Q3 2020 Trean Insurance Group Inc Earnings Call
Greetings and welcome to the trio insurance group Inc. third quarter 2020 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Station if anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn this conference over to your host Mr. Garrett Edson IDR. Please go ahead Sir.
Thank you operator, good afternoon, and welcome tree on insurance.
The group's third quarter earnings call. This afternoon. The company released its financial results for the quarter ended September 32020.
Press releases Melbourne, the Investor Relations section of the company's website at Www Dot tree on the call I would like to remind everyone that certain statements made in the course of this call are not based on historical information may constitute forward looking statements.
Statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward looking state.
Today, the company undertakes no duty to update any forward looking statements that may be made during the course of this call but.
Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered isolation or as a substitute for the financial information presented in accordance with GAAP reconciliation.
Rates of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot FCC Dot Gov. Joining me on the call today are Andrew Brian The company's Chief Executive Officer, and Julie bearing the company's Chief financial officer with that I'm now going to turn the call over to Andy.
Thank you Garrett and welcome to our third quarter 2020 earnings call. We appreciate your participation on our call and for your continued interest in tree a bunch.
On today's call I will walk through our higher level quarter results in our overall strategy.
See approach would be booked there will follow and provide some detail about a third.
Quarter results and then we'll open it up to you today.
We were pleased with our third quarter performance as we embark on public life in mid July we continue to execute well in all facets of our operations from driving revenue growth to flowing through our cash flows and earnings.
This enabled us to enter the fourth quarter and the strongest.
Financial position and tree on 24 year history, even in the face of the ongoing challenges brought about by the Covance pandemic.
Along with our successful initial public offering during the third quarter. We grew gross written premiums by 23% year over year.
We increased retail.
Mention of our net earned premiums to over 25%.
We recorded a combined ratio of 81% in 810 basis point improvement over the prior year period, thanks to our prudent underwriting approach than we generated adjusted net income after excluding onetime items of 10 point.
$5 million.
Or 21 cents per diluted share producing adjusted our OE of over 15%.
Our proven business model and operating strategy is really paying dividends for triad and validates the resumed the resiliency of our business.
We remain focused on supporting their program.
Ram partners responsibly, accepting new opportunities seeking proper rate levels and quickly and fairly resolving claims.
On our prior call I talked about our four distinct strategies to grow and create long term value.
Growing organically in our existing markets selectively adding new pro.
Graham partners Opportunistically growing through acquisitions, and harnessing our growing capital base retain more premium.
The third quarter saw us execute well in all of these strategies of our 23% increase in gross written premium from the prior year period, our workers comp segment saw.
Pro 6% growth, while our non workers comp liability lines more than doubled their gross written premiums from the prior year period.
A vital part of our program partner strategy involves specific targeting of each programs with the competitive edge and our third quarter performance demonstrated to clear value that.
Approach.
We are continuing to maintain a strong pipeline of opportunities to add new partners in the coming quarters.
In addition at the time of the IPO, we completed the acquisition of the remaining cost our interest and at the beginning of the fourth quarter. We closed on the acquisition of 77.
Even 10 insurance company, a leader in workers comp for emergency services, particularly underserved market and they are already making valuable contributions to our growth.
We also have a robust balance sheet, including $165.3 million in unrestricted cash putting us in an average.
That takes us positioned to execute our growth strategy.
During the quarter, we increased retention of our net written premiums to over 25%.
Keeping more of the quality business, we are writing on our balance sheet instead of ceded to reinsurers.
As we look into 2021, we remain excited about.
Finally, the landscape, we see for workers comp and other insurance lines.
Given the potential for sustainable and profitable growth in vastly underserved markets. We are investing wisely in our business and providing proper support for our program partners to better reinforce our partner and customer relationships, which.
Each will lead to long term value creation.
I am proud of our entire team for producing such strong results in the third quarter and their ongoing hard work and efforts will help ensure our long term success.
With that I'll now turn the call over to our CFO Julian truly library Julie Thank.
Mandy and good afternoon to everyone on the call, let's go right into our third quarter results.
In the third quarter. Our team grew gross written premiums by 23% to $132.3 million compared to 175 point $107.5 million in the prior year period.
This growth was driven by the addition of new programming partners in the second and third quarters and resulted in an increase in both workers compensation and non workers compensation liability lines of business.
We produced a very strong gross written premiums performance, particularly given the ongoing challenging operating environment.
Gross earned premiums were 100, <unk> hundred and 9.3 million for the third quarter of 2020 up 7% compared to the prior year period due primarily to the increase in gross written premium and partially offset by the increase in gross unearned premium due to the addition of new program partners in the second and third quarters this premium toward.
We're largely on earned as of the end of the third quarter.
As a reminder, since we cannot control the timing of effective dates of new policies. This lag effect is fairly common occurrence when we onboard new program partners. Thus, we continue to recommend that the focus be on gross written premiums as the best proxy for the growth of our business.
As you think about the fourth quarter. We also remind you that premium sometimes come in and even block. So there can be some imbalance to our quarterly gross written premium.
That's why we certainly expect to achieve a strong quarter of growth for the fourth quarter and working hard to exceed our own expectations. It is difficult to simply utilize one quarter.
Performance at the run rate for the next quarter.
That said, we remain confident in our ability to onboard additional program partners and sustainably grow our business grow our gross written premium over the longer term.
Net earned premiums for the quarter were $27.9 million, an increase of 26% compared.
To $22.2 million in the prior year period, primarily due to the increase in gross earned premium more than offsetting a smaller increase in ceded earned premiums.
We retain 25.5% of premium in the third quarter of 2028, 380 basis point improvement from 21.7% in the prior year.
Oh period.
With a fortified balance sheet, we expect to continue retaining more premium overtime and grow net earned premiums commensurately.
Our loss ratio for the third quarter of 2020, with 55.9%, a 720 basis point improvement compared to 63.1%.
Our year period.
Loss activity during the third quarter of 2020 was directly attributable to attributable to the increase in earned premiums and partially offset by favorable.
By lower favorable loss reserve estimate true ups made for the third quarter of 2020 that for the prior year period.
DNA expense was $7 million in the third quarter of 2020 compared to $5.8 million in the prior year quarter.
DNA expense increased 1.2 million, primarily due to higher net agent commissions, resulting from an increase in written premium increased professional fees, including legal consulting and other.
MTO and public company readiness efforts as well as higher expenses associated with an expanded workforce in which we continued to invest.
These increases were largely offset by a net reduction in gionee expenses of 3 million, resulting from synergies and from the acquisition of comp store during the quarter.
We are continuing.
I mean to prudently invest in our business, our workforce and our growth and as such suspect Gn expenses will remain somewhat elevated compared to the prior year period.
All in our combined ratio for the third quarter of 2020 was 81% and 810 basis point improvement from 89.1% in the.
Prior year period, due primarily to the increase in earned premium more than offsetting the increase in losses and loss adjustment expense and DNA expense.
Underwriting income for the third quarter.
It was 5.3 million, a 118% increase compared to $2.4 million in the prior year period.
Net investment income for the third quarter of 2020 was $1.9 million up 8% compared to the prior year period. The majority of our investment portfolio was comprised of fixed maturity securities of $375.3 million at September Thirtyth 2020 classified as available for sale.
We also.
So had 165.3 million of cash and cash equivalents.
Our investment portfolio had an average rating of double a at the end of the quarter.
Other revenue, which consists primarily of third party administrator and brokerage fees was $5.4 million for the quarter due to recording higher brokerage.
Fees related to the effective dates of reinsurance contracts for current and new program partners and increases in estimated premiums on reinsurance contract.
Equity earnings and affiliates net of tax was point $4 million.
Lower than the prior year period due to the company acquiring the remaining ownership interest.
In comps are in mid July and no longer accounted for its investment as an equity method investment.
GAAP net income for the third quarter of 2020 was $69.3 million as we booked a $69.8 million onetime gain on the reevaluation of the comp start investments upon our acquisition of the remaining 55.
With that we did not own partially offset by $11.1 million in one time IPO related payments.
When excluding these and other onetime items adjusted net income for the third quarter of 2020 was $10.5 million, a 62% increase from $6.5 million in the prior year period.
Adjusted diluted earnings per share for the third quarter of 2020 was 21 cents.
In the fourth quarter, assuming no additional share issuances, you should assume a share count of $51.1 million when calculating earnings per share.
Our OE for the third quarter of.
Was 102 point.
0.5% due to the onetime gain while adjusted our OE, which excludes the AFFO excludes the aforementioned onetime items was 15.5%.
Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity was 25.9.
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With that I. Thank you for your time, and we will now open up the call for today operator.
At this time, we'll be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad, a confirmation somewhat indicate your.
Line is in the question queue, you May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star key one moment, while we poll for questions.
Our first.
Question comes from the line of Matt Carletti with GMP Securities. You May proceed with your question.
Hey, Thanks, good afternoon.
[laughter].
Okay.
Julie I'm going to start with a numbers question I was hoping.
We go to the loss ratio and could you spell out for us how much in dollars.
First a favorable development was it this quarter and how much it was last third quarter.
So this quarter, we recognized about 300000, a favorable development in the third quarter and last year was slightly higher than that.
I want to say it was about 350.
Okay.
Okay great.
And then just more broadly can you talk about what youre seeing in the loss cost environment.
You know and particularly I think in the past Youve commented a little about how cove. It has been a benefit but your we've been waiting to see kind of how it plays out across the year and if you could update us on your thoughts there.
I'll be happy to do that yes. This is Daniel Brian and thanks for joining the call.
The story for Us recorded.
Really the same this quarter as we reported last quarter, we are still not seeing a whole lot of loss activity as respects covert claims.
Those that we do have most have been either closing without payment or.
Closing without a lot of payment we do have a couple of claims it looks like they could be serious but in the scope of things yeah. That's not a big deal claim calls are not increasing materially.
Similar to last year in fact.
Moreover, all of this year.
Claim counts increased less than what we would've expected for the current year. So it's really pretty much the same as we talked about last quarter sold bar code that is not yet.
Material impact on our activities in terms of claims or so.
Okay, Great and then maybe could you talk a bit about just broader kind of economic activity and what you're seeing in your book I mean, we know that you have a a large california contractors exposure you know what what are you seeing in terms of you know maybe not the job there on but you know the next job those sorts of things just any visibility.
Do you have into economic activity of your Insureds.
So we we we do not have a lot of insight into what's happening spin.
Specifically within the California economy, we are hearing that things are slowing in California.
And of course, a fad.
Happens that will have an impact on us.
But so far we haven't seen a lot of change.
The associated with a change in the economy.
Okay, Great and last question you know can you talk a bit about just the pipeline for you right you mentioned.
Some of the partnerships that.
I think it already announced and starting to come on board, how how is that pipeline looking for continuing to add new partnerships going forward.
Right away by way of just.
Memory, or just going back a bit in the third quarter, we when we talked last last quarter.
Do we talked about the fact that we had added four programs.
Uh huh.
For the year through the second quarter and that we were working on to up to five more in the second half.
As respects those five programs that we were working on we did onboard three of those during the third quarter.
And we have onboarded to others.
You are in the fourth quarter. So in total Weve Onboarded a night programs.
This year in addition to the two acquisitions that we've made.
Oh, we're probably not going to be making any more new onboards.
This year, we're getting close to a you said it was usually have a pretty good time for putting on new programs.
And that really starts with Thanksgiving. So we've probably onboarded audit programs. This year, there were going to onboard.
Okay, great. Thank you for the color and best of luck.
Thank you.
Our next question comes from the line of David Watson Madden with Evercore ISI you May proceed with your question.
Hi, good evening.
I wanted to just talk about the expense ratio.
So.
Came in at 25, one this quarter.
I'm, a little bit higher than where I was expecting.
Julie you mentioned.
You expected the expense ratio to run a little higher as you invest in the business.
I guess I'm just wondering what your outlook is for.
Next next year should we still expect that to be in the 21% to 22%.
Range.
You know right now we are expecting that it might tick up a little bit as we are retaining more business. One of the items. That's included in our DNA expenses our commissions.
Besides we retain more business our ceding commission is reduced and that's a reduction to the commission expense. So.
We'll see our our DNA will tick up but then we will have more net earned premium.
In lieu of that.
Right so.
So the combo of those you are still comfortable getting to like 21 22 for next year.
At this time.
We are.
Okay.
Great and then if I could just ask Andy just a follow up.
On.
On the workers comp side.
Hi, just on what you're seeing from a.
From a claims frequency and I know last quarter, you had indicated that you didn't what.
Potential frequency benefits come through results.
Some of your peers have I'm, just wondering is that still the case.
You did not allow any of the favorable frequency to come through in a in the accident year result.
We have not we have not recognized.
Trouble developing you already know our financial results other than to this flaw number that Julie mentioned during or.
End of <unk>.
He comments and so that is something that we are looking at this quarter and we'll make a decision at the end of this quarter.
Okay got it.
And then Andy if I could just sneak one more in I'm just wondering just to get your comments on.
Okay on the workers comp pricing environment as the rate environment.
Whether you're seeing rate levels, a bottom out here start to improve sort of what you saw in Threeq, you and what what you're seeing so far and what your expectations are for next year.
Yeah, we we have now.
And.
We have not seen great levels drop.
Appreciably, so far in this quarter or really for the year on the other hand, we haven't seen much of that increase either so I hope that that means there were.
But as you know, we we think that Theres.
Still a lot of competition.
Or rate on larger accounts and right now we are disappointed.
About.
The ability to get to get the rate, we would like on larger accounts and by larger accounts, we really need a codes that are generating more than say 250000 premium here.
Okay.
Got it thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a moment only poll for questions.
Our next question comes from the line of Jeff.
Schmidt with William Blair You May proceed with your question.
Hi, good afternoon quick.
A question on a lot of my questions were answered here, but just a question on other revenue was up quite a bit I guess above what you had seen kept initially expected.
And is that just driven by the new program partners.
No I mean, I think a lot of that.
Reinsurance brokerage if I'm correct.
But could you maybe just talk about that how you.
What your views on that going forward.
Yeah. So.
Part of it was due to the new programs that we onboarded part.
Part and then the US the rest of it is really.
Related to the.
The new accounting standards.
So you know you're recognizing the revenue on the effective date of the contract for reinsurance.
And so that requires an estimation of what that premium is going to be and so you know and then you're required to do the true ups to those.
And so we did that this quarter and we had some favorable upside, but again you know in the future that could also be.
Downturn. It if you know program as the premiums are down so it.
It was just an adjustment.
For the quarter.
Okay.
And then just on the investment.
Portfolio, just the cash and cash equivalents obviously.
Hum pretty high are you rolling those into fixed since come securities or how should we think about that.
We have not.
Our investment portfolio is very conservative we've always taken the.
In addition, there are we are primarily in the underwriting risk business.
And therefore, we wanted to take our risk there rather than to be aggressive on the investment side.
Divestment investment returns are.
Very disappointing right now interest rates are very low on the other hand, the stock market is very high.
And so we've been reluctant to make any big change in our underwriting Im sorry, our investment philosophy or guidelines right now and that's something again that we will be we look at it on a quarterly basis.
And we'll be looking at data on an ongoing basis going forward.
Okay. Thank.
Yeah.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr., Andrew O'brien for closing remarks.
Thank you all for taking the time to join us for this presentation.
You shouldn't we appreciate your interest in our company we are.
Dedicated and committed to providing good results and performing well for our shareholders and so we look forward to visiting with you again at the next earnings call. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
And enjoy the rest of your evening.
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