Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 20202021
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________


Commission file number: 001-39392


TREAN INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware84-4512647
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
150 Lake Street West
Wayzata, MN 55391
(Address of principal executive offices and zip code)
(952) 974-2200
(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareTIGThe Nasdaq Global Select Market


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,”" a “smaller"smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☐Non-accelerated filer☒Smaller reporting company☐
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.     ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No ☒
As of August 26, 2020,November 5, 2021, there were 51,154,09751,174,887 shares of the registrant's common stock outstanding.


BIC HOLDINGS LLC -
Table of Contents
TREAN HOLDINGS LLCINSURANCE GROUP, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
3
Item 1
Condensed Combined Financial Statements
Condensed Combined Balance Sheets
3
Condensed CombinedConsolidated Statements of Operations
4
Condensed CombinedConsolidated Statements of Comprehensive Income
5
Condensed CombinedConsolidated Statements of Members’Stockholders’ Equity and Redeemable Preferred Stock
6
Condensed CombinedConsolidated Statements of Cash Flows
8
Notes to the Condensed CombinedConsolidated Financial Statements
10
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PART II - OTHER INFORMATION
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2


Table of Contents

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements


BIC Holdings LLC - Trean Holdings LLCInsurance Group, Inc. and Subsidiaries
Condensed CombinedConsolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
September 30, 2021December 31, 2020
Assets(unaudited)
Fixed maturities, at fair value (amortized cost of $417,288 and $388,409, respectively)$425,596 $405,604 
Preferred stock, at fair value (amortized cost of $243 and $243, respectively)231 240 
Common stock, at fair value (cost $741 and $1,554, respectively)741 3,534 
Equity method investments— 232 
Total investments426,568 409,610 
Cash and cash equivalents134,821 153,149 
Restricted cash3,567 4,085 
Accrued investment income2,378 2,458 
Premiums and other receivables135,354 109,217 
Income taxes receivable1,393 1,322 
Reinsurance recoverable361,673 343,213 
Prepaid reinsurance premiums138,223 107,971 
Deferred policy acquisition cost, net8,966 1,332 
Property and equipment, net7,588 8,254 
Right of use asset5,028 6,338 
Goodwill142,141 140,640 
Intangible assets, net74,614 75,316 
Other assets10,124 6,878 
Total assets$1,452,438 $1,369,783 
Liabilities
Unpaid loss and loss adjustment expenses$510,792 $457,817 
Unearned premiums222,866 157,987 
Funds held under reinsurance agreements176,838 174,704 
Reinsurance premiums payable49,240 57,069 
Accounts payable and accrued expenses25,766 61,240 
Lease liability5,491 6,893 
Deferred tax liability8,233 12,329 
Debt30,920 31,637 
Total liabilities1,030,146 959,676 
Commitments and contingencies0
Stockholders' equity
Common stock, $0.01 par value per share (600,000,000 authorized; 51,174,887 and 51,148,782 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively)512 511 
Additional paid-in capital288,114 287,110 
Retained earnings127,146 109,060 
Accumulated other comprehensive income6,520 13,426 
Total stockholders' equity422,292 410,107 
Total liabilities and stockholders' equity$1,452,438 $1,369,783 

See accompanying notes to the condensed consolidated financial statements.
3
 June 30, 2020 December 31, 2019
Assets   
Fixed maturities, at fair value (amortized cost of $359,355 and $329,640, respectively)$375,705
 $337,865
Preferred stock, at fair value (amortized cost of $332 and $337, respectively)325
 343
Common stock, at fair value (cost $1,554 and $492, respectively)3,428
 492
Equity method investments11,693
 12,173
Total investments391,151
 350,873
Cash and cash equivalents97,326
 74,268
Restricted cash7,746
 1,800
Accrued investment income2,605
 2,468
Premiums and other receivables75,017
 62,460
Related party receivables20,385
 22,221
Reinsurance recoverable334,124
 307,338
Prepaid reinsurance premiums91,311
 80,088
Deferred policy acquisition cost, net2,951
 2,115
Property and equipment, net8,130
 7,937
Right of use asset5,958
 —
Deferred tax asset—
 1,367
Goodwill3,339
 2,822
Other assets9,889
 3,277
Total assets$1,049,932
 $919,034
Liabilities   
Unpaid loss and loss adjustment expenses$442,500
 $406,716
Unearned premiums120,427
 103,789
Funds held under reinsurance agreements165,371
 163,445
Reinsurance premiums payable54,030
 53,620
Accounts payable and accrued expenses73,325
 14,995
Lease liability6,186
 —
Income taxes payable3,999
 714
Deferred tax liability12
 —
Long-term debt39,698
 29,040
Total liabilities905,548
 772,319
Commitments and contingencies

 
Redeemable preferred stock (1,000,000 authorized; 51 outstanding)5,100
 5,100
Members' equity   
Members' equity78,478
 78,438
Additional paid-in capital16,542
 17,995
Retained earnings35,561
 40,361
Accumulated other comprehensive income8,703
 4,821
Total members' equity139,284
 141,615
Total liabilities and members' equity$1,049,932
 $919,034
Table of Contents

BIC Holdings LLC - Trean Holdings LLCInsurance Group, Inc. and Subsidiaries
Condensed CombinedConsolidated Statements of Operations
(in thousands)thousands, except share and per share data)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenues
Gross written premiums$177,624 $132,284 $480,905 $349,755 
Increase in gross unearned premiums(28,478)(22,963)(64,836)(39,601)
Gross earned premiums149,146 109,321 416,069 310,154 
Ceded earned premiums(97,191)(81,465)(275,037)(238,460)
Net earned premiums51,955 27,856 141,032 71,694 
Net investment income2,187 2,364 6,562 9,134 
Gain on revaluation of Compstar investment— 69,846 — 69,846 
Net realized capital gains49 115 72 3,345 
Other revenue2,799 5,401 8,683 11,323 
Total revenue56,990 105,582 156,349 165,342 
Expenses
Losses and loss adjustment expenses32,129 15,564 86,735 40,681 
General and administrative expenses13,788 6,995 40,946 23,437 
Other expenses— 11,054 845 11,054 
Intangible asset amortization1,499 1,120 4,326 1,154 
Noncash stock compensation468 307 1,098 307 
Interest expense419 520 1,271 1,482 
Total expenses48,303 35,560 135,221 78,115 
Gains (losses) on embedded derivatives(121)(367)1,869 (5,547)
Other income35 209 191 263 
Income before taxes8,601 69,864 23,188 81,943 
Income tax expense2,083 817 5,102 4,035 
Equity earnings in affiliates, net of tax— 401 — 2,333 
Net income$6,518 $69,448 $18,086 $80,241 
Earnings per share:
Basic$0.13 $1.42 $0.35 $1.94 
Diluted$0.13 $1.42 $0.35 $1.94 
Weighted average shares outstanding:
Basic51,171,416 49,054,441 51,157,726 41,304,132 
Diluted51,171,416 49,056,001 51,172,602 41,304,652 

See accompanying notes to the condensed consolidated financial statements.
4
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Revenues       
Gross written premiums$109,612
 $104,420
 $217,471
 $205,954
Increase in gross unearned premiums(9,265) (1,535) (16,638) (12,487)
Gross earned premiums100,347
 102,885
 200,833
 193,467
Ceded earned premiums(78,968) (79,508) (156,995) (150,466)
Net earned premiums21,379
 23,377
 43,838
 43,001
Net investment income1,524
 1,570
 4,796
 2,857
Net realized capital gains (losses)(4) 111
 3,230
 723
Other revenue1,530
 1,893
 5,922
 5,488
Total revenue24,429
 26,951
 57,786
 52,069
Expenses       
Losses and loss adjustment expenses12,183
 13,014
 25,117
 24,470
General and administrative expenses8,316
 6,193
 16,476
 10,162
Interest expense501
 561
 962
 1,185
Total expenses21,000
 19,768
 42,555
 35,817
Other income40
 33
 54
 126
Income before taxes3,469
 7,216
 15,285
 16,378
Income tax expense979
 1,690
 3,891
 3,009
Equity earnings in affiliates, net of tax1,230
 865
 1,932
 1,473
Net income$3,720
 $6,391
 $13,326
 $14,842
Table of Contents

BIC Holdings LLC - Trean Holdings LLCInsurance Group, Inc. and Subsidiaries
Condensed CombinedConsolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net income$6,518 $69,448 $18,086 $80,241 
Other comprehensive gain (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) arising during the period(2,419)546 (8,670)8,781 
Income tax expense (benefit)(508)115 (1,821)1,842 
Unrealized investment gains (losses), net of tax(1,911)431 (6,849)6,939 
Less reclassification adjustments to:
Net realized investment gains (losses) included in net realized capital gains (losses)49 114 72 232 
Income tax expense10 24 15 49 
Total reclassifications included in net income, net of tax39 90 57 183 
Other comprehensive income (loss)(1,950)341 (6,906)6,756 
Total comprehensive income$4,568 $69,789 $11,180 $86,997 
See accompanying notes to the condensed consolidated financial statements.
5
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Net income$3,720
 $6,391
 $13,326
 $14,842
Other comprehensive income, net of tax:       
Unrealized investment gains:       
Unrealized investment gains arising during the period6,252
 2,782
 5,029
 7,753
Income tax expense1,310
 585
 1,054
 1,629
Unrealized investment gains, net of tax4,942
 2,197
 3,975
 6,124
Less reclassification adjustments to:       
Net realized investment gains (losses) included in net realized capital gains (losses)(1) 111
 118
 89
Income tax expense (benefit)(1) 24
 25
 19
Total reclassifications included in net income, net of tax—
 87
 93
 70
Other comprehensive income4,942
 2,110
 3,882
 6,054
Total comprehensive income$8,662
 $8,501
 $17,208
 $20,896
Table of Contents

BIC Holdings LLC - Trean Holdings LLCInsurance Group, Inc. and Subsidiaries
Condensed CombinedConsolidated Statements of Members’Stockholders' Equity and Redeemable Preferred Stock
For the Three and SixNine Months Ended JuneSeptember 30, 20202021 and 20192020
(in thousands, except share and unit data)
(unaudited)


Common StockAdditional Paid in CapitalAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance at June 30, 202151,157,004 $511 $287,734 $8,470 $120,628 $417,343 
Stock compensation expense— — 468 — — 468 
Common stock issuances pursuant to equity compensation awards, net of shares repurchased17,883 1 (88)— — (87)
Other comprehensive income— — — (1,950)— (1,950)
Net income— — — — 6,518 6,518 
Balance at September 30, 202151,174,887 $512 $288,114 $6,520 $127,146 $422,292 



Members' Equity
Redeemable Preferred StockClass A - Non VotingClass B - VotingClass B - Non VotingClass C - Non VotingCommon StockAdditional Paid in CapitalAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders' Equity
SharesAmountUnitsAmountUnitsAmountUnitsAmountUnitsAmountSharesAmount
Balance at June 30, 202051 $5,100 65,036,780 $65,037 5,045,215 $5,045 8,159,775 $8,160 235,905 $236 — $— $16,542 $12,915 $31,349 $139,284 
Issuance of Class C units— — — — — — — — 157,270 157 — — — — — 157 
Dividends on Series B preferred stock— — — — — — — — — — — — — — (45)(45)
Redemption of Series B Redeemable Preferred Stock(51)(5,100)— — — — — — — — — — — — — — 
Corporate recapitalization— — (65,036,780)(65,037)(5,045,215)(5,045)(8,159,775)(8,160)(393,175)(393)37,386,394 374 78,261 — — — 
Issuance of common shares for acquisition of Compstar— — — — — — — — — — 6,613,606 66 99,138 — — 99,204 
Proceeds from common stock sold in initial public offering, net of offering costs— — — — — — — — — — 7,142,857 71 93,068 — — 93,139 
Common stock issuances pursuant to equity compensation awards— — — — — — — — — — 5,925 — (82)— — (82)
Stock compensation expense— — — — — — — — — — — — 307 — — 307 
Other comprehensive income— — — — — — — — — — — — — 341 — 341 
Net income— — — — — — — — — — — — — — 69,448 69,448 
Balance at September 30, 2020— $— — $— — $— — $— — $— 51,148,782 $511 $287,234 $13,256 $100,752 $401,753 


See accompanying notes to the condensed consolidated financial statements.
6
Table of Contents
     Members' Equity      
 Redeemable Preferred StockPreferred Stock Class A - Non Voting Class B - Voting Class B - Non Voting Class C - Non Voting Additional Paid in Capital Accumulated Other Comprehensive Income Retained Earnings Total Members' Equity
 SharesAmountSharesAmount UnitsAmount UnitsAmount UnitsAmount UnitsAmount 
Balance at March 31, 202051
$5,100
—
$—
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 216,247
$216
 $17,995
 $3,761
 $49,967
 $150,181
Issuance of Class C units—
—
—
—
 —
—
 —
—
 —
—
 19,658
20
 —
 —
 —
 20
Distributions to members—
—
—
—
 —
—
 —
—
 —
—
 —
—
 (1,453) —
 (18,043) (19,496)
Dividends on Series B preferred stock—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (83) (83)
Other comprehensive income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 4,942
 —
 4,942
Net income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 3,720
 3,720
Balance at June 30, 202051
$5,100
—
$—
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 235,905
$236
 $16,542
 $8,703
 $35,561
 $139,284
Common StockAdditional Paid in CapitalAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance at December 31, 202051,148,782 $511 $287,110 $13,426 $109,060 $410,107 
Stock compensation expense— — 1,098 — — 1,098 
Common stock issuances pursuant to equity compensation awards, net of shares repurchased26,105 1 (94)— — (93)
Other comprehensive loss— — — (6,906)— (6,906)
Net income— — — — 18,086 18,086 
Balance at September 30, 202151,174,887 $512 $288,114 $6,520 $127,146 $422,292 






Members' Equity
Redeemable Preferred StockClass A - Non VotingClass B - VotingClass B - Non VotingClass C - Non VotingCommon StockAdditional Paid in CapitalAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders' Equity
SharesAmountUnitsAmountUnitsAmountUnitsAmountUnitsAmountSharesAmount
Balance at December 31, 201951 $5,100 65,036,780 $65,037 5,045,215 $5,045 8,159,775 $8,160 196,588 $196 — $— $17,995 $6,500 $38,682 $141,615 
Issuance of Class C units— — — — — — — — 196,587 197 — — — — — 197 
Distributions to members— — ��� — — — — — — — — — (1,453)— (18,043)(19,496)
Dividends on Series B preferred stock— — — — — — — — — — — — — — (128)(128)
Redemption of Series B Redeemable Preferred Stock(51)(5,100)— — — — — — — — — — — — — — 
Corporate recapitalization— — (65,036,780)(65,037)(5,045,215)(5,045)(8,159,775)(8,160)(393,175)(393)37,386,394 374 78,261 — — — 
Issuance of common shares for acquisition of Compstar— — — — — — — — — — 6,613,606 66 99,138 — — 99,204 
Proceeds from common stock sold in initial public offering, net of offering costs— — — — — — — — — — 7,142,857 71 93,068 — — 93,139 
Common stock issuances pursuant to equity compensation awards— — — — — — — — — — 5,925 — (82)— — (82)
Stock compensation expense— — — — — — — — — — — — 307 — — 307 
Other comprehensive income— — — — — — — — — — — — — 6,756 — 6,756 
Net income— — — — — — — — — — — — — — 80,241 80,241 
Balance at September 30, 2020— $— — $— — $— — $— — $— 51,148,782 $511 $287,234 $13,256 $100,752 $401,753 


See accompanying notes to the condensed consolidated financial statements.
7
     Members' Equity      
 Redeemable Preferred StockPreferred Stock Class A - Non Voting Class B - Voting Class B - Non Voting Class C - Non Voting Additional Paid in Capital Accumulated Other Comprehensive Income Retained Earnings Total Members' Equity
 SharesAmountSharesAmount UnitsAmount UnitsAmount UnitsAmount UnitsAmount 
Balance at March 31, 201960
$6,000
10
$1,000
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 137,612
$137
 $17,995
 $1,941
 $18,916
 $118,231
Issuance of Class C units—
—
—
—
 —
—
 —
—
 —
—
 19,658
20
 —
 —
   20
Distributions to members—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (313) (313)
Dividends on Series A preferred stock—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (13) (13)
Dividends on Series B preferred stock—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (74) (74)
Other comprehensive income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 2,110
 —
 2,110
Net income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 6,391
 6,391
Balance at June 30, 201960
$6,000
10
$1,000
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 157,270
$157
 $17,995
 $4,051
 $24,907
 $126,352



Table of Contents
     Members' Equity      
 Redeemable Preferred StockPreferred Stock Class A - Non Voting Class B - Voting Class B - Non Voting Class C - Non Voting Additional Paid in Capital Accumulated Other Comprehensive Income Retained Earnings Total Members' Equity
 SharesAmountSharesAmount UnitsAmount UnitsAmount UnitsAmount UnitsAmount 
Balance at December 31, 201951
$5,100
—
$—
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 196,588
$196
 $17,995
 $4,821
 $40,361
 $141,615
Issuance of Class C units—
—
—
—
 —
—
 —
—
 —
—
 39,317
40
 —
 —
 —
 40
Distributions to members—
—
—
—
 —
—
 —
—
 —
—
 —
—
 (1,453) —
 (18,043) (19,496)
Dividends on Series B preferred stock—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (83) (83)
Other comprehensive income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 3,882
 —
 3,882
Net income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 13,326
 13,326
Balance at June 30, 202051
$5,100
—
$—
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 235,905
$236
 $16,542
 $8,703
 $35,561
 $139,284


     Members' Equity      
 Redeemable Preferred StockPreferred Stock Class A - Non Voting Class B - Voting Class B - Non Voting Class C - Non Voting Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Members' Equity
 SharesAmountSharesAmount UnitsAmount UnitsAmount UnitsAmount UnitsAmount 
Balance at December 31, 201860
$6,000
10
$1,000
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 117,953
$118
 $17,995
 $(2,003) $9,779
 $105,131
Cumulative effect of adopting ASC Topic 606—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 695
 695
Issuance of Class C units—
—
—
—
 —
—
 —
—
 —
—
 39,317
39
 —
 —
 —
 39
Distributions to members—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (313) (313)
Dividends on Series A preferred stock—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (22) (22)
Dividends on Series B preferred stock—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 (74) (74)
Other comprehensive income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 6,054
 —
 6,054
Net income—
—
—
—
 —
—
 —
—
 —
—
 —
—
 —
 —
 14,842
 14,842
Balance at June 30, 201960
$6,000
10
$1,000
 65,036,780
$65,037
 5,045,215
$5,045
 8,159,775
$8,160
 157,270
$157
 $17,995
 $4,051
 $24,907
 $126,352

BIC Holdings LLC - Trean Holdings LLCInsurance Group, Inc. and Subsidiaries
Condensed CombinedConsolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30,
20212020
Operating activities
Net income$18,086 $80,241 
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization5,123 1,823 
Stock compensation1,098 307 
Unrealized (gains) losses on embedded derivatives(3,761)3,066 
Net capital gains(72)(5,242)
Gain on revaluation of Compstar— (69,846)
Bond amortization and accretion1,715 1,465 
Issuance of member units as compensation— 197 
Equity earnings in affiliates, net of tax— (2,333)
Distributions from equity method investments— 2,953 
Deferred income taxes(2,259)(317)
Deferred financing costs126 90 
Changes in operating assets and liabilities:
Accrued investment income80 50 
Premiums and other receivables(25,167)(13,308)
Reinsurance recoverable on paid and unpaid losses(18,460)(43,087)
Prepaid reinsurance premiums(30,252)(23,841)
Right of use asset1,444 (5,538)
Other assets(10,863)(8,729)
Unpaid loss and loss adjustment expenses52,975 58,787 
Unearned premiums64,879 39,601 
Funds held under reinsurance agreements19,585 (5,942)
Reinsurance premiums payable(7,829)6,136 
Accounts payable and accrued expenses(11,430)11,448 
Lease liability(1,537)5,752 
Income taxes payable(71)(1,525)
Net cash provided by operating activities53,410 32,208 
Investing activities
Payments for capital expenditures(92)(665)
Proceeds from sale of equity method investment— 3,000 
Return of capital on equity method investment232 115 
Purchase of investments, available for sale(129,474)(84,125)
Proceeds from investments sold, matured or repaid61,998 89,374 
Acquisition of subsidiary, net of cash received(3,795)(1,098)
Cash received in the acquisition of Compstar— 11,891 
Net cash provided by (used in) investing activities(71,131)18,492 
Financing activities
Shares redeemed for payroll taxes(94)(82)
Proceeds from initial public offering— 99,643 
Deferred offering costs— (5,839)
Proceeds from credit agreement— 32,453 
Principal payments on debt(1,031)(41,789)
Buyback of preferred shares— (5,100)
Distribution to members— (19,496)
Dividends paid on preferred stock— (128)
Net cash provided by (used in) financing activities(1,125)59,662 
Net increase (decrease) in cash, cash equivalents and restricted cash(18,846)110,362 
Cash, cash equivalents and restricted cash – beginning of period157,234 76,068 
Cash, cash equivalents and restricted cash – end of period$138,388 $186,430 
See accompanying notes to the condensed consolidated financial statements.
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 Six Months Ended June 30,
 2020 2019
Operating activities   
Net income$13,326
 $14,842
Adjustments to reconcile net income to net cash from operating activities:   
Depreciation and amortization458
 360
Net capital gains (losses) on investments(5,042) 67
Deferred offering costs(1,339) —
Gain on bargain purchase of subsidiary—
 (634)
Bond amortization and accretion944
 863
Issuance of member units as compensation40
 39
Equity earnings in affiliates, net of tax(1,932) (1,473)
Distributions from equity method investments2,413
 2,127
Deferred income taxes349
 (506)
Deferred financing costs48
 51
Changes in operating assets and liabilities:   
Accrued investment income(137) (109)
Premiums and other receivables(10,666) (17,347)
Reinsurance recoverable on paid and unpaid losses(26,786) (27,040)
Prepaid reinsurance premiums(11,223) (11,048)
Right of use asset(5,958) —
Other assets(3,284) (1,391)
Unpaid loss and loss adjustment expenses35,784
 35,632
Unearned premiums16,638
 11,601
Funds held under reinsurance agreements(1,306) (6,030)
Reinsurance premiums payable409
 11,409
Accounts payable and accrued expenses19,591
 5,271
Lease liability6,186
 —
Income taxes payable3,270
 (1,992)
Net cash provided by operating activities31,783
 14,692
Investing activities   
Payments for capital expenditures(554) (493)
Proceeds from sale of equity method investment3,000
 —
Return of capital on equity method investment115
 —
Purchase of investments, available for sale(55,695) (51,196)
Proceeds from investments sold, matured or repaid60,339
 49,405
Acquisition of subsidiary, net of cash received(1,098) (5,496)
Net cash provided by (used in) investing activities6,107
 (7,780)
Financing activities   
Proceeds from credit agreement32,453
 —
Principal payments on long-term debt(21,843) (4,145)
Distribution to members(19,496) (313)
Dividends paid on preferred stock—
 (127)
Net cash used in financing activities(8,886) (4,585)
Net increase in cash, cash equivalents and restricted cash29,004
 2,327
Cash, cash equivalents and restricted cash ‑ beginning of period76,068
 55,962
Cash, cash equivalents and restricted cash ‑ end of period$105,072
 $58,289

BIC Holdings LLC - Trean Holdings LLCInsurance Group, Inc. and Subsidiaries
Condensed CombinedConsolidated Statements of Cash Flows
(in thousands)
(unaudited)
September 30,
Disaggregation of cash and restricted cash:20212020
Cash and cash equivalents$134,821 $165,255 
Restricted cash3,567 21,175 
Total cash, cash equivalents and restricted cash$138,388 $186,430 


Nine Months Ended September 30,
Supplemental disclosure of cash flow information:20212020
Cash paid during the year for:
Interest$1,145 $1,391 
Income taxes7,395 5,809 
Non-cash investing and financing activity:
Right-of-use assets obtained in exchange for new operating lease liabilities319 8,245 
Non-cash transfer of investments to settle funds held for reinsurance13,562 — 
Non-cash transfer of investments to settle amounts held for others in accounts payable26,211 — 
Contingent consideration for the acquisition of subsidiary1,500 — 
Shares issued for the acquisition of subsidiary— 99,204 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases1,824 1,484 

See accompanying notes to the condensed consolidated financial statements.
9
Disaggregation of cash and restricted cash:As of June 30, 2020 As of June 30, 2019
Cash and cash equivalents$97,326
 $50,648
Restricted cash7,746
 7,641
Total cash, cash equivalents and restricted cash$105,072
 $58,289

Table of Contents
 Six Months Ended June 30,
Supplemental disclosure of cash flow information:2020 2019
Cash paid during the year for:   
Interest$914
 $1,323
Income taxes201
 5,462
Non-cash investing and financing activity:   
Right-of-use assets obtained in exchange for new operating lease liabilities6,906
 —
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases906
 —


Notes to the Condensed CombinedConsolidated Financial Statements


Note 1. Business and Basis of Presentation
The condensed combined financial statements includeIn July 2020, Trean Insurance Group, Inc. (together with its wholly owned subsidiaries, the accounts, after elimination"Company") completed its initial public offering ("IPO") of intercompany accountscommon stock. Prior to the completion of the IPO, the Company effected the following reorganization transactions: (i) each of Trean Holdings LLC ("Trean"), an insurance services company, and transactions, of BIC Holdings LLC (BIC)("BIC"), a property and casualty insurance holding company, contributed all of their respective assets and Trean Holdings LLC (Trean), an insurance services company, along with their wholly owned subsidiaries, collectively the “Company”. BIC and Trean are owned by the same members. In July 2020,liabilities to Trean Insurance Group, Inc. completed its initial public offering, a newly formed direct subsidiary of BIC, in exchange for shares of common stock. Asstock in Trean Insurance Group, Inc. and (ii) upon the accompanying financial statements are ascompletion of the transfers by Trean and forBIC, Trean and BIC were dissolved and distributed in-kind common shares to the three and six months ended June 30, 2020, they are presented on a combined basis rather than on a consolidated basis. All dollar amounts are shown in thousands, except unit and per unit amounts.pre-IPO unitholders.


The Company is an established and growing company providingprovides products and services to the specialty insurance market. Historically, the Company has focused on specialty casualty markets that are believed to be under servedunder-served and where the Company’s expertise allows the Company to achieve higher rates, such as niche workers' compensation markets and small- to medium-sized specialty casualty insurance programs. The Company underwrites specialty-casualty insurance products both through programs where the Company partners with other organizations (Program Partners)("Program Partners"), and also through the Company’s own managing general agencies (Owned MGAs)("Owned MGAs"). The Company also provides Program Partners with a variety of services, including issuing carrier services, claims administration, and reinsurance brokerage from which the Company generates fee-based revenues.


BIC’sThe Company's wholly owned subsidiary issubsidiaries include: (a) Benchmark Holding Company, a property and casualty insurance holding company, which owns Benchmark Insurance Company (Benchmark)("Benchmark"), a property and casualty insurance company domiciled in the state of Kansas, and American Liberty Insurance Company (ALIC)("ALIC"), a property and casualty insurance company domiciled in the state of Utah.

Trean’s wholly owned subsidiaries areUtah, and 7710 Insurance Company, a property and casualty insurance company domiciled in the state of South Carolina; (b) Trean Compstar Holdings, LLC, a limited liability company created originally for the purchase of an interest in Compstar Insurance Services LLC, a California-based general agency,agency; and (c) Trean Corporation (Trean Corp)("Trean Corp"), a reinsurance intermediary manager and a managing general agent, which consists of the following wholly owned subsidiaries: Trean Reinsurance Services, LLC, (TRS), a reinsurance intermediary broker; Benchmark Administrators LLC, (BIC Admin), a claims third-party administrator; Western Integrated Care, LLC, a managed care organization; and Westcap Insurance Services, LLC, (Westcap), a managing general agent based in California.


The accompanying condensed combinedconsolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP)("GAAP") for interim financial information and with the instructions to the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934. Accordingly, they do not contain all of the information included in the Company's annual combinedconsolidated financial statements and notes. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s condensed combinedconsolidated financial position and results of operations for the periods presented have been included. Although management believes the disclosures and information presented are adequate, these interim condensed combinedconsolidated financial statements should be read in conjunction with the Company's most recent audited combined financial statements and notes theretoour Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on2020 (the "2020 Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020.10-K"). Operating results for the three and sixnine months ended JuneSeptember 30, 20202021 are not necessarily indicative of the results that may be expected for the year endedending December 31, 2020.2021.


During the second quarter of 2021, the Company determined that its funds held agreements with reinsurers contain embedded derivatives relating to a total return swap on the underlying investments. As a result, the Company has revised the presentation of its financial results to report the change in fair value of the embedded derivatives in gains (losses) on embedded derivatives in the condensed consolidated and combined statements of operations. In addition, investment earnings credited to the funds withheld accounts are reported in gains (losses) on embedded derivatives in the condensed consolidated and combined statements of operations, whereas previously these were reported as an offset to net investment income. While the prior period amounts have been corrected for comparability, the correction was not material to the previously reported condensed consolidated and condensed combined financial statements. The impact of the prior period corrections on the condensed consolidated balance sheet and the related components of stockholders' equity is as follows:

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December 31, 2020September 30, 2020
Previously reportedAdjustmentAs adjustedPreviously reportedAdjustmentAs adjusted
Retained earnings$112,959 $(3,899)$109,060 $104,853 $(4,101)$100,752 
Accumulated other comprehensive income9,527 3,899 13,426 9,155 4,101 13,256 


June 30, 2020December 31, 2019
Previously reportedAdjustmentAs adjustedPreviously reportedAdjustmentAs adjusted
Retained earnings$35,561 $(4,212)$31,349 $40,361 $(1,679)$38,682 
Accumulated other comprehensive income8,703 4,212 12,915 4,821 1,679 6,500 


The impact of the prior period corrections on the condensed consolidated statements of operations and other comprehensive income is as follows:

Three Months Ended September 30, 2020
Previously reportedAdjustmentAs adjusted
Net investment income$1,857 $507 $2,364 
Total revenue105,075 507 105,582 
Gains (losses) on embedded derivatives— (367)(367)
Income before taxes69,724 140 69,864 
Income tax expense788 29 817 
Net income$69,337 $111 $69,448 
Earnings per share:
Basic$1.41 $0.01 $1.42 
Diluted$1.41 $0.01 $1.42 
Other comprehensive income, net of tax
Unrealized investment gains:
Unrealized investment gains arising during the period$686 $(140)$546 
Income tax expense144 (29)115 
Unrealized investment gains, net of tax542 (111)431 
Other comprehensive income$452 $(111)$341 


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Table of Contents
Nine Months Ended September 30, 2020
Previously reportedAdjustmentAs adjusted
Net investment income$6,653 $2,481 $9,134 
Total revenue162,861 2,481 165,342 
Gains (losses) on embedded derivatives— (5,547)(5,547)
Income before taxes85,009 (3,066)81,943 
Income tax expense4,679 (644)4,035 
Net income$82,663 $(2,422)$80,241 
Earnings per share:
Basic$2.00 $(0.06)$1.94 
Diluted$2.00 $(0.06)$1.94 
Other comprehensive income, net of tax
Unrealized investment gains:
Unrealized investment gains arising during the period$5,715 $3,066 $8,781 
Income tax expense1,198 644 1,842 
Unrealized investment gains, net of tax4,517 2,422 6,939 
Other comprehensive income$4,334 $2,422 $6,756 


The correction of the prior period amounts had no impact on total operating, investing, and financing activities as presented on the Company’s condensed consolidated statements of cash flows during the nine months ended September 30, 2020. In conjunction with the correction of the prior period amounts, the fair value leveling table as of December 31, 2020 in Note 3 was corrected from $174,704, which represented the total funds withheld under reinsurance agreements liability, to $4,937, which relates only to the fair value of the embedded derivative; the net investment income table in Note 4 was corrected to incorporate the income from funds held investments of $507 and $2,481 for the three and nine months ended September 30, 2020, respectively; the effective tax rate in Note 8 was corrected from 1.1% to 1.2% for the three months ended September 30, 2020 and from 5.5% to 4.9% for the nine months ended September 30, 2020; and Note 14 has been corrected to reflect the changes to other comprehensive income described above.

Use of estimates


While preparing the condensed combinedconsolidated financial statements, the Company has made certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed combinedconsolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require extensive use of estimates include the reserves for unpaid losses and loss adjustment expenses (LAE)("LAE"), reinsurance recoveries, investments, goodwill and goodwill.other intangible assets. Except for the captions on the condensed combinedconsolidated balance sheets and condensed combinedconsolidated statements of comprehensive income, generally, the term loss(es) is used to collectively refer to both loss and LAE.



Accounting pronouncements


Recently adopted policies


In March 2020, the Financial Accounting Standards Board (FASB)("FASB") issued Accounting Standards Update (ASU)("ASU") No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04) ("ASU 2020-04"). This update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This standard is effective for
12
Table of Contents
the period between March 12, 2020 and December 31, 2022. The adoption of this standard did not have a material impact on the condensed combinedconsolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. The Company adopted this standard effective January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the condensed combined financial statements.

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842) (ASU 2016-02), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of lease payments. Management adopted this standard effective January 1, 2020 under the modified retrospective approach. Adoption of this standard resulted in the Company recognizing initial right-of-use assets of $5,946 and initial lease liabilities of $5,946 and did not result in a cumulative effect adjustment on retained earnings. The adoption of this standard did not have a material impact on the condensed combined statements of operations or condensed combined statements of cash flows.


Pending policies


Trean Insurance Group, Inc.The Company completed its initial public offeringIPO in July 2020, and is an emerging growth company as defined under federal securities laws. As such, the Company has elected to adopt pending accounting policies under the dates required for private companies. Therefore, the dates included within this section reflect the effective dates for the adoption of new accounting policies required by private companies.


In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (ASU 2020-03). This update represents changes to clarify and improve the codification to allow for easier application by eliminating inconsistencies and providing clarification. Certain issues addressedclarification on items such as (i) the application of fair value option disclosures; (ii) the accounting for fees related to modifications of debt; and (iii) aligning the contractual term of a net investment in this update area lease in accordance with ASC Topic 326, Financial Instruments - Credit Losses, and the lease term determined in accordance with ASC Topic 842, Leases. The Company adopted items (i) and (ii) effective for annual periods beginning after December 15,January 1, 2020 and others are effective for annual periods beginning after December 15, 2022. The Company will adopt each standard upon their respective effective dates of January 1, 2021 anditem (iii) on January 1, 2023. Adoption of this standard has not had, and is not expected to have, a material impact on the condensed combinedconsolidated financial statements.


In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323 and Topic 815 (ASU 2020-01). This update addresses the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting. Further, the update addresses scope considerations for forward contracts and purchased options on certain securities. ASU 2020-01 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter. The Company will adopt this standard effective January 1, 2022. Adoption of this standard is not expected to have a material impact on the condensed combinedconsolidated financial statements.


In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment. ASU 2017-04 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter, with early adoption permitted. The Company will adopt this standard effective January 1, 2022. Adoption of this standard is not expected to have a material impact on the condensed combined financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update requires financial assets measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Additionally, credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit

losses, with the amount of the allowance limited to the amount by which the fair value is below the amortized cost. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this standard effective January 1, 2023. The Company is currently evaluating the impact of this standard on the condensed combinedconsolidated financial statements.


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Note 2. Acquisitions
Western Integrated Care

Effective July 6, 2021, Trean Corp acquired 100% ownership of Western Integrated Care, LLC ("WIC") for a total purchase price of $5,500, which includes $1,500 that is contingent on WIC's future earnings, as defined in the agreement. WIC is a managed care organization that offers services to workers' compensation insurers to enable employees who are injured on the job to access qualified medical treatment. The following table summarizes the consideration paid and the amounts of estimated fair value of the net assets acquired and liabilities assumed at the acquisition date:

Fair value of total consideration transferred$5,500 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents205 
Premiums and other receivables1,025 
Property and equipment, net39 
Right of use asset135 
Goodwill1,501 
Intangible assets, net3,624 
Other assets16 
Accounts payable and accrued expenses(667)
Lease liability(135)
Debt(243)
Net assets acquired$5,500 


The assessment of fair value, the determination of deferred taxes and other payables and receivables are preliminary and are based on the information that was available at the time the condensed consolidated financial statements were prepared. Accordingly, the allocation of purchase price to intangible assets, goodwill, deferred tax assets, and liabilities and other payables and receivables is preliminary and, therefore, subject to adjustment in future periods.

The Company recorded $1,501 of goodwill associated with the business combination. The goodwill recognized is attributable to the assembled workforce, the expected growth resulting from the acquisition, and synergies gained to assist in reducing operating expenses.

The Company also recorded preliminary intangible assets totaling $3,624, which are comprised of the following:

Useful LifeBalance
Trade name2 years$28 
Non-compete agreements5 years256 
Customer relationships12 years3,340 
Total intangible assets$3,624 

The operating results of WIC have been included in the condensed consolidated financial statements of the Company since July 6, 2021, the date of acquisition, and were immaterial to the condensed consolidated financial statements.



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Table of Contents
7710 Insurance Company

Effective October 1, 2020, Benchmark Holding Company acquired 100% ownership of 7710 Insurance Company as well as its associated program manager and agency, 7710 Service Company, LLC and Creekwood Insurance Agency, LLC, for a purchase price of $12,140. 7710 Insurance Company underwrites workers' compensation primarily for emergency services, including firefighters and emergency medical services ("EMS"). 7710 Insurance Company focuses on reducing costs and claims through the implementation of a proprietary safety preparedness and loss control program, created and staffed by experienced firefighters and EMS professionals.

The following table summarizes the consideration paid and the amounts of estimated fair value of the net assets acquired and liabilities assumed at the acquisition date:

Fair value of total consideration transferred$12,140 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Fixed maturities895 
Cash and cash equivalents2,704 
Accrued investment income7 
Premiums and other receivables2,618 
Reinsurance recoverable5,069 
Prepaid reinsurance premiums920 
Deferred policy acquisition costs466 
Property and equipment22 
Right of use asset196 
Goodwill2,873 
Intangible assets3,299 
Other assets7,435 
Unpaid loss and loss adjustment expenses(8,117)
Unearned premiums(3,831)
Funds held under reinsurance agreements(421)
Accounts payable and accrued expenses(1,112)
Lease liability(220)
Deferred tax liabilities(394)
Debt(269)
Net assets acquired$12,140 


The Company recorded $2,873 of goodwill associated with the business combination. The goodwill recognized is attributable to the assembled workforce and the expected growth resulting from the acquisition.

The Company also recorded intangible assets totaling $3,299, which are comprised of the following:

Useful LifeBalance
Trade name15 years$458 
Customer relationships10 years2,841 
Total intangible assets$3,299 


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Table of Contents
Compstar Holding Company LLC

Effective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining 55% ownership interest in Compstar Holding Company LLC ("Compstar"), a holding company, along with its wholly owned subsidiary Compstar Insurance Services, a managing general agent, by issuing 6,613,606 shares of the Company’s common stock with a market price of $15 per share on the date of acquisition. Prior to the acquisition date, the Company held a 45% ownership interest in Compstar and accounted for its investment under the equity method. The acquisition-date fair value of the Company’s previous equity interest was revalued using the market price of the shares issued as consideration for the acquisition. The fair value attributable to the Company’s previous equity interest was $81,167 and the carrying value was $11,321. As a result, the Company recorded a gain of $69,846 from the remeasurement of its previous equity interest, which is included in gain on revaluation of Compstar investment on the condensed consolidated statement of operations.

The following table summarizes the consideration paid and the amounts of estimated fair value of the net assets acquired and liabilities assumed at the acquisition date.

Fair value of total consideration transferred$99,204 
Previous investment in subsidiary11,321 
Fair value adjustment to prior investment69,846 
Fair value of assets acquired and liabilities assumed180,371 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents11,891 
Premiums and other receivables3,632 
Property and equipment444 
Right of use asset1,020 
Goodwill134,428 
Intangible assets, net73,954 
Other assets184 
Accounts payable and accrued expenses(11,328)
Lease liability(1,302)
Deferred tax liabilities(12,487)
Debt(20,065)
Net assets acquired$180,371 


The Company recorded $134,428 of goodwill associated with the business combination. The goodwill recognized is attributable to the assembled workforce, the expected growth resulting from the acquisition, and synergies gained through the reduction of operating expenses.

The Company also recorded intangible assets totaling $73,954, which are comprised of the following:

Useful LifeBalance
Trade name15 years$3,157 
Customer relationships14 years70,797 
Total intangible assets$73,954 

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LCTA Risk Services, Inc.


Effective April 1, 2020, Trean Corp purchased 100% of the operating assets and assumed the liabilities of LCTA Risk Services, Inc. The total purchase price was $1,400. The following table summarizes the consideration paid and the amounts of estimated fair value of the net assets acquired and liabilities assumed at the acquisition date (in thousands):date:


Fair value of total consideration transferred$1,400 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents302 
Premiums and other receivables55 
Property and equipment63 
Goodwill517 
Intangible assets, net482 
Other assets12 
Accounts payable(17)
Income taxes payable(14)
Net assets acquired$1,400 
Fair value of total consideration transferred$1,400
Recognized amounts of identifiable assets acquired and liabilities assumed: 
Cash and cash equivalents302
Premiums and other receivables55
Property and equipment63
Goodwill517
Other assets494
Accounts payable(17)
Income taxes payable(14)
Net assets acquired$1,400



The Company recorded $517 of goodwill associated with the business combination. The goodwill recognized is attributable to the expected growth resulting from the acquisition and the synergies gained to assist in reducingthrough the reduction of operating expenses.


American Liberty Insurance Company

Effective March 31, 2019, Benchmark Holdings Company purchased the remaining 25% of outstanding voting shares in ALIC for $1,155. The purchase price was determined based on the statutory surplus of ALIC.

First Choice Casualty Insurance Company

Effective February 19, 2019, Benchmark purchased 100% of the operating assets and assumed the liabilities of First Choice Casualty Insurance Company (FCCIC). The total purchase price was $5,314. As part of the acquisition, the Company recorded a bargain purchase gain of $634 which is included in net realized capital gains (losses) on the condensed combined statements of operations. The Company was able to realize a bargain purchase gain as the seller was looking to exit the workers' compensation market with the sale of their management agreement to a new manager. With the new manager, the seller had a lack of interest and expertise in maintaining workers' compensation policies, which had historically been underwritten and managed by Trean Corp.

The following table summarizes the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Fair value of total consideration transferred$5,314
Recognized amounts of identifiable assets acquired and liabilities assumed: 
Cash973
Investments4,252
Accrued investment income40
Premiums and other receivables1,571
Deferred tax asset242
Other assets10
Unpaid loss and loss adjustment expenses(6,426)
Unearned premiums(1,003)
Funds held under reinsurance agreements7,980
Reinsurance premiums payable(1,037)
Accounts payable and accrued expenses(316)
Income taxes payable(338)
Net assets acquired5,948
Gain on bargain purchase$634


Note 3. Fair Value Measurements


The Company’s financial instruments include assets and liabilities carried at fair value. The inputs to valuation techniques used to measure fair value are prioritized into a three level hierarchy. The fair value hierarchy is as follows:


Level 1: Fair values primarily based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.


Level 2: Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.


Level 3: Fair values primarily based on valuations derived when one or more of the significant inputs are unobservable. With little or no observable market, the determination of fair value uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.


The Company classifies the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. The following tables present the estimated fair value of the Company’s significant financial instruments.



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September 30, 2021
June 30, 2020Level 1Level 2Level 3Total
(in thousands)Level 1 Level 2 Level 3 Total
Fixed maturities:       Fixed maturities:
U.S. government and government securities$16,073
 $175
 $—
 $16,248
U.S. government and government securities$26,773 $174 $— $26,947 
Foreign governments—
 305
 —
 305
Foreign governments— 2,500 — 2,500 
States, territories and possessions—
 7,544
 —
 7,544
States, territories and possessions— 8,116 — 8,116 
Political subdivisions of states territories and possessions—
 28,915
 —
 28,915
Political subdivisions of states territories and possessions— 32,552 — 32,552 
Special revenue and special assessment obligations—
 71,875
 —
 71,875
Special revenue and special assessment obligations— 91,568 — 91,568 
Industrial and public utilities—
 129,892
 —
 129,892
Industrial and public utilities— 100,815 — 100,815 
Commercial mortgage-backed securities—
 17,908
 —
 17,908
Commercial mortgage-backed securities— 104,435 — 104,435 
Residential mortgage-backed securities—
 59,412
 —
 59,412
Residential mortgage-backed securities— 16,006 — 16,006 
Other loan-backed securities—
 43,250
 —
 43,250
Other loan-backed securities— 42,545 — 42,545 
Hybrid securities—
 356
 —
 356
Hybrid securities— 112 — 112 
Total fixed maturities16,073
 359,632
 —
 375,705
Total fixed maturities26,773 398,823 — 425,596 
Equity securities:       Equity securities:
Preferred stock—
 325
 —
 325
Preferred stock— 231 — 231 
Common stock852
 576
 2,000
 3,428
Common stock— 741 — 741 
Total equity securities852
 901
 2,000
 3,753
Total equity securities— 972 — 972 
Total investments$16,925
 $360,533
 $2,000
 $379,458
Total investments$26,773 $399,795 $— $426,568 
       
Funds held under reinsurance agreements—
 165,371
 —
 165,371
       
Long-term debt:       
Junior subordinated debt—
 7,732
 —
 7,732
Secured credit facility—
 32,794
 —
 32,794
Total long-term debt$—
 $40,526
 $—
 $40,526
Embedded derivatives on funds held under reinsurance agreementsEmbedded derivatives on funds held under reinsurance agreements$85 $1,089 $— $1,174 
DebtDebt— 31,538 — 31,538 




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December 31, 2020
December 31, 2019Level 1Level 2Level 3Total
(in thousands)Level 1 Level 2 Level 3 Total
Fixed maturities:       Fixed maturities:
U.S. government and government securities$16,129
 $—
 $—
 $16,129
U.S. government and government securities$17,471 $— $— $17,471 
Foreign governments—
 302
 —
 302
Foreign governments— 302 — 302 
States, territories and possessions—
 4,923
 —
 4,923
States, territories and possessions— 7,774 — 7,774 
Political subdivisions of states, territories and possessions—
 25,104
 —
 25,104
Political subdivisions of states, territories and possessions— 33,212 — 33,212 
Special revenue and special assessment obligations—
 61,405
 —
 61,405
Special revenue and special assessment obligations— 81,714 — 81,714 
Industrial and public utilities—
 123,207
 —
 123,207
Industrial and public utilities— 113,741 — 113,741 
Commercial mortgage-backed securities—
 16,312
 —
 16,312
Commercial mortgage-backed securities— 18,066 — 18,066 
Residential mortgage-backed securities—
 54,109
 —
 54,109
Residential mortgage-backed securities— 93,017 — 93,017 
Other loan-backed securities—
 36,011
 —
 36,011
Other loan-backed securities— 39,945 — 39,945 
Hybrid securities—
 363
 —
 363
Hybrid securities— 362 — 362 
Total fixed maturities16,129
 321,736
 —
 337,865
Total fixed maturities17,471 388,133 — 405,604 
Equity securities:       Equity securities:
Preferred stock—
 343
 —
 343
Preferred stock— 240 — 240 
Common stock—
 492
 —
 492
Common stock958 576 2,000 3,534 
Total equity securities—
 835
 —
 835
Total equity securities958 816 2,000 3,774 
Total investments$16,129
 $322,571
 $—
 $338,700
Total investments$18,429 $388,949 $2,000 $409,378 
       
Funds held under reinsurance agreements—
 163,445
 —
 163,445
       
Long-term debt:       
Junior subordinated debt—
 7,732
 —
 7,732
Secured credit facility—
 21,637
 —
 21,637
Total long-term debt$—
 $29,369
 $—
 $29,369
Embedded derivatives on funds held under reinsurance agreementsEmbedded derivatives on funds held under reinsurance agreements$176 $4,761 $— $4,937 
DebtDebt— 32,381 — 32,381 




Bonds and preferred stocks: equity securities: The Company, in conjunction with its third-party pricing service provider, uses a variety of sources to estimate the fair value of investments such as Reuters, Iboxx, PricingDirect, ICE BofAML Index, ICE Data Services, and for equities, Bloomberg. Equity securities are valued at the closing price on the exchange on which they are primarily traded as provided by a third-party pricing service. Fixed income securities are generally valued at an evaluated bid as provided by a third-party pricing service. Securities and other assets generally valued using third-party pricing services may also be valued at broker/dealer bid quotations. Values obtained from third-party pricing services can utilize several data sources for inputs such as transaction data, yield, quality, coupon rate, maturity, issue type, trading characteristics, and market activity. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent trading activity, analytical review of fair values, and an evaluation of the underlying pricing methodologies. Based on these procedures, the Company did not adjust the prices or quotes from the third-party pricing service.


FundsEmbedded derivatives: The Company enters into funds held contracts under reinsurance agreements: The Company holds certain investments as collateral under reinsurance contracts and values these investmentsagreements which create embedded derivatives on the underlying investments. These embedded derivatives are valued based upon the unrealized gain or loss position of the funds held portfolio, which is determined consistent with its other investments using third-party pricing services. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent activity, analytical review of fair values and an evaluation of the underlying pricing methodologies. Based on these procedures, the Company did not adjust the prices or quotes from the third-party pricing service.



Long-term debt:Debt: The Company held long-termholds debt related to multipleits secured credit agreements.facility. The Company has determined that the remaining balance of the debt reflected its fair value as this would represent the total amount to repay the debt.


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Note 4. Investments
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company's investments in securities classified as available for sale are as follows:


September 30, 2021
Cost or
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
Fixed maturities:
U.S. government and government securities$26,811 $165 $(29)$26,947 
Foreign governments2,500 — — 2,500 
States, territories and possessions7,937 191 (12)8,116 
Political subdivisions of states, territories and possessions31,709 942 (99)32,552 
Special revenue and special assessment obligations88,998 3,039 (469)91,568 
Industrial and public utilities97,169 3,790 (144)100,815 
Commercial mortgage-backed securities104,888 799 (1,252)104,435 
Residential mortgage-backed securities15,010 996 — 16,006 
Other loan-backed securities42,161 407 (23)42,545 
Hybrid securities105 7 — 112 
Total fixed maturities available for sale417,288 10,336 (2,028)425,596 
Equity securities:
Preferred stock243 — (12)231 
Common stock741 — — 741 
Total equity securities984 — (12)972 
Total investments$418,272 $10,336 $(2,040)$426,568 


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December 31, 2020
June 30, 2020Cost or
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
(in thousands)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Fixed maturities:       Fixed maturities:
U.S. government and government securities$15,778
 $470
 $—
 $16,248
U.S. government and government securities$17,135 $336 $— $17,471 
Foreign governments300
 5
 —
 305
Foreign governments300 2 — 302 
States, territories and possessions7,299
 245
 —
 7,544
States, territories and possessions7,500 274 — 7,774 
Political subdivisions of states, territories and possessions27,684
 1,231
 —
 28,915
Political subdivisions of states, territories and possessions31,759 1,453 — 33,212 
Special revenue and special assessment obligations68,065
 3,815
 (5) 71,875
Special revenue and special assessment obligations77,329 4,422 (37)81,714 
Industrial and public utilities122,814
 7,223
 (145) 129,892
Industrial and public utilities107,017 6,768 (44)113,741 
Commercial mortgage-backed securities16,400
 1,598
 (90) 17,908
Commercial mortgage-backed securities16,242 1,848 (24)18,066 
Residential mortgage-backed securities57,787
 1,714
 (89) 59,412
Residential mortgage-backed securities91,478 1,626 (87)93,017 
Other loan-backed securities42,871
 772
 (393) 43,250
Other loan-backed securities39,293 719 (67)39,945 
Hybrid securities357
 2
 (3) 356
Hybrid securities356 6 — 362 
Total fixed maturities available for sale$359,355
 $17,075
 $(725) $375,705
Total fixed maturities available for sale388,409 17,454 (259)405,604 
Equity securities:Equity securities:
Preferred stockPreferred stock243 — (3)240 
Common stockCommon stock1,554 2,053 (73)3,534 
Total equity securitiesTotal equity securities1,797 2,053 (76)3,774 
Total investmentsTotal investments$390,206 $19,507 $(335)$409,378 


 December 31, 2019
(in thousands)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Fixed maturities:       
U.S. government and government securities$15,965
 $167
 $(3) $16,129
Foreign governments299
 3
 —
 302
States, territories and possessions4,789
 134
 —
 4,923
Political subdivisions of states, territories and possessions24,444
 670
 (10) 25,104
Special revenue and special assessment obligations59,149
 2,298
 (42) 61,405
Industrial and public utilities119,735
 3,490
 (18) 123,207
Commercial mortgage-backed securities15,586
 757
 (31) 16,312
Residential mortgage-backed securities53,467
 679
 (37) 54,109
Other loan-backed securities35,849
 281
 (119) 36,011
Hybrid securities357
 6
 —
 363
Total fixed maturities available for sale$329,640
 $8,485
 $(260) $337,865




The following table illustrates the Company’s gross unrealized losses and fair value of fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


September 30, 2021
Less Than 12 Months12 Months or MoreTotal
Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
Fixed maturities:
U.S. government and government securities$6,802 $(29)$— $— $6,802 $(29)
Foreign governments— — — — — — 
States, territories and possessions313 (12)— — 313 (12)
Political subdivisions of states, territories and possessions10,171 (99)— — 10,171 (99)
Special revenue and special assessment obligations25,038 (469)— — 25,038 (469)
Industrial and public utilities15,978 (87)967 (57)16,945 (144)
Commercial mortgage-backed securities74,540 (1,200)3,598 (52)78,138 (1,252)
Residential mortgage-backed securities1,500 — — — 1,500 — 
Other loan-backed securities6,870 (5)2,482 (18)9,352 (23)
Hybrid securities— — — — — — 
Total bonds$141,212 $(1,901)$7,047 $(127)$148,259 $(2,028)


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December 31, 2020
June 30, 2020Less Than 12 Months12 Months or MoreTotal
Less Than 12 Months 12 Months or More TotalFair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
(in thousands)Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Fixed maturities:           Fixed maturities:
U.S. government and government securities$505
 $—
 $—
 $—
 $505
 $—
U.S. government and government securities$4,518 $— $— $— $4,518 $— 
Foreign governments—
 —
 —
 —
 —
 —
Foreign governments— — — — — — 
States, territories and possessions—
 —
 —
 —
 —
 —
States, territories and possessions— — — — — — 
Political subdivisions of states, territories and possessions—
 —
 —
 —
 —
 —
Political subdivisions of states, territories and possessions— — — — — — 
Special revenue and special assessment obligations932
 (5) —
 —
 932
 (5)Special revenue and special assessment obligations2,923 (37)— — 2,923 (37)
Industrial and public utilities1,512
 (145) —
 —
 1,512
 (145)Industrial and public utilities2,106 (44)— — 2,106 (44)
Commercial mortgage-backed securities936
 (90) —
 —
 936
 (90)Commercial mortgage-backed securities999 (24)— — 999 (24)
Residential mortgage-backed securities1,575
 (67) 308
 (22) 1,883
 (89)Residential mortgage-backed securities8,811 (74)262 (13)9,073 (87)
Other loan-backed securities10,148
 (89) 10,488
 (304) 20,636
 (393)Other loan-backed securities2,037 (10)9,036 (57)11,073 (67)
Hybrid securities104
 (3) —
 —
 104
 (3)Hybrid securities250 — — — 250 — 
Total bonds$15,712
 $(399) $10,796
 $(326) $26,508
 $(725)Total bonds$21,644 $(189)$9,298 $(70)$30,942 $(259)


 December 31, 2019
 Less Than 12 Months 12 Months or More Total
(in thousands)Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Fixed maturities:           
U.S. government and government securities$293
 $(2) $1,349
 $(1) $1,642
 $(3)
Foreign governments—
 —
 —
 —
 —
 —
States, territories and possessions—
 —
 —
 —
 —
 —
Political subdivisions of states, territories and possessions1,500
 (9) 690
 (1) 2,190
 (10)
Special revenue and special assessment obligations3,206
 (42) 181
 —
 3,387
 (42)
Industrial and public utilities5,939
 (16) 1,094
 (2) 7,033
 (18)
Commercial mortgage-backed securities2,138
 (30) 129
 (1) 2,267
 (31)
Residential mortgage-backed securities6,936
 (13) 1,917
 (24) 8,853
 (37)
Other loan-backed securities2,189
 (11) 13,885
 (108) 16,074
 (119)
Hybrid securities—
 —
 —
 —
 —
 —
Total bonds$22,201
 $(123) $19,245
 $(137) $41,446
 $(260)



The unrealized losses on the Company’s available for sale securities as of JuneSeptember 30, 20202021 and December 31, 20192020 were primarily caused by wideningattributable to an increase in corporate and tax exempt spreads, rather than credit-related problems.interest rates, which predominantly impacted fixed maturities acquired since the second quarter of 2020.



The amortized cost and estimated fair value of fixed maturities as of JuneSeptember 30, 2020,2021, by contractual maturity, are as follows:

Cost or Amortized CostFair Value
Available for sale:
Due in one year or less$6,101 $6,111 
Due after one year but before five years108,603 111,392 
Due after five years but before ten years71,941 75,073 
Due after ten years68,584 70,034 
Commercial mortgage-backed securities104,888 104,435 
Residential mortgage-backed securities15,010 16,006 
Other loan-backed securities42,161 42,545 
Total$417,288 $425,596 
(in thousands)Cost or Amortized Cost Fair Value
Available for sale:   
Due in one year or less$22,078
 $22,266
Due after one year but before five years118,280
 124,043
Due after five years but before ten years58,074
 62,674
Due after ten years43,865
 46,152
Commercial mortgage-backed securities16,400
 17,908
Residential mortgage-backed securities57,787
 59,412
Other loan-backed securities42,871
 43,250
Total$359,355
 $375,705


Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


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Realized gains and losses on investments included in the condensed combinedconsolidated statements of operations for the three and sixnine months ended JuneSeptember 30, 20202021 and 20192020 are as follows:

Three Months Ended September 30,Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,2021202020212020
(in thousands)2020 2019 2020 2019
Fixed maturities:       Fixed maturities:
Gains$—
 $119
 $119
 $120
Gains$52 $120 $150 $239 
Losses(1) (8) (1) (31)Losses— (6)(75)(7)
Total fixed maturities(1) 111
 118
 89
Total fixed maturities52 114 75 232 
Funds held investments:Funds held investments:
GainsGains110 — 110 — 
LossesLosses(1)— (1)— 
Total funds held investmentsTotal funds held investments109 — 109 — 
Equity securities:       Equity securities:
Equity method investments:       Equity method investments:
Gains—
 —
 3,115
 —
Gains— — — 3,115 
LossesLosses(112)— (112)— 
Total equity securities—
 —
 3,115
 —
Total equity securities(112)— (112)3,115 
Total net investment realized gains (losses)$(1) $111
 $3,233
 $89
Total net realized gains (losses)Total net realized gains (losses)$49 $114 $72 $3,347 



Net investment income consists of the following for the three and sixnine months ended JuneSeptember 30, 20202021 and 2019:2020:

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Fixed maturities$1,597 $1,804 $4,734 $4,684 
Income on funds held investments585 507 1,783 2,481 
Preferred stock5 19 41 39 
Common stock— 30 — 1,904 
Interest earned on cash and short-term investments— 4 4 26 
Net investment income$2,187 $2,364 $6,562 $9,134 


Embedded derivatives

The Company enters into funds held contracts under reinsurance agreements which create embedded derivatives, which are measured at fair value. The embedded derivatives within our funds held under reinsurance agreements relate to a total return swap on the underlying investments. These embedded derivatives had no impact on total operating, investing and financing activities as presented on the Company’s condensed consolidated statements of cash flows during the three and nine months ended September 30, 2021 and 2020. Total funds held under reinsurance agreements includes the following:

September 30, 2021December 31, 2020
Funds held under reinsurance agreements, at cost$175,664 $169,767 
Embedded derivatives, at fair value1,174 4,937 
Total funds held under reinsurance agreements$176,838 $174,704 


23
Table of Contents
 Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2020 2019 2020 2019
Fixed maturities$1,408
 $1,558
 $2,880
 $2,827
Preferred stock34
 (19) 20
 (23)
Common stock75
 —
 1,874
 —
Interest earned on cash and short-term investments7
 31
 22
 53
Net investment income$1,524
 $1,570
 $4,796
 $2,857
Gains (losses) on embedded derivatives consists of the following for the three and nine months ended September 30, 2021 and 2020:



Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Change in fair value of embedded derivatives$573 $140 $3,761 $(3,066)
Effect of net investment income on funds held investments(585)(507)(1,783)(2,481)
Effect of realized gains on funds held investments(109)— (109)— 
Total gains (losses) on embedded derivatives$(121)$(367)$1,869 $(5,547)


Note 5. Equity Method Investments
The Company hasheld equity method investments in Compstar Holding Company LLC (Compstar) and Trean Intermediaries (TRI)("TRI"). Equity earnings and losses arewere reported in equity earnings in affiliates, net of tax on the condensed combinedconsolidated statements of operations.



TheOn July 15, 2020, the Company owned 45% ofpurchased the remaining 55% ownership interest in Compstar which hadand, as a carrying value of approximately $11,461result, Compstar is no longer recorded as an equity method investment. For the three and $11,831 as of Junenine months ended September 30, 2020, and December 31, 2019, respectively. Thethe Company recorded earnings for the three months ended June 30, 2020of $401 and 2019$2,333, respectively, and received distributions of $1,230$540 and $692, respectively. Distributions received from Compstar for the three months ended June 30, 2020 and 2019 were $1,024 and $1,334, respectively. The Company recorded earnings for the six months ended June 30, 2020 and 2019 of $1,932 and $1,134, respectively. Distributions received from Compstar for the six months ended June 30, 2020 and 2019 were $2,302 and $1,537,$2,842, respectively.


On January 3, 2020, the Company sold 15% of its previous 25% ownership in TRI for cash proceeds of $3,000. The Company currently maintains$3,000 resulting in a 10%remaining ownership interest in TRI.of 10%. As a result of its significant ownership reduction and its inability to havelack of significant influence over the operations and policies of TRI, the Company reclassified its TRI investment, at fair value, to investments in common stock in the first quarter of 2020. The Company realized a gain on the sale of $3,115, which is included in net realized capital gains on the condensed combinedconsolidated statements of operations. The Company subsequently re-measured its TRI investment shares, resulting in an unrealized gain of $2,000, which is recorded in net investment income on the condensed combinedconsolidated statement of operations. The carrying value of TRI as of December 31, 2019 was approximately $110. The Company received distributions totaling $225 for the six months ended June 30, 2020. The Company recorded earnings of $174 and $340 for the three and six months ended June 30, 2019, respectively. The Company received distributions of $275 and $590$225 for the three and sixnine months ended JuneSeptember 30, 2019, respectively.2020. The Company sold all of its remaining ownership interest in TRI during Q3 2021 for $1,888, resulting in a realized loss of $112, which is included in net realized capital gains on the condensed consolidated statement of operations.


Note 6. Debt
Long‑term debtDebt consisted of the following:

September 30, 2021December 31, 2020
Secured credit facility$31,350 $32,381 
PPP loans188 — 
Total debt31,538 32,381 
Less: unamortized deferred financing costs(618)(744)
Net debt$30,920 $31,637 

(in thousands)June 30, 2020 December 31, 2019
Junior subordinated debt$7,732
 $7,732
Secured credit facility32,794
 21,637
Long-term debt40,526
 29,369
Less: unamortized deferred financing costs(828) (329)
Net long‑term debt$39,698
 $29,040

Junior Subordinated Debt

In June 2006, Trean Capital Trust I (the Trust) issued 7,500 shares of preferred capital securities to qualified institutional buyers and 232 common securities to Trean Corp. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of Trean Corp's Junior Subordinated Debt due 2036 (the Subordinated Notes). The Subordinated Notes represent the sole assets of the Trust. The Subordinated Notes mature on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of LIBOR (1.22% and 1.99% as of June 30, 2020 and December 31, 2019, respectively) plus 3.50% is in effect. The interest rate totaled 4.72% and 5.49% as of June 30, 2020 and December 31, 2019, respectively. There are optional dates for redemption of the Subordinated Notes, at the option of the Company, on any January 7, April 7, July 7, or October 7 following July 7, 2011. There are no funding requirements for Trean Corp to the Trust except for the necessary quarterly interest payments. Trean Corp is the guarantor of the debt.

The preferred capital securities issued by the Trust in turn pay quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011 and thereafter at a variable rate per annum, reset quarterly, equal to LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Subordinated Notes on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by the Company.

The Company recorded $92 and $119 of interest expense associated with the Subordinated Notes during the three months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded $196 and $241 of interest expense, respectively, associated with the Subordinated Notes.

The terms of this agreement require the Company to maintain certain general and financial covenants and ratios. The Company was in compliance with all covenants and ratios as of June 30, 2020 and December 31, 2019.



Secured Credit Facility


In April 2018, Trean Corp entered into a credit agreement with a bank which includes a term loan facility totaling $27,500 and a revolving credit facility of $3,000. Borrowings are secured by substantially all of the assets of Trean and its subsidiaries.


On May 26, 2020, the Company entered into a new Amended and Restated Credit Agreement which, among other things, extended the Company's credit facility for a period of five years through May 26, 2025 and increased its term loan facility by $11,707, resulting in a total term loan debt amount of $33,000 at the time of closing. The loan has a variable interest rate of LIBOR plus 3.50% and 3.00%4.50%, which was 5.95%4.65% and 6.33%4.72% as of JuneSeptember 30, 20202021 and December 31, 2019,2020, respectively. The
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outstanding principal balance of the loan is to be repaid in quarterly installments which escalate from $206 to $825. All sharesequity securities of the subsidiaries of Trean Insurance Group, Inc. (other than Benchmark Holding Company and its subsidiariessubsidiaries) have been pledged as guaranteed collateral.


The Company recorded $388$377 and $420$403 of interest expense associated with its credit facility during the three months ended JuneSeptember 30, 20202021 and 2019,2020, respectively. During the sixnine months ended JuneSeptember 30, 20202021 and 2019,2020, the Company recorded $722$1,145 and $892$1,125 of interest expense, respectively, associated with its credit facility.


The terms of this agreementthe credit facility require the Company to maintain certain financial covenants and ratios. The Company was in compliance with all covenants and ratios as of JuneSeptember 30, 20202021 and December 31, 2019.2020.


PPP Loans

In conjunction with the acquisition of WIC, the Company acquired 2 Federal Paycheck Protection Program Loans ("PPP Loans") with a principal balance of $243. As of September 30, 2021, one loan with a principal balance of $55 had been fully forgiven. The outstanding balance for the remaining loan was $188 as of September 30, 2021.

Note 7. Revenue from Contracts with Customers
Revenue from contracts with customers, included in other revenue, includes brokerage, management, third-party administrative, and consulting fees.and other fee-based revenue. Revenue from contracts with customers was $1,530$2,799 and $5,922$8,683 for the three and sixnine months ended JuneSeptember 30, 2020,2021, respectively, compared to $1,893$5,401 and $5,488$11,323 for the three and sixnine months ended JuneSeptember 30, 2019,2020, respectively.


The following table presents the revenues recognized from contracts with customers included in the condensed combinedconsolidated statements of operations.
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Brokerage$1,989 $4,422 $6,214 $8,870 
Managing general agent fees88 312 407 720 
Third-party administrator fees437 562 1,191 1,329 
Consulting and other fee-based revenue285 105 871 404 
Total revenue from contracts with customers$2,799 $5,401 $8,683 $11,323 
 Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2020 2019 2020 2019
Brokerage$755
 $912
 $4,448
 $3,615
Managing general agent fees254
 227
 408
 567
Third-party administrator fees383
 559
 767
 973
Consulting fees138
 195
 299
 333
Total revenue from contracts with customers$1,530
 $1,893
 $5,922
 $5,488




The Company did not have any contract liabilities as of JuneSeptember 30, 20202021 or December 31, 2019.2020. The following table provides information related to the contract assets from contracts with customers. Contract assets are included within other assets on the condensed combinedconsolidated balance sheets.
September 30, 2021December 31, 2020
Contract assets$4,537 $3,405 
(in thousands)June 30, 2020 December 31, 2019
Contract assets$2,569
 $1,103




Note 8. Income Taxes
Income tax expense for interim periods is measured using an estimated effective income tax rate for the annual period. The Company's effective tax rate was 28.2%24.2% and 25.5%22.0% for the three and sixnine months ended Junemonths ended September 30, 2021. The increase in the effective tax rate from the statutory rate for these periods was primarily due to the impact of recording the Company's 2020 tax return accrual to return true-up in the third quarter of 2021.

The Company’s effective tax rate was 1.2% and 4.9% for the three and nine months ended September 30, 2020, respectively. The effective tax rate differed from the statutory rate primarily due to the non-tax impact of state taxes and the deferredgain recorded on the revaluation of the Company's original 45% investment in Compstar, offset by certain IPO-related expenses not deductible for tax effectpurposes.
25
Table of a tax accounting method change on excess ceding commissions.Contents




The Company's effective tax rate was 23.4% for the three months ended June 30, 2019. The effective tax rate differed from the statutory rate of 21% due to the impact of state taxes. The Company's effective tax rate was 18.4% for six months ended June 30, 2019. The effective tax rate differed from the statutory rate primarily due to book and tax basis differences resulting from the acquisition of FCCIC and deferred tax benefits related to the tax impact of deferred acquisition costs.

Note 9. Liability for Unpaid Losses and Loss Adjustment Expense
The following table represents a reconciliation of changes in the liability for unpaid losses and LAE.

Three Months Ended September 30,Nine Months Ended September 30,
Three Months Ended June 30, Six Months Ended June 30,2021202020212020
(in thousands)2020 2019 2020 2019
Unpaid losses and LAE reserves at beginning of period$418,757
 $364,360
 $406,716
 $340,415
Unpaid losses and LAE reserves at beginning of period$502,560 $442,500 $457,817 $406,716 
Less losses ceded through reinsurance(312,105) (271,005) (304,005) (257,421)Less losses ceded through reinsurance(358,601)(332,765)(335,655)(304,005)
Net unpaid losses and LAE at beginning of period106,652
 93,355
 102,711
 82,994
Net unpaid losses and LAE at beginning of period143,959 109,735 122,162 102,711 
Acquisition of First Choice Casualty Insurance Company—
 —
 —
 6,366
Incurred losses and LAE related to:       Incurred losses and LAE related to:
Current period13,020
 14,350
 27,189
 27,279
Current period32,947 15,864 88,032 43,053 
Prior period(837) (1,336) (2,072) (2,809)Prior period(818)(300)(1,297)(2,372)
Total incurred losses and LAE12,183
 13,014
 25,117
 24,470
Total incurred losses and LAE32,129 15,564 86,735 40,681 
Paid losses and LAE, net of reinsurance, related to:       Paid losses and LAE, net of reinsurance, related to:
Current period3,392
 1,230
 4,590
 2,328
Current period12,638 4,196 25,111 8,786 
Prior period5,708
 6,640
 13,503
 13,003
Prior period7,092 4,771 27,428 18,274 
Total paid losses and LAE9,100
 7,870
 18,093
 15,331
Total paid losses and LAE19,730 8,967 52,539 27,060 
Net unpaid losses and LAE at end of period109,735
 98,499
 109,735
 98,499
Net unpaid losses and LAE at end of period156,358 116,332 156,358 116,332 
Plus losses ceded through reinsurance332,765
 283,974
 332,765
 283,974
Plus losses ceded through reinsurance354,434 349,170 354,434 349,170 
Unpaid losses and LAE reserves at end of period$442,500
 $382,473
 $442,500
 $382,473
Unpaid losses and LAE reserves at end of period$510,792 $465,502 $510,792 $465,502 




As a result of changes in estimates of insured events in prior years,During the provisionthree and nine months ended September 30, 2021, the reserves for unpaid losses and loss adjustment expenses decreasedLAE developed favorably by approximately $837$818 and $1,336 for$1,297, respectively, primarily attributable to the development in the Company's workers' compensation book of business. For the three and nine months ended JuneSeptember 30, 2020, the reserves for unpaid losses and 2019, respectively,LAE developed favorably by $300 and decreased by approximately $2,072 and $2,809 for the six months ended June 30, 2020 and 2019,$2,372, respectively, primarily attributable to the development in the Company’s workers’ compensation book of business.


Note 10. Reinsurance
The Company utilizes reinsurance contracts to reduce its exposure to losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not relieve the Company from its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of its reinsurers.



A summary of the impact of ceded reinsurance on premiums written and premiums earned is as follows:


Three Months Ended September 30,
20212020
GrossAssumedCededNetGrossAssumedCededNet
Written premiums$175,516 $2,108 $(114,374)$63,250 $129,927 $2,357 $(94,083)$38,201 
Earned premiums146,170 2,976 (97,191)51,955 107,314 2,007 (81,465)27,856 


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Nine Months Ended September 30,
Three Months Ended June 30,20212020
2020 2019GrossAssumedCededNetGrossAssumedCededNet
(in thousands)Gross Assumed Ceded Net Gross Assumed Ceded Net
Written premiums$107,596
 $2,016
 $(86,586) $23,026
 $102,962
 $1,458
 $(82,183) $22,237
Written premiums$473,463 $7,442 $(305,164)$175,741 $343,500 $6,255 $(262,301)$87,454 
Earned premiums98,337
 2,010
 (78,968) 21,379
 101,097
 1,788
 (79,508) 23,377
Earned premiums408,936 7,133 (275,037)141,032 304,194 5,960 (238,460)71,694 




 Six Months Ended June 30,
 2020 2019
(in thousands)Gross Assumed Ceded Net Gross Assumed Ceded Net
Written premiums$213,573
 $3,898
 $(168,218) $49,253
 $202,320
 $3,634
 $(162,632) $43,322
Earned premiums196,880
 3,953
 (156,995) 43,838
 189,650
 3,817
 (150,466) 43,001


Note 11. Leases
Adoption of Leases, Topic 842

On January 1, 2020, the Company adopted ASU No. 2016-02, Leases (Topic 842), and all related amendments under the modified retrospective approach. Under this transition approach, comparative prior periods, including disclosures, were not restated. The Company elected the transition package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification. The Company chose not to elect the hindsight practical expedient. The Company has elected, as a practical expedient, to account for lease components and any non-lease components within a contract as a single lease component, and therefore allocates all of the expected lease payments to the lease component. The adoption of the standard did not have an impact on the Company's condensed combined statements of operations and there was no adjustment to its retained earnings opening balance sheet as of January 1, 2020. The Company does not expect the adoption of the new standard to have a material impact on the Company's operating results on an ongoing basis. The most significant impact of the new lease standard was the recognition of right-of-use assets and lease liabilities for operating leases. On January 1, 2020, the adoption of the new standard resulted in the recognition of a right-of-use asset and total lease liability of $5,946.

The Company's leases consist of operating leases for office space and equipment. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Some of the Company's leases include options to extend the term, which isare only included in the lease liability and right-of-use assetsasset calculation when it is reasonably certain the Company will exercise thatan option. Our leases have remaining terms ranging from one month to 6045 months, some of which have options to extend the lease for up to 5 years. As of JuneSeptember 30, 2020,2021, the lease liability and right-of-use assets did not include the impact of any lease extension options as it is not reasonably certain that the Company will exercise the extension options.


Total lease expense for the three months ended JuneSeptember 30, 2021 was $626, inclusive of $29 in variable lease expense. Total lease expense for the three months ended September 30, 2020 was $535,$641, inclusive of $22$72 in variable lease expense. The Company also sublets some of its leased office space and recorded $36$33 and $11 of sublease income for the three months ended JuneSeptember 30, 2021 and 2020, respectively, which is included in other income on the condensed combined statementsconsolidated statement of operations. Total rent expense was $389 and sublease income was $30 for the three months ended June 30, 2019, which were recorded prior to the adoption of ASU 2016-02.



Total lease expense for the sixnine months ended JuneSeptember 30, 2021 was $1,831, inclusive of $56 in variable lease expense. Total lease expense for the nine months ended September 30, 2020 was $1,114,$1,755, inclusive of $142$214 in variable lease expense. The Company also sublets some of its leased office space and recorded $48$74 and $59 of sublease income for the sixnine months ended JuneSeptember 30, 2021 and 2020, respectively, which is included in other income on the condensed combinedconsolidated statement of operations. Total rent expense was $737 and sublease income was $120 for the six months ended June 30, 2019, which were recorded prior to the adoption of ASU 2016-02.


Supplemental balance sheet information, the weighted average remaining lease term and weighted average discount rate related to leases were as follows:

September 30, 2021December 31, 2020
Right of use asset$5,028 $6,338 
Lease liability$5,491 $6,893 
Weighted average remaining lease term2.61 years3.26 years
Weighted average discount rate6.32 %6.37 %


27
(dollars in thousands)June 30, 2020
Right of use asset$5,958
Lease liability$6,186
Weighted average remaining lease term3.64 years
Weighted average discount rate6.49%
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Future maturities of lease liabilities as of JuneSeptember 30, 20202021 are as follows:

Operating Leases
(in thousands)Operating Leases
2020$1,005
20211,949
2021$607 
20221,899
20222,425 
20231,313
20231,840 
2024699
2024978 
2025202597 
Thereafter82
Thereafter3 
Total lease payments6,947
Total lease payments5,950 
Less: imputed interest(761)Less: imputed interest(459)
Total lease liabilities$6,186
Total lease liabilities$5,491 




The Company had the following minimum annual commitments for payment of leases as of December 31, 2019:

(in thousands)Rent Expense
2020$1,718
20211,614
20221,594
20231,191
2024669
Thereafter46
Total lease payments$6,832



Note 12. Equity
Members' EquityInitial Public Offering and Reorganization


BIC Holdings LLCOn July 20, 2020, Trean Insurance Group, Inc. closed the sale of 10,714,286 shares of its common stock in its IPO, comprised of 7,142,857 shares issued and sold by Trean Holdings LLC were each formedInsurance Group, Inc. and 3,571,429 shares sold by selling stockholders. On July 22, 2020, Trean Insurance Group, Inc. closed the sale of an additional 1,207,142 shares by certain selling stockholders in the stateIPO pursuant to the exercise of Delaware asthe underwriters’ option to purchase additional shares to cover over-allotments. The IPO price per share was $15.00. The aggregate IPO price for all shares sold in the IPO was approximately $107,142 and the aggregate initial public offering price for all shares sold by the selling stockholders in the IPO was approximately $71,678. The shares began trading on the Nasdaq Global Select Market on July 16, 2020 under the symbol "TIG". The offer and sale was pursuant to a limited liability company (LLC). Any debts,registration statement on Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020.

Trean Insurance Group, Inc. received net proceeds from the sale of shares in the IPO of approximately $93,139 after deducting underwriting discounts and commissions of $7,500 and estimated offering expenses obligationsof $6,503. Trean Insurance Group, Inc. did not receive any proceeds from the sale of shares by the selling stockholders. In addition, and in conjunction with its IPO, Trean Insurance Group, Inc. issued 6,613,606 shares of common stock, with a purchase price value of $99,204, to acquire the remaining 55% ownership in Compstar Holding Company LLC.

Prior to the completion of the above offering, the Company effected the following reorganization transactions: (i) each of Trean and BIC contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc. and (ii) upon the completion of the Company are solelytransfers by Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the responsibility of the Company. Any member of the LLC does not have any liability for the obligations or liabilities of the Company solely by reason of being a member or acting as a member of the Company.pre-IPO unitholders.


Common Stock

The Company currently has authorized 600,000,000 shares of common stock with a par value of $0.01. As of September 30, 2021 and December 31, 2020, there were 51,174,887 and 51,148,782 shares of common stock issued and outstanding.

Members' Equity

Prior to the IPO of Trean Insurance Group, Inc., the Company had three classes of ownership units, each with its respective rights, preferences and privileges as follows:


1)
Class A Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class B Units, on a pro rata basis prior to distributions made to other classes of ownership units.

1)Class A Units: Received an allocation of profits and losses incurred by the Company as well as maintained the right to receive distributions, along with Class B Units, on a pro rata basis prior to distributions made to other classes of ownership units.
2)
Class B Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class A Units, on a pro rata basis prior to distributions made to other classes of ownership units. Class B maintains both voting and non-voting units. Each Class B Voting Unit is entitled to one vote per Class B Voting Unit on each matter to which the members are entitled to vote. Class B Non-Voting Units maintain

28
2)Class B Units: Received an allocation of profits and losses incurred by the Company as well as maintained the right to receive distributions, along with Class A Units, on a pro rata basis prior to distributions made to other classes of ownership units. Class B maintained both voting and non-voting units. Each Class B Voting Unit was entitled to one vote per Class B Voting Unit on each matter to which the members were entitled to vote. Class B Non-Voting Units maintained all rights, preferences and privileges allowed to Class B Voting Units with the exception of voting rights.

3)
Class C Units: Receive an allocation of profits and losses incurred by the Company. Participating Class C Units maintain the right to receive distributions after any Class A or Class B units based on the unit holders’ pro rata share.

Redeemable Preferred Stock

Trean Corp has designated and authorized 1,000,000 shares as Series A Redeemable Preferred Stock (Series A) which have no voting rights. The holder is entitled

3)Class C Units: Received an allocation of profits and losses incurred by the Company. Participating Class C Units maintained the right to receive annual cumulative dividends at 4.5 percentdistributions after any Class A or Class B units based on the unit holders’ pro rata share.

As part of the original cost per share. Incorporate reorganization performed in conjunction with the eventIPO of liquidation, dissolution, or winding upTrean Insurance Group, all ownership units were exchanged for a total of 37,386,394 shares of the affairs of Trean Corp, liquidation distributions are made to preferred stockholders beforeCompany's common stockholders. Series A contained no conversion features. During 2019 the Company redeemed all of its remaining shares of Series A.stock.


Benchmark Holding Company has designated and authorized 1,000,000 shares as Series B Redeemable Preferred Stock (Series B) which have no voting rights. The holder is entitled to receive annual cumulative dividends as a percentage of the original cost per share or the actual earning on the invested funds. In the event of liquidation, dissolution, or winding up of the affairs of Benchmark Holding Company, liquidation distributions are made to preferred stockholders before common stockholders. Series B contains no conversion features. The liquidation preference and redemptive value of Series B is equivalent to its carrying value as of June 30, 2020 and December 31, 2019. The Company classified the shares of Series B within temporary equity on the condensed combined balance sheets as of June 30, 2020 and December 31, 2019, due to the liquidation rights associated with the termination of the shareholder customer agreement.

The Company is required to redeem all shares of outstanding Series A or Series B if any of the following events occur:
1.Upon demand by a majority of the shareholders having voting rights in the Company
2.Upon termination of the underlying stock purchase agreement between the Series A holders and Trean (only applicable to Series A shares)
3.Any refinancing, recapitalization, sale of assets or stock by Trean Corp or Benchmark Holding Company that results in a realization of gain by the shareholders, to the extent the same is distributed to shareholders, whether in a single or a series of distributions (only applicable to Series A shares)
4.Change in the majority control of the Company (only applicable to Series B shares)
5.The termination of the shareholder customer agreement (only applicable to Series B shares)
6.A qualified initial public offering of Trean Corp or Benchmark Holding Company

The cumulative dividends earned by Series B holders totaled approximately $83 for the three and six months ended June 30, 2020, which consist of the following (in thousands, except share and per share amounts):

 Three and Six Months Ended June 30, 2020
 Total Dividend Dividend per Share 
Weighted
Average Shares
Dividends on preferred shares - Series B$83
 $1,622.90
 51.00


The cumulative dividends earned by Series A and Series B holders totaled approximately $87 and $96 for the three and six months ended June 30, 2019, respectively, which consist of the following (in thousands, except share and pre share amounts):

 Three Months Ended June 30, 2019
 Total Dividend Dividend per Share 
Weighted
Average Shares
Dividends on preferred shares - Series A$13
 $1,352.82
 10.00
Dividends on preferred shares - Series B74
 1,240.46
 60.00
Total preferred share dividends$87
    


 Six Months Ended June 30, 2019
 Total Dividend Dividend per Share 
Weighted
Average Shares
Dividends on preferred shares - Series A$22
 $2,231.51
 10.00
Dividends on preferred shares - Series B74
 1,240.46
 60.00
Total preferred share dividends$96
    



Note 13. Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares outstanding during reported periods. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods and is calculated using the treasury stock method.

The following table presents the calculation of basic and diluted EPS of common stock:

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net income — basic and diluted$6,518 $69,448 $18,086 $80,241 
Weighted average number of shares outstanding — basic51,171,416 49,054,441 51,157,726 41,304,132 
Effect of dilutive securities:
Restricted stock units— 1,560 14,876 520 
Dilutive shares— 1,560 14,876 520 
Weighted average number of shares outstanding — diluted51,171,416 49,056,001 51,172,602 41,304,652 
Excluded: Antidilutive common stock equivalents123,003 — 123,003 — 
Earnings per share:
Basic$0.13 $1.42 $0.35 $1.94 
Diluted$0.13 $1.42 $0.35 $1.94 


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Note 14. Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income for unrealized gains and losses on available-for-sale securities:


Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Balance at beginning of period$8,470 $12,915 $13,426 $6,500 
Other comprehensive gain (loss), net of tax:
Unrealized investment gain (loss):
Unrealized investment gains (losses) arising during the period$(2,419)$546 $(8,670)$8,781 
Income tax expense (benefit)$(508)$115 $(1,821)$1,842 
Unrealized investment gain (loss), net of tax$(1,911)$431 $(6,849)$6,939 
Less: reclassification adjustments to:
Net realized investment gains (losses) included in net realized capital gains (losses)$49 $114 $72 $232 
Income tax expense (benefit)$10 $24 $15 $49 
Total reclassifications included in net income, net of tax$39 $90 $57 $183 
Other comprehensive income (loss)$(1,950)$341 $(6,906)$6,756 
Balance at end of period$6,520 $13,256 $6,520 $13,256 
 Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2020 2019 2020 2019
Balance at beginning of period$3,761
 $1,941
 $4,821
 $(2,003)
Other comprehensive income, net of tax:       
Unrealized investment gains:       
Unrealized investment gains arising during the period6,252
 2,782
 5,029
 7,753
Income tax expense1,310
 585
 1,054
 1,629
Unrealized investment gains, net of tax4,942
 2,197
 3,975
 6,124
Less: reclassification adjustments to:       
Net realized investment gains (losses) included in net realized capital gains (losses)(1) 111
 118
 89
Income tax expense (benefit)(1) 24
 25
 19
Total reclassifications included in net income, net of tax—
 87
 93
 70
Other comprehensive income4,942
 2,110
 3,882
 6,054
Balance at end of period$8,703
 $4,051
 $8,703
 $4,051




Note 14. Stock-Based15. Stock Compensation
On June 15, 2017,As of September 30, 2021, the Company entered into a Management Incentive Unit Agreement with an individual, who is a member ofhas one incentive plan, the Board of Managers of the Company, to issue Class C shares as partial compensation for future services to the Company. The shares issued under this agreement are subject to terms in the agreements between the Company and the recipient. The Company had approximately $157 and $197 of unrecognized stock compensation expense as of June 30, 2020 and December 31, 2019, respectively, related to non-vested stock-based compensation granted. The remaining non-vested stock-based compensation will become vested in the third quarter of 2020 in conjunction with the initial public offering of Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan, (the "2020 Omnibus Plan"). The purposes of the 2020 Omnibus Plan are to provide additional incentive to selected officers, employees, non-employee directors, independent contractors, and consultants of the Company recognized approximately $20whose contributions are essential to the growth and $40success of the business of the Company and its affiliates, to strengthen the commitment and motivate such individuals to faithfully and diligently perform their responsibilities and to attract competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company and its affiliates. The 2020 Omnibus Plan is administered by the Compensation, Nominating, and Corporate Governance Committee of the Company's board of directors and provides for the issuance of up to 5,058,085 shares of the Company's common stock granted in the form of stock basedoptions, stock appreciation rights, restricted stock, restricted stock units, stock bonuses, other stock awards, or any combination of the foregoing.

Stock Options

Compensation expense is recognized for all stock compensation arrangements by the Company. Stock compensation expense related to stock option awards was $49 and $118 for the three and sixnine months ended JuneSeptember 30, 2020,2021, respectively. The Company recognized approximately $20 and $39 ofStock compensation expense related to stock based compensation expenseoption awards was $28 for the three and sixnine months ended JuneSeptember 30, 2019.2020, respectively.


Employee stock option awards granted set forth, among other things, the option exercise price, the option term, provisions regarding option exercisability, and whether the option is intended to be an incentive stock option or a nonqualified stock option. Stock options may be granted to employees at such exercise prices as the Company’s board of directors may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. Employee options vest one third annually over a period of three years and have contractual terms of 10 years from the date of grant.

The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. The Company’s expected volatility for the period is based on a weighted average expected volatility of an industry peer group of insurance companies of similar size, life cycle, and
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lines of business. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company’s stock option grants qualify as plain vanilla options and as such the Company uses the simplified method in estimating its expected option term as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its common shares have been publicly traded. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.

Fiscal 2021
Expected volatility29.8%
Expected term6 years
Risk-free interest rate1.32%


A summary of the status of the Company's stock option activity as of September 30, 2021 and changes during the nine-month period then ended are as follows:

Stock OptionsWeighted Average Exercise Price
Balance outstanding, December 31, 202089,920 $15.00 
Granted60,729 $17.50 
Forfeited or cancelled(27,646)$15.64 
Balance outstanding, September 30, 2021123,003 $16.09 
Options exercisable, September 30, 202124,351 $15.00 


The following table summarizes information regarding stock options outstanding as of September 30, 2021:

Options OutstandingOptions Vested or Expected to Vest
Stock OptionsNumber of SharesWeighted Average Exercise PriceWeighted Average Remaining Contract TermAggregate Intrinsic ValueNumber of SharesWeighted Average Exercise PriceWeighted Average Remaining Contract TermAggregate Intrinsic Value
2020 Omnibus Plan123,003 $16.09 8.97 years$— 123,003 $16.09 8.97 years$— 


The weighted average grant-date fair value of options granted in the nine months ended September 30, 2021 was $5.49. As of September 30, 2021, total unrecognized compensation cost related to stock options was $422 and is expected to be recognized over a weighted average period of approximately 1.2 years.

Restricted Stock Units

Compensation expense relating to restricted stock unit grants was $419 and $980 for the three and nine months ended September 30, 2021, respectively. Compensation expense relating to restricted stock unit grants was $279 for the three and nine months ended September 30, 2020. As of September 30, 2021, there was $3,669 of total unrecognized compensation cost related to non-vested restricted stock unit grants, which is expected to be recognized over a weighted average life of 2.4 years. The total fair value of restricted stock units vested during the three and nine months ended September 30, 2021 was $342 and $478, respectively.

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The Company has granted time-based restricted stock units ("RSUs"), performance stock units ("PSUs"), and market-based stock units ("MSUs") to certain key employees as part of the Company's long-term incentive program. The estimated fair value of restricted stock units is based on the grant date closing price of the Company's stock for time-based and performance-based vesting awards. A Monte Carlo valuation model is used to estimate the fair value for market-based vesting awards. RSUs generally vest in three equal annual installments beginning one year from the grant date and are amortized as compensation expense over the three-year vesting period. The Company has also granted time-based restricted stock units to non-employee directors as part of the Company's annual director compensation program. Each time-based restricted stock grant to non-employee directors vests on the day immediately preceding the next annual meeting of stockholders following the date of grant. The grants are amortized as director compensation expense over the vesting period. The Company recognizes compensation expense on PSUs ratably over the requisite performance period of the award and to the extent management views the performance goal attainment as probable. The Company recognizes compensation expense on MSUs ratably over the requisite performance period of the award.

For the 2021 fiscal year, the Company granted PSUs to certain key employees pursuant to the Company's 2020 Omnibus Plan. The number of shares earned is based on the Company’s achievement of pre-established target threshold goals for total gross written premiums over a three-year performance measurement period. The performance goals allow for a payout ranging from 0% to 200% of the target award. If performance satisfies minimum requirements to result in shares being awarded, the number of shares will be determined between 50% and 200% of target thresholds, as defined in the applicable award agreements. Any earned PSU will vest if the employee’s service has been continuous through the vesting date. Any PSU not earned because of failure to achieve the minimum performance goal at the end of the performance period will be immediately forfeited. The grant date fair value of the PSUs was determined based on the grant date closing price of the Company’s stock.

For the 2021 fiscal year, the Company granted MSUs to certain key employees pursuant to the Company's 2020 Omnibus Plan. The number of restricted stock units earned is based on the Company’s cumulative total shareholder return ("TSR"), as defined in the applicable award agreement, over a three-year performance measurement period. If TSR satisfies minimum requirements to result in shares being awarded, the number of shares will be determined between 50% and 200% shown in the table below. Any MSU not earned because of failure to achieve the minimum performance goal at the end of the performance period will be immediately forfeited. Grant date fair values were determined using a Monte Carlo valuation model based on the following assumptions:

Fiscal 2021
Total grant date fair value$845 
Total grant date fair value per share$13.92 
Expected volatility35.0 %
Weighted average expected life2.77 years
Risk-free interest rate0.27 %


The percent of the target MSU that will be earned based on the Company’s TSR is as follows:

Cumulative TSR %Percent of Units Vested
Below 25.1%0%
25.1%50%
47.2%100%
69.3% and above200%


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A summary of the status of the Company’s non-vested restricted stock unit activity as of September 30, 2021 and changes during the nine-month period then ended is as follows:

RSUsMSUsPSUsTotal
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Non-vested outstanding, December 31, 2020111,588 $14.99 — $— — $— 111,588 $14.99 
Granted60,729 $17.50 60,715 $13.92 121,458 $17.50 242,902 $16.61 
Vested(32,686)$15.33 — $— — $— (32,686)$15.33 
Forfeited or cancelled(27,646)$16.02 (7,039)$13.92 (14,078)$17.50 (48,763)$16.14 
Non-vested outstanding, September 30, 2021111,985 $16.00 53,676 $13.92 107,380 $17.50 273,041 $16.18 


Note 15.16. Transactions with Related Parties
On July 6, 2021, Trean Corp purchased 100% ownership of WIC. Prior to the acquisition, WIC was partially owned by two employees of the Company. The Company owed Altaris Capital Partners, LLC, a private equity firm, approximately $83,total purchase price was $5,500, which includes $1,500 that is contingent on WIC's future earnings, as defined in the agreement. As of September 30, 2021, $1,500 of the total purchase price is outstanding and included within accounts payable and accrued expenses on the condensed combinedconsolidated balance sheet as of December 31, 2019.sheet.


The Company was owed amounts from TRI of approximately $14 as of December 31, 2019, which is included in related party receivables on the December 31, 2019 condensed combined balance sheet. The Company recorded $50 and $100$150 of revenue for consulting services provided to TRI for the three and sixnine months ended JuneSeptember 30, 2020, respectively, which is included in other revenue on the condensed combined statements of operations. The Company recorded $502021 and $100 of revenue for consulting services provided to TRI for the three and six months ended June 30, 2019,2020, respectively.


TheEffective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining ownership interest in Compstar. Prior to the acquisition, the Company ownsowned a 45% interest in Compstar, a program manager whichthat handles the underwriting, premium collection and servicing of insurance policies for the Company. The Company recorded $43,917 and $90,199 of gross earned premiums resulting in gross commissions of $7,737 and $17,709 for the three and six months ended June 30, 2020, respectively. The Company recorded $45,668 and $79,691 of gross earned premiums resulting in gross commissions of $9,191 and $16,554 due to Compstar for the three and sixnine months ended JuneSeptember 30, 2019, respectively. All receivables are stated net2020.

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commissions due under the Program Manager Agreement and totaled $20,385 and $22,207 as of June 30, 2020 and December 31, 2019, respectively, which is recorded in related party receivables on the condensed combined balance sheets. The Company’s ownership interest, and right to receive any distributions, is listed as collateral on debt taken out by Compstar.

Note 16. Subsequent Events
Events or transactions that occur after the balance sheet date, but before the condensed combined financial statements are complete, are reviewed by the Company to determine if they are to be recognized and/or disclosed as appropriate.

The ongoing global COVID-19 pandemic and response thereto has significantly impacted financial markets, businesses, households and communities and has caused a contraction in business activity and volatility in financial markets. The Company took several actions to protect the health of the public and its employees and to comply with directives and advice of governmental authorities, including restricting business travel and transitioning from an office-based company to primarily a remote working culture. As state, city and county guidelines progress, the Company has implemented new health and safety in-office procedures to prepare for transitioning its workforce back to working in offices on a limited basis. To date, the effects of the COVID-19 pandemic have not had a significant impact on the Company's financial position, results of operations or cash flows. However, continuation of the COVID-19 pandemic could cause additional reduction in business activity and financial market instability. The extent of the impact or continuation of the COVID-19 pandemic on the Company's future operational and financial performance will depend on several factors, including the duration of the pandemic and actions taken by government and health officials in response, all of which are uncertain and cannot be predicted. The Company will continue to monitor the impact of the ongoing continuation of the COVID-19 pandemic on its business, including how it will impact premium revenue, loss experience and loss expense, liquidity, regulatory capital and surplus, and operations.

On July 20, 2020, Trean Insurance Group, Inc. closed the sale of 10,714,286 shares of its common stock in its initial public offering (IPO), comprised of 7,142,857 shares issued and sold by Trean Insurance Group, Inc. and 3,571,429 shares sold by selling stockholders.  On July 22, 2020, Trean Insurance Group, Inc. closed the sale of an additional 1,207,142 shares by certain selling stockholders in the IPO pursuant to the exercise of the underwriters’ option to purchase additional shares to cover over-allotments. The initial public offering price per share was $15.00. The aggregate initial public offering price for all shares sold in the IPO was approximately $107,142 and the aggregate initial public offering price for all shares sold by the selling stockholders in the IPO was approximately $71,678. The shares began trading on the Nasdaq Global Select Market on July 16, 2020 under the symbol "TIG". The offer and sale was pursuant to a registration statement on Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020. 

Trean Insurance Group, Inc. received net proceeds from the sale of shares in the IPO of approximately $94,906 after deducting underwriting discounts and commissions of $7,500 and estimated offering expenses of $4,737.  Trean Insurance Group, Inc. did not receive any proceeds from the sale of shares by the selling stockholders. In addition, and in conjunction with its IPO, Trean Insurance Group, Inc. issued 6,613,606 shares of common stock, with a purchase price value of $99,204, to acquire the remaining 55% ownership in Compstar Holding Company LLC. See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" for a detailed discussion of use of proceeds associated with the IPO.

Prior to the completion of the above offering, the Company effected the following reorganization transactions: (i) each of Trean Holdings LLC (Trean) and BIC Holdings LLC (BIC) contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc., (ii) upon the completion of the transfers by Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.

On July 16, 2020, Benchmark Holding Company entered into an agreement to acquire 7710 Holdings, LLC (7710), which includes 7710 Insurance Company as well as its associated program manager and agency, 7710 Service Company, LLC and Creekwood Insurance Agency, LLC for a purchase price of $12,000. 7710 Insurance Company underwrites workers' compensation primarily for emergency services, including firefighters and emergency medical services (EMS). 7710 focuses on reducing costs and claims through the implementation of a propriety safety preparedness and loss control program (S.H.I.E.L.D.), created and staffed by experienced firefighters and EMS professionals.


All of the effects of subsequent events that provide additional evidence about conditions that existed at the condensed combined balance sheet date, including the estimates inherent in the process of preparing the condensed combined financial statements, are recognized in the condensed combined financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


The following discussion and analysis of financial condition and results of operations for the three and sixnine months ended JuneSeptember 30, 20202021 is qualified by reference to and should be read in conjunction with the accompanying unaudited condensed combinedconsolidated financial statements and the related notes included herein and the audited combinedconsolidated financial statements and notes of BIC Holdings LLC and Trean Holdings LLC as of December 31, 2019 and 2018.included in our 2020 Form 10-K. The discussion and analysis below are based on comparisons between our historical financial data for different periods and include certain forward-looking statements about our business, operations, and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors described in the section “Risk Factors.” included herein andItem 1A — "Risk Factors" in our registration statement filed with the SEC on2020 Form S-1.10-K. Our actual results may differ materially from those expressed in, or implied by, those forward-looking statements. See "Forward-Looking Statements."


All references to "we", "us", "our","we," "us," "our," "the Company", "Trean",Company," "Trean," or similar terms arerefer to (i) Trean, BIC and their subsidiaries before the consummation of the reorganization transactions defined in anticipation of our registration statement filed with the SEC on Form S-1, to Trean Holdings LLC, BIC Holdings LLC and their subsidiariesIPO and (ii) after such reorganization transactions, to Trean Insurance Group, Inc. and its subsidiaries after such reorganization transactions, unless the context otherwise requires. The information contained in this quarterly report is not a complete description of our business or the risks associated with an investment in our common stock.


The Company defines increases or decreases greater than 200% as "NM" or not meaningful.

Forward-Looking Statements


The following Management's DiscussionThis Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and Analysis of Financial Condition and Results of Operations contain forward-looking statements.uncertainties. Forward-looking statements generally relate to future events or our future financial performance or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "would," "potential," or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. These forward-looking statements include, among others, statements that are not historical or current facts. These statements may discuss, among other things,relating to our future financial performance, our business prospects and strategy, the lines of business we target, our anticipated financial position, liquidity and capital our dividend policyneeds, and market and industry conditions. 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" andother similar terms.matters. Forward-looking statements are based on management’s current expectations and assumptions about future events. These statementsevents, which are only predictions and are not guarantees of future performance. Forward-looking statements areinherently subject to uncertainties, risks, and uncertainties, including changes in circumstances that are difficult to predict. If one or more

The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and assumptions, which in many cases are beyond our control, as described in "Item 1A — Risk Factors" in our 2020 Form 10-K and in this Quarterly Report on Form 10-Q. Our statements reflecting these risks and uncertainties are not exhaustive, and other risks and uncertainties may currently exist or uncertainties materialize,may arise in the future that could have material effects on our business, operations and financial condition. We cannot assure you that the results, events, and circumstances reflected in the forward looking statements reflected in this Quarterly Report on Form 10-Q and our other public statements and securities filings will be achieved or if our underlying beliefsoccur, and assumptions prove to be incorrect, actual results, mayevents or circumstances could differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include those described in the “Risk Factors” section included herein and in our registration statement filed with the SEC on Form S-1. Forward-lookingforward looking statements.

These forward-looking statements speak only as of the date on which theysuch statements are made. ExceptWe undertake no obligation, and do not intend, to update any forward looking statements after the date of this Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as expressly required under federalby applicable securities laws or the rules and regulations of the SEC, we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements.SEC.


Overview


We are an established and growing company focused on providinga provider of products and services to the specialty insurance market. We underwrite specialty casualty insurance products both through our Program Partners and also through our Owned MGAs. We also provide our Program Partners with a variety of services, including issuing carrier services, claims administration, and reinsurance brokerage, from which we generate recurring fee-based revenues.


We have one reportable segment. We provide our insurance products and services to our Program Partners and Owned MGAs focused on specialty lines. We target a diversified portfolio of small to medium programs, typically with less than $30 million of premiums, that focus on niche segments of the specialty casualty insurance market and that we believe have strong underwriting track records.

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Our goal is
Initial Public Offering and Reorganization

On July 20, 2020, Trean Insurance Group, Inc. closed the sale of 10,714,286 shares of its common stock in its IPO, comprised of 7,142,857 shares issued and sold by Trean Insurance Group, Inc. and 3,571,429 shares sold by selling stockholders. On July 22, 2020, Trean Insurance Group, Inc. closed the sale of an additional 1,207,142 shares by certain selling stockholders in the IPO pursuant to deliver long-term valuethe exercise of the underwriters’ option to ourpurchase additional shares to cover over-allotments. The aggregate proceeds to the Company from all shares sold by the Company in the IPO were approximately $107,142 and the aggregate IPO proceeds from all shares sold by the selling stockholders in the IPO were approximately $71,678. The shares began trading on the Nasdaq Global Select Market on July 16, 2020 under the symbol "TIG."

Prior to the completion of the above IPO, the Company effected the following reorganization transactions: (i) each of Trean and BIC contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc. and (ii) upon the completion of the transfers by growing our businessTrean and generating attractive returns.BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.

In conjunction with the IPO and corporate restructuring, the Company made a payment to Altaris Capital Partners, LLC in connection with the termination of the Company's consulting and advisory agreements as well as paid bonuses to employees and pre-IPO unitholders for the successful completion of the IPO. The aggregate amount of these payments totaled $11,054.

Secondary Offering of Common Stock

On May 19, 2021, Trean Insurance Group, Inc. closed the sale of 5,000,000 shares of its common stock, comprised entirely of shares sold by selling stockholders. We plan to use our available cash and capital to supportdid not receive any proceeds from the growthsale of shares of our business, including making contributionscommon stock by the selling stockholders in this offering. As a result of this offering, the Altaris Funds no longer beneficially own more than 50% of the outstanding common stock of the Company.

Acquisition of Compstar

Effective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining 55% ownership interest in Compstar, a holding company, along with its wholly owned subsidiary, Compstar Insurance Services, a managing general agent, by issuing 6,613,606 shares of the Company’s common stock with a market price of $15 per share on the date of acquisition. Prior to the acquisition date, the Company held a 45% ownership interest in Compstar and accounted for its investment under the equity method. As of the acquisition date, the fair value attributable to the Company’s previous equity interest was $81,167 and the carrying value was $11,321. As a result, the Company recorded a gain of $69,846 from the remeasurement of its previous equity interest. The fair value of the Company’s previous equity interest was revalued on the acquisition date using the market price of the shares issued as consideration for the acquisition.

Acquisition of 7710

Effective October 1, 2020, Benchmark Holding Company acquired 100% ownership of 7710 Insurance Company as well as its associated program manager and agency, 7710 Service Company, LLC and Creekwood Insurance Agency, LLC, for a purchase price of $12,140. 7710 Insurance Company underwrites workers' compensation primarily for emergency services, including firefighters, and EMS. 7710 Insurance Company focuses on reducing costs and claims through the implementation of a propriety safety preparedness and loss control program, created and staffed by experienced firefighters and EMS professionals.

Western Integrated Care

Effective July 6, 2021, Trean Corp acquired 100% ownership of WIC for a total purchase price of $5,500. WIC is a managed care organization that offers services to workers' compensation insurers to enable employees who are injured on the job to access qualified medical treatment.
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Embedded Derivatives

During the second quarter of 2021, the Company determined that its funds held agreements with reinsurers contain embedded derivatives relating to a total return swap on the underlying investments. As a result, the Company has revised the presentation of its financial results to report the change in fair value of the embedded derivatives in gains (losses) on embedded derivatives in the condensed consolidated statements of operations. In addition, the effect of investment earnings and realized capital gains (losses) related to funds held accounts will also be reported in gains (losses) on embedded derivatives in the condensed consolidated statements of our insurance subsidiariesoperations, whereas previously these were reported as an offset to net investment income and retaining more risknet realized capital gains (losses), respectively. While the prior period amounts have been corrected for comparability, the correction was not material to capture additional premiums.the previously reported condensed consolidated and condensed combined financial statements.



Coronavirus (COVID-19)("COVID-19") Impact


We are monitoring the impact of the ongoing continuation of the COVID-19 pandemic on our business, including how it willmay impact our premium revenue, loss experience and loss expense, liquidity, and our regulatory capital and surplus, and operations.


Workforce Operations


WeFollowing the emergence of the COVID-19 pandemic in early 2020, we took severala number of actions to protect the health of the public and our employees and to comply with directives and advice of governmental authorities.authorities and public health experts. We responded by developing a Preparedness Plan that outlined both corporate-wide and location-specific modifications to working conditions and operations in our offices. This multi-faceted plan included elements such as restricting business travel and transitioning from an office-based company to primarily a remote working culture. As most of our employees already had secure remote working connections, we took additional measures to ensure all employees who wanted or needed to work remotely were able to do so securely with limited connectivity disruption. We also provided our employees education and training with respect to cybersecurity issues that may arise relating to COVID-19 and working remotely in conjunction with the goal of serving the operational needs of a remote workforce and continuing to serve our customers. We implemented safeguards for employees who play critical roles to ensure operational reliability and established protocols for employees who interact directly with the public. As state, city, and county guidelines progress, we have implemented new health and safety in-office procedures and have launched our "Return to prepare for transitioningOffice" plan to transition our workforce back to working in our offices on a limited basis.while continuing to monitor the progression of the COVID-19 Delta Variant.


Premium Revenue, Claims and Losses


We have not hadexperienced a significantmaterial impact to our premium revenue in the first halfnine months of 2020 relating to2021 as a result of the COVID-19 pandemic. Only 10.0% of our business falls under hospitality, healthcare, and education, where the majority of the layoffs have occurred so far. Gross written premiums have increased by 5.0% and gross earned premiums have decreased by 2.5% duringDuring the quarter ended JuneSeptember 30, 2020 due primarily to the addition of second quarter new Program Partners whose premiums have not yet been earned,2021, compared to the quarter ended JuneSeptember 30, 2019. On a year-to-date basis,2020, gross written premiums have increased 34.3%, primarily driven by 5.6%growth in our existing Program Partner business as well as the addition of new Program Partners, and gross earned premiums have increased by 3.8% during the six months ended June 30, 2020 compared to the six months ended June 30, 201936.4%, primarily driven by the increase in gross written premiums. As over 80%During the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, gross written premiums increased by 37.5% and gross earned premiums increased by 34.1%, primarily driven by both significant growth in our existing Program Partner business as well as the addition of new Program Partners. Because a majority of our gross written premiums are related to workers’ compensation insurance, we expect that future revenue trends could be impacted by higher unemployment rates as businesses slowly restart or if unemployment levels continue to trend high over the balance of 2020.impacted. However, a significant portion of our workers’ compensation premiums are pay-as-you-go programs, which reduces our downside risk from future premium audits or refunds.

We also have not seenexperienced a significantmaterial impact in our reported claims or incurred losses in the first halfnine months of 2020 relating to2021 as a specific result of the COVID-19 pandemic. Losses and loss adjustment expenses decreased $831, or 6.4%, to $12,183 for the three months ended June 30, 2020, compared to $13,014 for the three months ended June 30, 2019. On a year-to-date basis, losses and loss adjustment expenses increased $647, or 2.6%, to $25,117 for the six months ended June 30, 2020, compared to $24,470 for the six months ended June 30, 2019 primarily attributable to the growth in earned premiums during the period. In addition, ourOur loss ratio remained relatively consistent at 57.0%increased to 61.8% and 57.3%61.5%, respectively, during the second quarterthree and six-month periodsnine months ending JuneSeptember 30, 2002 versus 55.7%2021 from 55.9% and 56.9%56.7%, respectively, for the comparable 20192020 periods. The increases in our loss ratios are attributable to a number of large unusual losses primarily incurred on our workers' compensation line of business as well as property losses incurred during the first half of 2021coupled with continued current year loss development.



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Investment Portfolio


With respect to our investment portfolio, we seek to hold a high-quality, diversified portfolio of investments, which are primarily in fixed maturity and available-for-sale investments and, as such, our investment portfolio has limited exposure to the recent equity market volatility. In addition, and as a precaution, we put a temporary freeze on further investments to accumulate cash for liquidity purposes. For the sixnine months ended JuneSeptember 30, 2020,2021, we have experienced a net increasedecrease of $5,029 $8,670, or 2.1%,in the fair value of our investment portfolio due to a reduction in unrealized gains on the value of our fixed maturity investments and have not seen a significant increase in gross or aged unrealized losses with respect to our fixed maturity investments. We believe that anyThe decline in the fair value of specificour fixed maturity investments duringis primarily attributable to rising interest rates following 2020 is due to the recent disruption in the global financial markets associated with COVID-19 driven lower rates as opposed to underlying issues withcredit risk within our investment portfolio. While we have seen an improvement in our unrealized investment positions as of the end of June 2020, ifIf there were to be continued equity and debt financial market volatility, which in turn could create mark-to-market investment valuation decreases, we expect there could be additional or increased unrealized losses recorded during the balance of the year. However, given the conservative nature of our investment portfolio, we expect that any adverse impact on the value of our investment portfolio, as it relates to COVID-19, will be temporary, and we do not expect a long-term negative impact on our financial condition, results of operations or cash flows.


Other Concerns


Adverse events such as adverse changes in the overall public health environment resulting from changing infection patterns and other factors, variant strains of COVID-19, health-related concerns about working in our offices, the inability toongoing restrictions on travel, the potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and delay the implementation of our business strategy. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.


Significant Components of Results of Operations


Gross written premiums: Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for general and administrative expenses (including policy acquisition costs), reinsurance costs, or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
Addition
•addition and retention of Program Partners;
New•new business submissions to our Program Partners;
Binding•binding of new business submissions into policies;
Renewals•renewals of existing policies; and
Average•average size and premium rate of bound policies.


Gross earned premiums: Gross earned premiums are the earned portion of gross written premiums. We earn insurance premiums on a pro rata basis over the term of the policy. Our insurance policies generally have a term of one year.


Ceded earned premiums: Ceded earned premiums are the amount of gross earned premiums ceded to reinsurers. We enter into reinsurance contracts to limit our maximum losses and diversify our exposure and provide statutory surplus relief. The volume of our ceded earned premiums is affected by the level of our gross earned premiums and any decision we make to increase or decrease limits, retention levels, and co-participations.


Net earned premiums: Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is earned and ceded to third-party reinsurers, including our Program Partners and professional reinsurers, under our reinsurance agreements.


Net investment income: We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed maturities, including other investments and short-term investments. Our net investment income includes interest income on our invested assets, which is net of the income earned on our reinsurance agreements, which arefunds held for the benefit of our Program Partners,investments as well as unrealized gains and losses on our equity portfolio.



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Net realized capital gains/losses: Net realized capital gains/losses are a function of the difference between the amount received by us on the sale of a security and the security’s recorded value as well as any “other-than-temporary impairments”"other-than-temporary impairments" relating to fixed maturity investments recognized in earnings.


Other revenue: Other revenue includes brokerage, third-party administrative, management and consulting, fees,and other fee-based revenues, which are commonly based on written premiums.


Loss and loss adjustment expenses: Losses and LAE are net of reinsurance and include claims paid, estimates of future claim payments, changes in those estimates from prior reporting periods, and costs associated with investigating, defending, and servicing claims. In general, our losses and LAE are affected by:

•frequency of claims associated with the particular types of insurance contacts that we write;
•trends in the average size of losses incurred on a particular type of business;
•mix of business written by us;
•changes in the legal or regulatory environment related to the business we write;
•trends in legal defense costs;
•wage inflation; and
•inflation in medical costscosts.

Losses and LAE are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and LAE may be paid out over a period of years.


General and administrative expenses: General and administrative expenses include net commissions, insurance-related expenses, and general and administrative operating expenses. Net commissions consist of policy acquisition costs and other underwriting expenses.expenses, net of ceding commissions. Policy acquisition costs are principally comprised of the commissions we pay our brokers and program managers, net of ceding commissions we receive on business ceded under our reinsurance contracts.managers. Policy acquisition costs that are directly related to the successful acquisition or reinsurance of those policies are deferred. The amortization of suchAll policy acquisition costs isare charged to expense in proportion to premium earned over the policy life. Other generalWe receive ceding commissions on business ceded under our reinsurance contracts. Insurance-related expenses largely consist of state premium taxes. General and administrative operating expenses include employee salaries and benefits, corporate insurance costs, technology costs, office rent, and professional services fees such as legal, accounting, audit, tax and actuarial services.


Intangible asset amortization: Intangible asset amortization consists of expenses incurred related to the amortization of intangible assets recorded as a result of business acquisitions and consists of trade names, customer lists and relationships, and non-compete agreements.

Noncash stock compensation: Noncash stock compensation includes expenses related to the fair value and issuance of restricted stock units and stock options.

Gains (losses) on embedded derivatives: Gains (losses) on embedded derivatives consist of the change in fair value of derivatives, the effect of net investment income on funds held investments, and the effect of realized gains and loss on funds held investments.

Interest expense: Interest expense consists primarily of interest paid on (i) our term loan facility and (ii) the preferred capital securities issued by the Trust (See “—"Financial Condition, Liquidity and capital resources — Debt and Credit Agreements”Agreements").


Other income: Other income consists primarily of sublease revenue and other miscellaneous income items.


Equity earnings in affiliates, net of tax: Equity earnings in affiliates, net of tax includes the Company's share of earnings from equity method investments.


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Key Metrics


We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.


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


Adjusted net incomeis a non-GAAP financial measure defined as net income excluding the impact of unusual events orcertain items, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and stock compensation, noncash unrealized gains and losses on embedded derivatives, other expenses and gains or losses that we believe do not believe reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results.results across periods. See “Reconciliation"Reconciliation of Non-GAAP Financial Measures”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 expensesLAE to net earned premiums.


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


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


Tangible members'stockholders' equity is defined as members'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 members’stockholders' equity during the period. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of return on tangible equity to return on equity in accordance with GAAP.


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’stockholders' equity during the period. See “Reconciliation"Reconciliation of Non-GAAP Financial Measures”Measures" for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.


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Results of Operations


Combined
Consolidated Results of Operations for the Three Months Ended JuneSeptember 30, 20202021 Compared to JuneSeptember 30, 20192020


The following table summarizes our results of operations for the three months ended JuneSeptember 30, 20202021 and 2019:2020:


Three Months Ended September 30,Change
Percentage Change (1)
(in thousands, except for percentages)20212020
Revenues
Gross written premiums$177,624 $132,284 $45,340 34.3 %
Increase in gross unearned premiums(28,478)(22,963)(5,515)24.0 %
Gross earned premiums149,146 109,321 39,825 36.4 %
Ceded earned premiums(97,191)(81,465)(15,726)19.3 %
Net earned premiums51,955 27,856 24,099 86.5 %
Net investment income2,187 2,364 (177)(7.5)%
Gain on revaluation of Compstar investment— 69,846 (69,846)(100.0)%
Net realized capital gains49 115 (66)(57.4)%
Other revenue2,799 5,401 (2,602)(48.2)%
Total revenue56,990 105,582 (48,592)(46.0)%
Expenses
Losses and loss adjustment expenses32,129 15,564 16,565 106.4 %
General and administrative expenses13,788 6,995 6,793 97.1 %
Other expenses— 11,054 (11,054)(100.0)%
Intangible asset amortization1,499 1,120 379 33.8 %
Noncash stock compensation468 307 161 52.4 %
Interest expense419 520 (101)(19.4)%
Total expenses48,303 35,560 12,743 35.8 %
Gains (losses) on embedded derivatives(121)(367)246 (67.0)%
Other income35 209 (174)(83.3)%
Income before taxes8,601 69,864 (61,263)(87.7)%
Income tax expense2,083 817 1,266 155.0 %
Equity earnings in affiliates, net of tax— 401 (401)(100.0)%
Net income$6,518 $69,448 $(62,930)(90.6)%
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.


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 Three Months Ended June 30, Change Percentage Change
(in thousands, except for percentages)2020 2019  
Revenues       
Gross written premiums$109,612
 $104,420
 $5,192
 5.0 %
Increase in gross unearned premiums(9,265) (1,535) (7,730) 503.6 %
Gross earned premiums100,347
 102,885
 (2,538) (2.5)%
Ceded earned premiums(78,968) (79,508) 540
 (0.7)%
Net earned premiums21,379
 23,377
 (1,998) (8.5)%
Net investment income1,524
 1,570
 (46) (2.9)%
Net realized capital gains (losses)(4) 111
 (115) (103.6)%
Other revenue1,530
 1,893
 (363) (19.2)%
Total revenue24,429
 26,951
 (2,522) (9.4)%
Expenses       
Losses and loss adjustment expenses12,183
 13,014
 (831) (6.4)%
General and administrative expenses8,316
 6,193
 2,123
 34.3 %
Interest expense501
 561
 (60) (10.7)%
Total expenses21,000
 19,768
 1,232
 6.2 %
Other income40
 33
 7
 21.2 %
Income before taxes3,469
 7,216
 (3,747) (51.9)%
Income tax expense979
 1,690
 (711) (42.1)%
Equity earnings in affiliates, net of tax1,230
 865
 365
 42.2 %
Net income$3,720
 $6,391
 $(2,671) (41.8)%
Three Months Ended September 30,
(in thousands, except for percentages)20212020
Key metrics:
Underwriting income(1)
$6,038 $5,297 
Adjusted net income(1)
$7,678 $10,477 
Loss ratio61.8 %55.9 %
Expense ratio26.5 %25.1 %
Combined ratio88.3 %81.0 %
Return on equity6.2 %102.7 %
Adjusted return on equity(1)
7.3 %15.5 %
Return on tangible equity(1)
12.7 %171.4 %
Adjusted return on tangible equity(1)
15.0 %25.9 %
(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.


 Three Months Ended June 30,
(in thousands, except for percentages)2020 2019
Key metrics:   
Underwriting income(1)
$880
 $4,170
Adjusted net income(1)
$4,771
 $6,934
Loss ratio57.0% 55.7%
Expense ratio38.9% 26.5%
Combined ratio95.9% 82.2%
Return on equity10.3% 21.1%
Adjusted return on equity(1)
13.2% 22.9%
Return on tangible equity(1)
10.5% 21.6%
Adjusted return on tangible equity(1)
13.5% 23.4%

(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.

Gross written premiums: Gross written premiums increased $5,192, or 5.0%, to $109,612 for the three months ended June 30, 2020, compared to $104,420 for the three months ended June 30, 2019. The increase is primarily attributable to the addition of new Program Partners brought on board during the second quarter of 2020. The changes in gross written premiums were most notably due to the following lines of business:

Workers' compensation, which represented 75.9% of our gross written premiums for the three months ended June 30, 2020, decreased by $2,164, or 2.5%, compared to the three months ended June 30, 2019.

All other non-workers' compensation liability, which represented 24.1% of our gross written premiums for the three months ended June 30, 2020, increased $7,356, or 38.5%, compared to the three months ended June 30, 2019.

Gross earned premiums: Gross earned premiums decreased $2,538, or 2.5%, to $100,347 for the three months ended June 30, 2020, compared to $102,885 for the three months ended June 30, 2019. The decrease is driven by the increase in gross unearned premiums of $7,730, which is 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. Gross earned premiums as a percentage of gross written premiums decreased to 91.5% for the three months ended June 30, 2020, compared to 98.5%, for the three months ended June 30, 2019.

Ceded earned premiums: Ceded earned premiums decreased $540, or 0.7%, to $78,968 for the three months ended June 30, 2020, compared to $79,508 for the three months ended June 30, 2019. The decrease in ceded earned premiums is primarily driven by the timing of new policy effective dates for ceded policies. The total ceded earned premiums as a percentage of gross earned premiums remained relatively consistent at 78.7% for the three months ended June 30, 2020, compared to 77.3% for the three months ended June 30, 2019.

Net earned premiums: Net earned premiums decreased $1,998, or 8.5%, to $21,379 for the three months ended June 30, 2020, compared to $23,377 for the three months ended June 30, 2019. The decrease is due primarily to the decrease in gross earned premiums described above, partially offset by the decrease in ceded earned premiums over the three months ended June 30, 2019.


The table below shows the total premiums earned on a gross and net basis for the respective three-month periods:


Three Months Ended September 30,
Percentage Change (1)
(in thousands, except percentages)20212020Change
Revenues:
Gross written premiums$177,624 $132,284 $45,340 34.3 %
Increase in gross unearned premiums(28,478)(22,963)(5,515)24.0 %
Gross earned premiums149,146 109,321 39,825 36.4 %
Ceded earned premiums(97,191)(81,465)(15,726)19.3 %
Net earned premiums$51,955 $27,856 $24,099 86.5 %
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.
 Three Months Ended June 30,   Percentage Change
(in thousands, except percentages)2020 2019 Change 
Revenues:       
Gross written premiums$109,612
 $104,420
 $5,192
 5.0 %
Increase in gross unearned premiums(9,265) (1,535) (7,730) 503.6 %
Gross earned premiums100,347
 102,885
 (2,538) (2.5)%
Ceded earned premiums(78,968) (79,508) 540
 (0.7)%
Net earned premiums$21,379
 $23,377
 $(1,998) (8.5)%


Net investment incomeGross written premiums: Net investment income remained relatively consistent at $1,524Gross written premiums increased $45,340, or 34.3%, to $177,624 for the three months ended JuneSeptember 30, 2020,2021, compared to $1,570$132,284 for the three months ended JuneSeptember 30, 2019.2020. The increase is primarily attributable to the growth in our existing Program Partner business and the addition of new Program Partners. The changes in gross written premiums were due to the following:


Workers' compensation represented 54.3% of our gross written premiums for the three months ended September 30, 2021, compared to 72.7% for the three months ended September 30, 2020, primarily as a result of our ongoing strategic effort to diversify our lines of business. For the three months ended September 30, 2021, gross written premiums for workers' compensation increased by $343, or 0.4%, compared to the same period in 2020.

All other non-workers' compensation liability represented 45.7% of our gross written premiums for the three months ended September 30, 2021, compared to 27.3% for the three months ended September 30, 2020. For the three months ended September 30, 2021, gross written premiums for all other non-workers' compensation liability increased $44,997, or 124.4%, compared to the same period in 2020. The increase is due to growth in our other liability, accident & health, commercial auto and homeowners lines of business in keeping with our diversification.

Gross earned premiums: Gross earned premiums increased $39,825, or 36.4%, to $149,146 for the three months ended September 30, 2021, compared to $109,321 for the three months ended September 30, 2020. The increase in gross earned premiums reflects the increase in gross written premiums of $45,340 net of an increase in gross unearned premiums of $5,515. The increase in gross unearned premiums is directly attributable to the growth in gross written premiums. Gross
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earned premiums as a percentage of gross written premiums decreased to 84.0% for the three months ended September 30, 2021, compared to 82.6%, for the three months ended September 30, 2020.

Ceded earned premiums: Ceded earned premiums increased $15,726, or 19.3%, to $97,191 for the three months ended September 30, 2021, compared to $81,465 for the three months ended September 30, 2020. The increase in ceded earned premiums is driven by the growth in gross earned premiums as described above, partially offset by an increase in our retention. Ceded earned premiums as a percentage of gross earned premiums decreased to 65.2% for the three months ended September 30, 2021, compared to 74.5% for the three months ended September 30, 2020, reflecting the Company's strategic decision to retain more gross written premiums.

Net earned premiums: Net earned premiums increased $24,099, or 86.5%, to $51,955 for the three months ended September 30, 2021, compared to $27,856 for the three months ended September 30, 2020. The increase is due to the growth in gross earned premiums as described above and the Company's strategic decision to retain more gross written premiums.

Net investment income: Net investment income decreased $177, or 7.5%, to $2,187 for the three months ended September 30, 2021, compared to $2,364 for the three months ended September 30, 2020. The decrease largely reflects the reinvestment of funds from higher yielding maturities into lower yielding investments due to lower interest rates.

Net realized capital gains (losses): Net realized capital gains (losses) decreased $115$66 to a loss of $4$49 for the three months ended JuneSeptember 30, 2020,2021, compared to a gain of $111$115 for the three months ended JuneSeptember 30, 2019. The decrease is due to a reduction in trading activity during the current period.

Other revenue: Other revenue decreased $363, or 19.2%, to $1,530 for the three months ended June 30, 2020, compared to $1,893 for the three months ended June 30, 2019.2020. The decrease is driven by a decreaseloss of $112 realized in third-party administrator feesthe third quarter of $176 resulting from a loss2021 on the Company's sale of its remaining investment in certain customers as well as a decrease in brokerageTRI.

Other revenue of $157 driven by the reduction in brokerage fees earned.

Losses and loss adjustment expenses: Losses and loss adjustment expenseOther revenue decreased $831,$2,602, or 6.4%48.2%, to $12,183$2,799 for the three months ended JuneSeptember 30, 2020,2021, compared to $13,014$5,401 for the three months ended JuneSeptember 30, 2019.2020. The decrease is directly attributabledriven by a reduction in brokerage revenue of $2,433 due to due to a $2.2 million increase in estimated premiums and the timing of effective dates for brokered reinsurance contracts recognized in the third quarter of 2020. In addition, brokerage revenue was also reduced in 2021 due to the decrease in earned premiums duringCompany’s higher retention of brokered reinsurance contracts compared to the period, offset by a decrease in favorablesame prior-year period.

Losses and loss reserve estimate true-ups made during the second quarter of 2020 versus the second quarter of 2019. The Company's loss ratio remained relatively consistent at 57.0%adjustment expenses: Losses and LAE increased $16,565, or 106.4%, to $32,129 for the three months ended JuneSeptember 30, 20202021, compared to 55.7%$15,564 for the three months ended JuneSeptember 30, 2019 as2020. The increase is attributable to the growth in gross earned premiums and increased retention during the three months ended September 30, 2021. This resulted in a resultloss ratio of some programs experiencing decreased61.8% for the three months ended September 30, 2021 compared to 55.9% for the three months ended September 30, 2020. The increase is attributable to a number of unusually large losses experienced during the first half of 2021, resulting in a higher overall loss ratios quarter over quarter.ratio pick related to the 2021 accident year.


General and administrative expenses: General and administrative expenses increased $2,123,$6,793, or 34.3%97.1%, to $8,316$13,788 for the three months ended JuneSeptember 30, 2020,2021, compared to $6,193$6,995 for the three months ended JuneSeptember 30, 2019. This change resulted in an increase in the Company's2020. The expense ratio to 38.9% for the three months ended June 30, 2020, compared towas 26.5% for the three months ended JuneSeptember 30, 2019. 2021, compared to 25.1% for the three months ended September 30, 2020.

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The increase is attributabletable below shows the components of general and administrative expenses for the respective three month periods:
Three Months Ended September 30,
20212020Change
Direct commissions$27,594 $18,879 $8,715 
Ceding commissions(31,655)(26,314)(5,341)
Net commissions(4,061)(7,435)3,374 
Insurance-related expenses5,371 3,925 1,446 
General and administrative operating expenses12,478 10,505 1,973 
Total general and administrative expenses$13,788 $6,995 $6,793 
General and administrative expenses — % of gross written premiums7.0 %7.9 %
Retention rate (1)
34.8 %25.5 %
Direct commission rate (2)
18.5 %17.3 %
Ceding commission rate (3)
32.6 %32.3 %
(1) Net earned premium 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.

Direct commissions increased $8,715 primarily due to (i) an increase in professional service expense of $1,782, of which $788 was relatedgross earned premiums. Ceding commissions increased $5,341 due to the Company's IPO readiness efforts; (ii) an increase in net agent commissions of $1,580 resulting fromceded earned premiums reflecting the increase in gross earned premiums, partially offset by an increase in written premium; (iii)retention. Insurance-related expenses increased $1,446, primarily as a result of an increase in gross earned premiums. General and administrative operating expenses increased $1,973, primarily as a result of: (i) an increase in salaries and benefits of $936 resulting$1,833, of which $668 directly resulted from an increased workforce;acquisitions made in the second half of 2020 and (iv)a general increase in workforce and (ii) additional IT software and systems costs totaling $138 relating$344 related to new software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19. These increases areautomation initiatives; partially offset by a reductiondecrease in premium receivable write-offsprofessional fees of $2,073$245.

Other expenses: Other expenses were $0 for the nine months ended September 30, 2021, compared to $11,054 for the three months ended September 30, 2020 which consisted of one-time IPO bonuses and the termination of the Company's consultant and advisory agreement with Altaris Capital Partners, LLC.

Intangible asset amortization: Intangible asset amortization increased $379 to $1,499 for the three months ended September 30, 2021, compared to $1,120 for the three months ended September 30, 2020. The increase is driven by the addition of intangible assets acquired as a reductionresult of the purchase of 7710 Insurance Company in corporate travel expensesthe fourth quarter of $260 due2020 and WIC in the third quarter of 2021.

Noncash stock compensation: Noncash stock compensation was $468 for the three months ended September 30, 2021, compared to $307 for the three months ended September 30, 2020. Expenses incurred during both periods relates to the effectsfair value of COVID-19.restricted stock units and stock options granted under the Company's 2020 Omnibus Plan amortized over appropriate and applicable vesting periods.



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Gains (losses) on embedded derivatives:

The table below shows the components of gains (losses) on embedded derivatives for the respective three month periods:

Three Months Ended September 30,
20212020Change
Change in fair value of embedded derivatives$573$140$433
Effect of net investment income on funds held investments(585)(507)(78)
Effect of realized gains on funds held investments(109)—(109)
Total gains (losses) on embedded derivatives$(121)$(367)$246

Losses on embedded derivatives decreased $246 to $121 for the three months ended September 30, 2021, compared to $367 for the three months ended September 30, 2020. The decrease reflects an increase in the fair value of embedded derivatives of $433 partially offset by the effect of realized gains on funds held investments of $109 and the effect of investment income on funds held investments of $78.

Income tax expense: Income tax expense was $979$2,083 for the three months ended JuneSeptember 30, 20202021, which resulted in an effective tax rate of 28.2%, compared to $1,690 for the three months ended June 30, 2019 which resulted in an effective tax rate of 23.4%24.2%. The increase in the effective tax rate from the statutory rate of 21% is due primarily to the impact of state taxes andrecording our 2020 tax return accrual to return true-up in the deferredthird quarter of 2021. For the three months ended September 30, 2020 income tax effectexpense was $817, which resulted in an effective tax rate of a1.2%. The decrease in the effective tax accounting method changerate from the statutory rate of 21% is due primarily to the non-tax impact of the $69,846 gain recorded on excess ceding commissions.the revaluation of the Company's original 45% investment in Compstar, offset by certain IPO-related expenses not deductible for tax purposes.


Equity earnings in affiliates, net of tax: Equity earnings in affiliates, net of tax increased $365decreased $401 to $1,230$0 for the three months ended JuneSeptember 30, 2020,2021, compared to $865$401 for the three months ended JuneSeptember 30, 2019.2020. This increasedecrease is due to the increasereduction in the Company's share of earnings in Compstar of $538. This is partially offset by the reduction in the Company's share of earnings in TRI of $174, which is no longer carried$401 as an equity method investment due to the sale of a portionresult of the Company's investment in TRIacquisition of the remaining ownership interest during the firstthird quarter of 2020.


Owned MGA's and Program Partner Premiums:
Combined
The following table shows the total premiums earned on a gross and net basis for Owned MGAs and Program Partners:

Three Months Ended September 30, 2021
Owned MGAsProgram PartnerTotal
Gross written premiums69,857 107,767 177,624 
Increase in gross unearned premiums(2,569)(25,909)(28,478)
    Gross earned premiums67,288 81,858 149,146 
Ceded earned premiums(36,013)(61,178)(97,191)
    Net earned premiums31,275 20,680 51,955 
Direct commissions7,85519,73927,594
Ceding commissions(10,829)(20,826)(31,655)
    Net Commissions(2,974)(1,087)(4,061)
Direct commissions rate(1)
11.7 %24.1 %18.5 %
Ceding commissions rate(2)
30.1 %34.0 %32.6 %
(1) Direct commissions as a percentage of gross earned premiums
(2) Ceded commissions as a percentage of gross earned premiums

We utilize both quota share and catastrophe XOL contracts in our reinsurance strategy for our Owned MGAs and Program Partners. Direct commissions for Program Partners include third-party agent commissions and MGA service fees, while
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Owned MGAs direct commissions includes only third-party agent commissions, while the expenses associated with MGA services are included in general and administrative operating expenses. The ceding commission rates vary based on a number of factors including: the line of business, negotiated reinsurance terms, and program cost structures. For the three months ended September 30, 2021, the Company retained 46.5% of gross earned premiums for Owned MGAs compared to 25.3% for Program Partners. The loss ratios for Owned MGAs and Program Partners for the three months ended September 30, 2021was 59.3% and 65.6% respectively, resulting in a consolidated loss ratio of 61.8%. The higher loss ratio for Program Partners was primarily attributable to calendar year loss experience.

Consolidated Results of Operations for the SixNine Months Ended JuneSeptember 30, 20202021 Compared to JuneSeptember 30, 20192020


The following table summarizes our results of operations for the sixnine months ended JuneSeptember 30, 20202021 and 2019:2020:



Nine Months Ended September 30,Change
Percentage Change (1)
(in thousands, except for percentages)20212020
Revenues
Gross written premiums$480,905 $349,755 $131,150 37.5 %
Increase in gross unearned premiums(64,836)(39,601)(25,235)63.7 %
Gross earned premiums416,069 310,154 105,915 34.1 %
Ceded earned premiums(275,037)(238,460)(36,577)15.3 %
Net earned premiums141,032 71,694 69,338 96.7 %
Net investment income6,562 9,134 (2,572)(28.2)%
Gain on revaluation of Compstar investment— 69,846 (69,846)(100.0)%
Net realized capital gains72 3,345 (3,273)(97.8)%
Other revenue8,683 11,323 (2,640)(23.3)%
Total revenue156,349 165,342 (8,993)(5.4)%
Expenses
Losses and loss adjustment expenses86,735 40,681 46,054 113.2 %
General and administrative expenses40,946 23,437 17,509 74.7 %
Other expenses845 11,054 (10,209)(92.4)%
Intangible asset amortization4,326 1,154 3,172 NM
Noncash stock compensation1,098 307 791 NM
Interest expense1,271 1,482 (211)(14.2)%
Total expenses135,221 78,115 57,106 73.1 %
Gains (losses) on embedded derivatives1,869 (5,547)7,416 (133.7)%
Other income191 263 (72)(27.4)%
Income before taxes23,188 81,943 (58,755)(71.7)%
Income tax expense5,102 4,035 1,067 26.4 %
Equity earnings in affiliates, net of tax— 2,333 (2,333)(100.0)%
Net income$18,086 $80,241 $(62,155)(77.5)%
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.


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 Six Months Ended June 30, Change Percentage Change
(in thousands, except for percentages)2020 2019  
Revenues       
Gross written premiums$217,471
 $205,954
 $11,517
 5.6 %
Increase in gross unearned premiums(16,638) (12,487) (4,151) 33.2 %
Gross earned premiums200,833
 193,467
 7,366
 3.8 %
Ceded earned premiums(156,995) (150,466) (6,529) 4.3 %
Net earned premiums43,838
 43,001
 837
 1.9 %
Net investment income4,796
 2,857
 1,939
 67.9 %
Net realized capital gains3,230
 723
 2,507
 346.7 %
Other revenue5,922
 5,488
 434
 7.9 %
Total revenue57,786
 52,069
 5,717
 11.0 %
Expenses       
Losses and loss adjustment expenses25,117
 24,470
 647
 2.6 %
General and administrative expenses16,476
 10,162
 6,314
 62.1 %
Interest expense962
 1,185
 (223) (18.8)%
Total expenses42,555
 35,817
 6,738
 18.8 %
Other income54
 126
 (72) (57.1)%
Income before taxes15,285
 16,378
 (1,093) (6.7)%
Income tax expense3,891
 3,009
 882
 29.3 %
Equity earnings in affiliates, net of tax1,932
 1,473
 459
 31.2 %
Net income$13,326
 $14,842
 $(1,516) (10.2)%
Nine Months Ended September 30,
(in thousands, except for percentages)20212020
Key metrics:
Underwriting income(1)
$13,351 $7,576 
Adjusted net income(1)
$20,103 $21,600 
Loss ratio61.5 %56.7 %
Expense ratio29.0 %32.7 %
Combined ratio90.5 %89.4 %
Return on equity5.8 %39.4 %
Adjusted return on equity(1)
6.4 %10.6 %
Return on tangible equity(1)
12.1 %65.4 %
Adjusted return on tangible equity(1)
13.4 %17.6 %
(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.

 Six Months Ended June 30,
(in thousands, except for percentages)2020 2019
Key metrics:   
Underwriting income(1)
$2,245
 $8,369
Adjusted net income(1)
$11,095
 $15,303
Loss ratio57.3% 56.9%
Expense ratio37.6% 23.6%
Combined ratio94.9% 80.5%
Return on equity19.0% 25.9%
Adjusted return on equity(1)
15.8% 26.7%
Return on tangible equity(1)
19.5% 26.6%
Adjusted return on tangible equity(1)
16.2% 27.4%

(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.

Gross written premiums: Gross written premiums increased $11,517, or 5.6%, to $217,471 for the six months ended June 30, 2020, compared to $205,954 for the six months ended June 30, 2019. The increase is primarily attributable to the growth in our existing program partner business as well as the addition of new Program Partners added in the second quarter. The changes in gross written premiums were most notably due to the following lines of business:

Workers' compensation, which represented 79.3% of our gross written premiums for the six months ended June 30, 2020, increased by $3,007, or 1.8%, compared to the six months ended June 30, 2019.


All other non-workers' compensation liability, which represented 20.7% of our gross written premiums for the six months ended June 30, 2020, increased $8,510, or 23.4%, compared to the six months ended June 30, 2019.

Gross earned premiums: Gross earned premiums increased $7,366, or 3.8%, to $200,833 for the six months ended June 30, 2020, compared to $193,467 for the six months ended June 30, 2019. The increase is driven by the increase in gross written premiums. This increase is partially offset by the increase in gross unearned premiums of $4,151, which is driven by the addition of new Program Partners during the second quarter whose premiums have not yet been earned . Gross earned premiums as a percentage of gross written premiums decreased to 92.3% for the six months ended June 30, 2020, compared to 93.9%, for the six months ended June 30, 2019.

Ceded earned premiums: Ceded earned premiums increased $6,529, or 4.3%, to $156,995 for the six months ended June 30, 2020, compared to $150,466 for the six months ended June 30, 2019. The increase in ceded earned premiums is primarily due to the growth in earned premiums of Compstar, whose premiums are largely ceded, as well as the addition of new Program Partners during the second quarter whose premiums are fully ceded. The total ceded earned premiums as a percentage of gross earned premiums remained relatively consistent at 78.2% for the six months ended June 30, 2020, compared to 77.8% for the six months ended June 30, 2019.

Net earned premiums: Net earned premiums increased $837, or 1.9%, to $43,838 for the six months ended June 30, 2020, compared to $43,001 for the six months ended June 30, 2019. The increase is due primarily due to the higher gross written and earned premiums described above, offset by the increase in ceded earned premiums under reinsurance agreements over the six months ended June 30, 2019.


The table below shows the total premiums earned on a gross and net basis for the respective six-monthnine-month periods:

Nine Months Ended September 30,
Percentage Change (1)
(in thousands, except percentages)20212020Change
Revenues:
Gross written premiums$480,905 $349,755 $131,150 37.5 %
Increase in gross unearned premiums(64,836)(39,601)(25,235)63.7 %
Gross earned premiums416,069 310,154 105,915 34.1 %
Ceded earned premiums(275,037)(238,460)(36,577)15.3 %
Net earned premiums$141,032 $71,694 $69,338 96.7 %
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.

Gross written premiums: Gross written premiums increased $131,150, or 37.5%, to $480,905 for the nine months ended September 30, 2021, compared to $349,755 for the nine months ended September 30, 2020. The increase is primarily attributable to the growth in our existing Program Partner business, the addition of new Program Partners and the acquisition of 7710 Insurance Company in the fourth quarter of 2020. The changes in gross written premiums were due to the following:

Workers' compensation represented 60.2% of our gross written premiums for the nine months ended September 30, 2021, compared to 76.8% for the nine months ended September 30, 2020, primarily as a result of our ongoing strategic effort to diversify our lines of business. For the nine months ended September 30, 2021, gross written premiums for workers' compensation increased by $20,987, or 7.8%, compared to the same period in 2020.

All other non-workers' compensation liability represented 39.8% of our gross written premiums for the nine months ended September 30, 2021, compared to 23.2% for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, gross written premiums for all other non-workers' compensation liability increased $110,163, or 135.9%, compared to the same period in 2020. The increase is due primarily to growth in our other liability, commercial auto, homeowners and accident & health lines of business in keeping with our diversification strategy.

Gross earned premiums: Gross earned premiums increased $105,915, or 34.1%, to $416,069 for the nine months ended September 30, 2021, compared to $310,154 for the nine months ended September 30, 2020. The increase in gross earned premiums reflects the increase in gross written premiums of $131,150 net of an increase in gross unearned premiums of $25,235. The increase in gross unearned premiums is directly attributable to the growth in gross written premiums. Gross
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 Six Months Ended June 30,   Percentage Change
(in thousands, except percentages)2020 2019 Change 
Revenues:       
Gross written premiums$217,471
 $205,954
 $11,517
 5.6%
Increase in gross unearned premiums(16,638) (12,487) (4,151) 33.2%
Gross earned premiums200,833
 193,467
 7,366
 3.8%
Ceded earned premiums(156,995) (150,466) (6,529) 4.3%
Net earned premiums$43,838
 $43,001
 $837
 1.9%
earned premiums as a percentage of gross written premiums decreased to 86.5% for the nine months ended September 30, 2021, compared to 88.7% for the nine months ended September 30, 2020.


Ceded earned premiums: Ceded earned premiums increased $36,577, or 15.3%, to $275,037 for the nine months ended September 30, 2021, compared to $238,460 for the nine months ended September 30, 2020. The increase in ceded earned premiums is driven by the growth in gross earned premiums as described above, partially offset by an increase in our retention. The total ceded earned premiums as a percentage of gross earned premiums decreased to 66.1% for the nine months ended September 30, 2021, compared to 76.9% for the nine months ended September 30, 2020, reflecting the Company's strategic decision to retain more gross written premiums.

Net earned premiums: Net earned premiums increased $69,338, or 96.7%, to $141,032 for the nine months ended September 30, 2021, compared to $71,694 for the nine months ended September 30, 2020. The increase is due to the growth in gross earned premiums as described above and the Company's strategic decision to retain more gross written premiums.

Net investment income: Net investment income increased $1,939decreased $2,572, or 28.2%, to $4,796$6,562 for the sixnine months ended JuneSeptember 30, 2020,2021, compared to $2,857$9,134 for the sixnine months ended JuneSeptember 30, 2019.2020. The increasedecrease is primarily attributable to the fair value re-measurement and common stock investment reclassification of the Company's investment in TRI during the first quarter of 2020, which was previously classified as an equity method investment whichand resulted in an unrealizeda gain of $2,000. The decrease also reflects the reinvestment of funds from higher yielding maturities into lower yielding investments due to lower interest rates, partially offset by an increased in our invested balance.


Net realized capital gains: Net realized capital gains increased $2,507decreased $3,273 to $3,230$72 for the sixnine months ended JuneSeptember 30, 2020,2021, compared to $723$3,345 for the sixnine months ended JuneSeptember 30, 2019.2020. The increasedecrease is primarily due to the recording of a $3,115 realized gain on the sale of a portion of the Company's investment in TRI during the first quarter of 2020 and partially offset by a loss of $112 realized in the bargain purchase gain recorded in connection with the acquisition of First Choice Casualty Insurance Company (FCCIC) during the firstthird quarter of 20192021 on the Company's sale of $634.its remaining investment in TRI.


Other revenue: Other revenue increased $434,decreased $2,640, or 7.9%23.3%, to $5,922$8,683 for the sixnine months ended JuneSeptember 30, 2020,2021, compared to $5,488$11,323 for the sixnine months ended JuneSeptember 30, 2019.2020. The increasedecrease is largely driven by an increasea reduction in brokerage revenue of $833 driven by$2,656 due to a $2.2 million increase in estimated premiums and the growthtiming of effective dates for brokered reinsurance contracts recognized in the third quarter of 2020. In addition, brokerage fees earned and related primarily to Compstar. This increase is partially offset by a reductionrevenue was also reduced in managing general agent fees of $159,2021 due to the lossCompany’s higher retention of a service contract in April 2019 and reduced FCCIC managing general agent fees as a result of Trean's acquisition ofbrokered reinsurance contracts compared to the company in February 2019.same prior-year period.


Losses and loss adjustment expenses: Losses and loss adjustment expenseLAE increased $647,$46,054, or 2.6%113.2%, to $25,117$86,735 for the sixnine months ended JuneSeptember 30, 2020,2021, compared to $24,470$40,681 for the sixnine months ended JuneSeptember 30, 2019.2020. The increase is directly attributable to the growth in earned premiums and increased retention during the period andnine months ended September 30, 2021. This resulted in a decrease in favorable loss reserve estimate true-ups maderatio of 61.5% for the nine months ended September 30, 2021 compared to 56.7% for the nine months ended September 30, 2020. The increase is attributable to a number of unusually large losses experienced during the first half of 2020 versus the first half of 2019. The Company's2021, resulting in a higher overall loss ratio remained relatively consistent atpick related to the 2021 accident year.


57.3% for the six months ended June 30, 2020 compared to 56.9% for the six months ended June 30, 2019 as a result of some programs experiencing increased loss ratios period over period.

General and administrative expenses: General and administrative expenses increased $6,314,$17,509, or 62.1%74.7%, to $16,476$40,946 for the sixnine months ended JuneSeptember 30, 2020,2021, compared to $10,162$23,437 for the sixnine months ended JuneSeptember 30, 2019. This change resulted in2020. The expense ratio was 29.0% for the nine months ended September 30, 2021, compared to 32.7% for the nine months ended September 30, 2020.

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The table below shows the components of general and administrative expenses for the respective nine-month periods:

Nine Months Ended September 30,
20212020Change
Direct commissions$78,304 $62,817 $15,487 
Ceding commissions(89,547)(79,075)(10,472)
Net commissions(11,243)(16,258)5,015 
Insurance-related expenses14,796 11,486 3,310 
General and administrative operating expenses37,393 28,209 9,184 
Total general and administrative expenses$40,946 $23,437 $17,509 
General and administrative expenses — % of gross written premiums7.8 %8.1 %
Retention rate (1)
33.9 %23.1 %
Direct commission rate (2)
18.8 %20.3 %
Ceding commission rate (3)
32.6 %33.2 %
(1) Net earned premium 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.

Direct commissions increased $15,487 primarily due to an increase in the Company's expense ratiogross earned premiums. Ceding commissions increased $10,472 due to 37.6% for the six months ended June 30, 2020, compared to 23.6% for the six months ended June 30, 2019. The increase is attributable to (i) an increase in net agent commissions of $2,914 resulting fromceded earned premiums reflecting the increase in gross earned premiums, partially offset by an increase in written premiums; (ii)retention. Insurance-related expenses increased $3,310 primarily as a result of an increase in gross earned premiums. General and administrative operating expenses increased $9,184, primarily as a result of (i) an increase in salaries and benefits of $2,210 resulting$6,718, of which $3,423 directly resulted from an increasedacquisitions made in the second half of 2020 and a general increase in workforce; (iii)(ii) additional rent and office-related expenses totaling $1,771 due to an increase in professional servicebusiness insurance expense as well as the addition of $2,115, of which $1,200 was related to the Company's IPO readiness effort; (iv)new office locations; and (iii) additional IT software and systems costs totaling $441 relating$1,347 related to new software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19; and (v) additional rent and office-related expenses totaling $441 due to the addition of new office locations and rent increases. These increases wereautomation initiatives; partially offset by a reductiondecrease in premium receivable write-offsprofessional fees of $2,100$1,220 as a result of the Company's IPO readiness effort in 2020.

Other expenses: Other expenses were $845 for the nine months ended September 30, 2021, which primarily relates to secondary offering costs of $555 and executive transition costs totaling $290. Other expenses were $11,054 for the nine months ended September 30, 2020, which consisted of one-time IPO bonuses and the termination of the Company's consultant and advisory agreement with Altaris Capital Partners, LLC.

Intangible asset amortization: Intangible asset amortization increased $3,172 to $4,326 for the nine months ended September 30, 2021, compared to $1,154 for the nine months ended September 30, 2020. The increase is driven by the addition of intangible assets acquired as a reductionresult of the purchase of the remaining equity interest of Compstar in corporate travel expensesthe third quarter of $139 due2020 and 7710 Insurance Company in the fourth quarter of 2020 and WIC in the third quarter of 2021.

Noncash stock compensation: Noncash stock compensation was $1,098 for the nine months ended September 30, 2021, compared with $307 for the nine months ended September 30, 2020. Expenses incurred during both periods relates to the effectsfair value of COVID-19.restricted stock units and stock options granted under the Company's 2020 Omnibus Plan amortized over appropriate and applicable vesting periods.


Gains (losses) on embedded derivatives:
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The table below shows the components of gains (losses) on embedded derivatives for the respective nine-month periods:

Nine Months Ended September 30,
20212020Change
Change in fair value of embedded derivatives$3,761 $(3,066)$6,827 
Effect of net investment income on funds held investments(1,783)(2,481)698 
Effect of realized gains on funds held investments(109)— (109)
Total gains (losses) on embedded derivatives$1,869 $(5,547)$7,416 

Gains on embedded derivatives increased $7,416 to $1,869 for the nine months ended September 30, 2021, compared to losses of $5,547 for the nine months ended September 30, 2020. The gain reflected an increase in the fair value of embedded derivatives of $6,827 and the effect of investment income on funds held investments of $698, partially offset by the effect of realized gains on funds held investments of $109.

Income tax expense: Income tax expense was $3,891$5,102 for the sixnine months ended JuneSeptember 30, 20202021, which resulted in an effective tax rate of 25.5%, compared to $3,009 for the six months ended June 30, 2019 which resulted in an effective tax rate of 18.4%22.0%. The increase in the effective tax rate from the statutory rate of 21% is due primarily to the impact of recording our 2020 tax return accrual to return true-up in the third quarter of 2021. For the nine months ended September 30, 2020, income tax expense was $4,035, which resulted in an effective tax rate of 4.9%. The increase in the effective tax rate from the statutory rate of 21% is due primarily to the impact of state taxes and the deferred tax effect of a tax accounting method change on excess ceding commissions. Additionally, the Company received tax benefits in the six months ended June 30, 2019 due to book and tax basis differences resulting from the acquisition of FCCIC and tax benefits related to the tax impact of deferred acquisition costs.


Equity earnings in affiliates, net of tax: Equity earnings in affiliates, net of tax increased $459decreased $2,333 to $1,932$0 for the sixnine months ended JuneSeptember 30, 2020,2021, compared to $1,473$2,333 for the sixnine months ended JuneSeptember 30, 2019.2020. This increasedecrease is due to the increasereduction in the Company's share of earnings in Compstar of $798. This is partially offset by the reduction in the Company's share of earnings in TRI of $340, which is no longer carried$2,333 as an equity method investment due to the sale of a portionresult of the Company's investment in TRIacquisition of the remaining ownership interest during the firstthird quarter of 2020.


Owned MGA's and Program Partner Premiums:

The following table shows the total premiums earned on a gross and net basis for Owned MGAs and Program Partners:

Nine Months Ended September 30, 2021
Owned MGAsProgram PartnerTotal
Gross written premiums209,640 271,265 480,905 
Increase in gross unearned premiums(6,263)(58,573)(64,836)
    Gross earned premiums203,377 212,692 416,069 
Ceded earned premiums(113,396)(161,641)(275,037)
    Net earned premiums89,981 51,051 141,032 
Direct Commission25,96252,34278,304
Ceding Commission(33,740)(55,807)(89,547)
    Net Commissions(7,778)(3,465)(11,243)
Direct commissions rate(1)
12.8 %24.6 %18.8 %
Ceding commissions rate(2)
29.8 %34.5 %32.6 %
(1) Direct commissions as a percentage of gross earned premiums.
(2) Ceding commissions as a percentage of ceded earned premiums.

We utilize both quota share and catastrophe XOL contracts in our reinsurance strategy for our Owned MGAs and Program Partners. Direct commissions for Program Partners include third-party agent commissions and MGA service fees, while Owned MGAs direct commissions includes only third-party agent commissions, while the expenses associated with MGA services are included in general and administrative operating expenses. The ceding commission rates vary based on a number
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of factors including: the line of business, negotiated reinsurance terms, and program cost structures. For the nine months ended September 30, 2021, the Company retained 44.2% of gross earned premiums for Owned MGAs compared to 24.0% for Program Partners. The loss ratios for Owned MGAs and Program Partners for the nine months ended September 30, 2021was 59.8% and 64.4% respectively, resulting in a consolidated loss ratio of 61.5%. The higher loss ratio for Program Partners was primarily attributable to calendar year loss experience.

Reconciliation of Non-GAAP Financial Measures


Underwriting income


We define underwriting income as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, intangible asset amortization, noncash stock compensation, gains and losses on embedded derivatives, interest expense, other revenue, interest expense and other income.income and expenses. Underwriting income represents the pre-tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment income, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense, and other revenue and income.other income and expenses. We use this metric asbecause we believe it gives our management and other users of our financial information useful insight into our underlyingunderwriting business performance.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 (1)
(in thousands, except percentages)20212020
Net income$6,518 $69,448 (90.6)%
Income tax expense2,083 817 155.0 %
Equity earnings in affiliates, net of tax— (401)(100.0)%
Income before taxes8,601 69,864 (87.7)%
Other revenue(2,799)(5,401)(48.2)%
Gains (losses) on embedded derivatives121 367 (67.0)%
Net investment income(2,187)(2,364)(7.5)%
Gain on revaluation of Compstar investment— (69,846)(100.0)%
Net realized capital gains(49)(115)(57.4)%
Other expenses— 11,054 (100.0)%
Interest expense419 520 (19.4)%
Intangible asset amortization1,499 1,120 33.8 %
Noncash stock compensation468 307 52.4 %
Other income(35)(209)(83.3)%
Underwriting income$6,038 $5,297 14.0 %


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Three Months Ended June 30, Percentage ChangeNine Months Ended September 30,
Percentage Change (1)
(in thousands, except percentages)2020 2019 (in thousands, except percentages)20212020
Net income$3,720
 $6,391
 (41.8)%Net income$18,086 $80,241 (77.5)%
Income tax expense979
 1,690
 (42.1)%Income tax expense5,102 4,035 26.4 %
Equity earnings in affiliates, net of tax(1,230) (865) 42.2 %Equity earnings in affiliates, net of tax— (2,333)(100.0)%
Income before taxes3,469
 7,216
 (51.9)%Income before taxes23,188 81,943 (71.7)%
Other revenue(1,530) (1,893) (19.2)%Other revenue(8,683)(11,323)(23.3)%
Gains (losses) on embedded derivativesGains (losses) on embedded derivatives(1,869)5,547 (133.7)%
Net investment income(1,524) (1,570) (2.9)%Net investment income(6,562)(9,134)(28.2)%
Net realized capital (gains) losses4
 (111) (103.6)%
Gain on revaluation of Compstar investmentGain on revaluation of Compstar investment— (69,846)(100.0)%
Net realized capital gainsNet realized capital gains(72)(3,345)(97.8)%
Other expensesOther expenses845 11,054 (92.4)%
Interest expense501
 561
 (10.7)%Interest expense1,271 1,482 (14.2)%
Intangible asset amortizationIntangible asset amortization4,326 1,154 NM
Noncash stock compensationNoncash stock compensation1,098 307 NM
Other income(40) (33) 21.2 %Other income(191)(263)(27.4)%
Underwriting income$880
 $4,170
 (78.9)%Underwriting income$13,351 $7,576 76.2 %
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.


 Six Months Ended June 30, Percentage Change
(in thousands, except percentages)2020 2019 
Net income$13,326
 $14,842
 (10.2)%
Income tax expense3,891
 3,009
 29.3 %
Equity earnings in affiliates, net of tax(1,932) (1,473) 31.2 %
Income before taxes15,285
 16,378
 (6.7)%
Other revenue(5,922) (5,488) 7.9 %
Net investment income(4,796) (2,857) 67.9 %
Net realized capital gains(3,230) (723) 346.7 %
Interest expense962
 1,185
 (18.8)%
Other income(54) (126) (57.1)%
Underwriting income$2,245
 $8,369
 (73.2)%



Adjusted net income


We define adjusted net income as net income excluding the impact of various unusual events,certain items, including the consummation of the reorganization transactions in connection with our IPO, ornoncash intangible asset amortization and stock compensation, noncash unrealized gains and losses on embedded derivatives, other expenses, and gains or losses that we don't believe do not reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results.results across periods. We calculate the tax impact only on adjustments whichthat would be included in calculating our income tax expense using the effective tax rate at the end of each period. We use adjusted net income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance.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 Change (1)
(in thousands, except percentages)20212020
Net income$6,518 $69,448 (90.6)%
Intangible asset amortization1,499 1,120 33.8 %
Noncash stock compensation468 307 52.4 %
Change in fair value of embedded derivative(573)(140)NM
Other expenses— 11,054 (100.0)%
Expenses associated with IPO and other one-time legal and consulting expenses— 645 (100.0)%
FMV adjustment of remaining investment in affiliate— (69,846)(100.0)%
Net loss (gain) on purchase & disposal of affiliates112 — NM
Total adjustments1,506 (56,860)(102.6)%
Tax impact of adjustments(346)(2,111)(83.6)%
Adjusted net income$7,678 $10,477 (26.7)%
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 Three Months Ended June 30, Percentage Change
(in thousands, except percentages)2020 2019 
Net income$3,720
 $6,391
 (41.8)%
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders442
 441
 0.2 %
Expenses associated with IPO and other one-time legal and consulting expenses788
 215
 266.5 %
Expenses related to debt issuance costs135
 25
 440.0 %
Total adjustments1,365
 681
 100.4 %
Tax impact of adjustments(314) (138) 127.5 %
Adjusted net income$4,771
 $6,934
 (31.2)%




Nine Months Ended September 30,
Percentage Change (1)
(in thousands, except percentages)20212020
Net income$18,086 $80,241 (77.5)%
Intangible asset amortization4,326 1,154 NM
Noncash stock compensation1,098 307 NM
Change in fair value of embedded derivative(3,761)3,066 NM
Other expenses845 11,054 (92.4)%
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders— 883 (100.0)%
Expenses associated with IPO and other one-time legal and consulting expenses— 1,845 (100.0)%
Expenses related to debt issuance costs— 135 (100.0)%
FMV adjustment of remaining investment in affiliate— (71,846)(100.0)%
Net loss (gain) on purchase & disposal of affiliates112 (3,115)(103.6)%
Total adjustments2,620 (56,517)(104.6)%
Tax impact of adjustments(603)(2,124)(71.6)%
Adjusted net income$20,103 $21,600 (6.9)%
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.

 Six Months Ended June 30, Percentage Change
(in thousands, except percentages)2020 2019 
Net income$13,326
 $14,842
 (10.2)%
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders883
 882
 0.1 %
Expenses associated with IPO and other one-time legal and consulting expenses1,200
 442
 171.5 %
Expenses related to debt issuance costs135
 50
 170.0 %
FMV adjustment of remaining investment in affiliate(2,000) —
 100.0 %
Net gain on purchase & disposal of affiliates(3,115) (634) 391.3 %
Total adjustments(2,897) 740
 (491.5)%
Tax impact of adjustments666
 (279) (338.7)%
Adjusted net income$11,095
 $15,303
 (27.5)%



Adjusted return on equity


We define adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending member’sstockholders' equity during the period. We use adjusted return on equity as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance.performance by adjusting for items that we believe do not reflect our 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)2021202020212020
Adjusted return on equity calculation:
Numerator: adjusted net income$7,678 $10,477 $20,103 $21,600 
Denominator: average equity419,818 270,519 416,200 271,684 
Adjusted return on equity7.3 %15.5 %6.4 %10.6 %
Return on equity6.2 %102.7 %5.8 %39.4 %


52
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Adjusted return on equity calculation:       
Numerator: adjusted net income$4,771
 $6,934
 $11,095
 $15,303
Denominator: average members' equity144,733
 121,292
 140,450
 114,742
Adjusted return on equity13.2% 22.9% 15.8% 26.7%
Return on equity10.3% 21.1% 19.0% 25.9%
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Return on tangible equity and adjusted return on tangible equity


We define tangible members’stockholders' equity as members’stockholders' equity less goodwill and other intangible assets. We define return on tangible equity as net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’stockholders' equity during the period. We define adjusted return on tangible equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’stockholders' equity during the period. We regularly evaluate acquisition opportunities and have historically made acquisitions that affect members’stockholders' equity. We use return on tangible equity and adjusted return on tangible equity as internal performance measures in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance.performance by adjusting for the effects of acquisitions on our stockholders' equity and, in the case of adjusted return on tangible equity, by adjusting for the items that we believe do not reflect our 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 a substitute for return on equity or return on tangible equity, respectively, 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)2021202020212020
Return on tangible equity calculation:
Numerator: net income$6,518 $69,448 $18,086 $80,241 
Denominator:
Average stockholders' equity419,818 270,519 416,200 271,684 
Less: average goodwill and other intangible assets214,942 108,476 216,356 107,994 
Average tangible stockholders' equity204,876 162,043 199,844 163,690 
Return on tangible equity12.7 %171.4 %12.1 %65.4 %
Return on equity6.2 %102.7 %5.8 %39.4 %

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Return on tangible equity calculation:       
Numerator: net income$3,720
 $6,391
 $13,326
 $14,842
Denominator:       
Average members' equity144,733
 121,292
 140,450
 114,742
Less: average goodwill and other intangible assets3,453
 3,006
 3,459
 3,012
Average tangible members' equity141,280
 118,286
 136,991
 111,730
Return on tangible equity10.5% 21.6% 19.5% 26.6%
Return on equity10.3% 21.1% 19.0% 25.9%


Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except percentages)2021202020212020
Adjusted return on tangible equity calculation:
Numerator: adjusted net income$7,678 $10,477 $20,103 $21,600 
Denominator: average tangible equity204,876 162,043 199,844 163,690 
Adjusted return on tangible equity15.0 %25.9 %13.4 %17.6 %
Return on equity6.2 %102.7 %5.8 %39.4 %

 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' equity141,280
 118,286
 136,991
 111,730
Adjusted return on tangible equity13.5% 23.4% 16.2% 27.4%
Return on equity10.3% 21.1% 19.0% 25.9%



Financial Condition, Liquidity and Capital Resources


Sources and Uses of Funds


We are organized as a holding company with our operations conducted through our subsidiaries, including our wholly owned insurance subsidiaries,subsidiaries: Benchmark, which is domiciled in Kansas and commercially domiciled in California, andCalifornia; ALIC, which is domiciled in Utah.Utah; and 7710 Insurance Company, which is domiciled in South Carolina. Accordingly, the holding company may receive cash throughthrough: (i) loans from banks, (ii) draws on a revolving loan agreement, (iii) issuance of equity and debt securities, (iv) corporate service fees from our operating subsidiaries, (v) payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions and (vi) dividends from our non-insurance subsidiaries and, subject to certain limitations discussed below, dividends from our insurance subsidiaries. We also may use the proceeds from these sources to contribute funds to the insurance subsidiaries in order to support premium growth, reduce our reliance on reinsurance, retire indebtedness on preferred stock, pay taxes, and for other general business purposes.

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State insurance laws restrict the ability of insurance companies to declare stockholder dividends without prior regulatory approval. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.

Under Kansas and California law, dividends payable from Benchmark without the prior approval of the applicable insurance commissioner are limited tomust not exceed the greater of (i) 10% of Benchmark’sBenchmark's surplus as shown on the last statutory financial statement on file with the Kansas Insurance Department and the California Department of Insurance, respectively, or (ii) 100% of statutory net income during the applicable twelve-month period. period (not including realized capital gains). Dividends shall not include pro rata distributions of any class of Benchmark's own securities.

Under Utah law, dividends payable from ALIC without the prior approval of the applicable insurance commissioner are limited tomust not exceed the lesser ofof: (i) 10% of ALIC’sALIC's surplus as shown on the last statutory financial statement on file with the Utah Insurance Department or (ii) 100% of net income during the applicable twelve-monthtwelve- month period (not including realized capital gains).

Under South Carolina law, dividends payable from 7710 Insurance Company without the prior approval of the applicable insurance commissioner are limited to the following during the preceding twelve months: (a) when paid from other than earned surplus must not exceed the lesser of: (i) 10% of 7710 Insurance Company's surplus as regards policyholders as shown in 7710 Insurance Company's most recent annual statement; or (ii) the net income, not including net realized capital gains or losses as shown in 7710 Insurance Company's most recent annual statement; or (b) when paid from earned surplus must not exceed the greater of: (i) 10% of 7710 Insurance Company's surplus as regards policyholders as shown in 7710 Insurance Company's most recent annual statement; or (ii) the net income, not including net realized capital gains or losses as shown in the 7710 Insurance Company's most recent annual statement.

The maximum amount of dividends the insurance subsidiaries can pay us during 20202021 without regulatory approval is $14.0 million.$23,859. Insurance regulators have broad powers to ensure that statutory surplus remains at adequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. In the future, state insurance regulatory authorities that have jurisdiction over the payment of dividends by the insurance subsidiaries may adopt statutory provisions more restrictive than those currently in effect.



Our insurance subsidiaries are also required to by state law to maintain a minimum level of policyholder'spolicyholders' surplus. Kansas, Utah, and UtahSouth Carolina utilize a risk-based capital requirementsrequirement as promulgated by the National Association of Insurance Commissioners. Such requirements are designed to identify the various business risks (e.g., investment risk, underwriting profitability risk, etc.) of insurance companies and their subsidiaries. As of JuneSeptember 30, 20202021 and December 31, 2019,2020, the total adjusted capital of our insurance subsidiaries was in excess of their respective prescribed risk-based capital requirements.


As of JuneSeptember 30, 2020,2021, we had $97,326$134,821 in cash and cash equivalents, compared to $74,268$153,149 as of December 31, 2019.2020.


Management believes that we have sufficient liquidity available to meet our operating cash needs and obligations and committed capital expenditures for the next 12 months.

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Cash Flows


Our most significant source of cash is from premiums received from insureds, net of the related commission amount for the policies. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that generally earn interest and dividends. The table below summarizes our net cash flows.


Nine Months Ended September 30,
20212020
Cash, cash equivalents and restricted cash provided by (used in):
Operating activities$53,410 $32,208 
Investing activities(71,131)18,492 
Financing activities(1,125)59,662 
Net increase (decrease) in cash, cash equivalents and restricted cash$(18,846)$110,362 
 Six Months Ended June 30,
(in thousands)2020 2019
Cash, cash equivalents and restricted cash provided by (used in):   
Operating activities$31,783
 $14,692
Investing activities6,107
 (7,780)
Financing activities(8,886) (4,585)
Net increase in cash, cash equivalents and restricted cash$29,004
 $2,327




Operating Activities: Net cash provided by operating activities for the sixnine months ended JuneSeptember 30, 20202021 was $31,783$53,410, compared to $14,692$32,208 for the same period in 2019. The $17,091 increase in2020. Net cash provided by operating activities is drivenincludes net income as adjusted for depreciation and amortization, stock compensation, unrealized gains and losses on embedded derivatives, net capital gains and losses, bond amortization and accretion, the change in deferred income taxes, and amortization of deferred financing costs. Net cash provided by an increase in cash duringoperating activities for the sixnine months ended JuneSeptember 30, 2020 resulting from (i) an increase2021 reflects increases in unpaid loss and loss adjustment expenses of $52,975, unearned premiums of $64,879, and funds held under reinsurance agreements of $19,585; partially offset by increases in premiums and other receivables of $25,167, reinsurance recoverables of $18,460, prepaid reinsurance premiums of $30,252, other assets of $10,863 and decreases in reinsurance premiums payable of $7,829, and accounts payable and accrued expenses of $14,320, (ii) a decrease$11,430. Unpaid loss and loss adjustment expenses and unearned premiums increased primarily due to an increase in the changegross written premiums. The increases in premiums and other receivables of $6,681 and (iii)reinsurance recoverables were primarily a result of an increase in gross written premiums during the changeperiod. Other assets increased as a result of increases in unearned premiumsour deferred acquisition costs and contract asset balances. Funds held under reinsurance agreements decreased due to an arbitration settlement in the fourth quarter of $5,037. This increase is partially offset by2020, resulting in the non-cash transfer of certain investments held as collateral. Excluding non-cash transfers, funds held under reinsurance agreements increased as a reduction in underwriting incomeresult of $6,124, an increase in gross written premium. Net cash provided by operating activities for the change in othernine months ended September 30, 2020 reflects distributions received from equity method investments and incremental cash received for operating assets of $1,893 and $1,339 paid for deferred offering costs during 2020.liabilities.


Investing Activities: Net cash used in investing activities for the nine months ended September 30, 2021 was $71,131 compared to net cash provided by investing activities of $18,492 for the same period in 2020. Net cash used in investing activities for the nine months ended September 30, 2021 includes $67,476 net cash used in the purchase and sale of investments, $3,795 in cash used in the acquisition of a subsidiary, net of cash received, $232 received for the return of capital on equity method investments and $92 in capital expenditures. Additionally, the nine months ended September 30, 2021 includes non-cash transfers of investments to settle amounts owed for funds held for reinsurance agreements by $13,562 and accounts payable and accrued expenses by $26,211. Net cash provided by investing activities for the sixnine months ended JuneSeptember 30, 2020 was $6,107 compared toincludes $5,249 net cash used of $7,780 for the same period in 2019. The $13,887 increase in cash used in investing activities is driven by (i) $6,435 net cash provided byreceived from the purchase and sale of investments; (ii)investments, $11,891 cash received in the acquisition of Compstar, $3,000 in cash received fromfor the sale of TRIequity method investments, $115 received for the return of capital on equity method investments, $1,098 in 2020; and (iii) the incremental $4,398cash used in 2019 for the acquisitionsacquisition of First Choice Casualty Insurance Companya subsidiary, net of cash received and the remaining 25% of American Liberty Insurance Company.$665 in capital expenditures.


Financing Activities: Net cash used in financing activities for the sixnine months ended JuneSeptember 30, 20202021 was $8,886$1,125 compared to $4,585net cash provided by financing activities of $59,662 for the same period in 2019. The increase in2020. Net cash used is drivenin financing activities for the nine months ended September 30, 2021 primarily includes the principal payments made on the Company's debt. Net cash provided by an increasefinancing activities for the nine months ended September 30, 2020 included by $99,643 of net cash proceeds received from the Company's IPO, $19,496 in distributions to members of $19,183, partially offset by thepre-IPO unitholders, $9,336 in cash provided by the Company's long-term debt,for principal payments, net of principle payments,proceeds from the credit agreement, cash paid for deferred offering costs of $14,755.$5,839, and cash used in the buyback of redeemable preferred stock $5,100.


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Debt and Credit Agreements


First Horizon Credit Agreement


In April 2018, Trean Corporation and Trean Compstar entered into a credit agreement with First Horizon Bank (formerly, First Tennessee Bank National Association) (the 2018"2018 First Horizon Credit Agreement)Agreement"), which includesincluded a term loan facility totaling $27.5 million and a revolving credit facility of $3.0 million. Borrowings are secured by substantially all of the assets of Trean Holdings LLC and its subsidiaries.



On May 26, 2020, the Company entered into a newan Amended and Restated Credit Agreement with First Horizon Bank, which, among other things, extended the Company's credit facility for a period of five years through May 26, 2025 and increased its term loan facility by $11,707, resulting in a total term loan debt amount of $33,000 and a revolving credit facility of $2,000. Borrowings under the new facility are secured by substantially all of the assets of Trean Holdings LLC and its subsidiaries (other than equity interests of Compstar and Compstar Insurance Services, LLC), and after giving effect to the July reorganization transactions, borrowings will be secured by substantially all of the assets of Trean Insurance Group, Inc.Company other than Benchmark Holding Company and its subsidiaries. The loan has a variable interest rate of 3-month LIBOR plus 3.50%4.50%, which was 5.95%4.65% as of JuneSeptember 30, 20202021 and 6.33%4.72% as of December 31, 20192020 (under the 2018 First Horizon Credit Agreement). The outstanding principal balance of the loan is to be repaid in quarterly installments that escalate from approximately $206 to $825 until March 2025. All equity securities of the subsidiaries of Trean Holdings LLC have been pledged as collateral, and after giving effect to the July reorganization transactions, all equity securities of the subsidiaries of Trean Insurance Group, Inc.Company (other than Benchmark Holding Company and its subsidiaries) will behave been pledged as collateral.


In addition, and in conjunction with, the executionReinsurance

We cede a portion of the Amended and Restated Credit Agreement, the Company made dividend distribution payments to Trean members totaling $18,154 in May 2020.

2006 Subordinated Notes

In June 2006, Trean Capital Trust I (the Trust) issued 7,500 shares of preferred capital securities to Bear Stearns Securities Corp. and 232 common securities to Trean Corporation. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of the Subordinated Notes. The Subordinated Notes represents the sole assets of the Trust. The Subordinated Notes maturerisk we accept on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of 3-month LIBOR (1.22% and 1.99% as of June 30, 2020 and December 31, 2019, respectively) plus 3.50% is in effect. The interest rate totaled 4.72% and 5.49% as of June 30, 2020 and December 31, 2019, respectively. There are optional dates for redemption of the Subordinated Notes, at the option of the Company, on any January 7, April 7, July 7, or October 7 following July 7, 2011. There are no funding requirements for Trean Corporation to the Trust except for the necessary quarterly interest payments. Trean Corporation is the guarantor of the debt.

The preferred capital securities issued by the Trust in turn paid quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011, and thereafter pay at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Subordinated Notes on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by us.

Reinsurance

We use reinsurance to convert underwriting risk to credit risk, protect theour balance sheet reduce earnings volatilityto third-party reinsurers through a variety of reinsurance arrangements. We manage these arrangements to align risks with our Program Partners, optimize our net retention relative to our financial objectives, balance sheet size and increase overall premium writing capacity.ratings requirements, as well as to limit our maximum loss resulting from a single program or a single event. We utilize both quota share and excess of loss ("XOL") reinsurance as tools in our overall risk management strategy to achieve these goals.goals, usually in conjunction with each other. Quota share reinsurance involves the proportional sharing of premiums and losses. Under excesslosses of loss reinsurance, losses in excess of a retention level are paid by the reinsurer, subject to a limit.

Quota share reinsurance

each defined program. We utilize quota share reinsurance to:for several purposes, including (i) to cede premiumrisk to Program Partners, (non-professional reinsurers)which allows us to transfer underwriting riskshare economics and align incentives and (ii) to cede premiumrisk to professionalthird-party reinsurers in order to increase the amount of grossmanage our net written premiums we can write while managing net premiums written leverage appropriately based on itsour financial objectives, capital base, A.M. Best financial strength rating and risk appetite. It is a core pillar of our underwriting philosophy that Program Partners retain a significant portion of the underwriting risk of their program. We believe this best aligns interests, attracts higher quality programs, and leads to better underwriting results.


Excess of loss and catastrophe Under XOL reinsurance,

We purchase losses in excess of lossa retention level are paid by the reinsurer, subject to a limit, and catastropheare customized per program or across multiple programs. We utilize XOL reinsurance from professional reinsurers to protect against catastrophic large loss and/or other unforeseen extreme loss activity that could otherwise negatively impact Benchmark’sour profitability and capital base. The majority of our exposure to catastrophe risk stems from the workers’ compensation premium we retain net of premiums ceded to Program Partners and professional reinsurers.retain. Potential catastrophic events include an earthquake, terrorism, or another event that could cause more than one covered employee working at the same location to be injured in the event. This catastrophic exposure is generally amelioratedWe believe we mitigate this risk by the type of accounts we underwrite. Due to our focus on small- to mid-sized accounts, (i.e., few employees per policy and location),which means that we generally do not have concentrated employee counts at single locations that can serve as the basis forcould be exposed to a catastrophic loss. The limited catastrophic risk that does exist is cededcost and limits of the reinsurance coverage we purchase vary from year to large, professional reinsurers through excessyear based on the availability of lossquality reinsurance contracts.at an acceptable price and our desired level of retention.


Ratings


We have a financial strength rating of “A”"A" (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from “A+"A++”" (Superior) to “S”"S" (Rating Suspended). “A”"A" (Excellent) is the third highest rating issued by A.M. Best. The “A”"A" (Excellent) rating is assigned to insurers that have, in A.M. Best’sBest's opinion, an excellent ability to meet their ongoing obligations to policyholders. This rating is intended to provide an independent opinion of an insurer’s ability to meet its obligation to policyholders and is not an evaluation directed at investors. See also “Risk"Risk factors — Risks related to our business and industry — A downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries may negatively affect our business.”" in our 2020 Form 10-K.


The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that the insurance companies receive. The “A”"A" (Excellent) rating obtained by us is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan.


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Contractual Obligations and Commitments


Other than the $11,707 increase in our credit facility, thereThere have been no material changes in the Company's contractual obligations as of JuneSeptember 30, 20202021 compared to December 31, 2019.2020.


Financial condition


Members'Stockholders' Equity


As of JuneSeptember 30, 2020,2021, total members'stockholders' equity was $139,284,$422,292, compared to $141,615$410,107 as of December 31, 2019, a decrease2020, an increase of $2,331.$12,185. The decreaseincrease in members'stockholders' equity over the period was driven primarily by distributions to members totaling $18,043 during the six months ended June 30, 2020. This was offset by$11,180 of net income of $13,326 earned during the period and unrealized gains on available-for-sale investments of $3,882 during the period. comprehensive income.

We had $157$4,091 of unrecognized stock compensation as of JuneSeptember 30, 20202021 related to non-vested stock-basedstock compensation granted. WeThe Company recognized approximately $20 and $40$1,098 of stock based compensation expense forduring the three and sixnine months ended JuneSeptember 30, 2020, respectively.2021.


Investment Portfolio


Our invested asset portfolio consists of fixed maturities, equity securities, other investments, and short-term investments. The majority of the investment portfolio was comprised of fixed maturity securities of $375,705$425,596 at JuneSeptember 30, 2020,2021, that were classified as available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.


Our investment portfolio objectives are to maintain liquidity, facilitating financial strength and stability and ensuring regulatory and legal compliance. Our investment portfolio consists of available-for-sale fixed maturities and other equity investments, all of which are carried at fair value. We seek to hold a high-quality portfolio of investments that is managed by a professional investment advisory management firm in accordance with the Company's investment policy and routinely reviewed by our management team. Our investments, however, are subject to general economic conditions and market risks as well as risks inherent to particular securities. The Company's investment portfolio has the following objectives:


Meet•meet insurance regulatory requirements with respect to investments under the applicable insurance laws;
Maintain•maintain an appropriate level of liquidity to satisfy the cash requirements of current operations and long-term obligations;
Adjust•adjust investment risk to offset or complement insurance risk based on our total corporate risk tolerance; and
Realize•realize the highest possible levels of investment income, while generating superior after-tax total rates of return.


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The composition of our investment portfolio is shown in the following table as of JuneSeptember 30, 20202021 and December 31, 2019.2020.


September 30, 2021
Cost or
Amortized Cost		Fair Value
Fixed maturities:
U.S. government and government securities$26,811 $26,947 
Foreign governments2,500 2,500 
States, territories and possessions7,937 8,116 
Political subdivisions of states, territories and possessions31,709 32,552 
Special revenue and special assessment obligations88,998 91,568 
Industrial and public utilities97,169 100,815 
Commercial mortgage-backed securities104,888 104,435 
Residential mortgage-backed securities15,010 16,006 
Other loan-backed securities42,161 42,545 
Hybrid securities105 112 
Total fixed maturities417,288 425,596 
Equity securities:
Preferred stock243 231 
Common stock741 741 
Total equity securities984 972 
Total investments$418,272 $426,568 


December 31, 2020
Cost or
Amortized Cost		Fair Value
Fixed maturities:
U.S. government and government securities$17,135 $17,471 
Foreign governments300 302 
States, territories and possessions7,500 7,774 
Political subdivisions of states, territories and possessions31,759 33,212 
Special revenue and special assessment obligations77,329 81,714 
Industrial and public utilities107,017 113,741 
Commercial mortgage-backed securities16,242 18,066 
Residential mortgage-backed securities91,478 93,017 
Other loan-backed securities39,293 39,945 
Hybrid securities356 362 
Total fixed maturities388,409 405,604 
Equity securities:
Preferred stock243 240 
Common stock1,554 3,534 
Total equity securities1,797 3,774 
Total investments$390,206 $409,378 


58
 June 30, 2020
(in thousands)
Cost or
Amortized Cost
 Fair Value
Fixed maturities:   
U.S. government and government securities$15,778
 $16,248
Foreign governments300
 305
States, territories and possessions7,299
 7,544
Political subdivisions of states, territories and possessions27,684
 28,915
Special revenue and special assessment obligations68,065
 71,875
Industrial and public utilities122,814
 129,892
Commercial mortgage-backed securities16,400
 17,908
Residential mortgage-backed securities57,787
 59,412
Other loan-backed securities42,871
 43,250
Hybrid securities357
 356
Total fixed maturities359,355
 375,705
Equity securities:   
Preferred stock332
 325
Common stock1,554
 3,428
Total equity securities1,886
 3,753
Total investments$361,241
 $379,458


Table of Contents
 December 31, 2019
(in thousands)
Cost or
Amortized Cost
 Fair Value
Fixed maturities:   
U.S. government and government securities$15,965
 $16,129
Foreign governments299
 302
States, territories and possessions4,789
 4,923
Political subdivisions of states, territories and possessions24,444
 25,104
Special revenue and special assessment obligations59,149
 61,405
Industrial and public utilities119,735
 123,207
Commercial mortgage-backed securities15,586
 16,312
Residential mortgage-backed securities53,467
 54,109
Other loan-backed securities35,849
 36,011
Hybrid securities357
 363
Total fixed maturities329,640
 337,865
Equity securities:   
Preferred stock337
 343
Common stock492
 492
Total equity securities829
 835
Total investments$330,469
 $338,700


The following table shows the percentage of the total estimated fair value of our fixed maturity securities as of JuneSeptember 30, 20202021 and December 31, 20192020 by credit rating category, using the lower of ratings assigned by Moody's Investor Service or S&P.


September 30, 2021
(in thousands, except percentages)Fair Value% of Total
AAA$74,036 17.4 %
AA242,911 57.1 %
A75,596 17.8 %
BBB32,049 7.5 %
BB954 0.2 %
Below investment grade50 — %
Total fixed maturities$425,596 100.0 %
 June 30, 2020
(in thousands, except percentages)Fair Value % of Total
"AAA"$62,876
 16.7%
"AA"174,294
 46.4%
"A"108,488
 28.9%
"BBB"27,743
 7.4%
"BB"2,255
 0.6%
Below investment grade49
 —%
Total fixed maturities$375,705
 100.0%



December 31, 2020
(in thousands, except percentages)Fair Value% of Total
AAA$59,887 14.8 %
AA224,371 55.3 %
A89,975 22.2 %
BBB29,404 7.2 %
BB1,921 0.5 %
Below investment grade46 — %
Total fixed maturities$405,604 100.0 %
 December 31, 2019
(in thousands, except percentages)Fair Value % of Total
"AAA"$52,571
 15.6%
"AA"153,838
 45.5%
"A"101,040
 29.9%
"BBB"30,245
 9.0%
"BB"119
 —%
Below investment grade52
 —%
Total fixed maturities$337,865
 100.0%





Critical Accounting Policies and Estimates


The unaudited interim condensed combinedconsolidated financial statements included in this quarterly reportQuarterly Report on Form 10-Q include amounts based on the use of estimates and judgments of management.


We identified the accounting estimates whichthat are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our condensed combinedconsolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the condensed combinedconsolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. The estimates and judgments that are most critical to the preparation of the condensed combinedconsolidated financial statements include: (a) reserves for unpaid loss and LAE; (b) reinsurance recoveries; (c) investment fair value measurements; and; (d) goodwill and intangible assets. Actual results may differ materially from the estimatesassets; and assumptions used in preparing the condensed combined financial statements.(e) business combinations. For a detailed discussion of our accounting policies, see the “Notes"Notes to the Consolidated and Combined Financial Statements”Statements" included in our registration statement filed with the SEC on2020 Form S-1.10-K.


Off-Balance Sheet Arrangements


We have no off-balance sheet arrangements as of JuneSeptember 30, 2020.2021.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk


Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates, and commodity prices. The primary components of market risk affecting us are credit risk, interest rate risk, and interestequity rate risk, which are described in detail in theItem 7A — "Quantitative and qualitative disclosures about market risk" section ofQualitative Disclosures About Market Risk" in our registration statement filed with the SEC on2020 Form S-1.10-K. We do not have exposure to foreign currency exchange rate risk or commodity risk.


Item 4. Controls and Procedures


Disclosure Controls and Procedures


As of the end of the period covered by this report, management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.


Changes in Internal Control Over Financial Reporting


There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.



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PART II. OTHER INFORMATION


Item 1. Legal Proceedings


From time-to-time, the Company may be involved in legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually or in the aggregate, will not have a material adverse effect on our combinedconsolidated financial position.


Item 1A. Risk Factors

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all the other information contained in this Quarterly Report on Form 10-Q and in our prospectus relating to our registration statement on Form S-1, as amended (File No. 333-239291) (the Prospectus), including our combined financial statements and the related notes. The risks and uncertainties described below are not the only ones facing us. There may be additional risks and uncertainties of which we currently are unaware or that we currently believe to be immaterial. If any of these risks or uncertainties occurs, our business, financial condition and results of operations may be materially adversely affected. In that event, the market price of our common stock could decline.

Risks related to our business and industry

Failure of our Program Partners or our Owned MGAs to properly market, underwrite or administer policies could adversely affect us.

The marketing, underwriting, claims administration and other administration of policies in connection with our issuing carrier services and for business written directly by our Owned MGAs are the responsibility of our Program Partners and our Owned MGAs. Any failure by them to properly handle these functions could result in liability to us. Even though our Program Partners may be required to compensate us for any such liability, there are risks that they do not pay us because they become insolvent or otherwise. Any such failures could create regulatory issues or harm our reputation, which could materially and adversely affect our business, financial condition and results of operations.

We depend on a limited number of Program Partners for a substantial portion of our gross written premiums.

We source a significant amount of our premiums from our Program Partners, which are generally MGAs and insurance companies. Historically, we have focused our business on a limited group of core Program Partners and have sought to grow the business by expanding existing Program Partner relationships and selectively adding new Program Partners.

For the years ended December 31, 2019 and 2018, approximately 34% and 42% of our gross written premiums was derived from our top ten Program Partners.

A significant decrease in business from, or the entire loss of, our largest Program Partners or several of our other Program Partners may materially adversely affect our business, financial condition and results of operations.

More than half of our gross written premiums are written in three key states.

For the year ended December 31, 2019, we derived approximately 49%, 9% and 8%, respectively, of our gross written premiums in the states of California, Michigan and Arizona. As a result, our financial results are subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in these states, in particular our gross written premiums in California. Adverse developments relating to any of these conditions could materially adversely affect our business, financial condition and results of operations.


A downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries may negatively affect our business.

A.M. Best financial strength ratings (“FSRs”) are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated for overall financial strength by A.M. Best. These FSRs reflect A.M. Best’s opinion of our insurance company subsidiaries’ financial strength, operating performance, strategic position and ability to meet obligations to policyholders, and are not evaluations directed to investors. Our insurance company subsidiaries’ FSRs are subject to periodic review, and the criteria used in the rating methodologies are subject to change. While our insurance company subsidiaries are rated “A” (Excellent), their FSRs are subject to change. A significant portion of our business is conducted through small- and mid-sized insurance carriers, program managers and other insurance organizations that do not have an A.M. Best financial strength rating or require a highly rated carrier, such as ourselves, to meet their business objectives. A significant downgrade in our insurance company subsidiaries’ FSRs could lead to our Program Partners doing business with other insurance companies and materially adversely affect our business, financial condition and results of operations.

If we are unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders, our business, financial condition and results of operations may be materially and adversely affected.

In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses and loss adjustment expenses (“LAE”) and other general and administrative expenses in order to earn a profit. If we do not accurately assess the risks that we assume, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower policyholder retention, resulting in lower revenues. Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. To accurately price our policies, we must:
collect and properly analyze a substantial volume of data from our insureds;
develop, test and apply appropriate actuarial projections and ratings formulas;
closely monitor and timely recognize changes in trends; and
project both frequency and severity of our insureds’ losses with reasonable accuracy.
We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:
insufficient or unreliable data;
incorrect or incomplete analysis of available data;
uncertainties generally inherent in estimates and assumptions;
our failure to implement appropriate actuarial projections and ratings formulas or other pricing methodologies;
regulatory constraints on rate increases;
our failure to accurately estimate investment yields and the duration of our liability for losses and LAE; and
unanticipated court decisions, legislation or regulatory action.


We may be unable to access the capital markets when needed, which may adversely affect our ability to take advantage of business opportunities as they arise and to fund our operations in a cost-effective manner.

Our ability to grow our business, either organically or through acquisitions, depends, in part, on our ability to access capital when needed. Capital markets may become illiquid from time to time, and we cannot predict the extent and duration of future economic and market disruptions or the impact of any government interventions. We may not be able to obtain financing on terms acceptable to us, or at all. If we need capital but cannot raise it or cannot obtain financing on terms acceptable to us, our business, financial condition and results of operations may be materially adversely affected and we may be unable to execute our long-term growth strategy.

Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability.

Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can affect the business and economic environment. These same factors affect our ability to generate revenue and profits. In an economic downturn that is characterized by higher unemployment, declining spending and reduced corporate revenues, the demand for insurance products is generally adversely affected, which directly affects our premium levels and profitability. Prolonged and high unemployment that reduces the payrolls of our insureds would reduce the premiums that we are able to collect. Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure and may adversely affect our opportunities to underwrite profitable business.

Negative developments in the workers’ compensation insurance industry could adversely affect our business, financial condition and results of operations.

Although we engage in other businesses, 82.8% of our gross written premiums for the year ended December 31, 2019 were attributable to workers’ compensation insurance policies providing both primary and excess coverage. As a result, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have a material adverse effect on our business, financial condition and results of operations. If one of our larger markets were to enact legislation to increase the scope or amount of benefits for employees under workers’ compensation insurance policies without related premium increases or loss control measures, this could negatively affect our business, financial condition and results of operations.

The insurance industry is cyclical in nature.

The financial performance of the insurance industry has historically fluctuated with periods of lower premium rates and excess underwriting capacity resulting from increased competition followed by periods of higher premium rates and reduced underwriting capacity resulting from decreased competition. Although the financial performance of an individual insurance company depends on its own specific business characteristics, the profitability of many insurance companies tends to follow this cyclical market pattern. Because this market cyclicality is due in large part to the actions of our competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. We expect these cyclical patterns will cause our revenues and net income to fluctuate, which may cause the market price of our common stock to be more volatile.

Our failure to accurately and timely pay claims could harm our business.

We must accurately and timely evaluate and pay claims to manage costs and close claims expeditiously. Many factors affect our ability to evaluate and pay claims accurately and timely, including the training and experience of our claims staff, our claims department’s culture and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to accurately and timely pay claims could lead to regulatory and administrative actions or material litigation, undermine our reputation in the marketplace and materially and adversely affect our business, financial condition and results of operations.

If we do not hire and train new claims staff effectively or if we lose a significant number of experienced claims staff, our claims department may be required to handle an increasing workload, which could adversely affect the quality of our claims administration, and our business could be materially and adversely affected.


The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and economic, legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include, but are not limited to:
judicial expansion of policy coverage and the impact of new theories of liability;
plaintiffs targeting property and casualty (P&C) insurers in purported class action litigation relating to claims-handling and other practices;
medical developments that link health issues to particular causes, resulting in liability claims; and
claims relating to unanticipated consequences of current or new technologies, including cyber-security related risks and claims relating to potentially changing climate conditions.
In some instances, these emerging issues may not become apparent for some time after we have issued the affected insurance policies. As a result, the full extent of liability under our insurance policies may not be known until many years after the policies are issued.

In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on our business.

The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict and could harm our business and materially adversely affect our results of operations.

Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk.


We have developed and continue to develop enterprise-wide risk management policies and procedures to mitigate risk and loss to which we are exposed. There are inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not anticipated or identified. If our risk management policies and procedures are ineffective, we may suffer unexpected losses and could be materially adversely affected. As our business changes and the niches in which we operate evolve, our risk management framework may not evolve at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not identified, monitored or managed. In times of market stress, unanticipated market movements or unanticipated claims experience, the effectiveness of our risk management strategies may be limited, resulting in losses to us. In addition, we may be unable to effectively review and monitor all risks and our employees may not follow our risk management policies and procedures.

The National Association of Insurance Commissioners (the NAIC) and state legislatures and regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to insurers. Our insurance company subsidiaries are subject to regulation in Kansas, the state of domicile of Benchmark, California, where Benchmark is commercially domiciled, and Utah, the state of domicile of ALIC. The Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department, the primary regulators of our insurance company subsidiaries, have adopted regulations implementing a requirement under the Kansas, California and Utah insurance laws, respectively, for insurance holding companies to adopt a formal enterprise risk management (ERM) function and to file an annual enterprise risk report. The regulations also require domestic insurers to conduct an Own Risk and Solvency Assessment (ORSA) and to submit an ORSA summary report prepared in accordance with the NAIC’s ORSA Guidance Manual. While we operate within an ERM framework designed to assess and monitor our risks, we may not be able to effectively review and monitor all risks, our employees may not all operate within the ERM framework and our ERM framework may not resultdisclosed in our accurately identifying all risks2020 Form 10-K the most significant risk factors that can impact year-to-year comparisons and limiting our exposures based on our assessments.


We are subject to reinsurance counterparty credit risk. Our reinsurers may not pay on losses in a timely fashion, or at all.

We purchase reinsurance to transfer part of the risk we have assumed (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to policyholders. Accordingly, we are exposed to credit risk with respect to our reinsurers to the extent the reinsurance receivable is not sufficiently secured by collateral or does not benefit from other credit enhancements. We also bear the risk that a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverable for any reason, including that:
the terms of the reinsurance contract do not reflect the intent of the parties of the contract or there is a disagreement between the parties as to their intent;
the terms of the contract cannot be legally enforced;
the terms of the contract are interpreted by a court or arbitration panel differently than intended;
the reinsurance transaction performs differently than we anticipated due to a flawed design of the reinsurance structure, terms or conditions; or
a change in laws and regulations, or in the interpretation of the laws and regulations, materially affects a reinsurance transaction.
The insolvency of one or more of our reinsurers, or inability or unwillingness to make timely payments under the terms of our contracts, could materially adversely affect our business, financial condition and results of operations.

If we are unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us, we may be required to bear increased risks or reduce the level of our underwriting commitments.

Our insurance company subsidiaries purchase reinsurance as part of our overall risk management strategy. While reinsurance does not discharge our insurance company subsidiaries from their obligation to pay claims for losses insured under their insurance policies, it does make the reinsurer liable to them for the reinsured portion of the risk. As part of our strategy for our issuing carrier business, we reinsure underwriting risk to third-party reinsurers. At the inception of a new program, we typically act as an issuing carrier where we reinsure a substantial amount of such risk to third parties. For these reasons, reinsurance is an important tool to manage transaction and insurance risk retention and to mitigate losses. We may be unable to maintain our current reinsurance arrangements or to obtain other reinsurance in adequate amounts and at favorable rates, particularly if reinsurers become unwilling or unable to support our specialized issuing carrier model in the future. Additionally, market conditions beyond our control may impact the availability and cost of reinsurance and could have a material adverse effect on our business, financial condition and results of operations. In recent years, our Program Partners have benefitted from favorable market conditions, including growth in the role of MGAs and of offshore and other alternative sources of reinsurance. A decline in the availability of reinsurance, increases in the cost of reinsurance or a decreased level of activity by MGAs could limit the amount of issuing carrier business we could write and materially and adversely affect our business, financial condition, results of operations and prospects. We may, at certain times, be forced to incur additional costs for reinsurance or may be unable to obtain sufficient reinsurance on terms acceptable to us. In the latter case, we would have to accept an increase in exposure to risk, reduce the amount of business written by our insurance company subsidiaries or seek alternatives in line with our risk limits, all of which could materially adversely affect our business, financial condition and results of operations.

Some of our issuing carrier arrangements contain limits on the reinsurer’s obligations to us.

While we reinsure underwriting risk in our issuing carrier business, including a substantial amount of such risk at the inception of a new program, we have in certain cases entered into programs that contain limits on our reinsurers’ obligations to us, including loss ratio caps or aggregate reinsurance limits. To the extent losses under these programs exceed the prescribed limits, we will be liable to pay the losses in excess of such limits, which could materially and adversely affect our business, financial condition and results of operations.


Retention of business written by our Program Partners could expose us to potential losses.

We retain risk for our own account on business underwritten by our insurance company subsidiaries. The determination to reduce the amount of reinsurance we purchase, or not to purchase reinsurance for a particular risk, customer segment or niche is based on a variety of factors, including market conditions, pricing, availability of reinsurance, our capital levels and loss experience. Retention increases our financial exposure to losses and significant losses could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Our loss reserves may be inadequate to cover our actual losses.

Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related LAE. Loss reserves are estimates of the ultimate cost of claims and do not represent a precise calculation of any ultimate liability. These estimates are based on historical information and on estimates of future trends that may affect the frequency and severity of claims that may be reported in the future. Estimating loss reserves is a difficult, complex and inherently uncertain process involving many variables and subjective judgments. As partfuture performance of the reserving process,Company's business. On a quarterly basis, we review historical datathese disclosures and considerupdate the impact of variousrisk factors, such as:
loss emergence and cedant reporting patterns;
underlying policy terms and conditions;
business and exposure mix;
trends in claim frequency and severity;
changes in operations;
emerging economic and social trends;
inflation; and
changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. It also assumes that adequate historical or other data exists upon which to make these judgments. For more information on the estimates used in the establishment of loss reserves, see “Management’s discussion and analysis of financial condition and results of operations - Critical accounting estimates - Reserves for unpaid losses and loss adjustment expenses” in the Prospectus. There, however, is no precise method for evaluating the impact of any specific factor on the adequacy of reserves and actual results are likely to differ from original estimates, perhaps materially. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability could suffer.

We may not be able to manage our growth effectively.

We intend to grow our business in the future, which could require additional capital, systems development and skilled personnel. We, however, must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees or effectively incorporate any acquisitions we make in our effort to achieve growth. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.


Our ability to grow our business will depend in part on the addition of new Program Partners, and our inability to effectively onboard such new Program Partners could have a material adverse effect on our business, financial condition and results of operations.

Our ability to grow our business will depend in part on the addition of new Program Partners. If we do not effectively onboard our new Program Partners, including assisting such Program Partners to quickly resolve any post-onboarding issues and provide effective ongoing support, our ability to add new Program Partners and our relationships with our existing Program Partners could be adversely affected. Additionally, our reputation with potential new customers could be damaged. If we fail to meet the requirements of our customers, it may be more difficult to execute on our strategy to retain Program Partners, which could have a material adverse effect on our business, financial condition and results of operations.

We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel.

We depend on our ability to attract and retain experienced personnel and seasoned key executives who are knowledgeable about our business. The pool of talent from which we actively recruit is may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions.as appropriate. As such, higher demand for employees having the desired skills and expertise could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired levels. We do not have employment agreements with our executive officers. Should any of our executives terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our business and results of operations.

Technology breaches or failures of our or our business partners’ systems could adversely affect our business.

Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems and those of our business partners or service providers to sophisticated and targeted measures known as advanced persistent threats. While we and our business partners and service providers employ measures designed to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of information technology networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data (personal or otherwise) and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. In 2020, we discovered that we were subject to a cybersecurity incident that involved a third party obtaining unauthorized access to an employee’s electronic mailbox that was compromised in August 2019 through a phishing email. In conjunction with our cyber insurance carrier, we engaged outside counsel and a consulting firm specializing in digital forensics. While we do not believe the incident will have a material adverse effect on our business, financial performance and reputation, our investigation is ongoing and the ultimate effect of the incident is uncertain. Our evaluation, together with outside counsel,date of whether data breach notifications may be required or appropriate in connection with this incident is ongoing, but we may decide to make such notifications in the future. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of our technology systems (or the data held by such systems) could affect our operations. We may not have the resources or technical sophistication to anticipate or prevent every type of cyber-attack. A significant cybersecurity incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, expose us to litigation and potential liability, damage our reputation, cause a loss of customers or give rise to monetary fines and other penalties, any or all of which could be material. It is possible that insurance coverage we have in place would not entirely protect us in the event that we experienced a cybersecurity incident, interruption or widespread failure of our information technology systems.


Any significant interruption in the operation of our computer systems could adversely affect our business, financial condition and results of operations.

We rely on multiple computer systems to interact with customers, issue policies, pay claims, run modeling functions, assess insurance risks and complete various important internal processes including accounting and bookkeeping. Our business depends on our ability to access these systems to perform necessary business functions. Additionally, some of these systems may include or rely upon third-party systems not located on our premises. Any of these systems may be exposed to unplanned interruption, unreliability or intrusion from a variety of causes, including among others, storms and other natural disasters, terrorist attacks, utility outages, security breaches or complications encountered as existing systems are replaced or upgraded.

Any such issues could materially affect us including the impairment of information availability, compromise of system integrity or accuracy, misappropriation of confidential information, reduction of our volume of transactions and interruption of our general business. Although we believe our computer systems are securely protected and continue to take steps to ensure they are protected against such risks, such problems may occur. If they do, interruption to our business and damage to our reputation, and related costs, could be significant, which could have a material adverse effect on our business, financial condition and results of operations.

Performance of our investment portfolio is subject to a variety of investment risks.

Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a high-quality portfolio of investments that is managed by a professional investment advisory management firm in accordance with our investment policy and routinely reviewed by our management team. Our investments, however, are subject to general economic conditions and market risks as well as risks inherent to particular securities.

Our primary market risk exposures are to changes in interest rates. See “Management’s discussion and analysis of financial condition and results of operations — Quantitative and qualitative disclosures about market risk.” In recent years, interest ratesreport, there have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our net investment income, which, in turn, may adversely affect our profitability. Future increases in interest rates could cause the values of our fixed income securities portfolios to decline, with the magnitude of the decline depending on the duration of securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as mortgage-backed and asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.

The value of our investment portfolio is subjectno material changes to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities.

Such factors could reduce our net investment income and result in realized investment losses. Our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we holdfrom those disclosed in our portfolio does not reflect prices at which actual transactions would occur.2020 Form 10-K.


Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the NAIC, the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department. Our investment objectives may not be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses.


Any shift in our investment strategy could increase the riskiness of our investment portfolio and the volatility of our results, which, in turn, may adversely affect our profitability.

Our investment strategy has historically been focused on fixed income securities which are subject to less volatility but also lower returns as compared to certain other asset classes. In the future, our investment strategy may include a greater focus on investments in equity securities, which are subject, among other things, to changes in value that may be attributable to market perception of a particular issuer or to general stock market fluctuations that affect all issuers. Investments in equity securities may be more volatile than investments in other asset classes such as fixed income securities. Common stocks generally subject their holders to more risks than preferred stocks and debt securities because common stockholders’ claims are subordinated to those of holders of preferred stocks and debt securities upon the bankruptcy of the issuer. An increase in the riskiness of our investment portfolio could lead to volatility of our results, which, in turn, may adversely affect our profitability.

We could be forced to sell investments to meet our liquidity requirements.

We invest the premiums we receive from our insureds until they are needed to pay policyholder claims. Consequently, we seek to manage the duration of our investment portfolio based on the duration of our losses and loss adjustment expenses reserves to ensure sufficient liquidity and avoid having to liquidate investments to fund claims. Risks such as inadequate losses and loss adjustment expenses reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. We may not be able to sell our investments at favorable prices or at all. Sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities.

We may face increased competition in our programs market.

While we believe there are relatively few competitors in the small- and mid-sized programs market that have the broad in-house expertise and wide array of services that we offer to our Program Partners, we may face increased competition if other companies decide to compete with us in our programs market or competitors begin to offer policy administration or other services. Any increase in competition in this market, especially by one or more companies that have greater resources than we have, could materially adversely affect our business, financial condition and results of operations.

We compete with a large number of companies in the insurance industry for underwriting premium.

We compete with a large number of other companies in the insurance industry for underwriting premium. During periods of intense competition for premium, we are exposed to the actions of other companies that may seek to write policies without the appropriate regard for risk and profitability. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.

We face competition from a wide range of specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than we are and that have significantly greater financial, marketing, management and other resources. Some of these competitors also have greater market recognition than we do. We may incur increased costs in competing for underwriting revenues. If we are unable to compete effectively in the markets in which we operate or expand our operations into new markets, our underwriting revenues may decline, as well as overall business results.

Our results of operations, liquidity, financial condition and FSRs are subject to the effects of natural and man-made catastrophic events.

Events such as hurricanes, windstorms, flooding, earthquakes, wildfires, solar storms, acts of terrorism, explosions and fires, cyber-crimes, public health crises, illness, epidemics or pandemic health events, product defects, mass torts and other catastrophes may adversely affect our business in the future. Such catastrophic events, and any relevant regulations, could expose us to:
widespread claim costs associated with P&C and workers’ compensation claims;
losses resulting from a decline in the value of our invested assets;
losses resulting from actual policy experience that is adverse compared to the assumptions made in product pricing;

declines in value and/or losses with respect to companies and other entities whose securities we hold and counterparties with whom we transact business to whom we have credit exposure, including reinsurers, and declines in the value of investments; and
significant interruptions to our systems and operations.
Natural and man-made catastrophic events are generally unpredictable. While we have structured our business and selected our niches in part to avoid catastrophic losses, our exposure to such losses depends on various factors, including the frequency and severity of the catastrophes, the rate of inflation and the value and geographic or other concentrations of insured companies and individuals. Vendor models and proprietary assumptions and processes that we use to manage catastrophe exposure may prove to be ineffective due to incorrect assumptions or estimates.

In addition, legislative and regulatory initiatives and court decisions following major catastrophes could require us to pay the insured beyond the provisions of the original insurance policy and may prohibit the application of a deductible, resulting in inflated catastrophe claims.

These and other disruptions could materially and adversely affect our business, financial condition and results of operations.

Disruptions related to COVID-19, including economic impacts of the COVID-19-related governmental actions, could materially and adversely affect our business, financial condition and results of operations.

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the U.S., and was declared a pandemic by the World Health Organization on March 11, 2020. The global outbreak of COVID-19 continues to rapidly evolve and has resulted in quarantines, reductions in business activity, widespread unemployment and overall economic and financial market instability. In addition, the ongoing continuation of the COVID-19 pandemic and the economic impacts of COVID-19-related governmental actions may also eventually have an impact on our premium revenue, our loss experience and loss expense, liquidity, or our regulatory capital and surplus, and operations.

It is still too early to determine the ultimate effect that the economic shutdown, resulting from the COVID-19 pandemic, will have on our future revenues or expected claims and losses. Legislative and regulatory initiatives taken, or which may be taken in response to COVID-19, may adversely affect our operations, particularly with respect to our workers’ compensation businesses. Adverse effects could include:
Legislative or regulatory action seeking to retroactively mandate coverage for losses, which our policies would not otherwise cover or have been priced to cover;
Regulatory actions relaxing reporting requirements for claims, which may affect coverage under our claims made and reported policies;
Legislative actions prohibiting us from canceling policies in accordance with our policy terms or non-renewing policies at their expiration date;
Legislative orders to provide premium refunds, extend premium payment grace periods and allow time extensions for past due premium payments;
We may have increased workers’ compensation loss expense and claims frequency if policyholder employees in high risk roles with essential businesses contract COVID-19 in the workplace;
While we have seen through the three and six months ended June 30, 2020 fewer claims reported despite insuring more employees and have not seen a significant impact on the average value of incurred losses due to the COVID-19 pandemic, high unemployment and low interest rates could adversely affect our profitability and declining payrolls could adversely affect our workers' compensation written premiums;
Travel restrictions and quarantines leading to a lack of in-person meetings, which would hinder our ability to establish relationships or originate new business;
Alternative working arrangements, including employees working remotely, which could negatively impact our business should such arrangements remain for an extended period of time;
We may experience elevated frequency and severity in our workers’ compensation lines as a result of legislative or regulatory action to effectively expand workers’ compensation coverage for certain types of workers; and

We may experience delayed reporting of losses, settlement negotiations and disputed claims resolution above our normal claims resolution trends.
The occurrence of any of these events or experiences, individually or collectively, could materially and adversely affect our business, financial condition and results of operations.

Global climate change may in the future increase the frequency and severity of weather events and resulting losses, particularly to the extent our policies are concentrated in geographic areas where such events occur, may have an adverse effect on our business, financial condition and results of operations.

Scientific evidence indicates that man-made production of greenhouse gas has had, and will continue to have, an adverse effect on the global climate. There is a growing consensus today that climate change increases the frequency and severity of extreme weather events and, in recent years, the frequency of extreme weather events appears to have increased. We cannot predict whether or to what extent damage that may be caused by natural events, such as wild fires, severe tropical storms and hurricanes, will affect our ability to write new insurance policies and reinsurance contracts, but, to the extent our policies are concentrated in the specific geographic areas in which these events occur, the increased frequency and severity of such events and the total amount of our loss exposure in the impacted areas of such events may adversely affect our business, financial condition and results of operations. In addition, although we have historically had limited exposure to catastrophic risk, claims from catastrophe events could reduce our earnings and cause substantial volatility in our business, financial condition and results of operations for any period. However, assessing the risk of loss and damage associated with the adverse effects of climate change and the range of approaches to address loss and damage associated with the adverse effects of climate change, including impacts related to extreme weather events and slow onset events, remains a challenge and might adversely affect our business, financial condition and results of operations.

Because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results.

Certain premiums from policyholders, where the business is produced by brokers, are collected directly by the brokers and forwarded to our insurance subsidiary. In certain jurisdictions, when the insured pays its policy premium to its broker for payment on behalf of our insurance subsidiary, the premium may be considered to have been paid under applicable insurance laws and regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually received the premium from that broker. Consequently, we assume a degree of credit risk associated with the brokers with whom we work. Where necessary, we review the financial condition of potential new brokers before we agree to transact business with them. Although the failure by any of our brokers to remit premiums to us has not been material to date, there may be instances where our brokers collect premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth in the policy despite the absence of related premiums being paid to us.

Because the possibility of these events occurring depends in large part on the financial condition and internal operations of our brokers, we monitor broker behavior and review financial information on an as-needed basis. If we are unable to collect premiums from our brokers in the future, our underwriting profits may decline and our financial condition and results of operations could be materially and adversely affected.

Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term prospects.

Our operating results are subject to fluctuation and have historically varied from quarter to quarter. We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophic or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected renewal rates of our existing policies and contracts, adverse investment performance and the cost of reinsurance coverage.

In particular, we seek to underwrite products and make investments to achieve favorable returns on tangible stockholders’ equity over the long term. In addition, our opportunistic nature and focus on long-term growth in tangible equity may result in fluctuations in gross written premiums from period to period as we concentrate on underwriting contracts that we believe will generate better long-term, rather than short-term, results. Accordingly, our short-term results of operations may not be indicative of our long-term prospects.


Changes in accounting practices and future pronouncements may materially affect our reported financial results.

Developments in accounting practices may require us to incur considerable additional expenses to comply, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, stockholders’ equity and other relevant financial statement line items.

Our insurance subsidiaries are required to comply with statutory accounting principles (SAP). SAP and various components of SAP are subject to constant review by the NAIC and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues and otherwise improve financial reporting. Various proposals are pending before committees and task forces of the NAIC, some of which, if enacted, could have negative effects on insurance industry participants. The NAIC continuously examines existing laws and regulations. We cannot predict whether or in what form such reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect us.

Legal and regulatory risks

We are subject to extensive regulation.

Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. These regulations, generally administered by a department of insurance in each state and territory in which we do business, relate to, among other things:
approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers;
challenging our use of fronting arrangements in states in which our Program Partner is not licensed;
imposing minimum capital and surplus requirements for insurance company subsidiaries;
restrictions on agreements with our large revenue-producing agents;
cancellation and non-renewal of policies;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of our insurance company subsidiaries to pay dividends to us;
restrictions on transactions between our insurance company subsidiaries and their affiliates;
restrictions on the size of risks insurable under a single policy;
requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
prescribing the form and content of records of financial condition required to be filed; and
requiring reserves for unearned premium, losses and other purposes.
State insurance departments also conduct periodic examinations of the conduct and affairs of insurance companies and require the filing of annual, quarterly and other reports relating to financial condition, holding company issues, ERM and ORSA and other matters. These regulatory requirements could adversely affect or inhibit our ability to achieve some or all of our business objectives, including profitable operations in our various customer segments.

In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could fine us, preclude or temporarily suspend us from carrying on some or all of our activities in certain jurisdictions or otherwise penalize us. This could adversely affect our

ability to operate our business. Further, changes in the laws and regulations applicable to the insurance industry or interpretations by regulatory authorities could adversely affect our ability to operate our business as currently conducted and in accordance with our business objectives.

In addition to regulations specific to the insurance industry, including the insurance laws of our principal state regulators (the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department), as a public company we will also be subject to the rules and regulations of the SEC and the securities exchange on which our common stock is listed, each of which regulate many areas such as financial and business disclosures, corporate governance and stockholder matters. Among other laws, we are subject to laws relating to federal trade restrictions, privacy/data security and terrorism risk insurance laws.

We monitor these laws, regulations and rules on an ongoing basis to ensure compliance and make appropriate changes as necessary. Implementing such changes may require adjustments to our business methods, increases to our costs and other changes that could cause us to be less competitive in our industry. For further information on the regulation of our business, see the “Regulation”section of our registration statement filed with the SEC on Form S-1.

Regulators may challenge our use of fronting arrangements in states in which our Program Partners are not licensed.

We enter into fronting, or issuing carrier, arrangements with our Program Partners that require a broadly licensed, highly rated admitted carrier to conduct their business in states in which such Program Partner is not licensed or is not authorized to write particular lines of insurance. We typically act as the reinsurance broker to the program as well as the issuing carrier, which enables us to charge fees for the placement of reinsurance in addition to the fronting fees. We also receive ceding commissions from third-party reinsurers to which we transfer all or a portion of the underwriting risk. Some state insurance regulators may object to our issuing carrier arrangements. In certain states, including Florida and Kentucky, the insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no statutory or regulatory prohibition against an authorized insurer acting as an issuing carrier for an unauthorized insurer could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.

If regulators in any of the states where we conduct our issuing carrier business were to prohibit or limit the arrangement, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material and adverse effect on our business, financial condition and results of operations. See “- More than half of our gross written premiums are written in three key states.”

Regulation may become more extensive in the future.

Legislators and regulators may periodically consider various proposals that may affect our business practices and product designs, how we sell or service certain products we offer or the profitability of our business. We continually monitor such proposals and assess how they may apply to us or our competitors or how they could impact our business, financial condition, results of operations and ability to compete effectively.

Increasing regulatory focus on privacy issues and expanding laws could affect our business model and expose us to increased liability.

The regulatory environment surrounding information security and privacy is increasingly demanding.

We are subject to numerous U.S. federal and state laws and non-U.S. regulations governing the protection of personal and confidential information of our customers or employees. On October 24, 2017, the National Association of Insurance Commissioners (NAIC) adopted an Insurance Data Security Model Law, which requires licensed insurance entities to comply with detailed information security requirements. The NAIC model law has been adopted by certain states and is under consideration by others. It is not yet known whether or not, and to what extent, states legislatures or insurance regulators where we operate will enact the Insurance Data Security Model Law in whole or in part, or in a modified form. Such enactments, especially if inconsistent between states or with existing laws and regulations could raise compliance costs or increase the risk of noncompliance, with the attendant risk of being subject to regulatory enforcement actions and penalties, as well as reputational harm. Any such events could potentially have an adverse impact on our business, financial condition or results of operations.

As a holding company, we rely on dividends and payments from our subsidiaries to operate our business. Our ability to receive dividends and permitted payments from our insurance company subsidiaries is subject to regulatory constraints.

We are a holding company and, as such, have no direct operations of our own. We do not expect to have any significant assets other than our ownership of equity interests in our operating subsidiaries. We accordingly depend on the payment of funds from our subsidiaries in the form of dividends, distributions or otherwise to meet our obligations and to pay our expenses. The ability of our subsidiaries to make any payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions.

In addition, dividends payable from our insurance company subsidiaries without the prior approval of the applicable insurance commissioner are limited to the greater of 10% of Benchmark’s surplus as shown on the last statutory financial statement on file with the Kansas Insurance Department and the California Department of Insurance, respectively, or 100% of net income during the applicable twelve-month period (not including realized capital gains); and in Utah, the lesser of 10% of ALIC’s surplus as shown on the last statutory financial statement on file with the Utah Insurance Department, 100% of net income during the applicable twelve-month period (not including realized capital gains). As of December 31, 2019, the maximum amount of unrestricted dividends that our insurance company subsidiaries could pay to us without approval was $11.6 million. Our insurance company subsidiaries may be unable to pay dividends in the future, and the limitations of such dividends could adversely affect our business, liquidity or financial condition.

The effects of litigation on our business are uncertain and could have an adverse effect on our business.

As is typical in our industry, we continually face risks associated with litigation of various types, including general commercial and corporate litigation, and disputes relating to bad faith allegations which could result in us incurring losses in excess of policy limits. We are party to certain litigation matters throughout the year, mostly with respect to claims. Litigation is subject to inherent uncertainties, and if there were an outcome unfavorable to us, there exists the possibility of a material adverse impact on our results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not materialize, we still may face substantial expense and disruption associated with the litigation.

We may have exposure to losses from acts of terrorism as we are required by law to provide certain coverage for such losses.

U.S. insurers are required by state and federal law to offer coverage for acts of terrorism in certain commercial lines, including workers’ compensation. The Terrorism Risk Insurance Act, as extended by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) requires commercial P&C insurance companies to offer coverage for acts of terrorism, whether foreign or domestic, and established a federal assistance program through the end of 2020 to help cover claims related to future terrorism-related losses. The likelihood and impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Although we reinsure a portion of the terrorism risk we retain under TRIPRA, our terrorism reinsurance does not provide full coverage for an act stemming from nuclear, biological or chemical terrorism. To the extent an act of terrorism, whether a domestic or foreign act, is certified by the Secretary of Treasury, we may be covered under TRIPRA of our losses for certain P&C lines of insurance. However, any such coverage would be subject to a mandatory deductible based on 20% of earned premium for the prior year for the covered lines of commercial P&C insurance. Based on our 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 is approximately $59 million. The federal government will then reimburse us for losses in excess of our deductible, which will be 81% of losses in 2019, and 80% in 2020, up to a total industry program limit of $100 billion.

Assessments and premium surcharges for state guaranty funds, secondary-injury funds, residual market programs and other mandatory pooling arrangements may reduce our profitability.

Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. Some states also have laws that establish secondary-injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on incurred losses.

In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in any given period or limit our ability to grow our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Unregistered Sales of Equity Securities


None.

Use of Proceeds

On July 20, 2020, we closed the sale of 10,714,286 sharesThe following table sets forth information concerning purchases of our common stock in our IPO, comprised of 7,142,857 shares issued and sold by us and 3,571,429 shares sold by selling stockholders.  On July 22, 2020, we closedfor the sale of an additional 1,207,142 shares by certain selling stockholders in the IPO pursuant to the exercise of the underwriters’ option to purchase additional shares to cover over-allotments.  The IPO terminated upon completion of the sale of the above-referenced shares. three months ended September 30, 2021:


The initial public offering price per share was $15.00.  The aggregate initial public offering price for all shares sold by us in the IPO was approximately $107.1 million and the aggregate initial public offering price for all shares sold by the selling stockholders in the IPO was approximately $71.7 million.  The offer and sale was pursuant to a registration statement on Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020.  J.P. Morgan Securities LLC, Evercore Group, L.L.C. and William Blair & Company, L.L.C. acted as joint book-running managers of the IPO, and JMP Securities LLC acted as co-manager.
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2021 - July 31, 20215,638 $14.46 — — 
August 1, 2021 - August 31, 2021— $— — — 
September 1, 2021 - September 30, 2021624 $10.53 — — 
6,262 — 


We received net proceeds from the sale of shares by us in the IPO of approximately $94.9 million after deducting underwriting discounts and commissions of $7.5 million and estimated offering expenses of $4.7 million.  We did not receive any proceeds from the sale of shares by the selling stockholders.  We used or are in the process of using the net proceeds from the sale of shares by us in the IPO to (i) redeem all $5.1 million aggregate liquidation preference of the Series B Nonconvertible Preferred Stock of our subsidiary Benchmark Holding Company, (ii) pay $7.7 million to redeem all outstanding Subordinated Notes, (iii) use $19.3 million to repay in full all outstanding term loan borrowings under the credit agreement with Oak Street Funding LLC, (iv) pay an aggregate one-time payment of approximately $7.6 million to Altaris Capital Partners, LLC in connection with the termination of our consulting and advisory agreements with Altaris Capital Partners, LLC and (v) pay an aggregate $3.1 million to certain pre-IPO unitholders and other employees in connection with the reorganization transactions and pursuant to the operating agreements for Trean Holdings LLC and BIC Holdings LLC.  The remaining net proceeds will be used for general corporate purposes, including to support the growth of our business.  There has been no material change in the anticipated use of proceeds from the IPO as described in our final prospectus filed with the SEC on July 17, 2020 pursuant to Rule 424(b)(4).

Item 3. Defaults Upon Senior Securities


None.Not applicable.


Item 4. Mine Safety Disclosures


Not applicable.



Item 5. Other Information


None.Not applicable.

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Item 6. Exhibits


Exhibit NumberDescription
Amended and Restated Certificate of Incorporation of Trean Insurance Group, Inc. (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 28, 2020 and incorporated by reference herein)
Amended and Restated By-Laws of Trean Insurance Group, Inc. (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 28, 2020 and incorporated by reference herein)
Registration Rights Agreement, dated as of July 20, 2020, among Trean Insurance Group, Inc. and the parties named therein
10.2
Reorganization Agreement, dated as of July 16, 2020, among Trean Insurance Group, Inc. and the parties named therein
10.3
Contribution Agreement, dated as of July 16, 2020, among Trean Insurance Group, Inc., BIC Holdings LLC and Trean Holdings LLC
10.4
Contribution Agreement, dated as of July 16, 2020, between Trean Insurance Group, Inc. and Trean Compstar Holdings LLC
10.5
Director Nomination Agreement, dated as of July 16, 2020, among Trean Insurance Group, Inc., AHP-BHC LLC, AHP-TH LLC, ACP-BHC LLC and ACP-TH LLC
10.6
Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan
10.7
Termination Agreement, dated as of July 16, 2020, among Altaris Capital Partners, LLC, BIC Holdings LLC, Trean Holdings LLC and Trean Insurance Group, Inc.
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS **XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference to any filing under the Securities Act of 1933, as amended, or the Exchange Act.
** The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.+ Filed herewith.



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Signatures


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



TREAN INSURANCE GROUP, INC.
Date:November 12, 2021TREAN INSURANCE GROUP, INC.
By:
Date:August 28, 2020By:/s/ Andrew M. O'Brien
Andrew M. O'Brien
President and Chief Executive Officer
(Principal Executive Officer)
Date:August 28, 2020November 12, 2021By:/s/ Julie A. BaronNicholas J. Vassallo
Julie A. BaronNicholas J. Vassallo
Chief Financial Officer Treasurer and Secretary
(Principal Financial Officer)



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