R&Q’s operating earnings up 30% in H1 2020

Randall & Quilter Investment Holdings Ltd (R&Q) said its operating earnings were up 30 percent in the first half of the year as its legacy and program management businesses performed well despite Covid-19 temporarily slowing down deal completion.

The group - who delayed publishing its H1 2020 results because of the pandemic - said on an underlying basis its H1 performance climbed to £10.4mn vs £8mn a year earlier as it completed a record nine legacy transactions in the period, while the roll-out of its US-European program business continued at a pace.

However, on an IFRS accounting basis, its pre-tax profit fell from £33.1mn to £0.6mn without the benefit of the major Global Re legacy acquisition which was accounted for in H1 2019 and the temporary impact of mark-to-market, unrealised losses from the pandemic-related slump in equities and credit in March-April 2020. 

R&Q pointed to a flurry of legacy reinsurance transactions (LPTs/ADCs) with heavyweight counter-parties such as Allianz, HIIG and RenRe as evidence of the growing demand for back year deals from carriers keen to free up solvency capital to focus on live underwriting.

In total, R&Q completed a record nine transactions in the period across seven jurisdictions, with its net reserves acquired increasing 81 percent to £267mn (H1 2019: £148mn).

But four of the transactions were reinsurance deals which - under an IFRS accounting basis - means the immediate gain cannot be booked in the same way as a discounted reserves acquisition. The group prefers the operating results measure which enables it to effectively account for its legacy deals in a similar way regardless of whether they are acquisitions or loss portfolio transfers (LPTs).

R&Q’s newer fronting business - which operates under the Accredited banner - also performed well in H1 2020. According to the London-listed firm, it signed ten new programs in the period taking the live total to 36. It has also added four new ones since 1 July with ~$200mn of contracted premium.

As previously announced, Accredited’s contracted premium from these partnerships with MGAs increased $925mn from $475mn a year earlier. It has subsequently exceeded $1bn GWP. 

R&Q - which earns commissions on GWPs written on its AM Best A- rated capacity in both the EU and US - said its program business arm has now moved into profit on an economic EBITDA basis with H1 2019’s modest loss of $0.3mn moving to a $0.8mn profit. It also said it will benefit from the market hardening which is seeing rate increases accelerate in most classes while growth will continue as contracted premium continues to earn through to written premium.

In addition, the group said it has bolstered Accredited’s European arm in the period with the establishment of a UK branch of its Maltese operating company which enables the firm to “continue to underwrite and service our UK partners post Brexit”. It has also opened a branch in Milan, Italy.

More recently, R&Q formed a US Excess and Surplus (E&S) lines company, Accredited Specialty Insurance Company, which will enable Accredited to expand its fronting/program services to the fast-growing $55bn market. The group recently announced the hiring of Aon veteran Pat Rastiello to lead the iniative.

Other major, already announced initiatives this year include the recruitment of a new CFO Tom Solomon and a sizeable injection of $100mn in fresh equity. 

The third quarter has also seen the group take a sizeable equity position in one of its MGA customers - the New York construction specialist Tradesman Program Managers, LLC - which locks in the group’s access to program fees.

According to the London-listed firm this morning: “The transaction not only strengthens our Program Management relationship with Tradesman, but our 35% strategic stake in the business should prove to be a valuable investment”.

R&Q continued: “Tradesman reported EBITDA of $8.1mn in 2019, the basis on which the valuation was agreed, and has grown rapidly in H1 2020”.

In a joint statement, the R&Q senior management team of chairman Ken Randall, deputy chairman William Spiegel and CEO Alan Quilter gave an upbeat assessment of business prospects.

“Despite unprecedented challenges introduced by Covid-19, we have had minimal disruptions to our operations. Importantly, we are excited by the opportunities available to us in the current market”, the trio explained.

They continued: “Covid-19 and other market events have generated significant losses for the insurance industry, creating a ‘hardening’ insurance environment and increasing the demand for our Legacy and Program Management solutions”.

The FY results - it added - will be in line with market expectations and it will return to paying shareholders a cash dividend equivalent to 3.8p a share.

Numis analyst Nick Johnson commented: “Overall there is plenty to be encouraged by in these results”.

He continued: “We reaffirm our view that R&Q is in the process of generating significantly increased shareholder value through build-out of the program management business and successfully capturing opportunities in a favourable market for legacy insurance transactions”.