UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 001-39392
TREAN INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-4512647 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
150 Lake Street West
Wayzata, MN 55391
(Address of principal executive offices and zip code)
(952) 974-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value per share | TIG | The Nasdaq Global Select Market | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☐ | ||||
Emerging growth company | ☒ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 26, 2020, there were 51,154,097 shares of the registrant's common stock outstanding.
BIC HOLDINGS LLC - TREAN HOLDINGS LLC
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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.
10
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
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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.
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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.
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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 | |||||||
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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.
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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 | ||||||
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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.
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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 | ||||||