Accelerant Extinguishes Its Stock Listing

You may have seen the news last week that Accelerant is going private after just a year in the public markets. The acquisition price ($20.25) is slightly below the IPO price ($21), though an improvement over the roughly 50% decline since the IPO.

I never got around to writing about Accelerant last year but I think the decision to return to private markets validates the widely held bearish takes on the business model, which I largely agreed with.

The bigger question is why the buyer, Thoma Bravo (a software investing specialist), would agree to pay a price comparable to the IPO price given the environment today vs. a year ago.

I’ll provide an abbreviated review of my concerns about the Accelerant business model and then some observations on why this might not be the best deal, or at least the best price, for Thoma Bravo.

Adverse Selection Risk

I know a lot of the criticism regarding Accelerant reflected its corporate structure featuring a lot of confusing related party transactions. These were concerning to me as well, but I had more basic concerns.

It is unclear to me why a MGA with a good book would partner with them, but pretty obvious why a MGA with a bad book would seek them out.

Accelerant’s basic proposition is it can help smaller MGAs access reinsurance through its technology platform. The problem for Accelerant is a talented MGA underwriter would have the reputation and results to find their own reinsurance.

That means Accelerant was more likely to attract lower quality MGAs who don’t know how to underwrite but think they have some brilliant idea for “changing the boring insurance industry” (e.g. your typical know-nothing startup) or some business with a specialized marketing niche who thinks expanding into offering these clients insurance is a good idea.

These types of MGAs are more likely to produce underwriting losses and less likely to have the ability to find their own reinsurance support. So they go to Accelerant.

Also, for Accelerant to keep growing over time, they need to find more of these new MGAs…which means they have to scrape further down the bottom of the barrel.

And, Accelerant doesn’t just promise them reinsurance capacity. They go one step further. They offer them guaranteed capacity for as much as five years!

How does Accelerant get reinsurers to agree to this? We’ll come back to that in a minute. First, let’s consider the appeal of this to a MGA.

If I’m a MGA and I know I have five years of reinsurance locked in, I’m going to do one of two things – grow as fast as I can or be loose with my underwriting standards. I may even do both!

In the short term, that’s great news for Accelerant. After all, they get to show faster growth to their investors since their clients are gunning it. The problem is what happens when the underwriting results deteriorate and you’ve promised the client three more years of reinsurance capacity?

The Warehouse Risk

That brings us to the next big risk. How does Accelerant get reinsurers to give them capacity for five years out? They don’t. Accelerant hopes they can renew their reinsurance each year at acceptable rates.

And maybe they can. After all, reinsurers are desperate for growth and don’t want to “miss out” on a large new buyer. Accelerant was smart to realize that pooling a lot of small buyers into one large program gives them more market power as reinsurers will not want to be left out.

It’s easy enough to cross your fingers that Accelerant will find some good MGAs to balance out the bad ones and maybe it’s possible to make money on the whole portfolio?

But there is a clear incentive for MGAs that join Accelerant’s platform and have success to leave over time and buy their own reinsurance for less while the ones who are struggling remain which means there is also adverse selection for the reinsurers.

So, it seems fairly inevitable that at some point Accelerant will struggle to renew its insurance program at acceptable terms. What happens then?

As best as I can tell, they have to take that risk on balance sheet by providing the reinsurance themselves. Of course, they don’t have the capital to do that, so it would seem likely it would be game over?

Is Thoma Overpaying?

Others would add many more concerns over Accelerant’s business model, but I think I’ve shown enough to make the point there are some meaningful issues to be concerned about.

Given that, why would Thoma Bravo agree to pay a large premium to where the stock was trading? They must think it is a very attractive time to buy an insurance software platform. After all, they’re software investing experts!

And maybe they have identified value that everyone else has missed. But there is one big elephant in the room this overlooks. Software stocks have been decimated in the year since Accelerant’s IPO.

Thoma Bravo itself has been under a lot of scrutiny for past deals it has made that may end up as “zeroes” due to AI disruption.

Given that, one would think they would only be looking to make acquisitions where they can bottom feed and buy at distressed valuations. Does Accelerant qualify as a vulture acquisition?

Well, as I noted, Thoma is basically paying the IPO price. How does that compare to other software stocks over the last year?

We can start at a broad level and look at IGV, the software ETF. It’s down just 8% since the Accelerant IPO so maybe Thoma did pay a fair price?

The problem with that simple analysis is the IGV is a mix of stocks are down a lot and others (e.g. cybersecurity) that are up a lot.

What if we look specifically at financial stocks with a software element to their business? Verisk is the one with the biggest insurance-related business. It’s down 37%. Others who are less insurance driven (including TRU, SPGI, INTU, and FDS) range from -15% to -54%.

What about insurance brokers? Ryan is down 34%, Brown -30%, and Baldwin -23%. Want to look at a tech savvy underwriter? OK, Kinsale is -20%.

Accelerant was down about 40% from the IPO before the merger announcement, so fairly similar to these other companies.

So why would Thoma pay a 60% premium to the pre-announcement price for any software acquisition, let alone Accelerant which already has a lot of questions about its business before we even introduce AI risk?

This does not appear to be bottom fishing. Rather, it appears to be a bet that Accelerant will not only experience no disruption from AI, but also not suffer from the adverse selection risk that is core to its product offering. That’s not a bet I would make, but that’s what makes a market.