Randall & Quilter Investment Holdings Ltd (LON:RQIH), the leading non-life global specialty insurance company focusing on the Program Management and Legacy Insurance businesses, has announced its results for the half year ended 30 June 2021, and the launch of Gibson Re.
Strategic Update
· Formed Gibson Re, a Bermuda-domiciled collateralised reinsurer with ~$300 million of capital; allows R&Q to support ~$2 billion of reserves1
· Gibson Re will reinsure 80% of all of R&Q’s new qualifying legacy transactions for three years, with R&Q participating in 20% to promote alignment of interest
· R&Q to receive annual recurring fees of 4.25% of Gibson Re’s reserves for at least six years, plus potential performance fees
· Gibson Re will transform Legacy Insurance into primarily a recurring fee-based business
· By 2023 expect run-rate Group Fee Income of greater than $140 million and Group Pre-Tax Operating Profit of over $90 million, assuming Gibson Re capital is fully utilised by 2023
H1 2021 Financial Highlights
· Pre-Tax Operating Loss of $23.5 million; loss reduced to approximately breakeven when including two signed Legacy Insurance transactions with $23 million of Underwriting Profit that are expected to close in H2 2021, reflecting the episodic earnings profile associated with Legacy Insurance
· Program Management Gross Written Premium of $890 million and Fee Income of $50 million (H1 2021 annualised), increases of 80% and 135%, respectively, from H1 2020
· Program Management Pre-Tax Operating Profit of $20 million (H1 2021 annualised) compared with $1.6 million (H1 2020 annualised); Pre-Tax Operating Profit Margin of 40% compared with 7.5% at H1 2020
· Program Management Gross Written Premium target for FY 2023 increased to $1.75 billion from $1.5 billion
· Legacy Insurance completed eight transactions
· Legacy Insurance pipeline of over $1 billion of reserves; traditionally ~70% of transactions complete in H2
· Changed reporting currency to US Dollars for fiscal year 2021
· Interim dividend for H1 2021 of 2.0 pence per share and reiteration of progressive dividend policy of growing dividend from 4 pence per share in FY 2020
Q3 2021 Update
· Program Management added 8 new programs in July and August increasing Contracted Premium to ~$1.8 billion
· Legacy Insurance completed the first Insurance Business Transfer in Oklahoma between two unaffiliated parties, opening up a new avenue for US legacy business
1Subject to regulatory approval
Summary Financial Performance (see Notes for definitions)
| ($m, except where noted) | ||
| Group Results | ||
| Income Statement | H1 2021 | H1 2020 |
| Pre-Tax Operating Profit | (23.5) | 12.8 |
| Fee Income | 25.1 | 10.7 |
| Operating Earnings per Share2 | (8.5)c | 5.9c |
| Profit Before Tax | (45.4) | 0.7 |
| Reported Earnings Per Share2 | (13.7)c | 0.5c |
| Dividend Per Share | 2.0p | 3.8p |
| Balance Sheet | 30 Jun 2021 | 31 Dec 2020 |
| Tangible Net Asset Value Per Share2 | 160.2c | 173.3c |
| Net Asset Value Per Share2 | 180.8c | 193.3c |
| Business Segment Metrics | H1 2021 | H1 2020 |
| Program Management | ||
| Contracted Premium (period end) | 1,605.0 | 925.0 |
| Gross Written Premium | 445.0 | 247.0 |
| Pre-Tax Operating Profit | 9.9 | 0.8 |
| Pre-Tax Operating Profit Margin | 39.9% | 7.5% |
| Legacy Insurance | ||
| Cash and Investments Acquired | 147.9 | 402.9 |
| Net Reserves Acquired | 112.5 | 336.3 |
| Pre-Tax Operating Profit | (14.8) | 37.5 |
2 On a fully diluted basis
William Spiegel, Executive Chairman of R&Q, commented:
“Over the course of 2021, we have successfully implemented a key component of our Five-Year strategy – developing a more fee-based business. Our announcement of the formation of Gibson Re starts the transformation of R&Q’s Legacy Insurance business from being balance sheet intensive with episodic earnings to a more capital light and predictable, largely recurring fee-based model. Gibson Re is a $300 million Bermuda-domiciled collateralised reinsurer owned and funded by sophisticated insurance investors. Our Legacy Insurance business now joins our Program Management business in generating most of its future revenues from annual recurring fees.
R&Q is repositioning the business to become an asset manager for Legacy Insurance business, focusing on our core strengths of insurance origination, underwriting and claims management. This change reduces our reliance on the capital markets to support our growth. The launch of Gibson Re simplifies our Legacy Insurance revenue model from one with lumpy Underwriting Income and seasonality (historically only ~30% of our Legacy Insurance transactions complete in H1 and ~ 70% in H2, measured by reserves acquired) to one with a predictable and high-quality recurring Fee Income. Importantly, by reducing the capital intensity of Legacy Insurance, we free up capital to support our previously announced progressive dividend policy and reduce our reliance on the equity markets for additional funding.
For the next three years, Gibson Re will reinsure 80% of all of R&Q’s qualifying Legacy Insurance transactions. Gibson Re’s capital allows R&Q to acquire approximately $2 billion of insurance reserves, and R&Q will be paid annual fees of 4.25% on reserves ceded to Gibson Re, plus potential performance fees. R&Q will manage Gibson Re for at least six years, and after seven years, R&Q will offer a commutation of the outstanding reserves. If all of Gibson Re’s capital is deployed by 2023, Legacy Insurance should generate run-rate Fee Income of approximately $50 million. It is anticipated that we will raise a new sidecar after three years for ongoing capital support of the Legacy Insurance business.
Program Management continued its strong growth in the first half of 2021 with annualised Fee Income of approximately $50 million, a growth of nearly 135% from H1 2020. Importantly, Pre-Tax Operating Profit grew over 1,100% to $20 million on an annualised basis and we are seeing the benefits of significant operating leverage as Pre-Tax Operating Profit Margins grew to 40% from 7.5% in H1 2020. With 68 programs as of 31 August, 2021, we are increasing our target Gross Written Premium in 2023 from $1.5 billion to at least $1.75 billion. Furthermore, our 40% ownership of Tradesman Program Managers, which generated $31 million of net income (H1 2021 annualised), contributed Fee Income of $12 million (H1 2021 annualised).
The development of a more fee-based business model inevitably means adjustments in our reported earnings. This is due to the timing of revenue recognition as we transition to a business model that replaces upfront capital-intensive Underwriting Income with predictable annual recurring Fee Income. With the formation of Gibson Re, we expect FY 2021 Pre-Tax Operating Profit to be relatively flat to FY 2020, depending on the timing of completing Legacy Insurance transactions. By 2023, if we deliver on our business targets, we expect to generate run-rate Fee Income of greater than $140 million and Pre-Tax Operating Profit of over $90 million, assuming Gibson Re capital is fully utilised.
The Board of Randall & Quilter Investment Holdings Ltd. is pleased to confirm that it will pay an interim dividend of 2.0 pence per share on 12 October 2021. The dividend will be paid to shareholders on the register on 24 September 2021, with a corresponding ex-dividend date of 23 September 2021. Moreover, we reiterate our intention to grow the total amount of the annual cash dividend from the fiscal year 2020 level of 4 pence per share, in line with our progressive dividend policy. Given the expected Pre-Tax Operating Profit for fiscal year 2021 will be impacted by the transition to recurring Fee Income, the dividend payout ratio is likely to be significantly above our 25 – 50% range, funded by excess capital created by the establishment of Gibson Re.
We remain in the enviable position of being market leaders in specialised insurance markets with favorable market conditions and strong competitive moats around our businesses. To take advantage of these conditions, we are relentlessly pursuing our previously articulated Five-Year strategy of being a “capital efficient, fee-oriented and data driven company”. Inevitably change is difficult and cannot be achieved without engagement and partnership from our employees and of course the support of our Board of Directors and shareholders. As the expression goes: “there is no “I” in team”; business is a team sport and R&Q has an outstanding and motivated team.”
Investor presentation
Our shareholders presentation and accompanying video is available on our website.
As part of its commitment to open communication with all of its shareholder base, R&Q will also provide a live presentation and Q&A via the Investor Meet Company platform at 3pm on 6 September 2021. Registration details can be accessed via:
https://www.investormeetcompany.com/randall-quilter-investment-holdings-ltd/register-investor
Questions can be submitted pre-event via the IMC dashboard or at any time during the live presentation via the ‘Ask a Question’ function.
