Trean Insurance Group, Inc.

Greetings, and welcome to the Trayon Insurance Group's Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in 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 then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson. Thank you, Sue. You may begin.

Thank you, Operator. Good afternoon, and welcome to Trayon Insurance Group's third quarter 2022 earnings call. This afternoon, the company released its financial results for the third quarter and September 30, 2022. The press release is available in the investor relations section of the company's website at www.trayon.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 Julie Barron, the company's President and Chief Executive Officer, and Nick Passallo, 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 Treon. We are very pleased with our performance this quarter as we delivered on top line 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 $0.11 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 Treon's 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 B Capital Partners Americas. marking our entrance into the rapidly growing non-admitted insurance market, specifically excess and surplus product offerings. We spent the last couple of months working with BEAT 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 BEAT, we strengthened our balance sheet during the quarter with the issuance of a 50 million, 6.75% 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. We were also pleased, subsequent to the end of the quarter, to have AMBEST reaffirm 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 now turn the call over to Nick, 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 termination of an underwriting partner in a higher-risk segment at the end of the third quarter of 2021, as the company focuses on maintaining its underwriting discipline. Gross unearned premiums increased $1.1 million in the third quarter of 2022. As of September 30, 2022, net unearned premiums represented $101.5 million on our balance sheet. a decrease of $3 million or 2.9% from June 30, 2022, and up $16.9 million or 19.9% from September 30, 2021. As we've consistently noted, net unearned premiums represent a material source of deferred potential profits. That 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 $26,000. 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. The net investment income increase in the quarter was the result of an increase in income from fixed maturities, income from funds held investments, and or 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 30, 2022, 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 at an average rating of AA 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 based on the effective dates of underlying issuing contracts. insurance contract. Net income for the third quarter of 2022 was $7.6 million or $0.15 per diluted share compared to $6.5 million or $0.13 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 $0.11 compared to $0.15 per in the same prior year period. Return on equity for the third quarter was 7.5%, and adjusted return on equity was 5.4%. Adjusted 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 raise the low end of our prior range, and this represents a year-over-year 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 high end. 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 percent of net earned premium. The expense ratio reflects the aforementioned increase in retention, which reduces the company's seating commission offset to its general administrative expenses, as well as additional reductions in seating commissions, resulting from adding more short-term lines of business, which typically have lower front fees. 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 expects its 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 6.75% and rising interest rates, the company expects fourth quarter total interest expense to be approximately 1.5 million. 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?

Thank you, sir.

Ladies and gentlemen, you will now be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. The first question we have is from Pablo Singon from JT Mobile.

Hi, thank you. I was hoping to get your perspective on investment income. Appreciate all the sort of call or guidance you've given on the premiums and the adjusted income number. But, you know, where do you think net investment income goes from here, recognizing that, you know, we're in a rising rate environment? If you look at the past couple of quarters, there's been a good pickup there.

Right, so Pablo, you know, we just received the $50 million proceeds from our surplus note, so we were able to invest those at some pretty nice yields, you know, most of those exceeding 4%, so we're pretty pleased with that. Obviously, we're having the unrealized gains and losses that are offsetting our investment income, but we do, so that will depress the investment income that shows up on our P&Ls.

Yep, understood.

Pablo, if you look at the supplemental table that's in the press release, it itemizes all the components that make up the net investment income line in the P&L, and it'll show the components inclusive of that unrealized income. game loss that is still there on the holdings. So that schedule should show you all the components you need.

Right. Thank you. And then my second question was just on your outfit for the loss ratio in the fourth quarter. Based on what you said, it seems like you're implying little to no favorable PYD in the fourth quarter. First of all, can you sort of confirm that? And secondly, I'm just wondering why that's your expectation given, you know, your historical pattern of reporting where in the fourth quarter you tend to, you know, release sort of the fourth quarter tends to be the largest quarter for PYD. Thank you.

Right, Pablo. That has, we have been fortunate that we've been able to have those releases in the fourth quarter in the past. We have been trying to, you know, read address that in our calls and calling that out that we that that is not going to continue to happen forever you know that is you know your favorable development is something of a finite bucket it's not endless and you know 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 you know They, you know, they base 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, you know, for doing, for having better loss results this year. But, you know, we probably won't get all of that credit.

Understood. Thank you.

But just to point out, though, we didn't have unfavorable development. So, that's always, you know, very positive.

Right. Thank you. Thank you, sir.

Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have is from Franco Mekris from Evercool. Please go ahead.

Hi, and good afternoon. Just on reinsurance renewals, we hear a lot about property reinsurance rates increasing quite a bit. Are you expecting any meaningful reinsurance costs to increase on your end?

We have been seeing reinsurance costs increasing and seeing reinsurers looking to cap their participation, what their losses might be. 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, it'll quiet down a little bit and we'll, you know, have something more favorable happen. But, you know, I think it's pretty much expected that we'll be seeing increases.

Got it. Thank you. And just on the loss ratio, you know, 63.9 loss ratio that we should think about for 4Q. How would you think about that in the context of 2023?

That would be very forward-looking.

Yeah, 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 it's written. As far as 2023, I think it's a little too early to do that kind of speculation or to even throw out anything definitive at this point.

Got it. Thank you. Thank you, sir.

There are no further questions at this time. I would now like to turn the floor back over to Julie Barron 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 you again for taking your time and for your interest in Trion. Have a great day.

Thank you, ma'am. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.