Restricted - Internal

Randall & Quilter

Approaching inflection point; initiate at Overweight

We do not believe the current share price fully reflects the positive fundamentals of R&Q's equity story. These include 1) the Program business reaching an inflection point,

  1. the value of the recent Legacy deals completed, and 3) the industry-wide opportunities that now present themselves across both divisions. Therefore, we initiate on R&Q with an OW rating, a price target of 251p and entry multiples of a 1yr fwd PE of 8.6x and 1yr fwd PB of 1.2x. We are one of a handful of houses that cover this stock.

What does R&Q do: R&Q's Legacy business aims to acquire back books of P&C businesses and run them off profitably. Program is R&Q's newest venture, which earns a commission from matching (re)insurers' capital with underwriters, specifically Managing General Agents (MGAs), a buoyant market segment.

Program's J curve: Our analysis indicates c$25m in income (c55% of our FY20 earnings estimate) is already on R&Q's books but not yet earned. We believe this will support earnings growth with c85% of the additional income hitting the bottom line.

Legacy deals: R&Q has announced more than £250m of Legacy transactions in 2H20, a potentially record-breaking half year. Despite this, the share price has remained stable even though the deals are able to support earnings for years to come, in our view.

Supportive market environment: 2020 has been a year of large losses which we believe supports rate increases in R&Q's Program book. It may also draw in more market participants in Program and potentially more Legacy volumes, as losses incentivise insurers to optimise portfolios and potentially seek divestments of back books.

Catalysts: We would expect further evidence of rate hardening from upcoming Reinsurance roundtables and divestment announcements to support the stock.

RQIH.L: Financial and Valuation Metrics EPS GBp

FY Dec

2018

2019

2020

2021

2022

EPS

7.8A

20.3A

15.9E

20.9E

29.7E

Previous EPS

N/A

N/A

N/A

N/A

N/A

Consensus EPS

N/A

19.4A

13.1E

18.8E

19.6E

P/E

23.3

8.9

11.4

8.7

6.1

Source: Barclays Research.

Consensus numbers are from Bloomberg received on 19-Jan-2021; 13:50 GMT

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA.

FOCUS

Equity Research

Financial Services | European Insurance 20 January 2021

Stock Rating

OVERWEIGHT

from N/A

Industry View

POSITIVE

Unchanged

Price Target

GBp 251

from N/A

Price (18-Jan-2021)

GBp 182

Potential Upside/Downside

+38.3%

Tickers

RQIH LN / RQIH.L

Market Cap (GBP mn)

407

Shares Outstanding (mn)

224.28

Free Float (%)

94.20

52 Wk Avg Daily Volume (mn)

0.4

Dividend Yield (%)

4.16

Return on Equity TTM (%)

1.57

Current BVPS (GBp)

167.40

Source: Bloomberg

Price Performance

Exchange-LSE

52 Week range

GBP 1.86-1.05

Source: IDC; Link to Barclays Live for interactive charting

European Insurance

Thomas Howarth

+44 (0)20 3134 5741 thomas.howarth@barclays.com Barclays, UK

Ivan Bokhmat

+44 (0)20 7773 0417 ivan.bokhmat@barclays.com Barclays, UK

PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 29.

Barclays | Randall & Quilter

European Insurance

Industry View: POSITIVE

Randall & Quilter (RQIH.L)

Stock Rating: OVERWEIGHT

Income statement (£mn)

2019A

2020E

2021E

2022E

CAGR

Program operating profit

-2

-1

12

25

N/A

Legacy operating profit

64

80

80

86

10.3%

Corporate and other operating profit

-2

-17

-18

-18

N/A

Total operating profit

48

49

60

80

18.7%

Pre-tax income

38

35

47

66

20.2%

Tax rate (%)

3

10

10

10

43.8%

Shareholder post-tax profit

37

33

44

62

18.7%

Program contracted premium ($mn)

842

1,092

1,350

1,624

24.5%

Program GWP ($mn)

369

532

861

1,166

46.7%

Program economic commission income

13

24

39

54

60.8%

($mn)

Program economic commission margin (%)

3.5

4.5

4.6

4.6

9.6%

Legacy reserves acquired

276

535

252

216

-7.8%

Legacy operating EBIT

32

71

68

76

33.7%

Legacy return on capital deployed (%)

10.4

17.4

13.6

13.9

10.1%

Total investment income

22

23

21

21

-1.3%

Per share data (GBp)

CAGR

EPS (reported)

20.3

15.9

20.9

29.7

13.4%

EPS (operating)

20.1

15.1

19.9

28.3

12.1%

DPS

9.90

9.90

10.10

10.40

1.7%

BVPS

158.2

162.5

170.9

186.8

5.7%

BVPS (ex-GW)

136.69

143.40

146.51

157.84

4.9%

Balance sheet (£bn)

CAGR

Total investments

0.81

1.16

1.31

1.42

20.4%

Total reserves

1.07

0.00

0.00

0.00

-100.0%

Shareholders' equity (ex-GW)

0.25

0.30

0.31

0.33

9.8%

Balance sheet metrics

Average

Investment gearing (x)

3.2

3.8

4.3

4.3

3.9

Total debt/capital (%)

32.9

32.4

31.4

29.6

31.6

Valuation metrics

Average

P/BV (ex-GW) (x)

1.33

1.27

1.24

1.15

1.25

P/E (reported) (x)

9.0

11.5

8.7

6.1

8.8

Dividend yield (%)

5.4

5.4

5.5

5.7

5.5

ROE (ex-GW) (%)

23.0

13.3

14.6

20.3

17.8

Price (18-Jan-2021)

GBp 182

Price Target

GBp 251

Why Overweight? Following R&Q's fast growth in 2019 and 1H 2020, we believe investors will benefit from earnings growth as premiums written catches up with premiums contracted in Program. Furthermore, we expect both of R&Q's business lines to benefit from the hardening rate environment, which should support further growth at R&Q.

Upside case

GBp 264

Our upside case is a SOTP valuation of R&Q's two distinct businesses. We apply an 11x fwd PE onto R&Q's legacy earnings, in line with sector peers but an 18x fwd PE multiple on R&Q's Program business. This elevated multiple aligns more closely to typical Insurance broker multiples.

Downside case

GBp 114

In Program, we assume 10% lower growth than the base case whilst also assuming a lower 70% premium contracted to be deployed vs the base case of 90%. We also assume 50bps lower investment yield from the base case a 25% lower average legacy case size.

Upside/Downside scenarios

Source: Company data, Bloomberg, Barclays Research

Note: FY End Dec

20 January 2021

2

Barclays | Randall & Quilter

The Story in 5 Charts

FIGURE 1

We believe R&Q is approaching an inflection point…

R&Q earnings profile (£m)

100

80

60

40

20

0

2018

2019

2020E

2021E

2022E

2023E

Operating profit

Profit before tax

FIGURE 2

  • driven, in part from business already on its books

R&Q earnings profile with no growth (£m)

60

50

40

30

20

10

0

2018

2019

2020E

2021E

2022E

2023E

Operating profit

Profit before tax

FIGURE 3

This includes Program management as premiums written/earned catches up with premiums contracted

Lag between contracting premium and deploying it ($m)

2,000

1,500

1,000

We model c18m month

c12 month lag

lag given rate of growth in

capital commitments

500

0

2017

2018

1H19

2H19

1H20

2H20E

1H21E

2H21E

1H22E

2H22E

1H23E

2H23E

Contracted Premium

Annualised GWP

FIGURE 4

While 2019 and YTD 2020 have been active in Legacy…

R&Q Legacy acquisition profile

30

25

24.3

20

17.3

15

14.0

12.0

10

7.0

7.0

5

0.8

0

2018

2019

2020E

2021E

2022E

2023E

2024E

No. of transaction

Average transaction size (£m)

Source for all charts: Company data, Barclays Research

FIGURE 5

.. we model the group still having c10% of its market cap as excess capital ready to deploy

R&Q excess capital to be deployed ($m)

600

41

500

400

300

150% target

capital level

200

100

0

20 January 2021

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Barclays | Randall & Quilter

Investment thesis

Approaching inflection point, initiate at OW with a PT of 270p: We believe R&Q offers an attractive growth profile on compelling multiples. On our estimates, R&Q trades on 8.6x FY21 PER and 1.23x tangible FY21 BVPS. In addition to this, we expect the most recent growth in program management contracted premium, which nearly doubled in 2019, to start trickling down to the bottom line from 2021 while the legacy business continues to expand with reserves having grownc70% over the past two years.

  • Program Management - In our view, the two key factors for investors to consider are:
    1. $25m of income is already on the books: Program management has been a growth engine for R&Q over the past two years with annualised GWPs more than doubling to $450m and contracted premium increasing to c$1bn. The gap between contracted premium and earned premium can be up to 2yrs, and we model 18 months. Our analysis indicates that R&Q has $25m of income is yet to be booked despite already being contracted. With the program business now fully built-out, we expect most of this growth to fall to the bottom line and be the key driver of R&Q's PBT tripling in 2021 from 2018 levels.
    2. Favourable market environment will support growth: While 2020 has been a challenging year for the industry, it has also begun a process of rate hardening. Over the next three years we expect the higher rates (often increasing double digits across multiple lines) to flow through R&Q's contracted terms. Medium term, we also expect the higher rates to draw more reinsurance capital into the industry, facilitating further market expansion and an increased addressable market for R&Q.
  • Legacy - fresh powder in a receptive market: Following a series of debt and equity raises, we estimate R&Q has c$41m of regulatory excess capital (above its 150% solvency target) which it can deploy even after factoring in R&Q's potentially record breaking 2H. We estimate this c$40m of capital could fund reserve acquisitions of another c£200m based on historical strains. In our view, this flurry of deal making, excess capital available to be deployed (before factoring in accrued earnings) and receptive market environment has not been reflected in the R&Q share price over the past two months.
  • Valuation: We believe R&Q operates in an attractive segment of the P&C market as evidenced by the recent transaction volumes. In 2020, we have seen two of R&Q's legacy peers being acquired while one of R&Q's program peers was acquired in 2017, all at attractive multiples. With Legacy remaining R&Q's largest business, we view P/B as a key valuation metric for the group. Our ROE/PB regression indicates the stock is c60% undervalued and implies a valuation closer to c300p. This also ties into our re-rating argument which is predicated on the basis that program earnings are high quality and similar to brokerage commissions and so deserves the current broker multiple of c18x. A SOTP methodology implies 45% upside potential and a valuation above 260p. Our PT of 251p, based on a residual income model, equates to a FY21E PER of 12.0x and a PB of 1.7x.

20 January 2021

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Barclays | Randall & Quilter

FIGURE 6

R&Q 2021E business mix by division

Program management - 8% of 2021E earnings

Program management is where an insurer (R&Q) sits as an intermediary between an MGA (managing general agent) and a (re)insurer. The MGA sources customers with risks that need underwriting, the program manager than subsequently completed due diligence on the MGA and if viewed as acceptable, sources capital that can be used to underwrite the aforementioned risk. In return for connecting an MGA with an underwriter, the program manager earns commission as a percentage of total premiums written. The program manager then reinsurers out all of the underwriting risk (and underwriting profit/losses) to the (re)insurer.

As of 1H20 contracted premiums were c$900mx and GWPs c$490m. The two having grown at a CAGR of 99% and 141% respectively since 2017. R&Q aims to make a margin on 5% on all GWPs written

While difficult to estimate, the MGA market is estimated at between $80-$100bn of premiums per year and would be expected to grow at least in line with the underlying market which is in the process or rapid expansion virtue of the rate hardening environment

The cost base for Program Management has a sizable fixed component that is associated with infrastructure, property costs and people. We would subsequently expect costs to remain controlled going forward as R&Q targets a c80% pre- tax margin in Program

Key Objectives:

To write grows written premiums of $1.5-2bn by 2022/2023 Generate Economic EBITDA of $50m by 2022/2023

Progress as of 1H20:

Contracted premium stood at $1.1bn with GWP of $494m Economic EBITDA of $0.8m through 1H20

Program management

12

13%

Legacy

80

87%

Legacy - 92% of 2021E earnings

R&Q Legacy business is R&Q's legacy business aims to buy (or reinsure) other back books of P&C business. While P&C business is often shorter tailed than Life in terms of claims discovery, the actual process of managing and paying claims can last multiple years and sometimes up to 20 years plus. As a result, R&Q aims to generate earnings several ways. Firstly it aims to manage the claims more efficiently, lowering the cost if possible. Secondly It the aims to generate investment returns from the cash held against the reserves and lastly it aims to buy books at a discount meaning it crystallizes a day one again upon completion of the acquisition.

The key drivers to R&Q's business remain regulation change (such as Solvency 2), insurance companies portfolio management and Investment returns.

In total R&Q has acquired c£0.9bn of reserves as of 1H20 and £1.2bn of cash/investments with them. As of 1H20 R&Q had deployed c£340m of tangible capital and £222m of Equity in the business generating a 5 year ORoTC of 16.3% and an ORoTE of 21.4%.

Key objectives:

IRR of greater than or equal to 15%

Grow fee based income from managing third party capital

Progress as of 1H20:

Returns consistently above cost of capital with a 5yr ROTC of 16.3% and a 5yr ROTE of 21.4%

In the process of exploring alternative capital

Source: Company data, Barclays Research. Group earnings based on Barclays 2018 operating profits

20 January 2021

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Barclays | Randall & Quilter

R&Q Program Management - the J curve

What is R&Q's Program Management business? Program management is where an insurer (R&Q) acts as an intermediarybetween an MGA (managing general agent) and a (re)insurer.

  • The MGA identifies customers with risk in need of underwriting.
  • The program manager (PM) reviews and completes the due diligence on the MGA; if the MGA meets certain criteria, the PM sources capital from the underwriter to cover the risk.
  • In return for the PM's services, it earns a commission as a percentage of total premiums written.
  • The PM then reinsures out of all of the underwriting risk to a (re)insurer.

In our view, program management, R&Q's fastest growing business, is the key to R&Q's investment case given its pace of growth and the quality of its commission earnings. Program management allows R&Q to operate as an intermediary between an MGA and a provider of underwriting capital (typically a reinsurer). MGAs source customers with business models that require underwriting capital. They then must manage the underwriting, pricing and settling claims on behalf of the ultimate underwriting insurer. The PM conducts continuing due diligence on the MGA on behalf of the prospective underwriter. PMs must assess the underwriting expertise, industry specialisation, distribution, program tenure and operational history of the MGA. In order to conduct due diligence effectively, program managers need to understand the MGA's operating segment; they need to understand the underwriting process, the claims and loss history in the segment and underlying profitability.

FIGURE 7

The program management business model

Source: Company reports

20 January 2021

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Barclays | Randall & Quilter

The benefit of PM for the ultimate underwriter is that R&Q conducts the ongoing due diligence (saving them the infrastructure cost) whilst also providing them with a larger pool of potential customers into which they can deploy capital. The benefit for MGAs is that R&Q operationally provides them with licenses and credit ratings whilst also being able to source capital by connecting them with the underlying underwriter.

Unlike MGAs, whose revenue profile is commission based but can have a variable profile aligned to underwriting performance, program managers typically just earn a commission and reinsure out 100% of the underwriting risk/earnings to a reinsurer. Within R&Q specifically it then generates a 5% commission margin on gross written premiums (GWPs).

FIGURE 8

We expect to see further economic commission margin accretion towards their 5% target

Profile of R&Q economic commission margin

6%

5%

4%

3%

2%

1%

0%

2018

1H19

2019

1H20

2020E

2021E

2022

2023

2024

5% NB pricing target

R&Q Economic commission margin

Source: Company reports, Barclays Research

As per Figure 8, we expect to see a steady increase in R&Q's economic (commission) margin over time. This is because in order to grow the business, R&Q initially charged closer to c3% but now typically earns 5% on all new business. With programs often several years long, we expect a steady increase in commission margin as these earliest programs roll off their previous agreements and are re-negotiated at or closer to 5%. We do not model a 5% commission margin going out into perpetuity as we would expect, over time, some programs to receive discounts due to increased scale, and we also bake in some conservatism for increased competition, which could weigh on margins.

FIGURE 9

Timeline of Program management

R&Q and an MGE

R&Q completes due

enter into

diligence on MGA

negotiations

From premiums being contracted to earned through the financial statements typically takes between 1-2 years

If suitable, R&Q now

R&Q then proceeds

Capital is then

adjusts for the

to source

deployed and earns

additional contracted

underwriting capital,

through the financial

premium as one of

typically from

statements

it's indicators

reinsurers

Contracted premium is based on the MGAs estimate of premiums that will be written under the program

Source: Barclays Research

20 January 2021

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Barclays | Randall & Quilter

R&Q's most important revenue metrics, in our view, are contracted premium, gross written premium and commission income. As per above, R&Q generates a c5% commission margin on gross written premiums, which drive their commission income. Contracted premium is the notional size of premiums expected to be written on an annual basis within a program. The notional size is estimated by each respective MGA and is recognised by R&Q once a program is contracted. R&Q then proceeds to source the underwriting capital from a reinsurer which, once done, can be deployed by the MGA.

The total process from a program being contracted to capital being deployed and subsequently recognised in the financial statements lasts c1-2 years. As per Figure 10, this process was closer to a year in 1H20. However, given the speed of growth in contracted premiums since 1H19 (roughly doubling) we would expect this process to slow down. We subsequently model a lag between contracted and deployed (in GWP terms) of c18 months. This means we expect R&Q to double its1H20 GWP's of c$500m by year end 2021.

FIGURE 10

Typically takes between 12 and 18 months to deploy commitments

Lag between contracting premium and deploying it ($m)

2,000

1,500

1,000

We model c18m

c12 month lag

month lag given

rate of growth in

500

capital

0

commitments

2017

2018

1H19

2H19

1H20

2H20E

1H21E

2H21E

1H22E

2H22E

1H23E

2H23E

Contracted Premium

Annualised GWP

Source: Company reports, Barclays Research

Despite the fast growth in R&Q's contracted and written premiums recently, we view the growth as being broad based across a range of product lines and MGAs/programs. R&Q's largest single product line exposure is to motor, which consists of 43% of its total book. It also has exposure to more specialised product lines such as Marine and Fiduciary. In total, it has GWPs (annualised) of $490m across 36 different programs as of 1H20. This means that it has a diverse exposure by program with, its largest program representing c23% of GWPs and its top 5 c58%. As R&Q continues to grow and deploy its contracted premiums, we would expect its exposure to its largest programs to dilute further. We believe this is important because while it is unlikely than an MGA would struggle to select risks appropriately, should underwriting earnings underperform, the program could be cancelled, and so R&Q would lose its commission income.

20 January 2021

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Barclays | Randall & Quilter

FIGURE 11

FIGURE 12

1H20 GPW by products

1H20 GPW by Program

Commerical

Fiduciary & Surity

Marine and

Motor

2%

Aviation

3% Legal Expenses

1%

Personal property

4%

8%

Other Liab

Program 1

(occurrence)

23%

26%

All other

Occupational

40%

accident

13%

Program 2

Motor (pysical

13%

Personal Motor

damange)

18%

25%

Program 3

11%

Program 5

Program 4

6%

7%

Source: Company reports

Source: Company reports

Market capacity

In our view, market capacity, both on the MGA side and Reinsurance side, represents the principal factor that should be assessed by investors when considering the upside for R&Q's program management business.

As per Figure 13, the overall MGA market has grown quickly since 2010. It is has grown from an estimated c$17.5bn of premiums per share up to closer to c$80bn according to Guy Carpenter or $100bn using R&Q's own estimate. This increase has drawn more market participants to the program management business, with Guy Carpenter announcing that it was entering the business line in October (The insurer, 14 Oct 2020). According to the 2019 Conning Study program, management as a whole generates more than c$45bn in premiums as of 2017 and therefore services a large proportion of the MGA market. While other large brokers such as AON and WTW do not yet have a specific program business, we would note how similar the business model is to their Fronting programs which also operate with similar economics.

FIGURE 13

MGA market c$80-$100bn

Estimated size of MGA/Program market ($bn)

120

100

100

79.6

80

60

40

24.7

27.4

30.1

32.3

34.3

36.1

17.5

20

6.5

0

1999

2010

2011

2012

2013

2014

2015

2016

2018

2020

Instec

Guy carpenter

R&Q Estimate

Source: Company reports, Barclays Research

FIGURE 14

Composition of addressable market sizes

R&Q c$2bn Program target

North American & European P&C market c$1.1trn

Global

speciality c$240bn

Estimated total

MGA/ program market c$100bn Program target

Source: Company reports, Barclays Research

20 January 2021

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Barclays | Randall & Quilter

In our view, while over the longer term increased market participants may heighten competition and subsequently depress margins, in the shorter/medium term, it will be favourable in growing the overall addressable market. The entire MGA market size is now estimated at c$100bn (Figure 14) with R&Q's target of $2bn of GWPs representing just 2% of that market, where R&Q principally targets the slightly smaller independent MGAs. While sizable, it still represents a small portion of the total P&C speciality market and the total North American/European P&C market. We would therefore continue to expect the overall addressable market that R&Q targets to grow at least in line if not faster than the total addressable P&C market.

FIGURE 15

FIGURE 16

Double-digit rate hardening across multiple lines

Likely to draw in increasing amounts of capital

50%

$bn

40%

80

260

30%

60

240

40

220

20%

20

200

10%

0

180

0%

-20

160

-40

140

Long time series by Aon illustrate link

-10%

-60

120

1Q14

3Q16

between capital and pricing

1Q12

3Q12

1Q13

3Q13

3Q14

1Q15

3Q15

1Q16

1Q17

3Q17

1Q18

3Q18

1Q19

3Q19

1Q20

3Q20

-80

100

2008

2007

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Property

Casualty

Financial Lines

capital

HypX property cat px index (RHS)

Source: Marsh, Barclays Research

Source: Hyperion-X, Aon, Barclays Research

The other constraining factor is the capital available to be deployed, principally from Reinsurers. To that end, 2020 has been one of the highest cat years on record, driven by the Covid pandemic. It has meant that Reinsurers have increased rates almost universally across all business lines. Higher rates indicate increased profitability going forward and as a result, more capacity enters the market (Figure 16). Given the scale of the losses in 2020, we expect the rate hardening to continue for several years. While this won't instantaneously replace the capital currently tied to the current losses. Overtime, next two or more years we would expect the overall pool of capital to increase. For R&Q, that means it will find it increasingly easy to source capital to fund its new programs with MGAs, whilst also benefiting from the rate rises through higher commissions when the business is written.

Approaching the inflection point

As we mentioned previously, R&Q's program business has grown quickly, nearly doubling in a year. In order to do this, R&Q has had to invest heavily in program management to build out the teams, the knowledge and the infrastructure. They now believe the business is fully built out and has the capacity of managing c$2bn of GWPs (4x their current position) without any material incremental spending. We therefore believe R&Q's program management business is now approaching its inflection point where it benefits from increasing operational leverage.

In fact, we don't even believe R&Q needs to grow its number of programs in order to benefit from this. At 1H20 R&Q had contracted premium of c$925m. If R&Q chose not to grow its program business further and just deployed the current amount already on its books, we would expect R&Q's average annual earnings (over the last four years) to double by 2022.

20 January 2021

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Barclays | Randall & Quilter

FIGURE 17

If R&Q didn't grow Program, still has an extra $25m of income, double our 2020 estimate to be realised

Support for earnings growth already on the books ($m)

50.0

1,400.0

40.0

1,200.0

30.0

1,000.0

800.0

20.0

600.0

10.0

400.0

0.0

200.0

(10.0)

0.0

1H19

2H19

1H20

2H20E

1H21E

2H21E

1H22E

2H22E

1H23E

2H23E

Group PBT (£m)

of which Program PBT (£m)

Contracted Premium (RHS)

Annualised GWP (RHS)

Source: Company reports, Barclays Research estimates

In addition to the growth already on its books, our base case factors in consistent growth from Program Management. By 2023, we expect it to be managing c66 programs, an increase of c83% from 1H20, resulting in contracted premium of c$1.85bn, with R&Q hitting its target of c$1.5bn of GWP by 2023. This growth, combined with the role through of earned premiums and R&Q's operational leverage, means we would also expect it to hit its Economic EBITDA target of c$50m also in H223, with Program being the key driver of group earnings growth.

FIGURE 18

We expect Program to be the key driver of earnings growth going forward

Progmam management KPI progress ($m)

100

2,500

80

2,000

60

1,500

40

1,000

20

0

500

(20)

2018

2019

2020E

2021E

2022E

2023E

2024E

0

Economic commission income

Economic EBITDA

Contracted Premium (RHS)

Annualised GWP (RHS)

Source: Company reports, Barclays Research

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PROGRAM MANAGEMENT FINANCIAL TABLE

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

Program management financial tables

GWP

149.4

369.3

532.2

861.4

1165.5

1451.5

1616.0

Economic commission income

5.2

12.9

23.9

39.2

53.6

68.9

76.8

Net costs

(9.0)

(14.1)

(19.8)

(20.8)

(21.9)

(22.9)

(24.8)

Economic EBITDA

(3.8)

(1.2)

4.2

18.4

31.7

46.0

52.0

Impact of earned commissions

-

(3.4)

(4.9)

(6.8)

(6.4)

(6.9)

(3.5)

Net investment gains (losses)

0.6

2.6

(0.7)

-

-

-

-

Finance costs

(0.3)

(0.3)

(0.4)

(0.4)

(0.4)

(0.4)

(0.4)

FX

-

-

-

-

-

-

-

Profit before tax

(1.9)

(2.2)

(1.9)

11.1

24.9

38.7

48.1

Contracted premium ($m)

413.0

842.0

1092.0

1350.0

1624.0

1848.0

2044.0

Number of programs (period end)

30.0

42.0

50.0

58.0

66.0

73.0

Average ticket size of contracted premium

($m)

28.1

26.0

27.0

28.0

28.0

28.0

Estimate that program sizes will remain stable

Growth in no. of programs

40%

20%

15%

14%

10% with consistent double digit growth in program numbers

Contract % expected to be deployed

90%

90%

90%

90%

90%

We model c90% assuming some Programs aren't fully

deployed with other cancelled

Economic commission margin

3.5%

3.5%

4.5%

4.6%

4.6%

4.8%

4.8%

Expect margin to approach but not reach 5% over time

Economic EBITDA margin

-73.1%

-9.3%

17.4%

46.9%

59.2%

66.7%

67.7%

Model R&Q investment in business to continue which means

they won't hit an EBITDA margin of 80%

Source: Company reports, Barclays Research estimates

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R&Q Legacy - fresh powder in a receptive market

In short - what is R&Q's Legacy business?: R&Q's legacy business aims to buy (or reinsure) other back books of P&C business. While P&C business is often shorter tailed than Life in terms of claims discovery, the actual process of managing and paying claims can last multiple years and sometimes decades. As a result, R&Q aims to generate earnings several ways. Firstly it aims to manage the claims more efficiently, lowering the cost if possible. Secondly, it aims to generate investment returns from the cash held against the reserves, and lastly it aims to buy books at a discount, meaning it crystallisesearnings on day one upon completion.

While we view R&Q's program management business as key to the investment case, its legacy business represents the largest contributor to earnings as of 1H20, and we continue to expect that to remain the case. Legacy is R&Q's longest running business line, with the goal to acquire back books of P&C business and then subsequently run them off over time.

It aims to generate earnings in several ways, including managing the cash/investments, buying books at a discount to book value, and better claims management. In total, R&Q has acquired c£0.9bn of reserves which have been backed by cash & investments of £1.2bn. As a result, the movement in net intangible (principally driven by goodwill arising on bargain purchases) has been R&Q's largest contributor to earnings over the last 10 years, producing c67% of total legacy earnings. The process of managing the investments has also been a large driver of earnings as R&Q benefits from running down these books over multiple years and in some casualty lines sometimes as long as 20 years.

FIGURE 19

Composition of Legacy earnings over the past ten years whilst acquiring c£0.7bn of net reserves

R&Q history of generating consistent earnings from acquisitions (£m)

60

£6m

£13m

£29m

£12m

£24m

£11m

£64m

£222m

£16m

£288m

50

40

30

20

49%

10

0

-10

-15%

-20

67%

-30

-40

% earnings

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Investment income

Underwriting result (including Op Ex)

Net intangibles

Net reserves acquired in period

% mix of earnings

Source: Company reports, Barclays Research

Crucially, R&Q has a track record of running off these businesses profitably over a lifetime, with the underlying underwriting result (which also includes a growing operating expense base) only modestly negative over the same time frame. This is representative by R&Q's lock pick releases as a percentage of net reserves acquired. Typically, R&Q generates surpluses from releases both within the first four years of acquisition and over the tail (more than four years since acquisition). The exception to this was in 2014 when R&Q acquired Accredited for its strategic offering during and subsequently had to top up reserves.

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FIGURE 20

FIGURE 21

Since 2010 most acquisitions have proved profitable in first

… with the trend continuing over longer tailed reserves

four years…

Loss picks in the first four year as a % op. net reserves acquired in period (+ve releases)

75.0%

66.9%

50.0%

25.3%

20.9%

25.0%

17.0%

15.6%

0.0%

0.2%

-1.7%

-25.0%

-14.6%

-17.6%

-284%

2010 2011 2012 2013 2014 2015 2016 2017*2018*2019*

Source: Company reports, Barclays research

Note: *denotes years to date where less than four years data is available

Loss picks after the first four year as a % op. net reserves acquired in period (+ve releases)

20.0%

12.2%

15.0%

12.8%

15.0%

10.0%

5.2%

3.6%

5.0%

0.0%

-5.0%

-10.0%

-9.3%

-15.0%

-20.0%

-81.3%

-25.0%

2010

2011

2012

2013

2014

2015

2016

Source: Company reports, Barclays research

Up to this point, the vast majority of back book reserves R&Q has taken on and subsequently sit on its balance sheet have been in casualty. Casualty represents c90% of reserves. As previously mentioned, this is likely given the difference in time it can take to run off a casualty claim versus some P&C claims. Longer tailed books of business given R&Q an increased amount of time to generate excess earnings from managing the investments/cash.

In terms of geography, the majority of R&Q's acquisition have been in the US. We would note there has been a recent concern over back book reserves for US casualty as a result of social inflation. But, this is not a trend that has come through R&Q's book in the past year with the company having reviewed its legacy portfolios identifying no material issues.

FIGURE 22

FIGURE 23

Legacy net reserves by product 1H20, c90% casualty

Legacy net reserves by geography 1H20, c90% casualty

Property

A&E

4%

Lloyds

4%

Auto

6%

6%

Other

Professional

Cont Europe

Liability

15%

9%

30%

USA

General liability

UK & Ire

53%

23%

Occupational and

26%

personal accident

24%

Source: Company reports

Source: Company reports, Barclays Research

Before R&Q completes an acquisition, it must first pass its hurdle rate. Its key hurdle rates are generating an IRR of greater than or equal to 15%, and the income from investments must be sufficient to cover the costs of managing the claim. This all feeds into R&Q's ROCE profile where the 1H20 ROCE of 17.7% was marginally up versus an historical five-year

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Barclays | Randall & Quilter

return of 16.3%. We continue to expect R&Q to be able to acquire back books of business that meat its hurdle rates and therefore ROCE to remain stable. That being said, we do model interest headwinds from lower rates which represents the divergence between ROCE and ROCE ex investment income in Figure 23.

FIGURE 24

R&Q legacy ROCE profile expected to be flat ex investment margin erosion

Legacy ROCE profile

20.0%

18.4%

17.4%

15.7%

13.9%

15.0%

13.6%

13.7%

12.8%

10.0% 10.4%

5.0%

0.0%

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

ROCE

ROCE ex investments

Source: Company reports, Barclays Research

R&Q has a relatively broad investment mix which includes asset backed securities and

mortgage backed securities. A large proportion of R&Q's portfolio is fixed income and will

be impacted by the rate erosion that we have seen in 2020. R&Q has an asset duration of

c2yrs and a reserve duration of c6yrs. Given the shortness in R&Q's duration we estimate

that the 2020 decline in rates will drive an annual pressure of c29bps. We therefore model

an interest rate return steadily declining from an annualised 2% as of 2020 (2.2% at 1H20)

to 1.6% by 2023. Over the period, we would expect continued management actions to

mitigate this rate erosion and reduce yield erosion from cycling into lower yielding

government bonds.

FIGURE 25

FIGURE 26

1H20 investment mix

Group investment return - expect lower rates to impact yield

Equity

4.0%

1%

3.5%

Other

3.5%

7%

ABS

Cash

3.0%

2.8%

14%

30%

2.5%

1.9%

2.0%

2.0%

1.8%

1.7%

MBS

1.6%

1.6%

1.6%

5%

1.5%

0.9%

Gov't & Muni's

1.0%

21%

Corporates

0.5%

22%

0.0%

2018

2019

2020E

2021E

2022E

2023E

2024E

Investment interest return rate

Total investment return

Source: Company reports

Source: Company reports, Barclays Research

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Barclays | Randall & Quilter

Still expect a strong pipeline with plenty of dry powder to fund it

While we view rates as a headwind to R&Q's legacy business, we believe 2020 is likely to have acted as a catalyst for R&Q's legacy business. In our view, large industry losses have historically driven increased consolidation and portfolio optimisation as businesses seek to exit lines which they can no longer manage profitably, and so serve as a drag on ROE and on their local solvency capital positions. This dynamic is developing from a total addressable market (estimates by PWC) of c$860bn. For this reason, we expect R&Q to continue to expand in a similar vain to 2019 and 2020 so far.

FIGURE 27

PWC estimates total addressable market of c$860bn run-off reserves

Global non-liferun-off reserves by region ($bn)

400

350

300

250

200

150

100

50

0

US

Northern

Asia

UK & Ire

Other

South

Canada Australasia

Europe

Europe

America

Source: PWC

Over 2019 R&Q acquired £270m of reserves through 16 transactions while in 1H R&Q has acquired c£276m over nine transactions. We continue to expect R&Q to complete c20 deals per year with an average transaction size of c£13m over the next two years decreasing to c£7m. While lower than the 2019 and 1H20 run rate, we view this run rate as sustainable and sufficient to more than offset the run off of the back book. We therefore model total legacy net reserves increasing from £590m as of FY19 to c£1.6bn by 2022.

FIGURE 28

Going forward we expect R&Q to do c18 deals per year

R&Q Legacy acquisition profile

30

25

24.3

20

17.3

15

14.0

12.0

10

7.0

7.0

5

0.8

0

2018

2019

2020E

2021E

2022E

2023E

2024E

No. of transaction

Average transaction size (£m)

Source: Company reports, Barclays Research

FIGURE 29

…with excess capital of c$41m and earnings to fund the growth

R&Q excess capital to be deployed ($m)

600

41

500

400

300

150% target

capital level

200

100

0

Source: Company reports, Barclays Research

In the last two years R&Q has raised both equity, convertible bonds (preference shares) and debt which leaves R&Q (by our estimates) with c$41m of fresh powder to deploy before it

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Barclays | Randall & Quilter

reaches its target solvency level of c150% (after accounting for a near record 2H20 and not including accrued earnings). By our estimates, we believe R&Q has capacity to acquire £0.2bn of net reserves, depending on capital intensity. We believe the process of raising and deploying the debt in December has facilitated a near doubling in net reserves from a FY19 reserve base.

Prior to R&Q's latest debt raise, the group had also de-leveraged through a combination of debt redemptions and an equity capital raise. As a result, we saw group leverage drop to c21% versus a target of c30%. Following the latest raise, leverage will increase to 32%, above the company's target. Given the firm's credit rating has become increasingly important to the group because of its expansion in program management, we expect leverage to decline below 30%. Given the volume of fresh powder available, we believe there is now an opportunity for investors to benefit from the growth following the tranches of equity capital raises.

In fact, similar to the program business, R&Q is unlikely to see the full benefits from its 2019-2020 growth until 2021. At that point operating EBIT should have almost double and will remain stable. For our base case, which assumes consistent reserve growth, we model operating EBIT climbing to c£76m by 2023.

FIGURE 30

FIGURE 31

Further debt capacity to benefit from market consolidation

Enough reserves already on the books to almost double

2019 EBIT by 2021

Group debt capacity

Legacy earnings run off (£m)

40%

90

1,400

11%

80

1,200

30%

70

1,000

60

800

20%

50

40

600

30%

31%

30%

10%

21%

30

400

20

200

0%

10

0

0

2019

2020

2021

2022

2018

2019

2020E

2021E

2022E

2023E

Impact from latest raise

Adjusted debt to capital ratio

Legacy operating EBIT

Legacy net reserves (RHS)

Adjusted debt to capital target

Source: Company reports, Barclays Research

Source: Company reports, Barclays Research

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Barclays | Randall & Quilter

LEGACY FINANCIAL TABLE

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

Legacy financial tables

-

Interest Income

1.8

9.9

12.9

13.7

13.8

14.9

14.9

-

Operating expenses

(50.1)

(58.5)

(64.3)

(70.7)

(74.3)

(78.0)

(81.9)

Operating EBIT

35.3

31.7

71.3

67.7

75.7

76.4

70.7

Net intangibles

(4.3)

28.5

7.2

12.6

10.8

6.3

6.3

Net investment gains (losses)

(0.9)

4.3

2.0

-

-

-

-

Finance costs

(6.1)

(8.9)

(11.5)

(11.5)

(11.5)

(11.5)

(11.5)

Profit before tax

24.0

55.5

68.9

68.8

75.0

71.2

65.5

Net reserves acquired

15.0

276.0

534.6

252.0

216.0

126.0

126.0

Reserve run off

(54.5)

(69.6)

(73.8)

(130.7)

(146.4)

(156.1)

(153.9)

Closing Net legacy reserves

393.4

590.4

1,045.5

1,171.5

1,248.7

1,231.6

1,215.4

Average operating tangible capital

Number of transaction per year

Av. Transaction size

Reserve runoff as a % of Op.reserves Capital as a % of reserves

Return on capital deployed (EBIT)

192.0

304.0

409.0

498.8

544.5

558.1

550.6

19.0

16.0

22.0

18.0

18.0

18.0

18.0

Estimate R&Q to manage a similar volume of deals going

forward

0.8

17.3

24.3

14.0

12.0

7.0

7.0

Expect R&Q to deploy a large proportion of their excess

capital in the next two years

11.6%

17.7%

12.5%

12.5%

12.5%

12.5%

12.5%

45%

62%

50%

45%

45%

45%

45%

18%

10%

17%

14%

14%

14%

13% Model ROCE declining due to investment margin erosion

Source: Company reports, Barclays Research estimates

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Group - putting it all together

As mentioned in the previous two sections, we believe R&Q's underlying businesses are approaching an inflection point. In Program Management, the build out is complete and so all incremental revenue should flow to the group bottom line. In Legacy, R&Q has doubled reserves in just over a year and has a further c$41m of fresh solvency capital to deploy. We believe the two combined will drive a substantial increase in earnings over the next few years and model both operating profit and PBT largely doubling from 2019 to 2022.

FIGURE 32

We see consistent earnings growth progression…

R&Q earnings profile (£m)

100

80

60

40

20

0

2018

2019

2020E

2021E

2022E

2023E

Operating profit

Profit before tax

Source: Company reports, Barclays Research

FIGURE 33

…after adjusting for marker moves

R&Q earnings ex market moves (£m)

100

80

60

40

20

0

2018

2019

2020E

2021E

2022E

2024E

Operating profit Operating profit ex realised/unrealised gains

Source: Company reports, Barclays Research

A large contributor to this in our view is R&Q's cost profile going forward. The process of de-leveraging had left R&Q with an IFRS leverage of c21% which we now estimate will increase to c32%. While Leverage has increased, we don't model finance costs increasing disproportionately. In fact we estimate finance costs increasing from c£10m pa in 2019 to £14m pa. We would expect R&Q to issue more debt going forward, aiming to maintain a leverage of c30% once it's capacity has increased again following book value growth.

In addition to this, we believe the primary roll out of growing Program has been completed. Over the previous two years we believe this process has been an incremental drag on costs of c£17m but we now expect this to flatline. We still expect some cost creep in Program by virtue of higher costs both in compensation and in infrastructure, as we believe management will continue to pursue growth above and beyond its $2bn GWP target. That being said, we model a cost growth of 10% CAGR from 2019 to 2023 (in line with overall group costs) but expect it to drop substantially from 2020 onwards, where 2020 to 2023 we only model a CAGR of 5% (vs 7% for the group as a whole).

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Barclays | Randall & Quilter

FIGURE 34

FIGURE 35

We expect cost growth to moderate now the Program

…with leverage declining following book value growth

business has been built out…

Group Op. Ex cost profile (£m)

140

120

20

21

22

100

19

80

2

14

60

84

87

94

98

102

40

75

72

56

20

0

2016

2017

2018

2019

2020E

2021E

2022E

2023E

Operating expenses

of which Program

Source: Barclays Research, Company Reports

2020E IFRS Leverage

35.0%

32.4%

30.0%

25.0%

24.2%

20.0%

17.5%

15.0%

10.0%

5.0%

0.0%

R&Q

Beazley

Lancashire

Source: Barclays Research

In total, we expect to see a favourable profile for earnings growth and subsequently also for DPS cover. Following this growth, we model a pay-out ratio dropping from c 50% in 2019 to c32% by 2023. While we believe R&Q has capacity to increase distributions further to more closely align distributions with its earnings profile, at this stage we believe it would be better served invested in the business. Following the large losses of 2020, 2021 and 2022 represent a unique opportunity to expand and benefit from further consolidation, rate hardening and capital inflows. We would therefore expect, even though we see the a sufficient distribution cover going forward, for R&Q to continue to deploy its excess capital in achieving its objectives, including developing a third party fund business for investors to co-invest in back book acquisitions.

FIGURE 36

FIGURE 37

We expect consistent growth in distributions…

…although expect more capital to be invested in order to

grow than distributed in the shorter term

GBp

Distribution per share

12

10

8

6

4

2

0

R&Q solvency distribution cover

300%

200%

9%

10%

8%

8%

7%

100%

186%

168%

175%

169%

168%

0%

2018 2019 2020E 2021E 2022E

Distribution drag

Capital after distributions

120% capital target

150% capital target

Source: Company reports, Barclays Research

Source: Company reports, Barclays Research

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Barclays | Randall & Quilter

GROUP AND KEY METRIC FINANCIAL TABLE

Group P&L

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

Operating profit

Program operating profit

(1.7)

(1.9)

(0.6)

11.7

25.4

39.3

48.6

Legacy operating profit

30.1

64.4

80.4

80.3

86.5

82.7

77.0

Corporate and other operating profit

5.6

(1.7)

(16.9)

(17.8)

(18.2)

(18.3)

(18.7)

Consolidation adjustments

(15.4)

(13.2)

(14.0)

(14.0)

(14.0)

(14.0)

(14.0)

Total segmental operating profit

18.6

47.6

49.0

60.3

79.7

89.7

92.9

Other non-operating costs

-

-

-

-

-

-

-

Finance costs

(4.3)

(9.5)

(13.6)

(13.6)

(13.6)

(13.6)

(13.6)

Profit before tax

14.3

38.1

35.4

46.6

66.1

76.1

79.3

Tax

(3.9)

(1.3)

(3.5)

(4.7)

(6.6)

(7.6)

(7.9)

Profit for period

10.3

36.8

31.8

42.0

59.5

68.5

71.3

Group Solvency

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

Solvency position

Enhanced capital requirement ($m)

131.2

190.9

256.9

278.0

300.9

302.1

303.0

Target capital level 150%

196.8

286.4

385.3

416.9

451.4

453.2

454.5

Actual statutory capital and surplus ($m)

255.5

338.6

470.6

490.6

527.2

572.3

619.2

Excess capital

58.7

52.2

85.3

73.6

75.8

119.2

164.7

Solvency coverage ratio

195%

177%

183%

176%

175%

189%

204%

Source: Company reports, Barclays Research estimates

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Barclays | Randall & Quilter

Valuation - we see upside of 70-80% on re-rating arguments

2020 has been a busy year within the Legacy space in terms of acquisitions and third-party investments. In addition to information in Figure 38 (according to The Insurer, 02 December 2020), Carrick Speciality has received start-up capital investment with Enstar (not covered), raising $500m of debt to fund growth. As discussed in previous sections, following large losses, we view the current environment as likely helping to crystallise or potentially even grow the PWC run-off estimate of c$860bn with the latest announcement by the insurer (8 December 2020) of Hiscox looking to spin part of its back book as evidence of the above comments. Subsequently, the bottom end of the range the Fortitude acquisition was for c0.8x tier 1 capital; this would underpin a group valuation of 148p. The top of the range the Riverstone PB multiple could underpin a valuation of c215-268p, or c20-50% upside potential.

FIGURE 38

Notable investments/acquisitions across Program management and legacy

Company

Investor/ Acquirer

Investment

Year

Comment

Program

State National

Markel

$919m

2017

Deal was completed on c4.2x FY 2016 (1 year prior) State National revenues,

11x FY 2016 EBITDA or 18.7x earnings

Legacy

Riverstone

CVC

$750 - $1bn

2020

Following a c$450m sale in Q1 2020 to OTPP for a 40% stake. Fairfax stake

sale implies a valuation of c$1.2-$1.5bn with last reported shareholder equity

of $0.8bn at 1H20

Fortitude Re

Carlyle Group and T&D

$2.2bn

2020

Acquiring a 76.6% stake in Fortitude from AIG for c0.78x tier 1 eligible capital

Marco

Oaktree Capital

EUR 500m

2020

Capital injection. Reportedly increases dry powder to EUR750m

Compre

Cinven and BCI

Undisclosed

2020

Source: The Insurer, Company reports, Barclays Research

The aforementioned upside range largely ties into our ROE regression analysis which implies that, relative to other listed European peers R&Q is trading at a discount. We model FY21E BVPS of 171p for R&Q and ROE of 13%. Adjusted for goodwill this becomes 147p and 15%, respectively. Aligning this with our regression implies a potential valuation of c290-308p, more than 60% upside potential from its current its current position.

At present, R&Q's earnings mix remains almost exclusively Legacy which we see expanding to a c13% mix by year end 2021. Given this, we believe it is most appropriate to continue to review R&Q on a PB multiple until Program becomes a larger part of R&Q's earnings mix. That being said, we also see the potential for a further re-rating argument which would be as a result of applying R&Q's program earnings on a broker multiple. In Figure 40 we see some of the large broker peers that currently trade on fwd PER of c17-18x. This is a similar multiple to the acquisition of State National by Markel in 2017; as a result, we could see this as a viable SOTP argument going forward as Program grows.

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Barclays | Randall & Quilter

FIGURE 39

ROE price to book regression of European insurers. Implies c80% of upside potential in R&Q

9.0

8.0

UK speciality insurers

R² = 0.779

Other European insurers

7.0

(x)

6.0

value

5.0

Price/Book

4.0

3.0

Hiscox

Beazley

2.0

Lancashire

1.0

R&Q

0.0

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

ROE (%)

Source: Bloomberg, Barclays Research

In this scenario we would then see another upside case where R&Q could rise above 300p. This would be driven by R&Q's program earnings being put on PE multiples akin to a broker at c18x with Legacy earnings remaining on 11x. As Program then continues to grow, we also would see this upside potential grow. While we view R&Q's program earnings as high quality and likely sufficient for a re-rating argument, we are not sure if the business is likely to be put on comparable multiples in isolation. We would note, however, that the low capital intensity in Program would drive a higher group ROE which we would then expect to be reflected in a higher PB multiple.

FIGURE 40

FIGURE 41

Composition of R&Q's peers

R&Q potential upside of additional 34p if Program earnings

re-rate

3yr average fwd PE multiples

R&Q upside from program earnings on a

20

18

18

17

19

broker multiples (x)

18

15

300

16

12

14

11

250

12

200

10

8

150

6

4

100

2

0

50

0

Base

Upside

Earnings on 11x

Program earnings on 18x

Source: Bloomberg, Barclays Research

Source: Bloomberg, Barclays Research

At present we believe R&Q stock currentlyhas an attractive multiple. On our numbers it offers a 1yr fwd PE of 8.6x, P/B of 1.2x and dividend yield of 5.6%. The stock itself performed relatively well between March and November, but we would point out that it has remained largely stable in December despite RNS announcements that could indicate that R&Q Legacy had one of the busiest half years on record by net reserves acquired.

20 January 2021

23

Barclays | Randall & Quilter

FIGURE 42

Comp sheet of R&Q and closest peers on 2021 and 2022 forward estimates

Comp Sheet

2021

2022

Metric

P/E

P/B

DY

P/E

P/B

DY

R&Q*

8.6

1.2

5.6%

6.1

1.1

5.7%

Beazley*

11.3

1.4

3.9%

9.3

1.2

4.1%

Hiscox*

18.7

1.8

3.3%

13.3

1.7

3.3%

Lancashire*

14.6

1.6

3.8%

12.4

1.5

5.7%

Marsh & Mclennan

21.4

5.6

1.8%

19.5

5.1

1.9%

Source: Bloomberg, Barclays Research

Note: All * are Barclays Research estimates and not Bloomberg consensus estimates

FIGURE 43

FIGURE 44

R&Q historical 3 yr fwd P/E multiple average c11.2x

R&Q historical fwd P/B multiple average c0.9x

18.0

1.4

16.0

1.2

14.0

1

12.0

10.0

0.8

8.0

0.6

6.0

0.4

4.0

0.2

2.0

0.0

0

P/E

Average

+10%

-10%

P/B

Average

+10%

-10%

Source: Bloomberg, Barclays Research

Source: Bloomberg, Barclays research

20 January 2021

24

Barclays | Randall & Quilter

R&Q management team and compensation

Below we lay out R&Q's executive board and key management personnel. We would also note the recent Director/PDMR shareholding announcements with both Mr Randall and Mr Quilter selling shares in the company. Following the share sales, they both retain sizable investments in the R&Q group at 2.21% and 0.93%, respectively. Mr Randall's sale was due to retirement planning. R&Q at present runs no long-term compensation incentive plan or share option scheme. Discretionary bonuses are based off individual performance targets and are capped. All bonuses are then phased in over three years and are subject to clawback arrangements.

FIGURE 45

Executive management team

Role

Name

Joined

Bio

Executive Chairman (Board) -

Ken Randall

1991 (Co-

Mr Randall is the co-founder and Executive Chairman of R&Q, having

Announced intention to retire in

founder)

stepped down from the CEO role last year after 29 years. Mr Randall

March 2021

has announced his intention to retire in 2021 but remains a significant

shareholder in the group. Prior to founding R&Q Mr Randall had also

previously been head of regulation at Lloyd's, CEO of the Merrett

Group and also founder of Eastgate Group (a subsidiary of the Randall

Group), which was later sold to Capita plc.

Deputy Executive Chairman

William Spiegel

2020

Mr Spiegel is the Deputy Executive Chairman and Executive Chairman

(Board) - Executive Chairman

designate upon retirement of Mr Randall. Mr Spiegel has over 30 years

designate

of experience within financial services and joined R&Q from the US

private equity firm US Pine Brook where he was a managing partner

and a co-founder. Mr Spiegel has been a founding investor and board

member in a range of insurance companies including Caitlin Group,

Lancashire Group, Montpellier Re and Third Point Reinsurance. Prior to

joining Pine Brook Mr Spiegel had also worked at Cypress Group and

within the merchant banking division at Lehman Brothers.

Group Chief Executive Officer

Alan Quilter

1991 (Co-

Mr Quilter is the co-founder and group CEO of R&Q. Mr Quilter has

(Board)

founder)

previously held the position of Chief Financial Officer since inception.

Prior to founding R&Q, Mr Quilter has been the head of the market

financial services group at Lloyd's and an MD of a UK specialist

investment vehicle.

Group Chief Financial Officer

Thomas Solomon

2020

Mr Solomon joined R&Q in 2020 as Group Chief Financial Officer. Prior

(Board)

to joining R&Q Mr Solomon was head of US insurance investment

banking at BofA Securities. He has also worked at Citigroup and PWC

as a consulting actuary. Mr Solomon is also a member of the society of

Actuaries and the American Academy of Actuaries.

Group Head of Legacy

Paul Corver

2018

Mr Corver has over 35 years of experience in the Insurance and

Reinsurance market. He has previous experience managing companies

in run-off and is the former head of claims at KWELM and was part-

founder/owner of the KMS group prior to its acquisition by R&Q.

CEO, Accredited Specialty

Patrick Rastiello

2020

Mr Rastiello has over 40 years of Industry experience with a focus on

Insurance Company

MGAs, including most recently at AON Reinsurance where he was

executive MD and founder of its MGA/Program practice group.

President and CEO, Accredited

Todd Campbell

2016

Mr Campbell has 25 years of experience within the industry including

Surety and Casualty Company, Inc

as a CEO of a Lloyd's coverholder, US life insurer and a US P&C insurer.

He also has a decade of experience as an attorney in Insurance M&A.

Group Chief Risk Officer

Susan Young

2014

Ms Young has worked in a range of insurance roles, including audit,

accountancy, compliance and risk management for over 25 years.

Prior to joining R&Q Ms Young was the risk manager at a newly

formed Lloyd's MGA and was formerly the local risk officer for a large corporate insurer. Ms Young is an active member or a range of risk institutions and committees including the Institute of Risk Management and Lloyd's Market Association Chief Risk Officer's Committee.

Source: R&Q company website, Company reports

20 January 2021

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Barclays | Randall & Quilter

RISKS TO OUR INVESTMENT THESIS

Issues to watch for (and where we could be wrong)

  • Underwriting performance at MGAs deteriorates - While R&Q will benefit from operating leverage as it grows, so too will it struggle if its top line falls. We would expect this risk to be crystallised if underwriting performance declined at the MGAs which would result in programs being cancelled.
  • Reserve increases at R&Q - While we view it as unlikely, we would see reserves being topped up at R&Q following acquisitions as a key risk investors should be aware of.
  • Regulation - All future regulation changes are an unknown to either the positive or negative. Should regulation reform be implemented that detrimentally impacts R&Q's business, this to could be a risk to our thesis.
  • Markets - While we view R&Q as less exposed to markets compared to other European insurance peers, it does still manage a large portfolio of fixed income assets, ABS and MBS. Market write-downs could impact R&Q's solvency position which could result in distribution cuts and being unable to continue to acquire back books.

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Barclays | Randall & Quilter

INCOME STATEMENT AND ESTIMATE CHANGES TABLE

FIGURE 46

Income statement

£m (unless otherwise stated)

Income statement

2018

2019

2020E

2021E

2022E

2023E

2024E

Program operating profit

(2)

(2)

(1)

12

25

39

49

Legacy operating profit

30

64

80

80

86

83

77

Corporate and other operating profit

6

(2)

(17)

(18)

(18)

(18)

(19)

Consolidation adjustments

(15)

(13)

(14)

(14)

(14)

(14)

(14)

Total segmental operating profit

19

48

49

60

80

90

93

Other non-operating costs

Finance costs

(4)

(10)

(14)

(14)

(14)

(14)

(14)

Profit before tax

14

38

35

47

66

76

79

Tax

Profit for period

10

37

32

42

59

69

71

Operating EPS (GBp)

8.2

20.1

15.1

19.9

28.3

32.5

33.9

Growth (%)

-25%

32%

42%

15%

4%

145%

DPS (GBp)

9.2

9.9

9.9

10.1

10.4

10.8

11.2

Growth (%)

8%

0%

2%

3%

4%

4%

Source: Company data, Barclays Research estimates

20 January 2021

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Barclays | Randall & Quilter

BALANCE SHEET AND EQUITY ROLL-FORWARD

FIGURE 47

Balance sheet

£m (unless otherwise stated)

Balance sheet

2018

2019

2020E

2021E

2022E

2023E

2024E

Assets

Intangibles

20

46

47

58

68

73

79

Financial investments

402

579

807

909

984

988

991

Reinsurace share of liabilities

300

471

787

896

970

974

977

Cash

237

253

353

402

436

437

439

Other assets

431

872

961

1,035

1,077

1,120

239

Total assets

1,198

1,781

2,866

3,226

3,492

3,549

3,605

Equity

Shareholder equity

176

291

405

425

462

507

554

Liabilities

Insurance liabilities

699

1,072

1,860

2,119

2,294

2,303

2,310

Financial liabilities

141

147

255

290

314

316

317

Insurance payables

176

291

405

425

462

507

554

Other liabilities

-

-

-

-

-

-

-

Total liabilities

1,022

1,490

2,461

2,801

3,031

3,043

3,052

Total liabilities & equity

1,198

1,781

2,866

3,226

3,492

3,549

3,605

Source: Company data, Barclays Research estimates

FIGURE 48

Equity roll-forward

£m (unless otherwise stated)

Shareholders' equity roll forward

2018

2019

2020E

2021E

2022E

2023E

2024E

Shareholders' equity b/f

167

176

291

405

425

462

507

Profit for year

8

37

32

42

59

69

71

OCI

13

(10)

16

-

-

-

-

Net issues and distributions

(11)

85

60

(22)

(23)

(23)

(25)

Other movements

3

6

0

0

0

0

0

Shareholders' equity c/f

176

291

405

425

462

507

554

Source: Company data, Barclays Research estimates

20 January 2021

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Barclays | Randall & Quilter

ANALYST(S) CERTIFICATION(S):

We, Thomas Howarth and Ivan Bokhmat, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

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Primary Stocks (Ticker, Date, Price)

Randall & Quilter (RQIH.L, 18-Jan-2021, GBp 182), Overweight/Positive, CD/J/K/L/N/Q

Unless otherwise indicated, prices are sourced from Bloomberg and reflect the closing price in the relevant trading market, which may not be the last available price at the time of publication.

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20 January 2021

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Barclays | Randall & Quilter

IMPORTANT DISCLOSURES

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Risk Disclosure(s)

Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLP unit holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units.

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Positive - industry coverage universe fundamentals/valuations are improving.

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Below is the list of companies that constitute the "industry coverage universe":

European Insurance

Admiral Group plc (ADML.L)

AEGON N.V. (AEGN.AS)

Allianz SE (ALVG.DE)

ASR Nederland NV (ASRNL.AS)

AVIVA plc (AV.L)

AXA (AXAF.PA)

Beazley (BEZG.L)

Direct Line Insurance Group (DLGD.L)

Generali (GASI.MI)

Gjensidige Forsikring ASA (GJFS.OL)

Hannover Re (HNRGn.DE)

Hiscox Ltd. (HSX.L)

Just Group (JUSTJ.L)

Lancashire Holdings (LRE.L)

Legal & General (LGEN.L)

20 January 2021

30

Barclays | Randall & Quilter

IMPORTANT DISCLOSURES

M&G plc (MNG.L)

Mapfre (MAP.MC)

Munich RE (MUVGn.DE)

NN (NN.AS)

Old Mutual Ltd (OMU.L)

Phoenix (PHNX.L)

Prudential Plc (PRU.L)

Randall & Quilter (RQIH.L)

RSA Insurance Group plc (RSA.L)

Sabre Insurance Group Plc (SBRE.L)

Sampo (SAMPO.HE)

Sanlam Ltd (SLMJ.J)

SCOR (SCOR.PA)

St. James's Place (SJP.L)

Swiss Re (SRENH.S)

Topdanmark (TOP.CO)

Tryg (TRYG.CO)

Unipol (UNPI.MI)

Zurich Insurance Group AG (ZURN.S)

Distribution of Ratings:

Barclays Equity Research has 1627 companies under coverage.

47% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 49% of companies with this rating are investment banking clients of the Firm; 72% of the issuers with this rating have received financial services from the Firm.

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20 January 2021

31

Barclays | Randall & Quilter

IMPORTANT DISCLOSURES

20 January 2021

32

Barclays | Randall & Quilter

IMPORTANT DISCLOSURES

Randall & Quilter (RQIH LN / RQIH.L)

Stock Rating

Industry View

GBp 182 (18-Jan-2021)

OVERWEIGHT

POSITIVE

Rating and Price Target Chart - GBp (as of 18-Jan-2021)

Currency=GBp

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

Jul- 2018

Jan- 2019

Jul- 2019

Jan- 2020

Jul- 2020

Jan- 2021

Publication Date

Closing Price Rating

Adjusted Price Target

Source: Bloomberg, Barclays Research

Historical stock prices and price targets may have been adjusted for stock splits and dividends.

Closing Price

Source: IDC, Barclays Research

Link to Barclays Live for interactive charting

CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by Randall & Quilter.

  1. Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by Randall & Quilter and/or in any related derivatives.
  2. Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from Randall & Quilter within the past 12 months.
  3. Randall & Quilter is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
  1. Randall & Quilter is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate.
  1. Barclays Bank PLC and/or an affiliate is a Corporate Broker to Randall & Quilter.

Valuation Methodology: For our price target of 251p we use a residual income method, with explicit forecast period of 5 years followed by 5 years of equity growth declining to a long-term average of -2% and at the same time a decline in ROE to cost of equity. We assume no residual earnings after that date. We apply cost of equity of 11.5% and believe that the group deserves to trade at an elevated multiple given its exposure to the hardening rate environment and the increased quality of its Program earnings.

Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Randall & Quilter is exposed to a range of risks which could cause material earnings and capital impacts. The growth in Program could be halted or reversed following poor underwriting performance at partnered MGAs. Investors should also remain vigilant for reserve top ups within its Legacy business following acquisitions. It also has financial investment exposures which could cause volatility. R&Q's main legal entity is based in Bermuda and is subject to Bermudian tax rules. Changes to tax rules or regulation, could cause a material impact on earnings.

20 January 2021

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R&Q - Randall & Quilter Investment Holdings Ltd. published this content on 19 January 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 February 2021 14:25:02 UTC.