Clear Blue narrowing down bids in Evercore-run sale process

Clear Blue is narrowing down bidders after receiving strong interest in the first round of its Evercore-run sale process at a time when the hybrid fronting carrier’s full-year growth is likely to have been bolstered by recent major program wins, including dealers’ open lot specialist Risk Point, The Insurer can reveal.

Market sources said Pine Brook-backed Clear Blue – which provides fronting services through its admitted and E&S carrier subsidiaries – has received bids from a range of sources including strategics and private equity firms.

The deadline for the first round of bids is understood to have been in the first half of June.

It is thought that the Jerome Breslin-led platform is on course for its biggest ever growth year and has told potential buyers it is set to significantly beat an already aggressive budget.

Sources said a key win in 2021 was Risk Theory-owned Risk Point’s dealers’ open lot program, which is thought to represent a $150mn+ block of business on an annualised basis.

The fronting carrier is also likely to be seeing strong growth on its existing programs in a market that continues to harden.

This publication revealed back in March that Clear Blue was talking to investment banks including Evercore as it prepared for a sale process that sources at the time said could see a valuation as high as $640mn as private equity firm Pine Brook looks to cash out of the business.

Rapid growth

The platform was launched at the end of 2015 with Breslin as CEO and has rapidly grown its book of business since then. It is understood to have closed 2020 with around $745mn in premium.

The group, which has established four carriers with both admitted and E&S capabilities, is seeing strong organic growth on existing programs in the current attractive pricing environment and has a full pipeline of deals that led it to budget $1bn in gross written premiums for 2021 at the start of the year.

On its current trajectory, with the recent major wins, Clear Blue is now expected to be well ahead of budget for 2021.

The active sale process comes after this publication reported early last year that Pine Brook was not at that stage looking for an imminent exit from Clear Blue despite speculation about a number of approaches for the fronting specialist.

Prior to the process, Clear Blue is understood to have fielded interest from several quarters in the last year, including strategic trade buyers, private equity firms and special purpose acquisition companies (SPACs).

Landmark deal

Evercore sold State National to Markel for $919mn – or 17x forward-looking Ebitda – in the summer of 2017.

The State National deal set a landmark for valuations of program fronting carriers and has also been identified as a catalyst for the money that has flowed into the sector since to back a wave of new entrants, attracted by the potential return on investment the vehicles can generate.

Clear Blue started out as a pure fronting carrier in the vein of State National, retaining no underwriting risk and instead ceding it 100 percent to reinsurers.

With an increasing number of competitors adopting the hybrid model of retaining a percentage of the risk on the programs they front, Clear Blue has evolved its own offering.

It uses an unrated captive vehicle called Condado Re, which operates as a sidecar-style structure that assumes a portion of the risk but then retrocedes the majority of that to reinsurers, retaining a relatively modest amount of the risk itself.

Alignment of interest

That means it has been able to avoid leveraging itself by keeping the risk off its own balance sheet, but at the same time demonstrated to reinsurer partners that there is an alignment of interest on its underwriting.

Although Clear Blue is technically an insurance company with a balance sheet and an AM Best A- rating, its model of retaining almost no underwriting risk means that it is more likely to be valued on a multiple of Ebitda.

The company’s main source of revenue is the fronting fees it charges, which are typically set at 5-6 percent of premium volume.

Premium written and fees generated earn into revenue and Ebitda over time.

But sources said that based on current projections and fees earned as written, Clear Blue is likely to be budgeting in the region of $30mn of pre-tax net income in 2021, with an estimated range of $28mn to $32mn.

With the current SPAC craze having a positive impact on valuations, it is thought that the current valuation range for fronting carriers is likely to be between 17x and 20x forward-looking Ebitda, or between $510mn and $600mn. At the top end of the range that could equate to a valuation of as high as $640mn.

A private equity firm would likely focus on sustainability of the growth trajectory and what that will deliver in returns, while a strategic that also has an MGA or other distribution platform, or a reinsurer, may see greater value in a vehicle that would guarantee access to admitted and E&S fronting paper.

Clear Blue and Pine Brook did not respond to a request for comment on this article.