S-1/A 1 nt10008305x7_s1a.htm S-1/A

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As filed with the Securities and Exchange Commission on July 9, 2020
Registration No. 333-239291
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Trean Insurance Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
6331
84-4512647
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
150 Lake Street West
Wayzata, MN 55391
(952) 974-2200
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Andrew M. O’Brien
President and Chief Executive Officer
Trean Insurance Group, Inc.
150 Lake Street West
Wayzata, MN 55391
(952) 974-2200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Dwight S. Yoo
Skadden, Arps, Slate, Meagher & Flom LLP
One Manhattan West
New York, New York 10001
(212) 735-3000
Richard D. Truesdell, Jr.
Shane Tintle
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “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 7(a)(2)(B) of the Securities Act.
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered
Shares to be
registered(1)
Proposed
maximum offering
price per share(2)
Proposed
maximum aggregate
offering price(2)
Amount of
registration fee(3)
Common stock, par value $0.01 per share
12,321,428
$15.00
$184,821,420.00
$23,989.82
(1)
Includes additional shares that the underwriters have the option to purchase to cover over-allotments.
(2)
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3)
Of this amount, $12,980.00 has been previously paid.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated July 9, 2020
Preliminary Prospectus
10,714,286 shares

Trean Insurance Group, Inc.
Common Stock
This is the initial public offering of common stock of Trean Insurance Group, Inc. We are offering 7,142,857 shares of our common stock. The selling stockholders identified in this prospectus are offering an additional 3,571,429  shares of our common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is estimated to be between $13.00 and $15.00 per share. We have applied to list our common stock on the Nasdaq Global Select Market (the “Nasdaq”) under the symbol “TIG.”
We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus summary — Implications of being an emerging growth company.”
Investing in our common stock involves risks. See “Risk factors” beginning on page 18.
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission or regulatory authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Per Share
Total
Initial public offering price
$    
$    
Underwriting discounts and commissions(1)
$
$
Proceeds, before expenses, to us
$
$
Proceeds, before expenses, to the selling stockholders
$      
$      
(1)
See “Underwriting” for a description of the compensation payable to the underwriters.
Certain of the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to an additional 1,607,142 shares of our common stock at the initial public offering price less the underwriting discounts.
The underwriters expect to deliver the shares of common stock through the book-entry facilities of the Depository Trust Company on or about    , 2020.
Joint Book-Running Managers
J.P. Morgan
Evercore ISI
William Blair
Co-Manager
JMP Securities
The date of this prospectus is      , 2020.

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Page
We, the selling stockholders and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our shares of common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
No action is being taken by us, the selling stockholders or the underwriters in any jurisdiction outside the United States to permit a public offering of shares of common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States must inform themselves about and observe any restrictions relating to this offering and the distribution of this prospectus applicable to that jurisdiction.
Market and industry data
This prospectus includes certain market and industry data that are based on third-party sources, including publicly available information, industry publications and reports from government agencies, including the Workers’ Compensation Insurance Rating Bureau of California, and our own estimates, including underlying assumptions, based on our management’s knowledge of, and experience in, the insurance industry and market segments in which we compete. Third-party industry publications and forecasts generally state that the information contained therein has been obtained from sources generally believed to be reliable. We have not independently verified any third-party information. Industry and market data could be inaccurate because of the method by which sources obtained their data and because information cannot be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. Our estimates have not been verified by any independent source. Such data and estimates, including those
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relating to a specified market’s projected growth or future performance, are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors.” These and other factors could cause future performance to differ materially from such data and estimates. See “Forward-looking statements.”
Trademarks and service marks
This prospectus contains references to a number of trademarks and service marks which are our registered trademarks or service marks, or trademarks or service marks for which we have pending applications or common law rights. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. Solely for convenience, the trademarks, service marks and trade names are referred to in this prospectus without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we or other owner thereof will not assert, to the fullest extent under applicable law, our or such owner’s rights to these trademarks, service marks and trade names. We do not intend our use or display of other companies’ trademarks, service marks or trade names to imply a relationship with, or endorsement or sponsorship of us by, such other companies.
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Prospectus summary
This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus, before deciding whether to purchase shares of our common stock. References in this prospectus to the “Company,” “we,” “us” and “our” are (i) before the consummation of the reorganization transactions defined below in “Our organizational structure,” to Trean Holdings LLC, BIC Holdings LLC and their subsidiaries and (ii) after such reorganization transactions, to Trean Insurance Group, Inc. and its subsidiaries, unless the context otherwise requires. References to “Benchmark” are to our subsidiary Benchmark Insurance Company, a Kansas insurance company. References to “ALIC” are to our subsidiary American Liberty Insurance Company, a Utah insurance company.
Our company
We are an established, growing and highly profitable company providing products and services to the specialty insurance market. Historically, we have focused on specialty casualty markets that we believe are underserved and where our expertise allows us to achieve higher rates, such as niche workers’ compensation markets and small- to mid-sized specialty casualty insurance programs. We underwrite specialty casualty insurance products both through programs where we partner with other organizations (“Program Partners”) and also through our own managing general agencies (“Owned MGAs”). We also provide our Program Partners with a variety of services including issuing carrier services, claims administration and reinsurance brokerage, from which we generate recurring fee-based revenues. We believe the business we target is generally subject to less competition and has better pricing, which we believe allows us to generate higher risk-adjusted returns. We believe many of our target markets are experiencing strong secular tailwinds and consequently are growing more quickly than the broader market.
We believe that a number of differentiating factors have contributed to our ability to achieve consistent levels of growth and profitability superior to that of the broader insurance industry. We believe our multi-service value proposition is highly attractive in our target markets, drives deep integration with our Program Partners and allows us to generate greater and more diversified revenue streams. We carefully identify and select our Program Partners, ensure we have closely aligned interests, and look to grow and expand these relationships over time. We believe we have a competitive advantage in claims management for longer-tailed lines, specifically workers’ compensation, where our in-house capabilities and differentiated philosophy enable us to have lower claims costs and to settle claims more quickly than our competitors. Our business strategy is supported by robust controls surrounding program design and underwriting, ongoing monitoring, and reinsurance and collateral management as evidenced by our “A” (Excellent) financial strength rating, with a stable outlook, by A.M. Best Company (“A.M. Best”), a leading rating agency for the insurance industry. This rating is based on matters of concern to policyholders and is not designed or intended for use by investors in evaluating our securities. Our management team has decades of insurance industry experience across underwriting as well as program administration, reinsurance, claims and distribution.
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Our goal is to deliver long-term value to our stockholders by growing our business and generating attractive returns. We have grown gross written premiums from $144.9 million for the year ended December 31, 2015 to $411.4 million for the year ended December 31, 2019, a compound annual growth rate (“CAGR”) of 29.8% and have grown our net income from $7.9 million to $31.3 million at a CAGR of 41.1% over the same time period. For the year ended December 31, 2019, our return on equity was 25.5% and our return on tangible equity(1) was 26.1%.

(1)
Return on tangible equity is a non-GAAP financial measure. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of return on tangible equity to return on equity in accordance with U.S. generally accepted accounting principles (“GAAP”).
(2)
Adjusted net income is a non-GAAP financial measure. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
(3)
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
Our business
We provide insurance products and services focused on specialty casualty lines to our Program Partners and Owned MGAs. We target a diversified portfolio of small- to mid-sized programs, typically with less than $30 million of premiums, that focus on niche segments of the specialty casualty insurance market and that we believe have strong underwriting track records.
For the three months ended March 31, 2020, 82.9% of our gross written premiums were related to workers’ compensation insurance. For the year ended December 31, 2019, 82.8% of our gross written premiums were related to workers’ compensation insurance. Within the workers’ compensation insurance market, we write business across a variety of industries and hazard classes. We target accounts that we believe offer greater risk-adjusted returns, such as small accounts less subject to competition or accounts with high experience modification factors that our underwriters assess to be attractively priced for the potential risk. Experience modification factors are determined by state insurance regulators based on the insured’s historical loss experience. We do not write accounts that we believe present outsized exposure to catastrophic risk. The average workers’ compensation premium per policy written by us was $19,103 for the year ended December 31, 2019.
In addition to our core expertise in workers’ compensation, we target lines of business that allow us to leverage our capabilities and where we believe we can add incremental risk-adjusted value. For example, our other liability business, which represented 7.5% of our gross written premiums for the three months ended March 31, 2020 and 7.3% of our gross written premiums for the year ended December 31, 2019, offers specific products to employers that have similar characteristics as those covered by our workers’ compensation insurance business.
We continuously evaluate potential new Program Partners through referrals from our existing customers and through our reinsurance brokerage operations. We seek to partner with organizations that have a strong track record of underwriting success and have the ability and willingness to retain risk to ensure
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alignment of interests. In recent years, as a result of our long-term relationships and high degree of integration with our Program Partners, we have also invested in or acquired six of our Program Partners, providing us greater control over and visibility into their business and allowing us to capture additional earnings from these programs.
For the three months ended March 31, 2020 and for the year ended December 31, 2019, 62.5% and 63.6% of our gross written premiums were generated by our Owned MGAs, respectively. Our Owned MGAs premiums include Compstar Insurance Services, LLC, of which we currently own 45% of the common equity of its parent company, Compstar Holding Company LLC (“Compstar”), which will become wholly owned upon completion of the reorganization transactions. We own 100% of all other Owned MGAs.
We are licensed to write business across 49 states and the District of Columbia. We seek to write business in states through select distribution outlets with the potential for attractive underwriting margins, and focus on markets with higher than average premium growth trends. California, Michigan and Arizona are the largest states in which we do business, representing approximately 49%, 9% and 8%, respectively, of our gross written premiums for the year ended December 31, 2019.
For the three months ended March 31, 2020 and for the year ended December 31, 2019, approximately 13.2% and 8.9% of our total revenues, respectively, were from fee-based services, including issuing carrier services, reinsurance brokerage and claims administration. We believe that these services, combined with our underwriting capabilities, are a compelling value proposition for our Program Partners, and provide us with a valuable range of touch-points to deepen our relationships and understanding of our Program Partners’ businesses. We also believe that our model allows us to generate greater revenue from our Program Partners than would a traditional insurance carrier model.
The following graphs illustrate our business mix of $411.4 million in gross written premiums by product, distribution channel and geography for the year ended December 31, 2019.
FY 2019 gross written premiums of $411.4 million by:


(1)
Other includes group accident & health, commercial auto liability, auto physical damage, private passenger auto liability, boiler and machinery, surety, fire and inland marine.
(2)
Pools are state insurance pools.
(3)
Other states include Montana, Tennessee, New Jersey and other U.S. geographical areas.
We evaluate the retention of risk internally as well as externally with Program Partners and professional reinsurers. We typically retain a portion of the risk for all underwritten business and cede a portion back to our Program Partners in order to align interests through direct exposure to underwriting results. We cede the balance, if any, to professional reinsurers in order to optimize our net position relative to our balance sheet. In aggregate for the three months ended March 31, 2020, we retained 24.3% of gross written premiums, and ceded 28.7% of gross written premiums to our Program Partners and 47.0% to professional reinsurers. In aggregate for the year ended December 31, 2019, we retained 20.8% of gross written premiums, and ceded 28.6% of gross written premiums to our Program Partners and 50.6% to professional reinsurers. Through our reinsurance strategy, we earn underwriting profit, reinsurance commission overrides, management fee income, and brokerage commissions.
We typically look to retain less net risk on programs that are new to us and may seek to grow our retention as we gain more experience with the Program Partner. For the year ended December 31, 2019, we retained less than 5% of gross written premiums from the five new Program Partners added since
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2018 and ceded 27.3% to professional third-party reinsurers and 68.1% to Program Partners. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not discharge us from our obligation to pay claims for losses insured under our insurance policies. See “Risk factors — We are subject to reinsurance counterparty credit risk. Our reinsurers may not pay on losses in a timely fashion, or at all.”
Due to our reinsurance strategy, we retain credit risk exposure to our Program Partners and our professional reinsurers. We carefully manage our credit exposure through stringent collateral requirements, which require at least 100% of reserves for unearned premiums and losses and loss adjustment expenses, including incurred but not reported reserves, for all non-rated or non-admitted reinsurers. The majority of collateral is collected on a funds-withheld basis, and is collected with monthly “true-ups.” Since the inception of our current programs in 2007 until December 31, 2019, we ceded $1.3 billion in premiums with no unpaid reinsurance recoverables.
Since we operate primarily in casualty lines, we have limited exposure to property catastrophe risks. In order to mitigate our exposure to a severe loss under our workers' compensation policies from a catastrophe, we purchase reinsurance catastrophe loss protection covering an estimate of the amount of the 500-year return period probable maximum loss, with varying co-participations through the first $15 million. We reinsure property losses for the 500-year return period probable maximum loss, with a small co-participation through the first $2 million.
Our competitive strengths
We believe that our competitive strengths include:
Expertise and focus in underserved specialty casualty insurance markets. We focus on select markets that we believe are underserved and where we can achieve higher rates, including niche workers’ compensation markets and small- to mid-sized specialty casualty insurance programs. We have the specialized expertise and capabilities to succeed in our target markets, and we believe we have few competitors in our target markets due to the specialized knowledge, broad licensing and filing authority requirements, and complex operational systems necessary to profitably manage these traditionally longer-tailed lines of business. We believe that larger companies that do have the required expertise and capabilities in these areas tend not to participate in our target markets due to the need for customized solutions when working with smaller, more entrepreneurial partners.
Multi-service value proposition for our partners. We believe that our focus on the needs of smaller accounts and the breadth of products and services we offer allow us to better serve the needs of our Program Partners, and provide us with greater revenue and profit opportunities. Our multi-service offering enables us to develop deep relationships with our Program Partners and enhances our ability to achieve our target results. We offer our Program Partners reinsurance brokerage, claims administration, underwriting capacity and, in particular, access to our A.M. Best “A” financial strength rating through issuing carrier services. Our ability to leverage our licenses across multiple products in 49 states and the District of Columbia allows us to provide a national multi-service solution for our Program Partners. Additionally, we believe that our Program Partners highly value the ease of doing business with us given our focus on smaller programs.
Long-term, carefully selected and aligned relationships with Program Partners. We carefully select the Program Partners we choose to do business with, and design our programs to align risks between parties. We select programs with the intention of building long-term relationships, where our business philosophies align and our Program Partners can grow alongside us. As of December 31, 2019, excluding the 5 Program Partners added in the prior two years, our relationships with our 17 other Program Partners have an average duration of more than eight years. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our Program Partners and Owned MGAs that have been with us for more than 10 years represented 63% and 62% of our gross written premiums, respectively. Our management team carefully evaluates potential new programs in conjunction with our underwriting and actuarial departments. We accept only programs that meet our stringent underwriting and actuarial
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requirements, and decline approximately 88% of the new opportunities that we evaluate. For every Program Partner we select, we work with them to appropriately align interests and to establish rigorous ongoing reporting and auditing requirements upfront. All but one of our Program Partners retain significant underwriting risk.
Differentiated in-house claims management. We believe that proactively managing our claims, while also accurately setting reserves, is a key aspect of keeping our losses low. In our workers’ compensation business, our claims philosophy is to provide an injured employee high-quality medical care as quickly as possible in order to reduce pain, accelerate healing, and lead to a faster and more complete recovery. Once an injured employee has healed, we aim to fully settle the claim and obtain a full and complete release of the claim at the earliest opportunity. In California, for the year ended December 31, 2018, valued as of March 31, 2020, our average medical cost for the workers’ compensation market was $10,774 per claim compared to the California workers’ compensation industry average of $29,500, as reported by the WCIRB. For the year ended December 31, 2018, we also closed 68% of our workers’ compensation claims in California within the calendar year following the accident year, compared with the industry average of 38% as of September 30, 2018, as reported by WCIRB. Our commitment to delivering the best claims process is exemplified by the experience of our claims administration department, who average 16 years of industry experience. To provide our policyholders this higher level of expertise and attention, we currently average 80 open claims per claims adjuster. In comparison, the 2019 Workers’ Compensation Benchmarking Study by Rising Medical Solutions found that 71% of TPAs had over 100 open claims per claims adjuster.
We believe this personal, high touch approach decreases the likelihood of lengthy and costly litigation. As of December 31, 2019, our reserves for claims incurred but not reported were approximately 70% of our total net loss reserves, and we have not had any unfavorable development on our initial loss projection since 2012.
Significant fee-based income and efficient capital structure. Our business model generates significant fee-based income from multiple sources including issuing carrier services, claims administration and reinsurance brokerage. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our fee-based income accounted for approximately 13.2% and 8.9% of total revenue, respectively. All of our fee-based income accrues outside of our regulated insurance companies, which we believe enhances our organization’s financial flexibility and increases the visibility of our earnings. Within our insurance companies, we cede a significant portion of the risk we originate to our reinsurance partners. These agreements enable us to maintain broader relationships with our Program Partners than our current capital base would otherwise enable. We believe that our strategy has allowed us to scale our business and provides a consistent fee-based income stream to complement our profitable underwriting business, thus providing us with greater revenue opportunities from our Program Partners than we would be able to access in a traditional insurance underwriter model.
Disciplined risk management across our organization. Our disciplined approach to risk management begins with the extensive due diligence performed during our Program Partner selection process and continues throughout the relationship. We have rigorous ongoing controls and reporting requirements, including with respect to underwriting and ongoing Program Partner diligence. Similarly, we maintain rigorous controls over our reinsurance exposures, maintaining stringent collateral requirements to minimize our credit exposure. As a result of providing multiple services to our Program Partners, we have numerous touch points and are in regular communication regarding underwriting, claims handling, reinsurance placement and collateral management, which we believe enhances our ability to achieve our desired financial targets with each Program Partner and minimizes risks to our organization.
Entrepreneurial and highly experienced management team. Our management team is highly experienced, with decades of experience in specialty insurance markets. Our team has a long history of cohesively driving the development and implementation of our business from its inception in 1996, with 18 members having been with us for over 10 years. We are led by our Chief Executive Officer and founder Andrew M. O’Brien. Prior to founding our company, Mr. O’Brien began his insurance career at the reinsurance broker E.W. Blanch Company, where he ultimately served as a General Partner, Executive Vice President and Director. As owners of approximately 13.7% of our outstanding common stock,
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assuming an initial public offering price of $14.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the completion of this offering, Mr. O’Brien and two directors will continue to be meaningful owners of Trean Insurance Group, Inc. and to have closely aligned interests with our stockholders.
Our strategy
We believe that our approach will allow us to continue to achieve our goals of both growing our business and generating attractive returns. Our strategy involves:
Growing within our existing markets. We focus on lines of business that have large markets, with $54 billion of workers’ compensation premiums and $81 billion for other liability written in the United States in 2019 according to S&P Global. There were greater than $40 billion direct written premiums in commercial property and casualty markets in 2018 produced by program administrators according to the Target Markets Program Administration Association (“TMPAA”). By comparison, we generated $411.4 million of gross written premiums for the year ended December 31, 2019. We select Program Partners operating in our target markets with whom we believe we can partner with to grow within these significant markets. Programs Partners and Owned MGAs that we wrote business with prior to December 31, 2015 generated a gross written premium CAGR of 28.8% from the year ended December 31, 2015 to the year ended December 31, 2019. Given the size of our markets and our proven ability to grow our business, we believe that we have ample room to continue to grow our business organically for the foreseeable future. Additionally, as we grow our premiums and capital, we expect to continuously optimize our reinsurance program to maximize our risk-adjusted returns.
Selectively adding new Program Partners. We have been selective in choosing our current Program Partners, and will continue to ensure that new Program Partners share our business philosophy and meet our rigorous underwriting and returns criteria. Since 2015, we have added fourteen new Program Partners, four of which were added in the first four months of 2020. We focus on specialty lines and will continue to add programs in these markets. However, we also continue to evaluate potential partnerships in additional lines of business that harness our core competencies and provide us with greater revenue opportunities.
Opportunistically grow our Owned MGA business through acquisitions. From time to time, we may have the opportunity to deepen our relationships with our existing Program Partners by acquiring equity interests from their management teams. Since 2013, we have successfully completed seven acquisitions of companies with which we have had prior relationships. These businesses represented 63.6% of our gross written premiums for the year ended December 31, 2019. We pursue these periodic opportunities with the same discipline and focus on enhancing our stockholders’ returns as we do in underwriting a new program.
Strengthen and harness our strong and growing capital base. Despite our relatively modest historical balance sheet, we have grown our premiums through the significant use of reinsurance. As our capital base has grown, new opportunities have emerged for us. Of particular note, in 2019, A.M. Best upgraded our insurance companies from an “A-” to an “A” (Excellent) (Outlook Stable) financial strength rating, which we believe differentiates us in the markets we operate. As we continue to generate additional capital, and through the proceeds raised in this offering, we believe we will have the opportunity to access additional business to which we did not previously have access. We will also have the ability to retain more profitable businesses that we have historically ceded to the reinsurance markets. Any incremental business that we retain will be carefully balanced to ensure continued alignment of interests with all of our Program Partners, in an effort to maximize our risk-adjusted returns.
Maintaining our distinct combination of industry-leading profitability and growth. Our competitive advantages, including our focus on underserved markets, have enabled us to grow our gross written premiums to $411.4 million for 2019 at a CAGR of 29.8% since 2015, while maintaining an average return on equity of approximately 19.3% for the same time period. For the three months ended March 31, 2020, we generated a loss ratio of 57.6%. For the year ended December 31, 2019, we generated a loss ratio of 51.6%, in line with our average annual loss ratio from 2015 to 2019 of 50.0%. As we seek to grow our business, we remain disciplined in targeting classes of business and markets where we believe we can generate attractive returns. Rather than make decisions based on where we are in the market cycle, we
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focus on selecting high-quality programs, only pursuing opportunities that we expect to meet our pricing and risk requirements over the long-term. We will not participate in markets where we do not believe our business model can add incremental risk-adjusted value.
Maintain disciplined controls over our key business risks. In order to maintain our underwriting profitability, we have systematic underwriting and risk monitoring processes across our business. Our processes are enhanced by our ability to provide multiple services to our Program Partners since we are in regular communication with them regarding underwriting, claims handling, reinsurance placement and collateral management. We seek to swiftly terminate relationships with Program Partners that are not producing targeted underwriting results, writing exposures outside of agreed upon risk tolerances, or not meeting their collateral or other commitments to us. Our stringent and extensive due diligence Program Partners selection process allows us to select superior Program Partners. We have terminated two partnerships for failure to perform contractually since 2010.
Recent developments
Estimated preliminary financial results for the two months ended May 31, 2020 (unaudited)
While unaudited interim condensed combined financial statements are not available for any period subsequent to March 31, 2020, based on the information currently available to us, we preliminarily estimate:
Gross written premiums increased $1.9 million, or 2.9%, to $69.6 million for the two months ended May 31, 2020, compared to $67.7 million for the two months ended May 31, 2019.
Net earned premiums increased $0.4 million, or 3.0%, to $13.8 million for the two months ended May 31, 2020, compared to $13.4 million for the two months ended May 31, 2019.
Consistent with the first quarter of 2020, the COVID-19 pandemic has not had a significant impact on our premium revenue for the two months ended May 31, 2020. The substantial majority of workers’ compensation risks that we insure, both through our Owned MGAs and our Program Partners, are not in classes of business that to date have heightened exposure to COVID-19. Growth in premiums and payroll for the month of May 2020 was generally consistent with prior months’ growth during 2020. The merger of LCTA Risk Services, Inc. into Trean Corporation, effective April 1, 2020, began to generate additional premiums in the month of May 2020. The incremental addition of insured employees from this acquisition in May 2020 offset the portion of our workers’ compensation portfolio that was impacted by business shutdowns driven by COVID-19.
Our combined ratio was 93.5% (comprised of a loss ratio of 58.5% and an expense ratio of 35.0%) for the two months ended May 31, 2020, compared to 82.2% (comprised of a loss ratio of 55.7% and an expense ratio of 26.5%) for the three months ended June 30, 2019.
The increase in the loss ratio for the two months ended May 31, 2020 compared to the three months ended June 30, 2019 was principally due to our maintaining adequate reserves for incurred but not yet reported losses in light of recent economic conditions and other effects related to the COVID-19 pandemic, including potential delays in reporting and settling claims as a result of stay-at-home and similar orders. The increase in the expense ratio was principally due to higher general and administrative expenses, including increases in salaries and benefits resulting from a larger workforce, professional services expenses and other costs related to the initial public offering and reorganization transactions, and additional fees incurred in connection with the 2020 First Horizon Credit Agreement (as defined below) entered into in May 2020. Additionally, our acquisition of LCTA Risk Services, Inc., effective April 1, 2020, increased expenses starting in April with additional premiums first being generated in May. We are currently engaged in discussions regarding the potential acquisition of a workers' compensation carrier with which we have a longstanding relationship and have entered into an exclusivity agreement with the target company. The proposed purchase price is approximately $12.0 million.
The preliminary financial results for the two months ended May 31, 2020 are preliminary and estimated. Actual financial results for the two months ended May 31, 2020 may differ materially from the preliminary financial results. We are currently in the process of performing procedures to prepare our unaudited interim condensed combined financial statements for the quarter ended June 30, 2020, but those financial
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statements will not be available until after the closing of this offering. To date, we have not identified any unusual or particular events or trends that occurred during the two months ended May 31, 2020 that we believe will materially affect the preliminary financial results presented above.
The preliminary financial results should not be viewed as a substitute for our unaudited interim condensed combined financial statements or our annual audited financial statements prepared in accordance with GAAP. Accordingly, you should not place undue reliance on the preliminary financial results. The preliminary financial results should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations,” “Forward-looking statements,” “Risk factors,” “Selected historical combined financial and other data” and our combined financial statements and related notes thereto included elsewhere in this prospectus.
The preliminary financial results presented above have been prepared by, and are the responsibility of, management. Our independent registered public accounting firm, Deloitte & Touche LLP, has not audited, reviewed, compiled or performed any procedures with respect to the preliminary financial results for the two months ended May 31, 2020. Accordingly, Deloitte & Touche LLP does not express an opinion or any other form of assurance with respect thereto.
Workers’ compensation monthly claims data
For the two months ended May 31, 2020, we are seeing fewer claims reported despite insuring more employees. We have not seen a significant impact on the number of reported claims or on the average value of incurred losses due to the COVID-19 pandemic. The number of workers’ compensation insured employees increased by approximately 1.5% year-over-year from April 30, 2019 to April 30, 2020. The number of workers’ compensation insured employees increased by approximately 4.0% year-over-year from May 31, 2019 to May 31, 2020. In contrast, the number of claims reported on a monthly basis during the two months ended May 31, 2020 declined compared to the number of claims reported monthly during the first quarter of 2020 and compared to the number of claims reported during the two months ended May 31, 2019. In addition, closed claims outpaced reported claims in April 2020 and May 2020.




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Summary risk factors
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors” immediately following this prospectus summary. These risks include the following:
failure of our Program Partners or our Owned MGAs to properly market, underwrite or administer policies could adversely affect us;
we depend on a limited number of Program Partners for a substantial portion of our gross written premiums;
more than half of our gross written premiums are written in three key states;
a downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries may negatively affect our business;
if we are unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders, our business, financial condition and results of operations may be materially and adversely affected;
adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability;
negative developments in the workers’ compensation insurance industry could adversely affect our business, financial condition and results of operations;
our failure to accurately and timely pay claims could harm our business;
we are subject to reinsurance counterparty credit risk and our reinsurers may not pay on losses in a timely fashion, or at all;
if we are unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us, we may be required to bear increased risks or reduce the level of our underwriting commitments;
retention of business written by our Program Partners could expose us to potential losses;
our loss reserves may be inadequate to cover our actual losses;
we may not be able to manage our growth effectively;
any shift in our investment strategy could increase the riskiness of our investment portfolio and the volatility of our results, which, in turn, may adversely affect our profitability;
our results of operations, liquidity, financial condition and FSRs are subject to the effects of natural and man-made catastrophic events;
disruptions related to COVID-19, including economic impacts of the COVID-19-related governmental actions, could materially and adversely affect our business, financial condition and results of operations;
because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results;
regulators may challenge our use of fronting arrangements in states in which our Program Partners are not licensed;
our principal stockholders will be able to exert significant influence over us and our corporate decisions;
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our principal stockholders could sell their interests in us to a third party in a private transaction, which may result in your not realizing any change-of-control premium on your shares and subject us to the influence of a currently unknown third party; and
we will incur significant increased costs as a result of operating as a public company, and operating as a public company will place additional demands on our management.
Before you invest in our common stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk factors.”
Implications of being an emerging growth company
As a company with less than $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:
we may present as few as two years of audited financial statements and two years of related management’s discussion and analysis of financial condition and results of operations in this prospectus;
we are exempt from the requirement to obtain an attestation report from our auditors on management’s assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002 for up to five years or until we no longer qualify as an emerging growth company;
we are permitted to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosures regarding our executive compensation; and
we are not required to hold non-binding advisory votes on executive compensation.
In addition to the relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to use this extended transition period, which means that our combined financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis.
In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, and in the future, we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenue of $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended.
Our history
We were founded in 1996 as a reinsurance broker and MGA targeting smaller, underserved insurance providers writing niche classes of business, predominantly workers’ compensation, accident and health and medical professional liability. From 1996 through 2000, we wrote business on the paper of a highly rated, third-party insurance carrier. In 2000, we purchased a small, unrated, single-state carrier in South Dakota. Through the addition of a risk-bearing insurance carrier, we expanded our product suite and created opportunities to earn additional revenue and profit in the form of underwriting and investment income.
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In 2003, we sold the South Dakota carrier and purchased Benchmark, which was licensed in 41 states and the District of Columbia. Benchmark provided us with an insurance carrier with a financial strength rating of “A-” from A.M. Best and that is now licensed in 49 states and the District of Columbia and has an “A” rating from A.M. Best. In 2007, we replaced Benchmark’s management team and began our plan to reposition the business as a specialty insurance carrier for select, high-performing small- to mid-sized Program Partners. We focused on a limited group of core Program Partners and sought to upgrade Benchmark’s staff, infrastructure and business processes. After stabilizing and repositioning the business by 2011, we turned our attention to growing the business by expanding existing Program Partner relationships and selectively adding new Program Partners. In 2013, we acquired S&C Claims Services, which, prior to the acquisition, had been handling our workers’ compensation claims for over 10 years.
In July 2015, we sold a minority equity stake of 36.4% to AHP-BHC LLC and AHP-TH LLC, entities affiliated with Altaris Capital Partners, LLC, a private equity firm focused on businesses operating in the healthcare and healthcare-related sector with $4.0 billion of assets actively under management. Altaris Capital Partners, LLC made additional equity investments through affiliated entities, ACP-BHC LLC and ACP-TH LLC (together with AHP-BHC LLC and AHP-TH LLC, the “Altaris Funds”), in January 2016 and May 2017.
The investments by the Altaris Funds provided liquidity for certain original stockholders, and the financial flexibility to grow our business and invest in our operations. In 2017, we acquired ALIC, a former Program Partner relationship that is a Utah-domiciled insurance company that writes workers’ compensation insurance in Utah and Arizona. In 2018, we acquired ownership interests in two additional Program Partner relationships, a 45% common equity ownership in Compstar, the parent company of Compstar Insurance Services, LLC, a general agent (“GA”) underwriting workers’ compensation insurance coverage for California contractors, and 100% ownership of Westcap Insurance Services, LLC (“Westcap”), an MGA underwriting general liability insurance coverages for California contractors. We had relationships of 11, 12 and 12 years with ALIC, Compstar Insurance Services, LLC and Westcap respectively prior to our equity investments.
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Our organizational structure
The diagram below depicts our current organizational structure:

Prior to the completion of this offering, we will effect the following transactions (the “reorganization transactions”): (i) each of Trean Holdings LLC (“Trean Holdings”) and BIC Holdings LLC (“BIC Holdings”) will contribute all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC Holdings, in exchange for shares of common stock in Trean Insurance Group, Inc., (ii) Trean Insurance Group, Inc. will acquire from Blake Baker Enterprises I, Inc., Blake Baker Enterprises II, Inc. and Blake Baker Enterprises III, Inc. (collectively, the “Blake Enterprises entities”) their 55% equity interest in Compstar Holding Company LLC (“Compstar”) in exchange for approximately 6.6 million shares of Trean Insurance Group, Inc.’s common stock, after which Trean Insurance Group, Inc. will contribute such 55% equity interest in Compstar to Trean Compstar Holdings LLC (“Trean Compstar”), so that Trean Compstar will own 100% of Compstar, (iii) upon the completion of the transfers by Trean Holdings and BIC Holdings, Trean Holdings and BIC Holdings will be dissolved and will distribute in-kind shares to the Pre-IPO Unitholders (as defined below) (including with respect to the Trean Holdings and BIC Holdings Class C units held by Randall D. Jones, one of our directors, that will become fully vested in connection with the IPO). In connection with such dissolutions and as contemplated by the operating agreements for Trean Holdings and BIC Holdings, among other things, transaction payments will be made by Trean Corporation and Benchmark to certain of the Pre-IPO Unitholders and certain other employees of Trean Corporation and/or Benchmark, which payment amounts are expected to be $3.1 million in the aggregate.
In the in-kind distribution described above, current holders of each of Trean Holdings and BIC Holdings equity interests (the “Pre-IPO Unitholders”) will receive 37,386,394 shares of common stock at an exchange rate of 0.48 shares of common stock per unit.
Assuming an initial public offering price of $14.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the completion of this offering, the Altaris Funds will hold approximately 57.6% of our common stock, 21.5% will be held by management and other Pre-IPO Unitholders and the Blake Enterprises entities and the remaining 20.9% will be held by public stockholders (or 54.8%, 21.1% and 24.1%, respectively, if the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full).
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The diagram below depicts our organizational structure immediately following this offering:

Our principal stockholders
We are, and after giving effect to this offering, will continue to be, subject to the significant influence of the Altaris Funds, our principal stockholders and selling stockholders in this offering. The Altaris Funds, immediately following the completion of this offering, are expected to own, in the aggregate, approximately 57.6% of our outstanding common stock, or 54.8% if the underwriters exercise their option to purchase additional shares to cover over-allotments in full. See “Principal and selling stockholders.” So long as the Altaris Funds own a significant amount of our outstanding common stock, the Altaris Funds may exert significant influence over us and our corporate decisions. See “Risk factors — Risks related to our common stock and this offering — Our principal stockholders will be able to exert significant influence over us and our corporate decisions.”
Corporate information
We were incorporated in the State of Delaware in January 2020. We are a newly formed corporation, have no material assets and have not engaged in any business or other activities except in connection with the reorganization. Our principal executive offices are located at 150 Lake Street West, Wayzata, MN 55391, and our telephone number is (952) 974-2200. Our website is www.trean.com. Our website and the information contained therein or connected thereto is not incorporated into this prospectus or the registration statement of which it forms a part.
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The offering
Common stock offered by us
7,142,857 shares
Common stock offered by the selling stockholders
3,571,429 shares (or 5,178,571 shares if the underwriters exercise their option to purchase additional shares of common stock in full)
Common stock to be outstanding immediately after this offering
51,142,857 shares
Use of proceeds
We estimate the net proceeds from the sale of shares by us in this offering will be approximately $88.3 million, based on an assumed initial public offering price of $14.00 per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of $4.7 million.
We intend to use the net proceeds from our sale of shares of common stock in this offering to (i) redeem all $5.1 million aggregate liquidation preference of the Series B Nonconvertible Preferred Stock of Benchmark Holding Company (the “Series B Preferred Stock”), (ii) pay $7.7 million to redeem all of our outstanding Fixed to Floating Rate Junior Subordinated Debt Securities of Trean Corporation (the “Subordinated Notes”), (iii) use $19.3 million to repay in full all outstanding term loan borrowings under the 2018 Oak Street Credit Agreement (as defined below), (iv) pay an aggregate one-time payment of approximately $7.3 million to Altaris Capital Partners, LLC in connection with the termination of our consulting and advisory agreements with Altaris Capital Partners, LLC and (v) pay an aggregate $3.1 million to certain Pre-IPO Unitholders and other employees in connection with the reorganization transactions. See “Certain relationships and related party transactions — Consulting Agreements” and “Organizational structure.” We will use all remaining proceeds for general corporate purposes, including to support the growth of our business. 
We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. See “Use of proceeds.”
Dividend policy
We currently do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, legal, tax and regulatory limitations, contractual restrictions and other factors that our board of directors considers relevant. See “Dividend policy.”
Controlled company
Upon the closing of this offering, the Altaris Funds will beneficially own more than 50% of the voting power for the election of members of our board of directors.
See “Certain relationships and related party transactions — Director Nomination Agreement.” Consequently, we will be a
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“controlled company” under the Nasdaq rules. As a controlled company, we qualify for, and intend to rely on, exemptions from certain corporate governance requirements of the Nasdaq. See “Risk factors.”
Voting rights
Shares of common stock are entitled to one vote per share. See “Description of capital stock.”
Proposed stock symbol
“TIG”
Risk factors
You should read the “Risk factors” section of this prospectus for a discussion of factors to carefully consider before deciding to invest in shares of our common stock.
The number of shares of common stock outstanding after the offering is based on our outstanding shares as of July 9, 2020, after giving effect to the reorganization transactions, and excludes 5,058,085 shares of common stock reserved for future issuance under the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan that we intend to adopt prior to the completion of this offering.
Unless otherwise indicated and except for our historical combined financial and other data and our combined financial statements and the related notes included elsewhere in this prospectus, the information in this prospectus:
assumes that the initial public offering price of the common stock will be $14.00 per share (the midpoint of the price range set forth on the cover of this prospectus);
gives effect to the completion of the reorganization transactions; and
assumes no exercise of the option granted to the underwriters to purchase up to an additional 1,607,142 shares of our common stock to cover over-allotments.
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Summary historical combined financial and other data 
The following tables present summary historical combined financial and other data of BIC Holdings LLC and Trean Holdings LLC, along with their wholly owned subsidiaries.
The summary historical combined financial and other data presented below do not purport to be indicative of the results that can be expected for any future period and should be read together with “Capitalization,” “Selected historical combined financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus.
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
 
(in thousands)
Revenues:
 
 
 
 
Gross written premiums
$107,859
$101,534
$411,401
$357,007
Increase in gross unearned premiums
(7,373)
(10,952)
(13,598)
(16,862)
Gross earned premiums
100,486
90,582
397,803
340,145
Ceded earned premiums
(78,027)
(70,958)
(311,325)
(273,569)
Net earned premiums
22,459
19,624
86,478
66,576
Net investment income
3,272
1,287
6,245
4,816
Net realized capital gains (losses)
3,234
612
667
(715)
Other revenue
4,392
3,595
9,125
7,826
Total revenue
33,357
25,118
102,515
78,503
 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
12,934
11,456
44,661
35,729
General and administrative expenses
8,160
3,969
21,005
15,706
Interest expense
461
624
2,169
1,557
Total expenses
21,555
16,049
67,835
52,992
 
 
 
 
 
Other income
14
93
121
639
Income before taxes
11,816
9,162
34,801
26,150
 
 
 
 
 
Provision for income taxes
2,912
1,319
7,074
5,546
Equity earnings (losses) in affiliates, net of tax
702
608
3,558
(1,082)
Net income
$9,606
$8,451
$31,285
$19,522
Adjusted net income(1)
$6,602
$8,369
$33,194
$22,197
 
Three months ended
March 31, 2020
Year ended
December 31, 2019
Pro forma per share data(2):
 
 
Pro forma earnings (loss) per share outstanding
 
 
Basic and diluted
$0.20
$0.68
Pro forma weighted average shares outstanding
 
 
Basic and diluted
51,142,857
51,142,857
(1)
Adjusted net income is a non-GAAP financial measure. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
(2)
Pro forma earnings per share outstanding gives pro forma effect to: (a) the issuance of 37,386,394 shares of our common stock to Trean Holdings and BIC Holdings in exchange for the contribution of all of their respective assets and liabilities to Trean Insurance Group, Inc., (b) the issuance of 6,613,606 shares of our common stock in connection with the acquisition from the Blake Enterprises entities of their 55% equity interest in Compstar, (c) the issuance of 7,142,857 shares of our common stock by us in the IPO and (d) equity in the net income of Compstar (net of tax) for the 55% that we do not currently own as if we had owned 100% of Compstar at the beginning of the period. See “Organizational structure.” See “Selected historical combined financial and other data” for the calculation of pro forma earnings per share outstanding.
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At March 31,
2020
At December 31,
 
2019
2018
 
(in thousands)
Balance sheet data:
 
 
 
Accrued investment income
$2,420
$2,468
$2,372
Premiums and other receivables
67,773
62,460
62,400
Related party receivables
21,871
22,221
15,934
Reinsurance recoverable
313,760
307,338
257,509
Prepaid reinsurance premiums
83,694
80,088
66,765
Deferred policy acquisition cost, net
3,103
2,115
2,976
Property and equipment, net
8,238
7,937
8,134
Deferred tax asset
1,280
1,367
1,823
Goodwill
2,822
2,822
2,822
Other assets
7,572
3,277
1,963
Total assets
954,583
919,034
800,119
Unpaid loss and loss adjustment expenses
418,757
406,716
340,415
Unearned premiums
111,162
103,789
90,074
Funds held under reinsurance agreements
165,018
163,445
166,838
Reinsurance premiums payable
48,099
53,620
40,135
Accounts payable and accrued expenses
18,360
14,995
15,004
Total liabilities
799,302
772,319
688,988
Redeemable preferred stock
5,100
5,100
6,000
Total members’ equity
150,181
141,615
105,131
Total liabilities and members’ equity
954,583
919,034
800,119
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
Underwriting and other ratios:
 
 
 
 
Loss ratio(1)
57.6%
58.4%
51.6%
53.7%
Expense ratio(2)
36.3%
20.2%
24.3%
23.6%
Combined ratio(3)
93.9%
78.6%
75.9%
77.3%
Return on equity(4)
26.3%
30.5%
25.5%
20.2%
Adjusted return on equity(5)
18.1%
30.2%
27.0%
23.0%
Return on tangible equity(6)
26.9%
31.4%
26.1%
20.6%
Adjusted return on tangible equity(7)
18.5%
31.1%
27.7%
23.4%
(1)
The loss ratio is the ratio, expressed as a percentage, of losses and loss adjustment expenses to net earned premiums.
(2)
The expense ratio is the ratio, expressed as a percentage, of general and administrative expenses to net earned premiums.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
(4)
Return on equity represents net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period.
(5)
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
(6)
Return on tangible equity is a non-GAAP financial measure defined as net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of return on tangible equity to return on equity in accordance with GAAP.
(7)
Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
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Risk factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all the other information contained in this prospectus, including our combined financial statements and the related notes, before deciding to invest in our common stock. The risks and uncertainties described below are not the only ones facing us. There may be additional risks and uncertainties of which we currently are unaware or that we currently believe to be immaterial. If any of these risks or uncertainties occurs, our business, financial condition and results of operations may be materially adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your investment.
Risks related to our business and industry
Failure of our Program Partners or our Owned MGAs to properly market, underwrite or administer policies could adversely affect us.
The marketing, underwriting, claims administration and other administration of policies in connection with our issuing carrier services and for business written directly by our Owned MGAs are the responsibility of our Program Partners and our Owned MGAs. Any failure by them to properly handle these functions could result in liability to us. Even though our Program Partners may be required to compensate us for any such liability, there are risks that they do not pay us because they become insolvent or otherwise. Any such failures could create regulatory issues or harm our reputation, which could materially and adversely affect our business, financial condition and results of operations.
We depend on a limited number of Program Partners for a substantial portion of our gross written premiums.
We source a significant amount of our premiums from our Program Partners, which are generally MGAs and insurance companies. Historically, we have focused our business on a limited group of core Program Partners and have sought to grow the business by expanding existing Program Partner relationships and selectively adding new Program Partners.
For the years ended December 31, 2019 and 2018, approximately 34% and 42% of our gross written premiums was derived from our top ten Program Partners.
A significant decrease in business from, or the entire loss of, our largest Program Partners or several of our other Program Partners may materially adversely affect our business, financial condition and results of operations.
More than half of our gross written premiums are written in three key states.
For the year ended December 31, 2019, we derived approximately 49%, 9% and 8%, respectively, of our gross written premiums in the states of California, Michigan and Arizona. As a result, our financial results are subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in these states, in particular our gross written premiums in California. Adverse developments relating to any of these conditions could materially adversely affect our business, financial condition and results of operations.
A downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries may negatively affect our business.
A.M. Best financial strength ratings (“FSRs”) are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated for overall financial strength by A.M. Best. These FSRs reflect A.M. Best’s opinion of our insurance company subsidiaries’ financial strength, operating performance, strategic position and ability to meet obligations to policyholders, and are not evaluations directed to investors. Our insurance company subsidiaries’ FSRs are subject to periodic review, and the criteria used in the rating methodologies are subject to change. While our insurance company subsidiaries are rated “A” (Excellent), their FSRs are subject to change. A significant portion of our business is conducted through small- and mid-sized insurance carriers, program managers and other insurance organizations that do not have an A.M. Best financial strength rating or
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require a highly rated carrier, such as ourselves, to meet their business objectives. A significant downgrade in our insurance company subsidiaries’ FSRs could lead to our Program Partners doing business with other insurance companies and materially adversely affect our business, financial condition and results of operations.
If we are unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders, our business, financial condition and results of operations may be materially and adversely affected.
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses and loss adjustment expenses (“LAE”) and other general and administrative expenses in order to earn a profit. If we do not accurately assess the risks that we assume, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower policyholder retention, resulting in lower revenues. Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. To accurately price our policies, we must:
collect and properly analyze a substantial volume of data from our insureds;
develop, test and apply appropriate actuarial projections and ratings formulas;
closely monitor and timely recognize changes in trends; and
project both frequency and severity of our insureds’ losses with reasonable accuracy.
We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:
insufficient or unreliable data;
incorrect or incomplete analysis of available data;
uncertainties generally inherent in estimates and assumptions;
our failure to implement appropriate actuarial projections and ratings formulas or other pricing methodologies;
regulatory constraints on rate increases;
our failure to accurately estimate investment yields and the duration of our liability for losses and LAE; and
unanticipated court decisions, legislation or regulatory action.
We may be unable to access the capital markets when needed, which may adversely affect our ability to take advantage of business opportunities as they arise and to fund our operations in a cost-effective manner.
Our ability to grow our business, either organically or through acquisitions, depends, in part, on our ability to access capital when needed. Capital markets may become illiquid from time to time, and we cannot predict the extent and duration of future economic and market disruptions or the impact of any government interventions. We may not be able to obtain financing on terms acceptable to us, or at all. If we need capital but cannot raise it or cannot obtain financing on terms acceptable to us, our business, financial condition and results of operations may be materially adversely affected and we may be unable to execute our long-term growth strategy.
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Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability.
Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can affect the business and economic environment. These same factors affect our ability to generate revenue and profits. In an economic downturn that is characterized by higher unemployment, declining spending and reduced corporate revenues, the demand for insurance products is generally adversely affected, which directly affects our premium levels and profitability. Prolonged and high unemployment that reduces the payrolls of our insureds would reduce the premiums that we are able to collect. Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure and may adversely affect our opportunities to underwrite profitable business.
Negative developments in the workers’ compensation insurance industry could adversely affect our business, financial condition and results of operations.
Although we engage in other businesses, 82.8% of our gross written premiums for the year ended December 31, 2019 were attributable to workers’ compensation insurance policies providing both primary and excess coverage. As a result, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have a material adverse effect on our business, financial condition and results of operations. If one of our larger markets were to enact legislation to increase the scope or amount of benefits for employees under workers’ compensation insurance policies without related premium increases or loss control measures, this could negatively affect our business, financial condition and results of operations.
The insurance industry is cyclical in nature.
The financial performance of the insurance industry has historically fluctuated with periods of lower premium rates and excess underwriting capacity resulting from increased competition followed by periods of higher premium rates and reduced underwriting capacity resulting from decreased competition. Although the financial performance of an individual insurance company depends on its own specific business characteristics, the profitability of many insurance companies tends to follow this cyclical market pattern. Because this market cyclicality is due in large part to the actions of our competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. We expect these cyclical patterns will cause our revenues and net income to fluctuate, which may cause the market price of our common stock to be more volatile.
Our failure to accurately and timely pay claims could harm our business.
We must accurately and timely evaluate and pay claims to manage costs and close claims expeditiously. Many factors affect our ability to evaluate and pay claims accurately and timely, including the training and experience of our claims staff, our claims department’s culture and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to accurately and timely pay claims could lead to regulatory and administrative actions or material litigation, undermine our reputation in the marketplace and materially and adversely affect our business, financial condition and results of operations.
If we do not hire and train new claims staff effectively or if we lose a significant number of experienced claims staff, our claims department may be required to handle an increasing workload, which could adversely affect the quality of our claims administration, and our business could be materially and adversely affected.
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The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and economic, legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include, but are not limited to:
judicial expansion of policy coverage and the impact of new theories of liability;
plaintiffs targeting property and casualty (“P&C”) insurers in purported class action litigation relating to claims-handling and other practices;
medical developments that link health issues to particular causes, resulting in liability claims; and
claims relating to unanticipated consequences of current or new technologies, including cyber-security related risks and claims relating to potentially changing climate conditions.
In some instances, these emerging issues may not become apparent for some time after we have issued the affected insurance policies. As a result, the full extent of liability under our insurance policies may not be known until many years after the policies are issued.
In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on our business.
The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict and could harm our business and materially adversely affect our results of operations.
Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk.
We have developed and continue to develop enterprise-wide risk management policies and procedures to mitigate risk and loss to which we are exposed. There are inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not anticipated or identified. If our risk management policies and procedures are ineffective, we may suffer unexpected losses and could be materially adversely affected. As our business changes and the niches in which we operate evolve, our risk management framework may not evolve at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not identified, monitored or managed. In times of market stress, unanticipated market movements or unanticipated claims experience, the effectiveness of our risk management strategies may be limited, resulting in losses to us. In addition, we may be unable to effectively review and monitor all risks and our employees may not follow our risk management policies and procedures.
The National Association of Insurance Commissioners (the “NAIC”) and state legislatures and regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to insurers. Our insurance company subsidiaries are subject to regulation in Kansas, the state of domicile of Benchmark, California, where Benchmark is commercially domiciled, and Utah, the state of domicile of ALIC. The Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department, the primary regulators of our insurance company subsidiaries, have adopted regulations implementing a requirement under the Kansas, California and Utah insurance laws, respectively, for insurance holding companies to adopt a formal enterprise risk management (“ERM”) function and to file an annual enterprise risk report. The regulations also require domestic insurers to conduct an Own Risk and Solvency Assessment (“ORSA”) and to submit an ORSA summary report prepared in accordance with the NAIC’s ORSA Guidance Manual. While we operate within an ERM framework designed to assess and monitor our risks, we may not be able to effectively review and monitor all risks, our employees may not all operate within the ERM framework and our ERM framework may not result in our accurately identifying all risks and limiting our exposures based on our assessments.
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We are subject to reinsurance counterparty credit risk. Our reinsurers may not pay on losses in a timely fashion, or at all.
We purchase reinsurance to transfer part of the risk we have assumed (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to policyholders. Accordingly, we are exposed to credit risk with respect to our reinsurers to the extent the reinsurance receivable is not sufficiently secured by collateral or does not benefit from other credit enhancements. We also bear the risk that a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverable for any reason, including that:
the terms of the reinsurance contract do not reflect the intent of the parties of the contract or there is a disagreement between the parties as to their intent;
the terms of the contract cannot be legally enforced;
the terms of the contract are interpreted by a court or arbitration panel differently than intended;
the reinsurance transaction performs differently than we anticipated due to a flawed design of the reinsurance structure, terms or conditions; or
a change in laws and regulations, or in the interpretation of the laws and regulations, materially affects a reinsurance transaction.
The insolvency of one or more of our reinsurers, or inability or unwillingness to make timely payments under the terms of our contracts, could materially adversely affect our business, financial condition and results of operations.
If we are unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us, we may be required to bear increased risks or reduce the level of our underwriting commitments.
Our insurance company subsidiaries purchase reinsurance as part of our overall risk management strategy. While reinsurance does not discharge our insurance company subsidiaries from their obligation to pay claims for losses insured under their insurance policies, it does make the reinsurer liable to them for the reinsured portion of the risk. As part of our strategy for our issuing carrier business, we reinsure underwriting risk to third-party reinsurers. At the inception of a new program, we typically act as an issuing carrier where we reinsure a substantial amount of such risk to third parties. For these reasons, reinsurance is an important tool to manage transaction and insurance risk retention and to mitigate losses. We may be unable to maintain our current reinsurance arrangements or to obtain other reinsurance in adequate amounts and at favorable rates, particularly if reinsurers become unwilling or unable to support our specialized issuing carrier model in the future. Additionally, market conditions beyond our control may impact the availability and cost of reinsurance and could have a material adverse effect on our business, financial condition and results of operations. In recent years, our Program Partners have benefitted from favorable market conditions, including growth in the role of MGAs and of offshore and other alternative sources of reinsurance. A decline in the availability of reinsurance, increases in the cost of reinsurance or a decreased level of activity by MGAs could limit the amount of issuing carrier business we could write and materially and adversely affect our business, financial condition, results of operations and prospects. We may, at certain times, be forced to incur additional costs for reinsurance or may be unable to obtain sufficient reinsurance on terms acceptable to us. In the latter case, we would have to accept an increase in exposure to risk, reduce the amount of business written by our insurance company subsidiaries or seek alternatives in line with our risk limits, all of which could materially adversely affect our business, financial condition and results of operations.
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Some of our issuing carrier arrangements contain limits on the reinsurer’s obligations to us.
While we reinsure underwriting risk in our issuing carrier business, including a substantial amount of such risk at the inception of a new program, we have in certain cases entered into programs that contain limits on our reinsurers’ obligations to us, including loss ratio caps or aggregate reinsurance limits. To the extent losses under these programs exceed the prescribed limits, we will be liable to pay the losses in excess of such limits, which could materially and adversely affect our business, financial condition and results of operations.
Retention of business written by our Program Partners could expose us to potential losses.
We retain risk for our own account on business underwritten by our insurance company subsidiaries. The determination to reduce the amount of reinsurance we purchase, or not to purchase reinsurance for a particular risk, customer segment or niche is based on a variety of factors, including market conditions, pricing, availability of reinsurance, our capital levels and loss experience. Retention increases our financial exposure to losses and significant losses could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our loss reserves may be inadequate to cover our actual losses.
Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related LAE. Loss reserves are estimates of the ultimate cost of claims and do not represent a precise calculation of any ultimate liability. These estimates are based on historical information and on estimates of future trends that may affect the frequency and severity of claims that may be reported in the future. Estimating loss reserves is a difficult, complex and inherently uncertain process involving many variables and subjective judgments. As part of the reserving process, we review historical data and consider the impact of various factors such as:
loss emergence and cedant reporting patterns;
underlying policy terms and conditions;
business and exposure mix;
trends in claim frequency and severity;
changes in operations;
emerging economic and social trends;
inflation; and
changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. It also assumes that adequate historical or other data exists upon which to make these judgments. For more information on the estimates used in the establishment of loss reserves, see “Management’s discussion and analysis of financial condition and results of operations — Critical accounting estimates — Reserves for unpaid losses and loss adjustment expenses.” There, however, is no precise method for evaluating the impact of any specific factor on the adequacy of reserves and actual results are likely to differ from original estimates, perhaps materially. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability could suffer.
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We may not be able to manage our growth effectively.
We intend to grow our business in the future, which could require additional capital, systems development and skilled personnel. We, however, must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees or effectively incorporate any acquisitions we make in our effort to achieve growth. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.
Our ability to grow our business will depend in part on the addition of new Program Partners, and our inability to effectively onboard such new Program Partners could have a material adverse effect on our business, financial condition and results of operations.
Our ability to grow our business will depend in part on the addition of new Program Partners. If we do not effectively onboard our new Program Partners, including assisting such Program Partners to quickly resolve any post-onboarding issues and provide effective ongoing support, our ability to add new Program Partners and our relationships with our existing Program Partners could be adversely affected. Additionally, our reputation with potential new customers could be damaged. If we fail to meet the requirements of our customers, it may be more difficult to execute on our strategy to retain Program Partners, which could have a material adverse effect on our business, financial condition and results of operations.
We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel.
We depend on our ability to attract and retain experienced personnel and seasoned key executives who are knowledgeable about our business. The pool of talent from which we actively recruit is may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions. As such, higher demand for employees having the desired skills and expertise could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired levels. We do not have employment agreements with our executive officers. Should any of our executives terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our business and results of operations.
Technology breaches or failures of our or our business partners’ systems could adversely affect our business.
Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems and those of our business partners or service providers to sophisticated and targeted measures known as advanced persistent threats. While we and our business partners and service providers employ measures designed to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of information technology networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data (personal or otherwise) and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. In 2020, we discovered that we were subject to a cybersecurity incident that involved a third party obtaining unauthorized access to an employee’s electronic mailbox that was compromised in August 2019 through a phishing email. In conjunction with our cyber insurance carrier, we engaged outside counsel and a consulting firm specializing in digital forensics. While we do not believe the incident will have a material adverse effect on our business, financial performance and reputation, our investigation is ongoing and the ultimate effect of the incident is uncertain. Our evaluation, together with outside counsel, of whether data breach notifications may be required or appropriate in connection with this incident is ongoing, but we may decide to make such notifications in the future. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of our technology systems (or the data held by such systems) could affect our operations. We may not have the resources or technical sophistication to anticipate or prevent every type of cyber-attack. A significant cybersecurity
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incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, expose us to litigation and potential liability, damage our reputation, cause a loss of customers or give rise to monetary fines and other penalties, any or all of which could be material. It is possible that insurance coverage we have in place would not entirely protect us in the event that we experienced a cybersecurity incident, interruption or widespread failure of our information technology systems.
Any significant interruption in the operation of our computer systems could adversely affect our business, financial condition and results of operations.
We rely on multiple computer systems to interact with customers, issue policies, pay claims, run modeling functions, assess insurance risks and complete various important internal processes including accounting and bookkeeping. Our business depends on our ability to access these systems to perform necessary business functions. Additionally, some of these systems may include or rely upon third-party systems not located on our premises. Any of these systems may be exposed to unplanned interruption, unreliability or intrusion from a variety of causes, including among others, storms and other natural disasters, terrorist attacks, utility outages, security breaches or complications encountered as existing systems are replaced or upgraded.
Any such issues could materially affect us including the impairment of information availability, compromise of system integrity or accuracy, misappropriation of confidential information, reduction of our volume of transactions and interruption of our general business. Although we believe our computer systems are securely protected and continue to take steps to ensure they are protected against such risks, such problems may occur. If they do, interruption to our business and damage to our reputation, and related costs, could be significant, which could have a material adverse effect on our business, financial condition and results of operations.
Performance of our investment portfolio is subject to a variety of investment risks.
Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a high-quality portfolio of investments that is managed by a professional investment advisory management firm in accordance with our investment policy and routinely reviewed by our management team. Our investments, however, are subject to general economic conditions and market risks as well as risks inherent to particular securities.
Our primary market risk exposures are to changes in interest rates. See “Management’s discussion and analysis of financial condition and results of operations — Quantitative and qualitative disclosures about market risk.” In recent years, interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our net investment income, which, in turn, may adversely affect our profitability. Future increases in interest rates could cause the values of our fixed income securities portfolios to decline, with the magnitude of the decline depending on the duration of securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as mortgage-backed and asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.
The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities.
Such factors could reduce our net investment income and result in realized investment losses. Our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we hold in our portfolio does not reflect prices at which actual transactions would occur.
Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include maximum percentages of investment in certain types of
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securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the NAIC, the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department. Our investment objectives may not be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses.
Any shift in our investment strategy could increase the riskiness of our investment portfolio and the volatility of our results, which, in turn, may adversely affect our profitability.
Our investment strategy has historically been focused on fixed income securities which are subject to less volatility but also lower returns as compared to certain other asset classes. In the future, our investment strategy may include a greater focus on investments in equity securities, which are subject, among other things, to changes in value that may be attributable to market perception of a particular issuer or to general stock market fluctuations that affect all issuers. Investments in equity securities may be more volatile than investments in other asset classes such as fixed income securities. Common stocks generally subject their holders to more risks than preferred stocks and debt securities because common stockholders’ claims are subordinated to those of holders of preferred stocks and debt securities upon the bankruptcy of the issuer. An increase in the riskiness of our investment portfolio could lead to volatility of our results, which, in turn, may adversely affect our profitability.
We could be forced to sell investments to meet our liquidity requirements.
We invest the premiums we receive from our insureds until they are needed to pay policyholder claims. Consequently, we seek to manage the duration of our investment portfolio based on the duration of our losses and loss adjustment expenses reserves to ensure sufficient liquidity and avoid having to liquidate investments to fund claims. Risks such as inadequate losses and loss adjustment expenses reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. We may not be able to sell our investments at favorable prices or at all. Sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities.
We may face increased competition in our programs market.
While we believe there are relatively few competitors in the small- and mid-sized programs market that have the broad in-house expertise and wide array of services that we offer to our Program Partners, we may face increased competition if other companies decide to compete with us in our programs market or competitors begin to offer policy administration or other services. Any increase in competition in this market, especially by one or more companies that have greater resources than we have, could materially adversely affect our business, financial condition and results of operations.
We compete with a large number of companies in the insurance industry for underwriting premium.
We compete with a large number of other companies in the insurance industry for underwriting premium. During periods of intense competition for premium, we are exposed to the actions of other companies that may seek to write policies without the appropriate regard for risk and profitability. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.
We face competition from a wide range of specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than we are and that have significantly greater financial, marketing, management and other resources. Some of these competitors also have greater market recognition than we do. We may incur increased costs in competing for underwriting revenues. If we are unable to compete effectively in the markets in which we operate or expand our operations into new markets, our underwriting revenues may decline, as well as overall business results.
Our results of operations, liquidity, financial condition and FSRs are subject to the effects of natural and man-made catastrophic events.
Events such as hurricanes, windstorms, flooding, earthquakes, wildfires, solar storms, acts of terrorism, explosions and fires, cyber-crimes, public health crises, illness, epidemics or pandemic health events,
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product defects, mass torts and other catastrophes may adversely affect our business in the future. Such catastrophic events, and any relevant regulations, could expose us to:
widespread claim costs associated with P&C and workers’ compensation claims;
losses resulting from a decline in the value of our invested assets;
losses resulting from actual policy experience that is adverse compared to the assumptions made in product pricing;
declines in value and/or losses with respect to companies and other entities whose securities we hold and counterparties with whom we transact business to whom we have credit exposure, including reinsurers, and declines in the value of investments; and
significant interruptions to our systems and operations.
Natural and man-made catastrophic events are generally unpredictable. While we have structured our business and selected our niches in part to avoid catastrophic losses, our exposure to such losses depends on various factors, including the frequency and severity of the catastrophes, the rate of inflation and the value and geographic or other concentrations of insured companies and individuals. Vendor models and proprietary assumptions and processes that we use to manage catastrophe exposure may prove to be ineffective due to incorrect assumptions or estimates.
In addition, legislative and regulatory initiatives and court decisions following major catastrophes could require us to pay the insured beyond the provisions of the original insurance policy and may prohibit the application of a deductible, resulting in inflated catastrophe claims.
These and other disruptions could materially and adversely affect our business, financial condition and results of operations.
Disruptions related to COVID-19, including economic impacts of the COVID-19-related governmental actions, could materially and adversely affect our business, financial condition and results of operations.
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the U.S., and was declared a pandemic by the World Health Organization on March 11, 2020. The global outbreak of COVID-19 continues to rapidly evolve and has resulted in quarantines, reductions in business activity, widespread unemployment and overall economic and financial market instability. In addition, the ongoing continuation of the COVID-19 pandemic and the economic impacts of COVID-19-related governmental actions may also eventually have an impact on our premium revenue, our loss experience and loss expense, liquidity, or our regulatory capital and surplus, and operations.
It is still too early to determine the ultimate effect that the economic shutdown, resulting from the COVID-19 pandemic, will have on our future revenues or expected claims and losses. Legislative and regulatory initiatives taken, or which may be taken in response to COVID-19, may adversely affect our operations, particularly with respect to our workers’ compensation businesses. Adverse effects could include:
Legislative or regulatory action seeking to retroactively mandate coverage for losses, which our policies would not otherwise cover or have been priced to cover;
Regulatory actions relaxing reporting requirements for claims, which may affect coverage under our claims made and reported policies;
Legislative actions prohibiting us from cancelling policies in accordance with our policy terms or non-renewing policies at their expiration date;
Legislative orders to provide premium refunds, extend premium payment grace periods and allow time extensions for past due premium payments;
We may have increased workers’ compensation loss expense and claims frequency if policyholder employees in high risk roles with essential businesses contract COVID-19 in the workplace;
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While we have seen through the two months ended May 31, 2020 fewer claims reported despite insuring more employees and have not seen a significant impact on the average value of incurred losses due to the COVID-19 pandemic, high unemployment and low interest rates could adversely affect our profitability and declining payrolls could adversely affect our workers' compensation written premiums;
Travel restrictions and quarantines leading to a lack of in-person meetings, which would hinder our ability to establish relationships or originate new business;
Alternative working arrangements, including employees working remotely, which could negatively impact our business should such arrangements remain for an extended period of time;
We may experience elevated frequency and severity in our workers’ compensation lines as a result of legislative or regulatory action to effectively expand workers’ compensation coverage for certain types of workers; and
We may experience delayed reporting of losses, settlement negotiations and disputed claims resolution above our normal claims resolution trends.
The occurrence of any of these events or experiences, individually or collectively, could materially and adversely affect our business, financial condition and results of operations.
Global climate change may in the future increase the frequency and severity of weather events and resulting losses, particularly to the extent our policies are concentrated in geographic areas where such events occur, may have an adverse effect on our business, financial condition and results of operations.
Scientific evidence indicates that man-made production of greenhouse gas has had, and will continue to have, an adverse effect on the global climate. There is a growing consensus today that climate change increases the frequency and severity of extreme weather events and, in recent years, the frequency of extreme weather events appears to have increased. We cannot predict whether or to what extent damage that may be caused by natural events, such as wild fires, severe tropical storms and hurricanes, will affect our ability to write new insurance policies and reinsurance contracts, but, to the extent our policies are concentrated in the specific geographic areas in which these events occur, the increased frequency and severity of such events and the total amount of our loss exposure in the impacted areas of such events may adversely affect our business, financial condition and results of operations. In addition, although we have historically had limited exposure to catastrophic risk, claims from catastrophe events could reduce our earnings and cause substantial volatility in our business, financial condition and results of operations for any period. However, assessing the risk of loss and damage associated with the adverse effects of climate change and the range of approaches to address loss and damage associated with the adverse effects of climate change, including impacts related to extreme weather events and slow onset events, remains a challenge and might adversely affect our business, financial condition and results of operations.
Because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results.
Certain premiums from policyholders, where the business is produced by brokers, are collected directly by the brokers and forwarded to our insurance subsidiary. In certain jurisdictions, when the insured pays its policy premium to its broker for payment on behalf of our insurance subsidiary, the premium may be considered to have been paid under applicable insurance laws and regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually received the premium from that broker. Consequently, we assume a degree of credit risk associated with the brokers with whom we work. Where necessary, we review the financial condition of potential new brokers before we agree to transact business with them. Although the failure by any of our brokers to remit premiums to us has not been material to date, there may be instances where our brokers collect premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth in the policy despite the absence of related premiums being paid to us.
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Because the possibility of these events occurring depends in large part on the financial condition and internal operations of our brokers, we monitor broker behavior and review financial information on an as-needed basis. If we are unable to collect premiums from our brokers in the future, our underwriting profits may decline and our financial condition and results of operations could be materially and adversely affected.
Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term prospects.
Our operating results are subject to fluctuation and have historically varied from quarter to quarter. We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophic or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected renewal rates of our existing policies and contracts, adverse investment performance and the cost of reinsurance coverage.
In particular, we seek to underwrite products and make investments to achieve favorable returns on tangible stockholders’ equity over the long term. In addition, our opportunistic nature and focus on long-term growth in tangible equity may result in fluctuations in gross written premiums from period to period as we concentrate on underwriting contracts that we believe will generate better long-term, rather than short-term, results. Accordingly, our short-term results of operations may not be indicative of our long-term prospects.
Changes in accounting practices and future pronouncements may materially affect our reported financial results.
Developments in accounting practices may require us to incur considerable additional expenses to comply, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, stockholders’ equity and other relevant financial statement line items.
Our insurance subsidiaries are required to comply with statutory accounting principles (“SAP”). SAP and various components of SAP are subject to constant review by the NAIC and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues and otherwise improve financial reporting. Various proposals are pending before committees and task forces of the NAIC, some of which, if enacted, could have negative effects on insurance industry participants. The NAIC continuously examines existing laws and regulations. We cannot predict whether or in what form such reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect us.
Legal and regulatory risks
We are subject to extensive regulation.
Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. These regulations, generally administered by a department of insurance in each state and territory in which we do business, relate to, among other things:
approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers;
challenging our use of fronting arrangements in states in which our Program Partner is not licensed;
imposing minimum capital and surplus requirements for insurance company subsidiaries;
restrictions on agreements with our large revenue-producing agents;
cancellation and non-renewal of policies;
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restrictions on the nature, quality and concentration of investments;
restrictions on the ability of our insurance company subsidiaries to pay dividends to us;
restrictions on transactions between our insurance company subsidiaries and their affiliates;
restrictions on the size of risks insurable under a single policy;
requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
prescribing the form and content of records of financial condition required to be filed; and
requiring reserves for unearned premium, losses and other purposes.
State insurance departments also conduct periodic examinations of the conduct and affairs of insurance companies and require the filing of annual, quarterly and other reports relating to financial condition, holding company issues, ERM and ORSA and other matters. These regulatory requirements could adversely affect or inhibit our ability to achieve some or all of our business objectives, including profitable operations in our various customer segments.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could fine us, preclude or temporarily suspend us from carrying on some or all of our activities in certain jurisdictions or otherwise penalize us. This could adversely affect our ability to operate our business. Further, changes in the laws and regulations applicable to the insurance industry or interpretations by regulatory authorities could adversely affect our ability to operate our business as currently conducted and in accordance with our business objectives.
In addition to regulations specific to the insurance industry, including the insurance laws of our principal state regulators (the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department), as a public company we will also be subject to the rules and regulations of the SEC and the securities exchange on which our common stock is listed, each of which regulate many areas such as financial and business disclosures, corporate governance and stockholder matters. Among other laws, we are subject to laws relating to federal trade restrictions, privacy/data security and terrorism risk insurance laws.
We monitor these laws, regulations and rules on an ongoing basis to ensure compliance and make appropriate changes as necessary. Implementing such changes may require adjustments to our business methods, increases to our costs and other changes that could cause us to be less competitive in our industry. For further information on the regulation of our business, see “Regulation.”
Regulators may challenge our use of fronting arrangements in states in which our Program Partners are not licensed.
We enter into fronting, or issuing carrier, arrangements with our Program Partners that require a broadly licensed, highly rated admitted carrier to conduct their business in states in which such Program Partner is not licensed or is not authorized to write particular lines of insurance. We typically act as the reinsurance broker to the program as well as the issuing carrier, which enables us to charge fees for the placement of reinsurance in addition to the fronting fees. We also receive ceding commissions from third-party reinsurers to which we transfer all or a portion of the underwriting risk. Some state insurance regulators may object to our issuing carrier arrangements. In certain states, including Florida and Kentucky, the insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no statutory or regulatory prohibition against an authorized insurer acting as an issuing carrier for an unauthorized insurer could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
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If regulators in any of the states where we conduct our issuing carrier business were to prohibit or limit the arrangement, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material and adverse effect on our business, financial condition and results of operations. See “— More than half of our gross written premiums are written in three key states.”
Regulation may become more extensive in the future.
Legislators and regulators may periodically consider various proposals that may affect our business practices and product designs, how we sell or service certain products we offer or the profitability of our business. We continually monitor such proposals and assess how they may apply to us or our competitors or how they could impact our business, financial condition, results of operations and ability to compete effectively.
Increasing regulatory focus on privacy issues and expanding laws could affect our business model and expose us to increased liability.
The regulatory environment surrounding information security and privacy is increasingly demanding.
We are subject to numerous U.S. federal and state laws and non-U.S. regulations governing the protection of personal and confidential information of our customers or employees. On October 24, 2017, the National Association of Insurance Commissioners (“NAIC”) adopted an Insurance Data Security Model Law, which requires licensed insurance entities to comply with detailed information security requirements. The NAIC model law has been adopted by certain states and is under consideration by others. It is not yet known whether or not, and to what extent, states legislatures or insurance regulators where we operate will enact the Insurance Data Security Model Law in whole or in part, or in a modified form. Such enactments, especially if inconsistent between states or with existing laws and regulations could raise compliance costs or increase the risk of noncompliance, with the attendant risk of being subject to regulatory enforcement actions and penalties, as well as reputational harm. Any such events could potentially have an adverse impact on our business, financial condition or results of operations.
As a holding company, we rely on dividends and payments from our subsidiaries to operate our business. Our ability to receive dividends and permitted payments from our insurance company subsidiaries is subject to regulatory constraints.
We are a holding company and, as such, have no direct operations of our own. We do not expect to have any significant assets other than our ownership of equity interests in our operating subsidiaries. We accordingly depend on the payment of funds from our subsidiaries in the form of dividends, distributions or otherwise to meet our obligations and to pay our expenses. The ability of our subsidiaries to make any payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions.
In addition, dividends payable from our insurance company subsidiaries without the prior approval of the applicable insurance commissioner are limited to the greater of 10% of Benchmark’s surplus as shown on the last statutory financial statement on file with the Kansas Insurance Department and the California Department of Insurance, respectively, or 100% of net income during the applicable twelve-month period (not including realized capital gains); and in Utah, the lesser of 10% of ALIC’s surplus as shown on the last statutory financial statement on file with the Utah Insurance Department, 100% of net income during the applicable twelve-month period (not including realized capital gains). As of December 31, 2019, the maximum amount of unrestricted dividends that our insurance company subsidiaries could pay to us without approval was $11.6 million. Our insurance company subsidiaries may be unable to pay dividends in the future, and the limitations of such dividends could adversely affect our business, liquidity or financial condition.
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The effects of litigation on our business are uncertain and could have an adverse effect on our business.
As is typical in our industry, we continually face risks associated with litigation of various types, including general commercial and corporate litigation, and disputes relating to bad faith allegations which could result in us incurring losses in excess of policy limits. We are party to certain litigation matters throughout the year, mostly with respect to claims. Litigation is subject to inherent uncertainties, and if there were an outcome unfavorable to us, there exists the possibility of a material adverse impact on our results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not materialize, we still may face substantial expense and disruption associated with the litigation.
We may have exposure to losses from acts of terrorism as we are required by law to provide certain coverage for such losses.
U.S. insurers are required by state and federal law to offer coverage for acts of terrorism in certain commercial lines, including workers’ compensation. The Terrorism Risk Insurance Act, as extended by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”) requires commercial P&C insurance companies to offer coverage for acts of terrorism, whether foreign or domestic, and established a federal assistance program through the end of 2020 to help cover claims related to future terrorism-related losses. The likelihood and impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Although we reinsure a portion of the terrorism risk we retain under TRIPRA, our terrorism reinsurance does not provide full coverage for an act stemming from nuclear, biological or chemical terrorism. To the extent an act of terrorism, whether a domestic or foreign act, is certified by the Secretary of Treasury, we may be covered under TRIPRA of our losses for certain P&C lines of insurance. However, any such coverage would be subject to a mandatory deductible based on 20% of earned premium for the prior year for the covered lines of commercial P&C insurance. Based on our 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 is approximately $59 million. The federal government will then reimburse us for losses in excess of our deductible, which will be 81% of losses in 2019, and 80% in 2020, up to a total industry program limit of  $100 billion.
Assessments and premium surcharges for state guaranty funds, secondary-injury funds, residual market programs and other mandatory pooling arrangements may reduce our profitability.
Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. Some states also have laws that establish secondary-injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on incurred losses.
In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in any given period or limit our ability to grow our business.
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Risks related to our common stock and this offering
There is no public market for our common stock and a market may never develop.
Prior to this offering, there has been no public market for our common stock. Although our common stock will be listed on the Nasdaq, an active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The price for our common stock in this offering will be determined by negotiations among us, the selling stockholders and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your shares of our common stock at or above the initial public offering price or at any other price, or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock, our ability to motivate our employees and sales representatives through equity incentive awards, and our ability to acquire other companies, products or technologies by using our common stock as consideration.
If securities analysts do not publish research or reports about our business or our industry or if they issue unfavorable commentary or negative recommendations with respect to our common stock, the price of our common stock could decline.
The trading market for our common stock will be influenced by the research and reports that equity research and other securities analysts publish about us, our business and our industry. We do not have control over these analysts and we may be unable or slow to attract research coverage. One or more analysts could issue negative recommendations with respect to our common stock or publish other unfavorable commentary or cease publishing reports about us, our business or our industry. If one or more of these analysts cease coverage of us, we could lose visibility in the market. As a result of one or more of these factors, the market price of our common stock price could decline rapidly and our common stock trading volume could be adversely affected.
Our stock price may be volatile or may decline regardless of our operating performance.
Some factors that may cause the market price of our common stock to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:
our operating and financial performance and prospects;
our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;
changes in earnings estimates or recommendations by securities analysts who cover our common stock;
fluctuations in our quarterly financial results or earnings guidance or the quarterly financial results or earnings guidance of companies perceived to be similar to us;
changes in our capital structure, such as future issuances of securities, sales of large blocks of common stock by our stockholders, including our principal stockholders, or the incurrence of additional debt;
departure of key personnel;
reputational issues;
changes in general economic and market conditions;
changes in industry conditions or perceptions or changes in the market outlook for the insurance industry; and
changes in applicable laws, rules or regulations, regulatory actions affecting us and other dynamics.
The securities markets have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies.
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These broad market fluctuations, as well as general market, economic and political conditions, such as recessions, loss of investor confidence or interest rate changes, may negatively affect the market price of our common stock. In addition, price volatility may be greater if the public float and trading volume of shares of our common stock are low.
Our principal stockholders will be able to exert significant influence over us and our corporate decisions.
Immediately following this offering, our principal stockholders, the Altaris Funds, will hold approximately 57.6% of our common stock or 54.8% if the underwriters exercise their option to purchase additional shares of common stock to cover over-allotments in full. As a result, our principal stockholders are able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. Our principal stockholders may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of us, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of us and may ultimately affect the market price of our common stock.
As long as our principal stockholders own a majority of our common stock, we may rely on certain exemptions from the corporate governance requirements of the Nasdaq available for “controlled companies.”
Upon the completion of this offering, we will be a “controlled company” within the meaning of the corporate governance listing requirements of the Nasdaq because our principal stockholders will continue to own more than 50% of our outstanding common stock. A controlled company may elect not to comply with certain corporate governance requirements of the Nasdaq. Accordingly, our board of directors will not be required to have a majority of independent directors and our compensation, nominating and corporate governance committee will not be required to meet the director independence requirements to which we would otherwise be subject until such time as we cease to be a “controlled company.” If we elect to rely on “controlled company” exemptions, you will not have certain of the protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq.
Our principal stockholders could sell their interests in us to a third party in a private transaction, which may result in your not realizing any change-of-control premium on your shares and subject us to the influence of a currently unknown third party.
Following the completion of this offering, our principal stockholders will continue to beneficially own more than 50% of our common stock. Our principal stockholders will have the ability, should they choose to do so, to sell some or all of their shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in another party gaining significant influence over us.
The ability of our principal stockholders to sell their shares of our common stock privately, with no requirement for a concurrent offer to be made to acquire all of the shares of our outstanding common stock that will be publicly traded after this offering, could prevent you from realizing any change-of-control premium on your shares of our common stock that may accrue to our principal stockholders upon their private sales of our common stock.
Future sales, or the perception of future sales, of our common stock may depress our stock price.
If our stockholders sell a large number of shares of our common stock, or if we issue a large number of shares of our common stock in connection with future acquisitions, financings, or other circumstances, the market price of shares of our common stock could decline significantly. Moreover, the perception in the public market that our stockholders may sell shares of our common stock could depress the market price of those shares. In addition, sales of a substantial number of shares of our common stock by our principal stockholders could adversely affect the market price of our common stock.
All the shares sold in this offering will be freely tradable without restriction, except for shares acquired by any of our “affiliates,” as defined in Rule 144 under the Securities Act. Immediately after this offering, the public market for our common stock will include only the 10,714,286 shares of common stock that are
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being sold in this offering. Once we register these shares, they can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates. In addition, the registration rights agreement with our principal stockholders pursuant to which we will be obligated to register our principal stockholders’ shares of our common stock for public resale upon request by our principal stockholders, beginning 180 days following the date of this prospectus. See “Shares eligible for future sale — Registration Rights Agreement.”
We expect that we, our directors and executive officers and holders of substantially all our common stock immediately preceding this offering will enter into lock-up arrangements under which we and they will agree that we and they will not sell, directly or indirectly, any common stock for a period of 180 days from the date of this prospectus (subject to certain exceptions) without the prior written consent of J.P. Morgan Securities LLC. See “Underwriting.”
We will incur significant increased costs as a result of operating as a public company, and operating as a public company will place additional demands on our management.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and the Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Compliance with these requirements will place significant additional demands on our management and will require us to enhance certain internal functions, such as investor relations, legal, financial reporting and corporate communications. Accordingly, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
We currently do not anticipate declaring or paying regular dividends on our common stock.
We do not currently anticipate declaring or paying regular cash dividends on our common stock in the near term. We currently intend to use our future earnings, if any, to fund our growth and develop our business and for general corporate purposes (which may include capital contributions to our insurance company subsidiaries). Therefore, you are not likely to receive any dividends on your common stock in the near term, and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which they are initially offered. Any future declaration and payment of dividends or other distributions of capital will be at the discretion of our board of directors and the payment of any future dividends or other distributions of capital will depend on many factors, including our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries) and any other factors that our board of directors deems relevant in making such a determination. In addition, the terms of the agreements governing the debt we incurred, or debt that we may incur, may limit or prohibit the payment of dividends. For more information, see “Dividend policy.” We may not establish a dividend policy or pay dividends in the future or continue to pay any dividend if we do commence paying dividends pursuant to a dividend policy or otherwise.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law (the “DGCL”) or any action asserting a claim against us that is governed by the internal affairs doctrine. Unless we consent in writing to the selection of an alternative forum, the exclusive forum for any action under the Securities Act or the Exchange Act shall be either the Court of Chancery of the State of Delaware or the federal district court for the District of Delaware. This exclusive forum provision will not apply to claims which are vested in the exclusive jurisdiction of a court
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or forum other than the Court of Chancery of the State of Delaware, for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction or, in the case of an action under the Securities Act or the Exchange Act, for which neither the Court of Chancery of the State of Delaware nor the federal district court for the District of Delaware has subject matter jurisdiction. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. Furthermore, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition and results of operations. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. This decision may be reviewed and ultimately overturned by the Delaware Supreme Court.
Provisions in our organizational documents, Delaware corporate law, state insurance laws and certain of our contractual agreements and compensation arrangements may prevent or delay an acquisition of us.
Provisions of our amended and restated certificate of incorporation and amended and restated by-laws and of state law may delay, deter, prevent or render more difficult a takeover attempt that our stockholders may consider in their best interests. For example, such provisions or laws may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
Certain provisions of our amended and restated certificate of incorporation and amended and restated by-laws may have anti-takeover effects and may delay, deter or prevent a takeover attempt that our stockholders may consider in their best interests. The provisions provide for, among others:
the ability of our board of directors to issue one or more series of preferred stock;
the filling of any vacancies on our board of directors by the affirmative vote of a majority of the remaining directors, even if less than a quorum, or by a sole remaining director or by the stockholders; provided, however, that after the first time when the principal stockholders cease to beneficially own, in the aggregate, at least 50% of our outstanding common stock, any vacancy occurring in our board of directors may only be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director (and not by the stockholders);
certain limitations on convening special stockholder meetings;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings; and
stockholder action by written consent only until the first time when our principal stockholders cease to beneficially own, in the aggregate, 50% or greater of our outstanding common stock.
Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation.
The insurance laws and regulations of the various states in which our insurance company subsidiaries are organized may delay or impede a business combination involving us. State insurance laws generally prohibit an entity from acquiring control of an insurance company without the prior approval of the domestic insurance regulator. Under most states’ statutes, an entity is presumed to have control of an
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insurance company if it owns, directly or indirectly, 10% or more of the voting stock of that insurance company or its parent company. These regulatory restrictions may delay, deter or prevent a potential merger or sale of us, even if our board of directors decides that it is in the best interests of stockholders for us to merge or be sold. These restrictions also may delay sales by us or acquisitions by third parties of our insurance company subsidiaries.
These anti-takeover provisions and laws may delay, deter or prevent a takeover attempt that our stockholders may consider in their best interests. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of capital stock — Certain anti-takeover provisions of our amended and restated certificate of incorporation, our amended and restated by-laws and applicable law.”
Our amended and restated certificate of incorporation will provide that our principal stockholders have no obligation to offer us corporate opportunities.
The Altaris Funds and the members of our board of directors who are affiliated with the Altaris Funds, by the terms of our amended and restated certificate of incorporation, are not required to offer us any corporate opportunity of which they become aware and can take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as our directors. Trean Insurance Group, Inc., by the terms of our amended and restated certificate of incorporation, expressly renounces any interest in any such corporate opportunity to the extent permitted under applicable law, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so. Our amended and restated certificate of incorporation cannot be amended to eliminate our renunciation of any such corporate opportunity arising prior to the date of any such amendment.
The Altaris Funds are in the business of making investments in portfolio companies and may from time to time acquire and hold interests in businesses that compete with us, and the Altaris Funds have no obligation to refrain from acquiring competing businesses. Any competition could intensify if an affiliate or subsidiary of the Altaris Funds were to enter into or acquire a business similar to ours. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by the Altaris Funds to themselves, their portfolio companies or their other affiliates instead of to us.
We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal control over financial reporting. If we are unable to achieve and maintain effective internal controls, our business, operating results and financial condition could be harmed.
As a public company with SEC reporting obligations, we will be required to document and test our internal control procedures to satisfy the requirements of Section 404(b) of the Sarbanes-Oxley Act, which will require annual assessments by management of the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ended December 31, 2020. We are an emerging growth company, and thus we are exempt from the auditor attestation requirement of Section 404(b) of Sarbanes-Oxley until such time as we no longer qualify as an emerging growth company. See also “— We are an “emerging growth company” within the meaning of the Securities Act and have elected to take advantage of reduced disclosure requirements and other exemptions applicable to emerging growth companies.” Regardless of whether we qualify as an emerging growth company, we will still need to implement substantial internal control systems and procedures in order to satisfy the reporting requirements under the Exchange Act and applicable requirements. During the course of our assessment, we may identify deficiencies that we are unable to remediate in a timely manner. Testing and maintaining our internal control over financial reporting may also divert management’s attention from other matters that are important to the operation of our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404(b) of Sarbanes-Oxley. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations. Moreover, any material weaknesses or other deficiencies in our internal control over
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financial reporting may impede our ability to file timely and accurate reports with the SEC. Any of the above could cause investors to lose confidence in our reported financial information or our common stock listing on the Nasdaq to be suspended or terminated, which could have a negative effect on the market price of our common stock.
We are an “emerging growth company” within the meaning of the Securities Act and have elected to take advantage of reduced disclosure requirements and other exemptions applicable to emerging growth companies.
For as long as we remain an “emerging growth company,” as defined in JOBS Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), being permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the SEC, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, and in the future, we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenue of $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended.
We have availed ourselves of reduced reporting requirements in this prospectus. In particular, in this prospectus, we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We expect to continue to avail ourselves of the emerging growth company exemptions described above. In addition, we expect to avail ourselves of the extended transition period for complying with new or revised accounting standards. As a result, the information that we provide to stockholders will be less comprehensive than what you may receive from other public companies.
Because we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company,” our combined financial statements may not be comparable to companies that currently comply with these accounting standards.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our combined financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Consequently, our combined financial statements may not be comparable to companies that comply with public company effective dates. Because our combined financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
You will incur immediate dilution as a result of this offering.
The initial public offering price is substantially higher than the net stockholders’ tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities divided
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by our shares of common stock outstanding immediately following this offering. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution in net tangible book value per share after consummation of this offering. You may experience additional dilution upon future equity issuances. See “Dilution.”
We have broad discretion in the use of the net proceeds from the sale of shares by us in this offering and may not use them effectively.
We intend to use the net proceeds from this offering for general corporate purposes. Our management has broad discretion over how these proceeds are to be used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds.
Applicable insurance laws may make it difficult to effect a change of control.
Under applicable Kansas, California and Utah insurance laws and regulations, no person may acquire control of a domestic insurer until written approval is obtained from the state insurance commissioner following a public hearing on the proposed acquisition. Such approval would be contingent upon the state insurance commissioner’s consideration of a number of factors including, among others, the financial strength of the proposed acquiror, the acquiror’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Kansas, California and Utah insurance laws and regulations pertaining to changes of control apply to both the direct and indirect acquisition of ten percent or more of the voting stock of that state’s domiciled insurer. Accordingly, the acquisition of ten percent or more of our common stock would be considered an indirect change of control of Trean Insurance Group, Inc. and would trigger the applicable change of control filing requirements under Kansas, California and Utah insurance laws and regulations, absent a disclaimer of control filing and its acceptance by the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department. These requirements may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Trean Insurance Group, Inc., including through transactions that some or all of the stockholders of Trean Insurance Group, Inc. may consider to be desirable. See “Regulation.”
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Forward-looking statements
This prospectus contains forward-looking statements. Forward-looking statements include statements that are not historical or current facts. These statements may discuss, among other things, our future financial performance, our business prospects and strategy, the lines of business we target, our anticipated financial position, liquidity and capital, our dividend policy and market and industry conditions. You can identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “predict,” “project,” “believe,” “seek,” “outlook,” “future,” “will,” “would,” “should,” “could,” “may,” “can have,” “likely” and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties, including changes in circumstances that are difficult to predict. If one or more of these risks or uncertainties materialize, or if our underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include those described in the “Risk factors” section of this prospectus.
Forward-looking statements speak only as of the date on which they are made. Except as expressly required under federal securities laws or the rules and regulations of the SEC, we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements.
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Organizational structure
The diagram below depicts our current organizational structure:

Following the date of this prospectus and prior to the completion of this offering, each of Trean Holdings and BIC Holdings will contribute all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC Holdings, in exchange for shares of common stock in Trean Insurance Group, Inc. as consideration. Upon the completion of the transfer, Trean Holdings and BIC Holdings will be dissolved and will distribute in-kind shares to the Pre-IPO Unitholders (including with respect to Trean Holdings and BIC Holdings Class C units held by Mr. Jones, one of our directors, that will become fully vested in connection with the IPO). In connection with such dissolutions and as contemplated by the operating agreements for Trean Holdings and BIC Holdings, among other things, transaction payments will be made by Trean Corporation and Benchmark to certain of the Pre-IPO Unitholders and certain other employees of Trean Corporation and/or Benchmark, which payment amounts are expected to be $3.1 million in the aggregate.
In addition, Trean Insurance Group, Inc. will acquire the Blake Enterprises entities’ 55% equity interest in Compstar in exchange for approximately 6.6 million shares of common stock in Trean Insurance Group, Inc. as consideration. Upon the completion of the acquisition, Trean Insurance Group, Inc. will contribute such 55% equity interest to Trean Compstar after which Trean Compstar will own 100% of Compstar.
In the in-kind distribution described above, the Pre-IPO Unitholders will receive 37,386,394 shares of common stock at an exchange rate of 0.48 shares of common stock per unit.
Assuming an initial public offering price of $14.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the completion of this offering, the Altaris Funds will hold approximately 57.6% of our common stock, 21.5% will be held by management and other Pre-IPO Unitholders and the Blake Enterprises entities and the remaining 20.9% will be held by public stockholders (or 54.8%, 21.1% and 24.1%, respectively, if the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full).
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The diagram below depicts our organizational structure immediately following this offering:

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Use of proceeds
We estimate the net proceeds from the sale of shares by us in this offering will be approximately $88.3 million, based on an assumed initial public offering price of $14.00 per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of $4.7 million.
A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $6.6 million, assuming the number of shares offered by us, which we show on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. 
We intend to use the net proceeds from our sale of shares of common stock in this offering to (i) redeem all $5.1 million aggregate liquidation preference of the Series B Preferred Stock, (ii) pay $7.7 million to redeem all of our outstanding Subordinated Notes, (iii) use $19.3 million to repay in full all outstanding term loan borrowings under the 2018 Oak Street Credit Agreement, (iv) pay an aggregate one-time payment of approximately $7.3 million to Altaris Capital Partners, LLC in connection with the termination of our consulting and advisory agreements with Altaris Capital Partners, LLC and (v) pay an aggregate $3.1 million to certain Pre-IPO Unitholders and other employees in connection with the reorganization transactions and pursuant to the operating agreements for Trean Holdings and BIC Holdings. See “Certain relationships and related party transactions — Consulting Agreements” and “Organizational structure.” Any remaining proceeds will be used for general corporate purposes, including to support the growth of our business.
There are four tranches of Series B Preferred Stock that have no maturity date and pay dividends at a rate per annum, respectively, of 3.00%, 4.00%, 2.85% and in an amount equal to the actual net investment income earned on the outstanding liquidation preference. The Subordinated Notes bear interest at 3-month LIBOR plus a margin of 3.50% and have a maturity date of July 7, 2036.
The term loan under the 2018 Oak Street Credit Agreement accrues interest at a variable per annum rate equal to the prime rate plus 1.25%. As of March 16, 2020, the date of the most recently announced prime rate, the interest rate under the term loan was 4.50%. The term loan matures on May 25, 2024.
This expected use of net proceeds from this offering represents our intentions based on our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As a result, our management will retain broad discretion over the use of the net proceeds from the sale of shares by us in this offering and our existing cash and cash equivalents.
We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.
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Dividend policy
We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
Our status as a holding company and a legal entity separate and distinct from our subsidiaries affects our ability to pay dividends and make other payments. As a holding company without significant operations of our own, the principal sources of our funds are dividends and other payments from our subsidiaries. The ability of our insurance company subsidiaries to pay dividends to us is subject to limits under insurance laws of the states in which our insurance company subsidiaries are domiciled or commercially domiciled. See “Risk factors — As a holding company, we rely on dividends and payments from our subsidiaries to operate our business. Our ability to receive dividends and permitted payments from our insurance company subsidiaries is subject to regulatory constraints.” Furthermore, dividends from our insurance company subsidiaries are limited by minimum capital requirements in state regulations. See “Management’s discussion and analysis of financial condition and results of operations — Liquidity and capital resources” and “Regulation.”
On May 22, 2020, Trean Holdings paid an $18.2 million one-time special cash distribution to the Pre-IPO Unitholders of Trean Holdings. The distribution was funded from (i) a distribution of $3.4 million from Trean Compstar to Trean Holdings, (ii) a distribution of $14.0 million from Trean Corporation to Trean Holdings, of which $11.2 million was funded from borrowings under the 2020 First Horizon Credit Agreement, and (iii) $0.8 million of cash on hand at Trean Holdings.
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Capitalization
The following table sets forth our capitalization as of March 31, 2020, on an:
actual basis;
as adjusted basis giving effect to the reorganization transactions; and
as further adjusted basis giving effect to the issuance and sale by us of 7,142,857 shares of our common stock in this offering and the application of the net proceeds therefrom as described in “Use of proceeds,” based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.
The as further adjusted information set forth in the table below is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined when the initial public offering price is determined. You should read this table with the sections of this prospectus entitled “Organizational structure,” “Use of proceeds,” “Selected historical combined financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus. 
 
As of March 31, 2020
 
Actual
As adjusted
As further
adjusted(1)
 
(in thousands, except shares
and per share data)
Long-term debt
$28,721
$48,981
$20,989
Redeemable preferred stock,1,000,000 shares authorized; 51 shares issued and outstanding, actual and as adjusted; no shares issued and outstanding, as further adjusted
5,100
5,100
Stockholders’ / members’ equity:
 
 
 
Members’ equity
78,458
Common stock, $0.01 par value per share, no shares authorized or issued and outstanding, actual; 600,000,000 shares authorized, 44,000,000 shares issued and outstanding, as adjusted; 51,142,857 shares issued and outstanding, as further adjusted
440
511
Preferred stock, $0.01 par value per share, no shares authorized or issued and outstanding, actual; 100,000,000 shares authorized, no shares issued and outstanding, as adjusted and as further adjusted
Additional paid-in capital
17,995
242,332
330,523
Retained earnings
49,967
64,501
64,501
Accumulated other comprehensive income
3,761
Total stockholders’ / members’ equity
150,181
307,273
395,535
Total capitalization
$  178,902
$ 356,253
$416,524
(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share of common stock (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) total stockholders’ equity by approximately $6.6 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000 increase or decrease in the number of shares of common stock offered in this offering by us would increase or decrease total stockholders’ equity by approximately $13.0 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us.
The number of shares of common stock outstanding after the offering is based on our outstanding shares as of July 9, 2020, after giving effect to the reorganization transactions, and excludes 5,058,085 shares of common stock reserved for future issuance under our omnibus incentive plan that we expect to have approved upon consummation of this offering.
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Dilution
If you invest in our common stock, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the as further adjusted net tangible book value per share of our common stock after this offering.
As of March 31, 2020, our net tangible book value was $147.2 million. As adjusted net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock that will be outstanding immediately after giving effect to the reorganization transactions but before the completion of this offering. As of March 31, 2020, our as adjusted net tangible book value per share was $2.67.
Dilution per share to new investors in this offering represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering (i.e., the initial public offering price per share) and the as further adjusted net tangible book value per share. As further adjusted net tangible book value per share represents as adjusted net tangible book value per share as further adjusted to give effect to sale by us of 7,142,857 shares of common stock in this offering (the number of shares offered by us set forth on the cover page of this prospectus), assuming an initial public offering price of $14.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As of March 31, 2020, our as further adjusted net tangible book value was $205.6 million, or $4.02 per share of common stock. This represents an immediate increase in as adjusted net tangible book value of $1.35 per share to existing stockholders and an immediate dilution of $9.98 per share to new investors purchasing shares in this offering.
The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share
 
$14.00
As adjusted net tangible book value per share as of March 31, 2020
$2.67
 
Increase in as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering
1.35
 
As further adjusted net tangible book value per share immediately after this offering
 
$4.02
Dilution per share to new investors in this offering
 
$9.98
A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our as further adjusted net tangible book value per share immediately after this offering by $0.13 per share and the dilution per share to new investors in this offering by $0.87 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Similarly, each increase (decrease) in 1,000,000 shares of the number of shares offered by us would increase (decrease) the as further adjusted net tangible book value per share immediately after this offering by $0.17 and decrease (increase) the dilution per share to new investors in this offering by $(0.17) per share, assuming the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional shares to cover over-allotments, as further adjusted net tangible book value per share immediately after this offering would not change since the selling stockholders are selling all the shares pursuant to any exercise of this option, and we will not receive any of the proceeds from the sale of shares by the selling stockholders.
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The following table summarizes, on an as further adjusted basis as of March 31, 2020 as described above, the differences between existing stockholders and new investors in this offering with respect to the number of shares of our common stock purchased, the total consideration paid to us and the average price per share paid:
 
Shares Purchased
Total Consideration
Average
Price
Per Share
 
Number
Percent
Amount
Percent
Existing stockholders
40,428,571
79.1%
$565,999,994
79.1%
$14.00
New investors in this offering
10,714,286
20.9%
$150,000,004
20.9%
$14.00
Total
51,142,857
100%
$715,999,998
100%
 
A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) total consideration paid by new investors in this offering and total consideration paid by all stockholders by approximately $7.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by $14.0 million, assuming the assumed initial public offering price of $14.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise in full their option to purchase additional shares to cover over-allotments, the number of shares held by existing stockholders will decrease to 38,821,429, or 75.9% of the total number of shares of common stock outstanding immediately after this offering and the number of shares held by new investors in this offering will increase to 12,321,428, or 24.1% of the total number of shares of common stock outstanding immediately after this offering.
To the extent that any options or other equity incentive grants are issued in the future with an exercise price or purchase price below the initial public offering price, new investors in this offering will experience further dilution.
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Selected historical combined financial and other data 
The following tables present selected historical combined financial and other data of BIC Holdings LLC and Trean Holdings LLC, along with their wholly owned subsidiaries, at the dates and for the periods indicated. The selected historical combined financial and other data set forth below as of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018 have been derived from our audited combined financial statements and the related notes included elsewhere in this prospectus. The selected historical combined financial and other data set forth below as of and for the three months ended March 31, 2020 and 2019 have been derived from our unaudited interim condensed combined financial statements included elsewhere in this prospectus. The unaudited interim condensed combined financial statements have been prepared on the same basis as the audited combined financial statements. In the opinion of our management, our unaudited interim condensed combined financial statements included in this prospectus include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the information set forth herein.
The selected historical combined financial and other data presented below do not purport to be indicative of the results that can be expected for any future period and should be read together with “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus.
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
 
(in thousands)
Revenues:
 
 
 
 
Gross written premiums
$107,859
$101,534
$411,401
$357,007
Increase in gross unearned premiums
(7,373)
(10,952)
(13,598)
(16,862)
Gross earned premiums
100,486
90,582
397,803
340,145
Ceded earned premiums
(78,027)
(70,958)
(311,325)
(273,569)
Net earned premiums
22,459
19,624
86,478
66,576
Net investment income
3,272
1,287
6,245
4,816
Net realized capital gains (losses)
3,234
612
667
(715)
Other revenue
4,392
3,595
9,125
7,826
Total revenue
33,357
25,118
102,515
78,503
 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
12,934
11,456
44,661
35,729
General and administrative expenses
8,160
3,969
21,005
15,706
Interest expense
461
624
2,169
1,557
Total expenses
21,555
16,049
67,835
52,992
 
 
 
 
 
Other income
14
93
121
639
Income before taxes
11,816
9,162
34,801
26,150
 
 
 
 
 
Provision for income taxes
2,912
1,319
7,074
5,546
Equity earnings (losses) in affiliates, net of tax
702
608
3,558
(1,082)
Net income
$9,606
$8,451
$31,285
$19,522
Adjusted net income(1)
$6,602
$8,369
$33,194
$22,197
 
Three months ended
March 31, 2020
Year ended
December 31, 2019
Pro forma per share data(2):
 
 
Pro forma earnings per share outstanding
 
 
Basic and diluted
$0.20
$0.68
Pro forma weighted average shares outstanding
 
 
Basic and diluted
51,142,857
51,142,857
(1)
Adjusted net income is a non-GAAP financial measure. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
(2)
Pro forma earnings per share outstanding gives pro forma effect to: (a) the issuance of 37,386,394 shares of our common stock to Trean Holdings and BIC Holdings in exchange for the contribution of all of their respective assets and liabilities to Trean Insurance Group, Inc., (b) the issuance of 6,613,606 shares of our common stock in connection with the acquisition from the Blake Enterprises
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entities of their 55% equity interest in Compstar, (c) the issuance of 7,142,857 shares of our common stock by us in the IPO and (d) equity in the net income of Compstar (net of tax) for the 55% that we do not currently own as if we had owned 100% of Compstar at the beginning of the period. See “Organizational structure.”
The table below sets forth the calculation of pro forma earnings per share outstanding:
 
Three months ended
March 31, 2020
Year ended
December 31, 2019
 
(in thousands, except share and per share data)
Numerator:
 
 
Net income
$9,606
$31,285
Pro forma adjustment: 55% equity in net income of Compstar (net of tax)
858
3,409
Pro forma net income
$10,464
$34,694
 
 
 
Denominator:
 
 
Issuance of our common stock to Trean Holdings and BIC Holdings in exchange for contribution
37,386,394
37,386,394
 
 
 
Issuance of common stock in connection with acquisition from the Blake Baker Enterprises Entities of their 55% equity interest in Compstar Holding Company LLC
6,613,606
6,613,606
Issuance of common stock by us in this offering
7,142,857
7,142,857
Pro forma shares outstanding
51,142,857
51,142,857
Pro forma earnings per share outstanding
 
 
Basic and diluted
$0.20
$0.68
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At March 31,
2020
At December 31,
 
2019
2018
 
(in thousands)
Balance sheet data:
 
 
 
Accrued investment income
$2,420
$2,468
$2,372
Premiums and other receivables
67,773
62,460
62,400
Related party receivables
21,871
22,221
15,934
Reinsurance recoverable
313,760
307,338
257,509
Prepaid reinsurance premiums
83,694
80,088
66,765
Deferred policy acquisition cost, net
3,103
2,115
2,976
Property and equipment, net
8,238
7,937
8,134
Deferred tax asset
1,280
1,367
1,823
Goodwill
2,822
2,822
2,822
Other assets
7,572
3,277
1,963
Total assets
954,583
919,034
800,119
Unpaid loss and loss adjustment expenses
418,757
406,716
340,415
Unearned premiums
111,162
103,789
90,074
Funds held under reinsurance agreements
165,018
163,445
166,838
Reinsurance premiums payable
48,099
53,620
40,135
Accounts payable and accrued expenses
18,360
14,995
15,004
Total liabilities
799,302
772,319
688,988
Redeemable preferred stock
5,100
5,100
6,000
Total members’ equity
150,181
141,615
105,131
Total liabilities and members’ equity
$954,583
$919,034
$800,119
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
Underwriting and other ratios:
 
 
 
 
Loss ratio(1)
57.6%
58.4%
51.6%
53.7%
Expense ratio(2)
36.3%
20.2%
24.3%
23.6%
Combined ratio(3)
93.9%
78.6%
75.9%
77.3%
Return on equity(4)
26.3%
30.5%
25.5%
20.2%
Adjusted return on equity(5)
18.1%
30.2%
27.0%
23.0%
Return on tangible equity(6)
26.9%
31.4%
26.1%
20.6%
Adjusted return on tangible equity(7)
18.5%
31.1%
27.7%
23.4%
(1)
The loss ratio is the ratio, expressed as a percentage, of losses and loss adjustment expenses to net earned premiums.
(2)
The expense ratio is the ratio, expressed as a percentage, of general and administrative expenses to net earned premiums.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
(4)
Return on equity represents net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period.
(5)
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
(6)
Return on tangible equity is a non-GAAP financial measure defined as net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of return on tangible equity to return on equity in accordance with GAAP.
(7)
Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
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Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2020 and 2019 and the years ended December 31, 2019 and 2018 should be read in conjunction with the information included under “Business,” “Selected historical combined financial and other data” and our combined financial statements and the related notes included elsewhere in this prospectus. The discussion and analysis below are based on comparisons between our historical financial data for different periods and include certain forward-looking statements about our business, operations and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors described in “Risk factors.” Our actual results may differ materially from those expressed in, or implied by, those forward-looking statements. See “Forward-looking statements.”
Overview
We are an established, growing and highly profitable company focused on providing products and services to the specialty insurance market. We underwrite specialty casualty insurance products both through our Program Partners and also through our Owned MGAs. We also provide our Program Partners with a variety of services, including issuing carrier services, claims administration and reinsurance brokerage, from which we generate recurring fee-based revenues.
We have one reportable segment. We provide insurance products and services focused on specialty casualty lines to our Program Partners and Owned MGAs. We target a diversified portfolio of small to medium programs, typically with less than $30 million of premiums, that focus on niche segments of the specialty casualty insurance market and that we believe have strong underwriting track records.
Our goal is to deliver long-term value to our stockholders by growing our business and generating attractive returns. We have grown gross written premiums from $144.9 million for the year ended December 31, 2015 to $411.4 million for the year ended December 31, 2019, a CAGR of approximately 29.8% and have grown our net income from $7.9 million to $31.3 million at a CAGR of approximately 41.1% over the same time period. Our average return on equity from 2015 to 2019 was approximately 19.3%. We plan to use any remaining proceeds from this offering to support the growth of our business, including making contributions to the capital of our insurance subsidiaries and retaining more risk to capture additional premiums.
Coronavirus (COVID-19) Impact
We are monitoring the impact of the ongoing continuation of the COVID-19 pandemic on our business, including how it will impact our premium revenue, loss experience and loss expense, liquidity, and our regulatory capital and surplus, and operations.
Workforce operations
We took several actions to protect the health of the public and our employees and to comply with directives and advice of governmental authorities. We responded by developing a Preparedness Plan that outlined both corporate-wide and location-specific modifications to offices. This multi-faceted plan included elements such as restricting business travel and transitioning from an office-based company to primarily a remote working culture. As most of our employees already had secure remote working connections, we took additional measures to ensure all employees who wanted or needed to work remotely were able to do so securely with limited connectivity disruption. We also provided our employees education and training with respect to cybersecurity issues that may arise relating to COVID-19 and working remotely in conjunction with the goal of serving the operational needs of a remote workforce and continuing to serve our customers. We implemented safeguards for employees who play critical roles to ensure operational reliability and established protocols for employees who interact directly with the public. As state, city and county guidelines progress, we have implemented new health and safety in-office procedures to prepare for transitioning our workforce back to working in our offices on a limited basis.
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Premium revenue, claims and losses
We have not had a significant impact to our premium revenue in the first quarter of 2020 relating to the COVID-19 pandemic. Only 10.0% of our business falls under hospitality, healthcare, and education, where a majority of the layoffs have occurred so far. Gross written premiums have increased by 6.2% and gross earned premiums have increased by 10.9% during the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. As over 80% of our gross written premiums are related to workers’ compensation insurance, we expect that future revenue trends could be impacted by higher unemployment rates as businesses slowly restart or if unemployment levels continue to trend high over the balance of 2020. However, a significant portion of our workers’ compensation premiums are pay-as-you-go programs, which reduces our downside risk from future premium audits or refunds. We believe our business interruption exposure is limited to certain commercial multiple peril premiums in Michigan, which are written on standard ISO forms.
We also have not seen a significant impact in our reported claims or incurred losses in the first quarter of 2020 relating to the COVID-19 pandemic. Losses and loss adjustment expenses increased $1.5 million, or 12.9%, to $12.9 million for the three months ended March 31, 2020, compared to $11.4 million for the three months ended March 31, 2019 primarily attributable to the growth in earned premiums during the period. In addition, our loss ratio remained relatively consistent at 57.6% during the first quarter of 2020 versus 58.4% during the first quarter of 2019.
Investment portfolio
With respect to our investment portfolio, we seek to hold a high-quality, diversified portfolio of investments, which are primarily in fixed maturity and available-for-sale investments and as such, our investment portfolio has limited exposure to the recent equity market volatility. In addition, and as a precaution, we put a temporary freeze on further investments to accumulate cash for liquidity purposes. For the three months ended March 31, 2020, we have experienced a slight decrease of only $1,233, or 0.4%, in the fair value of our investment portfolio due to unrealized losses on the value of our fixed maturity investments. We believe the recent decline in the fair value of our investment portfolio was due to the recent disruption in the global financial markets associated with COVID-19 as opposed to underlying issues with our investment portfolio. While we have seen an improvement in our unrealized investment positions as of the end of May 2020, if there were to be continued equity and debt financial market volatility, which in turn, could create market-to-market investment valuation decreases, we expect there could be additional or increased unrealized losses recorded during the balance of the year. However, given the conservative nature of our investment portfolio, we expect that any adverse impact on the value of our investment portfolio, as it relates to COVID-19, will be temporary, and we do not expect a long-term negative impact on our financial condition, results of operations or cash flows.
Other concerns
Adverse events such as health-related concerns about working in our offices, the inability to travel, the potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and delay the implementation of our business strategy. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.
Components of our results of operations
Gross written premiums
Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for general and administrative expenses (including policy acquisition costs), reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
Addition and retention of Program Partners;
New business submissions to our Program Partners;
Binding of new business submissions into policies;
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Renewals of existing policies; and
Average size and premium rate of bound policies.
Gross earned premiums
Gross earned premiums are the earned portion of gross written premiums. We earn insurance premiums on a pro rata basis over the term of the policy. Our insurance policies generally have a term of one year.
Ceded earned premiums
Ceded earned premiums are the amount of gross earned premiums ceded to reinsurers. We enter into reinsurance contracts to limit our maximum losses and diversify our exposure and provide statutory surplus relief. The volume of our ceded earned premiums is affected by the level of our gross earned premiums and any decision we make to increase or decrease limits, retention levels and co-participations.
Net earned premiums
Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is earned and ceded to third-party reinsurers, including our Program Partners and professional reinsurers, under our reinsurance agreements.
Net investment income
We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed maturities, including other investments and short-term investments. Our net investment income includes interest income on our invested assets, which is net of the income earned on our reinsurance agreements, which are held for the benefit of our Program Partners, as well as unrealized gains and losses on our equity portfolio.
Net realized capital gains/losses
Net realized capital gains/losses are a function of the difference between the amount received by us on the sale of a security and the security’s recorded value, as well as any “other-than-temporary impairments” related to fixed maturity investments recognized in earnings.
Other revenue
Other revenue includes brokerage, third-party administrative, management and consulting fees, which are commonly based on written premiums.
Losses and loss adjustment expenses
Losses and LAE are net of reinsurance and include claims paid, estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. In general, our losses and LAE are affected by:
frequency of claims associated with the particular types of insurance contracts that we write;
trends in the average size of losses incurred on a particular type of business;
mix of business written by us;
changes in the legal or regulatory environment related to the business we write;
trends in legal defense costs;
wage inflation; and
inflation in medical costs.
Losses and LAE are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and LAE may be paid out over a period of years.
General and administrative expenses
General and administrative expenses include policy acquisition costs and other underwriting expenses. Policy acquisition costs are principally comprised of the commissions we pay our brokers and program managers, net of ceding commissions we receive on business ceded under our reinsurance contracts.
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Policy acquisition costs that are directly related to the successful acquisition or reinsurance of those policies are deferred. The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life. Other underwriting expenses include employee salaries and benefits, technology costs, office rent and professional services fees such as legal, accounting and actuarial services.
Interest expense
Interest expense consists primarily of interest paid on (i) our 2016 promissory note through April 2018, when the note was paid in full (See “— Liquidity and capital resources — Debt securities — 2016 promissory note”), (ii) the preferred capital securities issued by the Trust (See “— Liquidity and capital resources — Debt securities — 2006 subordinated notes”) and (iii) our term loan facility (See “— Liquidity and capital resources — Credit agreements — 2020 First Horizon Credit Agreement”).
Other income
Other income consists primarily of sublease revenue and other miscellaneous income items.
Equity earning in affiliates, net of tax
Equity earnings in affiliates, net of tax includes the Company’s share of earnings from equity method investments.
Key metrics
We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.
Underwriting income is a non-GAAP financial measure defined as income before taxes excluding net investment income, net realized capital losses, other revenue, interest expense and other income. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of underwriting income to income before taxes in accordance with GAAP.
Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of unusual events, including the consummation of the reorganization transactions, or gains or losses that we do not believe reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of general and administrative expenses to net earned premiums.
Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.
Adjusted return on equity is a non-GAAP financial measured defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
Tangible members’ equity is defined as members’ equity less goodwill and other intangible assets.
Return on tangible equity is a non-GAAP financial measure defined as net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’ equity during the period.
Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible members’
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equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
Results of operations
Three months ended March 31, 2020 compared to three months ended March 31, 2019
The following table summarizes combined results of operations for the three months ended March 31, 2020 and 2019:
 
Three months ended
March 31,
Change
Percentage
Change
 
2020
2019
 
($ in thousands)
 
 
Revenues
 
 
 
 
Gross written premiums
$107,859
$101,534
$6,325
6%
Increase in gross unearned premiums
(7,373)
(10,952)
(3,579)
(33)
Gross earned premiums
100,486
90,582
9,904
11
Ceded earned premiums
(78,027)
(70,958)
7,069
10
Net earned premiums
22,459
19,624
2,835
14
Expenses
 
 
 
 
Losses and loss adjustment expenses
12,934
11,456
1,478
13
General and administrative expenses
8,160
3,969
4,191
106
Underwriting income(1)
1,365
4,199
(2,834)
(67)
Net investment income
3,272
1,287
1,985
154
Net realized capital gains (losses)
3,234
612
2,622
428
Other revenue
4,392
3,595
797
22
Interest expense
(461)
(624)
163
26
Other income
14
93
(79)
(85)
Income before taxes
11,816
9,162
2,654
29
Provision for income taxes
2,912
1,319
1,593
121
Equity earnings (losses) in affiliates, net of tax
702
608
94
15
Net income
$9,606
$8,451
$1,155
14%
Adjusted net income(2)
$6,602
$8,369
$(1,767)
(21)%
(1)
Underwriting income is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of underwriting income to net income in accordance with GAAP.
(2)
Adjusted net income is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
 
Three months ended
March 31,
 
2020
2019
Key metrics:
 
 
Loss ratio
57.6%
58.4%
Expense ratio
36.3%
20.2%
Combined ratio
93.9%
78.6%
Return on equity
26.3%
30.5%
Adjusted return on equity(1)
18.1%
30.2%
Return on tangible equity(2)
26.9%
31.4%
Adjusted return on tangible equity(3)
18.5%
31.1%
(1)
Adjusted return on equity is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
(2)
Return on tangible equity is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of return on tangible equity to return on equity in accordance with GAAP.
(3)
Adjusted return on tangible equity is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
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Gross written premiums
Gross written premiums increased $6.4 million, or 6.2%, to $107.9 million for the three months ended March 31, 2020, compared to $101.5 million for the three months ended March 31, 2019. The increase is primarily attributable to the growth in our program partner business, particularly from Compstar and other major program partners. The changes in gross written premiums were most notably due to the following lines of business:
Workers' compensation, which represented 82.9% of our gross written premiums in the first quarter of 2020, increased by $5.2 million, or 6.1%, for the three months ended March 31, 2020 compared to the same period in 2019.
All other non-workers’ compensation liability, which represented 17.1% of our gross written premiums in the first quarter of 2020, increased by $1.2 million, or 6.7%, for the three months ended March 31, 2020 compared to the same period in 2019.
Gross earned premiums
Gross earned premiums increased $9.9 million, or 10.9%, to $100.5 million for the three months ended March 31, 2020 from $90.6 million for the three months ended March 31, 2019. The increase is driven by the increase in gross written premiums as well as the reduction in gross unearned premiums of $3.6 million. Gross earned premiums as a percentage of gross written premiums increased to 93.2% for the three months ended March 31, 2020 from 89.2% for the same period in 2019.
Ceded earned premiums
Ceded earned premiums increased $7.1 million, or 10.0%, to $78.0 million for the three months ended March 31, 2020 from $70.9 million for the three months ended March 31, 2019. The increase was primarily due to an increase in our gross earned premiums for ceded policies during the period. Ceded earned premiums as a percentage of gross earned premiums increased to 77.6% for the three months ended March 31, 2020 from 78.3% for the three months ended March 31, 2019.
Net earned premiums
Net earned premiums increased $2.8 million, or 14.4%, to $22.5 million for the three months ended March 31, 2020 from $19.6 million for the three months ended March 31, 2019 due primarily to the higher gross written and earned premiums described above, offset by the higher ceded earned premiums described above under reinsurance agreements for the three months ended March 31, 2020. The below table shows the amount of premiums we earned on a gross and net basis:
 
Three months ended
March 31,
Change
Percentage
Change
 
2020
2019
 
(in thousands)
 
 
Revenues:
 
 
 
 
Gross written premiums
$107,859
$101,534
$6,325
6%
Increase in gross unearned premiums
(7,373)
(10,952)
(3,579)
(33)
Gross earned premiums
100,486
90,582
9,904
11
Ceded earned premiums
(78,027)
(70,958)
7,069
10
Net earned premiums
$22,459
$19,624
$2,835
14%
Net investment income
Investment income increased $2.0 million, or 154.2%, to $3.3 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019 due primarily to a fair value re-measurement and reclassification of our TRI equity method investment to an investment in common stock, which resulted in a $2.0 million unrealized gain during the three months ended March 31, 2020.
Net realized capital gains/losses
Net realized capital gains increased $2.6 million, or 428.4%, to a gain of $3.2 million for the three months ended March 31, 2020 from a gain of $0.6 million for the three months ended March 31, 2019 due
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primarily to a recording of a $3.1 million realized gain on the sale of a portion of the Company’s TRI equity investment during the three months ended March 31, 2020.
Other revenue
Other revenue increased $0.8 million, or 22.2%, to $4.4 million for the three months ended March 31, 2020 from $3.6 million for the three months ended March 31, 2019 due primarily to an increase of $1.0 million in brokerage fees, primarily related to Compstar, offset by a $0.2 million reduction in management fees due to a lost service contract in April 2019 and reduced First Choice Casualty Insurance Company fees as a result of the Company’s acquisition of First Choice Casualty Insurance Company in February 2019.
Losses and loss adjustment expenses
Losses and LAE increased $1.4 million, or 12.9%, to $12.9 million for three months ended March 31, 2020 from $11.5 million for the three months ended March 31, 2019. The increase was directly attributable to the growth in earned premiums during the period. The Company's loss ratio remained relatively consistent at 57.6% for the three months ended March 31, 2020 compared to 58.4% for the three months ended March 31, 2019 as a result of some programs experiencing decreased loss ratios quarter over quarter.
General and administrative expenses
General and administrative expenses increased $4.2 million, or 105.6%, to $8.2 million for the three months ended March 31, 2020 from $4.0 million for the three months ended March 31, 2019. This change resulted in an increase in the Company's expense ratio to 36.3% for the three months ended March 31, 2020, compared to 20.2% for the three months ended March 31, 2019. The increase was attributable to (i) an increase in salaries and benefits of $1.4 million resulting from an increased workforce; (ii) an increase in net agent commissions of $1.3 million resulting from an increase in written premiums; (iii) an increase in IPO-related professional service expense of $0.4 million; (iv) additional IT software and system costs totaling $0.3 million resulting from new software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19; and (v) additional rent and office-related expenses totaling $0.3 million due to the addition of new office locations and rent increases.
Interest expense
Interest expense decreased $0.1 million, or 26.1%, to $(0.5) million for the three months ended March 31, 2020 from $(0.6) million for the three months ended March 31, 2019.
Other income
Other income decreased $79 thousand, or 84.9%, to $14 thousand for the three months ended March 31, 2020 from $93 thousand for the three months ended March 31, 2019.
Provision for income taxes
Provision for income taxes increased $1.6 million, or 120.8%, to $2.9 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019 due primarily to the impact of state taxes and temporary differences associated with the gains recorded on the sale of and subsequent re-measurement of our TRI investment shares during the three months ended March 31, 2020. Additionally, we received tax benefits in the three months ended March 31, 2019 due to book and tax basis differences resulting from the acquisition of First Choice Casualty Insurance Company and tax benefits related to the tax impact of deferred acquisition costs.
Equity earnings in affiliates, net of tax
Equity earnings in affiliates, net of tax increased $0.1 million, or 15.5%, to $0.7 million for the three months ended March 31, 2020 from $0.6 million for the three months ended March 31, 2019. This increase was primarily due to a $0.3 million increase in the Company’s share of Compstar’s earnings.
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Year ended December 31, 2019 compared to year ended December 31, 2018
The following table summarizes combined results of operations for the years ended December 31, 2019 and 2018:
<
 
Year ended
December 31,
Change
Percentage
Change
 
2019
2018
 
($ in thousands)
 
 
Revenues
 
 
 
 
Gross written premiums
$411,401
$357,007
$54,394
15%
Increase in gross unearned premiums
(13,598)
(16,862)
(3,264)
(19)
Gross earned premiums
397,803
340,145
57,658
17
Ceded earned premiums
(311,325)
(273,569)
37,756
14
Net earned premiums
86,478
66,576
19,902
30
Expenses
 
 
 
 
Losses and loss adjustment expenses
44,661
35,729
8,932
25