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 SeptemberJune 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)
| | | | | | | | |
Delaware | | 84-4512647 |
(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 class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | | TIG | | The 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 accelerated filer," "accelerated filer," a "smaller reporting company," and "emerging growth 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 November 11, 2020,August 6, 2021, there were 51,148,78251,173,844 shares of the registrant's common stock outstanding.
TREAN INSURANCE GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Balance Sheets
(in thousands, except share and per share data)
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Assets | Assets | (unaudited) | | | Assets | (unaudited) | | |
Fixed maturities, at fair value (amortized cost of $358,506 and $329,640, respectively) | $ | 375,286 | | | $ | 337,865 | | |
Preferred stock, at fair value (amortized cost of $243 and $337, respectively) | 240 | | | 343 | | |
Common stock, at fair value (cost $1,554 and $492, respectively) | 3,458 | | | 492 | | |
Fixed maturities, at fair value (amortized cost of $414,166 and $388,409, respectively) | | Fixed maturities, at fair value (amortized cost of $414,166 and $388,409, respectively) | $ | 424,943 | | | $ | 405,604 | |
Preferred stock, at fair value (amortized cost of $243 and $243, respectively) | | Preferred stock, at fair value (amortized cost of $243 and $243, respectively) | 235 | | | 240 | |
Common stock, at fair value (cost $741 and $1,554, respectively) | | Common stock, at fair value (cost $741 and $1,554, respectively) | 2,741 | | | 3,534 | |
Equity method investments | Equity method investments | 232 | | | 12,173 | | Equity method investments | 0 | | | 232 | |
Total investments | Total investments | 379,216 | | | 350,873 | | Total investments | 427,919 | | | 409,610 | |
Cash and cash equivalents | Cash and cash equivalents | 165,255 | | | 74,268 | | Cash and cash equivalents | 101,361 | | | 153,149 | |
Restricted cash | Restricted cash | 21,175 | | | 1,800 | | Restricted cash | 12,469 | | | 4,085 | |
Accrued investment income | Accrued investment income | 2,418 | | | 2,468 | | Accrued investment income | 2,329 | | | 2,458 | |
Premiums and other receivables | Premiums and other receivables | 99,635 | | | 62,460 | | Premiums and other receivables | 131,930 | | | 109,217 | |
Income taxes refundable | 797 | | | 0 | | |
Related party receivables | 33 | | | 22,221 | | |
Income taxes receivable | | Income taxes receivable | 5,113 | | | 1,322 | |
Reinsurance recoverable | Reinsurance recoverable | 350,425 | | | 307,338 | | Reinsurance recoverable | 361,943 | | | 343,213 | |
Prepaid reinsurance premiums | Prepaid reinsurance premiums | 103,929 | | | 80,088 | | Prepaid reinsurance premiums | 121,004 | | | 107,971 | |
Deferred policy acquisition cost, net | Deferred policy acquisition cost, net | 3,777 | | | 2,115 | | Deferred policy acquisition cost, net | 6,424 | | | 1,332 | |
Property and equipment, net | Property and equipment, net | 8,439 | | | 7,937 | | Property and equipment, net | 7,780 | | | 8,254 | |
Right of use asset | Right of use asset | 6,558 | | | — | | Right of use asset | 5,378 | | | 6,338 | |
Deferred tax asset | 0 | | | 1,367 | | |
Goodwill | Goodwill | 139,575 | | | 2,822 | | Goodwill | 140,640 | | | 140,640 | |
Intangible assets, net | Intangible assets, net | 73,436 | | | 154 | | Intangible assets, net | 72,489 | | | 75,316 | |
Other assets | Other assets | 9,721 | | | 3,123 | | Other assets | 8,410 | | | 6,878 | |
Total assets | Total assets | $ | 1,364,389 | | | $ | 919,034 | | Total assets | $ | 1,405,189 | | | $ | 1,369,783 | |
Liabilities | Liabilities | | | | Liabilities | | | |
Unpaid loss and loss adjustment expenses | Unpaid loss and loss adjustment expenses | $ | 465,502 | | | $ | 406,716 | | Unpaid loss and loss adjustment expenses | $ | 502,560 | | | $ | 457,817 | |
Unearned premiums | Unearned premiums | 143,390 | | | 103,789 | | Unearned premiums | 194,388 | | | 157,987 | |
Funds held under reinsurance agreements | Funds held under reinsurance agreements | 160,614 | | | 163,445 | | Funds held under reinsurance agreements | 161,013 | | | 174,704 | |
Reinsurance premiums payable | Reinsurance premiums payable | 59,756 | | | 53,620 | | Reinsurance premiums payable | 51,681 | | | 57,069 | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | 73,865 | | | 14,995 | | Accounts payable and accrued expenses | 31,017 | | | 61,240 | |
Lease liability | Lease liability | 7,054 | | | — | | Lease liability | 5,855 | | | 6,893 | |
Income taxes payable | 0 | | | 714 | | |
Deferred tax liability | Deferred tax liability | 12,597 | | | 0 | | Deferred tax liability | 10,229 | | | 12,329 | |
Debt | Debt | 39,858 | | | 29,040 | | Debt | 31,103 | | | 31,637 | |
Total liabilities | Total liabilities | 962,636 | | | 772,319 | | Total liabilities | 987,846 | | | 959,676 | |
Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | | 0 |
Redeemable preferred stock (0 and 1,000,000 authorized, respectively; 0 and 51 outstanding, respectively) | — | | | 5,100 | | |
Shareholders' equity | | |
Common stock, $0.01 par value per share (600,000,000 and 0 authorized, respectively; 51,148,782 and 0 issued and outstanding, respectively) | 511 | | | — | | |
Members' equity | — | | | 78,438 | | |
Stockholders' equity | | Stockholders' equity | |
Common stock, $0.01 par value per share (600,000,000 authorized; 51,157,004 and 51,148,782 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively) | | Common stock, $0.01 par value per share (600,000,000 authorized; 51,157,004 and 51,148,782 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively) | 511 | | | 511 | |
Additional paid-in capital | Additional paid-in capital | 287,234 | | | 17,995 | | Additional paid-in capital | 287,734 | | | 287,110 | |
Retained earnings | Retained earnings | 104,853 | | | 40,361 | | Retained earnings | 120,628 | | | 109,060 | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 9,155 | | | 4,821 | | Accumulated other comprehensive income | 8,470 | | | 13,426 | |
Total shareholders' equity | 401,753 | | | 141,615 | | |
Total liabilities and shareholders' equity | $ | 1,364,389 | | | $ | 919,034 | | |
Total stockholders' equity | | Total stockholders' equity | 417,343 | | | 410,107 | |
Total liabilities and stockholders' equity | | Total liabilities and stockholders' equity | $ | 1,405,189 | | | $ | 1,369,783 | |
See accompanying notes to the condensed consolidated financial statements.
3
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Operations
(in thousands, except share and per share data)
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Revenues | Revenues | | | | | | | | Revenues | | | | | | | |
Gross written premiums | Gross written premiums | $ | 132,284 | | | $ | 107,534 | | | $ | 349,755 | | | $ | 313,488 | | Gross written premiums | $ | 156,551 | | | $ | 109,612 | | | $ | 303,281 | | | $ | 217,471 | |
Increase in gross unearned premiums | Increase in gross unearned premiums | (22,963) | | | (5,612) | | | (39,601) | | | (18,099) | | Increase in gross unearned premiums | (17,927) | | | (9,265) | | | (36,358) | | | (16,638) | |
Gross earned premiums | Gross earned premiums | 109,321 | | | 101,922 | | | 310,154 | | | 295,389 | | Gross earned premiums | 138,624 | | | 100,347 | | | 266,923 | | | 200,833 | |
Ceded earned premiums | Ceded earned premiums | (81,465) | | | (79,761) | | | (238,460) | | | (230,227) | | Ceded earned premiums | (90,681) | | | (78,968) | | | (177,846) | | | (156,995) | |
Net earned premiums | Net earned premiums | 27,856 | | | 22,161 | | | 71,694 | | | 65,162 | | Net earned premiums | 47,943 | | | 21,379 | | | 89,077 | | | 43,838 | |
Net investment income | Net investment income | 1,857 | | | 1,721 | | | 6,653 | | | 4,578 | | Net investment income | 2,103 | | | 2,525 | | | 4,375 | | | 6,770 | |
Gain on revaluation of Compstar investment | 69,846 | | | 0 | | | 69,846 | | | 0 | | |
Net realized capital gains (losses) | Net realized capital gains (losses) | 115 | | | (34) | | | 3,345 | | | 689 | | Net realized capital gains (losses) | 10 | | | (4) | | | 23 | | | 3,230 | |
Other revenue | Other revenue | 5,401 | | | 2,561 | | | 11,323 | | | 8,049 | | Other revenue | 1,229 | | | 1,530 | | | 5,884 | | | 5,922 | |
Total revenue | Total revenue | 105,075 | | | 26,409 | | | 162,861 | | | 78,478 | | Total revenue | 51,285 | | | 25,430 | | | 99,359 | | | 59,760 | |
Expenses | Expenses | | Expenses | |
Losses and loss adjustment expenses | Losses and loss adjustment expenses | 15,564 | | | 13,976 | | | 40,681 | | | 38,446 | | Losses and loss adjustment expenses | 29,725 | | | 12,183 | | | 54,606 | | | 25,117 | |
General and administrative expenses | General and administrative expenses | 6,995 | | | 5,756 | | | 23,437 | | | 15,894 | | General and administrative expenses | 15,267 | | | 8,293 | | | 27,158 | | | 16,442 | |
IPO bonuses and contract buyout fee | 11,054 | | | 0 | | | 11,054 | | | 0 | | |
Other expenses | | Other expenses | 845 | | | 0 | | | 845 | | | 0 | |
Intangible asset amortization | Intangible asset amortization | 1,120 | | | 11 | | | 1,154 | | | 35 | | Intangible asset amortization | 1,413 | | | 23 | | | 2,827 | | | 34 | |
Noncash share-based compensation | 307 | | | 0 | | | 307 | | | 0 | | |
Noncash stock compensation | | Noncash stock compensation | 419 | | | 0 | | | 630 | | | 0 | |
Interest expense | Interest expense | 520 | | | 498 | | | 1,482 | | | 1,683 | | Interest expense | 425 | | | 501 | | | 852 | | | 962 | |
Total expenses | Total expenses | 35,560 | | | 20,241 | | | 78,115 | | | 56,058 | | Total expenses | 48,094 | | | 21,000 | | | 86,918 | | | 42,555 | |
Other income (expense) | 209 | | | (8) | | | 263 | | | 118 | | |
Gains (losses) on embedded derivatives | | Gains (losses) on embedded derivatives | (686) | | | (3,991) | | | 1,990 | | | (5,180) | |
Other income | | Other income | 35 | | | 40 | | | 156 | | | 54 | |
Income before taxes | Income before taxes | 69,724 | | | 6,160 | | | 85,009 | | | 22,538 | | Income before taxes | 2,540 | | | 479 | | | 14,587 | | | 12,079 | |
Income tax expense | Income tax expense | 788 | | | 1,395 | | | 4,679 | | | 4,404 | | Income tax expense | 414 | | | 351 | | | 3,019 | | | 3,218 | |
Equity earnings in affiliates, net of tax | Equity earnings in affiliates, net of tax | 401 | | | 1,021 | | | 2,333 | | | 2,494 | | Equity earnings in affiliates, net of tax | 0 | | | 1,230 | | | 0 | | | 1,932 | |
Net income | Net income | $ | 69,337 | | | $ | 5,786 | | | $ | 82,663 | | | $ | 20,628 | | Net income | $ | 2,126 | | | $ | 1,358 | | | $ | 11,568 | | | $ | 10,793 | |
Earnings per share: | Earnings per share: | | | | | | | | Earnings per share: | | | | | | | |
Basic | Basic | $ | 1.41 | | | $ | 0.15 | | | $ | 2.00 | | | $ | 0.55 | | Basic | $ | 0.04 | | | $ | 0.04 | | | $ | 0.23 | | | $ | 0.29 | |
Diluted | Diluted | $ | 1.41 | | | $ | 0.15 | | | $ | 2.00 | | | $ | 0.55 | | Diluted | $ | 0.04 | | | $ | 0.04 | | | $ | 0.23 | | | $ | 0.29 | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | Weighted average shares outstanding: | |
Basic | Basic | 49,054,441 | | | 37,386,394 | | | 41,304,132 | | | 37,386,394 | | Basic | 51,152,979 | | | 37,386,394 | | | 51,150,881 | | | 37,386,394 | |
Diluted | Diluted | 49,056,001 | | | 37,386,394 | | | 41,304,652 | | | 37,386,394 | | Diluted | 51,166,587 | | | 37,386,394 | | | 51,173,204 | | | 37,386,394 | |
See accompanying notes to the condensed consolidated financial statements.
4
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Comprehensive Income
(in thousands)
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Net income | Net income | $ | 69,337 | | | $ | 5,786 | | | $ | 82,663 | | | $ | 20,628 | | Net income | $ | 2,126 | | | $ | 1,358 | | | $ | 11,568 | | | $ | 10,793 | |
Other comprehensive income, net of tax: | | |
Unrealized investment gains: | | |
Unrealized investment gains arising during the period | 686 | | | 1,189 | | | 5,715 | | | 8,942 | | |
Income tax expense | 144 | | | 249 | | | 1,198 | | | 1,878 | | |
Unrealized investment gains, net of tax | 542 | | | 940 | | | 4,517 | | | 7,064 | | |
Other comprehensive gain (loss), net of tax: | | Other comprehensive gain (loss), net of tax: | |
Unrealized investment gains (losses): | | Unrealized investment gains (losses): | |
Unrealized investment gains (losses) arising during the period | | Unrealized investment gains (losses) arising during the period | 2,325 | | | 9,242 | | | (6,251) | | | 8,235 | |
Income tax expense (benefit) | | Income tax expense (benefit) | 488 | | | 1,938 | | | (1,313) | | | 1,727 | |
Unrealized investment gains (losses), net of tax | | Unrealized investment gains (losses), net of tax | 1,837 | | | 7,304 | | | (4,938) | | | 6,508 | |
Less reclassification adjustments to: | Less reclassification adjustments to: | | Less reclassification adjustments to: | |
Net realized investment gains (losses) included in net realized capital gains (losses) | Net realized investment gains (losses) included in net realized capital gains (losses) | 114 | | | (34) | | | 232 | | | 55 | | Net realized investment gains (losses) included in net realized capital gains (losses) | 10 | | | (1) | | | 23 | | | 118 | |
Income tax expense (benefit) | Income tax expense (benefit) | 24 | | | (8) | | | 49 | | | 11 | | Income tax expense (benefit) | 2 | | | (1) | | | 5 | | | 25 | |
Total reclassifications included in net income, net of tax | Total reclassifications included in net income, net of tax | 90 | | | (26) | | | 183 | | | 44 | | Total reclassifications included in net income, net of tax | 8 | | | 0 | | | 18 | | | 93 | |
Other comprehensive income | 452 | | | 966 | | | 4,334 | | | 7,020 | | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | 1,829 | | | 7,304 | | | (4,956) | | | 6,415 | |
Total comprehensive income | Total comprehensive income | $ | 69,789 | | | $ | 6,752 | | | $ | 86,997 | | | $ | 27,648 | | Total comprehensive income | $ | 3,955 | | | $ | 8,662 | | | $ | 6,612 | | | $ | 17,208 | |
See accompanying notes to the condensed consolidated financial statements.
5
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Shareholders’Stockholders' Equity and Redeemable Preferred Stock
For the Three and NineSix Months Ended SeptemberJune 30, 20202021 and 20192020
(in thousands, except share and unit data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Members' Equity | | | | | | | | | |
| Redeemable Preferred Stock | Preferred Stock | | Class A - Non Voting | | Class B - Voting | | Class B - Non Voting | | Class C - Non Voting | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Shareholders' Equity |
| Shares | Amount | Shares | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Shares | Amount | |
Balance at June 30, 2020 | 51 | | $ | 5,100 | | 0 | | $ | 0 | | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 235,905 | | $ | 236 | | | 0 | | $ | 0 | | | $ | 16,542 | | | $ | 8,703 | | | $ | 35,561 | | | $ | 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 | | | — | | | — | | | 0 | |
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-based compensation expense | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | 307 | | | — | | | — | | | 307 | |
Other comprehensive income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 452 | | | — | | | 452 | |
Net income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 69,337 | | | 69,337 | |
Balance at September 30, 2020 | 0 | | $ | 0 | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 51,148,782 | | $ | 511 | | | $ | 287,234 | | | $ | 9,155 | | | $ | 104,853 | | | $ | 401,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Shares | Amount | |
Balance at March 31, 2021 | 51,148,782 | | $ | 511 | | | $ | 287,321 | | | $ | 6,641 | | | $ | 118,502 | | | $ | 412,975 | |
Stock compensation expense | — | | — | | | 419 | | | — | | | — | | | 419 | |
Common stock issuances pursuant to equity compensation awards, net of shares repurchased | 8,222 | | — | | | (6) | | | — | | | — | | | (6) | |
Other comprehensive income | — | | — | | | — | | | 1,829 | | | — | | | 1,829 | |
Net income | — | | — | | | — | | | — | | | 2,126 | | | 2,126 | |
Balance at June 30, 2021 | 51,157,004 | | $ | 511 | | | $ | 287,734 | | | $ | 8,470 | | | $ | 120,628 | | | $ | 417,343 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Members' Equity | | | | | | | | | |
| Redeemable Preferred Stock | Class A - Non Voting | | Class B - Voting | | Class B - Non Voting | | Class C - Non Voting | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Shares | Amount | Units | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Shares | Amount | |
Balance at March 31, 2020 | 51 | | $ | 5,100 | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 216,247 | | $ | 216 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | 5,611 | | | $ | 48,117 | | | $ | 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 | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 7,304 | | | — | | | 7,304 | |
Net income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 1,358 | | | 1,358 | |
Balance at June 30, 2020 | 51 | | $ | 5,100 | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 235,905 | | $ | 236 | | | 0 | | $ | 0 | | | $ | 16,542 | | | $ | 12,915 | | | $ | 31,349 | | | $ | 139,284 | |
See accompanying notes to the condensed consolidated financial statements.
6
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Members' Equity | | | | | | | | | |
| Redeemable Preferred Stock | Preferred Stock | | Class A - Non Voting | | Class B - Voting | | Class B - Non Voting | | Class C - Non Voting | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Shareholders' Equity |
| Shares | Amount | Shares | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Shares | Amount | |
Balance at June 30, 2019 | 60 | | $ | 6,000 | | 10 | | $ | 1,000 | | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 157,270 | | $ | 157 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | 4,051 | | | $ | 24,907 | | | $ | 126,352 | |
Issuance of Class C units | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | 19,659 | | 20 | | | — | | — | | | — | | | — | | | | | 20 | |
Distributions to members | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (831) | | | (831) | |
Dividends on Series A preferred stock | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (12) | | | (12) | |
Dividends on Series B preferred stock | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (36) | | | (36) | |
Other comprehensive income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 966 | | | — | | | 966 | |
Net income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 5,786 | | | 5,786 | |
Balance at September 30, 2019 | 60 | | $ | 6,000 | | 10 | | $ | 1,000 | | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 176,929 | | $ | 177 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | 5,017 | | | $ | 29,814 | | | $ | 132,245 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Shares | Amount | |
Balance at December 31, 2020 | 51,148,782 | | $ | 511 | | | $ | 287,110 | | | $ | 13,426 | | | $ | 109,060 | | | $ | 410,107 | |
Stock compensation expense | — | | — | | | 630 | | | — | | | — | | | 630 | |
Common stock issuances pursuant to equity compensation awards, net of shares repurchased | 8,222 | | — | | | (6) | | | — | | | — | | | (6) | |
Other comprehensive loss | — | | — | | | — | | | (4,956) | | | — | | | (4,956) | |
Net income | — | | — | | | — | | | — | | | 11,568 | | | 11,568 | |
Balance at June 30, 2021 | 51,157,004 | | $ | 511 | | | $ | 287,734 | | | $ | 8,470 | | | $ | 120,628 | | | $ | 417,343 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Members' Equity | | | | | | | | | |
| Redeemable Preferred Stock | Preferred Stock | | Class A - Non Voting | | Class B - Voting | | Class B - Non Voting | | Class C - Non Voting | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Shareholders' Equity |
| Shares | Amount | Shares | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Shares | Amount | |
Balance at December 31, 2019 | 51 | | $ | 5,100 | | 0 | | $ | 0 | | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 196,588 | | $ | 196 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | 4,821 | | | $ | 40,361 | | | $ | 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 | | | — | | | — | | | 0 | |
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-based compensation expense | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | 307 | | | — | | | — | | | 307 | |
Other comprehensive income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 4,334 | | | — | | | 4,334 | |
Net income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 82,663 | | | 82,663 | |
Balance at September 30, 2020 | 0 | | $ | 0 | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 0 | | $ | 0 | | | 51,148,782 | | $ | 511 | | | $ | 287,234 | | | $ | 9,155 | | | $ | 104,853 | | | $ | 401,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Members' Equity | | | | | | | | | |
| Redeemable Preferred Stock | Class A - Non Voting | | Class B - Voting | | Class B - Non Voting | | Class C - Non Voting | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Shares | Amount | Units | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Shares | Amount | |
Balance at December 31, 2019 | 51 | | $ | 5,100 | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 196,588 | | $ | 196 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | 6,500 | | | $ | 38,682 | | | $ | 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 | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 6,415 | | | — | | | 6,415 | |
Net income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 10,793 | | | 10,793 | |
Balance at June 30, 2020 | 51 | | $ | 5,100 | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 235,905 | | $ | 236 | | | 0 | | $ | 0 | | | $ | 16,542 | | | $ | 12,915 | | | $ | 31,349 | | | $ | 139,284 | |
See accompanying notes to the condensed consolidated financial statements.
7
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Members' Equity | | | | | | | | | |
| Redeemable Preferred Stock | Preferred Stock | | Class A - Non Voting | | Class B - Voting | | Class B - Non Voting | | Class C - Non Voting | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Shareholders' Equity |
| Shares | Amount | Shares | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Units | Amount | | Shares | Amount | |
Balance at December 31, 2018 | 60 | | $ | 6,000 | | 10 | | $ | 1,000 | | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 117,953 | | $ | 118 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | (2,003) | | | $ | 9,779 | | | $ | 105,131 | |
Cumulative effect of adopting ASC Topic 606 | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 695 | | | 695 | |
Issuance of Class C units | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | 58,976 | | 59 | | | — | | — | | | — | | | — | | | — | | | 59 | |
Distributions to members | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (1,144) | | | (1,144) | |
Dividends on Series A preferred stock | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (34) | | | (34) | |
Dividends on Series B preferred stock | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (110) | | | (110) | |
Other comprehensive income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 7,020 | | | — | | | 7,020 | |
Net income | — | | — | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 20,628 | | | 20,628 | |
Balance at September 30, 2019 | 60 | | $ | 6,000 | | 10 | | $ | 1,000 | | | 65,036,780 | | $ | 65,037 | | | 5,045,215 | | $ | 5,045 | | | 8,159,775 | | $ | 8,160 | | | 176,929 | | $ | 177 | | | 0 | | $ | 0 | | | $ | 17,995 | | | $ | 5,017 | | | $ | 29,814 | | | $ | 132,245 | |
See accompanying notes to the condensed consolidated financial statements.
8
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Operating activities | Operating activities | | | | Operating activities | | | |
Net income | Net income | $ | 82,663 | | | $ | 20,628 | | Net income | $ | 11,568 | | | $ | 10,793 | |
Adjustments to reconcile net income to net cash from operating activities: | Adjustments to reconcile net income to net cash from operating activities: | | Adjustments to reconcile net income to net cash from operating activities: | |
Depreciation and amortization | Depreciation and amortization | 1,823 | | | 541 | | Depreciation and amortization | 3,374 | | | 458 | |
Stock-based compensation | 307 | | | 0 | | |
Net capital gains (losses) on investments | (5,242) | | | 333 | | |
Gain on bargain purchase of subsidiary | 0 | | | (634) | | |
Gain on revaluation of Compstar investment | (69,846) | | | 0 | | |
Stock compensation | | Stock compensation | 630 | | | 0 | |
Unrealized (gains) losses on embedded derivatives | | Unrealized (gains) losses on embedded derivatives | (3,189) | | | 3,206 | |
Net capital gains | | Net capital gains | (23) | | | (5,042) | |
Deferred offering costs | | Deferred offering costs | 0 | | | (1,339) | |
Bond amortization and accretion | Bond amortization and accretion | 1,465 | | | 1,241 | | Bond amortization and accretion | 1,174 | | | 944 | |
Issuance of member units as compensation | Issuance of member units as compensation | 197 | | | 59 | | Issuance of member units as compensation | 0 | | | 40 | |
Equity earnings in affiliates, net of tax | Equity earnings in affiliates, net of tax | (2,333) | | | (2,494) | | Equity earnings in affiliates, net of tax | 0 | | | (1,932) | |
Distributions from equity method investments | Distributions from equity method investments | 2,953 | | | 3,586 | | Distributions from equity method investments | 0 | | | 2,413 | |
Deferred income taxes | Deferred income taxes | 327 | | | (737) | | Deferred income taxes | (781) | | | (324) | |
Deferred financing costs | Deferred financing costs | 90 | | | 76 | | Deferred financing costs | 84 | | | 48 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accrued investment income | Accrued investment income | 50 | | | (17) | | Accrued investment income | 129 | | | (137) | |
Premiums and other receivables | Premiums and other receivables | (13,308) | | | (19,024) | | Premiums and other receivables | (22,714) | | | (10,666) | |
Reinsurance recoverable on paid and unpaid losses | Reinsurance recoverable on paid and unpaid losses | (43,087) | | | (42,775) | | Reinsurance recoverable on paid and unpaid losses | (18,730) | | | (26,786) | |
Prepaid reinsurance premiums | Prepaid reinsurance premiums | (23,841) | | | (16,499) | | Prepaid reinsurance premiums | (13,033) | | | (11,223) | |
Right of use asset | Right of use asset | (5,538) | | | — | | Right of use asset | 959 | | | (5,958) | |
Other assets | Other assets | (8,729) | | | (2,032) | | Other assets | (6,623) | | | (3,284) | |
Unpaid loss and loss adjustment expenses | Unpaid loss and loss adjustment expenses | 58,787 | | | 59,409 | | Unpaid loss and loss adjustment expenses | 44,742 | | | 35,784 | |
Unearned premiums | Unearned premiums | 39,601 | | | 17,213 | | Unearned premiums | 36,401 | | | 16,638 | |
Funds held under reinsurance agreements | Funds held under reinsurance agreements | (5,942) | | | (717) | | Funds held under reinsurance agreements | 3,080 | | | (1,306) | |
Reinsurance premiums payable | Reinsurance premiums payable | 6,136 | | | 9,971 | | Reinsurance premiums payable | (5,388) | | | 409 | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | 11,448 | | | 5,822 | | Accounts payable and accrued expenses | (4,011) | | | 19,591 | |
Lease liability | Lease liability | 5,752 | | | — | | Lease liability | (1,038) | | | 6,186 | |
Income taxes payable | Income taxes payable | (1,525) | | | (1,898) | | Income taxes payable | (3,791) | | | 3,270 | |
Net cash provided by operating activities | Net cash provided by operating activities | 32,208 | | | 32,052 | | Net cash provided by operating activities | 22,820 | | | 31,783 | |
Investing activities | Investing activities | | | | Investing activities | | | |
Payments for capital expenditures | Payments for capital expenditures | (665) | | | (567) | | Payments for capital expenditures | (73) | | | (554) | |
Proceeds from sale of equity method investment | Proceeds from sale of equity method investment | 3,000 | | | 0 | | Proceeds from sale of equity method investment | 232 | | | 3,000 | |
Return of capital on equity method investment | Return of capital on equity method investment | 115 | | | 0 | | Return of capital on equity method investment | 0 | | | 115 | |
Purchase of investments, available for sale | Purchase of investments, available for sale | (84,125) | | | (74,544) | | Purchase of investments, available for sale | (104,183) | | | (55,695) | |
Proceeds from investments sold, matured or repaid | Proceeds from investments sold, matured or repaid | 89,374 | | | 62,433 | | Proceeds from investments sold, matured or repaid | 38,425 | | | 60,339 | |
Acquisition of subsidiary, net of cash received | Acquisition of subsidiary, net of cash received | (1,098) | | | (5,496) | | Acquisition of subsidiary, net of cash received | 0 | | | (1,098) | |
Cash received in the acquisition of Compstar | 11,891 | | | 0 | | |
Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | 18,492 | | | (18,174) | | Net cash provided by (used in) investing activities | (65,599) | | | 6,107 | |
Financing activities | Financing activities | | | | Financing activities | | | |
Shares redeemed for payroll taxes | Shares redeemed for payroll taxes | (82) | | | 0 | | Shares redeemed for payroll taxes | (6) | | | 0 | |
Proceeds from initial public offering | 99,643 | | | 0 | | |
Deferred offering costs | (5,839) | | | 0 | | |
Proceeds from credit agreement | Proceeds from credit agreement | 32,453 | | | 0 | | Proceeds from credit agreement | 0 | | | 32,453 | |
Principal payments on debt | Principal payments on debt | (41,789) | | | (4,488) | | Principal payments on debt | (619) | | | (21,843) | |
Buyback of preferred shares | (5,100) | | | 0 | | |
Distribution to members | Distribution to members | (19,496) | | | (1,144) | | Distribution to members | 0 | | | (19,496) | |
Dividends paid on preferred stock | (128) | | | (164) | | |
Net cash provided by (used in) financing activities | 59,662 | | | (5,796) | | |
Net increase in cash, cash equivalents and restricted cash | 110,362 | | | 8,082 | | |
Net cash used in financing activities | | Net cash used in financing activities | (625) | | | (8,886) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | (43,404) | | | 29,004 | |
Cash, cash equivalents and restricted cash ‑ beginning of period | Cash, cash equivalents and restricted cash ‑ beginning of period | 76,068 | | | 55,962 | | Cash, cash equivalents and restricted cash ‑ beginning of period | 157,234 | | | 76,068 | |
Cash, cash equivalents and restricted cash ‑ end of period | Cash, cash equivalents and restricted cash ‑ end of period | $ | 186,430 | | | $ | 64,044 | | Cash, cash equivalents and restricted cash ‑ end of period | $ | 113,830 | | | $ | 105,072 | |
See accompanying notes to the condensed consolidated financial statements.
98
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | | | | | | | | June 30, |
Disaggregation of cash and restricted cash: | Disaggregation of cash and restricted cash: | As of September 30, 2020 | | As of September 30, 2019 | Disaggregation of cash and restricted cash: | 2021 | | 2020 |
Cash and cash equivalents | Cash and cash equivalents | $ | 165,255 | | | $ | 62,250 | | Cash and cash equivalents | $ | 101,361 | | | $ | 97,326 | |
Restricted cash | Restricted cash | 21,175 | | | 1,794 | | Restricted cash | 12,469 | | | 7,746 | |
Total cash, cash equivalents and restricted cash | Total cash, cash equivalents and restricted cash | $ | 186,430 | | | $ | 64,044 | | Total cash, cash equivalents and restricted cash | $ | 113,830 | | | $ | 105,072 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
Supplemental disclosure of cash flow information: | 2020 | | 2019 |
Cash paid during the year for: | | | |
Interest | $ | 1,391 | | | $ | 2,053 | |
Income taxes | 5,809 | | | 6,864 | |
Non-cash investing and financing activity: | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 8,245 | | | — | |
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 leases | 1,484 | | | — | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
Supplemental disclosure of cash flow information: | 2021 | | 2020 |
Cash paid during the year for: | | | |
Interest | $ | 768 | | | $ | 914 | |
Income taxes | 7,548 | | | 201 | |
Non-cash investing and financing activity: | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 31 | | | 6,906 | |
Non-cash transfer of investments to settle funds held for reinsurance | 13,562 | | | 0 | |
Non-cash transfer of investments to settle amounts held for others in accounts payable | 26,211 | | | 0 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | 1,217 | | | 906 | |
See accompanying notes to the condensed consolidated financial statements.
109
Notes to the Condensed Consolidated and Condensed Combined Financial Statements
Note 1. Business and Basis of Presentation
In July 2020, Trean Insurance Group, Inc. (together with its wholly owned subsidiaries, the Company)"Company") completed its initial public offering (IPO)("IPO") of common stock. Prior to the completion of the IPO, the Company effected the following reorganization transactions: (i) each of Trean Holdings LLC (Trean)("Trean"), an insurance services company, and BIC Holdings LLC (BIC)("BIC"), a property and casualty insurance holding company, 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 Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.
For the purpose of financial statement disclosures, references to the condensed consolidated financial statements for all post-IPO periods include the accounts of Trean Insurance Group, Inc., along with its wholly owned subsidiaries, after elimination of intercompany accounts and transactions. References to the condensed consolidated financial statements for all pre-IPO periods include the condensed combined financial statements of BIC and Trean, along with their wholly owned subsidiaries, after elimination of intercompany accounts and transactions. All dollar amounts are shown in thousands, except share and per share amounts.
The Company provides 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.
The Company's wholly owned subsidiaries 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;Utah, 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; 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; and Westcap Insurance Services, LLC, (Westcap), a managing general agent based in California.
The accompanying condensed consolidated 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 consolidated 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 consolidated 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 consolidated 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 ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 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 will now 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 will be 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Previously reported | | Adjustment | | As reported | | Previously reported | | Adjustment | | As reported |
Retained earnings | $ | 119,750 | | | $ | (1,248) | | | $ | 118,502 | | | $ | 112,959 | | | $ | (3,899) | | | $ | 109,060 | |
Accumulated other comprehensive income | 5,393 | | | 1,248 | | | 6,641 | | | 9,527 | | | 3,899 | | | 13,426 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | March 31, 2020 | | December 31, 2019 |
| Previously reported | | Adjustment | | As reported | | Previously reported | | Adjustment | | As reported | | Previously reported | | Adjustment | | As reported |
Retained earnings | $ | 35,561 | | | $ | (4,212) | | | $ | 31,349 | | | $ | 49,967 | | | $ | (1,850) | | | $ | 48,117 | | | $ | 40,361 | | | $ | (1,679) | | | $ | 38,682 | |
Accumulated other comprehensive income | 8,703 | | | 4,212 | | | 12,915 | | | 3,761 | | | 1,850 | | | 5,611 | | | 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 June 30, 2020 |
| Previously reported | | Adjustment | | As reported |
Net investment income | $ | 1,524 | | | $ | 1,001 | | | $ | 2,525 | |
Total revenue | 24,429 | | | 1,001 | | | 25,430 | |
Gains (losses) on embedded derivatives | 0 | | | (3,991) | | | (3,991) | |
Income before taxes | 3,469 | | | (2,990) | | | 479 | |
Income tax expense | 979 | | | (628) | | | 351 | |
Net income | $ | 3,720 | | | $ | (2,362) | | | $ | 1,358 | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 0.10 | | | $ | (0.06) | | | $ | 0.04 | |
Diluted | $ | 0.10 | | | $ | (0.06) | | | $ | 0.04 | |
| | | | | |
Other comprehensive income, net of tax | | | | | |
Unrealized investment gains: | | | | | |
Unrealized investment gains arising during the period | $ | 6,252 | | | $ | 2,990 | | | $ | 9,242 | |
Income tax expense | 1,310 | | | 628 | | | 1,938 | |
Unrealized investment gains, net of tax | 4,942 | | | 2,362 | | | 7,304 | |
Other comprehensive income | $ | 4,942 | | | $ | 2,362 | | | $ | 7,304 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
| Previously reported | | Adjustment | | As reported |
Net investment income | $ | 4,796 | | | $ | 1,974 | | | $ | 6,770 | |
Total revenue | 57,786 | | | 1,974 | | | 59,760 | |
Gains (losses) on embedded derivatives | 0 | | | (5,180) | | | (5,180) | |
Income before taxes | 15,285 | | | (3,206) | | | 12,079 | |
Income tax expense | 3,891 | | | (673) | | | 3,218 | |
Net income | $ | 13,326 | | | $ | (2,533) | | | $ | 10,793 | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 0.36 | | | $ | (0.07) | | | $ | 0.29 | |
Diluted | $ | 0.36 | | | $ | (0.07) | | | $ | 0.29 | |
| | | | | |
Other comprehensive income, net of tax | | | | | |
Unrealized investment gains: | | | | | |
Unrealized investment gains arising during the period | $ | 5,029 | | | $ | 3,206 | | | $ | 8,235 | |
Income tax expense | 1,054 | | | 673 | | | 1,727 | |
Unrealized investment gains, net of tax | 3,975 | | | 2,533 | | | 6,508 | |
Other comprehensive income | $ | 3,882 | | | $ | 2,533 | | | $ | 6,415 | |
The correction of the prior period amounts had no impact on total operating, investing and financing activities on the Company’s condensed consolidated and condensed combined statements of cash flows during the six months ended June 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 $1,001 and $1,974 for the three and six months ended June 30, 2020, respectively; the effective tax rate in Note 8 was corrected from 28.2% to 73.3% for the three months ended June 30, 2020 and from 25.5% to 26.6% for the six months ended June 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 consolidated 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 consolidated 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 and goodwill and other intangible assets. Except for the captions on the
condensed consolidated balance sheets and condensed consolidated 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
the period between March 12, 2020 and December 31, 2022. The adoption of this standard did not have a material impact on the condensed consolidated 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 consolidated 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 has elected to early adopt this standard effective January 1, 2020. Adoption of this standard did not have a material impact on the condensed consolidated financial statements and related disclosures.
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 consolidated statements of operations or condensed consolidated statements of cash flows.
Pending policies
The Company completed its IPO 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 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 a lease in accordance with ASC Topic 326, Financial Instruments - Credit Losses, and the lease term determined in accordance with ASC Topic 842, Leases. Certain issues addressed in this update areThe 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 consolidated 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 consolidated financial statements.
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 consolidated financial statements.
Note 2. Acquisitions
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 maturities | 895 | |
Cash and cash equivalents | 2,704 | |
Accrued investment income | 7 | |
Premiums and other receivables | 2,618 | |
Reinsurance recoverable | 5,069 | |
Prepaid reinsurance premiums | 920 | |
Deferred policy acquisition costs | 466 | |
Property and equipment | 22 | |
Right of use asset | 196 | |
Goodwill | 2,873 | |
Intangible assets | 3,299 | |
Other assets | 7,435 | |
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 assessment of fair value, the determination of the liability for unpaid loss and loss adjustment expense assumed, deferred taxes and other payables and receivables are preliminary and are based on the information that was available at the time the consolidated financial statements were prepared. Accordingly, the allocation of purchase price to intangible assets, goodwill, deferred tax assets and liabilities and the liability for unpaid loss and loss adjustment expense is preliminary and, therefore, subject to adjustment in future periods.
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 preliminary intangible assets totaling $3,299, which are comprised of the following:
| | | | | | | | | | | | | | |
| | Useful Life | | Balance |
Trade name | | 15 years | | $ | 458 | |
Customer relationships | | 10 years | | 2,841 | |
Total intangible assets | | | | $ | 3,299 | |
Compstar Holding Company LLC
Effective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining 55% ownership interest in Compstar Holding Company LLC (Compstar)("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, which is included in gain on revaluation of Compstar investment on the condensed consolidated statement of operations. 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. As a result, the fair value attributable to the Company’s previous equity interest was $81,167 and the carrying value was $11,321, and the Company therefore recorded a gain of $69,846 from the remeasurement of its previous equity interest.
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. The assessment of fair value and the determination of deferred tax assets acquired istaxes and other payables and receivables are preliminary and isare 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 and to deferred tax assets and liabilities is preliminary and, therefore, subject to adjustment in future periods.
| | | | | |
Fair value of total consideration transferred | $ | 99,204 | |
Previous investment in subsidiary | 11,321 | |
Fair value adjustment to prior investment | 69,846 | |
Fair value of assets acquired and liabilities assumed | 180,371 | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
Cash and cash equivalents | 11,891 | |
Premiums and other receivables | 1,6243,632 | |
Property and equipment | 444 | |
Right of use asset | 1,020 | |
Goodwill | 136,236134,428 | |
Intangible assets, net | 73,954 | |
Other assets | 184 | |
Accounts payable and accrued expenses | (11,128)(11,328) | |
Lease liability | (1,302) | |
Deferred tax liabilities | (12,487) | |
Debt | (20,065) | |
Net assets acquired | $ | 180,371 | |
The Company recorded $136,236$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 to assist inthrough the reduction of operating expenses.
The Company also recorded intangible assets totaling $73,954, and are included in other assets on the condensed consolidated balance sheet. Intangible assetswhich are comprised of the following:
| | | | | | | | | | | | | | |
(in thousands) | | Useful Life | | Balance |
Trade name | | 15 years | | $ | 3,157 | |
Customer relationships | | 14 years | | 70,797 | |
Total intangible assets | | | | $ | 73,954 | |
Subsequent to the acquisition date, Compstar recorded total revenue of $3,320, of which $3,313 is intercompany related and is eliminated in consolidation, and contributed net income totaling $1,222 to consolidated net income on the condensed consolidated statement of operations.
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 equivalents | 302 | |
Premiums and other receivables | 55 | |
Property and equipment | 63 | |
Goodwill | 517 | |
Intangible assets, net | 482 | |
Other assets | 12 | |
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 consolidated 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: | |
Cash | 973 | |
Investments | 4,252 | |
Accrued investment income | 40 | |
Premiums and other receivables | 1,571 | |
Deferred tax asset | 242 | |
Other assets | 10 | |
Unpaid loss and loss adjustment expenses | (6,426) | |
Unearned premiums | (1,003) | |
Funds held under reinsurance agreements | 7,980 | |
Reinsurance premiums payable | (1,037) | |
Accounts payable and accrued expenses | (316) | |
Income taxes payable | (338) | |
Net assets acquired | 5,948 | |
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.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
Fixed maturities: | | | | | | | |
U.S. government and government securities | $ | 12,932 | | | $ | 175 | | | $ | 0 | | | $ | 13,107 | |
Foreign governments | 0 | | | 304 | | | 0 | | | 304 | |
States, territories and possessions | 0 | | | 7,804 | | | 0 | | | 7,804 | |
Political subdivisions of states territories and possessions | 0 | | | 30,869 | | | 0 | | | 30,869 | |
Special revenue and special assessment obligations | 0 | | | 76,494 | | | 0 | | | 76,494 | |
Industrial and public utilities | 0 | | | 116,138 | | | 0 | | | 116,138 | |
Commercial mortgage-backed securities | 0 | | | 18,107 | | | 0 | | | 18,107 | |
Residential mortgage-backed securities | 0 | | | 70,384 | | | 0 | | | 70,384 | |
Other loan-backed securities | 0 | | | 41,724 | | | 0 | | | 41,724 | |
Hybrid securities | 0 | | | 355 | | | 0 | | | 355 | |
Total fixed maturities | 12,932 | | | 362,354 | | | 0 | | | 375,286 | |
Equity securities: | | | | | | | |
Preferred stock | 0 | | | 240 | | | 0 | | | 240 | |
Common stock | 882 | | | 576 | | | 2,000 | | | 3,458 | |
Total equity securities | 882 | | | 816 | | | 2,000 | | | 3,698 | |
Total investments | $ | 13,814 | | | $ | 363,170 | | | $ | 2,000 | | | $ | 378,984 | |
| | | | | | | |
Funds held under reinsurance agreements | 0 | | | 160,614 | | | 0 | | | 160,614 | |
| | | | | | | |
Debt: | | | | | | | |
Junior subordinated debt | 0 | | | 7,732 | | | 0 | | | 7,732 | |
Secured credit facility | 0 | | | 32,588 | | | 0 | | | 32,588 | |
PPP Loan | 0 | | | 325 | | | 0 | | | 325 | |
Total debt | $ | 0 | | | $ | 40,645 | | | $ | 0 | | | $ | 40,645 | |
| | | December 31, 2019 | | June 30, 2021 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
Fixed maturities: | Fixed maturities: | | | | | | | | Fixed maturities: | | | | | | | |
U.S. government and government securities | U.S. government and government securities | $ | 16,129 | | | $ | 0 | | | $ | 0 | | | $ | 16,129 | | U.S. government and government securities | $ | 28,531 | | | $ | 175 | | | $ | 0 | | | $ | 28,706 | |
Foreign governments | Foreign governments | 0 | | | 302 | | | 0 | | | 302 | | Foreign governments | 0 | | | 2,600 | | | 0 | | | 2,600 | |
States, territories and possessions | States, territories and possessions | 0 | | | 4,923 | | | 0 | | | 4,923 | | States, territories and possessions | 0 | | | 8,456 | | | 0 | | | 8,456 | |
Political subdivisions of states, territories and possessions | 0 | | | 25,104 | | | 0 | | | 25,104 | | |
Political subdivisions of states territories and possessions | | Political subdivisions of states territories and possessions | 0 | | | 32,166 | | | 0 | | | 32,166 | |
Special revenue and special assessment obligations | Special revenue and special assessment obligations | 0 | | | 61,405 | | | 0 | | | 61,405 | | Special revenue and special assessment obligations | 0 | | | 93,441 | | | 0 | | | 93,441 | |
Industrial and public utilities | Industrial and public utilities | 0 | | | 123,207 | | | 0 | | | 123,207 | | Industrial and public utilities | 0 | | | 105,987 | | | 0 | | | 105,987 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 0 | | | 16,312 | | | 0 | | | 16,312 | | Commercial mortgage-backed securities | 0 | | | 13,129 | | | 0 | | | 13,129 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 0 | | | 54,109 | | | 0 | | | 54,109 | | Residential mortgage-backed securities | 0 | | | 95,652 | | | 0 | | | 95,652 | |
Other loan-backed securities | Other loan-backed securities | 0 | | | 36,011 | | | 0 | | | 36,011 | | Other loan-backed securities | 0 | | | 44,444 | | | 0 | | | 44,444 | |
Hybrid securities | Hybrid securities | 0 | | | 363 | | | 0 | | | 363 | | Hybrid securities | 0 | | | 362 | | | 0 | | | 362 | |
Total fixed maturities | Total fixed maturities | 16,129 | | | 321,736 | | | 0 | | | 337,865 | | Total fixed maturities | 28,531 | | | 396,412 | | | 0 | | | 424,943 | |
Equity securities: | Equity securities: | | Equity securities: | |
Preferred stock | Preferred stock | 0 | | | 343 | | | 0 | | | 343 | | Preferred stock | 0 | | | 235 | | | 0 | | | 235 | |
Common stock | Common stock | 0 | | | 492 | | | 0 | | | 492 | | Common stock | 0 | | | 741 | | | 2,000 | | | 2,741 | |
Total equity securities | Total equity securities | 0 | | | 835 | | | 0 | | | 835 | | Total equity securities | 0 | | | 976 | | | 2,000 | | | 2,976 | |
Total investments | Total investments | $ | 16,129 | | | $ | 322,571 | | | $ | 0 | | | $ | 338,700 | | Total investments | $ | 28,531 | | | $ | 397,388 | | | $ | 2,000 | | | $ | 427,919 | |
| Funds held under reinsurance agreements | 0 | | | 163,445 | | | 0 | | | 163,445 | | |
| Debt: | | |
Junior subordinated debt | 0 | | | 7,732 | | | 0 | | | 7,732 | | |
Secured credit facility | 0 | | | 21,637 | | | 0 | | | 21,637 | | |
Total debt | $ | 0 | | | $ | 29,369 | | | $ | 0 | | | $ | 29,369 | | |
Embedded derivatives on funds held under reinsurance agreements | | Embedded derivatives on funds held under reinsurance agreements | $ | 111 | | | $ | 1,636 | | | $ | 0 | | | $ | 1,747 | |
Debt | | Debt | 0 | | | 31,763 | | | 0 | | | 31,763 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Fixed maturities: | | | | | | | |
U.S. government and government securities | $ | 17,471 | | | $ | 0 | | | $ | 0 | | | $ | 17,471 | |
Foreign governments | 0 | | | 302 | | | 0 | | | 302 | |
States, territories and possessions | 0 | | | 7,774 | | | 0 | | | 7,774 | |
Political subdivisions of states, territories and possessions | 0 | | | 33,212 | | | 0 | | | 33,212 | |
Special revenue and special assessment obligations | 0 | | | 81,714 | | | 0 | | | 81,714 | |
Industrial and public utilities | 0 | | | 113,741 | | | 0 | | | 113,741 | |
Commercial mortgage-backed securities | 0 | | | 18,066 | | | 0 | | | 18,066 | |
Residential mortgage-backed securities | 0 | | | 93,017 | | | 0 | | | 93,017 | |
Other loan-backed securities | 0 | | | 39,945 | | | 0 | | | 39,945 | |
Hybrid securities | 0 | | | 362 | | | 0 | | | 362 | |
Total fixed maturities | 17,471 | | | 388,133 | | | 0 | | | 405,604 | |
Equity securities: | | | | | | | |
Preferred stock | 0 | | | 240 | | | 0 | | | 240 | |
Common stock | 958 | | | 576 | | | 2,000 | | | 3,534 | |
Total equity securities | 958 | | | 816 | | | 2,000 | | | 3,774 | |
Total investments | $ | 18,429 | | | $ | 388,949 | | | $ | 2,000 | | | $ | 409,378 | |
| | | | | | | |
Embedded derivatives on funds held under reinsurance agreements | $ | 176 | | | $ | 4,761 | | | $ | 0 | | | $ | 4,937 | |
Debt | 0 | | | 32,381 | | | 0 | | | 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.
Funds held under reinsurance agreements:Embedded derivatives: The Company holds certain investments as collateralenters into funds held contracts 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.
Debt: The Company holds 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.
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, 2020 |
(in thousands) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Fixed maturities: | | | | | | | |
U.S. government and government securities | $ | 12,701 | | | $ | 406 | | | $ | 0 | | | $ | 13,107 | |
Foreign governments | 300 | | | 4 | | | 0 | | | 304 | |
States, territories and possessions | 7,537 | | | 267 | | | 0 | | | 7,804 | |
Political subdivisions of states, territories and possessions | 29,514 | | | 1,356 | | | (1) | | | 30,869 | |
Special revenue and special assessment obligations | 72,495 | | | 4,041 | | | (42) | | | 76,494 | |
Industrial and public utilities | 109,330 | | | 6,972 | | | (164) | | | 116,138 | |
Commercial mortgage-backed securities | 16,342 | | | 1,790 | | | (25) | | | 18,107 | |
Residential mortgage-backed securities | 68,864 | | | 1,630 | | | (110) | | | 70,384 | |
Other loan-backed securities | 41,067 | | | 811 | | | (154) | | | 41,724 | |
Hybrid securities | 356 | | | 1 | | | (2) | | | 355 | |
Total fixed maturities available for sale | $ | 358,506 | | | $ | 17,278 | | | $ | (498) | | | $ | 375,286 | |
| | | December 31, 2019 | | June 30, 2021 |
(in thousands) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Fixed maturities: | Fixed maturities: | | | | | | | | Fixed maturities: | | | | | | | |
U.S. government and government securities | U.S. government and government securities | $ | 15,965 | | | $ | 167 | | | $ | (3) | | | $ | 16,129 | | U.S. government and government securities | $ | 28,510 | | | $ | 217 | | | $ | (21) | | | $ | 28,706 | |
Foreign governments | Foreign governments | 299 | | | 3 | | | 0 | | | 302 | | Foreign governments | 2,599 | | | 1 | | | 0 | | | 2,600 | |
States, territories and possessions | States, territories and possessions | 4,789 | | | 134 | | | 0 | | | 4,923 | | States, territories and possessions | 8,240 | | | 225 | | | (9) | | | 8,456 | |
Political subdivisions of states, territories and possessions | Political subdivisions of states, territories and possessions | 24,444 | | | 670 | | | (10) | | | 25,104 | | Political subdivisions of states, territories and possessions | 31,120 | | | 1,087 | | | (41) | | | 32,166 | |
Special revenue and special assessment obligations | Special revenue and special assessment obligations | 59,149 | | | 2,298 | | | (42) | | | 61,405 | | Special revenue and special assessment obligations | 90,047 | | | 3,634 | | | (240) | | | 93,441 | |
Industrial and public utilities | Industrial and public utilities | 119,735 | | | 3,490 | | | (18) | | | 123,207 | | Industrial and public utilities | 101,624 | | | 4,450 | | | (87) | | | 105,987 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 15,586 | | | 757 | | | (31) | | | 16,312 | | Commercial mortgage-backed securities | 12,032 | | | 1,097 | | | 0 | | | 13,129 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 53,467 | | | 679 | | | (37) | | | 54,109 | | Residential mortgage-backed securities | 95,667 | | | 890 | | | (905) | | | 95,652 | |
Other loan-backed securities | Other loan-backed securities | 35,849 | | | 281 | | | (119) | | | 36,011 | | Other loan-backed securities | 43,972 | | | 501 | | | (29) | | | 44,444 | |
Hybrid securities | Hybrid securities | 357 | | | 6 | | | 0 | | | 363 | | Hybrid securities | 355 | | | 7 | | | 0 | | | 362 | |
Total fixed maturities available for sale | Total fixed maturities available for sale | $ | 329,640 | | | $ | 8,485 | | | $ | (260) | | | $ | 337,865 | | Total fixed maturities available for sale | 414,166 | | | 12,109 | | | (1,332) | | | 424,943 | |
Equity securities: | | Equity securities: | |
Preferred stock | | Preferred stock | 243 | | | 0 | | | (8) | | | 235 | |
Common stock | | Common stock | 741 | | | 2,000 | | | 0 | | | 2,741 | |
Total equity securities | | Total equity securities | 984 | | | 2,000 | | | (8) | | | 2,976 | |
Total investments | | Total investments | $ | 415,150 | | | $ | 14,109 | | | $ | (1,340) | | | $ | 427,919 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Fixed maturities: | | | | | | | |
U.S. government and government securities | $ | 17,135 | | | $ | 336 | | | $ | 0 | | | $ | 17,471 | |
Foreign governments | 300 | | | 2 | | | 0 | | | 302 | |
States, territories and possessions | 7,500 | | | 274 | | | 0 | | | 7,774 | |
Political subdivisions of states, territories and possessions | 31,759 | | | 1,453 | | | 0 | | | 33,212 | |
Special revenue and special assessment obligations | 77,329 | | | 4,422 | | | (37) | | | 81,714 | |
Industrial and public utilities | 107,017 | | | 6,768 | | | (44) | | | 113,741 | |
Commercial mortgage-backed securities | 16,242 | | | 1,848 | | | (24) | | | 18,066 | |
Residential mortgage-backed securities | 91,478 | | | 1,626 | | | (87) | | | 93,017 | |
Other loan-backed securities | 39,293 | | | 719 | | | (67) | | | 39,945 | |
Hybrid securities | 356 | | | 6 | | | 0 | | | 362 | |
Total fixed maturities available for sale | 388,409 | | | 17,454 | | | (259) | | | 405,604 | |
Equity securities: | | | | | | | |
Preferred stock | 243 | | | 0 | | | (3) | | | 240 | |
Common stock | 1,554 | | | 2,053 | | | (73) | | | 3,534 | |
Total equity securities | 1,797 | | | 2,053 | | | (76) | | | 3,774 | |
Total investments | $ | 390,206 | | | $ | 19,507 | | | $ | (335) | | | $ | 409,378 | |
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, 2020 |
| 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 | $ | 100 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 100 | | | $ | 0 | |
Foreign governments | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
States, territories and possessions | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Political subdivisions of states, territories and possessions | 299 | | | (1) | | | 0 | | | 0 | | | 299 | | | (1) | |
Special revenue and special assessment obligations | 2,347 | | | (42) | | | 0 | | | 0 | | | 2,347 | | | (42) | |
Industrial and public utilities | 2,172 | | | (164) | | | 0 | | | 0 | | | 2,172 | | | (164) | |
Commercial mortgage-backed securities | 1,000 | | | (25) | | | 0 | | | 0 | | | 1,000 | | | (25) | |
Residential mortgage-backed securities | 13,931 | | | (95) | | | 280 | | | (15) | | | 14,211 | | | (110) | |
Other loan-backed securities | 4,033 | | | (28) | | | 10,466 | | | (126) | | | 14,499 | | | (154) | |
Hybrid securities | 248 | | | (2) | | | 0 | | | 0 | | | 248 | | | (2) | |
Total bonds | $ | 24,130 | | | $ | (357) | | | $ | 10,746 | | | $ | (141) | | | $ | 34,876 | | | $ | (498) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Fixed maturities: | | | | | | | | | | | |
U.S. government and government securities | $ | 6,627 | | | $ | (21) | | | $ | 0 | | | $ | 0 | | | $ | 6,627 | | | $ | (21) | |
Foreign governments | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
States, territories and possessions | 316 | | | (9) | | | 0 | | | 0 | | | 316 | | | (9) | |
Political subdivisions of states, territories and possessions | 4,188 | | | (41) | | | 0 | | | 0 | | | 4,188 | | | (41) | |
Special revenue and special assessment obligations | 17,868 | | | (240) | | | 0 | | | 0 | | | 17,868 | | | (240) | |
Industrial and public utilities | 15,323 | | | (87) | | | 0 | | | 0 | | | 15,323 | | | (87) | |
Commercial mortgage-backed securities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgage-backed securities | 57,307 | | | (877) | | | 737 | | | (28) | | | 58,044 | | | (905) | |
Other loan-backed securities | 10,464 | | | (9) | | | 2,480 | | | (20) | | | 12,944 | | | (29) | |
Hybrid securities | 250 | | | 0 | | | 0 | | | 0 | | | 250 | | | 0 | |
Total bonds | $ | 112,343 | | | $ | (1,284) | | | $ | 3,217 | | | $ | (48) | | | $ | 115,560 | | | $ | (1,332) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
States, territories and possessions | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Political subdivisions of states, territories and possessions | 1,500 | | | (9) | | | 690 | | | (1) | | | 2,190 | | | (10) | |
Special revenue and special assessment obligations | 3,206 | | | (42) | | | 181 | | | 0 | | | 3,387 | | | (42) | |
Industrial and public utilities | 5,939 | | | (16) | | | 1,094 | | | (2) | | | 7,033 | | | (18) | |
Commercial mortgage-backed securities | 2,138 | | | (30) | | | 129 | | | (1) | | | 2,267 | | | (31) | |
Residential mortgage-backed securities | 6,936 | | | (13) | | | 1,917 | | | (24) | | | 8,853 | | | (37) | |
Other loan-backed securities | 2,189 | | | (11) | | | 13,885 | | | (108) | | | 16,074 | | | (119) | |
Hybrid securities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total bonds | $ | 22,201 | | | $ | (123) | | | $ | 19,245 | | | $ | (137) | | | $ | 41,446 | | | $ | (260) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Less Than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Fixed maturities: | | | | | | | | | | | |
U.S. government and government securities | $ | 4,518 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,518 | | | $ | 0 | |
Foreign governments | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
States, territories and possessions | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Political subdivisions of states, territories and possessions | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Special revenue and special assessment obligations | 2,923 | | | (37) | | | 0 | | | 0 | | | 2,923 | | | (37) | |
Industrial and public utilities | 2,106 | | | (44) | | | 0 | | | 0 | | | 2,106 | | | (44) | |
Commercial mortgage-backed securities | 999 | | | (24) | | | 0 | | | 0 | | | 999 | | | (24) | |
Residential mortgage-backed securities | 8,811 | | | (74) | | | 262 | | | (13) | | | 9,073 | | | (87) | |
Other loan-backed securities | 2,037 | | | (10) | | | 9,036 | | | (57) | | | 11,073 | | | (67) | |
Hybrid securities | 250 | | | 0 | | | 0 | | | 0 | | | 250 | | | 0 | |
Total bonds | $ | 21,644 | | | $ | (189) | | | $ | 9,298 | | | $ | (70) | | | $ | 30,942 | | | $ | (259) | |
The unrealized losses on the Company’s available for sale securities as of SeptemberJune 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 SeptemberJune 30, 2020,2021, by contractual maturity, are as follows:
| (in thousands) | Cost or Amortized Cost | | Fair Value | |
| | | Cost or Amortized Cost | | Fair Value |
Available for sale: | Available for sale: | | | | Available for sale: | | | |
Due in one year or less | Due in one year or less | $ | 19,595 | | | $ | 19,818 | | Due in one year or less | $ | 30,510 | | | $ | 30,870 | |
Due after one year but before five years | Due after one year but before five years | 104,832 | | | 110,134 | | Due after one year but before five years | 103,298 | | | 106,728 | |
Due after five years but before ten years | Due after five years but before ten years | 59,166 | | | 64,122 | | Due after five years but before ten years | 64,393 | | | 67,848 | |
Due after ten years | Due after ten years | 48,640 | | | 50,997 | | Due after ten years | 64,294 | | | 66,272 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 16,342 | | | 18,107 | | Commercial mortgage-backed securities | 12,032 | | | 13,129 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 68,864 | | | 70,384 | | Residential mortgage-backed securities | 95,667 | | | 95,652 | |
Other loan-backed securities | Other loan-backed securities | 41,067 | | | 41,724 | | Other loan-backed securities | 43,972 | | | 44,444 | |
Total | Total | $ | 358,506 | | | $ | 375,286 | | Total | $ | 414,166 | | | $ | 424,943 | |
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.
Realized gains and losses on investments included in the condensed consolidated statements of operations for the three and ninesix months ended SeptemberJune 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, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
| | | 2021 | | 2020 | | 2021 | | 2020 |
Fixed maturities: | Fixed maturities: | | | | | | | | Fixed maturities: | | | | | | | |
Gains | Gains | $ | 120 | | | $ | (42) | | | $ | 239 | | | $ | 78 | | Gains | $ | 18 | | | $ | 0 | | | $ | 98 | | | $ | 119 | |
Losses | Losses | (6) | | | 8 | | | (7) | | | (23) | | Losses | (8) | | | (1) | | | (75) | | | (1) | |
Total fixed maturities | Total fixed maturities | 114 | | | (34) | | | 232 | | | 55 | | Total fixed maturities | 10 | | | (1) | | | 23 | | | 118 | |
Equity securities: | Equity securities: | | Equity securities: | |
Equity method investments: | Equity method investments: | | Equity method investments: | |
Gains | Gains | 0 | | | 0 | | | 3,115 | | | 0 | | Gains | 0 | | | 0 | | | 0 | | | 3,115 | |
Total equity securities | Total equity securities | 0 | | | 0 | | | 3,115 | | | 0 | | Total equity securities | 0 | | | 0 | | | 0 | | | 3,115 | |
Total net investment realized gains (losses) | Total net investment realized gains (losses) | $ | 114 | | | $ | (34) | | | $ | 3,347 | | | $ | 55 | | Total net investment realized gains (losses) | $ | 10 | | | $ | (1) | | | $ | 23 | | | $ | 3,233 | |
Net investment income consists of the following for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
| | | 2021 | | 2020 | | 2021 | | 2020 |
Fixed maturities | Fixed maturities | $ | 1,804 | | | $ | 1,677 | | | $ | 4,684 | | | $ | 4,504 | | Fixed maturities | $ | 1,577 | | | $ | 1,408 | | | $ | 3,137 | | | $ | 2,880 | |
Income on funds held investments | | Income on funds held investments | 519 | | | 1,001 | | | 1,199 | | | 1,974 | |
Preferred stock | Preferred stock | 19 | | | 10 | | | 39 | | | (13) | | Preferred stock | 6 | | | 34 | | | 36 | | | 20 | |
Common stock | Common stock | 30 | | | 0 | | | 1,904 | | | 0 | | Common stock | 0 | | | 75 | | | 0 | | | 1,874 | |
Interest earned on cash and short-term investments | Interest earned on cash and short-term investments | 4 | | | 34 | | | 26 | | | 87 | | Interest earned on cash and short-term investments | 1 | | | 7 | | | 3 | | | 22 | |
Net investment income | Net investment income | $ | 1,857 | | | $ | 1,721 | | | $ | 6,653 | | | $ | 4,578 | | Net investment income | $ | 2,103 | | | $ | 2,525 | | | $ | 4,375 | | | $ | 6,770 | |
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. Total funds held under reinsurance agreements includes the following:
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Funds held under reinsurance agreements, at cost | | $ | 159,266 | | | $ | 169,767 | |
Embedded derivatives, at fair value | | 1,747 | | | 4,937 | |
Total funds held under reinsurance agreements | | $ | 161,013 | | | $ | 174,704 | |
The change in value of embedded derivatives for the three months ended June 30, 2021 and 2020 was a loss of $167 and $2,990, respectively. The change in value of embedded derivatives for the six months ended June 30, 2021 was a gain of $3,189, compared to a loss of $3,206 for the six months ended June 30, 2020. Changes in value of embedded derivatives is included in gains (losses) on embedded derivatives in the consolidated statement of operations. Investment expenses associated with the embedded derivatives for the three and six months ended June 30, 2021 was $519 and $1,199, respectively, compared to $1,001 and $1,974 for the three and six months ended June 30, 2020, which is included in gains (losses) on embedded derivatives on the consolidated statement of operations. These embedded derivatives had no impact on total operating, investing and financing activities on the Company’s condensed consolidated statements of cash flows during the three and six months ended June 30, 2021 and 2020.
Note 5. Equity Method Investments
The Company had investments in Compstar and Trean Intermediaries (TRI)("TRI"). Equity earnings and losses are reported in equity earnings in affiliates, net of tax on the condensed consolidated statements of operations.
On July 15, 2020, the Company purchased the remaining 55% ownership interest in Compstar (See Note 2). Prior to and, as a result, Compstar is no longer recorded as an equity method investment. For the acquisition,three and six months ended June 30, 2020, the Company owned 45% of Compstar which had a carrying value of approximately $11,831 as of December 31, 2019. The Company recorded earnings for the three months ended September 30, 2020of $1,230 and 2019$1,932, respectively, and received distributions of $401$1,024 and $919, respectively. Distributions received from Compstar for the three months ended September 30, 2020 and 2019 were $540 and $1,458, respectively. The Company recorded earnings for the nine months ended September 30, 2020 and 2019 of $2,333 and $2,053, respectively. Distributions received from Compstar for the nine months ended September 30, 2020 and 2019 were $2,842 and $2,995,$2,302, 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 lack 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 consolidated 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 consolidated statement of operations. The carrying value of TRI as of December 31, 2019 was approximately $110. The Company received distributions totalingof $225 for the ninesix months ended SeptemberJune 30, 2020. The Company recorded earnings of $104 and $445 for the three and nine months ended September 30, 2019, respectively. The Company received 0 distributions for the three months ended September 30, 2019, and $591 for the nine months ended September 30, 2019.currently maintains a 4% ownership interest in TRI due to further ownership dilution under its current operating agreement.
Note 6. Debt
Debt consisted of the following:
| | | | | | | | | | | |
(in thousands) | September 30, 2020 | | December 31, 2019 |
Junior subordinated debt | $ | 7,732 | | | $ | 7,732 | |
Secured credit facility | 32,588 | | | 21,637 | |
PPP Loan | 325 | | | 0 | |
Total debt | 40,645 | | | 29,369 | |
Less: unamortized deferred financing costs | (787) | | | (329) | |
Net debt | $ | 39,858 | | | $ | 29,040 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Secured credit facility | $ | 31,763 | | | $ | 32,381 | |
Less: unamortized deferred financing costs | (660) | | | (744) | |
Net debt | $ | 31,103 | | | $ | 31,637 | |
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, after which a variable interest rate of LIBOR (0.28% and 1.99% as of September 30, 2020 and December 31, 2019, respectively) plus 3.50% was in effect. The interest rate totaled 3.78% and 5.49% as of September 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 Subordinated Notes.
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%. These preferred securities were guaranteed by the Company and were paid off in full on October 7, 2020.
The Company recorded $69 and $115 of interest expense associated with the Subordinated Notes during the three months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded $265 and $356 of interest expense, respectively, associated with the Subordinated Notes.
The terms of the Subordinated Notes require the Company to maintain certain general and financial covenants and ratios. The Company was in compliance with all covenants and ratios as of September 30, 2020 and December 31, 2019. The Subordinated Notes were redeemed in full on October 7, 2020.
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 4.81%4.71% and 6.33%4.72% as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. The outstanding principal balance of the loan is to be repaid in quarterly installments which escalate from $206 to $825. All equity securities of the subsidiaries of Trean Insurance Group, Inc. (other than Benchmark Holding Company and its subsidiaries) have been pledged as collateral.
The Company recorded $403$383 and $369$388 of interest expense associated with its credit facility during the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company recorded $1,125$768 and $1,261$722 of interest expense, respectively, associated with its credit facility.
The terms of the credit facility require the Company to maintain certain financial covenants and ratios. The Company was in compliance with all covenants and ratios as of SeptemberJune 30, 20202021 and December 31, 2019.
PPP Loan
In conjunction with the acquisition of Compstar (See Note 2), the Company acquired a Federal Paycheck Protection Program Loan (PPP Loan) with a principal balance of $325. The PPP Loan has a fixed interest rate of 1.00%. The Company recorded $1 of interest expense for the three and nine months ended September 30, 2020.
Oak Street Loan
In conjunction with the acquisition of Compstar (See Note 2), the Company acquired a loan from Oak Street Funding with a total principle of $19,740. In July 2020, upon completion of the acquisition, the Company paid this loan off in full.
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 $5,401$1,229 and $11,323$5,884 for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, compared to $2,561$1,530 and $8,049$5,922 for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively.
The following table presents the revenues recognized from contracts with customers included in the condensed consolidated statements of operations.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
| | | 2021 | | 2020 | | 2021 | | 2020 |
Brokerage | Brokerage | $ | 4,422 | | | $ | 1,820 | | | $ | 8,870 | | | $ | 5,435 | | Brokerage | $ | 770 | | | $ | 755 | | | $ | 4,225 | | | $ | 4,448 | |
Managing general agent fees | Managing general agent fees | 312 | | | 144 | | | 720 | | | 711 | | Managing general agent fees | 30 | | | 254 | | | 319 | | | 408 | |
Third-party administrator fees | Third-party administrator fees | 562 | | | 432 | | | 1,329 | | | 1,405 | | Third-party administrator fees | 376 | | | 383 | | | 754 | | | 767 | |
Consulting fees | 105 | | | 165 | | | 404 | | | 498 | | |
Consulting and other fee-based revenue | | Consulting and other fee-based revenue | 53 | | | 138 | | | 586 | | | 299 | |
Total revenue from contracts with customers | Total revenue from contracts with customers | $ | 5,401 | | | $ | 2,561 | | | $ | 11,323 | | | $ | 8,049 | | Total revenue from contracts with customers | $ | 1,229 | | | $ | 1,530 | | | $ | 5,884 | | | $ | 5,922 | |
The Company did not have any contract liabilities as of SeptemberJune 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 consolidated balance sheets.
| | | | | | | | | | | |
(in thousands) | September 30, 2020 | | December 31, 2019 |
Contract assets | $ | 5,405 | | | $ | 1,103 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Contract assets | $ | 4,623 | | | $ | 3,405 | |
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 1.1%16.3% for the three months ended June 30, 2021. The effective tax rate differed from the statutory rate primarily due to the impact of tax-exempt municipal income on the Company's investments. The Company's effective tax rate was 20.7% for the six months ended June 30, 2021. The effective tax rate differed from the statutory rate primarily due to the impact of tax-exempt municipal income on the Company's investments.
The Company’s effective tax rate was 73.3% and 5.5%26.6% for the three and ninesix months ended SeptemberJune 30, 2020, respectively. The effective tax rate differed from the statutory rate primarily due to the non-tax impact of the gain recorded on the revaluation of the Company's original 45% investment in Compstar, offset by certain IPO-related expenses not deductible for tax purposes.
The Company's effective tax rate was 22.6% for the three months ended September 30, 2019. The effective tax rate differed from the statutory rate of 21% due to the impact of state taxes. The Company's effectivetaxes and the deferred tax rate was 19.5% for the nine months ended September 30, 2019. The effectiveeffect of a tax rate differed from the statutory rate primarily due to book and tax basis differences resulting from the acquisition of FCCIC.accounting method change on excess ceding commissions.
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, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 | |
| | | 2021 | | 2020 | | 2021 | | 2020 |
Unpaid losses and LAE reserves at beginning of period | Unpaid losses and LAE reserves at beginning of period | $ | 442,500 | | | $ | 382,473 | | | $ | 406,716 | | | $ | 340,415 | | Unpaid losses and LAE reserves at beginning of period | $ | 485,532 | | | $ | 418,757 | | | $ | 457,817 | | | $ | 406,716 | |
Less losses ceded through reinsurance | Less losses ceded through reinsurance | (332,765) | | | (283,974) | | | (304,005) | | | (257,421) | | Less losses ceded through reinsurance | (353,158) | | | (312,105) | | | (335,655) | | | (304,005) | |
Net unpaid losses and LAE at beginning of period | Net unpaid losses and LAE at beginning of period | 109,735 | | | 98,499 | | | 102,711 | | | 82,994 | | Net unpaid losses and LAE at beginning of period | 132,374 | | | 106,652 | | | 122,162 | | | 102,711 | |
Acquisition of First Choice Casualty Insurance Company | 0 | | | 0 | | | 0 | | | 6,366 | | |
Incurred losses and LAE related to: | Incurred losses and LAE related to: | | Incurred losses and LAE related to: | |
Current period | Current period | 15,864 | | | 14,358 | | | 43,053 | | | 41,637 | | Current period | 30,178 | | | 13,020 | | | 55,085 | | | 27,189 | |
Prior period | Prior period | (300) | | | (382) | | | (2,372) | | | (3,191) | | Prior period | (453) | | | (837) | | | (479) | | | (2,072) | |
Total incurred losses and LAE | Total incurred losses and LAE | 15,564 | | | 13,976 | | | 40,681 | | | 38,446 | | Total incurred losses and LAE | 29,725 | | | 12,183 | | | 54,606 | | | 25,117 | |
Paid losses and LAE, net of reinsurance, related to: | Paid losses and LAE, net of reinsurance, related to: | | | | | | | | Paid losses and LAE, net of reinsurance, related to: | | | | | | | |
Current period | Current period | 4,196 | | | 4,076 | | | 8,786 | | | 6,404 | | Current period | 8,950 | | | 3,392 | | | 12,473 | | | 4,590 | |
Prior period | Prior period | 4,771 | | | 2,107 | | | 18,274 | | | 15,110 | | Prior period | 9,190 | | | 5,708 | | | 20,336 | | | 13,503 | |
Total paid losses and LAE | Total paid losses and LAE | 8,967 | | | 6,183 | | | 27,060 | | | 21,514 | | Total paid losses and LAE | 18,140 | | | 9,100 | | | 32,809 | | | 18,093 | |
Net unpaid losses and LAE at end of period | Net unpaid losses and LAE at end of period | 116,332 | | | 106,292 | | | 116,332 | | | 106,292 | | Net unpaid losses and LAE at end of period | 143,959 | | | 109,735 | | | 143,959 | | | 109,735 | |
Plus losses ceded through reinsurance | Plus losses ceded through reinsurance | 349,170 | | | 299,959 | | | 349,170 | | | 299,959 | | Plus losses ceded through reinsurance | 358,601 | | | 332,765 | | | 358,601 | | | 332,765 | |
Unpaid losses and LAE reserves at end of period | Unpaid losses and LAE reserves at end of period | $ | 465,502 | | | $ | 406,251 | | | $ | 465,502 | | | $ | 406,251 | | Unpaid losses and LAE reserves at end of period | $ | 502,560 | | | $ | 442,500 | | | $ | 502,560 | | | $ | 442,500 | |
As a result of changes in estimates of insured events in prior years,During the provisionthree and six months ended June 30, 2021, the reserves for unpaid losses and LAE decreaseddeveloped favorably by approximately $300 for$453 and $479, respectively, primarily attributable to net case reserve releases.
During the three and six months ended SeptemberJune 30, 2020, and $382 for the three months ended September 30, 2019. The provisionreserves for unpaid losses and LAE decreaseddeveloped favorably by approximately $2,372$837 and $3,191 for the nine months ended September 30, 2020 and 2019,$2,072, 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, | | Three Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
(in thousands) | Gross | | Assumed | | Ceded | | Net | | Gross | | Assumed | | Ceded | | Net | |
| | | Gross | | Assumed | | Ceded | | Net | | Gross | | Assumed | | Ceded | | Net |
Written premiums | Written premiums | $ | 129,927 | | | $ | 2,357 | | | $ | (94,083) | | | $ | 38,201 | | | $ | 105,947 | | | $ | 1,587 | | | $ | (85,073) | | | $ | 22,461 | | Written premiums | $ | 153,049 | | | $ | 3,502 | | | $ | (101,306) | | | $ | 55,245 | | | $ | 107,596 | | | $ | 2,016 | | | $ | (86,586) | | | $ | 23,026 | |
Earned premiums | Earned premiums | 107,314 | | | 2,007 | | | (81,465) | | | 27,856 | | | 100,297 | | | 1,625 | | | (79,761) | | | 22,161 | | Earned premiums | 136,362 | | | 2,262 | | | (90,681) | | | 47,943 | | | 98,337 | | | 2,010 | | | (78,968) | | | 21,379 | |
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
(in thousands) | Gross | | Assumed | | Ceded | | Net | | Gross | | Assumed | | Ceded | | Net | |
| | | Gross | | Assumed | | Ceded | | Net | | Gross | | Assumed | | Ceded | | Net |
Written premiums | Written premiums | $ | 343,500 | | | $ | 6,255 | | | $ | (262,301) | | | $ | 87,454 | | | $ | 308,267 | | | $ | 5,221 | | | $ | (247,705) | | | $ | 65,783 | | Written premiums | $ | 297,947 | | | $ | 5,334 | | | $ | (190,790) | | | $ | 112,491 | | | $ | 213,573 | | | $ | 3,898 | | | $ | (168,218) | | | $ | 49,253 | |
Earned premiums | Earned premiums | 304,194 | | | 5,960 | | | (238,460) | | | 71,694 | | | 289,947 | | | 5,442 | | | (230,227) | | | 65,162 | | Earned premiums | 262,766 | | | 4,157 | | | (177,846) | | | 89,077 | | | 196,880 | | | 3,953 | | | (156,995) | | | 43,838 | |
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 consolidated 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 is only included in the lease liability and right-of-use assetsasset calculation when it is reasonably certain the Company will exercise that option. Our leases have remaining terms ranging from one month to 9348 months, some of which have options to extend the lease for up to 5 years. As of SeptemberJune 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 SeptemberJune 30, 2021 was $597, inclusive of $18 in variable lease expense. Total lease expense for the three months ended June 30, 2020 was $641,$535, inclusive of $72$22 in variable lease expense. The Company also sublets some of its leased office space and recorded $11$23 and $36 of sublease income for the three months ended SeptemberJune 30, 2021 and 2020, respectively, which is included in other income on the condensed consolidated statementsstatement of operations. Total rent expense was $382 and sublease income was $30 for the three months ended September 30, 2019, which were recorded prior to the adoption of ASU 2016-02.
Total lease expense for the ninesix months ended SeptemberJune 30, 2021 was $1,205, inclusive of $27 in variable lease expense. Total lease expense for the six months ended June 30, 2020 was $1,755,$1,114, inclusive of $214$142 in variable lease expense. The Company also sublets some of its leased office space and recorded $59$41 and $48 of sublease income for the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively, which is included in other income on the condensed consolidated statement of operations. Total rent expense was $1,119 and sublease income was $90 for the nine months ended September 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:
| | | | | |
(dollars in thousands) | September 30, 2020 |
Right of use asset | $ | 6,558 | |
Lease liability | $ | 7,054 | |
Weighted average remaining lease term | 3.49 years |
Weighted average discount rate | 6.41 | % |
Future maturities of lease liabilities as of September 30, 2020 are as follows:
| | | | | |
(in thousands) | Operating Leases |
2020 | $ | 595 | |
2021 | 2,324 | |
2022 | 2,266 | |
2023 | 1,686 | |
2024 | 922 | |
Thereafter | 78 | |
Total lease payments | 7,871 | |
Less: imputed interest | (817) | |
Total lease liabilities | $ | 7,054 | |
The Company had the following minimum annual commitments for payment of leases as of December 31, 2019:
| | | | | |
(in thousands) | Rent Expense |
2020 | $ | 1,718 | |
2021 | 1,614 | |
2022 | 1,594 | |
2023 | 1,191 | |
2024 | 669 | |
Thereafter | 46 | |
Total lease payments | $ | 6,832 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Right of use asset | $ | 5,378 | | | $ | 6,338 | |
Lease liability | $ | 5,855 | | | $ | 6,893 | |
Weighted average remaining lease term | 2.82 years | | 3.26 years |
Weighted average discount rate | 6.36 | % | | 6.37 | % |
Future maturities of lease liabilities as of June 30, 2021 are as follows:
| | | | | |
| Operating Leases |
2021 | $ | 1,208 | |
2022 | 2,369 | |
2023 | 1,783 | |
2024 | 934 | |
2025 | 94 | |
Total lease payments | 6,388 | |
Less: imputed interest | (533) | |
Total lease liabilities | $ | 5,855 | |
Note 12. Equity
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 shareholders.stockholders. On July 22, 2020, Trean Insurance Group, Inc. closed the sale of an additional 1,207,142 shares by certain selling shareholdersstockholders in the IPO pursuant to the exercise of the 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 shareholdersstockholders 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$93,139 after deducting underwriting discounts and commissions of $7,500 and estimated offering expenses of $4,737.$6,503. Trean Insurance Group, Inc. did not receive any proceeds from the sale of shares by the selling shareholders.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 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 Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the 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 SeptemberJune 30, 2020,2021, there were 51,148,78251,157,004 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: ReceiveReceived an allocation of profits and losses incurred by the Company as well as maintainmaintained 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: ReceiveReceived an allocation of profits and losses incurred by the Company as well as maintainmaintained 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 maintainsmaintained both voting and non-voting units. Each Class B Voting Unit iswas entitled to one vote per Class B Voting Unit on each matter to which the members arewere entitled to vote. Class B Non-Voting Units maintainmaintained all rights, preferences and privileges allowed to Class B Voting Units with the exception of voting rights.
3)Class C Units: ReceiveReceived an allocation of profits and losses incurred by the Company. Participating Class C Units maintainmaintained the right to receive distributions after any Class A or Class B units based on the unit holders’ pro rata share.
As part of the corporate reorganization performed in conjunction with the IPO of Trean Insurance Group, all ownership units were exchanged for a total of 37,386,394 shares of the Company's common stock.
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 to receive annual cumulative dividends at 4.5% of the original cost per share. In the event of liquidation, dissolution, or winding up of the affairs of Trean Corp, liquidation distributions are made to preferred shareholders before common shareholders. Series A contained no conversion features. During 2019 the Company redeemed all of its remaining shares of Series A.
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 shareholders before common shareholders. Series B contains no conversion features. The liquidation preference and redemptive value of Series B is equivalent to its carrying value as of September 30, 2020 and December 31, 2019. The Company classified the shares of Series B within temporary equity on the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, due to the liquidation rights associated with the termination of the shareholder customer agreement. In conjunction with the IPO of Trean Insurance Group, Inc. on July 15, 2020, the Company redeemed all of its remaining shares of Series B.
The cumulative dividends earned by Series B holders totaled approximately $45 and $128 for the three and nine months ended September 30, 2020, respectively, which consist of the following (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Total Dividend | | Dividend per Share | | Weighted Average Shares |
Dividends on preferred shares - Series B | $ | 45 | | | $ | 890.85 | | | 51.00 |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Total Dividend | | Dividend per Share | | Weighted Average Shares |
Dividends on preferred shares - Series B | $ | 128 | | | $ | 2,513.76 | | | 51.00 |
The cumulative dividends earned by Series A and Series B holders totaled approximately $48 and $144 for the three and nine months ended September 30, 2019, respectively, which consist of the following (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Total Dividend | | Dividend per Share | | Weighted Average Shares |
Dividends on preferred shares - Series A | $ | 12 | | | $ | 1,134.15 | | | 10.00 |
Dividends on preferred shares - Series B | 36 | | | 605.42 | | | 60.00 |
Total preferred share dividends | $ | 48 | | | | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Total Dividend | | Dividend per Share | | Weighted Average Shares |
Dividends on preferred shares - Series A | $ | 34 | | | $ | 3,365.75 | | | 10.00 |
Dividends on preferred shares - Series B | 110 | | | 1,845.88 | | | 60.00 |
Total preferred share dividends | $ | 144 | | | | | |
Note 13. Earnings Per Share
Basic earnings per share (EPS)("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. As a result of the Company's third quarter IPO and corporate reorganization in the third quarter of 2020, the number of shares used to compute earnings per share for pre-reorganization 20192020 periods presented was retrospectively adjusted to reflect the recapitalization akin to a split-like situation.
The following table presents the calculation of basic and diluted EPS of common stock:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except share and per share amounts) | 2020 | | 2019 | | 2020 | | 2019 | |
Net income - basic and diluted | $ | 69,337 | | | $ | 5,786 | | | $ | 82,663 | | | $ | 20,628 | | |
| | | | | | | | | | 2021 | | 2020 | | 2021 | | 2020 |
Weighted average number of shares outstanding - basic | 49,054,441 | | | 37,386,394 | | | 41,304,132 | | | 37,386,394 | | |
Net income — basic and diluted | | Net income — basic and diluted | $ | 2,126 | | | $ | 1,358 | | | $ | 11,568 | | | $ | 10,793 | |
| Weighted average number of shares outstanding — basic | | Weighted average number of shares outstanding — basic | 51,152,979 | | | 37,386,394 | | | 51,150,881 | | | 37,386,394 | |
Effect of dilutive securities: | Effect of dilutive securities: | | Effect of dilutive securities: | |
RSUs | 1,560 | | | 0 | | | 520 | | | 0 | | |
Restricted stock units | | Restricted stock units | 13,608 | | | 0 | | | 22,323 | | | 0 | |
Dilutive shares | Dilutive shares | 1,560 | | | 0 | | | 520 | | | 0 | | Dilutive shares | 13,608 | | | 0 | | | 22,323 | | | 0 | |
Weighted average number of shares outstanding - diluted | 49,056,001 | | | 37,386,394 | | | 41,304,652 | | | 37,386,394 | | |
Weighted average number of shares outstanding — diluted | | Weighted average number of shares outstanding — diluted | 51,166,587 | | | 37,386,394 | | | 51,173,204 | | | 37,386,394 | |
| Earnings per share: | Earnings per share: | | Earnings per share: | |
Basic | Basic | $ | 1.41 | | | $ | 0.15 | | | $ | 2.00 | | | $ | 0.55 | | Basic | $ | 0.04 | | | $ | 0.04 | | | $ | 0.23 | | | $ | 0.29 | |
Diluted | Diluted | $ | 1.41 | | | $ | 0.15 | | | $ | 2.00 | | | $ | 0.55 | | Diluted | $ | 0.04 | | | $ | 0.04 | | | $ | 0.23 | | | $ | 0.29 | |
For the three and nine months ended SeptemberJune 30, 2020, there2021, a total of 53,690 stock options with an exercise price of $17.50 per share were no anti-dilutive shares excluded from the calculation of diluted EPS.EPS because the options' exercise price was greater than the average market price of common shares, resulting in an antidilutive effect.
For the six months ended June 30, 2021, a total of 53,690 stock options with an exercise price of $17.50 per share were excluded from the calculation of diluted EPS because the options' exercise price was greater than the average market price of common shares, resulting in an antidilutive effect.
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, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Balance at beginning of period | $ | 8,703 | | | $ | 4,051 | | | $ | 4,821 | | | $ | (2,003) | |
Other comprehensive income, net of tax: | | | | | | | |
Unrealized investment gains: | | | | | | | |
Unrealized investment gains arising during the period | 686 | | | 1,189 | | | 5,715 | | | 8,942 | |
Income tax expense | 144 | | | 249 | | | 1,198 | | | 1,878 | |
Unrealized investment gains, net of tax | 542 | | | 940 | | | 4,517 | | | 7,064 | |
Less: reclassification adjustments to: | | | | | | | |
Net realized investment gains (losses) included in net realized capital gains (losses) | 114 | | | (34) | | | 232 | | | 55 | |
Income tax expense (benefit) | 24 | | | (8) | | | 49 | | | 11 | |
Total reclassifications included in net income, net of tax | 90 | | | (26) | | | 183 | | | 44 | |
Other comprehensive income | 452 | | | 966 | | | 4,334 | | | 7,020 | |
Balance at end of period | $ | 9,155 | | | $ | 5,017 | | | $ | 9,155 | | | $ | 5,017 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Balance at beginning of period | $ | 6,641 | | | $ | 5,611 | | | $ | 13,426 | | | $ | 6,500 | |
Other comprehensive gain (loss), net of tax: | | | | | | | |
Unrealized investment gain (loss): | | | | | | | |
Unrealized investment gains (losses) arising during the period | $ | 2,325 | | | $ | 9,242 | | | $ | (6,251) | | | $ | 8,235 | |
Income tax expense (benefit) | $ | 488 | | | $ | 1,938 | | | $ | (1,313) | | | $ | 1,727 | |
Unrealized investment gain (loss), net of tax | $ | 1,837 | | | $ | 7,304 | | | $ | (4,938) | | | $ | 6,508 | |
Less: reclassification adjustments to: | | | | | | | |
Net realized investment gains (losses) included in net realized capital gains (losses) | $ | 10 | | | $ | (1) | | | $ | 23 | | | $ | 118 | |
Income tax expense (benefit) | $ | 2 | | | $ | (1) | | | $ | 5 | | | $ | 25 | |
Total reclassifications included in net income, net of tax | $ | 8 | | | $ | 0 | | | $ | 18 | | | $ | 93 | |
Other comprehensive income (loss) | $ | 1,829 | | | $ | 7,304 | | | $ | (4,956) | | | $ | 6,415 | |
Balance at end of period | $ | 8,470 | | | $ | 12,915 | | | $ | 8,470 | | | $ | 12,915 | |
Note 15. Stock-BasedStock Compensation
As of SeptemberJune 30, 2020,2021, the Company has one incentive plan, the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan, (the 2020"2020 Omnibus Plan)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 whose contributions are essential to the growth and success of the business of the Company and its affiliates, in order 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 Company’sCompensation, 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 options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses, other stock-basedstock awards or any combination of the foregoing.
Stock Options
Compensation expense is recognized for all stock-basedstock compensation arrangements by the Company. Stock-basedStock compensation expense related to stock option awards was $28$34 and $69 for the three and ninesix months ended SeptemberJune 30, 2020.2021, 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 (ISO) 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 wasis based on a weighted average expected volatility of an industry peer group of insurance companies of similar size, life cycle and 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 22021 |
Expected volatility | 29.8% |
Expected term | 6 years |
Risk-free interest rate | 0.47%1.32% |
A summary of the status of the Company's stock option activity as of SeptemberJune 30, 20202021 and changes during the nine monthssix-month period then ended are as follows:
| | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price |
Balance outstanding, December 31, 2019 | 0 | | | $ | 0 | |
Granted | 89,920 | | | $ | 15.00 | |
Balance outstanding, September 30, 2020 | 89,920 | | | $ | 15.00 | |
Options exercisable, September 30, 2020 | 0 | | | $ | 0 | |
| | | | | | | | | | | |
| Stock Options | | Weighted Average Exercise Price |
Balance outstanding, December 31, 2020 | 89,920 | | | $ | 15.00 | |
Granted | 60,729 | | | $ | 17.50 | |
Forfeited or cancelled | (27,646) | | | $ | 15.64 | |
Balance outstanding, June 30, 2021 | 123,003 | | | $ | 16.09 | |
Options exercisable, June 30, 2021 | 0 | | | $ | 0 | |
The following table summarizes information regarding stock options outstanding as of SeptemberJune 30, 2020:2021:
| | | Options Outstanding | | Options Vested or Expected to Vest | | Options Outstanding | | Options Vested or Expected to Vest |
Stock Options | Stock Options | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Term | | Aggregate Intrinsic Value | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Term | | Aggregate Intrinsic Value | Stock Options | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Term | | Aggregate Intrinsic Value | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Term | | Aggregate Intrinsic Value |
2020 Omnibus Plan | 2020 Omnibus Plan | 89,920 | | | $ | 15.00 | | | 9.83 years | | $ | 22,480 | | | 89,920 | | | $ | 15.00 | | | 9.83 years | | $ | 22,480 | | 2020 Omnibus Plan | 123,003 | | | $ | 16.09 | | | 9.22 years | | $ | 91 | | | 123,003 | | | $ | 16.09 | | | 9.22 years | | $ | 91 | |
The weighted average grant-date fair value of options granted in the ninesix months ended SeptemberJune 30, 20202021 was $4.43.$5.49. As of SeptemberJune 30, 2020,2021, total unrecognized compensation cost related to stock options was $370$472 and is expected to be recognized over a weighted average period of approximately 1.51.3 years.
Restricted Stock Units
Compensation expense relating to restricted stock unit grants was $279$385 and $561 for the three and ninesix months ended SeptemberJune 30, 2020.2021, respectively. As of SeptemberJune 30, 20202021, there was $1,458$4,088 of total unrecognized compensation cost related to non-vested restricted stock unit grants. That costgrants, which is expected to be recognized over a weighted average expected life of 2.72.6 years. The total fair value of restricted stock units vested during the ninethree and six months ended SeptemberJune 30, 20202021 was $174.$136.
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.
The Company has granted restricted stock units A Monte Carlo valuation model is used to certain key employees as part ofestimate the Company's long-term incentive program. The restricted stockfair value for market-based vesting awards. RSUs generally vestsvest in three equal annual installments beginning one year from the grant date and is being 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 shareholdersstockholders following the date of grant. The grants are amortized as director compensation expense over the twelve-month 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 volatility | | 35.0 | % |
Weighted average expected life | | 2.77 years |
Risk-free interest rate | | 0.27 | % |
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 above | | 200% |
A summary of the status of the Company’s non-vested restricted stock unit activity as of SeptemberJune 30, 20202021 and changes during the nine-monthsix-month period then ended is as follows:
| | | Employees | | Non-Employee Directors | | Total | | RSUs | | MSUs | | PSUs | | Total |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Non-vested outstanding, December 31, 2019 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | |
Non-vested outstanding, December 31, 2020 | | Non-vested outstanding, December 31, 2020 | 111,588 | | | $ | 14.99 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | 111,588 | | | $ | 14.99 | |
Granted | Granted | 106,160 | | | $ | 15.42 | | | 6,668 | | | $ | 15.12 | | | 112,828 | | | $ | 15.40 | | Granted | 60,729 | | | $ | 17.50 | | | 60,715 | | | $ | 13.92 | | | 121,458 | | | $ | 17.50 | | | 242,902 | | | $ | 16.61 | |
Vested | Vested | (11,240) | | | $ | 15.51 | | | 0 | | | $ | 0 | | | (11,240) | | | $ | 15.51 | | Vested | (8,541) | | | $ | 15.21 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | (8,541) | | | $ | 15.21 | |
Non-vested outstanding, September 30, 2020 | 94,920 | | | $ | 15.41 | | | 6,668 | | | $ | 15.12 | | | 101,588 | | | $ | 15.39 | | |
Forfeited or cancelled | | Forfeited or cancelled | (27,646) | | | $ | 16.02 | | | (7,039) | | | $ | 13.92 | | | (14,078) | | | $ | 17.50 | | | (48,763) | | | $ | 16.14 | |
Non-vested outstanding, June 30, 2021 | | Non-vested outstanding, June 30, 2021 | 136,130 | | | $ | 15.89 | | | 53,676 | | | $ | 13.92 | | | 107,380 | | | $ | 17.50 | | | 297,186 | | | $ | 16.11 | |
Pre-IPO Stock-Based Compensation
On June 15, 2017, the Company entered into a Management Incentive Unit Agreement with an individual, who is a member of 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. All shares granted were vested as part of the IPO of Trean Insurance Group, Inc. during the third quarter. There was 0 non-vested stock-based compensation related to pre-IPO grants as of September 30, 2020. The Company recognized approximately $157 and $197 of stock based compensation expense for the three and nine months ended September 30, 2020, respectively. The Company recognized approximately $20 and $59 of stock based compensation expense for the three and nine months ended September 30, 2019.
Note 16. Transactions with Related Parties
The Company owed Altaris Capital Partners, LLC, a private equity firm and significant shareholder of the Company, approximately $83, which is included within accounts payable and accrued expenses on the condensed consolidated balance sheet as of December 31, 2019.
The Company was owed amounts from TRI of approximately $33 and $14 as of September 30, 2020 and December 31, 2019, respectively, which is included in related party receivables on the condensed consolidated balance sheet. The Company recorded $50 and $150$100 of revenue for consulting services provided to TRI for the three and ninesix months ended SeptemberJune 30, 2020, respectively, which is included in other revenue on the condensed consolidated statements of operations. The Company recorded $502021 and $150 of revenue for consulting services provided to TRI for the three and nine months ended September 30, 2019,2020, respectively.
Effective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining ownership interest in Compstar (See Note 2). Prior to the acquisition, the Company owned a 45% interest in Compstar, a program manager that 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 $17,709 for the nine months ended September 30, 2020. The Company recorded $47,825$7,737 and $127,516 of gross earned premiums resulting in gross commissions of $9,924 and $26,478$17,709 due to Compstar for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. All receivables are stated net of the commissions due under the Program Manager Agreement and totaled $22,207 as of December 31, 2019 which is recorded in related party receivables on the condensed consolidated balance sheets.
Note 17. Subsequent Events
Events or transactions that occur after the balance sheet date, but before the condensed consolidated 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 causedOn July 6, 2021, Trean Corp acquired 100% ownership in Western Integrated Care, LLC ("WIC") for a contraction in business activity and volatility in financial markets. The Company took several actionsbase purchase price of $4,000. WIC offers services to protect the health of the public and itsworkers' compensation insurers to enable 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 impactwho are injured 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 continuejob 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.access qualified medical treatment.
On October 1, 2020, Benchmark Holding Company acquired 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 $12,140. 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, created and staffed by experienced firefighters and EMS professionals.
On October 7, 2020,August 11, 2021, Trean Corp redeemed all of the Subordinated Notessold its remaining ownership interest in TRI for a total payoff amount of $7,807.$1,888.
All of the effects of subsequent events that provide additional evidence about conditions that existed at the condensed consolidated balance sheet date, including the estimates inherent in the process of preparing the condensed consolidated financial statements, are recognized in the condensed consolidated 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 ninesix months ended SeptemberJune 30, 20202021 is qualified by reference to and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included herein and the audited combinedconsolidated financial statements and notes of BIC and Trean as of December 31, 2019 and 2018 as filed onincluded in our 2020 Form S-1.10-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 sectionItem 1A — "Risk Factors."Factors" in our Quarterly Report on2020 Form 10-Q filed with the SEC on August 28, 2020.10-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 refer 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,IPO, and (ii) 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 Discussion and Analysis of Financial Condition and Results of Operations containThis Quarterly Report on Form 10-Q contains forward-looking statements as that term is defined inwithin the Private Securities Litigation Reform Actmeaning of 1995. the federal securities laws, which statements involve substantial risks and 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. Theseevents, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions, which in many cases are only predictionsbeyond our control, as described in "Item 1A — Risk Factors," and are not guarantees of future performance. Forward-lookingelsewhere in this Quarterly Report on Form 10-Q. Our statements involvereflecting these risks and uncertainties are not exhaustive, and other risks and uncertainties may currently exist or may arise in the future that could cause actualhave material effects on our business, operations and financial condition. We cannot assure you that the results, to differ materially from thoseevents and circumstances reflected in the forward-lookingforward looking statements if the underlying assumptions prove to be incorrect or as a result of risks, uncertainties, and other factors, including the impact of the COVID-19 pandemic on the business and operations of the Company, our program partners and other business relations. Other factors that may cause such differences include those risks describedreflected in the "Risk Factors" section in ourthis Quarterly Report on Form 10-Q filed withand our other public statements and securities filings will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the SEC on August 28, 2020. forward 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 required by 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 developments, changes in assumptions or otherwise. Investors are cautioned not to place undue reliance on the forward-looking statements contained herein or in other filings and public statements made by us.SEC.
Overview
We are a 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.
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 shareholders.stockholders. On July 22, 2020, Trean Insurance Group, Inc. closed the sale of an additional 1,207,142 shares by certain selling shareholdersstockholders in the IPO pursuant to the exercise of the underwriters’ option to purchase additional shares to cover over-allotments. The IPO price per share was $15.00 and 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 shareholdersstockholders in the IPO waswere approximately $71,678. The shares began trading on the Nasdaq Global Select Market on July 16, 2020 under the symbol "TIG"."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 Trean and 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 paidmade a one-time payment to Altaris Capital Partners, LLC in connection with the termination of the Company's consulting and advisory agreements as well as one-timepaid bonuses to employees and pre-IPO unitholders.unitholders for the successful completion of the IPO. The aggregate one-timeamount of these payments totaled $11,054 and are included$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 did not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. As a result of this offering, the "IPO bonuses and contract buyout fee" line onAltaris Funds no longer beneficially own more than 50% of the condensed consolidated statementoutstanding common stock of operations.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, which is included in gain on revaluation of Compstar investment on the condensed consolidated statement of operations.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.
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 will now 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 will be 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.
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 may 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 experienced a material impact to our premium revenue in the first ninesix months of 20202021 as a result of the COVID-19 pandemic. Only 10.0%Less than 20.0% of our business falls under hospitality, healthcare, and education, where the majority of layoffs in response to the pandemic have occurred so far. Gross written premiums have increased by 23.0% and gross earned premiums have increased by 7.3% duringDuring the quarter ended SeptemberJune 30, 20202021 compared to the quarter ended SeptemberJune 30, 20192020, gross written premiums increased 42.8%, primarily driven by growth in our existing Program Partner business as well as the addition of new Program Partners, and gross earned premiums increased 38.1%, primarily driven by the increase in gross written premiums. On a year-to-date basis,During the six months ended June 30, 2021, compared to the six months ended June 30, 2020, gross written premiums have increased by 11.6%39.5% and gross earned premiums have increased by 5.0% during the nine months ended September 30, 2020 compared to the nine months ended September 30, 201932.9%, primarily driven by both significant growth in our existing Program Partner business as well as the increase in gross written premiums. As over 70%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 20202021 and possibly beyond. 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 experienced a material impact in our reported claims or incurred losses in the first ninesix months of 20202021 as a result of the COVID-19 pandemic. Losses and LAE increased $1,588,$17,542, or 11.4%144.0%, to $15,564$29,725 for the three months ended SeptemberJune 30, 2020,2021, compared to $13,976$12,183 for the three months ended SeptemberJune 30, 2019.2020. On a year-to-date basis, lossesloss and LAE increased $2,235,$29,489, or 5.8%117.4%, to $40,681$54,606 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $38,446$25,117 for the ninesix months ended SeptemberJune 30, 2019,2020, with the increase primarily attributable to the growth in earned premiums during the period. In addition, our loss ratio decreasedincreased to 55.9%62.0% and 56.7%61.3%, respectively, during the third quarterthree and nine-month periodssix months ending SeptemberJune 30, 20202021 from 63.1%57.0% and 59.0%57.3%, respectively, for the comparable 2019 periods.2020 periods, attributable primarily to losses incurred on our workers' compensation line of business as well as property losses incurred during the first quarter.
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 ninesix months ended SeptemberJune 30, 2020,2021, we have experienced a net increaseslight decrease of $6,251, or 1.5%,$5,715 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 September 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:
•Additionaddition and retention of Program Partners;
•Newnew business submissions to our Program Partners;
•Bindingbinding of new business submissions into policies;
•Renewalsrenewals of existing policies; and
•Averageaverage 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 are held for the benefit of our Program Partners, as well as unrealized gains and losses on our equity portfolio.
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" 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 costs
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 policy acquisition costs and other underwriting expenses. 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. Policy acquisition costs that are directly related to the successful acquisition or reinsurance of those policies are deferred. The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life. Other general and administrative expenses include employee salaries and benefits, corporate insurance costs, technology costs, office rent and professional services fees such as legal, accounting 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 share-basedstock compensation: Noncash share-basedstock compensation includeincludes 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 consists of realized and unrealized gains and losses on investments held under reinsurance agreements.
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").
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.
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 income is a non-GAAP financial measure defined as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, intangible asset amortization, noncash share-basedstock compensation, gains and losses on embedded derivatives, interest expense, other revenue interest expense and other income.income and
expenses. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of underwriting income to income before taxes in accordance with GAAP.
Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of certain items, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and share-basedstock compensation, ornoncash unrealized gains and losses on embedded derivatives, other expenses and gains or losses that we believe do not reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results across periods. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of adjusted net income to net income in accordance with GAAP.
Loss ratio, expressed as a percentage, is the ratio of losses and LAE to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of general and administrative expenses to net earned premiums.
Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending shareholders'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 shareholders'stockholders' equity during the period. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
Tangible shareholders'stockholders' equity is defined as shareholders'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 shareholders'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 shareholders'stockholders' equity during the period. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
Results of Operations
Consolidated Results of Operations for the Three Months Ended SeptemberJune 30, 20202021 Compared to SeptemberJune 30, 20192020
The following table summarizes our results of operations for the three months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | Three Months Ended September 30, | | Change | | Percentage Change | | Three Months Ended June 30, | | Change | | Percentage Change (1) |
(in thousands, except for percentages) | (in thousands, except for percentages) | 2020 | | 2019 | | (in thousands, except for percentages) | 2021 | | 2020 | |
Revenues | Revenues | | | | | | | | Revenues | | | | | | | |
Gross written premiums | Gross written premiums | $ | 132,284 | | | $ | 107,534 | | | $ | 24,750 | | | 23.0 | % | Gross written premiums | $ | 156,551 | | | $ | 109,612 | | | $ | 46,939 | | | 42.8 | % |
Increase in gross unearned premiums | Increase in gross unearned premiums | (22,963) | | | (5,612) | | | (17,351) | | | 309.2 | % | Increase in gross unearned premiums | (17,927) | | | (9,265) | | | (8,662) | | | 93.5 | % |
Gross earned premiums | Gross earned premiums | 109,321 | | | 101,922 | | | 7,399 | | | 7.3 | % | Gross earned premiums | 138,624 | | | 100,347 | | | 38,277 | | | 38.1 | % |
Ceded earned premiums | Ceded earned premiums | (81,465) | | | (79,761) | | | (1,704) | | | 2.1 | % | Ceded earned premiums | (90,681) | | | (78,968) | | | (11,713) | | | 14.8 | % |
Net earned premiums | Net earned premiums | 27,856 | | | 22,161 | | | 5,695 | | | 25.7 | % | Net earned premiums | 47,943 | | | 21,379 | | | 26,564 | | | 124.3 | % |
Net investment income | Net investment income | 1,857 | | | 1,721 | | | 136 | | | 7.9 | % | Net investment income | 2,103 | | | 2,525 | | | (422) | | | (16.7) | % |
Gain on revaluation of Compstar investment | 69,846 | | | — | | | 69,846 | | | 100.0 | % | |
Net realized capital gains (losses) | Net realized capital gains (losses) | 115 | | | (34) | | | 149 | | | (438.2) | % | Net realized capital gains (losses) | 10 | | | (4) | | | 14 | | | NM |
Other revenue | Other revenue | 5,401 | | | 2,561 | | | 2,840 | | | 110.9 | % | Other revenue | 1,229 | | | 1,530 | | | (301) | | | (19.7) | % |
Total revenue | Total revenue | 105,075 | | | 26,409 | | | 78,666 | | | 297.9 | % | Total revenue | 51,285 | | | 25,430 | | | 25,855 | | | 101.7 | % |
Expenses | Expenses | | Expenses | |
Losses and loss adjustment expenses | Losses and loss adjustment expenses | 15,564 | | | 13,976 | | | 1,588 | | | 11.4 | % | Losses and loss adjustment expenses | 29,725 | | | 12,183 | | | 17,542 | | | 144.0 | % |
General and administrative expenses | General and administrative expenses | 6,995 | | | 5,756 | | | 1,239 | | | 21.5 | % | General and administrative expenses | 15,267 | | | 8,293 | | | 6,974 | | | 84.1 | % |
IPO bonuses and contract buyout fee | 11,054 | | | — | | | 11,054 | | | 100.0 | % | |
Other expenses | | Other expenses | 845 | | | — | | | 845 | | | NM |
Intangible asset amortization | Intangible asset amortization | 1,120 | | | 11 | | | 1,109 | | | 10,081.8 | % | Intangible asset amortization | 1,413 | | | 23 | | | 1,390 | | | NM |
Noncash share-based compensation | 307 | | | — | | | 307 | | | 100.0 | % | |
Noncash stock compensation | | Noncash stock compensation | 419 | | | — | | | 419 | | | NM |
Interest expense | Interest expense | 520 | | | 498 | | | 22 | | | 4.4 | % | Interest expense | 425 | | | 501 | | | (76) | | | (15.2) | % |
Total expenses | Total expenses | 35,560 | | | 20,241 | | | 15,319 | | | 75.7 | % | Total expenses | 48,094 | | | 21,000 | | | 27,094 | | | 129.0 | % |
Other income (expense) | 209 | | | (8) | | | 217 | | | (2,712.5) | % | |
Gains (losses) on embedded derivatives | | Gains (losses) on embedded derivatives | (686) | | | (3,991) | | | 3,305 | | | (82.8) | % |
Other income | | Other income | 35 | | | 40 | | | (5) | | | (12.5) | % |
Income before taxes | Income before taxes | 69,724 | | | 6,160 | | | 63,564 | | | 1,031.9 | % | Income before taxes | 2,540 | | | 479 | | | 2,061 | | | NM |
Income tax expense | Income tax expense | 788 | | | 1,395 | | | (607) | | | (43.5) | % | Income tax expense | 414 | | | 351 | | | 63 | | | 17.9 | % |
Equity earnings in affiliates, net of tax | Equity earnings in affiliates, net of tax | 401 | | | 1,021 | | | (620) | | | (60.7) | % | Equity earnings in affiliates, net of tax | — | | | 1,230 | | | (1,230) | | | (100.0) | % |
Net income | Net income | $ | 69,337 | | | $ | 5,786 | | | $ | 63,551 | | | 1,098.4 | % | Net income | $ | 2,126 | | | $ | 1,358 | | | $ | 768 | | | 56.6 | % |
| (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. |
| | | | | | | | | | | |
| Three Months Ended September 30, |
(in thousands, except for percentages) | 2020 | | 2019 |
Key metrics: | | | |
Underwriting income(1) | $ | 5,297 | | | $ | 2,429 | |
Adjusted net income(1) | $ | 10,477 | | | $ | 6,474 | |
Loss ratio | 55.9 | % | | 63.1 | % |
Expense ratio | 25.1 | % | | 26.0 | % |
Combined ratio | 81.0 | % | | 89.1 | % |
Return on equity | 102.5 | % | | 18.0 | % |
Adjusted return on equity(1) | 15.5 | % | | 20.2 | % |
Return on tangible equity(1) | 171.2 | % | | 18.5 | % |
Adjusted return on tangible equity(1) | 25.9 | % | | 20.7 | % |
(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) | 2021 | | 2020 |
Key metrics: | | | |
Underwriting income(1) | $ | 2,951 | | | $ | 903 | |
Adjusted net income(1) | $ | 4,316 | | | $ | 4,789 | |
Loss ratio | 62.0 | % | | 57.0 | % |
Expense ratio | 31.8 | % | | 38.8 | % |
Combined ratio | 93.8 | % | | 95.8 | % |
Return on equity | 2.0 | % | | 3.8 | % |
Adjusted return on equity(1) | 4.2 | % | | 13.2 | % |
Return on tangible equity(1) | 4.2 | % | | 3.8 | % |
Adjusted return on tangible equity(1) | 8.6 | % | | 13.6 | % |
| | | |
(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. |
Gross written premiums: Gross written premiums increased $24,750,$46,939, or 23.0%42.8%, to $132,284$156,551 for the three months ended SeptemberJune 30, 2020,2021, compared to $107,534$109,612 for the three months ended SeptemberJune 30, 2019.2020. The increase is primarily attributable to the growth in our existing Program Partner business, the addition of new Program Partners brought on board duringadded since the second quarter of 2020 and third quartersthe acquisition of 7710 Insurance Company in the fourth quarter of 2020. The changes in gross written premiums were most notably due to the following lines of business:
Workers' compensation which represented 72.7%60.0% of our gross written premiums for the three months ended SeptemberJune 30, 2020,2021, compared to 75.9% for the three months ended June 30, 2020. For the three months ended June 30, 2021, gross written premiums for workers' compensation increased by $5,480,$10,815, or 6.0%13.0%, compared to the three months ended September 30, 2019.same period in 2020.
All other non-workers' compensation liability, which primarily includes commercial auto, homeowners, other liability and accident & health lines of business, represented 27.3%40.0% of our gross written premiums for the three months ended SeptemberJune 30, 2020,2021, compared to 24.1% for the three months ended June 30, 2020. For the three months ended June 30, 2021, gross written premiums for all other non-workers' compensation liability increased $19,270,$36,124, or 114.1%136.6%, compared to the three months ended September 30, 2019.same period in 2020.
Gross earned premiums: Gross earned premiums increased $7,399,$38,277, or 7.3%38.1%, to $109,321$138,624 for the three months ended SeptemberJune 30, 2020,2021, compared to $101,922$100,347 for the three months ended SeptemberJune 30, 2019.2020. The increase is drivena result of the increase in gross written premiums, offset by the increase in gross written premium, partially offset by the increase in unearned premiums of $17,351,$8,662, driven by the overall growth in premiums, which is due to the addition of new Program Partners in the second and third quarter whose premiums are largely unearned as of SeptemberJune 30, 2020.2021. Gross earned premiums as a percentage of gross written premiums decreased to 82.6%88.5% for the three months ended SeptemberJune 30, 2020,2021, compared to 94.8%91.5%, for the three months ended SeptemberJune 30, 2019.2020.
Ceded earned premiums: Ceded earned premiums increased $1,704,$11,713, or 2.1%14.8%, to $81,465$90,681 for the three months ended SeptemberJune 30, 2020,2021, compared to $79,761$78,968 for the three months ended SeptemberJune 30, 2019.2020. The increase in ceded earned premiums is primarily due to the growth in the earned premiums of Compstar as well as the addition of new Program Partners duringsince the second and third quarter of 2020 whose premiums are largely ceded. The total ceded earned premiums as a percentage of gross earned premiums decreased to 74.5%65.4% for the three months ended SeptemberJune 30, 2020,2021, compared to 78.3%78.7% for the three months ended SeptemberJune 30, 2019.2020, primarily driven by the Company's retention of a larger portion of gross written premiums.
Net earned premiums: Net earned premiums increased $5,695,$26,564, or 25.7%124.3%, to $27,856$47,943 for the three months ended SeptemberJune 30, 2020,2021, compared to $22,161$21,379 for the three months ended SeptemberJune 30, 2019.2020. The increase is primarily due primarily to the increase in gross written and earned premiums described above, partially offset by the increase in ceded earned premiums over the three months ended SeptemberJune 30, 2019.2021.
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 | | Three Months Ended June 30, | | Percentage Change (1) |
(in thousands, except percentages) | (in thousands, except percentages) | 2020 | | 2019 | | Change | | (in thousands, except percentages) | 2021 | | 2020 | | Change | |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | |
Gross written premiums | Gross written premiums | $ | 132,284 | | | $ | 107,534 | | | $ | 24,750 | | | 23.0 | % | Gross written premiums | $ | 156,551 | | | $ | 109,612 | | | $ | 46,939 | | | 42.8 | % |
Increase in gross unearned premiums | Increase in gross unearned premiums | (22,963) | | | (5,612) | | | (17,351) | | | 309.2 | % | Increase in gross unearned premiums | (17,927) | | | (9,265) | | | (8,662) | | | 93.5 | % |
Gross earned premiums | Gross earned premiums | 109,321 | | | 101,922 | | | 7,399 | | | 7.3 | % | Gross earned premiums | 138,624 | | | 100,347 | | | 38,277 | | | 38.1 | % |
Ceded earned premiums | Ceded earned premiums | (81,465) | | | (79,761) | | | (1,704) | | | 2.1 | % | Ceded earned premiums | (90,681) | | | (78,968) | | | (11,713) | | | 14.8 | % |
Net earned premiums | Net earned premiums | $ | 27,856 | | | $ | 22,161 | | | $ | 5,695 | | | 25.7 | % | Net earned premiums | $ | 47,943 | | | $ | 21,379 | | | $ | 26,564 | | | 124.3 | % |
| (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. |
Net investment income: Net investment income increased $136,decreased $422, or 7.9%16.7%, to $1,857$2,103 for the three months ended SeptemberJune 30, 2020,2021, compared to $1,721$2,525 for the three months ended SeptemberJune 30, 2019.2020. The increasedecrease is driven by an increasedue primarily to a reduction in the Company's fixed maturity investment portfolio.income from funds held investments.
Net realized capital gains (losses): Net realized capital gains (losses) increased $149$14 to a gain of $115$10 for the three months ended SeptemberJune 30, 2020,2021, compared to a lossnet capital losses of $34$4 for the three months ended SeptemberJune 30, 2019. The increase is due to an increase in net gains recorded for trading activity during the current period.2020.
Other revenue: Other revenue increased $2,840,decreased $301, or 110.9%19.7%, to $5,401$1,229 for the three months ended SeptemberJune 30, 2020,2021, compared to $2,561$1,530 for the three months ended SeptemberJune 30, 2019.2020. The increasedecrease is driven by an increasea reduction in brokerage revenue of $2,602management fees due to the effective datesexpiration of reinsurance contracts for current and new Program Partners and increases in estimated premiums on reinsurance contracts.a management contract at the end of the first quarter of 2021.
Losses and loss adjustment expenses: Losses and LAE increased $1,588,$17,542, or 11.4%144.0%, to $15,564$29,725 for the three months ended SeptemberJune 30, 2020,2021, compared to $13,976$12,183 for the three months ended SeptemberJune 30, 2019.2020. The increase is directly attributable to the increasegrowth in earned premiums during the period and a decreaseas well as an increase in favorablethe Company's loss reserve estimate true-ups maderatio experienced during the three months ended SeptemberJune 30, 2020 versus the three months ended September 30, 2019.2021. The Company's loss ratio decreasedincreased to 55.9%62.0% for the three months ended SeptemberJune 30, 20202021 compared to 63.1%57.0% for the three months ended SeptemberJune 30, 2019,2020, primarily asattributable to a resultnumber of increases in estimatedunusually large losses incurred but not reportedexperienced during the three months ended September 30, 2019.first half of 2021.
General and administrative expenses: General and administrative expenses increased $1,239,$6,974, or 21.5%84.1%, to $6,995$15,267 for the three months ended SeptemberJune 30, 2020,2021, compared to $5,756$8,293 for the three months ended SeptemberJune 30, 2019. The2020. This change resulted in a decrease in the Company's expense ratio decreased to 25.1%31.8% for the three months ended SeptemberJune 30, 2020,2021, compared to 26.0%38.8% for the three months ended SeptemberJune 30, 2019. The increase is attributable to (i)2020, a 700 basis point improvement. Net commissions increased $2,507, driven primarily by an increase in retention, partially offset by a reduction in our net agent commissionscommission rate. Insurance-related expenses increased $1,525, primarily as a result of $1,869 resulting from an increase in written premium; (ii)gross earned premiums. General and administrative operating expenses increased $2,942, primarily as a result of (i) an increase in salaries and benefits of $1,260 resulting$2,416, of which $1,381 directly resulted from an increasedacquisitions made in the second half of 2020 and a general increase in workforce; (iii)(ii) an increase in professional service expense of $375, driven byoffice-related expenses and rent totaling $1,016 due to an increase of $258 relating to the Company's post-IPO readinessin business insurance expense as well as legalthe addition of new office locations; and consulting expenses; (iv) an increase in insurance related expenses of $307 as a result of increased written premium and (v)(iii) additional IT software and systems costs totaling $269 relating$490 related to an increased workforcenew software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19. These increases areautomation initiatives; offset by a net reductiondecrease in professional fees of $1,408 as a result of the Company's IPO readiness effort in 2020.
The table below shows the components of general and administrative expenses for the respective three month periods:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2021 | | 2020 | | Change |
Direct commissions | $ | 27,602 | | | $ | 21,463 | | | $ | 6,139 | |
Ceding commissions | (29,684) | | | (26,052) | | | (3,632) | |
Net commissions | (2,082) | | | (4,589) | | | 2,507 | |
Insurance-related expenses | 5,149 | | | 3,624 | | | 1,525 | |
General and administrative operating expenses | 12,200 | | | 9,258 | | | 2,942 | |
Total general and administrative expenses | $ | 15,267 | | | $ | 8,293 | | | $ | 6,974 | |
| | | | | |
General and administrative expenses — % of gross written premiums | 7.8 | % | | 8.4 | % | | |
Retention rate (1) | 34.6 | % | | 21.3 | % | | |
Direct commission rate (2) | 19.9 | % | | 21.4 | % | | |
Ceding commission rate (3) | 32.7 | % | | 33.0 | % | | |
|
(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. |
Other expenses: Other expenses were $845 for the three months ended June 30, 2021, which primarily relates to secondary offering costs of $3,000 as a result of synergies gained from the acquisition of Compstar during the quarter.$555 and executive transition and other costs totaling $290.
Intangible asset amortization: Intangible asset amortization increased $1,109$1,390 to $1,120$1,413 for the three months ended SeptemberJune 30, 2020,2021, compared to $11$23 for the three months ended SeptemberJune 30, 2019.2020. The increase is driven by the addition of intangible assets acquired as a result of the Company's purchase of the remaining equity interest of Compstar in the third quarter.quarter of 2020 and 7710 Insurance Company in the fourth quarter of 2020.
Noncash share-basedstock compensation: Noncash share-basedstock compensation was $307$419 for the three months ended SeptemberJune 30, 2020.2021. Expenses incurred during the period relaterelated to restricted stock units and stock options granted under the Company's 2020 Omnibus Plan duringPlan.
Gains (losses) on embedded derivatives: The Company recorded losses on embedded derivatives of $686 for the quarter.three months ended June 30, 2021, compared to $3,991 for the three months ended June 30, 2020. The decrease is primarily due to a reduction in unrealized losses on funds held investments of $2,823 and a reduction of expenses on funds held investments of $482.
Income tax expense: Income tax expense was $788$414 for the three months ended SeptemberJune 30, 2020,2021, which resulted in an effective tax rate of 1.1%, compared to $1,395 for the three months ended September 30, 2019, which resulted in an effective
tax rate of 22.6%16.3%. The decrease in the effective tax rate from the statutory rate of 21% is due primarily to the non-tax impact of the gain recordedtax exempt municipal income on the revaluationCompany's investments. For the three months ended June 30, 2020 income tax expense was $351, which resulted in an effective tax rate of 73.3%. The increase in the Company's original 45% investment in Compstar, offset by certain IPO-related expenses not deductible foreffective tax purposes.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.
Equity earnings in affiliates, net of tax: Equity earnings in affiliates, net of tax decreased $620$1,230 to $401$0 for the three months ended SeptemberJune 30, 2020,2021, compared to $1,021$1,230 for the three months ended SeptemberJune 30, 2019. The2020. This decrease is due to the reduction in the Company's share of earnings in Compstar decreased by $518 due toof $1,230 as a result of the Company acquiringacquisition of the remaining ownership interest in Compstar and no longer accounting for its investment as an equity method investment. In addition, the Company's share of earnings in TRI, which is also no longer carried as an equity method investment, decreased $104 due to the sale of a portion of the Company's investment during the firstthird quarter of 2020.
Consolidated Results of Operations for the NineSix Months Ended SeptemberJune 30, 20202021 Compared to SeptemberJune 30, 20192020
The following table summarizes our results of operations for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | Nine Months Ended September 30, | | Change | | Percentage Change | | Six Months Ended June 30, | | Change | | Percentage Change (1) |
(in thousands, except for percentages) | (in thousands, except for percentages) | 2020 | | 2019 | | (in thousands, except for percentages) | 2021 | | 2020 | |
Revenues | Revenues | | | | | | | | Revenues | | | | | | | |
Gross written premiums | Gross written premiums | $ | 349,755 | | | $ | 313,488 | | | $ | 36,267 | | | 11.6 | % | Gross written premiums | $ | 303,281 | | | $ | 217,471 | | | $ | 85,810 | | | 39.5 | % |
Increase in gross unearned premiums | Increase in gross unearned premiums | (39,601) | | | (18,099) | | | (21,502) | | | 118.8 | % | Increase in gross unearned premiums | (36,358) | | | (16,638) | | | (19,720) | | | 118.5 | % |
Gross earned premiums | Gross earned premiums | 310,154 | | | 295,389 | | | 14,765 | | | 5.0 | % | Gross earned premiums | 266,923 | | | 200,833 | | | 66,090 | | | 32.9 | % |
Ceded earned premiums | Ceded earned premiums | (238,460) | | | (230,227) | | | (8,233) | | | 3.6 | % | Ceded earned premiums | (177,846) | | | (156,995) | | | (20,851) | | | 13.3 | % |
Net earned premiums | Net earned premiums | 71,694 | | | 65,162 | | | 6,532 | | | 10.0 | % | Net earned premiums | 89,077 | | | 43,838 | | | 45,239 | | | 103.2 | % |
Net investment income | Net investment income | 6,653 | | | 4,578 | | | 2,075 | | | 45.3 | % | Net investment income | 4,375 | | | 6,770 | | | (2,395) | | | (35.4) | % |
Gain on revaluation of Compstar investment | 69,846 | | | — | | | 69,846 | | | 100.0 | % | |
Net realized capital gains | Net realized capital gains | 3,345 | | | 689 | | | 2,656 | | | 385.5 | % | Net realized capital gains | 23 | | | 3,230 | | | (3,207) | | | (99.3) | % |
Other revenue | Other revenue | 11,323 | | | 8,049 | | | 3,274 | | | 40.7 | % | Other revenue | 5,884 | | | 5,922 | | | (38) | | | (0.6) | % |
Total revenue | Total revenue | 162,861 | | | 78,478 | | | 84,383 | | | 107.5 | % | Total revenue | 99,359 | | | 59,760 | | | 39,599 | | | 66.3 | % |
Expenses | Expenses | | Expenses | |
Losses and loss adjustment expenses | Losses and loss adjustment expenses | 40,681 | | | 38,446 | | | 2,235 | | | 5.8 | % | Losses and loss adjustment expenses | 54,606 | | | 25,117 | | | 29,489 | | | 117.4 | % |
General and administrative expenses | General and administrative expenses | 23,437 | | | 15,894 | | | 7,543 | | | 47.5 | % | General and administrative expenses | 27,158 | | | 16,442 | | | 10,716 | | | 65.2 | % |
IPO bonuses and contract buyout fee | 11,054 | | | — | | | 11,054 | | | 100.0 | % | |
Other expenses | | Other expenses | 845 | | | — | | | 845 | | | NM |
Intangible asset amortization | Intangible asset amortization | 1,154 | | | 35 | | | 1,119 | | | 3,197.1 | % | Intangible asset amortization | 2,827 | | | 34 | | | 2,793 | | | NM |
Noncash share-based compensation | 307 | | | — | | | 307 | | | 100.0 | % | |
Noncash stock compensation | | Noncash stock compensation | 630 | | | — | | | 630 | | | NM |
Interest expense | Interest expense | 1,482 | | | 1,683 | | | (201) | | | (11.9) | % | Interest expense | 852 | | | 962 | | | (110) | | | (11.4) | % |
Total expenses | Total expenses | 78,115 | | | 56,058 | | | 22,057 | | | 39.3 | % | Total expenses | 86,918 | | | 42,555 | | | 44,363 | | | 104.2 | % |
Gains (losses) on embedded derivatives | | Gains (losses) on embedded derivatives | 1,990 | | | (5,180) | | | 7,170 | | | (138.4) | % |
Other income | Other income | 263 | | | 118 | | | 145 | | | 122.9 | % | Other income | 156 | | | 54 | | | 102 | | | 188.9 | % |
Income before taxes | Income before taxes | 85,009 | | | 22,538 | | | 62,471 | | | 277.2 | % | Income before taxes | 14,587 | | | 12,079 | | | 2,508 | | | 20.8 | % |
Income tax expense | Income tax expense | 4,679 | | | 4,404 | | | 275 | | | 6.2 | % | Income tax expense | 3,019 | | | 3,218 | | | (199) | | | (6.2) | % |
Equity earnings in affiliates, net of tax | Equity earnings in affiliates, net of tax | 2,333 | | | 2,494 | | | (161) | | | (6.5) | % | Equity earnings in affiliates, net of tax | — | | | 1,932 | | | (1,932) | | | (100.0) | % |
Net income | Net income | $ | 82,663 | | | $ | 20,628 | | | $ | 62,035 | | | 300.7 | % | Net income | $ | 11,568 | | | $ | 10,793 | | | $ | 775 | | | 7.2 | % |
| (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. |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(in thousands, except for percentages) | 2020 | | 2019 |
Key metrics: | | | |
Underwriting income(1) | $ | 7,576 | | | $ | 10,822 | |
Adjusted net income(1) | $ | 21,600 | | | $ | 21,797 | |
Loss ratio | 56.7 | % | | 59.0 | % |
Expense ratio | 32.7 | % | | 24.4 | % |
Combined ratio | 89.4 | % | | 83.4 | % |
Return on equity | 40.6 | % | | 23.4 | % |
Adjusted return on equity(1) | 10.6 | % | | 24.7 | % |
Return on tangible equity(1) | 67.3 | % | | 24.0 | % |
Adjusted return on tangible equity(1) | 17.6 | % | | 25.3 | % |
(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) | 2021 | | 2020 |
Key metrics: | | | |
Underwriting income(1) | $ | 7,313 | | | $ | 2,279 | |
Adjusted net income(1) | $ | 12,425 | | | $ | 11,122 | |
Loss ratio | 61.3 | % | | 57.3 | % |
Expense ratio | 30.5 | % | | 37.5 | % |
Combined ratio | 91.8 | % | | 94.8 | % |
Return on equity | 5.6 | % | | 15.4 | % |
Adjusted return on equity(1) | 6.0 | % | | 15.8 | % |
Return on tangible equity(1) | 11.6 | % | | 15.8 | % |
Adjusted return on tangible equity(1) | 12.5 | % | | 16.2 | % |
| | | |
(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 $36,267,$85,810, or 11.6%39.5%, to $349,755$303,281 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $313,488$217,471 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase is primarily attributable to the growth in our existing program partnerProgram Partner business, as well as the addition of new Program Partners added since the second quarter of 2020 and the acquisition of 7710 Insurance Company in the second and third quartersfourth quarter of 2020. The changes in gross written premiums were most notably due to the following lines of business:
Workers' compensation which represented 76.8%63.7% of our gross written premiums for the ninesix months ended SeptemberJune 30, 2020,2021, compared to 79.3% for the six months ended June 30, 2020. For the six months ended June 30, 2021, gross written premiums for workers' compensation increased by $6,606,$20,644, or 2.5%12.0%, compared to the nine months ended September 30, 2019.same period in 2020.
All other non-workers' compensation liability, which primarily includes commercial auto, homeowners, other liability and accident & health lines of business, represented 23.2%36.3% of our gross written premiums for the ninesix months ended SeptemberJune 30, 2020,2021, compared to 20.7% for the six months ended June 30, 2020. For the six months ended June 30, 2021, gross written premiums for all other non-workers' compensation liability increased $29,661,$65,166, or 57.7%145.0%, compared to the nine months ended September 30, 2019.same period in 2020.
Gross earned premiums: Gross earned premiums increased $14,765,$66,090, or 5.0%32.9%, to $310,154$266,923 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $295,389$200,833 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase is driven bya result of the increase in gross written premiums, partially offset by the increase in gross unearned premiums of $21,502, which is$19,720, driven by the addition of new Program Partners during the second and third quarters whoseoverall growth in premiums, which are largely unearned as of SeptemberJune 30, 2020.2021. Gross earned premiums as a percentage of gross written premiums decreased to 88.7%88.0% for the ninesix months ended SeptemberJune 30, 2020,2021, compared to 94.2%,92.3% for the ninesix months ended SeptemberJune 30, 2019.2020.
Ceded earned premiums: Ceded earned premiums increased $8,233,$20,851, or 3.6%13.3%, to $238,460$177,846 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $230,227$156,995 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in ceded earned premiums is primarily due to the growth in earned premiums of Compstar as well as the addition of new Program Partners duringsince the second and third quartersquarter of 2020 whose premiums are largely ceded. The total ceded earned premiums as a percentage of gross earned premiums remained relatively consistent at 76.9%decreased to 66.6% for the ninesix months ended SeptemberJune 30, 2021, compared to 78.2% for the six months ended June 30, 2020, compared to 77.9% forprimarily driven by the nine months ended September 30, 2019.Company's retention of a larger portion of gross written premiums.
Net earned premiums: Net earned premiums increased $6,532,$45,239, or 10.0%103.2%, to $71,694$89,077 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $65,162$43,838 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase is due primarily due to the increase in gross written and earned premiums described above, partially offset by the increase in ceded earned premiums over the ninesix months ended SeptemberJune 30, 2019.2021.
The table below shows the total premiums earned on a gross and net basis for the respective nine-monthsix-month periods:
| | | Nine Months Ended September 30, | | Percentage Change | | Six Months Ended June 30, | | Percentage Change (1) |
(in thousands, except percentages) | (in thousands, except percentages) | 2020 | | 2019 | | Change | | (in thousands, except percentages) | 2021 | | 2020 | | Change | |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | |
Gross written premiums | Gross written premiums | $ | 349,755 | | | $ | 313,488 | | | $ | 36,267 | | | 11.6 | % | Gross written premiums | $ | 303,281 | | | $ | 217,471 | | | $ | 85,810 | | | 39.5 | % |
Increase in gross unearned premiums | Increase in gross unearned premiums | (39,601) | | | (18,099) | | | (21,502) | | | 118.8 | % | Increase in gross unearned premiums | (36,358) | | | (16,638) | | | (19,720) | | | 118.5 | % |
Gross earned premiums | Gross earned premiums | 310,154 | | | 295,389 | | | 14,765 | | | 5.0 | % | Gross earned premiums | 266,923 | | | 200,833 | | | 66,090 | | | 32.9 | % |
Ceded earned premiums | Ceded earned premiums | (238,460) | | | (230,227) | | | (8,233) | | | 3.6 | % | Ceded earned premiums | (177,846) | | | (156,995) | | | (20,851) | | | 13.3 | % |
Net earned premiums | Net earned premiums | $ | 71,694 | | | $ | 65,162 | | | $ | 6,532 | | | 10.0 | % | Net earned premiums | $ | 89,077 | | | $ | 43,838 | | | $ | 45,239 | | | 103.2 | % |
| (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. |
Net investment income: Net investment income increased $2,075,decreased $2,395, or 45.3%35.4%, to $6,653$4,375 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $4,578$6,770 for the ninesix months ended SeptemberJune 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, which resulted in an unrealized gain of $2,000.
Net realized capital gains: Net realized capital gains increased $2,656decreased $3,207 to $3,345$23 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $689$3,230 for the ninesix months ended SeptemberJune 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, offset by the bargain purchase gain recorded in connection with the acquisition of FCCIC during the first quarter of 2019 of $634.2020.
Other revenue: Other revenue increased $3,274,decreased $38, or 40.7%0.6%, to $11,323$5,884 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $8,049$5,922 for the ninesix months ended SeptemberJune 30, 2019.2020. The increasedecrease is driven by a decrease in brokerage and management fees, partially offset by an increase in brokerage revenue of $3,435 due to the addition of new Program Partnersconsulting and increases in estimated premiums on reinsurance contracts.other fee-based revenue.
Losses and loss adjustment expenses: Losses and LAE increased $2,235,$29,489, or 5.8%117.4%, to $40,681$54,606 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $38,446$25,117 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase is directly attributable to the growth in earned premiums during the period and a decreaseas well as an increase in favorablethe Company's loss reserve estimate true-ups maderatio experienced during the ninesix months ended SeptemberJune 30, 2020 versus the nine months ended September 30, 2019.2021. The Company's loss ratio decreasedincreased to 56.7%61.3% for the ninesix months ended SeptemberJune 30, 2021 compared to 57.3% for the six months ended June 30, 2020, comparedprimarily attributable to 59.0% for the nine months ended September 30, 2019, as a resultnumber of increases in estimatedunusually large losses incurred but not reportedexperienced during the nine months ended September 30, 2019.first half of 2021.
General and administrative expenses: General and administrative expenses increased $7,543,$10,716, or 47.5%65.2%, to $23,437$27,158 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $15,894$16,442 for the ninesix months ended SeptemberJune 30, 2019.2020. This change resulted in an increasea decrease in the Company's expense ratio to 32.7%30.5% for the ninesix months ended SeptemberJune 30, 2021, compared to 37.5% for the six months ended June 30, 2020, compared to 24.4% for the nine months ended September 30, 2019. The increase is attributable to (i)a 700 basis point improvement. Net commissions increased $1,641, driven primarily by an increase in retention, partially offset by a reduction in our net agent commissionscommission rate. Insurance-related expenses increased $1,864 primarily as a result of $4,783 resulting from an increase in written premiums; (ii)gross earned premiums. General and administrative operating expenses increased $7,211, primarily as a result of (i) an increase in salaries and benefits of $3,519 resulting$4,885, of which $2,756 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 $1,786 due to an increase in professional servicebusiness insurance expense of $2,440, driven by an increase of $1,875 related to the Company's IPO and post-IPO readiness as well as legalthe addition of new office locations; and consulting expenses; (iv)(iii) additional IT software and systems costs totaling $708 relating$1,003 related to new software implementation an increased workforce and additional expenses incurred to accommodate a remote workforce due to COVID-19; and (v) additional rent and office-related expenses totaling $749 due to the addition of new office locations and rent increases. These increases were partiallyautomation initiatives; offset by a net reductiondecrease in professional fees of $975 as a result of the Company's IPO readiness effort in 2020.
The table below shows the components of general and administrative expenses for the respective six-month periods:
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2021 | | 2020 | | Change |
Direct commissions | $ | 50,710 | | | $ | 43,938 | | | $ | 6,772 | |
Ceding commissions | (57,892) | | | (52,761) | | | (5,131) | |
Net commissions | (7,182) | | | (8,823) | | | 1,641 | |
Insurance-related expenses | 9,425 | | | 7,561 | | | 1,864 | |
General and administrative operating expenses | 24,915 | | | 17,704 | | | 7,211 | |
Total general and administrative expenses | $ | 27,158 | | | $ | 16,442 | | | $ | 10,716 | |
| | | | | |
General and administrative expenses — % of gross written premiums | 8.2 | % | | 8.1 | % | | |
Retention rate (1) | 33.4 | % | | 21.8 | % | | |
Direct commission rate (2) | 19.0 | % | | 21.9 | % | | |
Ceding commission rate (3) | 32.6 | % | | 33.6 | % | | |
|
(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. |
Other expenses: Other expenses were $845 for the six months ended June 30, 2021, which primarily relates to secondary offering costs of $3,000 as a result of synergies gained from the acquisition of Compstar during the third quarter$555 and a reduction in insurance related expenses of $1,532, primarily driven by a year-to-date reduction in premium receivable write-offs.executive transition and other costs totaling $290.
Intangible asset amortization: Intangible asset amortization increased $1,119$2,793 to $1,154$2,827 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $35$34 for the ninesix months ended SeptemberJune 30, 2019.2020. The increase is driven by the addition of intangible assets acquired as a result of the purchase of the remaining equity interest of Compstar in the third quarter.quarter of 2020 and 7710 Insurance Company in the fourth quarter of 2020.
Noncash share-basedstock compensation: Noncash share-basedstock compensation was $307$630 for the ninesix months ended SeptemberJune 30, 2020.2021. Expenses incurred during the period related to restricted stock units and stock options granted under the Company's 2020 Omnibus Plan during the third quarter.Plan.
44Gains (losses) on embedded derivatives: The Company recorded gains on embedded derivatives of $1,990 for the six months ended June 30, 2021, compared to losses of $5,180 for the six months ended June 30, 2020. The increase is driven primarily by an increase in unrealized gains on funds held investments of $6,396 as well as a reduction in expenses from funds held investments of $774.
Income tax expense: Income tax expense was $4,679$3,019 for the ninesix months ended SeptemberJune 30, 2020,2021, which resulted in an effective tax rate of 5.5%, compared to $4,404 for the nine months ended September 30, 2019, which resulted in an effective tax rate of 19.5%20.7%. The decrease in the effective tax rate from the statutory rate of 21% is due primarily to the non-tax impact of the gain recordedtax-exempt municipal income on the revaluationCompany's investments. For the six months ended June 30, 2020, income tax expense was $3,218, which resulted in an effective tax rate of 26.6%. The increase in the Company's original 45% investment in Compstar, offset by certain IPO-related expenses not deductible foreffective tax purposes.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.
Equity earnings in affiliates, net of tax: Equity earnings in affiliates, net of tax decreased $161$1,932 to $2,333$0 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to $2,494$1,932 for the ninesix months ended SeptemberJune 30, 2019.2020. This decrease is due to the reduction in the Company's share of earnings in TRI of $445, which is no longer carried as an equity method investment due to the sale of a portion of the Company's investment in TRI during the first quarter of 2020. This is partially offset by the increase in the Company's share of earnings in Compstar of $280, prior to$1,932 as a result of the acquisition of the remaining ownership interest in Compstar.during the third quarter of 2020.
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 share-basedstock 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 share-basedstock compensation, interest expense, and other revenue and income.other income and expenses. We use this metric because we believe it gives our management and other users of our financial information useful insight into our underwriting business performance by adjusting for these expenses and sources of income. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.
| | | Three Months Ended September 30, | | Percentage Change | | Three Months Ended June 30, | | Percentage Change (1) |
(in thousands, except percentages) | (in thousands, except percentages) | 2020 | | 2019 | | (in thousands, except percentages) | 2021 | | 2020 | |
Net income | Net income | $ | 69,337 | | | $ | 5,786 | | | 1,098.4 | % | Net income | $ | 2,126 | | | $ | 1,358 | | | 56.6 | % |
Income tax expense | Income tax expense | 788 | | | 1,395 | | | (43.5) | % | Income tax expense | 414 | | | 351 | | | 17.9 | % |
Equity earnings in affiliates, net of tax | Equity earnings in affiliates, net of tax | (401) | | | (1,021) | | | (60.7) | % | Equity earnings in affiliates, net of tax | — | | | (1,230) | | | (100.0) | % |
Income before taxes | Income before taxes | 69,724 | | | 6,160 | | | 1,031.9 | % | Income before taxes | 2,540 | | | 479 | | | NM |
Other revenue | Other revenue | (5,401) | | | (2,561) | | | 110.9 | % | Other revenue | (1,229) | | | (1,530) | | | (19.7) | % |
Gains (losses) on embedded derivatives | | Gains (losses) on embedded derivatives | 686 | | | 3,991 | | | (82.8) | % |
Net investment income | Net investment income | (1,857) | | | (1,721) | | | 7.9 | % | Net investment income | (2,103) | | | (2,525) | | | (16.7) | % |
Gain on revaluation of Compstar investment | (69,846) | | | — | | | 100.0 | % | |
Net realized capital (gains) losses | (115) | | | 34 | | | (438.2) | % | |
Net realized capital gains (losses) | | Net realized capital gains (losses) | (10) | | | 4 | | | NM |
Other expenses | | Other expenses | 845 | | | — | | | NM |
Interest expense | Interest expense | 520 | | | 498 | | | 4.4 | % | Interest expense | 425 | | | 501 | | | (15.2) | % |
IPO bonuses and contract buyout fee | 11,054 | | | — | | | 100.0 | % | |
Intangible asset amortization | Intangible asset amortization | 1,120 | | | 11 | | | 10,081.8 | % | Intangible asset amortization | 1,413 | | | 23 | | | NM |
Noncash share-based compensation | 307 | | | — | | | 100.0 | % | |
Noncash stock compensation | | Noncash stock compensation | 419 | | | — | | | NM |
Other income | Other income | (209) | | | 8 | | | (2,712.5) | % | Other income | (35) | | | (40) | | | (12.5) | % |
Underwriting income | Underwriting income | $ | 5,297 | | | $ | 2,429 | | | 118.1 | % | Underwriting income | $ | 2,951 | | | $ | 903 | | | NM |
| | | Nine Months Ended September 30, | | Percentage Change | | Six Months Ended June 30, | | Percentage Change (1) |
(in thousands, except percentages) | (in thousands, except percentages) | 2020 | | 2019 | | (in thousands, except percentages) | 2021 | | 2020 | |
Net income | Net income | $ | 82,663 | | | $ | 20,628 | | | 300.7 | % | Net income | $ | 11,568 | | | $ | 10,793 | | | 7.2 | % |
Income tax expense | Income tax expense | 4,679 | | | 4,404 | | | 6.2 | % | Income tax expense | 3,019 | | | 3,218 | | | (6.2) | % |
Equity earnings in affiliates, net of tax | Equity earnings in affiliates, net of tax | (2,333) | | | (2,494) | | | (6.5) | % | Equity earnings in affiliates, net of tax | — | | | (1,932) | | | (100.0) | % |
Income before taxes | Income before taxes | 85,009 | | | 22,538 | | | 277.2 | % | Income before taxes | 14,587 | | | 12,079 | | | 20.8 | % |
Other revenue | Other revenue | (11,323) | | | (8,049) | | | 40.7 | % | Other revenue | (5,884) | | | (5,922) | | | (0.6) | % |
Gains (losses) on embedded derivatives | | Gains (losses) on embedded derivatives | (1,990) | | | 5,180 | | | (138.4) | % |
Net investment income | Net investment income | (6,653) | | | (4,578) | | | 45.3 | % | Net investment income | (4,375) | | | (6,770) | | | (35.4) | % |
Gain on revaluation of Compstar investment | (69,846) | | | — | | | 100.0 | % | |
Net realized capital gains | Net realized capital gains | (3,345) | | | (689) | | | 385.5 | % | Net realized capital gains | (23) | | | (3,230) | | | (99.3) | % |
Other expenses | | Other expenses | 845 | | | — | | | NM |
Interest expense | Interest expense | 1,482 | | | 1,683 | | | (11.9) | % | Interest expense | 852 | | | 962 | | | (11.4) | % |
IPO bonuses and contract buyout fee | 11,054 | | | — | | | 100.0 | % | |
Intangible asset amortization | Intangible asset amortization | 1,154 | | | 35 | | | 3,197.1 | % | Intangible asset amortization | 2,827 | | | 34 | | | NM |
Noncash share-based compensation | 307 | | | — | | | 100.0 | % | |
Noncash stock compensation | | Noncash stock compensation | 630 | | | — | | | NM |
Other income | Other income | (263) | | | (118) | | | 122.9 | % | Other income | (156) | | | (54) | | | 188.9 | % |
Underwriting income | Underwriting income | $ | 7,576 | | | $ | 10,822 | | | (30.0) | % | Underwriting income | $ | 7,313 | | | $ | 2,279 | | | NM |
| (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. |
Adjusted net income
We define adjusted net income as net income excluding the impact of certain items, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and share-basedstock compensation, ornoncash unrealized gains and losses on embedded derivatives, other expenses and gains or losses that we believe do not reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results across periods. We calculate the tax impact only on adjustments that 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 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 | | Three Months Ended June 30, | | Percentage Change (1) |
(in thousands, except percentages) | (in thousands, except percentages) | 2020 | | 2019 | | (in thousands, except percentages) | 2021 | | 2020 | |
Net income | Net income | $ | 69,337 | | | $ | 5,786 | | | 1,098.4 | % | Net income | $ | 2,126 | | | $ | 1,358 | | | 56.6 | % |
Intangible asset amortization | Intangible asset amortization | 1,120 | | | 11 | | | 10,081.8 | % | Intangible asset amortization | 1,413 | | | 23 | | | NM |
Noncash stock-based compensation | 307 | | | — | | | 100.0 | % | |
Noncash stock compensation | | Noncash stock compensation | 419 | | | — | | | NM |
Unrealized losses on embedded derivatives | | Unrealized losses on embedded derivatives | 167 | | | 2,990 | | | (94.4) | % |
Other expenses | | Other expenses | 845 | | | — | | | NM |
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders | Expenses associated with Altaris management fee, including cash bonuses paid to unit holders | — | | | 441 | | | (100.0) | % | Expenses associated with Altaris management fee, including cash bonuses paid to unit holders | — | | | 442 | | | (100.0) | % |
Expenses associated with IPO and other one-time legal and consulting expenses | Expenses associated with IPO and other one-time legal and consulting expenses | 645 | | | 387 | | | 66.7 | % | Expenses associated with IPO and other one-time legal and consulting expenses | — | | | 788 | | | (100.0) | % |
Expenses related to debt issuance costs | Expenses related to debt issuance costs | — | | | 25 | | | (100.0) | % | Expenses related to debt issuance costs | — | | | 135 | | | (100.0) | % |
FMV adjustment of remaining investment in affiliate | (69,846) | | | — | | | 100.0 | % | |
IPO bonuses and contract buyout fee | 11,054 | | | — | | | 100.0 | % | |
Total adjustments | Total adjustments | (56,720) | | | 864 | | | (6,664.8) | % | Total adjustments | 2,844 | | | 4,378 | | | (35.0) | % |
Tax impact of adjustments | Tax impact of adjustments | (2,140) | | | (176) | | | 1,115.9 | % | Tax impact of adjustments | (654) | | | (947) | | | (30.9) | % |
Adjusted net income | Adjusted net income | $ | 10,477 | | | $ | 6,474 | | | 61.8 | % | Adjusted net income | $ | 4,316 | | | $ | 4,789 | | | (9.9) | % |
| | | Nine Months Ended September 30, | | Percentage Change | | Six Months Ended June 30, | | Percentage Change (1) |
(in thousands, except percentages) | (in thousands, except percentages) | 2020 | | 2019 | | (in thousands, except percentages) | 2021 | | 2020 | |
Net income | Net income | $ | 82,663 | | | $ | 20,628 | | | 300.7 | % | Net income | $ | 11,568 | | | $ | 10,793 | | | 7.2 | % |
Intangible asset amortization | Intangible asset amortization | 1,154 | | | 35 | | | 3,197.1 | % | Intangible asset amortization | 2,827 | | | 34 | | | NM |
Noncash stock-based compensation | 307 | | | — | | | 100.0 | % | |
Noncash stock compensation | | Noncash stock compensation | 630 | | | — | | | NM |
Unrealized (gains) losses on embedded derivatives | | Unrealized (gains) losses on embedded derivatives | (3,189) | | | 3,206 | | | (199.5) | % |
Other expenses | | Other expenses | 845 | | | — | | | NM |
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders | Expenses associated with Altaris management fee, including cash bonuses paid to unit holders | 883 | | | 1,324 | | | (33.3) | % | 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 | Expenses associated with IPO and other one-time legal and consulting expenses | 1,845 | | | 829 | | | 122.6 | % | Expenses associated with IPO and other one-time legal and consulting expenses | — | | | 1,200 | | | (100.0) | % |
Expenses related to debt issuance costs | Expenses related to debt issuance costs | 135 | | | 75 | | | 80.0 | % | Expenses related to debt issuance costs | — | | | 135 | | | (100.0) | % |
FMV adjustment of remaining investment in affiliate | FMV adjustment of remaining investment in affiliate | (71,846) | | | — | | | 100.0 | % | FMV adjustment of remaining investment in affiliate | — | | | (2,000) | | | (100.0) | % |
Net gain on purchase & disposal of affiliates | Net gain on purchase & disposal of affiliates | (3,115) | | | (634) | | | 391.3 | % | Net gain on purchase & disposal of affiliates | — | | | (3,115) | | | (100.0) | % |
IPO bonuses and contract buyout fee | 11,054 | | | — | | | 100.0 | % | |
Total adjustments | Total adjustments | (59,583) | | | 1,629 | | | (3,757.6) | % | Total adjustments | 1,113 | | | 343 | | | NM |
Tax impact of adjustments | Tax impact of adjustments | (1,480) | | | (460) | | | 221.7 | % | Tax impact of adjustments | (256) | | | (14) | | | NM |
Adjusted net income | Adjusted net income | $ | 21,600 | | | $ | 21,797 | | | (0.9) | % | Adjusted net income | $ | 12,425 | | | $ | 11,122 | | | 11.7 | % |
| (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. |
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 shareholders'stockholders' 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 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, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | |
(in thousands, except percentages) | | (in thousands, except percentages) | 2021 | | 2020 | | 2021 | | 2020 |
Adjusted return on equity calculation: | Adjusted return on equity calculation: | | | | | | | | Adjusted return on equity calculation: | | | | | | | |
Numerator: adjusted net income | Numerator: adjusted net income | $ | 10,477 | | | $ | 6,474 | | | $ | 21,600 | | | $ | 21,797 | | Numerator: adjusted net income | $ | 4,316 | | | $ | 4,789 | | | $ | 12,425 | | | $ | 11,122 | |
Denominator: average equity | Denominator: average equity | 270,519 | | | 128,299 | | | 271,684 | | | 117,688 | | Denominator: average equity | 415,159 | | | 144,733 | | | 413,725 | | | 140,450 | |
Adjusted return on equity | Adjusted return on equity | 15.5 | % | | 20.2 | % | | 10.6 | % | | 24.7 | % | Adjusted return on equity | 4.2 | % | | 13.2 | % | | 6.0 | % | | 15.8 | % |
Return on equity | Return on equity | 102.5 | % | | 18.0 | % | | 40.6 | % | | 23.4 | % | Return on equity | 2.0 | % | | 3.8 | % | | 5.6 | % | | 15.4 | % |
Return on tangible equity and adjusted return on tangible equity
We define tangible shareholders'stockholders' equity as shareholders'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 shareholders'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 shareholders'stockholders' equity during the period. We regularly evaluate acquisition opportunities and have historically made acquisitions that affect shareholders'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 by adjusting for the effects of acquisitions on our sharehoders'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, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | |
(in thousands, except percentages) | | (in thousands, except percentages) | 2021 | | 2020 | | 2021 | | 2020 |
Return on tangible equity calculation: | Return on tangible equity calculation: | | | | | | | | Return on tangible equity calculation: | | | | | | | |
Numerator: net income | Numerator: net income | $ | 69,337 | | | $ | 5,786 | | | $ | 82,663 | | | $ | 20,628 | | Numerator: net income | $ | 2,126 | | | $ | 1,358 | | | $ | 11,568 | | | $ | 10,793 | |
Denominator: | Denominator: | | Denominator: | |
Average shareholders' equity | 270,519 | | | 128,299 | | | 271,684 | | | 117,688 | | |
Average stockholders' equity | | Average stockholders' equity | 415,159 | | | 144,733 | | | 413,725 | | | 140,450 | |
Less: average goodwill and other intangible assets | Less: average goodwill and other intangible assets | 108,476 | | | 2,982 | | | 107,994 | | | 2,993 | | Less: average goodwill and other intangible assets | 213,836 | | | 3,453 | | | 214,543 | | | 3,459 | |
Average tangible shareholders' equity | 162,043 | | | 125,317 | | | 163,690 | | | 114,695 | | |
Average tangible stockholders' equity | | Average tangible stockholders' equity | 201,323 | | | 141,280 | | | 199,182 | | | 136,991 | |
Return on tangible equity | Return on tangible equity | 171.2 | % | | 18.5 | % | | 67.3 | % | | 24.0 | % | Return on tangible equity | 4.2 | % | | 3.8 | % | | 11.6 | % | | 15.8 | % |
Return on equity | Return on equity | 102.5 | % | | 18.0 | % | | 40.6 | % | | 23.4 | % | Return on equity | 2.0 | % | | 3.8 | % | | 5.6 | % | | 15.4 | % |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | |
(in thousands, except percentages) | | (in thousands, except percentages) | 2021 | | 2020 | | 2021 | | 2020 |
Adjusted return on tangible equity calculation: | Adjusted return on tangible equity calculation: | | | | | | | | Adjusted return on tangible equity calculation: | | | | | | | |
Numerator: adjusted net income | Numerator: adjusted net income | $ | 10,477 | | | $ | 6,474 | | | $ | 21,600 | | | $ | 21,797 | | Numerator: adjusted net income | $ | 4,316 | | | $ | 4,789 | | | $ | 12,425 | | | $ | 11,122 | |
Denominator: average tangible equity | Denominator: average tangible equity | 162,043 | | | 125,317 | | | 163,690 | | | 114,695 | | Denominator: average tangible equity | 201,323 | | | 141,280 | | | 199,182 | | | 136,991 | |
Adjusted return on tangible equity | Adjusted return on tangible equity | 25.9 | % | | 20.7 | % | | 17.6 | % | | 25.3 | % | Adjusted return on tangible equity | 8.6 | % | | 13.6 | % | | 12.5 | % | | 16.2 | % |
Return on equity | Return on equity | 102.5 | % | | 18.0 | % | | 40.6 | % | | 23.4 | % | Return on equity | 2.0 | % | | 3.8 | % | | 5.6 | % | | 15.4 | % |
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: 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.
State insurance laws restrict the ability of insurance companies to declare shareholderstockholder 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 (not including realized capital gains andgains). Dividends shall not includinginclude pro rata distributions of any class of Benchmark's own securities). Under California law, dividends payable from Benchmark without the prior approval of the applicable insurance commissioner are limited to the greater of (i) 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 (ii) 100% of statutory net income during the applicable twelve-month period. securities.
Under Utah law, dividends payable from ALIC without the prior approval of the applicable insurance commissioner are limited tomust not exceed the lesser of (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 andgains).
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 pro rata distributionsnet 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 any class of ALIC's own securities). 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 by state law to maintain a minimum level of policyholder'spolicyholders' surplus. Kansas, Utah and UtahSouth Carolina utilize a risk-based capital requirement 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 SeptemberJune 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 SeptemberJune 30, 2020,2021, we had $165,255$101,361 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.
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, | | Six Months Ended June 30, |
(in thousands) | 2020 | | 2019 | |
| | | 2021 | | 2020 |
Cash, cash equivalents and restricted cash provided by (used in): | Cash, cash equivalents and restricted cash provided by (used in): | | | | Cash, cash equivalents and restricted cash provided by (used in): | | | |
Operating activities | Operating activities | $ | 32,208 | | | $ | 32,052 | | Operating activities | $ | 22,820 | | | $ | 31,783 | |
Investing activities | Investing activities | 18,492 | | | (18,174) | | Investing activities | (65,599) | | | 6,107 | |
Financing activities | Financing activities | 59,662 | | | (5,796) | | Financing activities | (625) | | | (8,886) | |
Net increase in cash, cash equivalents and restricted cash | $ | 110,362 | | | $ | 8,082 | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (43,404) | | | $ | 29,004 | |
Operating Activities: Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20202021 was $32,208$22,820, compared to $32,052$31,783 for the same period in 2019. The $156 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 ninesix months ended SeptemberJune 30, 2020 resulting from (i) an increase2021 reflects increases in unpaid loss and loss adjustment expenses of $44,742, unearned premiums of $22,388 resulting from the increase$36,401 and funds held under reinsurance agreements of $3,080; partially offset by increases in written premium during the period; (ii) an increasepremiums and other receivables of $22,714, reinsurance recoverables of $18,730, prepaid reinsurance premiums of $13,033, other assets of $6,623 and decreases in reinsurance premiums payable of $5,388, accounts payable and accrued expenses of $5,626,$4,011 and (iii) a decreaseincome taxes payable of $3,791. 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 $5,716. This increase is partially offset by (i)and reinsurance recoverables were primarily a reduction in underwriting incomeresult of $3,246; (ii) an increase in gross written premiums during the changeperiod. Other assets increased as a result of increases in prepaidour deferred acquisition costs and contract asset balances. Funds held under reinsurance premiumsagreements decreased due to an arbitration settlement in the fourth quarter of $7,342; (iii)2020, resulting in the non-cash transfer of certain investments held as collateral. Excluding non-cash transfers, funds held under reinsurance agreements increased as a result of an increase in gross written premium. Net cash provided by operating activities for the change in othersix months ended June 30, 2020 reflects distributions received from equity method investments and incremental cash received for operating assets of $6,697; (iv) a decrease in realized capital gains and losses of $5,575; and (v) an increase in funds held for reinsurance agreements of $5,225.liabilities.
Investing Activities: Net cash used in investing activities for the six months ended June 30, 2021 was $65,599 compared to net cash provided by investing activities of $6,107 for the same period in 2020. Net cash used in investing activities for the six months ended June 30, 2021 includes $65,758 net cash used in the purchase and sale of investments, $73 in capital expenditures and $232 in cash received for the sale of equity method investments. Additionally, the six months ended June 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 ninesix months ended SeptemberJune 30, 2020 was $18,492 compared toincludes $4,644 net cash used of $18,174 for the same period in 2019. The $36,666 increase in cash provided by investing activities is driven by (i) an increase of $17,360 net cash provided byreceived from the purchase and sale of investments; (ii) $11,891investments, $3,000 in cash received for the sale of equity method investments, $115 received for the return of capital on equity method investments, $1,098 in cash used in the acquisition of Compstar; (iii) $3,000a subsidiary, net of cash received from the sale of TRIand $554 in 2020; and (iv) the incremental $4,398 used in 2019 for the acquisitions of First Choice Casualty Insurance Company and the remaining 25% of American Liberty Insurance Company.capital expenditures.
Financing Activities: Net cash provided byused in financing activities for the ninesix months ended SeptemberJune 30, 20202021 was $59,662$625 compared to net cash used of $5,796$8,886 for the same period in 2019. The increase2020. Net cash used in financing activities for the six months ended June 30, 2021 primarily includes the principal payments made on the Company's debt. Net cash used in financing activities for the six months ended June 30, 2020 included $19,496 in distributions to pre-IPO unitholders, partially offset by $10,610 in cash provided by investing activities of $65,458 is driven by $99,643 of net cash proceeds received from the Company's IPO. This increase is partially offset by distributions paid to members prior to the Company's IPO of $18,352, cash paid for deferred offering costs of $5,839, cash used in the buyback of redeemable preferred stock $5,100 and principal payments on the Company'slong-term debt, net of incremental principal received in the refinance of debt, of $4,848.payments.
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 included a term loan facility totaling $27.5 million and a revolving credit facility of $3.0 million.
On May 26, 2020, the Company entered into an 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 facility are secured by substantially all of the assets of Trean Insurance Group, Inc.the 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 4.81%4.71% as of SeptemberJune 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 Insurance Group, Inc.the Company (other than Benchmark Holding Company and its subsidiaries) will behave been pledged as collateral.
In addition, and in conjunction with, the execution 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, 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 interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of 3-month LIBOR (0.28% and 1.99% as of September 30, 2020 and December 31, 2019, respectively) plus 3.50% is in effect. The interest rate totaled 3.78% and 5.49% as of September 30, 2020 and December 31, 2019, respectively. The Subordinated Notes were redeemed in full on October 7, 2020.
PPP Loan
In conjunction with the acquisition of Compstar, the Company acquired a PPP Loan with a principal balance of $325. The PPP Loan has a fixed interest rate of 1.00%.
Oak Street Loan
In conjunction with the acquisition of Compstar, the Company acquired a loan from Oak Street Funding with a total principle of $19,740. After the completion of the acquisition, the Company paid this loan off in full.
Reinsurance
We use reinsurance to convert underwriting risk to credit risk, protect the balance sheet, reduce earnings volatility and increase overall premium writing capacity. We utilize both quota share and excess of loss reinsurance to achieve these goals.goals, usually in combination with each other. Quota share reinsurance involves the proportional sharing of premiums and losses. Under excess of loss reinsurance, losses in excess of a retention level are paid by the reinsurer, subject to a limit.
Quota share reinsurance
We utilize quota share reinsurance to: (i) cede premium to Program Partners (non-professional reinsurers) to transfer underwriting risk and align incentives, and (ii) cede premium to professional reinsurers to increase the amount of gross premiums we can write while managing net premiums written leverage appropriately based on its capital base, A.M. Best rating and risk appetite. It is a core pillar of ourthe Company's 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 reinsurance
We purchase excess of loss and catastrophe reinsurance from professional reinsurers to protect against catastrophic, large loss and/or unforeseen extreme loss activity that could otherwise negatively impact Benchmark’sthe Company’s 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. Potential catastrophic events include 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 ameliorated 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), we generally do not have concentrated employee counts at single locations that can serve as the basis for a catastrophic loss. The limited catastrophic risk that does exist is ceded to large, professional reinsurers through excess of loss reinsurance contracts.
Ratings
We have a financial strength rating of "A" (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from "A++" (Superior) to "S" (Rating Suspended). "A" (Excellent) is the third highest rating issued by A.M. Best. The "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 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 registration statement filed with the SEC on2020 Form S-1.10-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" (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.
Contractual Obligations and Commitments
Other than the $11,707 increase in term loan borrowings under our Amended and Restated Credit Facility, thereThere have been no material changes in the Company's contractual obligations as of SeptemberJune 30, 20202021 compared to December 31, 2019. Further, the Company paid in full the Subordinated Notes on October 7, 2020.
Financial condition
Shareholders'Stockholders' Equity
As of SeptemberJune 30, 2020,2021, total shareholders'stockholders' equity was $401,753,$417,343, compared to $141,615$410,107 as of December 31, 2019,2020, an increase of $260,138.$7,236. The increase in shareholders'stockholders' equity over the period was driven primarily by the $99,204 in common shares issued for the acquisition$6,612 of Compstar; the $93,139 in proceeds from common stock sold in the Company's IPO, net of offering costs; and $86,997 of comprehensive income. These increases were partially offset by distributions to members totaling $18,043 during the nine months ended September 30, 2020.
We had $1,828$4,560 of unrecognized stock compensation as of SeptemberJune 30, 20202021 related to non-vested stock-basedstock compensation granted. The Company recognized $307$630 of stock-basedstock compensation during the ninesix months ended SeptemberJune 30, 2020. In addition, we recognized approximately $157 and $197 of expense related to membership unit awards for the three and nine months ended September 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 $375,286$424,943 at SeptemberJune 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 insurance regulatory requirements with respect to investments under the applicable insurance laws;
•Maintain an appropriate level of liquidity to satisfy the cash requirements of current operations and long-term obligations;
•Adjust investment risk to offset or complement insurance risk based on our total corporate risk tolerance; and
•Realize the highest possible levels of investment income, while generating superior after-tax total rates of return.
The composition of our investment portfolio is shown in the following table as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 | | June 30, 2021 |
(in thousands) | Cost or Amortized Cost | | Fair Value | |
| | | Cost or Amortized Cost | | Fair Value |
Fixed maturities: | Fixed maturities: | | | | Fixed maturities: | | | |
U.S. government and government securities | U.S. government and government securities | $ | 12,701 | | | $ | 13,107 | | U.S. government and government securities | $ | 28,510 | | | $ | 28,706 | |
Foreign governments | Foreign governments | 300 | | | 304 | | Foreign governments | 2,599 | | | 2,600 | |
States, territories and possessions | States, territories and possessions | 7,537 | | | 7,804 | | States, territories and possessions | 8,240 | | | 8,456 | |
Political subdivisions of states, territories and possessions | Political subdivisions of states, territories and possessions | 29,514 | | | 30,869 | | Political subdivisions of states, territories and possessions | 31,120 | | | 32,166 | |
Special revenue and special assessment obligations | Special revenue and special assessment obligations | 72,495 | | | 76,494 | | Special revenue and special assessment obligations | 90,047 | | | 93,441 | |
Industrial and public utilities | Industrial and public utilities | 109,330 | | | 116,138 | | Industrial and public utilities | 101,624 | | | 105,987 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 16,342 | | | 18,107 | | Commercial mortgage-backed securities | 12,032 | | | 13,129 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 68,864 | | | 70,384 | | Residential mortgage-backed securities | 95,667 | | | 95,652 | |
Other loan-backed securities | Other loan-backed securities | 41,067 | | | 41,724 | | Other loan-backed securities | 43,972 | | | 44,444 | |
Hybrid securities | Hybrid securities | 356 | | | 355 | | Hybrid securities | 355 | | | 362 | |
Total fixed maturities | Total fixed maturities | 358,506 | | | 375,286 | | Total fixed maturities | 414,166 | | | 424,943 | |
Equity securities: | Equity securities: | | Equity securities: | |
Preferred stock | Preferred stock | 243 | | | 240 | | Preferred stock | 243 | | | 235 | |
Common stock | Common stock | 1,554 | | | 3,458 | | Common stock | 741 | | | 2,741 | |
Total equity securities | Total equity securities | 1,797 | | | 3,698 | | Total equity securities | 984 | | | 2,976 | |
Total investments | Total investments | $ | 360,303 | | | $ | 378,984 | | Total investments | $ | 415,150 | | | $ | 427,919 | |
| | | December 31, 2019 | | December 31, 2020 |
(in thousands) | Cost or Amortized Cost | | Fair Value | |
| | | Cost or Amortized Cost | | Fair Value |
Fixed maturities: | Fixed maturities: | | | | Fixed maturities: | | | |
U.S. government and government securities | U.S. government and government securities | $ | 15,965 | | | $ | 16,129 | | U.S. government and government securities | $ | 17,135 | | | $ | 17,471 | |
Foreign governments | Foreign governments | 299 | | | 302 | | Foreign governments | 300 | | | 302 | |
States, territories and possessions | States, territories and possessions | 4,789 | | | 4,923 | | States, territories and possessions | 7,500 | | | 7,774 | |
Political subdivisions of states, territories and possessions | Political subdivisions of states, territories and possessions | 24,444 | | | 25,104 | | Political subdivisions of states, territories and possessions | 31,759 | | | 33,212 | |
Special revenue and special assessment obligations | Special revenue and special assessment obligations | 59,149 | | | 61,405 | | Special revenue and special assessment obligations | 77,329 | | | 81,714 | |
Industrial and public utilities | Industrial and public utilities | 119,735 | | | 123,207 | | Industrial and public utilities | 107,017 | | | 113,741 | |
Commercial mortgage-backed securities | Commercial mortgage-backed securities | 15,586 | | | 16,312 | | Commercial mortgage-backed securities | 16,242 | | | 18,066 | |
Residential mortgage-backed securities | Residential mortgage-backed securities | 53,467 | | | 54,109 | | Residential mortgage-backed securities | 91,478 | | | 93,017 | |
Other loan-backed securities | Other loan-backed securities | 35,849 | | | 36,011 | | Other loan-backed securities | 39,293 | | | 39,945 | |
Hybrid securities | Hybrid securities | 357 | | | 363 | | Hybrid securities | 356 | | | 362 | |
Total fixed maturities | Total fixed maturities | 329,640 | | | 337,865 | | Total fixed maturities | 388,409 | | | 405,604 | |
Equity securities: | Equity securities: | | Equity securities: | |
Preferred stock | Preferred stock | 337 | | | 343 | | Preferred stock | 243 | | | 240 | |
Common stock | Common stock | 492 | | | 492 | | Common stock | 1,554 | | | 3,534 | |
Total equity securities | Total equity securities | 829 | | | 835 | | Total equity securities | 1,797 | | | 3,774 | |
Total investments | Total investments | $ | 330,469 | | | $ | 338,700 | | Total investments | $ | 390,206 | | | $ | 409,378 | |
The following table shows the percentage of the total estimated fair value of our fixed maturity securities as of SeptemberJune 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, 2020 | | June 30, 2021 |
(in thousands, except percentages) | (in thousands, except percentages) | Fair Value | | % of Total | (in thousands, except percentages) | Fair Value | | % of Total |
AAA | AAA | $ | 60,868 | | | 16.2 | % | AAA | $ | 69,921 | | | 16.4 | % |
AA | AA | 190,209 | | | 50.7 | % | AA | 240,731 | | | 56.7 | % |
A | A | 93,598 | | | 24.9 | % | A | 80,405 | | | 18.9 | % |
BBB | BBB | 28,771 | | | 7.7 | % | BBB | 31,847 | | | 7.5 | % |
BB | BB | 1,791 | | | 0.5 | % | BB | 1,986 | | | 0.5 | % |
Below investment grade | Below investment grade | 49 | | | — | % | Below investment grade | 53 | | | — | % |
Total fixed maturities | Total fixed maturities | $ | 375,286 | | | 100.0 | % | Total fixed maturities | $ | 424,943 | | | 100.0 | % |
| | | December 31, 2019 | | December 31, 2020 |
(in thousands, except percentages) | (in thousands, except percentages) | Fair Value | | % of Total | (in thousands, except percentages) | Fair Value | | % of Total |
AAA | AAA | $ | 52,571 | | | 15.6 | % | AAA | $ | 59,887 | | | 14.8 | % |
AA | AA | 153,838 | | | 45.5 | % | AA | 224,371 | | | 55.3 | % |
A | A | 101,040 | | | 29.9 | % | A | 89,975 | | | 22.2 | % |
BBB | BBB | 30,245 | | | 9.0 | % | BBB | 29,404 | | | 7.2 | % |
BB | BB | 119 | | | — | % | BB | 1,921 | | | 0.5 | % |
Below investment grade | Below investment grade | 52 | | | — | % | Below investment grade | 46 | | | — | % |
Total fixed maturities | Total fixed maturities | $ | 337,865 | | | 100.0 | % | Total fixed maturities | $ | 405,604 | | | 100.0 | % |
Critical Accounting Policies and Estimates
The unaudited interim condensed consolidated 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 consolidated 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 consolidated 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 consolidated financial statements include: (a) reserves for unpaid loss and LAE; (b) reinsurance recoveries; (c) investment fair value measurements; (d) goodwill and intangible assets; and (e) business combinations. Actual results may differ materially from the estimates and assumptions used in preparing the condensed consolidated financial statements. For a detailed discussion of our accounting policies, see the "Notes to the Consolidated and Combined Financial 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 SeptemberJune 30, 2020.2021.
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.
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 consolidated financial position.
Item 1A. Risk Factors
We have disclosed in our Quarterly Report on2020 Form 10-Q, issued August 28, 202010-K the most significant risk factors that can impact year-to-year comparisons and that may affect the future performance of the Company's business. On a quarterly basis, we review these disclosures and update the risk factors, as appropriate. As of the date of this report, there have been no material changes to the risk factors containedfrom those disclosed in our Quarterly Report.2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
The following table sets forth information concerning purchases of our common stock for the three months ended SeptemberJune 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
July 1, 2020 - July 31, 2020 | 5,315 | | | $ | 15.51 | | | — | | | — | |
August 1, 2020 - August 31, 2020 | — | | | — | | | — | | | — | |
September 1, 2020 - September 30, 2020 | — | | | — | | | — | | | — | |
| 5,315 | | | | | — | | | |
(1) The shares of common stock in this column represent shares surrendered to us by stock plan participants in order to satisfy minimum tax withholding obligations related to the vesting of restricted stock.
(2) We had no publicly announced plans or open market repurchase programs for shares of our common stock during the three months ended September 30, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
April 1, 2021 - April 30, 2021 | | — | | | $ | — | | | — | | | — | |
May 1, 2021 - May 31, 2021 | | 319 | | | $ | 17.83 | | | — | | | — | |
June 1, 2021 - June 30, 2021 | | — | | | $ | — | | | — | | | — | |
| | 319 | | | | | — | | | |
Prior to July 15, 2020, the Company held a 45% ownership interest in Compstar. On July 15, 2020, the Company issued 6,613,606 shares of the Company’s common stock with a market price of $15 per share as consideration to acquire the remaining 55% ownership interest in Compstar from the owners thereof. The securities were issued under Section 4(a)(2) of the Securities Act of 1933, as amended, in reliance on certain representations from the Compstar owners.
Use of Proceeds
On July 20, 2020, we closed the sale of 10,714,286 shares 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 shareholders.stockholders. On July 22, 2020, we closed the sale of an additional 1,207,142 shares by certain selling shareholdersstockholders 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.
The IPO price per share was $15.00. The aggregate IPO price for all shares sold by us in the IPO was approximately $107.1 million and the aggregate I price for all shares sold by the selling shareholdersstockholders 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.
We received net proceeds from the sale of shares by us in the IPO of approximately $94.9$93.1 million after deducting underwriting discounts and commissions of $7.5 million and estimated offering expenses of $4.7$6.5 million. We did not receive
any proceeds from the sale of shares by the selling shareholders.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 and BIC. The remaining net proceeds will bewere used for general corporate purposes, including to fund cash needs of our subsidiaries and to support the growth of our business. As of June 30, 2021, all net proceeds from the IPO had been utilized.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
| | | | | | | | |
Exhibit Number | | Description |
| | 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) |
| | 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.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover 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. |
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: | NovemberAugust 13, 20202021 | By: | /s/ Andrew M. O'Brien |
| | | Andrew M. O'Brien |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
Date: | NovemberAugust 13, 20202021 | By: | /s/ Julie A. BaronNicholas J. Vassallo |
| | | Julie A. BaronNicholas J. Vassallo |
| | | Chief Financial Officer Treasurer and Secretary |
| | | (Principal Financial Officer) |