SEC Filing | Trean Insurance Group, Inc.

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tig-20200930

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 September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 001-39392

TREAN INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware						84-4512647
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

150 Lake Street West

Wayzata, MN 55391

(Address of principal executive offices and zip code)

(952) 974-2200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

TIG

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," a "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 11, 2020, there were 51,148,782 shares of the registrant's common stock outstanding.

Table of Contents

TREAN INSURANCE GROUP, INC.

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION

Item 1	Financial Statements
	Condensed Consolidated and Condensed Co mbined Balance Sheets	3
	Condensed Consolidated and Condensed Combined Statements of Operations	4
	Condensed Consolidated and Condensed Combined Statements of Comprehensive Income	5
	Condensed Consolidated and Condensed Combined Statements of Shareholders ’ Equity and Redeemable Preferred Stock	6
	Condensed Consolidated and Condensed Combined Statements of Cash Flows	9
	Notes to the Condensed Consolidated and Condensed Combined Financial Statements	11
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4	Controls and Procedures	55

PART II - OTHER INFORMATION

Item 1	Legal Proceedings	56
Item 1A	Risk Factors	56
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3	Defaults Upon Senior Securities	57
Item 4	Mine Safety Disclosures	57
Item 5	Other Information	57
Item 6	Exhibits	58

Signatures		59

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated and Condensed Combined Balance Sheets

(in thousands, except share and per share data)


	September 30, 2020		December 31, 2019
Assets	(unaudited)
Fixed maturities, at fair value (amortized cost of $358,506 and $329,640, respectively)	$	375,286	$	337,865
Preferred stock, at fair value (amortized cost of $243 and $337, respectively)	240		343
Common stock, at fair value (cost $1,554 and $492, respectively)	3,458		492
Equity method investments	232		12,173
Total investments	379,216		350,873
Cash and cash equivalents	165,255		74,268
Restricted cash	21,175		1,800
Accrued investment income	2,418		2,468
Premiums and other receivables	99,635		62,460
Income taxes refundable	797		—
Related party receivables	33		22,221
Reinsurance recoverable	350,425		307,338
Prepaid reinsurance premiums	103,929		80,088
Deferred policy acquisition cost, net	3,777		2,115
Property and equipment, net	8,439		7,937
Right of use asset	6,558		—
Deferred tax asset	—		1,367
Goodwill	139,575		2,822
Intangible assets, net	73,436		154
Other assets	9,721		3,123
Total assets	$	1,364,389	$	919,034
Liabilities
Unpaid loss and loss adjustment expenses	$	465,502	$	406,716
Unearned premiums	143,390		103,789
Funds held under reinsurance agreements	160,614		163,445
Reinsurance premiums payable	59,756		53,620
Accounts payable and accrued expenses	73,865		14,995
Lease liability	7,054		—
Income taxes payable	—		714
Deferred tax liability	12,597		—
Debt	39,858		29,040
Total liabilities	962,636		772,319
Commitments and contingencies
Redeemable preferred stock (0 and 1,000,000 authorized, respectively; 0 and 51 outstanding, respectively)	—		5,100
Shareholders' equity
Common stock, $0.01 par value per share (600,000,000 and 0 authorized, respectively; 51,148,782 and 0 issued and outstanding, respectively)	511		—
Members' equity	—		78,438
Additional paid-in capital	287,234		17,995
Retained earnings	104,853		40,361
Accumulated other comprehensive income	9,155		4,821
Total shareholders' equity	401,753		141,615
Total liabilities and shareholders' equity	$	1,364,389	$	919,034

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated and Condensed Combined Statements of Operations

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues
Gross written premiums	$	132,284	$	107,534	$	349,755	$	313,488
Increase in gross unearned premiums	(22,963)		(5,612)		(39,601)		(18,099)
Gross earned premiums	109,321		101,922		310,154		295,389
Ceded earned premiums	(81,465)		(79,761)		(238,460)		(230,227)
Net earned premiums	27,856		22,161		71,694		65,162
Net investment income	1,857		1,721		6,653		4,578
Gain on revaluation of Compstar investment	69,846		—		69,846		—
Net realized capital gains (losses)	115		(34)		3,345		689
Other revenue	5,401		2,561		11,323		8,049
Total revenue	105,075		26,409		162,861		78,478
Expenses
Losses and loss adjustment expenses	15,564		13,976		40,681		38,446
General and administrative expenses	6,995		5,756		23,437		15,894
IPO bonuses and contract buyout fee	11,054		—		11,054		—
Intangible asset amortization	1,120		11		1,154		35
Noncash share-based compensation	307		—		307		—
Interest expense	520		498		1,482		1,683
Total expenses	35,560		20,241		78,115		56,058
Other income (expense)	209		(8)		263		118
Income before taxes	69,724		6,160		85,009		22,538
Income tax expense	788		1,395		4,679		4,404
Equity earnings in affiliates, net of tax	401		1,021		2,333		2,494
Net income	$	69,337	$	5,786	$	82,663	$	20,628
Earnings per share:
Basic	$	1.41	$	0.15	$	2.00	$	0.55
Diluted	$	1.41	$	0.15	$	2.00	$	0.55
Weighted average shares outstanding:
Basic	49,054,441		37,386,394		41,304,132		37,386,394
Diluted	49,056,001		37,386,394		41,304,652		37,386,394

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated and Condensed Combined Statements of Comprehensive Income

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	69,337	$	5,786	$	82,663	$	20,628
Other comprehensive income, net of tax:
Unrealized investment gains:
Unrealized investment gains arising during the period	686		1,189		5,715		8,942
Income tax expense	144		249		1,198		1,878
Unrealized investment gains, net of tax	542		940		4,517		7,064
Less reclassification adjustments to:
Net realized investment gains (losses) included in net realized capital gains (losses)	114		(34)		232		55
Income tax expense (benefit)	24		(8)		49		11
Total reclassifications included in net income, net of tax	90		(26)		183		44
Other comprehensive income	452		966		4,334		7,020
Total comprehensive income	$	69,789	$	6,752	$	86,997	$	27,648

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated and Condensed Combined Statements of Shareholders’ Equity and Redeemable Preferred Stock

For the Three and Nine Months Ended September 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			Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Shares	Amount		Units	Amount		Units	Amount		Units	Amount		Units	Amount		Shares	Amount
Balance at June 30, 2020	51	$	5,100	—	$	—	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
Issuance of Class C units	—	—		—	—		—	—		—	—		—	—		157,270	157		—	—		—		—		—		157
Dividends on Series B preferred stock	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(45)		(45)
Redemption of Series B redeemable preferred stock	(51)	(5,100)		—	—		—	—		—	—		—	—		—	—		—	—		—		—		—		—
Corporate recapitalization	—	—		—	—		(65,036,780)	(65,037)		(5,045,215)	(5,045)		(8,159,775)	(8,160)		(393,175)	(393)		37,386,394	374		78,261		—		—		—
Issuance of common shares for acquisition of Compstar	—	—		—	—		—	—		—	—		—	—		—	—		6,613,606	66		99,138		—		—		99,204
Proceeds from common stock sold in initial public offering, net of offering costs	—	—		—	—		—	—		—	—		—	—		—	—		7,142,857	71		93,068		—		—		93,139
Common stock issuances pursuant to equity compensation awards	—	—		—	—		—	—		—	—		—	—		—	—		5,925	—		(82)		—		—		(82)
Stock-based compensation expense	—	—		—	—		—	—		—	—		—	—		—	—		—	—		307		—		—		307
Other comprehensive income	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		452		—		452
Net income	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		69,337		69,337
Balance at September 30, 2020	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	51,148,782	$	511	$	287,234	$	9,155	$	104,853	$	401,753

See accompanying notes to the condensed consolidated financial statements.

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			Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Shares	Amount		Units	Amount		Units	Amount		Units	Amount		Units	Amount		Shares	Amount
Balance at June 30, 2019	60	$	6,000	10	$	1,000	65,036,780	$	65,037	5,045,215	$	5,045	8,159,775	$	8,160	157,270	$	157	—	$	—	$	17,995	$	4,051	$	24,907	$	126,352
Issuance of Class C units	—	—		—	—		—	—		—	—		—	—		19,659	20		—	—		—		—				20
Distributions to members	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(831)		(831)
Dividends on Series A preferred stock	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(12)		(12)
Dividends on Series B preferred stock	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(36)		(36)
Other comprehensive income	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		966		—		966
Net income	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		5,786		5,786
Balance at September 30, 2019	60	$	6,000	10	$	1,000	65,036,780	$	65,037	5,045,215	$	5,045	8,159,775	$	8,160	176,929	$	177	—	$	—	$	17,995	$	5,017	$	29,814	$	132,245


							Members' Equity
	Redeemable Preferred Stock			Preferred Stock			Class A - Non Voting			Class B - Voting			Class B - Non Voting			Class C - Non Voting			Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Shares	Amount		Units	Amount		Units	Amount		Units	Amount		Units	Amount		Shares	Amount
Balance at December 31, 2019	51	$	5,100	—	$	—	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	—	—		—	—		—	—		—	—		—	—		196,587	197		—	—		—		—		—		197
Distributions to members	—	—		—	—		—	—		—	—		—	—		—	—		—	—		(1,453)		—		(18,043)		(19,496)
Dividends on Series B preferred stock	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(128)		(128)
Redemption of Series B redeemable preferred stock	(51)	(5,100)		—	—		—	—		—	—		—	—		—	—		—	—		—		—		—		—
Corporate recapitalization	—	—		—	—		(65,036,780)	(65,037)		(5,045,215)	(5,045)		(8,159,775)	(8,160)		(393,175)	(393)		37,386,394	374		78,261		—		—		—
Issuance of common shares for acquisition of Compstar	—	—		—	—		—	—		—	—		—	—		—	—		6,613,606	66		99,138		—		—		99,204
Proceeds from common stock sold in initial public offering, net of offering costs	—	—		—	—		—	—		—	—		—	—		—	—		7,142,857	71		93,068		—		—		93,139
Common stock issuances pursuant to equity compensation awards	—	—		—	—		—	—		—	—		—	—		—	—		5,925	—		(82)		—		—		(82)
Stock-based compensation expense	—	—		—	—		—	—		—	—		—	—		—	—		—	—		307		—		—		307
Other comprehensive income	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		4,334		—		4,334
Net income	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		82,663		82,663
Balance at September 30, 2020	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	51,148,782	$	511	$	287,234	$	9,155	$	104,853	$	401,753

See accompanying notes to the condensed consolidated financial statements.

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			Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Shares	Amount		Units	Amount		Units	Amount		Units	Amount		Units	Amount		Shares	Amount
Balance at December 31, 2018	60	$	6,000	10	$	1,000	65,036,780	$	65,037	5,045,215	$	5,045	8,159,775	$	8,160	117,953	$	118	—	$	—	$	17,995	$	(2,003)	$	9,779	$	105,131
Cumulative effect of adopting ASC Topic 606	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		695		695
Issuance of Class C units	—	—		—	—		—	—		—	—		—	—		58,976	59		—	—		—		—		—		59
Distributions to members	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(1,144)		(1,144)
Dividends on Series A preferred stock	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(34)		(34)
Dividends on Series B preferred stock	—	—		—	—		—	—		—	—		—	—		—	—		—	—		—		—		(110)		(110)
Other comprehensive income	—	—		—	—		—	—		—	—		—	—		—	—		—	—