Q4 2020 Trean Insurance Group Inc Earnings Call
Greetings and welcome to tree on Insurance Group, Inc. Fourth quarter 'twenty 'twenty earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. 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 of ICR. Thank you Sir you may begin.
Thank you good afternoon, and welcome to tree on insurance group's fourth quarter and full year 2020 earnings call. This afternoon. The company released its financial results for the quarter and full year ended December 31 2020 per.
This release is available on the Investor Relations section of the company's website at Www Dot tree on Dot Com I would like to remind everyone that certain statements made on a course of this call are not based on historical information and May constitute forward looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual.
Sales 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 statements made today company undertakes no duty to update any forward looking statements that may be made during the course of this call.
Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or a substitute for the financial information presented in accordance with GAAP reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our fine.
Links with the SEC at Www Dot FCC Dot Gov. Joining me on the call today are Andrew O'brien, the company's President and Chief Executive Officer, and Julie bearing the company's Chief financial officer with that I am now going to turn the call over to Andy.
Thank you Garrett.
We welcome you on to our fourth quarter 2020 earnings call. We appreciate your participation on our call and for your continued interest in triage.
On today's call I will walk through our higher level of results and our overall strategy for 2021 and beyond.
Our CFO, Judy Barrett will follow and provide some detail about our fourth quarter and full year results.
And then we'll open it up to Q&A.
2020 was a year that truly tested all of us and I'm proud to say that our entire team at tree on faced the challenges head on and delivered rock solid results throughout the year in July we completed our initial public offering a landmark achievement for our company.
Further the resilience of our business model was validated and we enter 2021 and price position to further expand our market share and sustainably grow our business in.
In particular, we were very pleased by our fourth quarter performance, we drove considerable revenue volume revenue growth, which stream to our cash flow and ultimately will increase our earnings.
In the fourth quarter.
We grew gross written premiums by 37 per cent year over year and excellent performance generated through multiple sources.
<unk>, our new program partners organic growth and the acquisition of 70 710 insurers.
Our net earned premium ratio is 30 point.
2%.
We continue to improve our loss ratio on a year over year basis.
The evidence of our successful approach to underwriting.
And we generated adjusted net income after excluding nonrecurring other expenses and significant noncash items of $11 $2 million or 22 cents per diluted share producing adjusted ROE of 11% and adjusted R. O T E up $23 four per se.
We've consistently discussed that a vital part of our overall program partner strategy is targeting specific niche programs with a clear edge.
In the fourth quarter, our non workers comp liability lines grew gross written premiums by 75 per cent year over year.
Our workers compensation segment saw a 28 per cent increase.
While workers' comp still makes up the lion's share of our business, we are making strong inroads in diversifying our overall business, which would serve to reduce concentration risk and enable us to exploit our advantages in newark, each segments to grow more rapidly.
We also continue to remain as strong and maintain a strong pipeline of opportunities to add new business in the coming quarters.
The fourth quarter was very strong for us in terms of year over year gross written premiums growth and as we continue to retain more and more premium on our books, thanks to our solid capital base.
I also see numerous additional opportunities to further expand our market share.
During 2020, we added nine new program partners, all of which are already making strong contributions to free up.
Our growth in the second half of 2020 exceeded our projections and we expect that momentum to carry into 2021.
To responsibly build on this momentum we plan to accelerate our investments in automation.
Technology workforce additions and other areas in order to ensure that we are providing a superior competitive and value proposition to existing and prospective customers.
While these investments on our growth will cause G&A to remain somewhat elevated in 2020. One we know these targeted investments will help ensure a sustainable and profitable growth for triage and is ultimately the right path forward to create additional long term value.
As we sit here in March and judging by our fourth quarter and overall 2020 performance, we remain very well positioned to succeed and significantly grow our gross written premium through 2020, what we.
We will continue to pursue organic growth within our existing markets to further increase our gross written premium.
That is clearly evident we've made significant progress in retaining more quality net earned premium.
Should further enhance our bottom line going forward.
With a robust balance sheet, we are confident that we can successfully execute on our growth strategies.
Our business spot on the operating strategy is exceedingly resumed yet and powerful and.
And we are excited for what entails for 2021 and be on.
We remain focused on supporting our existing program partners responsibly accepting new opportunities seeking proper rate levels and quickly it's fairly resolving claims I'm proud of our entire team for their continued efforts and dedication and.
And with that I'll now turn the call over to our CFO Julie Barrett Julie.
You, Andy and good afternoon to everyone on the call, let's go right into our fourth quarter results.
In the fourth quarter, our teen growth gross written premiums by 37% so hard on this.
$34 5 million compared to $97 9 million in the prior year period.
This growth was driven by the addition of nine New program partners throughout 2020 organic growth as well as the acquisition of 70 710 insurance company at the beginning of the fourth quarter and resulted in an increase in both workers compensation and non workers compensation liability lines of business.
We are proud of our gross written premiums from format and are positioned strongly from continued growth in 2021.
Well from premiums or a hunter on $21 9 million from the fourth quarter of 2020 up 19% compared from the prior year period.
Primarily to the increase in gross written premium and partially offset by the increase in gross unearned premium is the addition of new program partners. During 2020 with premiums were largely on earned as of the end of the fourth quarter.
As a reminder, since we cannot control the timing of the effective date of new policies. This lag effect is a fairly common occurrence totally on board New program partners.
We continue to recommend that the focus would be on gross written premiums as the best proxy from the growth of our business.
As we noted in our last call one quarter's performance is difficult to utilize as a run rate for the next quarter as premiums often comment on even block.
That said, we remain confident in our ability to onboard additional new program partner and sustainably grow on gross written premiums over the long term.
Net earned premiums for the fourth quarter with $36 8 million, an increase of 73 per cent compared to $21 3 million in the prior year period.
Mary due to the increase in gross earned premium more than offsetting a smaller increase in ceded earned premiums.
Our net earned premiums to gross earned premium ratio was 32% in the fourth quarter of 2020, and 940 basis point improvement from 28% in the prior year period.
With our robust balance sheet, we expect to continue retaining more premium over time and grow net earned premiums commensurately.
Our loss ratio for the fourth quarter of 2020 is $27 four per cent.
180 basis point improvement compared to $29 two per cent and the prior year period.
Loss activity during the fourth quarter of 2020 was directly attributable to the increase in earned premium and partially offset by lower favorable loss reserve estimates for the fourth quarter of 2020 back from the prior year period.
We typically record a lower loss ratio on the fourth quarter compared to the first through third quarter and thus we would expect the loss ratio to return to a more normalized figure in the first quarter of 2021.
G&A expense was $15 2 million on the fourth quarter of 2020 compared to $5 1 million in the prior year quarter included in G&A expense for the fourth quarter on 2020 with approximately $5 2 million of various accrual true up related to profit sharing ceding commission and deferred acquisition costs.
Remainder of the increase was primarily due to higher net agent commissions, resulting from the company's increased retention increased insurance and professional service expenses as well as higher expenses associated with an expanded workforce from acquisition and continued investment.
As Andy noted given the significant momentum we are seeing in our business. They are going to invest throughout the year and our business technology and our work force in order to enhance our competitive position and take advantage of opportunities we are seeing other marketplace.
As a result, we expect G&A expenses will continue to remain elevated in 2021 compared to prior year period.
All in our combined ratio from the fourth quarter of 2020 was $68 eight per cent compared to 53% from the prior year period.
Excluding the accrual true up G&A charges I just mentioned our combined ratio for the fourth quarter of 2020 would have been 54, 6%.
Underwriting income for the fourth quarter was $11 4 million, a 14% increase compared to 10 million in the prior year period.
Net investment income for the fourth quarter of 2020 was $1 7 million comparable with the prior year period. The majority of our investment portfolio was comprised of fixed maturity securities of $405 6 million at December 31, 2020 classified as available for sale.
We also had $153 1 billion of cash on cash equivalent.
Our investment portfolio had an average rating of double H C on the corner.
Other revenue, which consists primarily of third party administrator and brokerage fees, what point 8 million from the corner due to reduce brokerage fees due to the changes in estimated premium on reinsurance contracts.
GAAP net income for the fourth quarter of 2020 was $8 1 million or 16 cents per diluted earnings per share.
When excluding nonrecurring other expenses noncash stock compensation and intangible asset amortization adjusted net income for the fourth quarter of 2020 was $11 2 million from parents of about $1 4 million on the prior year period.
Adjusted diluted earnings per share for the fourth quarter of 2020 with 22 cents.
Our ROE for the fourth quarter was 8%, while adjusted ROE was 11% adjusted return on tangible equity, which is computed as annualized adjusted net income or average tangible equity was $23 four per cent.
For the full year 2020, gross written premiums grew 18% to $484 2 million driven by the addition of new program partners throughout 2020 organic growth as well as the acquisition of 70 710 insurance company.
Oh underwriting income for 2020 with $19 million compared to $20 9 million in the prior year, while adjusted net income for 2020 was $32 8 million relatively comparable to the prior year. Despite the additional expenses incurred from being a public company in July 2020.
It was a very successful 2020 per tree on in the midst of an incredibly challenging environment and we believe we are positioned strongly to pro rapidly and responsibly in 2021 and for the long term.
With that I. Thank you for your time, and we'll now open up the call for Q&A.
Operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press Star two share and move your question from the queue from participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes on line of Matt <unk> with JMP Securities. You May proceed with your question.
Hey, Thanks, good afternoon.
My first question, probably probably for you Julie Hey, how are you.
Could you pick up on the loss ratio, a little bit and specifically just looking for the the dollar amounts of cash.
Prior year development in the quarter, and then secondarily could you talk a little bit about I know in prior quarters. You had talked about you know a frequency benefit that you had been seeing likely COVID-19 related but you haven't recognized debt.
Is there a way to kind of get a feel for how much of that you might have recognized now with the Q4 results at vs that you might have held on too.
He helped take on board.
Okay.
So we had we had favorable loss reserve releases in prior years of about four a little over 14 million.
14.
Yes.
Okay.
Okay Wonderful and then and then yeah.
Could you update us on the kind.
Kind of frequency trends youre seeing and if anything changed in Q4, both from what you're observing vs. What you might have recognized that you had in prior quarters.
Yeah.
Matt Nothing nothing specific stands on right now we did see a number of Covid claims filed in California, as a result of the presumption statute.
Many of those claims have been.
Resolved with little or no payment.
Overall frequency.
At the end of the year it seems youre cutting the COVID-19 claims seem to be similar to what we experienced in previous years.
Okay great.
And then maybe Andy if I could just ask you about the workers' comp environment more broadly what you're seeing in terms of.
Competition pricing.
Things like that no in California is a big piece of your book.
Sure.
Over the over all of our business, which we still have not seen any significant rate increases.
Really anywhere.
Haven't seen much on the way you break deterioration, though so I would say over our business. It feels like the right levels. This year are very similar to the rate levels next year.
There is still a lot of competitors in the market.
Hum.
Haven't seen we haven't seen a lot of new entrants, where we are participating in California has been a little bit more challenging this year.
The rate levels in California, they have not moved in a direction that we would have wished they would've moved yet.
That's fair enough.
And then lastly, if I could ask you to kind of clarify I think both Andy jewelry. Both you had comments about investing in the business.
Forward and how we should think about the expenses in 'twenty one.
We look at the expense ratio for the full year for 'twenty is kind of that sort of level of reasonable level to think about 'twenty, one even given the growth there.
You could help us frame that a little bit it would be helpful. Thank you.
Yeah, Matt let me start with a more general statement.
We exceeded our 2020 growth objectives, and we are optimistic about our 2021 growth opportunities there.
Take advantage of these opportunities we do plan to accelerate some investments in new people on automation.
Remember, there's a lag between the time, we recognized expenses.
And when we can record profit so our expense ratio will be higher.
In times of elevated growth.
We actually believe that the growth in our premium is probably a good measure of the deferred profit. We are building as we are growing our company on and Crane are upfront expenses.
Alright, great. Thank you congrats on the very nice end of the year and good luck in 'twenty one.
Great. Thanks, Matt.
Our next question comes from the line of Jimmy Buhler with J P. Morgan you May proceed with your question.
Hi, first a question on just your premium growth can you discuss you mentioned non workers comp growing at a fast rate what line you're growing in and what your outlook is in terms of like how these lines will contribute to your growth in 2020 one outside of workers' comp.
Yeah.
Hi, Jimmy we did grow significantly from a percentage basis in lines outside of workers' comp.
There are we we are seeing rate increases in the other lines that are outstripping, what we're seeing in workers' comp.
Where we have seen some improvements are.
Really across a variety of lives.
Commercial auto homeowners and medical stop loss or three legs that group pretty appreciably for us.
In the second half of 2020, and we anticipate that.
The momentum that began in those lines last year, we'll be continuing this year.
Got it.
So on.
Go on sorry.
I was just going to add just some number ex work comp growth in the fourth quarter was 28% of a per.
Prior year period, and other lines. The other lines of business grew about 75 per cent compared to last same period last year and again as Andy mentioned most of that was commercial auto homeowners and stop on.
Okay and in terms of the expense ratio can you quantify how much you expect expenses to be elevated versus the last few quarters.
And what do you like just to give us an idea on how the core expense ratios are trending versus some of the investments you're making on how much are they going on sort of pick up the expense ratio this year.
You know, Jamie we're really not wanting to provide any guidance around or the expense ratio.
You know, where where we know that it's going to be elevated because of the investments that we're making due to our growth and we felt like we really have to do that to service our programs and the business and in the manner that we've always done that.
Okay. That's all that thank you.
Thank you.
Our next question comes from the line of David <unk> with Evercore ISI. You May proceed with your question.
Hi, good afternoon.
Andy I was hoping maybe you could talk a bit about.
The deal pipeline not only for M&A, but also for.
Potential program partners.
Been hearing a lot that the pandemic has maybe pushed more you know smaller businesses that are right in your wheelhouse to consider partnering with larger organizations.
So sorry, such as yourself, how have you seen a meaningful pickup in this and I guess, just maybe talk about how big of an opportunity. This is and your pipeline and you know it was what was an increase in your pipeline and sort of what you guys are seeing.
Really a big driver behind the increased investments that you guys are are going to make to support the growth on the horizon.
Yeah, you know, Dave we did exceed.
Our expectations in both the third and fourth quarter last year.
And that's really on the back so I mean, we always expected that our growth will come primarily in the second half of the year, but.
We certainly did not expect the.
A number of opportunities that would be presented to us it has been at.
A very high level of all of the last half of the year.
It has continued on it is continuing.
It is continuing weak we are as I mentioned earlier, we're just very optimistic about our 2021 growth opportunities.
We don't want to provide guidance.
Where are we think it's going to be but I can tell you that we think that.
There are many attractive opportunities and they do not seem to be slowing down.
Got it so it's I guess your would you say your your similarly like are you are you more confident about growth organically or Inorganically I guess could you comment on just what Avenue you feel you feel best about going forward.
Good question, Dan and.
When you look at the new programs that we've put on in the fourth quarter and some of these programs are just starting now to produce.
And so I guess, we can talk about is that organic growth because they're already on a program or are they part of the new programs I guess I'd call them part of the new programs.
No I think organic growth.
It's not going to be as high as the growth we are getting it from new partners I think that's what we're going to see and of course we.
No one new program can make a big difference for us. So we're excited by that.
Got it okay. That's helpful.
And then I just wanted to ask just on the retention levels.
No. That's I think it's a second quarter in a row, where you guys have have retained a bit more than than what I had thought.
I guess you know.
I guess are are you guys thinking you know as you guys retain more business are you thinking you'll reach up to 40% retention in 2021 or is that something other.
You know something more like a 2022 event just sort of thinking about how much business you guys are comfortably keeping on your own balance sheet.
Are you.
Yeah again, we don't want to provide guidance, but yeah. We did increase our retention on a couple of programs last year and you know that takes time it doesn't happen you know.
On the day the contract sign it happens over time as the premiums earned out.
When you when you see it flow through the income statement. So well you know it takes a full year before you see the full impact of that increase retention.
At that earned premium level.
But we you know we are increasing our retention.
And so it it.
But again, that's offset by adding new programs, where we're retaining.
Anywhere from <unk> 10 per cent only so it really does depend on the mix.
D var right on.
Our business philosophy is to be very conservative in terms of retained risk on our new programs.
And because truly just dilutive we're keeping in the aggregate over these new programs something like two six per cent.
Net risk in those programs. So we're keeping a lot more on our established programs.
To the degree that our new programs.
Continue to produce as they did in the last two quarters.
That will drive down our overall retained percentage, even though our percentage on our existing business, where we think it's more proven is increasing.
Right.
Right that makes sense and just to just to refresh my memory are you guys at fully 100% retained on Pompe star.
So we are not.
Okay is that something you guys think youll get to within the next year.
I don't think so I don't think so.
Okay.
Okay, That's fair and I I think the philosophy that you guys are following it yeah. It makes sense from a from a disciplined risk management discipline standpoint.
Yes, if I could just sneak one more in I'm. This is probably for Julie I think you said it was what $14 8 million of favorable reserve releases.
Could you maybe help me with what accident years, those primarily came from.
I don't have that off the top of my head David that I would have to pull off the schedule piece.
Look at those.
They will I would say the majority of it was in the 19 to 15 years.
Got it okay. Thanks, I think that's pretty evenly spread pretty evenly over those years.
Got it understood. Thank you.
Yeah.
Our next question comes from the line of Adam Klauber with William Blair. You May proceed with your question.
Thanks.
A couple of questions just to follow up on the growth could you give us a rough idea on the contribution of.
Organic versus new partners versus the acquisition.
A lot of the new growth element is coming from the new partners.
The organic growth.
Okay.
Yeah. So.
We grew gross written premium in the fourth quarter about 37% about a third of that growth was from our existing programs and two thirds of that was from our new business.
Okay. Okay, that's very helpful.
And then just roughly for.
For the fourth quarter, what was the percentage of business that was non comp versus maybe the fourth quarter of last year.
I have a growth number.
Yes.
We have that number somewhere but we get back to you with that.
Okay, Yeah, Yeah sure sure.
And also you know with with the non comp growth is that coming.
From the new partners and existing partners or is it more skewed towards the newer partners coming on.
It's mostly the new partners are.
We have seen a number of just very attractive programs last year that we put on it outside of work coughing.
And there they are.
They're performing consistent with our expectations right now.
Okay. Okay.
And along that lines.
I think how you run the business typically new programs.
You take lower retention, so it assume that.
Some of these are you know the non comp or are you know newer programs you probably have a little retentions on that than your average book at that is that you know ballpark a fair assessment.
Absolutely a fair statement, yes.
Okay. Okay. That's helpful. And then on expenses and you know till I understand that not giving guidance at this point, yes can.
Can we think about the <unk>.
What about I guess the base level. So excluding their accruals. Your G&A was roughly 10 million in the fourth quarter.
And you said you may elevate from there, but is that a reasonable base, we can think about sort of that $10 million.
I think that would be giving guidance if I answered that so sorry.
Sorry jewelry reign.
Okay.
Okay that debt. It's Darren you may have said, but how's your pipeline for new programs I guess twofold, one how's your pipeline and how is your ability to bring on new programs given that you had a really strong year last year.
You know the.
Hmm.
The opportunities that are being presented to us.
We continue to be at an elevated rate.
We did put on nine new programs last year.
Okay.
As theirs.
With a number of new programs that we have that are just developing we don't need to put on a lot of new programs this year or two to make some make.
So significant growth during the year.
Right right, but is that you can clearly I mean do you have shown.
Much much better growth than we had expected.
You know if you see some good programs do you have that bandwidth right now or are you still busy with those cause I mean non programs with what it was like compared to what you've historically done you know are you just sort of add capacity, we're getting these new programs up and running right now.
Yeah, that's a great question and I'll try and answer it in two parts.
Yes, it's a really good program came to us.
We would have the bandwidth to add their program, but at some point at some point if we don't.
Make some investments.
We will find ourselves in a situation where a good program will come to us and we won't be able to take advantage of it and that's exactly the situation. We want to avoid we just see a great opportunity here and we want to make sure that we can handle it responsibly and that we've got the resources in place to do the job and then that's why we've made the.
Vision that we're gonna be making some investments in people.
And automation efforts to make sure that we can always respond appropriately and quickly.
So a good program when it comes to us.
Okay, Great and then can you give us I guess some idea on what those investments in automation would be on those new.
Policy management systems, New claims systems I guess, what is generally what does that entail.
Okay.
Could be all of the above I mean, certainly we are working on a new claim system.
And so that's something that we are working on now we've identified a lot of low hanging our I T people have identified a lot of more hanging fruit items, where by just making a few.
Changes, we can really automate a number of areas that are not as automated as we'd like them to be on it I guess, we're like every other insurance company that way.
Hum, but we're feeling we're feeling that we need to act now because of the.
Because of the growth.
It's.
Been exciting.
How are you thinking about upgrading your policy management system culture.
I don't think well you know what that is it that.
That gives us gets me into guidance.
I'm, sorry, [laughter] yeah.
Very good.
Well, we'll take that off the table and say okay.
It's pretty good that's very helpful. Thanks, guys.
Great. Thanks, Ed.
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. Andy O'brien for closing remarks.
Thank you.
On a program partners and are treating on team performed exceptionally well during this it's really difficult past year and so my thanks to them.
For their commitment and effort, we enjoyed strong growth and we're optimistic about our future our loss ratios were stable, we're executing on our proven historic plan.
We thank you for your interest and support thank you.
This concludes today's program you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
Okay.
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Yeah.
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