Randall & Quilter Investment Holdings Ltd (LON:RQIH) and Brickell PC Insurance Holdings LLC and have announced that they have agreed the terms of a recommended cash acquisition of the entire issued ordinary share capital of R&Q by Brickell as well as $100 million of new equity funding. The Acquisition will be undertaken by way of a merger under the Bermuda Companies Act.
· Under the terms of the Acquisition, each R&Q Shareholder will be entitled to receive:
175 pence in cash for each R&Q Share
valuing R&Q’s existing issued share capital at approximately £482 million.
· The price of 175 pence per R&Q Share represents:
o a premium of approximately 20 per cent. to the Closing Price per R&Q Share of 146 pence on 31 March 2022 (being the last practicable dealing day prior to the date of this announcement)1;
o a premium of approximately 17 per cent. to the 30 day volume weighted average share price for the period ended 31 March 20221;
o 1.82x price to Tangible Net Asset Value per share based on estimated figures for 31 December 20211; and
o 1.65x price to Net Asset Value per share based on estimated figures for 31 December 20211.
· In addition, Brickell has committed to provide new equity funding to R&Q of $100 million to de-lever R&Q’s balance sheet and improve the Group’s financial profile following new management’s in-depth review of the Group’s Legacy Insurance portfolio.
· The Acquisition and New Equity Funding will be conditional on, among other things, the approval by R&Q Shareholders of various matters at the General Meeting, receipt of Regulatory Clearances and the satisfaction (or waiver) of the other Conditions set out in Section 1 of Appendix III of this announcement. It is currently expected that a Circular will be posted around the week of April 25th 2022 with the General Meeting expected to be held around the week of May 23rd 2022, and the Acquisition is expected to become effective around April 2023 (although may be extended in certain circumstances), subject to receipt of Regulatory Clearances and to the satisfaction (or waiver) of the other Conditions.
· The R&Q Directors believe the terms of the Acquisition and New Equity Funding are in the best interests of shareholders and, accordingly, intend to recommend unanimously that R&Q Shareholders vote in favour of the various resolutions to approve the Acquisition and the New Equity Funding and related matters, which are to be proposed at the General Meeting. In addition, the R&Q Directors have irrevocably undertaken to vote or procure votes in favour of such resolutions in respect of their holdings of R&Q Shares, in aggregate, representing 9,102,904 outstanding R&Q Shares and constituting approximately 3.31 per cent. of R&Q’s issued share capital as at 31 March 2022 (being the latest practicable date prior to the date of this announcement).
· Barclays Bank PLC (acting through its Investment Bank) (“Barclays”) and Numis Securities Limited (“Numis”) are acting as financial advisors to R&Q on the Acquisition.
Information relating to Brickell
· Brickell and its affiliates currently have a 23.2% shareholding in R&Q but 9.9% voting rights in R&Q. In March 2019, Brickell made its initial investment in R&Q by acquiring a 9.0% shareholding. In April 2020, Brickell purchased an additional $80 million of exchangeable preferred stock of a R&Q affiliate. In January 2021, Brickell exchanged the preferred stock to equity in R&Q but remained at 9.9% voting interest in R&Q following the receipt of relevant regulatory approvals. As a result of the terms of the conversion documents and R&Q’s Bye-laws, Brickell and its affiliates currently only have the ability to exercise voting rights equal to 9.9% of the current total voting rights in R&Q without obtaining relevant regulatory approvals.
· Brickell is controlled by Steven W. Pasko who has over thirty five years of financial services experience. Brickell’s principal economic investor is 777 Partners LLC (“777”). 777 is a global investment firm headquartered in Miami, Florida. The firm invests across six verticals; insurance, consumer and commercial finance, litigation finance, sports media and entertainment, aviation, and direct lending. As 777’s non-voting ownership interest in Brickell does not include any ability for 777 to exercise board control or any other ability to direct or cause the direction of management or policies of Brickell, 777 does not exercise control over Brickell.
· Brickell PC2 Insurance Holdings Limited will be incorporated in Bermuda in 2022 for purposes of merging with R&Q. Brickell PC2 Insurance Holdings Limited will merge with and into R&Q with the result that R&Q will be the surviving company of the Merger. As a result of the Merger, R&Q will become an indirect wholly-owned subsidiary of Brickell. After completion of the Merger, R&Q would be owned by Brickell which will then be the holding company of both R&Q and Brickell’s other existing insurance operations.
Information relating to R&Q
· R&Q has been operating in the insurance industry for over 30 years and is a leading non-life global specialty insurance company focusing on Program Management and Legacy Insurance businesses. The company is incorporated in Bermuda, with operations in the US, UK, Europe and Bermuda and has 308 employees across 8 offices.
· FY 2021 was a pivotal year for R&Q as the Legacy Insurance business took a significant step towards its transformation into a capital lighter, more recurring fee-based business model through the formation of Gibson Re, a Bermuda-domiciled collateralised reinsurer with c.$300 million of third-party capital. The launch of Gibson Re as a legacy sidecar reinsurer for 80% of R&Q’s Legacy Insurance business, simplifies the Legacy Insurance revenue model from one that is episodic and capital intensive towards one that is capital lighter with more predictable and recurring annual fee income. However, as discussed at the time of R&Q’s H1 2021 interim results, this repositioning of Legacy Insurance inevitably results in a temporary reduction to R&Q’s earnings as Legacy Insurance transitions from upfront ‘Day One’ underwriting income to annual recurring fee income. Under new accounting standards due to become effective in FY 2023, ‘Day One’ underwriting income will not be permitted.
· The Group’s Program Management business continued its growth with gross written premiums (“GWP”) expected to reach $1 billion2 for FY 2021, a 92% increase versus FY 2020, due to growth in new programs and the seasoning of existing programs. This is expected to drive fee income growth for Program Management of 133% to $56 million2, which includes income from the Group’s 40% ownership in the Tradesman Program Managers MGA. Program Management pre-tax operating profit is expected to reach $21 million2 with a pre-tax operating profit margin of c.35%.
· The Group’s Legacy Insurance business is currently expecting to complete 15 Legacy Insurance deals for FY 2021, reflecting $726 million of gross reserves acquired compared with $640 million of reserves acquired in FY 2020. Given that not all of the Legacy Insurance transactions have been completed, this outlook is still subject to change. Gibson Re began assuming risk in 4Q 2021 representing $367 million of Reserves Under Management (“RUM”) at YE 2021 with annual recurring fee income of $16 million for the Group; however these fees will not be recognized until FY 2022. Had the Group not had the benefit of Gibson Re, it would have required an additional c.$100 million of capital to fund its Legacy Insurance deals. Legacy Insurance is expecting a pre-tax operating (loss) of c.$(5) million to $(10) million2 for FY 2021 primarily due to the unanticipated adverse reserve development of c.$30 million2.
· Given that not all of the Legacy Insurance transactions have completed, the outlook for the Group’s FY 2021 pre-tax operating profit remains variable although management currently anticipates a Group pre-tax operating (loss) of c.$(20) million to $(30) million2, which includes unanticipated adverse reserve development of c.$30 million2 and unallocated corporate and interest expense. Pre-tax operating profit is a measure of the underlying earnings power of the Group and excludes non-recurring items.
· The Group anticipates achieving c.$90 million in run-rate pre-tax operating profit by the end of FY 2023. This is due to significant operating leverage as the business achieves scale, which the Group believes is underpinned by the ongoing growth in its Program Management business and the ability to deploy Gibson Re’s capital. The Group also expects to achieve $1.75 billion of Program Management GWP in FY 2022, one year earlier than previously reported. As the Company continues its transformational journey to becoming primarily a recurring fee-based business by FY 2024, it currently anticipates a pre-tax operating profit for FY 2022 of between $8 million and $15 million. In FY 2022, the Group is expecting to incur c.$20 million of one-time charges primarily associated with an efficiency initiative to automate R&Q’s business processes, which are not included in pre-tax operating profit. This initiative is anticipated to yield meaningful annual cost savings by FY 2024.
· The new R&Q management team took over in April 2021 and initiated an in-depth review of the Group’s Legacy Insurance portfolio in Q4 2021. The review identified a potential c.$90 million2 non-cash, pre-tax charge associated with impairing a structured reinsurance contract that was previously capitalised as an asset on the Group’s balance sheet. The impairment is due to the likely commutation of this reinsurance contract by a subsidiary to provide liquidity to meet anticipated claims which have recently accelerated above expectations. This subsidiary was acquired over 15 years ago and management believes it is in the best interest of shareholders to commute the reinsurance policy rather than fund future claims out of Group liquidity. Furthermore, in Q4 2021, the Group used meaningful cash capacity to fund collateral requirements upon certain reserve strengthening. The combined impact of these two items results in a need for c.$100 million of equity capital to de-lever the balance sheet and improve the Group’s financial profile. The result of the charge and other non-operating items is an IFRS-based profit after-tax (loss) of c.$(135) million to $(145) million2.
Commenting on the Acquisition, Steven Pasko, Chairman of Brickell, said:
“We have enjoyed a strong relationship with R&Q as a shareholder since 2019 and further supported the business with an infusion of capital in 2020. We are excited about the prospect of integrating R&Q into our robust insurance ecosystem and expanding our business into the legacy space, by combining R&Q’s deep experience in managing complex run-off claims with 777’s unique asset management capabilities.”
Commenting on the Acquisition, William Spiegel, Executive Chairman of Randall & Quilter, said:
“Having agreed with Brickell the terms for a recommended cash acquisition of R&Q and $100 million new equity funding, the Board of R&Q is unanimous in its belief that this represents the best outcome for our shareholders. The Acquisition provides shareholders the opportunity to crystallise the value of their holdings, in cash, and at a material 20% premium to our undisturbed share price, and a substantial 1.82x multiple of expected FY 2021 Tangible Net Asset Value per share, while also providing $100 million in new equity funding to de-lever our balance sheet and improve our financial profile.
Furthermore, the offer demonstrates the strength of both our business today and the opportunities ahead of us. The value Brickell sees in R&Q is testament to the clear strategic vision we have outlined, the quality of our Legacy Insurance and Program Management businesses and the skills and expertise of our people. Brickell is a long-term strategic partner that has a deep understanding of our business and our markets, and has bought into our five-year plan to transform R&Q into a fee-based, capital lighter business. In addition to enabling our shareholders to realise attractive value, we also believe that an acquisition by Brickell would be an excellent outcome for our trading partners and employees, with Brickell’s existing presence and significant ambitions in the fronting and legacy sectors highly complementary to our business. I would like to thank our people for their ongoing commitment as we continue to focus on business as usual and delivering our strategy.”
This summary should be read in conjunction with, and is subject to, the full text of the following announcement and its Appendices.
The Acquisition will be subject to the Conditions that are set out in Section 1 of Appendix III of this announcement. Appendix I contains information on the sources of information and bases of calculation used in this summary and in the following announcement. Appendix II contains a summary of the irrevocable undertakings referred to in this summary and in the following announcement. Appendix III contains a summary of the key terms of the Implementation Agreement. Appendix IV contains definitions of terms used in this summary and in the following announcement.