R&Q evaluates second legacy sidecar, as Gibson Re delivers higher fees

R&Q Insurance Holdings Ltd., the specialty player that is soon to return to its original legacy insurance and reinsurance focus, is already evaluating opportunities to launch a second collateralised sidecar vehicle, while the fee income earned from its first legacy sidecar Gibson Re rose through the first-half of this year.

We reported just the other week that, having announced a sale agreement for its Accredited program management business, R&Q is now set to refocus on its legacy specialism, with its Gibson Re collateralised sidecar vehicle expected to play an even more core role going forwards.

This morning, R&Q has updated the stock market and shareholders on the future strategy for R&Q Legacy, saying that on the assumption a sale of Accredited concludes, its Board “recognises shareholders’ interest in better understanding the profile of R&Q Legacy as a standalone business.”

The company said that its proposed R&Q legacy management team is “excited by the growth opportunity it sees within R&Q Legacy’s addressable market,” believing that it has an opportunity to deliver growth in fee income, at reduced expenses and with lower balance sheet volatility than before.

Underpinning this is an ambition to de-risk the R&Q Legacy portfolio, with options available to it including a possible LPT (Loss Portfolio Transfer) or ADC (Adverse Development Cover) on certain portfolios, the sale of certain non-core assets, or even a sale, or securitization, of back book legacy liabilities, the company explained.

A key piece of the go-forwards plan is the need to pay down R&Q’s existing debt and the company puts this as a top priority, but believes it can deliver operating profitability by full year 2025, while doubling fee income by that year, and lowering expenses significantly.

Key to the whole strategy is the legacy reinsurance sidecar, Gibson Re, and recognising the role it could play R&Q is already considering launching a second vintage sidecar.

The company said it is “evaluating opportunities for a second sidecar,” and that it still has significant firepower available in Gibson Re to fund more deals.

With roughly US $160 million in uncalled capital as of the middle of this year, R&Q believes this can represent roughly $600 million of reserves, based on an operating leverage of roughly 4x.

So far, R&Q said that it has ceded 7 legacy transactions to Gibson Re, covering around $470 million of initial reserves.

Across these 7 transactions, the company said that some $29 million of fee income has already been generated for R&Q and they have reduced R&Q’s required capital funding by more than $150 million.

That’s a healthy increase in fee income from the Gibson Re sidecar, which had been $12.1 million in 2022.

Reserves under management at Gibson Re reached $353 million at the end of the first-half of 2023 and R&Q projects another roughly $600 million being added, using the uncalled capital that remains, so taking Gibson Re to around $1 billion of reserves under management before its underwriting period expires in September 2024.

At that level of reserves under management, the $1 billion mark, R&Q expects that Gibson Re could deliver around $40 million in annualised fee income for the company.

Gibson Re is also seen as a key lever for reducing volatility in the R&Q legacy book, as the company would share around 80% of risk transacted with the sidecar.

Of course, R&Q needs shareholder approval for the sale of Accredited to be in a position to enact its legacy plans, but should it get to do so the sidecar seems primed to be a key lever for the companies future and could provide an example for others in the legacy space, as to how third-party capital investors can help leverage the business and provide efficiencies to the model.

Jeff Hayman, Chairman of R&Q, commented on today’s announcement, “We recognise the importance of giving our shareholders a clear vision around R&Q’s future as a refocused global legacy company, should the proposed Sale of Accredited to Onex achieve a successful conclusion. The Presentation further outlines our belief that R&Q can build significant value as a standalone legacy business and the clear strategy we have to return the business to operating profitability, materially reduce balance sheet volatility and establish a stronger capital position. Building our Reserves Under Management is an important part of this strategy, and we have also provided detail on the strength of our management team and their extensive experience in non-life run-off, our large and addressable market opportunity and the active nature of our pipeline. We look forward to continuing to engage with all of our stakeholders.”