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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.



Table of Contents

BIC HOLDINGS LLC - TREAN HOLDINGS LLC
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Table of Contents

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.
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Table of Contents

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.
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Table of Contents

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.
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Table of Contents

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.
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Table of Contents

 
 
 
 
 
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.
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Table of Contents

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

Table of Contents


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

Table of Contents

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

Table of Contents

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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Table of Contents


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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Table of Contents

 
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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Table of Contents

 
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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Table of Contents

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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Table of Contents

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

 
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: