Randall & Quilter Investment Holdings Ltd

Results for the half year ended 30 June 2021

Announcing the Formation of Gibson Re, a Legacy Insurance Sidecar; Transitioning Legacy Insurance into a Recurring Fee-Based Business

6 September 2021

Randall & Quilter Investment Holdings Ltd. (AIM: RQIH) ("R&Q"), the leading non-life global specialty insurance company focusing on the Program Management and Legacy Insurance businesses, today announces 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 (commonly known as a "sidecar") 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)

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 at:

 http://www.rqih.com/investors/shareholder-information/investor-presentations

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.

Enquiries to:

Notes to financials

Pre-Tax Operating Profit or loss is a measure of how the Group's core businesses performed adjusted for Unearned Program Fee Revenue, intangibles created in Legacy Insurance acquisitions and net realised and unrealised investment gains on fixed income and lease-based assets.

Operating EPS represents Pre-Tax Operating Profit adjusted for the marginal tax rate, divided by the average number of diluted shares outstanding in the period.

Tangible Net Asset Value represents Net Asset Value adjusted for Unearned Program Fee Revenue, intangibles created in Legacy Insurance acquisitions, net unrealised investment gains on fixed income and lease-based assets and foreign translation currency reserves.

Gross Operating Income represents Pre-Tax Operating Profit before Fixed Operating Expenses and Interest Expense.

Fee Income represents Program Fee Revenue and our share of earnings from minority stakes in MGAs.

Underwriting Income represents net premium earned less net claims costs, acquisitions expenses, claims management costs and premium taxes / levies.

Investment Income represents income on the investment portfolio excluding net realised and unrealised investment gains on fixed income and lease-based assets.

Fixed Operating Expenses include employment, legal, accommodation, information technology, Lloyd's syndicate, and other fixed expenses of ongoing operations, excluding non-core and exceptional items.

Contracted Premium is the Gross Premium that our existing distribution partners believe their programs will generate over an annual period. We expect a significant portion of Contracted Premium to become Gross Written Premium.

Program Fee Revenue represents the full fee revenue from insurance policies already bound including Unearned Program Fee Revenue, regardless of the length of the underlying policy period. We believe Program Fee Revenue is a more appropriate measure of the revenue of the business during periods of high growth, due to a larger than normal gap between Gross Written and Gross Earned (IFRS) Premium.

Unearned Program Fee Revenue represents the portion of Program Fee Revenue that has not yet earned on an IFRS basis.

Program Fee represents Program Fee Revenue as a percentage of ceded written premium.

Pre-Tax Operating Profit Margin is our profit margin on Gross Operating Income.

Average Operating Tangible Equity is based on the Group's target solvency capital models and includes allocated debt.

Operating Return on Tangible Equity includes allocated interest expense and has been annualised for interim reporting periods.

Chief Financial Officer Review

Group

Effective this year, we are reporting our financials in US dollars. Given that the majority of our assets are denominated in US dollars, we decided to report our financial results in US dollars in order to minimise volatility of foreign exchange translation in our financial statement results.

Our H1 2021 financial results were impacted by the timing of completing Legacy Insurance transactions, which tend to close in the second half of the year. Nonetheless, we have a strong pipeline of transactions in our Legacy Insurance business and continue to experience strong growth in Program Management.

Our key performance indicators measure the run-rate economics of the business and adjust IFRS metrics to include fully written Program Fee Revenue and exclude non-cash intangibles created from acquisitions in Legacy Insurance, net realised and unrealised investment gains on fixed income and lease-based assets, foreign currency translation reserves and non-core, one-time items. We provide our key performance indicators on both a consolidated Group basis as well as on a segmental basis as described below.

Pre-Tax Operating Loss was $23.5 million compared to a profit of $12.8 million in H1 2020. This is primarily due to the timing of Legacy Insurance transactions, which historically are completed in the second half of the year. Had we included two signed transactions with $23 million of Underwriting Income that are expected to close in H2 2021, our Pre-Tax Operating Profit would have been break-even. Our Tangible Net Asset Value was $439.4 million and on a fully diluted basis; our Tangible Net Asset Value Per Share was 160.2 cents. One of our objectives is to grow Fee Income, which was $25.1 million, a 135% increase compared to H1 2020.

Our IFRS results include the impact of intangibles created from acquisitions in Legacy Insurance, mark-to-market movements in our fixed income investment portfolio, foreign currency translation reserves associated with changes in interest and exchange rates and non-core items, respectively, and exclude Unearned Program Fee Revenue. We had a pre-tax loss of $45.4 million compared to profit of $0.7 million in H1 2020 and our Net Asset Value Per Share was 180.8 cents.

Program Management

Our Program Management business continued to grow rapidly in H1 2021. At 30 June 2021, we had 60 active programs, an increase of 24 programs compared to H1 2020, our Contracted Premium was $1.6 billion, a 74% increase compared to H1 2020 and our Gross Written Premium was $445 million, an 80% increase compared to H1 2020.  Our results are beginning to show the benefits of scale as we earned a Pre-Tax Operating Profit of $9.9 million, representing a 39.9% margin on Gross Operating Income compared to breakeven profitability in H1 2020.

The primary driver of Pre-Tax Operating Profit is our Fee Income, which represents Program Fee Revenue from written premium ceded to reinsurers, and our share of net income generated from our 40% minority stake in Tradesman, which increased from 35% in Q1 2021. Fee Income was $25.1 million, a 135% increase compared to H1 2020.  The Program Fee averaged 4.6% and contributed $19.3 million of Fee Income and our 40% stake in Tradesman contributed $5.8 million of Fee Income.  Underwriting Income represents our ~5% retention of Program risk. We generated an Underwriting Loss of $1.2 million primarily due to the purchase of stop-loss reinsurance costing ~$2.6 million to minimise claims volatility. Excluding the purchase of stop loss reinsurance coverage, our Underwriting Income was $1.4 million, which is indicative of the underlying profitability that our reinsurers earn. Our Investment Income only contributed $0.9 million to Gross Operating Income due to the vast majority of premium ceded to third party reinsurers. Finally, Fixed Operating Expenses increased 59% compared to H1 2021 due to an increase in allocations of corporate expenses and the expansion of our staff with the establishment of our Excess & Surplus platform.

Legacy Insurance

Our Legacy Insurance business was impacted by the seasonality of completing transactions, which tend to close in the second half of the year. During H1 2021, we concluded eight transactions with Cash and Investments of $148 million and Net Reserves of $113 million, a decrease of 63% and 67%, respectively, compared to H1 2020 when we experienced an unusually high level of transaction volume. Our Pre-Tax Operating Loss was $14.8 million compared to a profit of $37.5 million in H1 2020. The primary driver of Pre-Tax Operating Profit is our Underwriting Income, which represents Tangible Day 1 gains on transactions originated during the year and claims management of transactions closed in prior years. Underwriting Income was $20.3 million, a 66% decrease compared to H1 2020 due to a lower amount of assets and reserves acquired during the period. Our Investment Income was $9.2 million, a 24% increase compared to H1 2020 driven by acquired assets on transactions over the past twelve months. Finally, our Fixed Operating Expenses grew 46% compared to H1 2021 primarily due to an increase in allocations of corporate expenses.

Our pipeline of transactions remains robust. We have two signed deals that are expected to close in H2 2021 with $60 million of net reserves and $23 million of Underwriting Income. Furthermore, we are actively involved in potential transactions representing over $1 billion of net reserves.

Corporate and Other

Our Corporate and Other segment includes investment income on excess capital, unallocated operating expenses, and finance costs.

Pre-Tax Operating Loss was $18.6 million, a 27% decrease compared to H1 2020 primarily driven by cost allocations to our business segments offset by higher Interest Expense associated with the issuance of $125 million of subordinated debt in H2 2020.

Our IFRS results include non-core and exceptional items, which amounted to a loss of $6.6 million in H1 2021. These represent non-recurring items such as pending mergers, retirement of executives, and one-time costs associated with special projects.

Cash and Investments

Our Cash and Investments have grown meaningfully over the last several years and now sit at $1.7 billion, driven by acquired assets in Legacy Insurance. We produced an annualised book yield, which excludes net realised and unrealised gains and losses on fixed income and lease-based assets, of 1.4%, a decrease of 30 bps compared to H1 2020 due to the impact of low interest rates and a relative increase in non dollar denominated assets. The 2-Year US Treasury yield averaged 15 bps in H1 2021 compared to 39 bps in 2020.

We maintain a conservative, liquid investment portfolio so that we can produce consistent cash flows to meet our liability obligations, while also earning a reasonable risk-adjusted return. 93% of our investments were rated investment grade, and another 2% of our portfolio was invested in non-rated money market funds. After cash, which comprised 16% of our portfolio, our largest allocations were to corporate bonds (43%), government and municipal securities (20%) and asset-backed securities (18%). Our portfolio remains with a short duration of 2.7 years, yet we are beginning to reinvest longer on the interest rate curve.

Our IFRS results include mark-to-market movements in fixed income assets, including realised net investment gains and losses, which amounted to a loss of $6.5 million for H1 2021, predominantly driven by the increase in interest rates since the beginning of the year.

Capital and Liquidity

Our estimated Group Solvency ratio remains very strong at 171%, a decrease of 17 percentage points compared to year-end 2020, but comfortably above our target of 150%. This reflects the impact of lower discount rates and other risk charges partially offset by the restructuring of $70 million of senior notes to receive Tier 3 capital treatment for Group Solvency purposes.  Our adjusted debt to capital, which provides for partial equity credit on our subordinated debt, was 29% and below our target of 30%.