Trean Insurance Group, Inc. (TIG) Q1 2022 Earnings Call Transcript

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Trean Insurance Group, Inc. (TIG)
Q1 2022 Earnings Call
May 04, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Trean Insurance Group, Inc. first quarter 2022 earnings call. [Operator instructions] Please note that this conference is being recorded.

I will now turn the conference over to your host, Garrett Edson, you may begin.

Garrett Edson -- Investor Relations

Thank you, operator. Good afternoon, and welcome to Trean 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.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. 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 referred 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 Baron, 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.

Andy O'Brien -- President and Chief Executive Officer

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 Trean. 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 $0.16 per diluted share, which represents a 16.2% adjusted return on tangible equity. At our fourth quarter earnings call, we forecast today's first quarter 2022 loss ratio between 61.5% and 62.5% of net earned premium.

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. The events during the first quarter supported our belief that the unexpected number of large losses in 2021 were a nonrecurring 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 Trean 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 Trean further and sustainably grow its top and bottom line. With that, let me turn the call over to our incoming CEO, Julie Baron. Julie?

Julie Baron -- Incoming Chief Executive Officer

Thank you, Andy. It has been an excellent pleasure working closely with you over the last 15 years. I and the Trean team are excited to lead Trean 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% to $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. Gross unearned 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 profit. 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.

Nick Vassallo -- Chief Financial Officer

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 totaled $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 ceding 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 the 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 from 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 ceding commission expense offset to G&A expenses, as well as reductions in ceding commissions resulting from adding more short tail lines of business which typically have lower front fees.

Expense ratio also reflects expected continued operational investments in the company throughout the rest of 2022. For the second quarter 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?

Questions & Answers:

Operator

[Operator instructions] Our first question is from Pablo Singzon with J.P. Morgan. Please proceed with your question.

Pablo Singzon -- J.P. Morgan -- Analyst

Hi. Thank you. So just on the loss ratio this quarter, I think you guys noted a small amount of favorable QID. So if you add that back, it's about 61.7%.

My question is, and I assume that's mostly elastic, right, just given where you are in the year. I was hoping for some context on how the compares to what you've done over the past couple of years, even if it's not a specific number, but directionally, has that been going up or going down? And, I guess, the follow-up question to that is, I was hoping you could speak to what you're seeing in terms of pricing of workers' comp and loss trends. Like, 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.

Andy O'Brien -- President and Chief Executive Officer

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 we doubled us in the first quarter of 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. If you'd ask for some reference to how things looked in the past. This quarter, we remind me very much of most of our years prior to 2021. So we're quite pleased with it.

Pablo Singzon -- J.P. Morgan -- Analyst

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.

Andy O'Brien -- President and Chief Executive Officer

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.

Pablo Singzon -- J.P. Morgan -- Analyst

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

Andy O'Brien -- President and Chief Executive Officer

It's too early to know yet. Yes, 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 payroll has really started a few months ago, when we started to hear that consistently in the press.

And that's just too early to see it starting to hit in our revenues.

Pablo Singzon -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

[Operator instructions] Our next question is from David Motemaden with Evercore ISI. Please proceed with your question.

David Motemaden -- Evercore ISI -- Analyst

Hi. Thanks. Good afternoon. And first, before I ask my question, Andy, just wanted to say good luck in your next chapter.

It's been great working with you. 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 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?

Andy O'Brien -- President and Chief Executive Officer

Thanks for your kind comment at the start, David. Thank you. When we talked last quarter when we gave a full review of 2021, we talked about the three programs that have 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 fourth -- in the first quarter. The 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.

David Motemaden -- Evercore ISI -- Analyst

Got it. OK. 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 gave you comfort to increase retention. Are those on -- 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.

Andy O'Brien -- President and Chief Executive Officer

David, a lot of the retention that 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 the 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 -- 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 all 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?

David Motemaden -- Evercore ISI -- Analyst

I guess so. 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?

Andy O'Brien -- President and Chief Executive Officer

You know, 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 have been made about what we're 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. And so we thought it would be appropriate to let the market know that.

David Motemaden -- Evercore ISI -- Analyst

Got it. OK. Understood. And then if I could ask one more just in the revenue outlook.

It appears like it went up -- for the full year, it went up -- 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?

Andy O'Brien -- President and Chief Executive Officer

Well, first, to answer your question, David, on 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 in 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 $1 million, 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'll continue to look at quarter to quarter, depending on what's going on in our available cash. So does that answer the question?

David Motemaden -- Evercore ISI -- Analyst

Yes, it does. Yes. Thank you.

Operator

We have reached the end of the question-and-answer session. And I will now turn the call over to Andy O'Brien for closing remarks.

Andy O'Brien -- President and Chief Executive Officer

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 Trean team members, and we look forward to continuing the path that we are on, and we thank you for your interest in our company.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Garrett Edson -- Investor Relations

Andy O'Brien -- President and Chief Executive Officer

Julie Baron -- Incoming Chief Executive Officer

Nick Vassallo -- Chief Financial Officer

Pablo Singzon -- J.P. Morgan -- Analyst

David Motemaden -- Evercore ISI -- Analyst

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