Q4 2021 Trean Insurance Group Inc Earnings Call
Greetings and welcome to the tree on insurance group fourth quarter 2021 earnings call. At this time all participants are in a listen only mode. A brief 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.
Now my pleasure to introduce your host Garrett Edson of ICR. Thank you Gerry you may begin.
Thank you operator, good afternoon, and welcome to Triage insurance group's fourth quarter 2021 earnings call.
The company released its financial results for the quarter and full year ended December 31, 2021 press release is available on the Investor Relations section of the company's website at Www Dot trade on Dot com.
Like to remind everyone that certain statements made in the 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 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.
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.
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.
Reconciliations 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 Dot Gov.
Joining me on the pulp there 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 am now going to turn the call over to Andy.
Thank you and welcome to our fourth quarter and full year 2021 earnings call. We appreciate your participation on our call and for your continued support and confidence in Korea.
We posted a 2021 calendar year combined ratio of 93, 3% and reported adjusted net income of $22 1 million, which represents an 11% adjusted return on tangible equity.
Combined ratio was substantially better than the industry into the insurance industry average.
It marks the 25th consecutive year in which Trina has earned a profit.
We also grew our top line above our expectation and enhanced our infrastructure to position ourselves for continued profitable growth.
Before I talk about these positives, let's address our higher than expected loss ratio.
We tried to be as accurate as we can when calculating our loss estimates.
Historically, our ultimate cost have been much lower than our initial projections.
For example in the developed here of 2017, we projected our 2017 claims would cost $35 $6 million, but in hindsight. We now expect those claims to cost $23 4 million.
We've always and continue to believe that favorable surprises or better than your adverse surprises and we use our loss projections in our underwriting strategy.
Two of the Ola loss projection.
Maybe two mistakes that are more costly than two high loss ratio projection.
Earlier in 2021, where you reported on some of the large unusual losses, we experienced in 2021.
We expected that our loss results would average out over the course of the full year and that was the case were made through November .
Unfortunately in December we encourage some new large claims at the end of 2021 large losses push up the reported loss ratio and have a multiplicative impact on the actuarial loss projections as a result, we reported a higher 2021 loss ratio.
Our elevated losses came primarily from three of our 30 program. Ironically until 2021. These programs are well established and had consistently produce positive results up to 2021 and as bad luck with avid we materially increased our retention in each of these programs.
During 2021.
When the losses began to emerge we carefully reviewed the operations of each program to see if there were any changes in rates levels. The.
The claims environment or underwriting practices.
Right of course.
The elevated losses they were experiencing.
Based on that review, we believe that these are good programs that will contribute to our future profitability. Despite the losses, we experienced in 2021.
We are very encourage their prior year's claims for these programs developed favorably during 2021.
We are also encouraged that these three programs have reported positive results through February of this year and as a result, we are expecting our first quarter 2022 loss ratio between 61, 5% and 62, 5% of net earned premium.
We grew gross written premiums 31% during 2021.
We believe that this growth is all the more impressive considering the actions that we took with our California workers comp business, which is our single largest program.
We did this because of several adverse developments, we were seeing within the state, including aggressive rate cutting as well as regulatory action regarding agricultural goods.
And pricing.
As a result of our California workers' compensation premium dropped by roughly 18, 4% in 2021.
Or tomorrow, and you put a seven 3% of our total 2020 gross written premium.
We believe we now have a better rated and more balanced risk pool in California, and our position to re grow our California workers comp business when the risk reward ratio improves.
Our actions in California, underscore two important points regarding our business first.
First we are committed to profitable growth not growth itself and we are prepared to take rapid action to preserve underwriting discipline second. The fact, we grew so rapidly despite shrinking or tell us what are your business demonstrates the strength of our overall business model and the attractive market available too.
Sure.
We believe the insurance program market is large rapidly growing and then we have a leading position within that market.
In addition in 2020 , one we invested significantly in prudently and time and capital to improve our infrastructure.
Claims handling is always going to key focus for us and we are on track to launch a new claims software system.
And to support our continued growth.
Throughout the year, we implemented a variety of I T upgrades to capture efficiencies.
Andrew and analyze our business.
We reorganized our processes to more effectively and quickly onboard new programs.
Finally, we added skilled people throughout the organization to improve our capabilities and further strengthen our bench I am proud that we accomplished this while carefully controlling our expenses.
We wanted to be both the most skilled and lowest cost competitor you know our business area.
We have built a strong and deep bench equipped with the culture tools and practices that can be the foundation for decades of future success.
As such this is an optimal time for me to transition the role of CEO to Julie for her to lead tree on into the future.
Over the past two decades, he has emerged as an exceptional leader for.
Her deep knowledge of the insurance business.
The understanding of the triage secret sauce that drives our company combined with an exceptional management team will position us to build into our success in the future I will remain on transporting as its executive chairman and will continue to stay closely involved with the team's efforts and evaluating and supporting our programs.
With that I will hand, it over to Julie.
Thank you Andy and good afternoon to everyone on the call before discussing our fourth quarter results I want to congratulate Andy on an incredible career and wildly serve retirement from daily operation.
And his leadership and vision for tree on that.
It's definitely grown the company into a national presence and he has paid a clear path forward for myself and our wonderful team I have greatly enjoyed the last 15 years working closely together.
Andy support as executive Chairman, along with our expert management team I am more than 19 to lead triaged into our next chapter of growth.
We are committed to our business model and will continue to focus on the fundamentals that have brought us so much success.
One program partner selection prudent financial management and being the people people want to do business there.
Additionally, we will also continue to look for opportunities to expand our product improve efficiencies and enhance shareholder value.
Now let me take you through some of the heart yourself.
In the fourth quarter, our team came through gross written premiums by 14% to 153 million.
This increase was due in large part to the full year impact of nine program partners that we added last year and ongoing strong performance from existing program partners across the accident and health commercial commercial auto homeowners and other liability lines of business.
Our ability to grow these lines reflect our efforts to diversify our product offering.
However, this work was partially upset by a decline in the California workers compensation business, which as Andy discussed we strategically undertook decreased our exposure there.
Identifying and minimizing risk its an ongoing effort as we focus on businesses that offer a more sustainable and profitable growth.
Gross unearned premiums decreased $2 9 million in the fourth quarter of 2021 and increased $61 9 million for the full year 2021.
As of December 31, 2021, net unearned premiums represented $91 million on our balance sheet, an increase of 6 million or 7% from September 30th 2021, and that's up $41 million or 81% from year end 2020.
As we've consistently noted net unearned premiums represent a material source I conferred potential profit.
Net earned premiums for the quarter was 58 million a 57% increase from the prior year period, driven by both the growth in gross earned premiums and a strategic increase in our retention of gross written premium.
More importantly for the full year 2021, we generated gross written premium of 634 million or 31% increase from 2020 and exceeded our 2021 outlook of 61 $610 million to $620 million.
We also generated net earned premiums of 199 million for the full year, an increase of 83% compared to prior year and grew total revs.
Revenue for 218 billion, both of which also exceeded our expectation.
I'll now turn the call over to Nick who will discuss our expenses and other financial results.
Thank you Julie and I also want to congratulate you on your promotion and Andy on all your accomplishments and your new position as executive chairman of the tree on board.
While we were pleased to have surpassed the expectations that we provided in our third quarter 2021 earnings release for gross written premiums net earned premiums in total revenue.
Losses, Unfortunately impacted our bottom line in the quarter.
Our loss ratio for the fourth quarter of 2021 was 76, 4%.
As Andy mentioned in his remarks, along with a large and unusual losses, we experienced in the first half of 2021, we experienced additional large claims in December of Q4.
As a result full year 2021 loss ratio was 65, 8%.
General and administrative expenses were $13 8 million in the fourth quarter of 2021 compared to $15 2 million. The prior year. The decrease was attributable to accrual true ups recorded in the fourth quarter of 2020 that did not reoccur in the fourth quarter of 2021.
This was partially offset by increased salaries and benefits.
Our growing workforce as well as an increase in net commission and insurance related expenses from the growth in our gross earned premiums.
Our general and administrative operating expense as a percentage of gross written premiums for the fourth quarter was seven 4% roughly in line with the prior year period.
Our expense ratio for the fourth quarter of 2021 was 23, 9% compared to 41, 4% in the prior year quarter and 26, 5% in the third quarter of 2021, the improving expense ratio was driven by the growth in net earned premiums and the non recurrence of accrual true ups.
Included in the fourth quarter of 2020.
For the full year 2021, we recorded an expense ratio of 27, 5% exceeding our expectation of 29% to 31%.
Our combined ratio for the fourth quarter of 2021 was 103% compared to $68 eight in the same prior year period, and 88, 3% in the third quarter of 2021.
Underwriting income for the fourth quarter was a slight loss due to the losses reported in the fourth quarter compared to income of $11 4 million in the prior year period, and 6 million for the third quarter of 2021.
Net investment income for the fourth quarter of 2021 was $2 2 million compared to $2 5 million in the same prior year period, excluding income on funds held investments our fourth.
Quarter net investment income was $1 6 million compared to $1.7 million in the same prior year quarter.
The majority of our investment portfolio was comprised of fixed maturity securities of $471 1 million at December 31, 2021.
We also had $129 6 million of cash and cash equivalents on our balance sheet at December 31 2021.
Our investment portfolio and an average rating of double a at the end of the quarter.
Other revenue, which consists primarily of brokerage and third party administrative fees.
Was $1 6 million for the quarter compared to 800000 in the same prior year quarter, driven by a $700000 increase in brokerage revenue.
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 and their renewables.
Net income for the fourth quarter of 2021 was $1 2 million or <unk> <unk> per diluted share adjusted net income for the fourth quarter of 2021 was $2 million compared to $11 2 million in the same prior year period.
Diluted earnings per share for the fourth quarter of 2021 was four cents per diluted share.
Net income for the full year 2021 was $19 3 million or <unk> 38 cents per diluted share adjusted net income for the full year 2021 was $22 1 million or 43 cents per diluted share.
Our ROE for the fourth quarter was one 2%, while adjusted ROA was one 9%.
Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity was three 9%.
Our ROE for the full year was four 6%, while adjusted ROE was five 3%.
And adjusted return on tangible equity for the full year was 11%.
We are we are providing our initial full year outlook for 2022 for several metrics.
For the full year 2022, we are expecting the following.
Gross written premiums to be between $655 million and $670 million.
The company expects to deliberately moderate gross written premium growth in 2022, and 31% growth in 2021 place the company well on track to achieve its long term gross written premium goals.
It will focus its efforts in 2022 on effectively managing premium to ensure sustained net income growth.
Net earned premium to be between $240 million and $250 million. This.
This represents a year over year growth of 21% on the low end and 26% on the high end.
Net earned premium outlook reflects expected increased retention rate throughout 2022 are based on current contracts enforced.
Total revenue to be between $253 million and $263 million.
Yeah.
Expense ratio to be between 32, and 33% of net earned premium expense ratio reflects the eight four mentioned the.
That increase in retention, which would reduce the company's ceding commission offset to general and administrative expenses as well as additional reductions in ceding commissions, resulting from adding more short tail lines of business, which typically have lower front fees expense.
The expense ratio also reflects expected continued operational investments in the company during 2022.
In terms of our calendar year loss ratio for 2022, we believe absent any unusual activity losses should hopefully begin to normalize during the year.
Because we are mostly through the first quarter, we are providing one time additional color on our quarterly 2022 loss outlook for the first quarter only.
As Andy noted in his remarks, we expect our first quarter 2022 loss ratio barring any material unfavorable activity in the final three weeks of the quarter to be between 61, 5% and 62, 5%.
We appreciate and thank you for your time this afternoon with that we'll now open the call for Q&A operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from David <unk> with Evercore ISI. Please proceed with your question.
David is your line on mute you May proceed with your question.
Sorry about that hi, good afternoon Julie.
Yes.
Just wondering is there any change to how you will operate the company going forward specifically on the strategy I'm wondering if you could talk about the desire to increase retention in light of the losses, you just experienced in 'twenty one.
Just on the outlook you provided for 2022, it looks like you're also expecting your premium retention to tick up.
Again in 2022, but I guess, maybe just wondering why you think that's the right move here.
Given the losses that you experienced in 2021.
Yeah.
You are considering going back to more of a fronting type model.
Hum.
David.
Yeah.
We don't expect to change our strategy at this point I mean honestly we're off anytime.
Now it's time for a contract renewal well see what our options are and you know look for whatever makes the most financial sense at the time and that we think is it didn't live.
Right now we don't have any plans to change anything we felt I think that the programs. When we saw the large law says we did a lot of due diligence digging into the numbers.
Revealing underwriting guidelines looking at the policies that generated these large claims and you know and really work with our partners.
And our underwriters to make sure you know that.
There wasn't something underlying that was causing an issue and we don't believe that there is these are some of our most profitable programs that we've had for.
For the last 510 years.
Yeah, sometimes I mean this is insurance, sometimes you have a bad year and we felt like that was a bad bad year and we're looking forward to this year being a better year.
Got it.
Maybe just on those three programs are are those all workers' comp programs could you talk about how big they are from a premium standpoint.
And maybe just talk maybe you can just give a little bit more.
Elaboration on why you don't think this is a fundamental issue.
Hey, this is Andy O'brien.
Take a crack at that.
These three programs are significant and they are significant programs they.
They represent.
A significant amount of our net premium.
Hum.
As Julie mentioned, we did do a deep dive into each of these programs to see if there was any underlying change in the environment the claims environment the rate levels.
And and.
How people were underwriting.
Programs willingness to look at any changes in underwriting that might be Ah indeed.
Indicated.
And we came to the conclusion and all of these situations to all three of these situations.
If they were essentially good programs and.
That.
As Julie mentioned, sometimes sometimes.
Sometimes.
And the volatility of insurance business, you do get hit and we feel we did get hit Oh, Okay. This year.
Hum.
The increase in net earned premium in 2022 is really reflective of actions that we took in raising retentions in 2021.
Over the course of the last six to nine months since we've been looking at new programs, we have been taking.
We have been taking are retaining <unk>.
Significantly less participations in those programs compared to what Youre seeing in the overall numbers, though.
That's something we plan to be doing.
As new programs come on throughout the year.
Got it okay.
And then maybe just one last one just just on the losses I mean, the environment right now is obviously improving.
From a claims reporting standpoint.
But I don't think things are totally back to normal.
On that on that front, yeah, when I look at some of your peers, specifically workers' comp reported claims they are still well below.
2019 levels. So what what makes you think or what gives you the confidence that the provisions you've set for the 2021 large losses are sufficient.
What makes you think there won't be any additional surprises from additional late reported claims.
Well these.
We're not late reported claims.
So I think there's probably.
And to clarify that.
We haven't had any surprises with with adverse development or claims.
Looking beyond what we originally anticipated what are the reasons, we are comfortable with where these programs are headed.
This is the fact that each of these each of these three programs enjoy favorable loss development.
Their previous years underwriting yeah.
When youre looking at a program that has historically provided.
Yes, historically producing positive results.
And and that has continued to do so in terms of prior year's development.
That's a sign to us that losses and in the current year are not indicative of an overall.
Not indicative of an overall problem.
We take comfort in the fact that our experience as we.
Alluded to earlier for the first two months.
<unk> of this year has been very good.
Correct.
Two of these three programs.
Enjoyed their most favorable reported loss development since we've been working with them.
During 2022, so we hope we're back on track as we expect large losses, we define a large losses the loss over $250000.
At this time last year, we had 11 of them. So far this year, we've only had three so that's another encouraging sign.
Got it. Thank you yeah, just just to clarify on my question I was just wondering about adverse development on 2021 accident year. In 2022 2023, just as those claims you know its obviously workers' comp is an occurrence line. So yeah I'm just wondering if you know we saw.
Sure.
In 2020 in 2021, just yeah, there's more of a lag in terms of when the accidents or when when something actually occurs and when it's actually reported and if that is potentially something that you guys are worried about.
But it sounds like you took the provision you think is necessary.
Yeah and of course, where I guess, we are in the worrying business. So we worry about everything but I guess I'm looking at just the 2021 year.
For example for one of our or our California book of business.
For the two months January and February .
The 2021 losses developed at half the rate that they develop or the 'twenty 2020 19 years, So again, a very favorable sign.
Recognizing that it's just two months, but everything is looking pretty nice after two months.
Got it thank you.
Yeah.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
Yeah.
Our next question comes from Pablo things on with J P. Morgan. Please proceed with your question.
Hi.
Hoping that you could talk about your gross margin guidance for next year, just given that a bit is now clearly 4%, it's much lower than what you've done historically is that just a function of the California workers comp book not growing as much as it's done and I suppose you are growing with their programs, but it seems like the nurse.
From California.
It's just overwhelming and any thoughts on how that growth might evolve beyond 'twenty two.
We we are we are projecting at a slower rate of growth in.
In 2022 compared to 2021.
Yeah, a large part of that Pablo it's just that we grew so much in 2021.
Have the financial capacity to grow 31% per year.
That's much higher than what we expected to grow last year and so we began in the fourth quarter or two you know.
Make sure that we were moderating our our our growth.
So that we could statement so that we didn't get over our skis.
Long term, we we are still anticipating.
We still have as our goal that we want to be a billion dollar company by 2025, and we think we're on track to achieve that.
And.
And that's what capacity are you looking at like the premiums to surplus ratio because youre well below one at this point or is there anything else you're considering.
So we are we look at a variety of different factors.
We.
We don't look so much.
Written premium to surplus, although we do pay attention to that but we pay attention to our risk based capital scores, we pay attention to.
A M best the car scores.
And so we really look at those two issues for those two elements more to assess our leverage ratios and our growth potential than we do our net written to surplus ratio.
Okay.
And then on the expense ratio I was.
Wondering if you could help me just bridge what you did in 'twenty, one and your guidance for 'twenty.
'twenty, one with seven and a half so there'll be new grades in the next this year.
What component is that what component of that change is coming from the lower negative commissions versus I guess other expenses going up as a percentage.
Hey, Pablo it's Nick.
If you remember.
The expense ratio is low this year versus last year because of some true ups. We had in 2020. So comparatively it's it's it's just it just looks lower than last year, but calling from 'twenty to 'twenty one to 2022.
A couple of factors one we're gonna have you know.
As we mentioned in the actual press release, we're expecting you know retention to continue to creep up in 2022 from where it is right now in 2021, mostly due to contracts that are already in place and already have been renewed at retention rates in 2021 that will carry over into 2022 as you know we can.
And really adjust retentions until contracts come up for renewal. So there's a little lead time, there before you can actually effectively change that contract by contract. So that's one of the reasons. In addition, we're also with the expected increase in retention.
That will result in less ceding Commission and as you also know ceding Commission offsets our direct commissions in our G&A line item. So we're expecting less offset in next year due to that retention as well.
And we're also planning to invest continue to invest in.
And in the company in 2022, which.
Which will increase the dollars of G&A over over this year as well, but not but for sure in proportion to our top line as we have been doing for the last couple of years.
Okay and those two components.
Just call it the negative commission right at the hands of net earned premiums and other expenses other expenses as a percentage of net earned premiums is there a way to break that out just the June 27, and a half the 32.
Uh huh.
Wouldn't get that granular in breaking that out at this point, we're just putting the guidance out there to ensure that you know.
Some of the things that we're talking about with respect to retention.
Understood.
<unk>.
For year 2021 quarter to quarter before we were able to before we decided to put out guidance. In 2021 are we constantly had an uphill battle with.
Oh yeah.
With models that are out there versus what we truly felt we were going to achieve internally. That's why we're putting out the guidance right out of the gate this year for 2022.
In addition, as.
You remember Pablo when we.
Put out starting last year that supplemental table of G&A components, we did that so that the street and you know the public can see the dynamics of the components of G&A and as you can see in the release, we put out.
Fourth quarter, you can see the G&A operating expense component of the total G&A expense is still.
Sitting between that seven five to seven to 875% to 8%.
Percentage of our gross written premiums, so where we're not spending any more proportionately than our growth allows us to and we've been saying that every quarter and showing that every quarter for at least the last five five quarters. So.
I don't know if that answers your question, but I just wanted to make sure that was on.
Yeah. Thank you for that and then last one for me I guess, if you can just sort of take a step back right. So.
There's pressure in workers' comp and growing other lions.
It seems like Youre going to run expense ratio there.
Low 30 June 'twenty, two you did give an indication for the loss ratio in the first quarter or so called low sixties.
Yeah.
So moving.
Moving forward.
Is that a trend looked look at 90% combined ratio book is that sort of a decent parameter to think about it.
Going forward for Purion.
Although I think we'd like to.
We'd like to.
Respectfully not uptake.
Take a stab at that yet.
We have a really good idea, we think about where we're gonna be with an expense ratio.
We are providing guidance for that.
We say its a 90 per se business, then we've kind of provided guidance for a loss ratio.
And we still want to do that at this time.
We don't rule out the fact that we might provide more guidance in the future about the loss ratio, but at this point, we'd like to just.
With the numbers that we have shared.
Alright, thank you for that.
Okay.
Thank you there are no further questions at this time I'd like to turn the floor back over to Andy O'brien for any closing comments.
Thank you.
During 2021, we achieved a number of important goals and we believe that we're well positioned for future success.
We are committed to profitable growth.
Weighted to sound underwriting and appropriate expense control.
We remain confident about our plan and prospects and we will continue with our strategies and philosophies.
You're paying your interest and support of trio.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.