We own our corporate headquarters building and land in Wayzata, Minnesota which has approximately 25,229 square feet of office space. As of December 31, 2020, we leased office space in 10 states. We believe that our existing office space is adequate for our current needs.
The following discussion and analysis of financial condition and results of operations for the year ended December 31, 2020 is qualified by reference to and should be read in conjunction with the accompanying consolidated and combined financial statements and the related notes included herein. The discussion and analysis below are based on comparisons between our historical financial data for different periods and include certain forward-looking statements about our business, operations and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors described in the section "Item 1A - Risk Factors." Our actual results may differ materially from those expressed in, or implied by, those forward-looking statements. See "Forward-Looking Statements."
The Company defines increases or decreases greater than 200% as "NM" or not meaningful.
In conjunction with the IPO and corporate restructuring, the Company made a payment to Altaris Capital Partners, LLC in connection with the termination of the Company's consulting and advisory agreements as well as paid bonuses to employees and pre-IPO unitholders for the successful completion of the IPO. The aggregate amount of these payments totaled $11,054 and is included in other expenses on the consolidated statement of operations.
Effective July 15, 2020, Trean Compstar Holdings LLC purchased the remaining 55% ownership interest in Compstar, a holding company, along with its wholly owned subsidiary Compstar Insurance Services, a managing general agent, by issuing 6,613,606 shares of the Company’s common stock with a market price of $15 per share on the date of acquisition. Prior to the acquisition date, the Company held a 45% ownership interest in Compstar and accounted for its investment under the equity method. As of the acquisition date, the fair value attributable to the Company’s previous equity interest was $81,167 and the carrying value was $11,321. As a result, the Company recorded a gain of $69,846 from the remeasurement of its previous equity interest, which is included in gain on revaluation of Compstar investment on the consolidated statement of operations. The fair value of the Company’s previous equity interest was revalued on the acquisition date using the market price of the shares issued as consideration for the acquisition.
Effective October 1, 2020, Benchmark Holding Company acquired 100% ownership of 7710 Insurance Company as well as its associated program manager and agency, 7710 Service Company, LLC and Creekwood Insurance Agency, LLC for a purchase price of $12,140. 7710 Insurance Company underwrites workers' compensation primarily for emergency services, including firefighters and emergency medical services (EMS). 7710 Insurance Company focuses on reducing costs and claims through the implementation of a propriety safety preparedness and loss control program, created and staffed by experienced firefighters and EMS professionals.
We have undertaken a number of measures to manage the impact of the ongoing COVID-19 pandemic on our business and continue to monitor how it may impact our premium revenue, loss experience and loss expense, liquidity, and our regulatory capital and surplus, and operations.
We took several actions to protect the health of the public and our employees and to comply with directives and advice of governmental authorities. We responded by developing a Preparedness Plan that outlined both corporate-wide and location-specific modifications to offices. This multi-faceted plan included elements such as restricting business travel and transitioning from an office-based company to primarily a remote working culture. As most of our employees already had secure remote working connections, we took additional measures to ensure all employees who wanted or needed to work remotely were able to do so securely with limited connectivity disruption. We also provided our employees with education and training with respect to cybersecurity issues that may arise relating to COVID-19 and working remotely in conjunction with the goal of serving the operational needs of a remote workforce and continuing to serve our customers. We implemented safeguards for employees who play critical roles to ensure operational reliability and established protocols for employees who interact directly with the public. As state, city and county guidelines progress, we have implemented new health and safety in-office procedures to prepare for transitioning our workforce back to working in our offices on a limited basis.
We also did not experience a material impact in our reported claims or incurred losses for the year ended December 31, 2020 as a result of the COVID-19 pandemic. Losses and LAE increased $6,113, or 13.7%, to $50,774 for the year ended December 31, 2020, compared to $44,661 for the year ended December 31, 2019, with the increase primarily attributable to the growth in earned premiums during the period. In addition, our loss ratio decreased to 46.8% during the year ended December 31, 2020 from 51.6% for the year ended December 31, 2019.
With respect to our investment portfolio, we seek to hold a high-quality, diversified portfolio of investments, which are primarily in fixed maturity and available-for-sale investments and as such, our investment portfolio has limited exposure to the recent equity market volatility. For the year ended December 31, 2020, we experienced a net increase of $6,218 in the fair value of our investment portfolio due to unrealized gains on the value of our fixed maturity investments and have not seen a significant increase in gross or aged unrealized losses with respect to our fixed maturity investments. We believe that any decline in the fair value of individual fixed maturity investments within our portfolio during 2020 was due to the disruption in the global financial markets associated with COVID-19 as opposed to underlying issues with our investment portfolio. While we experienced an improvement in our unrealized investment positions as of the end of December 2020, if there were to be continued equity and debt financial market volatility as a result of the pandemic or otherwise, which in turn could create mark-to-market investment valuation decreases, we expect there could be additional or increased unrealized losses recorded in future reporting periods. However, given the conservative nature of our investment portfolio, we expect that any adverse impact on the value of our investment portfolio, as it relates to COVID-19, will be temporary, and we do not expect a long-term negative impact on our financial condition, results of operations or cash flows.
Adverse events such as health-related concerns about working in our offices, the inability to travel, the potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and delay the implementation of our business strategy. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.
Gross written premiums: Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for general and administrative expenses (including policy acquisition costs), reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
Ceded earned premiums: Ceded earned premiums are the amount of gross earned premiums ceded to reinsurers. We enter into reinsurance contracts to limit our maximum losses and diversify our exposure and provide statutory surplus relief. The volume of our ceded earned premiums is affected by the level of our gross earned premiums and any decision we make to increase or decrease limits, retention levels and co-participations.
Net earned premiums: Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is earned and ceded to third-party reinsurers, including our Program Partners and professional reinsurers, under our reinsurance agreements.
Loss and loss adjustment expenses: Losses and LAE are net of reinsurance and include claims paid, estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. In general, our losses and LAE are affected by:
•frequency of claims associated with the particular types of insurance contacts that we write;
•trends in the average size of losses incurred on a particular type of business;
Losses and LAE are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and LAE may be paid out over a period of years.
General and administrative expenses: General and administrative expenses include policy acquisition costs and other underwriting expenses. Policy acquisition costs are principally comprised of the commissions we pay our brokers and program managers, net of ceding commissions we receive on business ceded under our reinsurance contracts. Policy acquisition costs that are directly related to the successful acquisition or reinsurance of those policies are deferred. The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life. Other general and administrative expenses include employee salaries and benefits, corporate insurance costs, technology costs, office rent and professional services fees such as legal, accounting and actuarial services.
Noncash stock compensation: Noncash stock compensation include expenses related to the fair value and issuance of restricted stock units and stock options.
Equity earnings in affiliates, net of tax: Equity earnings in affiliates, net of tax includes the Company's share of earnings from equity method investments.
We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.
Underwriting income is a non-GAAP financial measure defined as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, litigation settlements, intangible asset amortization, noncash stock compensation, other revenue, interest expense and other income and expenses. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of underwriting income to income before taxes in accordance with GAAP.
Loss ratio, expressed as a percentage, is the ratio of losses and LAE to net earned premiums.
Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders' equity during the period. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of adjusted return on tangible equity to return on tangible equity in accordance with GAAP.
The following table summarizes our results of operations for the year ended December 31, 2020 and 2019:
(1) the Company defines increases or decreases greater than 200% as "NM" or not meaningful.
Gross written premiums: Gross written premiums increased $72,848, or 17.7%, to $484,249 for the year ended December 31, 2020, compared to $411,401 for the year ended December 31, 2019. The increase is primarily attributable to the addition of new Program Partners throughout the fiscal year, the growth in our existing program partner business and the acquisition of 7710 in the fourth quarter. The changes in gross written premiums were most notably due to the following lines of business:
•all other non-workers' compensation liability, which represented 23.8% of our gross written premiums for the year ended December 31, 2020, increased $44,342, or 62.5%, compared to the year ended December 31, 2019.
Other expenses: Other expenses were $13,427 for the year ended December 31, 2020, which includes (i) a payment to Altaris Capital Partners, LLC in connection with the termination of the Company's consulting and advisory agreement totaling $7,639; (ii) IPO bonuses paid to employees and pre-IPO unitholders of $3,415; (iii) an arbitration settlement, including associated legal fees, totaling $1,572; and (iv) an executive severance accrual of $801.
Income tax expense: Income tax expense was $6,825 for the year ended December 31, 2020, which resulted in an effective tax rate of 7.2%, compared to $7,074 for the year ended December 31, 2019, which resulted in an effective tax rate of 20.3%. The decrease in the effective tax rate from the statutory rate of 21% is due primarily to the non-tax impact of the gain recorded on the revaluation of the Company's original 45% investment in Compstar, offset by certain IPO-related expenses not deductible for tax purposes and the impact of state taxes.
We define underwriting income as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense other revenue and other income and expenses. Underwriting income represents the pre-tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment income, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. We use this metric because we believe it gives our management and other users of our financial information useful insight into our underwriting business performance by adjusting for these expenses and sources of income. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.
We define adjusted net income as net income excluding the impact of certain items, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and stock compensation, other expenses and gains or losses that we believe do not reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results across periods. We calculate the tax impact only on adjustments that would be included in calculating our income tax expense using the effective tax rate at the end of each period. We use adjusted net income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance by eliminating the effects of these items. Adjusted net income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted net income differently.
We define adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period. We use adjusted return on equity as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance by adjusting for items that we believe do not reflect our core operating performance and that may diminish comparability across periods. Adjusted return on equity should not be viewed as a substitute for return on equity calculated in accordance with GAAP, and other companies may define adjusted return on equity differently.
State insurance laws restrict the ability of insurance companies to declare stockholder dividends without prior regulatory approval. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.
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 capital 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 (ii) 100% of net income during the applicable twelve- month period (not including realized capital gains).
Our insurance subsidiaries are also required by state law to maintain a minimum level of policyholder's surplus. Kansas, Utah and South Carolina utilize a risk-based capital requirement as promulgated by the National Association of Insurance Commissioners. Such requirements are designed to identify the various business risks (e.g., investment risk, underwriting profitability risk, etc.) of insurance companies and their subsidiaries. As of December 31, 2020 and December 31, 2019, the total adjusted capital of our insurance subsidiaries was in excess of their respective prescribed risk-based capital requirements.
Management believes that we have sufficient liquidity available to meet our operating cash needs and obligations and committed capital expenditures for the next 12 months.
Our most significant source of cash is from premiums received from insureds, net of the related commission amount for the policies. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that generally earn interest and dividends. The table below summarizes our net cash flows.
Operating Activities: Net cash provided by operating activities for the year ended December 31, 2020 was $50,012 compared to $52,173 for the same period in 2019. The $2,161 decrease in cash provided by operating activities during the year ended December 31, 2020 is driven by a decrease in cash related to (i) an increase in net income of $59,484, offset by a non-cash gain on the revaluation of Compstar of $69,846 (ii) unpaid loss and loss adjustment expense of $16,889; (iii) premiums and other receivables of $13,722; (iv) prepaid reinsurance premiums of $13,640; and (v) reinsurance premiums payable of $8,999. This decrease is partially offset by an increase in cash related to (i) unearned premiums of $37,655; (ii) reinsurance recoverables of $19,024; and (iii) funds held under reinsurance agreements of $5,230.
Investing Activities: Net cash used in investing activities for the year ended December 31, 2020 was $20,246 compared to $23,943 for the same period in 2019. The $3,697 decrease in cash used in investing activities is driven by (i) an increase of $11,891 net cash received in the acquisition of Compstar and (ii) $3,000 received from the sale of TRI in 2020. This increase in cash is partially offset by (i) by an increase in the net cash used in the purchase and sale of investments of $6,097 and (ii) an increase in cash used in the acquisition of subsidiaries of $5,038.
In April 2018, Trean Corporation and Trean Compstar entered into a credit agreement with First Horizon Bank (formerly, First Tennessee Bank National Association) (the 2018 First Horizon Credit Agreement), which included a term loan facility totaling $27.5 million and a revolving credit facility of $3.0 million.
In conjunction with the acquisition of Compstar, the Company acquired a loan from Oak Street Funding with a total principle of $19,740. After the completion of the acquisition, the Company paid this loan off in full.
We use reinsurance to convert underwriting risk to credit risk, protect the balance sheet, reduce earnings volatility and increase overall premium writing capacity. We utilize both quota share and excess of loss reinsurance to achieve these goals. Quota share reinsurance involves the proportional sharing of premiums and losses. Under excess of loss reinsurance, losses in excess of a retention level are paid by the reinsurer, subject to a limit.
We purchase excess of loss and catastrophe reinsurance from professional reinsurers to protect against catastrophic, large loss and/or unforeseen extreme loss activity that could otherwise negatively impact the Company’s profitability and capital base. The majority of our exposure to catastrophe risk stems from the workers’ compensation premium we retain net of premiums ceded to Program Partners and professional reinsurers. Potential catastrophic events include earthquake, terrorism or another event that could cause more than one covered employee working at the same location to be injured in the event. This catastrophic exposure is generally ameliorated by the type of accounts we underwrite. Due to our focus on small- to mid-sized accounts (i.e., few employees per policy and location), we generally do not have concentrated employee counts at single locations that can serve as the basis for a catastrophic loss. The limited catastrophic risk that does exist is ceded to large, professional reinsurers through excess of loss reinsurance contracts.
The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that the insurance companies receive. The "A" (Excellent) rating obtained by us is consistent with our business plan and allows us to actively pursue relationships with the agents and brokers identified in our marketing plan.
The following table illustrates our contractual obligations and commercial commitments by due date as of as of December 31, 2020:
We had $1,739 of unrecognized stock compensation as of December 31, 2020 related to non-vested stock compensation granted. The Company recognized $506 of stock compensation during the year ended December 31, 2020. In addition, we recognized approximately $197 of expense related to pre-IPO membership unit awards for the year ended December 31, 2020.
Our investment portfolio objectives are to maintain liquidity, facilitating financial strength and stability and ensuring regulatory and legal compliance. Our investment portfolio consists of available-for-sale fixed maturities and other equity investments, all of which are carried at fair value. We seek to hold a high-quality portfolio of investments that is managed by a professional investment advisory management firm in accordance with the Company's investment policy and routinely reviewed by our management team. Our investments, however, are subject to general economic conditions and market risks as well as risks inherent to particular securities. The Company's investment portfolio has the following objectives:
•Meet insurance regulatory requirements with respect to investments under the applicable insurance laws;
•Maintain an appropriate level of liquidity to satisfy the cash requirements of current operations and long-term obligations;
We categorize our reserves for unpaid loss and LAE into two types: case reserves and incurred but not yet reported (IBNR). We establish our case reserves based on claims information reported to us through our claims administrator. Our case reserves include an estimate of the ultimate losses from the claims including administrative costs associated with the
In addition to case reserves, we establish a reserve for IBNR. With the assistance of an independent actuarial firm, we estimate the total loss and LAE related to IBNR which is comprised of: (a) future payments on claims that existed as of the balance sheet date but had not yet been reported to us; (b) a reserve for the additional development on claims that have been reported to us; and (c) a provision for additional payments on closed claims that may reopen. These estimates are based on historical information, industry information and estimates of trends that may impact the ultimate frequency and severity of IBNR claims.
Our loss reserves, including the main components of such reserves, were as follows:
The process of estimating the reserves for unpaid loss and LAE expenses requires a high degree of judgment. Estimates are prepared using several generally accepted actuarial methodologies for estimating loss reserves including, but not limited to, the incurred development method, paid development method, incurred Bornhuetter-Ferguson method, hindsight IBNR/case reserve ratios, and loss ratio method. The methods used vary based on the line of business and the Partner Program or general agency that generated the business. Considering each of the alternative ultimate estimates, we determine the appropriate estimate of ultimate loss for each line of business and Program Partner.
Level 3: Fair values primarily based on valuations derived when one or more of the significant inputs are unobservable. With little or no observable market, the determination of fair value uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.
We utilize a third-party pricing service to assist us with the valuation of our investments. The fair value of our available-for-sale fixed maturity and equity securities are based on quoted market prices, where available. These fair values are obtained primarily from our third-party pricing service, which generally include Level 1 or Level 2 inputs. Inputs often used in the valuation methodologies include, but are not limited to, transaction data, yield, quality, coupon rate, maturity, issue type, trading characteristics and market activity.
We prepare an impairment analysis for goodwill and other intangible assets. In evaluating for impairment, we identify whether events or circumstances have occurred that may impact the carrying value of these assets and make assumptions regarding future events such as cash flows and profitability. If the carrying amount of the assets are deemed to be not recoverable, the Company records an impairment loss. Differences in the assumptions of recoverability and actual results could materially impact the carrying amount of these assets and our operating results.
The Company strategically identifies opportunities to grow through acquisition. Such business combinations include the identification and valuation of certain assets acquired and liabilities assumed including the valuation of goodwill and intangible assets. Valuations are determined using a market participant assumption and generally include the following valuation approaches:
The Cost Approach is based on replacement value using the acquired company's balance sheet as the basis for valuing the business or individual assets. Under this approach, the appraiser must determine the potential value that is attainable from the sale of all assets or individual assets less the repayment of any associated debt. Separate valuations are performed for each item on the balance sheet and all tangible and intangible assets and liabilities are adjusted to their respective values.
Schedule II - Condensed Financial Information of Registrant - Parent Company Only
Pursuant to Rule 7-05 of Regulation S-X, Financial Statement Schedules I, III, IV, V and VI have been omitted as the information to be set forth therein is not applicable or has been included in the Consolidated and Combined Financial Statements or notes thereto.
To the stockholders and the Board of Directors of Trean Insurance Group, Inc.
In July 2020, Trean Insurance Group, Inc. (together with its wholly owned subsidiaries, the Company) completed its initial public offering (IPO) of common stock. Prior to the completion of the IPO, the Company effected the following reorganization transactions: (i) each of Trean Holdings LLC (Trean), an insurance services company, and BIC Holdings LLC (BIC), a property and casualty insurance holding company, contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc. and (ii) upon the completion of the transfers by Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.
The Company's wholly owned subsidiaries include (a) Benchmark Holding Company, a property and casualty insurance holding company, which owns Benchmark Insurance Company (Benchmark), a property and casualty insurance company domiciled in the state of Kansas, American Liberty Insurance Company (ALIC), a property and casualty insurance company domiciled in the state of Utah, and 7710 Insurance Company, a property and casualty insurance company domiciled in the state of South Carolina; (b) Trean Compstar Holdings, LLC, a limited liability company created originally for the purchase of Compstar Insurance Services LLC, a California-based general agency; and (c) Trean Corporation (Trean Corp), a reinsurance intermediary manager and a managing general agent, which consists of the following wholly owned subsidiaries: Trean Reinsurance Services, LLC (TRS), a reinsurance intermediary broker; Benchmark Administrators LLC (BIC Admin), a claims third-party administrator; and Westcap Insurance Services, LLC (Westcap), a managing general agent based in California.
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and with the instructions to Form 10-K under the Securities Exchange Act of 1934. All dollar amounts are shown in thousands, except share and per share amounts.
While preparing the consolidated financial statements, the Company has made certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require extensive use of estimates include the reserves for unpaid losses and loss adjustment expenses (LAE), reinsurance recoverables, investments, goodwill and intangible assets. Except for the captions on the consolidated balance sheets and consolidated statements of comprehensive income, generally, the term loss(es) is used to collectively refer to both losses and LAE.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing requirements on fair value measurements in Topic 820 by changing the disclosure requirements regarding Level 1, Level 2 and Level 3 investments. The Company adopted this standard effective January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the consolidated financial statements.
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10). The amendments in this ASU provide clarification on certain aspects related to the guidance issued in ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The areas for correction or improvement include (1) equity securities without a readily determinable fair value - discontinuation; (2) equity securities without a readily determinable fair value - adjustments; (3) forward contracts and purchased options; (4) presentation requirements for certain fair value option liabilities; (5) fair value option liabilities denominated in a foreign currency; and (6) transition guidance for equity securities without a readily determinable fair value. The Company adopted this standard effective January 1, 2019 on a prospective basis. The adoption of this standard did not have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) of the Accounting Standards Codification (ASC). Insurance contracts are excluded from the scope of this guidance. The core principle of ASC Topic 606 is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The Company adopted this standard effective January 1, 2019 using the modified retrospective approach to all contracts. The cumulative effect of adopting the standard resulted in an increase to the opening balance of retained earnings of $695, with offsetting changes to other assets and deferred tax asset. The cumulative effect adjustment recorded to other assets is related to the recording of brokerage revenue. Under ASC Topic 606, the Company is required to estimate the full contractual revenues at contract inception, subject to a constraint, which
The impact of adopting ASC Topic 606 on the Company’s consolidated statement of operations is summarized as follows:
The impact on the Company’s consolidated balance sheet as of January 1, 2019 related to the adoption of ASC Topic 606 using the modified retrospective approach as discussed above is as follows:
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, Topic 220 (ASU 2018-02), which amends ASC Topic 220 and ASC Topic 740 by addressing the amounts included within Accumulated Other Comprehensive Income ("AOCI") which may result from the enactment of the 2017 Tax Act. Though AOCI is presented on a net-of-tax basis, ASC Topic 740 requires that the effects of new tax laws on items in AOCI be recognized without a corresponding adjustment to AOCI and instead recorded in income tax expense. ASU 2018-02 permits amounts included within AOCI specifically resulting from the 2017 Tax Act to be removed from AOCI and reclassified to retained earnings. During 2018, the Company elected to adopt this standard effective January 1, 2018. The adoption did not have a material effect on the consolidated financial statements.
Cash and cash equivalents: Cash and cash equivalents consist of all cash accounts, money market investments, and investments with maturities, at the time of acquisition, of 90 days or less. These amounts are carried at cost, which approximates fair value. Although the Company maintains its cash accounts in a limited number of commercial banks, management of the Company believes it is not exposed to any significant credit risk on cash and short-term investments.
Restricted cash of $4,085 and $1,800 represents fiduciary funds held for other companies as of December 31, 2020 and 2019, respectively. There is a corresponding obligation to the other companies included in accounts payable and accrued expenses as of December 31, 2020 and 2019 (Note 11).
Investments: Investment securities, consisting of fixed maturities, are classified as available-for-sale and reported at fair value. The change in unrealized gain and loss on fixed maturity investments is recorded as a component of accumulated other comprehensive income in the consolidated balance sheets, net of the related deferred tax effect, until realized. The change in
unrealized gain and loss on equity securities is recorded as a component of net income and is included in net investment income on the consolidated statements of operations. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis and included in net realized capital gains (losses) on the consolidated statement of operations on the trade date. The Company amortizes any premium or discount on fixed maturities over the remaining maturity period of the related securities and reports the amortization in net investment income. Dividend and interest income is recognized when earned.
The Company regularly reviews its investment portfolio to determine if other-than-temporary impairment exists for any debt securities. An investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that investment. As part of the assessment process, the Company determines whether the impairment is temporary or other-than-temporary. The assessment is based on both quantitative criteria and qualitative information, considering a number of factors including, but not limited to: how long the security has been impaired; the amount of the impairment; or whether management intends to sell the debt security or it is more likely than not that management will have to sell the security before recovery of the amortized cost; the financial condition and near-term prospects of the issuer; whether the issuer is current on contractually-obligated interest and principal payments; key corporate events pertaining to the issuer and whether the market decline was affected by macroeconomic conditions.
The Company acts as a third-party claims administrator and earns TPA fees for providing such services. The fee structures vary based on the specific contract and can be dependent upon a number of factors which typically include agreed-upon fee rates, the total amount of premium written or collected under the agreement and the total time and expense incurred for
The Company provides consulting services for certain reinsurance contracts which includes services such as contract consultation and review. The compensation structure for consulting services is based on fixed periodic payments, generally monthly or quarterly. Consulting services consist of a single performance obligation which is recognized over the term of the consulting agreement.
Deferred financing costs: Deferred financing costs are amortized as interest expense over the term of the underlying debt agreement by use of the effective interest method. Unamortized deferred financing costs are recorded as a reduction to long-term debt on the consolidated balance sheets.
To the extent that unearned premium on existing policies are not adequate to cover the sum of expected losses, unamortized acquisition costs and policy maintenance costs, unamortized deferred policy acquisition costs are expensed to eliminate the premium deficiency. If the premium deficiency is greater than the unamortized policy acquisition costs, a liability is recorded. No premium deficiency exists as of December 31, 2020, 2019 and 2018.
Long-lived assets, such as property and equipment, and purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset to be impaired, the Company recognizes impairment to the extent that the carrying value exceeds the asset’s fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values, and third-party independent appraisals. The Company recorded no impairments of property and equipment for the years ended December 31, 2020, 2019 and 2018.
Reserves for unpaid losses include estimates for both claims that have been reported and those that have been incurred but not reported. The estimated losses are regularly reviewed and adjusted as necessary based on historical experience and as the Company obtains new information.
The Company records amounts recoverable from reinsurers on paid losses and estimated amounts recoverable on unpaid losses. The estimate of amounts recoverable on unpaid losses is based on unpaid losses in conjunction with the reinsured policies.
The Company estimates uncollectible amounts receivable from reinsurers based on an assessment of factors including the credit worthiness of the reinsurers and the adequacy of collateral obtained, where applicable. The Company recorded no bad debt expense related to reinsurance during the years ended December 31, 2020, 2019 and 2018.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.
The Company records any income tax penalties and income tax-related interest as income tax expense in the period incurred. The Company did not incur any material tax penalties or income-tax-related interest during the years ended December 31, 2020, 2019 and 2018.
Concentrations of risk: The Company had total gross written premiums of $484,249, $411,401 and $357,007 for the years ended December 31, 2020, 2019 and 2018, respectively, including:
* The amount for the state is relevant for 2020 but not in other periods and therefore, was not presented.
As of December 31, 2020, approximately 28% and 27% of the Company’s investment portfolio was comprised of securities issued in industrial and public utility bonds and mortgage-backed securities, respectively, compared to 36% and 21% as of December 31, 2019, respectively. All of these securities are investment grade. This portfolio is widely diversified among various issuers and industries and does not depend on the economic stability of one issuer and industry.
As of December 31, 2019, approximately 8% of the Company’s net assets were comprised of the equity method investment in Compstar Holding Company LLC. During fiscal year 2020, the Company purchased the remaining ownership share of Compstar Holding Company LLC and no longer carries its investment under the equity method.
Deferred offering costs: Deferred offering costs are specific incremental costs directly attributable to an offering of securities. The Company defers these costs and will charge them against the gross proceeds of a future offering. The Company had $664 of deferred offering costs as of December 31, 2019 which are included within other assets on the consolidated balance sheets. As of December 31, 2019, $253 of deferred offering costs were unpaid and are included within accounts payable and accrued expenses on the consolidated balance sheets. The Company completed its offering on July 15, 2020 and offset proceeds with $6,503 of deferred offering costs.
The assessment of fair value, the determination of deferred tax assets acquired, the liability for unpaid loss and loss adjustment expense assumed and other payables and receivables are preliminary and are based on the information that was available at the time the consolidated financial statements were prepared. Accordingly, the allocation of purchase price to intangible assets, goodwill, deferred tax assets and liabilities and the liability for unpaid loss and loss adjustment expense is preliminary and, therefore, subject to adjustment in future periods.
Services, a managing general agent, by issuing 6,613,606 shares of the Company’s common stock with a market price of $15 per share on the date of acquisition. Prior to the acquisition date, the Company held a 45% ownership interest in Compstar and accounted for its investment under the equity method. As of the acquisition date, the fair value attributable to the Company’s previous equity interest was $81,167 and the carrying value was $11,321. As a result, the Company recorded a gain of $69,846 from the remeasurement of its previous equity interest, which is included in gain on revaluation of Compstar on the consolidated statement of operations. The acquisition-date fair value of the Company’s previous equity interest was revalued using the market price of the shares issued as consideration for the acquisition.
The assessment of fair value, the determination of deferred tax assets acquired and other payables and receivables are preliminary and are based on the information that was available at the time the consolidated financial statements were prepared. Accordingly, the allocation of purchase price to intangible assets, goodwill and deferred tax assets and liabilities is preliminary and, therefore, subject to adjustment in future periods.
The Company recorded $134,428 of goodwill associated with the business combination. The goodwill recognized is attributable to the assembled workforce, the expected growth resulting from the acquisition and synergies gained to assist in the reduction of operating expenses.
The Company also recorded preliminary intangible assets totaling $73,954, which are comprised of the following:
Subsequent to the acquisition date, Compstar recorded total revenue of $7,949, of which $7,928 is intercompany related and is eliminated in consolidation, and contributed net income totaling $1,989 to consolidated net income on the consolidated statement of operations.
The Company recorded $517 of goodwill associated with the business combination. The goodwill recognized is attributable to the expected growth resulting from the acquisition and the synergies gained to assist in reducing operating expenses.
Effective March 31, 2019, Benchmark Holdings Company purchased the remaining 25% of outstanding voting shares in ALIC for $1,155. The purchase price was determined based on the statutory surplus of ALIC.
Effective February 19, 2019, Benchmark purchased 100% of the operating assets and assumed the liabilities of First Choice Casualty Insurance Company (FCCIC). The total purchase price was $5,314. As part of the acquisition, the Company recorded a bargain purchase gain of $634 which is included in net realized capital gains (losses) on the consolidated statements of operations. The Company was able to realize a bargain purchase gain as the seller was looking to exit the workers' compensation market with the sale of their management agreement to a new manager. With the new manager, the seller had a lack of interest and expertise in maintaining workers' compensation policies, which had historically been underwritten and managed by Trean Corp.
Effective April 2, 2018, the Company purchased 100% of the operating assets and assumed certain liabilities of Westcap Insurance Services, LLC (Westcap). The total purchase price was $2,450.
The following table summarizes the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition date:
The Company’s financial instruments include assets and liabilities carried at fair value. The inputs to valuation techniques used to measure fair value are prioritized into a three level hierarchy. The fair value hierarchy is as follows:
Level 1: Fair values primarily based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
The Company classifies the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. The following tables present the estimated fair value of the Company’s significant financial instruments.
Bonds and equity securities: The Company, in conjunction with its third-party pricing service provider, uses a variety of sources to estimate the fair value of investments such as Reuters, Iboxx, PricingDirect, ICE BofAML Index, ICE Data Services, and for equities, Bloomberg. Equity securities are valued at the closing price on the exchange on which they are primarily traded as provided by a third-party pricing service. Fixed income securities are generally valued at an evaluated bid as provided by a third-party pricing service. Securities and other assets generally valued using third-party pricing services may also be valued at broker/dealer bid quotations. Values obtained from third-party pricing services can utilize several data sources for inputs such as transaction data, yield, quality, coupon rate, maturity, issue type, trading characteristics and market activity. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent trading activity, analytical review of fair values and an evaluation of the underlying pricing methodologies. Based on these procedures, the Company did not adjust the prices or quotes from the third-party pricing service.
The following table illustrates the Company’s gross unrealized losses and fair value of fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
The amortized cost and estimated fair value of fixed maturities as of December 31, 2020, by contractual maturity, are as follows:
Net investment income consists of the following for the years ended December 31, 2020, 2019, and 2018:
On January 3, 2020, the Company sold 15% of its previous 25% ownership in TRI for cash proceeds of $3,000. The Company currently maintains a 10% ownership interest in TRI. As a result of its significant ownership reduction and its lack of significant influence over the operations and policies of TRI, the Company reclassified its TRI investment, at fair value, to investments in common stock in the first quarter of 2020. The Company realized a gain on the sale of $3,115, which is included in net realized capital gains (losses) on the consolidated statements of operations. The Company subsequently re-measured its TRI investment shares resulting in an unrealized gain of $2,000 which is recorded in net investment income on the consolidated statement of operations. The carrying value of TRI as of December 31, 2019 was approximately $110. The Company recorded earnings for the years ended December 31, 2019 and 2018 of $552 and $709, respectively. Distributions received from TRI for the years ended December 31, 2020, 2019 and 2018 were $225, $840 and $309, respectively.
Summarized financial information for the Company's equity method investments are as follows:
In 2019, the Company was engaged with certain entities that were deemed to be variable interest entities. A variable interest entity ("VIE") is an entity that has investors that lack certain essential characteristics of a controlling financial interest, such as a simple majority equity ownership or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the consolidated and combined financial statements.
The Company had a variable interest in Compstar Holding Company LLC (Compstar), a limited liability company created for the purchase of an interest in Compstar Insurance Services, LLC, a California based general agent. Compstar was a variable interest entity under current accounting guidance because Compstar did not have sufficient capital at risk, as evidenced by a loan guarantee by a member. However, the Company was not the primary beneficiary of Compstar, and therefore, was not reported in the Company’s consolidated and combined balance sheet as of December 31, 2019. During 2020, the Company purchased the remaining ownership interest in Compstar resulting in Compstar becoming a wholly-owned subsidiary of the Company. As of December 31, 2020, Compstar is no longer considered a VIE.
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $912, $830 and $470, respectively.
Amortization expense for the years ended December 31, 2020, 2019 and 2018 was $2,573, $46 and $27, respectively.
The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the years ended December 31, 2020, 2019 and 2018.
The table below depicts the activity with regard to deferred policy acquisition costs, net:
In June 2006, Trean Capital Trust I (the Trust) issued 7,500 shares of preferred capital securities to qualified institutional buyers and 232 common securities to Trean Corp. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of Trean Corp's Junior Subordinated Debt due 2036 (the Subordinated Notes). The Subordinated Notes represent the sole assets of the Trust. On October 7, 2020, Trean Corp redeemed all of the Subordinated Notes for a total payoff amount of $7,807.
On July 16, 2020, the Company entered into a new Second Amended and Restated Credit Agreement which, among other things, extended the Company's credit facility for a period of five years through May 26, 2025 and increased its term loan facility by $11,707 resulting in a total term loan debt amount of $33,000 at the time of closing. The loan has a variable interest rate of LIBOR plus 4.50%, 3.00% and 3.50%, which was 4.72%, 6.33% and 6.89% as of December 31, 2020, 2019 and 2018, respectively. The outstanding principal balance of the loan is to be repaid in quarterly installments which escalate from $206 to $825. All equity securities of the subsidiaries of Trean Insurance Group, Inc. (other than Benchmark Holding Company and its subsidiaries) have been pledged as collateral.
During the years ended December 31, 2020, 2019 and 2018, the Company recorded $1,518, $1,617 and $1,404 of interest expense, respectively, associated with its credit facility.
In conjunction with the acquisition of Compstar (See Note 3), the Company acquired a loan from Oak Street Funding with a total principle of $19,740. In July 2020, upon completion of the acquisition, the Company paid this loan off in full.
In conjunction with the acquisition of Compstar, the Company acquired a Federal Paycheck Protection Program (PPP) Loan with a principal balance of $325. The PPP Loan was forgiven on November 6, 2020. In conjunction with the acquisition of 7710, the Company acquired a PPP Loan with a principal balance of $269. The PPP Loan was forgiven on November 12, 2020.
The following table presents the revenues recognized from contracts with customers included in the consolidated statements of operations.
On December 22, 2017 the 2017 Tax Act was signed into law. The 2017 Tax Act has modified loss reserve discounting requirements for tax purposes. The 2017 Tax Act extends the payment pattern used to calculate loss discounts and increases the discount rate, replacing the applicable federal rate for a higher-yield corporate bond rate. The new discounting requirements are applicable to all existing and future loss reserves, effective beginning in tax year 2018, subject to an eight-year adjustment.
As of December 31, 2020 and 2019, the Company has net operating loss (NOL) carryforwards for federal income tax purposes of approximately $3,639 and $4,752 related to the purchases of ALIC and FCCIC. Due to the purchases, the Company is limited to the amount of NOL Carryforward it can use each year. The Company estimates it can use approximately $1,676 of the available NOL carryforward over the next 18 years, and has established a deferred tax asset of approximately $118 and $352 as of December 31, 2020 and 2019, respectively.
The Company completed its IRS examination related to the 2017 income tax return of Trean Corp. The results of the examination resulted in no changes to the 2017 Trean Corp tax return. The Company's tax years 2017 through 2019 remain open to examination by the IRS and various state authorities.
As of December 31, 2020 and 2019, the Company has not taken any uncertain tax positions with regard to its tax returns.
The Company establishes reserves for unpaid losses and LAE which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not reported losses, or "IBNR") and LAE incurred that remain unpaid at the balance sheet date. The Company reserves for loss after considering all information known at each reporting period. At any given point in time, loss reserves represent the best estimate of the ultimate settlement and administration cost of insured claims incurred and unpaid. Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, the ultimate liability will likely differ from these estimates. The Company revises the reserves for unpaid losses as additional information becomes available, and reflects adjustments, if any, in earnings in the periods in which the adjustments are deemed necessary. The liability for unpaid losses is recorded on an undiscounted basis.
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and LAE decreased by approximately $14,813 and $10,272 and $5,906 for the years ended December 31, 2020, 2019 and 2018, respectively, primarily attributable to the development in the Company’s workers’ compensation book of business.
The Company utilizes reinsurance contracts to reduce its exposure to losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not relieve the Company from its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of its reinsurers.
The Company has unsecured aggregate recoverable for losses, paid and unpaid, loss adjustment expenses and unearned premiums with the following individual reinsurers, authorized or unauthorized, exceeding 5 percent of stockholders’ equity:
A summary of the impact of ceded reinsurance is as follows:
On January 1, 2020, the Company adopted ASU No. 2016-02, Leases (Topic 842), and all related amendments under the modified retrospective approach. Under this transition approach, comparative prior periods, including disclosures, were not restated. The Company elected the transition package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification. The Company chose not to elect the hindsight practical expedient. The Company has elected, as a practical expedient, to account for lease components and any non-lease components within a contract as a single lease component, and therefore allocates all of the expected lease payments to the lease component. The adoption of the standard did not have an impact on the Company's consolidated statements of operations and there was no adjustment to its retained earnings opening balance sheet as of January 1, 2020. The Company does not expect the adoption of the new standard to have a material impact on the Company's operating results on an ongoing basis. The most significant impact of the new lease standard was the recognition of right-of-use assets and lease liabilities for operating leases. On January 1, 2020, the adoption of the new standard resulted in the recognition of a right-of-use asset and total lease liability of $5,946.
The Company's leases consist of operating leases for office space and equipment. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Some of the Company's leases include options to extend the term, which is only included in the lease liability and right-of-use assets calculation when it is reasonably certain the Company will exercise that option. Our leases have remaining terms ranging from one month to 90 months, some of which have options to extend the lease for up to 5 years. As of December 31, 2020, the lease liability and right-of-use assets did not include the impact of any lease extension options as it is not reasonably certain that the Company will exercise the extension options.
Future maturities of lease liabilities as of December 31, 2020 are as follows:
Trean Insurance Group, Inc. received net proceeds from the sale of shares in the IPO of approximately $93,139 after deducting underwriting discounts and commissions of $7,500 and offering expenses of $6,503. Trean Insurance Group, Inc. did not receive any proceeds from the sale of shares by the selling stockholders. In addition, and in conjunction with its IPO, Trean Insurance Group, Inc. issued 6,613,606 shares of common stock, with a purchase price value of $99,204, to acquire the remaining 55% ownership in Compstar Holding Company LLC. See "Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for a detailed discussion of use of proceeds associated with the IPO.
Prior to the completion of the above offering, the Company effected the following reorganization transactions: (i) each of Trean and BIC contributed all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC, in exchange for shares of common stock in Trean Insurance Group, Inc. and (ii) upon the completion of the transfers by Trean and BIC, Trean and BIC were dissolved and distributed in-kind common shares to the pre-IPO unitholders.
Prior to the IPO, the Company had three classes of ownership units, each with its respective rights, preferences and privileges as follows:
1)Class A Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class B Units, on a pro rata basis prior to distributions made to other classes of ownership units.
3)Class C Units: Receive an allocation of profits and losses incurred by the Company. Participating Class C Units maintain the right to receive distributions after any Class A or Class B units based on the unit holders’ pro rata share.
Trean Corp has designated and authorized 1,000,000 shares as Series A Redeemable Preferred Stock (Series A) which have no voting rights. The holder is entitled to receive annual cumulative dividends at 4.5% of the original cost per share. In the event of liquidation, dissolution, or winding up of the affairs of Trean Corp, liquidation distributions are made to preferred shareholders before common shareholders. Series A contained no conversion features. During 2019 the Company redeemed all of its remaining shares of Series A.
Benchmark Holding Company has designated and authorized 1,000,000 shares as Series B Redeemable Preferred Stock (Series B) which have no voting rights. The holder is entitled to receive annual cumulative dividends as a percentage of the original cost per share or the actual earning on the invested funds. In the event of liquidation, dissolution, or winding up of the affairs of Benchmark Holding Company, liquidation distributions are made to preferred shareholders before common shareholders. Series B contains no conversion features. The liquidation preference and redemptive value of Series B is equivalent to its carrying value as of December 31, 2019. The Company classified the shares of Series B within temporary equity on the consolidated balance sheets as of December 31, 2019, due to the liquidation rights associated with the termination of the shareholder customer agreement. In conjunction with the IPO of Trean Insurance Group, Inc. on July 15, 2020, the Company redeemed all of its remaining shares of Series B.
The cumulative dividends earned by Series A and Series B holders totaled approximately $254 and $225 for the years ended December 31, 2019 and 2018, respectively, which consist of the following (in thousands, except share and per share amounts):
The following table presents the changes in accumulated other comprehensive income for unrealized gains and losses on available-for-sale securities:
As of December 31, 2020, the Company has one incentive plan, the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan, (the 2020 Omnibus Plan). The purposes of the 2020 Omnibus Plan are to provide additional incentive to selected officers, employees, non-employee directors, independent contractors, and consultants of the Company whose contributions are essential to the growth and success of the business of the Company and its affiliates, in order to strengthen the commitment and motivate such individuals to faithfully and diligently perform their responsibilities and attract competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company and its affiliates. The 2020 Omnibus Plan is administered by the Company’s board of directors and provides for the issuance of up to 5,058,085 shares of the Company's common stock granted in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses, other stock awards or any combination of the foregoing.
Employee stock option awards granted set forth, among other things, the option exercise price, the option term, provisions regarding option exercisability and whether the option is intended to be an incentive stock option (ISO) or a nonqualified stock option (NQSO). Stock options may be granted to employees at such exercise prices as the Company’s board of directors may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. Employee options vest one third annually over a period of three years and have contractual terms of 10 years from the date of grant.
A summary of the status of the Company’s non-vested restricted stock unit activity as of December 31, 2020 and changes during the year then ended is as follows:
Summarized statutory basis information, which differs from GAAP, is shown below for Benchmark, ALIC and 7710.
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 capital 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 7710's surplus as regards policyholders as shown in 7710’s most recent annual statement; or (ii) the net income, not including net realized capital 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. For the year ended December 31, 2020 the Company could approve dividends without the approval of the state up to $118.
The insurance laws of Kansas require Benchmark to maintain minimum capital and surplus of $1,500. The insurance laws of Utah require ALIC to maintain minimum capital in the amount of $300. The insurance laws of South Carolina require 7710 to maintain minimum capital and surplus of $1,200.
In connection with our IPO, we entered into a director nomination agreement with the Altaris Funds, the Company's principal stockholder. So long as the Altaris Funds own 35% or more of our outstanding common stock, the Altaris Funds will have the right (but not the obligation) to nominate three individuals to our board of directors; so long as the Altaris Funds own 20% or more but less than 35% of our outstanding common stock, the Altaris Funds will have the right (but not the obligation) to nominate two individuals to our board of directors; and so long as the Altaris Funds own 10% or more but less than 20% of our outstanding common stock, the Altaris Funds will have the right (but not the obligation) to nominate one individual to our board of directors. Prior to the IPO, the Company paid a management fee to the Altaris Funds totaling $500, $1,000 and $1,000 for the years ended December 31, 2020, 2019 and 2018, respectively, which is included in general and administrative expenses on the consolidated statement of operations. In conjunction with the IPO, the Company paid a termination fee to the Altaris Funds totaling $7,639, which is included in other expenses on the consolidated statement of operations. As of December 31, 2019, the Company owed the Altaris Funds $83, which is included within accounts payable and accrued expenses on the 2019 consolidated balance sheet.
The Company was owed amounts from TRI of $14 as of December 31, 2019, which is included in related party receivables on the consolidated balance sheet. The Company recorded and $200, $200 and $144 of revenue for consulting services provided to TRI for the years ended December 31, 2020, 2019 and 2018, respectively.
Any effects of subsequent events that provide additional evidence about conditions that existed at the consolidated balance sheet date, including the estimates inherent in the process of preparing the consolidated financial statements, are recognized in the consolidated financial statements.