TREAN INSURANCE GROUP, INC. – 10-Q

The following discussion and analysis of financial condition and results of
operations for the three months ended March 31, 2022 is qualified by reference
to and should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements and the related notes included herein and the
audited consolidated financial statements and notes included in our 2021 Form
10-K. 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 Item 1A - "Risk
Factors" in our 2021 Form 10-K. Our actual results may differ materially from
those expressed in, or implied by, those forward-looking statements. See
"Forward-Looking Statements."

All references to "we," "us," "our," "the Company," "Trean," or similar terms
refer to Trean Insurance Group, Inc. and its subsidiaries, unless the context
otherwise requires. The information contained in this quarterly report is not a
complete description of our business or the risks associated with an investment
in our common stock.

The Company defines increases or decreases greater than 200% as “NM” or not
meaningful.

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 performance 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. 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, and assumptions, which in many cases are beyond
our control, as described in "Item 1A - Risk Factors" in our 2021 Form 10-K and
in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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.

These forward-looking statements 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 Quarterly Report on Form
10-Q or to conform such statements to actual results or revised expectations,
except as required by applicable securities laws or the rules and regulations of
the Securities and Exchange Commission ("SEC").

Overview

We are a provider of products and services to the specialty insurance market. We
underwrite specialty casualty insurance products both through our Program
Partners and also through our Owned MGAs. We also provide our Program Partners
with a variety of services, including issuing carrier services, claims
administration, and reinsurance brokerage, from which we generate recurring
fee-based revenues.

We have one reportable segment. We provide our insurance products and services
to our Program Partners and Owned MGAs focused on specialty lines. We target a
diversified portfolio of small to medium programs, typically with less than $30
million of premiums, that focus on niche segments of the specialty casualty
insurance market and that we believe have strong underwriting track records.

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Coronavirus ("COVID-19") Impact

We are monitoring the impact of the ongoing continuation of the COVID-19
pandemic on our business, including how it may impact our premium revenue, loss
experience and loss expense, liquidity, and our regulatory capital and surplus,
and operations.

Workforce Operations

Following the emergence of the COVID-19 pandemic in early 2020, we took a number
of actions to protect the health of the public and our employees and to comply
with directives and advice of governmental authorities and public health
experts. We responded by developing a Preparedness Plan that outlined both
corporate-wide and location-specific modifications to working conditions and
operations in our offices. As state, city, and county guidelines progress, we
have implemented new health and safety in-office procedures where necessary
while continuing to monitor the progression of new COVID-19 variants and related
developments that could impact us in the future.

Premium Revenue, Claims and Losses

We have not experienced a material impact to our premium revenue as a result of
the COVID-19 pandemic. During the three months ended March 31, 2022, compared to
the three months ended March 31, 2021, gross written premiums increased by 10.0%
and gross earned premiums increased by 23.6%, primarily driven by significant
growth in our existing Program Partner business. Because a majority of our gross
written premiums are related to workers' compensation insurance, revenue trends
could be impacted in future periods if the COVID-19 pandemic were to continue or
significantly get worse. However, a significant portion of our workers'
compensation premiums are pay-as-you-go programs, which reduces our downside
risk from future premium audits or refunds. We also have not experienced a
material impact in our reported claims or incurred losses in the first three
months of 2022 as a specific result of the COVID-19 pandemic.

Investment Portfolio

With respect to our investment portfolio, we seek to hold a high-quality,
diversified portfolio of investments, which are primarily in fixed maturity and
available-for-sale investments and as such, our investment portfolio has limited
exposure to equity market volatility. For the three months ended March 31, 2022,
we experienced a decrease of $23,804 in the fair value of our fixed maturities
investment portfolio. The decline in the fair value of our fixed maturity
investments is primarily attributable to the recent rise in interest rates
driven primarily by changing conditions in the financial markets as compared to
the comparatively lower rates that prevailed during the initial part of the
COVID-19 pandemic in 2020 and 2021, rather than underlying credit risk within
our investment portfolio. If there were to be continued debt market volatility,
which in turn could create mark-to-market investment valuation decreases, we
expect there could be additional or increased unrealized losses recorded or
realized losses, if sold, in future reporting periods. In addition, if there
were to be continued equity financial market volatility, which in turn could
create mark-to-market investment valuation decreases, we expect there could be
additional or increased unrealized losses on equity investments held, which are
recorded through net investment income, 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.

Other Concerns

Adverse events such as changes in the overall public health environment,
changing infection patterns and new variants of COVID-19, health-related
concerns about working in our offices, restrictions on travel, the potential
impact on our business partners and customers, and other matters affecting our
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.

Significant Components of Results of Operations

Gross written premiums: Gross written premiums are the amounts received or to be
received for insurance policies written or assumed by us during a specific
period of time without reduction for general and administrative expenses
(including policy acquisition costs), reinsurance costs or other deductions. The
volume of our gross written premiums in any given period is generally influenced
by:
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Addition and retention of Program Partners;

•new business submissions to our Program Partners;

•binding of new business submissions into policies;

•renewals of existing policies; and

•average size and premium rate of bound policies.

Gross earned premiums: Gross earned premiums are the earned portion of gross
written premiums. We earn insurance premiums on a pro rata basis over the term
of the policy. Our insurance policies generally have a term of one year.

Ceded earned premiums: Ceded earned premiums are the amount of gross earned
premiums ceded to reinsurers. We enter into reinsurance contracts to limit our
maximum losses and diversify our exposure and provide statutory surplus relief.
The volume of our ceded earned premiums is affected by the level of our gross
earned premiums and any decision we make to increase or decrease limits,
retention levels, and co-participations.

Net earned premiums: Net earned premiums represent the earned portion of our
gross written premiums, less that portion of our gross written premiums that is
earned and ceded to third-party reinsurers, including our Program Partners and
professional reinsurers, under our reinsurance agreements.

Net investment income: We earn investment income on our portfolio of cash and
invested assets. Our cash and invested assets are primarily comprised of fixed
maturities, equity securities, and short-term investments. Our net investment
income includes interest income on our invested assets, income on funds held
investments as well as unrealized gains and losses on our equity portfolio.

Net realized gains/losses: Net realized gains/losses are a function of the
difference between the amount received by us on the sale of a security and the
security’s recorded value as well as any “other-than-temporary impairments”
relating to fixed maturity investments recognized in earnings.

Other revenue: Other revenue includes brokerage, third-party administrative,
management, consulting, and other fee-based revenues, which are commonly based
on written premiums.

Loss and loss adjustment expenses (LAE): 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 associated claims with the particular types of insurance contacts
that we write;

•trends in the average size of losses incurred on a particular type of business;

•mix of business written by us;

•changes in the legal or regulatory environment related to the business we
write;

•trends in legal defense costs;

•wage inflation; and

•inflation in medical costs.

Losses and LAE are based on an actuarial analysis of the estimated losses,
Including losses incurred during the period and changes in estimates from prior
periods. Losses and LAE may be paid out over a period of years.

General and administrative expenses: General and administrative expenses include
net commissions, insurance-related expenses, and general and administrative
operating expenses. Net commissions consist of policy acquisition costs and
other underwriting expenses, net of ceding commissions. Policy acquisition costs
are principally comprised of the commissions we pay our brokers and program
managers. Policy acquisition costs that are directly related to the successful
acquisition or reinsurance of those policies are deferred. All policy
acquisition costs are charged to expense in proportion to premium earned over
the policy life. We receive ceding commissions on business ceded under our
reinsurance contracts. Insurance-
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related expenses largely consist of state premium taxes. General and
administrative operating expenses primarily include employee salaries and
benefits, corporate business insurance costs, technology costs, office rent, and
professional services fees such as legal, accounting, audit, tax, and actuarial
services.

Intangible asset amortization: Intangible asset amortization consists of
expenses incurred related to the amortization of intangible assets recorded as a
result of business acquisitions and consists of trade names, customer lists and
relationships, and non-compete agreements.

Nocash stock compensation: Nocash stock compensation includes expenses related
to the fair value and issuance of restricted stock units (time, market and
performance-based) and stock options.

Gains on embedded derivatives: Gains on embedded derivatives consist of the
change in fair value of derivatives, the effect of net investment income on
funds held investments, and the effect of realized gains and loss on funds held
investments.

Interest expense: Interest expense consists primarily of interest paid on our
term loan facility (See "Financial Condition, Liquidity and capital resources -
Debt and Credit Agreements").

Other income: Other income consists primarily of sublease revenue and other
miscellaneous income items.

Key Metrics

We discuss certain key financial and operating metrics, described below, which
provide useful information about our business and the operational factors
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 gains or losses, intangible asset amortization, noncash stock
compensation, gains and losses on embedded derivatives, interest expense, other
revenue, 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.

Adjusted net income is a non-GAAP financial measure defined as net income
excluding the impact of certain items, including noncash intangible asset
amortization and stock compensation, noncash changes in the fair value of
embedded derivatives, 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.
See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of
adjusted net income to net income in accordance with GAAP.

Loss ratio, expressed as a percentage, is the ratio of losses and LAE to net
earned premiums.

Expense ratio, expressed as a percentage, is the ratio of general and
administrative expenses to net earned premiums.

Combined ratio is the sum of the loss ratio and the expense ratio. A combined
ratio under 100% generally indicates an underwriting profit. A combined ratio
over 100% generally indicates an underwriting loss.

Return on equity is net income expressed on an annualized basis as a percentage
of average beginning and ending stockholders’ equity during the period.

Adjusted return on equity is a non-GAAP financial measure defined as adjusted
net income expressed on an annualized basis as a percentage of average beginning
and ending stockholders' equity during the period. See "Reconciliation of
Non-GAAP Financial Measures" for a reconciliation of adjusted return on equity
to return on equity in accordance with GAAP.

Tangible stockholders’ equity is defined as stockholders’ equity less goodwill
and other intangible assets.

Return on tangible equity is a non-GAAP financial measure defined as net income
expressed on an annualized basis as a percentage of average beginning and ending
tangible stockholders' equity during the period. See "Reconciliation of Non-GAAP
Financial Measures" for a reconciliation of return on tangible equity to return
on equity in accordance with GAAP.

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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.


Results of Operations

Consolidated Results of Operations for the Three Months Ended March 31, 2022
Compared to March 31, 2021

The following table summarizes our results of operations for the three months
ended March 31, 2022 and 2021:

                                             Three Months Ended March 31,                                    Percentage Change
(in thousands, except for percentages)        2022                    2021                 Change                   (1)

Revenues

Gross written premiums                          161,403               146,730          $    14,673                      10.0  %
Increase in gross unearned premiums              (2,864)              (18,431)              15,567                     (84.5) %
Gross earned premiums                           158,539               128,299               30,240                      23.6  %
Ceded earned premiums                           (94,362)              (87,165)              (7,197)                      8.3  %
Net earned premiums                              64,177                41,134               23,043                      56.0  %
Net investment income                             2,576                 2,272                  304                      13.4  %

Net realized gains (losses)                      (1,047)                   13               (1,060)                          NM
Other revenue                                     3,201                 4,655               (1,454)                    (31.2) %
Total revenue                                    68,907                48,074               20,833                      43.3  %
Expenses
Losses and loss adjustment expenses              39,193                24,881               14,312                      57.5  %
General and administrative expenses              18,300                11,891                6,409                      53.9  %

Intangible asset amortization                     1,499                 1,414                   85                       6.0  %
Noncash stock compensation                          156                   211                  (55)                    (26.1) %
Interest expense                                    408                   427                  (19)                     (4.4) %
Total expenses                                   59,556                38,824               20,732                      53.4  %
Gains on embedded derivatives                     6,236                 2,676                3,560                     133.0  %
Other income                                         23                   121                  (98)                    (81.0) %
Income before taxes                              15,610                12,047                3,563                      29.6  %
Income tax expense                                3,270                 2,605                  665                      25.5  %

Net income                             $         12,340          $      9,442          $     2,898                      30.7  %

(1) The Company defines increases or decreases greater than 200% as “NM” or not meaningful.




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The table below shows the total premiums earned on a gross and net basis for the
respective three-month periods:

                                                                    Three Months Ended March 31,
(in thousands, except for percentages)                                2022                     2021
Key metrics:
Underwriting income(1)                                       $         6,684              $     4,362
Adjusted net income(1)                                       $         8,304              $     8,109
Loss ratio                                                              61.1      %              60.5  %
Expense ratio                                                           28.5      %              28.9  %
Combined ratio                                                          89.6      %              89.4  %
Return on equity                                                        11.8      %               9.2  %
Adjusted return on equity(1)                                             7.9      %               7.9  %
Return on tangible equity(1)                                            24.1      %              19.2  %
Adjusted return on tangible equity(1)                                   16.2      %              16.5  %

(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial
Measures' for a reconciliation of this metric to the applicable GAAP metric.


                                           Three Months Ended March 31,
(in thousands, except for                                                                                 Percentage Change
percentages)                                 2022                   2021                Change                   (1)
Revenues
Gross written premiums                $       161,403          $   146,730          $    14,673                      10.0  %
Increase in gross unearned premiums            (2,864)             (18,431)              15,567                     (84.5) %
Gross earned premiums                         158,539              128,299               30,240                      23.6  %
Ceded earned premiums                         (94,362)             (87,165)              (7,197)                      8.3  %
Net earned premiums                   $        64,177          $    41,134          $    23,043                      56.0  %

(1) The Company defines increases or decreases greater than 200% as “NM” or not meaningful.



Gross written premiums: Gross written premiums increased $14,673, or 10.0%, to
$161,403 for the three months ended March 31, 2022, compared to $146,730 for the
three months ended March 31, 2021. The increase is primarily attributable to the
growth in our existing Program Partner business and the changes in gross written
premiums were due to the following:

Workers' compensation represented 61.1% of our gross written premiums for the
three months ended March 31, 2022, compared to 67.6% for the three months ended
March 31, 2021. For the three months ended March 31, 2022, gross written
premiums for workers' compensation decreased by $593, or 0.6%, compared to the
same period in 2021. The moderation in growth and shift in mix reflects our
ongoing effort to diversify our lines of business and a strategic decrease in
our California worker's compensation business that resulted from the Company's
measures undertaken to exit certain unfavorable risks in 2021.

All other non-workers' compensation liability represented 38.9% of our gross
written premiums for the three months ended March 31, 2022, compared to 32.4%
for the three months ended March 31, 2021. For the three months ended March 31,
2022, gross written premiums for all other non-workers' compensation liability
increased $15,266, or 32.1%, compared to the same period in 2021. The increase
is due primarily to growth in our accident & health, commercial auto and
commercial lines, a result of continued line of business diversification.

Gross earned premiums: Gross earned premiums increased $30,240, or 23.6%, to
$158,539 for the three months ended March 31, 2022, compared to $128,299 for the
three months ended March 31, 2021. The increase in gross earned premiums
reflects the increase in gross written premiums of $14,673 net of a reduction in
gross unearned premiums of $15,567. Gross
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earned premiums as a percentage of gross written premiums increased to 98.2% for
the three months ended March 31, 2022, compared to 87.4% for the three months
ended March 31, 2021.

Ceded earned premiums: Ceded earned premiums increased $7,197, or 8.3%, to
$94,362 for the three months ended March 31, 2022, compared to $87,165 for the
three months ended March 31, 2021. The increase in ceded earned premiums is
driven by the growth in gross earned premiums as described above, partially
offset by an increase in our retention. Ceded earned premiums as a percentage of
gross earned premiums decreased to 59.5% for the three months ended March 31,
2022, compared to 67.9% for the three months ended March 31, 2021, reflecting
the Company's strategic decision to retain more gross written premiums.

Net earned premiums: Net earned premiums increased $23,043, or 56.0%, to $64,177
for the three months ended March 31, 2022, compared to $41,134 for the three
months ended March 31, 2021. The increase is due to the growth in gross earned
premiums as described above and the Company's strategic decision to retain more
gross written premiums.

Net investment income: Net investment income increased $304, or 13.4%, to $2,576
for the three months ended March 31, 2022, compared to $2,272 for the three
months ended March 31, 2021. The increase reflects the reinvestment of funds
from lower yielding maturities, pay downs and redemptions into higher yielding
investments and an increase in our average invested balance. During the first
quarter of 2022, we purchased $33,288 higher-yielding equity securities, which
we believe will improve the yield on our portfolio.

Net realized gains (losses): Net realized losses were $1,047 for the three
months ended March 31, 2022, compared to net realized gains of $13 for the three
months ended March 31, 2021. We executed a repositioning strategy to sell some
of our lower-yielding assets and purchased higher-yielding investments, prior to
anticipated interest rate increases. This turnover in our portfolio resulted in
realized losses recorded of $1,022.

Other revenue: Other revenue decreased $1,454, or 31.2%, to $3,201 for the three
months ended March 31, 2022, compared to $4,655 for the three months ended March
31, 2021. The decrease is largely driven by a reduction in brokerage revenue of
$862 due to lower placement rates reflecting the Company's continued increase in
retention year over year. In addition, there was a slight reduction in managing
general agent fees, consulting and other fee-based revenue during the period.

Losses and loss adjustment expenses: Losses and LAE increased $14,312, or 57.5%,
to $39,193 for the three months ended March 31, 2022, compared to $24,881 for
the three months ended March 31, 2021. The increase is primarily attributable to
the growth in earned premiums and increased retention during the three months
ended March 31, 2022. This resulted in a loss ratio of 61.1% for the three
months ended March 31, 2022 compared to 60.5% for the three months ended March
31, 2021.

General and administrative expenses: General and administrative expenses
increased $6,409, or 53.9%, to $18,300 for the three months ended March 31,
2022, compared to $11,891 for the three months ended March 31, 2021. The expense
ratio was 28.5% for the three months ended March 31, 2022, compared to 28.9% for
the three months ended March 31, 2021.

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The table below shows the components of general and administrative expenses for
the respective three-month periods:

                                                         Three Months Ended March 31,
                                                          2022                   2021                Change
Direct commissions                                  $      27,908           $    23,108          $     4,800
Ceding commissions                                        (26,997)              (28,208)               1,211
Net commissions                                               911                (5,100)               6,011
Insurance-related expenses                                  5,771                 4,276                1,495
General and administrative operating expenses              11,618                12,715               (1,097)
Total general and administrative expenses           $      18,300           

$11,891 $6,409

General and administrative expenses - % of gross
written premiums                                              7.2   %               8.7  %
Retention rate (1)                                           40.5   %              32.1  %
Direct commission rate (2)                                   17.6   %              18.0  %
Ceding commission rate (3)                                   28.6   %              32.4  %

(1) Net earned premium as a percentage of gross earned premiums.
(2) Direct commissions as a percentage of gross earned premiums.
(3) Ceding commissions as a percentage of ceded earned premiums.



Direct commissions increased $4,800 primarily due to an increase in gross earned
premiums. Ceding commissions decreased $1,211 due to an increase in retention,
partially offset by an increase in ceded earned premiums reflecting the increase
in gross earned premiums. Insurance-related expenses increased $1,495 primarily
as a result of an increase in gross earned premiums. General and administrative
operating expenses decreased $1,097. The decrease in general and administrative
operating expense is primarily the result of a decrease in professional fees of
$801 and depreciation of $89.

Intangible asset amortization: Intangible asset amortization increased $85 to
$1,499 for the three months ended March 31, 2022, compared to $1,414 for the
three months ended March 31, 2021. The increase is driven by the addition of
intangible assets acquired in the acquisition of WIC in the third quarter of
2021.

Noncash stock compensation: Noncash stock compensation was $156 for the three
months ended March 31, 2022, compared with $211 for the three months ended March
31, 2021. Expenses incurred during both periods relates to the fair value of
restricted stock units and stock options granted under the Company's 2020
Omnibus Plan amortized over appropriate and applicable vesting periods.

Gains on embedded derivatives:
The table below shows the components of gains on embedded derivatives for the
respective three-month periods:

                                                              Three Months 

Ended March 31,

                                                    2022                  2021                 Change
Change in fair value of embedded derivatives  $       6,896          $      3,356          $      3,540
Effect of net investment income on funds held
investments                                            (668)                 (680)                   12
Effect of realized gains on funds held
investments                                               8                     -                     8
Total gains on embedded derivatives           $       6,236          $      

2,676 $3,560



Gains on embedded derivatives increased $3,560 to $6,236 for the three months
ended March 31, 2022, compared to $2,676 for the three months ended March 31,
2021. The gain reflected an increase in the change in fair value of embedded
derivatives of $3,540, the effect of investment income on funds held investments
of $12 and the effect of realized gains on
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funds held investments of $8. The increase in the fair value of the embedded
derivatives is a result of the recent increase in interest rates, which has
reduced the value of the underlying funds held investments under reinsurance
agreements.

Income tax expense: Income tax expense was $3,270 for the three months ended
March 31, 2022, which resulted in an effective tax rate of 20.9%. The decrease
in the effective tax rate from the statutory rate of 21% was primarily due to
the impact of tax-exempt municipal income on the Company's investments,
partially offset by the impact of state taxes. For the three months ended March
31, 2021, income tax expense was $2,605, which resulted in an effective tax rate
of 21.6%. The increase in the effective tax rate from the statutory rate of 21%
is due primarily to the impact of state taxes.

Owned MGAs and Program Partner Premiums:

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

                                                             Three Months Ended March 31, 2022
                                                 Owned MGAs            Program Partner             Total
Gross written premiums                         $     68,644          $         92,759          $   161,403
Increase in gross unearned premiums                  (5,259)                    2,395               (2,864)
  Gross earned premiums                              63,385                    95,154              158,539
Ceded earned premiums                               (25,389)                  (68,973)             (94,362)
  Net earned premiums                          $     37,996          $         26,181          $    64,177



We utilize both quota share and catastrophe excess of loss ("XOL") contracts in
our reinsurance strategy for our Owned MGAs and Program Partners. For the three
months ended March 31, 2022, the Company retained 59.9% of gross earned premiums
for Owned MGAs compared to 27.5% for Program Partners.
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Reconciliation of Non-GAAP Financial Measures

Underwriting income

We define underwriting income as income before taxes excluding net investment
income, investment revaluation gains, net realized gains or losses, intangible
asset amortization, noncash stock compensation, non-cash changes in fair value
of embedded derivatives, 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.
                                                         Three Months Ended March 31,              Percentage Change
(in thousands, except percentages)                        2022                    2021                    (1)
Net income                                         $         12,340          $     9,442                      30.7  %
Income tax expense                                            3,270                2,605                      25.5  %
Equity earnings in affiliates, net of tax                         -                    -                           NM
Income before taxes                                          15,610               12,047                      29.6  %
Other revenue                                                (3,201)              (4,655)                    (31.2) %
Gains on embedded derivatives                                (6,236)              (2,676)                    133.0  %
Net investment income                                        (2,576)              (2,272)                     13.4  %

Net realized (gains) losses                                   1,047                  (13)                          NM

Interest expense                                                408                  427                      (4.4) %
Intangible asset amortization                                 1,499                1,414                       6.0  %
Noncash stock compensation                                      156                  211                     (26.1) %
Other income                                                    (23)                (121)                    (81.0) %
Underwriting income                                $          6,684          $     4,362                      53.2  %

(1) The Company defines increases or decreases greater than 200% as “NM” or not meaningful.

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Adjusted net income

We define adjusted net income as net income excluding the impact of certain
items, including noncash intangible asset amortization and stock compensation,
noncash changes in fair value of embedded derivatives, 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.

                                                                 Three Months Ended March 31,
(in thousands, except percentages)                                 2022                  2021
Net income                                                   $      12,340          $     9,442
Intangible asset amortization                                        1,499                1,414
Noncash stock compensation                                             156                  211
Change in fair value of embedded derivatives                        (6,896)              (3,356)

Total adjustments                                                   (5,241)              (1,731)
Tax impact of adjustments                                            1,205                  398
Adjusted net income                                          $       8,304          $     8,109

(1) The Company defines increases or decreases greater than 200% as “NM” or not meaningful.


Adjusted return on equity

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.

                                                   Three Months Ended March 

31,

(in thousands, except percentages)                                          2022           2021
Adjusted return on equity calculation:
Numerator: adjusted net income                                           $  8,304       $  8,109
Denominator: average equity                                               419,153        411,541
Adjusted return on equity                                                     7.9  %         7.9  %
Return on equity                                                             11.8  %         9.2  %




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Return on tangible equity and adjusted return on tangible equity

We define tangible stockholders' equity as stockholders' equity less goodwill
and other intangible assets. We define return on tangible equity as net income
expressed on an annualized basis as a percentage of average beginning and ending
tangible stockholders' equity during the period. We define adjusted return on
tangible equity as adjusted net income expressed on an annualized basis as a
percentage of average beginning and ending tangible stockholders' equity during
the period. We regularly evaluate acquisition opportunities and have
historically made acquisitions that affect stockholders' equity. We use return
on tangible equity and adjusted return on tangible equity as internal
performance measures in the management of our operations because we believe they
give our management and other users of our financial information useful insight
into our results of operations and our underlying business performance by
adjusting for the effects of acquisitions on our stockholders' equity and, in
the case of adjusted return on tangible equity, by adjusting for the items that
we believe do not reflect our core operating performance and that may diminish
comparability across periods. Return on tangible equity and adjusted return on
tangible equity should not be viewed as a substitute for return on equity or
return on tangible equity, respectively, calculated in accordance with GAAP, and
other companies may define return on tangible equity and adjusted return on
tangible equity differently.

                                                                 Three Months Ended March
                                                                           31,
(in thousands, except percentages)                                             2022                   2021
Return on tangible equity calculation:
Numerator: net income                                                     $     12,340          $       9,442
Denominator:
Average stockholders' equity                                                   419,153                411,541
Less: average goodwill and other intangible assets                             214,712                215,250
Average tangible stockholders' equity                                          204,441                196,291
Return on tangible equity                                                         24.1  %                19.2  %
Return on equity                                                                  11.8  %                 9.2  %



                                                                 Three Months Ended March 31,
(in thousands, except percentages)                                                  2022                        2021
Adjusted return on tangible equity calculation:
Numerator: adjusted net income                                                           8,304                       8,109
Denominator: average tangible equity                                                   204,441                     196,291
Adjusted return on tangible equity                                                        16.2  %                     16.5  %
Return on equity                                                                          11.8  %                      9.2  %



Financial Condition, Liquidity and Capital Resources

Sources and Uses of Funds

We are organized as a holding company with our operations conducted through our
subsidiaries, including our wholly owned insurance subsidiaries: Benchmark,
which is domiciled in Kansas and commercially domiciled in California; ALIC,
which is domiciled in Utah; 7710, which is domiciled in South Carolina; and
BSIC, which is domiciled in Arkansas. Accordingly, the holding company may
receive cash through: (i) loans from banks, (ii) draws on a revolving loan
agreement, (iii) issuance of equity and debt securities, (iv) corporate service
fees from our operating subsidiaries, (v) payments from our subsidiaries
pursuant to our consolidated tax allocation agreement and other transactions and
(vi) dividends from our non-insurance subsidiaries and, subject to certain
limitations discussed below, dividends from our insurance subsidiaries. We also
may use the proceeds from these sources to contribute funds to the insurance
subsidiaries in order to support premium growth, reduce our reliance on
reinsurance, pay taxes, and for other general business purposes.

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 status
capital and excess.

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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 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 Insurance
Company's most recent annual statement; or (ii) the net income, not including
net realized gains or losses as shown in the 7710 Insurance Company'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.

The maximum amount of dividends the insurance subsidiaries can pay us during
2022 without regulatory approval is approximately $17,800. Insurance regulators
have broad powers to ensure that statutory surplus remains at adequate levels,
and there is no assurance that dividends of the maximum amount calculated under
any applicable formula would be permitted. In the future, state insurance
regulatory authorities that have jurisdiction over the payment of dividends by
the insurance subsidiaries may adopt statutory provisions more restrictive than
those currently in effect.

Our insurance subsidiaries are also required by state law to maintain a minimum
level of policyholders' surplus. Kansas, Utah, Arkansas 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
March 31, 2022 and December 31, 2021, the total adjusted capital of our
insurance subsidiaries was in excess of their respective prescribed risk-based
capital requirements.

As of March 31, 2022we had $103,865 in cash and cash equivalents, compared to
$129,577 as of December 31, 2021.

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.

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Cash Flows

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.

                                                                Three 

Months Ended March 31,

                                                                 2022                    2021
Cash, cash equivalents and restricted cash provided by
(used in):
Operating activities                                      $         8,748          $      (2,964)
Investing activities                                              (33,969)               (17,128)
Financing activities                                                 (420)                  (206)
Net increase (decrease) in cash, cash equivalents and
restricted cash                                           $       (25,641)         $     (20,298)




Operating Activities: Net cash provided by operating activities for the three
months ended March 31, 2022 was $8,748, compared to net cash used in operating
activities of $2,964 for the same period in 2021. Net cash provided by operating
activities includes net income as adjusted for depreciation and amortization,
stock compensation, unrealized gains on embedded derivatives, net realized gains
and losses, bond amortization and accretion, the change in deferred income
taxes, and amortization of deferred financing costs. Net cash provided by
operating activities for the three months ended March 31, 2022 primarily
reflects decreased prepaid reinsurance premiums of $8,339, increased unpaid loss
and loss adjustment expenses of $6,661, increased unearned premiums of $2,962,
increased funds held under reinsurance agreements of $3,511; increases in
reinsurance premiums payable of $1,765 and increased income taxes payable of
$1,013, partially offset by increases in premiums and other receivables of
$11,133, a decrease in accounts payable and accrued expenses of $7,025, an
increase in reinsurance recoverables of $3,346, and an increase in other assets
of $3,718. The decrease in prepaid reinsurance premiums was the result of
increased retention, partially offset by the increase in ceded premiums. Unpaid
loss and loss adjustment expenses and unearned premiums increased primarily due
to an increase in gross written premiums and an increase in our retention. Funds
held under reinsurance agreements decreased due a reduction in the fair value of
the embedded derivatives, partially offset by an increase in ceded premiums. The
increases in premiums and other receivables and reinsurance recoverables were
primarily a result of an increase in gross written premiums during the period.
The decrease in accounts payable and accrued expenses is due to reductions in
accrued bonuses, accrued 401(k) match and accrued premium taxes, all paid in the
first quarter of 2022. Other assets increased as a result of increases in our
deferred acquisition costs and contract asset balances. Net cash provided by
operating activities for the three months ended March 31, 2021 reflects
incremental cash used for operating assets and liabilities.

Investing Activities: Net cash used in investing activities for the three months
ended March 31, 2022 was $33,969 compared to net used in investing activities of
$17,128 for the same period in 2021. Net cash used in investing activities for
the three months ended March 31, 2022 includes $33,737 net cash used in the
purchase and sale of investments and $232 in capital expenditures. Net cash
provided by investing activities for the three months ended March 31, 2021
includes $17,287 net cash used in the purchase and sale of investments and $73
in capital expenditures, partially offset by $232 in cash received for the sale
of equity method investments.

Financing Activities: Net cash used in financing activities for the three months
ended March 31, 2022 was $420 compared to net cash used in financing activities
of $206 for the same period in 2021. Net cash used in financing activities for
the three months ended March 31, 2022 and 2021 primarily includes the principal
payments made on the Company's debt.

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Debt and Credit Agreements

First Horizon Credit Agreement

On July 16, 2020, the Company entered into an Amended and Restated Credit
Agreement with First Horizon Bank, 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 and a revolving credit facility of $2,000. Borrowings under
the facility are secured by substantially all of the assets of the Company other
than Benchmark Holding Company and its subsidiaries. The loan has a variable
interest rate of 3-month LIBOR plus 4.50%, which was 4.73% as of March 31, 2022
and 4.64% as of December 31, 2021 (under the 2018 First Horizon Credit
Agreement). The outstanding principal balance of the loan is to be repaid in
quarterly installments that escalate from approximately $206 to $825 until March
2025. All equity securities of the subsidiaries of the Company (other than
Benchmark Holding Company and its subsidiaries) have been pledged as collateral.

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 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 catastrophe risk
stems from the workers' compensation premium we retain. Potential catastrophic
events include an earthquake, terrorism, or another event that could cause more
than one covered employee working at the same location to be injured in the
event. We believe we mitigate this risk by our focus on small- to mid-sized
accounts, which means that we generally do not have concentrated employee counts
at single locations 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.

Ratings

We have a financial strength rating of "A" (Excellent) from A.M. Best. A.M. Best
assigns 16 ratings to insurance companies, which currently range from "A++"
(Superior) to "S" (Rating Suspended). "A" (Excellent) is the third highest
rating issued by A.M. Best. The "A" (Excellent) rating is assigned to insurers
that have, in A.M. Best's opinion, an excellent ability to meet their ongoing
obligations to policyholders. This rating is intended to provide an independent
opinion of an insurer's ability to meet its obligation to policyholders and is
not an evaluation directed at investors. See also "Risk factors - Risks related
to our business and industry - A downgrade in the A.M. Best financial strength
ratings of our insurance company subsidiaries may negatively affect our
business." in our 2021 Form 10-K.

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.

There have been no material changes in the Company’s contractual obligations as
of March 31, 2022 compared to December 31, 2021.

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Financial condition

Stockholders' Equity

As of March 31, 2022total stockholders’ equity was $416,397compared to
$421,909 as of December 31, 2021a decrease of $5,512. The decrease in
stockholders’ equity over the period was primarily driven by $5,660 of net
comprehensive loss.

We had $3,836 of unrecognized stock compensation as of March 31, 2022 related to
non-vested stock compensation granted. The Company recognized $156 of stock
compensation during the three months ended March 31, 2022.

Investment Portfolio

Our invested asset portfolio consists of fixed maturities, equity securities,
other investments, and short-term investments. The majority of the investment
portfolio was comprised of fixed maturity securities of $447,349 at March 31,
2022, that were classified as available-for-sale. Available-for-sale investments
are carried at fair value with unrealized gains and losses on these securities,
net of applicable taxes, reported as a separate component of accumulated other
comprehensive income.

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
insurance applicable laws;

•maintain an appropriate level of liquidity to satisfy the cash requirements of
current operations and long-term obligations;

•adjust investment risk to offset or complement insurance risk based on our
total corporate risk tolerance; and

•realize the highest possible levels of investment income and after-tax total
rates of return.

The composition of our investment portfolio is shown in the following table as
of March 31, 2022 and December 31, 2021.

                                                                          March 31, 2022
                                                                 Cost or
                                                              Amortized Cost            Fair Value
Fixed maturities:
U.S. government and government securities                   $        42,026          $       40,610
Foreign governments                                                     400                     393
States, territories and possessions                                  11,388                  10,822
Political subdivisions of states, territories and
possessions                                                          39,166                  37,419
Special revenue and special assessment obligations                   98,436                  94,078
Industrial and public utilities                                     107,816                 106,298
Commercial mortgage-backed securities                               104,291                  97,267
Residential mortgage-backed securities                               19,040                  18,800
Other loan-backed securities                                         41,939                  41,662
Hybrid securities                                                         -                       -
Total fixed maturities                                              464,502                 447,349

Equity securities                                                    34,119                  34,162
Total investments                                           $       498,621          $      481,511




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                                                                        December 31, 2021
                                                                 Cost or
                                                              Amortized Cost            Fair Value
Fixed maturities:
U.S. government and government securities                   $        41,490          $       41,434
Foreign governments                                                   2,500                   2,490
States, territories and possessions                                  10,593                  10,766
Political subdivisions of states, territories and
possessions                                                          39,170                  40,002
Special revenue and special assessment obligations                   93,664                  95,991
Industrial and public utilities                                     100,774                 103,257
Commercial mortgage-backed securities                               119,378                 118,218
Residential mortgage-backed securities                               16,549                  17,368
Other loan-backed securities                                         41,236                  41,425
Hybrid securities                                                       105                     110
Total fixed maturities                                              465,459                 471,061

Equity securities                                                       984                     969
Total investments                                           $       466,443          $      472,030




The following table shows the percentage of the total estimated fair value of
our fixed maturity securities as of March 31, 2022 and December 31, 2021 by
credit rating category, using the lower of ratings assigned by Moody's Investor
Service or S&P.

                                                March 31, 2022
(in thousands, except percentages)        Fair Value        % of Total
AAA                                    $       76,317           17.1  %
AA                                            254,759           56.9  %
A                                              77,351           17.3  %
BBB                                            34,308            7.7  %
BB                                              4,588            1.0  %
Below investment grade                             26              -  %
Total fixed maturities                 $      447,349          100.0  %




                                                        December 31, 2021
         (in thousands, except percentages)         Fair Value         % of Total
         AAA                                    $         80,455           17.1  %
         AA                                              278,557           59.1  %
         A                                                77,097           16.4  %
         BBB                                              33,959            7.2  %
         BB                                                  947            0.2  %
         Below investment grade                               46            

– %

         Total fixed maturities                 $        471,061          100.0  %




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Critical Accounting Policies and Estimates

The unaudited interim condensed consolidated financial statements included in
this Quarterly Report on Form 10-Q include amounts based on the use of estimates
and judgments of management.

We identified the accounting estimates that are critical to the understanding of
our financial position and results of operations. Critical accounting estimates
are defined as those estimates that are both important to the portrayal of our
financial condition and results of operations and require us to exercise
significant judgment. We use significant judgment concerning future results and
developments in applying these critical accounting estimates and in preparing
our condensed consolidated financial statements. These judgments and estimates
affect our reported amounts of assets, liabilities, revenues and expenses and
the disclosure of our material contingent assets and liabilities. Actual results
may differ materially from the estimates and assumptions used in preparing the
condensed consolidated financial statements. We evaluate our estimates regularly
using information that we believe to be relevant. The estimates and judgments
that are most critical to the preparation of the condensed consolidated
financial statements include: (i) reserves for unpaid loss and LAE; (ii)
reinsurance recoveries; (iii) investment fair value measurements; (iv) goodwill
and intangible assets; and (v) business combinations. For a detailed discussion
of our accounting policies, see the "Notes to the Consolidated and Combined
Financial Statements" included in our 2021 Form 10-K.

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