Merger talks that could have seen UK insurance leader Clyde & Co play the role of White Knight to Sedgwick have faltered amid a spate of partner defections from the ailing US firm, according to sources close to the matter.

Three sources with knowledge of the discussions told Legal Week sibling title The American Lawyer that the pair had been in discussions for months about some kind of tie-up.

One source described the talks between Sedgwick and Clydes as "very bullish"  as recently as three weeks ago.

One City insurance partner said: "I heard about this in the summer. The talks were pretty far advanced, I think; at one point it was said there was going to be a merger and people were deciding what they were going to do."

However, another source in the US said that Clydes' interest in a whole-firm deal had waned as Sedgwick's insurance practice lost groups of partners to rival UK insurance firm Kennedys in the US.

This year, Sedgwick's headcount has fallen nearly 35%, according to ALM Intelligence, with more than 45 partners departing the firm. In the past 30 days, nine partners have left the firm.

A source within Sedgwick said the firm had lost more than 20% of its annual gross revenue as of June, when the firm laid off a number of staff members in response to partner defections. The firm's revenue has dropped by 18% since 2013, from $208.5m (£157.5m) to $170.5m (£128.8m) in 2016.

The string of departures to Kennedys began shortly after Sedgwick's New York office lost 12 lawyers, including four partners, to Am Law 200 firm Robinson & Cole in late August.

In early September, a six-lawyer group from Sedgwick's New York office, including former office managing partner John Blancett, left for Kennedys. Sedgwick's Chicago office managing partner, John Scheiner, made a similar move to Kennedys in early October, bringing with him two other partners: Richard Geddes and Jennifer Quinn Broda. Kennedys' latest raid on Sedgwick came on Monday, when the firm announced it would be bolting on Sedgwick's former outpost in Bermuda.

That practice, now known as Kennedys Chudleigh, was led by Mark Chudleigh, who declined to comment on the merger talks between Sedgwick and Clydes. Chudleigh was considered a rainmaker at the firm, whose practice included work on a specialised insurance product known as the Bermuda Form. Some of that work was handled by lawyers in the Chicago office, according to a fourth source familiar with Sedgwick.

"Clydes is clearly losing the crown jewels they would want as part of a merger," one source with knowledge of Sedgwick said.

A related problem to the mounting exits that could also explain Clydes' cooling attitude towards a whole firm deal, is the growing amount of partner capital Sedgwick owes to those leaving the firm. One former partner said Sedgwick typically requires partners to carry a capital account equal to about 55% of their yearly compensation, with this money then paid back in 36 monthly installments.

Lawyers to have left the firm in recent months, who spoke on the condition of anonymity, said there had been little communication from firm management regarding the string of departures. One former lawyer said management sent around an email in response to a Law360 article from August that detailed defections from the firm. The message was to encourage lawyers to focus on servicing clients.

"It was business as usual to some extent," the lawyer said. "But it's kind of hard not to notice people leaving and offices being empty."

Sedgwick has 11 offices – in Chicago, Dallas, Kansas City, London, Los Angeles, Miami, New Jersey, New York, Orange County, San Francisco and Seattle.

Clydes has been ramping up its presence in the US, adding offices in Los Angeles, Washington DC and Chicago in the last year.

The firm now has some 50 partners and 200 lawyers in the US, operating out of nine offices across Atlanta, Long Beach, Miami, New Jersey, New York, San Francisco, as well as those listed above.

A spokesperson for Clydes said: "As with all major businesses we continuously study our markets for opportunities and, at any given time, we may be in discussion with a number of individuals, teams or firms . As a matter of policy we never comment on such discussions until it is appropriate to do so."

In 2016-17, Clydes revenue broke £500m for the first time, rising from £447.4m to £508.1m, a 14% increase. However, profit per equity partner fell by 2% to £650,000, a drop the firm attributed to an 11% increase in its partner numbers, which rose by 40 to 397.

Sedgwick managing partner Michael Healy did not respond to a request for comment on the stalled merger talks.

Additional reporting by Joseph Evans