Clear Blue pulls sales process as PE bids fall short of expectations

Clear Blue and its majority owner Pine Brook have cancelled the Evercore-run sales process for the hybrid fronting carrier after final bids from private equity firms didn’t match expectations based on its growth trajectory, The Insurer can reveal.

It is thought that there were at least six bidders in the final stages of the process, with sources linking private equity firms Warburg Pincus, Centerbridge Partners, Gallatin Point Capital, Atlas Merchant Capital and New Mountain Capital as well as special purpose acquisition companies (SPACs) including one set up by Cohen & Co.

While it is believed there were several bids in the range of $500mn to $650mn, a combination of the unappealing deal structure of the higher bids and cash bids that were below expectations led the seller to reconsider pushing for a transaction at this point.

As previously reported, Clear Blue is on a strong growth trajectory after last year writing premium volumes of $745mn, up from $600mn in 2019.

This year the Jerome Breslin-led company is thought to have initially budgeted $1bn of gross written premium (GWP) on its quartet of carrier subsidiaries, which provide both admitted and E&S capabilities, based on the pipeline of deals at the start of 2021.

However, a number of recent major wins including the Risk Point dealers’ open lot program, the total GWP for 2021 could be well north of $1.1bn, with the expectation that based on the growth of current and pipeline deals GWP could be up by a further 30 percent in 2022.

That would mean that Clear Blue had almost doubled its top line in two years, with further Ebitda growth leaving a bigger base for the business to be valued on.

The higher levels of projected growth are likely to have raised the price expectation of the seller to the top of the range or beyond.

But sources have previously highlighted the challenge for hybrid fronting carriers in communicating the value of projected earnings and growth to potential buyers.

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.

By contrast, traditional carriers are valued as a multiple of book value – an approach that may even apply to some of Clear Blue’s peers that have adopted a model where they retain a significant portion of the risk.

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. That means there is a lag in GAAP reported numbers as fees earn over the average policy term such that current growth rates may not reflect in Ebitda for a year or more.

As a result, Clear Blue’s Ebitda numbers on which a sale valuation would be based do not fully reflect the rapid growth that has seen the company become the biggest of the new wave of fronting specialists launched in recent years.

This publication previously reported that the company was initially likely to be budgeting in the region of $30mn of Ebitda this year, which could equate to a valuation of around $600mn based on a top end 20x multiple.

Despite the pulled sales process, the expectation is that Clear Blue will continue to consider approaches. With strong SPAC interest it is likely to continue evaluating that as an option, as well as other public routes to provide a liquidity event for Pine Brook.

Clear Blue, Warburg Pincus, Centerbridge, Gallatin Point, Atlas Merchant, New Mountain and Cohen & Co did not immediately respond to a request for comment.