Trean Insurance Group Reports Second Quarter 2020 Results

Grows Gross Written Premiums by 5% to $109.6 Million Despite COVID-19 Environment

WAYZATA, Minn., Aug. 27, 2020 (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 second quarter ended June 30, 2020.

Trean completed its initial public offering (“IPO”) in July 2020 and the results detailed below reflect the pre-IPO combined entities of BIC Holdings LLC and Trean Holdings LLC, as well as costs related to the IPO and the Company’s public company readiness efforts.

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 for California 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 Trean. “The COVID-19 pandemic continues to provide significant uncertainty to many businesses throughout the country, including the insurance industry, but we believe Trean’s operating strategy will continue to demonstrate the stability and effectiveness of our approach. We remain committed to supporting our program partners, responsibly accepting new opportunities, seeking proper rate levels and quickly and fairly resolving claims. We are confident about the growth opportunities in our largest product line – workers compensation – and in deriving the benefits from our newly added program partners and acquisitions we completed earlier in 2020. We are excited by our performance thus far in 2020, and look forward to building additional value for shareholders in the coming years.”

Underwriting Results

Gross written premiums increased 5.0% to $109.6 million for the second quarter of 2020, compared to $104.4 million for the second quarter of 2019, primarily attributable to the addition of new program partners brought on board during the second quarter of 2020. Net earned premiums of $21.4 million declined 8.5% compared to the prior year’s second quarter, driven by the increase in gross unearned premiums, which was due to the addition of second quarter new program partners whose premiums have not yet been earned, and the timing of the effective dates of new policies written during the second quarter.

Underwriting income(1) was $0.9 million, resulting in a combined ratio of 95.9%, for the second quarter of 2020, compared to underwriting income of $4.2 million and a combined ratio of 82.2% for the prior-year period. Losses and loss adjustment expenses for the second quarter of 2020 were $12.2 million, which resulted in a 57.0% loss ratio. Loss activity during the second quarter was directly attributable to the decrease in net earned premiums during the period, offset by a decrease in favorable loss reserve estimate true-ups made during the second quarter of 2020 versus the second quarter of 2019.

General and administrative expenses increased $2.1 million, or 34.3%, to $8.3 million for the second quarter of 2020, compared to $6.2 million for the prior-year period. The Company’s expense ratio was 38.9% for the second quarter of 2020, compared to 26.5% for the prior-year period. The increase was primarily attributable to an increase in professional service expenses, higher salaries and benefits resulting from an expanded workforce and a rise in net agent commissions resulting from an increase in written premiums.

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 $4.8 million, compared to $6.9 million for the prior-year period.

Investment Results

Net investment income was $1.5 million for the second quarter of 2020, compared to $1.6 million for the prior-year period. Cash and invested assets consist primarily of fixed maturities, equity securities and cash equivalents. The majority of the investment portfolio was comprised of fixed maturity securities of $375.7 million at June 30, 2020, that were classified as available-for-sale. Also included in investments at June 30, 2020 were $3.8 million of equity securities and $97.3 million of cash and cash equivalents. The Company’s investment portfolio had an average rating of “AA” at both June 30, 2020 and June 30, 2019.

Other

Other revenue decreased $0.4 million, or 19.2%, to $1.5 million for the second quarter of 2020, compared to $1.9 million for the prior-year period, largely driven by a decrease in third-party administrator fees and brokerage fees earned.

Equity earnings, net of tax was $1.2 million for the second quarter of 2020, compared to $0.9 million for the second quarter of 2019. The increase is due to increased income of the Company’s equity method investments.

Members’ Equity and Returns

Total members’ equity was $139.3 million at June 30, 2020, compared to $141.6 million at December 31, 2019. Return on equity was 10.3% for the second quarter of 2020, compared to 21.1% for the prior-year period, and adjusted return on equity(1) was 13.2% for the second quarter of 2020, compared to 22.9% for the prior-year period. The change in return on equity reflected a significant increase in the Company’s members’ equity, primarily due to the increase in retained earnings since December 2019.

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 (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 Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. These forward-looking statements speak only as of the date of this press release. 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.

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

 
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Operations
(in thousands, except for percentages)
(unaudited)
                               
  Three Months Ended June 30,       Percentage   Six Months Ended June 30,       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 June 30,   Six Months Ended June 30,
(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.
               


BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Balance Sheets
(in thousands) 
(unaudited) 
       
  June 30, 2020
  December 31, 2019
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  
Goodwill   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 June 30,   Percentage    Six Months Ended June 30,   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 June 30,   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 June 30,   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 June 30,   Six Months Ended June 30,
(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 June 30,   Six Months Ended June 30,
(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 June 30,   Six Months Ended June 30,
   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 %
               

TIG-Logo.jpg

Source: Trean Insurance Group, Inc.