Trean IPO to help fuel growth and retain more business

Program carrier and MGA platform Trean Insurance Group (TIG) will use a portion of proceeds from its planned IPO to add to its capital base in a move it says will give it the opportunity to access additional business.

The Wayzata, Minnesota-based group includes AM Best A rated carriers Benchmark Insurance Company and American Liberty Insurance Company as well as broker Trean Reinsurance Services and several MGAs.

It was founded in 1996 by CEO Andrew O’Brien, a former EW Blanch executive vice president and director.

As previously reported, TIG earlier this week filed a registration statement for a potential IPO of its common stock on the Nasdaq Global Select Market with a proposed maximum aggregate offering price of $100mn.

Part of the proceeds – totalling around $33mn – has been earmarked to repay debt and redeem preference shares.

In the S-1 filing TIG said that funds from the IPO would also help support several areas of its strategy, including strengthening and harnessing the “strong and growing capital base” of its insurance carrier platform.

The company highlighted last year’s upgrade by AM Best of its insurance companies from A- to A, which it said differentiates it in the markets in which it operates.

“As we continue to generate additional capital, and through the proceeds raised in this offering, we believe we will have the opportunity to access additional business to which we did not previously have access,” it said.

It would also be able to retain more profitable business in the future that historically it has ceded to reinsurers, TIG added.

“Any incremental business that we retain will be carefully balanced to ensure continued alignment of interests with all of our program partners, in an effort to maximise our risk-adjusted returns,” the filing continued.

In the IPO documentation, TIG highlighted other key areas of its growth strategy that could be supported by additional funds.

It pointed to growth opportunities in existing markets for its core workers compensation business and other lines of business it writes in.

Last year the company generated $411.4mn of gross written premiums and 63.6 percent of the total came from MGAs it either wholly or partially owns. This includes Compstar Insurance Services, whose parent company, Compstar Holding, Trean currently owns a 45 percent stake in.

Compstar Holding will become wholly owned upon completion of Trean’s planned reorganisation transactions which will coincide with the planned IPO.

The group said it plans to opportunistically grow its owned-MGA business through acquisitions.

TIG is also looking to selectively add new program partners, with 14 added since 2015 and four in the first four months of 2020.

“We focus on specialty lines and will continue to add programs in these markets. However, we also continue to evaluate potential partnerships in additional lines of business that harness our core competencies and provide us with greater revenue opportunities,” said the company.

As of the end of December, it had 17 program partners that it had worked with for more than two years – with an average duration of eight years – as well as five partners added in the previous two years.

In addition, TIG receives fee-based income from providing its program partners with a variety of services including issuing carrier services, claims administration and reinsurance brokerage. In 2019, 8.9 percent of its total revenues were from fee-based services.

The selling stockholders for the IPO are funds affiliated with healthcare-focused private equity firm Altaris funds, which acquired a 36.4 percent stake in 2015 and made additional investments in 2016 and 2017.

TIG said that upon the closing of the offering, the Altaris Funds will beneficially own more than 50 percent of the voting power for the election of members of our board of directors.

TIG’s management team will continue to be meaningful owners of the company after the completion of the planned IPO.

“Strong secular tailwinds”

Trean’s gross written premiums have grown from $144.9mn in 2015 to $411.4mn in 2019, a compound annual growth rate of 29.8 percent. Its net income has grown from $7.9mn to $31.3mn at a CAGR of 41.1 percent over the same time period. Its return on equity for 2015 was 25.5 percent.

“Historically, we have focused on specialty casualty markets that we believe are underserved and where our expertise allows us to achieve higher rates, such as niche workers compensation markets and small- to mid-sized specialty casualty insurance programs,” the S-1 filing stated.

“We believe the business we target is generally subject to less competition and has better pricing, which we believe allows us to generate higher risk-adjusted returns. We believe many of our target markets are experiencing strong secular tailwinds and consequently are growing more quickly than the broader market.”

The company targets a diversified portfolio of small- to mid-sized programs, typically with less than $30mn of premiums. In the first quarter of this year 82.9 percent of its gross written premiums came from workers compensation, while that figure was 82.8 percent for the whole of 2019.

TIG’s three largest states are California, Michigan and Arizona, respectively representing 49 percent, 9 percent and 8 percent of 2019 gross written premiums.

The company said it has not seen a significant impact to premium revenue, claims or losses in the first quarter from the Covid-19 pandemic, noting only 10 percent of its business falls under hospitality, healthcare, and education, where a majority of the layoffs have occurred so far.

The joint book-running managers for the IPO are JP Morgan, Evercore ISI and William Blair with JMP Securities acting as co-manager.

Trean’s plan to float follows renters insurtech Lemonade filing earlier this month for an IPO on the New York Stock Exchange.