Randall & Quilter
These notes are based on a Randall & Quilter company presentation given by Tom Booth, Corporate Finance Director, to an UKSA arranged gathering on 30th March 2011. The venue was the Orestone Manor Hotel, situated a few miles north of Torquay.
Background
Randall & Quilter are a Lloyd's based insurance company who specialise in buying company insurance portfolios in run-off and, more latterly, have expanded into other areas. The business was founded by Ken Randall (now aged 62) and Alan Quilter (60) in 1991, both having previously held senior positions at Lloyd's, and was listed on AIM in 2007 (epic RQIH).
Tom Booth, the presenter, commented that his involvement with the company began as an advisor to the AIM listing. He subsequently joined the company and is due to become Group Finance Director in June 2011, with Alan Quilter remaining an executive Director.
Numbers
Net assets are roughly £80m which, with 54m shares in issue, equates to 147p/share compared to a share price recently at 101p. Results are due on 28th April with market forecasts of a pre-tax profit of £7.4m. (The company is not challenging this forecast, which they are required to do if they believe it is outside 10% of their own expectations.) The company has 300 employees, owns 9 insurance companies and also generates a profit stream from a number of service companies.
A dividend base of 7p was established in 2009 with an expectation of a 5% annual rise. Special dividends or share buy-backs are a possibility, but unlikely at present following an active period in 2010 of buying up small businesses.
Over 50% of the company is owned by Directors (who tend to take money out of the company through dividends rather than bonuses). The free float is currently taken up by 3 funds having 6-10% each; some more having 2-3%; and the remainder c.1,000 private shareholders. Liquidity was noted as having increased over time.
Run-off portfolios
R&Q specialise in insurance, or reinsurance, for companies rather than individuals with consequently less policies and administrative staff involved for a given turnover. Their target for purchase is portfolios of policies where events are historical, i.e. over a year since cessation of writing of any new policies.
Sellers of such portfolios are motivated by a variety of factors: managing live and run-off portfolios requires different expertise so 'live' companies may choose to concentrate on their core business; the release of regulatory capital tied up with the run-off portfolio; and incentives to run-off policies quickly tend not to be in place, creating a long-term burden which the owners prefer to off-load.
When buying run-off portfolios there is a thorough process of reviewing audited accounts/actuarial reports and estimating claim liabilities. A surplus buffer is the norm with purchases at a discount. The due diligence process draws on expertise within the company and uses conservative estimates.
5-10 years ago portfolios for sale were mostly problematic and bought for very little. More recently the market has developed, with reduced discounts but less volatility, which together are a better deal. It is important for the purchaser to settle claims fairly, to preserve their own reputation and that of the originator. Regulators will not approve future sales to anyone with a bad reputation.
R&Q's aim is to settle claims early, sometimes through a scheme of arrangement authorised via the courts.
On purchase a portfolio with net assets of say £10m is added to the accounts for the purchase price of say £5m, accompanied by corresponding negative goodwill through the P&L account. Generally claim positions improve each year, a facet of conservative estimating, but one portfolio has deteriorated to date.
Part of the overall profit arises from the cash held, the free float. R&Q have a £300m investment fund which is mostly invested in fixed income – short duration and rated A or above. With the current economic outlook there is no appetite for investment losses on bonds if interest rates start to rise.
The target is an internal rate of return of 25%, prior to any gains. In some cases there are unforeseen premiums able to be collected, e.g. when a claim has been settled to a stipulated ceiling and cover is renewed within the same year. Servicing can also generate income, albeit not allowed in the US.
R&Q's focus is on smaller portfolios, which tends to attract less competition, and regards itself as a nimble minnow. Competitors include Berkshire Hathaway (no deal too small!) who are sometimes also a partner; Enstar (listed on NASDAQ; associated with Chris Flowers); Fairfax (Canadian, with a London operation); Tarwai (owned by Carrefore); Catalina (private, PE formerly RBS); Comfrey and RTCSan (Soros, Lloyd's market). Berkshire Hathaway was noted as being greedy on margins, so a good competitor to have.
The UK market is large, valued in £billions.
Turnkey
The wider reputation of Lloyd's has now been restored, with the debacle over asbestos losses now history. For example, the Lloyd's model is being adopted in the US.
R&Q are a Lloyd's managing agent, managing run-off for a syndicate and charging a 20% profit share. With agency infrastructure in place (contacts and expertise in actuaries, reinsurance, etc.) Lloyd's were approached to extend this infrastructure into a 'turnkey' service. A Norwegian prospect, for example, sought Lloyd's reputation, opportunities and capital efficiency. R&Q charge a fixed fee for managing a syndicate, plus a profit percentage, with 3 years or more of guidance.
There is little competition for mentoring and the original expectation was for demand to be event driven, but is now a niche area. The expectation is to gain and lose a client each year.
Debt
R&Q actively purchases debt, typically from US insurers/reinsurers or corporates who may themselves be insolvent. Purchases provide liquidity to the sellers and is often a bet on timing, with the risk of litigation delays. Administrators tend to be very conservative, so often the outcome is better than expected.
The largest liabilities carried by R&Q are in US$. Generally assets and liabilities are matched in currency terms. Positions are sometimes hedged, but none recently.
Captives
This division offers traditional accounting and regulatory return services, initiated by acquisition with operations in Bermuda and Gibraltar. The 120 clients are typically US corporates, providing £3m revenue and 25% margins, and the business is generally 'sticky'.
Gibraltar has a 10% tax rate but the main attraction is being regarded as European and able to write UK business. Following recent US government rhetoric a lot of US companies don't want to go offshore.
Insurance cycles
The 2005 US hurricane season was bad for 'live' insurance, but good news for run-off groups as insurance rates rise in response. More recently the New Zealand earthquake, Australian floods and events in Japan all point to higher future rates as the market picks up.
The insurance cycle is dependent on capital, not the business cycle.
Future
Solvency II legislation is coming into Europe, so relocation of some business close to Europe, e.g. Jersey, may be opportune. Opportunities exist to extend claims management services to the captive division clients (albeit some clients also offer their own claims management services). Strong growth prospects are expected from Underwriting Management.
