Q3 2021 Trean Insurance Group Inc Earnings Call

Good day and welcome to the tray on Insurance Group, Inc. Third quarter of 2021 or any call.

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I would now like to turn the call Prince Edson.

Ah I see are please go ahead.

Thank you operator, good afternoon welcome to tree on insurance groups third quarter 2021 earnings call. This afternoon. The company released its financial results for the quarter ended September 30th 2021. The press releases available on the Investor Relations section of the company's website at Www Dot triage Dot com.

Would like to remind everyone that certain statements made in the course of this call or not based on historical information and May constitute forward looking statements. He's 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 are for you to the company's filings made with the SEC for a more detailed.

Discussion of the risks and factors that could cause the 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 as a substitute for the financial information presented in accordance with GAAP reconciliation 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.

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Putting me on the call today are Andrew O'brien, the company's Chief Executive Officer, Julie bearing the company's President and Chief operating officer, Nick the shallow company's chief financial officer with that I am now going to turn the call over to Andy.

Thank you and welcome to our third quarter of 2021 earnings call. We appreciate your participation in our call and for your continued support and confidence in Korea.

A very solid third quarter, as we generated and 83% combined ratio as.

As well as 34% growth year over year and grocery and premiums.

Net earned premiums for 87% higher than that other than premiums now stand at $85 million at the end of the third quarter up 69% from the edge.

2020.

As a reminder of these under the premiums will eventually converted to earn premiums and tie and assuming our loss ratios and other operating expenses remained stable.

Significant net unarmed premium represents bird potential profit to be recognized reception quick quarters. As these net premiums are.

We indicated last quarter that we had a number of unusual large losses in the first half of 2021.

We are pleased to note that there were no the large losses in the third quarter.

We are optimistic that this normalization trend will continue.

Carter.

During the third quarter loss development and create 2021 years continued to be favorable.

We have achieved our growth and results by executing artist underwriting risks Sherry collateral management and reserving practices.

A R loss estimates, we always have to be prudent as we never want to misjudge the profitability or programs.

We are pleased with the risk Bacup and performance of the programs. We've added since our IPO during the quarter after completing our due diligence process.

Two new programs for our roster. We expect these two programs to begin producing revenue for us in the first quarter of 2022.

The deep pipeline and new opportunities, but we will continue to remain disciplined and only add where there is a clear opportunity to achieve positive risk adjusted returns.

We're confident in our overall approach to growth and a longer term strategy, giving their successful record spanning decades.

By growing both organically prudently, adding new partners 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.

I remain proud of our entire teams hard work and dedication. We appreciate all of their effort to remain very excited for our future with that I will now turn the call over to Julie will discuss our underwriting revenue details.

Thank you Andy and good afternoon to everyone on the call, let's go right into our third quarter results.

And the third quarter, our team Grand grocery and premiums by 34% to a record 178 million. This is driven by both organic growth.

Program partner business and the addition of new program partner.

Last year.

Notably the growth came predominantly from our other liability.

How commercial auto and homeowner's lines.

As we continue to balance our portfolio to minimize risks and emphasized lines of business that we believe will offer the most attractive returned.

We would note that gross written premium growth.

Necessarily accelerate in the fourth quarter at 2020, and as a result, beginning in the fourth quarter of 2021, our growth costs will be calculated against the higher revenue base.

We remain well positioned onboard additional program partner and generate sustainable growth written premiums growth over the long term.

Preference premium for 149 million for the third quarter of 2021 up 36% compared to the same prior year period, driven by the continued increases in growth certain premium net of an increase in growth iron premium.

As a reminder, as we continue to grow our growth rate in premium there's a lag in the growth of our premium at these premiums are recognized over the term of written policies.

Bet on premiums for the quarter were $52 million and 87% increase on the same prior year period, driven by both the growth and growth earned premiums and a strategic increase in our retention rate.

As we noted in our second quarter call as we continue to grow grow certain premium we expect to see increases in growth unearned premium.

The growth and growth on our premium is a strong positive metric for our business and it represents each and that earned premiums over time as these policies earn out.

As of September 30th 2021, we have.

Premiums reflected on our balance sheet nearly 85 million.

Seven $3 million compared to Q2, 2021, and an increase of nearly $35 million compared to ear and 2020.

I'll note I will now turn the call over to net.

Alright, and other financial results for the quarter.

Thank you Julie.

A loss ratio for the third quarter of 2021 was 61.8% compared to 55.9% in the same prior year period.

As a reminder of the first half of 2021 was marked by a number of large and unusual losses, resulting in a higher 2021 accident year loss ratio than experienced in 2020.

While we experienced no such losses in the third quarter of 2021, we anticipate that the 2021 accident yield loss ratio will be higher compared to previous years and thus we do not expect 2021 calendar year loss ratio to decrease through the end of the year.

Our expense ratio for the third quarter of 2021 was 26.5% compared to 25.1% in the same prior year quarter and 31.8% in the second quarter of 2021.

G&A expense was $13.8 million in the third quarter of 2021 compared to $7 million in the same prior year quarter.

The increase was driven by an increase in direct commission and insurance related expenses, resulting primarily from the growth in gross premiums offset by increased seating commissions, resulting from higher seeded earned premiums.

In addition, the company incurred increase salaries and benefits, resulting primarily from an expanded workforce.

Our G&A operating expense as a percentage of gross written premiums was 7% a 90 basis point improvement year over year as we continue to remain disciplined on our opex spending in relation to a gross written premiums.

We expect to continue investing entry on to drive sustainable growth.

All in our combined ratio for the third quarter of 2021 was 88.3% compared to 81% in the same prior year period and 93.8% in the second quarter of 2021.

Underwriting income for the third quarter was 6 million up from $5.3 million in the same prior year period, and doubling underwriting income from the second quarter of 2021.

Net investment income for the third quarter of 2021 was $2.2 million compared to $2.4 million the same prior year period.

We've added a supplemental table to our earnings release this quarter that breaks out net investment income bias components. The table shows that the income on funds held investment component of net investment income is completely offset by a related components in the gains and losses, an embedded derivative line.

An item in our P&L.

So excluding income on fund tailed investments are third quarter net investment income was $1.6 million compared to net investment income of $1.9 million and the same prior year quarter.

The majority of our investment portfolio was comprised of fixed maturity securities of 425 $6 million in at September 30th 2021, We also had $134.8 million of cash and cash equivalents and our investment portfolio had an average rating of double eight at the end of the quarter.

Other revenue, which consists primarily of brokerage in third party administrative fees was $2.8 million for the quarter compared to $5.4 million in the same prior year quarter.

This was driven by a reduction in brokerage revenue of 2.4 million.

Due to a 2.2 million increase an estimated premiums and the timing of effective dates for brokerage contracts recognized in the third quarter of 2020.

As a reminder, other revenue and brokerage fees can vary significantly from quarter to quarter based on the effective date of those underlying insurance contracts.

Net income for the third quarter of 2021 was six $5 million or 13.

Diluted earnings per share when excluding intangible asset amortization non-cash stock compensation the changes in the value of our embedded derivatives and non-recurring other expenses and losses adjusted net income for the third quarter of 2021 was seven $7 million compared to 10.5 million.

And the same prior year period.

Just the diluted earnings per share for the third quarter of 2021 was 15 cents.

For the third quarter was six 2%, while adjusted row was seven 3% adjusted return on tangible equity R. O T E, which is computed is annualized adjusted net income over average tangible equity was 15% for the quarter.

Even though a strong results we are raising our full year outlook for 2021 for gross written premiums to be between $610 million and 620 million compared to our previous outlook of between $605 million and $615 million.

Our new outlook represents year over year growth of 26% on the low end and 28% on the high end.

We are also providing the following outlook for the full year of 2021.

Net earned premium to be between $190 million and 195 million.

Total revenue to be between $207 million and 212 million.

Expense ratio to be between 29% and 31% of net Eric premium.

And the company does not expect the 2021 calendar year loss ratio to decrease through the end of the year.

We are pleased with our third quarter results and appreciate you. Thank you for your time this afternoon and with that we will now open up the call for Q&A operator.

We will now begin the question and answer session.

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This time, we will pause momentarily to assembler author.

Our first question comes from pop Pablo <unk>.

With J P. Morgan. Please go ahead.

Hi, Thank you.

Andy you had mentioned some favorable prior development in the third quarter can you quantify how much it was.

[noise] Hello.

Could you repeat that question please purple.

Yes, I think in the press release and in your comments there was a reference there.

Fever, both development and I presume there was a printed this quarter.

I was hoping you could quantify that weather dollar terms or a percentage off network premiums.

We recognize that 8000.

In the quarter, a favorable development, so that will come out to about 1.2 for the year $1.2 million for the year.

Year to date.

Okay.

And then.

My second question is for <unk>. So your comment about the calendar year loss ratio not declining in 2021.

Does that imply no fear bill prior to develop in the fourth quarter. I think historically you you you tend to take down reserves by a meaningful amounts in the fourth quarter of the past few years.

Should we take your comment to me that you won't see the same thing this year.

I think Pablo it's safe to say that the comment we made was indicative of why we put it in there.

We said we are not expecting too.

To decrease our loss reserved for calendar year 2021.

Compared to where we are at this moment that is that is that is what we said.

Okay. Thank you.

Again, if you would like to ask a question. Please press star one.

Our next question comes from David.

<unk> with Evercore. Please go ahead.

Hi, Thanks, Good afternoon, I had a follow up just on that last point and maybe you could just walk me through cause I know in the past you guys have had fairly sizeable reserve releases in the fourth quarter.

Maybe you could just talk about some of the trends and what you are seeing specifically on the worker's comp book.

And what causes you to be so conservative or to not release reserves. This year.

Hi, David.

I can answer that.

Certainly the large losses in the first half elevated our loss ratio for the year.

We are optimistic that this would normalize overtime and in fact that happened in the third quarter.

Where we do not have any large losses and were encouraged by what we've seen so far.

Since the third quarter.

On the other hand, one quarter doesn't make a trend.

So we really need some more time before we can be comfortable about reserve releases.

We're very encouraged with you overall trends.

We're encouraged with our prior year favorable development and we're also encouraged with all the large losses are resolving.

Got it.

Okay, and then maybe.

Just on the the two new programs that you you mentioned you added Andy that are going to start on boarding in the first quarter of 22.

Would you just give us a sense for how big of a of a premium opportunity those are.

They're both were anticipated that both will be modest for 2022.

What one is.

An accident health program.

Which has got very ambitious goals.

But generally that those those types of programs start slowly introducing into the second year that you really begin to see the premium.

So we think both of those will be fairly modest.

I would guesstimate next year together, maybe $15 million.

Got it. Thank you and are those I guess, what what <unk> what are those workers compensation programs are those in some of these other lines.

Other lines, one is accident health and the other is almost.

Call it up employment.

Salary reimbursement type program.

So really a benefit.

Unemployed type benefit and typically these things will start out.

They build monthly and so we're not really expecting the full impact of either of these programs to be felt until 2023.

Would start.

Producing premium for us in 2002.

2022 in fact, one already has a little bit of premium this year, but.

We really expect the full impact to be 2022, okay.

2023.

Got it.

I'll I'll I'll <unk> I'll stop there. Thank you.

This concludes the question and answer session I would like to turn the conference back over to Andy O'brien for closing remarks.

Thank you.

During this third quarter or 83% combined ratio substantially outperformed the industry.

We've stuck to our disciplined process in philosophy, and adding and managing programs.

We're building all of our new infrastructure to support future growth.

I'm in within budget.

We're excited and optimistic about our future and we thank you for your support.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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