Trean has strong growth outlook following IPO: JMP Securities

Program carrier, MGA and reinsurance intermediary platform Trean Insurance Group has “significant runway for continued strong growth”, after its recently closed IPO positioned it to take advantage of opportunities in new and existing markets as well as M&A, according to JMP Securities.

In a note, analyst Matt Carletti highlighted the company’s fee income generation capabilities as “highly accretive” to ROE.

The company, which has a strong workers’ compensation presence but has also diversified into other lines of business, produces fee income through fronting – or carrier services – reinsurance brokerage, and claims administration.

Carletti said he estimates the streams of fee income account for around 25 percent of total revenue at Trean, which is significantly greater than many of its peers.

“This is key as this fee income requires little-to-no capital to support, and thus is highly accretive to ROE,” he said.

He also pointed to the benefit of Trean’s carrier platform being recently upgraded to A by AM Best, which has increased leads.

“With the capital from the IPO, Trean is now much better situated to take advantage of these opportunities,” said the analyst, as he forecasted top line growth of 23 percent in 2021 and 15 percent in 2022.

Retain more business

In the note Carletti also said Trean is planning to retain more of the “highly profitable” business it already controls but largely places with reinsurers.

He observed that last year Trean retained around 21 percent of the premiums it wrote, but following the recent capital raise that amount is projected by the analyst to rise to 37 percent in 2021 and 40 percent in 2022.

“Importantly, it is not increasing risk retention uniformly across the board, but rather doing so very selectively on a small handful of programs where it owns the MGA and has a long history with the book of business,” said Carletti.

Carletti said he anticipates growth in the underlying books of business from existing partnerships Trean has with MGAs as they continue to grow, as well as new MGA relationships, with 10 partnerships added since 2018, including four in 2020.

“As the more recent partnerships come on line, and more relationships are established, we believe this will help drive growth as well,” he added.

MGA M&A

And the analyst noted that Trean’s model sees it grow its business through buying MGAs with which it has an existing relationship. That allows it to gain the economics of the MGA in the form of lucrative fee income, as well as control over placement of the premiums.

Its latest acquisition was announced last month with a deal to buy 7710 Insurance Company, a workers’ compensation program manager run by former Carvill and CNA Re executive Bill Adamson.

“Having made six acquisitions since 2013, we expect this trend to continue in the future,” he predicted.

The analyst said that a key differentiator for the company is its focus on claims management to drive loss ratio outperformance, especially in its core workers compensation business.

“Trean understands that better outcomes in workers compensation are driven by superior claims handling, which is why ~50 percent of its employees are in the claims department. Trean’s differentiated claims management has been shown to produce superior results.

“The average medical costs per claim are roughly 1/3 of the industry average and the claims closure rate within 12 months is roughly 2x the industry average,” he said.