Q1 2022 Trean Insurance Group Inc Earnings Call

Greetings and welcome to the tree on Insurance Group, Inc. First quarter 2022 earnings call at.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

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Please note that this conference is being recorded I will now turn the conference over to your host Garrett Edson you may begin.

Thank you operator, good afternoon, welcome Trianda insurance group's first quarter 2022 earnings call.

The company released financial results for the first quarter ended March 31, 2022 press release is available on the Investor Relations section of the company's website at Www Dot tree on Dot com.

I'd 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.

For you to the company's filings made with the SEC for 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.

Certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended.

Centered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Reconciliations of these non-GAAP financial measures the most comparable measures prepared.

In accordance with GAAP can be accessed your filings with the SEC at Www Dot.

Yes.

Joining me on the call today are Andrew O'brien, the company's Chief Executive Officer, Julie Darrin, the company's President and Chief operating Officer, Nick Vassallo, The Companys Chief Financial Officer with that I have now been to turn the call over to Ed.

Thank you Gary and welcome to our first quarter 2022 earnings call. We appreciate your participation on our call and for your continued support and confidence in <unk>.

We were pleased with our first quarter performance as we posted a combined ratio of 89, 6% and reported adjusted net income of $8 3 million or.

Or <unk> 16 per diluted share, which represents a 16, 2% adjusted return on tangible equity.

But our fourth quarter earnings call, we forecast today first quarter 2022 loss ratio between 61, five and 62, 5% of net earned premium.

We reported a 61, 1% loss ratio for the quarter.

We did not experience adverse loss development across our lines of business during the first quarter.

Events during the first quarter supported our belief that the unexpected number of large losses in 2021.

Non recurring exception to our historical and expected loss results.

As we forge ahead, we remain focused on our strategic plan emphasizing strong partnerships.

Upon program selection and management.

Patient effective claims management.

On a personal note as this is my final earnings call before I move into the executive Chairman role I want to thank our partners, our investors and especially the entire <unk> team for their support and dedication over the years. We've built an excellent consistently profitable business that is positioned to succeed.

For the long term and I am excited to remain involved at the board level and helping triage further and sustainably grow its top and bottom line.

With that let me turn the call over to our incoming CEO Julie Barrett Julie.

Thank you Andy and it's been an absolute pleasure working closely with you over the last 15 years and the triage team are excited to lead <unk> into our next chapter and I look forward to working with you in your new board role.

Looking forward, we will continue to focus on the fundamentals that have brought us success.

Glenn program partner selection, our prudent financial management and being the people people want to do business with.

And when there are opportunities to expand our product improve efficiencies and enhance shareholder value. We will act accordingly.

In the first quarter of 2022, our team grew gross written premiums by 10% to $161 million.

The increase was attributable to growth in our existing program partner business, primarily in the accident and health commercial auto and commercial lines as a result.

Our line of business diversification.

Gross unearned premiums increased $2 9 million in the first quarter of 2022.

As of March 31, 2022, net unearned premiums represented $101 8 million on our balance sheet, an increase of $11 3 million or 13% from December 31, 2021, and up $35 7 million or 54% from March 31 2021.

As we've consistently noted that unearned premiums represent a material source of the FERC potential profit.

Net earned premiums for the first quarter was $64 2 million or 56% increase from the same prior year period, driven by both the growth in gross premiums and a strategic increase in our retention of gross written premium.

I'll now turn the call over to Nick who will discuss our expenses and other financial results.

Thank you Julie.

As Andy noted our loss ratio for the first quarter of 2022 was 61, 1% and we are pleased to have slightly exceeded the expectation of $61 $5 62, 5% that we provided on our last call.

Prior period favorable loss development from the first quarter of 2022 totaled <unk> 4 million.

General and administrative expenses was $18 3 million in the first quarter of 2022 compared to $11 9 million in the same prior year period. This was driven by an increase in direct commission and insurance related expenses due to our premium growth and.

And a reduction of ceding commissions as a result of our increased retention.

Our expense ratio for the first quarter of 2022 was 28, 5% compared to 28, 9% in the same prior year quarter.

Combined ratio for the first quarter of 2022 was 89, 6% compared to 89, 4% in the same prior year period and 103% in the fourth quarter of 2021.

Underwriting income for the first quarter was $6 7 million, a 53% increase compared to underwriting income of $4 4 million in the same prior year period.

Net investment income for the first quarter of 2022 was $2 6 million compared to $2 3 million in the same prior year period excluding.

Excluding income on funds held investments our first quarter net investment income was $1 9 million compared to $1 6 million in the same prior year quarter.

Our investment portfolio totaled $481 5 million at March 31, 2022, and was comprised primarily of fixed maturity securities that were classified as available for sale.

We also had $103 $9 million of cash and cash equivalents on our balance sheet at March 31 2022.

Our investment portfolio had 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 $3 2 million for the quarter compared to $4 7 million in the same prior year quarter due primarily to a reduction in brokerage fees. As a reminder, other revenue and brokerage fees can vary significantly from quarter to quarter based on the effective dates of the <unk>.

Allying insurance contracts.

Net income for the first quarter of 2022 was $12 3 million or <unk> <unk> per diluted share compared to $9 4 million or <unk> 18 per diluted share in the same prior year period adjusted.

Adjusted net income for the first quarter was $8 3 million compared to $8 1 million from the same prior year period.

Diluted earnings per share for the first quarter of 2022 was 16 cents per share.

Our ROE for the first quarter was 11, 8% and adjusted ROE was seven 9%.

Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity was 16, 2%.

We are providing our second quarter outlook and updating our full year outlook for 2022 from the metrics, we provided on our fourth quarter call.

For the full year 2022, we expect the following gross written premiums are still expected to be between $655 million and $670 million.

We've raised our net earned premium expectations to be between $255 million and $265 million compared to our prior expectations of between $240 million and $250 million.

This represents a year over year growth of 28% on the low end and 33% on the high end.

Net earned premium outlook reflects expected increased retention rate throughout 2022 based on current contracts in force.

We've also raised our total revenue expectations to be between $268 million and $278 million compared to our prior expectations of between $253 million and $263 million.

Expense ratio is still expected to be between 32 and 33% of net earned premium expense ratio reflects the aforementioned expected increase in retention, which would reduce the company's ceding commission expense offset to G&A expenses.

As well as reductions in ceding commissions, resulting from adding more short tail lines of business, which typically have lower front seats.

Hence ratio also reflects expected continued operational investments in the company throughout the rest of 2022.

For the second quarter 2022, we expect gross written premiums to be between $158 million and $163 million and adjusted net income to be between $4 3 million and $5 3 million.

The company reminds investors that its outlook as forward looking information is based on management's assumptions and expectations as of the date of this release and it is inherently subject to a number of risks and uncertainties, including as to the company's level of losses and loss development many of which are beyond the company's immediate.

Control.

We appreciate and thank you for your time this afternoon with that we'll now open up the call Q&A operator.

At this time, we'll be conducting a question and answer session.

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One moment, please while we poll for questions.

Our first question is from Pablo <unk> with Jpmorgan. Please proceed with your question.

Hi, Thank you so just on the loss ratio this quarter I think.

You guys noted a small amount of favorable QAD. So if you add that back it's about 61 seven.

The question My question is.

And I assume thats, mostly a loss pick right just getting rid of yard the year.

So hoping for some context on how the loss pick compares to what you've done over the past couple of years, even if it's not you know the.

The specific number but directionally has that been going up or going down I guess.

Follow up question to that is.

I was hoping you could speak to what youre seeing in terms of.

Pricing in workers' comp and loss trends.

Yeah.

Covid was the benefit the loss trends I was wondering if you know you are still seeing that as well.

Things continue to go back to normal.

Sure. Thanks for your question this is Andy O'brien.

Let me start with the pricing, we have not yet seen any significant improvement in pricing.

Most of the country, where we are underwriting workers' compensation business.

In California, we've been successful in achieving roughly a 7% rate increase so far this year.

But that is not our sense of where the market is growing overall, we have seen a lot of rate cut in California, and Thats, just not something that we're going to follow through on it.

In terms of our losses.

I would say that our first quarter loss ratio was better than what we had expected when we gave guidance.

I guess, a month or two ago.

We did not see any of the kind of large losses that doubled us in the first quarter last year.

We've been pleased with our existing claims have been settling out.

And I would say this first quarter really reminds me of our historic first quarters.

You had asked for some reference to how things looked in the past this quarter remind you reminded me very much.

Most of our years prior to 2021, so we're quite pleased with it.

Got it.

And then my second question.

I was wondering if you are seeing any benefit from wage inflation and.

To what extent does that flow into margins as opposed to being upset in the in the benefit ratio for example, thank you.

We haven't seen any significant impact.

Hope of inflation on claims settlements.

Yes.

We are we are getting higher rates of return right now based on the increase in interest rates on new cash that's coming in so that's a very encouraging sign for us.

But from the Big picture I would say that so far inflation hasn't been a material.

A material factor for us.

And it hasn't helped the payrolls your car.

Charging opinions against handy or.

It's too early to know yet.

It's too early to know yet.

There's going to be a dumping it.

It uptick.

Payroll is from inflation, we typically would capture that at the end of the policy period, when we do premium audits.

And really.

The news that we're hearing about.

Higher payroll is really started a few months ago, we started to hear that consistently in the press and Thats just too early to see it starting to hit.

Our.

Get our revenues.

Okay. Thank you.

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Our next question is from David <unk> with Evercore ISI. Please proceed with your question.

Hi, Thanks, good afternoon.

First before I ask my question to Andy just wanted to say good luck and in your next chapter it's been great working with you.

On I guess, just a question just more on the loss ratio. When you say it exceeded expectations was there anything one off in the quarter that was a that was a favorable.

Outside of the favorable prior period development.

Or are you really just referring to.

Something else isn't.

Just lower large losses that you saw during 2021 or no large losses that you saw during 2021.

Thanks for your kind comments.

At the start David Thank you.

We.

We talked last last quarter, when we gave them a full review of 2020, when we talked about the three programs that.

Really shown a sharp uptick in the loss ratio in 2021, and we stated our belief that we thought that that was a one off thing that it wasn't going to be something that would continue.

And we're really gratified to report today is that all three of those programs showed a decided improvement.

And of course in the first quarter.

They're they're reported loss ratios.

For the first quarter were dramatically lower than what they experienced in 2021 and very consistent with what our expectations were so that.

Because those programs are important to us that was certainly a big factor.

The loss ratio being just a tad better than what we had expected.

Yeah.

Got it Okay. That's that's helpful and then maybe just.

On the on the outlook items are the updated outlook items on the increased retention.

You know that's obviously gone up since you last gave US three months ago could you just talk a little bit about.

You know what what made you decide to increase the retention what Gabe what gives you what gives you comfort.

To increase retention are those on I'm, assuming those are on existing programs that you have had relationships with for.

At least five years, but could you just give some some background and just some color on.

Some of the characteristics of those of those books, where you're increasing the retention.

David a lot of the retention.

We've put up 40% retention this quarter.

Drives itself from previous arrangement that we had prior to even moving into this year.

We knew that we were going to be increasing guidance last year as we spill into 2022, and we believe it's going to continue to be and where it is.

Until things until contracts come up until we have the opportunity to take a different stance on either new business in the future for retention purposes, or all ones that are renewing and deciding at that time, what we want to do with that with that renewal.

That is our feel on where we are expecting retention to be throughout 2022.

Did I answer your question.

Yeah, I guess, so so you guys knew about.

You, obviously knew which books you wanted to increase the retention on.

I guess did it just happen faster and that's why we're increasing the net earned premium outlook versus the beginning of the year.

So when we gave the original guidance, we certainly had a little bit more uncertainty about how much premium these programs would be writing here, you're absolutely correct in that.

The reinsurance decisions had been made.

About what we're gonna be retaining.

Early last year and so now we're looking at how.

That's going to play out.

I think the best way to answer that is to say, we're just much more comfortable that these programs.

<unk> are going to develop.

In terms of premium in a way that's favorable to us than what we were just two months ago.

And so we thought it would be appropriate to let the market know that.

Got it okay understood and then if I could if I could ask one more just in the revenue outlook.

It appears.

Like it went up.

For the full year it went up.

You know it it looks like mainly just driven by the increase in the earned premium estimate or outlook that you guys have and so I was just wondering and Andy you mentioned this in an earlier in a response to the earlier question.

Sort of what you're assuming for net investment income.

Have you changed your view there.

For the rest of the year.

Well first to answer your question David on the the increase in total revenue stemming from net earned premium that's correct that is exactly the reason why those went up proportionately with our Q1 results and.

Knowing where our retention is most likely going to end up for the year. When you projected out we felt very comfortable raising the net earned premium.

And then Max on the outlook that we gave in March.

To answer your question on the net investment income we are doing a number of things to increase yield on our investment portfolio.

In doing that we also are as you can see in our Q1, we had a realized loss.

Of about $1 million, which equates to the fact that we had to.

Ourselves out of some longer term holdings that were lower yielding investments and get into higher yielding investments. So we had to take we have to take a hit on.

I'm getting out of things that we know what the macro environment that we wanted to get better yield on in the future and that's a.

Tenuous look that would that we started in 2022 that was going to continually look at quarter to quarter, depending on what's going on in our available cash.

So.

Does that answer the question.

Yes. It does yes. Thank you.

We have reached the end of the question and answer session and I will now turn the call over to Andy O'brien for closing remarks.

Thank you we had a solid first quarter and we believe we are well situated for sustained profitability.

Thankful for the support of our partners and tree on team members and we look forward to continuing the path that we're on and we thank you for your interest in our company.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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