R&q Insurance Share Discussion Threads

[red ninja] 03/4/2022 10:45

Simon,

Yes, I agree the risk would be that a problem reveals itself before the carve out acquisition completes.

However, the risk of further problems should be low (but who knows for sure). The rest of the the legacy subsidiaries must have passed the 4th quarter 2021 review. RQIH have not had these sort of problems in the past either as far as I can recall.
However, clearly there is some unknown risk that another problem may reveal itself.

There is no mention that Bricknell have either done due dilligence or propose do do it, but it would be logical that they have done it otherwise why make the offer.

William Speigel in the Voice of Insurance podcast was saying that the look for more runoffs of higher quality so I am surprised that the problem subsidiary was acquired 15 years ago and was still in runoff maybe it was acquired before the criteria for acquisition runoffs change to safer more mature ones.

Whatever clearly there processes/management of the legacy area failed badly here.

If only it was only financial stocks that had problems, history teaches us that problems are more widely spread. I personally have worked for a company brought down by fraud.

[red ninja] 02/4/2022 12:10

Simon,

Yes, I agree it is a gradual transfer of the business, but it should offer shareholders quicker access to some of the cash as after a carve out acquisition clears requlation, Bricknell should pass on the cash for the carve out acquisition to R and Q which should then pay the shareholders.

Also when the first carve out passes to Bricknell, then Bricknell is commited to paying the rest of the aquisition sum within a year or that's how I read it.

It seems to me that is better than just a completion in April 2023 which up to that point Bricknell could walk away from.

Just my understanding. DYOR.

[simon gordon] 02/4/2022 10:37

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

-Warren Buffett

[simon gordon] 01/4/2022 19:07

Red,

I was reading the Carve Out like it was a potential wind down:

8. Carve Out Acquisition

Brickell and R&Q have agreed to cooperate, engage in discussions and use all reasonable endeavours to enable Brickell, prior to the completion of the Acquisition, to acquire parts of R&Q's business, including those entities comprising R&Q's Program Management business, as and when applicable Regulatory Clearances have been obtained, potentially allowing for an earlier payment to shareholders (each, a "Carve Out Acquisition").

The members of the R&Q Group forming part of the Carve Out Acquisition ("Carve Out Companies") will be acquired by Brickell prior to completion of the Merger and all members of the R&Q Group not so acquired will remain as subsidiaries of R&Q and will become indirect subsidiaries of Brickell following completion of the Merger on the Closing Date.

On completion of any Carve Out Acquisition, Brickell shall pay to R&Q consideration for the relevant Carve Out Companies, representing fair market value for such Carve Out Companies, as mutually determined by R&Q and Brickell (the "Carve Out Consideration").

The terms of any Carve Out Acquisition shall be structured so as to ensure that R&Q is able to and does pay an amount equal to such Carve Out Consideration to the R&Q Shareholders who hold R&Q Shares (such payment to be by way of dividend, distribution, return of capital or other mechanism to be agreed with Brickell pursuant to the terms of any Carve Out Acquisition).

In the event that Closing has not occurred following a Carve Out Acquisition, on the earlier of: (a) the date falling 12 months after the date of completion of the Carve Out Acquisition or (b) an earlier date if Brickell so elects (the "Carve Out Acquisition Payment Date"), Brickell shall pay an amount to R&Q sufficient to enable R&Q to make a payment to the R&Q Shareholders equal to the Acquisition Consideration less the Carve Out Consideration and regardless of whether Closing subsequently takes place, the R&Q Shareholders shall not receive any further payment in respect of the Acquisition or the Merger.

Accordingly, if a Carve Out Acquisition is completed, R&Q Shareholders shall then become entitled to receive amounts totaling, in aggregate, the Acquisition Consideration regardless of whether any remaining Conditions (including the obtaining of any Regulatory Clearances) are satisfied or waived.

It is not anticipated that the Acquisition, together with any Carve Out Acquisition, will constitute a 'fundamental change of business' for the purposes of AIM Rule 15 and, accordingly, R&Q and Brickell do not expect any Carve Out Acquisition to need to be conditional upon R&Q Shareholder approval. In the event that R&Q Shareholder approval is required pursuant to AIM Rule 15 (whether for the purpose of the implementation of any Carve Out Acquisition or otherwise), such shareholder approval will either be sought at the General Meeting or, if it is not possible to seek such shareholder approval at the General Meeting (due to timing constraints or the status of discussions in relation to any Carve Out Acquisition) then such shareholder approval will be sought at a subsequent special general meeting.

[simon gordon] 01/4/2022 17:24

I sold at the opening bell because after reading the RNS I thought an c.8% return wasn't worth the risk. I am actually quite relieved they managed to do this deal.

If they had tried a placing for c.£75m it could have been priced at a pound or much less. Who is going to want to jump in when one item on the balance sheet has blown up at a cost of c.£70m and there could be another or more UXB's like it? The uncertainty hanging over the share would have been immense, it would have been radioactive for years. I wonder what the Gibson RE investors are thinking and after this blow up are people going to be keen to do Gibson 2?

The new strategy from the American team has gone up in smoke with this blow up. Now they will be working for Brickell / 777. I wonder if over time the top team will move on. The head of tax has just left and a top level executive in Bermuda has also moved on, will the top tier start leaving? Life is all about momentum and RQIH have just lost a lot of energy with this emergency bailout and take over.

I suppose the ultimate risk for holders is that Program is carved out and then Legacy has another toxic under reserved blow up on its balance sheet and it becomes radioactive or even worthless. They've found one, are there more? It's certainly a red flag and time for me to move on and thank Brickell for assuming the risk for now. I suppose that's insurance for you!!

I think holders have been very lucky to come out of this without a serious haircut or years of misery.

[red ninja] 01/4/2022 17:01

There is uncertainty due to the potential long lead time to a deal and that is triggering selling.

However, there seems to be some large buys going through as well.

Also looking at the announcement again RQIH shareholders may get earlier payments via the carve out provisions :-

"Brickell and R&Q have agreed to cooperate, engage in discussions and use all reasonable endeavours to enable Brickell, prior to the completion of the Acquisition, to acquire parts of R&Q's business, including those entities comprising R&Q's Program Management business, as and when applicable Regulatory Clearances have been obtained, potentially allowing for an earlier payment to shareholders (each, a "Carve Out Acquisition")."

If Bricknell go for carve then it would seem they have to have to pay a sum equal to the acquisition ?

"In the event that Closing has not occurred following a Carve Out Acquisition, on the earlier of: (a) the date falling 12 months after the date of completion of the Carve Out Acquisition or (b) an earlier date if Brickell so elects (the "Carve Out Acquisition Payment Date"), Brickell shall pay an amount to R&Q sufficient to enable R&Q to make a payment to the R&Q Shareholders equal to the Acquisition Consideration less the Carve Out Consideration and regardless of whether Closing subsequently takes place, the R&Q Shareholders shall not receive any further payment in respect of the Acquisition or the Merger."

It seems to me it's a complicated takeover and when and if it becomes clearer that the takeover is moving ahead as carve out goes ahead we should see the share price move closer to the acquisition price. No guarantees though,



"

[petomi] 01/4/2022 14:12

The price suggests considerable doubt as to whether this will go through at all, over and above uncertainty about the timing. Some institutions may hold out for more but Brickell would seem to have the leverage.

Disappointing - I always thought this would likely be taken out but hoped we'd get to 250 first and then a decent premium on top of that. As it is, and taking the newly disclosed legacy problems at face value, this is looking a very unstable situation so I have derisked by selling most of my holding at a decent profit. But GL to those who hold on for the full 175 or even the hope of more.

GLA

[fred177] 01/4/2022 13:09

Red Ninja thanks for this, hopefully if they are mopping up shares below the £1.75 it will reinforce their commitment

[topvest] 01/4/2022 12:43

I guess there are numerous regulatory clearances to obtain. Bit of a mess really.

What about this?

"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.$30 million2 and unallocated corporate and interest expense. Pre-tax operating profit is a measure of the underlying earnings power of the Group and excludes non-recurring items. The impact of the non-cash charge and other non-operating items results in a IFRS-based profit after-tax (loss) of c.$(135) million to $(145) million2."

[red ninja] 01/4/2022 12:26

On the other hand if things go well I would think they would want to close the deal closer to August 2022 as other suitors might possibly emerge as time goes on.

[red ninja] 01/4/2022 12:23

Well I suppose Bricknell are thinking that if there other problems this deal timetable will give them time to walk away.

[rik shaw] 01/4/2022 12:18

So sell in the market today or wait and get c12% more assuming the deal does ahead with downside risk if it doesn't.

[red ninja] 01/4/2022 12:14

Although I note last line as :-

· Long Stop Date for Completion of the Acquisition: April 2023 (although may be extended in certain circumstances)"

It says that date could be "extended in certain circumstances". Thus in extremis it could be later that April 2023.

[red ninja] 01/4/2022 12:12

See below they are calling April 2023 a "long stop date"

"A long stop date is a date that is agreed upon for the property to be complete no longer than this date."

Thus we are talking about a completion date between August 2022 and April 2023.
However, hopefully closer to August 2022 than April 2023.


"The anticipated timeline for the Acquisition and New Equity Funding is as follows:

· Post Circular to approve the Acquisition and New Equity Funding: around week of April 25th 2022

· General Meeting of Shareholders to approve the Acquisition and New Equity Funding: around week of May 20th 2022

· Receipt of $70 million of proceeds from New Equity Funding in June 2022 and $30 million in August 2022

· Long Stop Date for Completion of the Acquisition: April 2023 (although may be extended in certain circumstances)"

[fred177] 01/4/2022 11:11

I am reading that the takeover wont be completed until April 2023 will shareholders have to wait until then to get £1.75?

I don't think Slater will be too happy either

[topvest] 01/4/2022 10:48

Its the nature of legacy capitive insurance companies. Anyone remember Tawa? I had shares in that one and still have - its being liquidated, and almost finished now, but returns were awful.

If you keep buying captive insurance companies, eventually something will come back to bite you.

Personally, I think Randall and Quilter jobs did an excellent job in the circumstances and did grow the business well in a very astute way.

It's just not worth much more than net asset value as a business, particularly given its always been capital intensive and doesn't throw off much cash. Long-term, they have delivered a healthy dividend and a 175p exit, so not bad versus the original listing. Obviously, not as positive as many expected. I suspect Phoenix won't be very happy!

[simon gordon] 01/4/2022 10:32

I bought into RQIH due to the quality of the newly installed top team, with the CFO buying 340K of shares last September. Gibson RE had launched and Accredited was firing on all cylinders. The future looked bright. The company looks to have been up for sale since the 8th of November when RQIH announced a vote on a change to the company bye-laws. So, the hole in the balance sheet probably surfaced in October. It looks like they started discussing this with shareholders / market in February and the share started falling on a potential fund raise.

All in all, it looks like the new top team have a lower quality asset than was sold to them by Messrs Randall and Quilter. They've had to save the situation by selling the company at the best price they could achieve. If R&Q were still in charge the share would have tanked and been almost worthless. The quality of the top team has saved shareholders a packet.

I would think the new top team are somewhat vexed that they've been sold a pup.

[red ninja] 01/4/2022 10:23

Mmm, the problem seems to stem from the time of the old management.

The new management have still got a reasonable exit price even given the problems a sign perhaps of how they are esteemed.

Yes, there is some risk in holding to the takeover as more problems may reveal themselves and the takeover may not go ahead.

I see there are big buys in the market at 1 million shares a time I wonder if that's Bricknell buying in the market at around £1.60 ie a good discount to the takeover pice.

[riverman77] 01/4/2022 10:10

Sold out a while ago as wasn't keen on the new management team or strategy. The current situation looks a bit of a mess and glad to be watching from sidelines. Agree, if I were a holder I'd use this as an opportunity to get out.

[asagi] 01/4/2022 08:53

correct, simon gordon.

It looks like it was 175p or a capital raise to fill a $100m hole. 175p takeover is the best result for shareholders in the circumstances. I'd be selling in the market this morning and moving on. I'd likely be counting myself lucky too.

Asagi (no position)

[martindjzz] 01/4/2022 08:14

I think we need to be told when the Board first became aware of the circumstances necessitating the capital raise.

[simon gordon] 01/4/2022 07:50

Considering the circumstances that is a good deal for shareholders. Otherwise, it would have been a bloodbath.

[hugodscott] 01/4/2022 07:24

I am staggered. The share price was above 175p only six weeks ago. If you look at the chart over the past two months it almost looks like someone has been steadily off-loading a few shares in order to drive the price down to around 145p and as a result make a 175p offer look vaguely acceptable. I am not a conspiracy theorist but I am genuninely amazed by this news this morning.

[topvest] 01/4/2022 07:21

Yes, a disappointing end result. I don't hold any longer but held for many years. Got a bit jumpy when Ken Randall retired and sold at 175.5p as it happens last tax year as I didn't like the quality of their earnings.

There was always the risk of something nasty coming out of the legacy portfolio, as it so often does in this line of business.

"Background to and Reasons for the New Equity Funding

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 Group has received pre-emptive waivers from its bank lenders on its existing financial covenants until the earlier of a capital raise or the end of June 2022. In the absence of a capital raise or an extension of the waiver, it is likely that the Group would be in breach once the current waivers expire."