R&Q Insurance 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 2022.
Strategic and Governance Update
· Raised $130 million via a placing, including a $34 million Firm Issuance in June followed by a Conditional Issuance and Open Offer for the remaining $96 million in July (the ‘Fundraise’), demonstrating strong shareholder support for our strategy
· Significant progress made in executing against all 5 pillars of our 5-year strategy to become a recurring fee-based, capital-lighter business with increased returns on equity and growing shareholder dividends
· Appointment of Robert Legget as the Senior Independent Director on 26 August as part of our ongoing plans to enhance our Board composition. The Board plans to introduce an Independent Non-Executive Chair as soon as possible with the appointment of further Independent Non-Executive Directors in due course
H1 2022 Financial Highlights
Program Management
· Gross Written Premium of $807.3 million (H1 2021: $444.8 million, an 82% increase)
· Fee Income (incl. Tradesman stake) of $44.3 million (H1 2021: $25.1 million, a 76% increase); Fee Income (excl. Tradesman stake) increased 105%
· Pre-Tax Operating Profit of $23.3 million (H1 2021: $9.9 million, a 136% increase)
· Pre-Tax Operating Profit Margin of 54.0% (H1 2021: 39.9%, a 14.1 percentage point increase)
Legacy Insurance
· Completed two transactions with Gross Reserves Acquired of $5.3 million (transactions are seasonally active in Q4)
· Reserves Under Management of $386.6 million
· Fee Income of $8.8 million
· Pre-Tax Operating Loss of $26.7 million as the business transitions to an annual recurring, fee-based revenue model
Group
· Total Fee Income of $53.1 million (H1 2021: $25.1 million, a 112% increase)
· Pre-Tax Operating Loss of $24.3 million; results impacted by Legacy Insurance revenue model transition
· An interim dividend for H1 2022 will not be declared; dividend strategy is to pay out 25 ‒ 50% of Pre-Tax Operating Profit
· Unrealised net investment losses of $88 million; unrealised investment gains/losses always excluded from Pre-Tax Operating Profit as they are non-economic and unlikely to be realised due to the high credit quality fixed income portfolio and the Group’s asset-liability management strategy
Operational Highlights
· Continued focus on cost control with Fixed Operating Expenses increasing only 3% year-over-year at constant foreign exchange rates and down 3% when accounting for foreign exchange movements
· Operational improvement programme underway with c. $10 million of the total $20 ‒ 25 million investment deployed since 2021, with the remainder to be incurred in H2 2022 and 2023
· This investment in automation and technology processes is expected to generate approximately $10 million of recurring annual cost efficiencies by 2024
Outlook
· Program Management expected to achieve $1.75 billion of Gross Written Premium in 2022
o Five programs launched post 30 June 2022 expected to generate c. $250 million of annualised Gross Written Premium
o Further pipeline of 13 programs in advanced due diligence totalling an additional c. $225 million of expected annualised Gross Written Premium
o Fee Income equal to c. 5% of ceded Gross Written Premium
· Legacy Insurance transaction execution continues to have heavy weighting towards Q4
o Strong pipeline of over $1 billion in gross reserves
o Over $1 billion of capacity in Gibson Re
o Fee Income equal to 4.25% of Reserves Under Management
· R&Q reiterates guidance of achieving in excess of $90 million Pre-Tax Operating Profit in 2024
William Spiegel, Executive Chairman of R&Q, commented:
“I am pleased to report another six months of progress against our 5-year strategy. These results showcase excellent underlying momentum in executing our 5-pillar strategy as we continue our transformation into a fee-based, capital-lighter business. This transformation is evidenced by the significant growth in recurring Fee Income, which has more than doubled from last year and now represents over 60% of our Gross Operating Income, a proxy for revenue. We also re-iterate our confidence in achieving in excess of $90 million of Pre-Tax Operating Profit in 2024. As a result of our strategy, R&Q will deliver more predictable earnings, with increased returns on equity and growing sustainable shareholder dividends over time.
Program Management continues to grow strongly with Gross Written Premium up 82%, and a Pre-tax Operating Profit of $23.3 million. We are now seeing the benefits of increasing scale, as demonstrated by a margin of 54.0% (H1 2021: 39.9%), with our operating leverage expected to drive this higher to c. 70% at scale. The pipeline in Program Management also remains robust, with the business on track to deliver its targeted $1.75 billion in Gross Written Premium for FY 2022. In addition, we continue to explore minority stakes in Managing General Agents where we provide Program Management services, and have executed on our second investment after the period close.
It is exciting to see Legacy Insurance generating recurring fees for the first time under its new reinsurance relationship with Gibson Re. In H1 2021, Fee Income of nearly $9 million based on Reserves Under Management of $387 million as of 30 June 2022. As we have previously outlined, this model will enable Legacy Insurance to significantly increase its return on equity while materially reducing earnings volatility and capital requirements. While it will take time for the new structure to mature and scale, and our operating performance reflects its transition, we remain on track with our objectives and have a strong pipeline of deal activity in place as we head into Q4 – historically the most active period for legacy transactions.
The outlook for both Program Management and Legacy Insurance remains highly favourable, with both well insulated against many of the broader macroeconomic challenges impacting the wider insurance industry such as rising interest rates, increasing inflation, hardening (re)insurance pricing and the Ukraine/Russia conflict. In addition, our recent Fundraise has further strengthened our capital position, enhanced parent liquidity, and decreased financial leverage, putting us on a strong financial footing to execute on our business objectives. Our investment portfolio is well positioned and comprises high-quality fixed income securities with a duration that is shorter than our stable, casualty-oriented liabilities. A rising rate environment is unlikely to require us to realise any mark-to-market unrealised losses on our portfolio but rather creates attractive reinvestment opportunities at significantly higher yields.
In addition to the positive progress we are seeing in our two businesses, we are also underway with implementing extensive improvements in how we operate as a Group, aimed at making us more efficient and technology-enabled, while enhancing our governance, culture and risk management. As part of this effort, we are investing a total of $20 ‒ 25 million, with c. $10 million already incurred to date, in process automation and technology. We expect this programme to generate c. $10 million of annual efficiencies by 2024, implying a payback on the upfront investment in approximately three years.
It would be remiss if I did not comment on the requisition notice from a minority shareholder and the proposed resolutions to bring back the former executive chairman. While our sentiments on this situation are documented in the Circular distributed on 24 August 2022, I wanted to personally thank the Board, our employees and the shareholders who have provided support to both me and the strategy that we have laid out and been executing on. Despite this and a number of other exceptional corporate events in 2022 that have caused some short-term and unexpected disruption to the business, our focus for the remainder of the year and beyond is firmly on the continued delivery of our plan.
In conclusion, the first half of the year has firmly demonstrated our ability to deliver on our 5-year, 5-pillar strategy of implementing a capital-lighter business model underpinned by recurring Fee Income. We know there is more work to do, but I am encouraged by how much we have already accomplished and the pace at which we are evolving into a less balance sheet intensive business with more predictable earnings. This is only made possible because of our talented and committed employees, and I would like to thank them for their ongoing efforts in helping us to achieve our goals.”
Investor presentation
R&Q Insurance shareholders presentation and accompanying video is available on our website at:
http://www.rqih.com/investors/shareholder-information/investor-presentations
