The following article was published by SNL: MarketWeek on May 11th, 2018 and names Pine Brook Road Partners-backed Clear Blue Financial. TAG Financial represented Clear Blue Financial Holdings LLC ("Clear Blue") as a start-up in November of 2015 bringing in Pine Brook, acquiring two insurance carriers and assisting Clear Blue in the AM Best rating process.
Fronting carriers eye organic, inorganic expansion EXCLUSIVE
Friday, May 11, 2018 3:09 PM ET
By Tim Zawacki
Continued high levels of traditional and alternative reinsurance capacity rank prominently among the factors that bode well for the growing number of U.S. property and casualty insurers that operate so-called fronting arrangements.
Recent results show an expansion in the direct or gross premium volume of several of the carriers specializing in fronting arrangements at a time in which a collection of startup insurers are looking to pursue opportunities, both organically and inorganically, in the business.
Fronting, which is essentially a fee-based business whereby third-party reinsurers generally assume and support the underlying risks, typically involves one carrier providing market access to another carrier or managing general agency that may lack the required state licenses or financial strength rating. Ceding fees from fronting arrangements typically show up on statutory income statements as reductions to other underwriting expenses.
The business drew newfound attention in July 2017 when Markel Corp. announced its acquisition of State National Cos. Inc., a leading provider of fronting arrangements. The Markel program services segment, which reflects the fronting portion of State National's business, generated $457.8 million in direct premiums written in the first quarter.
In 2016, another M&A deal in the space saw AmTrust Financial Services Inc. acquire Republic Cos. Inc. Lead subsidiary Republic Underwriters Insurance Co. in its annual statement said approximately two-thirds of its $731.1 million in gross premiums written came from its program and fronting business. The Republic group partners with unaffiliated MGAs and national and regional insurers.
Several other insurers engage in fronting strategies, though perhaps not to the same level.
James River Group Holdings Ltd. reported year-over-year growth of 23.3% in fronting and program gross premiums written in the first quarter to $74.8 million, following a 2017 in which its writings in that segment soared by nearly 91% to $272.3 million.
Argonaut Insurance Co. and its subsidiaries, which are ultimately controlled by Argo Group International Holdings Ltd., disclosed that direct premiums written from their fronting programs climbed 22.6% to nearly $152 million in 2017.
The need for state licenses and, typically, an A-category financial strength rating provide natural barriers to entry in terms of both competing providers of fronting arrangements and demand among third parties to have business fronted. But several companies, including Spinnaker Insurance Co., Clear Blue Financial Holdings LLC and, most recently, Trisura Specialty Insurance Co., have successfully cleared those hurdles in recent years.
Spinnaker attributed the vast majority of its $32.4 million in 2017 direct premiums written to MGAs, with renters program manager Millennial Specialty Insurance LLC contributing the largest single amount.
The Pine Brook Road Partners LLC-backed Clear Blue companies ended 2017 with a surplus of $104.1 million, including capital contributions of $40 million. They generated $206.7 million in direct premiums written during the year from various general agencies, including Amigo MGA LLC and Allstar Risk Managers Inc., none of which they retained. Clear Blue Insurance Co. said in its annual statement that the group is seeking to grow organically through relationships with MGAs and "select" reinsurers "to leverage opportunities in the market for pure fronting paper."
The pairing of Clear Blue Insurance and Clear Blue Specialty Insurance Co. occurred by virtue of November 2015 M&A deals involving what were formerly known as RLI Indemnity Corp. and Maiden Specialty Insurance Co.
Trisura Specialty, meanwhile, bound its first transactions in the first quarter of this year. The company, a new unit of Toronto-based Trisura Group Ltd., said it believes market conditions are favorable to source business from a core base of established program managers.
" ...[P]rogram administrators welcome our new capacity as there is currently a lack of fronting carriers and the products and arrangements currently offered to them by the existing market do not always meet the needs of their business and clients," Trisura Group said in its most recent quarterly report.
"Furthermore," the company added, "we believe there is a strong supply of highly rated international reinsurance capacity keen to gain exposure to this business."
In addition to organic growth, Trisura Group said that it plans to seek U.S. companies that operate in similar specialty insurance market niches as acquisition targets. A transaction, should it materialize, would take place in a market segment that has been no stranger to M&A activity.
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