Q3 2022 Trean Insurance Group Inc Earnings Call

Greetings.

And welcome to the chain Insurance Group, Inc, third quarter 'twenty three to unfold.

At this time, all participants are in listen only mode.

A brief question answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

He is now my pleasure to introduce your host Garrett Edson. Thank you Sir you may begin.

Thank you operator, good afternoon, and welcome to try on insurance groups third quarter 2022 earnings call. This afternoon. The company released its financial results for the third quarter ended September 32022 press release is available in the Investor Relations section of the company's website at Www Dot Trey 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.

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.

Tends 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 FCC Dot Gov.

Joining me on the call today are Julie Barron, Companys, President and Chief Executive Officer, and Nick <unk>, The company's Chief Financial Officer with that I am now going to turn the call over to Julie.

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

We are very pleased with our performance this quarter as we delivered on topline and bottom line results ahead of our expectations and generated double digit adjusted return on tangible equity for the quarter. We reported adjusted net income of $5 5 million or <unk> 11 per diluted share and an 11, 2% adjusted return on tangible equity.

With our year to date loss ratio remaining relatively consistent through the quarter, our focus on underwriting discipline and profitability is keeping us in solid shape, despite the challenging macro environment.

Along with our solid performance, we made strides in the quarter to further strengthen <unk> ability to drive sustainable and profitable growth over the long term as we noted on our last call. We completed a new exclusive distribution partnership with <unk> capital partners Americas market, marking our entrance into the rapidly growing non admitted insurance.

Market, specifically excess and surplus product offering.

We spent the last couple of months working with be to bring the program online and are excited for its full year contribution in 2023, we believe the E&S offering and partnership will become a material contributor to our performance in the new year and unlock significant long term profit potential for the company.

In addition to partnering with B, we strengthened our balance sheet during the quarter with the issuance of about 50 million of 675% surplus note. Due 2042. This issuance provides us with additional surplus to help ensure that we continue to successfully execute on our longer term growth strategy.

Also please subsequent to the end of the quarter that a M best reaffirmed our a rating.

As we wrap up the year, we will continue to focus on the fundamentals that have brought US success, our disciplined underwriting and program partner selection efficient claims management and prudent stewardship of our balance sheet with an increasingly challenging macro and competitive environment expected for the foreseeable future, we will look to responsibly and profitably grow our business.

In the new year and successfully drive sustainable adjusted net income growth over the longer term.

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

Thank you Julie.

In the third quarter of 2022, we generated gross written premiums of $162 million compared to $177 million in the prior year period.

The year over year reduction was primarily attributable to the company's determination of an underwriting partner and a higher risk segment at the end of the third quarter of 2021 as the company focuses on maintaining its underwriting discipline.

Gross earned premiums increased $1 1 million in the third quarter of 2022.

As of September 32022, net unearned premiums represented $101 5 million on our balance sheet.

Decrease of $3 million or two 9% from June 32022, and up $16 9 million or 19, 9% from September 32021.

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

Net earned premiums for the third quarter was $71 4 million a 37, 4% increase from the same prior year period, primarily driven by both the growth in gross earned premiums and the strategic increase in our retention of gross written premiums.

Our loss ratio for the third quarter of 2022 was 63, 9% compared to 61, 8% in the same prior year period.

Prior period favorable loss development for the third quarter of 2022 totaled $26000.

General and administrative expenses were $23 3 million in the third quarter of 2022 compared to $13 8 million in the same prior year period. This was primarily driven by an increase in net commissions, resulting from our increased retention and increased gross earned premiums during the quarter.

G&A operating expenses of $12 5 million were comparable to the same prior year period.

Our expense ratio for the third quarter of 2022 as a result of our increased retention increased to 32, 6% compared to 26, 5% in the same prior year quarter.

Our combined ratio for the third quarter of 2022 was 96, 5% compared to 88, 3% in the same prior year period underwriting income for the third quarter was $2 5 million compared to underwriting income of $6 million in the same prior year period.

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

Net investment income increase in the quarter was the result of an increase in income from fixed maturities income from funds held investments and our equity securities and partially offset by unrealized losses on equity securities incurred in the third quarter of 2022.

Our investment portfolio totaled $565 4 million at September 32022, and was comprised primarily of fixed maturity securities that were classified as available for sale. We also had $81 $5 million of cash and cash equivalents on our balance sheet at September 30.

2022, our investment portfolio with an average rating of <unk>.

<unk> at the end of the quarter.

Other revenue, which consists primarily of brokerage and third party administrative fees was $2 1 million for the quarter compared to $2 8 million in the same prior year quarter due primarily to a year over year decrease in brokerage revenue as a reminder, our other revenue and brokerage fees can vary significantly from quarter to quarter.

And based on the effective dates of underlying issuing contracts insurance contracts.

Net income for the third quarter of 2022 was $7 6 million or <unk> 15 per diluted share compared to $6 5 million or <unk> 13 per diluted share in the same prior year period.

Adjusted net income for the third quarter of 2022 was $5 5 million compared to $7 7 million in the same prior year period.

Adjusted diluted earnings per share for the third quarter of 2022 was 11.

15.

In the same prior year period.

Return on equity for the third quarter was seven 5% and adjusted return on equity was five 4%.

<unk> return on tangible equity, which is computed as annualized adjusted net income over average tangible equity was 11, 2%.

We are updating our full year outlook for 2022 from the metrics we provided on our prior call for the full year 2022, we now expect the following.

Gross written premium is now expected to be between $620 million and $630 million as we raised the low end of our prior range and this represents a year over year, a reduction of 2% on the low end and 1% on the high end.

Net earned premiums are now expected to be between $263 million and $268 million compared to the prior range of between $255 million and $265 million. This represents a year over year growth of 32% on the low end and 35% on the Hyatt.

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

Total revenue is now expected to be between $278 million and $283 million compared to the prior range of between $268 million and $278 million.

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

Vince ratio reflects the aforementioned increase in retention, which reduces the company's ceding commission offset to its general 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.

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

For the fourth quarter 2022, we expect gross written premiums to be between $142 million and $152 million adjusted net income to be between $2 8 million and $3 8 million.

Barring any large unusual loss activity the company expect the loss ratio in the fourth quarter of 2022 to be consistent with its loss ratio.

In the third quarter of 2022.

With the addition of the $50 million surplus note at 675% and rising interest rates. The company expects fourth quarter total interest expense to be approximately $1 5 million.

The company reminds investors then its outlook as forward looking information 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 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 for Q&A.

Operator.

Thank you Sam.

Some of our surplus notes so we were able to invest those at some pretty nice yield.

You know most of those exceeding 4% so we're pretty pleased with that.

We're obviously, we're having the unrealized gains and losses that are offsetting our investment income, but we do.

So that will depress than the investment income that shows up on our on our P&L.

Yep.

Good.

Oh my goodness.

I'm sorry go ahead Pablo it's Nick if you look at the supplemental table Thats in the press release it Itemizes all the components that make up the net investment income line in the P&L.

It will show the components inclusive of that unrealized.

<unk> loss.

Still there on the holdings, so that that schedule should show you all the components you need.

Right. Thank you.

And then my second question was.

Just on your Opex for the loss ratio in the fourth quarter.

Based on what you said it seems like you're implying.

Little to no favorable BYD in the fourth quarter.

First of all can you sort of confirm that and secondly.

I'm just wondering why you got your expectation given.

Your historical patterns reporting where in the fourth quarter you tend to you know.

Release.

Thanks.

We've already acquired for <unk>. Thank you.

Right.

That has we have been fortunate that we've been able to have those releases in the fourth quarter than in the past we have been trying to.

Yeah.

We addressed that in our calls.

And calling that out that we that.

That is not going to continue to happen forever.

That is.

Our favorable development is something of a finite bucket, it's not endless.

And.

We're coming off of a really difficult last year last year I mean, we all talked a lot about that and you know as the actuaries look at those results and.

Yeah.

Their analysis and projections for the future based on the past. So we just we don't expect that we'll get we'll get some credit for.

We're doing for having a better loss result, this year, but yeah, we were.

We probably won't get all of that credit.

Understood. Thank you.

But just to point out that we didn't have unfavorable development.

That's always.

You know very positive.

Right. Thank you.

Thank you Sir.

Ladies and gentlemen, just a reminder, here with me.

To ask a question. Please press star and then one now.

Next question.

Next question, we have is from Samsung.

Please go ahead.

Hi, good afternoon.

Just on reinsurance renewals.

We hear a lot about property.

Reinsurance rates, increasing quite a bit.

Are you expecting.

Meaningful reinsurance costs to increase on your own.

And we have been seeing reinsurance costs, increasing and seeing reinsurers looking to cap their participation. There you know there are you know what.

Their losses might be so so we have seen that we do expect we'll continue to see that our property book that we have doesn't really renew until may so hopefully.

You know some it'll quiet down a little bit more.

Yeah.

Has something more favorable happen, but yeah, I think it's pretty much expected that we'll be seeing increases.

Got it thank you and just.

On the on the loss ratio this 60.

64.

$63 nine.

The loss ratio that we should think about for <unk>. How would you think about that in the context of 2023.

That would be very forward looking I you know we.

[laughter], we put out that guidance to make sure that it's clear what we're expecting on a year to date loss ratio for the full 2022 year.

That's why that guidance is out there the way its written as far as 2023.

It's a little too early to do that kind of speculation or to even even throw out.

Anything definitive at this point.

Got it thank you.

Okay.

Thank you Sir.

There are no further questions at this time I would now like.

Just on the floor back over to Judy Zhang for closing comments.

Great. Thank you operator, and I'd like to thank everyone for joining our call today and as a recap we are very pleased with our third quarter results and believe we are well positioned for the future. Thank.

Thank you again for taking your time and for your interest in <unk> have a great day.

Thank you ma'am, ladies and gentlemen.

Today's conference. Thank you for joining US you may now disconnect your lines.

Okay.

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