Accredited buyer driving hard bargain on retained liabilities and net price

Advanced sale talks between R&Q and the potential buyer of its fronting business Accredited have been complicated by issues relating to the latter’s retained program liabilities, together with adjustments which could reduce the net sale value below $400mn, Program Manager understands.

R&Q is currently exploring legacy solutions of its own to protect against further adverse development on its Lloyd’s book, but it is unclear whether it has also considered buying protection for Accredited’s liabilities ahead of a potential sale to Canadian private equity firm Onex Corporation.

Accredited has grown to become one of the largest hybrid fronters, using its A- rated capacity to front on behalf of MGAs. Each program is protected by cut-through reinsurance provided by major names such as Swiss Re, Validus Re, SiriusPoint and Hannover Re, as well as Roosevelt Road Re and collateralized reinsurers such as Corinthian Re.

It also buys separate reinsurance to protect against adverse movements on the circa 7 percent of each risk that it retains.

However, three years of group losses are forcing AIM-listed R&Q to sell assets to pay down its debt. It sold its 40 percent stake in Tradesman, previously Accredited’s largest customer, for gross consideration of $41mn+ earlier this year and appointed Barclays, Howden Tiger Capital Markets and Fenchurch Advisory to advise on the sale of its profitable Accredited arm.

And last month, it confirmed it was in advanced discussions with Onex.

R&Q is exploring appetite for reinsurance to protect against further deterioration in its own Lloyd’s legacy book after slumping to a heavy H1 loss primarily because of a $40mn reserve charge relating to adverse development in its Lime Street back years.

But sources added that if Onex – or any other buyer – refuses to take on the liability of adverse development on the retained liabilities at Accredited, then it means R&Q will also need to provide a post-sale guarantee in some form or buy third-party reinsurance protection.

The fronting platform is expected to write over $2.1bn in gross premiums in 2023 from around 80 programs it provides paper to for MGAs and other delegated underwriting authority entities.

As previously reported, R&Q is seeking to spin off thefronting arm to pay down debt, which includes $55mn of preferred equity with Scopia Capital and $333mn of senior notes and bank facilities as at 30 June. It also provides intragroup and letters of credit guarantees.

Without Lloyd's adverse development, the group still would have posted an $18mn pre-tax operating loss, in contrast to the $28.6mn pre-tax operating profit at Accredited.

Sale process and valuation

Earlier this year, this publication estimated that a sale at around 10x price to earnings might result in an enterprise value of around $434mn. Meanwhile, corporate broker Numis valued the business at $484mn based on a similar multiple.

However, sources now indicate a final sale price could be materially lower than those projections after adjustments have been made following the due diligence process Onex is currently undertaking.

Onex emerged as the frontrunner after what has been described as a decent level of interest from potential acquirers, despite clouds forming over the sector in the aftermath of the Vesttoo affair and certain complexities specific to a potential Accredited deal.

Other names understood to have been involved earlier in the process include Goldman Sachs Asset Management’s private equity arm, Atlas Merchant, Golden Gate Capital and strategic buyer AmTrust.

If Onex emerges with a deal it would represent the latest sector investment by the Canadian firm, which is a lead backer of Convex and has also invested in distribution powerhouses Ryan Specialty in the wholesale space and USI in retail.

Accredited attractions

In Accredited it would be buying a hybrid fronting carrier that has established US and European platforms – an almost unique footprint to address the mature but still fast-growing US programs sector as well as the burgeoning market in Europe.

Crucially, the Accredited companies – which include its US admitted and non-admitted subsidiaries as well as its Malta-based European subsidiary – are now viewed by AM Best as an independent rating unit, distinct from R&Q, supporting an A- financial strength rating. However, a sale would still need to untangle the cross (re)insurance, debt and inter-connected guarantees between the two businesses that shared operating platforms.

The program management platform has a consistent pedigree of delivering meaningful growth, has low capital intensity and is fee-earning, providing a cash flow positive business to a potential acquirer.

In 2022 it contributed pre-tax operating profits of $55.7mn, in what was an otherwise bleak set of financials for R&Q Group.

R&Q declined to comment and Onex did not immediately respond to a request for comment.