Trean Insurance Group Reports Second Quarter 2020 Results
Second Quarter 2020 Highlights and Subsequent Events
- Gross written premiums increased by 5.0% to
$109.6 million , compared to$104.4 million in the second quarter of 2019 - Loss ratio of 57.0%, compared to 55.7% in the second quarter of 2019
- Expense ratio of 38.9% compared to 26.5% in the second quarter of 2019, primarily driven by
$1.8 million of additional professional service expenses related to legal, consulting and other IPO and public company readiness efforts, as well as expenses associated with an increased workforce - Combined ratio of 95.9%, primarily driven by the increased expense ratio
- Net income was
$3.7 million ; Adjusted net income(1) was$4.8 million - Return on equity of 10.3%; Adjusted return on equity(1) of 13.2%
- Upon completion of the reorganization transactions in connection with the IPO, acquired the remaining 55% interest in
Compstar Holding Company LLC (“Compstar”) and now owns 100% of Compstar, the parent of a general agent underwriting workers’ compensation insurance coverage forCalifornia contractors - Subsequent to the second quarter, entered into agreement to acquire 7710
Insurance Company and its associated program manager and agency
(1) Adjusted net income, adjusted return on equity and underwriting income are non-GAAP financial measures. See discussion of “Key Metrics” below.
“Having recently completed a successful initial public offering in July, our focus remains on executing on our proven 24-year business model to drive future growth,” said Andrew M. O’Brien, President and Chief Executive Officer of
Underwriting Results
Gross written premiums increased 5.0% to
Underwriting income(1) was
General and administrative expenses increased
The second quarters of 2020 and 2019 included certain expenses related to the IPO, transaction and other one-time consulting expenses, expenses related to debt refinancing and management fee expenses including cash bonuses paid to unitholders. Adjusted net income(1), which excludes those items, for the second quarter of 2020 was
Investment Results
Net investment income was
Other
Other revenue decreased
Equity earnings, net of tax was
Members’ Equity and Returns
Total members’ equity was
Webcast and Conference Call
A webcast and conference call to discuss the Company’s results will be held today beginning at
The dial-in number for the conference call is (833) 519-1344 (toll-free) or (914) 800-3906 (international), conference ID# 2439999. 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, net realized capital gains or losses, other revenue, interest expense and other income. 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 unusual events, including the consummation of the reorganization transactions in connection with the IPO, or 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. 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 members’ 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 members’ 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 members’ equity is defined as members’ 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 members’ 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 members’ 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. You can identify forward-looking statements 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. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that may cause such differences include the risks described in the Company’s filings with the
About
Contacts
Investor Relations
investor.relations@trean.com
(952) 974-2260
Condensed Combined Statements of Operations | |||||||||||||||||||||||||
(in thousands, except for percentages) | |||||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||
Three Months Ended |
Percentage | Six Months Ended |
Percentage | ||||||||||||||||||||||
2020 | 2019 | Change | Change | 2020 | 2019 | Change | Change | ||||||||||||||||||
Revenues | |||||||||||||||||||||||||
Gross written premiums | $ | 109,612 | $ | 104,420 | 5,192 | 5.0% | $ | 217,471 | $ | 205,954 | 11,517 | 5.6% | |||||||||||||
Increase in gross unearned premiums | (9,265 | ) | (1,535 | ) | (7,730 | ) | 503.6% | (16,638 | ) | (12,487 | ) | (4,151 | ) | 33.2% | |||||||||||
Gross earned premiums | 100,347 | 102,885 | (2,538 | ) | (2.5)% | 200,833 | 193,467 | 7,366 | 3.8% | ||||||||||||||||
Ceded earned premiums | (78,968 | ) | (79,508 | ) | 540 | (0.7)% | (156,995 | ) | (150,466 | ) | (6,529 | ) | 4.3% | ||||||||||||
Net earned premiums | 21,379 | 23,377 | (1,998 | ) | (8.5)% | 43,838 | 43,001 | 837 | 1.9% | ||||||||||||||||
Net investment income | 1,524 | 1,570 | (46 | ) | (2.9)% | 4,796 | 2,857 | 1,939 | 67.9% | ||||||||||||||||
Net realized capital gains (losses) | (4 | ) | 111 | (115 | ) | (103.6)% | 3,230 | 723 | 2,507 | 346.7% | |||||||||||||||
Other revenue | 1,530 | 1,893 | (363 | ) | (19.2)% | 5,922 | 5,488 | 434 | 7.9% | ||||||||||||||||
Total revenue | 24,429 | 26,951 | (2,522 | ) | (9.4)% | 57,786 | 52,069 | 5,717 | 11.0% | ||||||||||||||||
Expenses | |||||||||||||||||||||||||
Losses and loss adjustment expenses | 12,183 | 13,014 | (831 | ) | (6.4)% | 25,117 | 24,470 | 647 | 2.6% | ||||||||||||||||
General and administrative expenses | 8,316 | 6,193 | 2,123 | 34.3% | 16,476 | 10,162 | 6,314 | 62.1% | |||||||||||||||||
Interest expense | 501 | 561 | (60 | ) | (10.7)% | 962 | 1,185 | (223 | ) | (18.8)% | |||||||||||||||
Total expenses | 21,000 | 19,768 | 1,232 | 6.2% | 42,555 | 35,817 | 6,738 | 18.8% | |||||||||||||||||
Other income | 40 | 33 | 7 | 21.2% | 54 | 126 | (72 | ) | (57.1)% | ||||||||||||||||
Income before taxes | 3,469 | 7,216 | (3,747 | ) | (51.9)% | 15,285 | 16,378 | (1,093 | ) | (6.7)% | |||||||||||||||
Provision for income taxes | 979 | 1,690 | (711 | ) | (42.1)% | 3,891 | 3,009 | 882 | 29.3% | ||||||||||||||||
Equity earnings in affiliates, net of tax | 1,230 | 865 | 365 | 42.2% | 1,932 | 1,473 | 459 | 31.2% | |||||||||||||||||
Net income | $ | 3,720 | $ | 6,391 | (2,671 | ) | (41.8)% | $ | 13,326 | $ | 14,842 | (1,516 | ) | (10.2)% | |||||||||||
Key Metrics | |||||||||||||||
Three Months Ended |
Six Months Ended |
||||||||||||||
(in thousands, except percentages) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Underwriting income (1) | $ | 880 | $ | 4,170 | $ | 2,245 | $ | 8,369 | |||||||
Adjusted net income (1) | $ | 4,771 | $ | 6,934 | $ | 11,095 | $ | 15,303 | |||||||
Loss ratio | 57.0 | % | 55.7 | % | 57.3 | % | 56.9 | % | |||||||
Expense ratio | 38.9 | % | 26.5 | % | 37.6 | % | 23.6 | % | |||||||
Combined ratio | 95.9 | % | 82.2 | % | 94.9 | % | 80.5 | % | |||||||
Return on equity | 10.3 | % | 21.1 | % | 19.0 | % | 25.9 | % | |||||||
Adjusted return on equity (1) | 13.2 | % | 22.9 | % | 15.8 | % | 26.7 | % | |||||||
Return on tangible equity (1) | 10.5 | % | 21.6 | % | 19.5 | % | 26.6 | % | |||||||
Adjusted return on tangible equity (1) | 13.5 | % | 23.4 | % | 16.2 | % | 27.4 | % | |||||||
(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. | |||||||||||||||
Condensed Combined Balance Sheets | |||||||
(in thousands) | |||||||
(unaudited) | |||||||
Assets | |||||||
Fixed maturities, available for sale | $ | 375,705 | $ | 337,865 | |||
Preferred stock, available for sale | 325 | 343 | |||||
Common stock, available for sale | 3,428 | 492 | |||||
Equity method investments | 11,693 | 12,173 | |||||
Total investments | 391,151 | 350,873 | |||||
Cash and cash equivalents | 97,326 | 74,268 | |||||
Restricted cash | 7,746 | 1,800 | |||||
Accrued investment income | 2,605 | 2,468 | |||||
Premiums and other receivables | 75,017 | 62,460 | |||||
Related party receivables | 20,385 | 22,221 | |||||
Reinsurance recoverable | 334,124 | 307,338 | |||||
Prepaid reinsurance premiums | 91,311 | 80,088 | |||||
Deferred policy acquisition cost, net | 2,951 | 2,115 | |||||
Property and equipment, net | 8,130 | 7,937 | |||||
Right of use asset | 5,958 | - | |||||
Deferred tax asset | - | 1,367 | |||||
3,339 | 2,822 | ||||||
Other assets | 9,889 | 3,277 | |||||
Total assets | $ | 1,049,932 | $ | 919,034 | |||
Liabilities | |||||||
Unpaid loss and loss adjustment expenses | $ | 442,500 | $ | 406,716 | |||
Unearned premiums | 120,427 | 103,789 | |||||
Funds held under reinsurance agreements | 165,371 | 163,445 | |||||
Reinsurance premiums payable | 54,030 | 53,620 | |||||
Accounts payable and accrued expenses | 73,325 | 14,995 | |||||
Lease liability | 6,186 | - | |||||
Income taxes payable | 3,999 | 714 | |||||
Deferred tax liability | 12 | - | |||||
Long-term debt | 39,698 | 29,040 | |||||
Total liabilities | 905,548 | 772,319 | |||||
Redeemable preferred stock | 5,100 | 5,100 | |||||
Members' Equity | |||||||
Members' equity | 78,478 | 78,438 | |||||
Additional paid-in capital | 16,542 | 17,995 | |||||
Retained earnings | 35,561 | 40,361 | |||||
Accumulated other comprehensive loss | 8,703 | 4,821 | |||||
Total members' equity | 139,284 | 141,615 | |||||
Total liabilities and members' equity | $ | 1,049,932 | $ | 919,034 | |||
Reconciliation of Non-GAAP Financial Measures
Underwriting income
The Company defines underwriting income as income before taxes excluding net investment income, net realized capital gains or losses, other revenue, interest expense and other income. 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, interest expense and other revenue and income. The Company uses this metric as the Company believes it gives management and other users of the Company’s financial information useful insight into the Company’s underlying business performance. 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 |
Percentage | Six Months Ended |
Percentage | ||||||||||||||||
(in thousands, except percentages) | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||
Net income | $ | 3,720 | $ | 6,391 | (41.8)% | $ | 13,326 | $ | 14,842 | (10.2)% | |||||||||
Income tax expense | 979 | 1,690 | (42.1)% | 3,891 | 3,009 | 29.3% | |||||||||||||
Equity earnings in affiliates, net of tax | (1,230 | ) | (865 | ) | 42.2% | (1,932 | ) | (1,473 | ) | 31.2% | |||||||||
Income before taxes | 3,469 | 7,216 | (51.9)% | 15,285 | 16,378 | (6.7)% | |||||||||||||
Other revenue | (1,530 | ) | (1,893 | ) | (19.2)% | (5,922 | ) | (5,488 | ) | 7.9% | |||||||||
Net investment income | (1,524 | ) | (1,570 | ) | (2.9)% | (4,796 | ) | (2,857 | ) | 67.9% | |||||||||
Net realized capital (gains) losses | 4 | (111 | ) | (103.6)% | (3,230 | ) | (723 | ) | 346.7% | ||||||||||
Interest expense | 501 | 561 | (10.7)% | 962 | 1,185 | (18.8)% | |||||||||||||
Other income | (40 | ) | (33 | ) | 21.2% | (54 | ) | (126 | ) | (57.1)% | |||||||||
Underwriting income | $ | 880 | $ | 4,170 | (78.9)% | $ | 2,245 | $ | 8,369 | (73.2)% | |||||||||
Adjusted net income
The Company defines adjusted net income as net income excluding the impact of various unusual events, including the consummation of the reorganization transactions in connection with the IPO, or 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. The Company calculates the tax impact only on adjustments which 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. 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 |
Percentage | ||||||||
(in thousands, except percentages) | 2020 | 2019 | Change | ||||||
Net income | $ | 3,720 | $ | 6,391 | (41.8)% | ||||
Expenses associated with Altaris management fee, including cash bonuses paid to unitholders | 442 | 441 | 0.2% | ||||||
Expenses associated with IPO and other one-time legal and consulting expenses | 788 | 215 | 266.5% | ||||||
Expenses related to debt issuance costs | 135 | 25 | 440.0% | ||||||
Total adjustments | 1,365 | 681 | 100.4% | ||||||
Tax impact of adjustments | (314 | ) | (138 | ) | 127.5% | ||||
Adjusted net income | $ | 4,771 | $ | 6,934 | (31.2)% | ||||
Six Months Ended |
Percentage | ||||||||
(in thousands, except percentages) | 2020 | 2019 | Change | ||||||
Net income | $ | 13,326 | $ | 14,842 | (10.2)% | ||||
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders | 883 | 882 | 0.1% | ||||||
Expenses associated with IPO and other one-time legal and consulting expenses | 1,200 | 442 | 171.5% | ||||||
Expenses related to debt issuance costs | 135 | 50 | 170.0% | ||||||
FMV adjustment of remaining investment in affiliate | (2,000 | ) | - | 100.0% | |||||
Net loss gain on purchase & disposal of affiliates | (3,115 | ) | (634 | ) | 391.3% | ||||
Total adjustments | (2,897 | ) | 740 | (491.5)% | |||||
Tax impact of adjustments | 666 | (279 | ) | (338.7)% | |||||
Adjusted net income | $ | 11,095 | $ | 15,303 | (27.5)% | ||||
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 members’ 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. 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 |
Six Months Ended |
||||||||||||||
(in thousands, except percentages) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Adjusted return on equity calculation: | |||||||||||||||
Numerator: adjusted net income | $ | 4,771 | $ | 6,934 | $ | 11,095 | $ | 15,303 | |||||||
Denominator: average members' equity | 144,733 | 121,292 | 140,450 | 114,742 | |||||||||||
Adjusted return on equity | 13.2 | % | 22.9 | % | 15.8 | % | 26.7 | % | |||||||
Return on equity | 10.3 | % | 21.1 | % | 19.0 | % | 25.9 | % | |||||||
Return on tangible equity and adjusted return on tangible equity
The Company defines tangible members’ equity as members’ 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 members’ 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 members’ equity during the period. The Company regularly evaluates acquisition opportunities and have historically made acquisitions that affect members’ 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. 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 |
Six Months Ended |
||||||||||||||
(in thousands, except percentages) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Return on tangible equity calculation: | |||||||||||||||
Numerator: net income | $ | 3,720 | $ | 6,391 | $ | 13,326 | $ | 14,842 | |||||||
Denominator: | |||||||||||||||
Average members' equity | 144,733 | 121,292 | 140,450 | 114,742 | |||||||||||
Less: Average goodwill and other intangible assets | 3,453 | 3,006 | 3,459 | 3,012 | |||||||||||
Average tangible members' equity | 141,280 | 118,286 | 136,991 | 111,730 | |||||||||||
Return on tangible equity | 10.5 | % | 21.6 | % | 19.5 | % | 26.6 | % | |||||||
Return on equity | 10.3 | % | 21.1 | % | 19.0 | % | 25.9 | % | |||||||
Three Months Ended |
Six Months Ended |
||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Adjusted return on tangible equity calculation: | |||||||||||||||
Numerator: adjusted net income | $ | 4,771 | $ | 6,934 | $ | 11,095 | $ | 15,303 | |||||||
Denominator: average tangible members' equity | 141,280 | 118,286 | 136,991 | 111,730 | |||||||||||
Adjusted return on tangible equity | 13.5 | % | 23.4 | % | 16.2 | % | 27.4 | % | |||||||
Return on equity | 10.3 | % | 21.1 | % | 19.0 | % | 25.9 | % | |||||||
Source: Trean Insurance Group, Inc.