R&Q looks to third-party capital sidecars to fund large legacy deals

Specialist non-life insurance and reinsurance legacy investor and program manager Randall & Quilter (R&Q) Investment Holdings is says third-party capital structured through sidecar like arrangements could help it to finance larger run-off deals.

R&Q is on the verge of completing its largest ever legacy transaction, an $80.5 million deal to acquire the in run-off Global Re U.S.

But the company has an appetite for larger legacy and run-off deals and believes that third-party investors can assist it in building the capital necessary for individual arrangements through the use of a sidecar like structure.

In reporting its first-quarter results this morning, R&Q Group Chairman and CEO Ken Randall explained, “I am pleased to report a 45% increase in the pre-tax profit for continuing operations which was achieved despite the deferral of significant Legacy transactions, now expected to complete in 2019 (including Global Re).

“The current year has begun positively with regulatory approval received for the change of control of Global Re, which will complete in the next few days.”

Randall sees the legacy space as buoyant currently, saying that R&Q’s “Legacy pipeline remains very active with continuing evidence that insurers are increasingly turning to run off specialists to offload discontinued portfolios of insurance business in order to improve their capital efficiency and reduce costs of managing non-core activities.”

Seeking to tap into this, R&Q has been increasingly positioning itself to participate and lead larger run-off acquisition transactions, having raised fresh capital in recent months through debt and equity arrangements.

But to enter into the very large legacy opportunities that come available, R&Q believes it can enter into partnerships with third-party capital to boost its transaction capabilities even further.

Randall explained that R&Q is ideally capitalised to continue to close on its pipeline of smaller to mid-sized legacy transactions, but, “Larger Legacy deals will be funded externally or through some form of “side car” partnership arrangement.”

Insurance-linked securities (ILS) investors have an appetite for run-off and legacy risk, particularly shorter-tailed, with some specialist ILS funds already allocating to such arrangements and other large institutional investors seeing the benefits of partnering with a specialist to access prime sources of legacy risk linked returns.

Partnering is the key word here, as legacy and run-off is a specialist business where the ability to manage claims, season portfolios of risk and forecast profitable outcomes is key.

Hence, for large ILS investors with the appetite to access insurance or reinsurance linked returns from the legacy and run-off space, partnering with a specialist such as R&Q is likely the best way to achieve this.

A sidecar structure of sorts could enable investors to participate in R&Q legacy transactions on a deal by deal basis.

But perhaps even more appealing might be a raised investment fund, whose mandate is to be deployed into legacy insurance and reinsurance transactions over a fixed term (say deployed within a year, locked in for five), which might give R&Q greater flexibility in both deployment and managing the capital, while investors could benefit from the returns of a more diversified (multi-transaction) pool of legacy risk.

However it was structured, R&Q has clearly spotted the current opportunity to bring large investors an ILS like return from legacy risk, with its own expertise in selecting, acquiring and managing the run-off portfolios a key differentiator that would make this attractive to investors.

Explaining the appetite at R&Q, Randall said, “R&Q has decades of experience in acquiring smaller Legacy portfolios. We now have the opportunity and scalable infrastructure to acquire and manage larger portfolios where the returns justify the investment. The agreement to acquire Global Re demonstrates our ability to source and execute larger deals whilst still maintaining our pricing discipline and focus on prospects where we have a competitive edge and proven experience.

“Demand from owners of discontinued businesses to divest their run-off portfolios and free up capital and management time remains high.  In the years ahead, we expect to complete more transactions of the scale of Global Re and we also expect to secure larger sized Program contracts.”

Timing is a factor in legacy acquisitions though, which might make the deal by deal sidecar approach a quicker way to bring third-party capital into its run-off business for R&Q.

A fund structure would need to have some flexibility in how and when it could be deployed.

In fact, operationally it would appear more like a private equity or venture fund, but with the promise of delivering relatively uncorrelated insurance or reinsurance risk-linked returns to its investors.

That could be very attractive for larger institutional investors who seek the diversifying returns of insurance-linked investing, but for whom the added benefit of alpha generated by an experienced legacy acquirer and manager could make this particularly appealing.

On the larger transactions, Randall said, “We anticipate repeating this approach – acquiring larger scale portfolios – but only where the estimated returns are within our pricing expectations.  For very large portfolios we also anticipate entering into strategic partnerships with capital providers to share the financing risk.”

R&Q anticipates completing more legacy deals in 2019 than it did last year and if the company can tap the capital markets and the appetites of investors to access ILS like returns successfully, the volume of run-off deals it can write could increase significantly.

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