Madison Dearborn and HPS consortium frontrunner to acquire Neon

A private equity consortium made up of Madison Dearborn and HPS has emerged as the frontrunner to buy American Financial Group’s Lloyd’s business Neon, The Insurance Insider can reveal.

Sources told this publication that one other bidder remains involved in the process, but it is understood to be a highly price-sensitive trade player and is more likely to play the role of cover bidder.

The auction has been highly challenged and sources have suggested that the business, which has book value of around £340mn ($445mn), is likely to change hands with very little goodwill paid.

Sources suggested that final bids for the Martin Reith-led business are due around the end of the month, with a conclusion expected shortly afterwards.

Madison Dearborn and HPS are the backers of diversified insurance group Ardonagh, which has operating entities including Price Forbes, Bishopsgate and Towergate.

It seems likely that any deal to acquire Neon would open the door to strategic cooperation with Ardonagh, which has been working to rationalise its trading relationships.

Madison Dearborn is among the most active private equity houses in the insurance space.

It also backs US retailer NFP and came in behind Stone Point on the AmTrust take-private last year. It also owns a majority stake in Amynta, the fee business formerly owned by AmTrust.

The Insurance Insider revealed that AFG had launched efforts to divest Neon, ideally via a management buyout in September last year, with Macquarie retained to advise.

Neon paused the process, which had been restricted to financial bidders, in the fourth quarter as it wrestled with the Lloyd’s Performance Gap process.

Sources said Neon’s growth plans – like those of many of its peers – were thwarted by the Corporation, as it looked to address market-wide underperformance by restraining underwriting.

With Neon’s planned premiums for 2019 held to the £385mn 2018 levels, the business was obliged to exit personal accident and bloodstock to create headroom for growth in better performing lines of business.

To do this, the firm was obliged to place its whole staff under general consultation for redundancy.

When the process was relaunched in January, AFG opened it to trade bidders as its price expectations came under pressure.

Like another recent process for ERS, Neon has struggled to gain traction, with the manifold challenges of the market undermining efforts.

However, the business has also failed to attract the interest seen with a process like Pembroke owing to its results.

Neon has been almost completely overhauled since Reith was parachuted in as CEO of what was then called Marketform in 2015.

As well as overhauling the management team, he has overseen a major shift from long-tail to short-tail lines and disposed of all of the legacy liabilities from prior to his tenure – transforming the company into a quasi-start-up.

He has also added third-party managed capital and invested in Tom Milligan and John Cavanagh’s venture capital business Beat Capital.

Nevertheless, amid a poor trading environment, the former Ascot CEO has found it difficult to turnaround the underwriting performance of the former medical malpractice syndicate.

Neon was able to narrowly outperform the market in cat-hit 2017 with a 112 percent combined ratio, as it booked a one-time gain from a major run-off deal with Enstar.

However, in 2018, its combined ratio swelled to 119 percent compared to a market average of 105 percent, pushing its losses up to £47.5mn.