BULL POINTS:
■ Attractive dividend yield
■ Fast growth in captive management
■ Now a managing agent at Lloyd's
■ Geographical spread widening
BEAR POINTS:
■ Disputes with acquired portfolios
■ Competition for assets in run-off
Randall & Quilter (R&Q) is not that complex, though its operations are clouded by technical terms. In broad terms, R&Q is a sort of insurance conglomerate: it runs non-life insurance operations and provides various services to other insurance companies.
The group is split into four divisions: insurance investments, insurance services, underwriting management and captives. Starting with captives, these are self-insurance vehicles, where groups of businesses set up their own insurance operation to cover liabilities, rather than insuring with a conventional insurance company. It can be a cheaper way of doing things, especially if the day-to-day management of the business is contracted out; R&Q now has 82 captive clients.
| IC TIP RATING | |
|---|---|
| Tip style: | Value |
| Risk rating: | Medium |
| Timescale: | Long term |
On the insurance investments side, the company buys solvent non-life insurance companies that are no longer taking on new businesses. There is no premium income, so R&Q offers a discounted price to take control of the remaining assets, usually cash and bonds. The downside is that buying such a business can sometimes include unwanted baggage, namely unresolved insurance claims arising from earlier years. Normally, these are settled quickly, and the aim is to settle all the outstanding claims for less than the purchase price. Competition here can be quite fierce, but the group has eight insurance companies in run-off, with net assets of around £61m
| RANDALL & QUILTER (RQIH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 105p | MARKET VALUE: | £58.7m | |
| TOUCH: | 99-105p | 12-MONTH HIGH: | 128p | LOW: 102p |
| DIVIDEND YIELD: | 7.0% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 134p | |||
| Year to 31 Dec | Gross premiums (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 0.29 | 38.56 | 150.3 | nil |
| 2007 | 1.46 | 7.03 | 29.5 | nil |
| 2008 | 0.64 | 8.76 | 10.8 | 7.00 |
| 2009 | 0.67 | 0.26 | -0.30 | 7.00 |
| 2010* | na | 7.30 | 9.2 | 7.35 |
| % change | - | +2708 | - | +5 |
Normal market size: 2,500 Market makers: 3 Beta: Nil *Numis estimates | ||||
And there are other risks, as the company found out when acting on professional advice to take to court a claim by Equitas, a company involved in the run-off of non-life liabilities of Lloyd's underwriters dating back to the first Gulf War. R&Q lost the case, and the settlement virtually wiped out 2009's pre-tax profits (see table).
However, corporate finance director Tom Booth insists that there are no more skeletons in the cupboard. "It's water under the bridge now," he says. And while profits were hit last year, total income was up 17 per cent to £26.4m, and the dividend payout was maintained at 7p a share. So, barring unforeseen circumstances, management plans to increase the distribution to shareholders by at least 5 per cent a year from a 7p per share starting point, meaning the expected starting yield for investors buying now is 7 per cent.
Meanwhile, R&Q has gained approval from Lloyd's of London to act as a 'turnkey' managing agent. This is a significant feather in its cap and means that it can manage operations for anyone wishing to set up their own underwriting syndicate within Lloyd's. Of course, there is nothing to stop underwriters from doing it themselves, but the process can be a nightmare. So, for new participants, R&Q can provide initial planning discussions with Lloyd's, syndicate establishment, management and operation, and, ultimately, the creation of the insurance company.
The group has also progressed in improving its geographical spread. Recently, it completed the purchase of La Licorne, its first run-off business in France, while a new joint venture captive management company has been started in Scandinavia.
