2019 feels a long time ago which might explain why there was a sense of a history lesson with R&Q’s strong FY results published this morning (share price up 13 percent by midday).
But one advantage of going late is that it enables a much better insight on what to expect in the year ahead. And in R&Q’s case, the next few years.
R&Q is upbeat about the future prospects in its legacy arm – after all, it makes sense that at a time of market distress insurers will be even more motivated to free up capital by offloading their back years to specialist acquirers like R&Q.
But tucked away – in the penultimate sentence of the final paragraph of today’s results statement – was also a bold declaration for R&Q’s other core business line, its relatively new program management division.
R&Q and its predecessor companies have been acquiring defunct insurance businesses since 1991. Program management, on the other hand, only began in late 2016 when R&Q realised it could use its balance sheet, infrastructure and AM Best rated capacity to effectively “front” for reinsurance-backed MGAs.
In return, R&Q receives a commission tied to the business written (typically ~5 percent of GWP). And in its third-full year, the business is clearly maturing. It has now written $369.3mn in GWPs (against $3.9mn in 2016) and has over 30 MGA partnerships in seven different counties.
But it is confident this growth will continue. Today, R&Q predicted GWPs will grow to $1.5bn-$2bn, together with an 80 percent pre-tax margin and economic Ebitda of $50mn (“economic” refers to business written but not earned). Covid-19, it predicts, will create new opportunities as MGA are forced to find new reinsurance partners.
Companies normally avoid setting prescriptive targets for the obvious reason they create a petard that can detonate if they’re not met.
It’s true R&Q has given itself some wriggle room with a range of both dead line (2022-23) and GWP. On the flip side, however, they are ambitious goals when measured against 2019 GWP of $369.3mn (see chart) and economic Ebitda of $1.8mn.
But investors like targets and they also like management teams who have the confidence in their business to present them.
R&Q’s share price was up nearly 13 percent by midday today. This was primarily a reflection of 2019’s strong results (pre-tax profit up 180 percent to £40.1mn and 13 percent growth in NAV per share after capital return).
But the management’s upbeat confidence amidst the uncertainty of Covid-19 will likely also have been a factor.
Now, all R&Q has to do is make those targets…