Trean Insurance Group Reports Second Quarter 2022 Results

Net Income and Adjusted Net Income of $5.5 Million

Diluted and Adjusted Diluted Earnings per Share of $0.11

Provides Third Quarter and Updates Full Year 2022 Outlook

WAYZATA, Minn., Aug. 03, 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 second quarter ended June 30, 2022.

Second Quarter 2022 and Subsequent Highlights

  • Gross written premiums were $154.2 million, a $2.4 million, or 1.5%, decline compared to the same prior-year period.
  • Net earned premiums were $66.0 million, an $18.1 million, or 37.7%, increase compared to the same prior-year period.
  • Net income was $5.5 million, or $0.11 per diluted share, compared to $2.1 million, or $0.04 per diluted share in the same prior-year period.
  • Adjusted net income(1) was $5.5 million, or $0.11 per diluted share, compared to $4.3 million, or $0.08 per diluted share in the same prior-year period.
  • Underwriting income was $3.4 million, a $0.5 million, or 16.7%, increase compared to the same prior-year period.
  • Loss and expense ratios were 61.9% and 32.8%, respectively, compared to 62.0% and 31.8%, respectively, in the same prior-year period.
  • Combined ratio was 94.7%, compared to 93.8% for the same prior-year period.
  • Return on equity of 5.3%; adjusted return on equity(1) of 5.4%; return on tangible equity of 11.0%; and adjusted return on tangible equity(1) of 11.1%.
  • Subsequent to the quarter end, the Company announced a partnership in the surplus lines insurance market with Beat Capital, giving Trean its first partnership in the large non-admitted insurance underwriting space and another avenue to achieve its long-term goals.

    (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.

“We delivered solid second quarter results, as our continued focus on underwriting discipline and profitable growth led to us exceeding our initial expectations and producing double-digit year-over-year adjusted net income growth and adjusted return on tangible equity,” said Julie Baron, President and Chief Executive Officer of Trean. “While our gross written premiums are being impacted by the competitive and macro environment, we continue to emphasize strong partnerships, efficient claims management and underwriting discipline, and we believe our strategic plan positions us well to drive sustainable adjusted net income growth over the long term.”

Underwriting Results

Gross written premiums were $154.2 million for the second quarter of 2022, a 1.5% reduction compared to $156.6 million for the second quarter of 2021, primarily driven by the Company’s continued focus on maintaining underwriting discipline in an unusually competitive environment and a more gradual increase of current year premium from new program partners added in 2021 and 2022 than originally estimated.

Gross unearned premiums decreased $3.0 million in the second quarter of 2022, compared to an increase of $17.9 million in the same prior-year period. As of June 30, 2022, the Company had net unearned premiums reflected on its balance sheet of $104.5 million, an increase of $2.7 million, or 2.6%, compared to March 31, 2022 and up $31.1 million, or 42.4%, from June 30, 2021. The continued growth in net unearned premium represents a material source of deferred potential profit.

Net earned premiums increased 37.7% to $66.0 million for the second quarter of 2022, compared to $47.9 million for the second quarter of 2021, primarily driven by an increase in both gross earned premiums and retention of gross written premiums.

General and administrative expenses were $21.7 million for the second quarter of 2022, compared to $15.3 million for the same prior-year period, primarily driven by an increase in net commissions resulting from increased gross earned premiums and increased retention. The Company’s expense ratio was 32.8% for the second quarter of 2022, compared to 31.8% for the same prior-year period.

Net income was $5.5 million for the second quarter of 2022, compared to net income of $2.1 million for the same prior-year period. Diluted earnings per share for the second quarter of 2022 was $0.11. Adjusted net income(1), which excludes intangible asset amortization, noncash stock compensation, the change in fair value of embedded derivatives and their related tax impact, and unrealized gains or losses on equity securities, was $5.5 million for the second quarter of 2022, compared to adjusted net income of $4.3 million for the same prior-year period. Adjusted diluted earnings per share for the second quarter of 2022 was $0.11.

Underwriting income of $3.4 million resulted in a combined ratio of 94.7% for the second quarter of 2022, compared to underwriting income of $3.0 million and a combined ratio of 93.8% for the same prior-year period. Losses and loss adjustment expenses for the second quarter of 2022 were $40.9 million, which resulted in a 61.9% loss ratio, compared to 62.0% in the same prior-year period. Prior period favorable loss development for the second quarter 2022 totaled $0.4 million.

Investment Results

Net investment loss was $0.4 million for the second quarter of 2022, compared to net investment income of $2.1 million in the same prior-year period, primarily due to $3.4 million of unrealized losses on equity securities incurred in the second quarter of 2022.

Cash and invested assets consist primarily of fixed maturities, equity securities and cash equivalents. The Company’s investment portfolio totaled $497.5 million as of June 30, 2022 and was primarily comprised of fixed maturity securities that were classified as available-for-sale. The Company also had $100.7 million of cash and cash equivalents on its balance sheet as of June 30, 2022. The Company’s fixed maturities portfolio had an average rating of “AA” as of both June 30, 2022 and December 31, 2021.

Other

Other revenue was $1.8 million for the second quarter of 2022, compared to $1.2 million for the same prior-year period, due primarily to a year-over-year increase in brokerage revenue.

Stockholders’ Equity and Returns

Total stockholders’ equity was $410.1 million at June 30, 2022, compared to $421.9 million at December 31, 2021. Return on equity was 5.3% for the second quarter of 2022, compared to 2.0% for the same prior-year period, and adjusted return on equity(1) was 5.4% for the second quarter of 2022, up from 4.2% for the same prior-year period. Return on tangible equity was 11.0% for the second quarter of 2022, compared to 4.2% for the same prior-year period and adjusted return on tangible equity was 11.1% for the second quarter of 2022, compared to 8.6% for the same prior-year period.

Full Year 2022 Outlook

The Company is updating its outlook for the full year 2022 to the following:

  • Gross written premium is now expected to be between $615 million and $630 million, compared to the prior range of between $655 million and $670 million. The new outlook represents a year-over-year reduction of 3% on the low end and 1% on the high end and reflects the Company’s continued focus on underwriting discipline in an unusually competitive environment, as well as a more gradual increase of current year premium from new program partners added in 2021 and 2022 than originally estimated.
  • Net earned premium outlook is still expected to be between $255 million and $265 million. This represents year-over-year growth of 28% on the lower end and 33% on the upper end and reflects an expected increased retention rate throughout 2022 based on current contracts in-force.
  • Total revenue is still expected to be between $268 million and $278 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 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, and expected continued operational investments in the Company.
  • The Company expects that its loss ratio in the second half of 2022 will be consistent with its loss ratio in the first half of 2022 barring any large unusual loss activity.

Third Quarter 2022 Outlook

The company is providing the following outlook for the third quarter 2022:

  • Gross written premium between $150 million and $160 million.
  • Adjusted net income 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.

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# 13731059. 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://www.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, 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, 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, 2021. 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 share and per share amounts)

(unaudited)

  Three Months Ended June 30,   Six Months Ended June 30,
    2022       2021       2022       2021  
Revenues              
Gross written premiums $ 154,189     $ 156,551     $ 315,592     $ 303,281  
Decrease (increase) in gross unearned premiums $ 2,953       (17,927 )   $ 89       (36,358 )
Gross earned premiums $ 157,142       138,624     $ 315,681       266,923  
Ceded earned premiums $ (91,132 )     (90,681 )   $ (185,494 )     (177,846 )
Net earned premiums $ 66,010       47,943     $ 130,187       89,077  
Net investment income (loss) $ (391 )     2,103     $ 2,185       4,375  
Net realized gains $ 1,349       10     $ 302       23  
Other revenue $ 1,804       1,229     $ 5,005       5,884  
Total revenue $ 68,772       51,285     $ 137,679       99,359  
Expenses              
Losses and loss adjustment expenses $ 40,887       29,725     $ 80,080       54,606  
General and administrative expenses $ 21,679       15,267     $ 39,979       27,158  
Other expenses $ 268       845     $ 268       845  
Intangible asset amortization $ 1,500       1,413     $ 2,999       2,827  
Noncash stock compensation $ 403       419     $ 559       630  
Interest expense $ 467       425     $ 875       852  
Total expenses $ 65,204       48,094     $ 124,760       86,918  
Gains (losses) on embedded derivatives $ 3,356       (686 )   $ 9,592       1,990  
Other income $ 24       35     $ 47       156  
Income before taxes $ 6,948       2,540     $ 22,558       14,587  
Income tax expense $ 1,457       414     $ 4,727       3,019  
Net income $ 5,491     $ 2,126     $ 17,831     $ 11,568  
               
Earnings per share:              
Basic $ 0.11     $ 0.04     $ 0.35     $ 0.23  
Diluted $ 0.11     $ 0.04     $ 0.35     $ 0.23  
               
Weighted average shares outstanding:              
Basic   51,197,111       51,152,979       51,187,509       51,150,881  
Diluted   51,197,533       51,166,587       51,187,720       51,173,204  


Key Metrics

(in thousands, except for percentages)

(unaudited)

  Three Months Ended June 30,   Six Months Ended June 30,
   2022    2021    2022    2021
Key metrics:              
Underwriting income (1) $ 3,444     $ 2,951     $ 10,128     $ 7,313  
Adjusted net income (1) $ 5,546     $ 4,316     $ 13,850     $ 12,425  
Loss ratio   61.9 %     62.0 %     61.5 %     61.3 %
Expense ratio   32.8 %     31.8 %     30.7 %     30.5 %
Combined ratio   94.7 %     93.8 %     92.2 %     91.8 %
Return on equity   5.3 %     2.0 %     8.6 %     5.6 %
Adjusted return on equity (1)   5.4 %     4.2 %     6.7 %     6.0 %
Return on tangible equity (1)   11.0 %     4.2 %     17.6 %     11.6 %
Adjusted return on tangible equity (1)   11.1 %     8.6 %     13.7 %     12.5 %
               
(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)

  June 30, 2022   December 31, 2021
Assets (unaudited)    
Fixed maturities, available for sale $ 466,819     $ 471,061  
Equity securities, at fair value   30,698       969  
Total investments   497,517       472,030  
       
Cash and cash equivalents   100,716       129,577  
Restricted cash   299       407  
Accrued investment income   2,736       2,344  
Premiums and other receivables   153,822       141,920  
Income taxes receivable   969       460  
Reinsurance recoverable   388,801       377,241  
Prepaid reinsurance premiums   115,459       129,411  
Deferred policy acquisition cost, net   16,195       13,344  
Property and equipment, net   7,590       7,632  
Right of use asset   3,807       4,530  
Goodwill   142,347       142,347  
Intangible assets, net   70,116       73,114  
Other assets   10,906       8,658  
Total assets $ 1,511,280     $ 1,503,015  
       
Liabilities      
Unpaid loss and loss adjustment expenses $ 577,686     $ 544,320  
Unearned premiums   219,949       219,940  
Funds held under reinsurance agreements   200,338       199,410  
Reinsurance premiums payable   45,250       45,130  
Accounts payable and accrued expenses   23,601       29,448  
Lease liability   4,178       4,976  
Deferred tax liability   539       7,520  
Debt   29,621       30,362  
Total liabilities   1,101,162       1,081,106  
Commitments and contingencies      
Stockholders' Equity      
Common stock, $0.01 par value per share (600,000,000 authorized; 51,202,136 and 51,176,887 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively)   512       512  
Additional paid-in capital   289,174       288,623  
Retained earnings   146,221       128,390  
Accumulated other comprehensive income   (25,789 )     4,384  
Total stockholders' equity   410,118       421,909  
Total liabilities and stockholders' equity $ 1,511,280     $ 1,503,015  


Supplemental Table of Other Revenue Components

  Three Months Ended June 30,   Six Months Ended June 30,
(unaudited, in thousands)   2022       2021       2022       2021  
Other Revenue              
Brokerage $ 1,222     $ 770     $ 3,815     $ 4,225  
Managing general agent fees   84       30       168       319  
Third-party administrator fees   249       376       572       754  
Consulting and other fee-based revenue   249       53       450       586  
Total Other Revenue   1,804       1,229       5,005       5,884  


Supplemental Table of Net Investment Income Components

  Three Months Ended June 30,   Six Months Ended June 30,
(unaudited, in thousands)   2022       2021       2022       2021  
Fixed maturities $ 1,807     $ 1,577     $ 3,561     $ 3,137  
Income on funds held investments   774       519       1,442       1,199  
Equity securities   456       6       610       36  
Unrealized losses on equity securities   (3,441 )     -       (3,441 )     -  
Interest on cash and short-term investments   13       1       13       3  
Total net investment income (loss) $ (391 )   $ 2,103     $ 2,185     $ 4,375  


Supplemental Table of Gains (Losses) on Embedded Derivative Components

  Three Months Ended June 30,   Six Months Ended June 30,
(unaudited, in thousands)   2022       2021       2022       2021  
Change in fair value of embedded derivatives $ 4,140     $ (167 )   $ 11,036     $ 3,189  
Effect of net investment income on funds held investments   (774 )     (519 )     (1,442 )     (1,199 )
Effect of realized gains on funds held investments   (10 )     -       (2 )     -  
Total gains (losses) on embedded derivatives $ 3,356     $ (686 )   $ 9,592     $ 1,990  


Supplemental Table of Net G&A Components

  Three Months Ended June 30,   Six Months Ended June 30,
(unaudited, in thousands)  2022    2021    2022    2021
Direct commissions $ 29,133     $ 27,602     $ 57,041     $ 50,710  
Ceding commissions   (26,628 )     (29,684 )     (53,625 )     (57,892 )
Net commissions   2,505       (2,082 )     3,416       (7,182 )
Insurance-related expense   5,889       5,149       11,660       9,425  
G&A operating expenses   13,285       12,200       24,903       24,915  
Total G&A expense $ 21,679     $ 15,267     $ 39,979     $ 27,158  
               
G&A operating expense - % of GWP   8.6 %     7.8 %     7.9 %     8.2 %
Retention rate(1)   42.0 %     34.6 %     41.2 %     33.4 %
Direct commission rate(2)   18.5 %     19.9 %     18.1 %     19.0 %
Ceding commission rate(3)   29.2 %     32.7 %     28.9 %     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, non-cash changes in fair value of embedded derivatives, investment revaluation gains, net realized capital gains or losses, 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, 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 June 30,   Six Months Ended June 30,
(unaudited, in thousands)   2022       2021       2022       2021  
Net income $ 5,491     $ 2,126     $ 17,831     $ 11,568  
Income tax expense   1,457       414       4,727       3,019  
Income before taxes   6,948       2,540       22,558       14,587  
Other revenue   (1,804 )     (1,229 )     (5,005 )     (5,884 )
Change in fair value of embedded derivatives   (3,356 )     686       (9,592 )     (1,990 )
Net investment income   391       (2,103 )     (2,185 )     (4,375 )
Net realized gains   (1,349 )     (10 )     (302 )     (23 )
Other expenses   268       845       268       845  
Interest expense   467       425       875       852  
Intangible asset amortization   1,500       1,413       2,999       2,827  
Noncash stock compensation   403       419       559       630  
Other income   (24 )     (35 )     (47 )     (156 )
Underwriting income $ 3,444     $ 2,951     $ 10,128     $ 7,313  


Adjusted net income and adjusted net income outlook

The Company defines adjusted net income as net income excluding the impact of certain items, including noncash intangible asset amortization and stock compensation, non-cash changes in fair value of embedded derivatives, 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 an expected effective tax rate for the applicable years. 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 June 30,   Six Months Ended June 30,
(unaudited, in thousands)   2022       2021       2022       2021  
Net income $ 5,491     $ 2,126     $ 17,831     $ 11,568  
Intangible asset amortization $ 1,500       1,413     $ 2,999       2,827  
Noncash stock compensation $ 403       419     $ 559       630  
Change in fair value of embedded derivatives $ (4,140 )     167     $ (11,036 )     (3,189 )
Unrealized losses on equity securities $ 3,441       -     $ 3,441       -  
Realized gain on sale of investment $ (1,400 )     -     $ (1,400 )     -  
Other expenses $ 268       845     $ 268       845  
Total adjustments $ 72       2,844     $ (5,169 )     1,113  
Tax impact of adjustments $ (17 )     (654 )   $ 1,188       (256 )
Adjusted net income $ 5,546     $ 4,316     $ 13,850     $ 12,425  


The Company’s outlook for second quarter 2022 adjusted net income constitutes forward-looking information and the Company believes that it cannot reconcile such forward-looking information to the most comparable GAAP measure without unreasonable efforts. Certain of the GAAP components cannot be reliably quantified due to the combination of variability and volatility of such components and may, depending on the size of the components, have a significant impact on the reconciliation.

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 June 30,   Six Months Ended June 30,
(unaudited, in thousands)  2022    2021    2022    2021
Adjusted return on equity calculation:              
Numerator: adjusted net income $ 5,546     $ 4,316     $ 13,850     $ 12,425  
Denominator: average stockholders' equity   413,258       415,159       416,014       413,725  
Adjusted return on equity   5.4 %     4.2 %     6.7 %     6.0 %
Return on equity   5.3 %     2.0 %     8.6 %     5.6 %


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 June 30,   Six Months Ended June 30,
(unaudited, in thousands)  2022    2021    2022    2021
Return on tangible equity calculation:              
Numerator: net income $ 5,491     $ 2,126     $ 17,831     $ 11,568  
Denominator:              
    Average stockholders' equity   413,258       415,159       416,014       413,725  
    Less: Average goodwill and other intangible assets   213,213       213,836       213,962       214,543  
Average tangible stockholders' equity   200,045       201,323       202,052       199,182  
Return on tangible equity   11.0 %     4.2 %     17.6 %     11.6 %
Return on equity   5.3 %     2.0 %     8.6 %     5.6 %
               
               
               
  Three Months Ended June 30,   Six Months Ended June 30,
(unaudited, in thousands)  2022    2021    2022    2021
Adjusted return on tangible equity calculation:              
Numerator: adjusted net income $ 5,546     $ 4,316     $ 13,850     $ 12,425  
Denominator: average tangible stockholders' equity   200,045       201,323       202,052       199,182  
Adjusted return on tangible equity   11.1 %     8.6 %     13.7 %     12.5 %
Return on equity   5.3 %     2.0 %     8.6 %     5.6 %
               

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Source: Trean Insurance Group, Inc.