IPO Launch: Trean Insurance Group Proposes $150 Million IPO Terms

IPOStreet

Trean Insurance Group (TIG) and selling shareholders intend to raise $150 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides primarily workers’ compensation insurance to small and midsize businesses in North America.

TIG has grown quickly but the IPO appears to be priced for perfection in a highly uncertain environment given the Covid19 pandemic.

_____

To listen to an audio version of this report, click the Play button on the graphic below:

_____

Wayzata, Minnesota-based Trean was founded to offer specialty casualty insurance coverage to small and mid-sized businesses, primarily workers' compensation insurance.

Workers' comp provided 82.8% of the firm’s gross written premiums for the year ended December 31, 2019.

Management is headed by founder, president and CEO Mr. Andrew O'Brien, who was previously EVP at the E.W. Blanch Company and has held senior positions at other insurance industry firms prior to that.

Below is a brief overview video of casualty insurance:

Source: The Audiopedia

The company’s primary offerings are sold through:

  • Program Partners - other organizations
  • Owned MGAs - owned managing general agencies

Trean has received at least $96.5 million from investors including Altaris Funds and Blake Enterprises, who are also selling some of their shares in the IPO.

The firm acquires new customer by two means, working through unrelated third parties (Program Partners) and through its owned managing general agencies [MGSs]

In specialty insurance markets, companies such as Trean tend to rely on specialist distributors and wholesale brokers.

This serves to reduce infrastructure and personnel costs by limiting the number of companies the firm interacts with.

G&A expenses as a percentage of total revenue have been rising as revenues have increased.

The G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of G&A spend, was 1.0x in the most recent reporting period.

According to a 2019 market research report gleaned from Fitch Ratings, the 2020 property & casualty insurance market in the U.S. was expected to see 4.4% written premium growth on a direct basis and 3.9% net.

The report, which was prepared before the onset of the Covid19 pandemic, expected pricing growth to 'modestly outpace loss costs in 2020, contributing to the slight improvement in underwriting results.'

The report suggested that rate hikes would continue for 'the next year or two' for most lines.

Also, a report by Willis Towers Watson said it expected price increases to continue, but 'a more orderly market to emerge by mid-2020, especially for property.'

The Covid19 pandemic has likely thrown a wrench into those expectations for continued price hikes, especially in the hospitality, healthcare and education sectors where the majority of layoffs have occurred.

Major competitive or other industry participants include:

  • State National Companies
  • AF Group

Management says it hasn't seen 'a significant impact in our reported claims or incurred losses in the first quarter of 2020 relating to the Covid-19 pandemic.'

However, most observers believe the second quarter of 2020 (and beyond) is when the real economic pain will begin hitting the U.S. economy.

Trean’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing operating income and margin
  • Uneven net income
  • Decreasing cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

tigpl

Source: Company registration statement

As of March 31, 2020, Trean had $73.8 million in cash and $799.3 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $49.4 million.

TIG intends to sell 10.7 million shares of common stock at a midpoint price of $14.00 per share for gross proceeds of approximately $150.0 million, not including the sale of customary underwriter options.

The firm will sell 7.1 million of the shares and selling shareholders, which include Altaris Funds and Blake Enterprises entities, will sell 3.6 million shares in the offering.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $671 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 20.95%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use the net proceeds from our sale of shares of common stock in this offering to [i] redeem all $5.1 million aggregate liquidation preference of the Series B Nonconvertible Preferred Stock of Benchmark Holding Company (the “Series B Preferred Stock”), [ii] pay $7.7 million to redeem all of our outstanding Fixed to Floating Rate Junior Subordinated Debt Securities of Trean Corporation (the “Subordinated Notes”), [iii] use $19.3 million to repay in full all outstanding term loan borrowings under the 2018 Oak Street Credit Agreement (as defined below), [iv] pay an aggregate one-time payment of approximately $7.3 million to Altaris Capital Partners, LLC in connection with the termination of our consulting and advisory agreements with Altaris Capital Partners, LLC and [v] pay an aggregate $3.1 million to certain Pre-IPO Unitholders and other employees in connection with the reorganization transactions.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are J.P. Morgan, Evercore ISI, William Blair and JMP Securities.

Commentary

Trean and selling shareholders are selling shares to the public to raise expansion capital or reduce their position in the firm.

The company’s financials indicate strong revenue growth, increasing earnings per share, and other impressive basic financial metrics.

G&A expenses as a percentage of total revenue have risen as revenues have grown.

Below are various underwriting and other relevant ratios:

tigratios

Source: Company registration statement

The company’s overall loss and expense ratios have trended upward, while its adjusted return on equity has fluctuated significantly, producing its lowest result in the most recent quarter.

The market opportunity for workers’ compensation and other casualty insurance was expected to witness moderate growth, although the question is whether this expected growth will materialize due to the ongoing effects of the Covid19 pandemic.

J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 77.1% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, compared to a basket of publicly held insurance companies (Property & Casualty) with an average EV / Revenue of 1.49x, the TIG IPO appears very highly priced, at a proposed EV / Revenue multiple of 6.06x, or more than four times the basket.

While the basket of comparables may be growing more slowly than TIG has historically grown, a question is whether the firm’s growth trajectory will continue to justify such a high multiple.

I’m more in the wait-and-see camp, so my opinion on the IPO is NEUTRAL until we gain better visibility into the effects of the Covid19 pandemic on its trajectory and also whether management can keep up the growth.

Expected IPO Pricing Date: July 15, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

-----

To receive automatic notification of new IPO activity, click the "+ Follow" link at the top right of the page.

Comments

News

FEATURED
COMMUNITY