R&Q still looking at sidecars to bring third-party capital into legacy deals

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Randall & Quilter (R&Q) Investment Holdings, the specialist non-life insurance and reinsurance legacy investor and program manager, is continuing to explore the potential for third-party capital to assist it on undertaking larger legacy transactions.

randall-quilter-logoIn announcing its results today, R&Q explained that tapping the appetite of insurance and reinsurance linked investors to support its deal-flow would be attractive.

The legacy and run-off market has become increasingly focused on very large insurance and reinsurance portfolios, making having ample capital, or access to it, key to win the most competitive bids.

R&Q sees an opportunity to enter into much larger transactions by putting its expertise in understanding and managing the risk to work alongside third-party investor capital.

The firms Executive Chairman Ken Randall said today that R&Q continues to explore ways to achieve this.

“We continue to explore potential “side-car” arrangements with third party capital to finance larger acquisitions where we believe R&Q’s originating and structuring skills are attractive to third party investors seeking exposure to discontinued non-life insurance business,” Randall explained.

It’s something the firm has been exploring for a while now, trying to find an optimal way to align its own and investors interest in a structure that allows for capital to flow more readily to support deals.

A third-party capitalised vehicle structured like a sidecar arrangement could be ideal for this purpose, providing a more permanent capital vehicle than an insurance-linked fund, which could have fixed terms and perhaps run through some kind of commutation and re-financing loop to extend the term

With legacy books of business typically featuring longer-tailed exposures there is a need for a fixed term for investors, to enable them to have a liquidity opportunity, but with an opportunity to reinvest and refinance also clearly available.

Achieving this means legacy books would have to be “seasoned” on a periodic basis, to give investors a clear view of how the book is performing, after which an entry and exit point could be arranged, to allow investor capital to leave and come in, perhaps.

The end result could be a structure that helps R&Q to finance larger run-off deals, making it more competitive in large deal bidding through the use of third-party capital from institutional investors.

Randall said the firm sees an increasing number of these large legacy insurance and reinsurance deals.

“There are increasing, and sometimes large, opportunities emerging where insurers decide to sell off Legacy portfolios in order to free up capital to support their ongoing business. Last year saw an increased number of major merger announcements and we expect this trend to continue. Such business combinations frequently give rise to Legacy opportunities following the post-merger rationalisation process,” he explained.

Adding, “Our traditional Legacy business continues to thrive with five Legacy acquisitions and three Legacy reinsurances completed in the period. We are seeing a growing number of larger deal opportunities as the demand for Legacy solutions continues to grow.”

Insurance-linked securities (ILS) investors have demonstrated an appetite for run-off and legacy risk through other existing vehicles, particularly of the mid to shorter-tailed kind.

Some specialist ILS funds already allocate some capital to these arrangements and other large institutional investors see the benefits of partnering with a legacy specialist to access prime sources of legacy risk linked returns.

Partnering is critical, as legacy and run-off is a particularly specialist business, where the ability to manage claims volume, season the portfolio of risk to better understand it and forecast profitable outcomes is key.

Large ILS investors with the appetite to access insurance or reinsurance linked returns from the legacy and run-off space and the ability to lock capital up for more than one-year would likely find partnering with a specialist such as R&Q the optimal way to achieve this.

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