UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2021

OR

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

For the transition period from ___________ to ___________

Commission file number: 001-39392

TREAN INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

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

150 Lake Street West

Wayzata, MN 55391

(Address of principal executive offices and zip code)

 (952) 974-2200

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	TIG	The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐    No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐    No ☒

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 13(a) of the Exchange Act.     ☐ 

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☐

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

The aggregate market value, as of June 30, 2021, of voting shares held by non-affiliates of the registrant was approximately $338,889,839.

As of March 9, 2022, there were 51,176,887 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.

TREAN INSURANCE GROUP, INC.

TABLE OF CONTENTS

		Page
Forward-Looking Statements		3
PART I
Item 1	Business	6
Item 1A	Risk Factors	28
Item 1B	Unresolved Staff Comments	48
Item 2	Properties	48
Item 3	Legal Proceedings	49
Item 4	Mine Safety Disclosures	49
PART II
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	50
Item 6	Reserved	51
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	52
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	74
Item 8	Financial Statements and Supplementary Data	76
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	127
Item 9A	Controls and Procedures	127
Item 9B	Other Information	127
Item 9C	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	127
Part III
Item 10	Directors, Executive Officers and Corporate Governance	128
Item 11	Executive Compensation	128
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	128
Item 13	Certain Relationships and Related Transactions and Director Independence	128
Item 14	Principal Accountant Fees and Services	128
PART IV
Item 15	Exhibits and Financial Statement Schedules	129
Item 16	Form 10-K Summary	130
Signatures		131

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Forward-Looking Statements

This Annual Report on Form 10-K contains forward‑looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward‑looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward‑looking statements because they contain words such as "may", "will", "should", "expects", "plans", "anticipates", "could", "intends", "target", "projects", "contemplates", "believes", "estimates", "predicts", "would", "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These forward‑looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward‑looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.

The outcome of the events described in these forward‑looking statements is subject to risks, uncertainties, assumptions and other factors, which in many cases are beyond our control, as described in "Item 1A — Risk Factors", and elsewhere in this Annual Report on Form 10-K. Our statements reflecting these risks and uncertainties are not exhaustive, and other risks and uncertainties may currently exist or may arise in the future that could have material effects on our business, operations and financial condition. We cannot assure you that the results, events and circumstances reflected in the forward‑looking statements reflected in this Annual Report on Form 10-K and our other public statements and securities filings will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward‑looking statements.

You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we currently expect. We qualify all of our forward‑looking statements by these cautionary statements.

The forward‑looking statements made in this Annual Report on Form 10-K speak only as of the date on which such statements are made. We undertake no obligation, and do not intend, to update any forward‑looking statements after the date of this Annual Report on Form 10-K or to conform such statements to actual results or revised expectations, except as required by applicable securities laws or other rules and regulations of the SEC.

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Summary Risk Factors

Our actual results may differ materially from those expressed in, or implied by, the forward‑looking statements included in this Annual Report on Form 10-K as a result of various factors. Our business is subject to numerous risks and uncertainties, including those highlighted in "Item 1A — Risk Factors". These risks include the following:

Risks related to COVID-19:

•We may experience disruptions related to COVID-19, including economic impacts of the COVID-19-related governmental actions;

Risks related to our business and industry:

•Our Program Partners or our Owned MGAs may fail to properly market, underwrite or administer policies;

•We depend on a limited number of Program Partners for a substantial portion of our gross written premiums;

•Our business is subject to significant geographic concentration;

•We may suffer a downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries;

•We may be unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders;

•Renewals of our existing contracts may not meet expectations;

•We may change our underwriting guidelines or our strategy without stockholder approval;

•We may act based on inaccurate or incomplete information regarding the accounts we underwrite;

•Our employees could take excessive risks;

•We may be unable to access the capital markets when needed;

•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;

•Negative developments in the workers’ compensation insurance industry could adversely affect our results;

•The insurance industry is cyclical in nature;

•Our failure to accurately and timely pay claims could harm our business;

•The effects of emerging claim and coverage issues on our business are uncertain;

•Our risk management policies and procedures may prove to be ineffective;

•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;

•We are subject to reinsurance counterparty credit risk. Our reinsurers may not pay on losses in a timely fashion, or at all;

•Some of our issuing carrier arrangements contain limits on the reinsurer's obligations to us;

•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;

•Our ability to grow our business will depend in part on the addition of new Program Partners, which may be unavailable;

•We could be harmed by the loss of one or more key executives or by an inability to attract and retain qualified personnel;

•Performance of our investment portfolio is subject to a variety of investment risks;

•Any shift in our investment strategy could increase the risk exposure of our investment portfolio;

•We could be forced to sell investments to meet our liquidity requirements;

•We may face increased competition in our programs market;

•We compete with a large number of companies in the insurance industry for underwriting premium;

•Our results of operations, liquidity, financial condition and FSRs are subject to the effects of natural and man-made catastrophic events;

•Global climate change may in the future increase the frequency and severity of weather events and resulting losses;

•Because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels;

•Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term prospects;

•Any failure to protect our intellectual property rights could impair our ability to protect our intellectual property, proprietary technology platform and brand, or we may be sued by third parties for alleged infringement of their proprietary rights;

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Technology risks:

•Technology breaches, failures or service interruptions of our or our business partners’ systems could harm our business and/or reputation;

•We may be unable to maintain third-party software licenses or errors in their software;

Legal and regulatory risks:

•We are subject to extensive regulation;

•Regulators may challenge our use of fronting arrangements in states in which our Program Partners are not licensed.

•Regulation may become more extensive in the future;

•Increasing regulatory focus on privacy issues and expanding laws may impair our operations;

•Our ability to receive dividends and permitted payments from our subsidiaries is subject to regulatory constraints;

•We may have exposure to losses from acts of terrorism;

•Assessments and premium surcharges may reduce our profitability;

•Changes in federal, state or foreign tax laws could adversely affect our financial results or market conditions;

•The discontinuance of LIBOR may adversely affect the value of certain investments we hold, assets and liabilities;

Risks related to our common stock:

•Our stock price may be volatile or may decline regardless of our operating performance;

•Our principal stockholders are able to exert significant influence over us and our corporate decisions;

•Our principal stockholders could sell their interests in us to a third-party in a private transaction;

•Sales or issuances of a substantial amount of shares of our common stock may cause the market price of our common stock to decline and make it more difficult for investors to sell;

•We will incur significant increased costs as a result of operating as a public company;

•We currently do not anticipate declaring or paying regular dividends on our common stock;

•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;

•Our principal stockholders have no obligation to offer us corporate opportunities;

Risks related to our status as an emerging growth company:

•We have elected to take advantage of reduced disclosure requirements and other exemptions;

•We have elected to use the extended transition period for complying with new or revised accounting standards;

General risk factors:

•Changes in accounting practices and future pronouncements may materially affect our reported financial results;

•If we are unable to maintain effective internal controls, our financial reporting could suffer;

•The effects of litigation on our business are uncertain;

•The Court of Chancery of the State of Delaware is the exclusive forum for certain disputes which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

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PART I

Item 1. Business

Trean Insurance Group, Inc. ("we" or the "Company") is an established, growth-oriented 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 our Program Partners and Owned Managing General Agents ("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 that 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 results and growth that historically have outperformed the broader insurance industry. We believe our multi-service value proposition represents a competitive advantage in our target markets, drives deep integration with our Program Partners and allows us to generate more diversified revenue streams. We seek to carefully identify and select our Program Partners, ensure we have closely aligned interests, and 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 many of 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.

The Company and its subsidiaries 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, Texas and Michigan are our largest markets, representing approximately 28%, 13% and 7%, respectively, of our gross written premiums for the year ended December 31, 2021.

History

We were founded in 1996 as a reinsurance broker and MGA that targeted smaller, underserved insurance providers writing niche classes of business, predominantly workers’ compensation, accident and health, and medical professional liability.

In 2003, we purchased Benchmark Insurance Company ("Benchmark"), which was licensed in 41 states and the District of Columbia and provided us with an insurance carrier with a financial strength rating of "A-" from A.M. Best. Beginning in 2007, we successfully repositioned Benchmark as a specialty insurance carrier for select, high-performing small- to mid-sized Program Partners. Benchmark is now licensed in 49 states and has an "A" rating from A.M. Best.

In July 2015, we sold an equity stake of 36.4% to certain entities affiliated with Altaris Capital Partners, LLC, a private equity firm (collectively, the "Altaris Funds"). The Altaris Funds subsequently made additional equity investments and owned approximately 47% of our Company's outstanding common stock as of December 31, 2021.

We have historically made equity investments in or acquired long-term partners where we believe they can add substantial value to our business. 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 2017, we acquired American Liberty Insurance Company ("ALIC"), a Utah-domiciled insurance company that was a former Program Partner and writes workers’ compensation insurance. ALIC is licensed or eligible to conduct insurance business, and therefore subject to regulation and supervision by insurance regulators, in 38 states and the District of Columbia. In 2018, we acquired ownership interests in two additional Program Partners: (i) a 45% common equity ownership in Compstar Holding Company LLC, the parent company of Compstar Insurance Services, LLC, an MGA underwriting workers’ compensation insurance coverage for California contractors; and (ii) a 100% ownership

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of Westcap, an MGA underwriting general liability insurance coverages for California contractors. In 2020, we acquired: (i) the remaining equity interest in Compstar Holding Company LLC; and (ii) a 100% ownership interest in 7710 Insurance Company ("7710"), a South Carolina-domiciled insurance company that was a former Program Partner and writes workers' compensation insurance, along with its associated program manager and agency. 7710 is licensed or eligible to conduct insurance business, and therefore subject to regulation and supervision by insurance regulators, in 9 states. In 2021, we acquired Western Integrated Care, LLC ("WIC"), a managed care organization that offers services to workers' compensation insurers to enable employees who are injured on the job to access qualified medical treatment.

On July 20, 2020, we closed the sale of 10,714,286 shares of our common stock in our Initial Public Offering ("IPO"), comprised of 7,142,857 shares issued and sold by us and 3,571,429 shares sold by selling stockholders pursuant to a registration statement on Form S-1 (File No. 333-239291), which was declared effective by the SEC on July 15, 2020. On July 22, 2020, we closed the sale of an additional 1,207,142 shares by certain selling stockholders in the IPO pursuant to the exercise of the underwriters’ option to purchase additional shares to cover over-allotments. The IPO terminated upon completion of the sale of the above-referenced shares.

On May 19, 2021, we closed the sale of 5,000,000 shares of its common stock, comprised entirely of shares sold by selling stockholders. We did not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. As a result of this offering, the Altaris Funds no longer beneficially own more than 50% of the outstanding common stock of the Company, and we are no longer a "controlled company" within the meaning of the Nasdaq listing rules.

Our structure

The chart below displays our corporate structure:

				Trean Insurance Group, Inc.
Trean Compstar Holdings LLC			Trean Corporation				Benchmark Holding Company
Compstar Holding Company LLC	Trean Reinsurance Services LLC	Benchmark Administrators LLC		Western Integrated Care LLC	Westcap Insurance Services LLC	Benchmark Insurance Company		American Liberty Insurance Company
						Benchmark Specialty Insurance Company		7710 Insurance Company
Compstar Insurance Services LLC

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 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 most other companies of our size and smaller do not possess these capabilities to the degree needed to be competitive with us, while most larger companies that do have the required expertise and capabilities in these areas tend not to participate in our target markets because their business models eschew the type of customized solutions that are needed when working with smaller, more entrepreneurial partners.

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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. 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. Our multi-service offering enables us to develop deep relationships with our Program Partners.

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. Our management team carefully evaluates potential new programs in conjunction with our underwriting and actuarial departments. We only accept programs that meet our stringent underwriting and actuarial requirements. For the year ended December 31, 2021, we declined approximately 96% of the new opportunities that we evaluated. For every Program Partner we select, we work with them to appropriately align interests and to establish rigorous ongoing reporting and auditing requirements upfront.

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 settle the claim and obtain a full and complete release of the claim at the earliest opportunity. In California, for the claim year ended December 31, 2020, valued as of December 31, 2021, our average medical cost for the workers' compensation market was $9,030 per claim compared to the California workers' compensation industry average of $27,940, as reported by the Workers' Compensation Insurance Rating Bureau ("WCIRB") at September 30, 2021. For the claim year ended December 31, 2020, we also closed 65% of our workers' compensation claims in California within the calendar year following the accident year, compared with the industry average of 34%, as reported by the WCIRB at September 30, 2021. To provide our policyholders these processing results, we currently average 93 open claims per claims adjuster. In comparison, the 2020 Workers’ Compensation Benchmarking Study by Rising Medical Solutions found that 61% of third-party administrators ("TPAs") had over 100 open claims per claims adjuster.

Significant fee-based income. Our business model generates significant fee-based income from multiple sources including issuing carrier services, claims administration and reinsurance brokerage. For the years ended December 31, 2021, 2020 and 2019, our fee-based income accounted for approximately 4.7%, 5.9% and 8.6% 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 by maintaining stringent collateral requirements to limit 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 manage risks to our organization.

Entrepreneurial and highly experienced management team. Our management team is highly experienced with decades of experience in specialty insurance markets. In addition to this significant industry experience, our team has a long history of continuity in our business. Our business has been led by our Chief Executive Officer and founder Andrew M. O’Brien since its inception in 1996.

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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, including workers' compensation with $51 billion of premiums and all of our other lines of business written with $345 billion in premiums in the United States in 2020 according to S&P Global. By comparison, we generated $634.2 million, $484.2 million and $411.4 million of gross written premiums for the years ended December 31, 2021, 2020 and 2019, respectively. We select Program Partners operating in our target markets with whom we believe we can partner to grow within these significant markets. In addition, Benchmark Specialty Insurance Company ("BSIC"), which was created in 2021, will write specialty/niche products through separate program partners, which will provide the group with expanded geographic diversification, rate flexibility and new product offerings on a non-admitted basis opening the excess and surplus lines $66.1 billion market.

Given the size of our markets, 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 continue to optimize our reinsurance program to drive 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 underwriting and returns criteria. 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 will leverage our core competencies and provide us with new revenue opportunities.

Opportunistically grow and maintain 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 nine acquisitions of companies with which we have had prior relationships. Seven of these companies write premiums which represented more than 40% of our gross written premiums for the year ended December 31, 2021.

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 in which we operate. As we continue to grow, we believe that we will have the opportunity to access additional business and to retain more profitable business that we have historically ceded to the reinsurance markets.

Maintaining our focus on long-term profitability and growth. Our competitive advantages, including our focus on underserved markets, have enabled us to grow our gross written premiums to $634.2 million for 2021 at a CAGR of 27.9% since 2015, while maintaining an average return on equity of approximately 19% and an average adjusted return on equity of approximately 17% for the same time period. 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 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. We believe our risk management is enhanced by the fact that we provide multiple services to many of our Program Partners and thus are in regular communication with them regarding underwriting, claims handling, reinsurance placement and collateral management. We seek to swiftly identify, correct and, if necessary, 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.

Products and services

We have historically provided products and services to our target markets in the specialty casualty insurance market. We underwrite specialty casualty insurance products both through our Program Partners, programs where we partner with other

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organizations, and our Owned MGAs. Our insurance product offerings include workers’ compensation, other liability, accident and health, and other lines of business. We also provide our Program Partners with a variety of services from which we generate recurring fee-based revenues, including reinsurance brokerage and, in particular, issuing carrier or "fronting" services.

Owned MGA's and Program Partner Premiums:

The following table shows the total premiums earned on a gross and net basis for Owned MGAs and Program Partners:

	The Year Ended December 31, 2021
	Owned MGAs			Program Partner			Total
Gross written premiums	$	268,943		$	365,221		$	634,164
Increase in gross unearned premiums	(25)			(61,886)			(61,911)
Gross earned premiums	268,918			303,335			572,253
Ceded earned premiums	(144,375)			(229,198)			(373,573)
Net earned premiums	$	124,543		$	74,137		$	198,680
Direct commissions	32,351			73,614			105,965
Ceding commission	(44,168)			(76,520)			(120,688)
Net commissions	$	(11,817)		$	(2,906)		$	(14,723)
Direct commissions rate(1)	12.0		%	24.3		%	18.5		%
Ceding commissions rate(2)	30.6		%	33.4		%	32.3		%
(1) Direct commissions as a percentage of gross earned premiums.
(2) Ceding commissions as a percentage of ceded earned premiums.

We utilize both quota share and catastrophe XOL contracts in our reinsurance strategy for our Owned MGAs and Program Partners. Direct commissions for Program Partners include third-party agent commissions and MGA service fees, while Owned MGAs direct commissions includes only third-party agent commissions, while the expenses associated with MGA services are included in general and administrative operating expenses. The ceding commission rates vary based on a number of factors including: the line of business, negotiated reinsurance terms, and program cost structures. For the year ended December 31, 2021, the Company retained 46.3% and 24.4% of gross earned premiums for Owned MGAs and Program Partners, respectively. The loss ratios for Owned MGAs and Program Partners for the year ended December 31, 2021 were 67.6% and 62.9%, respectively, resulting in a consolidated loss ratio of 65.8%.

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The following table shows our gross written premiums by insurance product for the years ended December 31, 2021, 2020 and 2019, in thousands.

	Year Ended December 31,
	2021		2020		2019
Workers' compensation	$	376,819	$	368,949	$	340,444
Other liability - occurrence	72,306		25,531		20,129
Commercial auto liability	53,959		25,301		9,935
Homeowners multiple peril	38,023		17,356		—
Commercial multiple peril	37,496		24,930		17,662
Group accident and health	32,565		2,375		7,678
Auto physical damage	13,746		7,340		4,843
Excess workers' compensation	5,587		3,986		2,539
Boiler and machinery	1,782		1,253		783
Inland marine	1,157		25		4
Products liability - occurrence	487		7,033		7,368
Fire	201		129		64
Surety	36		41		52
Private passenger auto liability	—		—		(100)
Total	$	634,164	$	484,249	$	411,401

In total, we are licensed in 49 states and the District of Columbia. The following table shows our gross written premiums by state for the years ended December 31, 2021, 2020 and 2019, in thousands.

	Year Ended December 31,
	2021		2020		2019
California	$	179,426	$	203,421	$	202,446
Texas	85,154		28,909		*
Michigan	46,271		41,830		38,174
Florida	27,982		*		*
Arizona	26,272		27,950		34,215
Georgia	25,619		12,869		*
Alabama	20,991		17,549		12,946
Pennsylvania	20,375		10,498		*
Tennessee	15,966		12,347		8,065
Louisiana	14,124		*		*
Other geographical areas	171,984		128,876		115,555
Total	$	634,164	$	484,249	$	411,401

* Amount was included in other geographical areas for the years ended December 31, 2020 and 2019 and therefore, is not presented.

Workers’ compensation

We offer workers’ compensation insurance through both our Owned MGAs and our Program Partners. California, Arizona and Florida represented 41.5%, 6.3% and 5.3%, respectively, of our workers’ compensation gross written premiums for the year ended December 31, 2021. We write business across a variety of industries and hazard classes. The construction industry is our largest industry exposure, representing 25% of premiums written for the year ended December 31, 2021. The workers’ compensation insurance industry classifies risks into hazard groups defined by the National Council on Compensation

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Insurance, or NCCI, and based on severity, with employers in lower groups having lower cost claims. Our premiums are spread across hazard classes. We target accounts that we believe offer greater risk-adjusted returns, such as small accounts that are 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 exposure to catastrophic risk. The average workers’ compensation premium per policy written by us was $14,779 and $16,187 for the years ended December 31, 2021 and 2020, respectively.

We manage workers’ compensation claims administration for all of our Owned MGAs and for several of our Program Partners. We believe that our claims philosophy has been a key differentiating factor allowing us to maintain lower loss ratios and settle claims quickly. Our workers’ compensation programs are supported by various quota share and excess of loss reinsurance facilities, which we utilize to align risk with our Program Partners and optimize our net retention relative to our financial objectives, balance sheet size and ratings requirements. We ceded 57.6% and 73.0% of gross workers’ compensation premiums earned to third-party insurers for the year ended December 31, 2021 and 2020, respectively.

The following exhibits illustrate our business mix of workers’ compensation gross written premiums by industry and hazard class for the year ended December 31, 2021.

Other liability

We offer other liability insurance products through both our Owned MGAs and our Program Partners. We target segments of the market that we believe are underserved or mispriced, such as California contractors with an average of five employees.

The other liability products that we offer through our Owned MGAs include admitted general liability and construction defect products offered to small contractors that protect them against claims from third parties. We distribute these products through select wholesale brokers in California. Additionally, through several of our Program Partners, we write 12 other liability insurance products in 49 states and the District of Columbia. Our claims personnel administer claims for our Owned MGA other liability products. We ceded approximately 79.1% and 82.9% of our gross other liability premiums earned to third-party insurers for the years ended December 31, 2021 and 2020, respectively.

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Issuing carrier services

We provide issuing carrier services to several of our Program Partners who offer workers' compensation, commercial multi-peril, personal auto and commercial auto and other liability insurance. In these relationships, we act as the policy-issuing insurance carrier for our Program Partner and transfer all or a substantial portion of the underwriting risk to third-party reinsurers. When we enter into issuing carrier relationships, we typically receive reinsurance ceding commissions at rates that include our fronting service from our reinsurers who are both Program Partners and/or third-party reinsurers. Reinsurance ceding commissions vary based on the line of business and premium volume. We provide issuing carrier services across each of our insurance products. For the year ended December 31, 2021, 2020 and 2019, reinsurance ceding commissions from issuing carrier services were $86.9 million, $71.8 million and $87.7 million, respectively, and are recognized as a reduction of direct insurance commission expense within 'General and administrative expenses' in the consolidated statement of operations.

Reinsurance brokerage services

Our reinsurance brokerage services division provides reinsurance placement, servicing and renewal services to small- to mid-sized insurance organizations, including most of our Program Partners and additional third-party insurance organizations. We earn commissions for structuring and placing reinsurance coverage on behalf of our clients. Commissions are based on a percentage of premiums ceded to reinsurers and vary by type or complexity of reinsurance coverage. Our reinsurance brokerage services are a valuable risk management tool in our relationships with our Program Partners, as we typically require the use of our reinsurance brokerage services to place and structure reinsurance prior to the inception of a new program. For the years ended December 31, 2021, 2020 and 2019, reinsurance brokerage generated $7.0 million, $9.0 million and 5.8 million in revenue, which is included in Other revenue.

Other services

We provide a variety of other services to insurance organizations, including claims administration and insurance management services. We provide workers’ compensation insurance claims administration services to some of our Program Partners as well as to third-party insurance organizations with which we do not have additional relationships.

Inland marine

Inland marine underwrites coverage for property that may be held in transit or instrumentalities of transportation and communication, such as builders risk, contractors equipment, transportation risk and mobile equipment.

Marketing and distribution

We market and distribute our products through several channels. Our Owned MGAs market through both retail agents and wholesale brokers, and our reinsurance brokerage services division actively markets our services directly to prospective clients. Additionally, we distribute products and services to our Program Partners, which comprise program administrators and insurance carriers. Since we focus on smaller accounts, we do not market our products and services through large insurance brokers. For the year ended December 31, 2021, our Owned MGAs represented 42% of our gross written premiums, Program Partners represented 57% of gross written premiums and national insurance pools represented 1% of gross written premiums. For the year ended December 31, 2020, our Owned MGAs represented 59% of our gross written premiums, Program Partners represented 40% of gross written premiums and national insurance pools represented 1% of gross written premiums. For the year ended December 31, 2019, our Owned MGA's represented 64% of our gross written premiums, Program Partners represented 35% of gross written premiums and national insurance pools represented 1% of gross written premiums.

Retail agents

We distribute our Owned MGA workers’ compensation products through approximately 1,122 retail agents. We target retail agents with experience and distribution capabilities in our target markets. Retail agents must demonstrate an ability to produce both our desired quality and quantity of business. To assist with this goal, our underwriters regularly visit our retail brokers to market and discuss the products we offer. We terminate retail agents who are unable to produce consistently profitable business or who produce unacceptably low volumes of business.

Wholesale brokers

We distribute our other liability products underwritten by our Owned MGAs through wholesale brokers that have expertise and strong track records in our niche target markets. For these products, we target small contractors in California. We use wholesale brokers to distribute these products because wholesale brokers are an important channel for commercial insurance

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products where they control much of the premium in these segments. We select our wholesale brokers based on our management’s review of their experience, knowledge, business plan, and track record of delivering us profitable business.

Reinsurance brokerage services

Our reinsurance brokerage services division actively markets our reinsurance services to small- and mid- sized program administrators and other insurance organizations. The primary focus of our reinsurance brokerage services division is to place reinsurance for our program partners, direct business and third parties. We are also able to leverage our reinsurance brokerage relationships to cultivate new Program Partner relationships and market our other services. The majority of our current Program Partner relationships originated as an introduction from our reinsurance brokerage services division.

Program administrators

We partner with select program administrators across each of our target markets to harness the efficiency and scale of these organizations’ marketing and distribution infrastructures. Through these relationships, we are able to access national distribution channels or write specialized risks in our target markets efficiently. Generally, policies bound by our program administrators are underwritten according to strict underwriting guidelines that we establish with each program administrator. We have long relationships with many of our program administrators and, in most cases, we have had an existing relationship with a program administrator before adding it as a new Program Partner. For example, we may have previously provided the program with reinsurance placement or consulting services, or worked with the key principals of the prospective Program Partner at their prior organization. We believe program administrators value our multi-service offering and capabilities and the flexibility with which we can offer these services. In addition to underwriting insurance products through program administrators, we provide these organizations with issuing carrier services and reinsurance brokerage services.

Carrier and other partnerships

Given our unique focus on flexible multi-service offering, we are a partner of choice for small- to mid-sized insurance carriers seeking a specialty casualty insurance partner to satisfy insurance department requirements, provide comprehensive management solutions or transfer certain classes of risk. We have partnerships with insurance companies, risk retention groups, trusts and state insurance pools.

Program selection, underwriting and controls

Program selection

Given our position and reputation in the market, we are presented with more new program opportunities than we choose to write, allowing us to be highly selective with respect to the Program Partners with whom we choose to partner. We decline approximately 96% of the new opportunities we are presented with prior to or through our pre-screening process. We typically source new opportunities through our reinsurance brokerage services business or through referrals from existing Program Partners. For each new opportunity that we choose to evaluate, we conduct a comprehensive pre-screening of the company, including an evaluation of its philosophy, size, past performance, future performance targets and above all, compatibility with our operating model, risk appetite and existing book of business. Our target Program Partners tend to have several, if not all, of the following traits:

•small- to mid-sized books of business (less than $30 million of annual gross premiums at the inception of the relationship);

•presence in markets where we believe we can leverage our distinctive expertise, multi-service offering and market relationships to create a competitive advantage;

•track record of underwriting success supported with credible data;

•proven ability to administer the program pursuant to agreed-upon underwriting and claims guidelines;

•ability and willingness to assume a meaningful quota share risk participation in the program, typically through ownership of an insurance company or captive;

•collaborative, entrepreneurial management team; and

•willingness and ability for us to control the structuring and placement of reinsurance.

Underwriting and program design

For opportunities that are acceptable to us through the pre-screening process, we conduct rigorous underwriting due diligence prior to entering into a partnership. As part of this process, our due diligence team collects and analyzes data relating to the

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organization’s operating, underwriting, financial and biographical information to prepare an initial due diligence file for our Underwriting Committee. Our Underwriting Committee is led by our CEO and consists of members with expertise in underwriting and finance. In 2021, 4 out of 90 submissions were approved by the Underwriting Committee. If the Underwriting Committee approves the submission on a provisional basis, we then conduct comprehensive underwriting, claims and financial diligence on the potential Program Partner. This includes inviting the potential Program Partner’s management for an on-site meeting at our Wayzata headquarters and on-site diligence of the potential Program Partner.

If we look to enter into a contractual relationship with a potential Program Partner, we work with them to design a program that appropriately aligns interests and establish rigorous underwriting guidelines and ongoing reporting and auditing requirements. At the inception of a new program, we typically act as an issuing carrier where we reinsure a substantial amount of risk to third parties. We also typically require the Program Partner to maintain significant underwriting risk or otherwise align incentives with the Program Partner’s underwriting performance. The amount of risk and premiums ceded to Program Partners is contractually stipulated with each Program Partner. Over time we look to optimize our net retention positions with our Program Partners once we have become comfortable with their performance through our ongoing interactions.

Ongoing monitoring and controls

Throughout the lifetime of a relationship with a Program Partner, we maintain systematic monitoring and control mechanisms to ensure each relationship meets our financial objectives. We closely monitor each Program Partner’s adherence to the agreed upon underwriting and claims guidelines and conduct regular reviews of loss experience, rate levels, reserves and the overall financial health of the Program Partner. We receive underwriting and claims data feeds from each Program Partner at least monthly. We typically conduct two underwriting, claims and accounting audits per program per year. Because we typically provide multiple services to our Program Partners, we are in regular communication with them regarding underwriting, claims handling, reinsurance placement and collateral management. As a result, we have near continuous opportunities to interact with our Program Partners and evaluate their performance.

We maintain the right to terminate relationships with our Program Partners. Reasons for us to terminate a relationship include an inability to produce targeted underwriting results, writing exposures outside of agreed upon risk tolerances, delinquency in meeting reporting requirements, a change of strategic direction, or failure to meet collateral or other commitments to us. Our stringent and extensive due diligence and selection process allows us the flexibility to partner with organizations with which we believe we will have successful relationships.

Claims

We actively manage claims for our Owned MGA businesses, as well as for select Program Partners that underwrite workers’ compensation insurance. Other lines of business are typically managed directly by our Program Partners, or in some cases by TPAs. When our Program Partners or TPAs administer claims, our claims personnel are responsible for overseeing the Program Partner or TPA, including the management of loss reserves, settlement, arbitration and mediation. Claims are reported directly to the applicable Program Partner or TPA, which adheres to agreed-upon service level standards.

For business where we manage the claims, our experienced claims team actively manages the claims. In our largest line of business, workers’ compensation, our philosophy is to provide an injured employee with the high-quality medical care as quickly as possible to reduce pain, expedite healing and lead to a faster and more complete recovery. Once an injured employee has healed, we aim to fully settle and achieve a full and complete release of the claim at the earliest opportunity. This approach to claims management enables us to lower our claim costs and settle the ultimate claim reserves more quickly. In order to achieve these outcomes, we manage our claims organization to ensure that each of our claims personnel is responsible for lower than industry average claims files per claims adjuster.

Our claims adjusters have settlement authority that varies by the line of business and the experience of each adjuster. In the case of a catastrophic claim, we may use a third-party administrator that specializes in these types of claims to ease the burden of catastrophic claims on our organization. In addition, our claims examiners work closely with our underwriting staff to keep apprised of claims trends. Vendor management is also an important component of effective claims management and our claims examiners work closely with our vendors to manage expenses and costs.

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Reinsurance

We cede a portion of the risk we accept on our balance sheet to third-party reinsurers through a variety of reinsurance arrangements. We manage these arrangements to align risks with our Program Partners, optimize our net retention relative to our financial objectives, balance sheet size and ratings requirements, as well as to limit our maximum loss resulting from a single program or a single event. We utilize both quota share and excess of loss ("XOL") reinsurance as tools in our overall risk management strategy to achieve these goals, usually in conjunction with each other. Quota share reinsurance involves the proportional sharing of premiums and losses of each defined program. We utilize quota share reinsurance for several purposes, including (i) to cede risk to Program Partners, which allows us to share economics and align incentives and (ii) to cede risk to third-party reinsurers in order to manage our net written premiums appropriately based on our financial objectives, capital base, A.M. Best financial strength rating and risk appetite. It is a core pillar of our underwriting philosophy that Program Partners retain a portion of the underwriting risk of their program. We believe this best aligns interests, attracts higher quality programs and leads to better underwriting results. Under XOL reinsurance, losses in excess of a retention level are paid by the reinsurer, subject to a limit, and are customized per program or across multiple programs. We utilize XOL reinsurance to protect against catastrophic or other unforeseen extreme loss activity that could otherwise negatively impact our profitability and capital base. The majority of our exposure to catastrophic risk stems from the workers' compensation premium we retain. Potential catastrophic events include an earthquake, terrorism or another event. We believe we mitigate risk by our focus on small-to mid-sized accounts, which means that we generally do not have concentrated employee counts at a single location that could be exposed to a catastrophic loss. The cost and limits of the reinsurance coverage we purchase vary from year to year based on the availability of quality reinsurance at an acceptable price and our desired level of retention.

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Our XOL reinsurance structure consolidates multiple programs under a single XOL reinsurance program comprised of two excess of loss reinsurance agreements with four professional reinsurers. We believe this structure significantly decreases our cost of reinsurance compared with each program maintaining its own XOL reinsurance program. As of December 31, 2021, we had $2 million retention of which is reinsured under various quota share reinsurance agreements at a weighted average rate of 37%, based on 2021 premiums for the applicable programs. These agreements apply to programs that accounted for 87% of workers' compensation premiums for the year ended December 31, 2021. We have the following XOL coverage:

▪0% of $3 million of losses in excess of $2 million as of December 31, 2021. Gross written premiums for the applicable programs for this layer accounted for 75% of workers' compensation premiums for the year ended December 31, 2021.

▪57.5% of $10 million of losses in excess of $5 million. Gross written premiums for the applicable programs for this layer accounted for 79% of workers' compensation premiums for the year ended December 31, 2021.

▪100% of $35 million of losses in excess of $15 million. Gross written premiums for the applicable programs for this layer accounted for 90% of workers' compensation premiums for the year ended December 31, 2021.

Summary workers' compensation reinsurance program

$50,000,000
	7/1/2021 Excess of Loss Reinsurance $35M xs $15M Per Occurrence Risks Attaching
$15,000,000
	7/1/2021 Excess of Loss Reinsurance $10M xs $5M Per Occurrence Risks Attaching		7/1/2021 Excess of Loss Reinsurance $10M xs $5M Per Occurrence Risks Attaching Retention: 42.5%
$5,000,000
	$3M xs $2M  Retention: 100%
$2,000,000
	Quota Share Reinsurance First $2M Per Occurrence Risks Attaching	Quota Share Reinsurance First $2M Per Occurrence Risks Attaching - Retention: 63%1
$0

1 Quota share retention rate reflects a weighted rate based on 2021 gross written premiums for multiple contracts across multiple programs.

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Collateral management

As a result of our extensive use of reinsurance in our business model, we effectively convert underwriting risk to credit risk of our Program Partners and other professional reinsurers. Accordingly, it is critical for the success of our business that we actively manage our credit exposures. We achieve this through active collateral management, including: (i) requiring our reinsurance partners who do not have an A.M. Best financial strength rating of "A-" or higher or who are not authorized reinsurers to post collateral equal to at least 100% of reserves for unearned premiums and losses and loss adjustment expense, including incurred but not yet reported ("IBNR") reserves, based on our assessment of expected losses; (ii) securing collateral by trust funds, letters of credit or, more frequently, funds withheld accounts; and (iii) reviewing collateral accounts on a monthly basis and secured with quarterly and annual "true-ups."

As of December 31, 2021, we had reinsurance recoverables on paid and unpaid losses of $377.2 million. Against these recoverables, we maintained $199.4 million of funds withheld and $151.4 million of other forms of collateral, for a total of approximately $350.8 million in credit protection from our reinsurers. As of December 31, 2021, we did not have any balance from reinsurers that was over 90 days old or in dispute and we held appropriate funding or collateral from all unauthorized reinsurers.

The following table sets forth our ten largest reinsurance recoverables by reinsurer as of December 31, 2021, in thousands:

Reinsurers:	A.M. Best Rating	Reinsurance Recoverables		Collateral		Net Recoverables
Markel Global	A	$	74,584	$	7,651	$	66,933
Greenlight	A-	68,741		96,296		(27,555)
Provistar Insurance Company, Limited	NR	26,310		30,600		(4,290)
Employers National Insurance Company	NR	26,167		35,155		(8,988)
Arch Reinsurance Company (U.S.)	A+	25,541		3,491		22,050
Munich Reins America Incorporation	A+	20,185		—		20,185
First Insurance Company of OK (FICO)	NR	19,755		25,818		(6,062)
VGM Insurance Companies of America Limited	NR	15,705		26,976		(11,271)
Synergy Comp. Insurance Company	A-	11,720		14,622		(2,901)
Swiss Reinsurance America Corp	A+	8,772		1,718		7,054
Total		297,479		242,327		55,152
All other reinsurers		79,762		111,195		(31,433)
Total recoverables		$	377,241	$	353,522	$	23,719

Technology

We operate on a digital platform with a data warehouse that collects and builds a robust repository of statistical data for our workers’ compensation business and a substantial amount of our other liability business. All of our workers’ compensation business data is automated through the data warehouse. Our platform provides a high degree of efficiency, accuracy and speed across all of our processes. We are able to use the data that we collect through Application Programming Interfaces ("APIs") to quickly analyze trends across all functions in our business. The data warehouse is easily searchable and contains most of the underwriting and claims information we collect at every level. We are able to track rates, monitor historical loss experience and reserve development and measure other relevant metrics at a granular level of detail. Our technology team is continuously enhancing this system to improve its capability and expand its use across our business. We believe our systems and technology allow us to quickly collect and analyze data, thereby improving our ability to manage our business. We have scalable, standardized infrastructure technology systems built for automation, efficiency and security, and are not burdened by legacy technology systems.

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Reserves

We record reserves for estimated losses of the policies that we underwrite and for loss adjustment expenses ("LAE") related to the investigation and settlement of policy claims. Our reserves for losses and LAE represent the estimated cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid as of a given point in time. We evaluate the overall adequacy of gross, ceded and net losses and LAE reserves in accordance with established actuarial standards to set our reserves. We establish reserves on a line of business basis at the individual program level. Consistent with our gross and net premium breakdown, reserves for workers’ compensation losses comprise the majority of our carried reserve position. Due to our shorter claims process and ability to close claims faster than competitors, we believe we are able to settle our ultimate reserves more quickly as well.

When a claim is first reported, we establish an initial case reserve for the estimated amount of our loss based on our estimate of the most likely outcome of the claim at that time. Generally, a case reserve is established within 30 days after the claim is reported and consists of anticipated medical costs, indemnity costs and specific adjustment expenses. This case reserve is set to cover the life of the claim based on information available at that point in time. At any point in time, the amount paid on a claim, as well as the reserve for future amounts to be paid, represents the estimated total cost of the claim or the case incurred amount. The estimated amount of loss for a reported claim is based on various factors, including:

•type of loss;

•severity of the injury or damage;

•age and occupation of the injured employee;

•estimated length of temporary disability;

•anticipated permanent disability;

•expected medical procedures, costs and duration;

•our knowledge of the circumstances surrounding the claim;

•insurance policy provisions, including coverage, related to the claim;

•jurisdiction of the occurrence; and

•other benefits defined by applicable statute.

Reserves are estimates involving actuarial projections of the expected ultimate cost to settle and administer claims at a given time but are not expected to precisely represent the ultimate liability. Estimates are based on past loss experience modified for current trends as well as prevailing economic, legal and social conditions. Such estimates are also based on facts and circumstances then known but are subject to significant uncertainty based on the outcome of various factors, such as future events, future trends in claim severity, inflation and changes in the judicial interpretation of policy provisions relating to the determination of coverage.

Reserves are set by our Reserve Committee in consultation with an independent third-party actuarial firm. Our Reserve Committee includes our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Senior Vice President of Underwriting, Corporate Controller and Insurance Divisional Controller. The Reserve Committee meets semi-annually to review the actuarial reserving recommendations made by the independent actuary. Our independent third-party actuarial firm reviews our net reserves at June 30 and September 30 of each year and performs a comprehensive review of all programs at each year-end.

As of December 31, 2021 we have had aggregate favorable development of $43.8 million on our reserve estimates since 2014, respectively.

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Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																					As of December 31, 2021
Years Ended December 31,																					Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2012		2013		2014		2015		2016		2017		2018		2019		2020		2021
2012	$	21,857	$	21,831	$	20,697	$	21,053	$	20,331	$	20,058	$	20,646	$	20,690	$	20,651	$	20,548	$	989	4,154
2013			24,661		24,755		24,280		21,361		21,342		21,506		21,465		21,631		21,671		1,674		4,491
2014					24,580		22,777		21,726		21,571		21,095		21,054		20,897		20,183		1,939		5,075
2015							25,757		26,614		26,414		25,450		25,650		22,518		22,516		2,671		6,474
2016									35,281		33,672		32,554		30,165		27,340		26,550		3,044		11,499
2017											43,499		35,113		32,685		30,847		29,783		4,406		17,062
2018													47,263		41,630		39,880		38,108		6,195		14,810
2019															57,778		51,598		51,824		10,840		13,086
2020																	63,734		64,362		15,773		13,343
2021																			127,981		41,149		18,290
																			$	423,526
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Years Ended December 31,
Accident Year	2012		2013		2014		2015		2016		2017		2018		2019		2020		2021
2012	$	6,143	$	11,996	$	14,480	$	16,249	$	17,196	$	18,188	$	19,098	$	19,399	$	19,704	$	19,824
2013			6,799		12,602		15,984		17,708		19,246		19,712		20,129		20,121		20,617
2014					6,011		12,005		14,814		16,666		17,260		18,238		18,507		18,702
2015							6,275		13,785		16,512		18,046		18,923		19,340		19,685
2016									8,110		16,791		19,677		20,780		22,138		22,648
2017											8,903		17,555		20,809		22,673		23,727
2018													10,339		22,279		26,852		29,479
2019															13,215		27,174		33,678
2020																	14,487		34,437
2021																			38,435
																			261,232
	All outstanding liabilities before 2012, net of reinsurance																		5,157
	Liabilities for claims and claim adjustment expenses, net of reinsurance																		$	167,451

Investments

Investment income is a significant component of our earnings. We invest our reserves and maintain a conservative investment portfolio primarily comprised of highly rated fixed income securities. Our investment strategy is to preserve capital and limit our exposure to investment risk. Our portfolio is managed by New England Asset Management, Inc. ("NEAM"), an investment management firm with a focus on insurance portfolios. Under our current agreement with NEAM, which we can terminate at any time upon 30 days’ notice, we pay NEAM a quarterly fee of a percentage of our assets under management. There are no minimum amounts of assets required under our agreement with NEAM. Our Investment Committee meets periodically and reports to our board of directors.

As of December 31, 2021, we had approximately $402.2 million of total cash and invested assets, net of all collateral held on behalf of our Program Partners under reinsurance treaties. The weighted average rating of the fixed income portfolio is "AA" and the weighted average duration is approximately 4.0 years. The fixed income portfolio pre-tax book yield was 1.99%.

We hold funds withheld balances in separate accounts for the benefit of our Program Partners. The funds withheld assets and associated investment income belong to our various Program Partners. However, we require that the assets in these accounts be managed in accordance with our investment guidelines. As of December 31, 2021, we had $199.4 million of funds held under reinsurance treaties.

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	December 31,
	2021						2020
	Cost or Amortized Cost		Fair Value		% of Total Fair Value		Cost or Amortized Cost		Fair Value		% of Total Fair Value
	(in thousands, except percentages)
Fixed maturities:
U.S. government and government securities	$	41,490	$	41,434	8.8	%	$	17,135	$	17,471	4.3	%
Foreign governments	2,500		2,490		0.5	%	300		302		0.1	%
States, territories and possessions	10,593		10,766		2.3	%	7,500		7,774		1.9	%
Political subdivisions of states territories and possessions	39,170		40,002		8.5	%	31,759		33,212		8.1	%
Special revenue and special assessment obligations	93,664		95,991		20.3	%	77,329		81,714		20.0	%
Industrial and public utilities	100,774		103,257		21.9	%	107,017		113,741		27.8	%
Commercial mortgage-backed securities	119,378		118,218		25.0	%	16,242		18,066		4.4	%
Residential mortgage-backed securities	16,549		17,368		3.7	%	91,478		93,017		22.7	%
Other loan-backed securities	41,236		41,425		8.8	%	39,293		39,945		9.7	%
Hybrid securities	105		110		—	%	356		362		0.1	%
Total fixed maturities	465,459		471,061		99.8	%	388,409		405,604		99.1	%
Equity securities:
Preferred stock	243		228		—	%	243		240		0.1	%
Common stock	741		741		0.2	%	1,554		3,534		0.8	%
Total equity securities	984		969		0.2	%	1,797		3,774		0.9	%
Total investments	$	466,443	$	472,030	100.0	%	$	390,206	$	409,378	100.0	%

	December 31,
	2021						2020
	Cost or Amortized Cost		Fair Value		% of Total Fair Value		Cost or Amortized Cost		Fair Value		% of Total Fair Value
	(in thousands, except percentages)
Due in one year or less	$	29,108	$	29,329	6.2	%	$	25,844	$	26,107	6.4	%
Due after one year but before five years	117,366		119,275		25.3	%	102,491		107,516		26.5	%
Due after five years but before ten years	78,967		81,217		17.2	%	61,952		67,091		16.5	%
Due after ten years	62,855		64,229		13.6	%	51,109		53,862		13.3	%
Commercial mortgage-backed securities	119,378		118,218		25.2	%	16,242		18,066		4.5	%
Residential mortgage-backed securities	16,549		17,368		3.7	%	91,478		93,017		22.9	%
Other loan-backed securities	41,236		41,425		8.8	%	39,293		39,945		9.9	%
Total	$	465,459	$	471,061	100.0	%	$	388,409	$	405,604	100.0	%

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	December 31,
	2021				2020
	Fair Value		% of Total Fair Value		Fair Value		% of Total Fair Value
	(in thousands, except percentages)
Rating
AAA	$	80,455	17.1	%	$	59,887	14.8	%
AA	278,557		59.1	%	224,371		55.3	%
A	77,097		16.4	%	89,975		22.2	%
BBB	33,959		7.2	%	29,404		7.2	%
BB	947		0.2	%	1,921		0.5	%
Below investment grade	46		—	%	46		—	%
Total	$	471,061	100.0	%	$	405,604	100.0	%

Enterprise risk management

We designed and implemented an enterprise risk management ("ERM") program to identify, manage and mitigate the risks the company is exposed to. The board of directors and its committees are supported in their oversight of our ERM process by an ERM Committee consisting of seven senior executives who each represent a critical operating unit of ours.

Our board of directors, ERM committee and senior management have identified five key risk areas for oversight within the ERM framework. The five key risk areas are credit risk, market risk, underwriting risk, strategic risk and operational risk. Within each key risk, we have identified specific risk sub-categories leading to the identification and analysis of more granular risks. Through a documented analytical process, the ERM committee continually reviews and evaluates these risks to monitor their potential impact on our businesses and periodically reports its findings to the board of directors and its committees. Our board of directors believes this overall structure and analytical process creates effective risk identification, appetite determination, controls, oversight and management for our Company.

Competition

In general, the property and casualty ("P&C") insurance market is highly competitive. Some of our competitors have greater financial, marketing and management resources and experience than we do. We may also compete with new market entrants in the future. In the workers’ compensation insurance market, our competitors include insurance companies, state insurance pools and self-insurance funds. According to the most recent market data from S&P Global, approximately 250 insurance companies participated in the workers’ compensation market in 2020. We compete against State National Companies, Inc. and AF Group in the provision of issuing carrier services to program administrators.

Competition is based on many factors, including the reputation and experience of the insurer, coverages and services offered, pricing and other terms and conditions, speed of claims payment, customer service, relationships with brokers and agents (including ease of doing business, service provided and commission rates paid), size and financial strength ratings, among other considerations.

Ratings

As of March 2022, we have an "A" (Excellent) (Outlook Stable) financial strength rating ("FSR") from A.M. Best, which rates insurance companies based on factors of concern to policyholders. A.M. Best’s FSRs reflect its opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders.

A.M. Best currently assigns 16 FSRs to insurance companies, which currently range from "A++" (Superior) to "S" (Rating Suspended). "A" (Excellent) is the third highest FSR in the A.M. Best system. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its losses

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and loss expense reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence.

Human capital

Overview

As of December 31, 2021, we had 355 employees. Our employees are not subject to any collective bargaining agreements, and we are not aware of any current efforts to implement such an agreement. We believe that our employee relationships are good.

Compensation and benefits

We believe that our employees are one of our most valuable assets. In order to attract and retain talent, we offer fair, competitive compensation and benefits to support our team members’ overall well-being. Employee compensation includes base pay, annual incentive compensation and, in some cases, stock compensation.

Diversity and inclusion

We are committed to fostering a diverse and inclusive work environment free from discrimination of any kind and that supports the communities we serve. We seek to recruit the best qualified employees regardless of gender, ethnicity or other protected traits and it is our policy to fully comply with all laws applicable to discrimination in the workplace.

Regulation

Our business is subject to extensive regulation in the United States at both the state and federal level, including regulation under state insurance and federal laws. We cannot predict the impact of future state or federal laws or regulations on our business. Future laws and regulations, or the interpretation thereof, may materially adversely affect our financial condition and results of operations.

Insurance regulation - General

Our insurance subsidiaries are subject to extensive regulation and supervision by the states in which they are domiciled, particularly with respect to their financial condition. Benchmark is domiciled in Kansas where it is regulated and supervised by the Kansas Insurance Department. Additionally, Benchmark is commercially domiciled in California, where it is regulated and supervised by the California Department of Insurance. ALIC is domiciled in Utah where it is regulated and supervised by the Utah Insurance Department. 7710 is domiciled in South Carolina where it is regulated and supervised by the South Carolina Department of Insurance. BSIC is domiciled in Arkansas where it is regulated and supervised by the Arkansas Department of Insurance. Our insurance subsidiaries are also subject to regulation by all states in which they transact business, which oversight in practice often focuses on review of their market conduct. Benchmark is licensed to conduct insurance business, and therefore, Benchmark is subject to regulation and supervision by insurance regulators, in 49 states and the District of Columbia. ALIC is licensed or eligible to conduct insurance business, and therefore, ALIC is subject to regulation and supervision by insurance regulators, in 38 states and the District of Columbia. 7710 is licensed or eligible to conduct insurance business, and therefore, 7710 is subject to regulation and supervision by insurance regulators, in 9 states. BSIC is licensed to conduct business in 1 state and is authorized to issue policies in 1 state. The extent and scope of insurance regulation varies between jurisdictions, but most jurisdictions have laws and regulations governing the financial security of insurers, including admittance of assets for purposes of calculating statutory surplus, standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurers.

In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, the approval of rates. State statutes and regulations also prescribe the permitted types and concentrations of investments by insurers. The primary purpose of this insurance industry regulation is to protect policyholders. P&C insurance companies are required to file detailed quarterly and annual statements with insurance regulatory authorities in each of the jurisdictions in which they are licensed or eligible to do business, and their operations and accounts are subject to periodic examination by such authorities. In connection with the continued licensing of insurance companies, regulators have discretionary authority to limit or prohibit the ability to issue new policies if, in their judgment, the regulators determine that an insurer is not maintaining minimum statutory surplus or capital or if the further transaction of business will be detrimental to its policyholders.

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The amount of dividends that our insurance subsidiaries may pay in any twelve-month period, without prior approval by their respective domestic insurance regulators, is restricted under the laws of Kansas, California, Utah, Arkansas and South Carolina.

Under Kansas and California law, dividends payable from Benchmark without the prior approval of the applicable insurance commissioner must not exceed the greater of (i) 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 (ii) 100% of net income during the applicable twelve-month period (not including realized gains). Dividends shall not include pro rata distributions of any class of Benchmark's own securities.

Under Utah law, dividends payable from ALIC without the prior approval of the applicable insurance commissioner must not exceed the lesser of (i) 10% of ALIC’s surplus as shown on the last statutory financial statement on file with the Utah Insurance Department; or (ii) 100% of net income during the applicable twelve- month period (not including realized gains). Dividends shall not include pro rata distributions of any class of ALIC's own securities.

Under South Carolina law, dividends payable from 7710 without the prior approval of the applicable insurance commissioner are limited to the following during the preceding twelve months: (a) when paid from other than earned surplus must not exceed the lesser of: (i) 10% of 7710's surplus as regards policyholders as shown in 7710’s most recent annual statement; or (ii) the net income, not including net realized gains or losses as shown in the 7710's most recent annual statement; or (b) when paid from earned surplus must not exceed the greater of: (i) 10% of the 7710's surplus as regards policyholders as shown in 7710’s most recent annual statement; or (ii) the net income, not including net realized gains or losses as shown in the 7710's most recent annual statement. Dividends shall not include pro rata distributions of any class of 7710’s own securities.

Under Arkansas law, dividends payable from BSIC without the prior approval of the applicable insurance commissioner must not exceed the lesser of (i) 10% of BSIC’s surplus as shown on the last statutory financial statement on file with the Arkansas Insurance Department; or (ii) 100% of net income during the applicable twelve- month period (not including realized gains). Dividends shall not include pro rata distributions of any class of BSIC's own securities.

In addition, payments of dividends and advances or repayment of funds to us by our insurance subsidiaries are restricted by the applicable laws of our insurance subsidiaries’ respective jurisdictions requiring that each insurance subsidiary hold a specified amount of minimum reserves in order to meet future obligations on its outstanding policies. These regulations specify that the minimum reserves shall be calculated to be sufficient to meet future obligations, giving consideration for required future premiums to be received, which are based on certain specified interest rates and methods of valuation, which are subject to change.

Insurance holding company regulation

We are an insurance holding company and, together with our insurance subsidiaries and our other subsidiaries and affiliates, are subject to the insurance holding company system laws of Kansas, California, Utah, Arkansas and South Carolina. These laws vary across jurisdictions, but generally require an insurance holding company and insurers that are members of such insurance holding company’s system to register with the jurisdiction’s insurance regulatory authorities, to file reports disclosing certain information, including their capital structure, ownership, management, financial condition, enterprise risk and own risk and solvency assessment.

These laws also require disclosure of certain qualifying transactions between or among our insurance subsidiaries and us or any of our other subsidiaries or affiliates to which one or more of our insurance subsidiaries is a party. Such transactions could include loans, investments, sales, service agreements and reinsurance agreements among other similar inter-affiliate transactions. These laws also require that inter-company transactions be fair and reasonable. In certain circumstances, the insurance company must give prior notice of the transaction to the insurance department in its state of domicile, and the insurance department must either approve or disapprove the subject inter-company transaction within defined periods. Further, these laws require that an insurer’s contract holders’ surplus following any dividends or distributions to shareholder affiliates be reasonable in relation to the insurer’s outstanding liabilities and its financial needs.

The insurance holding company laws in some states, including Kansas, California, Utah, Arkansas and South Carolina, require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s parent company. Generally, to obtain approval from the insurance commissioner for any acquisition of control of an insurance company or its parent company, the proposed acquirer must file with the applicable commissioner an application containing certain information

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including with respect to the participant companies in and terms of the transaction. Different jurisdictions may have requirements for prior approval of any acquisition of control of any insurance or reinsurance company licensed or authorized to transact business in those jurisdictions. Additional requirements may include re-licensing or subsequent approval for renewal of existing licenses upon an acquisition of control.

Credit for reinsurance

State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. The Nonadmitted Reinsurance Reform Act contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") provides that if the state of domicile of a ceding insurer is a National Association of Insurance Commissioners ("NAIC") accredited state, or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk, then no other state may deny such credit for reinsurance. Because all states are currently accredited by the NAIC, the Dodd-Frank Act prohibits a state in which a U.S. ceding insurer is licensed but not domiciled from denying credit for reinsurance for the insurer’s ceded risk if the cedant’s domestic state regulator recognizes credit for reinsurance. The ceding company in this instance is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premium (which are that portion of written premiums which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves to the extent ceded to the reinsurer.

Statutory examinations

We are required to file detailed quarterly and annual financial statements, in accordance with prescribed statutory accounting rules with regulatory officials in each of the jurisdictions in which we do business. As part of their routine regulatory oversight process, the Kansas Insurance Department, the California Department of Insurance, the Utah Insurance Department, the Arkansas Department of Insurance, and the South Carolina Department of Insurance conduct periodic detailed examinations, generally once every three to five years, of the books, records, accounts and operations of our insurance subsidiaries domiciled in their states.

Financial tests

The NAIC has developed a set of financial relationships or "tests," known as the Insurance Regulatory Information System or IRIS, which is designed for early identification of companies that may require special attention or action by insurance regulatory authorities. Insurance companies submit data annually to the NAIC, which in turn analyzes the data by utilizing ratios. State insurance regulators review this statistical report, which is available to the public, together with an analytical report, prepared by and available only to state insurance regulators, to identify insurance companies that appear to require immediate regulatory attention. A "usual range" of results for each ratio is used as a benchmark.

Risk-based capital requirements

In order to enhance the regulation of insurers’ solvency, the NAIC adopted a model law to implement risk-based capital ("RBC") requirements for P&C insurers. All states have adopted the NAIC’s model law or a substantively similar law. The NAIC Risk-Based Capital Model Act requires insurance companies to submit an annual RBC Report, which compares an insurer’s Total Adjusted Capital with its Authorized Control Level RBC. A company’s RBC is calculated by using a specified formula that applies factors to various specified asset, premium, claim, expense and reserve items. The factors are higher for those items with greater underlying risk and lower for items with less underlying risk.

Total Adjusted Capital is defined as the sum of an insurer’s statutory capital and surplus and asset valuation reserve and the estimated amount of all dividends declared by the insurer’s board of directors prior to the end of the statement year that are not yet paid or due at the end of the year. The RBC Report is used by regulators to initiate appropriate regulatory actions relating to insurers that show indications of weak or deteriorating conditions. RBC is an additional standard for minimum capital requirements that insurers must meet to avoid being placed in rehabilitation or liquidation by regulators. The annual RBC Report, and the information contained therein, are not intended by the NAIC as a means to rank insurers.

RBC is a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. It provides a means of setting the capital requirement in which the degree of risk taken by the insurer is the primary determinant. The value of an insurer’s Total Adjusted Capital in relation to its RBC, together with its trend in its Total Adjusted Capital, is used as a basis for determining regulatory action that a state insurance regulator may be authorized or required to take with respect to an insurer. The four determinations, potentially applicable under each jurisdiction’s laws, are essentially as follows:

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•Company Action Level Event. Total Adjusted Capital is greater than or equal to 150% but less than 200% of RBC or Total Adjusted Capital greater than or equal to 200% but less than 250% of RBC, and has a negative trend. If there is a Company Action Level Event, the insurer must submit a plan (an "RBC Plan") outlining, among other things, the corrective actions it intends to take in order to remedy its capital deficiency.

•Regulatory Action Level Event. Total Adjusted Capital is greater than or equal to 100% but less than 150% of RBC or the insurer has failed to comply with filing deadlines for its RBC Report or RBC Plan. If there is a Regulatory Action Level Event, the insurer is also required to submit an RBC Plan. In addition, the insurance regulator must undertake a comprehensive examination of the insurer’s financial condition and must issue any appropriate corrective orders.

•Authorized Control Level Event. Total Adjusted Capital is below RBC but greater than or equal to 70% of RBC or the insurer has failed to respond to a corrective order. As noted above, if there is an Authorized Control Level Event, the insurance regulator may seek rehabilitation or liquidation of the insurer if it deems it to be in the best interests of the policyholders and creditors of the insurer and the public.

•Mandatory Control Level Event. Total Adjusted Capital is below 70% of RBC. If there is a Mandatory Control Level Event, the insurance regulator must seek rehabilitation or liquidation of the insurer.

Market conduct

Our insurance subsidiaries are subject to periodic market conduct exams ("MCE") in any jurisdiction where they do business. An MCE typically entails review of business activities, such as operations and management, complaint handling, marketing and sales, producer licensing, policyholder service, underwriting and rating and claims handling. Regulators may impose fines and penalties upon finding violations of regulations governing such business activities.

Rate and form approvals

Our insurance subsidiaries may be subject to each state’s laws and regulations regarding rate and form approvals. The applicable laws and regulations are used by states to establish standards to ensure that rates are not excessive, inadequate, unfairly discriminatory or used to engage in unfair price competition. An insurer’s ability to increase rates and the relative timing of the process can be dependent upon each state’s respective requirements.

Claims adjusting

Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions; failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled.

Assessments against insurers

Under the insurance guaranty fund laws existing in each state and the District of Columbia., licensed insurers can be assessed by insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Most of these laws provide for annual limits on the assessments and for an offset against state premium taxes. These premium tax offsets must be spread over future periods ranging from five to 20 years. Since these assessments typically are not made for several years after an insurer fails and depend upon the final outcome of liquidation or rehabilitation proceedings, we cannot accurately determine the amount or timing of any future assessments.

Regulation of investments

We are subject to state laws and regulations that require diversification of our investment portfolios and limit the amounts of investments in certain asset categories, such as below-investment grade fixed income securities, equity real estate, other equity investments and derivatives. Failure to comply with these requirements and limitations could cause affected investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, could require the divestiture of such non-qualifying investments.

Statutory accounting principles

Statutory accounting principles ("SAP") are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s solvency. Statutory

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accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

GAAP is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriately matching revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.

Potential issuing carrier restrictions

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 that have 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.

Enterprise risk and other developments

The NAIC, as part of its solvency modernization initiative, has engaged in a concerted effort to strengthen the ability of U.S. state insurance regulators to monitor U.S. insurance holding company groups. The NAIC’s solvency modernization initiative, among other things, aims to expand the authority and focus of state insurance regulators to encompass U.S. insurance holding company systems at the group level.

The holding company reform efforts at the NAIC culminated in December 2010 in the adoption of significant amendments to the NAIC’s Insurance Holding Company System Regulatory Act (the "Model Holding Company Act") and its Insurance Holding Company System Model Regulation (the "Model Holding Company Regulation"). Among other things, the revised Model Holding Company Act and Model Holding Company Regulation explicitly address "enterprise" risk – the risk that an activity, circumstance, event or series of events involving one or more affiliates of an insurer will, if not remedied promptly, be likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole – and require annual reporting of potential enterprise risk as well as access to information to allow the state insurance regulator to assess such risk. In addition, the Model Holding Company Act amendments include a requirement to the effect that any person divesting control over an insurer must provide 30 days’ notice to the regulator and the insurer (with an exception for cases where a Form A is being filed). The amendments direct the domestic state insurance regulator to determine those instances in which a divesting person will be required to file for and obtain approval of the transaction. Some form of the 2010 amendments to the Model Holding Company Act has been adopted in all states.

In December 2014, the NAIC adopted additional revisions to the Model Holding Company Act, updating the model to clarify the group-wide supervisor for a defined class of internationally active insurance groups. The revisions also outline the process for determining the lead state for domestic insurance groups, outline the activities the commissioner may engage in as group-wide supervisor and extend confidentiality protections to cover information received in the course of group-wide supervision. The 2014 revisions to the Model Holding Company Act have been adopted in all accredited U.S. jurisdictions.

In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment ("ORSA") Model Act, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Model Act provides that domestic insurers, or their insurance group, must regularly conduct an ORSA consistent with a process comparable to the ORSA Guidance Manual process. The ORSA Model Act also provides that, no more than once a year, an insurer’s domiciliary regulator may request that an insurer submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and the insurance group of which it is a member. If and when the ORSA Model Act is adopted by a particular state, the ORSA Model Act would impose more extensive filing requirements on parents and other affiliates of domestic insurers. Each of Kansas, California and Utah have adopted their version of the ORSA Model Act. Our insurance company subsidiaries, Benchmark, ALIC and 7710, will be subject to the requirements of the ORSA Model Act adopted in Kansas, California, Utah and South Carolina, respectively, when their direct written premiums and unaffiliated assumed premiums, if any, exceed $500 million (Benchmark, ALIC and 7710 are currently exempt from such requirements based on the amount of their direct written premiums and unaffiliated assumed premiums).

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Privacy regulation

Federal and state law and regulation require financial institutions to protect the security and confidentiality of personal information, including health-related and customer information, and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of health- related and customer information and their practices relating to protecting the security and confidentiality of that information. State laws regulate the use and disclosure of social security numbers and federal and state laws require notice to affected individuals, law enforcement, regulators and others if there is a breach of the security of certain personal information, including social security numbers. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to consumers and customers. Federal and state lawmakers and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of personal information.

Cybersecurity regulation

The NAIC adopted the Insurance Data Security Model Law in October 2017. As of the date of this Annual Report, 18 states, including South Carolina but not including Kansas, California, Arkansas or Utah, have adopted the model law or a variation of it. We expect that additional regulations could be enacted in other jurisdictions that could impact our cybersecurity program. Depending on these and other potential implementation requirements, we will likely incur additional costs of compliance.

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the SEC. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. The address of that site is http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information filed by us with the SEC are available, without charge, on our web site, http://www.trean.com, as soon as reasonably practicable after they are filed electronically with the SEC. The information on our website is not a part of this Annual Report.

Item 1A. Risk Factors

The execution of our business strategy, our results of operations and our financial condition are subject to inherent risks and uncertainties. A summary of certain material risks is provided below, and you should carefully consider these risks and uncertainties, as well as the financial and other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, in evaluating any investment decision involving the Company. This section does not describe all risks and uncertainties applicable to us and is intended only as a summary of certain factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects and the industry in which we operate. Other sections of this Annual Report on Form 10-K contain additional information about these and other risks and uncertainties. The occurrence of any of these risks and uncertainties could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects and cause the value of our stock to decline, which could cause you to lose all or part of your investment.

Risks related to COVID-19

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.

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 continuation of the COVID-19 pandemic and the economic impacts of COVID-19-related governmental actions may eventually have an impact on our premium revenue, our loss experience and loss expense, liquidity, regulatory capital and surplus and operations.

It is still difficult to determine the ultimate effect of the significantly impacted financial markets, businesses, households and communities 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 the future 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;

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•regulatory actions relaxing reporting requirements for claims, which may affect coverage under our claims made and reported policies;

•legislative actions prohibiting us from canceling 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;

•legislative action creating a presumption that COVID-19 was contracted in the course and scope of employment for certain workers;

•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;

•we may have increased workers’ compensation loss expense and claims frequency if policyholder employees experience an adverse reaction to COVID-19 vaccines due to the employer requiring or strongly encouraging vaccination for employees—a majority of case law thus far has determined adverse reactions in these situations are compensable under workers’ compensation laws;

•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, 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.

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 such compensation may be insufficient or entirely unavailable—for example, if the relevant Program Partner becomes insolvent or is otherwise unable to pay us. Any such failures could result in monetary losses, 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, 2021 and 2020, approximately 46% and 35% of our gross written premiums were derived from our top ten Program Partners, respectively.

A significant decrease in business from, or the entire loss of, any of our largest Program Partners or several of our other Program Partners may materially adversely affect our business, financial condition and results of operations. Approximately half of our gross written premiums are written in three key states.

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Our business is subject to significant geographic concentration, as more than half of our gross written premiums are written in three key states.

For the year ended December 31, 2021, we derived approximately 28%, 13% and 7%, respectively, of our gross written premiums in the states of California, Texas and Michigan. As a result, our financial results are subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions including any single, major catastrophic event, series of events or other condition causing significant losses in California, Texas and Michigan, 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.

Our insurance company subsidiaries are evaluated for overall financial strength by A.M. Best to receive financial strength ratings ("FSRs"), which are an important factor in establishing the competitive position of insurance companies. 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 all of our insurance company subsidiaries that are rated are currently rated "A" (Excellent), their FSRs are subject to change. In addition, 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 FSR themselves or otherwise require a highly rated carrier, such as ourselves, to meet their business objectives. A downgrade in our insurance company subsidiaries’ FSRs could lead to our Program Partners doing business preferentially 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 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 is a highly complex exercise involving 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.

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If actual renewals of our existing contracts do not meet expectations, our written premiums in future years and our future results of operations could be materially adversely affected.

Many of our contracts are written for a one-year term. In our financial forecasting process, we make assumptions about the rates of renewal of our prior year’s contracts. The insurance and reinsurance industries have historically been cyclical businesses with intense competition, often based on and highly sensitive to price. If actual renewals do not substantially meet expectations or if we choose not to write a renewal because of pricing conditions, our written premiums in future years and our future operations could be materially adversely affected.

We may change our underwriting guidelines or our strategy without stockholder approval.

Our management has the authority to change our underwriting guidelines or our strategy without notice to our stockholders and without stockholder approval. As a result, we may make fundamental changes to our operations without stockholder approval, which could result in our pursuing a strategy or implementing underwriting guidelines that may be materially different from the strategy or underwriting guidelines described in the section titled "Business" or elsewhere in this Annual Report on Form 10-K.

We may act based on inaccurate or incomplete information regarding the accounts we underwrite.

We rely on information provided by insureds or their representatives when underwriting insurance policies, and this information may be incorrect or incomplete. While we may make inquiries to validate or supplement the information provided, such inquiries cannot eliminate all risk that the information provided will be correct and complete and will include all factors and context relevant to our underwriting decisions and process. It is possible that we will misunderstand the nature or extent of the activities or facilities and the corresponding extent of the risks that we insure because of our reliance on inadequate or inaccurate information.

Our employees could take excessive risks, which could negatively affect our financial condition and business.

As an insurance enterprise, we are in the business of evaluating and binding certain risks. The employees who conduct our business, including executive officers and other members of management, underwriters, product managers and other employees, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such as setting underwriting guidelines and standards, product design and pricing, determining which business opportunities to pursue and other decisions. We endeavor, in both the setting and execution of our business strategy and the design and implementation of our compensation programs and practices, to avoid giving our employees incentives to take excessive risks. Employees may, however, take such risks regardless of strategic directives or the structure of our compensation programs and practices. Similarly, although we employ controls and procedures designed to monitor employees’ business decisions and prevent them from taking excessive risks, these controls and procedures may not be effective. If our employees take excessive risks, the impact of those risks could have a material adverse effect on our financial condition and business operations.

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.

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

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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, 59.4% of our gross written premiums for the year ended December 31, 2021 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. For example, 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 materially and adversely 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 all of which are outside of our control, we cannot predict the timing, duration or magnitude 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.

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 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 or effects of court decisions that expand the right to sue, remove limitations on recovery, extend applicable statutes of limitations or otherwise repeal or weaken tort reforms could have an adverse impact on our business.

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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, identified or accurately assessed. 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 markets in which we operate evolve, our risk management framework may not adapt 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 adequately 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 insufficient, 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.

In addition, 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, Utah, the state of domicile of ALIC, Arkansas, the state of domicile of BSIC, and South Carolina, the state of domicile of 7710 Insurance Company. The Kansas Insurance Department, the California Department of Insurance, the Utah Insurance Department, the Arkansas Department of Insurance and the South Carolina Department of Insurance, the primary regulators of our insurance company subsidiaries, have adopted regulations implementing a requirement under the Kansas, California, Utah, Arkansas and South Carolina 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.

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 benefited 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.

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

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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 their inability or unwillingness to make timely payments if and when required under the terms of our contracts, could materially adversely affect our business, financial condition and results of operations.

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 us or our Program Partners could expose us to potential losses.

We retain risk for our own account on business underwritten by both our insurance company subsidiaries and our Program Partners. The determination to retain risk by reducing the amount of reinsurance we purchase, or by not purchasing reinsurance for a particular risk, customer segment or niche, is based on a complex variety of factors, including market conditions, pricing, availability of reinsurance, our capital levels, loss experience and tolerance. A determination by us to retain greater risk 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.

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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" in this Annual Report on Form 10-K. There is, however, 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.

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. To affect our growth strategy, however, we 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 as a result of any of our failure to effectively onboard new Program Partners. Such reputational damage could make it more difficult for us to attract new and retain existing 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 and industry. The pool of talent from which we actively recruit 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. 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.

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 Investment Committee. 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 "Item 7A — 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.

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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 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, the Utah Insurance Department, the Arkansas Department of Insurance, and the South Carolina Department of Insurance. Our investment objectives may not be achieved in whole or in part, 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 risk exposure 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 have historically been 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 industry or to general stock market fluctuations that affect all issuers. Common stocks also generally subject their holders to greater risk of loss 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. For these reasons, among others, investments in equity securities have historically been more volatile than investments in other asset classes such as fixed income securities.