SEC Filing | Trean Insurance Group, Inc.

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tig-20210930

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, 2021

☐ 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 5, 2021, there were 51,174,887 shares of the registrant's common stock outstanding.

Table of Contents

TREAN INSURANCE GROUP, INC.

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION

Item 1	Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Preferred Stock	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to the Condensed Consolidated Financial Statements	10
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4	Controls and Procedures	60

PART II - OTHER INFORMATION

Item 1	Legal Proceedings	61
Item 1A	Risk Factors	61
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3	Defaults Upon Senior Securities	61
Item 4	Mine Safety Disclosures	61
Item 5	Other Information	61
Item 6	Exhibits	62

Signatures		63

Table of Contents

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)


	September 30, 2021		December 31, 2020
Assets	(unaudited)
Fixed maturities, at fair value (amortized cost of $417,288 and $388,409, respectively)	$	425,596	$	405,604
Preferred stock, at fair value (amortized cost of $243 and $243, respectively)	231		240
Common stock, at fair value (cost $741 and $1,554, respectively)	741		3,534
Equity method investments	—		232
Total investments	426,568		409,610
Cash and cash equivalents	134,821		153,149
Restricted cash	3,567		4,085
Accrued investment income	2,378		2,458
Premiums and other receivables	135,354		109,217
Income taxes receivable	1,393		1,322
Reinsurance recoverable	361,673		343,213
Prepaid reinsurance premiums	138,223		107,971
Deferred policy acquisition cost, net	8,966		1,332
Property and equipment, net	7,588		8,254
Right of use asset	5,028		6,338
Goodwill	142,141		140,640
Intangible assets, net	74,614		75,316
Other assets	10,124		6,878
Total assets	$	1,452,438	$	1,369,783
Liabilities
Unpaid loss and loss adjustment expenses	$	510,792	$	457,817
Unearned premiums	222,866		157,987
Funds held under reinsurance agreements	176,838		174,704
Reinsurance premiums payable	49,240		57,069
Accounts payable and accrued expenses	25,766		61,240
Lease liability	5,491		6,893
Deferred tax liability	8,233		12,329
Debt	30,920		31,637
Total liabilities	1,030,146		959,676
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value per share (600,000,000 authorized; 51,174,887 and 51,148,782 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively)	512		511
Additional paid-in capital	288,114		287,110
Retained earnings	127,146		109,060
Accumulated other comprehensive income	6,520		13,426
Total stockholders' equity	422,292		410,107
Total liabilities and stockholders' equity	$	1,452,438	$	1,369,783

See accompanying notes to the condensed consolidated financial statements.

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Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues
Gross written premiums	$	177,624	$	132,284	$	480,905	$	349,755
Increase in gross unearned premiums	(28,478)		(22,963)		(64,836)		(39,601)
Gross earned premiums	149,146		109,321		416,069		310,154
Ceded earned premiums	(97,191)		(81,465)		(275,037)		(238,460)
Net earned premiums	51,955		27,856		141,032		71,694
Net investment income	2,187		2,364		6,562		9,134
Gain on revaluation of Compstar investment	—		69,846		—		69,846
Net realized capital gains	49		115		72		3,345
Other revenue	2,799		5,401		8,683		11,323
Total revenue	56,990		105,582		156,349		165,342
Expenses
Losses and loss adjustment expenses	32,129		15,564		86,735		40,681
General and administrative expenses	13,788		6,995		40,946		23,437
Other expenses	—		11,054		845		11,054
Intangible asset amortization	1,499		1,120		4,326		1,154
Noncash stock compensation	468		307		1,098		307
Interest expense	419		520		1,271		1,482
Total expenses	48,303		35,560		135,221		78,115
Gains (losses) on embedded derivatives	(121)		(367)		1,869		(5,547)
Other income	35		209		191		263
Income before taxes	8,601		69,864		23,188		81,943
Income tax expense	2,083		817		5,102		4,035
Equity earnings in affiliates, net of tax	—		401		—		2,333
Net income	$	6,518	$	69,448	$	18,086	$	80,241
Earnings per share:
Basic	$	0.13	$	1.42	$	0.35	$	1.94
Diluted	$	0.13	$	1.42	$	0.35	$	1.94
Weighted average shares outstanding:
Basic	51,171,416		49,054,441		51,157,726		41,304,132
Diluted	51,171,416		49,056,001		51,172,602		41,304,652

See accompanying notes to the condensed consolidated financial statements.

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Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Net income	$	6,518	$	69,448	$	18,086	$	80,241
Other comprehensive gain (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) arising during the period	(2,419)		546		(8,670)		8,781
Income tax expense (benefit)	(508)		115		(1,821)		1,842
Unrealized investment gains (losses), net of tax	(1,911)		431		(6,849)		6,939
Less reclassification adjustments to:
Net realized investment gains (losses) included in net realized capital gains (losses)	49		114		72		232
Income tax expense	10		24		15		49
Total reclassifications included in net income, net of tax	39		90		57		183
Other comprehensive income (loss)	(1,950)		341		(6,906)		6,756
Total comprehensive income	$	4,568	$	69,789	$	11,180	$	86,997

See accompanying notes to the condensed consolidated financial statements.

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Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity and Redeemable Preferred Stock

For the Three and Nine Months Ended September 30, 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 June 30, 2021	51,157,004	$	511	$	287,734	$	8,470	$	120,628	$	417,343
Stock compensation expense	—	—		468		—		—		468
Common stock issuances pursuant to equity compensation awards, net of shares repurchased	17,883	1		(88)		—		—		(87)
Other comprehensive income	—	—		—		(1,950)		—		(1,950)
Net income	—	—		—		—		6,518		6,518
Balance at September 30, 2021	51,174,887	$	512	$	288,114	$	6,520	$	127,146	$	422,292


				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 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	$	12,915	$	31,349	$	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 compensation expense	—	—		—	—		—	—		—	—		—	—		—	—		307		—		—		307
Other comprehensive income	—	—		—	—		—	—		—	—		—	—		—	—		—		341		—		341
Net income	—	—		—	—		—	—		—	—		—	—		—	—		—		—		69,448		69,448
Balance at September 30, 2020	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	51,148,782	$	511	$	287,234	$	13,256	$	100,752	$	401,753

See accompanying notes to the condensed consolidated financial statements.

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	Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Stockholders' Equity
	Shares	Amount
Balance at December 31, 2020	51,148,782	$	511	$	287,110	$	13,426	$	109,060	$	410,107
Stock compensation expense	—	—		1,098		—		—		1,098
Common stock issuances pursuant to equity compensation awards, net of shares repurchased	26,105	1		(94)		—		—		(93)
Other comprehensive loss	—	—		—		(6,906)		—		(6,906)
Net income	—	—		—		—		18,086		18,086
Balance at September 30, 2021	51,174,887	$	512	$	288,114	$	6,520	$	127,146	$	422,292


				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	51	$	5,100	65,036,780	$	65,037	5,045,215	$	5,045	8,159,775	$	8,160	196,588	$	196	—	$	—	$	17,995	$	6,500	$	38,682	$	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 compensation expense	—	—		—	—		—	—		—	—		—	—		—	—		307		—		—		307
Other comprehensive income	—	—		—	—		—	—		—	—		—	—		—	—		—		6,756		—		6,756
Net income	—	—		—	—		—	—		—	—		—	—		—	—		—		—		80,241		80,241
Balance at September 30, 2020	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	51,148,782	$	511	$	287,234	$	13,256	$	100,752	$	401,753

See accompanying notes to the condensed consolidated financial statements.

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Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating activities
Net income	$	18,086	$	80,241
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	5,123		1,823
Stock compensation	1,098		307
Unrealized (gains) losses on embedded derivatives	(3,761)		3,066
Net capital gains	(72)		(5,242)
Gain on revaluation of Compstar	—		(69,846)
Bond amortization and accretion	1,715		1,465
Issuance of member units as compensation	—		197
Equity earnings in affiliates, net of tax	—		(2,333)
Distributions from equity method investments	—		2,953
Deferred income taxes	(2,259)		(317)
Deferred financing costs	126		90
Changes in operating assets and liabilities:
Accrued investment income	80		50
Premiums and other receivables	(25,167)		(13,308)
Reinsurance recoverable on paid and unpaid losses	(18,460)		(43,087)
Prepaid reinsurance premiums	(30,252)		(23,841)
Right of use asset	1,444		(5,538)
Other assets	(10,863)		(8,729)
Unpaid loss and loss adjustment expenses	52,975		58,787
Unearned premiums	64,879		39,601
Funds held under reinsurance agreements	19,585		(5,942)
Reinsurance premiums payable	(7,829)		6,136
Accounts payable and accrued expenses	(11,430)		11,448
Lease liability	(1,537)		5,752
Income taxes payable	(71)		(1,525)
Net cash provided by operating activities	53,410		32,208
Investing activities
Payments for capital expenditures	(92)		(665)
Proceeds from sale of equity method investment	—		3,000
Return of capital on equity method investment	232		115
Purchase of investments, available for sale	(129,474)		(84,125)
Proceeds from investments sold, matured or repaid	61,998		89,374
Acquisition of subsidiary, net of cash received	(3,795)		(1,098)
Cash received in the acquisition of Compstar	—		11,891
Net cash provided by (used in) investing activities	(71,131)		18,492
Financing activities
Shares redeemed for payroll taxes	(94)		(82)
Proceeds from initial public offering	—		99,643
Deferred offering costs	—		(5,839)
Proceeds from credit agreement	—		32,453
Principal payments on debt	(1,031)		(41,789)
Buyback of preferred shares	—		(5,100)
Distribution to members	—		(19,496)
Dividends paid on preferred stock	—		(128)
Net cash provided by (used in) financing activities	(1,125)		59,662
Net increase (decrease) in cash, cash equivalents and restricted cash	(18,846)		110,362
Cash, cash equivalents and restricted cash – beginning of period	157,234		76,068
Cash, cash equivalents and restricted cash – end of period	$	138,388	$	186,430

See accompanying notes to the condensed consolidated financial statements.

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Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	September 30,
Disaggregation of cash and restricted cash:	2021		2020
Cash and cash equivalents	$	134,821	$	165,255
Restricted cash	3,567		21,175
Total cash, cash equivalents and restricted cash	$	138,388	$	186,430


	Nine Months Ended September 30,
Supplemental disclosure of cash flow information:	2021		2020
Cash paid during the year for:
Interest	$	1,145	$	1,391
Income taxes	7,395		5,809
Non-cash investing and financing activity:
Right-of-use assets obtained in exchange for new operating lease liabilities	319		8,245
Non-cash transfer of investments to settle funds held for reinsurance	13,562		—
Non-cash transfer of investments to settle amounts held for others in accounts payable	26,211		—
Contingent consideration for the acquisition of subsidiary	1,500		—
Shares issued for the acquisition of subsidiary	—		99,204
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	1,824		1,484

See accompanying notes to the condensed consolidated financial statements.

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Notes to the Condensed Consolidated 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.

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; Western Integrated Care, LLC, a managed care organization; 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 and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

During the second quarter of 2021, the Company determined that its funds held agreements with reinsurers contain embedded derivatives relating to a total return swap on the underlying investments. As a result, the Company has revised the presentation of its financial results to report the change in fair value of the embedded derivatives in gains (losses) on embedded derivatives in the condensed consolidated and combined statements of operations. In addition, investment earnings credited to the funds withheld accounts are reported in gains (losses) on embedded derivatives in the condensed consolidated and combined statements of operations, whereas previously these were reported as an offset to net investment income. While the prior period amounts have been corrected for comparability, the correction was not material to the previously reported condensed consolidated and condensed combined financial statements. The impact of the prior period corrections on the condensed consolidated balance sheet and the related components of stockholders' equity is as follows:

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	December 31, 2020						September 30, 2020
	Previously reported		Adjustment		As adjusted		Previously reported		Adjustment		As adjusted
Retained earnings	$	112,959	$	(3,899)	$	109,060	$	104,853	$	(4,101)	$	100,752
Accumulated other comprehensive income	9,527		3,899		13,426		9,155		4,101		13,256


	June 30, 2020						December 31, 2019
	Previously reported		Adjustment		As adjusted		Previously reported		Adjustment		As adjusted
Retained earnings	$	35,561	$	(4,212)	$	31,349	$	40,361	$	(1,679)	$	38,682
Accumulated other comprehensive income	8,703		4,212