DARAG
Creating capital efficiency
The run-off industry is still misunderstood by many, but an increasing number of high-profile deals are generating new interest in the business and hint at a period of strong growth, says Joel Neal of DARAG North America in Bermuda.
“There is no substitute for completing deals and building up a track record.”
Joel Neal, DARAG North America
What is the background of DARAG North America’s Bermuda-based team?
DARAG launched its North America team in Bermuda following an injection of private equity capital in 2019. As an expansion of the business already established in Europe, this team is purposed to meet the opportunities and supply of legacy transactions in the US market.
As a statement of its ambitions in North America (especially with the captive insurance industry), it acquired a well-experienced mergers and acquisitions (M&A) team that, in the past five years, has completed over $1 billion in deals.
Since launching its North American platform, the team has completed 10 transactions worth around $600 million in total, including loss portfolio transfer (LPT) deals with Hallmark Financial Services in 2020 and Pacific Valley Insurance Company, the captive insurer for Lyft, in 2021. It has been a great start for the business by any measure, and the team seeks to build upon that success.
Why might a captive seek a run-off transaction partner?
There are many reasons why captives should be thinking about run-off. Most of these transactions can create free cash from previously encumbered collateral to be used to fund their go-forward programme or strategically deploy back into their business. Captive transactions also provide for mitigation of tail risk and the burden on the management team.
We often work with clients wanting to change their insurance programmes, whether looking to switch to a corporate deductible, winding down a particular line of coverage, or changing carriers on the front end.
Changes like this are good for the run-off sector because they create redundancy and often lead to collateral inefficiency. Our job is to come in and assist with improving the situation.
These types of transactions also work in situations where an entity is looking to provide certainty to the ultimate value of their historical liabilities or reduce volatility. Reinsuring a block of business to a LPT partner eliminates this risk and volatility as it’s a one-time payment from the reinsurers’ point of view, while we look to take these on as a way of diversifying our current books of business. It can be a genuine win-win situation.
How are you educating the industry on the benefits of these types of transactions?
Captives and commercial property and casualty insurers are increasingly familiar with the run-off offering, but we still have more work to do on the educational side. Some potential clients still see working with a run-off provider as being an admission of defeat, which is not the case. The counterparties we deal with are forward-thinking: they see opportunities for creating efficiencies within their insurance programme or reducing the management burden associated with these older liabilities.
These educational efforts are particularly important with captives. The decision-makers at corporates may not have backgrounds in insurance, and insurance is not their main business. Analysing historical insurance programmes consumes management time and may not be a top priority—but the potential gains are significant. That is why it is up to us to communicate these benefits.
Doing high-profile deals with large, well-known companies such as Lyft makes a big difference because people take notice. Smaller institutions who perhaps don’t know as much about run-off may begin to change their mindset and explore the options when they see large and respected companies making deals like these. They help our reputation—and that of the run-off sector as a whole.
Has COVID-19 had any impacts on industry education?
It certainly has slowed progress in that regard. We have missed talking to people one-on-one in the last 18 months because those kinds of conversations are vital in this business. Conferences are an important part of the education process, and we want to get back to them—connecting with people again and continuing to build new relationships.
How significant are captives relative to your overall business?
Captives represent a significant source of DARAG’s run-off business. Around half of the deals that we have completed in North America (whether acquisitions or novations) have involved a captive.
It is difficult to predict the trajectory of the business going forward but I would expect the proportion of business we do with captives to remain relatively consistent, as it has over the last five years. While run-off is still quite a niche business, we have had a lot of success in this space attributable to the team’s experience and relationship developed with clients and intermediaries.
How does a track record help build confidence with prospective clients?
Given the unique nature of every captive and insurance programme, there are potential pitfalls that can create problems in a run-off deal, and the more experience you have working through the various hurdles the easier it is to anticipate those issues before they become real problems. This means having not only plan A, but also back-up plans in place—and discussed with the client to try and remove any surprises down the line.
Ultimately, there is no substitute for completing deals and building up a track record. There is always execution risk, so having a reputation for getting deals over the line builds confidence with counterparties and intermediaries. You have to earn a reputation for working through problems, of not giving up, and of finding new ways to get things done.
While DARAG is keen to continue growing the business in North America, we have a global team that works together, including M&A people based in London, Hamburg and Bermuda. Whether it is the London team doing business with a captive in Guernsey, the Hamburg team on a European transaction or the Bermuda team working with a captive in Vermont, the client gets the whole package, and all the experience that comes with that.
Joel Neal is executive vice president of M&A at DARAG North America based in Bermuda. He can be contacted at: joel.neal@darag-na.com
