Trean Insurance Group Reports Fourth Quarter and Full Year 2021 Results, Provides 2022 Outlook

Full Year 2021 Net Income of $19.3 Million – 25th Consecutive Profitable Year

Commitment to Profitable Growth - Full Year 2021 Gross Written Premiums Grew 31%

57% Growth in Fourth Quarter Net Earned Premiums and 83% Growth for Full Year

WAYZATA, Minn., March 09, 2022 (GLOBE NEWSWIRE) -- Trean Insurance Group, Inc. (Nasdaq: TIG) (“Trean” or the “Company”), a leading provider of products and services to the specialty insurance market, today reported results for the fourth quarter and full year ended December 31, 2021.

Fourth Quarter and Full Year 2021 Highlights

  • Gross written premiums were $153.3 million in the fourth quarter, an increase of 14% compared to the same prior-year period. Full Year 2021 gross written premiums grew 31% to $634.2 million, compared to the prior year, strongly positioning the Company for profitable growth.
  • Net earned premiums increased 57% to $57.6 million in the fourth quarter, compared to the same prior-year period. Full Year 2021 net earned premiums were $198.7 million, an increase of 83% compared to the prior year.
  • Net income was $1.2 million, or $0.02 per diluted share, in the fourth quarter. Full Year 2021 net income was $19.3 million, or $0.38 per diluted share, reflecting the Company’s 25th consecutive year of profitability.
  • Adjusted net income(1) was $2.0 million, or $0.04 per diluted share, in the fourth quarter. Full Year adjusted net income was $22.1 million, or $0.43 per diluted share.
  • The Company’s fourth quarter loss and expense ratios were 76.4% and 23.9%, respectively, compared to 27.4% and 41.4%, respectively, in same prior-year period. Full Year 2021 loss and expense ratios were 65.8% and 27.5%, respectively, compared to 46.8% and 35.6%, respectively, for the prior year.
  • Combined ratio was 100.3% for the fourth quarter, compared to 68.8% for the same prior-year period. Full Year combined ratio was 93.3%, compared to 82.4% for the prior year.
  • Fourth quarter return on equity of 1.2%; adjusted return on equity(1) of 1.9%; and adjusted return on tangible equity of 3.9%(1). Full Year return on equity of 4.6%; adjusted return on equity of 5.3%; adjusted return on tangible equity was 11.0%.
  • As part of its commitment to profitable growth, the Company made the strategic decision to retain more premium. The fourth quarter retention rate was 36.9%, compared to 30.2% for the same prior-year period, and the full year retention rate was 34.7%, compared to 25.1% for the prior year.

(1) Adjusted net income, adjusted diluted earnings per share, adjusted return on equity, adjusted return on tangible equity and underwriting income are non-GAAP financial measures. See discussion of “Key Metrics” below.

Management Commentary

“We posted a 2021 calendar year combined ratio of 93.3% and earned an adjusted net income of $22.1 million, which represents an 11.0% adjusted return on tangible equity,” said Andrew O’Brien, Chief Executive Officer of Trean. “This combined ratio is substantially better than the overall insurance industry average and marks the 25th consecutive year in which Trean has earned a profit. We also grew gross written premiums above our expectations and enhanced our infrastructure to position ourselves for continued profitable growth. Before I talk about these positives, let’s address our higher-than-expected loss ratio.”

“When calculating our loss estimates, we keep in mind that favorable surprises are better than adverse surprises as too low an estimate can be more costly. Historically, our ultimate costs have been much lower than our initial projections. For example, in the developed year of 2017, we projected our 2017 claims would cost $35.6 million but, in hindsight, we now expect those claims to cost $23.4 million. Early in 2021, we reported on some of the large, unusual losses that we experienced in 2021. We expected that our loss results would average-out over the course of the full year, which was the case from May through November. Unfortunately, in December we incurred some new, large claims at the end of 2021. Large losses push up the reported loss ratio and have a multiplicative impact on actuarial loss projections. As a result, we reported a higher 2021 loss ratio.”

“Our elevated losses came primarily from three of our thirty programs. Ironically, these three programs were well established and had consistently produced positive results up to 2021, and as a result, we materially increased our retention in each of these programs during 2021. When the losses began to emerge, we carefully reviewed the operations of each program to see if there were any changes in rate levels, the claims environment, or underwriting practices that might be the cause for the elevated losses they were experiencing. Based upon that review, we believe these are good programs that will contribute to our future profitability despite the losses they experienced in 2021. We are very encouraged that prior years’ claims for these programs developed favorably during 2021. We are also encouraged that the three programs have reported positive results through February of this year, and as a result, we are expecting a first quarter 2022 loss ratio between 61.5% and 62.5% of net earned premium.”

“We grew gross written premiums 31% during 2021. This growth is all the more impressive considering the actions that we took with our California workers compensation business, which is our single largest program. During 2021, we saw three developments in California that concerned us. First, we encountered aggressive rate cutting competition for large accounts. Second, the legislature created a presumption that agricultural workers who contracted COVID contracted it on the job, enabling those workers to collect workers compensation benefits if they contracted COVID. Finally, the insurance department set rates below the level proposed by the state rating agency. We responded to these developments by exiting most agricultural risks, refusing to aggressively compete for large accounts, and seeking warranted rate increases on specific risks. As a result, our California workers compensation business shrunk by roughly 18.4% during 2021, or an amount equal to 7.3% of our total 2020 gross written premiums. We believe that we now have a better rated, more balanced risk pool and are positioned to regrow our California workers compensation business when the risk/reward ratio improves.”

“Our actions in California underscore two important points regarding our business. First, we are committed to profitable growth, not to growth itself, and we are prepared to take rapid action to preserve underwriting discipline. Second, the fact we grew so rapidly, despite shrinking our California business, demonstrates the strength of our overall business model and the attractive market available to us. We believe the insurance program market is large, rapidly growing, and that we have a leading position within that market.”

“In 2021 we invested significantly and prudently in time and capital to improve our infrastructure. Claims handling is a key focus for us and we are on track to launch a new claims software system designed to support our continued growth. Throughout the year we implemented a variety of IT upgrades to capture efficiencies in how we handle and analyze our business. We reorganized our processes to more effectively and quickly on-board new programs. Finally, we added skilled people throughout the organization to improve our capabilities and further strengthen our bench. I am proud that we accomplished these goals while carefully controlling our expenses. We strive to be both the most skilled and lowest cost competitor in our business area.”

Underwriting Results

Gross written premiums increased 14% to $153.3 million for the fourth quarter of 2021, compared to $134.5 million for the fourth quarter of 2020. The increase was largely driven by the full year effect of nine program partners added in the prior year and growth from existing program partners across the accident & health, commercial, commercial auto, homeowners and other liability lines of business. The growth in these lines reflect the Company’s continued strategy to diversify its product offerings. This growth was partially offset by a decrease in the California workers’ compensation business that resulted from the Company’s strategic measures undertaken to exit certain unfavorable workers’ compensation risks. The Company continues to balance its portfolio to minimize risk and emphasize lines of business that offer profitable growth.

Gross unearned premiums decreased $2.9 million in the fourth quarter of 2021, compared to an increase of $12.6 million in the prior-year period. As of December 31, 2021, the Company had net unearned premiums reflected on its balance sheet of $90.5 million, an increase of $5.9 million, or 7%, compared to September 30, 2021 and up $40.5 million, or 81%, from December 31, 2020. This continued growth in net unearned premium represents a material source of deferred potential profit.

Net earned premiums of $57.6 million grew 56.8% compared to the prior year’s fourth quarter, driven by an increase in gross earned premiums and the strategic decision to retain more gross written premiums.

General and administrative expenses were $13.8 million for the fourth quarter of 2021, compared to $15.2 million for the prior-year period. The decrease resulted primarily from $5.2 million of various accrual true-ups in the fourth quarter of 2020 that did not recur in the fourth quarter of 2021, partially offset by an increase in net commissions and insurance-related expenses that were primarily tied to the growth in gross earned premiums, as well as increased salaries and benefits resulting from an expanded workforce. The Company’s expense ratio was 23.9% for the fourth quarter of 2021, a 1750 basis point improvement compared to 41.4% for the prior-year period. The improvement in the expense ratio was primarily due to the year-over-year increase in net earned premiums and the non-recurrence of accrual true-ups included in the fourth quarter of 2020.

Net income was $1.2 million for the fourth quarter of 2021, compared to net income of $8.3 million for the prior-year period. Diluted earnings per share for the fourth quarter of 2021 was $0.02. Adjusted net income(1), which excludes intangible asset amortization, noncash stock compensation and the effect of unrealized funds held investment losses on the fair value of embedded derivatives and their related tax impact, was $2.0 million for the fourth quarter of 2021, compared to adjusted net income of $11.2 million for the prior-year period. Adjusted diluted earnings per share for the fourth quarter of 2021 was $0.04.

Underwriting loss of $0.2 million resulted in a combined ratio of 100.3% for the fourth quarter of 2021, compared to underwriting income of $11.4 million and a combined ratio of 68.8% for the prior-year period. Losses and loss adjustment expenses for the fourth quarter of 2021 were $44.0 million, which resulted in a 76.4% loss ratio, compared to 27.4% in the prior-year period. The increase in the loss ratio during the fourth quarter of 2021 versus the prior-year period was primarily attributable to an unusual number of large losses experienced during 2021, including in the fourth quarter, resulting in a significantly higher 2021 accident year loss ratio compared to what was experienced in 2020.

Investment Results

Net investment income was $2.2 million for the fourth quarter of 2021, compared to $2.5 million in the prior-year period.   Cash and invested assets consist primarily of fixed maturities, equity securities and cash equivalents. The majority of the Company’s investment portfolio at December 31, 2021 was comprised of $471.1 million of fixed maturity securities that were classified as available-for-sale. The Company also had $129.6 million of cash and cash equivalents on its balance sheet as of December 31, 2021.   The Company’s fixed maturities portfolio had an average rating of “AA” at both December 31, 2021 and December 31, 2020.

Other

Other revenue was $1.6 million for the fourth quarter of 2021, compared to $0.8 million for the prior-year period, due to a year-over-year increase in brokerage revenue.

Stockholders’ Equity and Returns

Total stockholders’ equity was $421.9 million at December 31, 2021, compared to $410.1 million at December 31, 2020. Return on equity was 1.2% for the fourth quarter of 2021, compared to 8.2% for the prior-year period, and adjusted return on equity(1) was 1.9% for the fourth quarter of 2021, compared to 11.0% for the prior-year period. Return on tangible equity was 2.4% for the fourth quarter of 2021, compared to 17.4% for the prior-year period and adjusted return on tangible equity was 3.9% for the fourth quarter of 2021, compared to 23.4% for the prior-year period.

Full Year 2022 Outlook

The Company is providing the following outlook for the full year 2022:

-  Gross written premium between $655 million and $670 million

  • The Company expects to deliberately moderate gross written premium growth in 2022 as 31% growth in 2021 placed the Company well on track to achieve its long-term gross written premium goals. It will focus its efforts in 2022 on effectively managing premium to ensure sustained net income growth.

-  Net earned premium between $240 million and $250 million. This represents year-over-year growth of 21% on the lower end and 26% on the upper end

  • Net earned premium outlook reflects expected increased retention rate throughout 2022 based on current contracts in-force.

-  Total revenue between $253 million and $263 million

-  Expense ratio 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 offset to general and administrative expenses, as well as additional 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.

First Quarter 2022 Outlook

As noted in management commentary, the Company expects first quarter 2022 loss ratio to be between 61.5% and 62.5% of net earned premium

Webcast and Conference Call

A webcast and conference call to discuss the Company’s results will be held today beginning at 5:00 p.m. (Eastern Time). The audio webcast is accessible through the investor relations section of the Company’s website at https://investors.trean.com.

The dial-in number for the conference call is (877) 407-3982 (toll-free) or (201) 493-6780 (international), conference ID# 13727381. Any person interested in listening to the call should dial in or access the website at least 10 minutes before the call.

A replay of the call will be available at https://investors.trean.com for one year following the call.

Key Metrics

The Company discusses certain key financial and operating metrics, described below, which provide useful information about its business and the operational factors underlying its financial performance.

Underwriting income is a non-GAAP financial measure defined as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of underwriting income to income before taxes in accordance with GAAP.

Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of various specific events, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and stock compensation, other expenses and gains or losses that the Company does not believe reflect its core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of the Company’s results across periods. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.

Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums.

Expense ratio, expressed as a percentage, is the ratio of general and administrative expenses to net earned premiums.

Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.

Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

Adjusted return on equity is a non-GAAP financial measured defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.

Tangible stockholders’ equity is defined as stockholders’ equity less goodwill and other intangible assets.

Return on tangible equity is a non-GAAP financial measure defined as net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period.

Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on tangible equity to return on equity in accordance with GAAP.

Forward-Looking Statements

This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that are not historical or current facts. These statements may discuss the Company’s net income, cash flow, financial condition, impairments, expenditures, growth, strategies, plans, achievements, capital structure, organizational structure, market opportunities and general market and industry conditions. Such forward-looking statements can be identified by words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “predict,” “project,” “believe,” “seek,” “outlook,” “future,” “will,” “would,” “should,” “could,” “may,” “can have,” “likely” and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events. These statements are only predictions and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements if the underlying assumptions prove to be incorrect or as a result of risks, uncertainties, and other factors, including the impact of the COVID-19 pandemic on the business and operations of the Company, our program partners and other business relations. Other factors that may cause such differences include the risks described in the Company’s filings with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. These forward-looking statements speak only as of the date on which they are made. Except as required by applicable securities laws, the Company disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, changes in assumptions or otherwise. Investors are cautioned not to place undue reliance on the forward-looking statements contained in this press release or in other filings and public statements of the Company.

About Trean Insurance Group, Inc.

Trean Insurance Group, Inc. (Nasdaq: TIG) provides products and services to the specialty insurance market. Trean underwrites specialty casualty insurance products both through its program partners and its own managing general agencies. Trean also provides its program partners with a variety of services including issuing carrier services, claims administration and reinsurance brokerage. Trean is licensed to write business across 49 states and the District of Columbia. For more information, please visit www.trean.com.

Contacts

Investor Relations
investor.relations@trean.com 
(952) 974-2260

 
Trean Insurance Group, Inc. and Subsidiaries
 
Condensed Consolidated and Combined Statements of Operations
 
(in thousands, except for percentages, share and per share amounts)
 
(unaudited)
                               
  Three Months Ended December 31,       Percentage   Twelve Months Ended December 31,       Percentage
    2021       2020     Change   Change(1)     2021       2020     Change   Change(1)
Revenues                              
Gross written premiums $ 153,259     $ 134,494     18,765     14.0 %   $ 634,164     $ 484,249     149,915     31.0 %
Increase in gross unearned premiums   2,925       (12,614 )   15,539     (123.2 )%     (61,911 )     (52,215 )   (9,696 )   18.6 %
Gross earned premiums   156,184       121,880     34,304     28.1 %     572,253       432,034     140,219     32.5 %
Ceded earned premiums   (98,536 )     (85,107 )   (13,429 )   15.8 %     (373,573 )     (323,567 )   (50,006 )   15.5 %
Net earned premiums   57,648       36,773     20,875     56.8 %     198,680       108,467     90,213     83.2 %
Net investment income   2,159       2,535     (376 )   (14.8 )%     8,721       11,669     (2,948 )   (25.3 )%
Gain on revaluation of Compstar   -       -     -     NM     -       69,846     (69,846 )   (100.0 )%
Net realized capital gains   (23 )     20     (43 )   NM     49       3,365     (3,316 )   (98.5 )%
Other revenue   1,557       781     776     99.4 %     10,240       12,104     (1,864 )   (15.4 )%
Total revenue   61,341       40,109     21,232     52.9 %     217,690       205,451     12,239     6.0 %
Expenses                              
Losses and loss adjustment expenses   44,037       10,093     33,944     NM     130,772       50,774     79,998     157.6 %
General and administrative expenses   13,760       15,231     (1,471 )   (9.7 )%     54,706       38,668     16,038     41.5 %
Other expenses   -       2,373     (2,373 )   (100.0 )%     845       13,427     (12,582 )   (93.7 )%
Intangible asset amortization   1,500       1,419     81     5.7 %     5,826       2,573     3,253     126.4 %
Noncash stock compensation   424       199     225     113.1 %     1,522       506     1,016     NM
Interest expense   414       440     (26 )   (5.9 )%     1,685       1,922     (237 )   (12.3 )%
Total expenses   60,135       29,755     30,380     102.1 %     195,356       107,870     87,486     81.1 %
Gains (losses) on embedded derivatives   357       (608 )   965     (158.7 )%     2,226       (6,155 )   8,381     (136.2 )%
Other income   28       762     (734 )   (96.3 )%     219       1,025     (806 )   (78.6 )%
Income before taxes   1,591       10,508     (8,917 )   (84.9 )%     24,779       92,451     (67,672 )   (73.2 )%
Income tax expense   347       2,200     (1,853 )   (84.2 )%     5,449       6,235     (786 )   (12.6 )%
Equity earnings in affiliates, net of tax   -       -     -     NM     -       2,333     (2,333 )   (100.0 )%
Net income $ 1,244     $ 8,308     (7,064 )   (85.0 )%   $ 19,330     $ 88,549     (69,219 )   (78.2 )%
                               
Earnings per share:                              
Basic $ 0.02     $ 0.16             $ 0.38     $ 2.02          
Diluted $ 0.02     $ 0.16             $ 0.38     $ 2.02          
                               
Weighted average shares outstanding:                              
Basic   51,175,996       51,148,782               51,162,293       43,744,003          
Diluted   51,175,996       51,150,187               51,173,450       43,744,744          
                               
(1)The Company defines increases or decreases greater than 200% as “NM” or not meaningful.
                               


Key Metrics
 
(in thousands, except for percentages)
 
(unaudited)
               
  Three Months Ended December 31,   Twelve Months Ended December 31,
    2021       2020       2021       2020  
Key metrics:              
Underwriting income(1) $ (149 )   $ 11,449     $ 13,202     $ 19,025  
Adjusted net income(1) $ 2,029     $ 11,179     $ 22,132     $ 32,778  
Loss ratio   76.4 %     27.4 %     65.8 %     46.8 %
Expense ratio   23.9 %     41.4 %     27.5 %     35.6 %
Combined ratio   100.3 %     68.8 %     93.3 %     82.4 %
Return on equity   1.2 %     8.2 %     4.6 %     32.1 %
Adjusted return on equity(1)   1.9 %     11.0 %     5.3 %     11.9 %
Return on tangible equity(1)   2.4 %     17.4 %     9.7 %     53.2 %
Adjusted return on tangible equity(1)   3.9 %     23.4 %     11.0 %     19.7 %
               
(1)Adjusted net income, adjusted return on equity, return on tangible equity, adjusted return on tangible equity and underwriting income are
non-GAAP financial measures. See “Reconciliation of Non-GAAP Financial Measures” below for a reconciliation to the applicable GAAP measure.
 


Trean Insurance Group, Inc. and Subsidiaries
 
Condensed Consolidated Balance Sheets
 
(in thousands)
       
  December 31, 2021   December 31, 2020
Assets (unaudited)    
Fixed maturities, available for sale $ 471,061   $ 405,604
Preferred stock, at fair value   228     240
Common stock, at fair value   741     3,534
Equity method investments   -     232
Total investments   472,030     409,610
       
Cash and cash equivalents   129,577     153,149
Restricted cash   407     4,085
Accrued investment income   2,344     2,458
Premiums and other receivables   141,920     109,217
Income taxes receivable   460     1,322
Reinsurance recoverable   377,241     343,213
Prepaid reinsurance premiums   129,411     107,971
Deferred policy acquisition cost, net   13,344     1,332
Property and equipment, net   7,632     8,254
Right of use asset   4,530     6,338
Goodwill   142,347     140,640
Intangible assets, net   73,114     75,316
Other assets   8,658     6,878
Total assets $ 1,503,015   $ 1,369,783
       
Liabilities      
Unpaid loss and loss adjustment expenses $ 544,320   $ 457,817
Unearned premiums   219,940     157,987
Funds held under reinsurance agreements   199,410     174,704
Reinsurance premiums payable   45,130     57,069
Accounts payable and accrued expenses   29,448     61,240
Lease liability   4,976     6,893
Deferred tax liability   7,520     12,329
Debt   30,362     31,637
Total liabilities   1,081,106     959,676
Commitments and contingencies      
Stockholders' Equity      
Common stock, $0.01 par value per share (600,000,000 authorized;
51,176,887 and 51,148,782 issued and outstanding as of December 30,
2021 and December 31, 2020, respectively)
  512     511
Additional paid-in capital   288,623     287,110
Retained earnings   128,390     109,060
Accumulated other comprehensive income   4,384     13,426
Total stockholders' equity   421,909     410,107
Total liabilities and stockholders' equity $ 1,503,015   $ 1,369,783
       


Supplemental Table of Other Revenue Components  
      
  Three Months Ended December 31,   Twelve Months Ended December 31,  
(unaudited, in thousands)   2021     2020     2021     2020  
Other Revenue                
Brokerage $ 822   $ 124   $ 7,036   $ 8,994 (1)
Managing general agent fees   196     256     603     976  
Third-party administrator fees   417     301     1,608     1,630  
Consulting and other fee-based revenue   122     100     993     504  
Total Other Revenue   1,557     781     10,240     12,104  
                 
(1) Includes a $2.2 million brokerage revenue increase related to an increase in estimated premiums and the timing of effective dates on brokered reinsurance contracts recognized in the third quarter of 2020.  


Supplemental Table of Net Investment Income Components
 
    Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)     2021       2020       2021       2020  
Fixed maturities   $ 1,597     $ 1,587     $ 6,331     $ 6,271  
Income on funds held investments     555       864       2,338       3,345  
Preferred stock     7       9       48       48  
Common stock     -       76       -       1,980  
Interest on cash and short-term investments     -       (1 )     4       25  
Total net investment income   $ 2,159     $ 2,535     $ 8,721     $ 11,669  
                 
 
Supplemental Table of Gain (Loss) on Embedded Derivative Components
                 
    Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)     2021       2020       2021       2020  
Change in fair value of embedded derivatives   $ 905     $ 256     $ 4,666     $ (2,810 )
Effect of net investment income on funds held investments     (555 )     (864 )     (2,338 )     (3,345 )
Effect of realized gains on funds held investments     7       -       (102 )     -  
Total gains (losses) on embedded derivatives   $ 357     $ (608 )   $ 2,226     $ (6,155 )
                 


Supplemental Table of Net G&A Components
 
    Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)     2021       2020       2021       2020  
Direct commissions   $ 27,660     $ 27,439     $ 105,965     $ 90,256  
Ceding commissions     (31,140 )     (26,425 )     (120,688 )     (105,500 )
Net commissions     (3,480 )     1,014       (14,723 )     (15,244 )
Insurance-related expense     5,936       4,537       20,732       16,075  
G&A operating expenses     11,304       9,680       48,697       37,837  
Total G&A expense   $ 13,760     $ 15,231     $ 54,706     $ 38,668  
                 
G&A operating expense - % of GWP   7.4 %     7.2 %     7.7 %     7.8 %
Retention rate(1)     36.9 %     30.2 %     34.7 %     25.1 %
Direct commission rate(2)     17.7 %     22.5 %     18.5 %     20.9 %
Ceding commission rate(3)     31.6 %     31.0 %     32.3 %     32.6 %
                 
(1)Net earned premiums as a percentage of gross earned premiums.
(2)Direct commissions as a percentage of gross earned premiums.
(3)Ceding commissions as a percentage of ceded earned premiums.
                 

Reconciliation of Non-GAAP Financial Measures

Underwriting income

The Company defines underwriting income as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. Underwriting income represents the pre-tax profitability of the Company’s underwriting operations and allows management to evaluate the Company’s underwriting performance without regard to investment income, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. The Company uses this metric because the Company believes it gives management and other users of the Company’s financial information useful insight into the Company’s underwriting business performance by adjusting for these expenses and sources of income. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.

  Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)   2021       2020       2021       2020  
Net income $ 1,244     $ 8,308     $ 19,330     $ 88,549  
Income tax expense   347       2,200       5,449       6,235  
Equity earnings in affiliates, net of tax   -       -       -       (2,333 )
Income before taxes   1,591       10,508       24,779       92,451  
Other revenue   (1,557 )     (781 )     (10,240 )     (12,104 )
Gains (losses) on embedded derivatives   (357 )     608       (2,226 )     6,155  
Net investment income   (2,159 )     (2,535 )     (8,721 )     (11,669 )
Gain on revaluation of Compstar   -       -       -       (69,846 )
Net realized capital gains (losses)   23       (20 )     (49 )     (3,365 )
Other expenses   -       2,373       845       13,427  
Interest expense   414       440       1,685       1,922  
Intangible asset amortization   1,500       1,419       5,826       2,573  
Noncash stock compensation   424       199       1,522       506  
Other income   (28 )     (762 )     (219 )     (1,025 )
Underwriting income $ (149 )   $ 11,449     $ 13,202     $ 19,025  
               

Adjusted net income

The Company defines adjusted net income as net income excluding the impact of certain items, including the consummation of the reorganization transactions in connection with the IPO, noncash intangible asset amortization and stock compensation, other expenses and gains or losses that the Company believes do not reflect its core operating performance, which items may have a disproportionate effect in a given period, affecting comparability the Company’s results across periods. The Company calculates the tax impact only on adjustments that would be included in calculating the Company’s income tax expense using the effective tax rate at the end of each period. The Company uses adjusted net income as an internal performance measure in the management of its operations because the Company believes it gives its management and other users of its financial information useful insight into the Company’s results of operations and underlying business performance by eliminating the effects of these items. Adjusted net income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted net income differently.

  Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)   2021       2020       2021       2020  
Net income $ 1,244     $ 8,308     $ 19,330     $ 88,549  
Intangible asset amortization   1,500       1,419     $ 5,826       2,573  
Noncash stock compensation   424       199     $ 1,522       506  
Change in fair value of embedded derivatives   (905 )     (256 )   $ (4,666 )     2,810  
Other expenses   -       2,373     $ 845       13,427  
Expenses associated with Altaris management fee,
including cash bonuses paid to unitholders
  -       -     $ -       883  
Expenses associated with IPO and other one-time
legal and consulting expenses
  -       -     $ -       1,845  
Expenses related to debt issuance costs   -       -     $ -       135  
FMV adjustment of remaining investment in subsidiary   -       -     $ -       (71,846 )
Net loss (gain) on purchase & disposal of subsidiaries   -       -     $ 112       (3,115 )
Total adjustments   1,019       3,735     $ 3,639       (52,782 )
Tax impact of adjustments   (234 )     (864 )   $ (837 )     (2,989 )
Adjusted net income $ 2,029     $ 11,179     $ 22,132     $ 32,778  
               

Adjusted return on equity

The Company defines adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. The Company uses adjusted return on equity as an internal performance measure in the management of its operations because the Company believes it gives management and other users of the Company’s financial information useful insight into the Company’s results of operations and underlying business performance by adjusting for items that the Company believes do not reflect its core operating performance and that may diminish comparability across periods. Adjusted return on equity should not be viewed as a substitute for return on equity calculated in accordance with GAAP, and other companies may define adjusted return on equity differently.

               
  Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)   2021       2020       2021       2020  
Adjusted return on equity calculation:              
Numerator: adjusted net income $ 2,029     $ 11,179     $ 22,132     $ 32,778  
Denominator: average stockholders' equity   422,101       405,930       416,008       275,861  
Adjusted return on equity   1.9 %     11.0 %     5.3 %     11.9 %
Return on equity   1.2 %     8.2 %     4.6 %     32.1 %
               

Return on tangible equity and adjusted return on tangible equity

The Company defines tangible stockholders’ equity as stockholders’ equity less goodwill and other intangible assets. The Company defines return on tangible equity as net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period. The Company defines adjusted return on tangible equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period. The Company regularly evaluates acquisition opportunities and have historically made acquisitions that affect stockholders’ equity. The Company uses return on tangible equity and adjusted return on tangible equity as internal performance measures in the management of the Company’s operations because the Company believes they give management and other users of its financial information useful insight into the Company’s results of operations and underlying business performance by adjusting for the effects of acquisitions on the Company’s stockholders’ equity and, in the case of adjusted return on tangible equity, by adjusting for items that the Company believes do not reflect its core operating performance and that may diminish comparability across periods. Return on tangible equity and adjusted return on tangible equity should not be viewed as substitutes for return on equity calculated in accordance with GAAP, and other companies may define return on tangible equity and adjusted return on tangible equity differently.

  Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)   2021       2020       2021       2020  
Return on tangible equity calculation:              
Numerator: net income $ 1,244     $ 8,308     $ 19,330     $ 88,549  
Denominator:              
Average stockholders' equity   422,101       405,930       416,008       275,861  
Less: Average goodwill and other intangible assets   216,108       214,484       215,709       109,466  
Average tangible stockholders' equity   205,993       191,446       200,299       166,395  
Return on tangible equity   2.4 %     17.4 %     9.7 %     53.2 %
Return on equity   1.2 %     8.2 %     4.6 %     32.1 %
               
               
  Three Months Ended December 31,   Twelve Months Ended December 31,
(unaudited, in thousands)   2021       2020       2021       2020  
Adjusted return on tangible equity calculation:              
Numerator: adjusted net income $ 2,029     $ 11,179     $ 22,132     $ 32,778  
Denominator: average tangible stockholders' equity   205,993       191,446       200,299       166,395  
Adjusted return on tangible equity   3.9 %     23.4 %     11.0 %     19.7 %
Return on equity   1.2 %     8.2 %     4.6 %     32.1 %
               

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Source: Trean Insurance Group, Inc.

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