Item 1. Financial Statements
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Balance Sheets
(in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
Fixed maturities, at fair value (amortized cost of $359,355 and $329,640, respectively)
|
$
|
375,705
|
|
|
$
|
337,865
|
|
Preferred stock, at fair value (amortized cost of $332 and $337, respectively)
|
325
|
|
|
343
|
|
Common stock, at fair value (cost $1,554 and $492, respectively)
|
3,428
|
|
|
492
|
|
Equity method investments
|
11,693
|
|
|
12,173
|
|
Total investments
|
391,151
|
|
|
350,873
|
|
Cash and cash equivalents
|
97,326
|
|
|
74,268
|
|
Restricted cash
|
7,746
|
|
|
1,800
|
|
Accrued investment income
|
2,605
|
|
|
2,468
|
|
Premiums and other receivables
|
75,017
|
|
|
62,460
|
|
Related party receivables
|
20,385
|
|
|
22,221
|
|
Reinsurance recoverable
|
334,124
|
|
|
307,338
|
|
Prepaid reinsurance premiums
|
91,311
|
|
|
80,088
|
|
Deferred policy acquisition cost, net
|
2,951
|
|
|
2,115
|
|
Property and equipment, net
|
8,130
|
|
|
7,937
|
|
Right of use asset
|
5,958
|
|
|
—
|
|
Deferred tax asset
|
—
|
|
|
1,367
|
|
Goodwill
|
3,339
|
|
|
2,822
|
|
Other assets
|
9,889
|
|
|
3,277
|
|
Total assets
|
$
|
1,049,932
|
|
|
$
|
919,034
|
|
Liabilities
|
|
|
|
Unpaid loss and loss adjustment expenses
|
$
|
442,500
|
|
|
$
|
406,716
|
|
Unearned premiums
|
120,427
|
|
|
103,789
|
|
Funds held under reinsurance agreements
|
165,371
|
|
|
163,445
|
|
Reinsurance premiums payable
|
54,030
|
|
|
53,620
|
|
Accounts payable and accrued expenses
|
73,325
|
|
|
14,995
|
|
Lease liability
|
6,186
|
|
|
—
|
|
Income taxes payable
|
3,999
|
|
|
714
|
|
Deferred tax liability
|
12
|
|
|
—
|
|
Long-term debt
|
39,698
|
|
|
29,040
|
|
Total liabilities
|
905,548
|
|
|
772,319
|
|
Commitments and contingencies
|
|
|
|
|
Redeemable preferred stock (1,000,000 authorized; 51 outstanding)
|
5,100
|
|
|
5,100
|
|
Members' equity
|
|
|
|
Members' equity
|
78,478
|
|
|
78,438
|
|
Additional paid-in capital
|
16,542
|
|
|
17,995
|
|
Retained earnings
|
35,561
|
|
|
40,361
|
|
Accumulated other comprehensive income
|
8,703
|
|
|
4,821
|
|
Total members' equity
|
139,284
|
|
|
141,615
|
|
Total liabilities and members' equity
|
$
|
1,049,932
|
|
|
$
|
919,034
|
|
See accompanying notes to the condensed combined financial statements.
3
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Operations
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
|
|
|
Gross written premiums
|
$
|
109,612
|
|
|
$
|
104,420
|
|
|
$
|
217,471
|
|
|
$
|
205,954
|
|
Increase in gross unearned premiums
|
(9,265
|
)
|
|
(1,535
|
)
|
|
(16,638
|
)
|
|
(12,487
|
)
|
Gross earned premiums
|
100,347
|
|
|
102,885
|
|
|
200,833
|
|
|
193,467
|
|
Ceded earned premiums
|
(78,968
|
)
|
|
(79,508
|
)
|
|
(156,995
|
)
|
|
(150,466
|
)
|
Net earned premiums
|
21,379
|
|
|
23,377
|
|
|
43,838
|
|
|
43,001
|
|
Net investment income
|
1,524
|
|
|
1,570
|
|
|
4,796
|
|
|
2,857
|
|
Net realized capital gains (losses)
|
(4
|
)
|
|
111
|
|
|
3,230
|
|
|
723
|
|
Other revenue
|
1,530
|
|
|
1,893
|
|
|
5,922
|
|
|
5,488
|
|
Total revenue
|
24,429
|
|
|
26,951
|
|
|
57,786
|
|
|
52,069
|
|
Expenses
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
12,183
|
|
|
13,014
|
|
|
25,117
|
|
|
24,470
|
|
General and administrative expenses
|
8,316
|
|
|
6,193
|
|
|
16,476
|
|
|
10,162
|
|
Interest expense
|
501
|
|
|
561
|
|
|
962
|
|
|
1,185
|
|
Total expenses
|
21,000
|
|
|
19,768
|
|
|
42,555
|
|
|
35,817
|
|
Other income
|
40
|
|
|
33
|
|
|
54
|
|
|
126
|
|
Income before taxes
|
3,469
|
|
|
7,216
|
|
|
15,285
|
|
|
16,378
|
|
Income tax expense
|
979
|
|
|
1,690
|
|
|
3,891
|
|
|
3,009
|
|
Equity earnings in affiliates, net of tax
|
1,230
|
|
|
865
|
|
|
1,932
|
|
|
1,473
|
|
Net income
|
$
|
3,720
|
|
|
$
|
6,391
|
|
|
$
|
13,326
|
|
|
$
|
14,842
|
|
See accompanying notes to the condensed combined financial statements.
4
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Comprehensive Income
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income
|
$
|
3,720
|
|
|
$
|
6,391
|
|
|
$
|
13,326
|
|
|
$
|
14,842
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
Unrealized investment gains:
|
|
|
|
|
|
|
|
Unrealized investment gains arising during the period
|
6,252
|
|
|
2,782
|
|
|
5,029
|
|
|
7,753
|
|
Income tax expense
|
1,310
|
|
|
585
|
|
|
1,054
|
|
|
1,629
|
|
Unrealized investment gains, net of tax
|
4,942
|
|
|
2,197
|
|
|
3,975
|
|
|
6,124
|
|
Less reclassification adjustments to:
|
|
|
|
|
|
|
|
Net realized investment gains (losses) included in net realized capital gains (losses)
|
(1
|
)
|
|
111
|
|
|
118
|
|
|
89
|
|
Income tax expense (benefit)
|
(1
|
)
|
|
24
|
|
|
25
|
|
|
19
|
|
Total reclassifications included in net income, net of tax
|
—
|
|
|
87
|
|
|
93
|
|
|
70
|
|
Other comprehensive income
|
4,942
|
|
|
2,110
|
|
|
3,882
|
|
|
6,054
|
|
Total comprehensive income
|
$
|
8,662
|
|
|
$
|
8,501
|
|
|
$
|
17,208
|
|
|
$
|
20,896
|
|
See accompanying notes to the condensed combined financial statements.
5
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Members’ Equity and Redeemable Preferred Stock
For the Three and Six Months Ended June 30, 2020 and 2019
(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
|
|
Additional Paid in Capital
|
|
Accumulated Other Comprehensive Income
|
|
Retained Earnings
|
|
Total Members' Equity
|
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
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
|
|
|
$
|
17,995
|
|
|
$
|
3,761
|
|
|
$
|
49,967
|
|
|
$
|
150,181
|
|
Issuance of Class C units
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
19,658
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Distributions to members
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(1,453
|
)
|
|
—
|
|
|
(18,043
|
)
|
|
(19,496
|
)
|
Dividends on Series B preferred stock
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(83
|
)
|
|
(83
|
)
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
4,942
|
|
|
—
|
|
|
4,942
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,720
|
|
|
3,720
|
|
Balance at June 30, 2020
|
51
|
|
$
|
5,100
|
|
—
|
|
$
|
—
|
|
|
65,036,780
|
|
$
|
65,037
|
|
|
5,045,215
|
|
$
|
5,045
|
|
|
8,159,775
|
|
$
|
8,160
|
|
|
235,905
|
|
$
|
236
|
|
|
$
|
16,542
|
|
|
$
|
8,703
|
|
|
$
|
35,561
|
|
|
$
|
139,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' Equity
|
|
|
|
|
|
|
|
Redeemable Preferred Stock
|
Preferred Stock
|
|
Class A - Non Voting
|
|
Class B - Voting
|
|
Class B - Non Voting
|
|
Class C - Non Voting
|
|
Additional Paid in Capital
|
|
Accumulated Other Comprehensive Income
|
|
Retained Earnings
|
|
Total Members' Equity
|
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Balance at March 31, 2019
|
60
|
|
$
|
6,000
|
|
10
|
|
$
|
1,000
|
|
|
65,036,780
|
|
$
|
65,037
|
|
|
5,045,215
|
|
$
|
5,045
|
|
|
8,159,775
|
|
$
|
8,160
|
|
|
137,612
|
|
$
|
137
|
|
|
$
|
17,995
|
|
|
$
|
1,941
|
|
|
$
|
18,916
|
|
|
$
|
118,231
|
|
Issuance of Class C units
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
19,658
|
|
20
|
|
|
—
|
|
|
—
|
|
|
|
|
20
|
|
Distributions to members
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(313
|
)
|
|
(313
|
)
|
Dividends on Series A preferred stock
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
Dividends on Series B preferred stock
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(74
|
)
|
|
(74
|
)
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
2,110
|
|
|
—
|
|
|
2,110
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,391
|
|
|
6,391
|
|
Balance at June 30, 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
|
|
|
$
|
17,995
|
|
|
$
|
4,051
|
|
|
$
|
24,907
|
|
|
$
|
126,352
|
|
See accompanying notes to the condensed combined 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
|
|
Additional Paid in Capital
|
|
Accumulated Other Comprehensive Income
|
|
Retained Earnings
|
|
Total Members' Equity
|
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
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
|
|
|
$
|
17,995
|
|
|
$
|
4,821
|
|
|
$
|
40,361
|
|
|
$
|
141,615
|
|
Issuance of Class C units
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
39,317
|
|
40
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40
|
|
Distributions to members
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(1,453
|
)
|
|
—
|
|
|
(18,043
|
)
|
|
(19,496
|
)
|
Dividends on Series B preferred stock
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(83
|
)
|
|
(83
|
)
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
3,882
|
|
|
—
|
|
|
3,882
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,326
|
|
|
13,326
|
|
Balance at June 30, 2020
|
51
|
|
$
|
5,100
|
|
—
|
|
$
|
—
|
|
|
65,036,780
|
|
$
|
65,037
|
|
|
5,045,215
|
|
$
|
5,045
|
|
|
8,159,775
|
|
$
|
8,160
|
|
|
235,905
|
|
$
|
236
|
|
|
$
|
16,542
|
|
|
$
|
8,703
|
|
|
$
|
35,561
|
|
|
$
|
139,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' Equity
|
|
|
|
|
|
|
|
Redeemable Preferred Stock
|
Preferred Stock
|
|
Class A - Non Voting
|
|
Class B - Voting
|
|
Class B - Non Voting
|
|
Class C - Non Voting
|
|
Additional Paid in Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Retained Earnings
|
|
Total Members' Equity
|
|
Shares
|
Amount
|
Shares
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
Amount
|
|
Units
|
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
|
|
|
$
|
17,995
|
|
|
$
|
(2,003
|
)
|
|
$
|
9,779
|
|
|
$
|
105,131
|
|
Cumulative effect of adopting ASC Topic 606
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
695
|
|
|
695
|
|
Issuance of Class C units
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
39,317
|
|
39
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
Distributions to members
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(313
|
)
|
|
(313
|
)
|
Dividends on Series A preferred stock
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
(22
|
)
|
Dividends on Series B preferred stock
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(74
|
)
|
|
(74
|
)
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
6,054
|
|
|
—
|
|
|
6,054
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,842
|
|
|
14,842
|
|
Balance at June 30, 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
|
|
|
$
|
17,995
|
|
|
$
|
4,051
|
|
|
$
|
24,907
|
|
|
$
|
126,352
|
|
See accompanying notes to the condensed combined financial statements.
7
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
Operating activities
|
|
|
|
Net income
|
$
|
13,326
|
|
|
$
|
14,842
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
Depreciation and amortization
|
458
|
|
|
360
|
|
Net capital gains (losses) on investments
|
(5,042
|
)
|
|
67
|
|
Deferred offering costs
|
(1,339
|
)
|
|
—
|
|
Gain on bargain purchase of subsidiary
|
—
|
|
|
(634
|
)
|
Bond amortization and accretion
|
944
|
|
|
863
|
|
Issuance of member units as compensation
|
40
|
|
|
39
|
|
Equity earnings in affiliates, net of tax
|
(1,932
|
)
|
|
(1,473
|
)
|
Distributions from equity method investments
|
2,413
|
|
|
2,127
|
|
Deferred income taxes
|
349
|
|
|
(506
|
)
|
Deferred financing costs
|
48
|
|
|
51
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accrued investment income
|
(137
|
)
|
|
(109
|
)
|
Premiums and other receivables
|
(10,666
|
)
|
|
(17,347
|
)
|
Reinsurance recoverable on paid and unpaid losses
|
(26,786
|
)
|
|
(27,040
|
)
|
Prepaid reinsurance premiums
|
(11,223
|
)
|
|
(11,048
|
)
|
Right of use asset
|
(5,958
|
)
|
|
—
|
|
Other assets
|
(3,284
|
)
|
|
(1,391
|
)
|
Unpaid loss and loss adjustment expenses
|
35,784
|
|
|
35,632
|
|
Unearned premiums
|
16,638
|
|
|
11,601
|
|
Funds held under reinsurance agreements
|
(1,306
|
)
|
|
(6,030
|
)
|
Reinsurance premiums payable
|
409
|
|
|
11,409
|
|
Accounts payable and accrued expenses
|
19,591
|
|
|
5,271
|
|
Lease liability
|
6,186
|
|
|
—
|
|
Income taxes payable
|
3,270
|
|
|
(1,992
|
)
|
Net cash provided by operating activities
|
31,783
|
|
|
14,692
|
|
Investing activities
|
|
|
|
Payments for capital expenditures
|
(554
|
)
|
|
(493
|
)
|
Proceeds from sale of equity method investment
|
3,000
|
|
|
—
|
|
Return of capital on equity method investment
|
115
|
|
|
—
|
|
Purchase of investments, available for sale
|
(55,695
|
)
|
|
(51,196
|
)
|
Proceeds from investments sold, matured or repaid
|
60,339
|
|
|
49,405
|
|
Acquisition of subsidiary, net of cash received
|
(1,098
|
)
|
|
(5,496
|
)
|
Net cash provided by (used in) investing activities
|
6,107
|
|
|
(7,780
|
)
|
Financing activities
|
|
|
|
Proceeds from credit agreement
|
32,453
|
|
|
—
|
|
Principal payments on long-term debt
|
(21,843
|
)
|
|
(4,145
|
)
|
Distribution to members
|
(19,496
|
)
|
|
(313
|
)
|
Dividends paid on preferred stock
|
—
|
|
|
(127
|
)
|
Net cash used in financing activities
|
(8,886
|
)
|
|
(4,585
|
)
|
Net increase in cash, cash equivalents and restricted cash
|
29,004
|
|
|
2,327
|
|
Cash, cash equivalents and restricted cash ‑ beginning of period
|
76,068
|
|
|
55,962
|
|
Cash, cash equivalents and restricted cash ‑ end of period
|
$
|
105,072
|
|
|
$
|
58,289
|
|
See accompanying notes to the condensed combined financial statements.
8
BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
Disaggregation of cash and restricted cash:
|
As of June 30, 2020
|
|
As of June 30, 2019
|
Cash and cash equivalents
|
$
|
97,326
|
|
|
$
|
50,648
|
|
Restricted cash
|
7,746
|
|
|
7,641
|
|
Total cash, cash equivalents and restricted cash
|
$
|
105,072
|
|
|
$
|
58,289
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
Supplemental disclosure of cash flow information:
|
2020
|
|
2019
|
Cash paid during the year for:
|
|
|
|
Interest
|
$
|
914
|
|
|
$
|
1,323
|
|
Income taxes
|
201
|
|
|
5,462
|
|
Non-cash investing and financing activity:
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
6,906
|
|
|
—
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
906
|
|
|
—
|
|
See accompanying notes to the condensed combined financial statements.
9
Notes to the Condensed Combined Financial Statements
Note 1. Business and Basis of Presentation
The condensed combined financial statements include the accounts, after elimination of intercompany accounts and transactions, of BIC Holdings LLC (BIC), a property and casualty insurance holding company, and Trean Holdings LLC (Trean), an insurance services company, along with their wholly owned subsidiaries, collectively the “Company”. BIC and Trean are owned by the same members. In July 2020, Trean Insurance Group, Inc. completed its initial public offering of common stock. As the accompanying financial statements are as of and for the three and six months ended June 30, 2020, they are presented on a combined basis rather than on a consolidated basis. All dollar amounts are shown in thousands, except unit and per unit amounts.
The Company is an established and growing company providing products and services to the specialty insurance market. Historically, the Company has focused on specialty casualty markets that are believed to be under 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), and also through the Company’s own managing general agencies (Owned MGAs). The Company also provides Program Partners with a variety of services, including issuing carrier services, claims administration, and reinsurance brokerage from which the Company generates fee-based revenues.
BIC’s wholly owned subsidiary is Benchmark Holding Company, a property and casualty insurance holding company, which owns Benchmark Insurance Company (Benchmark), a property and casualty insurance company domiciled in the state of Kansas, and American Liberty Insurance Company (ALIC), a property and casualty insurance company domiciled in the state of Utah.
Trean’s wholly owned subsidiaries are Trean Compstar Holdings, LLC, a limited liability company created for the purchase of an interest in Compstar Insurance Services LLC, a California-based general agency, and Trean Corporation (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 combined financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to 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 combined 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 combined 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 combined financial statements should be read in conjunction with the Company's most recent audited combined financial statements and notes thereto for the year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.
Use of estimates
While preparing the condensed combined 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 combined 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), reinsurance recoveries, investments and goodwill. Except for the captions on the condensed combined balance sheets and condensed combined 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) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (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 combined financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. The Company adopted this standard effective January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the condensed combined financial statements.
In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842) (ASU 2016-02), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of lease payments. Management adopted this standard effective January 1, 2020 under the modified retrospective approach. Adoption of this standard resulted in the Company recognizing initial right-of-use assets of $5,946 and initial lease liabilities of $5,946 and did not result in a cumulative effect adjustment on retained earnings. The adoption of this standard did not have a material impact on the condensed combined statements of operations or condensed combined statements of cash flows.
Pending policies
Trean Insurance Group, Inc. completed its initial public offering in July 2020, and is an emerging growth company as defined under federal securities laws. As such, the Company has elected to adopt pending accounting policies under the dates required for private companies. Therefore, the dates included within this section reflect the effective dates for the adoption of new accounting policies required by private companies.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (ASU 2020-03). This update represents changes to clarify and improve the codification to allow for easier application by eliminating inconsistencies and providing clarification. Certain issues addressed in this update are effective for annual periods beginning after December 15, 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 and January 1, 2023. Adoption of this standard is not expected to have a material impact on the condensed combined 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 combined financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment. ASU 2017-04 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter, with early adoption permitted. The Company will adopt this standard effective January 1, 2022. Adoption of this standard is not expected to have a material impact on the condensed combined financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update requires financial assets measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Additionally, credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit
losses, with the amount of the allowance limited to the amount by which the fair value is below the amortized cost. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this standard effective January 1, 2023. The Company is currently evaluating the impact of this standard on the condensed combined financial statements.
Note 2. Acquisitions
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):
|
|
|
|
|
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
|
|
Other assets
|
494
|
|
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 reducing operating expenses.
American Liberty Insurance Company
Effective March 31, 2019, Benchmark Holdings Company purchased the remaining 25% of outstanding voting shares in ALIC for $1,155. The purchase price was determined based on the statutory surplus of ALIC.
First Choice Casualty Insurance Company
Effective February 19, 2019, Benchmark purchased 100% of the operating assets and assumed the liabilities of First Choice Casualty Insurance Company (FCCIC). The total purchase price was $5,314. As part of the acquisition, the Company recorded a bargain purchase gain of $634 which is included in net realized capital gains (losses) on the condensed combined statements of operations. The Company was able to realize a bargain purchase gain as the seller was looking to exit the workers' compensation market with the sale of their management agreement to a new manager. With the new manager, the seller had a lack of interest and expertise in maintaining workers' compensation policies, which had historically been underwritten and managed by Trean Corp.
The following table summarizes the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
|
|
|
|
|
Fair value of total consideration transferred
|
$
|
5,314
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government and government securities
|
$
|
16,073
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
16,248
|
|
Foreign governments
|
—
|
|
|
305
|
|
|
—
|
|
|
305
|
|
States, territories and possessions
|
—
|
|
|
7,544
|
|
|
—
|
|
|
7,544
|
|
Political subdivisions of states territories and possessions
|
—
|
|
|
28,915
|
|
|
—
|
|
|
28,915
|
|
Special revenue and special assessment obligations
|
—
|
|
|
71,875
|
|
|
—
|
|
|
71,875
|
|
Industrial and public utilities
|
—
|
|
|
129,892
|
|
|
—
|
|
|
129,892
|
|
Commercial mortgage-backed securities
|
—
|
|
|
17,908
|
|
|
—
|
|
|
17,908
|
|
Residential mortgage-backed securities
|
—
|
|
|
59,412
|
|
|
—
|
|
|
59,412
|
|
Other loan-backed securities
|
—
|
|
|
43,250
|
|
|
—
|
|
|
43,250
|
|
Hybrid securities
|
—
|
|
|
356
|
|
|
—
|
|
|
356
|
|
Total fixed maturities
|
16,073
|
|
|
359,632
|
|
|
—
|
|
|
375,705
|
|
Equity securities:
|
|
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
325
|
|
|
—
|
|
|
325
|
|
Common stock
|
852
|
|
|
576
|
|
|
2,000
|
|
|
3,428
|
|
Total equity securities
|
852
|
|
|
901
|
|
|
2,000
|
|
|
3,753
|
|
Total investments
|
$
|
16,925
|
|
|
$
|
360,533
|
|
|
$
|
2,000
|
|
|
$
|
379,458
|
|
|
|
|
|
|
|
|
|
Funds held under reinsurance agreements
|
—
|
|
|
165,371
|
|
|
—
|
|
|
165,371
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
Junior subordinated debt
|
—
|
|
|
7,732
|
|
|
—
|
|
|
7,732
|
|
Secured credit facility
|
—
|
|
|
32,794
|
|
|
—
|
|
|
32,794
|
|
Total long-term debt
|
$
|
—
|
|
|
$
|
40,526
|
|
|
$
|
—
|
|
|
$
|
40,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government and government securities
|
$
|
16,129
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,129
|
|
Foreign governments
|
—
|
|
|
302
|
|
|
—
|
|
|
302
|
|
States, territories and possessions
|
—
|
|
|
4,923
|
|
|
—
|
|
|
4,923
|
|
Political subdivisions of states, territories and possessions
|
—
|
|
|
25,104
|
|
|
—
|
|
|
25,104
|
|
Special revenue and special assessment obligations
|
—
|
|
|
61,405
|
|
|
—
|
|
|
61,405
|
|
Industrial and public utilities
|
—
|
|
|
123,207
|
|
|
—
|
|
|
123,207
|
|
Commercial mortgage-backed securities
|
—
|
|
|
16,312
|
|
|
—
|
|
|
16,312
|
|
Residential mortgage-backed securities
|
—
|
|
|
54,109
|
|
|
—
|
|
|
54,109
|
|
Other loan-backed securities
|
—
|
|
|
36,011
|
|
|
—
|
|
|
36,011
|
|
Hybrid securities
|
—
|
|
|
363
|
|
|
—
|
|
|
363
|
|
Total fixed maturities
|
16,129
|
|
|
321,736
|
|
|
—
|
|
|
337,865
|
|
Equity securities:
|
|
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
343
|
|
|
—
|
|
|
343
|
|
Common stock
|
—
|
|
|
492
|
|
|
—
|
|
|
492
|
|
Total equity securities
|
—
|
|
|
835
|
|
|
—
|
|
|
835
|
|
Total investments
|
$
|
16,129
|
|
|
$
|
322,571
|
|
|
$
|
—
|
|
|
$
|
338,700
|
|
|
|
|
|
|
|
|
|
Funds held under reinsurance agreements
|
—
|
|
|
163,445
|
|
|
—
|
|
|
163,445
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
Junior subordinated debt
|
—
|
|
|
7,732
|
|
|
—
|
|
|
7,732
|
|
Secured credit facility
|
—
|
|
|
21,637
|
|
|
—
|
|
|
21,637
|
|
Total long-term debt
|
$
|
—
|
|
|
$
|
29,369
|
|
|
$
|
—
|
|
|
$
|
29,369
|
|
Bonds and preferred stocks: The Company uses a variety of sources 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 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: The Company holds certain investments as collateral under reinsurance contracts and values these investments consistent with its other investments using third-party pricing services. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent activity, analytical review of fair values and an evaluation of the underlying pricing methodologies. Based on these procedures, the Company did not adjust the prices or quotes from the third-party pricing service.
Long-term debt: The Company held long-term debt related to multiple credit agreements. 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 investments in securities classified as available for sale are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
(in thousands)
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government and government securities
|
$
|
15,778
|
|
|
$
|
470
|
|
|
$
|
—
|
|
|
$
|
16,248
|
|
Foreign governments
|
300
|
|
|
5
|
|
|
—
|
|
|
305
|
|
States, territories and possessions
|
7,299
|
|
|
245
|
|
|
—
|
|
|
7,544
|
|
Political subdivisions of states, territories and possessions
|
27,684
|
|
|
1,231
|
|
|
—
|
|
|
28,915
|
|
Special revenue and special assessment obligations
|
68,065
|
|
|
3,815
|
|
|
(5
|
)
|
|
71,875
|
|
Industrial and public utilities
|
122,814
|
|
|
7,223
|
|
|
(145
|
)
|
|
129,892
|
|
Commercial mortgage-backed securities
|
16,400
|
|
|
1,598
|
|
|
(90
|
)
|
|
17,908
|
|
Residential mortgage-backed securities
|
57,787
|
|
|
1,714
|
|
|
(89
|
)
|
|
59,412
|
|
Other loan-backed securities
|
42,871
|
|
|
772
|
|
|
(393
|
)
|
|
43,250
|
|
Hybrid securities
|
357
|
|
|
2
|
|
|
(3
|
)
|
|
356
|
|
Total fixed maturities available for sale
|
$
|
359,355
|
|
|
$
|
17,075
|
|
|
$
|
(725
|
)
|
|
$
|
375,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government and government securities
|
$
|
15,965
|
|
|
$
|
167
|
|
|
$
|
(3
|
)
|
|
$
|
16,129
|
|
Foreign governments
|
299
|
|
|
3
|
|
|
—
|
|
|
302
|
|
States, territories and possessions
|
4,789
|
|
|
134
|
|
|
—
|
|
|
4,923
|
|
Political subdivisions of states, territories and possessions
|
24,444
|
|
|
670
|
|
|
(10
|
)
|
|
25,104
|
|
Special revenue and special assessment obligations
|
59,149
|
|
|
2,298
|
|
|
(42
|
)
|
|
61,405
|
|
Industrial and public utilities
|
119,735
|
|
|
3,490
|
|
|
(18
|
)
|
|
123,207
|
|
Commercial mortgage-backed securities
|
15,586
|
|
|
757
|
|
|
(31
|
)
|
|
16,312
|
|
Residential mortgage-backed securities
|
53,467
|
|
|
679
|
|
|
(37
|
)
|
|
54,109
|
|
Other loan-backed securities
|
35,849
|
|
|
281
|
|
|
(119
|
)
|
|
36,011
|
|
Hybrid securities
|
357
|
|
|
6
|
|
|
—
|
|
|
363
|
|
Total fixed maturities available for sale
|
$
|
329,640
|
|
|
$
|
8,485
|
|
|
$
|
(260
|
)
|
|
$
|
337,865
|
|
The following table illustrates the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 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
|
$
|
505
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
505
|
|
|
$
|
—
|
|
Foreign governments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
States, territories and possessions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Political subdivisions of states, territories and possessions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special revenue and special assessment obligations
|
932
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
932
|
|
|
(5
|
)
|
Industrial and public utilities
|
1,512
|
|
|
(145
|
)
|
|
—
|
|
|
—
|
|
|
1,512
|
|
|
(145
|
)
|
Commercial mortgage-backed securities
|
936
|
|
|
(90
|
)
|
|
—
|
|
|
—
|
|
|
936
|
|
|
(90
|
)
|
Residential mortgage-backed securities
|
1,575
|
|
|
(67
|
)
|
|
308
|
|
|
(22
|
)
|
|
1,883
|
|
|
(89
|
)
|
Other loan-backed securities
|
10,148
|
|
|
(89
|
)
|
|
10,488
|
|
|
(304
|
)
|
|
20,636
|
|
|
(393
|
)
|
Hybrid securities
|
104
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
104
|
|
|
(3
|
)
|
Total bonds
|
$
|
15,712
|
|
|
$
|
(399
|
)
|
|
$
|
10,796
|
|
|
$
|
(326
|
)
|
|
$
|
26,508
|
|
|
$
|
(725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
(in thousands)
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government securities
|
$
|
293
|
|
|
$
|
(2
|
)
|
|
$
|
1,349
|
|
|
$
|
(1
|
)
|
|
$
|
1,642
|
|
|
$
|
(3
|
)
|
Foreign governments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
States, territories and possessions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Political subdivisions of states, territories and possessions
|
1,500
|
|
|
(9
|
)
|
|
690
|
|
|
(1
|
)
|
|
2,190
|
|
|
(10
|
)
|
Special revenue and special assessment obligations
|
3,206
|
|
|
(42
|
)
|
|
181
|
|
|
—
|
|
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total bonds
|
$
|
22,201
|
|
|
$
|
(123
|
)
|
|
$
|
19,245
|
|
|
$
|
(137
|
)
|
|
$
|
41,446
|
|
|
$
|
(260
|
)
|
The unrealized losses on the Company’s available for sale securities as of June 30, 2020 and December 31, 2019 were primarily caused by widening in corporate and tax exempt spreads, rather than credit-related problems.
The amortized cost and estimated fair value of fixed maturities as of June 30, 2020, by contractual maturity, are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost or Amortized Cost
|
|
Fair Value
|
Available for sale:
|
|
|
|
Due in one year or less
|
$
|
22,078
|
|
|
$
|
22,266
|
|
Due after one year but before five years
|
118,280
|
|
|
124,043
|
|
Due after five years but before ten years
|
58,074
|
|
|
62,674
|
|
Due after ten years
|
43,865
|
|
|
46,152
|
|
Commercial mortgage-backed securities
|
16,400
|
|
|
17,908
|
|
Residential mortgage-backed securities
|
57,787
|
|
|
59,412
|
|
Other loan-backed securities
|
42,871
|
|
|
43,250
|
|
Total
|
$
|
359,355
|
|
|
$
|
375,705
|
|
Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Realized gains and losses on investments included in the condensed combined statements of operations for the three and six months ended June 30, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Fixed maturities:
|
|
|
|
|
|
|
|
Gains
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
119
|
|
|
$
|
120
|
|
Losses
|
(1
|
)
|
|
(8
|
)
|
|
(1
|
)
|
|
(31
|
)
|
Total fixed maturities
|
(1
|
)
|
|
111
|
|
|
118
|
|
|
89
|
|
Equity securities:
|
|
|
|
|
|
|
|
Equity method investments:
|
|
|
|
|
|
|
|
Gains
|
—
|
|
|
—
|
|
|
3,115
|
|
|
—
|
|
Total equity securities
|
—
|
|
|
—
|
|
|
3,115
|
|
|
—
|
|
Total net investment realized gains (losses)
|
$
|
(1
|
)
|
|
$
|
111
|
|
|
$
|
3,233
|
|
|
$
|
89
|
|
Net investment income consists of the following for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Fixed maturities
|
$
|
1,408
|
|
|
$
|
1,558
|
|
|
$
|
2,880
|
|
|
$
|
2,827
|
|
Preferred stock
|
34
|
|
|
(19
|
)
|
|
20
|
|
|
(23
|
)
|
Common stock
|
75
|
|
|
—
|
|
|
1,874
|
|
|
—
|
|
Interest earned on cash and short-term investments
|
7
|
|
|
31
|
|
|
22
|
|
|
53
|
|
Net investment income
|
$
|
1,524
|
|
|
$
|
1,570
|
|
|
$
|
4,796
|
|
|
$
|
2,857
|
|
Note 5. Equity Method Investments
The Company has investments in Compstar Holding Company LLC (Compstar) and Trean Intermediaries (TRI). Equity earnings and losses are reported in equity earnings in affiliates, net of tax on the condensed combined statements of operations.
The Company owned 45% of Compstar which had a carrying value of approximately $11,461 and $11,831 as of June 30, 2020 and December 31, 2019, respectively. The Company recorded earnings for the three months ended June 30, 2020 and 2019 of $1,230 and $692, respectively. Distributions received from Compstar for the three months ended June 30, 2020 and 2019 were $1,024 and $1,334, respectively. The Company recorded earnings for the six months ended June 30, 2020 and 2019 of $1,932 and $1,134, respectively. Distributions received from Compstar for the six months ended June 30, 2020 and 2019 were $2,302 and $1,537, 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 a 10% ownership interest in TRI. As a result of its significant ownership reduction and its inability to have 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 combined 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 combined statement of operations. The carrying value of TRI as of December 31, 2019 was approximately $110. The Company received distributions totaling $225 for the six months ended June 30, 2020. The Company recorded earnings of $174 and $340 for the three and six months ended June 30, 2019, respectively. The Company received distributions of $275 and $590 for the three and six months ended June 30, 2019, respectively.
Note 6. Debt
Long‑term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2020
|
|
December 31, 2019
|
Junior subordinated debt
|
$
|
7,732
|
|
|
$
|
7,732
|
|
Secured credit facility
|
32,794
|
|
|
21,637
|
|
Long-term debt
|
40,526
|
|
|
29,369
|
|
Less: unamortized deferred financing costs
|
(828
|
)
|
|
(329
|
)
|
Net long‑term debt
|
$
|
39,698
|
|
|
$
|
29,040
|
|
Junior Subordinated Debt
In June 2006, Trean Capital Trust I (the Trust) issued 7,500 shares of preferred capital securities to qualified institutional buyers and 232 common securities to Trean Corp. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of Trean Corp's Junior Subordinated Debt due 2036 (the Subordinated Notes). The Subordinated Notes represent the sole assets of the Trust. The Subordinated Notes mature on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of LIBOR (1.22% and 1.99% as of June 30, 2020 and December 31, 2019, respectively) plus 3.50% is in effect. The interest rate totaled 4.72% and 5.49% as of June 30, 2020 and December 31, 2019, respectively. There are optional dates for redemption of the Subordinated Notes, at the option of the Company, on any January 7, April 7, July 7, or October 7 following July 7, 2011. There are no funding requirements for Trean Corp to the Trust except for the necessary quarterly interest payments. Trean Corp is the guarantor of the debt.
The preferred capital securities issued by the Trust in turn pay quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011 and thereafter at a variable rate per annum, reset quarterly, equal to LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Subordinated Notes on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by the Company.
The Company recorded $92 and $119 of interest expense associated with the Subordinated Notes during the three months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded $196 and $241 of interest expense, respectively, associated with the Subordinated Notes.
The terms of this agreement require the Company to maintain certain general and financial covenants and ratios. The Company was in compliance with all covenants and ratios as of June 30, 2020 and December 31, 2019.
Secured Credit Facility
In April 2018, Trean Corp entered into a credit agreement with a bank which includes a term loan facility totaling $27,500 and a revolving credit facility of $3,000. Borrowings are secured by substantially all of the assets of Trean and its subsidiaries.
On May 26, 2020, the Company entered into a new Amended and Restated Credit Agreement which, among other things, extended the Company's credit facility for a period of five years through May 26, 2025 and increased its term loan facility by $11,707 resulting in a total term loan debt amount of $33,000 at the time of closing. The loan has a variable interest rate of LIBOR plus 3.50% and 3.00%, which was 5.95% and 6.33% as of June 30, 2020 and December 31, 2019, respectively. The outstanding principal balance of the loan is to be repaid in quarterly installments which escalate from $206 to $825. All shares of Trean and its subsidiaries have been pledged as guaranteed collateral.
The Company recorded $388 and $420 of interest expense associated with its credit facility during the three months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded $722 and $892 of interest expense, respectively, associated with its credit facility.
The terms of this agreement require the Company to maintain certain financial covenants and ratios. The Company was in compliance with all covenants and ratios as of June 30, 2020 and December 31, 2019.
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. Revenue from contracts with customers was $1,530 and $5,922 for the three and six months ended June 30, 2020, respectively, compared to $1,893 and $5,488 for the three and six months ended June 30, 2019, respectively.
The following table presents the revenues recognized from contracts with customers included in the condensed combined statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Brokerage
|
$
|
755
|
|
|
$
|
912
|
|
|
$
|
4,448
|
|
|
$
|
3,615
|
|
Managing general agent fees
|
254
|
|
|
227
|
|
|
408
|
|
|
567
|
|
Third-party administrator fees
|
383
|
|
|
559
|
|
|
767
|
|
|
973
|
|
Consulting fees
|
138
|
|
|
195
|
|
|
299
|
|
|
333
|
|
Total revenue from contracts with customers
|
$
|
1,530
|
|
|
$
|
1,893
|
|
|
$
|
5,922
|
|
|
$
|
5,488
|
|
The Company did not have any contract liabilities as of June 30, 2020 or December 31, 2019. The following table provides information related to the contract assets from contracts with customers. Contract assets are included within other assets on the condensed combined balance sheets.
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2020
|
|
December 31, 2019
|
Contract assets
|
$
|
2,569
|
|
|
$
|
1,103
|
|
Note 8. Income Taxes
Income tax expense for interim periods is measured using an estimated effective income tax rate for the annual period. The Company's effective tax rate was 28.2% and 25.5% for the three and six months ended June 30, 2020, respectively. The effective tax rate differed from the statutory rate primarily due to the impact of state taxes and the deferred tax effect of a tax accounting method change on excess ceding commissions.
The Company's effective tax rate was 23.4% for the three months ended June 30, 2019. The effective tax rate differed from the statutory rate of 21% due to the impact of state taxes. The Company's effective tax rate was 18.4% for six months ended June 30, 2019. The effective tax rate differed from the statutory rate primarily due to book and tax basis differences resulting from the acquisition of FCCIC and deferred tax benefits related to the tax impact of deferred acquisition costs.
Note 9. Liability for Unpaid Losses and Loss Adjustment Expense
The following table represents a reconciliation of changes in the liability for unpaid losses and LAE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Unpaid losses and LAE reserves at beginning of period
|
$
|
418,757
|
|
|
$
|
364,360
|
|
|
$
|
406,716
|
|
|
$
|
340,415
|
|
Less losses ceded through reinsurance
|
(312,105
|
)
|
|
(271,005
|
)
|
|
(304,005
|
)
|
|
(257,421
|
)
|
Net unpaid losses and LAE at beginning of period
|
106,652
|
|
|
93,355
|
|
|
102,711
|
|
|
82,994
|
|
Acquisition of First Choice Casualty Insurance Company
|
—
|
|
|
—
|
|
|
—
|
|
|
6,366
|
|
Incurred losses and LAE related to:
|
|
|
|
|
|
|
|
Current period
|
13,020
|
|
|
14,350
|
|
|
27,189
|
|
|
27,279
|
|
Prior period
|
(837
|
)
|
|
(1,336
|
)
|
|
(2,072
|
)
|
|
(2,809
|
)
|
Total incurred losses and LAE
|
12,183
|
|
|
13,014
|
|
|
25,117
|
|
|
24,470
|
|
Paid losses and LAE, net of reinsurance, related to:
|
|
|
|
|
|
|
|
Current period
|
3,392
|
|
|
1,230
|
|
|
4,590
|
|
|
2,328
|
|
Prior period
|
5,708
|
|
|
6,640
|
|
|
13,503
|
|
|
13,003
|
|
Total paid losses and LAE
|
9,100
|
|
|
7,870
|
|
|
18,093
|
|
|
15,331
|
|
Net unpaid losses and LAE at end of period
|
109,735
|
|
|
98,499
|
|
|
109,735
|
|
|
98,499
|
|
Plus losses ceded through reinsurance
|
332,765
|
|
|
283,974
|
|
|
332,765
|
|
|
283,974
|
|
Unpaid losses and LAE reserves at end of period
|
$
|
442,500
|
|
|
$
|
382,473
|
|
|
$
|
442,500
|
|
|
$
|
382,473
|
|
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and loss adjustment expenses decreased by approximately $837 and $1,336 for the three months ended June 30, 2020 and 2019, respectively, and decreased by approximately $2,072 and $2,809 for the six months ended June 30, 2020 and 2019, 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 June 30,
|
|
2020
|
|
2019
|
(in thousands)
|
Gross
|
|
Assumed
|
|
Ceded
|
|
Net
|
|
Gross
|
|
Assumed
|
|
Ceded
|
|
Net
|
Written premiums
|
$
|
107,596
|
|
|
$
|
2,016
|
|
|
$
|
(86,586
|
)
|
|
$
|
23,026
|
|
|
$
|
102,962
|
|
|
$
|
1,458
|
|
|
$
|
(82,183
|
)
|
|
$
|
22,237
|
|
Earned premiums
|
98,337
|
|
|
2,010
|
|
|
(78,968
|
)
|
|
21,379
|
|
|
101,097
|
|
|
1,788
|
|
|
(79,508
|
)
|
|
23,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
(in thousands)
|
Gross
|
|
Assumed
|
|
Ceded
|
|
Net
|
|
Gross
|
|
Assumed
|
|
Ceded
|
|
Net
|
Written premiums
|
$
|
213,573
|
|
|
$
|
3,898
|
|
|
$
|
(168,218
|
)
|
|
$
|
49,253
|
|
|
$
|
202,320
|
|
|
$
|
3,634
|
|
|
$
|
(162,632
|
)
|
|
$
|
43,322
|
|
Earned premiums
|
196,880
|
|
|
3,953
|
|
|
(156,995
|
)
|
|
43,838
|
|
|
189,650
|
|
|
3,817
|
|
|
(150,466
|
)
|
|
43,001
|
|
Note 11. Leases
Adoption of Leases, Topic 842
On January 1, 2020, the Company adopted ASU No. 2016-02, Leases (Topic 842), and all related amendments under the modified retrospective approach. Under this transition approach, comparative prior periods, including disclosures, were not restated. The Company elected the transition package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification. The Company chose not to elect the hindsight practical expedient. The Company has elected, as a practical expedient, to account for lease components and any non-lease components within a contract as a single lease component, and therefore allocates all of the expected lease payments to the lease component. The adoption of the standard did not have an impact on the Company's condensed combined statements of operations and there was no adjustment to its retained earnings opening balance sheet as of January 1, 2020. The Company does not expect the adoption of the new standard to have a material impact on the Company's operating results on an ongoing basis. The most significant impact of the new lease standard was the recognition of right-of-use assets and lease liabilities for operating leases. On January 1, 2020, the adoption of the new standard resulted in the recognition of a right-of-use asset and total lease liability of $5,946.
The Company's leases consist of operating leases for office space and equipment. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Some of the Company's leases include options to extend the term, which is only included in the lease liability and right-of-use assets calculation when it is reasonably certain the Company will exercise that option. Our leases have remaining terms ranging from one month to 60 months, some of which have options to extend the lease for up to 5 years. As of June 30, 2020, 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 June 30, 2020 was $535, inclusive of $22 in variable lease expense. The Company also sublets some of its leased office space and recorded $36 of sublease income for the three months ended June 30, 2020, which is included in other income on the condensed combined statements of operations. Total rent expense was $389 and sublease income was $30 for the three months ended June 30, 2019, which were recorded prior to the adoption of ASU 2016-02.
Total lease expense for the six months ended June 30, 2020 was $1,114, inclusive of $142 in variable lease expense. The Company also sublets some of its leased office space and recorded $48 of sublease income for the six months ended June 30, 2020, which is included in other income on the condensed combined statement of operations. Total rent expense was $737 and sublease income was $120 for the six months ended June 30, 2019, which were recorded prior to the adoption of ASU 2016-02.
Supplemental balance sheet information, the weighted average remaining lease term and weighted average discount rate related to leases were as follows:
|
|
|
|
|
(dollars in thousands)
|
June 30, 2020
|
Right of use asset
|
$
|
5,958
|
|
Lease liability
|
$
|
6,186
|
|
Weighted average remaining lease term
|
3.64 years
|
|
Weighted average discount rate
|
6.49
|
%
|
Future maturities of lease liabilities as of June 30, 2020 are as follows:
|
|
|
|
|
(in thousands)
|
Operating Leases
|
2020
|
$
|
1,005
|
|
2021
|
1,949
|
|
2022
|
1,899
|
|
2023
|
1,313
|
|
2024
|
699
|
|
Thereafter
|
82
|
|
Total lease payments
|
6,947
|
|
Less: imputed interest
|
(761
|
)
|
Total lease liabilities
|
$
|
6,186
|
|
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
|
|
Note 12. Equity
Members' Equity
BIC Holdings LLC and Trean Holdings LLC were each formed in the state of Delaware as a limited liability company (LLC). Any debts, expenses, obligations and liabilities of the Company are solely the responsibility of the Company. Any member of the LLC does not have any liability for the obligations or liabilities of the Company solely by reason of being a member or acting as a member of the Company.
The Company has three classes of ownership units, each with its respective rights, preferences and privileges as follows:
|
|
1)
|
Class A Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class B Units, on a pro rata basis prior to distributions made to other classes of ownership units.
|
|
|
2)
|
Class B Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class A Units, on a pro rata basis prior to distributions made to other classes of ownership units. Class B maintains both voting and non-voting units. Each Class B Voting Unit is entitled to one vote per Class B Voting Unit on each matter to which the members are entitled to vote. Class B Non-Voting Units maintain all rights, preferences and privileges allowed to Class B Voting Units with the exception of voting rights.
|
|
|
3)
|
Class C Units: Receive an allocation of profits and losses incurred by the Company. Participating Class C Units maintain the right to receive distributions after any Class A or Class B units based on the unit holders’ pro rata share.
|
Redeemable Preferred Stock
Trean Corp has designated and authorized 1,000,000 shares as Series A Redeemable Preferred Stock (Series A) which have no voting rights. The holder is entitled to receive annual cumulative dividends at 4.5 percent 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 stockholders before common stockholders. 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 stockholders before common stockholders. Series B contains no conversion features. The liquidation preference and redemptive value of Series B is equivalent to its carrying value as of June 30, 2020 and December 31, 2019. The Company classified the shares of Series B within temporary equity on the condensed combined balance sheets as of June 30, 2020 and December 31, 2019, due to the liquidation rights associated with the termination of the shareholder customer agreement.
The Company is required to redeem all shares of outstanding Series A or Series B if any of the following events occur:
|
|
1.
|
Upon demand by a majority of the shareholders having voting rights in the Company
|
|
|
2.
|
Upon termination of the underlying stock purchase agreement between the Series A holders and Trean (only applicable to Series A shares)
|
|
|
3.
|
Any refinancing, recapitalization, sale of assets or stock by Trean Corp or Benchmark Holding Company that results in a realization of gain by the shareholders, to the extent the same is distributed to shareholders, whether in a single or a series of distributions (only applicable to Series A shares)
|
|
|
4.
|
Change in the majority control of the Company (only applicable to Series B shares)
|
|
|
5.
|
The termination of the shareholder customer agreement (only applicable to Series B shares)
|
|
|
6.
|
A qualified initial public offering of Trean Corp or Benchmark Holding Company
|
The cumulative dividends earned by Series B holders totaled approximately $83 for the three and six months ended June 30, 2020, which consist of the following (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30, 2020
|
|
Total Dividend
|
|
Dividend per Share
|
|
Weighted
Average Shares
|
Dividends on preferred shares - Series B
|
$
|
83
|
|
|
$
|
1,622.90
|
|
|
51.00
|
The cumulative dividends earned by Series A and Series B holders totaled approximately $87 and $96 for the three and six months ended June 30, 2019, respectively, which consist of the following (in thousands, except share and pre share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Total Dividend
|
|
Dividend per Share
|
|
Weighted
Average Shares
|
Dividends on preferred shares - Series A
|
$
|
13
|
|
|
$
|
1,352.82
|
|
|
10.00
|
Dividends on preferred shares - Series B
|
74
|
|
|
1,240.46
|
|
|
60.00
|
Total preferred share dividends
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Total Dividend
|
|
Dividend per Share
|
|
Weighted
Average Shares
|
Dividends on preferred shares - Series A
|
$
|
22
|
|
|
$
|
2,231.51
|
|
|
10.00
|
Dividends on preferred shares - Series B
|
74
|
|
|
1,240.46
|
|
|
60.00
|
Total preferred share dividends
|
$
|
96
|
|
|
|
|
|
Note 13. Accumulated Other Comprehensive Income
The following table presents the changes in accumulated other comprehensive income for unrealized gains and losses on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Balance at beginning of period
|
$
|
3,761
|
|
|
$
|
1,941
|
|
|
$
|
4,821
|
|
|
$
|
(2,003
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
Unrealized investment gains:
|
|
|
|
|
|
|
|
Unrealized investment gains arising during the period
|
6,252
|
|
|
2,782
|
|
|
5,029
|
|
|
7,753
|
|
Income tax expense
|
1,310
|
|
|
585
|
|
|
1,054
|
|
|
1,629
|
|
Unrealized investment gains, net of tax
|
4,942
|
|
|
2,197
|
|
|
3,975
|
|
|
6,124
|
|
Less: reclassification adjustments to:
|
|
|
|
|
|
|
|
Net realized investment gains (losses) included in net realized capital gains (losses)
|
(1
|
)
|
|
111
|
|
|
118
|
|
|
89
|
|
Income tax expense (benefit)
|
(1
|
)
|
|
24
|
|
|
25
|
|
|
19
|
|
Total reclassifications included in net income, net of tax
|
—
|
|
|
87
|
|
|
93
|
|
|
70
|
|
Other comprehensive income
|
4,942
|
|
|
2,110
|
|
|
3,882
|
|
|
6,054
|
|
Balance at end of period
|
$
|
8,703
|
|
|
$
|
4,051
|
|
|
$
|
8,703
|
|
|
$
|
4,051
|
|
Note 14. 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. The Company had approximately $157 and $197 of unrecognized stock compensation expense as of June 30, 2020 and December 31, 2019, respectively, related to non-vested stock-based compensation granted. The remaining non-vested stock-based compensation will become vested in the third quarter of 2020 in conjunction with the initial public offering of Trean Insurance Group, Inc. The Company recognized approximately $20 and $40 of stock based compensation expense for the three and six months ended June 30, 2020, respectively. The Company recognized approximately $20 and $39 of stock based compensation expense for the three and six months ended June 30, 2019.
Note 15. Transactions with Related Parties
The Company owed Altaris Capital Partners, LLC, a private equity firm, approximately $83, which is included within accounts payable and accrued expenses on the condensed combined balance sheet as of December 31, 2019.
The Company was owed amounts from TRI of approximately $14 as of December 31, 2019, which is included in related party receivables on the December 31, 2019 condensed combined balance sheet. The Company recorded $50 and $100 of revenue for consulting services provided to TRI for the three and six months ended June 30, 2020, respectively, which is included in other revenue on the condensed combined statements of operations. The Company recorded $50 and $100 of revenue for consulting services provided to TRI for the three and six months ended June 30, 2019, respectively.
The Company owns a 45% interest in Compstar, a program manager which handles the underwriting, premium collection and servicing of insurance policies for the Company. The Company recorded $43,917 and $90,199 of gross earned premiums resulting in gross commissions of $7,737 and $17,709 for the three and six months ended June 30, 2020, respectively. The Company recorded $45,668 and $79,691 of gross earned premiums resulting in gross commissions of $9,191 and $16,554 due to Compstar for the three and six months ended June 30, 2019, respectively. All receivables are stated net of the
commissions due under the Program Manager Agreement and totaled $20,385 and $22,207 as of June 30, 2020 and December 31, 2019, respectively, which is recorded in related party receivables on the condensed combined balance sheets. The Company’s ownership interest, and right to receive any distributions, is listed as collateral on debt taken out by Compstar.
Note 16. Subsequent Events
Events or transactions that occur after the balance sheet date, but before the condensed combined financial statements are complete, are reviewed by the Company to determine if they are to be recognized and/or disclosed as appropriate.
The ongoing global COVID-19 pandemic and response thereto has significantly impacted financial markets, businesses, households and communities and has caused a contraction in business activity and volatility in financial markets. The Company took several actions to protect the health of the public and its employees and to comply with directives and advice of governmental authorities, including restricting business travel and transitioning from an office-based company to primarily a remote working culture. As state, city and county guidelines progress, the Company has implemented new health and safety in-office procedures to prepare for transitioning its workforce back to working in offices on a limited basis. To date, the effects of the COVID-19 pandemic have not had a significant impact on the Company's financial position, results of operations or cash flows. However, continuation of the COVID-19 pandemic could cause additional reduction in business activity and financial market instability. The extent of the impact or continuation of the COVID-19 pandemic on the Company's future operational and financial performance will depend on several factors, including the duration of the pandemic and actions taken by government and health officials in response, all of which are uncertain and cannot be predicted. The Company will continue to monitor the impact of the ongoing continuation of the COVID-19 pandemic on its business, including how it will impact premium revenue, loss experience and loss expense, liquidity, regulatory capital and surplus, and operations.
On July 20, 2020, Trean Insurance Group, Inc. closed the sale of 10,714,286 shares of its common stock in its initial public offering (IPO), comprised of 7,142,857 shares issued and sold by Trean Insurance Group, Inc. and 3,571,429 shares sold by selling stockholders. On July 22, 2020, Trean Insurance Group, Inc. closed the sale of an additional 1,207,142 shares by certain selling stockholders in the IPO pursuant to the exercise of the underwriters’ option to purchase additional shares to cover over-allotments. The initial public offering price per share was $15.00. The aggregate initial public offering price for all shares sold in the IPO was approximately $107,142 and the aggregate initial public offering price for all shares sold by the selling stockholders in the IPO was approximately $71,678. The shares began trading on the Nasdaq Global Select Market on July 16, 2020 under the symbol "TIG". The offer and sale was pursuant to a registration statement on Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020.
Trean Insurance Group, Inc. received net proceeds from the sale of shares in the IPO of approximately $94,906 after deducting underwriting discounts and commissions of $7,500 and estimated offering expenses of $4,737. Trean Insurance Group, Inc. did not receive any proceeds from the sale of shares by the selling stockholders. In addition, and in conjunction with its IPO, Trean Insurance Group, Inc. issued 6,613,606 shares of common stock, with a purchase price value of $99,204, to acquire the remaining 55% ownership in Compstar Holding Company LLC. See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" for a detailed discussion of use of proceeds associated with the IPO.
Prior to the completion of the above offering, the Company effected the following reorganization transactions: (i) each of Trean Holdings LLC (Trean) and BIC Holdings LLC (BIC) contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc., (ii) upon the completion of the transfers by Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.
On July 16, 2020, Benchmark Holding Company entered into an agreement to acquire 7710 Holdings, LLC (7710), which includes 7710 Insurance Company as well as its associated program manager and agency, 7710 Service Company, LLC and Creekwood Insurance Agency, LLC for a purchase price of $12,000. 7710 Insurance Company underwrites workers' compensation primarily for emergency services, including firefighters and emergency medical services (EMS). 7710 focuses on reducing costs and claims through the implementation of a propriety safety preparedness and loss control program (S.H.I.E.L.D.), created and staffed by experienced firefighters and EMS professionals.
All of the effects of subsequent events that provide additional evidence about conditions that existed at the condensed combined balance sheet date, including the estimates inherent in the process of preparing the condensed combined financial statements, are recognized in the condensed combined financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations for the three and six months ended June 30, 2020 is qualified by reference to and should be read in conjunction with the accompanying unaudited condensed combined financial statements and the related notes included herein and the audited combined financial statements and notes of BIC Holdings LLC and Trean Holdings LLC as of December 31, 2019 and 2018. The discussion and analysis below are based on comparisons between our historical financial data for different periods and include certain forward-looking statements about our business, operations and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors described in the section “Risk Factors.” included herein and in our registration statement filed with the SEC on Form S-1. 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", "the Company", "Trean", or similar terms are (i) before the consummation of the reorganization transactions defined in our registration statement filed with the SEC on Form S-1, to Trean Holdings LLC, BIC Holdings LLC and their subsidiaries and (ii) after such reorganization transactions, to Trean Insurance Group, Inc. and its subsidiaries, 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.
Forward-Looking Statements
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. Forward-looking statements include statements that are not historical or current facts. These statements may discuss, among other things, our future financial performance, our business prospects and strategy, the lines of business we target, our anticipated financial position, liquidity and capital, our dividend policy 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" and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties, including changes in circumstances that are difficult to predict. If one or more of these risks or uncertainties materialize, or if our underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include those described in the “Risk Factors” section included herein and in our registration statement filed with the SEC on Form S-1. Forward-looking statements speak only as of the date on which they are made. Except as expressly required under federal securities laws or the rules and regulations of the SEC, we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements.
Overview
We are an established and growing company focused on providing 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.
Our goal is to deliver long-term value to our stockholders by growing our business and generating attractive returns. We plan to use our available cash and capital to support the growth of our business, including making contributions to the capital of our insurance subsidiaries and retaining more risk to capture additional premiums.
Coronavirus (COVID-19) Impact
We are monitoring the impact of the ongoing continuation of the COVID-19 pandemic on our business, including how it will impact our premium revenue, loss experience and loss expense, liquidity, and our regulatory capital and surplus, and operations.
Workforce Operations
We took several actions to protect the health of the public and our employees and to comply with directives and advice of governmental authorities. We responded by developing a Preparedness Plan that outlined both corporate-wide and location-specific modifications to 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 to prepare for transitioning our workforce back to working in our offices on a limited basis.
Premium Revenue, Claims and Losses
We have not had a significant impact to our premium revenue in the first half of 2020 relating to the COVID-19 pandemic. Only 10.0% of our business falls under hospitality, healthcare, and education, where the majority of the layoffs have occurred so far. Gross written premiums have increased by 5.0% and gross earned premiums have decreased by 2.5% during the quarter ended June 30, 2020 due primarily to the addition of second quarter new Program Partners whose premiums have not yet been earned, compared to the quarter ended June 30, 2019. On a year-to-date basis, gross written premiums have increased by 5.6% and gross earned premiums have increased by 3.8% during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily driven by the increase in gross written premiums. As over 80% of our gross written premiums are related to workers’ compensation insurance, we expect that future revenue trends could be impacted by higher unemployment rates as businesses slowly restart or if unemployment levels continue to trend high over the balance of 2020. 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 seen a significant impact in our reported claims or incurred losses in the first half of 2020 relating to the COVID-19 pandemic. Losses and loss adjustment expenses decreased $831, or 6.4%, to $12,183 for the three months ended June 30, 2020, compared to $13,014 for the three months ended June 30, 2019. On a year-to-date basis, losses and loss adjustment expenses increased $647, or 2.6%, to $25,117 for the six months ended June 30, 2020, compared to $24,470 for the six months ended June 30, 2019 primarily attributable to the growth in earned premiums during the period. In addition, our loss ratio remained relatively consistent at 57.0% and 57.3%, respectively, during the second quarter and six-month periods ending June 30, 2002 versus 55.7% and 56.9% for the comparable 2019 periods.
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 six months ended June 30, 2020, we have experienced a net increase of $5,029 in the fair value of our investment portfolio due to 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 any decline in the fair value of specific fixed maturity investments during 2020 is due to the recent disruption in the global financial markets associated with COVID-19 as opposed to underlying issues with our investment portfolio. While we have seen an improvement in our unrealized investment positions as of the end of June 2020, if 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 health-related concerns about working in our offices, the inability to travel, the potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and delay the implementation of our business strategy. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.
Significant Components of Results of Operations
Gross written premiums: Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for general and administrative expenses (including policy acquisition costs), reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
|
|
•
|
Addition and retention of Program Partners;
|
|
|
•
|
New business submissions to our Program Partners;
|
|
|
•
|
Binding of new business submissions into policies;
|
|
|
•
|
Renewals of existing policies; and
|
|
|
•
|
Average size and premium rate of bound policies.
|
Gross earned premiums: Gross earned premiums are the earned portion of gross written premiums. We earn insurance premiums on a pro rata basis over the term of the policy. Our insurance policies generally have a term of one year.
Ceded earned premiums: Ceded earned premiums are the amount of gross earned premiums ceded to reinsurers. We enter into reinsurance contracts to limit our maximum losses and diversify our exposure and provide statutory surplus relief. The volume of our ceded earned premiums is affected by the level of our gross earned premiums and any decision we make to increase or decrease limits, retention levels and co-participations.
Net earned premiums: Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is earned and ceded to third-party reinsurers, including our Program Partners and professional reinsurers, under our reinsurance agreements.
Net investment income: We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed maturities, including other investments and short-term investments. Our net investment income includes interest income on our invested assets, which is net of the income earned on our reinsurance agreements, which 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, 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;
|
|
|
•
|
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, technology costs, office rent and professional services fees such as legal, accounting and actuarial services.
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 “— 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, net realized capital gains (losses), other revenue, interest expense and other income. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of underwriting income to income before taxes in accordance with GAAP.
Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of unusual events or gains or losses that we do not believe reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of general and administrative expenses to net earned premiums.
Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period.
Adjusted return on equity is a non-GAAP financial measured defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
Tangible members' equity is defined as members' equity less goodwill and other intangible assets.
Return on tangible equity is a non-GAAP financial measure defined as net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period.
Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
Results of Operations
Combined Results of Operations for the Three Months Ended June 30, 2020 Compared to June 30, 2019
The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change
|
|
Percentage Change
|
(in thousands, except for percentages)
|
2020
|
|
2019
|
|
|
Revenues
|
|
|
|
|
|
|
|
Gross written premiums
|
$
|
109,612
|
|
|
$
|
104,420
|
|
|
$
|
5,192
|
|
|
5.0
|
%
|
Increase in gross unearned premiums
|
(9,265
|
)
|
|
(1,535
|
)
|
|
(7,730
|
)
|
|
503.6
|
%
|
Gross earned premiums
|
100,347
|
|
|
102,885
|
|
|
(2,538
|
)
|
|
(2.5
|
)%
|
Ceded earned premiums
|
(78,968
|
)
|
|
(79,508
|
)
|
|
540
|
|
|
(0.7
|
)%
|
Net earned premiums
|
21,379
|
|
|
23,377
|
|
|
(1,998
|
)
|
|
(8.5
|
)%
|
Net investment income
|
1,524
|
|
|
1,570
|
|
|
(46
|
)
|
|
(2.9
|
)%
|
Net realized capital gains (losses)
|
(4
|
)
|
|
111
|
|
|
(115
|
)
|
|
(103.6
|
)%
|
Other revenue
|
1,530
|
|
|
1,893
|
|
|
(363
|
)
|
|
(19.2
|
)%
|
Total revenue
|
24,429
|
|
|
26,951
|
|
|
(2,522
|
)
|
|
(9.4
|
)%
|
Expenses
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
12,183
|
|
|
13,014
|
|
|
(831
|
)
|
|
(6.4
|
)%
|
General and administrative expenses
|
8,316
|
|
|
6,193
|
|
|
2,123
|
|
|
34.3
|
%
|
Interest expense
|
501
|
|
|
561
|
|
|
(60
|
)
|
|
(10.7
|
)%
|
Total expenses
|
21,000
|
|
|
19,768
|
|
|
1,232
|
|
|
6.2
|
%
|
Other income
|
40
|
|
|
33
|
|
|
7
|
|
|
21.2
|
%
|
Income before taxes
|
3,469
|
|
|
7,216
|
|
|
(3,747
|
)
|
|
(51.9
|
)%
|
Income tax expense
|
979
|
|
|
1,690
|
|
|
(711
|
)
|
|
(42.1
|
)%
|
Equity earnings in affiliates, net of tax
|
1,230
|
|
|
865
|
|
|
365
|
|
|
42.2
|
%
|
Net income
|
$
|
3,720
|
|
|
$
|
6,391
|
|
|
$
|
(2,671
|
)
|
|
(41.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(in thousands, except for percentages)
|
2020
|
|
2019
|
Key metrics:
|
|
|
|
Underwriting income(1)
|
$
|
880
|
|
|
$
|
4,170
|
|
Adjusted net income(1)
|
$
|
4,771
|
|
|
$
|
6,934
|
|
Loss ratio
|
57.0
|
%
|
|
55.7
|
%
|
Expense ratio
|
38.9
|
%
|
|
26.5
|
%
|
Combined ratio
|
95.9
|
%
|
|
82.2
|
%
|
Return on equity
|
10.3
|
%
|
|
21.1
|
%
|
Adjusted return on equity(1)
|
13.2
|
%
|
|
22.9
|
%
|
Return on tangible equity(1)
|
10.5
|
%
|
|
21.6
|
%
|
Adjusted return on tangible equity(1)
|
13.5
|
%
|
|
23.4
|
%
|
(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.
Gross written premiums: Gross written premiums increased $5,192, or 5.0%, to $109,612 for the three months ended June 30, 2020, compared to $104,420 for the three months ended June 30, 2019. The increase is primarily attributable to the addition of new Program Partners brought on board during the second quarter of 2020. The changes in gross written premiums were most notably due to the following lines of business:
Workers' compensation, which represented 75.9% of our gross written premiums for the three months ended June 30, 2020, decreased by $2,164, or 2.5%, compared to the three months ended June 30, 2019.
All other non-workers' compensation liability, which represented 24.1% of our gross written premiums for the three months ended June 30, 2020, increased $7,356, or 38.5%, compared to the three months ended June 30, 2019.
Gross earned premiums: Gross earned premiums decreased $2,538, or 2.5%, to $100,347 for the three months ended June 30, 2020, compared to $102,885 for the three months ended June 30, 2019. The decrease is driven by the increase in gross unearned premiums of $7,730, which is due to the addition of second quarter new Program Partners whose premiums have not yet been earned and the timing of the effective dates of new policies written during the second quarter. Gross earned premiums as a percentage of gross written premiums decreased to 91.5% for the three months ended June 30, 2020, compared to 98.5%, for the three months ended June 30, 2019.
Ceded earned premiums: Ceded earned premiums decreased $540, or 0.7%, to $78,968 for the three months ended June 30, 2020, compared to $79,508 for the three months ended June 30, 2019. The decrease in ceded earned premiums is primarily driven by the timing of new policy effective dates for ceded policies. The total ceded earned premiums as a percentage of gross earned premiums remained relatively consistent at 78.7% for the three months ended June 30, 2020, compared to 77.3% for the three months ended June 30, 2019.
Net earned premiums: Net earned premiums decreased $1,998, or 8.5%, to $21,379 for the three months ended June 30, 2020, compared to $23,377 for the three months ended June 30, 2019. The decrease is due primarily to the decrease in gross earned premiums described above, partially offset by the decrease in ceded earned premiums over the three months ended June 30, 2019.
The table below shows the total premiums earned on a gross and net basis for the respective three-month periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Percentage Change
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
Gross written premiums
|
$
|
109,612
|
|
|
$
|
104,420
|
|
|
$
|
5,192
|
|
|
5.0
|
%
|
Increase in gross unearned premiums
|
(9,265
|
)
|
|
(1,535
|
)
|
|
(7,730
|
)
|
|
503.6
|
%
|
Gross earned premiums
|
100,347
|
|
|
102,885
|
|
|
(2,538
|
)
|
|
(2.5
|
)%
|
Ceded earned premiums
|
(78,968
|
)
|
|
(79,508
|
)
|
|
540
|
|
|
(0.7
|
)%
|
Net earned premiums
|
$
|
21,379
|
|
|
$
|
23,377
|
|
|
$
|
(1,998
|
)
|
|
(8.5
|
)%
|
Net investment income: Net investment income remained relatively consistent at $1,524 for the three months ended June 30, 2020, compared to $1,570 for the three months ended June 30, 2019.
Net realized capital gains (losses): Net realized capital gains (losses) decreased $115 to a loss of $4 for the three months ended June 30, 2020, compared to a gain of $111 for the three months ended June 30, 2019. The decrease is due to a reduction in trading activity during the current period.
Other revenue: Other revenue decreased $363, or 19.2%, to $1,530 for the three months ended June 30, 2020, compared to $1,893 for the three months ended June 30, 2019. The decrease is driven by a decrease in third-party administrator fees of $176 resulting from a loss in certain customers as well as a decrease in brokerage revenue of $157 driven by the reduction in brokerage fees earned.
Losses and loss adjustment expenses: Losses and loss adjustment expense decreased $831, or 6.4%, to $12,183 for the three months ended June 30, 2020, compared to $13,014 for the three months ended June 30, 2019. The decrease is directly attributable to the decrease in earned premiums during the period, offset by a decrease in favorable loss reserve estimate true-ups made during the second quarter of 2020 versus the second quarter of 2019. The Company's loss ratio remained relatively consistent at 57.0% for the three months ended June 30, 2020 compared to 55.7% for the three months ended June 30, 2019 as a result of some programs experiencing decreased loss ratios quarter over quarter.
General and administrative expenses: General and administrative expenses increased $2,123, or 34.3%, to $8,316 for the three months ended June 30, 2020, compared to $6,193 for the three months ended June 30, 2019. This change resulted in an increase in the Company's expense ratio to 38.9% for the three months ended June 30, 2020, compared to 26.5% for the three months ended June 30, 2019. The increase is attributable to (i) an increase in professional service expense of $1,782, of which $788 was related to the Company's IPO readiness efforts; (ii) an increase in net agent commissions of $1,580 resulting from an increase in written premium; (iii) an increase in salaries and benefits of $936 resulting from an increased workforce; and (iv) additional IT software and systems costs totaling $138 relating to new software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19. These increases are partially offset by a reduction in premium receivable write-offs of $2,073 and a reduction in corporate travel expenses of $260 due to the effects of COVID-19.
Income tax expense: Income tax expense was $979 for the three months ended June 30, 2020 which resulted in an effective tax rate of 28.2%, compared to $1,690 for the three months ended June 30, 2019 which resulted in an effective tax rate of 23.4%. The increase in the effective tax rate from the statutory rate of 21% is due 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, net of tax increased $365 to $1,230 for the three months ended June 30, 2020, compared to $865 for the three months ended June 30, 2019. This increase is due to the increase in the Company's share of earnings in Compstar of $538. This is partially offset by the reduction in the Company's share of earnings in TRI of $174, which is no longer carried 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.
Combined Results of Operations for the Six Months Ended June 30, 2020 Compared to June 30, 2019
The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change
|
|
Percentage Change
|
(in thousands, except for percentages)
|
2020
|
|
2019
|
|
|
Revenues
|
|
|
|
|
|
|
|
Gross written premiums
|
$
|
217,471
|
|
|
$
|
205,954
|
|
|
$
|
11,517
|
|
|
5.6
|
%
|
Increase in gross unearned premiums
|
(16,638
|
)
|
|
(12,487
|
)
|
|
(4,151
|
)
|
|
33.2
|
%
|
Gross earned premiums
|
200,833
|
|
|
193,467
|
|
|
7,366
|
|
|
3.8
|
%
|
Ceded earned premiums
|
(156,995
|
)
|
|
(150,466
|
)
|
|
(6,529
|
)
|
|
4.3
|
%
|
Net earned premiums
|
43,838
|
|
|
43,001
|
|
|
837
|
|
|
1.9
|
%
|
Net investment income
|
4,796
|
|
|
2,857
|
|
|
1,939
|
|
|
67.9
|
%
|
Net realized capital gains
|
3,230
|
|
|
723
|
|
|
2,507
|
|
|
346.7
|
%
|
Other revenue
|
5,922
|
|
|
5,488
|
|
|
434
|
|
|
7.9
|
%
|
Total revenue
|
57,786
|
|
|
52,069
|
|
|
5,717
|
|
|
11.0
|
%
|
Expenses
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
25,117
|
|
|
24,470
|
|
|
647
|
|
|
2.6
|
%
|
General and administrative expenses
|
16,476
|
|
|
10,162
|
|
|
6,314
|
|
|
62.1
|
%
|
Interest expense
|
962
|
|
|
1,185
|
|
|
(223
|
)
|
|
(18.8
|
)%
|
Total expenses
|
42,555
|
|
|
35,817
|
|
|
6,738
|
|
|
18.8
|
%
|
Other income
|
54
|
|
|
126
|
|
|
(72
|
)
|
|
(57.1
|
)%
|
Income before taxes
|
15,285
|
|
|
16,378
|
|
|
(1,093
|
)
|
|
(6.7
|
)%
|
Income tax expense
|
3,891
|
|
|
3,009
|
|
|
882
|
|
|
29.3
|
%
|
Equity earnings in affiliates, net of tax
|
1,932
|
|
|
1,473
|
|
|
459
|
|
|
31.2
|
%
|
Net income
|
$
|
13,326
|
|
|
$
|
14,842
|
|
|
$
|
(1,516
|
)
|
|
(10.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(in thousands, except for percentages)
|
2020
|
|
2019
|
Key metrics:
|
|
|
|
Underwriting income(1)
|
$
|
2,245
|
|
|
$
|
8,369
|
|
Adjusted net income(1)
|
$
|
11,095
|
|
|
$
|
15,303
|
|
Loss ratio
|
57.3
|
%
|
|
56.9
|
%
|
Expense ratio
|
37.6
|
%
|
|
23.6
|
%
|
Combined ratio
|
94.9
|
%
|
|
80.5
|
%
|
Return on equity
|
19.0
|
%
|
|
25.9
|
%
|
Adjusted return on equity(1)
|
15.8
|
%
|
|
26.7
|
%
|
Return on tangible equity(1)
|
19.5
|
%
|
|
26.6
|
%
|
Adjusted return on tangible equity(1)
|
16.2
|
%
|
|
27.4
|
%
|
(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.
Gross written premiums: Gross written premiums increased $11,517, or 5.6%, to $217,471 for the six months ended June 30, 2020, compared to $205,954 for the six months ended June 30, 2019. The increase is primarily attributable to the growth in our existing program partner business as well as the addition of new Program Partners added in the second quarter. The changes in gross written premiums were most notably due to the following lines of business:
Workers' compensation, which represented 79.3% of our gross written premiums for the six months ended June 30, 2020, increased by $3,007, or 1.8%, compared to the six months ended June 30, 2019.
All other non-workers' compensation liability, which represented 20.7% of our gross written premiums for the six months ended June 30, 2020, increased $8,510, or 23.4%, compared to the six months ended June 30, 2019.
Gross earned premiums: Gross earned premiums increased $7,366, or 3.8%, to $200,833 for the six months ended June 30, 2020, compared to $193,467 for the six months ended June 30, 2019. The increase is driven by the increase in gross written premiums. This increase is partially offset by the increase in gross unearned premiums of $4,151, which is driven by the addition of new Program Partners during the second quarter whose premiums have not yet been earned . Gross earned premiums as a percentage of gross written premiums decreased to 92.3% for the six months ended June 30, 2020, compared to 93.9%, for the six months ended June 30, 2019.
Ceded earned premiums: Ceded earned premiums increased $6,529, or 4.3%, to $156,995 for the six months ended June 30, 2020, compared to $150,466 for the six months ended June 30, 2019. The increase in ceded earned premiums is primarily due to the growth in earned premiums of Compstar, whose premiums are largely ceded, as well as the addition of new Program Partners during the second quarter whose premiums are fully ceded. The total ceded earned premiums as a percentage of gross earned premiums remained relatively consistent at 78.2% for the six months ended June 30, 2020, compared to 77.8% for the six months ended June 30, 2019.
Net earned premiums: Net earned premiums increased $837, or 1.9%, to $43,838 for the six months ended June 30, 2020, compared to $43,001 for the six months ended June 30, 2019. The increase is due primarily due to the higher gross written and earned premiums described above, offset by the increase in ceded earned premiums under reinsurance agreements over the six months ended June 30, 2019.
The table below shows the total premiums earned on a gross and net basis for the respective six-month periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Percentage Change
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
Gross written premiums
|
$
|
217,471
|
|
|
$
|
205,954
|
|
|
$
|
11,517
|
|
|
5.6
|
%
|
Increase in gross unearned premiums
|
(16,638
|
)
|
|
(12,487
|
)
|
|
(4,151
|
)
|
|
33.2
|
%
|
Gross earned premiums
|
200,833
|
|
|
193,467
|
|
|
7,366
|
|
|
3.8
|
%
|
Ceded earned premiums
|
(156,995
|
)
|
|
(150,466
|
)
|
|
(6,529
|
)
|
|
4.3
|
%
|
Net earned premiums
|
$
|
43,838
|
|
|
$
|
43,001
|
|
|
$
|
837
|
|
|
1.9
|
%
|
Net investment income: Net investment income increased $1,939 to $4,796 for the six months ended June 30, 2020, compared to $2,857 for the six months ended June 30, 2019. The increase is primarily attributable to the fair value re-measurement and common stock investment reclassification of the Company's investment in TRI, 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 $2,507 to $3,230 for the six months ended June 30, 2020, compared to $723 for the six months ended June 30, 2019. The increase 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 First Choice Casualty Insurance Company (FCCIC) during the first quarter of 2019 of $634.
Other revenue: Other revenue increased $434, or 7.9%, to $5,922 for the six months ended June 30, 2020, compared to $5,488 for the six months ended June 30, 2019. The increase is driven by an increase in brokerage revenue of $833 driven by the growth in brokerage fees earned and related primarily to Compstar. This increase is partially offset by a reduction in managing general agent fees of $159, due to the loss of a service contract in April 2019 and reduced FCCIC managing general agent fees as a result of Trean's acquisition of the company in February 2019.
Losses and loss adjustment expenses: Losses and loss adjustment expense increased $647, or 2.6%, to $25,117 for the six months ended June 30, 2020, compared to $24,470 for the six months ended June 30, 2019. The increase is directly attributable to the growth in earned premiums during the period and a decrease in favorable loss reserve estimate true-ups made during the first half of 2020 versus the first half of 2019. The Company's loss ratio remained relatively consistent at
57.3% for the six months ended June 30, 2020 compared to 56.9% for the six months ended June 30, 2019 as a result of some programs experiencing increased loss ratios period over period.
General and administrative expenses: General and administrative expenses increased $6,314, or 62.1%, to $16,476 for the six months ended June 30, 2020, compared to $10,162 for the six months ended June 30, 2019. This change resulted in an increase in the Company's expense ratio to 37.6% for the six months ended June 30, 2020, compared to 23.6% for the six months ended June 30, 2019. The increase is attributable to (i) an increase in net agent commissions of $2,914 resulting from an increase in written premiums; (ii) an increase in salaries and benefits of $2,210 resulting from an increased workforce; (iii) an increase in professional service expense of $2,115, of which $1,200 was related to the Company's IPO readiness effort; (iv) additional IT software and systems costs totaling $441 relating to new software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19; and (v) additional rent and office-related expenses totaling $441 due to the addition of new office locations and rent increases. These increases were partially offset by a reduction in premium receivable write-offs of $2,100 and a reduction in corporate travel expenses of $139 due to the effects of COVID-19.
Income tax expense: Income tax expense was $3,891 for the six months ended June 30, 2020 which resulted in an effective tax rate of 25.5%, compared to $3,009 for the six months ended June 30, 2019 which resulted in an effective tax rate of 18.4%. The increase in the effective tax rate from the statutory rate of 21% is due to the impact of state taxes and the deferred tax effect of a tax accounting method change on excess ceding commissions. Additionally, the Company received tax benefits in the six months ended June 30, 2019 due to book and tax basis differences resulting from the acquisition of FCCIC and tax benefits related to the tax impact of deferred acquisition costs.
Equity earnings in affiliates, net of tax: Equity earnings, net of tax increased $459 to $1,932 for the six months ended June 30, 2020, compared to $1,473 for the six months ended June 30, 2019. This increase is due to the increase in the Company's share of earnings in Compstar of $798. This is partially offset by the reduction in the Company's share of earnings in TRI of $340, which is no longer carried 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.
Reconciliation of Non-GAAP Financial Measures
Underwriting income
We define underwriting income as income before taxes excluding net investment income, net realized capital gains or losses, other revenue, interest expense and other income. Underwriting income represents the pre-tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment income, interest expense and other revenue and income. We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percentage Change
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
Net income
|
$
|
3,720
|
|
|
$
|
6,391
|
|
|
(41.8
|
)%
|
Income tax expense
|
979
|
|
|
1,690
|
|
|
(42.1
|
)%
|
Equity earnings in affiliates, net of tax
|
(1,230
|
)
|
|
(865
|
)
|
|
42.2
|
%
|
Income before taxes
|
3,469
|
|
|
7,216
|
|
|
(51.9
|
)%
|
Other revenue
|
(1,530
|
)
|
|
(1,893
|
)
|
|
(19.2
|
)%
|
Net investment income
|
(1,524
|
)
|
|
(1,570
|
)
|
|
(2.9
|
)%
|
Net realized capital (gains) losses
|
4
|
|
|
(111
|
)
|
|
(103.6
|
)%
|
Interest expense
|
501
|
|
|
561
|
|
|
(10.7
|
)%
|
Other income
|
(40
|
)
|
|
(33
|
)
|
|
21.2
|
%
|
Underwriting income
|
$
|
880
|
|
|
$
|
4,170
|
|
|
(78.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Percentage Change
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
Net income
|
$
|
13,326
|
|
|
$
|
14,842
|
|
|
(10.2
|
)%
|
Income tax expense
|
3,891
|
|
|
3,009
|
|
|
29.3
|
%
|
Equity earnings in affiliates, net of tax
|
(1,932
|
)
|
|
(1,473
|
)
|
|
31.2
|
%
|
Income before taxes
|
15,285
|
|
|
16,378
|
|
|
(6.7
|
)%
|
Other revenue
|
(5,922
|
)
|
|
(5,488
|
)
|
|
7.9
|
%
|
Net investment income
|
(4,796
|
)
|
|
(2,857
|
)
|
|
67.9
|
%
|
Net realized capital gains
|
(3,230
|
)
|
|
(723
|
)
|
|
346.7
|
%
|
Interest expense
|
962
|
|
|
1,185
|
|
|
(18.8
|
)%
|
Other income
|
(54
|
)
|
|
(126
|
)
|
|
(57.1
|
)%
|
Underwriting income
|
$
|
2,245
|
|
|
$
|
8,369
|
|
|
(73.2
|
)%
|
Adjusted net income
We define adjusted net income as net income excluding the impact of various unusual events, including the consummation of the reorganization transactions in connection with our IPO, or gains or losses that we don't believe reflect our core operating performance, which items have a disproportionate effect in a given period, affecting comparability of our results. We calculate the tax impact only on adjustments which 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. Adjusted net income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted net income differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percentage Change
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
Net income
|
$
|
3,720
|
|
|
$
|
6,391
|
|
|
(41.8
|
)%
|
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders
|
442
|
|
|
441
|
|
|
0.2
|
%
|
Expenses associated with IPO and other one-time legal and consulting expenses
|
788
|
|
|
215
|
|
|
266.5
|
%
|
Expenses related to debt issuance costs
|
135
|
|
|
25
|
|
|
440.0
|
%
|
Total adjustments
|
1,365
|
|
|
681
|
|
|
100.4
|
%
|
Tax impact of adjustments
|
(314
|
)
|
|
(138
|
)
|
|
127.5
|
%
|
Adjusted net income
|
$
|
4,771
|
|
|
$
|
6,934
|
|
|
(31.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Percentage Change
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
Net income
|
$
|
13,326
|
|
|
$
|
14,842
|
|
|
(10.2
|
)%
|
Expenses associated with Altaris management fee, including cash bonuses paid to unit holders
|
883
|
|
|
882
|
|
|
0.1
|
%
|
Expenses associated with IPO and other one-time legal and consulting expenses
|
1,200
|
|
|
442
|
|
|
171.5
|
%
|
Expenses related to debt issuance costs
|
135
|
|
|
50
|
|
|
170.0
|
%
|
FMV adjustment of remaining investment in affiliate
|
(2,000
|
)
|
|
—
|
|
|
100.0
|
%
|
Net gain on purchase & disposal of affiliates
|
(3,115
|
)
|
|
(634
|
)
|
|
391.3
|
%
|
Total adjustments
|
(2,897
|
)
|
|
740
|
|
|
(491.5
|
)%
|
Tax impact of adjustments
|
666
|
|
|
(279
|
)
|
|
(338.7
|
)%
|
Adjusted net income
|
$
|
11,095
|
|
|
$
|
15,303
|
|
|
(27.5
|
)%
|
Adjusted return on equity
We define adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending member’s 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. Adjusted return on equity should not be viewed as a substitute for return on equity calculated in accordance with GAAP, and other companies may define adjusted return on equity differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Adjusted return on equity calculation:
|
|
|
|
|
|
|
|
Numerator: adjusted net income
|
$
|
4,771
|
|
|
$
|
6,934
|
|
|
$
|
11,095
|
|
|
$
|
15,303
|
|
Denominator: average members' equity
|
144,733
|
|
|
121,292
|
|
|
140,450
|
|
|
114,742
|
|
Adjusted return on equity
|
13.2
|
%
|
|
22.9
|
%
|
|
15.8
|
%
|
|
26.7
|
%
|
Return on equity
|
10.3
|
%
|
|
21.1
|
%
|
|
19.0
|
%
|
|
25.9
|
%
|
Return on tangible equity and adjusted return on tangible equity
We define tangible members’ equity as members’ equity less goodwill and other intangible assets. We define return on tangible equity as net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. We define adjusted return on tangible equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. We regularly evaluate acquisition opportunities and have historically made acquisitions that affect members’ 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. 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 June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Return on tangible equity calculation:
|
|
|
|
|
|
|
|
Numerator: net income
|
$
|
3,720
|
|
|
$
|
6,391
|
|
|
$
|
13,326
|
|
|
$
|
14,842
|
|
Denominator:
|
|
|
|
|
|
|
|
Average members' equity
|
144,733
|
|
|
121,292
|
|
|
140,450
|
|
|
114,742
|
|
Less: average goodwill and other intangible assets
|
3,453
|
|
|
3,006
|
|
|
3,459
|
|
|
3,012
|
|
Average tangible members' equity
|
141,280
|
|
|
118,286
|
|
|
136,991
|
|
|
111,730
|
|
Return on tangible equity
|
10.5
|
%
|
|
21.6
|
%
|
|
19.5
|
%
|
|
26.6
|
%
|
Return on equity
|
10.3
|
%
|
|
21.1
|
%
|
|
19.0
|
%
|
|
25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Adjusted return on tangible equity calculation:
|
|
|
|
|
|
|
|
Numerator: adjusted net income
|
$
|
4,771
|
|
|
$
|
6,934
|
|
|
$
|
11,095
|
|
|
$
|
15,303
|
|
Denominator: average tangible members' equity
|
141,280
|
|
|
118,286
|
|
|
136,991
|
|
|
111,730
|
|
Adjusted return on tangible equity
|
13.5
|
%
|
|
23.4
|
%
|
|
16.2
|
%
|
|
27.4
|
%
|
Return on equity
|
10.3
|
%
|
|
21.1
|
%
|
|
19.0
|
%
|
|
25.9
|
%
|
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, and ALIC, which is domiciled in Utah. Accordingly, the holding company may receive cash through (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 stockholder dividends without prior regulatory approval. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. Under Kansas and California law, dividends payable from Benchmark without the prior approval of the applicable insurance commissioner are limited 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. Under Utah law, dividends payable from ALIC without the prior approval of the applicable insurance commissioner are limited to the lesser of (i) 10% of ALIC’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-month period (not including realized capital gains). The maximum amount of dividends the insurance subsidiaries can pay us during 2020 without regulatory approval is $14.0 million. Insurance regulators have broad powers to ensure that statutory surplus remains at adequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. In the future, state insurance regulatory authorities that have jurisdiction over the payment of dividends by the insurance subsidiaries may adopt statutory provisions more restrictive than those currently in effect.
Our insurance subsidiaries are also required to by state law to maintain a minimum level of policyholder's surplus. Kansas and Utah utilize a risk-based capital requirements 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 June 30, 2020 and December 31, 2019, the total adjusted capital of our insurance subsidiaries was in excess of their respective prescribed risk-based capital requirements.
As of June 30, 2020, we had $97,326 in cash and cash equivalents, compared to $74,268 as of December 31, 2019.
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.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(in thousands)
|
2020
|
|
2019
|
Cash, cash equivalents and restricted cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
31,783
|
|
|
$
|
14,692
|
|
Investing activities
|
6,107
|
|
|
(7,780
|
)
|
Financing activities
|
(8,886
|
)
|
|
(4,585
|
)
|
Net increase in cash, cash equivalents and restricted cash
|
$
|
29,004
|
|
|
$
|
2,327
|
|
Operating Activities: Net cash provided by operating activities for the six months ended June 30, 2020 was $31,783 compared to $14,692 for the same period in 2019. The $17,091 increase in cash provided by operating activities is driven by an increase in cash during the six months ended June 30, 2020 resulting from (i) an increase in accounts payable and accrued expenses of $14,320, (ii) a decrease in the change in premiums and other receivables of $6,681 and (iii) an increase in the change in unearned premiums of $5,037. This increase is partially offset by a reduction in underwriting income of $6,124, an increase in the change in other assets of $1,893 and $1,339 paid for deferred offering costs during 2020.
Investing Activities: Net cash provided by investing activities for the six months ended June 30, 2020 was $6,107 compared to net cash used of $7,780 for the same period in 2019. The $13,887 increase in cash used in investing activities is driven by (i) $6,435 net cash provided by the purchase and sale of investments; (ii) $3,000 received from the sale of TRI in 2020; and (iii) 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.
Financing Activities: Net cash used in financing activities for the six months ended June 30, 2020 was $8,886 compared to $4,585 for the same period in 2019. The increase in cash used is driven by an increase in distributions to members of $19,183, partially offset by the cash provided by the Company's long-term debt, net of principle payments, of $14,755.
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 First Horizon Credit Agreement), which includes a term loan facility totaling $27.5 million and a revolving credit facility of $3.0 million. Borrowings are secured by substantially all of the assets of Trean Holdings LLC and its subsidiaries.
On May 26, 2020, the Company entered into a new Amended and Restated Credit Agreement with First Horizon Bank which, among other things, extended the Company's credit facility for a period of five years through May 26, 2025 and increased its term loan facility by $11,707 resulting in a total term loan debt amount of $33,000 and a revolving credit facility of $2,000. Borrowings under the new facility are secured by substantially all of the assets of Trean Holdings LLC and its subsidiaries (other than equity interests of Compstar and Compstar Insurance Services, LLC), and after giving effect to the July reorganization transactions, borrowings will be secured by substantially all of the assets of Trean Insurance Group, Inc. other than Benchmark Holding Company and its subsidiaries. The loan has a variable interest rate of 3-month LIBOR plus 3.50%, which was 5.95% as of June 30, 2020 and 6.33% as of December 31, 2019 (under the 2018 First Horizon Credit Agreement). The outstanding principal balance of the loan is to be repaid in quarterly installments that escalate from approximately $206 to $825 until March 2025. All equity securities of the subsidiaries of Trean Holdings LLC have been pledged as collateral, and after giving effect to the July reorganization transactions, all equity securities of the subsidiaries of Trean Insurance Group, Inc. (other than Benchmark Holding Company and its subsidiaries) will be 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, Trean Capital Trust I (the Trust) issued 7,500 shares of preferred capital securities to Bear Stearns Securities Corp. and 232 common securities to Trean Corporation. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of the Subordinated Notes. The Subordinated Notes represents the sole assets of the Trust. The Subordinated Notes mature on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of 3-month LIBOR (1.22% and 1.99% as of June 30, 2020 and December 31, 2019, respectively) plus 3.50% is in effect. The interest rate totaled 4.72% and 5.49% as of June 30, 2020 and December 31, 2019, respectively. There are optional dates for redemption of the Subordinated Notes, at the option of the Company, on any January 7, April 7, July 7, or October 7 following July 7, 2011. There are no funding requirements for Trean Corporation to the Trust except for the necessary quarterly interest payments. Trean Corporation is the guarantor of the debt.
The preferred capital securities issued by the Trust in turn paid quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011, and thereafter pay at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Subordinated Notes on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by us.
Reinsurance
We use reinsurance to convert underwriting risk to credit risk, protect 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. 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 our underwriting philosophy that Program Partners retain a significant portion of the underwriting risk of their program. We believe this best aligns interests, attracts higher quality programs and leads to better underwriting results.
Excess of loss and catastrophe 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’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’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.”
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 our credit facility, there have been no material changes in the Company's contractual obligations as of June 30, 2020 compared to December 31, 2019.
Financial condition
Members' Equity
As of June 30, 2020, total members' equity was $139,284, compared to $141,615 as of December 31, 2019, a decrease of $2,331. The decrease in members' equity over the period was driven primarily by distributions to members totaling $18,043 during the six months ended June 30, 2020. This was offset by net income of $13,326 earned during the period and unrealized gains on available-for-sale investments of $3,882 during the period. We had $157 of unrecognized stock compensation as of June 30, 2020 related to non-vested stock-based compensation granted. We recognized approximately $20 and $40 of stock based compensation expense for the three and six months ended June 30, 2020, respectively.
Investment Portfolio
Our invested asset portfolio consists of fixed maturities, equity securities, other investments and short-term investments. The majority of the investment portfolio was comprised of fixed maturity securities of $375,705 at June 30, 2020, 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:
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•
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Meet insurance regulatory requirements with respect to investments under the applicable insurance laws;
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•
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Maintain an appropriate level of liquidity to satisfy the cash requirements of current operations and long-term obligations;
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•
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Adjust investment risk to offset or complement insurance risk based on our total corporate risk tolerance; and
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•
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Realize the highest possible levels of investment income, while generating superior after-tax total rates of return.
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The composition of our investment portfolio is shown in the following table as of June 30, 2020 and December 31, 2019.
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June 30, 2020
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(in thousands)
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Cost or
Amortized Cost
|
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Fair Value
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Fixed maturities:
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|
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U.S. government and government securities
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$
|
15,778
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$
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16,248
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Foreign governments
|
300
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|
|
305
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States, territories and possessions
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7,299
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|
7,544
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Political subdivisions of states, territories and possessions
|
27,684
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28,915
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Special revenue and special assessment obligations
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68,065
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|
71,875
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Industrial and public utilities
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122,814
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|
129,892
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Commercial mortgage-backed securities
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16,400
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|
17,908
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Residential mortgage-backed securities
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57,787
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|
|
59,412
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Other loan-backed securities
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42,871
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|
43,250
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Hybrid securities
|
357
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|
|
356
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Total fixed maturities
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359,355
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375,705
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Equity securities:
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Preferred stock
|
332
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|
|
325
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Common stock
|
1,554
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|
|
3,428
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Total equity securities
|
1,886
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|
|
3,753
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Total investments
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$
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361,241
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|
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$
|
379,458
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|
|
|
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|
|
|
December 31, 2019
|
(in thousands)
|
Cost or
Amortized Cost
|
|
Fair Value
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Fixed maturities:
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|
|
|
U.S. government and government securities
|
$
|
15,965
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|
|
$
|
16,129
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Foreign governments
|
299
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|
|
302
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States, territories and possessions
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4,789
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4,923
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Political subdivisions of states, territories and possessions
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24,444
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25,104
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Special revenue and special assessment obligations
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59,149
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61,405
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Industrial and public utilities
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119,735
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123,207
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Commercial mortgage-backed securities
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15,586
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|
16,312
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Residential mortgage-backed securities
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53,467
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54,109
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Other loan-backed securities
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35,849
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|
36,011
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Hybrid securities
|
357
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|
|
363
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Total fixed maturities
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329,640
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|
337,865
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Equity securities:
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Preferred stock
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337
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|
343
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Common stock
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492
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|
492
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Total equity securities
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829
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|
835
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Total investments
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$
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330,469
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$
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338,700
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The following table shows the percentage of the total estimated fair value of our fixed maturity securities as of June 30, 2020 and December 31, 2019 by credit rating category, using the lower of ratings assigned by Moody's Investor Service or S&P.
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June 30, 2020
|
(in thousands, except percentages)
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Fair Value
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% of Total
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"AAA"
|
$
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62,876
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16.7
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%
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"AA"
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174,294
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|
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46.4
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%
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"A"
|
108,488
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|
|
28.9
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%
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"BBB"
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27,743
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|
|
7.4
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%
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"BB"
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2,255
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|
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0.6
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%
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Below investment grade
|
49
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—
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%
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Total fixed maturities
|
$
|
375,705
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|
|
100.0
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%
|
|
|
|
|
|
|
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|
December 31, 2019
|
(in thousands, except percentages)
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Fair Value
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% of Total
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"AAA"
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$
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52,571
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|
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15.6
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%
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"AA"
|
153,838
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|
45.5
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%
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"A"
|
101,040
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|
|
29.9
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%
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"BBB"
|
30,245
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|
|
9.0
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%
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"BB"
|
119
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|
|
—
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%
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Below investment grade
|
52
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|
|
—
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%
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Total fixed maturities
|
$
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337,865
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|
|
100.0
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%
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Critical Accounting Policies and Estimates
The unaudited interim condensed combined financial statements included in this quarterly report include amounts based on the use of estimates and judgments of management.
We identified the accounting estimates which 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 combined 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 combined 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 combined financial statements include: (a) reserves for unpaid loss and LAE; (b) reinsurance recoveries; (c) investment fair value measurements; and; (d) goodwill and intangible assets. Actual results may differ materially from the estimates and assumptions used in preparing the condensed combined financial statements. For a detailed discussion of our accounting policies, see the “Notes to the Combined Financial Statements” included in our registration statement filed with the SEC on Form S-1.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of June 30, 2020.