Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): November 12, 2020

 

 

TREAN INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-39392   84-4512647

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

150 Lake Street West

Wayzata, Minnesota

  55391
(Address of principal executive offices)   (Zip Code)

(952) 974-2200

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

 

 

Check the appropriate box if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d- 2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e- 4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading
symbol

 

Name of each exchange
on which registered

Common Stock, par value $0.01   TIG   The Nasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company.  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


ITEM 2.02.

RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On November 12, 2020, Trean Insurance Group, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the three and nine months ended September 30, 2020. The full text of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.

Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), the information furnished pursuant to Item 2.02 of this Current Report on Form 8-K (including Exhibit 99.1) is deemed to have been furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Such information shall not be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

ITEM 9.01.

FINANCIAL STATEMENTS AND EXHIBITS.

(d) Exhibits.

 

Exhibit No.

  

Description

99.1    Press Release issued by Trean Insurance Group, Inc., dated November 12, 2020


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: November 12, 2020

 

TREAN INSURANCE GROUP, INC.

 

By:

 

/s/ Julie A. Baron

Name:   Julie A. Baron
Title:   Chief Financial Officer, Treasurer and Secretary
EX-99.1

Exhibit 99.1

TREAN INSURANCE GROUP REPORTS THIRD QUARTER 2020 RESULTS

- 23% Year-over-Year Growth in Gross Written Premiums to $132.3 Million -

- Net Income of $69.3 Million, Diluted Earnings per Share of $1.41 -

- Adjusted Net Income of $10.5 Million, Adjusted Diluted Earnings per Share of $0.21 -

- Significant Year-over-Year Improvement in Loss and Combined Ratios -

Wayzata, MN, November 12, 2020 – 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 third quarter ended September 30, 2020.

Trean completed its initial public offering (“IPO”) in July 2020 and the results detailed below reflect gains and expenses related to the IPO and the Company’s public company readiness efforts.

Third Quarter 2020 Highlights and Subsequent Events

 

 

Gross written premiums increased 23.0% to $132.3 million, compared to $107.5 million in the third quarter of 2019

 

 

Loss ratio of 55.9%, a 720 basis point improvement compared to 63.1% in the third quarter of 2019

 

 

Expense ratio of 25.1%, a 90 basis point improvement compared to 26.0% in the third quarter of 2019

 

 

Combined ratio of 81.0%, an 810 basis point improvement versus 89.1% in the prior-year period

 

 

Net income was $69.3 million and diluted earnings per share were $1.41, primarily driven by a one-time $69.8 million gain on revaluation of the Company’s Compstar Holding Company LLC (“Compstar”) investment, and partially offset by $11.7 million in certain IPO-related bonuses, expenses and contract buyout fee

 

 

Adjusted net income(1) (excluding the aforementioned IPO-related events), was $10.5 million, and adjusted diluted earnings per share were $0.21

 

 

Return on equity of 102.5%; Adjusted return on equity(1) (excluding the aforementioned IPO-related events) of 15.5%; Adjusted return on tangible equity was 25.9%(1)

 

 

Subsequent to quarter end, completed acquisition of 7710 Insurance Company and its associated program manager and agency

 

(1)

Adjusted net income, adjusted return on equity, adjusted return on tangible equity and underwriting income are non-GAAP financial measures. See discussion of “Key Metrics” below.

“Our proven business model and operating strategy produced an outstanding third quarter performance despite the ongoing challenging environment,” stated Andrew M. O’Brien, President and Chief Executive Officer of Trean. “We produced double-digit growth in gross written premiums, in large part due to the onboarding of new program partners that are already providing valuable contributions. Furthermore, our prudent underwriting approach and ability to quickly and fairly resolve claims led to a strong quarter of profitability. As we begin looking into 2021, we are excited about the multiple opportunities present in workers compensation and other lines. We will also continue to invest thoughtfully in our business to support our program partners and to promote sustainable long-term growth.”


Underwriting Results

Gross written premiums increased 23.0% to $132.3 million for the third quarter of 2020, compared to $107.5 million for the third quarter of 2019, primarily attributable to the addition of new program partners brought on board during the second and third quarters of 2020. Net earned premiums of $27.9 million grew 25.7% compared to the prior year’s third quarter, driven by the increase in gross written and gross earned premiums, partially offset by an increase in ceded earned premiums compared to the prior-year period.

Underwriting income(1) was $5.3 million, resulting in a combined ratio of 81.0% for the third quarter of 2020, compared to underwriting income of $2.4 million and a combined ratio of 89.1% for the prior-year period. Losses and loss adjustment expenses for the third quarter of 2020 were $15.6 million, which resulted in a 55.9% loss ratio, a 720 basis point improvement compared to 63.1% in the prior-year period. The improvement in the loss ratio during the third quarter was primarily attributable to the increase in net earned premiums during the period, offset by a decrease in favorable loss reserve estimate true-ups made during the third quarter of 2020 versus the third quarter of 2019.

General and administrative expenses were $7.0 million for the third quarter of 2020, compared to $5.8 million for the prior-year period. The Company’s expense ratio was 25.1% for the third quarter of 2020, a 90 basis point improvement compared to 26.0% for the prior-year period, primarily attributable to an increase in net earned premiums, partially offset by a rise in net agent commissions resulting from the increase in written premiums, higher salaries and benefits resulting from an expanded workforce and an increase in professional service expenses.

The third quarters of 2020 and 2019 included certain gains and expenses related to the IPO transaction and other consulting expenses, and management fee expenses including cash bonuses paid to unitholders and employees. Adjusted net income(1), which excludes those items, for the third quarter of 2020 was $10.5 million, a 61.8% increase compared to net income of $6.5 million for the prior-year period. Adjusted diluted earnings per share for the third quarter of 2020 were $0.21.

Investment Results

Net investment income was $1.9 million for the third quarter of 2020, compared to $1.7 million for 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 September 30, 2020 was comprised of fixed maturity securities that were classified as available-for-sale of $375.3 million. Also included in investments at September 30, 2020 were $3.7 million of equity securities and $165.3 million of cash and cash equivalents. The Company’s investment portfolio had an average rating of “AA” at both September 30, 2020 and September 30, 2019.

Other

Other revenue increased $2.8 million, or 110.9%, to $5.4 million for the third quarter of 2020, compared to $2.6 million for the prior-year period, largely driven by an increase in brokerage fees earned due to the timing of effective dates of reinsurance contracts for current and new programs and increases in estimated premiums on reinsurance contracts.


Equity earnings in affiliates, net of tax were $0.4 million for the third quarter of 2020, compared to $1.0 million for the third quarter of 2019. The decrease primarily resulted from the Company acquiring the remaining 55% interest in Compstar in July 2020; following the acquisition, the Company now owns 100% of Compstar.

Shareholders’ Equity and Returns

Total shareholders’ equity was $401.8 million at September 30, 2020, compared to $141.6 million at December 31, 2019. Return on equity was 102.5% for the third quarter of 2020, compared to 18.0% for the prior-year period, and adjusted return on equity(1) was 15.5% for the third quarter of 2020, compared to 20.2% for the prior-year period. The change in return on equity reflected a significant increase in the Company’s shareholders’ equity, primarily resulting from the increases in additional paid-in capital related to the IPO and retained earnings since December 2019. Return on tangible equity was 171.2% for the third quarter of 2020, compared to 18.5% for the prior-year period and adjusted return on tangible equity was 25.9% for the third quarter of 2020, compared to 20.7% for the prior-year period.

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# 13711785. 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 share-based compensation, 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 various unusual events, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and share-based compensation, 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 shareholders’ 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 shareholders’ 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 shareholders’ equity is defined as shareholders’ 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 shareholders’ 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 shareholders’ 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 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 Statements of Operations

(in thousands, except for percentages)

(unaudited)

 

    Three Months Ended
September 30,
          Percentage     Nine Months Ended September 30,           Percentage  
    2020     2019     Change     Change     2020     2019     Change     Change  

Revenues

               

Gross written premiums

  $ 132,284     $ 107,534       24,750       23.0   $ 349,755     $ 313,488       36,267       11.6

Increase in gross unearned premiums

    (22,963     (5,612     (17,351     309.2     (39,601     (18,099     (21,502     118.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross earned premiums

    109,321       101,922       7,399       7.3     310,154       295,389       14,765       5.0

Ceded earned premiums

    (81,465     (79,761     (1,704     2.1     (238,460     (230,227     (8,233     3.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earned premiums

    27,856       22,161       5,695       25.7     71,694       65,162       6,532       10.0

Net investment income

    1,857       1,721       136       7.9     6,653       4,578       2,075       45.3

Gain on revaluation of Compstar investment

    69,846       —         69,846       100.0     69,846       —         69,846       100.0

Net realized capital gains (losses)

    115       (34     149       (438.2 )%      3,345       689       2,656       385.5

Other revenue

    5,401       2,561       2,840       110.9     11,323       8,049       3,274       40.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    105,075       26,409       78,666       297.9     162,861       78,478       84,383       107.5

Expenses

               

Losses and loss adjustment expenses

    15,564       13,976       1,588       11.4     40,681       38,446       2,235       5.8

General and administrative expenses

    6,995       5,756       1,239       21.5     23,437       15,894       7,543       47.5

IPO bonuses and contract buyout fee

    11,054       —         11,054       100.0     11,054       —         11,054       100.0

Intangible asset amortization

    1,120       11       1,109       10,081.8     1,154       35       1,119       3,197.1

Noncash share-based compensation

    307       —         307       100.0     307       —         307       100.0

Interest expense

    520       498       22       4.4     1,482       1,683       (201     (11.9 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    35,560       20,241       15,319       75.7     78,115       56,058       22,057       39.3

Other income (expense)

    209       (8     217       (2,712.5 )%      263       118       145       122.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    69,724       6,160       63,564       1,031.9     85,009       22,538       62,471       277.2

Provision for income taxes

    788       1,395       (607     (43.5 )%      4,679       4,404       275       6.2

Equity earnings in affiliates, net of tax

    401       1,021       (620     (60.7 )%      2,333       2,494       (161     (6.5 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 69,337     $ 5,786       63,551       1,098.4   $ 82,663     $ 20,628       62,035       300.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

               

Basic

  $ 1.41     $ 0.15         $ 2.00     $ 0.55      

Diluted

  $ 1.41     $ 0.15         $ 2.00     $ 0.55      

Weighted average shares outstanding

               

Basic

    49,054,441       37,386,394           41,304,132       37,386,394      

Diluted

    49,056,001       37,386,394           41,304,652       37,386,394      

Key Metrics

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
(in thousands, except percentages)    2020     2019     2020     2019  

Underwriting income (1)

   $ 5,297     $ 2,429     $ 7,576     $ 10,822  

Adjusted net income (1)

   $ 10,477     $ 6,474     $ 21,600     $ 21,797  

Loss ratio

     55.9     63.1     56.7     59.0

Expense ratio

     25.1     26.0     32.7     24.4

Combined ratio

     81.0     89.1     89.4     83.4

Return on equity

     102.5     18.0     40.6     23.4

Adjusted return on equity (1)

     15.5     20.2     10.6     24.7

Return on tangible equity (1)

     171.2     18.5     67.3     24.0

Adjusted return on tangible equity (1)

     25.9     20.7     17.6     25.3

 

(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)

 

     September 30, 2020      December 31, 2019  
     (unaudited)         

Assets

     

Fixed maturities, available for sale

   $ 375,286      $ 337,865  

Preferred stock, available for sale

     240        343  

Common stock, available for sale

     3,458        492  

Equity method investments

     232        12,173  
  

 

 

    

 

 

 

Total investments

     379,216        350,873  

Cash and cash equivalents

     165,255        74,268  

Restricted cash

     21,175        1,800  

Accrued investment income

     2,418        2,468  

Premiums and other receivables

     99,635        62,460  

Income taxes refundable

     797        —    

Related party receivables

     33        22,221  

Reinsurance recoverable

     350,425        307,338  

Prepaid reinsurance premiums

     103,929        80,088  

Deferred policy acquisition cost, net

     3,777        2,115  

Property and equipment, net

     8,439        7,937  

Right of use asset

     6,558        —    

Deferred tax asset

     —          1,367  

Goodwill

     139,575        2,822  

Intangible assets, net

     73,436        —    

Other assets

     9,721        3,277  
  

 

 

    

 

 

 

Total assets

   $ 1,364,389      $ 919,034  
  

 

 

    

 

 

 

Liabilities

     

Unpaid loss and loss adjustment expenses

   $ 465,502      $ 406,716  

Unearned premiums

     143,390        103,789  

Funds held under reinsurance agreements

     160,614        163,445  

Reinsurance premiums payable

     59,756        53,620  

Accounts payable and accrued expenses

     73,865        14,995  

Lease liability

     7,054        —    

Income taxes payable

     —          714  

Deferred tax liability

     12,597        —    

Long-term debt

     39,858        29,040  
  

 

 

    

 

 

 

Total liabilities

     962,636        772,319  

Redeemable preferred stock

     —          5,100  

Shareholders’ Equity

     

Common stock

     511        —    

Members’ equity

     —          78,438  

Additional paid-in capital

     287,234        17,995  

Retained earnings

     104,853        40,361  

Accumulated other comprehensive loss

     9,155        4,821  
  

 

 

    

 

 

 

Total shareholders’ equity

     401,753        141,615  
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 1,364,389      $ 913,934  
  

 

 

    

 

 

 


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 share-based compensation, 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, IPO-related expenses, intangible asset amortization, noncash share-based compensation, interest expense and other revenue and income. 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
September 30,
    Percentage
Change
    Nine Months Ended
September 30,
    Percentage
Change
 
(in thousands, except percentages)    2020     2019     2020     2019  

Net income

   $ 69,337     $ 5,786       1,098.0   $ 82,663     $ 20,628       300.7

Income tax expense

     788       1,395       (43.5 )%      4,679       4,404       6.2

Equity earnings in affiliates, net of tax

     (401     (1,021     (60.7 )%      (2,333     (2,494     (6.5 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Income before taxes

     69,724       6,160       1,031.9     85,009       22,538       277.2

Other revenue

     (5,401     (2,561     110.9     (11,323     (8,049     40.7

Net investment income

     (1,857     (1,721     7.9     (6,653     (4,578     45.3

Gain on revaluation of Compstar investment

     (69,846     —         100.0     (69,846     —         100.0

Net realized capital gains (losses)

     (115     34       (438.2 )%      (3,345     (689     385.5

Interest expense

     520       498       4.4     1,482       1,683       (11.9 )% 

IPO bonuses and contract buyout fee

     11,054       —         100.0     11,054       —         100.0

Intangible asset amortization

     1,120       11       10,081.8     1,154       35       3,197.1

Noncash share-based compensation

     307       —         100.0     307       —         100.0

Other income (expense)

     (209     8       (2,712.5 )%      (263     (118     122.9
  

 

 

   

 

 

     

 

 

   

 

 

   

Underwriting income

   $ 5,297     $ 2,429       118.1   $ 7,576     $ 10,822       (30.0 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   


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 share-based compensation, or 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 September 30,      Percentage
(in thousands, except percentages)    2020      2019      Change

Net income

   $ 69,337      $ 5,786      1,098.4%

Intangible asset amortization

     1,120        11      10,081.8%

Noncash stock-based compensation

     307        —        100.0%

Expenses associated with Altaris management fee, including cash bonuses paid to unitholders

     —          441      (100.0)%

Expenses associated with IPO and other one-time legal and consulting expenses

     645        387      66.7%

Expenses related to debt issuance costs, including OID amortization

     —          25      (100.0)%

FMV adjustment of remaining investment in subsidiary

     (69,846      —        100.0%

IPO bonuses and contract buyout fee

     11,054        —        100.0%
  

 

 

    

 

 

    

Total adjustments

     (56,720      864      (6,664.8)%

Tax impact of adjustments

     (2,140      (176    1,115.9%
  

 

 

    

 

 

    

Adjusted net income

   $ 10,477      $ 6,474      61.8%
  

 

 

    

 

 

    

 

     Nine Months Ended September 30,      Percentage
(in thousands, except percentages)    2020      2019      Change

Net income

   $ 82,663      $ 20,628      300.7%

Intangible asset amortization

     1,154        35      3,197.1%

Noncash stock-based compensation

     307        —        100.0%

Expenses associated with Altaris management fee, including cash bonuses paid to unitholders

     883        1,324      (33.3)%

Expenses associated with IPO and other one-time legal and consulting expenses

     1,845        829      122.6%

Expenses related to debt issuance costs, including OID amortization

     135        75      80.0%

FMV adjustment of remaining investment in subsidiary

     (71,846      —        100.0%

Net loss (gain) on purchase & disposal of subsidiaries

     (3,115      (634    391.3%

IPO bonuses and contract buyout fee

     11,054        —        100.0%
  

 

 

    

 

 

    

Total adjustments

     (59,583      1,629      (3,757.6)%

Tax impact of adjustments

     (1,480      (460    221.7%
  

 

 

    

 

 

    

Adjusted net income

   $ 21,600      $ 21,797      (0.9)%
  

 

 

    

 

 

    


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 shareholders’ 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
September 30,
    Nine Months Ended
September 30,
 
(in thousands, except percentages)    2020     2019     2020     2019  

Adjusted return on equity calculation:

        

Numerator: adjusted net income

   $ 10,477     $ 6,474     $ 21,600     $ 21,797  

Denominator: average shareholders’ equity

     270,519       128,299       271,684       117,688  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted return on equity

     15.5     20.2     10.6     24.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on equity

     102.5     18.0     40.6     23.4
  

 

 

   

 

 

   

 

 

   

 

 

 


Return on tangible equity and adjusted return on tangible equity

The Company defines tangible shareholders’ equity as shareholders’ 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 shareholders’ 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 shareholders’ equity during the period. The Company regularly evaluates acquisition opportunities and have historically made acquisitions that affect shareholders’ 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 shareholders’ 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
September 30,
    Nine Months Ended
September 30,
 
(in thousands, except percentages)    2020     2019     2020     2019  

Return on tangible equity calculation:

        

Numerator: net income

   $ 69,337     $ 5,786     $ 82,663     $ 20,628  

Denominator:

        

Average shareholders’ equity

     270,519       128,299       271,684       117,688  

Less: Average goodwill and other intangible assets

     108,476       2,982       107,994       2,993  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible shareholders’ equity

     162,043       125,317       163,690       114,695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on tangible equity

     171.2     18.5     67.3     24.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on equity

     102.5     18.0     40.6     23.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in thousands, except percentages)    2020     2019     2020     2019  

Adjusted return on tangible equity calculation:

        

Numerator: adjusted net income

   $ 10,477     $ 6,474     $ 21,600     $ 21,797  

Denominator: average tangible shareholders’ equity

     162,043       125,317       163,690       114,695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted return on tangible equity

     25.9     20.7     17.6     25.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on equity

     102.5     18.0     40.6     23.4

 

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