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spk02: Greetings and welcome to Treon Insurance Group's first quarter 2021 earnings conference 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. I would now like to turn this conference over to your host, Mr. Garrett Edson from ICR. Thank you, sir. You may begin.
spk04: Thank you, operator. Good afternoon and welcome to Treon Insurance Group's first quarter 2021 earnings call. This afternoon, the company released its financial results for the quarter ended March 31st, 2021. Press release is available in the investor relations section of the company's website at www.treon.com. I would 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. 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. The company undertakes no duty to update any forward-looking statements that may be made during the course of the 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.sec.gov. Joining me on the call today are Andrew O'Brien, the company's president and chief executive officer, and Julie Barron, the company's chief financial officer. With that, I am now going to turn the call over to Andy.
spk00: Thank you, Garrett, and welcome to our first quarter 2021 earnings call. We appreciate your participation on our call and for your continued interest in TRIAD. On today's call, I will walk through our higher-level results and update you on the great progress we're making with respect to our overall strategy. Julie will follow and provide some detail about our first quarter results, and then we'll open it up to Q&A. Our first quarter was a great follow-through to where we left off at the end of 2020. We generated excellent year-over-year premium growth in the first quarter in all facets, gross written, gross earned, and net earned premium, and continued to deliver on solid underwriting. As a result, we remain well-positioned to grow rapidly and profitably as we move through the balance of the year. During the first quarter, we grew gross written premiums by 36% year-over-year to a record $146.7 million, another excellent performance generated through multiple sources, including our new program partners and organic growth. Our net earned premium increased 83% to $41.1 million, compared to $22.5 million in the first quarter of 2020. Our loss ratio fell within our recent historical first quarter range of between 57 to 61%, and we improved our combined ratio on a year-over-year basis. And we generated a just net income after excluding non-recurring other expenses and significant non-cash items of $8 million, or 16 cents per diluted share, producing adjusted ROTE of 16.4%. Along with our solid first quarter results, we continue to make very strong progress in terms of rapidly expanding the market share of our non-workers' comp programs. In the first quarter, our non-workers' comp liability lines grew gross written premiums by 157% year over year. representing over 32% of our total gross written premiums for the first quarter. Workers' Comp continues to form the majority of our premiums, and we saw another quarter of double-digit growth in gross written premiums in that line of business. Beyond that, we are successfully executing on diversifying our business and further reducing our overall concentration risk. In addition to our 36% growth in gross written premiums, I also wanted to highlight that we generated additional gross unearned premiums of $18 million in the first quarter of 2021. As of March 31, 2021, we had net unearned premiums reflected on our balance sheet of $66.2 million, an increase of $16.1 million compared to December 31, 2020. Assuming our loss ratios and other operating expenses remain stable, This significant net unearned premium represents deferred future profit to be recognized over subsequent quarters as these net premiums are earned. We are very pleased with this kind of growth. We also continue to retain more premium on our books, which allowed us to drive our retention above 32% this past quarter. As we noted on our prior call, we have also started to accelerate our investments in automation, technology, workforce additions, and other areas in order to support our program partners and further provide a superior competitive and value proposition to existing and prospective customers. For instance, we are currently planning the implementation of a new claim system which should optimize our processes and further ensure timely handling of claims. In addition, our automation initiatives will benefit us by streamlining and improving systems and processes throughout the company to ultimately create long-lasting and meaningful expense savings. While G&A dollars will remain elevated in 2021 as a result of these investments, they ensure that we will be able to expand our market share and generate sustainable and profitable growth in the years to come. Looking into the balance of 2021, our powerful business model continues to be validated and our overall strategy and ability to successfully execute remains unchanged. We will continue pursuing organic growth within our existing markets to further increase our gross written premiums. We will retain more quality net earn premium, which should further enhance our bottom line moving forward. And we will selectively and responsibly add new program partners, in particular those that target specific niche programs with a clear competitive edge. Our entire team's constant hard work and dedication continues to pay off. We appreciate all of their efforts and remain very excited for our future. With that, I'll now turn the call over to Julie.
spk01: Thank you, Andy, and good afternoon to everyone on the call. Let's go right into our first quarter results. In the first quarter, our team grew gross written premiums by 36% to a record $146.7 million. compared to $107.9 million in the prior year period. This growth was driven by the addition of nine new program partners during 2020, as well as organic growth in our existing program partner business, resulting in an increase in both workers' compensation and non-workers' compensation liability lines of business. We remain strongly positioned for continued growth, continued gross written premiums growth throughout 2021. Growth earned premiums were $128.3 million for the first quarter of 2021, up 28% compared to the prior year period, due primarily to the increase in gross written premiums and partially offset by the rise in gross unearned premiums due to the addition of our new program partners, whose premiums were largely unearned as of the end of the first quarter. As a reminder, since we cannot control the timing of effective dates of new policies, this lag effect is a fairly common occurrence when we onboard new program partners. Thus, we continue to recommend that the focus be on gross written premiums as the best proxy for the growth of our business. Net earned premiums for the quarter were $41.1 million, an increase of 83.2% compared to $22.5 million in the prior year period, primarily due to the growth in gross earned premiums more than offsetting a smaller increase in seeded earned premiums. We note that the growth unearned premiums we recorded in the first quarter of 2021 is more indicative of what we would expect to see for this line item as we continue to grow. As Annie mentioned, this is a strong positive for our business as it means that we are growing more rapidly than we previously anticipated, and those unearned premiums will eventually convert into earned premiums in time. We remain confident in our ability to onboard additional program partners and sustainably grow our gross written premiums over the longer term. Our loss ratio for the first quarter of 2021 was 60.5% compared to 57.6% in the prior year period. The increase in the loss ratio during the first quarter of 2021 versus the prior year period was primarily attributable to property losses incurred in the first quarter. Our expense ratio for the first quarter of 2021 was 28.9%, an improvement of 740 basis points from the prior year quarter, primarily due to the significant increase in net earned premium. CNA expense was 11.9 million in the first quarter of 2021, compared to 8.1 million in the prior year quarter. The increase is primarily due to higher salaries and benefits resulting from acquisitions made in 2020, coupled with an expanded workforce, an increase in rent and office-related expenses, insurance and insurance-related expenses, and professional service expenses. As Andy mentioned and we discussed previously, we are going to continue to invest in the business. As a result, we expect G&A expenses will continue to remain elevated in 2021 compared to prior year periods. All in, our combined ratio for the first quarter of 2021 was 89.4%. a 450 basis point improvement compared to 93.9% in the prior year period. Underwriting income for the first quarter was $4.4 million, a 217% increase compared to $1.4 million in the prior year period. Net investment income for the first quarter of 2021 was $1.6 million compared to $3.3 million in the prior year period. The prior year period included a one-time $2 million unrealized gain related to a common stock reclassification and fair value remeasurement for one of our investments. The majority of our investment portfolio was comprised of fixed maturity securities of $378.1 million at March 31, 2021, classified as available for sale. We also had $130.9 million of cash and cash equivalents. Our investment portfolio had an average rating of AA at the end of the quarter. Other revenue, which consists primarily of third-party administrator and brokerage fees, was $4.7 million for the quarter, driven by an increase in fee-based revenue related to our CompStar acquisition in July 2020 and management fees, partially offset by reduced brokerage revenue, which can vary significantly from quarter to quarter based on the effective dates of the underlying reinsurance contracts. Net income for the first quarter of 2021 was $6.8 million, or 13 cents diluted earnings per share. When excluding intangible asset amortization, non-cash stock compensation, and non-recurring other expenses, adjusted net income for the first quarter of 2021 was $8 million, compared to $6.3 million in the prior year period. Adjusted diluted earnings per share for the first quarter of 2021 was 16 cents. Return on equity for the first quarter was 6.6%, while adjusted ROE was 7.8%. Adjusted return on tangible equity, which is computed as annualized adjusted net income over an average tangible equity, was 16.4%. We had a strong start to 2021 and remain well-positioned for strong and responsible growth for the remainder of the year and over the long term. With that, I thank you for your time and will now open up the call for Q&A. Operator?
spk02: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Jimmy Buehler with J.P. Morgan. You may proceed with your question.
spk08: Hi. I had a couple of questions. First, just if you could quantify what your property losses were in one queue and what they were the year ago period so people get a better sense of your loss ratio, X sort of catastrophe, your other events. And then relatedly, if you could quantify any impact you had on your loss ratio from prior year development.
spk00: Andy O' Jimmy, this is Andy O'Brien. Thank you for your questions and thanks for your participation. The property losses, we had some property losses coming out of the Texas ice storm. And then we had a couple of large building losses in Michigan. All of these losses were heavily reinsured and together did not have a terribly material impact, but they did up our loss ratio a little bit. We had no negative adverse development during the first quarter from prior years.
spk08: Any positive development because you've had that consistently over time or was there no development period?
spk00: We did not recognize any development at all during the first quarter.
spk01: Yeah, it's very minor, like $26,000 is what I recall.
spk08: Got it. And then if you could just talk about pricing in workers' comp, and I think obviously you're more of a player in a specific niche of the market, but a lot of companies have been hopeful that prices would start stabilizing and potentially improving at some point, but are you seeing that in the market overall?
spk00: I think that the market has stabilized. It certainly varies by geographic area. I would say in the southeast and in parts of the west that the market has stabilized. We have, the last two or three months, had some success in getting some positive rate movement in California, so we're happy about that.
spk08: Okay. And then just lastly on claims trends, how much of a risk do you feel there is of an uptick in claims given the strengthening labor market and just sort of if you're seeing tight supply of workers and if that could drive an uptick in losses?
spk00: Our insureds are not as impacted by some of the industries that are having trouble finding workers right now. So far, we haven't seen any – we certainly haven't seen – we've seen expanding payrolls, if anything, and we haven't seen any concerns in the claims area due to worker shortage or to, you know, workers not being as trained as well as they should be. It's early, though, Jimmy. It's, you know, it's just – that's just such a new thing that it would be much too soon for us to see something in the claims area to comment beyond that. Okay, thank you.
spk02: Our next question comes from the line of Matt Carletti with J&P Securities. You may proceed with your question.
spk07: Hey, thanks. Good afternoon. First question's on the gross written premium, the 36% growth in the quarter. Can you help us unpack that a little bit and if you can give any color around how much ballpark of that growth might have been driven by some of the newer partner additions? I think, Julie, you mentioned the nine partners that were added during 2020, and how much of that growth might be kind of some more longer-standing relationships that have been there for a while?
spk01: Sure. So our new programs represented about 16% of the total gross written premium in the first quarter of 2021. Okay. And then our organic growth on our owned programs was about 4.6%, and organic growth on our existing program partners was about 33%.
spk07: Got it. Okay, great. Thank you. That's helpful. And then just a numbers question. When I look at the net to gross retention, it's inching up, as we'd expect, given your selective retention of more risk. How should we view that 32 in the quarter? Is that, you know, ballpark a level that we should stabilize that in the near term, or should we expect that to continue to drift up as we move forward throughout the year?
spk01: You know, Matt, it's a little hard to say, you know, with the mix of the business. If we have a little more growth on a program that we have a lower retention on or one that has a higher retention, I think that's probably not a bad place to start.
spk07: Okay, great. Very helpful. Thanks for the call, Eric.
spk02: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. Our next question comes from the line of David Modenmaden with Evercore ISI. You may proceed with your question.
spk05: Hi, thanks. Good afternoon.
spk06: I had a question just on the expenses, the G&A expenses. I understand you expect those to remain elevated throughout the rest of the course of the year. Should I take that to mean that we should expect them to come in at around that $12 million a quarter-ish type of level? Or maybe if you could provide some commentary around that.
spk03: it's a good run rate as of now. Like Andy and Julie said, we're going to be investing and we'll temper that with any actual cash outlays for expenses. Some of that will be capitalized in the areas of software development that we are starting to get involved with over the course of this year. But I think that's a good run rate for now to think about going forward until we start to see something different.
spk05: Got it. Thanks. That's helpful.
spk06: And then, Andy, I guess just sort of a higher-level question just on the growth and the non-comp liability lines. You know, obviously, you know, the market's been hardening in some of those lines, but there's also a little bit of uncertainty there as well. So, I'm wondering just sort of how you're thinking about growing in those lines. I'm assuming it's, you know, I think a lot of it's general liability, but maybe you can also give us a bit more detail on what specifically it is that's driving that growth.
spk00: Sure. We have added a number of new programs outside of workers' comp. In fact, Matt, most of the programs that we've seen this past quarter have been outside of workers' comp, which I think is a sign that that market is tighter than the workers' comp market. We've added programs in property and commercial auto and accident health. Those are the three lines that we've added. And we've done that because, first, the programs have met our criteria. They've been excellent programs with operators who have proven track records. Second, these are people who are really getting significant rate increases. courses are very positive. Now, our approach with these programs is the same as we've discussed previously, which is that we're taking a very low net retention at the outset. I think for all of our programs, particularly those, of all the programs that we've added over this past quarter and really the last year, we're only retaining something like 8% to 9%. are writing and that's pursuing with our conservative approach towards or it's assuming underwriting risk at the outset of a program should these programs continue to develop well I could see us taking larger participation got it that's that's helpful yeah so just and then I guess just because of the low retention you know that helps you get comfort and then I guess we should you know relatedly
spk06: I guess it doesn't feel like there should be a big change in sort of the loss ratio just from a change in the mix of business shifting away from workers' comp to some of these other lines, but wondering if maybe you can comment on that.
spk00: Yeah, I can. Because our risk retention is so small in these other lines of business, it would be very difficult impact on our loss ratio. Now, if that business continues to grow and continues to become a larger part of our book, then certainly that statement would change. But as of right now, you know, we're just not anticipating that these other lines are going to materially impact our loss ratio.
spk05: Got it. That makes sense. Thank you.
spk02: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Andy O'Brien for closing remarks.
spk00: Thank you. We had a very good quarter. When we look at what our true north is, how to evaluate how we're performing, we look at two things. First, our growth and gross written premium. And second is our loss ratio stability. If we hit on those two items, really everything else follows for our company. And in this quarter, we solidly hit on both of those. So we're very pleased by what happened this quarter, and we're looking forward to continuing that through the remainder of the year. Thank you for your time, and we look forward to any questions, and we appreciate your support in the future.
spk02: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.
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