Randall & Quilter

www.rqih.com
Ticker: RQIH Exchange: L

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. 

Latest Reports

A record FY19 result and strong pipeline

Published: 7th July 2020

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

Published: 30th April 2020

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.

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Quality building rapidly

Published: 10th September 2019
The core strategy to build two complementary divisions and income streams looks well on track. A strong first half was driven by Legacy deals - announced in FY18, which obtained final approval in H1 - and a £16.0m boost from investment income (FY18: £5.0m). That is a reminder that Legacy transactions can be very profitable, but their timing unpredictable. We believe that makes recent rapid growth in Program Management especially important. 

Contracted new Program Management business scaling rapidly 

Program Management’s strong recent growth has built estimated future gross written premiums to approaching $800m pa from contracts secured to date. That effectively creates high-quality regular commission income, which will attain full to speed over the next 12-18 months. That represents a steady, growing revenue base and outlook. 

Interims boosted by Legacy deals completed in the period

Headline figures make good reading although specific Legacy deals are one-off boosts, so not an indication for H2. PBT was £33.1m (H1 18 continuing: £7.8m) and basic EPS 19.2p (H1 18 continuing: 3.6p). There was a 13% increase in NTA/share to 133.2p (H1 18: 117.6p) and a 12.5% return on tangible equity (H1 18: 6.8%).

We have marginally increased our FY19e forecast for better than expected investment returns, although assume an H2 contribution of c £4m. Completion of Legacy deals is also inherently tricky to predict. FY19e includes the $25m acquisition of Sandell Re, which should receive approval from the Bermuda regulator in H2. Previous acquisitions have been delayed, notably the US$80.5m Global Re deal, announced in Sep 2018, which received approval from the New York regulator in May 2019. 

Further Legacy deals await approval

The Legacy division completed five new acquisitions and three reinsurances in H1. The Program Management division launched ten new contracts in the USA and Europe. Both divisions report strong new business pipelines.    

The proposed interim distribution 3.8p/share (H1 2018: 3.6p) paid from capital, so tax-free to UK private investors; a prospective 5.7% yield based on 9.5p/share payment.

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Capitalising on opportunity

Published: 9th May 2019
FY 2018 saw excellent growth in continuing pre-tax profits to £14.3m, +45%. Underlying results confirm operational progress in line with strategic targets. Investment to date has established two high potential operations. 

The first, Programme Management (PM) continued to grow organically.  Its prospects were buoyed by an upgrade in its A.M. Best rating, a US$70m bond issue in December and a £103.5m equity issue post the year-end. The high rating is key to attracting enquiries from prospective new PM partners. 

The second division, Legacy/run-off secured further acquisitions in FY19. These included Global Re, its largest legacy deal to date, which received regulatory approval post the year-end. 

Both have distinct earnings patterns. PM builds gradually, but new operations incur expenses upfront as they build books of high quality, reproducible earnings. Legacy purchases can be difficult to forecast, particularly timing, but in contrast to PM can contribute to profit on day-one under group ownership. R&Q seeks to buy run-off insurance assets at a discount to book value, book an initial profit, then work acquired portfolios to release revenues over an extended period. 

We expect both divisions to achieve target scale in 2020 and fully contribute from FY21. Our forecast includes a substantial initial contribution from Global Re this year, then progressive growth from PM from FY20. R&Q reports a strong pipeline of PM enquiries and potential legacy acquisitions, and complementary revenues should create a stable revenue base and support a progressive distribution. 

The latter is paid from capital, so the 5.0% prospective yield is tax-free to UK private investors. NAV forecasts reflect a £103.5m equity issue post the year-end and retained earnings, net of dividends. 

We expect patient investors to be well rewarded as the full benefits of R&Q’s investment in its two core divisions become visible over the next 18-24 months. The shares are on undemanding ratings that appear to ignore clear growth opportunities. 
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Global Re acquisition on track for H1 2019

Published: 17th December 2018
Randall & Quilter Investment Holdings Limited (R&Q) is a long-established UK and US insurance business led by an experienced team. 

We have adjusted forecasts to reflect the revised timing of the Global Re acquisition. As the expected completion of a major acquisition has shifted by a few weeks, from late December to early January, it will now benefit H1 2019 not FY18. In all other respects everything remains on track.

Closure does matter, as the acquisition of GLOBAL Reinsurance Corporation of America (Global Re) is the largest transaction legacy/business combination R&Q has undertaken to date. It will acquire Global Re, a New York domiciled reinsurance company in run-off, from AXA for c $80.5m in cash funded from available cash and debt facilities. The price is a small discount to net assets and R&Q expects it to have material impact on its results, based upon its own reserve assessment and anticipated operational synergies.   

The exact timing of legacy deals is inherently difficult to predict, but the group’s track record is strong, completing 34 deals in the last two financial years. It confirmed that the Global Re acquisition remains on track, backed by strong new business pipelines for both further legacy acquisitions and its programme management business in the USA and Europe. Re the latter, R&Q anticipates that by the year end it will have signed contracts with managing general agents expected to generate c $500m pa of future gross written premiums. 

Our forecasts now reflect the shift of the contribution from Global Re into next year. The FY19e multiple is attractive, with the yield well covered and tax-free to UK private investors as a distribution of capital.

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Benefitting from refocus on core operations

Published: 9th October 2018
Randall & Quilter IH (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 two licensed UK and US 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. 

The interims reveal the early benefits of R&Q’s decision to simplify its business in 2016 and refocus on two core strategic areas. Volumes of new legacy and program management deals are gathering momentum, building complementary revenues and leveraging the group’s core competitive advantages and enabling it to capitalise on industry trends. The rationalisation has created two core divisions and activities. 

A strong first half saw a 40% increase in underlying operating profit (continuing operations) to £7.8m. That reflects growing contributions from legacy purchases, demand for program underwriting services in US and Europe, and a streamlined expense base. Two acquisitions announced with the interims could make a significant impact this year, subject to receipt of regulatory approval before 31 December, or in FY19 if not.  

Both divisions reported encouraging client growth and strong new business pipelines and look well placed to benefit as insurers seek to manage competitive pressures and cope with increased regulation. Additionally, R&Q’s Malta base puts it in a strong position to capitalise upon uncertainty resulting from the Brexit negotiations. 

Our forecasts assume the latest acquisition completes this year, but overall, builds in a 12-18 months delay before new program management business is fully reflected in the bottom line, which relates to accounting. As those factors fall away with scale, operational gearing should take over and drive up margins. Also, bigger floats and rising interest rates may see an up‐tick in investment income. 

A well-covered 4.7% yield (tax-free to UK private investors as a distribution of capital) and PER of 11x discounts early risks and looks attractive relative to upside potential.

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