Trean Insurance Group Inc (TIG) 2020 Q4 法說會逐字稿

Greetings, and welcome to Trean Insurance Group, Inc. Fourth Quarter 2020 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Garrett Edson of ICR. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to Trean Insurance Group's Fourth Quarter and Full Year 2020 Earnings Call. This afternoon, the company released its financial results for the quarter and full year ended December 31, 2020. The press release is available in the Investor Relations section of the company's website at www.trean.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. 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 President and Chief Executive Officer; and Julie Baron, the company's Chief Financial Officer.

With that, I am now going to turn the call over to Andy.

Thank you, Garrett. We welcome you all to our fourth quarter 2020 earnings call. We appreciate your participation on our call and for your continued interest in Trean. On today's call, I will walk through our higher level results and our overall strategy for 2021 and beyond. Our CFO, Julie Baron, will follow and provide some detail about our fourth quarter and full year results, and then we'll open it up to Q&A.

2020 was a year that truly tested all of us, and I'm proud to say that our entire team at Trean faced the challenges head on and delivered rock-solid results throughout the year.

In July, we completed our initial public offering, a landmark achievement for our company. Further, the resilience of our business model was validated, and we enter 2021 in prime position to further expand our market share and sustainably grow our business.

In particular, we were very pleased by our fourth quarter performance. We drove considerable revenue volume, revenue growth, which streamed to our cash flow and ultimately, will increase our earnings.

During the fourth quarter, we grew gross written premiums by 37% year-over-year and excellent performance generated through multiple sources, including our new program partners, organic growth and acquisition of 7710 Insurance. Our net earned premium ratio is 30.2%. We continue to improve our loss ratio on a year-over-year basis, further evidence of our successful approach to underwriting. And we generated adjusted net income after excluding nonrecurring other expenses and significant noncash items of $11.2 million or $0.22 per diluted share, producing adjusted ROE of 11% and adjusted ROTE up 23.4%. We've consistently discussed that a vital part of our overall program partner strategy is targeting specific niche programs with a clear competitive edge.

To that end, in the fourth quarter, our nonworkers' comp liability lines grew gross written premiums by 75% year-over-year, while our workers' compensation segment saw a 28% increase.

While workers' comp still makes up the lion's share of our business, we are making strong inroads in diversifying our overall business, which will serve to reduce concentration risk and enable us to exploit our advantages in newer niche segments to grow more rapidly.

We also continue to maintain a strong pipeline of opportunities to add new business in the coming quarters. The fourth quarter was very strong for us in terms of year-over-year gross written premiums growth. And as we continue to retain more and more premium in our books, thanks to our solid capital base, we've also seen numerous additional opportunities to further expand our market share.

During 2020, we added 9 new program partners, all of which are already making strong contributions to Trean. Our growth in the second half of 2020 exceeded our projections, and we expect that momentum to carry into 2021. To responsibly build on this momentum, we plan to accelerate our investments in automation, technology, workforce additions and other areas in order to ensure that we are providing a superior competitive and value proposition to existing and prospective customers.

While these investments in our growth will cause G&A to remain somewhat elevated in 2021, we know these targeted investments will help ensure a sustainable and profitable growth for Trean and is ultimately the right path forward to create additional long-term value.

As we sit here in March and judging by our fourth quarter and overall 2020 performance, we remain very well positioned to succeed and significantly grow our gross written premium through 2021.

We will continue to pursue organic growth within our existing markets to further increase our gross written premium. And as clearly evident, we've made significant progress in retaining more quality net earned premium, which should further enhance our bottom line going forward.

With a robust balance sheet, we are confident that we can successfully execute on our growth strategies. Our business motto and operating strategy is exceedingly resilient and powerful, and we are excited for what entails for 2021 and beyond.

We remain focused on supporting our existing program partners, responsibly accepting new opportunities, seeking proper rate levels, and quickly and fairly resolving claims. I'm proud of our entire team for their continued efforts and dedication.

And with that, I'll now turn the call over to our CFO, Julie Baron. Julie?

Thank you, Andy, and good afternoon to everyone on the call. Let's go right into our fourth quarter results.

In the fourth quarter, our team grew gross written premiums by 37% to $134.5 million compared to $97.9 million in the prior year period. This growth was driven by the addition of 9 new program partners throughout 2020, organic growth, as well as the acquisition of 7,710 insurance company at the beginning of the fourth quarter and resulted in an increase in both workers' compensation and nonworkers' compensation liability lines of business. We are proud of our gross written premium's performance and are positioned strongly for continued growth in 2021.

Gross earned premiums were $121.9 million for the fourth quarter of 2020, up 19% compared to the prior year period due primarily to the increase in gross written premiums and partially offset by the increase in gross unearned premiums due to the addition of new program partners during 2020, whose premiums were largely unearned as of the end of the fourth quarter.

As a reminder, since we cannot control the timing of effective dates of new policies, the 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. Further, as we noted in our last call, one quarter's performance is difficult to utilize as a run rate for the next quarter as premiums often come in an even block. That said, we remain confident in our ability to onboard additional new program partners and sustainably grow our gross written premiums over the long term.

Net earned premiums for the fourth quarter were $36.8 million, an increase of 73% compared to $21.3 million in the prior year period. Primarily due to the increase in gross earned premiums, more than offsetting a smaller increase in ceded earned premiums. Our net earned premium to gross earned premium ratio was 30.2% in the fourth quarter of 2020, a 940 basis point improvement from 20.8% in the prior year period. With our robust balance sheet, we expect to continue retaining more premium over time and grow net earned premiums commensurately.

Our loss ratio for the fourth quarter of 2020 is 27.4%, a 180 basis point improvement compared to 29.2% in the prior year period. Loss activity during the fourth quarter of 2020 was directly attributable to the increase in earned premium and partially offset by lower favorable loss reserve estimate true-up made for the fourth quarter of 2020 than for the prior year period. We typically report a lower loss ratio in the fourth quarter compared to the first through third quarters, and thus, we would expect the loss ratio to return to a more normalized figure in the first quarter of 2021.

G&A expense was $15.2 million in the fourth quarter of 2020 compared to $5.1 million in the prior year quarter. Included in G&A expense for the fourth quarter of 2020 was approximately $5.2 million of various accrual true-ups related to profit sharing, seeding commissions and deferred acquisition costs. The remainder of the increase was primarily due to higher net agent commissions resulting from the company's increased retention, increased insurance and professional service expenses as well as higher expenses associated with an expanded workforce from acquisitions and continued investments.

As Andy noted, given the significant momentum we are seeing in our business, we are going to invest throughout the year in our business, technology and our workforce in order to enhance our competitive position and take advantage of opportunities we are seeing in the marketplace. As a result, we expect G&A expenses will continue to remain elevated in 2021 compared to a prior year period.

All in, our combined ratio for the fourth quarter of 2020 was 68.8% compared to 53% in the prior year period.

Excluding the accrual true-up G&A charges I just mentioned, our combined ratio for the fourth quarter of 2020 would have been 54.6%. Underwriting income for the fourth quarter was $11.4 million, a 14% increase compared to $10 million in the prior year period.

Net investment income for the fourth quarter of 2020 was $1.7 million comparable with the prior year period. The majority of our investment portfolio was comprised of fixed maturity securities of $405.6 million at December 31, 2020, classified as available for sale. We also had $153.1 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 $0.8 million for the quarter due to reduced brokerage fees due to the changes in estimated premiums on reinsurance contracts.

GAAP net income for the fourth quarter of 2020 was $8.1 million or $0.16 diluted earnings per share. When excluding nonrecurring other expenses, noncash stock compensation and intangible asset amortization, adjusted net income for the fourth quarter of 2020 was $11.2 million compared to $11.4 million in the prior year period. Adjusted diluted earnings per share for fourth quarter of 2020 was $0.22.

ROE for the fourth quarter was 8%, while adjusted ROE was 11%. Adjusted return on tangible equity, which is computed as annualized adjusted net income over average tangible equity, was 23.4%.

For the full year 2020 gross written premiums grew 18% to $484.2 million, driven by the addition of new program partners throughout 2020, organic growth as well as the acquisition of 7710 Insurance Company.

Total underwriting income for 2020 was $19 million compared to $20.9 million in the prior year, while adjusted net income for 2020 was $32.8 million, relatively comparable to the prior year, despite the additional expenses incurred from being a public company in July 2020.

It was a very successful 2020 for Trean in the midst of an incredibly challenging environment, and we believe we are positioned strongly to grow rapidly and responsibly in 2021 and for the long term.

With that, I thank you for your time, and we'll now open up the call for Q&A.

Operator?

(Operator Instructions) Our first question comes from the line of Matt Carletti with JMP Securities.

My first question, probably for you, Julie. Could you pick apart the loss ratio a little bit and specifically, just looking for the dollar amounts of prior year development in the quarter? And then secondarily, could you talk a little bit about -- I know in prior quarters, you had talked about a frequency benefit that you had been seeing likely COVID related, but you haven't recognized it. Is there a way to kind of get a feel for how much of that you might have recognized with the Q4 results versus any you might have held on to see how it plays that going forward?

Okay. So we had several loss reserve releases in prior years of about a little over $14 million. $14.8 million.

Okay. Wonderful. And then could you update us on the -- just the kind of frequency trends you're seeing and anything changed in Q4, both from what you're observing versus what you might have recognized that you had in prior quarters?

Matt, nothing specific stands out right now. We did see a number of COVID claims filed in California as a result of the presumption statute. Many of those claims have been resolved with little or no payment. Overall, frequency at the end of the year, it seems -- accounting to COVID claims seem to be similar to what we experienced in previous years.

Okay. Great. And then maybe, Andy, if I could just ask you about the workers' comp environment more broadly, what you're seeing in terms of competition, pricing, things like that, now in California is a big piece of your book?

Sure. Over all of our business, we still have not seen any significant rate increases, really, anywhere. We haven't seen much in the way of rate deterioration, though. So I would say over our business, it feels like the rate levels this year are very similar to the rate levels next year.

There's still a lot of competitors in the market. We haven't seen a lot of new entrants where we are participating. California has been a little bit more challenging this year. So the rate levels in California, they have not moved in a direction that we would have wished they would have moved in.

Okay. Fair enough. And then lastly, if I could ask you to kind of clarify, I think both Andy, Julie, both you had comments about investing in the business for going forward and how we should think about the expenses in '21. If we look at the expense ratio kind of for the full year for '20 is kind of that sort of level, a reasonable level to think about '21, even given the growth? Or if you could help us frame that a little bit, that would be helpful.

Yes. Matt, let me start with a more general statement. We exceeded our 2020 growth objectives, and we are optimistic about our 2021 growth opportunities. To take advantage of these opportunities, we do plan to accelerate some investments in new people and automation. Remember, there's a lag between the time we recognize expenses and when we can record profit.

So our expense ratio will be higher in times of elevated growth. We actually believe that the growth in our premium is probably a good measure of the deferred profit we are building as we are growing our company and incurring our upfront expenses.

Great. Congrats on the very nice end of the year and good luck in '21.

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

First question on just your premium growth. Can you discuss -- you mentioned nonworkers' comp growing at a fast rate. What line you're growing in? And what your outlook is in terms of -- like how these lines will contribute to your growth in 2021 outside of workers' comp?

Jimmy, we did grow significantly from a percentage basis and lines outside of workers' comp. There are -- we are seeing rate increases in other lines that are outstripping what we're seeing in workers' comp, where we have seen some improvements are really across a variety of lines. Commercial auto, homeowners and medical stop-loss are 3 lines that grew pretty appreciably for us in the second half of 2020, and we anticipate that the momentum that began in those lines last year will be continuing this year.

And to put the numbers on this, Jimmy...

And so -- go on sorry.

I was just going to add just some numbers. Work comp growth in the fourth quarter was 28% over prior year period and the other lines of business grew about 75% compared to last -- same period last year. And again, as Andy mentioned, most of that was commercial auto, homeowners and stop-loss.

Okay. And in terms of the expense ratio, can you quantify how much you expect expenses to be elevated versus the last few quarters? And what the -- like just to give us an idea on how the core expense ratio is trending versus some of the investments you're making? And how much are they going to sort of pick up the expense ratio next -- this year?

Jimmy, we're really not wanting to provide any guidance around our -- the expense ratio. We're -- we know that it's going to be elevated because of the investments that we're making due to our growth, and we feel like we really have to do that to service our programs and the business in the manner that we've always done that.

Our next question comes from the line of David Motemaden with Evercore ISI.

Andy, I was hoping maybe you could talk a bit about the deal pipeline, not only for M&A, but also for potential program partners. Been hearing a lot that the pandemic has maybe pushed more smaller businesses that are right in your wheelhouse to consider partnering with larger organizations, such as yourself. Have you seen a meaningful pickup in this? And I guess, just maybe talk about how big of an opportunity this is? And your pipeline and was an increase in your pipeline and sort of what you guys are seeing really a big driver behind the increased investments that you guys are going to make to support, I guess, the growth on the horizon?

Yes. Dave, we did exceed our expectations in both the third and fourth quarter last year. And that's really on the back. So -- I mean, we always expected that our growth would come primarily in the second half of the year, but we certainly did not expect the number of opportunities that would be presented to us. It has been at a very high level, all of the last half of the year. And it has -- and it is continuing. It is continuing. We -- as I've mentioned earlier, we're just very optimistic about our 2021 growth opportunities. We don't want to provide guidance about where we think it's going to be. But I can tell you that we think that there are many attractive opportunities, and they do not seem to be slowing up.

Got it. So it's -- I guess, your -- would you say you're similarly -- like are you more confident about growth organically or inorganically? I guess could you comment on just what avenue you feel best about going forward?

Good question. And when you look at the new programs that we've put on in the fourth quarter, and some of these programs are just starting now to produce. And so I guess we can talk about is that organic growth because they're already on a program or are they part of the new program. I guess that called them part of the new programs.

I think organic growth it's not going to be as high as the growth we are getting from new partners. I think that's what we're going to see. And of course, we -- 1 new program can make a big difference for us. So we're excited by that.

Got it. Okay. That's helpful. And then I just wanted to ask just on the retention levels. That's -- I think it's the second quarter in a row where you guys have retained a bit more than what I had thought. I guess, are you guys thinking -- as you guys retain more business, are you thinking you'll reach up to 40% retention in 2021? Or is that something more of like a 2022 event, just sort of thinking about how much business you guys are comfortably keeping on your own balance sheet?

No. Again, we don't want to provide guidance, but we did increase our retention on a couple of programs last year. And that takes time. It doesn't happen on the day the contract is signed, it happens over time as the premiums earned out, when you see it flow through the income statement. So it will -- it takes a full year before you see the full impact of that increased retention at that earned premium level. But we are increasing our retention. And so -- but again, that's offset by adding new programs where we're retaining anywhere from 0% to 10% only. So it really going to depend on the mix.

Dave, our business philosophy is to be very conservative in terms of retained risk on our new programs. And as Julie just alluded, we're keeping in the aggregate, over these new programs, something like just 6% net risk. And as those programs -- so we're keeping a lot more on our established programs to the degree that our new programs continue to produce as they did in the last 2 quarters, that will drive down our overall retained percentage even though our percentage on our existing business, where we think it's more proven is increasing.

Right. Right. That makes sense. And just to refresh my memory, are you guys at fully 100% retained on Compstar?

No, we are not.

Okay. Is that something you guys think you'll get to within the next year?

I don't think so. I don't think so.

Okay. Okay. That's fair. And I think the philosophy that you guys are following, it makes sense from a disciplined -- risk management discipline standpoint. I guess, if I could just sneak 1 more in. This is probably for Julie. I think you said it was, what, $14.8 million of favorable reserve releases. Could you maybe help me with what accident years those primarily came from?

I don't have that off the top of my head, David, that I would have to pull off the schedule piece, look at those. I would say the majority of it was in the 19 to 15 years.

I think it was spread pretty evenly over those years.

Our next question comes from the line of Adam Klauber with William Blair.

Couple of questions. Just a follow-up on the growth. Can you give us a rough idea on the contribution of organic versus new partners versus the acquisition?

A lot of the new growth, Adam, is coming from the new partners. The organic growth...

Yes. Yes. So we grew gross written premium in the fourth quarter about 37%. About 1/3 of that growth was from our existing programs and 2/3 of that was from our new business.

Okay. Okay. That's very helpful. And then just roughly, for the fourth quarter, what was the percent of business that was non-comp versus maybe the fourth quarter of last year?

The growth number. Adam, we have that number somewhere, but we get back to you with that.

Okay. Yes. Yes, sure. And also with the non-comp growth, is that coming both from the new partners and existing partners? Or is it more skewed towards the newer partners coming on?

It's mostly the new partners. We've seen a number of just very attractive programs last year that we've put on outside of work comp, and they're performing consistent with our expectations right now.

Okay. Okay. And along that lines, I think how you run the business, typically new programs you take lower retention. So I would assume that because some of these are -- the non-comp are newer programs, you probably have lower retention on that than your average book. Is that the ballpark, a fair assessment?

Absolutely a fair statement. Yes.

Okay. Okay. That's helpful. And then on expenses, and I totally understand that, not given guidance at this point. Can we think about the sort of, I guess, a base level. So excluding the accruals, your G&A was roughly $10 million in the fourth quarter. And you said you may elevate from there. But is that a reasonable base we can think about sort of that $10 million?

I think that would be giving guidance if I answer that, so I will refrain.

Okay. Okay. That is fair enough. You may have said but how is your pipeline for new programs? I guess twofold, one, how is your pipeline? And how is your ability to bring on new programs given that you had a really strong year last year?

The opportunities that are being presented to us continue to be at an elevated rate. We did put on 9 new programs last year. So there's -- with the number of new programs that we have that are just developing, we don't need to put on a lot of new programs this year to make some -- to make significant growth during the year.

Right. Right. But is that -- and clearly, I mean, you're showing much better growth than we had expected. But if you see some good programs, do you have the bandwidth right now? Or are you so busy with those? Because I mean, 9 programs is a lot, a lot compared to what you've historically done. Are you just sort of that capacity before getting these new programs up and running right now?

That's a great question, and I'll try and answer it in 2 parts. Yes, if a really good program came to us, we would have the bandwidth to add that program. But at some point, if we don't make some investments, we will find ourselves in a situation where a good program will come to us, and we won't be able to take advantage of it. And that's exactly the situation we want to avoid. We just see a great opportunity here, and we want to make sure that we can handle it responsibly and that we've got the resources in place to do the job.

And that's why we've made the decision that we're going to be making some investments in people and in automation efforts to make sure that we can always respond appropriately and quickly to a good program when it comes to us.

Okay. Great. And then can you give us, I guess, some idea what those investments in automation would be? Are those new policy management systems, new claims systems? I guess, what is -- generally, what does that entail?

It could be all of the above. I mean, certainly, we are working on a new claims system. And so that's something that we are working on now. We've identified a lot of low -- our IT people have identified a lot of low-hanging fruit items where by just making a few IT changes, we can really automate a number of areas that are not as automated as we'd like them to be. And I guess we're like every other insurance company that way. But we're feeling that we need to act now because of the growth, it's been exciting.

Are you thinking about upgrading your policy management system also?

I don't think -- well, you know what that gets us into guidance. So I think I better refrain.

Sorry. We'll take that off the table then.

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.

Thank you. Our program partners and our Trean team performed exceptionally well during this really difficult past year. And so my thanks to them for their commitment and effort. We enjoyed strong growth, and we're optimistic about our future. Our loss ratios were stable. We're executing on our proven historic plan. We thank you for your interest and support. Thank you.

This concludes today's program. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.