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During the IPO season Francis Gaskins, editor of IPOdesktop.com & director of research for Equities.com, regularly appears on CNBC TV, Bloomberg, thestreet.com & other financial cable channels. On the day of the Visa IPO he appeared on four cable TV financial shows including Bloomberg & CNBC. Over the past five years he has been quoted over 500 times by such financial media as the Wall Street Journal, Bloomberg, Reuters, Associated Press, USA Today among others. Those quotes are available at IPOdesktop.com. His varied personal interests include violin playing. For example, he is concertmaster of the Palisades Symphony. He also holds an MBA from Harvard Business School (finance) and an AB from Princeton University (economics).

IPO Preview: Patriot National


PN is a national provider of outsourcing solutions within the workers’ compensation marketplace for insurance companies, employers, local governments and reinsurance captives: workman’s compensation broker.



Accumulated deficit ($mm)





Per share dilution





Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs*

Price /BkVlue

Price /TanBV

% offered in IPO

annualizing Sept 9 mos


Patriot National







*Sept 9 mos profit due to income from related party




Arthur J. Gallagher (NYSE:AJG)







Willis Group Holdings (NYSE:WSH)







To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

P/E of 22
Compare: AJG’s P/E is 22.9; WSH’s P/E is 21.1
Both have negative price-to-tangible book value ratios
Dilution more than the IPO price range midpoint
$51mm accumulated deficit
Sept 9 mos profit due to income from related party
Sept 9 mos profit includes $14mm in investment income (recurring?)
Proceeds to repay debt
Price-to-book of 7

PN is a national provider of comprehensive outsourcing solutions within the workers’ compensation marketplace for insurance companies, employers, local governments and reinsurance captives.

PN offers an end-to-end portfolio of services to increase business production, contain costs and reduce claims experience for PN’s clients.

Industry Trends
According to the NCCI Report, the total net premium written by state funds and private carriers of workers’ compensation insurance in the United States was $41.9 billion in 2013, an increase from $33.8 billion in 2010, representing a compound annual growth rate of 7.4% over that period, and according to data compiled by SNL Financial, total direct premium written by workers’ compensation insurance carriers in the United States, which includes the amount of premium reinsured by insurance carriers, was $52.5 billion in 2013, an increase from $40.4 billion in 2010, representing a compound annual growth rate of 9.2% over that period.

In the past several years, premium growth in the workers’ compensation industry has been predominantly driven by the recovery of employment levels to generally at or near pre-recession levels, as well as increasing premium rates.

Two cyclical drivers
Like other sectors of the insurance industry, the workers’ compensation sector experiences underwriting cyclicality, which generally underpins changes in premium rates. This cyclicality is determined by a number of factors, but there are two notable drivers.

First, ultimate loss costs become more difficult to predict when claims remain open for longer periods, generally as a result of wage and medical cost inflation.

For example, the NCCI Report indicates that medical costs per claim increased by approximately 6.5% on average per year from 1995 through 2013.

Second, the amount of investment income insurance carriers can earn may also influence such carrier’s underwriting practices. Investment income can be sufficiently significant, particularly when claims remain open for longer periods, to compensate for underwriting losses, such as those the workers’ compensation industry has experienced

in recent years, as reflected in a greater than 100% combined ratio for all but two years from 1990 to 2013.

However, in periods of low interest rates, similar to the current investment environment, insurance carriers cannot generate sufficient investment income to offset underwriting losses, and as a result have demanded higher premium rates.

This has led to a modest “hardening” of the workers’ compensation market. According to the Moody’s Report, rates in 2013 increased 8% and are expected to rise 5.5% in 2014.

Patriot National
PN leverages its strong distribution relationships, proprietary business processes, advanced technology infrastructure and management expertise to deliver valuable solutions to PN’s clients.

PN strives to deliver these value-added services to its clients in order to help them navigate the workers’ compensation landscape, ensure compliance with state regulations, handle all aspects of the claims process and ultimately contain costs.

PN works with leading insurance carriers to design workers’ compensation programs according to their preferred risk parameters and specifications.

PN markets the programs through its broad distribution network of over 1,000 independent retail agencies, and underwrite and bind coverage on behalf of PN’s clients. PN plays a central role in the underwriting, production and administration process, which PN believes gives it flexibility in the event of a change in carrier relationships.

Once an insurance program is established with an insurance carrier client, PN offers a full suite of additional services, including claims administration and adjudication, cost containment, nurse case management, fraud investigation and subrogation services.

PN also offers these services individually or as a customized package of services to PN’s other clients such as employers, local governments and reinsurance captives, based on a client’s particular needs.

PN believes that its proactive approach to claims administration, including PN’s proprietary SWARM process, results in higher than average claims closure rates versus the industry.

Technology Platform
PN’s technology platform provides timely information to its employees and its clients, which allows rapid initial case analysis and response to claims as well as direct access to information across PN’s internal organization.

PN believes this proactive approach to its business, combined with its industry expertise and distribution relationships, makes us a valued outsourcing partner for its clients.

Fee Revenue
PN derives substantially all of its revenue from providing brokerage and policyholder services and claims administration services.

PN generates fee revenue for its services, and PN does not write any insurance policies or bear underwriting risk.

On a pro forma basis, after giving effect to the Acquisitions, this offering and the application of use of proceeds therefrom, PN’s revenue was $101.1 million for the nine months ended September 30, 2014 and $93.0 million for the year ended December 31, 2013.

PN’s net income (loss) on a pro forma basis for such periods was $14.5 million and $(15.2) million, respectively.

The market for workers’ compensation insurance services is highly competitive.

Competition in PN’s business is based on many factors. In competing to offer PN’s services to insurance carriers, PN competes based on pricing, quality and scope of available services, underwriting practices, reputation and reliability, ability to reduce claims expenses, customer service and general experience.

In competing to place business on behalf of PN’s carrier partners, competition is also based on the product offerings, premium pricing and financial strength and reputation of PN’s carrier partners.

PN’s competitors are national and regional insurance companies that provide services similar to PN’s through in-house capabilities or separate divisions, and other workers’ compensation insurance agencies and service providers, many of which are significantly larger and possess considerably greater financial, marketing and other resources than PN does. As a result of this scale, they may be able to capitalize on lower expenses to offer more competitive pricing.

For its brokerage and policyholder services, PN believes it competes with numerous national wholesale agents and brokers, including Arrowhead General Insurance Agency, Inc., Appalachian Underwriters, Inc. and MarketScout Corporation, as well as insurance companies that sell directly to customers.

For its claims administration services, PN competes with numerous businesses of varying sizes that offer claims management, cost containment, and/or other services that are similar to those that PN offers.

These competitors include Arthur J. Gallagher & Co., CorVel Corporation, Crawford & Company, GENEX Services and Sedgwick Claims Management Services Inc., among others.

With respect to its outsourced services business in particular, PN also competes with insurance companies that service their policies in-house rather than outsourcing to a provider like us. In all of the services PN provides, it also competes with numerous smaller market participants that may operate in a particular geographic area or segment of the market and benefit from local knowledge and strong customer relationships, or offer only a particular service.

5% shareholders pre-IPO
Steven M. Mariano 84.9%

No dividends are planned.

Use of proceeds
PN expects to receive $113 million from its IPO and use it repay debt as follows:

$66.8 million to repay all outstanding amounts under the amended and restated first lien term loan agreement, dated as of August 6, 2014 (the “PennantPark Loan Agreement”), between, among others, us and certain of PN’s subsidiaries, as borrowers, certain of its other subsidiaries and certain affiliated entities, as guarantors, and PennantPark Investment Corporation and certain of its affiliates, as lenders, comprising

(NYSE:I) an initial tranche (the “Initial Tranche”) and (ii) an additional tranche (the “Additional Tranche”), and (2) $56.6 million to repay all outstanding amounts under the credit agreement, dated as of August 6, 2014 (the “UBS Credit Agreement”), between, among others, us and certain of PN’s subsidiaries, the lenders party thereto and UBS Securities LLC, as lead arranger, bookmanager, documentation agent and syndication agent, in each case including accrued interest and applicable prepayment premiums.

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