Innovation Group (TIG) Q1 2021 Earnings Call Transcript

Innovation Group (TIG)
Q1 2021 Earnings Call
May 12, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Trean Insurance Group's, Inc. first-quarter 2021 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 from ICR. Thank you, sir. You may begin.

Garrett Edson -- ICR

Thank you, operator. Good afternoon, and welcome to Trean Insurance Group's first-quarter 2021 earnings call. This afternoon, the company released its financial results for the quarter ended March 31, 2021. 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 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 risk 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 to 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.

Andy O'Brien -- President and Chief Executive Officer

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 Trean. On today's call, I will walk through our higher-level results and update you on the great progress we are 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 premiums, 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 adjusted net income, after excluding nonrecurring other expenses and significant noncash items, of $8 million or $0.16 per diluted share reducing 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 nonworkers' comp programs.

In the first quarter, our nonworkers' 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 remained 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 claims 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 earned 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 will now turn the call over to Julie.

Julie Baron -- Chief Financial Officer

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 nonworkers' compensation liability lines of business.

We remain strongly positioned for continued growth -- continued gross written premium growth throughout 2021. Gross 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 fairly common occurrence when we onboard new program partners. Thus, we continue to recommend that the focus be on gross written premiums is 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 ceded earned premium. We note that the gross unearned premiums we recorded in the first quarter of 2021 is more indicative of what we would expect to see from this line item as we continue to grow. As Andy mentioned, this is a strong positive for our business as it means that we are growing more rapidly than we previously anticipated, and those other unearned premiums will eventually convert into earned premiums in time. We remain confident in our ability to onboard additional program partners to 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. G&A 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 and 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 date of the underlying reinsurance contracts. Net income for the first quarter of 2021 was $6.8 million or $0.13 diluted earnings per share.

When excluding intangible asset amortization, noncash stock compensation, and nonrecurring 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 $0.16. 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 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 we'll now open up the call for Q&A. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Jimmy Bhullar with J.P. Morgan. You may proceed with your question.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Hi. I had a couple of questions. First, just if you could quantify what your property losses were in 1Q and what they were the year-ago period, so people get a better sense of your loss ratio, ex sort of catastrophe or other events. And then relatedly, if you could give us the -- or if you could quantify any impact you had on your loss ratio from prior-year development.

Thank you.

Andy O'Brien -- President and Chief Executive Officer

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 do 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.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Any positive development because you've had that consistency over time? Or was there no development period?

Andy O'Brien -- President and Chief Executive Officer

We did not recognize any development [Inaudible] in the quarter.

Julie Baron -- Chief Financial Officer

Yes. It's very minor, like $26,000 of [Inaudible].

Jimmy Bhullar -- J.P. Morgan -- Analyst

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?

Andy O'Brien -- President and Chief Executive Officer

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.

Jimmy Bhullar -- J.P. Morgan -- Analyst

OK. 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, I believe, of workers and if that could drive an uptick in losses.

Andy O'Brien -- President and Chief Executive Officer

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 workers not being as trained as well as they should be. It's early though, Jimmy.

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.

Jimmy Bhullar -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

Our next question comes from the line of Matt Carletti with JMP Securities. You may proceed with your question.

Matt Carletti -- JMP Securities -- Analyst

Thanks. Good afternoon. First question is 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?

Julie Baron -- Chief Financial Officer

Sure. So our new programs represented about 16% of the total gross written premium in the first quarter of 2021. And then on our -- and then our organic growth on our owned programs was about 4.6% and organic growth on our existing program -- partners is about 33%.

Matt Carletti -- JMP Securities -- Analyst

Got it. OK. 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 ballpark a level that we should stabilize at in the near term? Or should we expect that to continue to drift up as we move forward throughout the year?

Julie Baron -- Chief Financial Officer

You know, Matt, it's a little hard to say with the mix of the business, if we have a little more growth on a program that we have a lower retention on or want to have a higher retention. I think that's probably not a bad place to start.

Matt Carletti -- JMP Securities -- Analyst

Great. Very helpful. Thanks for the color.

Operator

[Operator instructions] Our next question comes from the line of David Motemaden with Evercore ISI. You may proceed with your question

David Motemaden -- Evercore ISI -- Analyst

Hi. Thanks. Good afternoon. I had a question just on the expenses, the G&A expenses.

Understand you expect those to remain elevated throughout the course -- the rest of the course of the year. Should I take that to mean that we should expect them to come in and around that $12 million a quarter-ish type of level? Or maybe if you could provide some commentary around that.

Unknown speaker

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.

David Motemaden -- Evercore ISI -- Analyst

Got it. Thanks. That's helpful. And then, Andy, I guess, just sort of a higher-level question, just on the growth and the non-comp liability lines.

Obviously, the market has 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 -- I think a lot of it is general liability, but maybe you can also give us a bit more detail on what specifically it is that's driving that growth.

Andy O'Brien -- President and Chief Executive Officer

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, which, of course, is a 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% of the business that these partners are writing. And that's pursuant with our conservative approach toward assuming underwriting risk at the outset of a program. Should these programs continue to develop well, I could see us taking larger participation.

David Motemaden -- Evercore ISI -- Analyst

Got it. That's helpful. Yes. So just -- and then I guess, just because of the low retention, that helps you get comfort.

And then I guess we should relatedly -- 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 comment on that.

Andy O'Brien -- President and Chief Executive Officer

Yeah, I can. Because our risk retention is so small in these other lines of business, it would be very difficult for them to have any kind of meaningful 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, we're just not anticipating that these other lines are going to materially impact our loss ratio.

David Motemaden -- Evercore ISI -- Analyst

Got it. That makes sense. Thank you.

Operator

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.

Andy O'Brien -- President and Chief Executive Officer

Thank you. We had a very good quarter. When we look at what our true north is, how do we evaluate how we're performing, we look at two things: first, our growth in 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.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Garrett Edson -- ICR

Andy O'Brien -- President and Chief Executive Officer

Julie Baron -- Chief Financial Officer

Jimmy Bhullar -- J.P. Morgan -- Analyst

Andy OBrien -- President and Chief Executive Officer

Matt Carletti -- JMP Securities -- Analyst

David Motemaden -- Evercore ISI -- Analyst

Unknown speaker

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