The Fortegra Group Pursues $100 Million U.S. IPO

Summary

• The Fortegra Group has filed to raise $100 million in an IPO, although the final figure may differ.
• The firm provides specialty insurance and warranty coverage in the U.S. and Europe.
• FRF has produced resilient financial results despite the pandemic.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

Photo by scyther5/iStock via Getty Images

Quick Take

The Fortegra Group (NYSE:FRF) has filed to raise $100 million in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides specialty insurance coverage in the United States and Europe.

FRF has produced resilient financial results through the pandemic.

I'll provide an update when we learn more about the IPO from management.

Company & Technology

Jacksonville, Florida-based Fortegra was founded to cover select lines of business insurance as well as provide U.S. and Europe consumer product warranty coverage for a range of electronic devices and furniture.

Management is headed by president and CEO Richard Kahlbaugh, who has been with the firm since 2003 and was previously president and CEO of Volvo's Global Insurance Group.

The company's primary offerings include:

• U.S. business insurance lines

• U.S. warranty coverage

• Europe warranty coverage

Fortegra has received at least $223 million from holding company and parent Tiptree (TIPT).

Customer/User Acquisition

The firm offers its insurance lines through independent insurance agents as well as agents within corporate partners for its various warranty coverage offerings.

The company says it has achieved a more than '95% persistency rate, which represents the annual retention of the number of our producing agents.'

Commission expenses as a percentage of total revenue have dropped as revenues have decreased, as the figures below indicate:

Commission	Expenses vs. Revenue
Period	Percentage
2020	58.6%
2019	60.7%

Click to enlarge

Source: Company registration statement

The Commission efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Commission spend, was negative (0.1x) in the most recent reporting period.

Market & Competition

According to a 2021 market research report by Cognitive Market Research, the U.S. market for specialty insurance is expected to reach approximately $275 billion by 2027.

The chart below shows the historical and projected future growth trajectory of specialty insurance market sizes by global region from 2014 to 2027, with the U.S. the darkest blue part of the chart:

Also, the U.S. product warranty market is expected to reach $1.1 billion by the end of 2021, according to a report by IBISWorld.

The market grew at an estimated average annual rate of 1.4% from 2016 to 2021.

Major competitive or other industry participants for the firm's various market segments include:

• Markel Corp.

• RLI Corp.

• Clear Blue Insurance Group

• AIG

• Allianz

• Assurant

• Securian Financial

• Great American

• Asurion

• AmTrust Financial

• SquareTrade

• Helvetia Insurance

• AXA SA

• Others

Financial Performance

Fortegra's recent financial results can be summarized as follows:

• Contracting total revenue

• Reduced profit net of loss adjustment expenses

• Reduced net income

• Increased cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2020	$ 477,991,000	-4.2%
2019	$ 499,108,000
Profit (Loss) Net Of Loss Adjustment Exp.
Period	Profit (Loss) Net Of Loss Adjustment Exp.	% Variance vs. Prior
2020	$ 299,743,000	-13.9%
2019	$ 348,099,000
Income (Loss) Before Taxes
Period	Income (Loss) Before Taxes	Before Tax Margin
2020	$ 26,948,000	5.6%
2019	$ 37,030,000	7.4%
Net Income (Loss)
Period	Net Income (Loss)
2020	$ 22,821,000
2019	$ 27,160,000
Cash Flow From Operations
Period	Cash Flow From Operations
2020	$ 169,688,000
2019	$ 107,024,000
(Glossary Of Terms)

Click to enlarge

Source: Company registration statement

As of December 31, 2020, Fortegra had $115 million in cash and $1.5 billion in total liabilities.

Free cash flow during the twelve months ended December 31, 2020, was $164 million.

IPO Details

Fortegra intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final figure may differ.

Class A common stockholders will be entitled to one vote per share and Class B shareholders will receive 10 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering, together with our cash on hand, to execute our growth strategy, repay [an undisclosed amount] in aggregate principal amount under the Fortress Credit Facility, along with related premiums, accrued and unpaid interest, and use the remainder for working capital and general corporate purposes.

Management's presentation of the company roadshow is not available.

Listed bookrunners of the IPO are BofA Securities and Barclays.

Commentary

Fortegra is seeking public capital market investment to pay down some debt and fund its growth plans.

The firm's financials show slightly contracting total revenue, reduced profits but increased cash flow from operations.

Free cash flow for the calendar year 2020 was $164 million.

Commission expenses as a percentage of total revenue have dropped slightly as revenues decreased.

The market opportunity for providing specialty lines of insurance including warranty insurance is expected to continue growth at a moderate rate in the coming years.

BofA Securities is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 80.5% since their IPO. This is a top-tier performance for all major underwriters during the period.

FRF is focused on niche business lines and operates under a vertically integrated business model that provides the company with a variety of revenue streams.

While the firm targets 'lines of business with a small premium-per-risk profile,' management believes this reduces its catastrophic risk profile, which when combined with its machine learning technology, can produce a superior persistency rate for its producing agent network.

FRF has generated resilient financial results through the 2020 pandemic.

When we learn more about the IPO's pricing and valuation assumptions, I'll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.