Randall & Quilter (Reborn)

By this point, Randall & Quilter (RQIH) has proved itself to be a canny buyer-manager of back book insurance businesses. This has been reflected in a total share price return of 89 per cent over five years, well ahead of the FTSE All-Share and 20 percentage points up on MSCI’s World Insurance index.

But if there’s one gripe with R&Q’s business model, it is the need to repeatedly seek fresh funds to finance the purchase of unwanted insurance books in run-off.

Getting this cash hasn’t been a problem – investors were tapped for equity injections twice in 2017, at 117p and 129p, and again in 2019, when management raised £107m at 153p per share – but the price has been dilution, lots of one-off arrangement fees and a drain on management time.

To address this, R&Q wants to become a more fee-based business, thereby reducing the strain on capital, and providing a more consistent earnings profile. Half-year results marked one large step in that direction with the tandem launch of Gibson Re, a vehicle backed with $300m (£217m) of third-party capital that will reinsure 80 per cent of new transactions for the next three years.

In return, R&Q will receive annual recurring fees of 4.25 per cent of Gibson’s reserves, plus potential performance bonuses, for at least six years. Assuming all capital is deployed, executive chairman William Spiegel thinks Gibson’s run-rate pre-tax operating profits can exceed $90m by 2023.

Analysts at Numis, who expect fully diluted operating earnings of 4.6p per share this year and 8.3p and 19.1p in 2022 and 2023, said the speed and scale of the pivot to asset management had “exceeded our expectations”. We’d tend to agree, especially if the market starts to value the business against earnings, in line with other asset managers. Buy.

Last IC View: Buy, 162.5p, 14 Oct 2020