R&q Insurance Share Discussion Threads

[martindjzz] 21/4/2022 09:15

My instinct is that a higher bid will be needed to take it private. As an alternative perhaps 3 or 4 other significant shareholders will agree to participate in a fund raising and keep it listed. PI’s would get diluted no doubt but it might be worth it to have a chance of the long term upside that we believe RQH offers.

[simon gordon] 20/4/2022 06:07

Speed,

Thanks mate!

[speedsgh] 20/4/2022 05:58

City backlash on insurer going private -

A £482 million deal to take the London-listed insurer Randall & Quilter private faces a potential backlash from leading City shareholders...

[simon gordon] 20/4/2022 05:49

Anyone got a sub to the Times and able to post this?

City Backlash on Insurer Going Private

[red ninja] 10/4/2022 19:58

Legacy carrier returns under pressure in ‘frothy’ run-off market
Luke Harrison, Catrin Shi 25 February 2022
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The legacy market is experiencing pressure on returns as it works through a new era of increased deal competition, with new entrants to the space and rising private equity influence.
The pressures come despite renewed interest in the run-off market by sellers, as it starts to shake off a decades-old stigma of legacy deals being associated with failure.

A wave of liabilities is being brought to market both via a greater number of deals and ever-larger deal sizes – with the recent $3.12bn portfolio transfer between Enstar and Aspen a prime example.

Meanwhile, a ground-breaking split reinsurance-to-close transaction announced between RiverStone and MS Amlin yesterday could unlock a fresh wave of run-off liabilities at Lloyd’s.

But as market popularity grows, legacy carriers must juggle incoming demand with heightening pricing competition, in addition to underwriting challenges being caused by social and fiscal inflation.

Sources canvassed by Insurance Insider gave a wide range of estimates of the returns available on legacy deals, ranging from mid-single digits at the most bearish end to high teens at the most optimistic.

However, most coalesced around the 10%-15% range, and sources said this was a definite shift downwards from a few years ago.

“I think people believe they can get 10%-15%, but whether you get 10%-15%, that is a different question,” one practitioner said.

This chimes with the results of PwC’s 2021 run-off survey, in which respondents were asked on their views on pricing of legacy deals.

at what target internal rate feb 25 ID 2022-01.jpg
Evidence of the difficulties faced by the market include the failure of Armour and Axa's decision to wind down its legacy arm – Axa LM – and to sell it off in pieces, as reported by Insurance Insider in July.

Sources identified four major components of the legacy-acquirer business model: investment income, income from acquired liabilities, operational expenses and capital efficiency. These all need to be firing and well managed for optimal success, sources pointed out. At present, investment returns are down and there is pressure on the liability side of the business.

In this vein, improving yields could provide “light at the end of the tunnel” for legacy businesses, although this will take time to feed in to yields.

All of this comes as UK regulators have also started to show increasing interest and involvement in the legacy space. The Prudential Regulation Authority will now implement Section 166 reviews for all non-life transfers with technical provisions of over £100mn ($139mn) and where the scheme will increase the acquirer’s technical provisions by 10% or more.

This increased scrutiny is not unanimously thought of as a hostile move by the regulator – some practitioners say it points to increased maturity of the legacy market – but it adds another source of pressure for carriers and could be interpreted by some as a bear signal on the market.

Not all legacy market executives speaking to Insurance Insider went so far as to describe the current market conditions in run-off as “soft”.

While deal competition is intense – particularly in the mid-size bracket of deals, involving sizes in the low-to-mid hundreds of millions – there is evidence that legacy carriers are willing to walk away from deals which are underpriced, sources pointed out.

Acrisure Re managing director Ben Canagaretna said: “I wouldn’t call the market soft but rather ‘frothy’.

“Players are having to be a bit more thoughtful around what their risk appetite is. For example, being competitive where they can demonstrably add value on claims or they have a better understanding of the risk.”

Another source noted that, although they believed the market to be “soft”, they were seeing an increasing number of deals which haven't made it over the line first time make a return to the market in different “formats”;.

“So that tells me that whilst the soft market is there, there is still discipline.”

Other takeaways from conversations with legacy market participants include:

There is concern that PE-backed legacy carriers will come under increased pressure to deploy capital in the coming years, which will exacerbate competition further

Social inflation is posing a major challenge for legacy acquirers, with some deals unable to get over the line due to reserving issues

The increasing involvement of brokers is altering the deal landscape – with younger underwriting years being included and more, and bigger, deals being brought to market

The increased “legitimacy221; of the legacy market is expected to result in bigger run-off deals becoming more common

A PE-powered market

In recent years there has been a wave of new entrants to the legacy market, which is the primary driver of increased deal competition and returns pressure.

In 2011, the legacy market was not far away from being a duopoly. Enstar and Catalina were the only two names that participated in all sales processes, while Berkshire Hathaway would unevenly participate, or announce the occasional mega deal, whereas the likes of Riverstone and White Mountains were dipping in and out of the market.

However, there are now upwards of 10 players, including eight or nine that can be relied on to compete very consistently for assets.

The legacy market players v2.png
In addition to this, the influx of private equity in the past few years has driven a step-change in the dynamics of the legacy market.

PE involvement has risen both via the acquisition of legacy acquirers and the set-up of sidecars.

Acrisure’s Canagaretna noted that it “made sense” for the legacy players to use sidecars, particularly on larger deals.

“They can scale up their positions whilst generating fee income, thereby increasing their RoE and potential valuations on a future change of control,” he explained.

pe involvement in legacy feb 25 2022 ID v2.PNG
However, given the typical three-to-seven-year investment horizon of private equity, market participants are wary that PE-backed acquirers could face pressure from their investors starting to compete more aggressively for deals as the life cycle of their investment begins to narrow.

Some speculated that this was already happening in the space among players who secured a PE deal two to three years ago.

There is also a question mark around whether new market entrants will be disciplined with their PE capital, or if their desire to grow and hit their PE return targets will cause them to be too “optimistic221; on pricing, sources have suggested.

“There's a complete misunderstanding with this money coming in, that they think they can become another Enstar, which isn’t going to happen,” one more pessimistic source said.

However, more optimistic sources believed that some PE backers were more sophisticated than others, with the “smart” investors refraining from pushing carriers to deploy capital. The fact that some sub-par deals are still being left on the table supports this theory, they stated.

Despite a number of noted concerns, private equity has also brought positives to the legacy market, and could be a contributor to the maturation of the legacy space, some pointed out.

Eleni Iacovides, chief development officer at Compre, said: “I think the availability of larger capital has a lot of positives because it gives the live industry confidence in our balance sheet, and when your client as well as regulators have confidence in your balance sheet, that means that they will be more likely to transact with you.”

Social inflation and the role of brokers

A more recent phenomenon in the legacy market has been the increasing involvement of brokers, acting as intermediaries in a space previously dominated by PwC, KPMG and EY.

And while the market agreed that the brokers had played a major part in selling the role of legacy as a capital-optimisation tool, some also noted how market dynamics have changed with their involvement.

Although the volume of deals in the market has increased, sources have suggested that brokers can also bring poorer deals to market, which are sometimes under-reserved or have unrealistic price expectations.

RiverStone CEO Luke Tanzer said he believed the overall impact of brokers within the legacy market has not been a negative one.

“If you are asking whether I feel that brokers are offering less good business on the premise that better business will follow down the line, then the answer is no I haven’t seen that happening and, in any event, we will assess each opportunity on its own merits.”

Others have highlighted that brokers are also pushing for “greener”; years to be included in some legacy deals, which are exacerbating losses.

“We see portfolios coming to market which also have a larger-than-before percentage of unexpired business and for pure legacy acquirers that that is a challenge,” one source said.

The push to include more recent underwriting years in deals creates an even greater challenge for legacy carriers in navigating the industry-wide pressures of social inflation.

This is particularly acute in US portfolios – legacy's biggest market in terms of opportunity, with $385bn of estimated run-off reserves, according to PwC.

the geographical breakdown ID feb 25 2022-01.jpg
One source highlighted the 2016 and 2017 years as particularly distressed, but also said years as recent as 2020 could be challenging. Others have previously noted that reserving issues are prevalent as far back as 2014.

“If you can't confidently reserve then you can't confidently take it on your balance sheet,” one source pointed out.

Sources in the market have stated that, due to social inflation, legacy deals which had traditionally been big areas of supply for the market have now become “trapped”;, as they are difficult to price, and have “unrealistic” expectations or under-reserving.

“I'm just hopeful that people are just going to turn that stuff down, and it's not going to get done”, one source said.

Others have stated that passing on inflationary costs to clients makes it difficult to get the deal over the line and therefore some carriers some are unwilling to do it.

“It depends how desperate you are to do the deal,” one source noted. “You're not going to predict any inflationary impacts on the clients if you if you want the deal because you're automatically pricing yourself out.”

However, sources also highlighted that not every US casualty portfolio is necessarily subject to social inflation to the same degree, with workers’ comp portfolios highlighted as more benign.

Bigger deals and tackling complexity

A more legitimised market has paved the way for mammoth-sized legacy deals, such as the one last month between Aspen and Enstar, in which Aspen agreed to transfer $3.12bn in prior-year loss reserves covering all business lines for accident years 2019 and prior to the legacy specialist (albeit with relatively low limit purchased).

reported announced legacy deals ID feb 25 2022.png
Darag CEO Tom Booth argued that these mega deals are effectively investment plays by those in the upper echelons of the market.

“The large end of the market, I think rightly, has moved to doing transactions which have got huge amounts of float and are effectively investment plays with little reserve risk.”

Legacy players believe there are only a certain few carriers that are capable of doing a deal of this magnitude, with Enstar, Riverstone and Catalina all noted as being able.

Historically, mega deals were also the domain of Berkshire Hathaway and Swiss Re, although sources have suggested that both carriers appear to have largely been dormant in recent times.

Compre’s Iacovides said: “My view is that you’re not going to see them [mega deals] every day, you're not going to see them every month, they will probably be bilateral because that kind of deal tends to be relationship-based, but I expect more.”

Mory Katz, SVP legacy practice leader at BMS Re, added that his belief was a lot of deals over the next 12 months would get done within the $50mn-$500mn liability range, and thinks “most of the legacy market is very comfortable with that”.

In addition to the Aspen deal, the “legitimised” run-off market has paved the way for a greater number of ADC deals making their way into the legacy market, which historically have been exclusively reserved for the larger reinsurers.

Darag’s Booth believes that if the legacy market is intuitive enough going forward, it should be capable of finding ways to take on unattractive books, rather than leaving certain portfolios untouched.

“When looking at a deal, it may be necessary to cut out parts, and keep the stuff that is a bit more predictable, a bit more mature. I think that’s maybe a way the market can avoid simply leaving deals on the table.

“It may be that there are ways to chop these up, for example having sub-limits on pieces.”

TAGS
LEGACYNEWS
Luke Harrison
Last updated on 28 February 2022

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[simon gordon] 10/4/2022 15:58

Red,

Could you post this one as well? Ta!

Legacy carrier returns under pressure in ‘frothy’ run-off market

[red ninja] 10/4/2022 10:50

Simon,

The article implies legacy deal criteria at R & Q have improved since 2006 and that was certainly the impression in the William Spiegel Voice of Insurance podcast, but time will tell I hope they have kept clear of Asbestos since then.

However, it's clear Bricknell are primarily after the programme management.

[simon gordon] 10/4/2022 10:39

Red,

Thanks!

With all the bearishness enveloping Legacy at R&Q and the general market, without this deal the share would have been hammered into the ground. Glad to see Brickell / 777 taken on the risk.

[red ninja] 10/4/2022 10:22

So there it is asbestos related legacy.

I note :-

"Since that deal, Brandywine has certainly haunted the company and created significant management distraction – legal disputes aside, R&Q was also forced to issue a profit warning in 2014 over deterioration in its US portfolio, which housed the Brandywine exposures."

I am thinking I know why Randall and Quilter have always seemed keen to sell down their shareholdings. I mean Randall sold all his shares when he left.

It also seems R and Q legacy criteria are better these days :-

"There are arguments that Brandywine was a unique and particularly difficult transaction which is not indicative of how R&Q or others approach deals today."

However, legacy industry seems plagued by asbestos :-

"Nevertheless, asbestos is the foundation of the legacy market. Virtually every run-off acquirer today holds asbestos liabilities – and if asbestos claims are deteriorating, then that will be felt across the market."

[simon gordon] 09/4/2022 14:51

Any chance someone could register and share this article on R&Q as I've already used up my free trial:

Insurance Insider - 8/4/22

Opinion: R&Q and the ghost of Brandywine

[fred177] 08/4/2022 13:28

Yes August 23 it is for now

[3800] 08/4/2022 11:49

thanks for taking the trouble to contact the management Fred unfortunetley it doesn't leave us much the wiser.
3800

[fred177] 07/4/2022 19:33

Hi all

emailed William Spiegel and he responded in kind

Dear William

I am a shareholder who was hoping for great things, unfortunately life doesn’t always go to plan.

I could take a substantial loss on my investment or I could wait to make a reduced loss which would be helpful. If things go reasonably well how soon do you see holders being paid? I accept that this is no guarantee but a steer would be helpful

Thank you

Fred177


Hi Fred,

Thanks for reaching out. It is best to consult the announcement which outlines the long stop date for the deal to close. From recollection, it could take up to a year to receive all regulatory approvals and we have extension provisions. It doesn’t mean it will take that long, but it could. We also have a mechanic to allow for a carveout transaction which could shorten the period for some proceeds to be distributed. Sorry for being imprecise. Again, I suggest you consult the announcement which has all the details.

William

William Spiegel
Executive Group Chairman
Randall & Quilter Investment Holdings Ltd.
[phone]
[e-mail]
www.rqih.com

[fred177] 07/4/2022 15:01

Thanks Simon

[simon gordon] 07/4/2022 14:33

Fred,

Going by the RNS it looks a protracted process with a likely carve out of Program and a partial payment whilst Legacy seeks regulatory approval for the business transfer to the new holding company. It might be worth dropping RQIH a line and asking if they've got a clearer timeline to how something like this plays out.

[fred177] 07/4/2022 14:26

Simon how soon will this complete? I will wait for circa 12% improvement until August

[simon gordon] 07/4/2022 10:58

Heard on the grapevine that Brickell made an unsolicited approach to RQIH in February. RQIH informed them of the situation re: Legacy and once appraised an offer was made. RQIH are confident there are no more UXB's on the balance sheet.

[martindjzz] 04/4/2022 07:50

I can’t see a competing bid emerging with the management having already given irrevocable undertakings to Brickell. But might we see an improved offer from Brickell if 3 or 4 significant shareholders push back?

[simon gordon] 03/4/2022 20:06

Red,

I see in the RNS they are spending $20m in 2022 to automate:

'In FY 2022, the Group is expecting to incur c.$20 million of one-time charges primarily associated with an efficiency initiative to automate R&Q's business processes, which are not included in pre-tax operating profit. This initiative is anticipated to yield meaningful annual cost savings by FY 2024.'

Glad to hear you've had a positive return on your investment. I took a 10% hit as only bought last October. Like you, I had high hopes. In a way Program saved their bacon, it is the jewel in the crown, if that hadn't developed so well and they'd had this blow up the company could have sunk without a trace. In a way the company was well hedged.

[red ninja] 03/4/2022 19:46

Simon,

I had high hopes for RQIH. The program management seems to be going well.

Yes $90 million was a huge loss from what must have been a relatively small legacy acquisition at that time.

I still believe Legacy asset management can be a success, but as in all industries they have to learn lessons from failure. William Spiegel has hinted that RQIH is not using computer software technology enough. I suspect the right technology could probably alerted them to problems if they had the right computer technology analysing the progress of their legacy programs.

If Legacy is getting frothy there could be more failures as clearly you have to maintain your risk premium.

You might be right on the due diligence, I'm not sure.

I have held RQIH for a long time. The price crashed after the AIM IPO so I bought first stakes in the 90's. I have also bought more on subsequent crashes not least in the pandemic. It got to the stage were I was top heavy in them so I sold about 2/3 on Friday. I thought I simply had too large a holding in case the takeover fell through.

It hasn't been a bad investment on that 2/3 as the dividends up to the pandemic have been good and I have made capital gains although not as good as I had hoped for.

I will be watching the share price and considering whether to hold to completion for the remaining 1/3 of my holding.

[stav13] 03/4/2022 13:30

The Group anticipates achieving c.$90 million in run-rate pre-tax operating profit by the end of FY 2023.
This seems like a good deal for Brickell and I would not be surprised if another competing bid emerges.

[simon gordon] 03/4/2022 11:53

Martin,

Yes, it's all about confidence in Tom and William and that they've gone through Legacy and there is nothing more that can blow up. Brickell have clauses in the agreement that allows them to walk away if there is a 'material adverse change'.

[martindjzz] 03/4/2022 11:34

Thanks Simon and RedNinja for your helpful commentaries. I imagine that Brickell is very confident that it understand what it is getting (further)in to when making the offer of £1.75 per share and agreeing to inject new $100m in new capital. Also, and if I read the proposed new management incentive plan correctly, certain managers will benefit from a new £24m management incentive to make sure things work out well for Brickell including, I suspect no more UXBs. I have nothing against the management team or Brickell but I would be very surprised if either of them saw much risk in the proposed take out arrangements and I take some comfort in that. On Friday the closing bid was £1.59. Is the 10% uplift from here attractive? It probably depends on your view of the UXB potential, specific opportunity costs and the investment outlook generally.

[simon gordon] 03/4/2022 11:24

Red,

I don't usually go near financial stocks, mainly focus on business services. Thing is there are two issues in Friday's RNS: the $90m hit and the $30m one. So, two problems have arisen in Q4 at Legacy.

I was feeling comfortable about the balance sheet because Tom Solomon had been in place since 2020 but it is now clear that this is the first full year were he has got hold of the accounts and bang! It must have hit in October as he sure wouldn't spend 340K in September if he'd spotted it beforehand.

In that Voice of Insurance podcast William talked about how important confidence is in the insurance industry. Well, these two hits will not give Gibson RE investors much confidence. If the sidecar idea dies after one go at least Brickell / 777 have the capital to fund more legacy deals.

The $90m hit is a hell of a write down for one deal done 15 years ago when the company was much smaller and could only assume small portions of risk.

On due diligence, doesn't that normally happen once shareholders agree to the takeover, not before? In that the information disclosed is material and business sensitive. You open the books once you've agreed a deal that shareholders have voted for?

It was in the press recently that the Legacy market is getting flooded by competition and returns are dropping:

Insurance Insider - 25/2/22

Legacy carrier returns under pressure in ‘frothy’ run-off market



I suppose if you hold for the deal to wrap up at 175p you have to have confidence that RQIH have cleansed the Legacy balance sheet and nothing more can blow up in the coming months or that Brickell find something they don't like. A 9% return for the tail risk.