Q2 2021 Trean Insurance Group Inc Earnings Call
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Good afternoon, everyone and welcome to the trio and Insurance Group, Inc. Second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by person to start key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one. Please note that this event is being recorded I would now like to turn the conference over to get Edson of IOC ICR. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Trina insurance groups second quarter 2021 earnings call. This afternoon. The company released its financial results for the quarter ended June 32021 press 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 in the course of this call are not based on.
All 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 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.
Slide 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 as a substitute for the financial information presented in accordance with GAAP reconciliations of these non-GAAP.
<unk> measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www SEC Dot Gov. Joining me on the call today are Andrew O'brien, the company's Chief Executive Officer, Julie barren, the company's President and Chief operating officer, and Nick the silo, the company's Chief financial officer with that I'm now going to turn the call over to.
Andy.
Thank you Garrett we welcome everyone to our second quarter 2021 earnings call. We appreciate your participation on this call and your continued support and confidence in Treehouse.
We had a strong second quarter and recorded the best gross written premium growth in our company's history for the first six months of the year. Further we are making significant progress in all of the areas. Most important in delivering long term value for our shareholders. Nick will be along shortly to provide details on our second quarter performance.
One year ago in July we completed an initial public offering.
I think this is an appropriate time to remind you of what we've accomplished where we see ourselves in the years to come in terms of our company and driving shareholder value and how we plan to get there.
First it's important to state. This right now as you can clearly see from our results over the past six years.
<unk> is currently a growth company, we followed up on a 36% gross written premium growth in the first quarter 2021, with 43% over year over year growth in the second quarter translating to a 40% growth for the first half of 2021.
We've been able to generate these growth figures because we developed a unique business model.
We work with owned and third Party program partners that focus on workers' comp and other underserved segments of the specialty insurance market.
Our partners are deeply about it.
We develop long term relationships with them.
Have a first class management team and with that combination of our model and our team we are able to take advantage of the large opportunity set in front of us.
Importantly, we are achieving our rapid topline growth, while we are while we continue to responsibly manage our risks.
Through risk sharing.
Collateral management and appropriate reserving.
Disciplined underwriting is critical to our long term success and our approach to underwriting and risk management will not change.
We're proud of our success in what we've built at Treehouse.
And now it's time to set new goals ambitious goals, but once the ones. We are confident we can achieve.
Our long term goal is to generate $1 billion in annual gross written premiums within the next five years.
We will accomplish this the same way we've grown so rapidly.
And maintaining long term relationships with exceptional program partners.
We think this goal is achievable for several reasons.
One we operated a huge and rapidly growing portion of the insurance market.
We've been hitting our long term goal of $1 billion in gross written premium we would still own a very small share of the whole growth all market.
The opportunity is clearly present.
We project that we can generate at least solid high single digit to low double digit growth per year within our existing program.
And we expect that we would add three to five new programs grew year to supplement our current program.
In order to hit our target of $1 billion in annual gross written premiums we need to grow in the low teens per year.
That growth will fluctuate on a quarter to quarter basis, we.
We don't run our business by the quarter, we focus on our annual report.
<unk> been a long term trajectory and as you can see from our historical results. We grew nearly 30% annually from 2015 to 2019 and last year, we grew to 18% despite the pandemic.
We have a clear track record of success that makes us confident that we will reach our target.
But we aren't just focused on the top line at the end of the day, our topline growth as to translate into profit.
Rapid growth such as we are having now will impact earnings as we recognize upfront costs that are ultimately recovered as unearned premiums are realized.
But how we evaluate our overall progress or our true north is simple.
We look to our annualized growth and the stability of our annualized loss ratio.
If we are growing to plan and our loss ratio remained stable, we will be in solid shape and as the premiums because earned they will eventually flow to our bottom line.
To that end, we look at the growth of our gross unearned premiums the place where our deferred earnings accumulate.
As one of the key measures of our long term success.
For the first half of 2021.
We have been spot on our true north.
We're confident in our growth efforts for the remainder of 2021 and our longer term strategy, because we have a successful record that validates our approach.
By growing organically prudently, adding new programs and retaining more of our gross premiums we continue to put ourselves in prime position to prosper and deliver long term value for our shareholders.
Our team's constant hard work and dedication continues to pay off we appreciate all of their efforts we remain very excited for our future.
With that I'll now turn the call over to Jeff.
Thank you Andy and good afternoon to everyone on the call.
Let's go right into our second quarter results.
In the second quarter. Our team grew gross written premiums by 43% to a record $156.6 million compared to $109.6 million in the prior year period. This was driven by organic growth in our existing program partner business. The addition of new program partners any acquisition of $77.10.
Insurance company in the fourth quarter of 2020, resulting in an increase in both workers compensation and non workers compensation liability lines of business.
We remain strongly positioned for continued gross written premium growth throughout 2021.
Gross earned premiums were $138.6 million for the second quarter of 2021 up 38% compared to the prior year period due primarily to the increase in gross written premiums and partially offset by the rise in gross unearned premium is due to the addition of our new program partners.
<unk> premiums were largely on earned as of the end of the second quarter.
As a reminder, since we cannot control the timing of effective dates of new policies. This lag effect is a fairly common occurrence when when we onboard new program partners.
Net earned premiums for the quarter were $47.9 million more than doubling the $21.4 million generated in the prior year period, primarily due to the growth in gross earned premiums more than offsetting a smaller increase in ceded earned premiums.
I would like to point out that the increase in gross unearned premiums we recorded in the second quarter of 2021 is more indicative of what we would expect to see for this line item as we continue to grow as Andy mentioned this is a strong positive for our business as it means that we are growing more rapidly than we previously anticipated.
Unearned premiums will eventually convert into earn premiums in time, we would also like to emphasize that as of June 32021, we have net unearned premiums reflected on our balance sheet of $73.4 million, which is an increase of $7.2 million compared to Q1.2020.
One and an increase of $23.4 million compared to year end 2020.
We remain confident in our ability to onboard additional program partners and sustainably grow our gross written premiums over the longer term.
Our loss ratio for the second quarter of 2021 was 62% compared to 57% in the prior year period. The increase in the loss ratio during the second quarter of 2021 versus the prior year period was primarily attributable to a number of unusual large losses experienced during the first half and quarter of 2021.
Don.
Our expense ratio for the second quarter of 2021 was 31, 8% an improvement of 700 basis points from the prior year quarter, primarily due to the significant increase in net earned premiums.
G&A expense was $15.3 million in the second quarter of 2021 compared to $8.3 million in the prior year quarter. The increase was primarily due to higher net agent commissions related to the rise in our retention rate from 21% to 35% year over year.
Higher salaries and benefits, resulting from acquisitions made in 2020.
Our expanded workforce.
Increased business insurance expense and other insurance related expenses.
And an increase in office related expenses as well.
In our earnings release.
And in a supplemental table in the back of the release to provide more insight and transparency into the components of our G&A income statement line.
While we have noted before that we expect our G&A to remain elevated as we invest in Xi'an and retain more business. It's important to see that the overall G&A and operating expense as a percentage of gross written premium are actually down year over year in other words, the opex spending as rising commensurately with.
Our growth, which means we are remaining disciplined with our overall spending.
What is driving the G&A ratio higher as our increased retention, which impacts our net commission as well as higher.
Business insurance and insurance related expenses.
While we've noted on prior calls is that increased retention, which we believe will help drive significant increases in net income for years to come.
All in our combined ratio for the second quarter of 2021 was 93, 8% up 200 basis point improvement compared to 95, 8% in the prior year period.
Your writing income for the second quarter was 3 million more than tripling underwriting income of 900000 in the prior year period.
Net investment income for the second quarter of 2021 was $2.1 million compared to $2.5 million in the prior year period. The majority of our investment portfolio was comprised of fixed maturity securities.
$424.9 million at June 32021.
We also had 100 million $401.4 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 administration and brokerage fees was $1.2 million for the quarter driven by a reduction in management fees due to the exploration of our management contract at the end of our first quarter 2021.
As a reminder, other revenue and brokerage fees can vary significantly from quarter to quarter based on the effective dates of the underlying insurance contracts net.
Net income for the second quarter of 2021 was $2.1 million or four cents diluted earnings per share when.
When excluding intangible asset amortization noncash stock compensation noncash unrealized losses on embedded derivatives and nonrecurring other expenses adjusted net income for the second quarter of 2021 was $4.3 million compared to $4.8 million in the prior year period.
Adjusted diluted earnings per share for the second quarter was eight.
Our ROE for the second quarter was 2%, while adjusted ROE was four 2%.
Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity was eight 6%.
During the second quarter of 2021, the company determined that a tons held agreements with its reinsurers contain embedded derivatives relating to a total return swap on the underlying investments as a result, the company will now report gains and losses on the embedded derivatives along with related investment earnings.
In operations.
While the correction was not material to previously reported condensed consolidated and condensed combined financial statements for prior period amounts, where we have been restated for comparability.
In an effort to provide additional visibility. We are also providing our full year outlook for 2021 for gross written premiums to be between $605 million and $615 million, which implies year over year growth of 25% on the low end.
And 27% on the high end.
We are very pleased with our growth trajectory in first half 2021 performance and remain well positioned for long term sustainable and profitable growth.
With that I. Thank you for your time and we'll now open the call for Q&A operator.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Okay.
Okay.
Okay.
Right.
Yeah.
And our first question today will come from David Martin Martin Maiden with Evercore ISI. Please go ahead.
Yes.
Hi, good afternoon.
I had a question.
Just on the loss ratio.
I was hoping to get some of the components. There if there was any favorable or unfavorable prior year development.
And then hoping you could provide a little color around the unusually large losses that you incurred in the quarter.
Yes, I'm happy to respond to that.
First so far this year, we have not had any adverse loss development in prior years.
In fact loss development to date has been better than our expectations. So we're very pleased with that we did have a number of large losses.
Goofy losses that I could give you some examples.
And I will end.
And so what we did is we went with a little bit lower or a little bit higher loss ratio pick in and Thats consistent in my comments earlier, I said that we're not going to change our approach to risk management or underwriting and part of that is our conservative reserving philosophy.
And you always like to hope that that particularly large losses, the nonrecurring loss in <unk>.
We've got good reason to hope for that but we also do want to.
Yeah. Two ahead of our hopes as an example of the types of unusual losses that we have we don't insure private automobile liability.
We ensure a small amount of property and its property, that's pretty well diversified.
We had a situation in the quarter were two automobiles collided in the middle of an intersection we didnt ensure either one.
Both companies careened into an adjacent 1 billion alongside the road crashed into the same building.
And the building collapsed.
We ensured the ability.
So you've got a big loss.
We had a tragic situation of the person was driving and truck work truck and went over above.
And if they are ahead at the top of the cab of the truck and killed though.
I mean these are just for large losses there.
Especially in the situation of the second one there are terrible losses.
And those aren't recurring those arent recurring.
Situations and so we're hopeful we're hopeful that <unk>.
As more premiums earn out you don't have those those types of losses in the future and that will be in a position to take down loss reserves in the future.
Got it thanks could you size I guess, how how much.
How big of an impact those had on the envelope on the loss ratio this quarter.
Bob.
Okay.
Yes, I mean, we took.
We raised it about a point if I remember correctly, we will have.
Maybe a point and a half where the loss ratio.
And you know.
Our quarterly range loss ratios over the last six years, when you look from quarter to quarter, our loss ratio by quarter have varied from 131, 32% to as high as 67%. So we went a little bit higher up within the range at this time.
But not a big amount.
Okay.
Got it and I guess you know this is the second quarter in a row, where we've had.
Some some property.
Some property losses.
That have impacted results in.
You guys are already retaining I think a small amount.
Is there any other sort of underwriting actions or any updates to the strategy.
That that you guys are thinking about undertaking too.
Yes kind of prevent this sort of thing from happening again in the future.
Yes.
So.
It's really hard to think of ways to avoid some of these losses I mean gosh, how do you start to cars from shooting each other.
Screening into one building.
So for a lot of these losses and we've gone through we've looked at we've had our underwriter's review of the policies.
See if they thought that the policies were properly underwritten by and large they've come to the conclusion that they were.
But but I will tell you we are taking some actions for our new business in the aggregate we've got a very small retention, but we're looking carefully at that.
What we're doing in some of our more established business spending for example in California, we are.
We are shrinking that book of business a bit.
We are seeking and getting some higher rate levels in that state and this is for workers' compensation.
Got it okay.
That's helpful. Thanks.
And then maybe if I could just ask one one other one just on the expense ratio.
Thanks, a lot for the for the enhanced.
Disclosure.
On the on some of the components of the G&A expenses.
I guess I'm just wondering.
Yes.
Is there a simple rule of thumb that we can think about.
In terms of you know as you guys are increasing Europe.
Retention, how much of an upward impact that should have on.
On the expense ratio.
Just as we think about lower ceding commissions.
That is obviously offset by some scale benefit but just wondering if there is if there's a way you can help us think about that that offset.
Yeah.
Well I think David.
We looked at the enhanced schedule all.
Let me flip to it.
Yeah, we really I mean, it really kind of has all of the pieces here so what we're saying.
Our our direct commission.
As you can see it's been around 19, 20% consistently.
And we check each numbers going back the last couple of years and that's very consistent around that percent. So that hurts. Our gross earned premium is that right.
And then the ceding commission rate.
Again fairly consistent around that 32% 32.
Turning to 233% that's it.
A multiple of our ceded earned premium.
And Dave and kind of build you can kind of.
Calculate that out.
With our changing retention right.
Those are kind of all the pieces that you would need to escalate that G&A.
Yes, David another way of looking at this schedule and the reason why we put it together the way it is to make it crystal clear that the retention percentage Delta is what's driving the decrease in ceding Commission income. If if you were to think that on a on a just on a spending level.
7% to 8% is just kind of in line with where we are from an operating expense percentage of GW P. And then knowing that.
Insurance related expenses kind of go up with our premiums variably and our direct commission and a rate in our direct commission is around 20% and Thats been solid as you can see in the table. It's the retention percentage change that is causing in the table the CD <unk>.
Emission income offset two.
To go up or down depending on growth and premium as well as that ceding Commission. So.
If we were to have flat topline. The ceding commission income is easily calculate able based on our average rates that you can see at the bottom and as that retention percentage keeps edging up then the offset would be coming down.
Yep got it that makes sense and so this relationship should hold going forward. So we can just sort of model that that that's helpful. Okay. Thank you.
Dave There is one kind of complicating factor.
Great.
But I'd just like you.
We've been talking nicorette in this.
Opening comments commented on our unearned premium and.
And in the insurance business as you know as we write new business.
We used to call it the unearned premium penalty of the new business penalty.
It happens is that we pay the agent commissions upfront we have all of these expenses that we get upfront that we have to recognize immediately.
But yes, we don't get to recognize the revenue that offsets those expenses until the premiums earn out.
And that's actually putting a lot of pressure on our expense ratio right now.
And Thats why we say look to our unearned premium because as those premiums earn out we expect to recoup those expenses as well as recoup underwriting income now the issue. We have is that we're growing so much faster than what we expected.
We originally were thinking 15% to 17% growth and here, we are at 25% to 27% growth.
And as a result, those upfront expenses are higher than what we would've originally anticipated I think that's a wonderful thing.
And I hope, we do a good job of explaining that to you and the shareholders.
And then David just one other comment on the schedule, which I think.
Pretty much give us the transparency that everyone wanted to see is the emphasis and we've made that I made this in my remarks as well the G&A operating expenses that are not tied to commissions or exceeding commissions.
In other variable insurance related expense, so the G&A operating expense as a percentage of GW, it's not increasing as everyone.
Thought might be the case in previous quarters, because they didn't understand the dynamic.
Okay.
And our next question will come from Adam Klauber with William Blair. Please go ahead.
Hi, good afternoon.
Last year, you had a combined ratio of 82%.
So sitting here in August I guess, what's your confidence.
At the end of this year, you'll be a couple of points above a couple of points below that.
Within our range.
Yeah.
And that's a tough question.
You know we are as you can see with our comments, we are providing to more guide we're trying to provide some guidance here.
I think we probably should not provide guidance.
About where we expect the combined ratio to be at year end.
But.
I guess in a helpful way I can tell you what would you point to our historical record which is that.
Typically our fourth quarter is our best quarter typically.
And typically that's the quarter, where we're much more comfortable.
<unk> seen reserves, we tend to be more conservative in our reserving practices in the first half of the year.
Then the second half of the yard and do really goes.
Back to that.
Saying that you know.
You only want surprises at birthday parties.
Right. So what's the chance you actually give us any given its premium guidance any guidance on combined ratio going forward.
We're not prepared to do that at this earnings release.
But we are we are trying to be.
Or more open to the idea of giving guidance.
Okay.
That's all I had.
And once again, if he would like to ask a question. Please press Star then one our next question will come from Pablo <unk> with JP Morgan. Please go ahead.
Hi, Thank you.
I hear you I appreciate the conservatism that youre loss reserving, but I guess my question is.
And maybe that you had already answered it somehow but if I look at what you've done the past couple of years.
You have taken down losses through the first half so I guess what changed with your brackets through this year.
If you could just sort of comment on why the change this year versus the past year.
Yeah, I'm not sure that we really have done much in the first half when reserve takedowns.
We've had some in the past.
Writer case Irving.
We really don't.
Do any release of ICR, the first half of the year, but if there is adjustments to case reserves that that would flow through and it could be just that in the past we've had some.
Yeah that has settled at lower amounts than we expected or that we've got more information on in the first quarter, then and they adjusted those case reserves, but we typically have that released IBM harvests tariff in the first half of the year.
Okay, I think thats a helpful distinction. So the features or comment makes sense, Okay and then.
The second question I had is how should we think about margins in your non comp lines that youre growing there so.
I think at the industry level work with small thanks, Charlie outperformed those of airlines and underwriting is it the same for you.
And in our other lines of business.
We have we.
We're keeping we're keeping a strong percentage.
Net retained.
And so our margin is a function of our issuing carrier fee what underwriting risk, we do keep and some of the other opportunities.
The opportunities that that created over our position at <unk>.
Right now, we're probably having operating margins as high if not higher on the other lines.
Compared to our workers' comp, which is one of the reasons why we are.
I actually kind of interested in some of the other lines right now.
Yeah.
Okay that makes sense and then the last for me could.
Could you just give comments on I guess your pricing outlook for Workers' comp I think couple of other companies have sort of said that you.
Maybe we're past bottoming, maybe slightly positive I'm wondering if you're seeing the same thing in.
Just your thoughts on.
Wage inflation that you're seeing that in your book and you see that as a profit of our negative for margins going forward. Thank you.
So we haven't seen any evidence of wage inflation yet.
That would be more likely to come later in the year premiums expire and we do premium audits and that's when that that would more likely to show up.
In some parts of the country, we are not seeing.
The ability to get a lot more rate.
In California, we are we are getting a little bit higher rate level.
It's a part of a deliberate approach on our part we've done some.
Meaningful re underwriting and California based on how that market has changed this past year.
And so we're feeling really good about the progress we're making there.
Got it thanks for your answers.
And this will conclude our question and answer session I would like to turn the conference back over to Andy O'brien for any closing remarks.
Thank you.
In this earnings release, we made a deliberate effort to try and provide some more specificity about our resorts, including some guidance. Our company has changed significantly over the last year or two but I really think for the bedroom I'm really excited about where we're going.
The second quarter and the first happening have been great for us and the reasons are simple first our growth opportunities are better than what we originally anticipated.
We think that the loss ratio, which appears to be within our accepted parameters.
And finally the.
Reorganization efforts that we've talked about the stuff that we've talked about in previous meetings. We think those are already bearing fruit. So we think we're in a great position and we appreciate your support and thank you for your participation on the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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