Randall & Quilter
Randall & Quilter Investment Holdings (R&Q) is a long-established UK and US insurance business led by an experienced team. It is focused on two core strategies: to drive commission income from writing niche books of business using its licensed carriers and to grow an industry leading provider of exit solutions for legacy/ run-off insurance assets to vendors in the US, Bermuda and Europe.
A record FY19 result and strong pipeline
Impressive FY19 results met expectations via a combination of record Legacy deals and growth in the scale, product range and geographical reach of Program Management income. The latter is key, as this builds a base for future growth in complementary, visible, and reproducible fee-based revenues and commissions.
Group revenues are defensive, so R&Q takes a pragmatic view regarding the short-term impact of economic turmoil on its business. It sees some potential for Covid-19 delays in securing both legacy deals and new programs this year but, conversely, for insurance industry disruption to drive business in its direction.
R&Q looks well set, based on business booked in FY19 and Q1 2020 and underlying growth in program activity. Premium and commission income is fully visible 12-18 months after business is booked and, as it builds, is likely to reduce the proportion related to legacy income. The latter is deal-based, so difficult to predict, but potentially highly profitable.
Record performance is a direct result of the strategic refocus, now into its third year, on two complementary, high growth specialty insurance activities: legacy purchases and program management. That has created a prospective mix of capital growth (in Legacy division) and steady, visible fee income (Program Management).
The group's valuation is best judged as a sum of the parts, since the two divisions have distinct revenue models and earnings profiles. Our analysis (see note) suggests a material undervaluation vs R&Q’s projected growth and internal targets.
Indeed, simply rerating to sector levels indicates in the region of a 66% undervaluation at present. Underpinned by a historic NAV / share of 148p that is only slightly below the current share price despite the clear growth opportunities, and with a record of attractive shareholder distributions.
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$100m new equity to support expansion
A reassuring announcement on April 29th confirmed the underlying resilience of R&Q’s existing businesses, that the potential to grow both core divisions is intact (and conceivably will be buoyed by the current turmoil) and that the group can access expansion capital as required.
Management believes that the pandemic will have a limited effect on its existing business, other than possible short-term delays in completion of transactions. The group’s existing legacy books have limited exposure to unexpired risk, and its program management portfolios are largely reinsured with highly rated counterparties.
R&Q reiterated its previous strategic outlook and intention to proactively pursue opportunities to grow its two core businesses, program management and legacy acquisitions. It expects the impact of the current disruption on the wider insurance industry to generate considerable growth opportunities.
R&Q will alert the market in due course re the expected release date for its FY19 results. Our forecasts are unchanged. We will review them post the results, as well as the potential EPS impact of the new equity.