Trean Insurance Group, Inc.

Greetings. Welcome to the Treon Insurance Group, Inc. First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A 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. Please note, 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 and welcome to Trion Insurance Group's first quarter 2022 earnings call. This afternoon, the company released financial results for the first quarter ended March 31, 2022. The 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 is a substitute to the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures and the most comparable measures prepared in accordance with GAAP can be accessed through a filing 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, Garrett, and welcome to our first quarter 2022 earnings call. We appreciate your participation on our call and for your continued support and confidence in Treon. 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 16 cents per diluted share, which represents a 16.2% adjusted return on tangible equity. At our fourth quarter earnings call, we forecasted a first quarter 2022 loss ratio between 61.5 and 62.5% of net earned premiums. 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 were a non-recurring exception to our historical and expected loss results. As we forge ahead, we remain focused on our strategic plan, emphasizing strong partnerships disciplined program selection and management, and efficient, 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 Treon 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 in helping Treon 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. It has been an absolute pleasure working closely with you over the last 15 years. I and the Treon team are excited to lead Treon 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, 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 products, improve efficiencies, and enhance shareholder value, we will act accordingly. In the first quarter of 2022, our team grew gross written premiums by 10%, so $161 million. This 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 of continuing our line of business diversification. Growth under 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, net unearned premiums represent a material source of deferred potential profits. Net earned premiums for the first quarter were $64.2 million, a 56% increase from the same prior year period, driven by both the growth in gross earned premiums and the strategic increase in our retention of gross written premiums. 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% to 62.5% that we provided on our last call. Prior period favorable loss development for the first quarter of 2022 totals 0.4 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 commissions and insurance related expenses due to our premium growth and a reduction of seating 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. Our combined ratio for the first quarter of 2022 was 89.6% compared to 89.4% in the same prior year period and 100.3% 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 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 AA 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 underlying insurance contracts. Net income for the first quarter of 2022 was $12.3 million or $0.24 per diluted share compared to $9.4 million or $0.18 per diluted share in the same prior year period. Adjusted net income for the first quarter was $8.3 million compared to $8.1 million in the same prior year period. Adjusted diluted earnings per share for the first quarter of 2022 was $0.16 per share. ROE for the first quarter was 11.8%, and adjusted ROE was 7.9%. Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity, was 16.2%. We are providing a 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 seating commission expense offset to G&A expenses. as well as reductions in seating commissions resulting from adding more short tail lines of business, which typically have lower front fees. Spence ratio also reflects expected continued operational investments in the company throughout the rest of 2022. For the second quarter of 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 is forward-looking information and 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?

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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Pablo Singzon with JP Morgan. 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 PYD. So if you add that back, it's about 61.7. My question is, and I assume that's mostly a loss pick, right, just given where we are in the year. I was hoping for some context on how that loss pick compares to what you've done over the past couple of years, even if it's not a specific number, but directionally, has that loss pick been going up or going down? I guess the follow-up question to that is, I was hoping you could speak to what you're seeing in terms of pricing and workers' comp and loss trends. Obviously, COVID was a benefit to loss trends. I was wondering if you're still seeing that as things continue to go back to normal. Thanks.

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 throughout 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 going overall. We have seen a lot of rate cutting in California, and that's just not something that we're going to follow through on. 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 just a month or two ago. We did not see any of the kind of large losses that bedeviled us in the first quarter last year. We've been pleased with how existing claims have been settling out. And I would say this first quarter really reminds me of our historic first quarters. You'd ask for some reference to how things looked in the past. This quarter reminded me very much of 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 offset in the benefit ratio, for example? Thank you.

We haven't seen any significant impact of inflation on claims settlements at this time. 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 factor for us.

And it hasn't helped the payrolls you're charging premiums against, Andy?

It's too early to know yet. Yeah, it's too early to know yet. If there's going to be an uptick from payrolls 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 payrolls really started a few months ago. We started to hear that consistently in the press. And that's just too early to see it starting to hit our revenues.

Okay, thank you.

As a reminder, if you'd 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. Our next question is from David Mothmaiden 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 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 favorable loss? outside of the favorable prior period development or are you really just referring to something else as in just lower or large losses that you saw during 2021 or no large losses that you saw during 2021?

Thanks for your kind comment at the start, Dave. Thank you. We talked last quarter when we gave a a full review of 2021, we talked about the three programs that had 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 what we're really gratified to report today is that all three of those programs showed a decided improvement in the first quarter. their 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 in the loss ratio being just a tad better than what we'd expected.

Got it. Okay. That's helpful. And then maybe just on the Outlook items, the updated Outlook items, on the increased retention that's obviously gone up since you last gave this three months ago, could you just talk a little bit about what made you decide to increase the retention? What gives you comfort? to increase retention? 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 background and just some color on some of the characteristics of those books where you're increasing the retention?

David, a lot of the retention that You know, we put up 40% retention this quarter. That drives itself from previous arrangements 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 kind of where it is until things change. 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 old ones that are renewing and deciding at that time what we want to do with that renewal. That is our feel on where we're expecting retention to be throughout 2022. Did I answer your question?

Yeah, I guess 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?

When we gave the original guidance, we certainly had a little bit more uncertainty about how much premium these programs would be writing. You're absolutely correct. in that the reinsurance decisions had been made about what we were going to be retaining really 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 are going to develop in terms of premium in a way that's favorable to us than what we were just months ago.

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 you know it went up for the full year it went up you know 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 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 project it out, we felt very comfortable raising the net-earned premium min and 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. But in doing that, we also are, as you can see in our Q1, we had a realized loss of about a million dollars, which equates to the fact that we had to get ourselves out of some longer-term holdings that were lower yielding investments and get into higher yielding investments. So we had to take a hit on getting out of things that we knew with the macro environment that we wanted to get better yield on in the future. And that's a continuous look that we've started in 2022 that we're 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'll now turn the call over to Andy O'Brien for closing remarks.

Thank you. We had a solid first quarter, and we believe we're well situated for sustained profitability. We're thankful for the support of our partners and Treon team members, and we look forward to continuing the path that we are 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.