UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2021
OR
For the transition period from ___________ to ___________
Commission file number: 001-39392
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(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 | ||||||||||||
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 | ☐ | ☒ | 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 May 7, 2021, there were 51,148,782 shares of the registrant's common stock outstanding.
TREAN INSURANCE GROUP, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | (unaudited) | ||||||||||
Fixed maturities, at fair value (amortized cost of $ | $ | $ | |||||||||
Preferred stock, at fair value (amortized cost of $ | |||||||||||
Common stock, at fair value (cost $ | |||||||||||
| Equity method investments | |||||||||||
| Total investments | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted cash | |||||||||||
| Accrued investment income | |||||||||||
| Premiums and other receivables | |||||||||||
| Income taxes receivable | |||||||||||
| Reinsurance recoverable | |||||||||||
| Prepaid reinsurance premiums | |||||||||||
| Deferred policy acquisition cost, net | |||||||||||
| Property and equipment, net | |||||||||||
| Right of use asset | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Unpaid loss and loss adjustment expenses | $ | $ | |||||||||
| Unearned premiums | |||||||||||
| Funds held under reinsurance agreements | |||||||||||
| Reinsurance premiums payable | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Lease liability | |||||||||||
| Income taxes payable | |||||||||||
| Deferred tax liability | |||||||||||
| Debt | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
3
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Operations
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | |||||||||||
| Gross written premiums | $ | $ | |||||||||
| Increase in gross unearned premiums | ( | ( | |||||||||
| Gross earned premiums | |||||||||||
| Ceded earned premiums | ( | ( | |||||||||
| Net earned premiums | |||||||||||
| Net investment income | |||||||||||
| Net realized capital gains | |||||||||||
| Other revenue | |||||||||||
| Total revenue | |||||||||||
| Expenses | |||||||||||
| Losses and loss adjustment expenses | |||||||||||
| General and administrative expenses | |||||||||||
| Intangible asset amortization | |||||||||||
| Noncash stock compensation | |||||||||||
| Interest expense | |||||||||||
| Total expenses | |||||||||||
| Other income | |||||||||||
| Income before taxes | |||||||||||
| Income tax expense | |||||||||||
| Equity earnings in affiliates, net of tax | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Comprehensive Income
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive loss, net of tax: | |||||||||||
| Unrealized investment losses: | |||||||||||
| Unrealized investment losses arising during the period | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Unrealized investment losses, net of tax | ( | ( | |||||||||
| Less reclassification adjustments to: | |||||||||||
| Net realized investment gains included in net realized capital gains | |||||||||||
| Income tax expense | |||||||||||
| Total reclassifications included in net income, net of tax | |||||||||||
| Other comprehensive loss | ( | ( | |||||||||
| Total comprehensive income | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
5
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Stockholders' Equity and Redeemable Preferred Stock
For the Three Months Ended March 31, 2021 and 2020
(in thousands, except share and unit data)
(unaudited)
| Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholders' Equity | ||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | ||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Members' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Preferred Stock | Class A - Non Voting | Class B - Voting | Class B - Non Voting | Class C - Non Voting | Common Stock | Additional Paid in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Units | Amount | Units | Amount | Units | Amount | Units | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class C units | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
6
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock compensation | |||||||||||
| Net capital gains | ( | ( | |||||||||
| Deferred offering costs | ( | ||||||||||
| Bond amortization and accretion | |||||||||||
| Issuance of member units as compensation | |||||||||||
| Equity earnings in affiliates, net of tax | ( | ||||||||||
| Distributions from equity method investments | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Deferred financing costs | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accrued investment income | |||||||||||
| Premiums and other receivables | ( | ( | |||||||||
| Reinsurance recoverable on paid and unpaid losses | ( | ( | |||||||||
| Prepaid reinsurance premiums | ( | ( | |||||||||
| Right of use asset | ( | ||||||||||
| Other assets | ( | ( | |||||||||
| Unpaid loss and loss adjustment expenses | |||||||||||
| Unearned premiums | |||||||||||
| Funds held under reinsurance agreements | ( | ||||||||||
| Reinsurance premiums payable | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Lease liability | ( | ||||||||||
| Income taxes payable | |||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Investing activities | |||||||||||
| Payments for capital expenditures | ( | ( | |||||||||
| Proceeds from sale of equity method investment | |||||||||||
| Return of capital on equity method investment | |||||||||||
| Purchase of investments, available for sale | ( | ( | |||||||||
| Proceeds from investments sold, matured or repaid | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Principal payments on debt | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash ‑ beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash ‑ end of period | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
7
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated and Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
| March 31, | |||||||||||
| Disaggregation of cash and restricted cash: | 2021 | 2020 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Three Months Ended March 31, | |||||||||||
| Supplemental disclosure of cash flow information: | 2021 | 2020 | |||||||||
| Cash paid during the year for: | |||||||||||
| Interest | $ | $ | |||||||||
| Non-cash investing and financing activity: | |||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
8
Notes to the Condensed Consolidated and Condensed Combined Financial Statements
Note 1. Business and Basis of Presentation
In July 2020, Trean Insurance Group, Inc. (together with its wholly owned subsidiaries, the "Company") completed its initial public offering ("IPO") of common stock. Prior to the completion of the IPO, the Company effected the following reorganization transactions: (i) each of Trean Holdings LLC ("Trean"), an insurance services company, and BIC Holdings LLC ("BIC"), a property and casualty insurance holding company, contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc. and (ii) upon the completion of the transfers by Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.
For the purpose of financial statement disclosures, references to the condensed consolidated financial statements for all post-IPO periods include the accounts of Trean Insurance Group, Inc., along with its wholly owned subsidiaries, after elimination of intercompany accounts and transactions. References to the condensed consolidated financial statements for all pre-IPO periods include the condensed combined financial statements of BIC and Trean, along with their wholly owned subsidiaries, after elimination of intercompany accounts and transactions. All dollar amounts are shown in thousands, except share and per share amounts.
The Company provides products and services to the specialty insurance market. Historically, the Company has focused on specialty casualty markets that are believed to be under-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.
The Company's wholly owned subsidiaries include (a) 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, American Liberty Insurance Company ("ALIC"), a property and casualty insurance company domiciled in the state of Utah, and 7710 Insurance Company, a property and casualty insurance company domiciled in the state of South Carolina; (b) Trean Compstar Holdings, LLC, a limited liability company created originally for the purchase of Compstar Insurance Services LLC, a California-based general agency; and (c) 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, a reinsurance intermediary broker; Benchmark Administrators LLC, a claims third-party administrator; and Westcap Insurance Services, LLC, a managing general agent based in California.
The accompanying condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934. Accordingly, they do not contain all of the information included in the Company's annual consolidated financial statements and notes. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s condensed consolidated financial position and results of operations for the periods presented have been included. Although management believes the disclosures and information presented are adequate, these interim condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"). Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Use of estimates
While preparing the condensed consolidated financial statements, the Company has made certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require extensive use of estimates include the reserves for unpaid losses and loss adjustment expenses ("LAE"), reinsurance recoveries, investments and goodwill and other intangible assets. Except for the captions on the condensed consolidated balance sheets and condensed consolidated statements of comprehensive income, generally, the term loss(es) is used to collectively refer to both loss and LAE.
9
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 consolidated financial statements.
Pending policies
The Company completed its IPO in July 2020, and is an emerging growth company as defined under federal securities laws. As such, the Company has elected to adopt pending accounting policies under the dates required for private companies. Therefore, the dates included within this section reflect the effective dates for the adoption of new accounting policies required by private companies.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (ASU 2020-03). This update represents changes to clarify and improve the codification to allow for easier application by eliminating inconsistencies and providing clarification on items such as (i) the application of fair value option disclosures; (ii) the accounting for fees related to modifications of debt; and (iii) aligning the contractual term of a net investment in a lease in accordance with ASC Topic 326, Financial Instruments - Credit Losses, and the lease term determined in accordance with ASC Topic 842, Leases. The Company adopted items (i) and (ii) effective January 1, 2020 and will adopt item (iii) on January 1, 2023. Adoption of this standard has not had, and is not expected to have, a material impact on the condensed consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323 and Topic 815 (ASU 2020-01). This update addresses the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting. Further, the update addresses scope considerations for forward contracts and purchased options on certain securities. ASU 2020-01 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter. The Company will adopt this standard effective January 1, 2022. Adoption of this standard is not expected to have a material impact on the condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update requires financial assets measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Additionally, credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which the fair value is below the amortized cost. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this standard effective January 1, 2023. The Company is currently evaluating the impact of this standard on the condensed consolidated financial statements.
Note 2. Acquisitions
7710 Insurance Company
Effective October 1, 2020, Benchmark Holding Company acquired 100 % ownership of 7710 Insurance Company as well as its associated program manager and agency, 7710 Service Company, LLC and Creekwood Insurance Agency, LLC, for a purchase price of $12,140 . 7710 Insurance Company underwrites workers' compensation primarily for emergency services, including firefighters and emergency medical services ("EMS"). 7710 Insurance Company focuses on reducing costs and claims through the implementation of a proprietary safety preparedness and loss control program, created and staffed by experienced firefighters and EMS professionals.
10
The following table summarizes the consideration paid and the amounts of estimated fair value of the net assets acquired and liabilities assumed at the acquisition date:
| Fair value of total consideration transferred | $ | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Fixed maturities | |||||
| Cash and cash equivalents | |||||
| Accrued investment income | |||||
| Premiums and other receivables | |||||
| Reinsurance recoverable | |||||
| Prepaid reinsurance premiums | |||||
| Deferred policy acquisition costs | |||||
| Property and equipment | |||||
| Right of use asset | |||||
| Goodwill | |||||
| Intangible assets | |||||
| Other assets | |||||
| Unpaid loss and loss adjustment expenses | ( | ||||
| Unearned premiums | ( | ||||
| Funds held under reinsurance agreements | ( | ||||
| Accounts payable and accrued expenses | ( | ||||
| Lease liability | ( | ||||
| Deferred tax liabilities | ( | ||||
| Debt | ( | ||||
| Net assets acquired | $ | ||||
The assessment of fair value, the determination of the liability for unpaid loss and loss adjustment expense assumed, deferred taxes and other payables and receivables are preliminary and are based on the information that was available at the time the consolidated financial statements were prepared. Accordingly, the allocation of purchase price to intangible assets, goodwill, deferred tax assets and liabilities and the liability for unpaid loss and loss adjustment expense is preliminary and, therefore, subject to adjustment in future periods.
The Company recorded $2,873 of goodwill associated with the business combination. The goodwill recognized is attributable to the assembled workforce and the expected growth resulting from the acquisition.
The Company also recorded preliminary intangible assets totaling $3,299 , which are comprised of the following:
| Useful Life | Balance | |||||||||||||
| Trade name | $ | |||||||||||||
| Customer relationships | ||||||||||||||
| Total intangible assets | $ | |||||||||||||
11
Compstar Holding Company LLC
Effective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining 55 % ownership interest in Compstar Holding Company LLC ("Compstar"), a holding company along with its wholly owned subsidiary Compstar Insurance Services, a managing general agent, by issuing 6,613,606 shares of the Company’s common stock with a market price of $15 per share on the date of acquisition. Prior to the acquisition date, the Company held a 45 % ownership interest in Compstar and accounted for its investment under the equity method. The acquisition-date fair value of the Company’s previous equity interest was revalued using the market price of the shares issued as consideration for the acquisition. As a result, the fair value attributable to the Company’s previous equity interest was $81,167 and the carrying value was $11,321 , and the Company therefore recorded a gain of $69,846 from the remeasurement of its previous equity interest.
The following table summarizes the consideration paid and the amounts of estimated fair value of the net assets acquired and liabilities assumed at the acquisition date. The assessment of fair value and the determination of deferred taxes and other payables and receivables are preliminary and is based on the information that was available at the time the condensed consolidated financial statements were prepared. Accordingly, the allocation of purchase price to intangible assets and to deferred tax assets and liabilities is preliminary and, therefore, subject to adjustment in future periods.
| Fair value of total consideration transferred | $ | ||||
| Previous investment in subsidiary | |||||
| Fair value adjustment to prior investment | |||||
| Fair value of assets acquired and liabilities assumed | |||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Cash and cash equivalents | |||||
| Premiums and other receivables | |||||
| Property and equipment | |||||
| Right of use asset | |||||
| Goodwill | |||||
| Intangible assets, net | |||||
| Other assets | |||||
| Accounts payable and accrued expenses | ( | ||||
| Lease liability | ( | ||||
| Deferred tax liabilities | ( | ||||
| Debt | ( | ||||
| Net assets acquired | $ | ||||
The Company recorded $134,428 of goodwill associated with the business combination. The goodwill recognized is attributable to the assembled workforce, the expected growth resulting from the acquisition and synergies gained through the reduction of operating expenses.
The Company also recorded intangible assets totaling $73,954 , which are comprised of the following:
| Useful Life | Balance | |||||||||||||
| Trade name | $ | |||||||||||||
| Customer relationships | ||||||||||||||
| Total intangible assets | $ | |||||||||||||
12
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:
| Fair value of total consideration transferred | $ | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
| Cash and cash equivalents | |||||
| Premiums and other receivables | |||||
| Property and equipment | |||||
| Goodwill | |||||
| Intangible assets, net | |||||
| Other assets | |||||
| Accounts payable | ( | ||||
| Income taxes payable | ( | ||||
| Net assets acquired | $ | ||||
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 through the reduction of operating expenses.
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.
13
| March 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government and government securities | $ | $ | $ | $ | |||||||||||||||||||
| Foreign governments | |||||||||||||||||||||||
| States, territories and possessions | |||||||||||||||||||||||
| Political subdivisions of states territories and possessions | |||||||||||||||||||||||
| Special revenue and special assessment obligations | |||||||||||||||||||||||
| Industrial and public utilities | |||||||||||||||||||||||
| Commercial mortgage-backed securities | |||||||||||||||||||||||
| Residential mortgage-backed securities | |||||||||||||||||||||||
| Other loan-backed securities | |||||||||||||||||||||||
| Hybrid securities | |||||||||||||||||||||||
| Total fixed maturities | |||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Preferred stock | |||||||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Total equity securities | |||||||||||||||||||||||
| Total investments | $ | $ | $ | $ | |||||||||||||||||||
| Funds held under reinsurance agreements | |||||||||||||||||||||||
| Debt | |||||||||||||||||||||||
14
| December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government and government securities | $ | $ | $ | $ | |||||||||||||||||||
| Foreign governments | |||||||||||||||||||||||
| States, territories and possessions | |||||||||||||||||||||||
| Political subdivisions of states, territories and possessions | |||||||||||||||||||||||
| Special revenue and special assessment obligations | |||||||||||||||||||||||
| Industrial and public utilities | |||||||||||||||||||||||
| Commercial mortgage-backed securities | |||||||||||||||||||||||
| Residential mortgage-backed securities | |||||||||||||||||||||||
| Other loan-backed securities | |||||||||||||||||||||||
| Hybrid securities | |||||||||||||||||||||||
| Total fixed maturities | |||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Preferred stock | |||||||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Total equity securities | |||||||||||||||||||||||
| Total investments | $ | $ | $ | $ | |||||||||||||||||||
| Funds held under reinsurance agreements | $ | $ | $ | $ | |||||||||||||||||||
| Debt | |||||||||||||||||||||||
Bonds and equity securities: The Company, in conjunction with its third-party pricing service provider, uses a variety of sources to estimate the fair value of investments such as Reuters, Iboxx, PricingDirect, ICE BofAML Index, ICE Data Services, and for equities, Bloomberg. Equity securities are valued at the closing price on the exchange on which they are primarily traded as provided by a third-party pricing service. Fixed income securities are generally valued at an evaluated bid as provided by a third-party pricing service. Securities and other assets generally valued using third-party pricing services may also be valued at broker/dealer bid quotations. Values obtained from third-party pricing services can utilize several data sources for inputs such as transaction data, yield, quality, coupon rate, maturity, issue type, trading characteristics and market activity. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent trading activity, analytical review of fair values and an evaluation of the underlying pricing methodologies. Based on these procedures, the Company did not adjust the prices or quotes from the third-party pricing service.
Funds held under reinsurance agreements: 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.
Debt: The Company holds debt related to its secured credit facility. The Company has determined that the remaining balance of the debt reflected its fair value as this would represent the total amount to repay the debt.
15
Note 4. Investments
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company's investments are as follows:
| March 31, 2021 | |||||||||||||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government and government securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Foreign governments | |||||||||||||||||||||||
| States, territories and possessions | ( | ||||||||||||||||||||||
| Political subdivisions of states, territories and possessions | ( | ||||||||||||||||||||||
| Special revenue and special assessment obligations | ( | ||||||||||||||||||||||
| Industrial and public utilities | ( | ||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ||||||||||||||||||||||
| Other loan-backed securities | ( | ||||||||||||||||||||||
| Hybrid securities | ( | ||||||||||||||||||||||
| Total fixed maturities available for sale | ( | ||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Preferred stock | ( | ||||||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Total equity securities | ( | ||||||||||||||||||||||
| Total investments | $ | $ | $ | ( | $ | ||||||||||||||||||
16
| December 31, 2020 | |||||||||||||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| U.S. government and government securities | $ | $ | $ | $ | |||||||||||||||||||
| Foreign governments | |||||||||||||||||||||||
| States, territories and possessions | |||||||||||||||||||||||
| Political subdivisions of states, territories and possessions | |||||||||||||||||||||||
| Special revenue and special assessment obligations | ( | ||||||||||||||||||||||
| Industrial and public utilities | ( | ||||||||||||||||||||||
| Commercial mortgage-backed securities | ( | ||||||||||||||||||||||
| Residential mortgage-backed securities | ( | ||||||||||||||||||||||
| Other loan-backed securities | ( | ||||||||||||||||||||||
| Hybrid securities | |||||||||||||||||||||||
| Total fixed maturities available for sale | ( | ||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||
| Preferred stock | ( | ||||||||||||||||||||||
| Common stock | ( | ||||||||||||||||||||||
| Total equity securities | ( | ||||||||||||||||||||||
| Total investments | $ | $ | $ | ( | $ | ||||||||||||||||||
The following table illustrates the Company’s gross unrealized losses and fair value of fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| U.S. government and government securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Foreign governments | |||||||||||||||||||||||||||||||||||
| States, territories and possessions | ( | ( | |||||||||||||||||||||||||||||||||
| Political subdivisions of states, territories and possessions | |||||||||||||||||||||||||||||||||||