final dividend for the 2012 year but the Group may choose to make future returns of value in addition or instead of ordinary dividend payments.

Further to the proposed placing and issue of new shares, the Group has decided to maintain the total distributions to shareholders at 8.4p per share in respect of the 2013 financial year, absent unforeseen circumstances. Thereafter the Group will follow a standard progressive distribution policy that reflects its financial performance and remains committed to providing strong cash returns to shareholders.

Litigation

During the period, we reached an agreement to resolve the legal dispute with various companies of the ACE Group ("ACE") including litigation that the Group filed against various ACE subsidiaries in May 2012 in the Supreme Court of New York. Through the resolution of this dispute, we have been able to remove a significant source of uncertainty for the Group and have now resumed normal commercial relations with ACE.

All other outstanding litigation is in the ordinary course of business and is claims and reinsurance related in the owned insurance companies and managed syndicates.

Staffing

The Group continues to seek high quality individuals to develop existing and new business areas. The Group has strength and depth in the management team across the three divisions.

During the past year, the staff have continued to make valuable contributions to the success of the Group and I wish to express my gratitude for this. It is of course regrettable that at the same time that we are expanding the number of staff in certain areas of the business, we have to contract in others in order to reflect business priorities and to manage our cost base. This in no way reflects on staff performance. We continue to reward staff and management primarily based on the Group's financial performance but we also offer equity incentives and profit shares to key people in certain of the new underwriting ventures to help retain and attract the best industry talent.

Key Performance Indicators

In order to focus our delivery to shareholders and facilitate analysis of our progress, we report the following key performance indicators:

• Revenue growth and Operating Profit margins in the Insurance Services division

• Operating profit in the:

- Insurance Investments Division

- Underwriting Management Division

• EPS

• Distributions per share (i.e dividends and any other capital return to shareholders)

• Net Tangible Asset Value per share

• Total Shareholder return

The tables below show the results:

1 After deduction of Minority Interests

2 Excludes goodwill impairment

3 Includes change in share price between 1 Jan and 31 Dec together with distributions per share relating to that accounting period

4 Assumed share cancellation had been completed

KE Randall

Chairman and Chief Executive Officer

Report of the Directors

For the year ended 31 December 2012

The Directors present their report together with the audited Financial Statements of the Company and its subsidiaries for the year ended 31 December 2012.

Principal Activities

The Company is a holding and investment company.

Group companies carry on business in the UK, Continental Europe, United States, Canada and Bermuda as owners, managers and acquirers of insurance companies and captives in run off, as participators and managers of active Lloyd's syndicates, as underwriting managers for active insurers, as purchasers of insurance receivables and as consultants to the non-life insurance market.

The Group owns thirteen insurance companies and captives in run-off in the UK, US and Continental Europe. The Group also owns and operates an active insurer in Bermuda which currently supports the Group's Lloyd's syndicate operations.

Results and Distributions

The results for the Group for the year ended 31 December 2012 are set out in the consolidated income statement.

The Directors declared and paid distributions for the year of 8.4 pence per share on the ordinary shares amounting to £4,162,000 (2011: £4,032,000).

Future distribution intentions are disclosed in the Chairman's Statement and Business Review on page 3.

Directors' Interests in Shares

As at 31 December 2012, the following Directors held ordinary shares as below. The total ordinary shares in issue at 31 December 2012 amounted to 50,133,002.

Risk Management

The Group has within it a dedicated Risk Management Function which has been focussed primarily within the Group's wholly owned Lloyd's Managing Agency in preparation for Solvency II. The Risk Management Function has continued to work with the other divisions within the group in identifying, assessing, reviewing and monitoring risks and mitigating controls, and developing the Risk Management and Reporting framework.

The following risks are deemed to be the principal risks facing the Group. Risks relating specifically to the Group's owned insurance entities service operations and underwriting management division are dealt with separately towards the end of this section.

Group Risks:

General economic climate and natural disasters

The markets in which the Group operates are directly affected by many national and international factors that are beyond its control. Any one of the following factors, among others, may cause a substantial decline in the financial markets in which the Group operates: legislative, legal and regulatory changes; economic and political conditions in the UK, continental Europe, the US and elsewhere in the world; changes in the supply and demand of capital, industrial disruption, concerns about terrorism and war; natural disasters; the level and volatility of equity, property and commodity markets; the level and volatility of interest rates and foreign currency exchange rates and concerns over inflation and changes in institutional and consumer confidence levels. Uncertain economic prospects or declines in investment markets for any of the foregoing reasons could adversely affect the operations, business and profitability of the Group.

Group Cash Flow Risk

The Group must actively manage its cash flow to ensure that operating cash flow requirements, debt repayments (together with interest payable) and claims payments can be met and the Group's distribution policy sustained. The Group undergoes a thorough annual budgeting process, which includes a monthly Group cash flow projection, against which actual movements are regularly monitored through, for example, the weekly circulation of the cash balances in each of the Group's entities. If cash flows are not managed, this will adversely affect the Group's ability to meet debt and claims repayments and sustain its distribution policy.

Capital Management

Growth within the Group may be constrained by the availability of capital. As part of the yearly budget process, the Directors work together with the finance team to consider any requirements for capital to expand the Group's existing operations and to fund the likely acquisition pipeline of legacy insurance assets or investment in further syndicate participations. This capital requirement is monitored on an ongoing basis. The visibility of pipeline acquisitions is however limited and the ability to complete transactions on the terms desired uncertain.

The majority of the Group's insurance entities are subject to external risk based or minimum capital requirements. The Directors have overall responsibility for managing the Group's overall capital base and for maintaining sufficient capital within the Group's insurance entities, including the Funds at Lloyd's requirement to support its syndicate participations to satisfy external regulatory requirements. The Group receives timely information regarding the levels of capital each entity is required to hold and the prevailing surpluses, which facilitates the Group's active capital management strategy. The Group is also required to meet its Group Capital Adequacy Requirement under the Insurance Group's Directive. This requires constant monitoring both of the Group's capital resources and requirements, which may vary, especially following new insurance company acquisitions. The Group has recently established more robust monitoring and forecasting processes designed to confirm compliance on a daily basis.

The Group has a five year credit facility with Clydesdale Bank which has over three years until expiration. There is no guarantee that the Group will be able to secure refinancing of this facility or alternative finance on comparable terms.

Competition

The Group operates in a competitive environment and faces competition from current and potential competitors. The Group may not be able to compete effectively with such competitors, particularly those with far greater capital resources.

Regulatory Risk

The insurance industry is heavily regulated in most jurisdictions. The majority of the insurance companies owned by the Group are subject to the insurance regulatory system in the jurisdictions in which they operate. These companies, and any future acquisitions by the Group, may not be able to maintain the necessary licences, permits, authorisations or accreditations in jurisdictions in which they currently engage in business or may only be able to do so only at significant cost.

Regulatory agencies in that operate in the Group's jurisdictions will have broad administrative power over many aspects of the Group's insurance business. These powers may influence premium rates, marketing and selling practices, advertising, licensing agents, policy forms, capital adequacy and permitted investments. At the same time, government regulators that operate in the jurisdictions will be concerned primarily with the protection of policyholders rather than shareholders or creditors.

In the United Kingdom, the Group is subject to the regulation of the Council of Lloyd's, the PRA and the FCA, whilst in the United States, the Group is subject to the regulations of each of the states in which it is admitted. Each of these regulatory authorities has substantial powers of intervention in relation to the companies and the markets which they regulate, with the ability to remove the authorisations and licences required by carriers and markets such as Lloyd's to conduct insurance business. Such authorisations and licences are fundamental to the Group's business.

In particular, the Council of Lloyd's has wide discretionary powers to regulate members' underwriting at Lloyd's. It may, for instance, vary the method by which the solvency ratio of Lloyd's and that of its members is calculated, or the investment criteria applicable to funds at Lloyd's. Either action could affect the amount of the Group's underwriting capacity and, consequently, the return on an investment in a given year of account.

Similarly, the PRA and the FCA have wide regulatory powers under FSMA and the Financial Services Act 2012, including the authority to grant, vary the terms of, or cancel a regulated firm's authorisation, to investigate marketing and sales practices and to require the maintenance of adequate financial resources. The PRA and the FCA have the power to take a range of investigative, disciplinary or enforcement actions, including public censure, restitution, fines or sanctions and to award compensation. The PRA and FCA may make enquiries of the companies which they regulate regarding compliance with regulations governing the operation of business and, like all UK-regulated financial service companies, the Group faces the risk that the PRA and the FCA could find that the Group has failed to comply with applicable regulations or has not undertaken corrective action as required.

In addition, the relevant members of the Group may not be able to comply fully with, or obtain appropriate exemptions from, any amendments to a regulatory regime. Failure to comply with or to obtain appropriate exemptions under any applicable laws could result in restrictions on the Group's ability to conduct business in one or more of the jurisdictions in which it operates and could result in the imposition of fines and other sanctions, each of which could have a material adverse effect on its reputation, financial condition and/or operating results.

Failure to comply with applicable regulations and solvency requirements, including the proposed Solvency II legislation, could result in an impediment of business development and/or a variety of sanctions. The Group's failure to gain and/or maintain a sufficiently high Solvency II rating for its Lloyd's managing agency could in particular impede its business development in the Underwriting Management Division. The Directors are responsible for ensuring that best practice is applied to ensure regulatory compliance.

The Group also faces the potential risk of an onerous Group solvency test under the proposed Solvency II legislation which may result in the Group being deemed to be insufficiently capitalised. As a result, the Group is planning to reduce this uncertainty and contain the potential consequences of these risks by establishing an insurance company consolidator in Malta and moving the Parent company to Bermuda domicile.

In addition, changes in the laws and regulations to which the Group's insurance operations are subject could have a material adverse effect on the Group's business and may increase the costs of complying with such laws and regulations.

A curtailment of certain of the licences held by Lloyd's or a deterioration in the credit rating and standing of Lloyd's could also adversely affect the Group's business and its future development, especially of its active underwriting operations.

Exposure to litigation

The extent and complexity of the legal and regulatory environment in which the Group operates and the products and services the Group offers mean that many aspects of the business involve substantial risks of liability. Any litigation brought against the Group or any companies within it in future could have a material adverse effect on the Group.

In addition, litigation may have a material adverse effect upon the Group's business in that legal decisions between third parties may expand the apparent scope of legal liabilities, which in turn could increase the amount of claims which have to be paid by the Group, thereby reducing profits. The Group's owned insurance companies are also exposed to potential tort claims including claims for punitive or exemplary damages that could have a materially adverse effect on profitability.

Distribution and third party capital support

The Group's active underwriting operations are dependent on maintaining strong relationships with insurance brokers and delegated authorities, who are the key source of distribution. The ability of the syndicates and Managing General Agents to maintain or grow their underwriting is also dependent on the continued support of the existing third party capital providers or the ability of the Group to secure alternative sources of capital.

Investment performance will affect the profitability and solvency position of the Group

The insurance companies in run-off owned by the Group and the syndicates (both run-off and active) on which the Group participates hold significant investments to support their liabilities and their earnings will be affected by the returns achieved on their investment portfolios. Therefore despite the Group's asset and liability management strategies, changes in credit spreads, interest rates, credit ratings, default rates and other economic variables could substantially affect the Group's profitability. The capital value of the Group's investments may fall as well as rise and the income derived from them may fluctuate. A fall in such capital values may adversely affect the Group's solvency position.

Industry wide developments could adversely affect the Group's business

The availability and price of insurance coverage and the number and nature of insurance companies entering run-off have been affected in the past by industry wide factors such as asbestos and environmental liability claims, other liability claims such as directors' and officers' liability and medical malpractice and major hurricanes. Similar or new industry wide factors in future may result in changes in market conditions or governmental intervention in the insurance markets, which may affect the ability of the Group to obtain suitable run-off reinsurance protection or potential businesses or companies for acquisition as well as impact the general insurance rating environment and demand for the Group's insurance products offered by both its active syndicates and Managing General Agents.

Business Growth and Integration Risk

The Group's operations have grown significantly in recent years both organically and through acquisition. Where growth occurs without requisite management controls in place there is an increased risk that business objectives are not aligned, new business targets not met and costs not adequately managed. The Directors seek to mitigate this risk through detailed budgeting, a regular flow of management information, including the preparation and analysis of monthly management accounts, and regular communication within the divisions.

Failure to Deliver Strategic Objectives

All operations within the Group are expected to work together to meet strategic divisional and Group objectives. Where there is a lack of understanding, cooperation or potentially even conflict across divisions, there is a risk that these objectives will not be met. The Directors seek to mitigate this risk through regular reporting in the various divisional and Group committees outlined above and through a clearly communicated strategy disseminated across the Group. The group's P.R representatives also help ensure that the full breadth of the business is understood both internally and externally.

Key Man Dependency

Appropriate succession planning arrangements are considered by the Directors to ensure that business operations are not disrupted by the loss of key staff. The Group has developed strength and depth across its management structures and believes its Human Resource policies are appropriate to retain such staff and recruit any appropriately skilled people required. However, the Group's reputation and standing is still significantly linked to the involvement of its founding directors, Ken Randall and Alan Quilter. A significant amount of knowledge, especially with regard to the terms of acquisition and detail of certain of the insurance company subsidiaries also lies with Ken Randall especially and is not easily replaceable.

Reliance on Group I.T and Communications

The Group may be unable to operate efficiently or in a timely manner in the event of a partial or complete failure of the I.T infrastructure and/or telephone systems. This is particularly important for the Group's active underwriting operations. The Group has reviewed its IT and telephony operations and has now contracted with a third party outsourcing partner to provide resilience and performance improvements across the IT estate. The improvements are already in place for the Group's live underwriting operation and have already undergone disaster recovery testing to demonstrate the effectiveness of the new IT model.

Interest rate/Credit risk

The Group's main exposure to fluctuation in interest rates arises in its effect on the value of funds invested in bonds. In order to mitigate this risk, the Group investment committee and insurance company boards, together with the external investment managers, attempt to anticipate any future interest rate movement and to take appropriate action to mitigate its effect on the value of investments held. The Group is also exposed to credit risk through holding collateralised loan obligations, mortgage backed securities, corporate bonds and loans, depending on actual default rate and/or changes in the perceived default rates, which may fluctuate over time. The Group is therefore exposed to absolute loss and mark to market movements in the valuations of these securities. In order to mitigate this risk the vast majority of securities held by the Group are investment grade and credit spread duration is kept low.

Liquidity Risk

Liquidity risk is the risk that cash may not be available to pay obligations when due. The cash position of each of the insurance companies is monitored on a regular basis to ensure that sufficient funds are available to meet liabilities as they fall due. Funds required to meet immediate and short term needs are invested in money market funds or short term deposits. Funds in excess of those required to meet short term needs are managed by external fund managers or placed in UCITS funds or Collective Investment Schemes. The investment performance of the fund managers and pooled funds is closely monitored throughout the year by the Group investment committee and insurance company boards.

The management contracts within the service companies are typically structured such that fees are payable by clients quarterly or annually in advance, providing the Group's Insurance Services Division with sufficient working capital to support the obligations of all companies within the division. The cash position of each of the service companies is monitored on a regular basis to ensure that sufficient funds are available to meet liabilities as they fall due.

Currency fluctuations

The Group will have businesses with funds, assets, investments and liabilities denominated in currencies other than sterling and may, from time to time, experience losses resulting from fluctuations in the values of US dollars, Euros and other non-UK currencies, which could adversely affect its operating results. Where possible, the Group manages the impact of this risk by broadly matching the currency of assets and liabilities. The Group however holds the surplus of the US insurance companies in US dollars and there is thus an impact on the Group's consolidated net asset position as a result of any fluctuations between Sterling and the US dollar. The Group has in the past hedged this exposure at times and the cost-benefit of such protection is regularly assessed.

Risk Management - Insurance Companies and Syndicates

The activities of the Group's insurance companies expose each of them to financial and non financial risks.

Other than as reported in Note 2a and Note 3, the Parent Company and its other subsidiaries bear no financial responsibility for any liabilities or obligations of individual insurance companies. Should any of the insurance companies cease to be able to continue as a going concern, any loss to the Parent company and its other subsidiaries is restricted to the book value of their investment in that individual insurance company and any intra group balances due by them or due to them.

Although the Directors strategically manage the risks within the Group, it is the responsibility of the Directors of the insurance companies to adhere to the Group's ethos in managing their company's exposure to these risks and, where possible, introduce controls and procedures that mitigate the effects of the exposure to risk.

Insurance Risk

The very nature of insurance business is that insurers are exposed to the possibility that claims will arise on business written. The risk attaching to insurance contracts is based on the fortuity that events will occur which will lead to a claim under the contract.

The main insurance risks which affect the insurance companies and syndicates (both run-off and active) on which the Group participates are:

• Pricing risk - the risk that coverage provided by the Group's insurance policies is inadequately priced, resulting in underwriting losses which in turn could lead to capital impairment.

• Claims risk - a series of claims in respect of a latent liability that the insurance industry is not currently aware of and/or a higher level of attritional losses and catastrophe related losses than anticipated and/or modelled on the policies underwritten in the active syndicates.

• Reinsurance risk - the risk that the reinsurers of the insurance companies will dispute the coverage of losses and/or inadequate or inappropriate reinsurance cover, especially of large catastrophe related losses in the active syndicates on which the Group participates.

• Legal risk - changes in statute or legal precedent.

• Reserving risk - the risk that the provisions established by the companies prove to be inadequate.

Receivables

There is a credit risk on reinsurance receivables in the owned companies and managed syndicates. Reinsurance receivables are evaluated each quarter as to credit risk and existing bad debt provisions are evaluated as to adequacy.

The carrying value (i.e. original acquisition cost) of the insurance debt acquired by the Group in the Insurance Investments Division may also prove to be overstated and/or may not be realisable.

There is also a risk that the Group is unable to realise the carrying value of certain life policies which are carried as a debtor in Syndicate 102.

There is a risk that structured settlements the Group has put in place with a number of life companies to settle certain of its liabilities may not pay out if the life companies were to default.

Currency Risk

The insurance companies are potentially exposed to currency risk in respect of liabilities generated through regular trading activity which are denominated in currencies other than Sterling. The most significant foreign currencies to which the companies are exposed are the US Dollar and the Euro. Group policy requires that the Directors seek to mitigate the risk by matching the estimated foreign currency denominated liabilities with assets denominated in the same currency. However, in certain asset classes, much better priced investment opportunities exist in Sterling and Euros rather than US Dollar denominated investments due to an aversion to non-US risk by US investors following the recent credit crisis. In certain of the Group's insurance company portfolios we have therefore put in place rolling foreign exchange hedges to mitigate any foreign exchange mismatch between the investments held and the underlying liabilities, rather than directly hold assets and liabilities in the same currency.

Reliance on Investment Income

The Group's accounting policy in its consolidated financial statements, in relation to the insurance company subsidiaries is not to discount insurance reserves and only to take a provision for future run-off operating expenses if estimated investment income is insufficient over the Group as a whole to cover future anticipated operating expenses. Each insurance company is modeled in detail to ascertain the quantum of any provision required, taking into account estimated investment returns, average funds held and operating costs over the expected life of the run-off.

The investments held in the insurance company subsidiaries are however subject to market risks, which include interest rate and credit risk, dealt with in detail below. Returns may not therefore meet expectations or losses may materialise. To mitigate these risks the Group has an Investment Committee, formed of the Executive Directors which advises the boards of the insurance companies on asset allocation and manager selection. The Investment Committee is also assisted by an independent investment advisor. Timely and accurate performance information is regularly made available to both the Group Investment Committee and insurance company boards to assist active management, which the Group believes is vital in this prolonged period of low interest rates and economic uncertainty.

The level of funds held in the insurance company subsidiaries may also decrease faster than anticipated due to accelerated claims payments and this may have an impact on the sufficiency of investment income to meet operating expenses, provided the latter does not reduce proportionately.

Reserving/Actuarial Risk

Failure to adopt the correct reserving techniques exposes the Group to reserving risk and may present liquidity issues. The Directors actively manage this risk through the appointment of both internal and external actuaries to perform all reserve calculations.

Risk Management - Service Companies

The activities of the Group's service companies expose each of them to financial and non-financial risks.

Although the Directors strategically manage the risks within the Group, it is the responsibility of the Directors of the service companies to adhere to the Group's ethos in managing the companies' exposures to these risks and, where possible, introduce controls and procedures that mitigate the effects of the exposure to risk.

Dependence on Clients

The service companies derive a significant proportion of their income from management contracts, which vary in length by up to five years. Failure to retain key clients on renewal will have an adverse impact on income. The Group enjoys a diverse client base with no single contract accounting for more than 10% of service income.

Risk Management - Underwriting Management

Strategic/Capital Risk

The Group manages the Syndicates in return for a managing agency fee, management charges and profit commission out of which it must meet retained expenses. The Group must maintain certain regulatory solvency surpluses to maintain an adequate capital base and to this end, the Group monitors its financial position by way of quarterly management accounts and regular cash flow reports and action would be taken to maintain the regulatory solvency position where appropriate.

Operational risk

This is the risk that errors caused by people, processes, systems or external events lead to losses to the Syndicates. The Group seeks to manage this risk with detailed policies and procedures addressing each potential source of operational risk and a structured programme of testing of processes and systems by internal audit.

Legal and Regulatory Risk

The Group's approval as a Managing Agent of Lloyd's Syndicates is subject to continuing approval by Lloyd's, Prudential Regulation Authority and the Financial Conduct Authority. The risk of this approval being removed is mitigated by monitoring and fully complying with all requirements in relation to a Lloyd's Managing Agent and the operation of its managed Syndicates.

Share Capital

Details of the changes in the Company's share capital structure, rights and obligations attaching to, and any restrictions on the transfer or voting rights of the Company's shares are given in Note 24 to the Financial Statements.

Charitable Donations

During the year the Group contributed £nil (2011: £559) for charitable purposes.

Employee Involvement

Review meetings are held with employees to discuss the financial position and prospects of the Group. Opportunity is given at these meetings for senior executives to be questioned about matters which concern the employees.

Employment of Disabled Persons

The Company and its subsidiaries have continued their policy of offering equal rights to employment training, career development and promotion to all their employees including disabled employees.

Creditor Payment Policy

It is the Group's policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions.

Events after the reporting period end

Events after the reporting period end are disclosed in note 33 to the Consolidated Financial Statements.

Purchase of own shares

During the year, the group completed the acquisition and cancellation of 3,959,914 of its own shares. Details of this are disclosed in note 24 to the Consolidated Financial Statements.

Disclosure of information to Auditors

The Directors who held office at the date of approval of this Report of the Directors confirm that, so far as they are individually aware:-

·; there is no relevant audit information of which the Company's auditors are unaware; and

·; each Director has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

Auditors

Littlejohn LLP has signified its willingness to continue in office as auditors and a resolution will be proposed at the forthcoming Annual General Meeting.

The Board and the Audit Committee has approved an extension to the engagement term of the Senior Statutory Auditor responsible for the audit opinion in relation to Randall & Quilter Investment Holdings Plc . The term was extended from five to six years and was made to safeguard the quality of the audit in light of the changes made or soon to be made to the structure of the group. The Audit Committee is satisfied that this extension does not in any way prejudice the objectivity and independence of the audit.

By order of the Board

Signed by

M L Glover

Company Secretary

24 April 2013

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the Group and Parent Company Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. Under that law the Directors have elected to prepare the Group Financial Statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union and elected to prepare the Parent Company Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice.

Under Company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the profit or loss of the Group for that year.

In preparing these Financial Statements the Directors are required to:

·; select suitable accounting policies and then apply them consistently;

·; make judgements and estimates that are reasonable and prudent;

·; state whether the Group Financial Statements have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the Financial Statements;

·; state whether the Parent Company Financial Statements have been prepared in accordance with UK Accounting Standards, subject to any material departures disclosed and explained in the Parent Company Financial Statements and

·; prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors confirm that they have complied with the above requirements in preparing the Financial Statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and which disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Report of the Directors that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the Financial Statements may differ from legislation in other jurisdictions.

Independent Auditors' Report to the Shareholders of

Randall & Quilter Investment Holdings plc

We have audited the Financial Statements of Randall & Quilter Investment Holdings plc for the year ended 31 December 2012 which comprise the Consolidated Income Statement, the Consolidated Statement of Financial Position, the Parent Company Balance Sheet, together with its accompanying notes, the Consolidated Cash Flow Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in the preparation of the Group Financial Statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company Financial Statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the Company's shareholders, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's shareholders those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's shareholders as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditors

As explained more fully in the Statement of Directors' Responsibilities, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the Financial Statements

An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances, and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the Directors, and the overall presentation of the Financial Statements.  In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on Financial Statements

In our opinion:

·; the Financial Statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2012 and of the Group's profit for the year then ended;

·; the Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

·; the Parent Company Financial Statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice;

·; the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Report of the Directors for the financial year for which the Consolidated Financial Statements are prepared is consistent with the Financial Statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if in our opinion:

·; adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

·; the Parent Company Financial Statements are not in agreement with the accounting records and returns; or

·; certain disclosures of Directors' remuneration specified by law are not made; or

·; we have not received all the information and explanations we require for our audit.

Carmine Papa (Senior Statutory Auditor)

For and on behalf of Littlejohn LLP

Statutory Auditor 1 Westferry Circus

Canary Wharf

London

E14 4HD

24 April 2013

Consolidated Income Statement

For the year ended 31 December 2012

Consolidated Statement of Financial Position

as at 31 December 2012

The Financial Statements were approved by the Board of Directors on 24 April 2013 and were signed on its behalf by:-

K E Randall T A Booth

Consolidated Cash Flow Statement

For the year ended 31 December 2012

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

Consolidated Statement of Changes in Equity

For the year ended 31 December 2012

Attributable to equity holders of the parent

Attributable to equity holders of the parent