R&q Insurance Share Discussion Threads

[simon gordon] 11/12/2022 17:49

When I was buying at 180p in October 2021 the shares in issue were 279.1m giving a market cap of £502m. Now there are 378m shares in issue which at 60p = £226.8m market cap.

Apart from Brandywine and the Brickell fiasco nothing else has changed, except it's a year closer to "in excess of $90m PTOP". Program came in a year ahead of schedule. Legacy closed, in four months, $400m for Gibson RE and it turns out that the journalist who told me the pipeline wasn't as strong as told to market was wrongly informed.

Interesting to note that in the Prelims it's explained that Brandywine isn't related to the core Legacy business - 13/6/22:

"While we made great strides with Gibson Re, I am disappointed to have to report an extraordinary non-cash, pre-tax charge of ~$90 million. By way of background, R&Q acquired a company over 15 years ago which has a reinsurance policy that provides coverage once claim payments reach a certain level. The reinsurance policy contains an experience refund to the subsidiary of any residual assets under the reinsurance treaty above and beyond that needed to pay claims. The experience refund is treated as an asset under IFRS on the Group's balance sheet based on the amount expected to be realised in the ordinary course over a 40-year projection period. Recently, claims have accelerated above expectations, leaving the subsidiary with minimal liquid assets while still requiring $34 million in future claim payments before it can access the reinsurance coverage. Management believes it is in the best interests of shareholders for the subsidiary to commute the reinsurance policy in order to provide liquidity to meet anticipated claims rather than having R&Q contribute up to $34 million to this subsidiary over the next two to three years. The impairment of the asset arises from the early commutation of this reinsurance contract. It is important to know that this impairment is not related to our core Legacy Insurance and Program Management businesses nor any of the Accredited companies. The decision we have taken enables us to move forward with a cleaner, less volatile business."

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Maybe the biggest risks going forward are:

1. Another Brandywine.

*Fingers crossed Tom Solomon has kitchen sinked the historic balance sheet with Brandywine.

2. Software overhaul goes wrong.

*To date all's going well and it should complete in 2023 - Prelims, 13/6/22:

"This automation will also empower our people, letting them spend greater time on the complex tasks associated with underwriting and origination where their skills are most valuable. In practice, automation will allow us to grow our business without adding incremental costs for certain processes. For example, we recently implemented a new piece of software that will deliver significant efficiency for our Actuarial and Finance functions, moving the team from manual data entry to an automated data feed. The new software is highly flexible and gives us data visualisation tools that offer better real-time insights and has increased usability for our underwriters. We are finalising the automation and centralization of the underlying data to save 200-300 hours a month and enhance our reporting capabilities. Another area we are progressing is the use of technology to automate manual processes, including robotic process automation: we have built and successfully launched our first robots, and we have begun to review the next set of process automation.

We are also changing how we process and store documents, again moving away from manual processing, which can be hugely time consuming. We have entered into a partnership with both a provider of a new document management system and a technology company specialising in Artificial Intelligence (AI) applied to documents for classification. This new approach makes it far quicker for our teams to file, retrieve and upload documents while also enabling us to automate monthly claims payment workflows - we have scanned and categorised over 1 million documents in this way."

Other than that, it should continue to grow in 2023 and be recession proof. But you never know. Risk, you gotta love it!!

[simon gordon] 11/12/2022 13:17

I quoted this figure from Edison, but looking at the RNS on the vote it was 70% that voted:

"85% of shareholders sided with Spiegel."

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This looks to be the most fundamental change for the business in 2023:

Interims - 5/9/22:

Change in accounting policy beginning in 2023

The Group will be voluntarily changing its basis of accounting from IFRS to the Generally Accepted Accounting Principles in the United States of America ("US GAAP") and will present its consolidated financial statements in US GAAP effective 1 January 2023. The reason for this change is due to the meaningful ongoing costs to conform with IFRS 17, which would place R&Q at a significant competitive disadvantage in the Legacy Insurance market, where most of the market participants report under US GAAP. The data requirements of IFRS 17 for run-off insurance policies and reinsurance contracts drive implementation costs for both existing and future transactions that are more than double that required under US GAAP. While there are differences between IFRS and US GAAP, the change in accounting framework will not alter the economic-based KPIs that we use to manage the business.



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I can see why they are starting Legacy Insurance Asset Management business due to the scale of the reserves they will accumulate going forward:

In the first half of 2022 they had $1.6bn of assets under management.

In 2023 that may climb toward $2bn+.

By 2028 it might be toward $5bn.

If rates stay higher for longer, then it could be a good little earner.

[dh1706] 11/12/2022 10:40

Scammer alert

[spectoacc] 10/12/2022 17:11

Thanks @sg, appreciate your comments.

Actuaries - were an awful lot of those at Equitable Life! ;)

Agree would be good to see some more director buying. And why has Mills stopped, why isn't he averaging down? He usually does.

[simon gordon] 10/12/2022 17:08

Specto,

The tide went out with Brandywine. Unless there is another Brandywine the balance sheet should be fine as Program grows rapidly and Legacy gains momentum. It was Tom Solomon buying 300,000, in September 2021, that was one catalyst for me to take a deeper look at the story. He found Brandywine and has been through the book. If a new problem arises then that would be the weak spot. He's a trained actuary with deep experience in the industry coming from Bank of America where he was head of insurance investment banking for the Americas. He is more important than Spiegel at the moment, post Brandywine.

You never know, it could hit 30p. It doesn't look like there's likely to be a profit warning brewing because Program and Legacy are firing and recurring in nature. If they do get toward $8bn then 434p is not out of the bounds of possibility. In 2023 they should hit $3.45bn, 2024 $4.25bn. They have fairly high future visibility, that's what's makes the odds so interesting. But at the end of the day it is a bet and the price is low because of what happened after Brandywine blew up. There is a lot of fear around the story and Phoenix are dumping, will Vida and Brickell join them?

[spectoacc] 10/12/2022 16:49

"30p downside/374p upside" isn't odds tho - I'd think the 30p is far more likely than the 374p.

Agree the Spiegel situation is distinctly odd. Phoenix surely didn't set out to lose this much money. Who's right, they or him?

But also a small holder - for richer or poorer.

Warren Buffett's "It's only when the tide goes out that you see who's been swimming naked" is maybe more apt ;) Question is, have RQIH washed up on a nudist beach? I hope so.

[simon gordon] 10/12/2022 16:11

Red,

Warren's fortune was built from the insurance industry. The float in particular gave him a lot of leverage. I see in the 2021 Annual Report that R&Q has now launched a Legacy Insurance Asset Management business.

Agreed, defo not one for widows and orphans.

Here's the new Chief Claims Officer in America:




They've now got a Head of Data and Cloud. He looks to have followed Rob Thomas from CNA:



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EI,

I think it's the odds that are enthusing me.

[red ninja] 10/12/2022 15:26

Simon,

I've been buying back some of the ones I sold previously.

I don't think it's a share for widows or orphans, and I'm not going to put a mint into it, but maybe its worth tucking away a few as a medium term bet.

Mmm I see you are quoting Warren Buffet. I'm not sure he'd be investing here.

[essentialinvestor] 10/12/2022 14:32

Simon, rarely seen you so enthused about a stock.

[simon gordon] 10/12/2022 14:32

Red,

1. According to management they have gone through the historic book forensically. With Gibson RE that risk is reducing on future reserves. It is the biggest uncertainty / risk.

2. Looking at what Spiegel is doing operationally and culturally his strategy looks superb. Alan Quilter remains. Phoenix were/are aligned with Ken Randall. The team Spiegel has built continues to deepen with hires of a very high caliber. 85% of shareholders sided with Spiegel. Look at The Insurer / Program Manager, if you believed what they're reporting you'd think R&Q were heading toward a death spiral. If you look hard what they are reporting are lies / fakery. Mark Slater has got a Non-Exec on the board - Robert Legget.

3. True, though it's easier to buy when liquidity is high. Scopia took a chunk of Phoenix's holding in the 70s and now it's come down to the 60s to maybe try and clear. It's a possibility that when the remainder clears the share bounces hard and quickly toward 100p.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

-Warren Buffett

4. Something to watch for. Only one Director has bought, 30,000 at 70p, Jo Fox.

[red ninja] 10/12/2022 13:51

Yes, many things still looking right with R & Q, but some of the issues remain :-

1) Is there going to be any more issues with the legacy portfolio which will require another cash raise ?

2) Phoenix seemed very unhappy with William Spiegel as boss of the company. Does it make sense to invest in a company with a Chairman whose integrity has been called into question.

3) Phoenix still selling out of their share presumably. They don't seem to have found a fund who wants to buy their remaining 4.5%. The share overhang may weigh on the company share price for a while yet.

4) The institutions bailed out RQIH at £1.05, but there is no indication that they are accumulating at current prices around 60p

[simon gordon] 10/12/2022 11:46

Couple of awards R&Q have won in 2022:

Trading Risk Awards - May 2022

Non-life Transaction of the Year sponsored by Conyers

Gibson Re (Winner)

Lloyd’s Central Fund Transaction/Constellation IC

Logistics Re Series 2021-1

Wrigley Re Series 2021-1



-

European Captive Awards - November 2022

Legacy Solutions

R&Q

[simon gordon] 09/12/2022 20:50

Program GWP:
-2018: $149.4m
-2019: $369.3m
-2020: $539m
-2021: $1bn
-2022: $1.75bn expected.
-2023: $2.25bn forecast.
-2024: $2.75bn forecast.

In May 2021 the company forecast that they would hit $1.75bn in 2023, this will now be delivered in 2022 a year ahead of schedule.

The company are targeting more mega MGA long term relationships like Policy First and First Underwriting. These are five to six year recurring revenue deals. If they add $0.5bn per anum they'll just about hit $5bn in 2028. There is always a possibility they could do it before 2028. Market size in USA $70bn, in Europe?

If they can get on a glide path to $8bn in 2028 for c.£164m and give that 10x = £1.64bn divided by 378m shares = 434p share price, plus dividends on the journey. Could the share become a stairway to heaven if it all comes together? Downside 30p, Upside 374p + dividends. These figures are all conjecture and I could be way off base.

[simon gordon] 09/12/2022 18:07

"they securitise 90%+ of the risk"

To be more "back of the envelope" precise, the risk on the balance sheet:

-Program: 7% of which they reinsure to collar potential liabilities.

-Legacy: 20%.

Say, they get to $8bn:

-Program: $5bn equals c.$350m of capped risk.

-Legacy: $3bn equals c.$600m risk, probably like BrandyWine it can be capped.

As a blend it gets to around c.12%. Then it all comes back to the quality of the underwriting. BrandyWine is probably RQIH's biggest blow up since they started. Tom Solomon has forensically been through the book and hopefully there are no more UXB's - that's probably the biggest risk in holding the shares.

If they get to $8bn they would be throwing off maybe £164m of cash a year, so any diffuse underwriting problem can be managed easily. Once they get to Gibson II it creates a step change in profitability, in the meantime Program is growing exponentially.

[simon gordon] 09/12/2022 14:55

Specto,

The forecasts look achievable. The two UK agreements for Progam are likely to bring in $600m per anum from 2023+. This year they should hit $1.75bn and they are one year ahead of forecasts for this division. They state that the pipeline is strong. As far as I can see they haven't put a foot wrong with Accredited. The talent pool is being deepened, software automated and the books put on one ledger. They've turned down Tradesman's $200m premium as the reinsurer is not rated. If you look at the 2021 Annual Report you'll see this as one of their key areas of focus.

Legacy and Gibsone RE is being filled, you never know they might fill it in the coming months as it's only been open for deals since September 2021, it's one third full. Seemingly, the market is strong and they shouldn't have a problem filling it. The quicker they fill it the quicker the bleeding stops and profits come in faster, though will only get really firing with Gibson RE II due to fixed overheads. The talent pool is being deepened with a super smart Head of Claims recently starting in America, she came from Markel. Andy Pinkes, the CEO of Legacy, is one of the top people in the field and only started just over a year ago. If you look closely he's building depth and scale.

All that's gone mainly wrong is that the new CFO found BrandyWine. Other than that, the fundamental business has never been stronger. 60p looks extremely good value if they hit the forecasts. From what I see, Program is firing and beating forecasts and Legacy is just starting to gain momentum. Both divisions are in secular growth trends, the earnings are recurring and both are capital light as they securitise 90%+ of the risk. 3.5x 2024 is, to my mind, worth a bet.

I am very bullish on the stock.

[spectoacc] 09/12/2022 14:12

Share price looking like Randall & Quilter (Deceased).

Admire your optimism @simon gordon, with what's gone on at RQIH so far. But not sure I'd put much faith in forecasts.

More interesting down here at least.

Not sure about links to things months old tho - look what the s/p's done since.

[simon gordon] 08/12/2022 21:22

Three interesting videos with some of the top divisional management of the group. The one with Pat Rastiello touched on how paper written by Accredited and placed in the ILS market could eventually end up in the Legacy market after three to five years.

The Insurer - 21/9/22

PM panel: Reinsurance has been “backbone” of MGA growth




The Insurer - 26/9/22:

R&Q’s Corver: Due diligence critical to managing social inflation as urges “buyers beware”




The Insurer - 30/9/22:

Accredited Europe: Growth in fronting space must be “controlled”

[simon gordon] 08/12/2022 16:33

In January the company RNS'd the £1bn five year agreement with First Underwriting.

In May they inked a £2bn six year agreement with Policy Expert without an RNS.

Insurance Age - 31/5/22:

Accredited deal sees QIC exit, Policy Expert confirms

Policy Expert’s capacity deal of up to £2bn over six years with Accredited Insurance will replace its existing arrangement with QIC Europe when the current contract expires, the business has confirmed to Insurance Age.

The home and motor insurtech, part of QMetric Group, revealed the tie-up with A- rated R&Q subsidiary Accredited last week.

According to Policy Expert the move followed a competitive tender process designed to support its future growth plans.

Policy Expert wrote its first home insurance policy in 2011 and expanded into motor in 2019 and recently passed the milestone of one million policyholders.

In 2019 the firm bought Sure Thing rebranding the motor broker as Policy Expert the following year



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Here's a smaller one from the summer:

Nexus - 22/6/22

Leading independent specialty Managing General Agent Nexus Underwriting has announced the formation of a new division, Nexus Frontier.

Frontier is a new Financial Lines MGA structure for Nexus, where fronted insurance arrangements will be housed in the new division. Nexus will be utilising Accredited Europe as its fronting partner, supported by a panel of blue chip reinsurers. This provides very stable, well-rated insurance capacity for clients and by partnering with Accredited, Nexus will have access to broad territorial licenses, allowing Frontier to meet the needs of both insureds as well as brokers.

Frontier’s initial product offering will focus on Commercial D&O, Commercial PI, Commercial Crime, Financial Institutions D&O, Financial Institutions PI, Financial Intuitions Crime and Pension Trustee Liability. Frontier will be able to adapt and expand quickly into new and existing markets in the future.

Frontier will be located at Box number 358 in the Lloyd's underwriting room. The Lloyd’s box will be manned by the Nexus Frontier team including James Rasmussen, MD of Nexus Frontier, Alex Mobbs, Senior Underwriter and Nexus Co-Founder, and Rebecca Patt, Underwriting Assistant, and marks a first for Nexus at Lloyd’s.

[simon gordon] 07/12/2022 17:29

Back of the envelope calculations:

2023
Profit after tax = £34.1m divided by 378m shares = 9p EPS at 60p = 6.7x P/E

2024
Profit after tax = £66.6m divided by 378m shares = 17.6p EPS at 60p = 3.4x P/E

-If they pay out 25% of 17.6p = 4.4p at 60p = 7.3% yield.

-If they paid out 50% of 17.6p = 8.8p at 60p = 14.7% yield.

Edison have a 6.8p dividend forecast for 2024 = 11.3% yield at 60p.

*Figures worked from Edison note of 18/8/22 with Cable at $1.23 and 10% Bermudian tax rate.

~Post edited to change share count from 392m to 378m.

[simon gordon] 07/12/2022 07:17

Directors Talk - 3/10/22:

R&Q Insurance Holdings Limited (LON:RQIH) overview, investment case and progress presented by William Spiegel (Chairman) and Tom Solomon (CFO).

[sspurt] 06/12/2022 11:44

Early days Specto

[spectoacc] 06/12/2022 11:08

Harwood paid average of 98p? Strewth. Another I once held, Fulcrum (FCRM), been a total fiasco too (they averaged down at 12p).

Unusual to see them getting them wrong.

[simon gordon] 05/12/2022 21:31

Phoenix still got 17.1m shares to offload.

-Brickell PC Insurance Holdings LLC
47,953,868 12.71%
-Slater Investments
44,249,871 11.73%
-Vida Capital Management, LLC
34,218,366 9.07%
-Scopia Capital Management LP
30,000,000 7.95%
-Aberdeen Standard Investments
23,398,047 6.20%
-GLG Partners LP
19,760,679 5.24%
-Gresham House Asset Management Ltd
19,050,008 5.05%
-J O Hambro Capital Management Ltd
18,891,558 5.01%
-Phoenix Asset Management Partners Limited
17,170,885 4.55%
-Hudson Structured Capital Management
15,966,385 4.23%
-Chelverton Asset Management
14,534,910 3.85%
-Harwood Capital Management (Gibraltar) Limited
13,217,501 3.50%