Trean Insurance Group, Inc.

Greetings and welcome to the Treon 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. It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you, Garrett, and you may begin.

Thank you, operator. Good afternoon and welcome to Trion Insurance Group's fourth quarter 2021 earnings call. This afternoon, the company released its financial results for the quarter and full year ended December 31st, 2021. Press release is available in the investor relations section of the company's website at www.trion.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. 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. The company 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.sec.gov. Joining me on the call today are Andrew O'Brien, the company's Chief Executive Officer, Julie Barron, the company's President and Chief Operating Officer, and Nick Vassallo, 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 Treon. 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. This combined ratio is substantially better than the insurance industry average and marks the 25th consecutive year in which Treon has earned a profit. We also grew our top line above our expectations. 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 try to be as accurate as we can when calculating our loss estimates. Historically, our ultimate costs have been much lower than our initial projections. For example, in the developed year 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 are better than adverse surprises, and we use our loss projections in our underwriting strategy. Too low a loss projection may lead to mistakes that are more costly than too high a loss ratio projection. Earlier in 2021, we 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 from May through November. Unfortunately, in December, we incurred some new large claims at the end of 2021. Large losses push up the reported loss ratio and have a multiplicative impact on actuarial loss projections. As a result, we reported a higher 2021 loss ratio. Our elevated losses came primarily from three of our 30 programs. Ironically, until 2021, these programs were well established and had consistently produced positive results up to 2021, and as bad luck would have it, 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 rate levels, the claims environment, or underwriting practices that might have caused 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 they experienced in 2021. We are very encouraged that prior year's claims for these programs develop 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 a 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 risks and pricing. As a result, our California workers' compensation premium dropped by roughly 18.4% in 2021, or an amount equal to 7.3% of our total 2020 gross written premium. We believe we now have a better rated and more balanced risk pool in California and are positioned to regrow our California workers' comp business when the risk-reward ratio improves. Our actions in California underscore two important points regarding our business. First, we are committed to profitable growth, not to growth itself, and we are prepared to take rapid action to preserve underwriting discipline. Second, the fact we grew so rapidly despite shrinking our California business demonstrates the strength of our overall business model and the attractive market available to us. We believe the insurance program market is large rapidly growing, and that we have a leading position within that market. In addition, in 2021, we invested significantly and prudently in time and capital to improve our infrastructure. Claims handling has always been a key focus for us, and we are on track to launch a new claims software system designed to support our continued growth. Throughout the year, we implemented a variety of IT upgrades to capture efficiencies in how we handle 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 the egos while carefully controlling our expenses. We want to be both the most skilled and lowest cost competitor in 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 Treon into the future. Over the past two decades, she has emerged as an exceptional leader. Her deep knowledge of the insurance business and understanding of the Treon secret sauce that drives our company, combined with an exceptional management team, will position us to build in our success in the future. I will remain on Treon's board as its executive chairman and will continue to stay closely involved with the team's efforts in evaluating and supporting our programs. With that, I will hand it over to Julie.