Darag is facing an uphill struggle in its sale process as it labours to convince other legacy companies that there is strategic value in a merger deal, Insurance Insider understands.
Sources told this publication that while Darag remains in talks with rivals Enstar, Premia and RiverStone International, there is a significant mismatch in valuation expectations, and major work needed to get a transaction to the line.
It is further understood that Marco – another rival which had initially expressed an interest – has also been disengaged for some time.
Bidders will sometimes remain involved in a thinly contested process opportunistically, giving them scope to move on an advantageously priced deal late in the day if all of the other suitors withdraw.
Sources added that little was achieved in August, with the process for the ~EUR200mn book value run-off player largely on the pause for the high point of the holiday season.
In May, Darag’s owners Aleph, Crestview and Keyhaven launched a strategic process to seek a solution for the legacy business which had run into issues, with Nomura advising.
The plan was to seek a paper merger deal with another legacy carrier, allowing the PE owners to roll their investment into a more established and scaled player without crystallizing losses.
Multiple sources told this publication that Aleph and Crestview – the driving forces behind the process – started with unrealistic expectations of a premium valuation given Darag’s underperformance and the notorious difficulty of legacy-on-legacy M&A.
Sources suggested that Darag’s path to a merger deal would have to rely on a willingness to accept a meaningful discount to book. Banking sources added that some structuring would likely be needed to protect any acquirer from adverse development on the existing Darag portfolio.
Legacy consolidation is challenging to execute because each portfolio effectively has to complete a process of due diligence. Other legacy acquirers also typically had the opportunity to take on those portfolios and chose not to.
Moreover, there is limited scope for cost synergies.
This tends to leave the value creation proposition resting on either adding new platforms that the acquirer lacks, or on a deal priced at a substantial discount to book.
Difficult deals
As this publication has previously reported, Darag has been through a tough period in which it has absorbed heavy losses from some difficult deals – including a $215mn loss portfolio transfer deal with Hallmark which was quickly exhausted and led to a legal dispute.
Darag recently won that arbitration against Hallmark, drawing a line in the sand under that particular uncertainty.
The carrier also faced difficulties on a $250mn LPT struck with rideshare company Lyft, which led Darag to commute the reinsurance contract to put a stop to losses.
Darag, led by CEO Tom Booth, has in total executed on 60 deals in 21 jurisdictions, with a deal volume of EUR1.7bn, according to its website.
The only prior example of legacy consolidation was the takeover of failed carrier Armour by Premia - although it is worth stressing that Darag is not in the same financial position as Armour, which at the time faced severe solvency challenges.
However, that deal effectively allowed PE-owner Aquiline to roll Armour into a bigger business with a credentialed management team, while taking the investment forward in Premia.
The Armour-Premia deal also featured a mechanism that diluted the Aquiline stake if the old Armour deals showed adverse development.
The legacy market is seeing an uptick in M&A activity, with Howden Tiger appointed to advise on a deal for R&Q’s legacy business. Efforts to find a solution for the loss-making business are expected to gear up once the Accredited sale process concludes.
Meanwhile, as this publication reported, Catalina is also looking to make disposals as it continues down the path of shedding its P&C run-off business to become predominantly life-focused. The legacy firm has placed Singapore-based Asia Capital Re and its Irish subsidiary up for sale, with Macquarie retained to advise.
Darag declined to comment. All other parties were contacted for comment.
