Q2 2022 Trean Insurance Group Inc Earnings Call

Greetings and welcome to the Cherry on Insurance Group, Inc. Second quarter 2022.

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Thank you operator, good afternoon, and welcome Trey on insurance group's second quarter 2022 earnings call. This afternoon. The company released its financial results for the second quarter ended June 30th 2020 to the press release is available on the Investor Relations section of the company's website at Www Dot Trey 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 I refer you to the company's filings.

Made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.

<unk> 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 financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot SEC Dot Gov. Joining me on the call today are Julie Darrin, the company's Chief Executive Officer, and Nick the seller of the Companys Chief Financial Officer with that I am now going to turn the call over to <unk>.

Julie.

Thank you Garrett and welcome to our second quarter 2022 earnings call. We appreciate your participation on our call and for your continued support and confidence in Korea.

Our strategy to focus on underwriting discipline and profitability is paying off as we delivered solid second quarter results.

We're pleased to have produced double digit adjusted net income growth and adjusted return on tangible equity reporting second quarter. Adjusted net income of $5 5 million or <unk> 11 per diluted share.

11, 1% adjusted return on tangible equity both exceeding our initial expectations.

While our gross written premiums are being impacted by the competitive and macro environment. We believe our strategic plan position us well to drive sustainable adjusted net income growth over the long term as we continue to emphasize efficient claims management and underwriting discipline and strong partnerships with disciplined program selection to that Ed.

And we are pleased to announce a new exclusive distribution partnership with <unk> capital.

<unk> partners of America last week.

While this program will gradually come online in the months ahead. We are excited by this opportunity. It marked our entrance into the vast and growing not admitted insurance market to excess and surplus surplus product offerings, which will unlock significant long term profit potential for the company.

In the second half of the year, we will continue to focus on the fundamentals that have brought US success. Our disciplined 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 business or improve efficiencies and enhance shareholder value. We will act accordingly.

We remain well positioned to succeed over the long term.

With that I'll now turn the call over to Nick who will discuss our financial results.

Thank you Julie.

In the second quarter of 2022, we generated gross written premiums of $154 million compared to $157 million in the prior year period.

Slight year over year reduction was primarily attributable to the company's continued focus on maintaining underwriting discipline and an unusually competitive environment and a more gradual increase of current year premiums from New program partners added in 2021 and 2022 than originally estimated.

Gross unearned premiums decreased $3 million in the second quarter of 2022 as of June 32022, net unearned premiums represented $104 5 million on our balance sheet, an increase of $2 7 million or 3% from March 31 2022.

And up $31 1 million or 42% from June 32021.

As we've consistently noted net unearned premiums represents a material source of deferred potential profit.

Net earned premiums for the second quarter was 66 million a 38% increase from the same prior year period, primarily driven by both the growth in gross earned premium and the strategic increase in our retention of gross written premium.

Our loss ratio for the second quarter of 2022 was 61, 9% compared to 62% in the same prior year period prior period favorable loss development for the second quarter 2022 totaled <unk>.

$4 million.

General and administrative expenses were $21 7 million in the second quarter of 2022 compared to $15 3 million in the same prior year period. This was primarily driven.

By an increase in direct commissions due to our gross earned premium growth over the past year and a reduction of ceding commissions as a result of our increased retention.

Our expense ratio for the second quarter of 2022 was 32, 8% compared to 31, 8% in the same prior year quarter.

Our combined ratio for the second quarter of 2022 was 94, 7% compared to 93, 8% in the same prior year period.

Underwriting income for the second quarter was $3 4 million, a 17% increase compared to underwriting income of $3 million in the same prior year period.

Net investment loss for the second quarter of 2022 was <unk> 4 million compared to net investment income of $2 1 million in the same prior year period.

The net investment loss in the quarter was the result of unrealized losses recorded on equity security holdings of $3 4 million.

Excluding these unrealized losses related to equity security holdings and income on funds held investments our second quarter net investment income was $1 8 million compared to $1 6 million in the same prior year quarter.

Our investment portfolio totaled $497 5 million at June 32022, and was comprised primarily of fixed maturity securities that were classified as available for sale. We also had $100 7 million of cash and cash equivalents on our balance sheet at June 32022.

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 $1 8 million for the quarter compared to $1 2 million in the same prior year quarter.

Due primarily to an increase in brokerage fees and as a reminder, other revenue and brokerage fees can vary significantly from quarter to quarter based on the effective dates of underlying insurance contracts and their renewals.

Yeah.

Net income for the second quarter of 2022 was $5 5 million or <unk> 11 per diluted share compared to $2 1 million or <unk> <unk> per diluted share in the same prior year period.

Adjusted net income for the second quarter of 2022 was also a $5 5 million compared to $4 3 million in the same prior year period adjusted.

Diluted earnings per share for the second quarter of 2022 was <unk> 11 compared to eight <unk> in the same prior year period.

Return on equity for the second quarter was five 3% and adjusted return on equity was five 4% adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity was 11, 1%.

We are providing a third quarter outlook and updating our full year outlook for 2022 from the metrics we provided on our prior call.

For the full year of 2022, we expect the following.

Gross written premium is now expected to be between $615 million and $630 million.

The new outlook represents a year over year reduction of 3% on the low end and 1% on the high end and reflects the company's continued focus on underwriting discipline and an unusually competitive environment and a more gradual increase of current year premium for new program partners added in 2021 and two.

2022 than originally estimated.

Net earned premiums are still expected to be between $255 million and $265 million. This represents a year over year growth of 28% on the low end and 33% on the highest.

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

Total revenue is still expected to be between $268 million and $278 million.

And expense ratio is still expected to be between 32% and 33% of net earned premium expense ratio reflects the a permission expected 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.

More short tail lines of business, which typically have lower front fees.

Expense ratio also reflects expected continued operational investments in the company.

The company expects that its loss ratio in the second half of 2022, it will be consistent with its loss ratio in the first half of 2022 barring any large unusual loss activity.

For the third quarter 2022, we expect gross written premiums to be between $150 million and $160 million in.

And adjusted net income to be between $4 3 million and $5 3 million.

The company reminds investors that its outlook is forward looking information and this is based on management's assumptions and expectations as of the date of this release and 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.

<unk> are beyond the company's immediate control.

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

Thank you Tom.

Ladies and gentlemen at this time, we will be conducting a question and answer session.

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The first question is from Pablo <unk> from Jpmorgan.

Hi, good afternoon.

I wanted to ask about your outlook for the loss ratio in the second half of this year.

I think they're saying, it's going to be consistent with the first half are you signaling that you don't expect any major Richard releases in the second half this year.

That's correct Pablo.

Okay.

Yeah.

And then a second question.

Wondering if you could speak to the increased competition you're seeing.

Is that are you referring to competition in California are you talking about.

Their product line or a new geography there.

Pablo This is Andy O'brien.

So.

Really a lot of aggressive competition price competition.

During the second quarter.

Certainly in California that is the case, we have significantly shrunk, our California business in response to their competition.

So began to see some of it in the southeastern part of the United States.

Competition seems to be.

Centered on larger accounts.

And we've just seen some.

Very unusually aggressive actions in those areas and then we've decided we're not going to cut our rates to a level that we think is less than what is necessary to carry the losses and expenses.

Got it.

And then the last one for me I was hoping you could speak to the expected trajectory of the net investment income.

Just given your growth trajectory as well as what youre doing with the portfolio I'm not sure if youre repositioning into higher yielding assets given the environment. Thank you.

No Pablo we're not.

Yes.

You are asking about our net earned premium as compared to the change in the gross written premiums.

No I was asking I was asking about.

The net investment income sorry, it wasn't so clear so yeah.

Yeah, just given sort of the growth in the premium base plus the interest rate environment. If you could sort of speak to your expectations for how that will develop over time. Thanks.

So Pablo this is Nick the net investment income as we explained in Q1.

Invested for the first time at the end of Q1 and into Q2 into equity securities to the tune of 7% of our portfolio.

In order to achieve higher yields on a quarter to quarter basis, which we are currently achieving in that regard.

In the release, if you look at the components of our net investment income in the back behind the actual release Youll see that the yields on all of the components fixed maturities equity securities are all increased over 21, both for the quarter and for the year to date. However, we did have because of the mark.

<unk> conditions and interest rates rising we did have a significant charge this quarter for unrealized holdings of those equity securities that we believe are temporary just because of the interest rate situation and of course as GAAP rec.

GAAP.

Mandates, we have to take those changes through the P&L. So we had a hit for about $3 $4 million. This quarter, we expect that to kind of depending on the macro environment that to stay around that amount.

Might fluctuate minimally over the next couple of quarters, unless something substantially happens again, we're right, but we took the hit.

In this quarter for that but the yields are coming in exactly the way we had hoped them to come in with our revised strategy of portfolio mix. This first half of 2022.

Got it thank you for your answers.

Thank you ladies and gentlemen.

As a reminder, if you would like to ask a question.

And then one no.

The next question we have is important.

I'm wondering is from Evercore ISI.

Hi, Good afternoon, just a quick question.

Did you guys experience any large losses in <unk> 'twenty two.

No we haven't actually.

Now its first any large losses in the first half of the year.

Great. Thanks.

Are you continuing to grow in NIH commercial auto and commercial lines as well.

Okay. So the competitive environment doesn't extend to those lines of business that comment.

We don't think so.

Have expanded outside.

Of the workers' comp area over the course of the last number of months. We've added I think four new programs in the accident and health area.

I will say that those programs.

I have not yet reached their premium projection.

Right.

So there's a little bit behind there.

This is lower margin businesses.

Yes short tail business, we think it's a good space.

Place to be competitive.

Competitive market.

Okay. Thank you.

And maybe just one last one.

Yes.

You mentioned a gradual increase.

Premiums from New program partners in your press release is that due to the competitive environment that you mentioned earlier or is that something on the production side.

That's just the <unk>.

Normal way.

This new program that we are speaking about with beat it.

Starting from scratch kind of a start up so it's going to take time for that premium to be written and then to be earned out impact our financials.

Got it Thats, just kind of the normal process.

Thanks.

Yeah.

Thank you.

Ladies and gentlemen.

At the end of our question and answer session I would like to turn the call back to Judy Burns for closing remarks. Please go ahead.

Great. Thank you operator, I'd just like to say, we bill we had a solid quarter and have worked to position ourselves for a consistent feature profit and we thank you for your support and training.

Thank you ladies.

Ladies and gentlemen that then concludes today's conference. Thank you for joining US you may now disconnect your lines.