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As filed with the Securities and Exchange Commission on June 19, 2020
Registration No. 333-      
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Trean Insurance Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
6331
84-4512647
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
150 Lake Street West
Wayzata, MN 55391
(952) 974-2200
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Andrew M. O’Brien
President and Chief Executive Officer
Trean Insurance Group, Inc.
150 Lake Street West
Wayzata, MN 55391
(952) 974-2200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Dwight S. Yoo
Skadden, Arps, Slate, Meagher & Flom LLP
One Manhattan West
New York, New York 10001
(212) 735-3000
Richard D. Truesdell, Jr.
Shane Tintle
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered
Proposed maximum aggregate
offering price(1)(2)
Amount of registration fee
Common stock, par value $0.01 per share
$100,000,000
$12,980
(1)
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)
Includes additional shares that the underwriters have the option to purchase to cover over-allotments.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated June 19, 2020
Preliminary Prospectus
    shares

Trean Insurance Group, Inc.
Common Stock
This is the initial public offering of common stock of Trean Insurance Group, Inc. We are offering     shares of our common stock. The selling stockholders identified in this prospectus are offering an additional    shares of our common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is estimated to be between $    and $    per share. We have applied to list our common stock on the Nasdaq Global Select Market (the “Nasdaq”) under the symbol “TIG.”
We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus summary — Implications of being an emerging growth company.”
Investing in our common stock involves risks. See “Risk factors” beginning on page 16.
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission or regulatory authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Per Share
Total
Initial public offering price
$    
$    
Underwriting discounts and commissions(1)
$
$
Proceeds, before expenses, to us
$
$
Proceeds, before expenses, to the selling stockholders
$      
$      
(1)
See “Underwriting” for a description of the compensation payable to the underwriters.
The selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to an additional     shares of our common stock at the initial public offering price less the underwriting discounts.
The underwriters expect to deliver the shares of common stock through the book-entry facilities of the Depository Trust Company on or about    , 2020.
Joint Book-Running Managers
J.P. Morgan
Evercore ISI
William Blair
Co-Manager
JMP Securities
The date of this prospectus is      , 2020.

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

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


1
Other includes group accident & health, commercial auto liability, auto physical damage, private passenger auto liability, boiler and machinery, surety, fire and inland marine.
2
Pools are state insurance pools.
3
Other states include Montana, Tennessee, New Jersey and other U.S. geographical areas.
We evaluate the retention of risk internally as well as externally with Program Partners and professional reinsurers. We typically retain a portion of the risk for all underwritten business and cede a portion back to our Program Partners in order to align interests through direct exposure to underwriting results. We cede the balance, if any, to professional reinsurers in order to optimize our net position relative to our balance sheet. In aggregate for the three months ended March 31, 2020, we retained 24.3% of gross written premiums, and ceded 28.7% of gross written premiums to our Program Partners and 47.0% to professional reinsurers. In aggregate for the year ended December 31, 2019, we retained 20.8% of gross written premiums, and ceded 28.6% of gross written premiums to our Program Partners and 50.6% to professional reinsurers. Through our reinsurance strategy, we earn underwriting profit, reinsurance commission overrides, management fee income, and brokerage commissions.
We typically look to retain less net risk on programs that are new to us and may seek to grow our retention as we gain more experience with the Program Partner. For the year ended December 31, 2019, we retained less than 5% of gross written premiums from the five new Program Partners added since 2018 and ceded 27.3% to professional third-party reinsurers and 68.1% to Program Partners. Although
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reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not discharge us from our obligation to pay claims for losses insured under our insurance policies. See “Risk factors — We are subject to reinsurance counterparty credit risk. Our reinsurers may not pay on losses in a timely fashion, or at all.”
Due to our reinsurance strategy, we retain credit risk exposure to our Program Partners and our professional reinsurers. We carefully manage our credit exposure through stringent collateral requirements, which require at least 100% of reserves for unearned premiums and losses and loss adjustment expenses, including incurred but not reported reserves, for all non-rated or non-admitted reinsurers. The majority of collateral is collected on a funds-withheld basis, and is collected with monthly “true-ups.” Since the inception of our current programs in 2007 until December 31, 2019, we ceded $1.3 billion in premiums with no unpaid reinsurance recoverables.
Since we operate primarily in casualty lines, we have limited exposure to property catastrophe risks. In order to mitigate our exposure to a severe loss under our workers' compensation policies from a catastrophe, we purchase reinsurance catastrophe loss protection covering an estimate of the amount of the 500-year return period probable maximum loss, with varying co-participations through the first $15 million. We reinsure property losses for the 500-year return period probable maximum loss, with a small co-participation through the first $2 million.
Our competitive strengths
We believe that our competitive strengths include:
Expertise and focus in underserved specialty casualty insurance markets. We focus on select markets that we believe are underserved and where we can achieve higher rates, including niche workers’ compensation markets and small- to mid-sized specialty casualty insurance programs. We have the specialized expertise and capabilities to succeed in our target markets, and we believe we have few competitors in our target markets due to the specialized knowledge, broad licensing and filing authority requirements, and complex operational systems necessary to profitably manage these traditionally longer-tailed lines of business. We believe that larger companies that do have the required expertise and capabilities in these areas tend not to participate in our target markets due to the need for customized solutions when working with smaller, more entrepreneurial partners.
Multi-service value proposition for our partners. We believe that our focus on the needs of smaller accounts and the breadth of products and services we offer allow us to better serve the needs of our Program Partners, and provide us with greater revenue and profit opportunities. Our multi-service offering enables us to develop deep relationships with our Program Partners and enhances our ability to achieve our target results. We offer our Program Partners reinsurance brokerage, claims administration, underwriting capacity and, in particular, access to our A.M. Best “A” financial strength rating through issuing carrier services. Our ability to leverage our licenses across multiple products in 49 states and the District of Columbia allows us to provide a national multi-service solution for our Program Partners. Additionally, we believe that our Program Partners highly value the ease of doing business with us given our focus on smaller programs.
Long-term, carefully selected and aligned relationships with Program Partners. We carefully select the Program Partners we choose to do business with, and design our programs to align risks between parties. We select programs with the intention of building long-term relationships, where our business philosophies align and our Program Partners can grow alongside us. As of December 31, 2019, excluding the 5 Program Partners added in the prior two years, our relationships with our 17 other Program Partners have an average duration of more than eight years. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our Program Partners and Owned MGAs that have been with us for more than 10 years represented 63% and 62% of our gross written premiums, respectively. Our management team carefully evaluates potential new programs in conjunction with our underwriting and actuarial departments. We accept only programs that meet our stringent underwriting and actuarial requirements, and decline approximately 88% of the new opportunities that we evaluate. For every Program Partner we select, we work with them to appropriately align interests and to establish rigorous ongoing reporting and auditing requirements upfront. All but one of our Program Partners retain significant underwriting risk.
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Differentiated in-house claims management. We believe that proactively managing our claims, while also accurately setting reserves, is a key aspect of keeping our losses low. In our workers’ compensation business, our claims philosophy is to provide an injured employee high-quality medical care as quickly as possible in order to reduce pain, accelerate healing, and lead to a faster and more complete recovery. Once an injured employee has healed, we aim to fully settle the claim and obtain a full and complete release of the claim at the earliest opportunity. In California, for the year ended December 31, 2018, valued as of March 31, 2020, our average medical cost for the workers’ compensation market was $10,774 per claim compared to the California workers’ compensation industry average of $29,500, as reported by the WCIRB. For the year ended December 31, 2018, we also closed 68% of our workers’ compensation claims in California within the calendar year following the accident year, compared with the industry average of 38% as of September 30, 2018, as reported by WCIRB. Our commitment to delivering the best claims process is exemplified by the experience of our claims administration department, who average 16 years of industry experience. To provide our policyholders this higher level of expertise and attention, we currently average 80 open claims per claims adjuster. In comparison, the 2019 Workers’ Compensation Benchmarking Study by Rising Medical Solutions found that 71% of TPAs had over 100 open claims per claims adjuster.
We believe this personal, high touch approach decreases the likelihood of lengthy and costly litigation. As of December 31, 2019, our reserves for claims incurred but not reported were approximately 70% of our total net loss reserves, and we have not had any unfavorable development on our initial loss projection since 2012.
Significant fee-based income and efficient capital structure. Our business model generates significant fee-based income from multiple sources including issuing carrier services, claims administration and reinsurance brokerage. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our fee-based income accounted for approximately 13.2% and 8.9% of total revenue, respectively. All of our fee-based income accrues outside of our regulated insurance companies, which we believe enhances our organization’s financial flexibility and increases the visibility of our earnings. Within our insurance companies, we cede a significant portion of the risk we originate to our reinsurance partners. These agreements enable us to maintain broader relationships with our Program Partners than our current capital base would otherwise enable. We believe that our strategy has allowed us to scale our business and provides a consistent fee-based income stream to complement our profitable underwriting business, thus providing us with greater revenue opportunities from our Program Partners than we would be able to access in a traditional insurance underwriter model.
Disciplined risk management across our organization. Our disciplined approach to risk management begins with the extensive due diligence performed during our Program Partner selection process and continues throughout the relationship. We have rigorous ongoing controls and reporting requirements, including with respect to underwriting and ongoing Program Partner diligence. Similarly, we maintain rigorous controls over our reinsurance exposures, maintaining stringent collateral requirements to minimize our credit exposure. As a result of providing multiple services to our Program Partners, we have numerous touch points and are in regular communication regarding underwriting, claims handling, reinsurance placement and collateral management, which we believe enhances our ability to achieve our desired financial targets with each Program Partner and minimizes risks to our organization.
Entrepreneurial and highly experienced management team. Our management team is highly experienced, with decades of experience in specialty insurance markets. Our team has a long history of cohesively driving the development and implementation of our business from its inception in 1996, with 18 members having been with us for over 10 years. We are led by our Chief Executive Officer and founder Andrew M. O’Brien. Prior to founding our company, Mr. O’Brien began his insurance career at the reinsurance broker E.W. Blanch Company, where he ultimately served as a General Partner, Executive Vice President and Director. As owners of approximately    % of our outstanding common stock, assuming an initial public offering price of $    per share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the completion of this offering, our management team will continue to be meaningful owners of Trean Insurance Group, Inc. and to have closely aligned interests with our stockholders.
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Our strategy
We believe that our approach will allow us to continue to achieve our goals of both growing our business and generating attractive returns. Our strategy involves:
Growing within our existing markets. We focus on lines of business that have large markets, with $54 billion of workers’ compensation premiums and $81 billion for other liability written in the United States in 2019 according to S&P Global. There were greater than $40 billion direct written premiums in commercial property and casualty markets in 2018 produced by program administrators according to the Target Markets Program Administration Association (“TMPAA”). By comparison, we generated $411.4 million of gross written premiums for the year ended December 31, 2019. We select Program Partners operating in our target markets with whom we believe we can partner with to grow within these significant markets. Programs Partners and Owned MGAs that we wrote business with prior to December 31, 2015 generated a gross written premium CAGR of 28.8% from the year ended December 31, 2015 to the year ended December 31, 2019. Given the size of our markets and our proven ability to grow our business, we believe that we have ample room to continue to grow our business organically for the foreseeable future. Additionally, as we grow our premiums and capital, we expect to continuously optimize our reinsurance program to maximize our risk-adjusted returns.
Selectively adding new Program Partners. We have been selective in choosing our current Program Partners, and will continue to ensure that new Program Partners share our business philosophy and meet our rigorous underwriting and returns criteria. Since 2015, we have added fourteen new Program Partners, four of which were added in the first four months of 2020. We focus on specialty lines and will continue to add programs in these markets. However, we also continue to evaluate potential partnerships in additional lines of business that harness our core competencies and provide us with greater revenue opportunities.
Opportunistically grow our Owned MGA business through acquisitions. From time to time, we may have the opportunity to deepen our relationships with our existing Program Partners by acquiring equity interests from their management teams. Since 2013, we have successfully completed seven acquisitions of companies with which we have had prior relationships. These businesses represented 63.6% of our gross written premiums for the year ended December 31, 2019. We pursue these periodic opportunities with the same discipline and focus on enhancing our stockholders’ returns as we do in underwriting a new program.
Strengthen and harness our strong and growing capital base. Despite our relatively modest historical balance sheet, we have grown our premiums through the significant use of reinsurance. As our capital base has grown, new opportunities have emerged for us. Of particular note, in 2019, A.M. Best upgraded our insurance companies from an “A-” to an “A” (Excellent) (Outlook Stable) financial strength rating, which we believe differentiates us in the markets we operate. As we continue to generate additional capital, and through the proceeds raised in this offering, we believe we will have the opportunity to access additional business to which we did not previously have access. We will also have the ability to retain more profitable businesses that we have historically ceded to the reinsurance markets. Any incremental business that we retain will be carefully balanced to ensure continued alignment of interests with all of our Program Partners, in an effort to maximize our risk-adjusted returns.
Maintaining our distinct combination of industry-leading profitability and growth. Our competitive advantages, including our focus on underserved markets, have enabled us to grow our gross written premiums to $411.4 million for 2019 at a CAGR of 29.8% since 2015, while maintaining an average return on equity of approximately 19.3% for the same time period. For the three months ended March 31, 2020, we generated a loss ratio of 57.6%. For the year ended December 31, 2019, we generated a loss ratio of 51.6%, in line with our average annual loss ratio from 2015 to 2019 of 50.0%. As we seek to grow our business, we remain disciplined in targeting classes of business and markets where we believe we can generate attractive returns. Rather than make decisions based on where we are in the market cycle, we focus on selecting high-quality programs, only pursuing opportunities that we expect to meet our pricing and risk requirements over the long-term. We will not participate in markets where we do not believe our business model can add incremental risk-adjusted value.
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Maintain disciplined controls over our key business risks. In order to maintain our underwriting profitability, we have systematic underwriting and risk monitoring processes across our business. Our processes are enhanced by our ability to provide multiple services to our Program Partners since we are in regular communication with them regarding underwriting, claims handling, reinsurance placement and collateral management. We seek to swiftly terminate relationships with Program Partners that are not producing targeted underwriting results, writing exposures outside of agreed upon risk tolerances, or not meeting their collateral or other commitments to us. Our stringent and extensive due diligence Program Partners selection process allows us to select superior Program Partners. We have terminated two partnerships for failure to perform contractually since 2010.
Summary risk factors
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors” immediately following this prospectus summary. These risks include the following:
our Program Partners or our Owned MGAs may fail to properly market, underwrite or administer policies;
we depend on a limited number of Program Partners for a substantial portion of our gross written premiums;
more than half of our gross written premiums are written in three key states;
a downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries may negatively affect our business;
if we are unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders, our business, financial condition and results of operations may be materially and adversely affected;
we could fail to accurately and timely pay claims;
negative developments in the workers’ compensation insurance industry could adversely affect our business, financial condition and results of operations;
we are subject to reinsurance counterparty credit risk and our reinsurers may not pay on losses in a timely fashion, or at all;
if we are unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us, we may be required to bear increased risks or reduce the level of our underwriting commitments;
retention of business written by our Program Partners could expose us to potential losses;
our loss reserves may be inadequate to cover our actual losses;
we may not be able to manage our growth effectively;
any shift in our investment strategy could increase the riskiness of our investment portfolio and the volatility of our results;
because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results;
regulators may challenge our use of fronting arrangements in states in which our Program Partners are not licensed;
our results of operations, liquidity, financial condition and FSRs are subject to the effects of natural and man-made catastrophic events;
Disruptions related to COVID-19, including economic impacts of the COVID-19-related governmental actions, could materially and adversely affect our business, financial condition and results of operations;
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our principal stockholders will be able to exert significant influence over us and our corporate decisions;
our principal stockholders could sell their interests in us to a third party in a private transaction, which may result in your not realizing any change-of-control premium on your shares and subject us to the influence of a currently unknown third party; and
we will incur significant increased costs as a result of operating as a public company, and operating as a public company will place additional demands on our management.
Before you invest in our common stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk factors.”
Implications of being an emerging growth company
As a company with less than $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:
we may present as few as two years of audited financial statements and two years of related management’s discussion and analysis of financial condition and results of operations in this prospectus;
we are exempt from the requirement to obtain an attestation report from our auditors on management’s assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002 for up to five years or until we no longer qualify as an emerging growth company;
we are permitted to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosures regarding our executive compensation; and
we are not required to hold non-binding advisory votes on executive compensation.
In addition to the relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to use this extended transition period, which means that our combined financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis.
In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, and in the future, we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenue of $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended.
Our history
We were founded in 1996 as a reinsurance broker and MGA targeting smaller, underserved insurance providers writing niche classes of business, predominantly workers’ compensation, accident and health and medical professional liability. From 1996 through 2000, we wrote business on the paper of a highly
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rated, third-party insurance carrier. In 2000, we purchased a small, unrated, single-state carrier in South Dakota. Through the addition of a risk-bearing insurance carrier, we expanded our product suite and created opportunities to earn additional revenue and profit in the form of underwriting and investment income.
In 2003, we sold the South Dakota carrier and purchased Benchmark, which was licensed in 41 states and the District of Columbia. Benchmark provided us with an insurance carrier with a financial strength rating of “A-” from A.M. Best and that is now licensed in 49 states and the District of Columbia and has an “A” rating from A.M. Best. In 2007, we replaced Benchmark’s management team and began our plan to reposition the business as a specialty insurance carrier for select, high-performing small- to mid-sized Program Partners. We focused on a limited group of core Program Partners and sought to upgrade Benchmark’s staff, infrastructure and business processes. After stabilizing and repositioning the business by 2011, we turned our attention to growing the business by expanding existing Program Partner relationships and selectively adding new Program Partners. In 2013, we acquired S&C Claims Services, which, prior to the acquisition, had been handling our workers’ compensation claims for over 10 years.
In July 2015, we sold a minority equity stake of 36.4% to AHP-BHC LLC and AHP-TH LLC, entities affiliated with Altaris Capital Partners, LLC, a private equity firm focused on businesses operating in the healthcare and healthcare-related sector with $2.5 billion of assets actively under management. Altaris Capital Partners, LLC made additional equity investments through affiliated entities, ACP-BHC LLC and ACP-TH LLC (together with AHP-BHC LLC and AHP-TH LLC, the “Altaris Funds”), in January 2016 and May 2017.
The investments by the Altaris Funds provided liquidity for certain original stockholders, and the financial flexibility to grow our business and invest in our operations. In 2017, we acquired ALIC, a former Program Partner relationship that is a Utah-domiciled insurance company that writes workers’ compensation insurance in Utah and Arizona. In 2018, we acquired ownership interests in two additional Program Partner relationships, a 45% common equity ownership in Compstar, the parent company of Compstar Insurance Services, LLC, a general agent (“GA”) underwriting workers’ compensation insurance coverage for California contractors, and 100% ownership of Westcap Insurance Services, LLC (“Westcap”), an MGA underwriting general liability insurance coverages for California contractors. We had relationships of 11, 12 and 12 years with ALIC, Compstar Insurance Services, LLC and Westcap respectively prior to our equity investments.
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Our organizational structure
The diagram below depicts our current organizational structure:

Prior to the completion of this offering, we will effect the following transactions (the “reorganization transactions”); (i) each of Trean Holdings LLC (“Trean Holdings”) and BIC Holdings LLC (“BIC Holdings”) will contribute all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC Holdings, in exchange for shares of common stock in Trean Insurance Group, Inc., (ii) Trean Insurance Group, Inc. will acquire from Blake Enterprises I, Inc., Blake Enterprises II, Inc. and Blake Enterprises III, Inc. (collectively, the “Blake Enterprises entities”) their 55% equity interest in Compstar Holding Company LLC (“Compstar”) in exchange for shares of Trean Insurance Group, Inc.’s common stock, after which Trean Insurance Group, Inc. will contribute such 55% equity interest in Compstar to Trean Compstar Holdings LLC (“Trean Compstar”), so that Trean Compstar will own 100% of Compstar, (iii) upon the completion of the transfers by Trean Holdings and BIC Holdings, Trean Holdings and BIC Holdings will be dissolved and will distribute in-kind shares to the Pre-IPO Unitholders (as defined below) and (iv) the Trean Holdings and BIC Holdings Class C units held by Randall D. Jones, one of our directors, will become fully vested in connection with the IPO and will be exchanged for an economically equivalent amount of fully-vested shares of our common stock determined based on the initial public offering price. In connection with such dissolutions and as contemplated by the operating agreements for Trean Holdings and BIC Holdings, among other things, transaction payments will be made by Trean Corporation and Benchmark to certain of the Pre-IPO Unitholders and certain other employees of Trean Corporation and/or Benchmark, which payment amounts are expected to be $3.1 million in the aggregate.
The current holders of each of Trean Holdings and BIC Holdings equity interests (the “Pre-IPO Unitholders”) will also receive an economically equivalent amount of shares of Trean Insurance Group, Inc.’s common stock determined based on the initial public offering price. Assuming an initial public offering price of $    per share (the midpoint of the price range set forth on the cover of this prospectus), the Pre-IPO Unitholders will receive    shares of common stock at an exchange rate of    shares of common stock per unit. A $1.00 increase in the assumed initial public offering price of $    per share would decrease the exchange rate to    shares of common stock per unit and decrease the number of shares of common stock the Pre-IPO Unitholders will receive by    shares. A $1.00 decrease in the assumed initial public offering price of $    per share would increase the exchange rate to    shares of common stock per unit and increase the number of shares of common
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stock the Pre-IPO Unitholders will receive by    shares.
Assuming an initial public offering price of $   per share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the completion of this offering, the Altaris Funds will hold approximately   % of our common stock,   % will be held by the management and other Pre-IPO Unitholders and the remaining   % will be held by public stockholders (or   %,   % and   %, respectively, if the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full).
The diagram below depicts our organizational structure immediately following this offering:

Our principal stockholders
We are, and after giving effect to this offering, will continue to be, subject to the significant influence of the Altaris Funds, our principal stockholders and selling stockholders in this offering. The Altaris Funds, immediately following the completion of this offering, are expected to own, in the aggregate, approximately    % of our outstanding common stock, or    % if the underwriters exercise their option to purchase additional shares to cover over-allotments in full. See “Principal and selling stockholders.” So long as the Altaris Funds own a significant amount of our outstanding common stock, the Altaris Funds may exert significant influence over us and our corporate decisions. See “Risk factors — Risks related to our common stock and this offering — Our principal stockholders will be able to exert significant influence over us and our corporate decisions.”
Corporate information
We were incorporated in the State of Delaware in January 2020. We are a newly formed corporation, have no material assets and have not engaged in any business or other activities except in connection with the reorganization. Our principal executive offices are located at 150 Lake Street West, Wayzata, MN 55391, and our telephone number is (952) 974-2200. Our website is www.trean.com. Our website and the information contained therein or connected thereto is not incorporated into this prospectus or the registration statement of which it forms a part.
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The offering
Common stock offered by us
   shares
Common stock offered by the selling stockholders
   shares (or     shares if the underwriters exercise their option to purchase additional shares of common stock in full)
Common stock to be outstanding immediately after this offering
   shares
Use of proceeds
We estimate the net proceeds from the sale of shares by us in this offering will be approximately $    million, based on an assumed initial public offering price of $    per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of $    million.
We intend to use the net proceeds from our sale of shares of common stock in this offering to (i) redeem all $5.1 million aggregate liquidation preference of the Series B Nonconvertible Preferred Stock of Benchmark Holding Company (the “Series B Preferred Stock”), (ii) redeem all $0.4 million aggregate liquidation preference of the Nonconvertible Preferred Stock of ALIC (the “ALIC Preferred Stock”), (iii) redeem all $7.7 million aggregate principal amount of the Fixed to Floating Rate Junior Subordinated Debt Securities of Trean Corporation (the “Subordinated Notes”), (iv) repay approximately $19.8 million of outstanding indebtedness under the 2018 Oak Street Credit Agreement (as defined below) and (v) pay an aggregate one-time payment of $    million to Altaris Capital Partners, LLC in connection with the termination of our consulting and advisory agreements with it. See “Certain Relationships and Related Party Transactions — Consulting Agreements.” We will use all remaining proceeds for general corporate purposes, including to support the growth of our business.
We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. See “Use of proceeds.”
Dividend policy
We currently do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, legal, tax and regulatory limitations, contractual restrictions and other factors that our board of directors considers relevant. See “Dividend policy.”
Controlled company
Upon the closing of this offering, the Altaris Funds will beneficially own more than 50% of the voting power for the election of members of our board of directors.
See “Certain relationships and related party transactions — Director Nomination Agreement.” Consequently, we will be a
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“controlled company” under the Nasdaq rules. As a controlled company, we qualify for, and intend to rely on, exemptions from certain corporate governance requirements of the Nasdaq. See “Risk factors.”
Voting rights
Shares of common stock are entitled to one vote per share. See “Description of capital stock.”
Proposed stock symbol
“TIG”
Risk factors
You should read the “Risk factors” section of this prospectus for a discussion of factors to carefully consider before deciding to invest in shares of our common stock.
The number of shares of common stock outstanding after the offering is based on our outstanding shares as of     , 2020, after giving effect to the reorganization transactions, and excludes      shares of common stock reserved for future issuance under the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan that we intend to adopt prior to the completion of this offering.
Unless otherwise indicated and except for our historical combined financial and other data and our combined financial statements and the related notes included elsewhere in this prospectus, the information in this prospectus:
assumes that the initial public offering price of the common stock will be $    per share (the midpoint of the price range set forth on the cover of this prospectus);
gives effect to the completion of the reorganization transactions; and
assumes no exercise of the option granted to the underwriters to purchase up to an additional     shares of our common stock to cover over-allotments.
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Summary historical combined financial and other data 
The following tables present summary historical combined financial and other data of BIC Holdings LLC and Trean Holdings LLC, along with their wholly owned subsidiaries.
The summary historical combined financial and other data presented below do not purport to be indicative of the results that can be expected for any future period and should be read together with “Capitalization,” “Selected historical combined financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus.
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
 
(in thousands)
Revenues:
 
 
 
 
Gross written premiums
$107,859
$101,534
$411,401
$357,007
Increase in gross unearned premiums
(7,373)
(10,952)
(13,598)
(16,862)
Gross earned premiums
100,486
90,582
397,803
340,145
Ceded earned premiums
(78,027)
(70,958)
(311,325)
(273,569)
Net earned premiums
22,459
19,624
86,478
66,576
Net investment income
3,272
1,287
6,245
4,816
Net realized capital gains (losses)
3,234
612
667
(715)
Other revenue
4,392
3,595
9,125
7,826
Total revenue
33,357
25,118
102,515
78,503
 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
12,934
11,456
44,661
35,729
General and administrative expenses
8,160
3,969
21,005
15,706
Interest expense
461
624
2,169
1,557
Total expenses
21,555
16,049
67,835
52,992
 
 
 
 
 
Other income
14
93
121
639
Income before taxes
11,816
9,162
34,801
26,150
 
 
 
 
 
Provision for income taxes
2,912
1,319
7,074
5,546
Equity earnings (losses) in affiliates, net of tax
702
608
3,558
(1,082)
Net income
$9,606
$8,451
$31,285
$19,522
Adjusted net income(1)
$6,602
$8,369
$33,194
$22,197
 
 
 
 
 
 
Three months ended
March 31, 2020
Year ended
December 31, 2019
Pro forma per share data(2):
 
 
 
 
Pro forma earnings (loss) per share outstanding
 
 
 
 
Basic and diluted
[ _ ]
 
[ _ ]
 
Pro forma weighted average shares outstanding
 
 
 
 
Basic and diluted
[ _ ]
 
[ _ ]
 
(1)
Adjusted net income is a non-GAAP financial measure. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
(2)
Pro forma weighted average shares outstanding reflect the estimated number of shares of common stock we expect to have outstanding upon the completion of the reorganization transactions.
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At March 31,
At December 31,
 
2020
2019
2018
 
(in thousands)
Balance sheet data:
 
 
 
Accrued investment income
$2,420
$2,468
$2,372
Premiums and other receivables
67,773
62,460
62,400
Related party receivables
21,871
22,221
15,934
Reinsurance recoverable
313,760
307,338
257,509
Prepaid reinsurance premiums
83,694
80,088
66,765
Deferred policy acquisition cost, net
3,103
2,115
2,976
Property and equipment, net
8,238
7,937
8,134
Deferred tax asset
1,280
1,367
1,823
Goodwill
2,822
2,822
2,822
Other assets
7,572
3,277
1,963
Total assets
954,583
919,034
800,119
Unpaid loss and loss adjustment expenses
418,757
406,716
340,415
Unearned premiums
111,162
103,789
90,074
Funds held under reinsurance agreements
165,018
163,445
166,838
Reinsurance premiums payable
48,099
53,620
40,135
Accounts payable and accrued expenses
18,360
14,995
15,004
Total liabilities
799,302
772,319
688,988
Redeemable preferred stock
5,100
5,100
6,000
Total members’ equity
150,181
141,615
105,131
Total liabilities and members’ equity
954,583
919,034
800,119
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
Underwriting and other ratios:
 
 
 
 
Loss ratio(1)
57.6%
58.4%
51.6%
53.7%
Expense ratio(2)
36.3%
20.2%
24.3%
23.6%
Combined ratio(3)
93.9%
78.6%
75.9%
77.3%
Return on equity(4)
26.3%
30.5%
25.5%
20.2%
Adjusted return on equity(5)
18.1%
30.2%
27.0%
23.0%
(1)
The loss ratio is the ratio, expressed as a percentage, of losses and loss adjustment expenses to net earned premiums.
(2)
The expense ratio is the ratio, expressed as a percentage, of general and administrative expenses to net earned premiums.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
(4)
Return on equity represents net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period.
(5)
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
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Risk factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all the other information contained in this prospectus, including our combined financial statements and the related notes, before deciding to invest in our common stock. The risks and uncertainties described below are not the only ones facing us. There may be additional risks and uncertainties of which we currently are unaware or that we currently believe to be immaterial. If any of these risks or uncertainties occurs, our business, financial condition and results of operations may be materially adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your investment.
Risks related to our business and industry
Failure of our Program Partners or our Owned MGAs to properly market, underwrite or administer policies could adversely affect us.
The marketing, underwriting, claims administration and other administration of policies in connection with our issuing carrier services and for business written directly by our Owned MGAs are the responsibility of our Program Partners and our Owned MGAs. Any failure by them to properly handle these functions could result in liability to us. Even though our Program Partners may be required to compensate us for any such liability, there are risks that they do not pay us because they become insolvent or otherwise. Any such failures could create regulatory issues or harm our reputation, which could materially and adversely affect our business, financial condition and results of operations.
We depend on a limited number of Program Partners for a substantial portion of our gross written premiums.
We source a significant amount of our premiums from our Program Partners, which are generally MGAs and insurance companies. Historically, we have focused our business on a limited group of core Program Partners and have sought to grow the business by expanding existing Program Partner relationships and selectively adding new Program Partners.
For the years ended December 31, 2019 and 2018, approximately 34% and 42% of our gross written premiums was derived from our top ten Program Partners.
A significant decrease in business from, or the entire loss of, our largest Program Partners or several of our other Program Partners may materially adversely affect our business, financial condition and results of operations.
More than half of our gross written premiums are written in three key states.
For the year ended December 31, 2019, we derived approximately 49%, 9% and 8%, respectively, of our gross written premiums in the states of California, Michigan and Arizona. As a result, our financial results are subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in these states, in particular our gross written premiums in California. Adverse developments relating to any of these conditions could materially adversely affect our business, financial condition and results of operations.
A downgrade in the A.M. Best financial strength ratings of our insurance company subsidiaries may negatively affect our business.
A.M. Best financial strength ratings (“FSRs”) are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated for overall financial strength by A.M. Best. These FSRs reflect A.M. Best’s opinion of our insurance company subsidiaries’ financial strength, operating performance, strategic position and ability to meet obligations to policyholders, and are not evaluations directed to investors. Our insurance company subsidiaries’ FSRs are subject to periodic review, and the criteria used in the rating methodologies are subject to change. While our insurance company subsidiaries are rated “A” (Excellent), their FSRs are subject to change. A significant portion of our business is conducted through small- and mid-sized insurance carriers, program managers and other insurance organizations that do not have an A.M. Best financial strength rating or
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require a highly rated carrier, such as ourselves, to meet their business objectives. A significant downgrade in our insurance company subsidiaries’ FSRs could lead to our Program Partners doing business with other insurance companies and materially adversely affect our business, financial condition and results of operations.
If we are unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders, our business, financial condition and results of operations may be materially and adversely affected.
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses and loss adjustment expenses (“LAE”) and other general and administrative expenses in order to earn a profit. If we do not accurately assess the risks that we assume, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower policyholder retention, resulting in lower revenues. Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. To accurately price our policies, we must:
collect and properly analyze a substantial volume of data from our insureds;
develop, test and apply appropriate actuarial projections and ratings formulas;
closely monitor and timely recognize changes in trends; and
project both frequency and severity of our insureds’ losses with reasonable accuracy.
We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:
insufficient or unreliable data;
incorrect or incomplete analysis of available data;
uncertainties generally inherent in estimates and assumptions;
our failure to implement appropriate actuarial projections and ratings formulas or other pricing methodologies;
regulatory constraints on rate increases;
our failure to accurately estimate investment yields and the duration of our liability for losses and LAE; and
unanticipated court decisions, legislation or regulatory action.
We may be unable to access the capital markets when needed, which may adversely affect our ability to take advantage of business opportunities as they arise and to fund our operations in a cost-effective manner.
Our ability to grow our business, either organically or through acquisitions, depends, in part, on our ability to access capital when needed. Capital markets may become illiquid from time to time, and we cannot predict the extent and duration of future economic and market disruptions or the impact of any government interventions. We may not be able to obtain financing on terms acceptable to us, or at all. If we need capital but cannot raise it or cannot obtain financing on terms acceptable to us, our business, financial condition and results of operations may be materially adversely affected and we may be unable to execute our long-term growth strategy.
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Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in frequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability.
Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can affect the business and economic environment. These same factors affect our ability to generate revenue and profits. In an economic downturn that is characterized by higher unemployment, declining spending and reduced corporate revenues, the demand for insurance products is generally adversely affected, which directly affects our premium levels and profitability. Prolonged and high unemployment that reduces the payrolls of our insureds would reduce the premiums that we are able to collect. Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure and may adversely affect our opportunities to underwrite profitable business.
Negative developments in the workers’ compensation insurance industry could adversely affect our business, financial condition and results of operations.
Although we engage in other businesses, 82.8% of our gross written premiums for the year ended December 31, 2019 were attributable to workers’ compensation insurance policies providing both primary and excess coverage. As a result, negative developments in the economic, competitive or regulatory conditions affecting the workers’ compensation insurance industry could have a material adverse effect on our business, financial condition and results of operations. If one of our larger markets were to enact legislation to increase the scope or amount of benefits for employees under workers’ compensation insurance policies without related premium increases or loss control measures, this could negatively affect our business, financial condition and results of operations.
The insurance industry is cyclical in nature.
The financial performance of the insurance industry has historically fluctuated with periods of lower premium rates and excess underwriting capacity resulting from increased competition followed by periods of higher premium rates and reduced underwriting capacity resulting from decreased competition. Although the financial performance of an individual insurance company depends on its own specific business characteristics, the profitability of many insurance companies tends to follow this cyclical market pattern. Because this market cyclicality is due in large part to the actions of our competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. We expect these cyclical patterns will cause our revenues and net income to fluctuate, which may cause the market price of our common stock to be more volatile.
Our failure to accurately and timely pay claims could harm our business.
We must accurately and timely evaluate and pay claims to manage costs and close claims expeditiously. Many factors affect our ability to evaluate and pay claims accurately and timely, including the training and experience of our claims staff, our claims department’s culture and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to accurately and timely pay claims could lead to regulatory and administrative actions or material litigation, undermine our reputation in the marketplace and materially and adversely affect our business, financial condition and results of operations.
If we do not hire and train new claims staff effectively or if we lose a significant number of experienced claims staff, our claims department may be required to handle an increasing workload, which could adversely affect the quality of our claims administration, and our business could be materially and adversely affected.
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The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and economic, legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include, but are not limited to:
judicial expansion of policy coverage and the impact of new theories of liability;
plaintiffs targeting property and casualty (“P&C”) insurers in purported class action litigation relating to claims-handling and other practices;
medical developments that link health issues to particular causes, resulting in liability claims; and
claims relating to unanticipated consequences of current or new technologies, including cyber-security related risks and claims relating to potentially changing climate conditions.
In some instances, these emerging issues may not become apparent for some time after we have issued the affected insurance policies. As a result, the full extent of liability under our insurance policies may not be known until many years after the policies are issued.
In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on our business.
The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict and could harm our business and materially adversely affect our results of operations.
Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk.
We have developed and continue to develop enterprise-wide risk management policies and procedures to mitigate risk and loss to which we are exposed. There are inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not anticipated or identified. If our risk management policies and procedures are ineffective, we may suffer unexpected losses and could be materially adversely affected. As our business changes and the niches in which we operate evolve, our risk management framework may not evolve at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not identified, monitored or managed. In times of market stress, unanticipated market movements or unanticipated claims experience, the effectiveness of our risk management strategies may be limited, resulting in losses to us. In addition, we may be unable to effectively review and monitor all risks and our employees may not follow our risk management policies and procedures.
The National Association of Insurance Commissioners (the “NAIC”) and state legislatures and regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to insurers. Our insurance company subsidiaries are subject to regulation in Kansas, the state of domicile of Benchmark, California, where Benchmark is commercially domiciled, and Utah, the state of domicile of ALIC. The Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department, the primary regulators of our insurance company subsidiaries, have adopted regulations implementing a requirement under the Kansas, California and Utah insurance laws, respectively, for insurance holding companies to adopt a formal enterprise risk management (“ERM”) function and to file an annual enterprise risk report. The regulations also require domestic insurers to conduct an Own Risk and Solvency Assessment (“ORSA”) and to submit an ORSA summary report prepared in accordance with the NAIC’s ORSA Guidance Manual. While we operate within an ERM framework designed to assess and monitor our risks, we may not be able to effectively review and monitor all risks, our employees may not all operate within the ERM framework and our ERM framework may not result in our accurately identifying all risks and limiting our exposures based on our assessments.
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We are subject to reinsurance counterparty credit risk. Our reinsurers may not pay on losses in a timely fashion, or at all.
We purchase reinsurance to transfer part of the risk we have assumed (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to policyholders. Accordingly, we are exposed to credit risk with respect to our reinsurers to the extent the reinsurance receivable is not sufficiently secured by collateral or does not benefit from other credit enhancements. We also bear the risk that a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverable for any reason, including that:
the terms of the reinsurance contract do not reflect the intent of the parties of the contract or there is a disagreement between the parties as to their intent;
the terms of the contract cannot be legally enforced;
the terms of the contract are interpreted by a court or arbitration panel differently than intended;
the reinsurance transaction performs differently than we anticipated due to a flawed design of the reinsurance structure, terms or conditions; or
a change in laws and regulations, or in the interpretation of the laws and regulations, materially affects a reinsurance transaction.
The insolvency of one or more of our reinsurers, or inability or unwillingness to make timely payments under the terms of our contracts, could materially adversely affect our business, financial condition and results of operations.
If we are unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us, we may be required to bear increased risks or reduce the level of our underwriting commitments.
Our insurance company subsidiaries purchase reinsurance as part of our overall risk management strategy. While reinsurance does not discharge our insurance company subsidiaries from their obligation to pay claims for losses insured under their insurance policies, it does make the reinsurer liable to them for the reinsured portion of the risk. As part of our strategy for our issuing carrier business, we reinsure underwriting risk to third-party reinsurers. At the inception of a new program, we typically act as an issuing carrier where we reinsure a substantial amount of such risk to third parties. For these reasons, reinsurance is an important tool to manage transaction and insurance risk retention and to mitigate losses. We may be unable to maintain our current reinsurance arrangements or to obtain other reinsurance in adequate amounts and at favorable rates, particularly if reinsurers become unwilling or unable to support our specialized issuing carrier model in the future. Additionally, market conditions beyond our control may impact the availability and cost of reinsurance and could have a material adverse effect on our business, financial condition and results of operations. In recent years, our Program Partners have benefitted from favorable market conditions, including growth in the role of MGAs and of offshore and other alternative sources of reinsurance. A decline in the availability of reinsurance, increases in the cost of reinsurance or a decreased level of activity by MGAs could limit the amount of issuing carrier business we could write and materially and adversely affect our business, financial condition, results of operations and prospects. We may, at certain times, be forced to incur additional costs for reinsurance or may be unable to obtain sufficient reinsurance on terms acceptable to us. In the latter case, we would have to accept an increase in exposure to risk, reduce the amount of business written by our insurance company subsidiaries or seek alternatives in line with our risk limits, all of which could materially adversely affect our business, financial condition and results of operations.
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Some of our issuing carrier arrangements contain limits on the reinsurer’s obligations to us.
While we reinsure underwriting risk in our issuing carrier business, including a substantial amount of such risk at the inception of a new program, we have in certain cases entered into programs that contain limits on our reinsurers’ obligations to us, including loss ratio caps or aggregate reinsurance limits. To the extent losses under these programs exceed the prescribed limits, we will be liable to pay the losses in excess of such limits, which could materially and adversely affect our business, financial condition and results of operations.
Retention of business written by our Program Partners could expose us to potential losses.
We retain risk for our own account on business underwritten by our insurance company subsidiaries. The determination to reduce the amount of reinsurance we purchase, or not to purchase reinsurance for a particular risk, customer segment or niche is based on a variety of factors, including market conditions, pricing, availability of reinsurance, our capital levels and loss experience. Retention increases our financial exposure to losses and significant losses could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our loss reserves may be inadequate to cover our actual losses.
Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related LAE. Loss reserves are estimates of the ultimate cost of claims and do not represent a precise calculation of any ultimate liability. These estimates are based on historical information and on estimates of future trends that may affect the frequency and severity of claims that may be reported in the future. Estimating loss reserves is a difficult, complex and inherently uncertain process involving many variables and subjective judgments. As part of the reserving process, we review historical data and consider the impact of various factors such as:
loss emergence and cedant reporting patterns;
underlying policy terms and conditions;
business and exposure mix;
trends in claim frequency and severity;
changes in operations;
emerging economic and social trends;
inflation; and
changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. It also assumes that adequate historical or other data exists upon which to make these judgments. For more information on the estimates used in the establishment of loss reserves, see “Management’s discussion and analysis of financial condition and results of operations — Critical accounting estimates — Reserves for unpaid losses and loss adjustment expenses.” There, however, is no precise method for evaluating the impact of any specific factor on the adequacy of reserves and actual results are likely to differ from original estimates, perhaps materially. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability could suffer.
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We may not be able to manage our growth effectively.
We intend to grow our business in the future, which could require additional capital, systems development and skilled personnel. We, however, must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees or effectively incorporate any acquisitions we make in our effort to achieve growth. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.
Our ability to grow our business will depend in part on the addition of new Program Partners, and our inability to effectively onboard such new Program Partners could have a material adverse effect on our business, financial condition and results of operations.
Our ability to grow our business will depend in part on the addition of new Program Partners. If we do not effectively onboard our new Program Partners, including assisting such Program Partners to quickly resolve any post-onboarding issues and provide effective ongoing support, our ability to add new Program Partners and our relationships with our existing Program Partners could be adversely affected. Additionally, our reputation with potential new customers could be damaged. If we fail to meet the requirements of our customers, it may be more difficult to execute on our strategy to retain Program Partners, which could have a material adverse effect on our business, financial condition and results of operations.
We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel.
We depend on our ability to attract and retain experienced personnel and seasoned key executives who are knowledgeable about our business. The pool of talent from which we actively recruit is may fluctuate based on market dynamics specific to our industry and independent of overall economic conditions. As such, higher demand for employees having the desired skills and expertise could lead to increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and recruit key personnel and maintain labor costs at desired levels. We do not have employment agreements with our executive officers. Should any of our executives terminate their employment with us, or if we are unable to retain and attract talented personnel, we may be unable to maintain our current competitive position in the specialized markets in which we operate, which could adversely affect our business and results of operations.
Technology breaches or failures of our or our business partners’ systems could adversely affect our business.
Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems and those of our business partners or service providers to sophisticated and targeted measures known as advanced persistent threats. While we and our business partners and service providers employ measures designed to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of information technology networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data (personal or otherwise) and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. In 2020, we discovered that we were subject to a cybersecurity incident that involved a third party obtaining unauthorized access to an employee’s electronic mailbox that was compromised in August 2019 through a phishing email. In conjunction with our cyber insurance carrier, we engaged outside counsel and a consulting firm specializing in digital forensics. While we do not believe the incident will have a material adverse effect on our business, financial performance and reputation, our investigation is ongoing and the ultimate effect of the incident is uncertain. Our evaluation, together with outside counsel, of whether data breach notifications may be required or appropriate in connection with this incident is ongoing, but we may decide to make such notifications in the future. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of our technology systems (or the data held by such systems) could affect our operations. We may not have the resources or technical sophistication to anticipate or prevent every type of cyber-attack. A significant cybersecurity
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incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, expose us to litigation and potential liability, damage our reputation, cause a loss of customers or give rise to monetary fines and other penalties, any or all of which could be material. It is possible that insurance coverage we have in place would not entirely protect us in the event that we experienced a cybersecurity incident, interruption or widespread failure of our information technology systems.
Any significant interruption in the operation of our computer systems could adversely affect our business, financial condition and results of operations.
We rely on multiple computer systems to interact with customers, issue policies, pay claims, run modeling functions, assess insurance risks and complete various important internal processes including accounting and bookkeeping. Our business depends on our ability to access these systems to perform necessary business functions. Additionally, some of these systems may include or rely upon third-party systems not located on our premises. Any of these systems may be exposed to unplanned interruption, unreliability or intrusion from a variety of causes, including among others, storms and other natural disasters, terrorist attacks, utility outages, security breaches or complications encountered as existing systems are replaced or upgraded.
Any such issues could materially affect us including the impairment of information availability, compromise of system integrity or accuracy, misappropriation of confidential information, reduction of our volume of transactions and interruption of our general business. Although we believe our computer systems are securely protected and continue to take steps to ensure they are protected against such risks, such problems may occur. If they do, interruption to our business and damage to our reputation, and related costs, could be significant, which could have a material adverse effect on our business, financial condition and results of operations.
Performance of our investment portfolio is subject to a variety of investment risks.
Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a high-quality portfolio of investments that is managed by a professional investment advisory management firm in accordance with our investment policy and routinely reviewed by our management team. Our investments, however, are subject to general economic conditions and market risks as well as risks inherent to particular securities.
Our primary market risk exposures are to changes in interest rates. See “Management’s discussion and analysis of financial condition and results of operations — Quantitative and qualitative disclosures about market risk.” In recent years, interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our net investment income, which, in turn, may adversely affect our profitability. Future increases in interest rates could cause the values of our fixed income securities portfolios to decline, with the magnitude of the decline depending on the duration of securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as mortgage-backed and asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.
The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities.
Such factors could reduce our net investment income and result in realized investment losses. Our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we hold in our portfolio does not reflect prices at which actual transactions would occur.
Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include maximum percentages of investment in certain types of
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securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the NAIC, the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department. Our investment objectives may not be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses.
Any shift in our investment strategy could increase the riskiness of our investment portfolio and the volatility of our results, which, in turn, may adversely affect our profitability.
Our investment strategy has historically been focused on fixed income securities which are subject to less volatility but also lower returns as compared to certain other asset classes. In the future, our investment strategy may include a greater focus on investments in equity securities, which are subject, among other things, to changes in value that may be attributable to market perception of a particular issuer or to general stock market fluctuations that affect all issuers. Investments in equity securities may be more volatile than investments in other asset classes such as fixed income securities. Common stocks generally subject their holders to more risks than preferred stocks and debt securities because common stockholders’ claims are subordinated to those of holders of preferred stocks and debt securities upon the bankruptcy of the issuer. An increase in the riskiness of our investment portfolio could lead to volatility of our results, which, in turn, may adversely affect our profitability.
We could be forced to sell investments to meet our liquidity requirements.
We invest the premiums we receive from our insureds until they are needed to pay policyholder claims. Consequently, we seek to manage the duration of our investment portfolio based on the duration of our losses and loss adjustment expenses reserves to ensure sufficient liquidity and avoid having to liquidate investments to fund claims. Risks such as inadequate losses and loss adjustment expenses reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. We may not be able to sell our investments at favorable prices or at all. Sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities.
We may face increased competition in our programs market.
While we believe there are relatively few competitors in the small- and mid-sized programs market that have the broad in-house expertise and wide array of services that we offer to our Program Partners, we may face increased competition if other companies decide to compete with us in our programs market or competitors begin to offer policy administration or other services. Any increase in competition in this market, especially by one or more companies that have greater resources than we have, could materially adversely affect our business, financial condition and results of operations.
We compete with a large number of companies in the insurance industry for underwriting premium.
We compete with a large number of other companies in the insurance industry for underwriting premium. During periods of intense competition for premium, we are exposed to the actions of other companies that may seek to write policies without the appropriate regard for risk and profitability. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.
We face competition from a wide range of specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than we are and that have significantly greater financial, marketing, management and other resources. Some of these competitors also have greater market recognition than we do. We may incur increased costs in competing for underwriting revenues. If we are unable to compete effectively in the markets in which we operate or expand our operations into new markets, our underwriting revenues may decline, as well as overall business results.
Our results of operations, liquidity, financial condition and FSRs are subject to the effects of natural and man-made catastrophic events.
Events such as hurricanes, windstorms, flooding, earthquakes, wildfires, solar storms, acts of terrorism, explosions and fires, cyber-crimes, public health crises, illness, epidemics or pandemic health events,
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product defects, mass torts and other catastrophes may adversely affect our business in the future. Such catastrophic events, and any relevant regulations, could expose us to:
widespread claim costs associated with P&C and workers’ compensation claims;
losses resulting from a decline in the value of our invested assets;
losses resulting from actual policy experience that is adverse compared to the assumptions made in product pricing;
declines in value and/or losses with respect to companies and other entities whose securities we hold and counterparties with whom we transact business to whom we have credit exposure, including reinsurers, and declines in the value of investments; and
significant interruptions to our systems and operations.
Natural and man-made catastrophic events are generally unpredictable. While we have structured our business and selected our niches in part to avoid catastrophic losses, our exposure to such losses depends on various factors, including the frequency and severity of the catastrophes, the rate of inflation and the value and geographic or other concentrations of insured companies and individuals. Vendor models and proprietary assumptions and processes that we use to manage catastrophe exposure may prove to be ineffective due to incorrect assumptions or estimates.
In addition, legislative and regulatory initiatives and court decisions following major catastrophes could require us to pay the insured beyond the provisions of the original insurance policy and may prohibit the application of a deductible, resulting in inflated catastrophe claims.
These and other disruptions could materially and adversely affect our business, financial condition and results of operations.
Disruptions related to COVID-19, including economic impacts of the COVID-19-related governmental actions, could materially and adversely affect our business, financial condition and results of operations.
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the U.S., and was declared a pandemic by the World Health Organization on March 11, 2020. The global outbreak of COVID-19 continues to rapidly evolve and has resulted in quarantines, reductions in business activity, widespread unemployment and overall economic and financial market instability. In addition, the ongoing continuation of the COVID-19 pandemic and the economic impacts of COVID-19-related governmental actions may also eventually have an impact on our premium revenue, our loss experience and loss expense, liquidity, or our regulatory capital and surplus, and operations.
It is still too early to determine the ultimate effect that the economic shut-down, resulting from the COVID-19 pandemic, will have on our future revenues or expected claims and losses. Legislative and regulatory initiatives taken, or which may be taken in response to COVID-19, may adversely affect our operations, particularly with respect to our workers’ compensation businesses, in the following areas:
Legislative or regulatory action seeking to retroactively mandate coverage for losses, which our policies would not otherwise cover or have been priced to cover;
Regulatory actions relaxing reporting requirements for claims, which may affect coverage under our claims made and reported policies;
Legislative actions prohibiting us from cancelling policies in accordance with our policy terms or non-renewing policies at their expiration date;
Legislative orders to provide premium refunds, extend premium payment grace periods and allow time extensions for past due premium payments;
We may have increased workers’ compensation loss expense and claims frequency if policyholder employees in high risk roles with essential businesses contract COVID-19 in the workplace;
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Travel restrictions and quarantines leading to a lack of in-person meetings, which would hinder our ability to establish relationships or originate new business;
Alternative working arrangements, including employees working remotely, which could negatively impact our business should such arrangements remain for an extended period of time;
We may experience elevated frequency and severity in our workers’ compensation lines as a result of legislative or regulatory action to effectively expand workers’ compensation coverage for certain types of workers; and
We may experience delayed reporting of losses, settlement negotiations and disputed claims resolution above our normal claims resolution trends.
The occurrence of any of these events or experiences, individually or collectively, could materially and adversely affect our business, financial condition and results of operations.
Global climate change may in the future increase the frequency and severity of weather events and resulting losses, particularly to the extent our policies are concentrated in geographic areas where such events occur, may have an adverse effect on our business, financial condition and results of operations.
Scientific evidence indicates that man-made production of greenhouse gas has had, and will continue to have, an adverse effect on the global climate. There is a growing consensus today that climate change increases the frequency and severity of extreme weather events and, in recent years, the frequency of extreme weather events appears to have increased. We cannot predict whether or to what extent damage that may be caused by natural events, such as wild fires, severe tropical storms and hurricanes, will affect our ability to write new insurance policies and reinsurance contracts, but, to the extent our policies are concentrated in the specific geographic areas in which these events occur, the increased frequency and severity of such events and the total amount of our loss exposure in the impacted areas of such events may adversely affect our business, financial condition and results of operations. In addition, although we have historically had limited exposure to catastrophic risk, claims from catastrophe events could reduce our earnings and cause substantial volatility in our business, financial condition and results of operations for any period. However, assessing the risk of loss and damage associated with the adverse effects of climate change and the range of approaches to address loss and damage associated with the adverse effects of climate change, including impacts related to extreme weather events and slow onset events, remains a challenge and might adversely affect our business, financial condition and results of operations.
Because our business depends on insurance brokers, we are exposed to certain risks arising out of our reliance on these distribution channels that could adversely affect our results.
Certain premiums from policyholders, where the business is produced by brokers, are collected directly by the brokers and forwarded to our insurance subsidiary. In certain jurisdictions, when the insured pays its policy premium to its broker for payment on behalf of our insurance subsidiary, the premium may be considered to have been paid under applicable insurance laws and regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually received the premium from that broker. Consequently, we assume a degree of credit risk associated with the brokers with whom we work. Where necessary, we review the financial condition of potential new brokers before we agree to transact business with them. Although the failure by any of our brokers to remit premiums to us has not been material to date, there may be instances where our brokers collect premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth in the policy despite the absence of related premiums being paid to us.
Because the possibility of these events occurring depends in large part on the financial condition and internal operations of our brokers, we monitor broker behavior and review financial information on an as-needed basis. If we are unable to collect premiums from our brokers in the future, our underwriting profits may decline and our financial condition and results of operations could be materially and adversely affected.
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Our operating results have in the past varied from quarter to quarter and may not be indicative of our long-term prospects.
Our operating results are subject to fluctuation and have historically varied from quarter to quarter. We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including the general economic conditions in the markets where we operate, the frequency of occurrence or severity of catastrophic or other insured events, fluctuating interest rates, claims exceeding our loss reserves, competition in our industry, deviations from expected renewal rates of our existing policies and contracts, adverse investment performance and the cost of reinsurance coverage.
In particular, we seek to underwrite products and make investments to achieve favorable returns on tangible stockholders’ equity over the long term. In addition, our opportunistic nature and focus on long-term growth in tangible equity may result in fluctuations in gross written premiums from period to period as we concentrate on underwriting contracts that we believe will generate better long-term, rather than short-term, results. Accordingly, our short-term results of operations may not be indicative of our long-term prospects.
Changes in accounting practices and future pronouncements may materially affect our reported financial results.
Developments in accounting practices may require us to incur considerable additional expenses to comply, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, stockholders’ equity and other relevant financial statement line items.
Our insurance subsidiaries are required to comply with statutory accounting principles (“SAP”). SAP and various components of SAP are subject to constant review by the NAIC and its task forces and committees, as well as state insurance departments, in an effort to address emerging issues and otherwise improve financial reporting. Various proposals are pending before committees and task forces of the NAIC, some of which, if enacted, could have negative effects on insurance industry participants. The NAIC continuously examines existing laws and regulations. We cannot predict whether or in what form such reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect us.
Legal and regulatory risks
We are subject to extensive regulation.
Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. These regulations, generally administered by a department of insurance in each state and territory in which we do business, relate to, among other things:
approval of policy forms and premium rates;
standards of solvency, including risk-based capital measurements;
licensing of insurers;
challenging our use of fronting arrangements in states in which our Program Partner is not licensed;
imposing minimum capital and surplus requirements for insurance company subsidiaries;
restrictions on agreements with our large revenue-producing agents;
cancellation and non-renewal of policies;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of our insurance company subsidiaries to pay dividends to us;
restrictions on transactions between our insurance company subsidiaries and their affiliates;
restrictions on the size of risks insurable under a single policy;
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requiring deposits for the benefit of policyholders;
requiring certain methods of accounting;
periodic examinations of our operations and finances;
prescribing the form and content of records of financial condition required to be filed; and
requiring reserves for unearned premium, losses and other purposes.
State insurance departments also conduct periodic examinations of the conduct and affairs of insurance companies and require the filing of annual, quarterly and other reports relating to financial condition, holding company issues, ERM and ORSA and other matters. These regulatory requirements could adversely affect or inhibit our ability to achieve some or all of our business objectives, including profitable operations in our various customer segments.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could fine us, preclude or temporarily suspend us from carrying on some or all of our activities in certain jurisdictions or otherwise penalize us. This could adversely affect our ability to operate our business. Further, changes in the laws and regulations applicable to the insurance industry or interpretations by regulatory authorities could adversely affect our ability to operate our business as currently conducted and in accordance with our business objectives.
In addition to regulations specific to the insurance industry, including the insurance laws of our principal state regulators (the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department), as a public company we will also be subject to the rules and regulations of the SEC and the securities exchange on which our common stock is listed, each of which regulate many areas such as financial and business disclosures, corporate governance and stockholder matters. Among other laws, we are subject to laws relating to federal trade restrictions, privacy/data security and terrorism risk insurance laws.
We monitor these laws, regulations and rules on an ongoing basis to ensure compliance and make appropriate changes as necessary. Implementing such changes may require adjustments to our business methods, increases to our costs and other changes that could cause us to be less competitive in our industry. For further information on the regulation of our business, see “Regulation.”
Regulators may challenge our use of fronting arrangements in states in which our Program Partners are not licensed.
We enter into fronting, or issuing carrier, arrangements with our Program Partners that require a broadly licensed, highly rated admitted carrier to conduct their business in states in which such Program Partner is not licensed or is not authorized to write particular lines of insurance. We typically act as the reinsurance broker to the program as well as the issuing carrier, which enables us to charge fees for the placement of reinsurance in addition to the fronting fees. We also receive ceding commissions from third-party reinsurers to which we transfer all or a portion of the underwriting risk. Some state insurance regulators may object to our issuing carrier arrangements. In certain states, including Florida and Kentucky, the insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no statutory or regulatory prohibition against an authorized insurer acting as an issuing carrier for an unauthorized insurer could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
If regulators in any of the states where we conduct our issuing carrier business were to prohibit or limit the arrangement, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material and adverse effect on our business, financial condition and results of operations. See “— More than half of our gross written premiums are written in three key states.”
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Regulation may become more extensive in the future.
Legislators and regulators may periodically consider various proposals that may affect our business practices and product designs, how we sell or service certain products we offer or the profitability of our business. We continually monitor such proposals and assess how they may apply to us or our competitors or how they could impact our business, financial condition, results of operations and ability to compete effectively.
Increasing regulatory focus on privacy issues and expanding laws could affect our business model and expose us to increased liability.
The regulatory environment surrounding information security and privacy is increasingly demanding.
We are subject to numerous U.S. federal and state laws and non-U.S. regulations governing the protection of personal and confidential information of our customers or employees. On October 24, 2017, the National Association of Insurance Commissioners (“NAIC”) adopted an Insurance Data Security Model Law, which requires licensed insurance entities to comply with detailed information security requirements. The NAIC model law has been adopted by certain states and is under consideration by others. It is not yet known whether or not, and to what extent, states legislatures or insurance regulators where we operate will enact the Insurance Data Security Model Law in whole or in part, or in a modified form. Such enactments, especially if inconsistent between states or with existing laws and regulations could raise compliance costs or increase the risk of noncompliance, with the attendant risk of being subject to regulatory enforcement actions and penalties, as well as reputational harm. Any such events could potentially have an adverse impact on our business, financial condition or results of operations.
As a holding company, we rely on dividends and payments from our subsidiaries to operate our business. Our ability to receive dividends and permitted payments from our insurance company subsidiaries is subject to regulatory constraints.
We are a holding company and, as such, have no direct operations of our own. We do not expect to have any significant assets other than our ownership of equity interests in our operating subsidiaries. We accordingly depend on the payment of funds from our subsidiaries in the form of dividends, distributions or otherwise to meet our obligations and to pay our expenses. The ability of our subsidiaries to make any payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions.
In addition, dividends payable from our insurance company subsidiaries without the prior approval of the applicable insurance commissioner are limited to the greater of 10% of Benchmark’s surplus as shown on the last statutory financial statement on file with the Kansas Insurance Department and the California Department of Insurance, respectively, or 100% of net income during the applicable twelve-month period (not including realized capital gains); and in Utah, the lesser of 10% of ALIC’s surplus as shown on the last statutory financial statement on file with the Utah Insurance Department, 100% of net income during the applicable twelve-month period (not including realized capital gains). As of December 31, 2019, the maximum amount of unrestricted dividends that our insurance company subsidiaries could pay to us without approval was $11.6 million. Our insurance company subsidiaries may be unable to pay dividends in the future, and the limitations of such dividends could adversely affect our business, liquidity or financial condition.
The effects of litigation on our business are uncertain and could have an adverse effect on our business.
As is typical in our industry, we continually face risks associated with litigation of various types, including general commercial and corporate litigation, and disputes relating to bad faith allegations which could result in us incurring losses in excess of policy limits. We are party to certain litigation matters throughout the year, mostly with respect to claims. Litigation is subject to inherent uncertainties, and if there were an outcome unfavorable to us, there exists the possibility of a material adverse impact on our results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not materialize, we still may face substantial expense and disruption associated with the litigation.
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We may have exposure to losses from acts of terrorism as we are required by law to provide certain coverage for such losses.
U.S. insurers are required by state and federal law to offer coverage for acts of terrorism in certain commercial lines, including workers’ compensation. The Terrorism Risk Insurance Act, as extended by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”) requires commercial P&C insurance companies to offer coverage for acts of terrorism, whether foreign or domestic, and established a federal assistance program through the end of 2020 to help cover claims related to future terrorism-related losses. The likelihood and impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. Although we reinsure a portion of the terrorism risk we retain under TRIPRA, our terrorism reinsurance does not provide full coverage for an act stemming from nuclear, biological or chemical terrorism. To the extent an act of terrorism, whether a domestic or foreign act, is certified by the Secretary of Treasury, we may be covered under TRIPRA of our losses for certain P&C lines of insurance. However, any such coverage would be subject to a mandatory deductible based on 20% of earned premium for the prior year for the covered lines of commercial P&C insurance. Based on our 2018 earned premiums, our aggregate deductible under TRIPRA during 2019 is approximately $59 million. The federal government will then reimburse us for losses in excess of our deductible, which will be 81% of losses in 2019, and 80% in 2020, up to a total industry program limit of  $100 billion.
Assessments and premium surcharges for state guaranty funds, secondary-injury funds, residual market programs and other mandatory pooling arrangements may reduce our profitability.
Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. Some states also have laws that establish secondary-injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on incurred losses.
In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in any given period or limit our ability to grow our business.
Risks related to our common stock and this offering
There is no public market for our common stock and a market may never develop.
Prior to this offering, there has been no public market for our common stock. Although our common stock will be listed on the Nasdaq, an active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The price for our common stock in this offering will be determined by negotiations among us, the selling stockholders and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your shares of our common stock at or above the initial public offering price or at any other price, or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock, our ability to
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motivate our employees and sales representatives through equity incentive awards, and our ability to acquire other companies, products or technologies by using our common stock as consideration.
If securities analysts do not publish research or reports about our business or our industry or if they issue unfavorable commentary or negative recommendations with respect to our common stock, the price of our common stock could decline.
The trading market for our common stock will be influenced by the research and reports that equity research and other securities analysts publish about us, our business and our industry. We do not have control over these analysts and we may be unable or slow to attract research coverage. One or more analysts could issue negative recommendations with respect to our common stock or publish other unfavorable commentary or cease publishing reports about us, our business or our industry. If one or more of these analysts cease coverage of us, we could lose visibility in the market. As a result of one or more of these factors, the market price of our common stock price could decline rapidly and our common stock trading volume could be adversely affected.
Our stock price may be volatile or may decline regardless of our operating performance.
Some factors that may cause the market price of our common stock to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:
our operating and financial performance and prospects;
our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;
changes in earnings estimates or recommendations by securities analysts who cover our common stock;
fluctuations in our quarterly financial results or earnings guidance or the quarterly financial results or earnings guidance of companies perceived to be similar to us;
changes in our capital structure, such as future issuances of securities, sales of large blocks of common stock by our stockholders, including our principal stockholders, or the incurrence of additional debt;
departure of key personnel;
reputational issues;
changes in general economic and market conditions;
changes in industry conditions or perceptions or changes in the market outlook for the insurance industry; and
changes in applicable laws, rules or regulations, regulatory actions affecting us and other dynamics.
The securities markets have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general market, economic and political conditions, such as recessions, loss of investor confidence or interest rate changes, may negatively affect the market price of our common stock. In addition, price volatility may be greater if the public float and trading volume of shares of our common stock are low.
Our principal stockholders will be able to exert significant influence over us and our corporate decisions.
Immediately following this offering, our principal stockholders, the Altaris Funds, will hold approximately   % of our common stock or   % if the underwriters exercise their option to purchase additional shares of common stock to cover over-allotments in full. As a result, our principal stockholders are able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. Our principal stockholders may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse
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to your interests. The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of us, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of us and may ultimately affect the market price of our common stock.
As long as our principal stockholders own a majority of our common stock, we may rely on certain exemptions from the corporate governance requirements of the Nasdaq available for “controlled companies.”
Upon the completion of this offering, we will be a “controlled company” within the meaning of the corporate governance listing requirements of the Nasdaq because our principal stockholders will continue to own more than 50% of our outstanding common stock. A controlled company may elect not to comply with certain corporate governance requirements of the Nasdaq. Accordingly, our board of directors will not be required to have a majority of independent directors and our compensation, nominating and corporate governance committee will not be required to meet the director independence requirements to which we would otherwise be subject until such time as we cease to be a “controlled company.” If we elect to rely on “controlled company” exemptions, you will not have certain of the protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq.
Our principal stockholders could sell their interests in us to a third party in a private transaction, which may result in your not realizing any change-of-control premium on your shares and subject us to the influence of a currently unknown third party.
Following the completion of this offering, our principal stockholders will continue to beneficially own more than 50% of our common stock. Our principal stockholders will have the ability, should they choose to do so, to sell some or all of their shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in another party gaining significant influence over us.
The ability of our principal stockholders to sell their shares of our common stock privately, with no requirement for a concurrent offer to be made to acquire all of the shares of our outstanding common stock that will be publicly traded after this offering, could prevent you from realizing any change-of-control premium on your shares of our common stock that may accrue to our principal stockholders upon their private sales of our common stock.
Future sales, or the perception of future sales, of our common stock may depress our stock price.
If our stockholders sell a large number of shares of our common stock, or if we issue a large number of shares of our common stock in connection with future acquisitions, financings, or other circumstances, the market price of shares of our common stock could decline significantly. Moreover, the perception in the public market that our stockholders may sell shares of our common stock could depress the market price of those shares. In addition, sales of a substantial number of shares of our common stock by our principal stockholders could adversely affect the market price of our common stock.
All the shares sold in this offering will be freely tradable without restriction, except for shares acquired by any of our “affiliates,” as defined in Rule 144 under the Securities Act. Immediately after this offering, the public market for our common stock will include only the   shares of common stock that are being sold in this offering. Once we register these shares, they can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates. In addition, the registration rights agreement with our principal stockholders pursuant to which we will be obligated to register our principal stockholders’ shares of our common stock for public resale upon request by our principal stockholders, beginning 180 days following the date of this prospectus. See “Shares eligible for future sale — Registration Rights Agreement.”
We expect that we, our principal stockholders and our directors and executive officers will enter into lock-up arrangements under which we and they will agree that we and they will not sell, directly or indirectly, any common stock for a period of 180 days from the date of this prospectus (subject to certain exceptions) without the prior written consent of J.P. Morgan Securities LLC. See “Underwriting.”
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We will incur significant increased costs as a result of operating as a public company, and operating as a public company will place additional demands on our management.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and the Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Compliance with these requirements will place significant additional demands on our management and will require us to enhance certain internal functions, such as investor relations, legal, financial reporting and corporate communications. Accordingly, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
We currently do not anticipate declaring or paying regular dividends on our common stock.
We do not currently anticipate declaring or paying regular cash dividends on our common stock in the near term. We currently intend to use our future earnings, if any, to fund our growth and develop our business and for general corporate purposes (which may include capital contributions to our insurance company subsidiaries). Therefore, you are not likely to receive any dividends on your common stock in the near term, and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which they are initially offered. Any future declaration and payment of dividends or other distributions of capital will be at the discretion of our board of directors and the payment of any future dividends or other distributions of capital will depend on many factors, including our financial condition, earnings, cash needs, regulatory constraints, capital requirements (including requirements of our subsidiaries) and any other factors that our board of directors deems relevant in making such a determination. In addition, the terms of the agreements governing the debt we incurred, or debt that we may incur, may limit or prohibit the payment of dividends. For more information, see “Dividend policy.” We may not establish a dividend policy or pay dividends in the future or continue to pay any dividend if we do commence paying dividends pursuant to a dividend policy or otherwise.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law (the “DGCL”) or any action asserting a claim against us that is governed by the internal affairs doctrine. Unless we consent in writing to the selection of an alternative forum, the exclusive forum for any action under the Securities Act or the Exchange Act shall be either the Court of Chancery of the State of Delaware or the federal district court for the District of Delaware. This exclusive forum provision will not apply to claims which are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware, for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction or, in the case of an action under the Securities Act or the Exchange Act, for which neither the Court of Chancery of the State of Delaware nor the federal district court for the District of Delaware has subject matter jurisdiction. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. Furthermore, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition and results
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of operations. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. This decision may be reviewed and ultimately overturned by the Delaware Supreme Court.
Provisions in our organizational documents, Delaware corporate law, state insurance laws and certain of our contractual agreements and compensation arrangements may prevent or delay an acquisition of us.
Provisions of our amended and restated certificate of incorporation and amended and restated by-laws and of state law may delay, deter, prevent or render more difficult a takeover attempt that our stockholders may consider in their best interests. For example, such provisions or laws may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
Certain provisions of our amended and restated certificate of incorporation and amended and restated by-laws may have anti-takeover effects and may delay, deter or prevent a takeover attempt that our stockholders may consider in their best interests. The provisions provide for, among others:
the ability of our board of directors to issue one or more series of preferred stock;
the filling of any vacancies on our board of directors by the affirmative vote of a majority of the remaining directors, even if less than a quorum, or by a sole remaining director or by the stockholders; provided, however, that after the first time when the principal stockholders cease to beneficially own, in the aggregate, at least 50% of our outstanding common stock, any vacancy occurring in our board of directors may only be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director (and not by the stockholders);
certain limitations on convening special stockholder meetings;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings; and
stockholder action by written consent only until the first time when our principal stockholders cease to beneficially own, in the aggregate, 50% or greater of our outstanding common stock.
Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation.
The insurance laws and regulations of the various states in which our insurance company subsidiaries are organized may delay or impede a business combination involving us. State insurance laws generally prohibit an entity from acquiring control of an insurance company without the prior approval of the domestic insurance regulator. Under most states’ statutes, an entity is presumed to have control of an insurance company if it owns, directly or indirectly, 10% or more of the voting stock of that insurance company or its parent company. These regulatory restrictions may delay, deter or prevent a potential merger or sale of us, even if our board of directors decides that it is in the best interests of stockholders for us to merge or be sold. These restrictions also may delay sales by us or acquisitions by third parties of our insurance company subsidiaries.
These anti-takeover provisions and laws may delay, deter or prevent a takeover attempt that our stockholders may consider in their best interests. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of capital stock — Certain anti-takeover provisions of our amended and restated certificate of incorporation, our amended and restated by-laws and applicable law.”
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Our amended and restated certificate of incorporation will provide that our principal stockholders have no obligation to offer us corporate opportunities.
The Altaris Funds and the members of our board of directors who are affiliated with the Altaris Funds, by the terms of our amended and restated certificate of incorporation, are not required to offer us any corporate opportunity of which they become aware and can take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as our directors. Trean Insurance Group, Inc., by the terms of our amended and restated certificate of incorporation, expressly renounces any interest in any such corporate opportunity to the extent permitted under applicable law, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so. Our amended and restated certificate of incorporation cannot be amended to eliminate our renunciation of any such corporate opportunity arising prior to the date of any such amendment.
The Altaris Funds are in the business of making investments in portfolio companies and may from time to time acquire and hold interests in businesses that compete with us, and the Altaris Funds have no obligation to refrain from acquiring competing businesses. Any competition could intensify if an affiliate or subsidiary of the Altaris Funds were to enter into or acquire a business similar to ours. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by the Altaris Funds to themselves, their portfolio companies or their other affiliates instead of to us.
We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal control over financial reporting. If we are unable to achieve and maintain effective internal controls, our business, operating results and financial condition could be harmed.
As a public company with SEC reporting obligations, we will be required to document and test our internal control procedures to satisfy the requirements of Section 404(b) of the Sarbanes-Oxley Act, which will require annual assessments by management of the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ended December 31, 2020. We are an emerging growth company, and thus we are exempt from the auditor attestation requirement of Section 404(b) of Sarbanes-Oxley until such time as we no longer qualify as an emerging growth company. See also “— We are an “emerging growth company” within the meaning of the Securities Act and have elected to take advantage of reduced disclosure requirements and other exemptions applicable to emerging growth companies.” Regardless of whether we qualify as an emerging growth company, we will still need to implement substantial internal control systems and procedures in order to satisfy the reporting requirements under the Exchange Act and applicable requirements. During the course of our assessment, we may identify deficiencies that we are unable to remediate in a timely manner. Testing and maintaining our internal control over financial reporting may also divert management’s attention from other matters that are important to the operation of our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404(b) of Sarbanes-Oxley. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations. Moreover, any material weaknesses or other deficiencies in our internal control over financial reporting may impede our ability to file timely and accurate reports with the SEC. Any of the above could cause investors to lose confidence in our reported financial information or our common stock listing on the Nasdaq to be suspended or terminated, which could have a negative effect on the market price of our common stock.
We are an “emerging growth company” within the meaning of the Securities Act and have elected to take advantage of reduced disclosure requirements and other exemptions applicable to emerging growth companies.
For as long as we remain an “emerging growth company,” as defined in JOBS Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), being permitted to have an extended transition period
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for adopting any new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the SEC, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, and in the future, we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenue of $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended.
We have availed ourselves of reduced reporting requirements in this prospectus. In particular, in this prospectus, we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We expect to continue to avail ourselves of the emerging growth company exemptions described above. In addition, we expect to avail ourselves of the extended transition period for complying with new or revised accounting standards. As a result, the information that we provide to stockholders will be less comprehensive than what you may receive from other public companies.
Because we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company,” our combined financial statements may not be comparable to companies that currently comply with these accounting standards.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our combined financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Consequently, our combined financial statements may not be comparable to companies that comply with public company effective dates. Because our combined financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
You will incur immediate dilution as a result of this offering.
The initial public offering price is substantially higher than the net stockholders’ tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities divided by our shares of common stock outstanding immediately following this offering. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution in net tangible book value per share after consummation of this offering. You may experience additional dilution upon future equity issuances. See “Dilution.”
We have broad discretion in the use of the net proceeds from the sale of shares by us in this offering and may not use them effectively.
We intend to use the net proceeds from this offering for general corporate purposes. Our management has broad discretion over how these proceeds are to be used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds.
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Applicable insurance laws may make it difficult to effect a change of control.
Under applicable Kansas, California and Utah insurance laws and regulations, no person may acquire control of a domestic insurer until written approval is obtained from the state insurance commissioner following a public hearing on the proposed acquisition. Such approval would be contingent upon the state insurance commissioner’s consideration of a number of factors including, among others, the financial strength of the proposed acquiror, the acquiror’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Kansas, California and Utah insurance laws and regulations pertaining to changes of control apply to both the direct and indirect acquisition of ten percent or more of the voting stock of that state’s domiciled insurer. Accordingly, the acquisition of ten percent or more of our common stock would be considered an indirect change of control of Trean Insurance Group, Inc. and would trigger the applicable change of control filing requirements under Kansas, California and Utah insurance laws and regulations, absent a disclaimer of control filing and its acceptance by the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department. These requirements may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Trean Insurance Group, Inc., including through transactions that some or all of the stockholders of Trean Insurance Group, Inc. may consider to be desirable. See “Regulation.”
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Forward-looking statements
This prospectus contains forward-looking statements. Forward-looking statements include statements that are not historical or current facts. These statements may discuss, among other things, our future financial performance, our business prospects and strategy, the lines of business we target, our anticipated financial position, liquidity and capital, our dividend policy and market and industry conditions. You can identify forward-looking statements by words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “predict,” “project,” “believe,” “seek,” “outlook,” “future,” “will,” “would,” “should,” “could,” “may,” “can have,” “likely” and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties, including changes in circumstances that are difficult to predict. If one or more of these risks or uncertainties materialize, or if our underlying beliefs and assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Factors that may cause such differences include those described in the “Risk factors” section of this prospectus.
Forward-looking statements speak only as of the date on which they are made. Except as expressly required under federal securities laws or the rules and regulations of the SEC, we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements.
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Organizational structure
The diagram below depicts our current organizational structure:

Following the date of this prospectus and prior to the completion of this offering, each of Trean Holdings and BIC Holdings will contribute all of their respective assets and liabilities to Trean Insurance Group, Inc., a newly formed direct subsidiary of BIC Holdings, in exchange for shares of common stock in Trean Insurance Group, Inc. as consideration. Upon the completion of the transfer, Trean Holdings and BIC Holdings will be dissolved and will distribute in-kind shares to the Pre-IPO Unitholders. Trean Holdings and BIC Holdings Class C units held by Mr. Jones, one of our directors, will become fully vested in connection with the IPO and will be exchanged for an economically equivalent amount of fully-vested shares of our common stock determined based on the initial public offering price. In connection with such dissolutions and as contemplated by the operating agreements for Trean Holdings and BIC Holdings, among other things, transaction payments will be made by Trean Corporation and Benchmark to certain of the Pre-IPO Unitholders and certain other employees of Trean Corporation and/or Benchmark, which payment amounts are expected to be $3.1 million in the aggregate.
In addition, Trean Insurance Group, Inc. will acquire the Blake Enterprises entities’ 55% equity interest in Compstar in exchange for shares of common stock in Trean Insurance Group, Inc. as consideration. Upon the completion of the acquisition, Trean Insurance Group, Inc. will contribute such 55% equity interest to Trean Compstar after which Trean Compstar will own 100% of Compstar.
The Pre-IPO Unitholders will receive an economically equivalent amount of shares of Trean Insurance Group, Inc.’s common stock determined based on the initial public offering price. Assuming an initial public offering price of $    per share (the midpoint of the price range set forth on the cover of this prospectus), the Pre-IPO Unitholders will receive    shares of common stock at an exchange rate of    shares of common stock per unit. A $1.00 increase in the assumed initial public offering price of $    per share would decrease the exchange rate to    shares of common stock per unit and decrease the number of shares of common stock the Pre-IPO Unitholders will receive by    shares. A $1.00 decrease in the assumed initial public offering price of $    per share would increase the exchange rate to    shares of common stock per unit and increase the number of shares of common stock the Pre-IPO Unitholders will receive by    shares.
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Assuming an initial public offering price of $   per share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the completion of this offering, the Altaris Funds will hold approximately   % of our common stock,   % will be held by the management and other Pre-IPO Unitholders and the remaining  % will be held by public stockholders (or   %,   % and   %, respectively, if the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full).
The diagram below depicts our organizational structure immediately following this offering:

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Use of proceeds
We estimate the net proceeds from the sale of shares by us in this offering will be approximately $   million, based on an assumed initial public offering price of $   per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of $   million.
A $1.00 increase (decrease) in the assumed initial public offering price of $   per share would increase (decrease) the net proceeds to us from this offering by approximately $   million, assuming the number of shares offered by us, which we show on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.
We intend to use the net proceeds from our sale of shares of common stock in this offering to (i) redeem all $5.1 million aggregate liquidation preference of the Series B Preferred Stock, (ii) redeem all $0.4 million aggregate liquidation preference of the ALIC Preferred Stock, (iii) redeem all $7.7 million aggregate principal amount of the Subordinated Notes, (iv) repay approximately $19.8 million of outstanding indebtedness under the 2018 Oak Street Credit Agreement and (v) pay an aggregate one-time payment of $   million to Altaris Capital Partners, LLC in connection with the termination of our consulting and advisory agreements with it. See “Certain Relationships and Related Party Transactions — Consulting Agreements.” Any remaining proceeds will be used for general corporate purposes, including to support the growth of our business.
There are four tranches of Series B Preferred Stock that have no maturity date and pay dividends at a rate per annum, respectively, of 3.00%, 4.00%, 2.85% and in an amount equal to the actual net investment income earned on the outstanding liquidation preference. The ALIC Preferred Stock have no maturity date and pay dividends in an amount per annum equal to the actual net investment income earned on the outstanding liquidation preference. The Subordinated Notes bear interest at 3-month LIBOR plus a margin of 3.50% and have a maturity date of July 7, 2036.
As of December 31, 2019, the Oak Street Credit Agreement provided for a term loan of $20.7 million, which had a variable per annum interest rate equal to (i) the rate of interest for the United States announced from time to time by the “Money Rates” section of The Wall Street Journal, plus (ii) 1.25%, which rate of interest was 4.50% as of March 16, 2020, the date of the most recently announced prime rate, and had a maturity date of May 25, 2024.
This expected use of net proceeds from this offering represents our intentions based on our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As a result, our management will retain broad discretion over the use of the net proceeds from the sale of shares by us in this offering and our existing cash and cash equivalents.
We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.
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Dividend policy
We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
Our status as a holding company and a legal entity separate and distinct from our subsidiaries affects our ability to pay dividends and make other payments. As a holding company without significant operations of our own, the principal sources of our funds are dividends and other payments from our subsidiaries. The ability of our insurance company subsidiaries to pay dividends to us is subject to limits under insurance laws of the states in which our insurance company subsidiaries are domiciled or commercially domiciled. See “Risk factors — As a holding company, we rely on dividends and payments from our subsidiaries to operate our business. Our ability to receive dividends and permitted payments from our insurance company subsidiaries is subject to regulatory constraints.” Furthermore, dividends from our insurance company subsidiaries are limited by minimum capital requirements in state regulations. See “Management’s discussion and analysis of financial condition and results of operations — Liquidity and capital resources” and “Regulation.”
On May 22, 2020, Trean Holdings paid an $18.2 million one-time special cash distribution to the Pre-IPO Unitholders of Trean Holdings. The distribution was funded from (i) a distribution of $3,346,651 from Trean Compstar to Trean Holdings, (ii) a distribution of $14,003,292 from Trean Corporation to Trean Holdings, of which $11,162,000 was funded from borrowings under the 2020 First Horizon Credit Agreement, and (iii) $803,954 of cash-on-hand at Trean Holdings.
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Capitalization
The following table sets forth our capitalization as of March 31, 2020, on an:
actual basis;
as adjusted basis giving effect to the reorganization transactions; and
as further adjusted basis giving effect to the issuance and sale by us of    shares of our common stock in this offering and the application of the net proceeds therefrom as described in “Use of proceeds,” based on an assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus.
The as further adjusted information set forth in the table below is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined when the initial public offering price is determined. You should read this table with the sections of this prospectus entitled “Organizational structure,” “Use of proceeds,” “Selected historical combined financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus.
 
As of March 31, 2020
 
Actual
As adjusted
As further
adjusted(1)
 
(in thousands, except shares
and per share data)
Long-term debt
$28,721
$
$
Stockholders’ / members’ equity:
 
 
 
Members’ equity
78,458
Preferred stock of subsidiaries, $0.01 par value per share, 1,000,000 shares authorized; 10 shares issued and outstanding, actual; no shares issued and outstanding, as adjusted and as further adjusted
Common stock, $0.01 par value per share, no shares authorized or issued and outstanding, actual;    shares authorized,    shares issued and outstanding, as adjusted;    shares issued and outstanding, as further adjusted
 
 
Preferred stock, $0.01 par value per share, no shares authorized or issued and outstanding, actual;    shares authorized, no shares issued and outstanding, as adjusted and as further adjusted
 
 
Additional paid-in capital
17,995
 
 
Retained earnings
49,967
 
 
Accumulated other comprehensive income
3,761
 
 
Total stockholders’ / members’ equity
150,181
    
    
Total capitalization
$  178,902
$  
$    
(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $    per share of common stock (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) total stockholders’ equity by approximately $    , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000 increase or decrease in the number of shares of common stock offered in this offering by us would increase or decrease total stockholders’ equity by approximately $    , assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us.
The number of shares of common stock outstanding after the offering is based on our outstanding shares as of      , 2020, after giving effect to the reorganization transactions, and excludes      shares of common stock reserved for future issuance under our omnibus incentive plan that we expect to have approved upon consummation of this offering.
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Dilution
If you invest in our common stock, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the as further adjusted net tangible book value per share of our common stock after this offering.
As of March 31, 2020, our net tangible book value was $    . As adjusted net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock that will be outstanding immediately after giving effect to the reorganization transactions but before the completion of this offering. As of March 31, 2020, our as adjusted net tangible book value per share was $   .
Dilution per share to new investors in this offering represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering (i.e., the initial public offering price per share) and the as further adjusted net tangible book value per share. As further adjusted net tangible book value per share represents as adjusted net tangible book value per share as further adjusted to give effect to sale by us of    shares of common stock in this offering (the number of shares offered by us set forth on the cover page of this prospectus), assuming an initial public offering price of $    per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As of March 31, 2020, our as further adjusted net tangible book value was $   million, or $    per share of common stock. This represents an immediate increase in as adjusted net tangible book value of $   per share to existing stockholders and an immediate dilution of $   per share to new investors purchasing shares in this offering.
The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share
 
$   
As adjusted net tangible book value per share as of March 31, 2020
$   
 
Increase in as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering
   
 
As further adjusted net tangible book value per share immediately after this offering
 
$
Dilution per share to new investors in this offering
 
$   
A $1.00 increase (decrease) in the assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our as further adjusted net tangible book value per share immediately after this offering by $    per share and the dilution per share to new investors in this offering by $    per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Similarly, each increase (decrease) in 1,000 shares of the number of shares offered by us would increase (decrease) the as further adjusted net tangible book value per share immediately after this offering by $    and decrease (increase) the dilution per share to new investors in this offering by $    per share, assuming the assumed initial public offering price of $    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional shares to cover over-allotments, as further adjusted net tangible book value per share immediately after this offering would not change since the selling stockholders are selling all the shares pursuant to any exercise of this option, and we will not receive any of the proceeds from the sale of shares by the selling stockholders.
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The following table summarizes, on an as further adjusted basis as of March 31, 2020 as described above, the differences between existing stockholders and new investors in this offering with respect to the number of shares of our common stock purchased, the total consideration paid to us and the average price per share paid:
 
Shares Purchased
Total Consideration
Average
Price
Per Share
 
Number
Percent
Amount
Percent
Existing stockholders
   
%
$   
%
$   
New investors in this offering
   
   
   
   
 
Total
   
100%
$
100%
 
A $1.00 increase (decrease) in the assumed initial public offering price of $    per share would increase (decrease) total consideration paid by new investors in this offering and total consideration paid by all stockholders by approximately $    million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase (decrease) of 1,000 shares in the number of shares offered by us would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by $    million, assuming the assumed initial public offering price of $   per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise in full their option to purchase additional shares to cover over-allotments, the number of shares held by existing stockholders will decrease to    , or   % of the total number of shares of common stock outstanding immediately after this offering and the number of shares held by new investors in this offering will increase to    , or   % of the total number of shares of common stock outstanding immediately after this offering.
To the extent that any options or other equity incentive grants are issued in the future with an exercise price or purchase price below the initial public offering price, new investors in this offering will experience further dilution.
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Selected historical combined financial and other data 
The following tables present selected historical combined financial and other data of BIC Holdings LLC and Trean Holdings LLC, along with their wholly owned subsidiaries, at the dates and for the periods indicated. The selected historical combined financial and other data set forth below as of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018 have been derived from our audited combined financial statements and the related notes included elsewhere in this prospectus. The selected historical combined financial and other data set forth below as of and for the three months ended March 31, 2020 and 2019 have been derived from our unaudited interim condensed combined financial statements included elsewhere in this prospectus. The unaudited interim condensed combined financial statements have been prepared on the same basis as the audited combined financial statements. In the opinion of our management, our unaudited interim condensed combined financial statements included in this prospectus include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the information set forth herein.
The selected historical combined financial and other data presented below do not purport to be indicative of the results that can be expected for any future period and should be read together with “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our combined financial statements and the related notes included elsewhere in this prospectus.
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
 
(in thousands)
Revenues:
 
 
 
 
Gross written premiums
$107,859
$101,534
$411,401
$357,007
Increase in gross unearned premiums
(7,373)
(10,952)
(13,598)
(16,862)
Gross earned premiums
100,486
90,582
397,803
340,145
Ceded earned premiums
(78,027)
(70,958)
(311,325)
(273,569)
Net earned premiums
22,459
19,624
86,478
66,576
Net investment income
3,272
1,287
6,245
4,816
Net realized capital gains (losses)
3,234
612
667
(715)
Other revenue
4,392
3,595
9,125
7,826
Total revenue
33,357
25,118
102,515
78,503
 
 
 
 
 
Expenses:
 
 
 
 
Losses and loss adjustment expenses
12,934
11,456
44,661
35,729
General and administrative expenses
8,160
3,969
21,005
15,706
Interest expense
461
624
2,169
1,557
Total expenses
21,555
16,049
67,835
52,992
 
 
 
 
 
Other income
14
93
121
639
Income before taxes
11,816
9,162
34,801
26,150
 
 
 
 
 
Provision for income taxes
2,912
1,319
7,074
5,546
Equity earnings (losses) in affiliates, net of tax
702
608
3,558
(1,082)
Net income
$9,606
$8,451
$31,285
$19,522
Adjusted net income(1)
$6,602
$8,369
$33,194
$22,197
 
Three months ended
March 31, 2020
Year ended
December 31, 2019
Pro forma per share data(2):
 
 
 
 
Pro forma earnings (loss) per share outstanding
 
 
 
 
Basic and diluted
[ _ ]
 
[ _ ]
 
Pro forma weighted average shares outstanding
 
 
 
 
Basic and diluted
[ _ ]
 
[ _ ]
 
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(1)
Adjusted net income is a non-GAAP financial measure. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
(2)
Pro forma weighted average shares outstanding reflect the estimated number of shares of common stock we expect to have outstanding upon the completion of the reorganization transactions.
 
At March 31,
At December 31,
 
2020
2019
2018
 
(in thousands)
Balance sheet data:
 
 
 
Accrued investment income
$2,420
$2,468
$2,372
Premiums and other receivables
67,773
62,460
62,400
Related party receivables
21,871
22,221
15,934
Reinsurance recoverable
313,760
307,338
257,509
Prepaid reinsurance premiums
83,694
80,088
66,765
Deferred policy acquisition cost, net
3,103
2,115
2,976
Property and equipment, net
8,238
7,937
8,134
Deferred tax asset
1,280
1,367
1,823
Goodwill
2,822
2,822
2,822
Other assets
7,572
3,277
1,963
Total assets
954,583
919,034
800,119
Unpaid loss and loss adjustment expenses
418,757
406,716
340,415
Unearned premiums
111,162
103,789
90,074
Funds held under reinsurance agreements
165,018
163,445
166,838
Reinsurance premiums payable
48,099
53,620
40,135
Accounts payable and accrued expenses
18,360
14,995
15,004
Total liabilities
799,302
772,319
688,988
Redeemable preferred stock
5,100
5,100
6,000
Total members’ equity
150,181
141,615
105,131
Total liabilities and members’ equity
$954,583
$919,034
$800,119
 
Three months ended
March 31,
Year ended
December 31,
 
2020
2019
2019
2018
Underwriting and other ratios:
 
 
 
 
Loss ratio(1)
57.6%
58.4%
51.6%
53.7%
Expense ratio(2)
36.3%
20.2%
24.3%
23.6%
Combined ratio(3)
93.9%
78.6%
75.9%
77.3%
Return on equity(4)
26.3%
30.5%
25.5%
20.2%
Adjusted return on equity(5)
18.1%
30.2%
27.0%
23.0%
(1)
The loss ratio is the ratio, expressed as a percentage, of losses and loss adjustment expenses to net earned premiums.
(2)
The expense ratio is the ratio, expressed as a percentage, of general and administrative expenses to net earned premiums.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
(4)
Return on equity represents net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period.
(5)
Adjusted return on equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending members’ equity during the period. See “Management’s discussion and analysis of financial condition and results of operations — Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
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Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2020 and 2019 and the years ended December 31, 2019 and 2018 should be read in conjunction with the information included under “Business,” “Selected historical combined financial and other data” and our combined financial statements and the related notes included elsewhere in this prospectus. The discussion and analysis below are based on comparisons between our historical financial data for different periods and include certain forward-looking statements about our business, operations and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors described in “Risk factors.” Our actual results may differ materially from those expressed in, or implied by, those forward-looking statements. See “Forward-looking statements.”
Overview
We are an established, growing and highly profitable company focused on providing products and services to the specialty insurance market. We underwrite specialty casualty insurance products both through our Program Partners and also through our Owned MGAs. We also provide our Program Partners with a variety of services, including issuing carrier services, claims administration and reinsurance brokerage, from which we generate recurring fee-based revenues.
We have one reportable segment. We provide 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.
Our goal is to deliver long-term value to our stockholders by growing our business and generating attractive returns. We have grown gross written premiums from $144.9 million for the year ended December 31, 2015 to $411.4 million for the year ended December 31, 2019, a CAGR of approximately 29.8% and have grown our net income from $7.9 million to $31.3 million at a CAGR of approximately 41.1% over the same time periods. Our average return on equity from 2015 to 2019 was approximately 19.3%. We plan to use any remaining proceeds from this offering to support the growth of our business, including making contributions to the capital of our insurance subsidiaries and retaining more risk to capture additional premiums.
Coronavirus (COVID-19) Impact
We are monitoring the impact of the ongoing continuation of the COVID-19 pandemic on our business, including how it will impact our premium revenue, loss experience and loss expense, liquidity, and our regulatory capital and surplus, and operations.
Workforce operations
We took several actions to protect the health of the public and our employees and to comply with directives and advice of governmental authorities. We responded by developing a Preparedness Plan that outlined both corporate-wide and location-specific modifications to offices. This multi-faceted plan included elements such as restricting business travel and transitioning from an office-based company to primarily a remote working culture. As most of our employees already had secure remote working connections, we took additional measures to ensure all employees who wanted or needed to work remotely were able to do so securely with limited connectivity disruption. We also provided our employees education and training with respect to cybersecurity issues that may arise relating to COVID-19 and working remotely in conjunction with the goal of serving the operational needs of a remote workforce and continuing to serve our customers. We implemented safeguards for employees who play critical roles to ensure operational reliability and established protocols for employees who interact directly with the public. As state, city and county guidelines progress, we have implemented new health and safety in-office procedures to prepare for transitioning our workforce back to working in our offices on a limited basis.
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Premium revenue, claims and losses
We have not had a significant impact to our premium revenue in the first quarter of 2020 relating to the COVID-19 pandemic. Only 10.0% of our business falls under hospitality, healthcare, and education, where a majority of the layoffs have occurred so far. Gross written premiums have increased by 6.2% and gross earned premiums have increased by 10.9% during the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. As over 80% of our gross written premiums are related to workers’ compensation insurance, we expect that future revenue trends could be impacted by higher unemployment rates as businesses slowly restart or if unemployment levels continue to trend high over the balance of 2020. However, a significant portion of our workers’ compensation premiums are pay-as-you-go programs, which reduces our downside risk from future premium audits or refunds. We believe our business interruption exposure is limited to certain commercial multiple peril premiums in Michigan, which are written on standard ISO forms.
We also have not seen a significant impact in our reported claims or incurred losses in the first quarter of 2020 relating to the COVID-19 pandemic. Losses and loss adjustment expenses increased $1,478, or 12.9%, to $12,934 for the three months ended March 31, 2020, compared to $11,456 for the three months ended March 31, 2019 primarily attributable to the growth in earned premiums during the period. In addition, our loss ratio remained relatively consistent at 57.6% during the first quarter of 2020 versus 58.4% during the first quarter of 2019.
Investment portfolio
With respect to our investment portfolio, we seek to hold a high-quality, diversified portfolio of investments, which are primarily in fixed maturity and available-for-sale investments and as such, our investment portfolio has limited exposure to the recent equity market volatility. In addition, and as a precaution, we put a temporary freeze on further investments to accumulate cash for liquidity purposes. For the three months ended March 31, 2020, we have experienced a slight decrease of only $1,233, or 0.4%, in the fair value of our investment portfolio due to unrealized losses on the value of our fixed maturity investments. We believe the recent decline in the fair value of our investment portfolio was due to the recent disruption in the global financial markets associated with COVID-19 as opposed to underlying issues with our investment portfolio. While we have seen an improvement in our unrealized investment positions as of the end of May 2020, if there were to be continued equity and debt financial market volatility, which in turn, could create market-to-market investment valuation decreases, we expect there could be additional or increased unrealized losses recorded during the balance of the year. However, given the conservative nature of our investment portfolio, we expect that any adverse impact on the value of our investment portfolio, as it relates to COVID-19, will be temporary, and we do not expect a long-term negative impact on our financial condition, results of operations or cash flows.
Other concerns
Adverse events such as health-related concerns about working in our offices, the inability to travel, the potential impact on our business partners and customers, and other matters affecting the general work and business environment could harm our business and delay the implementation of our business strategy. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.
Components of our results of operations
Gross written premiums
Gross written premiums are the amounts received or to be received for insurance policies written or assumed by us during a specific period of time without reduction for general and administrative expenses (including policy acquisition costs), reinsurance costs or other deductions. The volume of our gross written premiums in any given period is generally influenced by:
Addition and retention of Program Partners;
New business submissions to our Program Partners;
Binding of new business submissions into policies;
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Renewals of existing policies; and
Average size and premium rate of bound policies.
Gross earned premiums
Gross earned premiums are the earned portion of gross written premiums. We earn insurance premiums on a pro rata basis over the term of the policy. Our insurance policies generally have a term of one year.
Ceded earned premiums
Ceded earned premiums are the amount of gross earned premiums ceded to reinsurers. We enter into reinsurance contracts to limit our maximum losses and diversify our exposure and provide statutory surplus relief. The volume of our ceded earned premiums is affected by the level of our gross earned premiums and any decision we make to increase or decrease limits, retention levels and co-participations.
Net earned premiums
Net earned premiums represent the earned portion of our gross written premiums, less that portion of our gross written premiums that is earned and ceded to third-party reinsurers, including our Program Partners and professional reinsurers, under our reinsurance agreements.
Net investment income
We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of fixed maturities, including other investments and short-term investments. Our net investment income includes interest income on our invested assets, which is net of the income earned on our reinsurance agreements, which are held for the benefit of our Program Partners, as well as unrealized gains and losses on our equity portfolio.
Net realized capital gains/losses
Net realized capital gains/losses are a function of the difference between the amount received by us on the sale of a security and the security’s recorded value, as well as any “other-than-temporary impairments” related to fixed maturity investments recognized in earnings.
Other revenue
Other revenue includes brokerage, third-party administrative, management and consulting fees, which are commonly based on written premiums.
Losses and loss adjustment expenses
Losses and LAE are net of reinsurance and include claims paid, estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. In general, our losses and LAE are affected by:
frequency of claims associated with the particular types of insurance contracts that we write;
trends in the average size of losses incurred on a particular type of business;
mix of business written by us;
changes in the legal or regulatory environment related to the business we write;
trends in legal defense costs;
wage inflation; and
inflation in medical costs.
Losses and LAE are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Losses and LAE may be paid out over a period of years.
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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 underwriting expenses include employee salaries and benefits, technology costs, office rent and professional services fees such as legal, accounting and actuarial services.
Interest expense
Interest expense consists primarily of interest paid on (i) our 2016 promissory note through April 2018, when the note was paid in full (See “— Liquidity and capital resources — Debt securities — 2016 promissory note”), (ii) the preferred capital securities issued by the Trust (See “— Liquidity and capital resources — Debt securities — 2006 subordinated notes”) and (iii) our term loan facility (See “— Liquidity and capital resources — Credit agreements — 2020 First Horizon Credit Agreement”).
Other income
Other income consists primarily of sublease revenue and other miscellaneous income items.
Equity earning in affiliates, net of tax
Equity earnings in affiliates, net of tax includes the Company’s share of earnings from equity method investments.
Key metrics
We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.
Underwriting income is a non-GAAP financial measure defined as income before taxes excluding net investment income, net realized capital losses, other revenue, interest expense and other income. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of underwriting income to income before taxes in accordance with GAAP.
Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of unusual events or gains or losses that we do not believe reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.
Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums.
Expense ratio, expressed as a percentage, is the ratio of general and administrative expenses to net earned premiums.
Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.
Adjusted return on equity is a non-GAAP financial measured defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
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Results of operations
Three months ended March 31, 2020 compared to three months ended March 31, 2019
The following table summarizes combined results of operations for the three months ended March 31, 2020 and 2019:
 
Three months ended
March 31,
Change
Percentage
Change
 
2020
2019
 
($ in thousands)
 
 
Revenues
 
 
 
 
Gross written premiums
$107,859
$101,534
$6,325
6%
Increase in gross unearned premiums
(7,373)
(10,952)
(3,579)
(33)
Gross earned premiums
100,486
90,582
9,904
11
Ceded earned premiums
(78,027)
(70,958)
7,069
10
Net earned premiums
22,459
19,624
2,835
14
Expenses
 
 
 
 
Losses and loss adjustment expenses
12,934
11,456
1,478
13
General and administrative expenses
8,160
3,969
4,191
106
Underwriting income(1)
1,365
4,199
(2,834)
(67)
Net investment income
3,272
1,287
1,985
154
Net realized capital gains (losses)
3,234
612
2,622
428
Other revenue
4,392
3,595
797
22
Interest expense
(461)
(624)
163
26
Other income
14
93
(79)
(85)
Income before taxes
11,816
9,162
2,654
29
Provision for income taxes
2,912
1,319
1,593
121
Equity earnings (losses) in affiliates, net of tax
702
608
94
15
Net income
$9,606
$8,451
$1,155
14%
Adjusted net income(2)
$6,602
$8,369
$(1,767)
(21)%
(1)
Underwriting income is a non-GAAP financial measure. See " — Reconciliation of non-GAAP financial measures" for a reconciliation of underwriting income to net income in accordance with GAAP.
(2)
Adjusted net income is a non-GAAP financial measure. See " — Reconciliation of non-GAAP financial measures" for a reconciliation of adjusted net income to net income in accordance with GAAP.
 
Three months ended
March 31,
 
2020
2019
Key metrics:
 
 
Loss ratio
57.6%
58.4%
Expense ratio
36.3%
20.2%
Combined ratio
93.9%
78.6%
Return on equity
26.3%
30.5%
Adjusted return on equity(1)
18.1%
30.2%
(1)
Adjusted return on equity is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
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Gross written premiums
Gross written premiums increased $6.4 million, or 6.2%, to $107.9 million for the three months ended March 31, 2020, compared to $101.5 million for the three months ended March 31, 2019. The increase is primarily attributable to the growth in our program partner business, particularly from Compstar and other major program partners. The changes in gross written premiums were most notably due to the following lines of business:
Workers' compensation, which represented 82.9% of our gross written premiums in the first quarter of 2020, increased by $5.2 million, or 6.1%, for the three months ended March 31, 2020 compared to the same period in 2019.
All other non-workers’ compensation liability, which represented 17.1% of our gross written premiums in the first quarter of 2020, increased by $1.2 million, or 6.7%, for the three months ended March 31, 2020 compared to the same period in 2019.
Gross earned premiums
Gross earned premiums increased $9.9 million, or 10.9%, to $100.5 million for the three months ended March 31, 2020 from $90.6 million for the three months ended March 31, 2019. The increase is driven by the increase in gross written premiums as well as the reduction in gross unearned premiums of $3.6 million. Gross earned premiums as a percentage of gross written premiums increased to 93.2% for the three months ended March 31, 2020 from 89.2% for the same period in 2019.
Ceded earned premiums
Ceded earned premiums increased $7.1 million, or 10.0%, to $78.0 million for the three months ended March 31, 2020 from $70.9 million for the three months ended March 31, 2019. The increase was primarily due to an increase in our gross earned premiums for ceded policies during the period. Ceded earned premiums as a percentage of gross earned premiums increased to 77.6% for the three months ended March 31, 2020 from 78.3% for the three months ended March 31, 2019.
Net earned premiums
Net earned premiums increased $2.8 million, or 14.4%, to $22.5 million for the three months ended March 31, 2020 from $19.6 million for the three months ended March 31, 2019 due primarily to the higher gross written and earned premiums described above, offset by the higher ceded earned premiums described above under reinsurance agreements for the three months ended March 31, 2020. The below table shows the amount of premiums we earned on a gross and net basis:
 
Three months ended
March 31,
Change
Percentage
Change
 
2020
2019
Revenues:
 
 
 
 
Gross written premiums
$107,859
$101,534
$6,325
6%
Increase in gross unearned premiums
(7,373)
(10,952)
(3,579)
(33)
Gross earned premiums
100,486
90,582
9,904
11
Ceded earned premiums
(78,027)
(70,958)
7,069
10
Net earned premiums
$22,459
$19,624
$2,835
14%
Net investment income
Investment income increased $2.0 million, or 154.2%, to $3.3 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019 due primarily to a fair value re-measurement and reclassification of our TRI equity method investment to an investment in common stock, which resulted in a $2.0 million unrealized gain during the three months ended March 31, 2020.
Net realized capital gains/losses
Net realized capital gains increased $2.6 million, or 428.4%, to a gain of $3.2 million for the three months ended March 31, 2020 from a gain of $0.6 million for the three months ended March 31, 2019 due primarily to a recording of a $3.1 million realized gain on the sale of a portion of the Company’s TRI equity
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investment during the three months ended March 31, 2020.
Other revenue
Other revenue increased $0.8 million, or 22.2%, to $4.4 million for the three months ended March 31, 2020 from $3.6 million for the three months ended March 31, 2019 due primarily to an increase of $1.0 million in brokerage fees, primarily related to Compstar, offset by a $0.2 million reduction in management fees due to a lost service contract in April 2019 and reduced First Choice Casualty Insurance Company fees as a result of the Company’s acquisition of First Choice Casualty Insurance Company in February 2019.
Losses and loss adjustment expenses
Losses and LAE increased $1.4 million, or 12.9%, to $12.9 million for three months ended March 31, 2020 from $11.5 million for the three months ended March 31, 2019. The increase was directly attributable to the growth in earned premiums during the period. The Company's loss ratio remained relatively consistent at 57.6% for the three months ended March 31, 2020 compared to 58.4% for the three months ended March 31, 2019 as a result of some programs experiencing decreased loss ratios quarter over quarter.
General and administrative expenses
General and administrative expenses increased $4.2 million, or 105.6%, to $8.2 million for the three months ended March 31, 2020 from $4.0 million for the three months ended March 31, 2019. This change resulted in an increase in the Company's expense ratio to 36.3% for the three months ended March 31, 2020, compared to 20.2% for the three months ended March 31, 2019. The increase was attributable to (i) an increase in salaries and benefits of $1.4 million resulting from an increased workforce; (ii) an increase in net agent commissions of $1.3 million resulting from an increase in written premiums; (iii) an increase in IPO-related professional service expense of $0.4 million; (iv) additional IT software and system costs totaling $0.3 million resulting from new software implementation and additional expenses incurred to accommodate a remote workforce due to COVID-19; and (v) additional rent and office-related expenses totaling $0.3 million due to the addition of new office locations and rent increases.
Interest expense
Interest expense decreased $0.1 million, or 26.1%, to $(0.5) million for the three months ended March 31, 2020 from $(0.6) million for the three months ended March 31, 2019.
Other income
Other income decreased $79 thousand, or 84.9%, to $14 thousand for the three months ended March 31, 2020 from $93 thousand for the three months ended March 31, 2019.
Provision for income taxes
Provision for income taxes increased $1.6 million, or 120.8%, to $2.9 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019 due primarily to the impact of state taxes and temporary differences associated with the gains recorded on the sale of and subsequent re-measurement of our TRI investment shares during the three months ended March 31, 2020. Additionally, we received tax benefits in the three months ended March 31, 2019 due to book and tax basis differences resulting from the acquisition of First Choice Casualty Insurance Company and tax benefits related to the tax impact of deferred acquisition costs.
Equity earnings in affiliates, net of tax
Equity earnings in affiliates, net of tax increased $0.1 million, or 15.5%, to $0.7 million for the three months ended March 31, 2020 from $0.6 million for the three months ended March 31, 2019. This increase was primarily due to a $0.3 million increase in the Company’s share of Compstar’s earnings.
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Year ended December 31, 2019 compared to year ended December 31, 2018
The following table summarizes combined results of operations for the years ended December 31, 2019 and 2018:
 
Years ended
December 31,
Change
Percentage
Change
 
2019
2018
 
($ in thousands)
 
 
Revenues
 
 
 
 
Gross written premiums
$411,401
$357,007
$54,394
15%
Increase in gross unearned premiums
(13,598)
(16,862)
(3,264)
(19)
Gross earned premiums
397,803
340,145
57,658
17
Ceded earned premiums
(311,325)
(273,569)
37,756
14
Net earned premiums
86,478
66,576
19,902
30
Expenses
 
 
 
 
Losses and loss adjustment expenses
44,661
35,729
8,932
25
General and administrative expenses
21,005
15,706
5,299
34
Underwriting income(1)
20,812
15,141
5,671
38
Net investment income
6,245
4,816
1,429
30
Net realized capital gains (losses)
667
(715)
1,382
193
Other revenue
9,125
7,826
1,299
17
Interest expense
2,169
1,557
(612)
(39)
Other income
121
639
(518)
(81)
Income before taxes
34,801
26,150
8,651
33
Provision for income taxes
7,074
5,546
1,528
28
Equity earnings (losses) in affiliates, net of tax
3,558
(1,082)
4,640
429
Net income
$31,285
$19,522
$11,763
60%
Adjusted net income(2)
$33,194
$22,197
$10,997
50%
(1)
Underwriting income is a non-GAAP financial measure. See " — Reconciliation of non-GAAP financial measures" for a reconciliation of underwriting income to net income in accordance with GAAP.
(2)
Adjusted net income is a non-GAAP financial measure. See " — Reconciliation of non-GAAP financial measures" for a reconciliation of adjusted net income to net income in accordance with GAAP.
 
Year ended
December 31,
 
2019
2018
Key metrics:
 
 
Loss ratio
51.6%
53.7%
Expense ratio
24.3%
23.6%
Combined ratio
75.9%
77.3%
Return on equity
25.5%
20.2%
Adjusted return on equity(1)
27.0%
23.0%
(1)
Adjusted return on equity is a non-GAAP financial measure. See “— Reconciliation of non-GAAP financial measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.
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Gross written premiums
Gross written premiums were $411.4 million for the year ended December 31, 2019 compared to $357.0 million for the year ended December 31, 2018, an increase of $54.4 million, or 15.2%. Premium growth in 2019 was primarily due to an increase of $58.5 million in our Compstar business, offset by a decrease of $15.7 million due to the termination of two accident and health programs. The changes in gross written premiums were most notable in the following lines of business:
Workers’ compensation, which represented 82.8% of our gross written premiums in 2019, increased by $63.2 million, or 22.8%, for the year ended December 31, 2019 over the prior year.
Other liability, which represented 7.3% of our gross written premiums in 2019, increased by $1.5 million, or 5.4%, for the year ended December 31, 2019 over the prior year.
Gross earned premiums
Gross earned premiums increased $57.7 million, or 17.0%, to $397.8 million for the year ended December 31, 2019 from $340.1 million for the year ended December 31, 2018. The increase was primarily due to growth of our written premiums. Gross earned premiums as a percentage of gross written premiums increased to 96.7% for the year ended December 31, 2019 from 95% for the year ended December 31, 2018.
Ceded earned premiums
Ceded earned premiums increased $37.8 million, or 13.8%, to $311.3 million for the year ended December 31, 2019 from $273.6 million for the year ended December 31, 2018. The increase was primarily due to an increase in our gross earned premiums. Ceded earned premiums as a percentage of gross earned premiums decreased to 78.3% for the year ended December 31, 2019 from 80.4% for the year ended December 31, 2018. This decrease was primarily due to an increased retention of premiums written by Westcap and Compstar.
Net earned premiums
Net earned premiums increased $19.9 million, or 29.9%, to $86.5 million for the year ended December 31, 2019 from $66.6 million for the year ended December 31, 2018 due primarily to the higher gross earned premiums described above offset by the higher ceded earned premiums described above under reinsurance agreements for the year ended December 31, 2019. The below table shows the amount of premiums we earned on a gross and net basis:
 
Years ended
December 31,
Change
Percentage
Change
 
2019
2018
Revenues:
 
 
 
 
Gross written premiums
$411,401
$357,007
$54,394
15%
Increase in gross unearned premiums
(13,598)
(16,862)
(3,264)
(19)
Gross earned premiums
397,803
340,145
57,658
17
Ceded earned premiums
(311,325)
(273,569)
37,756
14
Net earned premiums
$86,478
$66,576
$19,902
30%
Net investment income
Investment income increased $1.4 million, or 29.7%, to $6.2 million for the year ended December 31, 2019 from $4.8 million for the year ended December 31, 2018 due primarily to an increase in invested assets within our investment portfolio.
Net realized capital gains/losses
Net realized capital gains/losses increased $1.4 million, or 193.3%, to a gain of $0.7 million for the year ended December 31, 2019 from a loss of $0.7 million for the year ended December 31, 2018 due primarily to a realized gain on the purchase of FCCIC in 2019 and realized capital losses on investments sold in 2018.
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Other revenue
Other revenue increased $1.3 million, or 16.6%, to $9.1 million for the year ended December 31, 2019 from $7.8 million for the year ended December 31, 2018 due primarily to an increase in claims administration revenue. The changes in other revenue were most notable in the following lines of business:
Claims administration, which represented approximately 19.5% of our other revenue earned in 2019, increased by $1.1 million, or 180.2%, for the year ended December 31, 2019 over the prior year.
Losses and loss adjustment expenses
Losses and LAE increased $9.0 million, or 25.0%, to $44.7 million for the year ended December 31, 2019 from $35.7 million for the year ended December 31, 2018 due primarily to growth of our written premiums.
General and administrative expenses
General and administrative expenses increased $5.3 million, or 33.7%, to $21.0 million for the year ended December 31, 2019 from $15.7 million for the year ended December 31, 2018 due primarily to an increase in salaries and benefits.
Interest expense
Interest expense increased $0.6 million, or 39.3%, to $2.2 million for the year ended December 31, 2019 from $1.6 million for the year ended December 31, 2018 due primarily to a full year of interest on the 2018 First Horizon Credit Agreement.
Other income
Other income decreased $0.5 million, or 81.1%, to $0.1 million for the year ended December 31, 2019 from $0.6 million for the year ended December 31, 2018 due primarily to a decrease in sublease revenue as a result of expansion of office space, reducing the need to sublease in certain offices.
Provision for income taxes
Provision for income taxes increased $1.6 million, or 27.6%, to $7.1 million for the year ended December 31, 2019 from $5.5 million for the year ended December 31, 2018 due primarily to an increase in net income before tax.
Equity earnings (losses) in affiliates, net of tax
Equity earnings (losses) in affiliates, net of tax increased $4.6 million, or 428.8%, to $3.5 million for the year ended December 31, 2019 from $(1.1) million for the year ended December 31, 2018 due primarily to an increase in income on the investment in Compstar due to a decrease in stock compensation amortized in 2019.
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, and ALIC, which is domiciled in Utah. 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, retire indebtedness on preferred stock, pay taxes and for other business purposes.
We receive corporate service fees from the operating subsidiaries to reimburse us for most of the operating expenses that we incur. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.
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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 are limited to the greater of 10% of Benchmark’s surplus as shown on the last statutory financial statement on file with the Kansas Insurance Department and the California Department of Insurance, respectively, or 100% of statutory net income during the applicable twelve-month period. Under Utah law, dividends payable from ALIC without the prior approval of the applicable insurance commissioner are limited to the lesser of 10% of ALIC’s surplus as shown on the last statutory financial statement on file with the Utah Insurance Department, 100% of net income during the applicable twelve-month period (not including realized capital gains). The maximum amount of dividends the insurance subsidiaries can pay us during 2020 without regulatory approval is $14.0 million. 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.
As of March 31, 2020, we had $70.7 million in cash and cash equivalents. As of December 31, 2019, we had $74.3 million in cash and cash equivalents, compared to $53.6 million as of December 31, 2018.
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.
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 flow.
 
Three months ended
March 31,
Change
Percentage
Change
 
2020
2019
Cash, cash equivalents and restricted cash provided by (used in):
 
 
 
 
Operating activities
$7,428
$9,332
$(1,904)
(20)%
Investing activities
(9,470)
(11,480)
2,010
18
Financing activities
(344)
(372)
28
8
Net increase in cash, cash equivalents and restricted cash
$(2,386)
$(2,520)
$134
5%
The decrease in cash provided by operating activities for the three months ended March 31, 2020 was driven by a decrease in underwriting income of $2.8 million and $0.4 million paid for deferred offering costs during 2020. This is partially offset by an additional $0.9 million in distributions received by equity method investments during the three months ended March 31, 2020 and $0.4 million incremental cash received for operating assets and liabilities. For the three months ended March 31, 2020, net cash used in investing activities was $9.5 million, a decrease of $2.0 million from 2018, driven by the $3 million received from the sale of TRI in 2020 as well as the incremental $5.5 million used in 2019 for the acquisition of First Choice Casualty Insurance Company and the remaining 25% of American Liberty Insurance Company, partially offset by an additional $6.3 million used in the purchase and sale of available for sale investments in 2020. For the three months ended March 31, 2020, net cash used in financing activities was $344 thousand, a decrease of $28 thousand from $372 thousand compared to the same period in 2019, driven primarily by the principal payments made on long-term debt obligations and by the Series A preferred stock dividend payments of $28 thousand made during the three months ended March 31, 2019.
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Years Ended
December 31,
Change
Percentage
Change
 
2019
2018
Cash provided by (used in):
 
 
 
 
Operating activities
$52,173
$75,266
$(23,093)
(31)%
Investing activities
(23,943)
(78,559)
54,616
70
Financing activities
(8,125)
14,282
(22,407)
(157)
Net increase in cash, cash equivalents and restricted cash
$20,105
$10,989
$9,116
83%
The decrease in cash provided by operating activities in 2019 was due primarily to funds being held under reinsurance treaties for certain programs. For the year ended December 31, 2019, net cash used in investing activities was $23.9 million, a decrease of $54.6 million from 2018, driven by fewer funds held being available to invest for certain programs. For the year ended December 31, 2019, net cash used in financing activities was $8.1 million, a decrease of $22.4 million from $14.3 million in 2018. This decrease was primarily driven by proceeds from our term loan facility in 2018.
Credit agreements
2020 First Horizon Credit Agreement
In May 2020, Trean Corporation, Trean Compstar and Benchmark Administrators, LLC entered into an amended and restated credit agreement with First Horizon Bank (formerly, First Tennessee Bank National Association) (the “2020 First Horizon Credit Agreement”), which includes a term loan facility totaling $33.0 million and a revolving credit facility of $2.0 million. Borrowings are secured by substantially all of the assets of Trean Holdings LLC and its subsidiaries (other than equity interests of Compstar and Compstar Insurance Services, LLC), and after giving effect to the reorganization transactions, borrowings will be secured by substantially all of the assets of Trean Insurance Group, Inc. other than Benchmark Holding Company and its subsidiaries. The loan has a variable interest rate of 3-month LIBOR plus 3.50%, which was 6.44% as of March 31, 2020 (under the 2018 credit agreement with First Horizon Bank (the “2018 First Horizon Credit Agreement”), which was amended and restated as the 2020 First Horizon Credit Agreement). The outstanding principal balance of the loan is to be repaid in quarterly installments that escalate from $206,250 to $825,000 until March 2025. All equity securities of the subsidiaries of Trean Holdings LLC have been pledged as collateral, and after giving effect to the reorganization transactions, all equity securities of the subsidiaries of Trean Insurance Group, Inc. (other than Benchmark Holding Company and its subsidiaries) will be pledged as collateral.
2018 Oak Street Credit Agreement
In April 2018, Compstar, Compstar Insurance Services, LLC and Blake Baker entered into a credit agreement with Oak Street Funding LLC (the “2018 Oak Street Credit Agreement”), which provided for a term loan to Compstar and Compstar Insurance Services, LLC of $23.7 million, the proceeds of which were used to fund a portion of the purchase price in connection with Compstar’s acquisition of Compstar Insurance Services, LLC in 2018. Borrowings are secured by, among other things, substantially all of the assets of Compstar and Compstar Insurance Services, LLC, a pledge of the equity interests of Compstar and Compstar Insurance Services, LLC and a cash collateral account equal to 2.50% of the initial proceeds of the term loan. The loan has a variable per annum interest rate equal to (i) the rate of interest for the United States announced from time to time by the “Money Rates” section of The Wall Street Journal, plus (ii) 1.25%, which rate of interest was 4.50% as of March 16, 2020, the date of the most recently announced prime rate. The outstanding principal balance of the loan is to be repaid in monthly installments until May 2024. Compstar expects to enter into an amendment to the 2018 Oak Street Credit Agreement prior to this offering to allow for the reorganization transactions involving Compstar, and Compstar expects to repay all of the loans outstanding under the 2018 Oak Street Credit Agreement and to terminate such agreement promptly following the completion of this offering.
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Debt securities
2006 subordinated notes
In June 2006, the Trean Capital Trust I, a Delaware statutory trust (the “Trust”), issued 7,500 shares of preferred capital securities to Bear, Stearns Securities Corp. and 232 common securities to Trean Corporation. The proceeds of such issuances were invested by the Trust in $7.7 million aggregate principal amount of the Subordinated Notes. The Subordinated Notes represent the sole assets of the Trust. The Subordinated Notes mature on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of 3-month LIBOR (1.91% as of December 31, 2019) plus 3.50% is in effect. The interest rate totaled 5.33% as of March 31, 2020. There are optional dates for redemption of the Subordinated Notes, at our option on any January 7, April 7, July 7 or October 7 following July 7, 2011. There are no funding requirements for Trean Corporation to the Trust except for the necessary quarterly interest payments. The Company is the guarantor of the debt.
The preferred capital securities issued by the Trust in turn paid quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011, and thereafter pay at a variable rate per annum, reset quarterly, equal to 3-month LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Subordinated Notes on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by us.
2016 promissory note
On August 12, 2016, Benchmark entered into an approximately $10 million, 10-year term promissory note to Anchor Bank, N.A. The note bears interest at a 4.07% fixed rate. In the event of default, we pledged all of our shares in Benchmark. This note was paid in full in April 2018.
Reinsurance
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.
Quota share reinsurance
We utilize quota share reinsurance to: (i) cede premium to Program Partners (non-professional reinsurers) to transfer underwriting risk and align incentives, and (ii) cede premium to professional reinsurers to increase the amount of gross premiums we can write while managing net premiums written leverage appropriately based on its capital base, A.M. Best rating and risk appetite. It is a core pillar of our underwriting philosophy that Program Partners retain a significant portion of the underwriting risk of their program. We believe this best aligns interests, attracts higher quality programs and leads to better underwriting results.
Excess of loss and catastrophe reinsurance
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 Benchmark’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. Beginning in 2018, we purchased one core excess reinsurance program that covers 78.2% of our workers’ compensation business.
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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.”
The Financial Strength Ratings (“FSRs”) 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.
Contractual obligations and commitments
The following table illustrates our contractual obligations and commercial commitments by due date as of December 31, 2019:
 
Payments Due by Period
 
Total
Less than
one year
One Year to
Less Than
Three Years
Three Years to
Less Than
Five Years
More Than
Five Years
Reserve for losses and loss adjustment expenses
$406,716
$94,765
$157,806
$60,194
$93,951
Debt securities and credit agreements
29,369
1,891
5,844
13,902
7,732
Interest payable(1)
11,340
1,788
3,125
1,146
5,282
Operating lease obligations
6,572
1,688
3,145
1,793
(54)
Total
$453,997
$100,132
$169,919
$77,035
$106,911
(1)
Interest on the subordinated debt and the note payable under the Secured Credit Facility is calculated using 5.94% & 6.33%, respectively, in effect at December 31, 2019 with the assumption that interest rates remain flat over the remainder of the period that the note is outstanding. At our option, we may prepay the note payable in whole or in part without premium or penalty.
Financial condition
Members’ equity
At March 31, 2020, total members’ equity was $150.2 million, compared to total members’ equity of $141.6 million at December 31, 2019. The increase in member’s equity over the prior year end balances was primarily due to a net income of $9.6 million earned during the period offset by unrealized losses on available-for-sale investments of $1.1 million.
At December 31, 2019, total members’ equity was $141.6 million, compared to total members’ equity of  $105.1 million at December 31, 2018. The increase in member’s equity over the prior year end balances was primarily due to an increase in net income and unrealized investment gains in 2019.
Equity-based compensation
On June 15, 2017, we entered into a Management Incentive Unit Agreement with Mr. Jones, who is a member of the Board of Managers of BIC Holdings LLC, to issue Class C shares as partial compensation for future services to us. The shares issued under this agreement are subject to terms in the agreements between us and the recipient. We had approximately $177 thousand of unrecognized stock compensation expense as of March 31, 2020 related to non-vested stock-based compensation granted, that we expect to recognize over the next three years. We recognized approximately $19 thousand of stock-based compensation expense during the quarter ended March 31, 2020.
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We had approximately $197 thousand of unrecognized stock compensation expense as of December 31, 2019 related to non-vested stock-based compensation granted. We recognized approximately $78 thousand of stock-based compensation expense during the year ended December 31, 2019.
Investment portfolio
Our cash and invested assets consist of fixed maturities, equity securities, other investments and short-term investments. The majority of the investment portfolio was comprised of fixed maturity securities of $347.5 million at March 31, 2020, 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. Also included in our investments were $3.7 million of equity securities classified as available-for-sale. At March 31, 2020, $70.7 million represented the cash and cash equivalents portion of our total cash and invested assets of $433.3 million. Our fixed maturity securities had a weighted average duration of 3.5 years at March 31, 2020 and at March 31, 2019. Our investment portfolio had an average rating of “AA” at March 31, 2020 and “AA” at March 31, 2019. Our total investment portfolio had a tax-equivalent book yield of 2.89% for the three months ended March 31, 2020, compared to 3.02% for the same period in the prior year.
The amortized cost and fair value on available-for-sale securities were as follows:
Cost or
Amortized
Cost
Fair Value
Cost or
Amortized
Cost
Fair Value
 
At March 31, 2020
At December 31, 2019
 
(in thousands)
Fixed maturities:
 
 
 
 
U.S. government and government securities
$15,374
$15,882
$15,965
$16,129
Foreign governments
299
306
299
302
States, territories and possessions
5,612
5,733
4,789
4,923
Political subdivisions of states, territories and possessions
24,992
25,726
24,444
25,104
Special revenue and special assessment obligations
64,694
67,326
59,149
61,405
Industrial and public utilities
116,362
118,012
119,735
123,207
Commercial mortgage-backed securities
15,547
16,334
15,586
16,312
Residential mortgage-backed securities
55,492
57,351
53,467
54,109
Other loan-backed securities
41,651
40,474
35,849
36,011
Hybrid securities
357
353
357
363
Total fixed maturities
340,380
347,497
329,640
337,865
Equity securities:
 
 
 
 
Preferred stock
332
310
337
343
Common stock
1,554
3,353
492
492
Total equity maturities
1,886
3,663
829
835
Total securities available for sale
$  342,266
$  351,160
$  330,469
$  338,700
Off-balance sheet arrangements (as of December 31, 2019 only)
We have various operating leases for office space requiring monthly payments ranging from approximately $1,000 to $17,000 which expire at various dates through February 2024. We also lease office equipment over terms of three to five years which expire at various dates through August 2023. Some of these leases have renewal options for additional terms. We are obligated to pay the cost of insurance, taxes, repairs and maintenance pursuant to the terms of most leases. As of March 31, 2020, and in conjunction with the adoption of ASU 2016-02, Leases, we have recorded a right of use asset totaling $5.7 million and lease liabilities totaling $5.9 million related to our lease commitments.
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Rent expense for operating leases was approximately $0.3 million for the three months ended March 31, 2020. We sublease space in buildings under various operating sublease agreements. The sublease income was approximately $90 thousand for the three months ended March 31, 2020.
Rent expense for operating leases was approximately $1.6 million for the year ended December 31, 2019. We sublease space in buildings under various operating sublease agreements. The sublease income was approximately $90 thousand for the year ended December 31, 2019.
Reconciliation of non-GAAP financial measures
Underwriting income
We define underwriting income as income before taxes excluding net investment income, net realized capital losses, other revenue, interest expense and other income. Underwriting income represents the pre-tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment income. We use this metric as we believe it gives our management and other users of our financial information useful insight into our underlying business performance. 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,
Change
Percentage
Change
 
2020
2019
Net income
$9,606
$8,451
$1,155
14%
Provision for income taxes
2,912
1,319
1,593
121
Equity (earnings) in affiliates, net of tax
(702)
(608)
94
15
Income before taxes
11,816
9,162
2,654
29
Other revenue
4,392
3,595
797
22
Net investment income
3,272
1,287
1,985
154
Net realized capital gains/(losses)
3,234
612
2,622
428
Interest expense
(461)
(624)
(163)
(26)
Other income
14
93
(79)
(85)
Underwriting income
$1,365
$4,199
$(2,834)
(67)%
 
Years ended
December 31,
Change
Percentage
Change
 
2019
2018
Net income
$  31,285
$ 19,522
$  11,763
60%
Provision for income taxes
7,074
5,546
1,528
28
Equity (earnings) losses in affiliates, net of tax
(3,558)
1,082
4,640
429
Income before taxes
34,801
26,150
8,651
33
Other revenue
(9,125)
(7,826)
1,299
17
Net investment income
(6,245)
(4,816)
1,429
30
Net realized capital (gains)/losses
(667)
715
1,382
193
Interest expense
2,169
1,557
612
39
Other income
(121)
(639)
518
81
Underwriting income
$20,812
$15,141
$5,671
37%
Adjusted net income
We define adjusted net income as net income excluding the impact of expenses relating to various transactions that we consider to be non-recurring in nature and certain other one-time costs. We calculate the tax impact only on adjustments which 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
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users of our financial information useful insight into our results of operations and our underlying business performance. 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,
Change
Percentage
Change
 
2020
2019
Net income
$  9,606
$  8,451
$ 1,155
14%
Net gain on purchase and disposal of subsidiaries
(3,116)
(634)
(2,482)
(391)
FMV adjustment of remaining investment in subsidiary
(2,000)
(2,000)
(100)
Expenses associated with Altaris management fee, including cash bonuses paid to unitholders
441
441
Expenses associated with IPO, Compstar transaction and other one-time consulting expenses
792
227
565
249
Expenses associated with debt issuance costs
25
25
Tax impact of adjustments
854
(141)
995
706
Adjusted net income
$6,602
$8,369
$(1,767)
(21)%
 
Years ended
December 31,
Change
Percentage
Change
 
2019
2018
Net income
$  31,285
$ 19,522
$11,763
60%
Net gain on purchase and disposal of subsidiaries
(600)
(600)
(100)
Expenses associated with Altaris management fee, including cash bonuses paid to unitholders
1,765
1,765
Expenses associated with IPO, Compstar transaction and other one-time consulting expenses
1,292
785
507
65
Expenses associated with purchase of outstanding voting shares of ALIC
770
(770)
(100)
Expenses associated with debt issuance costs
101
75
26
35
Tax impact of adjustments
(649)
(720)
71
10
Adjusted net income
$33,194
$22,197
$  10,997
50%
 
Years ended
December 31,
Change
Percentage
Change
 
2018
2017
Net income
$  19,522
$  16,408
$  3,114
19%
Expenses associated with Altaris management fee, including cash bonuses paid to unitholders
1,765
1,600
165
10
Expenses associated with IPO, Compstar transaction and other one-time consulting expenses
785
785
100
Expenses associated with purchase of outstanding voting shares of ALIC
770
385
385
100
Expenses associated with debt issuance costs
75
75
100
Tax impact of adjustments
(720)
(622)
(98)
(16)
Adjusted net income
$22,197
$17,771
$4,426
25%
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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 member’s 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. 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,
 
2020
2019
Adjusted return on equity calculation:
 
 
Numerator: adjusted net income
$  6,602
$  8,369
Denominator: average member’s equity
145,898
110,717
Adjusted return on equity
18.1%
30.2%
Return on equity
26.3%
30.5%
 
Year ended
December 31,
 
2019
2018
2017
Adjusted return on equity calculation:
 
 
 
Numerator: adjusted net income
$33,194
$22,197
$17,771
Denominator: average member’s equity
122,873
96,648
80,589
Adjusted return on equity
27.0%
23.0%
22.1%
Return on equity
25.5%
20.2%
20.4%
Quantitative and qualitative disclosures about market risk
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices. The primary components of market risk affecting us are credit risk, interest rate risk, and equity rate risk. We do not have exposure to foreign currency exchange rate risk or commodity risk.
Credit risk
Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We have exposure to credit risk as a holder of fixed maturity investments. Our risk management strategy and investment policy is to primarily invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. At December 31, 2019, our fixed maturity portfolio had an average rating of “AA,” with approximately 91% of securities in that portfolio rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2019, approximately 0.1% of our fixed maturity portfolio was unrated or rated below investment grade. We monitor the financial condition of all of the issuers of fixed maturity securities in our portfolio.
In addition, we are subject to credit risk with respect to our third-party reinsurers. Although our third-party reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and we might not collect amounts recoverable from our reinsurers. To address this risk, we require our reinsurance counterparties who do not have an A.M. Best Financial Strength Rating of “A-” or higher to post collateral. Additionally, we place the third-party reinsurance for the majority of our Program Partners. Controlling the reinsurance placement gives us greater influence over the structure and terms of the reinsurance
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Interest rate risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed maturity securities. Fluctuations in interest rates have a direct effect on the market valuation of these securities. When market interest rates rise, the fair value of our fixed maturity securities decreases. Conversely, as interest rates fall, the fair value of our fixed maturity securities increases. We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to the duration of our reserves. Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows. We set duration targets for our fixed income investment portfolios after consideration of the estimated duration of our liabilities and other factors. The effective weighted average duration of the portfolio as of December 31, 2019 was 3.5 years. We had fixed maturity securities with a fair value of $337.9 million at December 31, 2019 that were subject to interest rate risk. We estimate that a 100-basis point increase in interest rates would cause a 3.7% decline in the estimated fair value of our fixed maturities portfolio, while a 100-basis point decrease in interest rates would cause a 3.5% increase in the estimated fair value of that portfolio. The selected scenarios are not predictions of future events, but rather illustrate the effect that such events may have on the fair value of our fixed maturities portfolio.
Changes in interest rates will have an immediate effect on comprehensive income and stockholders’ equity but will not ordinarily have an immediate effect on net income. Actual results may differ from the hypothetical change in market rates assumed in this disclosure. This sensitivity analysis does not reflect the results of any action that we may take to mitigate such hypothetical losses in fair value.
Critical accounting policies and estimates
We identified the accounting estimates which 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 combined 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 combined 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 combined financial statements include: (a) reserves for unpaid loss and LAE; (b) reinsurance recoveries; (c) investment fair value measurements; and (d) goodwill and intangible assets. For a detailed discussion of our accounting policies, see the “Notes to the Combined Financial Statements” included in this prospectus.
Reserves for unpaid losses and loss adjustment expenses
The reserve for losses and LAE represents our estimated ultimate cost of all reported and unreported losses and LAE incurred and unpaid at the balance sheet date. We do not discount this reserve. We seek to establish reserves that will adequately represent our ultimate losses. We categorize our reserves for unpaid losses and loss adjustment expenses into two types: case reserves and reserves for incurred but not yet reported losses (“IBNR”). Through our third-party administrators (“TPAs”), we generally are notified of losses by our insureds or their agents or brokers. Based on the information provided by the TPAs, we establish initial case reserves by estimating the ultimate losses from the claim, including administrative costs associated with the ultimate settlement of the claim. Our claims department personnel use their knowledge of the specific claim along with internal and external experts, including underwriters and legal counsel, to estimate the expected ultimate losses. With the assistance of an independent, actuarial firm, we also use statistical analysis to estimate the cost of losses and LAE related to IBNR. Those estimates are based on our historical information, industry information and estimates of trends that may affect the ultimate frequency of incurred but not reported claims and changes in ultimate claims severity. We regularly review our reserve estimates and adjust them as necessary as experience develops or as new information becomes known to us.
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Such adjustments are included in the period in which the adjustment occurs. During the loss settlement period, if we have indications that claims frequency or severity exceeds our initial expectations, we generally increase our reserves for losses and LAE. Conversely, when claims frequency and severity trends are more favorable than initially anticipated, we generally reduce our reserves for losses and loss adjustment expenses once we have sufficient data to confirm the validity of the favorable trends. Even after such adjustments, the ultimate liability may exceed or be less than the revised estimates. Accordingly, the ultimate settlement of losses and LAE may vary significantly from the estimate included in our combined financial statements.
The following tables summarize our gross and net reserves for unpaid losses and loss adjustment expenses at December 31, 2019 and 2018:
 
Year Ended December 31, 2019
 
Gross
% of Total
Net
% of Total
 
($ in thousands)
Case Reserves
$    130,409
   32%
$    30,868
   30%
IBNR
276,307
68%
71,843
70%
Total
$406,716
100%
$102,711
100%
 
Year Ended December 31, 2018
 
Gross
% of Total
Net
% of Total
 
($ in thousands)
Case Reserves
$    104,953
   31%
$    26,262
   32%
IBNR
235,462
69%
56,732
68%
Total
$340,415
100%
$82,994
100%
The process of estimating the reserves losses and LAE requires a high degree of judgment and is subject to several variables. On a quarterly basis, we perform an analysis of our loss development and select the expected ultimate loss ratio for each of our product lines by accident year. In our actuarial analysis, we use input from our TPAs and our underwriting and claims departments, including premium pricing assumptions and historical experience. Multiple actuarial methods are used to estimate the reserve for losses and loss adjustment expenses. These methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures. The actuarial methods used to estimate losses and LAE are:
Reported and/or Paid Loss Development Methods—Ultimate losses are estimated based on historical reported and/or paid loss reporting patterns. Reported losses are the sum of paid and case losses. Industry development patterns are substituted for historical development patterns when sufficient historical data is not available.
Reported Bornhuetter-Ferguson Methods—Ultimate losses are estimated as the sum of cumulative reported losses and estimated IBNR losses. IBNR losses are estimated based on historical development patterns and one or more of the following: expected average severity and estimated ultimate claims counts, expected pure premium, and expected loss ratios underlying our filed loss cost multipliers.
Paid Bornhuetter-Ferguson Method—Under this method, ultimate losses are estimated as the sum of cumulative paid losses and estimated unpaid losses. Unpaid losses are estimated based on the expected loss ratios underlying our filed loss cost multipliers, and selected industry development patterns of paid losses.
The method(s) used vary based on the line of business and the loss event. Considering each of the alternative ultimate estimates, we select an estimate of ultimate loss for each line of business.
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On a quarterly basis, the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer meet to review the recommendations made by the independent actuarial consultant and use their best judgment to determine the best estimate to be recorded for the reserve for losses and LAE on our balance sheet.
Our reserves are driven by several important factors, including litigation and regulatory trends, legislative activity, climate change, social and economic patterns and claims inflation assumptions. Our reserve estimates reflect current inflation in legal claims’ settlements and assume we will not be subject to losses from significant new legal liability theories. Our reserve estimates assume that there will not be significant changes in the regulatory and legislative environment. The impact of potential changes in the regulatory or legislative environment is difficult to quantify in the absence of specific, significant new regulation or legislation.
The table below quantifies the impact of potential reserve deviations from our carried reserve at December 31, 2019. We applied sensitivity factors to incurred losses for the three most recent accident years and to the carried reserve for all prior accident years combined. We believe that potential changes such as these would not have a material impact on our liquidity. The amount by which estimated losses differ from those originally reported for a period is known as “development.” Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved, or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.
 
December 31, 2019
Potential impact of 2019
Sensitivity
Accident
year
Net ultimate
losses and
LAE sensitivity
factor
Net ultimate
incurred
losses
and LAE
Net losses
and LAE
reserve
Pre-tax
income
Stockholders’
equity
Sample increases
2019
5.0%
$53,009
$43,081
$(2,650)
$(2,094)
 
2018
2.5%
36,738
18,591
(918)
(726)
 
Prior
1.0%
179,010
41,039
(1,790)
(1,414)
Sample decreases
2019
-5.0%
53,009
43,081
2,650
2,094
 
2018
-2.5%
36,738
18,591
918
726
 
Prior
-1.0%
179,019
41,039
1,790
1,414
During the year ended December 31, 2019, our gross incurred losses for accident years 2018 and prior decreased by $10 million. This was due to favorable development primarily in our workers’ compensation line of business. Our four-year paid to incurred losses was 82% compared to the U.S. workers’ compensation industry four-year paid to incurred losses of 70%.
Goodwill and intangible assets
Goodwill
Goodwill represents the cost to acquire a business over the fair value of the net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. We had approximately $2.8 million recorded on the combined balance sheets as of March 31, 2020 and December 31, 2019.
Intangible assets
Acquired intangible assets include client relationships, customer lists, non-compete agreements and trade names acquired. Intangible assets with a finite life are amortized over the estimated useful life. In valuing these assets, assumptions are made regarding useful lives and projected growth rates. We periodically review identifiable intangible assets for impairment as events or changes in circumstances indicate that
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the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their undiscounted cash flows, additional impairment tests are performed to measure the amount of the impairment loss, if any. For the quarter ended March 31, 2020 and the year ended December 31, 2019, no impairment losses were recorded.
Investments
Fair value measurements
Our investments in fixed maturities and equity securities classified as available-for-sale investments are reported at fair value. Under current accounting guidance, changes in the fair value of investments classified as available-for-sale are not recognized as income during the period, but rather are recognized as a separate component of members’ equity until realized. Like other accounting estimates, fair value measurements may be based on subjective information and generally involve uncertainty and judgment. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Fair value hierarchy disclosures are based on the quality of inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. See Note 4 of the Notes to the Combined Financial Statements for further discussion regarding fair value hierarchy.
Deferred income taxes
We recognized deferred tax assets and liabilities for the future tax consequences of temporary differences between the financial reporting and tax bases of income. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which we are expected to recover or settle those temporary differences. Should a change in tax rates occur, the effect on deferred tax assets and liabilities will be recognized in operations in the period in which the change occurs. We recognize 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. We record any income tax penalties and income tax-related interest as provision for income taxes in the period incurred. We did not incur any material tax penalties or income-tax-related interest during the quarter ended March 31, 2020 and the year ended December 31, 2019.
See Note 2 and 12 of the Notes to the Combined Financial Statements for further discussion regarding our deferred tax assets and liabilities.
Reinsurance
We estimate 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. We recorded no bad debt expense related to reinsurance during the quarter ended March 31, 2020 and the year ended December 31, 2019.
Recent accounting pronouncements
See “Note 2 — Accounting Pronouncements” in the Notes to the Combined Financial Statements included in this prospectus for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our combined financial statements.
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Business
Industry
P&C insurance companies provide insurance coverage under a policy in exchange for premiums paid by the insured. An insurance policy is a contract between the insurance company and the insured under which the insurance company agrees to pay for losses suffered by the insured, or a third-party claimant, that are covered under the contract.
The type of coverage is often classified based on how long an insurance company may have exposure to the risk covered by the policy. For example, property insurance, which covers property damage caused by loss events such as theft, fire, vandalism or weather events, is generally considered a short-tail risk due to the short time span between the claim event and the settlement. Casualty insurance, which protects against third-party liability claims, is generally considered a long-tail risk because of the longer time between claim and settlement. Long-tail casualty risks require specialized expertise since they typically involve larger and more complex claims, require careful examination of the claims to ensure appropriate settlement and can result in litigation. For the year ended December 31, 2019, 78.2% of our gross written premiums were casualty insurance.
We have historically focused on specialty risks within the casualty market, including specialty workers’ compensation insurance. While there is no official definition of specialty risks, the specialist component of the P&C market entails expertise in underwriting, loss control, claims and customer knowledge. Specialty insurance markets can focus on niche market segments or specific industries and product lines. Product specialists are particularly prevalent in casualty lines given the expertise required to underwrite longer-tailed lines.
Specialty insurance markets tend to have different distribution channels as compared to standard lines of insurance. In specialty insurance markets, carriers often rely on specialist distributors such as a program administrator or MGA and wholesale brokers instead of using more standard distribution channels such as retail brokers or distributing directly to customers. Using these specialist distributors allows insurance carriers to reduce or avoid the infrastructure and personnel costs associated with maintaining relationships with the large number of retail brokerage firms necessary to write specialized insurance products at scale. We source our premiums from our Owned MGAs or from our Program Partners, which are generally MGAs and insurance companies. We also provide these intermediary companies with additional services, including, reinsurance brokerage, issuing carrier services, and other services.
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Workers’ compensation insurance
For the year ended December 31, 2019, workers’ compensation represented 82.8% of our gross written premiums, primarily from California as well as Utah, Arizona and Nevada (the “Southwest”). Workers’ compensation insurance covers the medical costs and lost wages associated with injuries on the job. Workers’ compensation laws require employers to pay for costs associated with employees injured on the job. Some employers choose to self-insure this risk, but most employers purchase workers’ compensation insurance. Each state has its own regulatory and adjudicatory system that quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment and specifies the required options in selecting medical providers available to the injured employee or the employer. These state laws generally require two types of benefits for injured employees: (i) medical benefits, which include expenses related to diagnosis and treatment of the injury, as well as any required rehabilitation and (ii) indemnity payments, which consist of temporary wage replacement, permanent disability payments and death benefits to surviving family members.
According to S&P Global, insurers wrote $54.1 billion of direct workers’ compensation premiums for the year ended December 31, 2019, a significant increase over the $41.5 billion written for the year ended December 31, 2009. According to the National Council on Compensation Insurance (“NCCI”), private workers’ compensation insurers had the lowest combined ratio of all major lines of business in the United States P&C industry for the year ended December 31, 2018, with an estimated combined ratio of 83%. This was the lowest combined ratio for the workers’ compensation insurance industry since the 1930s. More recently, direct premiums declined at a 2.6% CAGR between the years ended December 31, 2016 and 2019. According to NCCI, this change has been primarily driven by a decline in rates resulting from lower loss costs, partially offset by an increase in payroll. Despite the recent diminishing effect of declining rates, we believe in the long-run, other trends, including low reported claims frequency, legislative reforms, more effective use of data and predictive analytics and enhanced safety measures, continue to support attractive underwriting profits in the workers’ compensation insurance industry.

Source: NCCI, S&P Global
Note: 2018 combined ratio data from NCCI is preliminary
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California workers’ compensation insurance market
Our largest market for workers’ compensation insurance is California. For the year ended December 31, 2019, 55.9% of our workers’ compensation gross written premiums were written in California. According to S&P Global, $11.4 billion of workers’ compensation direct premiums were written in California for the year ended December 31, 2019, representing 21.1% of workers’ compensation direct premiums in the United States.
We believe the workers’ compensation market in California is an attractive environment for our business model. In California, a combination of factors including higher benefit levels, longer claims settlement times and higher than average medical costs have led to relatively high average pure premiums. According to the Workers’ Compensation Insurance Rating Bureau of California (“WCIRB”), the average California premium rates were $2.87 per $100 of payroll for the year ended December 31, 2018, compared to the national median of $1.70. The WCIRB also reports that it costs $0.54 to deliver $1.00 of benefits in California compared to the national median of $0.24 per $1.00 of benefits. In addition, the WCIRB reports 38% of medical losses in California are paid more than five years from the initial date of loss compared to 23% of NCCI states. Against the backdrop of higher rates and slower claims payment, we believe that our ability to settle claims quickly and effectively manage our costs has made California an attractive market for our business. According to the WCIRB, California's workers' compensation industry's average medical cost incurred per claim was approximately $29,500 as of December 31, 2018 whereas we were able to achieve an average of $10,774 medical cost per incurred claim. Also according to the WCIRB, the California workers' compensation industry closed an average of 38% of claims in the calendar year following the previous accident year as of September 30, 2018, while our California business closed an average of 68% of claims as of December 31, 2018.
Due to the market environment in California, concentration among the state's top workers compensation insurers has also significantly decreased in recent years. According to the S&P Global, the top ten California workers' compensation insurers accounted for 58% of the California workers' compensation premiums for the year ended December 31, 2019. This figure has declined from 65% for the year ended December 31, 2009. We believe that this lower market concentration presents greater opportunities for smaller and more focused businesses such as our own.

Source: WCIRB and S&P Global
Other liability insurance
For the year ended December 31, 2019, 7.3% of our business was classified as other liability insurance, which S&P Global defines as excess workers' compensation insurance, other liabilities (claims), other liabilities (occurrence) and product liability. Other liability insurance generally protects businesses from liability claims such as third-party bodily injury, property damage and advertising injury. Unlike workers’ compensation insurance, other liability insurance does not cover employees’ claims but would cover the
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cost of damage that the employer causes to third parties. Unlike workers’ compensation insurance, other liability insurance is not mandatory, but it is particularly important for small businesses that cannot afford costly third-party claims. According to S&P Global, in 2019, there were $81 billion other product liability premiums written in the United States.
Program administrators and insurance carriers
We offer program administrators and small- to mid-sized insurance carriers a variety of services including reinsurance brokerage, underwriting capacity and, in particular, issuing carrier or “fronting” services where our A.M. Best “A” financial strength rating is particularly attractive.
Program administrators are organizations that serve as intermediaries between retail brokers and insurance carriers. Program administrators typically provide a range of services to insurance carriers including marketing, underwriting, policy and claims administration, and payment processing. Program administrators commonly operate within specialty insurance lines, but can also operate in more standard lines. In most cases, program administrators offer specialized expertise or knowledge of the industry or geography.
According to the TMPAA, the program administration market totaled $40.5 billion of premiums for the year ended December 31, 2018, growing at an 11.1% CAGR from $17.5 billion of premiums for the year ended December 31, 2010. The program administration market has been growing more rapidly than the broader commercial insurance industry, which grew premiums at a 4.0% CAGR from the year ended December 31, 2010 to the year ended December 31, 2018, according to S&P Global. The TMPAA estimated that there were approximately 1,000 program administrators in the United States as of the year ended December 31, 2018, resulting in approximately $40.5 million of premiums per program administrator. We focus on program administrators with small- to mid-sized books of business, typically less than $30 million of annual gross premiums at the inception of the relationship.
We also offer our services to small- and mid-sized insurance carriers. According to S&P Global, insurance carriers with less than $100 million of direct premiums written accounted for $34 billion of direct premiums written for the year ended December 31, 2019. Additionally, according to S&P Global, for the year ended December 31, 2019, there were $40 billion of direct premiums written by insurance carriers that were unrated by A.M. Best, or had an A.M. Best financial strength rating below “A-.”
Our company
We are an established, growing and highly profitable company providing products and services to the specialty insurance market. Historically, we have focused on specialty casualty markets that we believe are underserved and where our expertise allows us to achieve higher rates, such as niche workers’ compensation markets and small- to mid-sized specialty casualty insurance programs. We underwrite specialty casualty insurance products through our Program Partners and Owned MGAs. We also provide our Program Partners with a variety of services including issuing carrier services, claims administration and reinsurance brokerage, from which we generate recurring fee-based revenues. We believe the business that we target is generally subject to less competition and has better pricing, which we believe allows us to generate higher risk-adjusted returns. We believe many of our target markets are experiencing strong secular tailwinds and consequently are growing more quickly than the broader market.
We believe that a number of differentiating factors have contributed to our ability to achieve consistent levels of growth and profitability superior to that of the broader insurance industry. We believe our multi-service value proposition is highly attractive in our target markets, drives deep integration with our Program Partners and allows us to generate greater and more diversified revenue streams. We carefully identify and select our Program Partners, ensure we have closely aligned interests, and look to grow and expand these relationships over time. We believe we have a competitive advantage in claims management for longer-tailed lines, specifically workers’ compensation, where our in-house capabilities and differentiated philosophy enable us to have lower claims costs and to settle claims more quickly than our competitors. Our business strategy is supported by robust controls surrounding program design and underwriting, ongoing monitoring, and reinsurance and collateral management as evidenced by our “A” (Excellent) financial strength rating, with a stable outlook, by A.M. Best, a leading rating agency for the
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insurance industry. This rating is based on matters of concern to policyholders and is not designed or intended for use by investors in evaluating our securities. Our management team has decades of insurance industry experience across underwriting as well as program administration, reinsurance, claims and distribution.
We are licensed to write business across 49 states and the District of Columbia. We seek to write business in states through select distribution outlets with the potential for attractive underwriting margins, and focus on markets with higher than average premium growth trends. California, Michigan, and Arizona are the largest states in which we do business, representing approximately 49%, 9% and 8%, respectively, of our gross written premiums for the year ended December 31, 2019.
Our competitive strengths
We believe that our competitive strengths include:
Expertise and focus in underserved specialty casualty insurance markets. We focus on select markets that we believe are underserved and where we can achieve higher rates, including niche workers’ compensation markets and small- to mid-sized specialty casualty insurance programs. We have the specialized expertise and capabilities to succeed in our target markets, and we believe we have few competitors in our target markets due to the specialized knowledge, broad licensing and filing authority requirements, and complex operational systems necessary to profitably manage these traditionally longer-tailed lines of business. We believe that larger companies that do have the required expertise and capabilities in these areas tend not to participate in our target markets due to the need for customized solutions when working with smaller, more entrepreneurial partners.
Multi-service value proposition for our partners. We believe that our focus on the needs of smaller accounts and the breadth of products and services we offer allow us to better serve the needs of our Program Partners, and provide us with greater revenue and profit opportunities. Our multi-service offering enables us to develop deep relationships with our Program Partners and enhances our ability to achieve our target results. We offer our Program Partners reinsurance brokerage, claims administration, underwriting capacity and, in particular, access to our A.M. Best “A” financial strength rating through issuing carrier services. Our ability to leverage our licenses across multiple products in 49 states and the District of Columbia allows us to provide a national multi-service solution for our Program Partners. Additionally, we believe that our Program Partners highly value the ease of doing business with us given our focus on smaller programs.
Long-term, carefully selected and aligned relationships with Program Partners. We carefully select the Program Partners we choose to do business with, and design our programs to align risks between parties. We select programs with the intention of building long-term relationships, where our business philosophies align and our Program Partners can grow alongside us. As of December 31, 2019, excluding the 5 Program Partners added in the prior two years, our relationships with our 17 other Program Partners have an average duration of more than eight years. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our Program Partners and Owned MGAs that have been with us for more than 10 years represented 63% and 62% of our gross written premiums, respectively. Our management team carefully evaluates potential new programs in conjunction with our underwriting and actuarial departments. We accept only programs that meet our stringent underwriting and actuarial requirements, and decline approximately 88% of the new opportunities that we evaluate. For every Program Partner we select, we work with them to appropriately align interests and to establish rigorous ongoing reporting and auditing requirements upfront. All but one of our Program Partners retain significant underwriting risk.
Differentiated in-house claims management. We believe that proactively managing our claims, while also accurately setting reserves, is a key aspect of keeping our losses low. In our workers’ compensation business, our claims philosophy is to provide an injured employee high-quality medical care as quickly as possible in order to reduce pain, accelerate healing, and lead to a faster and more complete recovery. Once an injured employee has healed, we aim to fully settle the claim and obtain a full and complete release of the claim at the earliest opportunity. In California, for the year ended December 31, 2018, valued as of March 31, 2020, our average medical cost for the workers' compensation market was $10,774 per claim compared to the California workers' compensation industry average of $29,500, as
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reported by the WCIRB. For the year ended December 31, 2018, we also closed 68% of our workers' compensation claims in California within the calendar year following the accident year, compared with the industry average of 38% as of September 30, 2018, as reported by WCIRB. Our commitment to delivering the best claims process is exemplified by the experience of our claims administration department, who average 16 years of industry experience. To provide our policyholders this higher level of expertise and attention, we currently average 80 open claims per claims adjuster. In comparison, the 2019 Workers’ Compensation Benchmarking Study by Rising Medical Solutions found that 71% of TPAs had over 100 open claims per claims adjuster.
We believe this personal, high touch approach decreases the likelihood of lengthy and costly litigation. As of December 31, 2019, our reserves for claims incurred but not reported were approximately 70% of our total net loss reserves, and we have not had any unfavorable development on our initial loss projection since 2012.
Significant fee-based income and efficient capital structure. Our business model generates significant fee-based income from multiple sources including issuing carrier services, claims administration and reinsurance brokerage. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our fee-based income accounted for approximately 13.2% and 8.9% of total revenue, respectively. All of our fee-based income accrues outside of our regulated insurance companies, which we believe enhances our organization’s financial flexibility and increases the visibility of our earnings. Within our insurance companies, we cede a significant portion of the risk we originate to our reinsurance partners. These agreements enable us to maintain broader relationships with our Program Partners than our current capital base would otherwise enable. We believe that our strategy has allowed us to scale our business and provides a consistent fee-based income stream to complement our profitable underwriting business, thus providing us with greater revenue opportunities from our Program Partners than we would be able to access in a traditional insurance underwriter model.
Disciplined risk management across our organization. Our disciplined approach to risk management begins with the extensive due diligence performed during our Program Partner selection process and continues throughout the relationship. We have rigorous ongoing controls and reporting requirements, including with respect to underwriting and ongoing Program Partner diligence. Similarly, we maintain rigorous controls over our reinsurance exposures, maintaining stringent collateral requirements to minimize our credit exposure. As a result of providing multiple services to our Program Partners, we have numerous touch points and are in regular communication regarding underwriting, claims handling, reinsurance placement and collateral management, which we believe enhances our ability to achieve our desired financial targets with each Program Partner and minimizes risks to our organization.
Entrepreneurial and highly experienced management team. Our management team is highly experienced, with decades of experience in specialty insurance markets. Our team has a long history of cohesively driving the development and implementation of our business from its inception in 1996, with 18 members having been with us for over 10 years. We are led by our Chief Executive Officer and founder Andrew M. O’Brien. Prior to founding our company, Mr. O’Brien began his insurance career at the reinsurance broker E.W. Blanch Company, where he ultimately served as a General Partner, Executive Vice President and Director. As owners of approximately    % of our outstanding common stock following the completion of this offering, our management team will continue to be meaningful owners of Trean Insurance Group, Inc. and to have closely aligned interests with our stockholders.
Our strategy
We believe that our approach will allow us to continue to achieve our goals of both growing our business and generating attractive returns. Our strategy involves:
Growing within our existing markets. We focus on lines of business that have large markets, with $54 billion of workers’ compensation premiums and $81 billion for other liability written in the United States in 2019 according to S&P Global. There were greater than $40 billion direct written premiums in commercial property and casualty markets in 2018 produced by program administrators according to the TMPAA. By comparison, we generated $411.4 million of gross written premiums for the year ended December 31, 2019. We select Program Partners operating in our target markets with whom we believe we can partner with to grow within these significant markets. Programs Partners and Owned MGAs that
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we wrote business with prior to December 31, 2015 generated a gross written premium CAGR of 28.8% from the year ended December 31, 2015 to the year ended December 31, 2019. Given the size of our markets and our proven ability to grow our business, we believe that we have ample room to continue to grow our business organically for the foreseeable future. Additionally, as we grow our premiums and capital, we expect to continuously optimize our reinsurance program to maximize our risk-adjusted returns.
Selectively adding new Program Partners. We have been selective in choosing our current Program Partners, and will continue to ensure that new Program Partners share our business philosophy and meet our rigorous underwriting and returns criteria. Since 2015, we have added fourteen new Program Partners. We focus on specialty lines and will continue to add programs in these markets. However, we also continue to evaluate potential partnerships in additional lines of business that harness our core competencies and provide us with greater revenue opportunities.
Opportunistically grow our Owned MGA business through acquisitions. From time to time, we may have the opportunity to deepen our relationships with our existing Program Partners by acquiring equity interests from their management teams. Since 2013, we have successfully completed seven acquisitions of companies with which we have had prior relationships. These businesses represented 63.6% of our gross written premiums for the year ended December 31, 2019. We pursue these periodic opportunities with the same discipline and focus on enhancing our stockholders’ returns as we do in underwriting a new program.
Strengthen and harness our strong and growing capital base. Despite our relatively modest historical balance sheet, we have grown our premiums through the significant use of reinsurance. As our capital base has grown, new opportunities have emerged for us. Of particular note, in 2019, A.M. Best upgraded our insurance companies from an “A-” to an “A” (Excellent) (Outlook Stable) financial strength rating, which we believe differentiates us in the markets we operate. As we continue to generate additional capital, and through the proceeds raised in this offering, we believe that we will have the opportunity to access additional business to which we did not previously have access. We will also have the ability to retain more profitable businesses that we have historically ceded to the reinsurance markets. Any incremental business that we retain will be carefully balanced to ensure continued alignment of interests with all of our Program Partners, in an effort to maximize our risk-adjusted returns.
Maintaining our distinct combination of industry-leading profitability and growth. Our competitive advantages, including our focus on underserved markets, have enabled us to grow our gross written premiums to $411.4 million for 2019 at a CAGR of 29.8% since 2015, while maintaining an average return on equity of approximately 19.3% for the same time period. For the year ended December 31, 2019, we generated a loss ratio of 51.6%, in line with our average annual loss ratio from 2015 to 2019 of 50.0%. As we seek to grow our business, we remain disciplined in targeting classes of business and markets where we believe we can generate attractive returns. Rather than make decisions based on where we are in the market cycle, we focus on selecting high-quality programs, only pursuing opportunities that we expect to meet our pricing and risk requirements over the long-term. We will not participate in markets where we do not believe our business model can add incremental risk-adjusted value.
Maintain disciplined controls over our key business risks. In order to maintain our underwriting profitability, we have systematic underwriting and risk monitoring processes across our business. Our processes are enhanced by our ability to provide multiple services to our Program Partners since we are in regular communication with them regarding underwriting, claims handling, reinsurance placement, and collateral management. We will swiftly terminate relationships with Program Partners that are not producing targeted underwriting results, writing exposures outside of agreed upon risk tolerances, or not meeting their collateral or other commitments to us. Our stringent and extensive due diligence Program Partners selection process allows us to select superior Program Partners. We have terminated two partnerships for failure to perform contractually since 2010.
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History
We were founded in 1996 as a reinsurance broker and MGA that targeted smaller, underserved insurance providers writing niche classes of business, predominantly workers’ compensation, accident and health, and medical professional liability. From 1996 through 2000, we utilized a fronting arrangement with a highly rated, third-party insurance carrier.
In 2003, we purchased Benchmark, which was licensed in 41 states and the District of Columbia and provided us with an insurance carrier with a financial strength rating of “A-” from A.M. Best. Beginning in 2007, we successfully repositioned Benchmark as a specialty insurance carrier for select, high-performing small- to mid-sized Program Partners. Benchmark is now licensed in 49 states and has an “A” rating from A.M. Best.
In July 2015, we sold an equity stake of 36.4% to the Altaris Funds. The Altaris Funds made additional equity investments in January 2016 and May 2017 and today own approximately 83% of our company.
We have historically made equity investments in or acquired long-term partners where we believe they can add substantial value to our business. In 2013, we acquired S&C Claims Services, which, prior to the acquisition, had been handling our workers’ compensation claims for over 10 years. In 2017, we acquired ALIC, a Utah-domiciled insurance company that was a former Program Partner and writes workers’ compensation insurance in Utah and Arizona. In 2018, we acquired ownership interests in two additional Program Partners: (i) a 45% common equity ownership in the parent company of Compstar Insurance Services, LLC, an MGA underwriting workers’ compensation insurance coverage for California contractors, and (ii) a 100% ownership of Westcap, an MGA underwriting general liability insurance coverages for California contractors. We had relationships of 11, 12 and 12 years with ALIC, Compstar Insurance Services, LLC and Westcap, respectively, prior to our equity investments.
We currently write insurance out of two subsidiaries: Benchmark and ALIC. We are licensed to write business across 49 states and the District of Columbia.
Products and services
We have historically provided products and services to our target markets in the specialty casualty insurance market. We underwrite specialty casualty insurance products both through our Program Partners, programs where we partner with other organizations, and our Owned MGAs, our own Managing General Agencies. Our insurance product offerings include workers’ compensation, other liability, accident and health, and other lines of business. We also provide our Program Partners with a variety of services from which we generate recurring fee-based revenues, including reinsurance brokerage and, in particular, issuing carrier or “fronting” services where our A.M. Best “A” financial strength rating is particularly attractive.
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The following table shows our gross written premiums and net written premium by insurance product for the years ended December 31, 2019 and 2018.
 
Year ended December 31,
 
2019
2018
 
Gross Written
Premiums
Net Written
Premiums
Gross Written
Premiums
Net Written
Premiums
 
(in thousands)
Workers’ compensation
$  340,444
$  73,287
$  277,291
$  59,764
Other liability – occurrence*
20,129
5,269
20,923
7,089
Commercial multiple peril
17,662
4,059
13,128
3,597
Commercial auto liability
9,935
1,474
7,251
1,076
Group accident and health
7,678
3
22,450
123
Products liability – occurrence*
7,368
6,496
Auto physical damage
4,843
874
4,404
651
Excess workers’ compensation*
2,539
546
1,090
227
Boiler and machinery
783
599
Fire
64
42
Surety
52
52
29
29
Inland marine
4
3
Private passenger auto liability
(100)
3,301
Total:
$  411,401
$85,564
$357,007
$72,556
*
Included in other liability.
In total, we are licensed in 49 states and the District of Columbia. The following table shows our gross written premiums and net written premiums by state for the years ended December 31, 2019 and 2018.
 
Year ended December 31,
 
2019
2018
 
Gross Written
Premiums
Net Written
Premiums
Gross Written
Premiums
Net Written
Premiums
 
(in thousands)
California
$  202,446
$  39,066
$  153,611
$  32,259
Michigan
38,174
7,990
37,084
7,741
Arizona
34,215
5,394
28,350
6,227
Alabama
12,946
5,551
11,907
5,694
Nevada
11,869
2,918
9,225
2,417
Utah
10,900
768
11,379
2,093
Mississippi
8,910
4,399
7,143
3,705
Tennessee
8,065
3,764
7,809
3,986
Indiana
6,295
1,295
*
*
New Jersey
6,222
82
7,580
(292)
Other geographical areas
71,359
14,337
73,316
8,694
Total:
$411,401
$85,564
$357,007
$72,556
*
The amount for the state is relevant for 2019 but not in 2018 and therefore, was not presented in 2018.
Workers’ compensation
We offer workers’ compensation insurance through both our Owned MGAs and our Program Partners. California and the Southwest represented 55.9% and 15.6% respectively of our workers’ compensation gross written premiums for the year ended December 31, 2019. We write business across a variety of industries and hazard classes. The construction industry is our largest industry exposure, representing 34% of premiums written for the year ended December 31, 2019. The workers’ compensation insurance
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industry classifies risks into hazard groups defined by the National Council on Compensation Insurance, or NCCI, and based on severity, with employers in lower groups having lower cost claims. Our premiums are spread across hazard classes. We target accounts that we believe offer greater risk-adjusted returns, such as small accounts that are less subject to competition, or accounts with high experience modification factors that our underwriters assess to be attractively priced for the potential risk. Experience modification factors are determined by state insurance regulators based on the insured’s historical loss experience. We do not write accounts that we believe present exposure to catastrophic risk. The average workers’ compensation premium per policy written by us was $19,103 for the year ended December 31, 2019.
We manage workers’ compensation claims administration for all of our Owned MGAs and for several of our Program Partners. We believe that our claims philosophy has been a key differentiating factor allowing us to maintain lower loss ratios and settle claims quickly. Our workers’ compensation programs are supported by various quota share and excess of loss reinsurance facilities, which we utilize to align risk with our Program Partners and optimize our net retention relative to our financial objectives, balance sheet size and ratings requirements. For the three months ended March 31, 2020, we ceded 75.7% of gross workers’ compensation premiums written to third-party insurers. For the year ended December 31, 2019, we ceded 78.5% of gross workers’ compensation premiums written to third-party insurers.
The following exhibits illustrate our business mix of workers’ compensation gross written premiums by industry and hazard class for the year ended December 31, 2019.

1 Other includes transportation warehousing, retail trade, education, hospitality, transportation, arts, entertainment and recreation, accommodation and food services, habitational, mining, quarrying and oil and gas extraction, information, utilities, finance and insurance, and management of companies and enterprises.
Other liability
We offer other liability insurance products through both our Owned MGAs and our Program Partners. We target segments of the market that we believe are underserved or mispriced, such as California contractors with an average of five employees, and where we bring substantial expertise.
The other liability products that we offer through our Owned MGAs include admitted general liability and construction defect products offered to small contractors that protect them against claims from third parties. We distribute these products through select wholesale brokers in California. Additionally, through several of our Program Partners, we write 18 products in 49 states and the District of Columbia. Our highly experienced claims personnel administer claims for our Owned MGA other liability products. For the three months ended March 31, 2020, we ceded approximately 67.2% of our gross other liability premiums written to third-party insurers. For the year ended December 31, 2019, we ceded approximately 80.6% of our gross other liability premiums written to third-party insurers.
Issuing carrier services
We provide issuing carrier or “fronting” services to several of our Program Partners who distribute commercial multi-peril, personal auto and commercial auto insurance business. In these relationships, we act as the policy-issuing insurance carrier for our Program Partner and transfer all or a substantial portion of the underwriting risk to third-party reinsurers. Unlike some other issuing carrier models, we typically act as the reinsurance broker to the program as well as the issuing carrier, which we believe enables us to have deeper relationships with our Program Partners as well as earn additional revenue for the placement
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of reinsurance. When we enter into issuing carrier relationships, we typically receive fronting fees from our reinsurers who are both Program Partners and/or third-party reinsurers and reinsurance brokerage fees and reinsurance ceding commissions from our reinsurance partners. Fronting fees vary based on the line of business and premium volume. In our target markets, we believe there are few issuing carrier competitors due to the specialized knowledge, broad licensing and filing authority requirements and complex operational systems necessary to profitably manage these traditionally longer-tailed lines of business. We provide issuing carrier services across each of our insurance products. We provide issuing carrier services to some of our Program Partners that offer workers’ compensation or other liability insurance.
Reinsurance brokerage services
Our reinsurance brokerage services division provides reinsurance placement, servicing and renewal services to small- to mid-sized insurance organizations, including most of our Program Partners and additional third-party insurance organizations. We earn commissions for structuring and placing reinsurance coverage on behalf of our clients. Commissions are based on a percentage of premiums ceded to reinsurers and vary by type or complexity of reinsurance coverage. Our reinsurance brokerage services are a valuable risk management tool in our relationships with our Program Partners, as we typically require the use of our reinsurance brokerage services to place and structure reinsurance prior to the inception of a new program. Additionally, our reinsurance brokerage services provide an attractive pipeline of referrals of potential Program Partners. For the year ended December 31, 2019, two new Program Partners were referred to us by this division. For the three months ended March 31, 2020, reinsurance brokerage generated $3.7 million in revenue. For the year ended December 31, 2019, reinsurance brokerage generated $5.8 million in revenue.
Other services
We provide a variety of other services to insurance organizations, including claims administration services. We provide workers’ compensation insurance claims administration services to some of our Program Partners as well as to third-party insurance organizations with which we do not have additional relationships.
Inland marine
Inland marine underwrites coverage for property that may be held in transit or instrumentalities of transportation and communication, such as builders risk, contractors equipment, transportation risk and mobile equipment.
Marketing and distribution
We market and distribute our products through several channels that we believe are able to access our target markets through the most efficient means. Our Owned MGAs market through both retail agents and wholesale brokers, and our reinsurance brokerage services division actively markets our services directly to prospective clients. Additionally, we distribute products and services to our Program Partners, which comprise program administrators and insurance carriers. Since we focus on smaller accounts, we do not market our products and services through large insurance brokers. By utilizing our own relationships and reinsurance brokerage services, we believe we are able to access more profitable business than if we relied on large insurance brokers for business. For the three months ended March 31, 2020, our Owned MGAs represented 63% of our gross written premiums, while our Program Partners represented 36% of gross written premiums. For the year ended December 31, 2019, our Owned MGAs represented 64% of our gross written premiums, while our Program Partners represented 35% of gross written premiums.
Retail agents
We distribute our Owned MGA workers’ compensation products in California and the Southwest through approximately 2,500 retail agents. We target retail agents with experience and distribution capabilities in our target markets. Relationships with these retail agents have an average tenure of 4.6 years. Retail
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agents must demonstrate an ability to produce both our desired quality and quantity of business. To assist with this goal, our underwriters regularly visit our retail brokers to market and discuss the products we offer. We terminate retail agents who are unable to produce consistently profitable business or who produce unacceptably low volumes of business.
Wholesale brokers
We distribute our other liability products underwritten by our Owned MGAs through 130 wholesale brokers that have expertise and strong track records in our niche target markets. For these products, we target small contractors in California. We use wholesale brokers to distribute these products because wholesale brokers are an important channel for commercial insurance products where they control much of the premium in these segments. We select our wholesale brokers based on our management’s review of their experience, knowledge, business plan, and track record of delivering us profitable business.
Reinsurance brokerage services
Our reinsurance brokerage services division actively markets our reinsurance services to small- and mid-sized program administrators and other insurance organizations. In addition to our active relationships with 31 clients, our reinsurance brokerage division maintains relationships with over seven prospective clients. The primary focus of our reinsurance brokerage services division is to place reinsurance for our customers, and we are also able to leverage our reinsurance brokerage relationships to cultivate new Program Partner relationships and market our other services. The majority of our current Program Partner relationships originated as an introduction from our reinsurance brokerage services division.
Program administrators
We partner with select program administrators across each of our target markets to harness the efficiency and scale of these organizations’ marketing and distribution infrastructures. Through these relationships, we are able to access national distribution channels or write specialized risks in our target markets efficiently. Generally, policies bound by our program administrators are underwritten according to strict underwriting guidelines that we establish with each program administrator. We have had long relationships with many of our program administrators and, in most cases, we have had an existing relationship with a program administrator before adding it as a new Program Partner. For example, we may have previously provided the program with reinsurance placement or consulting services, or worked with the key principals of the prospective Program Partner at their prior organization. We believe program administrators value our multi-service offering and capabilities and the flexibility with which we can offer these services. In addition to underwriting insurance products through program administrators, we provide these organizations with issuing carrier services and reinsurance brokerage services. As of March 31, 2020, we maintained relationships with 27 program administrators.
Carrier and other partnerships
Given our unique focus on flexible multi-service offering, we are a partner of choice for small- to mid-sized insurance carriers seeking a specialty casualty insurance partner to satisfy insurance department requirements, provide comprehensive management solutions or transfer certain classes of risk. As of March 31, 2020, we had partnerships with eight insurance companies, risk retention groups, state insurance pools and trusts and three state insurance departments (Mississippi, North Dakota and West Virginia), among others.
Program selection, underwriting and controls
Program selection
Given our position and reputation in the market, we are presented with more new program opportunities than we choose to write, allowing us to be highly selective with respect to the Program Partners with whom we choose to partner. We decline approximately 88% of the new opportunities we are presented with prior to or through our pre-screening process. We typically source new opportunities through our reinsurance brokerage services business or through referrals from existing Program Partners. For each new opportunity that we choose to evaluate, we conduct a fulsome pre-screening of the company,
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including an evaluation of its philosophy, size, past performance, future performance targets and above all, compatibility with our operating model, risk appetite, and existing book of business. Our target Program Partners tend to have several, if not all, of the following traits:
small- to mid-sized books of business (less than $30 million of annual gross premiums at the inception of the relationship);
operating in markets where we believe we can leverage our distinctive expertise, multi-service offering and market relationships to create a competitive advantage;
track record of underwriting success supported with credible data;
proven ability to administer the program pursuant to agreed-upon underwriting and claims guidelines;
ability and willingness to assume a meaningful quota share risk participation in the program, typically through ownership of an insurance company or captive;
collaborative, entrepreneurial management team; and
willingness and ability for us to control the structuring and placement of reinsurance.
Underwriting and program design
For opportunities that are acceptable to us through the pre-screening process, we conduct rigorous underwriting due diligence prior to entering into a partnership. As part of this process, our due diligence team collects and analyzes data relating to the organization’s operating, underwriting, financial and biographical information to prepare an initial due diligence file for our Underwriting Committee. Our Underwriting Committee is led by our CEO and consists of members with expertise in claims, underwriting, and finance. In 2019, four out of 36 submissions were approved by the Underwriting Committee. If the Underwriting Committee approves the submission on a provisional basis, we then conduct comprehensive underwriting, claims, and financial diligence on the potential Program Partner. This includes inviting the potential Program Partner’s management for an on-site meeting at our Wayzata headquarters and on-site diligence of the potential Program Partner.
If we look to enter into a contractual relationship with a potential Program Partner, we work with them to design a program that appropriately aligns interests and establish rigorous underwriting guidelines and ongoing reporting and auditing requirements. At the inception of a new program, we typically act as an issuing carrier where we reinsure a substantial amount of risk to third parties. We also typically require the Program Partner to maintain significant underwriting risk or otherwise align incentives with the Program Partner’s underwriting performance. The amount of risk and premiums ceded to Program Partners is contractually stipulated with each Program Partner. Over time we look to optimize our net retention positions with our Program Partners once we have become comfortable with their performance through our ongoing interactions. We plan to use any remaining proceeds from this offering to support the growth of our business, including making contributions to the capital of our insurance subsidiaries and retaining more risk to capture additional premiums.
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We believe that the thoroughness of our selection process and our careful program design, which aligns interests, allow us to build mutually beneficial relationships with each of our Program Partners, improves the likelihood of achieving our targeted financial performance with each Program Partner and reduces the possibility of future termination of the relationship, litigation or other contractual issues between parties. A majority of our gross written premiums today are a result of long-term, carefully designed partnerships. For the three months ended March 31, 2020 and for the year ended December 31, 2019, our Program Partners and Owned MGAs that have been with us for more than 10 years represented 63% and 62% of our gross written premiums, respectively.
Program Partners and Owned MGAs with a five year relationship GWP1 ($ millions)

1 Represents Program Partners and Owned MGAs added since December 31, 2015.
2 Represents GWP from ALIC.
3 Represents GWP from Compstar Insurance Services, LLC and Westcap.
4 Represents GWP from FCCIC.
GWP from Program Partners added since 20151 ($ millions)

1 Represents Program Partners and Owned MGAs added since December 31, 2015.
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Ongoing monitoring and controls
Throughout the lifetime of a relationship with a Program Partner, we maintain systematic monitoring and control mechanisms to ensure each relationship meets our financial objectives. We closely monitor each Program Partner’s adherence to the agreed upon underwriting and claims guidelines and conduct regular reviews of loss experience, rate levels, reserves and the overall financial health of the Program Partner. We receive underwriting and claims data feeds from each Program Partner at least monthly. Eight of our Program Partners operate on our underwriting system, whereby we receive daily data feeds. We conduct two underwriting, claims and accounting audits per program per year. Because we typically provide multiple services to our Program Partners, we are in regular communication with them regarding underwriting, claims handling, reinsurance placement and collateral management. As a result, we have near continuous opportunities to interact with our Program Partners and evaluate their performance.
We maintain the right to terminate relationships with our Program Partners. Reasons for us to terminate a relationship include an inability to produce targeted underwriting results, writing exposures outside of agreed upon risk tolerances, delinquency in meeting reporting requirements, a change of strategic direction, or failure to meet collateral or other commitments to us. Our stringent and extensive due diligence and selection process allows us the flexibility to partner with organizations with which we believe we will have successful relationships. We have only had to terminate two partnerships for failure to perform contractually since 2010, neither of which were material relationships.
Claims
We actively manage claims for our Owned MGA businesses, as well as for select Program Partners that underwrite workers’ compensation insurance. Other lines of business are typically managed directly by our Program Partners, or in some cases by TPAs. When our Program Partners or TPAs administer claims, our claims personnel are responsible for overseeing the Program Partner or TPA, including the management of loss reserves, settlement, arbitration and mediation. Claims are reported directly to the applicable Program Partner or TPA, which adheres to agreed-upon service level standards.
For business where we manage the claims, our claims team of 104 employees actively manages the claims. Our head of claims has over 20 years of experience and the average tenure of our claims personnel is 16 years. In our largest line of business, workers’ compensation, our philosophy is to provide an injured employee with the high-quality medical care as quickly as possible to reduce pain, expedite healing and lead to a faster and more complete recovery. Once an injured employee has healed, we aim to fully settle and achieve a full and complete release of the claim at the earliest opportunity. Our differentiated philosophy and hands-on approach to claims enables us to lower our claim costs and settle the ultimate claim reserves more quickly. In order to achieve these outcomes, we manage our claims organization to ensure that our claims personnel have lower than industry average claims files per claims adjuster.
Our claims adjusters have settlement authority that varies by the line of business and the experience of each adjuster. In the case of a catastrophic claim, we may use a third-party administrator that specializes in these types of claims to ease the burden of catastrophic claims on our organization. In addition, our claims examiners work closely with our underwriting staff to keep apprised of claims trends. Vendor management is also an important component of effective claims management and our claims examiners work closely with our vendors to manage expenses and costs.
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 and balance sheet size and ratings requirements, as well as limit our maximum loss resulting from a single program or a single event. We utilize both quota share and excess of loss (“XOL”) reinsurance to achieve these goals. Quota share reinsurance involves the proportional sharing of premiums and losses of each defined program. 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. The cost and limits of the reinsurance coverage we
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purchase vary from year to year based on the availability of quality reinsurance at an acceptable price and our desired level of retention.
Quota share reinsurance
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.
Catastrophe XOL reinsurance
We have designed an XOL reinsurance program to efficiently 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. As of December 31, 2019, our core catastrophe XOL reinsurance program covers 78.2% of our workers’ compensation business. We have a $2 million retention of which 75% is reinsured under a quota share reinsurance agreement with certain third-party reinsurers. We have purchased coverage for (i) 15% of $3 million of losses in excess of $2 million, (ii) 15% of $5 million of losses in excess of $5 million and (iii) 100% of $20 million of losses in excess of $10 million. We believe that our XOL reinsurance structure, which consolidates multiple programs under a single XOL reinsurance program comprised of three excess of loss reinsurance agreements with five professional reinsurers, significantly decreases our cost of reinsurance compared with each program maintaining its own XOL reinsurance program.
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Summary workers' compensation reinsurance program as of April 1, 2020

Collateral management
As a result of our extensive use of reinsurance in our business model, we effectively convert underwriting risk to credit risk of our Program Partners and other professional reinsurers. Accordingly, it is critical for the success of our business that we actively manage our credit exposures. We achieve this through active collateral management, including: (1) requiring our reinsurance partners who do not have an A.M. Best financial strength rating of “A-” or higher or who are not authorized reinsurers, to post collateral equal to at least 100% of reserves for unearned premiums and losses and loss adjustment expense, including IBNR reserves, based on our assessment of expected losses; (2) securing collateral by trust funds, letters of credit or, more frequently, funds withheld accounts; and (3) reviewing collateral accounts on a monthly basis and secured with quarterly and annual “true-ups.”
As of December 31, 2019, we had reinsurance recoverables on paid and unpaid losses of $307.3 million. Against these recoverables, we maintained $163.4 million of funds withheld and $98.1 million of other forms of collateral, for a total of approximately $261.5 million in credit protection from our reinsurers. As of December 31, 2019, we did not have any balance from reinsurers that was over 90 days old or in dispute and we held appropriate funding or collateral from all unauthorized reinsurers. Over the past 13 years, we have had no unpaid reinsurance recoverables on $1.3 billion of ceded earned premiums.
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The following table sets forth our ten largest reinsurance recoverables by reinsurer as of December 31, 2019:
Reinsurers:
A.M. Best
Rating
Reinsurance
Recoverables
Collateral
Net
Recoverables
 
(in thousands)
Markel Global Reinsurance Company
A
$ 70,510
$  4,617
$ 65,893
Provistar Insurance Company, Limited
NR
51,120
62,017
(10,897)
Arch Reinsurance Company (U.S.)
A+
40,021
3,313
36,708
Greenlight Reinsurance, Limited
A-
39,624
56,510
(16,886)
Sunz Insurance Company
NR
13,050
29,960
(16,910)
Synergy Comp. Insurance Company
NR
12,238
15,409
(3,171)
VGM Insurance Companies Of America Limited
NR
9,931
15,672
(5,741)
Employers National Insurance Company Inc.
NR
9,599
13,423
(3,824)
First Insurance Company Of Oklahoma, Inc.
NR
9,250
13,216
(3,966)
Steadpoint Insurance Company
NR
6,611
8,815
(2,204)
Total
 
261,954
222,952
39,002
 
 
 
 
 
All other reinsurers
 
45,384
38,577
6,807
Total recoverables
 
$307,338
$261,529
$45,809
Technology
Our information technology department consisted of 15 employees as of March 31, 2020. Our Chief Information Officer (“CIO”) has over 21 years of experience in the technology field. Our dedicated in-house system analysts support our key business systems. We believe our systems and technology allow us to quickly collect and analyze data, thereby improving our ability to manage our business. We have scalable, standardized infrastructure technology systems built for automation, efficiency and security, and are not burdened by legacy technology systems.
We operate on a digital platform with a data warehouse that collects and builds a robust repository of statistical data for our workers’ compensation business and a substantial amount of our other liability business. All of our workers’ compensation business data is automated through the data warehouse. Our platform provides a high degree of efficiency, accuracy and speed across all of our processes. We are able to use the data that we collect through Application Programming Interfaces (“APIs”) to quickly analyze trends across all functions in our business. The data warehouse is easily searchable and contains most of the underwriting and claims information we collect at every level. We are able to track rates, monitor historical loss experience and reserve development and measure other relevant metrics at a granular level of detail. Our technology team is continuously enhancing this system to improve its capability and expand its use across our business.
Reserves
We record reserves for estimated losses of the policies that we underwrite and for LAE related to the investigation and settlement of policy claims. Our reserves for losses and LAE represent the estimated cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid as of a given point in time. We evaluate the overall adequacy of gross, ceded and net losses and LAE reserves in accordance with established actuarial standards to set our reserves. We establish reserves on a line of business basis at the individual program level. Consistent with our gross and net premium breakdown, reserves for workers’ compensation losses comprise the majority of our carried reserve position. Due to our shorter claims process and ability to close claims faster than competitors, we believe we are able to settle our ultimate reserves more quickly as well.
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When a claim is first reported, we establish an initial case reserve for the estimated amount of our loss based on our estimate of the most likely outcome of the claim at that time. Generally, a case reserve is established within 30 days after the claim is reported and consists of anticipated medical costs, indemnity costs and specific adjustment expenses. This case reserve is set to cover the life of the claim based on information available at that point in time. At any point in time, the amount paid on a claim, as well as the reserve for future amounts to be paid, represents the estimated total cost of the claim or the case incurred amount. The estimated amount of loss for a reported claim is based on various factors, including:
type of loss;
severity of the injury or damage;
age and occupation of the injured employee;
estimated length of temporary disability;
anticipated permanent disability;
expected medical procedures, costs and duration;
our knowledge of the circumstances surrounding the claim;
insurance policy provisions, including coverage, related to the claim;
jurisdiction of the occurrence; and
other benefits defined by applicable statute.
Reserves are estimates involving actuarial projections of the expected ultimate cost to settle and administer claims at a given time, but are not expected to precisely represent the ultimate liability. Estimates are based on past loss experience modified for current trends as well as prevailing economic, legal, and social conditions. Such estimates are also based on facts and circumstances then known but are subject to significant uncertainty based on the outcome of various factors, such as future events, future trends in claim severity, inflation and changes in the judicial interpretation of policy provisions relating to the determination of coverage.
Reserves are set by our Reserve Committee in consultation with an independent third-party actuarial firm. Our Reserve Committee includes our Chief Executive Officer, Chief Financial Officer, Senior Vice President of Underwriting, Senior Vice President of Claims and Controller. The Reserve Committee meets semi-annually to review the actuarial reserving recommendations made by the independent actuary. Our independent third-party actuarial firm reviews our net reserves at June 30 and September 30 of each year and performs a comprehensive review of all programs at each year-end.
As of December 31, 2019, we have had aggregate favorable development of $23.6 million on our reserve estimates since 2014.
Incurred claims and allocated claim adjustment expenses, net of reinsurance
For the years ended December 31,
(in thousands)
As of
December 31,2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total of IBNR
liabilities plus
expected
development on
reported claims
Cumulative
number of
reported
claims
2010
$11,800
$11,580
$12,396
$12,806
$12,730
$13,557
$13,972
$13,976
$13,777
$13,754
$874
3,871
2011
 
14,456
14,923
16,636
17,578
17,620
17,854
18,419
18,834
18,793
360
3,835
2012
 
 
21,857
21,831
20,697
21,053
20,331
20,058
20,646
20,690
642
4,019
2013
 
 
 
24,661
24,755
24,280
21,361
21,342
21,506
21,465
902
4,364
2014
 
 
 
 
24,580
22,777
21,726
21,571
21,095
21,054
2,118
4,938
2015
 
 
 
 
 
25,653
26,571
26,392
25,430
25,630
5,561
6,265
2016
 
 
 
 
 
 
33,041
31,632
30,746
28,616
7,846
11,049
2017
 
 
 
 
 
 
 
39,295
31,462
29,008
8,410
16,396
2018
 
 
 
 
 
 
 
 
42,349
36,738
12,183
15,031
2019
 
 
 
 
 
 
 
 
 
53,009
27,173
12,179
Total
 
 
 
 
 
 
 
 
 
$268,757
 
 
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Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance
For the years ended December 31,
(in thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
$3,594
$7,007
$8,696
$10,095
$10,911
$11,384
$11,779
$12,154
$12,365
$12,499
2011
 
3,954
8,815
12,631
14,107
15,405
16,347
17,085
17,515
18,091
2012
 
 
6,143
11,996
14,480
16,249
17,196
18,188
19,098
19,399
2013
 
 
 
6,799
12,602
15,984
17,708
19,246
19,712
20,129
2014
 
 
 
 
6,011
12,005
14,814
16,666
17,260
18,238
2015
 
 
 
 
 
6,269
13,770
16,493
18,026
18,903
2016
 
 
 
 
 
 
7,509
15,516
18,182
19,286
2017
 
 
 
 
 
 
 
7,845
15,259
18,126
2018
 
 
 
 
 
 
 
 
8,326
18,905
2019
 
 
 
 
 
 
 
 
 
11,813
 
 
 
 
 
 
 
 
 
 
175,389
All outstanding liabilities before 2010, net of reinsurance
4,811
Liabilities for claims and claim adjustment expenses, net of reinsurance
$98,179
Investments
Investment income is a significant component of our earnings. We invest our reserves and maintain a conservative investment portfolio primarily comprised of highly rated fixed income securities. Our investment strategy is to preserve capital and limit our exposure to investment risk. Our portfolio is managed by New England Asset Management, Inc. (“NEAM”), an investment management firm with a focus on insurance portfolios. Under our current agreement with NEAM, which we can terminate at any time upon 30 days’ notice, we pay NEAM a quarterly fee of a percentage of our assets under management. There are no minimum amounts of assets required under our agreement with NEAM. Our Investment Committee meets periodically and reports to our board of directors.
As of March 31, 2020, we had approximately $218.7 million of total cash and invested assets, net of all collateral held on behalf of our Program Partners under reinsurance treaties. The weighted average rating of the fixed income portfolio is “AA” and the weighted average duration is approximately 3.5 years. The total portfolio pre-tax book yield was 2.89%.
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We hold funds withheld balances in separate accounts for the benefit of our Program Partners. The funds withheld assets and associated investment income belong to our various Program Partners. However, we require that the assets in these accounts be managed in accordance with our investment guidelines. As of March 31, 2020, we had $165.0 million of funds held under reinsurance treaties.
 
Three months ended March 31, 2020
Year ended December 31, 2019
 
Cost or
Amortized
Cost
Fair
Value
% of Total
Fair Value
Cost or
Amortized
Cost
Fair
Value
% of Total
Fair Value
 
($ in thousands)
($ in thousands)
Fixed maturities:
 
 
 
 
 
 
U.S. government and government securities
$15,374
$15,882
4.5%
$ 15,965
$ 16,129
4.8%
Foreign governments
299
306
0.1%
299
302
0.1%
States, territories and possessions
5,612
5,733
1.6%
4,789
4,923
1.5%
Political subdivisions of states, territories and possessions
24,992
25,726
7.3%
24,444
25,104
7.4%
Special revenue and special assessment obligations
64,694
67,326
19.2%
59,149
61,405
18.1%
Industrial and public utilities
116,362
118,012
33.6%
119,735
123,207
36.4%
Commercial mortgage-backed securities
15,547
16,334
4.7%
15,586
16,312
4.8%
Residential mortgage-backed securities
55,492
57,351
16.3%
53,467
54,109
16.0%
Other loan-backed securities
41,651
40,474
11.5%
35,849
36,011
10.6%
Hybrid securities
357
353
0.1%
357
363
0.1%
Total fixed maturities
340,380
347,497
98.9%
$329,640
$337,865
99.8%
 
 
 
 
 
 
 
Equity securities:
 
 
 
Preferred stock
332
310
0.1%
337
343
0.1%
Common stock
1,554
3,353
1.0%
492
492
0.1%
Total equity securities
1,886
3,663
1.1%
829
835
0.2%
Total securities available for sale
$342,266
$351,160
100.0%
$330,469
$338,700
100.0%
 
Three months ended March 31, 2020
Year ended December 31, 2019
 
Cost or
Amortized
Cost
Fair
Value
% of Total
Fair Value
Cost or
Amortized
Cost
Fair
Value
% of Total
Fair Value
 
($ in thousands)
($ in thousands)
Available for sale:
 
 
 
 
 
 
Due in one year or less
$19,827
$19,897
5.7%
$ 17,822
$ 17,872
5.3%
Due after one year but before five years
115,089
116,766
33.6%
120,772
123,603
36.6%
Due after five years but before ten years
53,322
55,663
16.0%
50,398
52,893
15.7%
Due after ten years
39,452
41,012
11.8%
35,746
37,065
11.0%
Commercial mortgage-backed securities
15,547
16,334
4.7%
15,586
16,312
4.8%
Residential mortgage-backed securities
55,492
57,351
16.5%
53,467
54,109
16.0%
Other loan-backed securities
41,651
40,474
11.7%
35,849
36,011
10.6%
Total
$340,380
$347,497
100.0%
$329,640
$337,865
100.0%
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Three months ended March 31, 2020
Year ended December 31, 2019
 
Fair
Value
% of Total
Fair Value
Fair
Value
% of Total
Fair Value
 
($ in thousands)
($ in thousands)
Rating:
 
 
 
 
AAA
$57,569
16.6%
$ 52,571
15.6%
AA
164,382
47.3%
153,838
45.5%
A
96,994
27.9%
101,040
29.9%
BBB
27,060
7.8%
30,245
9.0%
BB
1,443
0.4%
119
0.0%
NR
49
%
52
0.0%
Total
$347,497
100.0%
$337,865
100.0%
Enterprise risk management
We have designed and implemented an enterprise risk management (“ERM”) program to identify potential earnings and capital volatility and to maximize the value of the overall organization. The process is led by an ERM Committee consisting of one independent board member and seven senior executives who each represent a critical operating unit of ours, including our CEO.
Our ERM committee and senior management have identified five key risk areas for oversight within the ERM framework. The five key risk areas are credit risk, market risk, underwriting risk, strategic risk and operational risk. Within each key risk, we have identified specific risk sub-categories leading to the identification and analysis of more granular risks. Through a documented analytical process, the ERM committee has selected a subset of these more granular risks to monitor due to their potential impact on our businesses. In summary, the analysis process creates risk identification, risk appetite, controls, oversight, and risk management expectations.
Competition
In general, the P&C insurance market is highly competitive. Some of our competitors have greater financial, marketing and management resources and experience than we do. We may also compete with new market entrants in the future. In the workers’ compensation insurance market our competitors include insurance companies, state insurance pools and self-insurance funds. According to S&P Global, more than 247 insurance companies participated in the workers’ compensation market in 2019. We compete against State National Companies, Inc. and AF Group in the provision of issuing carrier services to program administrators.
Competition is based on many factors, including the reputation and experience of the insurer, coverages and services offered, pricing and other terms and conditions, speed of claims payment, customer service, relationships with brokers and agents (including ease of doing business, service provided and commission rates paid), size and financial strength ratings, among other considerations.
Ratings
As of May 2020, we have an “A” (Excellent) (Outlook Stable) financial strength rating from A.M. Best, which rates insurance companies based on factors of concern to policyholders. A.M. Best currently assigns 16 FSRs to insurance companies, which currently range from “A++” (Superior) to “S” (Rating Suspended). “A” (Excellent) is the third highest financial strength rating. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its losses and loss expense reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best’s FSRs reflect its opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders.
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Employees
As of March 31, 2020, we had 240 employees. Our employees are not subject to any collective bargaining agreements, and we are not aware of any current efforts to implement such an agreement. We believe that our employee relationships are good.
Facilities
We own our corporate headquarters building and land at 150 Lake Street West, Wayzata, Minnesota, which includes approximately 25,229 square feet of office space. In addition, we lease additional office space in the following locations: Ontario, California; Sacramento, California; Solvang, California; Fort Lauderdale, Florida; Maitland, Florida; Boise, Idaho; Independence, Missouri; Butte, Montana; Rio Rancho, New Mexico; Las Vegas, Nevada; Salem, Oregon; Provo, Utah and Salt Lake City, Utah. We believe that our facilities are adequate for our current needs.
Legal proceedings
We are subject to routine legal proceedings in the normal course of operating our insurance business. We are not involved in any legal proceedings which reasonably could be expected to have a material adverse effect on our business, financial condition and results of operations.
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Regulation
Our business is subject to extensive regulation in the United States at both the state and federal level, including regulation under state insurance and federal laws. We cannot predict the impact of future state or federal laws or regulations on our business. Future laws and regulations, or the interpretation thereof, may materially adversely affect our financial condition and results of operations.
Insurance regulation
General
Our insurance subsidiaries are subject to extensive regulation and supervision by the states in which they are domiciled, particularly with respect to their financial condition. Benchmark is domiciled in Kansas and commercially domiciled in California, where it is regulated and supervised by the Kansas Insurance Department and the California Department of Insurance, respectively. ALIC is domiciled in Utah where it is regulated and supervised by the Utah Insurance Department. Our insurance subsidiaries are also subject to regulation by all states in which they transact business, which oversight in practice often focuses on review of their market conduct. Benchmark is licensed to conduct insurance business, and therefore subject to regulation and supervision by insurance regulators, in 49 states and Washington D.C. ALIC is licensed or eligible to conduct insurance business, and therefore subject to regulation and supervision by insurance regulators, in 19 states and Washington D.C. The extent and scope of insurance regulation varies between jurisdictions, but most jurisdictions have laws and regulations governing the financial security of insurers, including admittance of assets for purposes of calculating statutory surplus, standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurers.
In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, and the approval of rates. State statutes and regulations also prescribe the permitted types and concentrations of investments by insurers. The primary purpose of this insurance industry regulation is to protect policyholders. P&C insurance companies are required to file detailed quarterly and annual statements with insurance regulatory authorities in each of the jurisdictions in which they are licensed or eligible to do business, and their operations and accounts are subject to periodic examination by such authorities. Regulators have discretionary authority, in connection with the continued licensing of insurance companies, to limit or prohibit the ability to issue new policies if, in their judgment, the regulators determine that an insurer is not maintaining minimum statutory surplus or capital or if the further transaction of business will be detrimental to its policyholders.
The amount of dividends that our insurance subsidiaries may pay in any twelve-month period, without prior approval by their respective domestic insurance regulators, is restricted under the laws of Kansas, California and Utah.
Under Kansas and California law, dividends payable from Benchmark without the prior approval of the applicable insurance commissioner are limited to the greater of 10% of Benchmark’s surplus as shown on the last statutory financial statement on file with the Kansas Insurance Department and the California Department of Insurance, respectively, or 100% of net income during the applicable twelve-month period (not including realized capital gains).
Under Utah law, dividends payable from ALIC without the prior approval of the applicable insurance commissioner are limited to the lesser of 10% of ALIC’s surplus as shown on the last statutory financial statement on file with the Utah Insurance Department, 100% of net income during the applicable twelve-month period (not including realized capital gains).
In addition, payments of dividends and advances or repayment of funds to us by our insurance subsidiaries are restricted by the applicable laws of our insurance subsidiaries’ respective jurisdictions requiring that each insurance subsidiary hold a specified amount of minimum reserves in order to meet future obligations on its outstanding policies. These regulations specify that the minimum reserves shall be calculated to be sufficient to meet future obligations, giving consideration for required future premiums to be received, which are based on certain specified interest rates and methods of valuation, which are subject to change.
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Insurance holding company regulation
We are an insurance holding company and, together with our insurance subsidiaries and our other subsidiaries and affiliates, are subject to the insurance holding company system laws of Kansas, California and Utah. These laws vary across jurisdictions, but generally require an insurance holding company and insurers that are members of such insurance holding company’s system to register with the jurisdiction’s insurance regulatory authorities, to file reports disclosing certain information, including their capital structure, ownership, management, financial condition, enterprise risk and own risk and solvency assessment.
These laws also require disclosure of certain qualifying transactions between or among our insurance subsidiaries and us or any of our other subsidiaries or affiliates to which one or more of our insurance subsidiaries is a party. Such transactions could include loans, investments, sales, service agreements and reinsurance agreements among other similar inter-affiliate transactions. These laws also require that inter-company transactions be fair and reasonable. In certain circumstances, the insurance company must give prior notice of the transaction to the insurance department in its state of domicile, and the insurance department must either approve or disapprove the subject inter-company transaction within defined periods. Further, these laws require that an insurer’s contract holders’ surplus following any dividends or distributions to shareholder affiliates is reasonable in relation to the insurer’s outstanding liabilities and its financial needs.
The insurance holding company laws in some states, including Kansas, California and Utah, require regulatory approval of a direct or indirect change of control of an insurer or an insurer’s parent company. Generally, to obtain approval from the insurance commissioner for any acquisition of control of an insurance company or its parent company, the proposed acquirer must file with the applicable commissioner an application containing information regarding: (i) the identity and background of the acquirer and its affiliates; (ii) the nature, source and amount of funds to be used to carry out the acquisition; (iii) the financial statements of the acquirer and its affiliates; (iv) any potential plans for disposition of the securities or business of the insurer; (v) the number and type of securities to be acquired; (vi) any contracts with respect to the securities to be acquired; (vii) any agreements with broker-dealers; and (viii) other matters. Different jurisdictions may have similar or additional requirements for prior approval of any acquisition of control of an insurance or reinsurance company licensed or authorized to transact business in those jurisdictions. Additional requirements may include re-licensing or subsequent approval for renewal of existing licenses upon an acquisition of control.
Credit for reinsurance
State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. The NRRA contained in the Dodd-Frank Act provides that if the state of domicile of a ceding insurer is an NAIC accredited state, or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk, then no other state may deny such credit for reinsurance. Because all states are currently accredited by the NAIC, the Dodd-Frank Act prohibits a state in which a U.S. ceding insurer is licensed but not domiciled from denying credit for reinsurance for the insurer’s ceded risk if the cedant’s domestic state regulator recognizes credit for reinsurance. The ceding company in this instance is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premium (which are that portion of written premiums which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves to the extent ceded to the reinsurer.
Statutory examinations
We are required to file detailed quarterly and annual financial statements, in accordance with prescribed statutory accounting rules with regulatory officials in each of the jurisdictions in which we do business. As part of their routine regulatory oversight process, the Kansas Insurance Department, the California Department of Insurance and the Utah Insurance Department conduct periodic detailed examinations, generally once every three to five years, of the books, records, accounts and operations of our insurance subsidiaries domiciled in their states.
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Financial tests
The NAIC has developed a set of financial relationships or “tests,” known as the Insurance Regulatory Information System or IRIS, which is designed for early identification of companies that may require special attention or action by insurance regulatory authorities. Insurance companies submit data annually to the NAIC, which in turn analyzes the data by utilizing ratios. State insurance regulators review this statistical report, which is available to the public, together with an analytical report, prepared by and available only to state insurance regulators, to identify insurance companies that appear to require immediate regulatory attention. A “usual range” of results for each ratio is used as a benchmark.
Risk-based capital requirements
In order to enhance the regulation of insurers’ solvency, the NAIC adopted a model law to implement risk-based capital (“RBC”) requirements for P&C insurers. All states have adopted the NAIC’s model law or a substantively similar law. The NAIC Risk-Based Capital Model Act requires insurance companies to submit an annual RBC Report, which compares an insurer’s Total Adjusted Capital with its Authorized Control Level RBC. A company’s RBC is calculated by using a specified formula that applies factors to various specified asset, premium, claim, expense and reserve items. The factors are higher for those items with greater underlying risk and lower for items with less underlying risk.
Total Adjusted Capital is defined as the sum of an insurer’s statutory capital and surplus and asset valuation reserve and the estimated amount of all dividends declared by the insurer’s board of directors prior to the end of the statement year that are not yet paid or due at the end of the year. The RBC Report is used by regulators to set in motion appropriate regulatory actions relating to insurers that show indications of weak or deteriorating conditions. RBC is an additional standard for minimum capital requirements that insurers must meet to avoid being placed in rehabilitation or liquidation by regulators. The annual RBC Report, and the information contained therein, is not intended by the NAIC as a means to rank insurers.
RBC is a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. It provides a means of setting the capital requirement in which the degree of risk taken by the insurer is the primary determinant. The value of an insurer’s Total Adjusted Capital in relation to its RBC, together with its trend in its Total Adjusted Capital, is used as a basis for determining regulatory action that a state insurance regulator may be authorized or required to take with respect to an insurer. The four determinations, potentially applicable under each jurisdiction’s laws, are essentially as follows:
Company Action Level Event. Total Adjusted Capital is greater than or equal to 150% but less than 200% of RBC or Total Adjusted Capital greater than or equal to 200% but less than 250% of RBC, and has a negative trend. If there is a Company Action Level Event, the insurer must submit a plan (an “RBC Plan”) outlining, among other things, the corrective actions it intends to take in order to remedy its capital deficiency.
Regulatory Action Level Event. Total Adjusted Capital is greater than or equal to 100% but less than 150% of RBC or the insurer has failed to comply with filing deadlines for its RBC Report or RBC Plan. If there is a Regulatory Action Level Event, the insurer is also required to submit an RBC Plan. In addition, the insurance regulator must undertake a comprehensive examination of the insurer’s financial condition and must issue any appropriate corrective orders.
Authorized Control Level Event. Total Adjusted Capital is below RBC but greater than or equal to 70% of RBC or the insurer has failed to respond to a corrective order. As noted above, if there is an Authorized Control Level Event, the insurance regulator may seek rehabilitation or liquidation of the insurer if it deems it to be in the best interests of the policyholders and creditors of the insurer and the public.
Mandatory Control Level Event. Total Adjusted Capital is below 70% of RBC. If there is a Mandatory Control Level Event, the insurance regulator must seek rehabilitation or liquidation of the insurer.
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Market conduct
Our insurance subsidiaries are subject to periodic market conduct exams (“MCE”) in any jurisdiction where they do business. An MCE typically entails review of business activities, such as operations and management, complaint handling, marketing and sales, producer licensing, policyholder service, underwriting and rating, and claims handling. Regulators may impose fines and penalties upon finding violations of regulations governing such business activities.
Rate and form approvals
Our insurance subsidiaries are subject to each state’s laws and regulations regarding rate and form approvals. Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices on a flagrant basis or with such frequency to indicate a general business practice. The applicable laws and regulations are used by states to establish standards to ensure that rates are not excessive, inadequate, unfairly discriminatory or used to engage in unfair price competition. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions; failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled. An insurer’s ability to increase rates and the relative timing of the process are dependent upon each state’s respective requirements.
Assessments against insurers
Under the insurance guaranty fund laws existing in each state and Washington D.C., licensed insurers can be assessed by insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Most of these laws provide for annual limits on the assessments and for an offset against state premium taxes. These premium tax offsets must be spread over future periods ranging from five to 20 years. Since these assessments typically are not made for several years after an insurer fails and depend upon the final outcome of liquidation or rehabilitation proceedings, we cannot accurately determine the amount or timing of any future assessments.
Regulation of investments
We are subject to state laws and regulations that require diversification of our investment portfolios and limit the amounts of investments in certain asset categories, such as below-investment grade fixed income securities, equity real estate, other equity investments and derivatives. Failure to comply with these requirements and limitations could cause affected investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, could require the divestiture of such non-qualifying investments.
Statutory accounting principles
Statutory accounting principles (“SAP”), are a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s solvency. Statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
GAAP is concerned with a company’s solvency, but is also concerned with other financial measurements, principally income and cash flows. Accordingly, GAAP gives more consideration to appropriately matching revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as compared to SAP.
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Potential issuing carrier restrictions
In certain states, including Florida and Kentucky, the Insurance Commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no statutory or regulatory prohibition against an authorized insurer acting as an issuing carrier for an unauthorized insurer could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
Enterprise risk and other developments
The NAIC, as part of its solvency modernization initiative, has engaged in a concerted effort to strengthen the ability of U.S. state insurance regulators to monitor U.S. insurance holding company groups. The NAIC’s solvency modernization initiative, among other things, aims to expand the authority and focus of state insurance regulators to encompass U.S. insurance holding company systems at the group level. The holding company reform efforts at the NAIC culminated in December 2010 in the adoption of significant amendments to the NAIC’s Insurance Holding Company System Regulatory Act (the “Model Holding Company Act”) and its Insurance Holding Company System Model Regulation (the “Model Holding Company Regulation”). Among other things, the revised Model Holding Company Act and Model Holding Company Regulation explicitly address “enterprise” risk - the risk that an activity, circumstance, event or series of events involving one or more affiliates of an insurer will, if not remedied promptly, be likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole - and require annual reporting of potential enterprise risk as well as access to information to allow the state insurance regulator to assess such risk. In addition, the Model Holding Company Act amendments include a requirement to the effect that any person divesting control over an insurer must provide 30 days’ notice to the regulator and the insurer (with an exception for cases where a Form A is being filed). The amendments direct the domestic state insurance regulator to determine those instances in which a divesting person will be required to file for and obtain approval of the transaction. Some form of the 2010 amendments to the Model Holding Company Act has been adopted in all states.
In December 2014, the NAIC adopted additional revisions to the Model Holding Company Act, updating the model to clarify the group-wide supervisor for a defined class of internationally active insurance groups. The revisions also outline the process for determining the lead state for domestic insurance groups, outline the activities the commissioner may engage in as group-wide supervisor and extend confidentiality protections to cover information received in the course of group-wide supervision. The 2014 revisions to the Model Holding Company Act have been adopted in all accredited U.S. jurisdictions.
In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Model Act provides that domestic insurers, or their insurance group, must regularly conduct an ORSA consistent with a process comparable to the ORSA Guidance Manual process. The ORSA Model Act also provides that, no more than once a year, an insurer’s domiciliary regulator may request that an insurer submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and the insurance group of which it is a member. If and when the ORSA Model Act is adopted by a particular state, the ORSA Model Act would impose more extensive filing requirements on parents and other affiliates of domestic insurers. Each of Kansas, California and Utah have adopted their version of the ORSA Model Act. Our insurance company subsidiaries, Benchmark and ALIC, will be subject to the requirements of the ORSA Model Act adopted in Kansas, California and Utah, respectively, when their direct written premiums and unaffiliated assumed premiums, if any, exceed $500 million (Benchmark and ALIC are currently exempt from such requirements based on the amount of their direct written premiums and unaffiliated assumed premiums).
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Privacy regulation
Federal and state law and regulation require financial institutions to protect the security and confidentiality of personal information, including health-related and customer information, and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of health-related and customer information and their practices relating to protecting the security and confidentiality of that information. State laws regulate the use and disclosure of social security numbers and federal and state laws require notice to affected individuals, law enforcement, regulators and others if there is a breach of the security of certain personal information, including social security numbers. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to consumers and customers. Federal and state lawmakers and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of personal information.
Cybersecurity regulation
The NAIC adopted the Insurance Data Security Model Law in October 2017. As of the date of this prospectus, eight states, not including Kansas, California or Utah, have adopted the model law or a variation of it. We expect that additional regulations could be enacted in other jurisdictions that could impact our cybersecurity program. Depending on these and other potential implementation requirements, we will likely incur additional costs of compliance.
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Management
Directors and executive officers
Set forth below are the names, ages and positions of our directors and executive officers as of the date of this prospectus.
Name
Age
Position
Andrew M. O’Brien
68
President and Chief Executive Officer, Director
Julie A. Baron
54
Chief Financial Officer, Treasurer and Secretary
Joy N. Edler
42
Chief Operating Officer
Nicholas J. Vassallo
56
Chief Accounting Officer
Jill K. Johnson
43
General Counsel
Martin A. Ericson
60
Senior Vice President of Underwriting
Matthew J. Spencer
43
Chief Information Officer
Daniel G. Tully
59
Chairman
David G. Ellison
37
Director
Randall D. Jones
66
Director
Steven B. Lee
68
Director
Terry P. Mayotte*
60
Director
*
Mr. Mayotte is currently a director nominee and will be appointed as a director upon consummation of this offering.
Andrew M. O’Brien has served as our President and Chief Executive Officer, and as one of our directors, since December 1996. Prior to founding our company, Mr. O’Brien served as a General Partner, Executive Vice President and director of E.W. Blanch Company. Mr. O’Brien has also served as a director of the Health Care Insurance Facility, First Dakota Indemnity Company and SAFE, Inc., a holding company for an accident and health insurer. Mr. O’Brien holds a B.A. in Sociology from the University of Minnesota, a J.D. from the University of Minnesota Law School and a Chartered Property Casualty Underwriter designation.
Julie A. Baron has served as our Chief Financial Officer since April 2015 and as our Treasurer and Secretary since February 2020. From November 2007 to March 2015, Ms. Baron served as the Controller for Benchmark. Prior to joining our company, Ms. Baron was a controller for Ala Carte Broker Services, LLC, a mortgage broker and title company in the Twin Cities. Ms. Baron holds a B.S. in Accounting from Arizona State University and is a Certified Public Accountant (inactive).
Joy N. Edler has served as our Chief Operating Officer since January 2020. Prior to joining our company, Ms. Edler served as the Vice President of Safety National Casualty Corp from January 2019 to January 2020, the Assistant Vice President of Safety National Casualty Corp from January 2016 to December 2018 and Director of Treaty Reinsurance at Safety National Casualty Corp from January 2014 to December 2015. Ms. Edler has experience as a senior-level treaty reinsurance underwriter and account executive responsible for developing, growing, and managing treaty reinsurance broker and client relationships, underwriting proportional and non-proportional programs, and promoting value-added client services. Ms. Edler also has a background in property and casualty insurance with an emphasis in workers’ compensation and other casualty. Ms. Edler holds a B.S. in Business Administration with an emphasis in Management and Human Resource Management from Columbia College.
Nicholas J. Vassallo has served as our Chief Accounting Officer since May 2020. Prior to joining our company, Mr.Vassallo served as Chief Accounting Officer for iMedia Brands, Inc. from May 2018 to October 2019 and as Senior Vice President – Corporate Controller since October 2015 and Vice President-Corporate Controller since 2001, having first joined iMedia Brands, Inc. as director of financial reporting in October 1996. Mr. Vassallo began his career with Arthur Anderson LLP, where he spent eight years in its audit practice group. Mr. Vassallo holds a B.S. in Accounting from St. John’s University and is a Certified Public Accountant (inactive).
Jill K. Johnson has served as our General Counsel since January 2015. Ms. Johnson has also served as the General Counsel and Vice President of Trean Corporation since April 2008, as the Secretary of S&C
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Claims Services, Inc. since September 2013 and as the Secretary of Benchmark Administrators, LLC since February 2016. Ms. Johnson holds a B.A. in Criminal Justice and Sociology from Gustavus Adolphus College and a J.D. from William Mitchell College of Law.
Martin A. Ericson has served as our Senior Vice President of Underwriting since July 2018. Mr. Ericson served as our Vice President of Underwriting from September 2013 to July 2018. Mr. Ericson has 28 years of experience and responsibility in the commercial insurance industry. Mr. Ericson holds a B.A. in Business Administration from Graceland University, a Chartered Property Casualty Underwriter designation and a Property Casualty Insurance Agents license.
Matthew J. Spencer has served as our Chief Information Officer since October 2018. Mr. Spencer served as our Vice President of Business Technology from April 2015 to October 2018. Prior to joining our company, Mr. Spencer served as the Senior Project Office Manager for MMIC Insurance, Inc. from July 2013 to March 2015. Mr. Spencer holds a B.S. in Quantitative Methods in Computer Science and a B.A. in Business Administration and Management from the University of St. Thomas.
Daniel G. Tully has served as one of our directors since July 2015 and will serve as the chairman of our board of directors. Mr. Tully is a Managing Director at Altaris Capital Partners, LLC, which he co-founded in November 2002. Mr. Tully has extensive experience serving on audit, compensation, and compliance committees. Prior to the formation of Altaris Mr. Tully held various positions with Merrill Lynch, including serving as the firm’s global head of healthcare equity capital markets and as a member of Merrill Lynch’s private equity and investment banking groups. Mr. Tully has also served as a director of Tivity Health, Inc. since August 2019. Mr. Tully received a B.S. in Economics from the University of Pennsylvania, Wharton Undergraduate Program.
David G. Ellison has served as one of our directors since July 2015. Mr. Ellison is a Managing Director at Altaris Capital Partners, LLC where he has held various positions since August 2007, and has extensive experience serving on audit, compensation, and compliance committees. Prior to Altaris Mr. Ellison was a member of the healthcare investment banking group at Lehman Brothers where he assisted clients in the execution of a number of mergers, acquisitions and financing transactions across the healthcare industry. Mr. Ellison holds a B.A. in Mathematics and Economics from Washington and Lee University.
Randall D. Jones has served as one of our directors since January 2008. Mr. Jones has served as the General Manager for Strategic Advisors Group, LLC since April 2001. From October 2010 to December 2017, Mr. Jones served as the Consulting Education Director for the National Association of Professional Surplus Lines Offices (“NAPSLO”), which is now the Wholesale & Specialty Insurance Association. Mr. Jones has over 40 years of experience in the specialty property and casualty insurance industry and has specific training as a wholesale broker, claims adjuster and underwriter. Mr. Jones holds a B.S. in Administration of Justice from Southern Illinois University and a M.Ed. from Central Michigan University.
Steven B. Lee has served as one of our directors since December 1996. Mr. Lee has also served as the Senior Vice President for Trean Reinsurance Services, LLC since December 2016. Mr. Lee has 38 years of experience in the reinsurance and insurance industry focusing on workers’ compensation, casualty and professional liability. Mr. Lee holds a B.A. in Psychology from St. Olaf College, an M.B.A. from the University of Wisconsin and a J.D. from the Mitchel Hamline School of Law.
Terry P. Mayotte will become a director effective upon consummation of this offering. Mr. Mayotte served as the Chief Financial Officer for Oasis Outsourcing Holdings Inc. from July 2016 to December 2018, when it was acquired by Paychex, Inc. Mr. Mayotte has extensive experience in workers' compensation, a core product of Oasis Outsourcing Holdings Inc. Mr. Mayotte holds a B.A. in Finance from Emory University.
There are no family relationships between any of our executive officers or directors.
Board of directors
Our by-laws provide that the number of directors constituting our entire board of directors shall be fixed from time to time by the board of directors. Our board of directors currently consists of five members: Messrs. Tully, O’Brien, Ellison, Jones and Lee. Upon consummation of this offering, our board of directors
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will consist of six members: Messrs. Tully, O’Brien, Ellison, Jones, Lee and Mayotte. Mr. Tully will be the chairman of our board of directors. As discussed under “Certain relationships and related party transactions — Director Nomination Agreement,” the Altaris Funds will have the right to nominate certain of our directors.
Prior to the completion of this offering, we will amend our certificate of incorporation and by-laws to divide our board of directors into three classes of approximately equal number of directors, with each director serving a three-year term and one class being elected at each annual meeting of stockholders. See “Description of capital stock — Certain anti-takeover provisions of our amended and restated certificate of incorporation, our amended and restated by-laws and applicable law — Classified board of directors; number of directors.”
Director independence
We have reviewed the independence of the persons that will be serving as directors upon the consummation of this offering using the Nasdaq independence standards. Based on this review, we expect our board of directors to determine that Messrs. Jones and Mayotte will qualify as independent directors under the Nasdaq independence standards.
Committees of the board of directors
After the completion of this offering, we will have two standing committees of the board of directors: the audit committee; and compensation, nominating and corporate governance committee.
Audit committee
Our audit committee will consist of Mr. Mayotte, who will serve as the chair of the audit committee, and Mr. Jones, who all qualify as independent directors under the corporate governance standards and the independence requirements of Rule 10A-3 under the Exchange Act. Following this offering, our board of directors have determined that Mr. Mayotte on our audit committee qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K. The audit committee will assist our board of directors in fulfilling its oversight responsibilities relating to:
the quality and integrity of our combined financial statements and our financial reporting process;
internal and external auditing and the independent registered public accounting firm’s qualifications and independence;
the performance of our internal audit function and independent registered public accounting firm;
the integrity of our systems of internal accounting and financial controls; and
our compliance with legal and regulatory requirements.
In so doing, the audit committee will be responsible for maintaining free and open communication between the committee, our independent registered public accounting firm and our management. In this role, the audit committee will be empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of Trean Insurance Group, Inc. and will have the power to retain outside counsel or other experts for this purpose.
The audit committee will have direct responsibility for the appointment, compensation, retention and oversight of our independent registered public accounting firm. The audit committee will meet in executive session with the independent registered public accounting firm at least quarterly.
Compensation, nominating and corporate governance committee
Our compensation, nominating and corporate governance committee will consist of Mr. Ellison, who will serve as the chair, Mr. Tully and Mr. Jones. The committee will assist our board of directors with reviewing the performance of our management in achieving corporate goals and objectives and assuring that our executives are compensated effectively in a manner consistent with our strategy, competitive practice and the requirements of appropriate regulatory bodies. Toward that end, the compensation, nominating and
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corporate governance committee will, among other responsibilities, review and approve director and executive officer compensation, incentive compensation and equity-based compensation plans, and employee benefit plans. The compensation, nominating and corporate governance committee will also assist our board of directors by:
identifying individuals qualified to become board members;
recommending to the board of directors the director nominees for the next annual meeting of stockholders;
leading the board of directors in its annual review of performance; and
recommending a code of conduct and, if deemed appropriate by the compensation, nominating and corporate governance committee, corporate governance guidelines, to the board of directors.
Compensation, nominating and corporate governance committee interlocks and insider participation
None of the members of our compensation, nominating and corporate governance committee and none of our executive officers has had a relationship that would constitute an interlocking relationship with executive officers or directors of another entity or insider participating in compensation decisions.
Code of conduct
Upon completion of this offering, we will have a code of conduct applicable to our directors, officers and employees that complies with the requirements of applicable rules and regulations of the SEC and the Nasdaq. This code will be designed to deter wrongdoing and to promote:
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;
compliance with applicable governmental laws, rules and regulations; and
prompt internal reporting to an appropriate person or persons identified in the code of conduct of violations of the code of conduct; and accountability for adherence to the code of conduct.
Upon completion of this offering, our code of conduct will be available on the investor relations portion of our website.
Director compensation for 2019
The following table summarizes the total compensation paid to or earned by each of our non-employee directors (other than directors affiliated with the Altaris Funds) for the year ended December 31, 2019. Our affiliated and employee directors are not separately compensated or their service on our board of directors. For 2019, our non-affiliated and non-employee directors received annual cash fees in the amount of $75,000 for their service on our board of directors. We also reimbursed all directors (including affiliated and employee directors) for reasonable out-of-pocket expenses they incur in connection with their service as directors.
Name
Fees Earned or
Paid in Cash
($)(1)
Stock
Awards
($)(2)
Total
($)
David G. Ellison
Randall D. Jones
75,000
75,000
Daniel G. Tully
Terry P. Mayotte(3)
(1)
The amount in this column reflects the cash compensation earned by Mr. Jones, our only non-affiliated and non-employee director, during the fiscal year ended December 31, 2019.
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(2)
None of our directors received stock awards during the fiscal year ended December 31, 2019. As of December 31, 2019, Mr. Jones held 5.43 Class C units in Trean Holdings (of which 2.7 Class C units were unvested as of December 31, 2019) and 393,169.29 Class C units in BIC Holdings (of which 196,584.6 Class C units were unvested as of December 31, 2019). As further described in the section titled “Our organizational structure” on page 10, upon the completion of the transfers, Trean Holdings and BIC Holdings will be dissolved and will distribute in-kind shares of our common stock to the Pre-IPO Unitholders, including Mr. Jones. With respect to each of his Class C units, Mr. Jones will receive an economically equivalent amount of fully-vested shares of our common stock determined based on the initial public offering price. Assuming an initial public offering price of $   per share (the midpoint of the price range set forth on the cover page of this prospectus), Mr. Jones will receive    shares of our common stock, with a value of $  .
(3)
Mr. Mayotte is currently a director nominee and will be appointed as a director upon consummation of this offering.
Pursuant to the director compensation policy that we expect to adopt prior to the completion of this offering, each of our non-affiliated and non-employee directors, as well as Mr. Lee, will be eligible to receive the following compensation for service on our board of directors following the completion of this offering:
an annual cash retainer in the amount of $75,000;
for the chairman of any committee of our board of directors, an additional annual cash retainer in the amount of $15,000;
for any member of a committee of our board of directors (not including the chairman), an additional cash retainer in the amount of $5,000;
an annual equity award in the form of service-based restricted stock units; and
reimbursement for all reasonable out-of-pocket expenses incurred in connection with service on our board of directors (including affiliated and employee directors).
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Executive compensation
The following section provides compensation information pursuant to the scaled disclosure rules applicable to “emerging growth companies” under the rules of the SEC, including reduced narrative and tabular disclosure obligations regarding executive compensation.
Summary compensation table for 2019
The following table sets forth information concerning the compensation paid to our principal executive officer and our two other most highly compensated executive officers (our “named executive officers” or “NEOs”) during the fiscal year ended December 31, 2019. All numbers are rounded to the nearest dollar.
Name and principal
position
Year
Salary ($)
Bonus ($)(1)
All other
compensation ($)(2)
Total ($)
Andrew M. O’Brien
President, Chief
Executive Officer
and Director
2019
400,000
600,000
8,058
1,008,058
Steven B. Lee
Senior Vice
President and Director
2019
165,000
165,000
12,122
342,122
Julie A. Baron
Chief Financial Officer, Treasurer
and Secretary
2019
202,833
80,000
7,093
289,926
(1)
Amounts represent a discretionary cash bonus earned by each NEO with respect to performance during the fiscal year ended December 31, 2019.
(2)
Amounts represent the items listed in the following table:
Name
401(k) matching
contributions
($)
Company-paid life
insurance premiums
($)
Andrew M. O’Brien
8,058
Steven B. Lee
4,152
7,970
Julie A. Baron
5,071
2,022
Elements of compensation
Each of our NEOs was provided with the following primary elements of compensation during the fiscal year ended December 31, 2019:
Base salary
Each of our NEOs received a fixed base salary. The base salary payable to each NEO is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. Each NEO’s base salary for the fiscal year ended December 31, 2019 is listed in the “Summary compensation table for 2019,” above.
2019 bonus arrangements
Each of our NEOs is entitled to receive a discretionary annual cash incentive bonus as determined by our board of directors. Annual cash incentive bonuses are designed to motivate our executive officers to meet our strategic business and financial objectives generally and our annual financial performance targets in particular. We anticipate continuing to provide our NEOs with an opportunity to earn an annual cash incentive bonus, based on individual and company goals, following the completion of this offering.
Equity awards during 2019
Our NEOs were not granted any equity awards during the fiscal year ended December 31, 2019.
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Transaction payments
As further described in the section titled “Our organizational structure” on page 10, at the time of the reorganization transactions, Trean Corporation and Benchmark will make transaction payments to certain employees of Trean Corporation and/or Benchmark. While we have not yet determined the recipients of those payments, the recipients may include certain of our NEOs.
Retirement and employee benefits
All employees are eligible to participate in broad-based and comprehensive employee benefit programs, including medical, dental, vision, life and disability insurance and a 401(k) plan with matching contributions. Our NEOs are eligible to participate in these plans on the same basis as our other employees. We do not sponsor or maintain any deferred compensation or supplemental retirement plans in addition to our 401(k) plan. The 401(k) matching contributions earned by each NEO in the fiscal year ended December 31, 2019, are shown in the “Summary Compensation Table for 2019” under “All Other Compensation.”
Employment agreements with our named executive officers
We have not entered into employment agreements with any of our NEOs.
Outstanding equity awards at fiscal year end
None of our NEOs held any outstanding unvested equity awards as of December 31, 2019.
Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan
Prior to the completion of this offering, we intend to adopt the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan (the “Plan”). The purpose of the Plan will be to provide additional incentives to selected officers, employees, non-employee directors, independent contractors and consultants, to strengthen their commitment, motivate them to faithfully and diligently perform their responsibilities and to attract and retain competent and dedicated persons who are essential to the success of our business and whose efforts will impact our long-term growth and profitability. The material terms of the Plan, as it is currently contemplated, are summarized below.
Administration and eligibility
The Plan will initially be administered by our board of directors, although it may be administered by either our board of directors or any committee of our board of directors, including a committee that complies with the applicable requirements of Section 16 of the Exchange Act and any other applicable legal or stock exchange listing requirements (the board of directors or the committee referred to above being sometimes referred to as the “plan administrator”). The plan administrator may interpret the Plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the Plan.
The Plan permits the plan administrator to select the officers, employees, non-employee directors, independent contractors and consultants who will receive awards, to determine the terms and conditions of those awards, including but not limited to the exercise price or other purchase price of an award, the number of shares of our common stock or cash or other property subject to an award, the term of an award and the vesting schedule applicable to an award, and to amend the terms and conditions of outstanding awards.
Shares available and limitation on awards
The maximum number of shares of our common stock reserved for issuance under the Plan shall be     shares. Non-employee directors are not permitted to be granted awards during any calendar year with a grant date fair value that, when aggregated with such non-employee director’s cash fees with respect to such calendar year, exceed $  in total value.
Shares of our common stock subject to an award under the Plan that remain unissued upon the cancellation, termination or expiration of the award (including shares of our common stock that are exchanged by a participant or withheld by the Company as full or partial payment of the exercise price or
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other purchase price in connection with any award under the Plan, as well as any shares of our common stock exchanged by a participant or withheld by the Company to satisfy the tax withholding obligations related to any award) will again become available for grant under the Plan. To the extent an award is paid or settled in cash, the number of shares of our common stock previously subject to the award will again be available for grant pursuant to the Plan. To the extent that an award can only be settled in cash, such award will not be counted against the total number of shares of our common stock available for grant under the Plan.
Awards, vesting and withholding taxes
Restricted stock units, which we refer to as “RSUs,” and restricted stock may be granted under the Plan. The plan administrator will determine the purchase price, vesting schedule and performance objectives, if any, applicable to the grant of RSUs and restricted stock. If the restrictions, performance objectives or other conditions determined by the plan administrator are not satisfied, the RSUs and restricted stock will be forfeited. Subject to the provisions of the Plan and the applicable individual award agreement, the plan administrator may provide for the lapse of restrictions in installments or the acceleration or waiver of restrictions (in whole or part) under certain circumstances as set forth in the applicable individual award agreement, including the attainment of certain performance goals, a participant’s termination of employment or service, or a participant’s death or disability. The rights of RSU and restricted stock holders upon a termination of employment or service will be set forth in individual award agreements.
Unless the applicable award agreement provides otherwise, participants with restricted stock will generally have all of the rights of a stockholder during the restricted period, including the right to vote and receive dividends declared with respect to such restricted stock, provided that any dividends declared during the restricted period with respect to such restricted stock will generally only become payable if the underlying restricted stock vests. During the restricted period, participants with RSUs will generally not have any rights of a stockholder, but, if the applicable individual award agreement so provides, may be credited with dividend equivalent rights that will be paid at the time that shares of our common stock in respect of the related RSUs are delivered to the participant.
We may issue stock options under the Plan. Options granted under the Plan may be in the form of non-qualified options or “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, as set forth in the applicable individual option award agreement. The exercise price of all options granted under the Plan will be determined by the plan administrator, but, unless otherwise determined by the plan administrator, in no event may the exercise price be less than 100% of the fair market value of the related shares of our common stock on the date of grant. The maximum term of all stock options granted under the Plan will be determined by the plan administrator, but may not exceed ten years. Each stock option will vest and become exercisable (including in the event of the optionee’s termination of employment or service) at such time and subject to such terms and conditions as determined by the plan administrator in the applicable individual option agreement.
Stock appreciation rights, which we refer to as “SARs,” may be granted under the Plan either alone or in conjunction with all or part of any option granted under the Plan. A free-standing SAR granted under the Plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of our common stock over the base price of the free-standing SAR. A SAR granted in conjunction with all or part of an option under the Plan entitles its holder to receive, at the time of exercise of the SAR and surrender of the related option, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of our common stock over the exercise price of the related option. Each SAR will be granted with a base price that is not less than 100% of the fair market value of the related shares of our common stock on the date of grant. The maximum term of all SARs granted under the Plan will be determined by the plan administrator, but may not exceed ten years. The plan administrator may determine to settle the exercise of a SAR in shares of our common stock, cash, or any combination thereof.
Each free-standing SAR will vest and become exercisable (including in the event of the SAR holder’s termination of employment or service) at such time and subject to such terms and conditions as determined by the plan administrator in the applicable individual free-standing SAR agreement. SARs granted in conjunction with all or part of an option will be exercisable at such times and subject to all of the terms and conditions applicable to the related option.
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Other stock-based awards, valued in whole or in part by reference to, or otherwise based on, shares of our common stock (including dividend equivalents) may be granted under the Plan. Any dividend or dividend equivalent awarded under the Plan will be subject to the same restrictions, conditions and risks of forfeiture as the underlying awards and will only become payable if the underlying awards vest. The plan administrator will determine the terms and conditions of such other stock-based awards, including the number of shares of our common stock to be granted pursuant to such other stock-based awards, the manner in which such other stock-based awards will be settled (e.g., in shares of our common stock or cash or other property), and the conditions to the vesting and payment of such other stock-based awards (including the achievement of performance objectives).
Bonuses payable in fully vested shares of our common stock and awards that are payable solely in cash may also be granted under the Plan.
The plan administrator may grant equity-based awards and incentives under the Plan that are subject to the achievement of performance objectives selected by the plan administrator in its sole discretion, including, without limitation, one or more of the following business criteria: (i) earnings, including one or more of operating income, net operating income, earnings before or after taxes, earnings before or after interest, depreciation, amortization, adjusted EBITDA, economic earnings, or extraordinary or special items or book value per share (which may exclude nonrecurring items); (ii) pre-tax income or after-tax income; (iii) earnings per share (basic or diluted); (iv) operating profit; (v) revenue, revenue growth or rate of revenue growth; (vi) return on assets (gross or net), return on investment, return on capital, or return on equity; (vii) returns on sales or revenues; (viii) operating expenses; (ix) stock price appreciation; (x) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (xi) implementation or completion of critical projects or processes; (xii) cumulative earnings per share growth; (xiii) operating margin or profit margin; (xiv) stock price or total stockholder return; (xv) cost targets, reductions and savings, productivity and efficiencies; (xvi) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion, customer satisfaction, employee satisfaction, human resources management, supervision of litigation, and information technology goals, and goals relating to acquisitions, divestitures, joint ventures and similar transactions, and budget comparisons; (xvii) personal professional objectives, including any of the foregoing performance goals, the implementation of policies and plans, the negotiation of transactions, the development of long term business goals, formation of joint ventures, research or development collaborations, and the completion of other corporate transactions; and (xviii) any combination of, or a specified increase in, any of the foregoing.
The business criteria may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to us or any of our affiliates, or one of our divisions or strategic business units or a division or strategic business unit of any of our affiliates, or may be applied to our performance relative to a market index, a group of other companies or a combination thereof, all as determined by the plan administrator. The business criteria may also be subject to a threshold level of performance below which no payment will be made, levels of performance at which specified payments will be made, and a maximum level of performance above which no additional payment will be made. The plan administrator will have the authority to make equitable adjustments to the business criteria, as may be determined by the plan administrator in its sole discretion.
Certain transactions and withholding taxes
In the event of a merger, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase, reorganization, corporate transaction or event, special or extraordinary dividend or other extraordinary distribution (whether in the form of shares of our common stock, cash or other property), stock split, reverse stock split, subdivision or consolidation, combination, exchange of shares, or other change in corporate structure affecting the shares of our common stock, an equitable substitution or proportionate adjustment shall be made, at the sole discretion of the plan administrator, in (i) the aggregate number of shares of our common stock reserved for issuance under the Plan, (ii) the kind and number of securities subject to, and the exercise price or base price of, any outstanding options and SARs granted under the Plan, (iii) the kind, number and purchase price of shares of our common stock, or the amount of cash or
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amount or type of property, subject to outstanding restricted stock, RSUs, stock bonuses and other stock-based awards granted under the Plan or (iv) the performance goals and periods applicable to award granted under the Plan. Equitable substitutions or adjustments other than those listed above may also be made as determined by the plan administrator. In addition, the plan administrator may terminate all outstanding awards for the payment of cash or in-kind consideration having an aggregate fair market value equal to the excess of the fair market value of the shares of our common stock, cash or other property covered by such awards over the aggregate exercise price or base price, if any, of such awards, but if the exercise price or base price of any outstanding award is equal to or greater than the fair market value of the shares of our common stock, cash or other property covered by such award, the board of directors may cancel the award without the payment of any consideration to the participant.
Unless otherwise determined by the plan administrator and evidenced in an award agreement, in the event that (i) a ‘‘change in control” (as defined in the Plan) occurs and (ii) a participant’s employment or service is terminated without cause, or with good reason (to the extent applicable), within 24 months following the change in control, then (a) any unvested or unexercisable portion of any award carrying a right to exercise shall become fully vested and exercisable, and (b) the restrictions, deferral limitations, payment conditions and forfeiture conditions applicable to an award granted under the Plan will lapse and such unvested awards will be deemed fully vested and any performance conditions imposed with respect to such awards will be deemed to be achieved at target performance levels. The completion of this offering will not be a change of control under the Plan.
Each participant will be required to make arrangements satisfactory to the plan administrator regarding payment of an amount up to the maximum statutory rates in the participant’s applicable jurisdictions with respect to any award granted under the Plan, as determined by us. We have the right, to the extent permitted by law, to deduct any such taxes from any payment of any kind otherwise due to the participant. With the approval of the plan administrator, the participant may satisfy the foregoing requirement by either electing to have us withhold from delivery of shares of our common stock, cash or other property, as applicable, or by delivering already owned unrestricted shares of our common stock, in each case, having a value not exceeding the applicable taxes to be withheld and applied to the tax obligations. We may also use any other method of obtaining the necessary payment or proceeds, as permitted by law, to satisfy our withholding obligation with respect to any award.
Amendment, termination and clawback provisions
The Plan provides our board of directors with the authority to amend, alter or terminate the Plan, but no such action may materially impair the rights of any participant with respect to outstanding awards without the participant’s consent. The plan administrator may amend an award, prospectively or retroactively, but no such amendment may materially impair the rights of any participant without the participant’s consent. Stockholder approval of any such action will be obtained if required to comply with applicable law.
No award will be granted pursuant to the Plan on or after the tenth anniversary of the effective date of the Plan (although awards granted before that time will remain outstanding in accordance with their terms).
All awards will be subject to the provisions of any clawback policy implemented by us to the extent set forth in such clawback policy, and will be further subject to such deductions and clawbacks as may be required to be made pursuant to any law, government regulation or stock exchange listing requirement.
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Certain relationships and related party transactions
We describe below transactions and series of similar transactions, during our last three fiscal years or currently proposed, to which we were or will be a participant, in which:
the amounts involved exceeded or will exceed the lesser of (i) $120,000 and (ii) 1% of the average of our total assets at year end for the last two completed fiscal years; and
any of our directors, director nominees or executive officers (in each case, including their immediate family members) or beneficial holders of more than 5% of any class of our voting securities had or will have a direct or indirect material interest.
Other than as described below, there have not been, nor are there any currently proposed, transactions or series of similar transactions meeting this criteria to which we have been or will be a participant other than compensation arrangements, which are described where required under “Executive compensation.”
Director Nomination Agreement
Upon the closing of this offering, we will enter into a director nomination agreement (the “Director Nomination Agreement”) with the Altaris Funds. 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. Subject to limited exceptions, we will include these nominees in the slate of nominees recommended to our stockholders for election as directors.
LLC Agreements
On January 22, 2016, (i) BIC Holdings entered into the Second Amended and Restated Limited Liability Company Agreement (the “BIC LLC Agreement”) together with AHP-BHC LLC, Andrew M. O’Brien (through a trust), Steven B. Lee and the other members named on Exhibit A therein and (ii) Trean Holdings entered into the Second Amended and Restated Limited Liability Company Agreement (the “Trean LLC Agreement” and, together with the BIC LLC Agreement, each as further amended, the “LLC Agreements”) together with AHP-TH LLC, Mr. O’Brien (through a trust), Mr. Lee and the other members named on Exhibit A therein. On May 1, 2017, (i) BIC Holdings, Mr. O’Brien (through a trust), Mr. Lee and the other members named on Exhibit A therein entered into Amendment No. 1 to the BIC LLC Agreement to, among other things, add ACP-BHC LLC as a member of BIC Holdings and (ii) Trean Holdings, Mr. O’Brien (through a trust), Mr. Lee and the other members named on Exhibit A therein entered into Amendment No. 1 to the Trean LLC Agreement to, among other things, add ACP-TH LLC as a member of Trean Holdings. On June 15, 2018, (i) the BIC LLC Agreement was further amended pursuant to Amendment No. 2 thereto and (ii) the Trean LLC Agreement was further amended pursuant to Amendment No. 2 thereto. Upon the completion of this offering, BIC Holdings LLC and Trean Holdings LLC will dissolve pursuant to the terms of their respective LLC Agreements.
Consulting Agreements
In connection with the Altaris Funds’ investment in us, (i) on July 31, 2015, BIC Holdings entered into a consulting agreement with Altaris Capital Partners, LLC and (ii) on May 1, 2017, Trean Holdings entered into Amendment No. 1 to the Amended and Restated Consulting Agreement, dated as of April 29 2016, with Altaris Capital Partners, LLC (collectively, the “Consulting Agreements”), relating to the engagement of Altaris Capital Partners, LLC to provide certain consulting and advisory services. The Consulting Agreements provide that we pay Altaris Capital Partners, LLC an annual fee of $1.0 million, payable quarterly in equal installments. We paid $1.0 million in each of 2018 and 2019 to Altaris Capital Partners, LLC for these services.
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In connection with this offering, we will enter into a termination letter agreement with Altaris Capital Partners, LLC pursuant to which the parties will agree to terminate the ongoing consulting and advisory services and fees described above. Pursuant to the terms of such termination letter agreement, we will agree to pay Altaris Capital Partners, LLC an aggregate one-time payment of $   million, which amount will equal 1.0% of the enterprise value of us plus $1.5 million in accordance with the terms of the Consulting Agreements, payable upon completion of this offering. Pursuant to the terms of such termination letter agreement the consulting and advisory fees will terminate.
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Principal and selling stockholders
The following table sets forth information regarding the beneficial ownership of our common stock as of     , 2020 (i) as adjusted to give effect to the reorganization transactions, but prior to this offering, and (ii) as adjusted to give effect to the reorganization transactions and this offering as described in “Use of proceeds” by:
each person or group whom we know to own beneficially more than 5% of our common stock;
each of the directors, the director nominee and named executive officers individually;
all directors, the director nominee and executive officers as a group; and
each of the other selling stockholders.
The numbers of shares of common stock beneficially owned, percentages of beneficial ownership and percentages of combined voting power before this offering that are set forth below are based on the number of shares of common stock to be issued and outstanding prior to this offering after giving effect to the reorganization. See “Organizational structure.” The numbers of shares of common stock beneficially owned, percentages of beneficial ownership and percentages of combined voting power after this offering that are set forth below are based on the number of shares of common stock to be issued and outstanding immediately after this offering.
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable pursuant to stock options that are exercisable within 60 days of    , 2020. The number of shares of common stock outstanding after this offering includes    shares of common stock being offered for sale by us in this offering. Unless otherwise indicated, the address for each listed stockholder is: c/o 150 Lake Street West, Wayzata, MN 55391. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.
The following table assumes the underwriters’ option to purchase additional shares of common stock is not exercised.
The table below does not reflect any shares of our common stock that our directors and executive officers may purchase through the directed share program, described in “Underwriting.”
 
Shares Beneficially
Owned Before
this Offering
Shares Beneficially
Owned After
this Offering
Name and Address of Beneficial Owner
Shares
Percentage
Shares
Percentage
Greater than 5% and Selling Stockholders:
 
 
 
 
Altaris Funds(1)
 
 
 
 
Blake Enterprises entities(2)
 
 
 
 
Named executive officers, directors and director nominee:
 
 
 
 
Andrew M. O’Brien(3)
 
 
 
 
Julie A. Baron
 
 
 
 
David G. Ellison
 
 
 
 
Randall D. Jones
 
 
 
 
Steven B. Lee(4)
 
 
 
 
Daniel G. Tully
 
 
 
 
Terry P. Mayotte
 
 
 
 
All executive officers, directors and director nominee as a group (12 persons)
 
 
 
 
(1)
Prior to this offering, consists of (i) [ _ ] shares of our common stock held by AHP-BHC LLC and [ _ ] shares of our common stock held by AHP-TH LLC and (ii) [ _ ] shares of our common stock held by ACP-BHC LLC and [ _ ] shares of our common stock held by ACP TH LLC (collectively, the “Altaris Funds”). After this offering, consists of (i) [ _ ] shares of our common stock held by AHP-BHC LLC and [ _ ] shares of our common stock held by AHP-TH LLC and (ii) [ _ ] shares of our common stock held by ACP-BHC LLC and [ _ ] shares
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of our common stock held by ACP TH LLC. Daniel G. Tully and George E. Aitken-Davies are members of the board of managers of Altaris Partners, LLC, which has investment and voting control over the shares held by the Altaris Funds. The address of the Altaris Funds is 10 East 53rd Street, 31st floor, New York, NY 10022.
(2)
Prior to this offering, consists of (i) [ _ ]shares of our common stock held by Blake Enterprises I, Inc., (ii) [ _ ] shares of our common stock held by Blake Enterprises II, Inc. and (iii) [ _ ] shares of our common stock held by Blake Enterprises III, Inc. After this offering, consists of (i) [ _ ] shares of our common stock held by Blake Enterprises I, Inc., (ii) [ _ ] shares of our common stock held by Blake Enterprises II, Inc. and (iii) [ _ ] shares of our common stock held by Blake Enterprises III, Inc. The Blake Enterprises entities are owned by The Baker Family Trust, dated July 8, 2019, of which Blake Baker is the sole settlor and trustee. The address of the Blake Enterprises entities is 26650 The Old Road, suite 110, Valencia, CA 91381.
(3)
Prior to this offering, consists of [ _ ] shares of our common stock held by the Andrew M. O’Brien Premarital Trust, of which Mr. O’Brien is the trustee. After this offering, consists of  [ _ ] shares of our common stock held by the Andrew M. O’Brien Premarital Trust, of which Mr. O’Brien is the trustee. The address of the Andrew M. O’Brien Premarital Trust is 150 Lake Street West, Wayzata, MN 55391.
(4)
Prior to this offering, consists of [ _ ] shares of our common stock. After this offering, consists of  [ _ ] shares of our common stock.
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Description of capital stock
In connection with this offering, we will amend our restated certificate of incorporation and restated by-laws. The forms of our amended and restated certificate of incorporation and amended and restated by-laws have been filed as exhibits to the registration statement of which this prospectus is a part. The provisions of our amended and restated certificate of incorporation and amended and restated by-laws that will be in effect upon consummation of this offering and relevant sections of the DGCL are summarized below. The following description of our capital stock and provisions of our amended and restated certificate of incorporation and our amended and restated by-laws are summaries and are qualified by reference to our amended and restated certificate of incorporation and our amended and restated by-laws that will be in effect upon the completion of this offering.
Authorized capital stock
Our authorized capital stock will consist of    shares, including: (i)    shares of our common stock, par value $0.01 per share, and (ii)    shares of preferred stock, $0.01 par value per share. As of    , we had outstanding    shares of our common stock, held of record by    stockholders, and no shares of preferred stock outstanding. Based on an assumed initial public offering price of $   (the midpoint of the price range set forth on the cover page of this prospectus), upon consummation of this offering (assuming no exercise of the underwriters’ option to purchase additional shares to cover over-allotments), we will have outstanding  shares of our common stock and no shares of preferred stock outstanding.
Common stock
Holders of our common stock will be entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of directors. Our common stockholders will not be entitled to cumulative voting in the election of directors. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of our common stock will be entitled to receive ratably such dividends as may be declared by our board of directors out of funds legally available therefor if our board of directors, in its discretion, determines to issue dividends and only then at the times and in the amounts that our board of directors may determine. Upon the liquidation, dissolution or winding-up of Trean Insurance Group, Inc., the holders of our common stock will be entitled to receive their ratable share of the net assets of Trean Insurance Group, Inc. available after payment of all debts and other liabilities, subject to the prior preferential rights and payment of liquidation preferences, if any, of any outstanding shares of preferred stock. Holders of our common stock will have no preemptive, subscription or redemption rights. There will be no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
Preferred stock
Our board of directors will have the authority, subject to the limitations imposed by Delaware law or the Nasdaq listing rules, without any further vote or action by our stockholders, to issue preferred stock in one or more series and to fix the designations, powers, preferences, limitations and rights of the shares of each series, including:
dividend rates;
conversion rights;
voting rights;
terms of redemption and liquidation preferences; and
the number of shares constituting each series.
Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of our common stock. Holders of
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shares of preferred stock may be entitled to receive a preference payment in the event of our liquidation, dissolution or winding-up before any payment is made to the holders of shares of our common stock.
Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.
There are no current agreements or understandings with respect to the issuance of preferred stock and our board of directors has no present intentions to issue any shares of preferred stock.
Certain anti-takeover provisions of our amended and restated certificate of incorporation, our amended and restated by-laws and applicable law
Certain provisions of our amended and restated certificate of incorporation, amended and restated by-laws, Delaware law and insurance regulations applicable to our business may discourage or make more difficult a takeover attempt that a stockholder might consider in his or her best interest. These provisions may also adversely affect prevailing market prices for our common stock. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unsolicited proposal to acquire or restructure us and outweigh the disadvantage of discouraging those proposals because negotiation of the proposals could result in an improvement of their terms.
Authorized but unissued capital stock
Delaware law does not require stockholder approval for any issuance of authorized shares. However, the listing requirements of the Nasdaq, which would apply if and so long as our common stock remains listed on the Nasdaq, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of common stock. These additional shares may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.
Our board of directors may generally issue preferred shares on terms calculated to discourage, delay or prevent a change in control of our company or the removal of our management. Moreover, our authorized but unissued shares of preferred stock will be available for future issuances without stockholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans.
One of the effects of the existence of unissued and unreserved common stock or preferred stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.
Classified board of directors; number of directors
Our amended and restated certificate of incorporation and amended and restated by-laws provide that, subject to any rights of holders of preferred stock to elect additional directors under specified circumstances, the number of directors will be fixed from time to time exclusively pursuant to a resolution adopted by the board of directors.
Our amended and restated certificate of incorporation provides that our board of directors is divided into three classes with staggered three-year terms, with the classes as nearly equal in number as possible. As a result, one class (i.e., approximately one-third of our board of directors) is elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective three-year terms. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time-consuming for stockholders to replace a majority of the directors on a classified board. Our amended and restated certificate of incorporation also provides that
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the number of directors on our board is fixed exclusively pursuant to resolution adopted by our board of directors.
In connection with this offering, we entered into a Director Nomination Agreement that grants the Altaris Funds the right to nominate individuals to our board of directors provided certain ownership requirements are met. See “Certain relationships and related party transactions — Director Nomination Agreement.”
Vacancies
Our amended and restated certificate of incorporation provides that, subject to the rights granted to one or more series of preferred stock then outstanding, any vacancies on our board of directors will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum, or by a sole remaining director.
Special stockholder meetings
Our amended and restated certificate of incorporation and amended and restated by-laws provides that special meetings of our stockholders for any purpose or purposes may be called at any time only (i) by the chairman of our board of directors, (ii) by our chief executive officer, (iii) pursuant to a resolution adopted by a majority of our board of directors or (iv) until the date that the principal stockholders cease to beneficially own 30% or more of our outstanding shares, at the request of holders of at least 50% of our outstanding shares. Except as described above, stockholders will not have the authority to call a special meeting of stockholders. Our amended and restated by-laws prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting.
Requirements for advance notification of director nominations and stockholder proposals
Our by-laws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors. In order for any matter to be “properly brought” before a meeting, a stockholder will have to comply with advance notice requirements and provide us with certain information. Generally, to be timely, a stockholder’s notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the immediately preceding annual meeting of stockholders. Our by-laws will also specify requirements as to the form and content of a stockholder’s notice. Our by-laws will allow the chairman of the meeting at a meeting of the stockholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions will not apply to the principal stockholders at any time when they beneficially own, in the aggregate, less than 30% of our outstanding common stock. These provisions may also defer, delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to influence or obtain control of us.
Stockholder action by written consent
Pursuant to Section 228 of the DGCL, any action required to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, is or are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of our stock entitled to vote thereon were present and voted, unless our amended and restated certificate of incorporation provides otherwise. Our amended and restated certificate of incorporation precludes stockholder action by written consent at any time when the principal stockholders beneficially own, in the aggregate, less than 30% of our outstanding common stock.
Section 203 of the Delaware General Corporation Law
As a Delaware corporation, we will be subject to Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with
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affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock. For the avoidance of doubt, our principal stockholders, the Altaris Funds, will not be interested stockholders. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:
before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and officers; or
at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.
A Delaware corporation may “opt out” of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from amendments approved by holders of at least a majority of the corporation’s outstanding voting shares. We will elect to “opt out” of Section 203.
Insurance regulations
The insurance laws and regulations of the states of Kansas, the state of domicile of Benchmark, California, where Benchmark is commercially domiciled, and Utah, the state of domicile of ALIC, may delay or impede a business combination involving our company. State insurance laws prohibit an entity from acquiring control of an insurance company without the prior approval of the domestic insurance regulator. Under most states’ statutes, including Kansas’, California’s and Utah’s, an entity is presumed to have control of an insurance company if it owns, directly or indirectly, 10% or more of the voting stock of that insurance company or its parent company. These regulatory restrictions may delay, deter or prevent a potential merger or sale of our company, even if our board of directors decides that it is in the best interests of stockholders for us to merge or be sold. These restrictions also may delay sales by us or acquisitions by third parties of our subsidiaries.
Certain provisions of our amended and restated certificate of incorporation
Exclusive forum
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or (iv) any action asserting a claim governed by the internal affairs doctrine. Unless the company consents in writing to the selection of an alternative forum, the exclusive forum for any action under the Securities Act or the Exchange Act shall be either the Court of Chancery of the State of Delaware or the federal district court for the District of Delaware. This exclusive forum provision will not apply to claims which are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware, for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction or, in the case of an action under the Securities Act or the Exchange Act, for which neither the Court of Chancery of the State of Delaware nor the federal district court for the District of Delaware has subject matter jurisdiction.
Conflicts of interest
The DGCL permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to the corporation or its officers, directors or stockholders. Our amended
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and restated certificate of incorporation renounces, to the maximum extent permitted from time to time by law, any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities that are from time to time presented to our officers, directors or stockholders or their respective affiliates, other than those officers, directors, stockholders or affiliates who are our or our subsidiaries’ employees. Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, each of the principal stockholders or any of their affiliates or any director who is not employed by us or his or her affiliates will have no duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing with us or our affiliates. In addition, to the fullest extent permitted by law, in the event that the principal stockholders or any non-employee director acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for themselves or himself or their or his affiliates or for us or our affiliates, such person will have no duty to communicate or offer such transaction or business opportunity to us or any of our affiliates and they may take any such opportunity for themselves or offer it to another person or entity. Our amended and restated certificate of incorporation does not renounce our interest in any business opportunity that is expressly offered to a non-employee director solely in his or her capacity as a director or officer of Trean Insurance Group, Inc. To the fullest extent permitted by law, no business opportunity will be deemed to be a potential corporate opportunity for us unless we would be permitted to undertake the opportunity under our amended and restated certificate of incorporation, we have sufficient financial resources to undertake the opportunity and the opportunity would be in line with our business.
Limitation of liability and indemnification of directors and officers
Our amended and restated certificate of incorporation includes provisions that limit the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors, except to the extent that such limitation is not permitted under the DGCL. Such limitation shall not apply, except to the extent permitted by the DGCL, to (i) any breach of a director’s duty of loyalty to us or our stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) any unlawful payment of a dividend or unlawful stock repurchase or redemption, as provided in Section 174 of the DGCL, or (iv) any transaction from which the director derived an improper personal benefit. These provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director’s breach of his or her duty of care.
Our amended and restated certificate of incorporation and our by-laws provide for indemnification, to the fullest extent permitted by the DGCL, of any person made or threatened to be made a party to any action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of Trean Insurance Group, Inc., or, at our request, serves or served as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or any other enterprise, against all expenses, judgments, fines, amounts paid in settlement and other losses actually and reasonably incurred in connection with the defense or settlement of such action, suit or proceeding. In addition, we intend to enter into indemnification agreements with each of our directors and executive officers pursuant to which we will agree to indemnify each such executive officer and director to the fullest extent permitted by the DGCL.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Listing
We have applied to list our common stock on the Nasdaq under the symbol “TIG.”
Transfer agent and registrar
Upon the consummation of this offering, the transfer agent and registrar for our common stock will be Equiniti Trust Company. The transfer agent’s address is 1110 Centre Pointe Curve, Suite 101, Mendota Heights, MN 55120-4101.
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Shares eligible for future sale
Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.
Resale of restricted shares
Upon completion of this offering, assuming a price per share at the midpoint of the price range set forth on the cover page of this prospectus, we will    have shares of common stock outstanding. Of the shares of common stock outstanding following this offering, the    shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any such shares of common stock held by our “affiliates,” as defined in Rule 144 under the Securities Act, which would be subject to the limitations and restrictions described below under “— Rule 144.” The remaining shares of common stock that will be outstanding are “restricted shares” as defined in Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 of the Securities Act. As a result of the contractual lock-up period described below under and the provisions of Rule 144 these shares will be available for sale in the public market as presented below:
Shares of Common Stock
Shares Available for Public Sale
 
The date of this prospectus
 
180 days following the date of this prospectus, subject to volume and manner of sale limitations
Lock-up agreements
We, our directors and executive officers and the selling stockholders have signed lock-up agreements under which they have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, or to enter into any hedging transactions with respect to, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for a period of 180 days commencing on the date of this prospectus, subject to certain exceptions. See “Underwriting.”
Rule 144
In general, under Rule 144 under the Securities Act, a person (or persons whose shares are aggregated) who is not and was not during the 90 days preceding the sale, an affiliate of ours, and who has held restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is or was during the 90 days preceding the sale, an affiliate of ours, and who has held restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of our last reported outstanding common shares or the average weekly trading volume of our common shares reported during the four calendar weeks preceding such sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.
No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock. See “Risk factors.”
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Registration Rights Agreement
In connection with this offering, we expect to enter into a registration rights agreement (the “Registration Rights Agreement”) with the principal stockholders and certain other pre-IPO stockholders, including our president and chief executive officer. Pursuant to the terms of the Registration Rights Agreement, the principal stockholders are entitled to certain rights, including demand registration rights, and the principal stockholders and such pre-IPO stockholders are entitled to certain rights, including piggyback registration rights, with respect to the registration of their shares of our common stock under the Securities Act after the consummation of this offering.
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U.S. federal income tax considerations for non-U.S. holders
The following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our common stock by non-U.S. holders (as defined below) who acquire such shares in this offering and hold our common stock as a capital asset (generally, property held for investment). This summary does not address all aspects of U.S. federal income taxation that may be important to a non-U.S. holder in light of that holder’s particular circumstances or that may be applicable to holders subject to special treatment under U.S. federal income tax law (including, for example, banks and other financial institutions, dealers in securities, traders in securities that elect mark-to-market treatment, insurance companies, retirement plans, mutual funds, tax-exempt entities, entities or arrangements treated as partnerships for U.S. federal tax purposes, controlled foreign corporations, passive foreign investment companies, holders liable for the alternative minimum tax, certain former citizens or former long-term residents of the United States, expatriates or holders who have a “functional currency” other than the U.S. dollar, holders who hold our common stock as part of a hedge, straddle, constructive sale or conversion transaction, and holders who own or have owned (directly, indirectly or constructively) 5% or more of our common stock (by vote or value)). In addition, this discussion does not address U.S. federal tax laws other than those pertaining to the U.S. federal income tax, nor does it address the Medicare tax on certain net investment income or U.S. state, local or non-U.S. taxes. Accordingly, prospective investors should consult their own tax advisors regarding the U.S. federal, state, local, non-U.S. income and other tax considerations (including any U.S. federal estate or gift tax considerations) of owning and disposing of shares of our common stock.
This summary is based on current provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations promulgated thereunder, and administrative rulings and interpretations and court decisions in effect as of the date hereof, all of which are subject to change or differing interpretation at any time, possibly with retroactive effect.
For purposes of this discussion, the term “non-U.S. holder” means a beneficial owner of our common stock that is not any of the following:
a citizen or individual resident of the United States;
a corporation, or other entity taxable as a corporation for U.S. federal tax purposes, created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia;
an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source;
a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person for U.S. federal income tax purposes; or
an entity or arrangement treated as a partnership for U.S. federal tax purposes.
If an entity or arrangement treated as a partnership for U.S. federal tax purposes holds shares of our common stock, the tax treatment of a person treated as a partner generally will depend on the status of the partner and the activities of the partnership. Persons that for U.S. federal tax purposes are treated as a partner in a partnership holding shares of our common stock should consult their own tax advisors.
Prospective holders of our common stock should consult their own tax advisors regarding the tax consequences to them (including the application and effect of any state, local, non-U.S. income and other tax laws) relating to the ownership and disposition of our common stock.
Distributions on our common stock
In general, any distributions we make to a non-U.S. holder with respect to its shares of our common stock that constitute dividends for U.S. federal income tax purposes will be subject to U.S. withholding tax at a rate of 30% of the gross amount (or a reduced rate prescribed by an applicable income tax treaty), unless the dividends are effectively connected with a trade or business carried on by the non-U.S. holder within
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the United States (and, if an income tax treaty applies, are attributable to a permanent establishment of the non-U.S. holder within the United States). A distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Any distribution not constituting a dividend will be treated as first reducing the adjusted basis in the non-U.S. holder’s shares of our common stock and, to the extent such distribution exceeds the adjusted basis in the non-U.S. holder’s shares of our common stock, as gain from the sale or exchange of such shares.
Dividends effectively connected with a U.S. trade or business (and, if an income tax treaty applies, attributable to a U.S. permanent establishment) of a non-U.S. holder generally will not be subject to U.S. withholding tax if the non-U.S. holder complies with applicable certification and disclosure requirements. Instead, such dividends generally will be subject to U.S. federal income tax on a net income basis, in the same manner as if the non-U.S. holder were a resident of the United States. A non-U.S. holder that is a corporation may be subject to an additional “branch profits tax” at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on its “effectively connected earnings and profits,” subject to certain adjustments.
The foregoing discussion is subject to the discussion below under “— Foreign Account Tax Compliance Act.”
Gain on sale or other disposition of our common stock
In general, a non-U.S. holder will not be subject to U.S. federal income tax on any gain recognized upon the sale or other disposition of our common stock unless:
the gain is effectively connected with a trade or business carried on by the non-U.S. holder within the United States and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the non-U.S. holder;
the non-U.S. holder is an individual and is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are satisfied; or
we are or have been a U.S. real property holding corporation for U.S. federal income tax purposes at any time within the shorter of the five-year period ending on the date of the disposition and the non-U.S. holder’s holding period and certain other conditions are satisfied.
Gain that is effectively connected with the conduct of a trade or business in the United States generally will be subject to U.S. federal income tax, net of certain deductions, at regular U.S. federal income tax rates. If the non-U.S. holder is a foreign corporation, the branch profits tax described above also may apply to such effectively connected gain. An individual non-U.S. holder who is subject to U.S. federal income tax because the non-U.S. holder was present in the United States for 183 days or more during the year of sale or other disposition of our common stock will be subject to a flat 30% tax on the gain derived from such sale or other disposition, which may be offset by U.S. source capital losses.
Generally, a corporation is a “U.S. real property holding corporation” if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business (all as determined for U.S. federal income tax purposes). Although there can be no assurances in this regard, we believe that we are not currently a U.S. real property holding corporation.
Foreign Account Tax Compliance Act
Provisions commonly referred to as “FATCA” impose withholding (separate and apart from, but without duplication of, the withholding tax described above) at a rate of 30% on payments of dividends (including constructive dividends) on our common stock to certain foreign financial institutions (which is broadly defined for this purpose and in general includes investment vehicles) and certain non-financial foreign entities unless (i) in the case of a foreign financial institution, such institution enters into, and complies with, an agreement with the U.S. government to withhold on certain payments, and to collect and provide, on an annual basis, to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain
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account holders that are foreign entities with U.S. owners), (ii) in the case of a non-financial foreign entity, such entity certifies to the withholding agent that it does not have any substantial U.S. owners or provides the withholding agent with a certification identifying the direct and indirect substantial U.S. owners of the entity or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules or, if required under an intergovernmental agreement between the United States and an applicable foreign country, reports the information in clause (i) to its local tax authority, which will exchange such information with the U.S. authorities. If FATCA withholding is imposed, a beneficial owner that is not a foreign financial institution will generally be entitled to a refund of any amounts withheld by filing a U.S. federal income tax return (which may entail significant administrative burden). An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations, may modify these requirements. Accordingly, the entity through which our common stock is held will affect the determination of whether such withholding is required. Prospective investors should consult their own tax advisors regarding the possible implications of FATCA on their investment in our common stock.
THIS DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, TAX ADVICE. THE FOREGOING SUMMARY IS NOT A SUBSTITUTE FOR AN INDIVIDUAL ANALYSIS OF THE TAX CONSIDERATIONS APPLICABLE TO A PROSPECTIVE HOLDER OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, WHICH ANALYSIS MAY BE COMPLEX AND WILL DEPEND ON THE HOLDER’S SPECIFIC SITUATION. WE URGE PROSPECTIVE HOLDERS TO CONSULT A TAX ADVISOR REGARDING THE PARTICULAR FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSIDERATIONS APPLICABLE TO PROSPECTIVE HOLDERS OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.
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Underwriting
We and the selling stockholders are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC, Evercore Group, L.L.C. and William Blair & Company, L.L.C. are acting as book-running managers of the offering and as representatives of the underwriters. We and the selling stockholders have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we and the selling stockholders have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:
Name
Number of
Shares
J.P. Morgan Securities LLC 
 
Evercore Group, L.L.C.
 
William Blair & Company, L.L.C.
 
JMP Securities LLC
           
Total
           
The underwriters are committed to purchase all the shares of common stock offered by us and the selling stockholders if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $   per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $   per share from the initial public offering price. After the initial offering of the shares to the public, if all of the shares of common stock are not sold at the initial public offering price, the underwriters may change the offering price and the other selling terms. Sales of shares made outside of the United States may be made by affiliates of the underwriters.
The underwriters have an option to buy up to    additional shares of common stock and the selling stockholders to cover sales of shares by the underwriters that exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this option to purchase additional shares. If any shares are purchased with this option to purchase additional shares, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us and the selling stockholders per share of common stock. The underwriting fee is $   per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us and the selling stockholders assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.
 
Without
option to
purchase
additional
shares
exercise
With full
option to
purchase
additional
shares
exercise
Per Share
$           
$           
Total
$   
$   
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We and the selling stockholders estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $  . We have agreed to reimburse the underwriters for expenses relating to clearance of this offering with FINRA of up to $   .
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make internet distributions on the same basis as other allocations.
We have agreed that we, subject to certain exceptions, will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any shares of common stock or any such other securities (regardless of whether any of these transactions are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise), in each case without the prior written consent of J.P. Morgan Securities LLC for a period of 180 days after the date of this prospectus.
Our directors and executive officers, and substantially all of our stockholders have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, for a period of 180 days after the date of this prospectus, subject to certain exceptions, may not, without the prior written consent of J.P. Morgan Securities LLC, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including, without limitation, common stock or such other securities that may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the rules and regulations of the SEC and securities that may be issued upon exercise of a stock option or warrant), (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock.
Notwithstanding the foregoing, the terms of the lock-up agreements generally do not apply to or prohibit, among others, the items described below:
(A)
transfers pursuant to the terms of this offering;
(B)
transfers of shares of common stock:
(i)
as a bona fide gift or gifts,
(ii)
by will, testamentary document or intestate succession,
(iii)
to any trust, family limited partnership or other entity for the direct or indirect benefit of the lock-up party or the immediate family of the lock-up party (for purposes of the lock-up agreements, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin),
(iv)
to partners, members, stockholders, trust beneficiaries or other equity owners of the lock-up party (including any subsequent in-kind distributions to or by the lock-up party’s transferees),
(v)
if the lock-up party is a corporation, partnership, limited liability company, trust or other
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entity, to any direct or indirect affiliate (as defined in Rule 405 under the Securities Act of 1933) of such party or to any investment fund or other entity controlled or managed by such party or by the management company or investment adviser that controls or manages such party (or an affiliate of such management company or investment adviser),
(vi)
solely by operation of law, pursuant to a qualified domestic order or in connection with a divorce settlement, and
(vii)
pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction approved by the Company’s board of directors and made to all holders of the Company’s securities involving a Change of Control of the Company, provided that in the event that such tender offer, merger, consolidation or other such transaction is not completed, the common stock owned by the lock-up party shall remain subject to the lock-up restrictions, provided, further, that for purposes of this clause (vii), “Change of Control” shall mean the transfer (whether by tender offer, merger, consolidation, spin-off or other such transaction), in one transaction or a series of related transactions, to a person or group of affiliated persons (other than an Underwriter pursuant to this offering), of the Company’s voting securities if, after such transfer, such person or group of affiliated persons would hold more than 50% of the outstanding voting securities of the Company (or the surviving entity), and provided, further, that any common stock transferred in connection with the tender offer, merger, consolidation or other such transaction shall remain subject to the lock-up restrictions;
(C)
common stock acquired by the lock-up party in this offering or in open market transactions subsequent to the closing of this offering, provided that no filing under the Exchange Act or other public announcement shall be required or voluntarily made by the lock-up party regarding such acquisition of common stock;
(D)
the establishment of a written plan for trading securities pursuant to and in accordance with Rule 10b5-1(c) (a “Rule 10b5-1 Plan”) under the Exchange Act, provided that (i) such Rule 10b5-1 Plan does not provide for the transfer of common stock (and no sales of common stock pursuant to such Rule 10b5-1 Plan shall be made) during the Restricted Period and (ii) no filing under the Exchange Act, or other public announcement shall be required or voluntarily made by the Company regarding the establishment of such Rule 10b5-1 Plan during the lock-up period;
(E)
transfers of common stock to the Company (or the withholding of common stock by the Company) (i) as payment for the exercise price of any options granted in the ordinary course pursuant to any of the Company’s current or future stock option, equity incentive or benefit plans described in this prospectus or (ii) to satisfy any tax withholding obligations upon the exercise of any such option or the vesting of any restricted common stock or other equity awards granted under any such plan, with any common stock received as contemplated by any transaction described in this clause (E) remaining subject to the lock-up restrictions; provided that any shares of common stock received upon such exercise shall be subject to the restrictions set forth in the lock-up agreements; and provided, further, that any filing required under Section 16(a) of the Exchange Act shall clearly indicate in the footnotes thereto and the transaction codes that any such disposition was made in connection with a “cashless” exercise solely to the Company; and
(F)
any demands or requests for, exercise any right with respect to, or take any action in preparation of, the registration by the Company under the Securities Act of 1933 of the lock-up party’s shares of common stock, provided that no transfer of the lock-up party’s shares of common stock registered pursuant to the exercise of any such right and no registration statement shall be filed under the Securities Act of 1933 with respect to any of the lock-up party’s shares of common stock during the lock-up period.
provided that in the case of any transfer or distribution pursuant to clause (B) (other than in the case of a transfer or distribution described in clause (B)(vii)), each donee, distributee or transferee shall be subject to the lock-up restrictions; and provided, further, that in the case of any transfer or distribution pursuant to
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clause (B) (other than in the case of a transfer or distribution described in clause (B)(vii)), no filing by any party (donor, donee, transferor or transferee) under the Exchange Act or other public announcement shall be required or shall be made voluntarily in connection with such transfer or distribution (other than a filing on a Form 5 made after the expiration of the lock-up period).
We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
We have applied to list our common stock on the Nasdaq under the symbol “TIG.”
Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ option to purchase additional shares referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discounts and commissions received by them.
These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the Nasdaq, in the over-the-counter market or otherwise.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us, the selling stockholders and the representatives of the underwriters. In determining the initial public offering price, we, the selling stockholders and the representatives of the underwriters expect to consider a number of factors including:
the information set forth in this prospectus and otherwise available to the representatives;
our prospects and the history and prospects for the industry in which we compete;
an assessment of our management;
our prospects for future earnings;
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the general condition of the securities markets at the time of this offering;
the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and
other factors deemed relevant by the underwriters, the selling stockholders and us.
Neither we, the selling stockholders nor the underwriters can assure investors that an active trading market will develop for our shares of common stock, or that the shares will trade in the public market at or above the initial public offering price.
Selling restrictions
Other than in the United States, no action has been taken by us, the selling stockholders or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Notice to prospective investors in the European Economic Area and the United Kingdom
In relation to each Member State of the European Economic Area and the United Kingdom (each a “Relevant State”), no shares of common stock have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the shares of common stock that have been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that offers of shares of common stock may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:
(a)
to any legal entity which is a qualified investor as defined under the Prospectus Regulation;
(b)
to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the underwriters; or
(c)
in any other circumstances falling within Article 1(4) of the Prospectus Regulation,
provided that no such offer of shares of common stock shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation and each person who initially acquires any shares of common stock or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with each of the underwriters and Trean Insurance Group, Inc. that it is a “qualified investor” within the meaning of Article 2(e) of the Prospectus Regulation. In the case of any shares of common stock being offered to a financial intermediary as that term is used in the Prospectus Regulation, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares of common stock acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances that may give rise to an offer of any shares of common stock to the public other than their offer or resale in a Relevant State to qualified investors as so defined or in circumstances in which the prior consent of the underwriters has been obtained to each such proposed offer or resale.
For the purposes of this provision, the expression an “offer to the public” in relation to shares of common stock in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of common stock to be offered so as to enable an investor to decide to purchase or subscribe for any shares of common stock, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
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Notice to prospective investors in the United Kingdom
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Regulation) (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”) or otherwise in circumstances that have not resulted and will not result in an offer to the public of the shares of common stock in the United Kingdom within the meaning of the Financial Services and Markets Act 2000.
Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons.
Notice to prospective investors in Canada
The shares of common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares of common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Notice to prospective investors in Switzerland
The shares of common stock may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document does not constitute a prospectus within the meaning of, and has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares of common stock or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, Trean Insurance Group, Inc. or the shares of common stock have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares of common stock will not be supervised by, the Swiss Financial Market Supervisory Authority (“FINMA”), and the offer of shares of common stock has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares of common stock.
Notice to prospective investors in Japan
The shares of common stock have not been and will not be registered pursuant to Article 4, Paragraph 1 of the Financial Instruments and Exchange Act. Accordingly, none of the shares of common stock nor any interest therein may be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any “resident” of Japan (which term as used herein means any person resident in Japan, including any
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corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to or for the benefit of a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act and any other applicable laws, regulations and ministerial guidelines of Japan in effect at the relevant time.
Notice to prospective investors in Hong Kong
The shares of common stock have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) of Hong Kong and any rules made thereunder; or (b) in other circumstances that do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong) (the “CO”) or that do not constitute an offer to the public within the meaning of the CO. No advertisement, invitation or document relating to the shares of common stock has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, that is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares of common stock that are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made thereunder.
Notice to prospective investors in Singapore
Each representative has acknowledged that this prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each representative has represented and agreed that it has not offered or sold any shares of common stock or caused the shares of common stock to be made the subject of an invitation for subscription or purchase and will not offer or sell any shares of common stock or cause the shares of common stock to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares of common stock, whether directly or indirectly, to any person in Singapore other than:
(a)
to an institutional investor (as defined in Section 4A of the Securities and Futures Act (Chapter 289) of Singapore, as modified or amended from time to time (the “SFA”)) pursuant to Section 274 of the SFA;
(b)
to a relevant person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA; or
(c)
otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares of common stock are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a)
a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b)
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, securities or securities-based derivatives contracts (each term as defined in Section 2(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares of common stock pursuant to an offer made under Section 275 of the SFA except:
(i)
to an institutional investor or to a relevant person, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
(ii)
where no consideration is or will be given for the transfer;
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(iii)
where the transfer is by operation of law;
(iv)
as specified in Section 276(7) of the SFA; or
(v)
as specified in Regulation 37A of the Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018.
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Legal matters
Certain legal matters relating to our common stock and this offering will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell LLP, New York, New York.
Experts
The balance sheet of Trean Insurance Group, Inc. as of February 29, 2020 included in this prospectus has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such balance sheet is included in reliance on the report of such firm given upon their authority as experts in accounting and auditing.
The combined financial statements of BIC Holdings LLC and Trean Holdings LLC as of December 31, 2019 and 2018, and for each of the two years ended December 31, 2019, included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such combined financial statements are included in reliance on the report of such firm given upon their authority as experts in accounting and auditing.
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Change in auditor
On November 20, 2019, we engaged Deloitte & Touche LLP (“Deloitte”) as our independent registered public accounting firm for the years ended December 31, 2019 and December 31, 2018. As a result of the engagement of Deloitte, we dismissed RSM US LLP (“RSM”) as our independent auditor. Subsequent to Deloitte’s appointment, we engaged Deloitte to audit our combined financial statements as of and for the years ended December 31, 2019 and December 31, 2018, the latter of which had previously been audited by RSM.
During the audit of the year ended December 31, 2018, there were no disagreements with RSM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure that, if not resolved to RSM’s satisfaction, would have caused RSM to make reference to the subject matter of the disagreement in connection with its report. The report of RSM on the financial statements of BIC Holdings LLC and Trean Holdings LLC, along with their wholly owned subsidiaries, as of and for the year ended December 31, 2018 did not contain any adverse opinions or disclaimer of opinion and was not qualified as to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2019 and 2018, neither the Company, nor any person on its behalf, consulted Deloitte with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and no written report or oral advice was provided to the Company by Deloitte that Deloitte concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement, as that term is described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is described in Item 304(a)(1)(v) of Regulation S-K.
We requested that RSM provide us with a letter addressed to the SEC stating whether or not it agrees with the above disclosure. A copy of RSM’s letter, dated June 19, 2020, is attached as Exhibit 16.1 to the registration statement of which this prospectus is a part.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 under the Securities Act relating to this offering of our common stock. This prospectus does not contain all of the information contained in the registration statement. The rules and regulations of the SEC allow us to omit certain information from this prospectus that is included in the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the documents summarized but are not complete descriptions of all terms of these documents. If we filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms. The SEC maintains an internet website that contains reports and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov.
As a result of the offering, we will be required to file periodic reports and other information with the SEC. We also maintain a website at www.trean.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.
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Index to combined financial statements
 
Page
Trean Insurance Group, Inc.
 
Balance Sheets
 
 
 
BIC Holdings LLC and Trean Holdings LLC
 
Unaudited Interim Condensed Combined Financial Statements
 
F-5
F-6
F-7
F-8
F-9
 
 
Audited Combined Financial Statements
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Trean Insurance Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Trean Insurance Group, Inc. (the “Company”) as of February 29, 2020 and the related notes (collectively referred to as the “financial statement”). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of February 29, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

April 9, 2020

We have served as the Company’s auditor since 2020.
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Trean Insurance Group, Inc.
Balance Sheets
 
March 31, 2020
February 29, 2020
 
(unaudited)
 
Assets:
 
 
Current assets:
 
 
Cash
$        10
$        10
Total assets
$10
$10
 
 
 
Commitments and contingencies (Note 3)
$
$
 
 
 
Stockholders’ equity:
 
 
Stockholders’ equity
$
$
Common stock, par value $0.01 per share, 1,000 shares authorized, issued, and outstanding
$10
$10
Total stockholders’ equity
$10
$10
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Notes to Balance Sheets
Note 1. Business and Basis of Presentation
Trean Insurance Group, Inc. (the “Company”) was incorporated in the state of Delaware on January 16, 2020. The Company was formed for the purpose of completing an initial public offering of its common stock and related transactions in order to carry on the business of BIC Holdings LLC and Trean Holdings LLC as a publicly-traded entity.
The accompanying balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America. Statements of income, stockholders’ equity and cash flows have not been presented because the Company has not engaged in any business or other activities except in connection with its formation.
Note 2. Stockholders’ Equity
The Company is authorized to and has issued 1,000 shares of stock with the par value of $0.01 per share.
Note 3. Commitments and Contingencies
From time to time, the Company is subject to litigation related to its insurance business. Management does not believe that the Company is a party to any such pending litigation that would have a material adverse effect on its future operations.
Note 4. Subsequent Events
Events or transactions that occur after the balance sheet date are reviewed by the Company to determine if they are to be recognized and/or disclosed as appropriate. Subsequent events have been evaluated through April 9, 2020, which is the date the audited balance sheet was available to be issued.
For purposes of the unaudited balance sheet as of March 31, 2020, subsequent events have been evaluated through June 18, 2020, which is the date the unaudited balance sheet was available to be issued.
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BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Balance Sheets
(in thousands, except share data)
(unaudited)
 
March 31,
2020
December 31,
2019
Assets
 
 
Fixed maturities, at fair value (amortized cost of $340,380 and $329,640, respectively)
$347,497
$337,865
Preferred stock, at fair value (amortized cost of $332 and $337, respectively)
310
343
Common stock, at fair value (cost $1,554 and $492, respectively)
3,353
492
Equity method investments
11,487
12,173
Total investments
362,647
350,873
Cash and cash equivalents
70,656
74,268
Restricted cash
3,026
1,800
Accrued investment income
2,420
2,468
Premiums and other receivables
67,773
62,460
Related party receivables
21,871
22,221
Reinsurance recoverable
313,760
307,338
Prepaid reinsurance premiums
83,694
80,088
Deferred policy acquisition cost, net
3,103
2,115
Property and equipment, net
8,238
7,937
Right of use asset
5,721
Deferred tax asset
1,280
1,367
Goodwill
2,822
2,822
Other assets
7,572
3,277
Total assets
$954,583
$919,034
 
 
 
Liabilities
 
 
Unpaid loss and loss adjustment expenses
$418,757
$406,716
Unearned premiums
111,162
103,789
Funds held under reinsurance agreements
165,018
163,445
Reinsurance premiums payable
48,099
53,620
Accounts payable and accrued expenses
18,360
14,995
Lease liability
5,926
Income taxes payable
3,259
714
Long-term debt
28,721
29,040
Total liabilities
799,302
772,319
 
 
 
Commitments and contingencies
 
 
Redeemable preferred stock (1,000,000 authorized; 51 outstanding)
5,100
5,100
 
 
 
Members' equity
 
 
Members' equity
78,458
78,438
Additional paid-in capital
17,995
17,995
Retained earnings
49,967
40,361
Accumulated other comprehensive income
3,761
4,821
Total members' equity
150,181
141,615
Total liabilities and members' equity
$954,583
$919,034
See accompanying notes to the condensed combined financial statements.
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BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Operations
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2020
2019
Revenues
 
 
Gross written premiums
$107,859
$101,534
Increase in gross unearned premiums
(7,373)
(10,952)
Gross earned premiums
100,486
90,582
Ceded earned premiums
(78,027)
(70,958)
Net earned premiums
22,459
19,624
Net investment income
3,272
1,287
Net realized capital gains
3,234
612
Other revenue
4,392
3,595
Total revenue
33,357
25,118
 
 
 
Expenses
 
 
Losses and loss adjustment expenses
12,934
11,456
General and administrative expenses
8,160
3,969
Interest expense
461
624
Total expenses
21,555
16,049
 
 
 
Other income
14
93
Income before taxes
11,816
9,162
 
 
 
Income tax expense
2,912
1,319
Equity earnings in affiliates, net of tax
702
608
Net income
$9,606
$8,451
See accompanying notes to the condensed combined financial statements.
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BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Comprehensive Income
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2020
2019
Net income
$9,606
$8,451
 
 
 
Other comprehensive income (loss), net of tax:
 
 
Unrealized investment gains (losses):
 
 
Unrealized investment gains (losses) arising during the period
(1,223)
4,971
Income tax expense (benefit)
(256)
1,044
Unrealized investment gains (losses), net of tax
(967)
3,927
 
 
 
Less reclassification adjustments to:
 
 
Net realized investment gains (losses) included in net realized capital gains (losses)
119
(22)
Income tax expense (benefit)
26
(5)
Total reclassifications included in net income (loss), net of tax
93
(17)
 
 
 
Other comprehensive income (loss)
(1,060)
3,944
 
 
 
Total comprehensive income
$8,546
$12,395
See accompanying notes to the condensed combined financial statements.
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BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Members’ Equity and Redeemable Preferred Stock
For the Three Months Ended March 31, 2020 and 2019
(in thousands, except unit data)
(unaudited)
 
 
 
 
 
Members' Equity
 
 
Redeemable
Preferred Stock
Preferred Stock
Class A - Non Voting
Class B - Voting
Class B - Non Voting
Class C - Non Voting
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Members'
Equity
 
Shares
Amount
Shares
Amount
Units
Amount
Units
Amount
Units
Amount
Units
Amount
Balance at December 31, 2019
51
$5,100
$—
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
196,588
$196
$17,995
$4,821
$40,361
$141,615
Issuance of Class C units
19,659
20
20
Other comprehensive loss
(1,060)
(1,060)
Net income
9,606
9,606
Balance at March 31, 2020
51
$5,100
$—
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
216,247
$216
$17,995
$3,761
$49,967
$150,181
 
 
 
 
 
Members' Equity
 
 
Redeemable
Preferred Stock
Preferred Stock
Class A - Non Voting
Class B - Voting
Class B - Non Voting
Class C - Non Voting
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Members'
Equity
 
Shares
Amount
Shares
Amount
Units
Amount
Units
Amount
Units
Amount
Units
Amount
Balance at December 31, 2018
60
$6,000
10
$1,000
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
117,953
$118
$17,995
$(2,003)
$9,779
$105,131
Cumulative effect of adopting ASC Topic 606
695
695
Issuance of Class C units
19,659
19
19
Dividends paid on Series A preferred stock
(9)
(9)
Other comprehensive income
3,944
3,944
Net income
8,451
8,451
Balance at March 31, 2019
60
$6,000
10
$1,000
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
137,612
$137
$17,995
$1,941
$18,916
$118,231
See accompanying notes to the condensed combined financial statements.
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BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2020
2019
Operating activities
 
 
Net income
$9,606
$8,451
Adjustments to reconcile net income to net cash from operating activities:
 
 
Depreciation and amortization
208
182
Net capital gains on investments
(5,018)
(106)
Deferred offering costs
(432)
Gain on bargain purchase of subsidiary
(634)
Bond amortization and accretion
399
433
Issuance of member units as compensation
20
19
Equity earnings in affiliates, net of tax
(702)
(608)
Distributions from equity method investments
1,389
518
Deferred income taxes
367
(162)
Deferred financing costs
25
25
Changes in operating assets and liabilities:
 
 
Accrued investment income
48
(84)
Premiums and other receivables
(4,962)
(10,756)
Reinsurance recoverable on paid and unpaid losses
(6,422)
(13,758)
Prepaid reinsurance premiums
(3,606)
(9,490)
Right of use asset
(5,721)
Other assets
(2,791)
(1,133)
Unpaid loss and loss adjustment expenses
12,042
17,518
Unearned premiums
7,373
10,365
Funds held under reinsurance agreements
1,358
2,833
Reinsurance premiums payable
(5,522)
6,616
Accounts payable and accrued expenses
1,299
(2,554)
Lease liability
5,926
Income taxes payable
2,544
1,657
Net cash provided by operating activities
7,428
9,332
Investing activities
 
 
Payments for capital expenditures
(504)
(245)
Proceeds from sale of equity method investment
3,000
Return of capital on equity method investment
115
Purchase of investments, available for sale
(24,323)
(23,630)
Proceeds from investments sold, matured or repaid
12,242
17,891
Acquisition of subsidiary, net of cash received
(5,496)
Net cash used in investing activities
(9,470)
(11,480)
Financing activities
 
 
Principal payments on long-term debt
(344)
(344)
Dividends paid on preferred stock
(28)
Net cash used in financing activities
(344)
(372)
Net decrease in cash, cash equivalents and restricted cash
(2,386)
(2,520)
Cash, cash equivalents and restricted cash - beginning of period
76,068
55,962
Cash, cash equivalents and restricted cash - end of period
$73,682
$53,442
See accompanying notes to the condensed combined financial statements.
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BIC Holdings LLC - Trean Holdings LLC
Condensed Combined Statements of Cash Flows
(in thousands)
(unaudited)
Disaggregation of cash and restricted cash:
As of March 31,
2020
As of March 31,
2019
Cash and cash equivalents
$70,656
$51,933
Restricted cash and restricted cash equivalents
3,026
1,509
Total cash, cash equivalents and restricted cash
$73,682
$53,442
 
Three Months Ended March 31,
Supplemental disclosure of cash flow information:
2020
2019
Cash paid during the year for:
 
 
Interest
$436
$364
Non-cash investing and financing activity:
 
 
Issuance of Class C member units as compensation
20
19
Right-of-use assets obtained in exchange for new operating lease liabilities
6,261
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
424
See accompanying notes to the condensed combined financial statements.
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Notes to the Condensed Combined Financial Statements
Note 1. Business and Basis of Presentation
The condensed combined financial statements include the accounts, after elimination of intercompany accounts and transactions, of BIC Holdings LLC (BIC), a property and casualty insurance holding company, and Trean Holdings LLC (Trean), an insurance services company, along with their wholly owned subsidiaries, collectively the “Company”. BIC and Trean are owned by the same members. All dollar amounts are shown in thousands, except unit and per unit amounts.
The Company is an established and growing company providing products and services to the specialty insurance market. Historically, the Company has focused on specialty casualty markets that are believed to be under served and where the Company’s expertise allows the Company to achieve higher rates, such as niche workers’ compensation markets and small- to medium-sized specialty casualty insurance programs. The Company underwrites specialty-casualty insurance products both through programs where the Company partners with other organizations (Program Partners), and also through the Company’s own Managing-General Agencies. The Company also provides Program Partners with a variety of services, including issuing carrier services, claims administration, and reinsurance brokerage from which the Company generates fee-based revenues.
BIC’s wholly owned subsidiary is 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, and American Liberty Insurance Company (ALIC), a property and casualty insurance company domiciled in the state of Utah.
Trean’s wholly owned subsidiaries are Benchmark Administrators LLC (BIC Admin), a claims third-party administrator conducting business for Benchmark mainly in the state of California, Trean Compstar Holdings, LLC, a limited liability company created for the purchase of an interest in Compstar Insurance Services LLC, a California-based general agent, and 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; S&C Claims Services, Inc. (S&C), a claims third-party administrator, mainly in the western United States; and Westcap Insurance Services, LLC (Westcap) a managing general agent based in California.
The accompanying condensed combined financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q under the Securities Exchange Act of 1934. Accordingly, they do not contain all of the information included in the Company’s annual combined financial statements and notes. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s condensed combined financial position and results of operations for the periods presented have been included. Although management believes the disclosures and information presented are adequate, these interim condensed combined financial statements should be read in conjunction with the Company’s most recent audited combined financial statements and notes thereto for the year ended December 31, 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Use of estimates
While preparing the condensed combined financial statements, the Company has made certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed combined 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 recoveries, investments and goodwill. Except for the captions on the condensed combined balance sheets and condensed combined statements of comprehensive income, generally, the term loss(es) is used to collectively refer to both loss and LAE.
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Accounting pronouncements
Recently adopted policies
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). This update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This standard is effective for the period between March 12, 2020 and December 31, 2022. The adoption of this standard did not have a material impact on the condensed combined financial statements.
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 disclosure requirements on fair value measurements in Topic 820 by changing 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 condensed combined financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of lease payments. Management adopted this standard effective January 1, 2020 under the modified retrospective approach. Adoption of this standard resulted in the Company recognizing initial right-of-use assets of $5,946 and initial lease liabilities of $5,946 and did not result in a cumulative effect adjustment on retained earnings. The adoption of this standard did not have a material impact on the condensed combined statement of operations or condensed combined statement of cash flows.
Pending policies
The Company will be issuing its initial public offering and filing as an emerging growth company. As such, the Company has elected to adopt pending accounting policies under the dates required for private companies. Therefore, the dates included within this section reflect the effective dates for the adoption of new accounting policies required by private companies.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (ASU 2020-03). This update represents changes to clarify and improve the codification to allow for easier application by eliminating inconsistencies and providing clarification. Certain issues addressed in this update are effective for annual periods beginning after December 15, 2020 and others are effective for annual periods beginning after December 15, 2022. The Company will adopt each standard upon their respective effective dates of January 1, 2021 and January 1, 2023. Adoption of this standard is not expected to have a material impact on the condensed combined financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323 and Topic 815 (ASU 2020-01). This update addresses the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting. Further, the update addresses scope considerations for forward contracts and purchased options on certain securities. ASU 2020-01 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter. The Company will adopt this standard effective January 1, 2022. Adoption of this standard is not expected to have a material impact on the condensed combined financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment. ASU 2017-04 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter, with early adoption permitted. The Company will adopt this standard effective January 1, 2022. Adoption of this standard is not expected to have a material impact on the condensed combined financial statements and related disclosures.
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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update requires financial assets measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Additionally, credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which the fair value is below the amortized cost. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this standard effective January 1, 2023. The Company is currently evaluating the impact of this standard on the condensed combined financial statements.
Note 2. Acquisitions
American Liberty Insurance Company
Effective March 31, 2019, Benchmark Holdings Company purchased the remaining 25% of outstanding voting shares in American Liberty Insurance Company for $1,155. The purchase price was determined based on the statutory surplus of American Liberty Insurance Company.
First Choice Casualty Insurance Company
Effective February 19, 2019, Benchmark Insurance Company 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 condensed combined statement 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.
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 (in thousands):
Fair value of total consideration transferred
$5,314
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Cash
973
Investments
4,252
Accrued investment income
40
Premiums and other receivables
1,571
Deferred tax asset
242
Other assets
10
Unpaid loss and loss adjustment expenses
(6,426)
Unearned premiums
(1,003)
Funds held under reinsurance agreements
7,980
Reinsurance premiums payable
(1,037)
Accounts payable and accrued expenses
(316)
Income taxes payable
(338)
Net assets acquired
5,948
Gain on bargain purchase
$634
Note 3. Fair Value Measurements
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.
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Level 2: Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
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.
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.
 
March 31, 2020
(in thousands)
Level 1
Level 2
Level 3
Total
Fixed maturities:
 
 
 
 
U.S. government and government securities
$15,707
$175
$
$15,882
Foreign governments
306
306
States, territories and possessions
5,733
5,733
Political subdivisions of states territories and possessions
25,726
25,726
Special revenue and special assessment obligations
67,326
67,326
Industrial and public utilities
118,012
118,012
Commercial mortgage-backed securities
16,334
16,334
Residential mortgage-backed securities
57,351
57,351
Other loan-backed securities
40,474
40,474
Hybrid securities
353
353
Total fixed maturities
15,707
331,790
347,497
Equity securities:
 
 
 
 
Preferred stock
310
310
Common stock
777
576
2,000
3,353
Total equity securities
777
886
2,000
3,663
Total investments
$16,484
$332,676
$2,000
$351,160
 
 
 
 
 
Funds held under reinsurance agreements
165,018
165,018
 
 
 
 
 
Long-term debt:
 
 
 
 
Junior subordinated debt
7,732
7,732
Secured credit facility
21,293
21,293
Total long-term debt
$
$29,025
$
$29,025
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December 31, 2019
(in thousands)
Level 1
Level 2
Level 3
Total
Fixed maturities:
 
 
 
 
U.S. government and government securities
$16,129
$
$—
$16,129
Foreign governments
302
302
States, territories and possessions
4,923
4,923
Political subdivisions of states, territories and possessions
25,104
25,104
Special revenue and special assessment obligations
61,405
61,405
Industrial and public utilities
123,207
123,207
Commercial mortgage-backed securities
16,312
16,312
Residential mortgage-backed securities
54,109
54,109
Other loan-backed securities
36,011
36,011
Hybrid securities
363
363
Total fixed maturities
16,129
321,736
337,865
Equity securities:
 
 
 
 
Preferred stock
343
343
Common stock
492
492
Total equity securities
835
835
Total investments
$16,129
$322,571
$—
$338,700
 
 
 
 
 
Funds held under reinsurance agreements
163,445
163,445
 
 
 
 
 
Long-term debt:
 
 
 
 
Junior subordinated debt
7,732
7,732
Secured credit facility
21,637
21,637
Total long-term debt
$
$29,369
$—
$29,369
Bonds and preferred stocks: The Company uses a variety of sources 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 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.
Funds held under reinsurance agreements: The Company holds certain investments as collateral under reinsurance contracts and values these investments consistent with its other investments using third-party pricing services. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent 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.
Long-term debt: The Company holds long-term debt related to multiple credit agreements. The Company has determined that the remaining balance of the debt reflects its fair value as this would represent the total amount to repay the debt.
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Note 4. Investments
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the investments in securities classified as available for sale are as follows:
 
March 31, 2020
(in thousands)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Fixed maturities:
 
 
 
 
U.S. government and government securities
$15,374
$508
$
$15,882
Foreign governments
299
7
306
States, territories and possessions
5,612
123
(2)
5,733
Political subdivisions of states, territories and possessions
24,992
757
(23)
25,726
Special revenue and special assessment obligations
64,694
2,672
(40)
67,326
Industrial and public utilities
116,362
2,417
(767)
118,012
Commercial mortgage-backed securities
15,547
878
(91)
16,334
Residential mortgage-backed securities
55,492
1,955
(96)
57,351
Other loan-backed securities
41,651
142
(1,319)
40,474
Hybrid securities
357
1
(5)
353
Total fixed maturities available for sale
$340,380
$9,460
$(2,343)
$347,497
 
December 31, 2019
(in thousands)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Fixed maturities:
 
 
 
 
U.S. government and government securities
$15,965
$167
$(3)
$16,129
Foreign governments
299
3
302
States, territories and possessions
4,789
134
4,923
Political subdivisions of states, territories and possessions
24,444
670
(10)
25,104
Special revenue and special assessment obligations
59,149
2,298
(42)
61,405
Industrial and public utilities
119,735
3,490
(18)
123,207
Commercial mortgage-backed securities
15,586
757
(31)
16,312
Residential mortgage-backed securities
53,467
679
(37)
54,109
Other loan-backed securities
35,849
281
(119)
36,011
Hybrid securities
357
6
363
Total fixed maturities available for sale
$329,640
$8,485
$(260)
$337,865
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The following table illustrates the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
March 31, 2020
 
Less Than 12 Months
12 Months or More
Total
(in thousands)
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fixed maturities:
 
 
 
 
 
 
U.S. government and government securities
$275
$
$
$
$275
$
Foreign governments
States, territories and possessions
1,346
(2)
1,346
(2)
Political subdivisions of states, territories and possessions
1,019
(23)
1,019
(23)
Special revenue and special assessment obligations
3,666
(40)
3,666
(40)
Industrial and public utilities
26,650
(767)
26,650
(767)
Commercial mortgage-backed securities
1,966
(91)
1,966
(91)
Residential mortgage-backed securities
862
(65)
502
(31)
1,364
(96)
Other loan-backed securities
19,746
(522)
10,011
(797)
29,757
(1,319)
Hybrid securities
102
(5)
102
(5)
Total bonds
$55,632
$(1,515)
$10,513
$(828)
$66,145
$(2,343)
 
December 31, 2019
 
Less Than 12 Months
12 Months or More
Total
(in thousands)
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fixed maturities:
 
 
 
 
 
 
U.S. government and government securities
$293
$(2)
$1,349
$(1)
$1,642
$(3)
Foreign governments
States, territories and possessions
Political subdivisions of states, territories and possessions
1,500
(9)
690
(1)
2,190
(10)
Special revenue and special assessment obligations
3,206
(42)
181
3,387
(42)
Industrial and public utilities
5,939
(16)
1,094
(2)
7,033
(18)
Commercial mortgage-backed securities
2,138
(30)
129
(1)
2,267
(31)
Residential mortgage-backed securities
6,936
(13)
1,917
(24)
8,853
(37)
Other loan-backed securities
2,189
(11)
13,885
(108)
16,074
(119)
Hybrid securities
Total bonds
$22,201
$(123)
$19,245
$(137)
$41,446
$(260)
The unrealized losses on the Company’s available for sale securities as of March 31, 2020 and December 31, 2019 were primarily caused by widening in corporate and tax-exempt spreads, rather than credit-related problems.
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The amortized cost and estimated fair value of fixed maturities as of March 31, 2020, by contractual maturity, are as follows:
(in thousands)
Cost or
Amortized
Cost
Fair Value
Available for sale:
 
 
Due in one year or less
$19,827
$19,897
Due after one year but before five years
115,089
116,766
Due after five years but before ten years
53,322
55,663
Due after ten years
39,452
41,012
Commercial mortgage-backed securities
15,547
16,334
Residential mortgage-backed securities
55,492
57,351
Other loan-backed securities
41,651
40,474
Total
$340,380
$347,497
Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Realized gains and losses on investments included in the condensed combined statements of operations for the three months ended March 31, 2020 and 2019 are as follows:
 
Three Months
Ended March 31,
(in thousands)
2020
2019
Fixed maturities:
 
 
Gains
$119
$1
Losses
(23)
Total fixed maturities
119
(22)
Equity securities:
 
 
Equity method investments:
 
 
Gains
3,115
Total equity securities
3,115
Total net investment realized gains (losses)
$3,234
$(22)
Net investment income consists of the following for the three months ended March 31, 2020 and 2019:
 
Three Months
Ended March 31,
(in thousands)
2020
2019
Fixed maturities
$1,472
$1,269
Preferred stock
(14)
(4)
Common stock
1,799
Interest earned on cash and short-term investments
15
22
Net investment income
$3,272
$1,287
Note 5. Equity Method Investments
The Company has investments in Compstar Holding Company LLC (Compstar) and Trean Intermediaries (TRI). Equity earnings and losses are reported in equity earnings (losses) in affiliates, net of tax on the condensed combined statements of operations.
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The Company owns 45% of Compstar which had a carrying value of approximately $11,255 and $11,831 as of March 31, 2020 and December 31, 2019, respectively. The Company recorded earnings for the three months ended March 31, 2020 and 2019 of approximately $702 and $442, respectively. Distributions received from Compstar for the three months ended March 31, 2020 and 2019 were approximately $1,279 and $203, respectively.
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 inability to have 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 on the condensed combined 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 condensed combined statement of operations. The carrying value of TRI as of December 31, 2019 was approximately $110. The Company received distributions totaling $225 for the three months ended March 31, 2020. The Company recorded earnings of $166 and received distributions of $315 for the three months ended March 31, 2019.
Note 6. Debt
Long-term debt consists of the following:
(in thousands)
March 31, 2020
December 31, 2019
Junior subordinated debt
$7,732
$7,732
Secured credit facility
21,293
21,637
Long-term debt
29,025
29,369
Less: unamortized deferred financing costs
(304)
(329)
Net long-term debt
$28,721
$29,040
Junior Subordinated Debt
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. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of Trean’s Junior Subordinated Debt due 2036 (the Debt). The Debt represents the sole assets of the Trust. The Debt matures on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of LIBOR (1.83% and 1.99% as of March 31, 2020 and December 31, 2019, respectively) plus 3.50% is in effect. The interest rate totaled 5.33% and 5.49% as of March 31, 2020 and December 31, 2019, respectively. There are optional dates for redemption of the Debt, at the option of the Company, on any January 7, April 7, July 7, or October 7 following July 7, 2011. There are no funding requirements for Trean to the Trust except for the necessary quarterly interest payments. Trean Corp is the guarantor of the Debt.
The preferred capital securities issued by the Trust in turn pay quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011 and thereafter at a variable rate per annum, reset quarterly, equal to LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debt on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by the Company.
The terms of this agreement require the Company to maintain certain general and financial covenants and ratios. The Company was in compliance with all covenants and ratios as of March 31, 2020 and December 31, 2019.
Secured Credit Facility
In April 2018, Trean Corp entered into a credit agreement with a bank which includes a term loan facility totaling $27,500 and a revolving credit facility of $3,000. Borrowings are secured by substantially all of the assets of Trean and its subsidiaries. The loan has a variable interest rate of LIBOR plus 3.00%, which
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was 6.44% and 6.33% as of March 31, 2020 and December 31, 2019, respectively. The outstanding principal balance of the loan is to be repaid in quarterly installments which escalate from approximately $344 to $859 until April 2023. All shares of Trean and its subsidiaries have been pledged as guaranteed collateral.
The terms of this agreement require the Company to maintain certain financial covenants and ratios. The Company was in compliance with all covenants and ratios as of March 31, 2020 and December 31, 2019.
Note 7. Revenue from Contracts with Customers
Revenue from contracts with customers was $4,392 and $3,595 for the three months ended March 31, 2020 and 2019, respectively.
The following table presents the revenues recognized from contracts with customers included in the condensed combined statements of operations.
 
Three Months Ended March 31,
(in thousands)
2020
2019
Brokerage
$3,693
$2,703
Managing general agent fees
154
340
Third-party administrator fees
384
414
Consulting fees
161
138
Total revenue from contracts with customers
$4,392
$3,595
The Company did not have any contract liabilities as of March 31, 2020 or December 31, 2019. The following table provides information related to the contract assets from contracts with customers. Contract assets are included within other assets on the condensed combined balance sheets.
(in thousands)
March 31, 2020
December 31, 2019
Contract assets
$3,049
$1,103
Note 8. Income Taxes
Income tax expense for interim periods is measured using an estimated effective income tax rate for the annual period. The Company’s effective tax rate was 24.6% for the three months ended March 31, 2020. The effective tax rate differed from the statutory rate of 21% primarily due to the impact of state taxes and temporary differences associated with the gains recorded on the sale and subsequent re-measurement of the Company’s TRI investment shares in the quarter ended March 31, 2020.
The Company’s effective tax rate was 14.4% for three months ended March 31, 2019. The effective tax rate differed from the statutory rate of 21% primarily due to book and tax basis differences resulting from the acquisition of FCCIC and deferred tax benefits related to the tax impact of deferred acquisition costs.
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Note 9. Liability for Unpaid Losses and Loss Adjustment Expense
The following table represents a reconciliation of changes in the liability for unpaid losses and LAE.
 
Three Months Ended March 31,
(in thousands)
2020
2019
Unpaid losses and LAE reserves at beginning of period
$406,716
$340,415
Less losses ceded through reinsurance
(304,005)
(257,421)
Net unpaid losses and LAE at beginning of period
102,711
82,994
Acquisition of First Choice Casualty Insurance Company
6,366
Incurred losses and LAE related to:
 
 
Current period
14,169
12,929
Prior period
(1,235)
(1,473)
Total incurred losses and LAE
12,934
11,456
Paid losses and LAE, net of reinsurance, related to:
 
 
Current period
1,198
1,098
Prior period
7,795
6,363
Total paid losses and LAE
8,993
7,461
Net unpaid losses and LAE at end of period
106,652
93,355
Plus losses ceded through reinsurance
312,105
271,005
Unpaid losses and LAE reserves at end of period
$418,757
$364,360
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and loss adjustment expenses decreased by approximately $1,235 and $1,473 for the three months ended March 31, 2020 and 2019, respectively, primarily attributable to the development in the Company’s workers’ compensation book of business.
Note 10. Reinsurance
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.
A summary of the impact of ceded reinsurance on premiums written and premiums earned is as follows:
 
Three Months Ended March 31,
 
2020
2019
(in thousands)
Gross
Assumed
Ceded
Net
Gross
Assumed
Ceded
Net
Written premiums
$105,977
$1,882
$(81,632)
$26,227
$99,358
$2,176
$(80,449)
$21,085
Earned premiums
98,543
1,943
(78,027)
22,459
88,553
2,029
(70,958)
19,624
Note 11. Leases
Adoption of Leases, Topic 842
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 condensed combined statements of operations and there was no adjustment to its retained earnings opening balance
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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 63 months, some of which have options to extend the lease for up to 5 years. As of March 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.
Total lease expense for the three months ended March 31, 2020 was $579, inclusive of $120 in variable lease expense. The Company also sublets some of its leased office space and recorded $12 of sublease income for the three months ended March 31, 2020, which is included in other income on the condensed combined statement of operations. Total rent expense was $348 and sublease income was $90 for the three months ended March 31, 2019, which were recorded prior to the adoption of ASU 2016-02.
Supplemental balance sheet information, the weighted average remaining lease term and weighted average discount rate related to leases were as follows:
(dollars in thousands)
March 31, 2020
Right of use asset
$5,721
Lease liability
$5,926
Weighted average remaining lease term
3.91 years
Weighted average discount rate
6.51%
Future maturities of lease liabilities as of March 31, 2020 are as follows:
(in thousands)
Operating Leases
2020
$1,333
2021
1,724
2022
1,689
2023
1,217
2024
670
Thereafter
86
Total lease payments
6,719
Less: imputed interest
(793)
Total lease liabilities
$5,926
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The Company had the following minimum annual commitments for payment of leases as of December 31, 2019:
(in thousands)
Rent Expense
2020
$1,718
2021
1,614
2022
1,594
2023
1,191
2024
669
Thereafter
46
Total lease payments
$6,832
Note 12. Equity
Members’ Equity
The Company is registered with the state of Delaware as a Limited Liability Company (LLC). Any debts, expenses, obligations and liabilities of the Company are solely the responsibility of the Company. Any member of the LLC does not have any liability for the obligations or liabilities of the Company solely by reason of being a member or acting as a member of the Company.
The Company has 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.
2)
Class B Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class A Units, on a pro rata basis prior to distributions made to other classes of ownership units. Class B maintains both voting and non-voting units. Each Class B Voting Unit is entitled to one vote per Class B Voting Unit on each matter to which the members are entitled to vote. Class B Non-Voting Units maintain all rights, preferences and privileges allowed to Class B Voting Units with the exception of voting rights.
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.
Redeemable Preferred Stock
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 percent of the original cost per share. In the event of liquidation, dissolution, or winding up of the affairs of Trean, liquidation distributions are made to preferred stockholders before common stockholders. 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 stockholders before common stockholders. Series B contains no conversion features. The liquidation preference and redemptive value of Series B is equivalent to its carrying value as of March 31, 2020 and December 31, 2019. The Company classified the shares of Series B within temporary equity on the condensed combined balance sheets as of March 31, 2020 and December 31, 2019, due to the liquidation rights associated with the termination of the shareholder customer agreement.
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The Company is required to redeem all shares of outstanding Series A or Series B if any of the following events occur:
1.
Upon demand by a majority of the shareholders having voting rights in the Company
2.
Upon termination of the underlying stock purchase agreement between the Series A holders and Trean (only applicable to Series A shares)
3.
Any refinancing, recapitalization, sale of assets or stock by Trean Corp or Benchmark Holding Company that results in a realization of gain by the shareholders, to the extent the same is distributed to shareholders, whether in a single or a series of distributions (only applicable to Series A shares)
4.
Change in the majority control of the Company (only applicable to Series B shares)
5.
The termination of the shareholder customer agreement (only applicable to Series B shares)
6.
A qualified initial public offering of Trean Corp or Benchmark Holding Company
There were no dividends paid to Series B holders for the three months ended March 31, 2020. The cumulative dividends earned by Series A holders totaled approximately $9 for the three months ended March 31, 2019. The cumulative dividends consist of the following (in thousands, except share and per share amounts):
 
Three Months Ended March 31, 2019
 
Total
Dividend
Dividend
per Share
Weighted
Average Shares
Dividends on preferred shares - Series A
$9
$878.59
10.00
Note 13. Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities:
 
Three Months Ended March 31,
(in thousands)
2020
2019
Balance at beginning of period
$4,821
$(2,003)
Other comprehensive income (loss), net of tax:
 
 
Unrealized investment gains (losses):
 
 
Unrealized investment gains (losses) arising during the period
(1,223)
4,971
Income tax expense (benefit)
(256)
1,044
Unrealized investment gains (losses), net of tax
(967)
3,927
Less: reclassification adjustments to:
 
 
Net realized investment gains (losses) included in net realized capital gains (losses)
119
(22)
Income tax expense (benefit)
26
(5)
Total reclassifications included in net income, net of tax
93
(17)
Other comprehensive income (loss)
(1,060)
3,944
Balance at end of period
$3,761
$1,941
Note 14. Stock-Based Compensation
On June 15, 2017, the Company entered into a Management Incentive Unit Agreement with an individual, who is a member of the Board of Managers of the Company, to issue Class C shares as partial compensation for future services to the Company. The shares issued under this agreement are subject to terms in the agreements between the Company and the recipient. The Company had approximately $177 and $197 of unrecognized stock compensation expense as of March 31, 2020 and December 31, 2019,
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respectively, related to non-vested stock-based compensation granted, that the Company expects to recognize over the next two years. The Company recognized approximately $20 and $19 of stock-based compensation expense for the three months ended March 31, 2020 and 2019, respectively.
Note 15. Transactions with Related Parties
The Company owed Altaris Capital Partners, a private equity firm, approximately $83 which is included within accounts payable and accrued expenses on the condensed combined balance sheet as of December 31, 2019.
The Company was owed amounts from TRI of approximately $14 as of December 31, 2019, which is included in related party receivables on the December 31, 2019 condensed combined balance sheet. The Company recorded $50 of revenue for consulting services provided to TRI for the three months ended March 31, 2020 and 2019, which is included in other revenue on the condensed combined statements of operations.
The Company owns a 45% interest in Compstar, a program manager which handles the underwriting, premium collection and servicing of insurance policies for the Company. The Company recorded $46,282 and $34,023 of gross earned premiums resulting in gross commissions of $9,972 and $7,363 due to Compstar for the three months ended March 31, 2020 and 2019, respectively. All receivables are stated net of the commissions due under the Program Manager Agreement and totaled $21,871 and $22,207 as of March 31, 2020 and December 31, 2019, respectively, which is recorded in related party receivables on the condensed combined balance sheets. The Company’s ownership interest, and right to receive any distributions, is listed as collateral on debt taken out by Compstar.
Note 16. Subsequent Events
Events or transactions that occur after the balance sheet date, but before the condensed combined financial statements are complete, are reviewed by the Company to determine if they are to be recognized and/or disclosed as appropriate.
On April 1, 2020, Trean Corporation purchased LCTA Risk Services, Inc., a managing general agency based in Louisiana, for a purchase price of $1,400.
The ongoing global COVID-19 pandemic and response thereto has significantly impacted financial markets, businesses, households and communities and has caused a contraction in business activity and volatility in financial markets.
The Company took several actions to protect the health of the public and its employees and to comply with directives and advice of governmental authorities, including restricting business travel and transitioning from an office-based company to primarily a remote working culture. As state, city and county guidelines progress, the Company has implemented new health and safety in-office procedures to prepare for transitioning its workforce back to working in offices on a limited basis. To date, the effects of the COVID-19 pandemic have not had a significant impact on the Company’s financial position, results of operations or cash flows. However, continuation of the COVID-19 pandemic could cause additional reduction in business activity and financial market instability. The extent of the impact or continuation of the COVID-19 pandemic on the Company’s future operational and financial performance will depend on several factors, including the duration of the pandemic and actions taken by government and health officials in response, all of which are uncertain and cannot be predicted. The Company will continue to monitor the impact of the ongoing continuation of the COVID-19 pandemic on its business, including how it will impact premium revenue, loss experience and loss expense, liquidity, regulatory capital and surplus, and operations.
On May 26, 2020, the Company entered into a new 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 at the time of closing. In addition, and in conjunction with, the execution of the Amended and Restated Credit Agreement, the Company made dividend distribution payments to Trean members totaling $18,154 in May 2020.
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All of the effects of subsequent events that provide additional evidence about conditions that existed at the condensed combined balance sheet date, including the estimates inherent in the process of preparing the condensed combined financial statements, are recognized in the condensed combined financial statements. Subsequent events have been evaluated through June 18, 2020, which is the date the condensed combined financial statements were available to be issued.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the equityholders and the Board of Directors of BIC Holdings LLC and Trean Holdings LLC
Opinion on the Financial Statements
We have audited the accompanying combined balance sheets of BIC Holdings LLC and Trean Holdings LLC (collectively, the “Company”) as of December 31, 2019 and 2018, the related combined statements of operations, comprehensive income, members' equity and redeemable preferred stock, and cash flows, for the years ended December 31, 2019 and 2018, the related notes, and the schedules listed in the index (collectively referred to as the "financial statements"). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and auditing standards generally accepted in the United States of America (“generally accepted auditing standards”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

April 9, 2020

We have served as the Company’s auditor since 2019.
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BIC Holdings LLC - Trean Holdings LLC
Combined Balance Sheets
December 31, 2019 and 2018
(in thousands, except share data)
2019
2018
Assets
 
 
Fixed maturities, at fair value (amortized cost of $329,640 and $309,771, respectively)
$337,865
$307,237
Preferred stock, at fair value (amortized cost of $337 and $325, respectively)
343
321
Common stock, at fair value (amortized cost of $492 and $0, respectively)
492
Equity method investments
12,173
13,900
Total investments
350,873
321,458
 
Cash and cash equivalents
74,268
53,574
Restricted cash
1,800
2,389
Accrued investment income
2,468
2,372
Premiums and other receivables
62,460
62,400
Related party receivables
22,221
15,934
Reinsurance recoverable
307,338
257,509
Prepaid reinsurance premiums
80,088
66,765
Deferred policy acquisition cost, net
2,115
2,976
Property and equipment, net
7,937
8,134
Deferred tax asset
1,367
1,823
Goodwill
2,822
2,822
Other assets
3,277
1,963
Total assets
$919,034
$800,119
 
 
 
Liabilities
 
 
Unpaid loss and loss adjustment expenses
$406,716
$340,415
Unearned premiums
103,789
90,074
Funds held under reinsurance agreements
163,445
166,838
Reinsurance premiums payable
53,620
40,135
Accounts payable and accrued expenses
14,995
15,004
Shares subject to mandatory redemption
1,096
Income taxes payable
714
1,655
Long-term debt
29,040
33,771
Total liabilities
772,319
688,988
 
 
 
Commitments and contingencies (Note 18 and Note 23)
 
 
Redeemable preferred stock (1,000,000 authorized; 51 and 60 outstanding, respectively)
5,100
6,000
 
 
 
Members’ equity
 
 
Members’ equity
78,438
78,360
Preferred stock, $0.01 par value (1,000,000 authorized; 0 and 10 outstanding, respectively)
1,000
Additional paid-in capital
17,995
17,995
Retained earnings
40,361
9,779
Accumulated other comprehensive income (loss)
4,821
(2,003)
Total members’ equity
141,615
105,131
Total liabilities and members’ equity
$919,034
$800,119
See accompanying notes to the combined financial statements
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BIC Holdings LLC - Trean Holdings LLC
Combined Statements of Operations
For the Years Ended December 31, 2019 and 2018
(in thousands)
2019
2018
Revenues
 
 
Gross written premiums
$411,401
$357,007
Increase in gross unearned premiums
(13,598)
(16,862)
Gross earned premiums
397,803
340,145
Ceded earned premiums
(311,325)
(273,569)
Net earned premiums
86,478
66,576
Net investment income
6,245
4,816
Net realized capital gains (losses)
667
(715)
Other revenue
9,125
7,826
Total revenue
102,515
78,503
 
 
 
Expenses
 
 
Losses and loss adjustment expenses
44,661
35,729
General and administrative expenses
21,005
15,706
Interest expense
2,169
1,557
Total expenses
67,835
52,992
 
 
 
Other income
121
639
Income before taxes
34,801
26,150
 
 
 
Provision for income taxes
7,074
5,546
Equity earnings (losses) in affiliates, net of tax
3,558
(1,082)
Net income
$31,285
$19,522
See accompanying notes to the combined financial statements
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BIC Holdings LLC - Trean Holdings LLC
Combined Statements of Comprehensive Income
For the Years Ended December 31, 2019 and 2018
(in thousands)
2019
2018
Net income
$31,285
$19,522
 
 
 
Other comprehensive income (loss), net of tax:
 
 
Unrealized investment gains (losses):
 
 
Unrealized investment gains (losses) arising during the period
8,708
(3,964)
Income tax expense (benefit)
1,831
(832)
Unrealized investment gains (losses), net of tax
6,877
(3,132)
 
 
 
Less: reclassification adjustments to:
 
 
Net realized investment gains (losses) included in net realized capital gains (losses)
67
(225)
Income tax expense (benefit)
14
(47)
Total reclassifications included in net income (loss), net of tax
53
(178)
 
 
 
Other comprehensive income (loss)
6,824
(2,954)
 
 
 
Total comprehensive income
$38,109
$16,568
See accompanying notes to the combined financial statements
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BIC Holdings LLC - Trean Holdings LLC
Combined Statements of Members’ Equity and Redeemable Preferred Stock
For the Years Ended December 31, 2019 and 2018
 
 
 
 
 
Members’ Equity
 
 
 
 
 
Redeemable
Preferred Stock
Preferred Stock
Class A -
Non-Voting
Class B -
Voting
Class B -
Non-Voting
Class C -
Non- Voting
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
(Accumulated
Deficit)
Retained
Earnings
Total
Members’
Equity
(in thousands, except for share and
unit data)
Shares
Amount
Shares
Amount
Units
Amount
Units
Amount
Units
Amount
Units
Amount
Balance at January 1, 2018
50
$5,000
30
$3,000
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
39,317
$39
$17,995
$951
$(8,062)
$92,165
Issuance of Class C units
78,636
79
79
Distributions to members
(1,456)
(1,456)
Dividends paid on Series A preferred stock (Note 19)
(45)
(45)
Dividends paid on Series B preferred stock (Note 19)
(180)
(180)
Redemption of Series A Redeemable Preferred Stock
(20)
(2,000)
(2,000)
Issuance of Series B Redeemable Preferred Stock
10
1,000
Other comprehensive income
(2,954)
(2,954)
Net income
19,522
19,522
Balance at December 31, 2018
60
$6,000
10
$1,000
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
117,953
$118
$17,995
$(2,003)
$9,779
$105,131
Cumulative effect of adopting ASC Topic 606 (Note 2)
695
695
Issuance of Class C units
78,635
78
78
Distributions to members
(1,144)
(1,144)
Dividends paid on Series A preferred stock (Note 19)
(43)
(43)
Dividends paid on Series B preferred stock (Note 19)
(211)
(211)
Redemption of Series A Redeemable Preferred Stock
(10)
(1,000)
(1,000)
Redemption of Series B Redeemable Preferred Stock
(9)
(900)
Other comprehensive income
6,824
6,824
Net income
31,285
31,285
Balance at December 31, 2019
51
$5,100
$
65,036,780
$65,037
5,045,215
$5,045
8,159,775
$8,160
196,588
$196
$17,995
$4,821
$40,361
$141,615
See accompanying notes to the combined financial statements
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BIC Holdings LLC - Trean Holdings LLC
Combined Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018
(in thousands)
2019
2018
Operating activities
 
 
Net income
$31,285
$19,522
Adjustments to reconcile net income to net cash from operating activities:
 
 
Depreciation and amortization
876
497
Net capital (gains) losses on investments
(76)
225
Deferred offering costs
(411)
Gain on bargain purchase of subsidiary
(634)
Loss on disposal of subsidiary
34
Net realized losses on sale of building
619
Bond amortization and accretion
1,713
1,957
Issuance of member units as compensation
78
79
Equity (earnings) losses in affiliates, net of tax
(3,558)
1,082
Distributions from equity method investments
5,489
2,852
Deferred income taxes
(1,118)
(71)
Deferred financing costs
101
76
Changes in operating assets and liabilities:
 
 
Accrued investment income
(56)
567
Premiums and other receivables
(4,777)
(13,862)
Reinsurance recoverable on paid and unpaid losses
(49,829)
(50,776)
Prepaid reinsurance premiums
(13,323)
(10,881)
Other assets
631
(769)
Unpaid loss and loss adjustment expenses
59,874
62,744
Unearned premiums
12,712
16,450
Funds held under reinsurance agreements
2,631
35,826
Reinsurance premiums payable
12,448
4,899
Accounts payable and accrued expenses
(639)
3,647
Income taxes payable
(1,278)
583
Net cash provided by operating activities
52,173
75,266
Investing activities
 
 
Payments for capital expenditures
(633)
(3,218)
Proceeds from sale of property and equipment
2,296
Purchase of investments, available for sale
(89,171)
(124,571)
Proceeds from investments sold, matured or repaid
71,357
65,518
Purchase of investments, equity method
(17,798)
Acquisition of subsidiary, net of cash received
(5,496)
(786)
Net cash used in investing activities
(23,943)
(78,559)
Financing activities
 
 
Proceeds from credit agreement
26,994
Principal payments on long-term debt
(4,832)
(10,031)
Proceeds from issuance of preferred shares
1,000
Buyback of preferred shares
(1,900)
(2,000)
Distributions to members
(1,144)
(1,456)
Dividends paid on preferred stock
(249)
(225)
Net cash (used in) provided by financing activities
(8,125)
14,282
Net increase in cash, cash equivalents and restricted cash
20,105
10,989
Cash, cash equivalents and restricted cash - beginning of period
55,963
44,974
Cash, cash equivalents and restricted cash - end of period
$76,068
$55,963
See accompanying notes to the combined financial statements
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BIC Holdings LLC - Trean Holdings LLC
Combined Statements of Cash Flows
For the Year Ended December 31, 2019 and 2018
(in thousands)
2019
2018
Disaggregation of cash and restricted cash:
 
 
Cash and cash equivalents
$74,268
$53,574
Restricted cash and restricted cash equivalents
1,800
2,389
Total cash, cash equivalents and restricted cash
$76,068
$55,963
 
 
 
Supplemental disclosure of cash flow information:
 
 
Cash paid during the year for:
 
 
Interest
$2,068
$2,004
Income taxes
9,137
4,962
Non-cash investing and financing activity:
 
 
Issuance of Class C member units as compensation
78
79
Accrued shares subject to mandatory redemption
770
See accompanying notes to the combined financial statements
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Notes to the Combined Financial Statements
Note 1. Business and Basis of Presentation
The combined financial statements include the accounts, after elimination of intercompany accounts and transactions, of BIC Holdings LLC (BIC), a property and casualty insurance holding company, and Trean Holdings LLC (Trean), an insurance services company, along with their wholly owned subsidiaries, collectively the “Company”. BIC and Trean are owned by the same members. All dollar amounts are shown in thousands, except unit and per unit amounts.
The Company is an established and growing company providing products and services to the specialty insurance market. Historically, the Company has focused on specialty casualty markets that are believed to be underserved and where the Company’s expertise allows the Company to achieve higher rates, such as niche workers’ compensation markets and small- to medium-sized specialty casualty insurance programs. The Company underwrites specialty-casualty insurance products both through programs where the Company partners with other organizations (Program Partners), and also through the Company’s own Managing-General Agencies. The Company also provides Program Partners with a variety of services, including issuing carrier services, claims administration, and reinsurance brokerage from which the Company generates fee-based revenues.
BIC’s wholly owned subsidiary is 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, and American Liberty Insurance Company (ALIC), a property and casualty insurance company domiciled in the state of Utah.
Trean’s wholly owned subsidiaries are Benchmark Administrators LLC (BIC Admin), a claims third-party administrator conducting business for Benchmark mainly in the state of California, Trean Compstar Holdings LLC, a limited liability company created for the purchase of an interest in Compstar Insurance Services LLC, a California-based general agent, and 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; S&C Claims Services, Inc. (S&C), a claims third-party administrator, mainly in the western United States; and Westcap Insurance Services, LLC (Westcap) a managing general agent based in California.
Note 2. Significant Accounting Policies
Use of estimates: The accompanying combined financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). While preparing the combined financial statements, the Company has made certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the combined 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 recoveries, investments and goodwill. Except for the captions on the combined balance sheets and combined statements of comprehensive income, generally, the term loss(es) is used to collectively refer to both loss and LAE.
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 $1,800 and $2,389 represents fiduciary funds held for other companies as of December 31, 2019 and 2018, respectively. There is a corresponding obligation to the other companies included in accounts payable and accrued expenses as of December 31, 2019 and 2018 (Note 9).
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 (loss) in the combined balance sheets, net of the related deferred tax effect, until realized. The change in unrealized gain and loss on equity
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securities is recorded as a component of net income and is included in net investment income on the combined 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 combined 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.
If a debt security is impaired and management intends to sell the security or it is more likely than not that the Company will have to sell the security before the amortized cost is recovered, then the Company recognizes impairment loss in net realized capital gains (losses). If it is determined that an impairment of a debt security is other-than-temporary and management neither intends to sell the security nor is it more likely than not that the Company will have to sell the security before it is able to recover its cost or amortized cost, then the Company separates the impairment into (a) the amount of impairment related to credit loss and (b) the amount of impairment related to all other factors. The Company records the amount of the impairment related to the credit loss as an impairment charge in net income and the amount of the impairment related to all other factors in accumulated other comprehensive income (loss). No other-than-temporary impairment was recorded for the years ended December 31, 2019 and 2018.
A large portion of the Company’s investment portfolio consists of fixed maturities which may be adversely affected by changes in interest rates as a result of governmental monetary policies, domestic and international economic and political conditions and other factors beyond the Company’s control.
Equity method investments: Certain investments where the Company does not have control but has the ability to exercise significant influence are accounted for by the equity method of accounting. Under this method, the Company’s investments in certain limited liability companies are recorded at cost and the investment accounts are adjusted for the Company’s share of the entities’ income or loss and for the distributions and contributions. The income and losses are recorded within equity earnings (losses) in affiliates, net of tax on the combined statements of operations.
Premium revenue: Premiums are earned over the policy period and are stated after deduction for reinsurance. The portion of premiums that will be earned in the future is deferred and reported as unearned premiums on the combined balance sheets.
Revenue from contracts with customers: Other revenue recorded by the Company includes brokerage, third-party administrative (TPA), management and consulting fees. The Company incurs certain costs associated with obtaining contracts with customers. Such contracts are one year contracts and the amortization periods are one year or less. The Company has elected, as a practical expedient, to expense these contract costs as incurred.
Brokerage revenue includes the amounts earned on excess of loss (XOL) and quota share reinsurance treaties. Billings for brokerage revenues generally occur monthly. Revenue for XOL treaties consist of a single performance obligation which is recorded on the effective date of the underlying contract as this is the time that the customer obtains control of the promised asset (the reinsurance treaty). Revenue is estimated based on the contractually specified minimum or deposit premiums using the expected value method. Adjustments to revenue are recorded as additional evidence is received for the ultimate amount of brokerage earned under the contract. Revenue recorded for quota share treaties consist of a single
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performance obligation which is recorded on the effective date of the treaty as this is the time that the customer obtains control of the promised asset (the reinsurance treaty). Revenue is estimated based on the projected premium income provided by the ceding insurer using the expected value method. The estimated brokerage revenue recognized is constrained to an amount that is probable to not have a significant negative adjustment to revenue in future periods. The estimated revenue and the constraint are evaluated as additional evidence of the ultimate amount of revenue to be recognized is received over the 12 months following the effective date of the placement.
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 processing claims. Billings for TPA fees occur on a monthly basis. TPA services consist of a single performance obligation which is recognized over time as claims are processed throughout the contract period. The volume of claims varies throughout the contract period and, therefore, the Company has elected to record revenue in an amount that reflects the total fees that the Company has a right to invoice for during the period.
The Company acts as a managing general agent (MGA) to provide certain administrative and underwriting services. The consideration received varies based on certain factors including the contractual MGA rate and the total amount of premium written or collected under the contract. Billings for management fees occur on a monthly basis. Management fees consist of a single performance obligation that are recognized by the Company over time as services are provided. The volume of premium written or collected for a single contract varies throughout the contract period and, therefore, the Company has elected to record revenue in an amount that reflects the total fees that the Company has a right to invoice for during the period.
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 combined balance sheets.
Premiums and other receivables: Premiums receivable are uncollateralized customer obligations due under normal terms requiring payment by the policy due date. Amounts outstanding that are deemed uncollectible are written off. When payments are received on amounts previously written off, the total premiums written off is reduced in the period in which the payment is received. Advanced premiums are recognized when payment is received prior to the beginning coverage date and are included within unearned premiums on the combined balance sheets.
Premiums and other receivables consist of the following:
(in thousands)
2019
2018
Premiums receivable
$61,774
$60,987
Trade receivables
1,053
1,390
Notes receivable
23
23
Total premiums and other receivables
62,850
62,400
Less: Allowance for doubtful accounts
(390)
Net premiums and other receivables
$62,460
$62,400
During the years ended December 31, 2019 and 2018, the Company wrote off $1,817 and $338 to bad debt, respectively. Bad debt expense is included within general and administrative expenses in the combined statements of operations.
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Policy acquisition costs: The Company incurs policy acquisition costs that vary with and are directly related to the production of new and renewal business. These costs consist of net commissions (including ceding commissions) paid to agents, program managers and reinsurers, and premium taxes. Proceeds from reinsurance transactions that represent recovery of acquisition costs reduce applicable unamortized acquisition costs in such a manner that net acquisition costs are capitalized and charged to expense. Amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the estimated policy term.
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, 2019 and 2018.
Property and equipment: Property and equipment are stated at cost net of accumulated depreciation. Depreciation is based on the estimated useful lives of the various classes of property and equipment and is determined based on the straight-line method. The estimated useful lives of property and equipment range from three to thirty years. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. The depreciation periods by asset class are as follows:
Asset class
Depreciation
period
Building and building improvements
30 years
Furniture and fixtures
7 years
Office equipment
5 years
Software and computer equipment
3 years
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, 2019 and 2018.
Reserve for unpaid loss and loss adjustment expenses: The liability for unpaid losses and LAE in the combined balance sheets represent the Company’s estimated losses incurred that remain unpaid as of the balance sheet date. The liability is recorded on an undiscounted basis.
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 combined balance sheets include reserves of unpaid losses gross of the amounts related to unpaid losses recoverable from reinsurers. The combined statements of comprehensive income includes the losses net of amounts ceded to reinsurers.
Reinsurance: The Company cedes all, or a portion of, its insurance in order to limit its maximum losses, diversify its exposure and provide statutory surplus relief. Ceding insurance does not relieve the Company of its primary liability to policyholders.
The reinsurance agreements are short-term, prospective contracts, typically 12-months in duration. The Company records an asset, prepaid reinsurance premiums, and a liability, reinsurance premiums payable, for the contract amount when premium is written under the reinsurance agreements. Prepaid reinsurance premiums are amortized in the same manner in which unearned premium is recognized.
The Company earns ceding commissions on certain reinsurance contracts, which reduces operating expenses. Ceding commissions are amortized over the contract period consistent with the deferred policy acquisition costs.
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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, 2019 and 2018.
Guaranty funds: State guaranty associations assess insurance companies for the estimated loss resulting from insurers encountering financial difficulty. The Company records these assessments, as well as any return assessments, upon notification of the state guaranty associations. The effect on operations or financial position relating to any estimated losses are not material for the years ended December 31, 2019 and 2018.
Income taxes: The Company recognized deferred tax assets and liabilities for the future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which it is expected to recover or settle those temporary differences. Should a change in tax rates occur, the effect on deferred tax assets and liabilities will be recognized in operations in the period that includes the enactment date.
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 provision for income taxes in the period incurred. The Company did not incur any material tax penalties or income-tax-related interest during the years ended December 31, 2019 and 2018.
Concentrations of risk: The Company had total direct gross written premiums of $411,401 and $357,007 for the year ended December 31, 2019 and 2018, respectively, including:
(in thousands)
2019
2018
California
$202,446
$153,611
Michigan
38,174
37,084
Arizona
34,215
28,350
Alabama
12,946
11,907
Nevada
11,869
9,225
Utah
10,900
11,379
Mississippi
8,910
7,143
Tennessee
8,065
7,809
Indiana
6,295
*
New Jersey
6,222
7,580
Other geographical areas
71,359
82,919
Total
$411,401
$357,007
*
The amount for the state is relevant for 2019 but not in 2018 and therefore, was not presented in 2018.
As of December 31, 2019, approximately 36% and 21% of the Company’s investment portfolio was comprised of securities issued in industrial and public utility bonds and mortgage-backed securities, respectively, compared to 39% and 17% as of December 31, 2018, 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 and 2018, approximately 8% and 12%, respectively, of the Company’s net assets were comprised of the equity method investment in Compstar Holding Company LLC. The Company does not depend upon the economic stability of Compstar Holding Company LLC as the Company’s results of operations are appropriately diversified amongst its other forms of income.
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The Company, from time to time, maintains its cash position at banks in excess of federally insured limits. The Company has not experienced any losses on such accounts.
Goodwill: Goodwill represents the cost to acquire a business over the fair value of the net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The Company has approximately $2,822 recorded on the combined balance sheets as of December 31, 2019 and 2018.
An impairment loss would generally be recognized when the carrying amount of the Company’s net assets exceeds the estimated fair value of the Company. For the years ended December 31, 2019 and 2018, no impairment loss was recorded.
Intangible assets: Acquired intangible assets include client relationships, customer lists, non-competes and trade names acquired. Intangible assets with a finite life are amortized over the estimated useful life. In valuing these assets, assumptions are made regarding useful lives and projected growth rates and significant judgment is required. The Company periodically reviews identifiable intangibles for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their undiscounted cash flows, additional impairment tests are performed to measure the amount of the impairment loss, if any. For the years ended December 31, 2019 and 2018, no impairment loss was recorded.
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 combined 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 combined balance sheets.
Segment reporting: Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker reviews financial information of the Company as a whole for purposes of assessing financial performance and making operating decisions. Accordingly, the Company considers itself to be operating as a single operating and reportable segment.
Accounting pronouncements:
Recently adopted policies
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 combined financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This update clarifies the definition of a business when evaluating whether transactions should be accounted for as an acquisition (or disposal) of a business or assets. The Company adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on the combined financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). This update substantially revises standards for the recognition,
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measurement and presentation of financial instruments. This standard revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. This requires the change in the value of equity securities to be reflected within the Company’s net income. The standard also amends certain disclosure requirements associated with the fair value of financial instruments. The Company adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on the combined 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 resulted in accelerated revenue recognition versus the previous revenue recognition patterns. The comparative period information was not restated and will continue to be reported under the legacy accounting standards that were in effect for those periods.
The impact of adopting ASC Topic 606 on the Company’s combined statement of operations is summarized as follows:
 
For the year ended December 31, 2019
(in thousands)
Legacy
GAAP
ASC Topic
606 Impact
As
Reported
Other revenue
$8,925
$200
$9,125
Total revenue
102,315
200
102,515
Income before taxes
34,601
200
34,801
Provision for income taxes
7,028
46
7,074
Net income
$31,131
$154
$31,285
The impact of adopting ASC Topic 606 on the Company’s combined balance sheet is summarized as follows:
 
December 31, 2019
(in thousands)
Legacy
GAAP
ASC Topic
606 Impact
As
Reported
Assets
 
 
 
Deferred tax asset
$1,621
$(254)
$1,367
Other assets
$2,174
$1,103
$3,277
 
 
 
 
Members’ Equity
 
 
 
Retained earnings
$39,512
$849
$40,361
The impact on the Company’s 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:
 
Adjustments
(in thousands)
As of
December 31,
2018
ASC
Topic 606
As of
January 1,
2019
Assets
 
 
 
Deferred tax asset
$1,823
(208)
1,615
Other assets
$1,963
$903
$2,866
 
 
 
 
Members’ Equity
 
 
 
Retained earnings
$9,779
$695
$10,474
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In November 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-18, Restricted Cash, which amended Statement of Cash Flows (Topic 230) of the Accounting Standards Codification. ASC Topic 230 requires amounts generally described as restricted cash and restricted cash equivalents to be included within cash and cash equivalents in the combined statement of cash flows. During 2018, the Company elected to adopt this standard effective January 1, 2018. The adoption did not have a material effect on the combined financial statements.
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 combined financial statements.
Pending policies
The Company will be issuing its initial public offering and filing as an emerging growth company. As such, the Company has elected to adopt pending accounting policies under the dates required for private companies. Therefore, the dates included within this section reflect the effective dates for the adoption of new accounting policies required by private companies.
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 disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods thereafter, with early adoption permitted. The Company will adopt this standard effective January 1, 2020. The Company is assessing the impact of adopting this new accounting standard on the combined financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangible – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment. ASU 2017-04 is effective for annual periods beginning after December 15, 2021, including interim periods thereafter, with early adoption permitted. The Company will adopt this standard effective January 1, 2022. Adoption of this standard will not have a material impact on the combined financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The ASU is effective for annual periods beginning after December 15, 2020, including interim periods thereafter, with early adoption permitted. Management intends to early adopt this standard effective January 1, 2020 with the cumulative effect of adopting the standard recognized in retained earnings on the transition date and without restatement of comparative periods. The Company does not expect the adoption of the standard to have a material impact on the combined financial statements.
Note 3. Nonconsolidated Variable Interest Entities
The Company is engaged with certain entities that are 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
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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 combined financial statements.
The Company has a variable interest in Trean Capital Trust I (the “Trust”) that has a mandatory redeemable preferred securities outstanding with a liquidation value of $7,500. The Trust is a variable interest entity under current accounting guidance because the Company has limited ability to make decisions about its activities. However, the Company is not the primary beneficiary of the Trust, and therefore, the Trust and the mandatory redeemable preferred securities issued by the Trust are not reported on the Company’s combined balance sheets. Instead, the Company’s investment in the junior subordinated debt securities (Note 16) held by the Trust are reported on the Company’s combined balance sheets. Interest on these related party debt securities is recorded as interest expense. The Company’s maximum loss exposure is limited to the required interest payments on the junior subordinated debt securities.
The Company has 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 is a variable interest entity under current accounting guidance because Compstar does not have sufficient capital at risk, as evidenced by a loan guarantee by a member. However, the Company is not the primary beneficiary of Compstar, and therefore, is not reported in the Company’s combined balance sheets. Instead, the Company’s investment in Compstar is reported on the Company’s combined balance sheets as an equity method investment (Note 6). Income on the investment in Compstar is recorded as equity earnings (losses) in affiliates, net of tax on the combined statements of operations. The Company’s maximum loss exposure is limited to the investment in Compstar.
Note 4. Investments
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the investments in securities classified as available for sale as of December 31, 2019 and 2018 are as follows:
 
2019
(in thousands)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Fixed maturities:
 
 
 
 
U.S. government and government securities
$15,965
$167
$(3)
$16,129
Foreign governments
299
3
302
States, territories and possessions
4,789
134
4,923
Political subdivisions of states, territories and possessions
24,444
670
(10)
25,104
Special revenue and special assessment obligations
59,149
2,298
(42)
61,405
Industrial and public utilities
119,735
3,490
(18)
123,207
Commercial mortgage-backed securities
15,586
757
(31)
16,312
Residential mortgage-backed securities
53,467
679
(37)
54,109
Other loan-backed securities
35,849
281
(119)
36,011
Hybrid securities
357
6
363
Total fixed maturities available for sale
$329,640
$8,485
$(260)
$337,865
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2018
(in thousands)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Fixed maturities:
 
 
 
 
U.S. government and government securities
$18,974
$20
$(171)
$18,823
Foreign governments
299
1
(1)
299
States, territories and possessions
5,118
42
(26)
5,134
Political subdivisions of states, territories and possessions
25,679
182
(215)
25,646
Special revenue and special assessment obligations
52,465
530
(333)
52,662
Industrial and public utilities
119,952
155
(1,767)
118,340
Commercial mortgage-backed securities
11,472
61
(122)
11,411
Residential mortgage-backed securities
41,028
85
(714)
40,399
Other loan-backed securities
34,526
17
(265)
34,278
Hybrid securities
258
(13)
245
Total fixed maturities
309,771
1,093
(3,627)
307,237
Equity securities:
 
 
 
 
Preferred stock
325
(4)
321
Total securities available for sale
$310,096
$1,093
$(3,631)
$307,558
The following table illustrates the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2019 and 2018:
 
2019
 
Less Than 12 Months
12 Months or More
Total
(in thousands)
Number of
Securities*
Fair
Value
Unrealized
Loss
Number of
Securities*
Fair
Value
Unrealized
Loss
Number of
Securities*
Fair
Value
Unrealized
Loss
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government and government securities
1
$293
$(2)
3
$1,349
$(1)
4
$1,642
$(3)
Foreign governments
States, territories and possessions
Political subdivisions of states, territories and possessions
6
1,500
(9)
5
690
(1)
11
2,190
(10)
Special revenue and special assessment obligations
13
3,206
(42)
2
181
15
3,387
(42)
Industrial and public utilities
14
5,939
(16)
4
1,094
(2)
18
7,033
(18)
Commercial mortgage-backed securities
3
2,138
(30)
3
129
(1)
6
2,267
(31)
Residential mortgage-backed securities
20
6,936
(13)
42
1,917
(24)
62
8,853
(37)
Other loan-backed securities
3
2,189
(11)
16
13,885
(108)
19
16,074
(119)
Hybrid securities
Total bonds
60
$22,201
$(123)
75
$19,245
$(137)
135
$41,446
$(260)
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2018
 
Less Than 12 Months
12 Months or More
Total
(in thousands)
Number of
Securities*
Fair
Value
Unrealized
Loss
Number of
Securities*
Fair
Value
Unrealized
Loss
Number of
Securities*
Fair
Value
Unrealized
Loss
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government and government securities
12
$3,604
$(16)
39
$9,789
$(155)
51
$13,393
$(171)
Foreign governments
1
198
(1)
1
198
(1)
States, territories and possessions
8
1,708
(14)
5
902
(12)
13
2,610
(26)
Political subdivisions of states, territories and possessions
16
3,955
(43)
51
9,726
(172)
67
13,681
(215)
Special revenue and special assessment obligations
47
11,567
(133)
76
12,194
(200)
123
23,761
(333)
Industrial and public utilities
171
54,431
(808)
136
38,464
(959)
307
92,895
(1,767)
Commercial mortgage-backed securities
19
6,717
(118)
4
314
(4)
23
7,031
(122)
Residential mortgage-backed securities
49
22,147
(355)
93
11,117
(359)
142
33,264
(714)
Other loan-backed securities
54
28,185
(249)
10
1,810
(16)
64
29,995
(265)
Hybrid securities
1
99
(9)
1
146
(4)
2
245
(13)
Total bonds
378
$132,611
$(1,746)
415
$84,462
$(1,881)
793
$217,073
$(3,627)
The unrealized losses on the Company’s bonds as of December 31, 2019 and 2018 were primarily caused by widening in corporate and tax exempt spreads, rather than credit-related problems. The unrealized losses on the Company’s equity securities as of December 31, 2019 and 2018 were deemed temporary, as the Company has the ability and intent to hold the securities until recovery, which is expected in the near term.
The scheduled maturities of bonds as of December 31, 2019, were as follows:
(in thousands)
Cost or
Amortized
Cost
Fair
Value
Available for sale:
 
 
Due in one year or less
$17,822
$17,872
Due after one year but before five years
120,772
123,603
Due after five years but before ten years
50,398
52,893
Due after ten years
35,746
37,065
Commercial mortgage-backed securities
15,586
16,312
Residential mortgage-backed securities
53,467
54,109
Other loan-backed securities
35,849
36,011
Total
$329,640
$337,865
Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Realized gains and losses on investments included in the combined statements of operations for the year ended December 31, 2019 and 2018 are as follows:
(in thousands)
2019
2018
Fixed maturities:
 
 
Gains
$91
$111
Losses
(24)
(201)
Total fixed maturities
67
(90)
Equity securities:
 
 
Preferred stocks:
 
 
Losses
(6)
Total equity securities
(6)
Total net investment realized gains
$67
$(96)
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Bonds with a carrying value of approximately $97,576 and $83,858 were on deposit with state insurance departments to satisfy regulatory requirements as of December 31, 2019 and 2018, respectively.
Net investment income consists of the following for the years ended December 31, 2019 and 2018:
(in thousands)
2019
2018
Fixed maturities
$6,078
$4,701
Preferred stock
40
25
Interest earned on cash and short-term investments
127
90
Net investment income
$6,245
$4,816
Fair Value Measurements
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.
Level 2:
Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
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 judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. The Company has no assets or liabilities measured at fair value in the Level 3 category.
The Company will classify 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:
 
2019
(in thousands)
Level 1
Level 2
Level 3
Total
Fixed maturities:
 
 
 
 
U.S. government and government securities
$16,129
$
$
$16,129
Foreign governments
302
302
States, territories and possessions
4,923
4,923
Political subdivisions of states territories and possessions
25,104
25,104
Special revenue and special assessment obligations
61,405
61,405
Industrial and public utilities
123,207
123,207
Commercial mortgage-backed securities
16,312
16,312
Residential mortgage-backed securities
54,109
54,109
Other loan-backed securities
36,011
36,011
Hybrid securities
363
363
Total fixed maturities
16,129
321,736
337,865
Equity securities:
 
 
 
 
Preferred stock
343
343
Common stock
492
492
Total equity securities
835
835
Total investments
$16,129
$322,571
$
$338,700
 
 
 
 
 
Funds held under reinsurance agreements
163,445
163,445
 
 
 
 
 
Long-term debt:
 
 
 
 
Junior subordinated debt
7,732
7,732
Secured credit facility
21,637
21,637
Total long-term debt
$
$29,369
$  —
$29,369
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2018
(in thousands)
Level 1
Level 2
Level 3
Total
Fixed maturities:
 
 
 
 
U.S. government and government securities
$18,823
$
$
$18,823
Foreign governments
298
298
States, territories and possessions
5,134
5,134
Political subdivisions of states, territories and possessions
25,646
25,646
Special revenue and special assessment obligations
52,663
52,663
Industrial and public utilities
118,340
118,340
Commercial mortgage-backed securities
11,411
11,411
Residential mortgage-backed securities
40,399
40,399
Other loan-backed securities
34,278
34,278
Hybrid securities
245
245
Total fixed maturities
18,823
288,414
307,237
Equity securities:
 
 
 
 
Preferred stock
321
321
Total investments
$18,823
$288,735
$
$307,558
 
 
 
 
 
Funds held under reinsurance agreements
166,838
166,838
 
 
 
 
 
Long-term debt:
 
 
 
 
Junior subordinated debt
7,732
7,732
Secured credit facility
26,469
26,469
Total long-term debt
$
$34,201
$  —
$34,201
Bonds and preferred stocks: The Company uses a variety of sources 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 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.
Funds held under reinsurance agreements: The Company holds certain investments as collateral under reinsurance contracts and values these investments consistent with its other investments using third-party pricing services. To validate the reasonableness of the quoted prices, the Company performs various qualitative and quantitative procedures such as analysis of recent 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.
Long-term debt: The Company holds long-term debt related to multiple credit agreements, refer to Note 16. The Company has determined that the remaining balance of the debt reflects its fair value as this would represent the total amount to repay the debt.
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Note 5.Acquisitions
American Liberty Insurance Company
Effective March 31, 2019, Benchmark Holdings Company purchased the remaining 25% of outstanding voting shares in American Liberty Insurance Company for $1,155. The purchase price was determined based on the statutory surplus of American Liberty Insurance Company and the non-controlling interest was recorded as shares subject to mandatory redemption on the combined balance sheet as of December 31, 2018.
First Choice Casualty Insurance Company
Effective February 19, 2019, Benchmark Insurance Company purchased 100% of the operating assets and assumed the liabilities of First Choice Casualty Insurance Company. 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 combined statement 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.
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 (in thousands):
Fair value of total consideration transferred
$5,314
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Cash
973
Investments
4,252
Accrued investment income
40
Premiums and other receivables
1,571
Deferred tax asset
242
Other assets
10
Unpaid loss and loss adjustment expenses
(6,426)
Unearned premiums
(1,003)
Funds held under reinsurance agreements
7,980
Reinsurance premiums payable
(1,037)
Accounts payable and accrued expenses
(316)
Income taxes payable
(338)
Net assets acquired
5,948
Gain on bargain purchase
$634
Westcap Insurance Services, LLC
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 (in thousands):
Fair value of total consideration transferred
$2,450
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Cash
1,003
Property and equipment
194
Other assets
1
Goodwill
2,154
Accounts payable
(902)
Net assets acquired
$2,450
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The Company recorded approximately $2,154 of goodwill associated with the business combination. The goodwill recognized is attributable to the expected growth resulting from the acquisition and the ability to direct the operations of Westcap. Further, the goodwill is attributable to synergies gained to assist in reducing future expenses.
CTS Underwriters, LLC
Effective December 12, 2018, the Company acquired certain operating assets of CTS Underwriters, LLC located in Florida. The total purchase price was $50.
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 (in thousands):
Fair value of total consideration transferred
$  50
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Equipment
10
Non-compete agreement
40
Net assets acquired
$50
Note 6. Equity Method Investments
The Company has investments in Compstar, Trean Intermediaries (Trean I) and Stop-Loss Re, LLC (Stop-Loss). Equity earnings and losses are reported in equity earnings (losses) in affiliates, net of tax on the combined statements of operations.
The Company owns 45% of Compstar which had a carrying value of approximately $11,831 and $13,468 as of December 31, 2019 and 2018, respectively. The Company recorded earnings for the year ended December 31, 2019 of approximately $3,012 and losses of $1,788 for the year ended December 31, 2018. Distributions received from Compstar for the years ended December 31, 2019 and 2018 were approximately $4,649 and $2,542, respectively.
The Company owns 25% of Trean I which had a carrying value of approximately $110 and $399 as of December 31, 2019 and 2018, respectively. The Company’s earnings for the years ended December 31, 2019 and 2018 were approximately $552 and $709, respectively. Distributions received from Trean I for the years ended December 31, 2019 and 2018 were approximately $840 and $309, respectively.
Effective December 31, 2019, the Company surrendered its ownership in Stop-Loss. The Company recorded a loss on disposal of approximately $34 for the year ended December 31, 2019 which is included within net realized capital gains (losses) on the combined statements of operations. The Company’s losses for the years ended December 31, 2019 and 2018 were approximately $6 and $2, respectively.
Summarized financial information for the Company’s equity method investments are as follows:
(in thousands)
2019
2018
Total assets
$58,657
$60,202
Total liabilities
42,980
44,476
Revenues
24,010
24,267
Net income (loss)
8,870
(1,150)
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Note 7. Property and Equipment
Property and equipment consists of the following:
(in thousands)
2019
2018
Land
$1,780
$1,780
Building and building improvements
5,150
4,754
Furniture and fixtures
772
748
Office equipment
2,193
1,487
Other property, plant and equipment
72
652
Deposits on fixed assets not placed in service
366
282
Total, at cost
10,333
9,703
Less: Accumulated depreciation
(2,396)
(1,569)
Property and equipment, net
$7,937
$8,134
Depreciation expense was approximately $830 and $470 for the years ended December 31, 2019 and 2018, respectively.
The Company sold one building on October 15, 2018. Proceeds from the sale were approximately $2,296 and the realized loss on disposal was approximately $619.
Note 8. Goodwill and Intangible Assets
Goodwill
Changes in the carrying value of goodwill are as follows:
(in thousands)
2019
2018
Balance at beginning of period
$2,822
$668
Acquisitions
2,154
Balance at end of period
$2,822
$2,822
Intangible assets
Intangible assets subject to amortization consist of the following:
(in thousands)
Useful Life
2019
2018
Non-compete agreement
4 years
$44
$44
Trade name
6 years
67
67
Customer lists and relationships
10 years
164
164
Totals
 
275
275
Less: Accumulated amortization
 
(121)
(74)
Balance at end of period
 
$154
$201
Amortization expense was approximately $46 and $27 for the years ended December 31, 2019 and 2018, respectively.
The estimated future amortization of intangible assets are as follows:
(in thousands)
Trade name
Customer
lists and
relationships
Non-compete
Total
2020
$   8
$  16
$  20
$  44
2021
8
16
24
2022
7
16
23
2023
16
16
2024
16
16
Thereafter
31
31
 
$23
$111
$20
$154
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Note 9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
(in thousands)
2019
2018
Accrued commissions and third party administration fees
$2,713
$3,378
Trade payables
2,387
2,978
Accrued taxes, licenses and fees
4,313
3,761
Accrued wages and employee benefits
2,167
745
Amounts retained for the accounts of others
2,467
3,067
Other liabilities
948
1,075
Totals
$14,995
$15,004
Note 10. Deferred Policy Acquisition Costs, Net
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, 2019 and 2018.
The table below depicts the activity with regard to deferred policy acquisition costs, net:
(in thousands)
2019
2018
Balance at January 1
$2,976
$1,833
Policy acquisition costs deferred
14,646
8,279
Amortization charged to expense
(15,507)
(7,136)
Balance at December 31
$2,115
$2,976
Note 11. Regulatory Matters
U.S. state insurance laws and regulations prescribe accounting practices for determining statutory net income and capital and surplus for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. Statutory accounting practices prescribed or permitted by regulatory authorities for the Company’s insurance company subsidiaries, Benchmark and ALIC differ from GAAP. The principal differences between statutory accounting practices (“SAP”) and GAAP as they relate to the financial statements of Benchmark and ALIC are (i) policy acquisition costs are expensed as incurred under SAP, whereas they are deferred and amortized under GAAP, (ii) deferred tax assets are subject to more limitations regarding what amounts can be recorded under SAP and (iii) bonds are recorded at amortized cost under SAP and fair value under GAAP. Benchmark is domiciled in Kansas and ALIC is domiciled in Utah. As of December 31, 2019 and 2018, and during the years then ended, Benchmark and ALIC met all regulatory requirements of the states in which they operate.
Risk-based capital (“RBC”) requirements as promulgated by the National Association of Insurance Commissioners (“NAIC”) require property and casualty insurers to maintain minimum capitalization levels determined based on formulas incorporating various business risks (e.g. investment risk, underwriting profitability, etc.) of the Insurance Company Subsidiaries. As of December 31, 2019 and 2018, the Insurance Company Subsidiaries’ adjusted capital and surplus exceeded their authorized control level as determined by the NAIC’s risk-based capital models.
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Summarized statutory basis information, which differs from GAAP, is shown below for Benchmark and ALIC.
 
2019
(in thousands)
Benchmark
ALIC
Statutory capital and surplus
$135,941
$5,947
RBC authorized control level
13,862
733
Statutory net income
23,475
266
RBC %
981%
811%
 
2018
(in thousands)
Benchmark
ALIC
Statutory capital and surplus
$112,752
$4,673
RBC authorized control level
12,454
1,095
Statutory net income
13,087
786
RBC %
905%
427%
Under statutory provisions regulating Kansas insurance companies, cash dividends may only be paid from statutory unassigned surplus and approval of the Kansas Commissioner of Insurance is required for any extraordinary dividends as defined by the Statute. Under the regulations of the state of Kansas, the Company may pay dividends without consent of the Insurance Department of Kansas if the total dividends for the preceding twelve months do not exceed the greater of (1) 10 percent of the statutory surplus at the end of the preceding year or (2) the statutory net income for the preceding year. For the years ended December 31, 2019 and 2018 the Company could approve dividends without the approval of the state up to $13,551 and $11,276, respectively. The Kansas Insurance Department does not have any limitations on the total amount of dividends paid.
Under statutory provisions regulating Utah insurance companies, dividends, savings and unabsorbed premium deposits may be distributed by an insurer to a policyholder, but insurers may not distribute a dividend to an entity that has no insurable interest in the insurance. Under the regulations of the state of Utah, the Company may pay dividends without consent of the state if the total dividends for the year do not exceed the lesser of (1) 10 percent of the statutory surplus at the end of the preceding year or (2) the statutory net income for the preceding year not including capital gains. For the years ended December 31, 2019 and 2018 the Company could approve dividends without the approval of the state up to $467 and $352, respectively.
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.
Note 12. Revenue from Contracts with Customers
See Note 2 for descriptions and policy regarding revenue from contracts with customers. The table below presents the revenues recognized for the year ended December 31, 2019, disaggregated by category:
(in thousands)
2019
Brokerage
$5,828
Managing general agent fees
858
Third-party administrator fees
1,776
Consulting fees
663
Total revenue from contracts with customers
$9,125
The Company does not have any contract liabilities as of December 31, 2019 or January 1, 2019. The following table provides information related to the contract assets from contracts with customers. Contract assets are included within other assets on the combined balance sheets.
(in thousands)
December 31,
2019
January 1,
2019
Contract assets
$1,103
$903
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Note 13. Income Taxes
The Company’s insurance subsidiaries are taxed as C-Corporations. Benchmark Holding Company, Benchmark and ALIC file a consolidated return. The income tax expense is comprised of the following:
(in thousands)
2019
2018
Current tax expense
$8,642
$5,618
Deferred tax expense
(1,568)
(72)
Total income tax expense
$7,074
$5,546
The income tax expense differs from the expected income tax expense computed by applying the applicable federal statutory tax rates to pretax income as a result of the following:
(in thousands)
2019
Effective Rate
Income tax expense computed at statutory tax rate
$7,309
21%
Tax-exempt municipal income, net of proration
(271)
(1)%
Change in valuation allowance on deferred tax asset
(4)
—%
Other
40
%
Total income tax expense
$7,074
20%
(in thousands)
2018
Effective Rate
Income tax expense computed at statutory tax rate
$5,492
21%
Tax-exempt municipal income, net of proration
(328)
(1)%
Change in valuation allowance on deferred tax asset
(13)
—%
Other
395
1%
Total income tax expense
$5,546
21%
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, 2019 and 2018, the Company has net operating loss (NOL) carryforwards for federal income tax purposes of approximately $4,752 and $3,493 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 $352 and $42 as of December 31, 2019 and 2018, respectively.
The significant components of deferred tax assets and liabilities are as follows:
(in thousands)
2019
2018
Deferred tax assets:
 
 
Unpaid losses and LAE
$2,671
$2,240
Unearned premiums
995
975
NOL carryforward
352
42
Other
366
204
Total deferred tax assets
4,384
3,461
 
 
 
Deferred tax liabilities
 
 
Deferred acquisition costs
(444)
(859)
Loss reserve discounting TCJA transitional adjustment
(675)
(808)
Unrealized gains/losses on investments
(1,281)
533
Property and equipment
(296)
(363)
Other
(321)
(141)
Total deferred tax liabilities
(3,017)
(1,638)
Net deferred tax assets
$1,367
$1,823
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The Company is not under IRS examination. However, the Company’s tax years 2016 through 2018 remain open to examination by the IRS and various state authorities.
As of December 31, 2019 and 2018, the Company has not taken any uncertain tax positions with regard to its tax returns.
Note 14. Unpaid Losses and Loss Adjustment Expense
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.
Activity in the aggregate reserves for unpaid losses and loss adjustment expense is as follows:
(in thousands)
2019
2018
Gross loss and loss adjustment expense reserves at January 1
$340,415
$277,671
Less losses ceded through reinsurance
(257,421)
(206,323)
Net loss and loss adjustment expense reserves at January 1
82,994
71,348
 
 
 
Acquisition of First Choice Casualty Insurance Company
6,366
 
 
 
Incurred loss and loss adjustment expense related to:
 
 
Current period
54,933
41,635
Prior period
(10,272)
(5,906)
Total incurred
44,661
35,729
 
 
 
Benefits and loss-related payments related to:
 
 
Current period
11,852
7,724
Prior period
19,458
16,359
Total paid
31,310
24,083
 
 
 
Net unpaid loss and loss adjustment expense at December 31
102,711
82,994
Plus losses ceded through reinsurance
304,005
257,421
Gross loss and loss adjustment expense reserves at December 31
$406,716
$340,415
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and loss adjustment expenses decreased by approximately $10,272 and $5,906 for the years ended December 31, 2019 and 2018, respectively, primarily attributable to the development in the Company’s workers’ compensation book of business.
The Company purchased annuities from life insurers under which the claimants are the payees. The purchase of these annuities allowed the Company to reduce reserves for unpaid losses by approximately $2,553 in previous years. Under the terms of settlement with the claimants, the Company remains liable for payments to the claimants of approximately $1,773 and $1,830 as of December 31, 2019 and 2018, respectively, in the event of default or insolvency of the life insurers.
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Loss Development Tables
The following tables represent cumulative incurred loss and allocated loss adjustment expenses, net of reinsurance by accident year and cumulative paid loss and allocated loss adjustment expenses, net of reinsurance by accident year, for the years ended December 31, 2010 to 2019, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2019, by reportable line of business and accident year (dollars in thousands). The Company’s primary lines of business are workers’ compensation and other liability.
Workers’ Compensation
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
As of
December 31, 2019
For the Years Ended December 31,
Total of IBNR
Liabilities Plus
Expected
Development on
Reported Claims
Cumulative
Number of
Reported
Claims
Accident
Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
10,469
10,348
11,156
11,713
11,571
12,232
12,422
12,424
12,226
12,388
817
3,450
2011
 
13,271
13,825
15,426
16,280
16,004
16,197
16,738
17,090
17,078
302
2,967
2012
 
 
20,397
20,948
19,699
20,176
19,235
18,778
18,898
18,967
343
3,184
2013
 
 
 
22,746
22,879
22,650
19,772
19,528
19,426
19,814
500
3,546
2014
 
 
 
 
22,357
20,686
19,781
19,394
17,967
18,025
1,024
3,554
2015
 
 
 
 
 
22,539
23,787
23,422
21,768
22,198
3,852
4,758
2016
 
 
 
 
 
 
28,470
27,221
25,866
23,881
5,472
9,583
2017
 
 
 
 
 
 
 
31,479
25,456
22,036
4,995
14,173
2018
 
 
 
 
 
 
 
 
35,208
29,586
8,019
11,979
2019
 
 
 
 
 
 
 
 
 
43,796
21,115
10,001
 
 
 
 
 
 
 
 
 
Total
$  227,769
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
For the Years Ended December 31,
 
 
Accident Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
3,564
6,832
8,112
9,393
10,107
10,457
10,640
10,925
11,148
11,277
 
 
2011
 
3,922
8,642
12,287
13,534
14,428
15,025
15,690
16,048
16,532
 
 
2012
 
 
6,100
11,854
14,292
15,902
16,683
17,426
17,951
18,164
 
 
2013
 
 
 
6,734
12,407
15,703
17,135
18,448
18,664
18,976
 
 
2014
 
 
 
 
5,958
11,672
14,393
16,011
16,177
16,535
 
 
2015
 
 
 
 
 
6,083
13,298
15,795
16,982
17,618
 
 
2016
 
 
 
 
 
 
6,659
14,054
16,409
17,234
 
 
2017
 
 
 
 
 
 
 
6,381
12,721
15,247
 
 
2018
 
 
 
 
 
 
 
 
6,965
16,437
 
 
2019
 
 
 
 
 
 
 
 
 
9,799
 
 
 
 
 
 
 
 
 
 
 
 
157,819
 
 
 
All outstanding liabilities before 2010, net of reinsurance
4,772
 
 
 
Liabilities for claims and claim adjustment expenses, net of reinsurance
$74,722
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance*
 
 
Years
1
2
3
4
5
6
7
8
9
10
 
 
 
20.9%
26.1%
10.9%
7.9%
5.2%
2.3%
3.1%
2.5%
3.8%
3.1%
 
 
*
Presented as unaudited required supplementary information.
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Other Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
As of
December 31, 2019
For the Years Ended December 31,
Total of IBNR
Liabilities Plus
Expected
Development on
Reported Claims
Cumulative
Number of
Reported
Claims
Accident
Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
1,141
1,149
1,130
1,053
1,094
1,269
1,488
1,515
1,506
1,316
47
239
2011
 
1,123
1,064
1,124
1,076
1,406
1,447
1,469
1,537
1,509
58
292
2012
 
 
1,439
880
973
863
1,092
1,278
1,745
1,721
298
356
2013
 
 
 
1,914
1,876
1,617
1,580
1,804
2,068
1,651
402
245
2014
 
 
 
 
2,183
1,964
1,921
2,154
3,107
3,013
1,094
332
2015
 
 
 
 
 
2,946
2,652
2,862
3,549
3,334
1,709
331
2016
 
 
 
 
 
 
2,689
2,794
3,135
3,180
2,355
221
2017
 
 
 
 
 
 
 
4,964
3,089
4,555
3,341
194
2018
 
 
 
 
 
 
 
 
4,256
4,278
3,807
123
2019
 
 
 
 
 
 
 
 
 
5,457
5,327
43
 
 
 
 
 
 
 
 
 
Total
$  30,014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
For the Years Ended December 31,
 
 
Accident
Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
20
157
556
674
776
899
1,111
1,199
1,185
1,188
 
 
2011
 
31
171
338
369
771
1,116
1,189
1,261
1,353
 
 
2012
 
 
42
141
187
346
512
761
1,146
1,234
 
 
2013
 
 
 
65
195
281
573
798
1,048
1,153
 
 
2014
 
 
 
 
53
233
405
639
1,067
1,687
 
 
2015
 
 
 
 
 
123
374
600
945
1,187
 
 
2016
 
 
 
 
 
 
54
137
355
558
 
 
2017
 
 
 
 
 
 
 
52
439
676
 
 
2018
 
 
 
 
 
 
 
 
52
345
 
 
2019
 
 
 
 
 
 
 
 
 
111
 
 
 
 
 
 
 
 
 
 
 
 
9,492
 
 
 
All outstanding liabilities before 2010, net of reinsurance
39
 
 
 
Liabilities for claims and claim adjustment expenses, net of reinsurance
$20,561
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance*
 
 
Years
1
2
3
4
5
6
7
8
9
10
 
 
 
1.2%
6.5%
7.0%
7.0%
9.1%
12.7%
8.7%
4.7%
4.5%
2.4%
 
 
*
Presented as unaudited required supplementary information.
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All Other Lines
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
As of
December 31, 2019
For the Years Ended December 31,
Total of IBNR
Liabilities Plus
Expected
Development on
Reported Claims
Cumulative
Number of
Reported
Claims
Accident
Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
190
83
110
40
65
56
62
37
45
50
10
182
2011
 
62
34
86
222
210
210
212
207
206
576
2012
 
 
21
3
25
14
4
2
3
2
1
479
2013
 
 
 
1
13
9
10
12
573
2014
 
 
 
 
40
127
24
23
21
16
1,052
2015
 
 
 
 
 
168
132
108
113
98
1,176
2016
 
 
 
 
 
 
1,882
1,617
1,745
1,555
19
1,245
2017
 
 
 
 
 
 
 
2,852
2,917
2,417
74
2,029
2018
 
 
 
 
 
 
 
 
2,885
2,874
357
2,929
2019
 
 
 
 
 
 
 
 
 
3,756
731
2,135
 
 
 
 
 
 
 
 
 
Total
$10,974
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
For the Years Ended December 31,
 
 
Accident
Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
10
18
28
28
28
28
28
30
32
34
 
 
2011
 
1
2
6
204
206
206
206
206
206
 
 
2012
 
 
1
1
1
1
1
1
1
1
 
 
2013
 
 
 
 
 
2014
 
 
 
 
100
16
16
16
16
 
 
2015
 
 
 
 
 
63
98
98
99
98
 
 
2016
 
 
 
 
 
 
796
1,325
1,418
1,494
 
 
2017
 
 
 
 
 
 
 
1,412
2,099
2,203
 
 
2018
 
 
 
 
 
 
 
 
1,309
2,123
 
 
2019
 
 
 
 
 
 
 
 
 
1,903
 
 
 
 
 
 
 
 
 
 
 
 
8,078
 
 
 
All outstanding liabilities before 2010, net of reinsurance
 
 
 
Liabilities for claims and claim adjustment expenses, net of reinsurance
$2,896
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance*
 
 
Years
1
2
3
4
5
6
7
8
9
10
 
 
 
45.0%
28.3%
3.4%
14.0%
0.2%
0.0%
0.0%
0.7%
0.7%
2.0%
 
 
*
Presented as unaudited required supplementary information.
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Total Lines
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
As of
December 31, 2019
For the Years Ended December 31,
Total of IBNR
Liabilities Plus
Expected
Development on
Reported Claims
Cumulative
Number of
Reported
Claims
Accident Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
11,800
11,580
12,396
12,806
12,730
13,557
13,972
13,976
13,777
13,754
874
3,871
2011
 
14,456
14,923
16,636
17,578
17,620
17,854
18,419
18,834
18,793
360
3,835
2012
 
 
21,857
21,831
20,697
21,053
20,331
20,058
20,646
20,690
642
4,019
2013
 
 
 
24,661
24,755
24,280
21,361
21,342
21,506
21,465
902
4,364
2014
 
 
 
 
24,580
22,777
21,726
21,571
21,095
21,054
2,118
4,938
2015
 
 
 
 
 
25,653
26,571
26,392
25,430
25,630
5,561
6,265
2016
 
 
 
 
 
 
33,041
31,632
30,746
28,616
7,846
11,049
2017
 
 
 
 
 
 
 
39,295
31,462
29,008
8,410
16,396
2018
 
 
 
 
 
 
 
 
42,349
36,738
12,183
15,031
2019
 
 
 
 
 
 
 
 
 
53,009
27,173
12,179
 
 
 
 
 
 
 
 
 
Total
$268,757
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
 
 
For the Years Ended December 31,
 
 
Accident
Year
2010*
2011*
2012*
2013*
2014*
2015*
2016*
2017*
2018*
2019
 
 
2010
3,594
7,007
8,696
10,095
10,911
11,384
11,779
12,154
12,365
12,499
 
 
2011
 
3,954
8,815
12,631
14,107
15,405
16,347
17,085
17,515
18,091
 
 
2012
 
 
6,143
11,996
14,480
16,249
17,196
18,188
19,098
19,399
 
 
2013
 
 
 
6,799
12,602
15,984
17,708
19,246
19,712
20,129
 
 
2014
 
 
 
 
6,011
12,005
14,814
16,666
17,260
18,238
 
 
2015
 
 
 
 
 
6,269
13,770
16,493
18,026
18,903
 
 
2016
 
 
 
 
 
 
7,509
15,516
18,182
19,286
 
 
2017
 
 
 
 
 
 
 
7,845
15,259
18,126
 
 
2018
 
 
 
 
 
 
 
 
8,326
18,905
 
 
2019
 
 
 
 
 
 
 
 
 
11,813
 
 
 
 
 
 
 
 
 
 
 
 
175,389
 
 
 
All outstanding liabilities before 2010, net of reinsurance
4,811
 
 
 
Liabilities for claims and claim adjustment expenses, net of reinsurance
$98,179
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance*
 
 
Years
1
2
3
4
5
6
7
8
9
10
 
 
 
23.3%
27.2%
11.6%
8.7%
6.1%
3.6%
3.8%
2.8%
4.0%
3.2%
 
 
*
Presented as unaudited required supplementary information.
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The reconciliation of the net incurred and paid claims development tables to the liability for unpaid loss and loss adjustment expense in the combined balance sheets is as follows (in thousands):
(in thousands)
2019
2018
Net outstanding liabilities
 
 
Workers compensation
$74,722
$61,073
Other liability
20,561
16,287
All other lines of business
2,896
2,788
Liabilities for unpaid loss and loss adjustment expenses, net of reinsurance
98,179
80,148
 
 
 
Reinsurance recoverable on unpaid claims
 
 
Workers compensation
237,088
176,126
Other liability
41,873
26,029
All other lines of business
25,044
55,266
Total reinsurance recoverable on unpaid claims
304,005
257,421
Unallocated loss adjustment expenses
4,532
2,846
Total gross liability for unpaid claims and LAE
$406,716
$340,415
Note 15. Reinsurance
The company utilized 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 reinsurers.
Amounts recoverable from reinsurers are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. The Company has diversified its credit risk related to the reinsurance ceded. There were no disputes with reinsurers as of December 31, 2019 and 2018. The Company has no reinsurance recoverables deemed uncollectible during the years ended December 31, 2019 and 2018.
The Company holds collateral on a funds held basis or requires collateral in a trust or as a letter of credit to secure recoverable balances from reinsurers not authorized in the insurance carriers state of domicile as follows:
(in thousands)
2019
2018
Letters of Credit
$65,877
$60,474
Trust
32,207
29,657
Funds Held
165,698
155,825
Total
$263,782
$245,956
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 3 percent of members’ equity:
(in thousands)
Rating
2019
Arch Reins Co
A
$36,551
Markel Global Reins Co
A+
65,211
Swiss Re
A+
5,378
(in thousands)
Rating
2018
Arch Reins Co
A+
$21,779
Markel Global Reins Co
A
39,651
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A summary of the impact of ceded reinsurance on written, earned and unearned premiums, and loss and loss adjustment expense incurred is as follows:
 
2019
(in thousands)
Gross
Assumed
Ceded
Net
Losses and LAE liabilities
$392,233
$14,483
$(304,005)
$102,711
Unearned premiums
101,225
2,564
(80,088)
23,701
Written premiums
405,353
6,048
(325,837)
85,564
Earned premiums
391,312
6,491
(311,325)
86,478
Losses and loss adjustment expenses
208,560
1,871
(165,770)
44,661
 
2018
(in thousands)
Gross
Assumed
Ceded
Net
Losses and LAE liabilities
$328,591
$11,824
$(257,421)
$82,994
Unearned premiums
86,480
3,007
(66,765)
22,722
Written premiums
346,870
10,137
(284,451)
72,556
Earned premiums
330,980
9,165
(273,569)
66,576
Losses and loss adjustment expenses
186,699
2,133
(153,103)
35,729
Note 16. Debt
Long-term debt consists of the following:
(in thousands)
2019
2018
Junior subordinated debt
$7,732
$7,732
Secured credit facility
21,637
26,469
Long-term debt
29,369
34,201
Less: unamortized deferred financing costs
(329)
(430)
Net long-term debt
$29,040
$33,771
In June 2006, the Trust issued 7,500 shares of preferred capital securities to qualified institutional buyers and 232 common securities to Trean. The proceeds of such issuances were invested by the Trust in $7,732 aggregate principal amount of Trean’s Junior Subordinated Debt due 2036 (the Debt). The Debt represents the sole assets of the Trust. The Debt matures on July 7, 2036. The interest rate was a fixed rate of 9.167% until July 7, 2011, at which time a variable interest rate of LIBOR (1.99% and 2.44% as of December 31, 2019 and 2018, respectively) plus 3.50% is in effect. The interest rate totaled 5.49% and 5.94% as of December 31, 2019 and 2018, respectively. There are optional dates for redemption of the Debt, at the option of the Company, on any January 7, April 7, July 7, or October 7 following July 7, 2011. There are no funding requirements for Trean to the Trust except for the necessary quarterly interest payments. Trean Corp is the guarantor of the Debt.
The preferred capital securities issued by the Trust in turn pay quarterly cash distributions at an annual rate of 9.167% per annum of the liquidation amount of $1 per security until July 7, 2011 and thereafter at a variable rate per annum, reset quarterly, equal to LIBOR plus 3.50%. The preferred capital securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debt on July 7, 2036, or upon earlier redemption. These preferred securities are fully guaranteed by the Company.
The terms of this agreement require the Company to maintain certain general and financial covenants and ratios. The Company was in compliance with all covenants and ratios as of December 31, 2019 and 2018.
On August 12, 2016, Benchmark entered into a $10,000 10-year term promissory note to Anchor Bank, NA. The note bears interest at 4.07% fixed rate. In the event of default, Benchmark had pledged all of its shares in Benchmark Insurance Company. This note was paid in full in April 2018.
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In April 2018, Trean Corp entered into a credit agreement with a bank which includes a term loan facility totaling $27,500 and a revolving credit facility of $3,000. Borrowings are secured by substantially all of the assets of Trean and its subsidiaries. The loan has a variable interest rate of LIBOR plus 3.00% and 3.50%, which was 6.33% and 6.89% as of December 31, 2019 and 2018, respectively. The outstanding principal balance of the loan is to be repaid in quarterly installments which escalate from approximately $344 to $859 until April 2023. All shares of Trean and its subsidiaries have been pledged as guaranteed collateral.
The terms of this agreement require the Company to maintain certain financial covenants and ratios. The Company was in compliance with all covenants and ratios as of December 31, 2019 and 2018.
Scheduled maturities of long-term debt, excluding deferred financing costs, are as follows:
2020
$1,891
2021
2,578
2022
3,266
2023
13,902
2024
Thereafter
7,732
Long-term debt
$29,369
Note 17. Employee Benefit Plan
The Company has a 401(k) Plan and Trust. This Plan covers all employees of the Company. An employee becomes eligible on the first day of each calendar quarter if they are at least 21 years old. Participants may elect to contribute 1 percent-15 percent of their salary annually. The Company matches 50 percent of each dollar an employee contributes on the first 5 percent of compensation. The Company may also make discretionary profit sharing contributions. The employees vest 25 percent per year of service beginning in the second full year of service. The Company contributed approximately $721 and $662 to the plan for the years ended December 31, 2019 and 2018, respectively.
Note 18. Lease Commitment
The Company has various operating leases for office space requiring monthly payments ranging from approximately $1 to $40 which expire at various dates through March 2025. The Company also leases office equipment over terms of three to five years which expire at various dates through February 2025. Some of these leases have renewal options for additional terms. The Company is obligated to pay the cost of insurance, taxes, repairs, and maintenance pursuant to the terms of most leases.
Rent expense for operating leases was approximately $1,575 and $1,115 for the years ended December 31, 2019 and 2018, respectively. The Company subleases space in its buildings under various operating sublease agreements. The sublease income was approximately $90 and $309 for the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Company had the following minimum annual commitments (benefits) for payment of rentals under leases which at inception had a non-cancellable term of more than one year:
(in thousands)
Rent
Expense
Sublease
Rental Income
Net Lease
Payments
2020
$1,718
$(30)
$1,688
2021
1,614
(31)
1,583
2022
1,594
(32)
1,562
2023
1,191
(33)
1,158
2024
669
(34)
635
Thereafter
46
(100)
(54)
 
$6,832
$(260)
$6,572
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Note 19. Stock Redemption Agreement
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 percent of the original cost per share. In the event of liquidation, dissolution, or winding up of the affairs of Trean, liquidation distributions are made to preferred stockholders before common stockholders. Series A contains no conversion features. The liquidation preference and redemptive value of Series A is equivalent to its carrying value as of December 31, 2019 and 2018.
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 stockholders before common stockholders. 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 and 2018. The Company classified the shares of Series B within temporary equity on the combined balance sheets as of December 31, 2019 and 2018, due to the liquidation rights associated with the termination of the shareholder customer agreement.
The Company is required to redeem all shares of outstanding Series A or Series B if any of the following events occur:
1.
Upon demand by a majority of the shareholders having voting rights in the Company
2.
Upon termination of the underlying stock purchase agreement between the Series A holders and Trean (only applicable to Series A shares)
3.
Any refinancing, recapitalization, sale of assets or stock by Trean Corp or Benchmark Holding Company that results in a realization of gain by the shareholders, to the extent the same is distributed to shareholders, whether in a single or a series of distributions (only applicable to Series A shares)
4.
Change in the majority control of the Company (only applicable to Series B shares)
5.
The termination of the shareholder customer agreement (only applicable to Series B shares)
6.
A qualified initial public offering of Trean Corp or Benchmark Holding Company
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. The cumulative dividends consist of the following (in thousands, except share and per share amounts):
 
2019
 
Total
Dividend
Dividend
per Share
Weighted
Average Shares
Dividends on preferred shares - Series A
$43
4,500.00
9.62
Dividends on preferred shares - Series B
211
3,506.84
60.00
Total preferred share dividends
$254
 
 
 
2018
 
Total
Dividend
Dividend
per Share
Weighted
Average Shares
Dividends on preferred shares - Series A
$45
4,500.00
10.00
Dividends on preferred shares - Series B
180
3,459.72
51.95
Total preferred share dividends
$225
 
 
On December 17, 2019, the Company redeemed its remaining 10 shares of Series A for $1,000.
On December 31, 2019, the Company redeemed 9 shares of Series B for $900.
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Note 20. Members’ Equity
The Company is registered with the state of Delaware as a Limited Liability Company (LLC). Any debts, expenses, obligations and liabilities of the Company are solely the responsibility of the Company. Any member of the LLC does not have any liability for the obligations or liabilities of the Company solely by reason of being a member or acting as a member of the Company.
The Company has 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.
2)
Class B Units: Receive an allocation of profits and losses incurred by the Company as well as maintain the right to receive distributions, along with Class A Units, on a pro rata basis prior to distributions made to other classes of ownership units. Class B maintains both voting and non-voting units. Each Class B Voting Unit is entitled to one vote per Class B Voting Unit on each matter to which the members are entitled to vote. Class B Non-Voting Units maintain all rights, preferences and privileges allowed to Class B Voting Units with the exception of voting rights.
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.
Note 21. Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities:
(in thousands)
2019
2018
Balance at beginning of period
$(2,003)
$951
Other comprehensive income (loss) before reclassifications, net of tax
6,877
(3,132)
Less: amounts reclassified from accumulated other comprehensive income (loss), net of tax
53
(178)
Net current period other comprehensive income (loss)
6,824
(2,954)
Balance at end of period
$4,821
$(2,003)
Note 22. Management Incentive Unit Agreement
On June 15, 2017, the Company entered into a Management Incentive Unit Agreement with an individual, who is a member of the Board of Managers of the Company, to issue Class C shares as partial compensation for future services to the Company. The shares issued under this agreement are subject to terms in the agreements between the Company and the recipient. The Company had approximately $197 and $275 of unrecognized stock compensation expense as of December 31, 2019 and 2018, respectively, related to non-vested stock-based compensation granted, that the Company expects to recognize over the next three years. The Company recognized approximately $78 and $79 of stock based compensation expense during the year ended December 31, 2019 and 2018, respectively.
Note 23. Commitments & Contingencies
From time to time, the Company is subject to litigation related to its insurance business. Management does not believe that the Company is a party to any such pending litigation that would have a material adverse effect on its future operations.
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Note 24. Transactions with Related Parties
The Company owed Stop-Loss approximately $18 which is included within accounts payable and accrued expenses on the combined balance sheet as of December 31, 2018.
The Company owed Altaris Capital Partners, a private equity firm, approximately $83 which is included within accounts payable and accrued expenses on the combined balance sheet as of December 31, 2019.
The Company was owed amounts from Trean Intermediaries totaling approximately $14 and $44 as of December 31, 2019 and 2018, respectively, which are included in related party receivables on the combined balance sheets. The Company recorded $200 and $144 of revenue for consulting services provided to Trean Intermediaries for the years ended December 31, 2019 and 2018, respectively, which is included in other revenue on the combined statements of operations.
As disclosed in Note 6, effective April 2, 2018, the Company owns a 45% interest in Compstar Holding Company LLC (Compstar), a program manager which handles the underwriting, premium collection and servicing of insurance policies for the Company. The Company recorded $176,083 and $116,584 of gross earned premiums resulting in gross commissions of $37,034 and $24,711 due to Compstar for the years ended December 31, 2019 and 2018, respectively. All receivables are stated net of the commissions due under the Program Manager Agreement and totaled $22,207 and $15,890 as of December 31, 2019 and 2018, respectively, which is recorded in related party receivables on the combined balance sheets. The Company’s ownership interest, and right to receive any distributions, is listed as collateral on debt taken out by Compstar.
Note 25. Subsequent Events
Events or transactions that occur after the balance sheet date, but before the combined financial statements are complete, are reviewed by the Company to determine if they are to be recognized and/or disclosed as appropriate.
On January 13, 2020, Trean Corporation sold 15% ownership in Trean I for $3,000. Trean Corporation maintains a 10% ownership interest in Trean I.
On April 1, 2020, Trean Corporation purchased LCTA Risk Services, Inc., a managing general agency based in Louisiana, for a purchase price of $1,400.
During early 2020, the Company began experiencing the effects of the COVID-19 pandemic which has heavily impacted the world economy. This may impact the financial results of the Company and certain estimates included in the combined financial statements. It is too early to assess the impact the pandemic will have on the Company's financial position, results of operations and cash flows.
All of the effects of subsequent events that provide additional evidence about conditions that existed at the combined balance sheet date, including the estimates inherent in the process of preparing the combined financial statements, are recognized in the combined financial statements. Subsequent events have been evaluated through April 9, 2020, which is the date the combined financial statements were available to be issued.
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BIC Holdings LLC - Trean Holdings LLC
Schedule I – Summary of Investments – Other Than Investments in Affiliates
December 31, 2019 and 2018
 
2019
(in thousands)
Cost or
Amortized Cost
Fair Value
Amount at
which
shown on
Balance Sheet
Fixed maturities:
 
 
 
U.S. government and government securities
$15,965
$16,129
$16,129
Foreign governments
299
302
302
States, territories and possessions
4,789
4,923
4,923
Political subdivisions of states, territories and possessions
24,444
25,104
25,104
Special revenue and special assessment obligations
59,149
61,405
61,405
Industrial and public utilities
119,735
123,207
123,207
Commercial mortgage-backed securities
15,586
16,312
16,312
Residential mortgage-backed securities
53,467
54,109
54,109
Other loan-backed securities
35,849
36,011
36,011
Hybrid securities
357
363
363
Total fixed maturities
329,640
337,865
337,865
Equity securities:
 
 
 
Preferred stock
337
343
343
Common stock
492
492
492
Total equity maturities
829
835
835
Equity method investments
12,173
12,173
12,173
Total Investments
$342,642
$350,873
$350,873
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2018
(in thousands)
Cost or
Amortized Cost
Fair Value
Amount at
which
shown on
Balance Sheet
Fixed maturities:
 
 
 
U.S. government and government securities
$18,974
$18,823
$18,823
Foreign governments
299
299
299
States, territories and possessions
5,118
5,134
5,134
Political subdivisions of states, territories and possessions
25,679
25,646
25,646
Special revenue and special assessment obligations
52,465
52,662
52,662
Industrial and public utilities
119,952
118,340
118,340
Commercial mortgage-backed securities
11,472
11,411
11,411
Residential mortgage-backed securities
41,028
40,399
40,399
Other loan-backed securities
34,526
34,278
34,278
Hybrid securities
258
245
245
Total fixed maturities
309,771
307,237
307,237
Equity securities:
 
 
 
Preferred stock
325
321
321
Total equity maturities
325
321
321
Equity method investments
13,900
13,900
13,900
Total Investments
$323,996
$321,458
$321,458
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BIC Holdings LLC - Trean Holdings LLC
Schedule II – Supplementary Insurance Information
December 31, 2019 and 2018
(in thousands)
Deferred policy
acquisition cost
Unpaid losses
and loss
adjustment
expenses
Unearned
premiums
As of December 31, 2019
 
 
 
Property and casualty insurance
$2,115
$406,716
$103,789
As of December 31, 2018
 
 
 
Property and casualty insurance
$2,976
$340,415
$90,074
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BIC Holdings LLC - Trean Holdings LLC
Schedule II – Supplementary Insurance Information
December 31, 2019 and 2018
(in thousands)
Earned
Premiums
Net
investment
income
Loss and
loss
adjustment
expenses
Amortization of
deferred policy
acquisition costs
Other
operating
expenses
Net
written
premiums
For the year ended December 31, 2019
 
 
 
 
 
 
Property and casualty insurance
$86,478
$6,245
$44,661
$15,507
$5,498
$85,564
For the year ended December 31, 2018
 
 
 
 
 
 
Property and casualty insurance
$66,576
$4,816
$35,729
$7,136
$8,570
$72,556
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BIC Holdings LLC - Trean Holdings LLC
Schedule III - Reinsurance
For the Year Ended December 31, 2019 and 2018
(in thousands)
Gross
amount
Ceded to
other
companies
Assumed
from other
companies
Net
amount
Percentage
of amount
assumed
to net
For the year ended December 31, 2019
 
 
 
 
 
Premiums:
 
 
 
 
 
Property and casualty insurance
$405,353
$325,837
$6,048
$85,564
7%
Total premiums
$405,353
$325,837
$6,048
$85,564
7%
For the year ended December 31, 2018
 
 
 
 
 
Premiums:
 
 
 
 
 
Property and casualty insurance
$346,870
$284,451
$10,137
$72,556
14%
Total premiums
$346,870
$284,451
$10,137
$72,556
14%
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BIC Holdings LLC - Trean Holdings LLC
Schedule IV – Supplemental Information Concerning Property and Casualty
Insurance Operations
For the Year Ended December 31, 2019 and 2018
 
 
Losses and Loss Adjustment
Expenses Incurred Related to:
 
(in thousands)
Discount
Deductible
from Liabilities
Current Year
Prior Year
Paid Losses
and Loss
Adjustment
Expenses
Years ended December 31,
 
 
 
 
2019
$    —
$54,933
$(10,272)
$31,310
2018
$
$41,635
$(5,906)
$24,083
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         shares

Common Stock

Trean Insurance Group, Inc.
Preliminary Prospectus
Joint Book-Running Managers
J.P. Morgan
Evercore ISI
William Blair
Co-Manager
JMP Securities
    , 2020
Until     , 2020, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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PART II
Information not required in the prospectus
Item 13.
Other expenses of issuance and distribution
The following table sets forth fees and expenses to be paid by us, other than underwriting discounts and commissions, in connection with this offering. Each of the amounts shown, other than the SEC registration fee, the FINRA filing fee and the stock exchange listing fee, is an estimate.
 
Amount to be paid
SEC registration fee
$12,980
FINRA filing fee
13,500
Stock exchange listing fee
*
Printing expenses
*
Legal fees and expenses
*
Accounting fees and expenses
*
Transfer agent and registrar fees and expenses
*
Miscellaneous expenses
*
Total
$*
*
To be completed by amendment.
Item 14.
Indemnification of directors and officers
Section 145 of the Delaware General Corporation Law (the “DGCL”) provides in relevant part that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The DGCL also permits a corporation to indemnify such persons against expenses (including attorneys’ fees) in connection with the defense or settlement of an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if such person is adjudged to be liable to the corporation. Where a present or former director or officer is successful in the defense of such an action, suit or proceeding referenced above, or in defense of any claim, issue or matter therein, the corporation must indemnify him or her against the expenses that such officer or director actually and reasonably incurred. Expenses (including attorneys’ fees) incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding upon, in the case of a current officer or director, receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined that such person is not entitled to be so indemnified.
The DGCL provides that the indemnification described above is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Company’s amended and restated certificate of incorporation provides for indemnification by the Company of its directors and officers to the fullest extent permitted by the DGCL.
In accordance with Section 102(b)(7) of the DGCL, our amended and restated certificate of incorporation contains a provision to limit the personal liability of a director to the corporation or its stockholders for monetary damages for violations of the directors’ fiduciary duty, except (i) for any breach of the director’s
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duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL, for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions or (iv) for any transaction from which a director derived an improper personal benefit.
The DGCL also provides corporations with the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation in a similar capacity for another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her in any such capacity or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability as described above. Policies of insurance are maintained by the Company under which our directors and officers are insured, within the limits and subject to the terms of the policies, against certain expenses in connection with the defense of, and certain liabilities that might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been directors or officers.
The foregoing statements are subject to the detailed provisions of the DGCL and the full text of our amended and restated certificate of incorporation, which is filed as Exhibit 3.1 hereto.
We intend to enter into separate indemnification agreements with each of our directors and executive officers that will provide, subject to their terms, the maximum indemnity allowed to directors and officers by Section 145 of the DGCL and certain additional procedural protections.
The proposed form of underwriting agreement filed as Exhibit 1.1 provides that the underwriters are obligated under certain circumstances to indemnify our directors, officers and certain controlling persons against specified liabilities, including liabilities under the Securities Act of 1933, as amended.
Item 15.
Recent sales of unregistered securities
During the last three years, we issued the following securities that were not registered under the Securities Act of 1933:
Prior to the completion of this offering, we will issue:
shares of our common stock to each of Trean Holdings LLC (“Trean Holdings”) and BIC Holdings LLC (“BIC Holdings”) in exchange for their contribution of all of their respective assets and liabilities to Trean Insurance Group, Inc.;
shares of our common stock to Blake Enterprises I, Inc., Blake Enterprises II, Inc. and Blake Enterprises III, Inc. (collectively, the “Blake Enterprises entities”) in exchange for their 55% equity interest in Compstar Holding Company LLC pursuant to an agreement, dated as of June 3, 2020, filed as Exhibit 10.5 hereto; and
shares of our common stock to Randall D. Jones in exchange for his Class C units in Trean Holdings and BIC Holdings that will become fully vested in connection with the IPO
See “Prospectus summary – Our organizational structure” in the prospectus relating to this offering for a more complete description of the issuances, including the number of shares to be issued, which depends on the initial public offering price.
These issuances will not involve any underwriters, underwriting discounts or commissions or a public offering, and we believe such issuances will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 16.
Exhibits and financial statement schedules
Exhibits
See the Exhibit index immediately preceding the signature page hereto, which is incorporated by reference as if fully set forth herein.
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Financial statement schedules
See the financial statement schedules listed in the Index to combined financial statements, which are incorporated by reference as if fully set forth herein.
Item 17.
Undertakings
(a)
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(c)
The undersigned registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2)
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
Exhibit index
Exhibit
Number
Description
1.1*
Form of Underwriting Agreement
3.1*
Form of Amended and Restated Certificate of Incorporation of Trean Insurance Group, Inc.
3.2*
Form of Amended and Restated By-Laws of Trean Insurance Group, Inc.
5.1*
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1*
Form of Registration Rights Agreement among Trean Insurance Group, Inc. and the parties named therein
Form of Reorganization Agreement among Trean Insurance Group, Inc. and the parties named therein
Form of Contribution Agreement among Trean Insurance Group, Inc., BIC Holdings LLC and Trean Holdings LLC
Form of Contribution Agreement between Trean Insurance Group, Inc. and Trean Compstar Holdings LLC
Agreement, dated as of June 3, 2020, among Blake Enterprises I, Inc., Blake Enterprises II, Inc., Blake Enterprises III, Inc., Blake Baker, Compstar Holding Company LLC, Trean Holdings LLC and Trean Compstar Holdings LLC
Form of Director Nomination Agreement among Trean Insurance Group, Inc. and the Altaris Funds
II-3

TABLE OF CONTENTS

Exhibit
Number
Description
Form of Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan
Form of Indemnification Agreement between Trean Insurance Group, Inc. and each of its directors and executive officers
Form of Termination Agreement among Altaris Capital Partners, LLC, BIC Holdings LLC, Trean Holdings LLC and Trean Insurance Group, Inc.
Amended and Restated Credit Agreement, dated as of May 26, 2020, among Trean Holdings LLC, Trean Corporation, Trean Compstar Holdings LLC, Benchmark Administrators, LLC and First Horizon Bank, N.A.
Change in auditor letter from RSM US LLP
List of subsidiaries of Trean Insurance Group, Inc.
Consent of Deloitte & Touche LLP, independent registered public accounting firm
Consent of Deloitte & Touche LLP, independent registered public accounting firm
23.3*
Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1)
Power of Attorney (included on signature page)
*
To be filed by amendment.

Compensatory plan or arrangement.
II-4

TABLE OF CONTENTS

Signatures
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Wayzata, Minnesota, on the 19th day of June, 2020.
 
TREAN INSURANCE GROUP, INC.
 
 
 
 
 
By:
/s/ Andrew M. O’Brien
 
 
Name:
Andrew M. O’Brien
 
 
Title:
President and Chief Executive Officer
Power of attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby makes, constitutes and appoints Andrew M. O’Brien and Julie A. Baron, as true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution, resubstitution and revocation, for and in the name, place and stead of the undersigned, to execute and deliver this registration statement on Form S-1, and any and all amendments thereto, including any post-effective amendments and supplements to this registration statement, and any additional registration statement filed pursuant to Rule 462(b); such registration statement and each such amendment to be in such form and to contain such terms and provisions as said attorney or substitute shall deem necessary or desirable; giving and granting unto said attorney, or to such person or persons as in any case may be appointed pursuant to the power of substitution herein given, full power and authority to do and perform any and every act and thing whatsoever requisite, necessary or, in the opinion of said attorney or substitute, able to be done in and about the premises as fully and to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorney or such substitute shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated:
Signature and Name
Title
Date
 
 
 
/s/ Andrew M. O’Brien
President, Chief Executive Officer and Director
(principal executive officer)
June 19, 2020
Andrew M. O’Brien
 
 
 
/s/ Julie A. Baron
Chief Financial Officer, Treasurer and Secretary
(principal financial officer)
June 19, 2020
Julie A. Baron
 
 
 
/s/ Nicholas J. Vassallo
Chief Accounting Officer
(principal accounting officer)
June 19, 2020
Nicholas J. Vassallo
 
 
 
/s/ Daniel G. Tully
Chairman of the Board
June 19, 2020
Daniel G. Tully
 
 
 
/s/ David G. Ellison
Director
June 19, 2020
David G. Ellison
 
 
 
/s/ Randall D. Jones
Director
June 19, 2020
Randall D. Jones
 
 
 
/s/ Steven B. Lee
Director
June 19, 2020
Steven B. Lee
II-5

Exhibit 10.2


REORGANIZATION AGREEMENT

This REORGANIZATION AGREEMENT (this “Agreement”), dated as of [•], 2020, is made and entered into by and among Trean Insurance Group, Inc., a Delaware corporation (“Trean”), BIC Holdings LLC, a Delaware limited liability company (“BIC Holdings”), Trean Holdings LLC, a Delaware limited liability company (“Trean Holdings”), Trean Corporation, a Minnesota corporation (“Trean Corporation”), Trean Compstar Holdings LLC, a Delaware limited liability company (“Trean Compstar”), and each of the individuals, trusts and entities admitted as members and listed in Schedule I hereto (each, the “Pre-IPO Unitholders”) of each of BIC Holdings and Trean Holdings in accordance with the terms of their respective Second Amended and Restated Limited Liability Company Agreements, each as amended (collectively, the “LLC Agreements”). Trean, BIC Holdings, Trean Holdings, Trean Corporation, Trean Compstar and the Pre-IPO Unitholders shall be referred to herein collectively as the “Parties” and each individually as a “Party.”

WHEREAS, it is contemplated that Trean will consummate an initial public offering (the “IPO”) of its shares of common stock, par value $0.01 per share (the “Common Stock”); and

WHEREAS, the Parties desire to effect a series of transactions intended to facilitate and in connection with the consummation of the IPO, including, without limitation, the steps more fully set forth below.

NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.
The Reorganization. In order to facilitate and in connection with the consummation of the IPO, the Parties agree to effect a reorganization through the following transactions (collectively, the “Reorganization Transactions”) substantially simultaneously and in the following sequential order:


(a)
Step 1. Contribution by BIC Holdings and Trean Holdings of all Assets and Liabilities to Trean. BIC Holdings, Trean Holdings and Trean shall enter into a contribution agreement, substantially in the form attached hereto as Exhibit A (the “HoldCo Contribution Agreement”) pursuant to which each of BIC Holdings and Trean Holdings shall contribute to Trean all of their respective assets and liabilities in exchange for an economically equivalent amount of shares of Common Stock as consideration.


(b)
Step 2. Trean to Acquire All Equity Interests of Compstar Holding Owned by Blake Enterprises. Pursuant to an agreement dated as of June 3, 2020 by and among Blake Enterprises I, Inc., Blake Enterprises II, Inc. and Blake Enterprises III, Inc. (collectively, “Blake Enterprises”), Blake Baker, Trean Holdings and Trean Compstar (the “Exchange Agreement”), substantially concurrently with the closing of the transactions contemplated by the HoldCo Contribution Agreement, Trean shall acquire all of the equity interests of Compstar Holding Company LLC (“Compstar Holding”) owned by Blake Enterprises in exchange for the amount of shares of Common Stock as consideration as specified in the Exchange Agreement.


(c)
Step 3. Trean to Contribute All of its Equity Interest in Compstar Holding to Trean Compstar. Trean and Trean Compstar shall enter into a contribution agreement, substantially in the form attached hereto as Exhibit B (the “Compstar Holding Contribution Agreement”) pursuant to which Trean shall contribute all of its equity interest in Compstar Holding to Trean Compstar.  Following such contribution, Trean Compstar shall own 100% of Compstar Holding.



(d)
Step 4. New Compstar Holding LLC Agreement.  Pursuant to the Exchange Agreement, the Limited Liability Company Agreement of Compstar Holding dated April 3, 2018, as amended, will terminate immediately following the contribution under the Compstar Holding Contribution Agreement.  Immediately thereafter, Trean Compstar will adopt the Limited Liability Company Agreement of Compstar Holding substantially in the form attached hereto as Exhibit C.


(e)
Step 5. Distribution by BIC Holdings and Trean Holdings of Trean Common Stock to Pre-IPO Unitholders. Each of BIC Holdings and Trean Holdings shall distribute to the Pre-IPO Unitholders in accordance with the distribution provisions in the LLC Agreements all of their respective shares of Common Stock in complete redemption of all units held by the Pre-IPO Unitholders in each of BIC Holdings and Trean Holdings, respectively. Upon completion of such distribution, each of BIC Holdings and Trean Holdings shall be dissolved pursuant to the terms of their respective LLC Agreements.


(f)
Step 6. Termination of Consulting Agreements.  Trean Holdings, BIC Holdings, and Trean will enter into a Termination Agreement (the “Termination Agreement”) with Altaris Capital Partners, LLC (“Altaris”) substantially in the form attached hereto as Exhibit D pursuant to which the Consulting Agreement, dated as of July 31, 2015, between Altaris and BIC Holdings, and the Amended and Restated Consulting Agreement, dated as of May 1, 2017, between Altaris and Trean Holdings, as amended, will, after the rights and obligations of Trean Holdings and BIC Holdings are transferred to Trean pursuant to Step 1 above, terminate immediately prior to the IPO, except with respect to the obligations in such agreements that are expressly specified to survive as provided in the Termination Agreement.


(g)
Step 7. IPO of Trean. Trean shall issue shares of Common Stock to public investors in exchange for cash pursuant to the IPO.

2.
Intended Tax Treatment.  It is intended that the transactions contemplated by Sections 1(a), (b) and (g) above will be treated as part of an integrated transaction qualifying under Section 351 of the Internal Revenue Code of 1986, as amended.

3.
Consents and Approvals. Each of the Parties, by execution of this Agreement, hereby provides consent, authorization, ratification and approval to effect the Reorganization Transactions, as may be required under any organizational document governing any of the Parties, any laws or regulations applicable to any of the Parties or any other agreement or contract to which such Party is a party.

4.
Further Assurances. Each of the Parties shall use reasonable best efforts to consummate the Reorganization Transactions as promptly as practicable and shall take or cause to be taken, as applicable, all such other actions necessary to cause the Reorganization Transactions to be carried out in accordance with the terms of this Agreement and the exhibits hereto, including, without limitation, (i) executing, delivering and performing the agreements and other documents contemplated by Section 1 of this Agreement (collectively, the “Reorganization Documents”) or any agreements or other documents of the type contemplated by Section 1 of this Agreement and (ii) filing any certificates, notices or other instruments with applicable governmental authorities. Each Party shall cooperate fully with each of the other Parties in connection with the foregoing. Each Party shall, at any time and from time to time following the consummation of the Reorganization Transactions, without further consideration, execute, deliver and perform or cause the execution, delivery and performance of, as applicable, any and all documents, agreements, certificates, and instruments, and take or cause to be taken, as applicable, such other actions as any other Party may reasonably require to carry out the intent of this Agreement and to effect the Reorganization Transactions.

2

5.
Power of Attorney. Each of the Pre-IPO Unitholders (other than AHP-TH LLC, ACP-TH LLC, AHP-BH LLC and ACP-BHC LLC, to which this Section 5 shall not apply) hereby agrees as follows:


(a)
In connection with the foregoing, the undersigned hereby irrevocably appoints Andrew M. O’Brien, Chief Executive Officer of Trean and Julie A. Baron, Chief Financial Officer, Treasurer and Secretary of Trean, or their duly designated substitutes (the “Attorneys”), as attorneys-in-fact with full power and authority to act, including full power of substitution, in the name of and for and on behalf of the undersigned with respect to all matters arising in connection with the Reorganization Transactions and the IPO, including, but not limited to:


(i)
entering into and approving, as applicable, the Reorganization Documents, receipt of drafts of which herewith is hereby acknowledged, containing such additions to or changes in the terms, provisions and conditions thereof as the Attorneys in their sole discretion shall determine; and


(ii)
making, exchanging, acknowledging and delivering all such other contracts, powers of attorney, orders, receipts, notices, requests, instructions, certificates, letters and other writings, including communications to the U.S. Securities and Exchange Commission (the “SEC”), and amendments to the underwriting agreement relating to the IPO, and in general to do all things and to take all actions, that the Attorneys in their sole discretion may consider necessary to effect the Reorganization Transactions and the IPO, as fully as could the undersigned if personally present and acting.


(b)
The Power of Attorney set forth in this Section 5 and all authority conferred hereby shall be irrevocable and shall not be terminated by the undersigned or by the death or incapacity of the undersigned (if the undersigned is an individual), by the death or incapacity of any trustee or executor or the termination of any trust or estate (if the undersigned is a trust or an estate), or by the dissolution or liquidation of any corporation or partnership (if the undersigned is a corporation or partnership), or by the occurrence of any other event unless otherwise provided by law.

Notwithstanding the foregoing, this Power of Attorney shall automatically terminate and be of no further effect, upon the earlier to occur of (i) the withdrawal by Trean of the registration statement filed with the SEC relating to the IPO and (ii) the consummation of the IPO; subject, however, to all lawful action done or performed by the Attorneys pursuant to this Agreement prior to such withdrawal or date.


(c)
The undersigned shall ratify all actions that the Attorneys have taken or shall take pursuant to this Section 5.

3


(d)
The Attorneys shall be entitled to act and rely upon any statement, request, notice or instruction respecting the Power of Attorney set forth in this Section 5 given to the Attorneys by the undersigned.


(e)
The undersigned agree to hold each Attorney free and harmless from any and all loss, damage or liability that the undersigned may sustain as a result of any action taken in good faith and within the authority granted herein, except where such loss, damage or liability is the result of bad faith, gross negligence or willful misconduct on the part of any Attorney. It is understood that the Attorneys shall serve without compensation.

6.
Representations and Warranties of the Pre-IPO Unitholders. Each of the Pre-IPO Unitholders hereby represents, warrants and acknowledges that, as of the date hereof:


(a)
With respect to each Pre-IPO Unitholder, such Pre-IPO Unitholder owns beneficially and of record the respective number and type of units set forth in Schedule I hereto, free and clear of any lien, mortgage, pledge, hypothecation, assignment, security interest or other encumbrance, or any preemptive right, right of first refusal, right of first offer, right of consent, put right, default or other similar right (collectively, “Liens”), other than restrictions on transfer under the LLC Agreements.


(b)
Any information which such Pre-IPO Unitholder has heretofore furnished in writing for the purposes of the transactions contemplated herein to BIC Holdings, Trean Holdings, Trean or their respective representatives is correct and complete as of the date of this Agreement and the date of the Reorganization Transaction to which such writing relates.


(c)
Such Pre-IPO Unitholder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”).


(d)
Such Pre-IPO Unitholder acknowledges that the shares of Common Stock received by such Pre-IPO Unitholder pursuant to the Reorganization Transactions, other than the shares of Common Stock issued to such Pre-IPO Unitholder in the IPO, if any, shall not be registered under the Securities Act or under any applicable state securities laws, and are being distributed in reliance on exemptions from the registration requirements of the Securities Act and all such laws.


(e)
The Common Stock received by such Pre-IPO Unitholder pursuant to the Reorganization Transactions, other than the shares of Common Stock issued to such Pre-IPO Unitholder in the IPO, if any, are being acquired by such Pre-IPO Unitholder for its own account for the purpose of investment or for the benefit of its member and not with a view to distribute in violation of applicable securities laws, it being understood that the right to dispose of the shares of Common Stock shall be subject to the terms and conditions in the Amended and Restated By-Laws of Trean, in addition to the transfer restrictions under the Securities Act. Such Pre-IPO Unitholder will refrain from transferring or otherwise disposing of the shares of Common Stock or any interest therein in such manner as to cause Trean to violate the Securities Act or any applicable state securities or blue sky laws.


(f)
Such Pre-IPO Unitholder represents that this Agreement has been duly executed and delivered by such Pre-IPO Unitholder and constitutes the legal, valid and binding obligation of such Pre-IPO Unitholder, and assuming the due execution, delivery and authorization of this Agreement by the other parties hereto, enforceable against such Pre-IPO Unitholder in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy laws and other similar laws affecting creditors’ rights generally.

4


(g)
Such Pre-IPO Unitholder, unless a natural person, is an entity duly organized, validly existing and in good standing under the laws of its state of organization. The execution, delivery and performance by such Pre-IPO Unitholder of this Agreement has been duly authorized by all necessary action.


(h)
The representations, warranties, agreements, undertakings and acknowledgments made by such Pre-IPO Unitholder in this Agreement shall survive the Reorganization Transactions. In addition, such Pre-IPO Unitholder shall notify Trean immediately of any change in any representation, warranty or other information relating to such Pre-IPO Unitholder set forth herein.

7.
Representations and Warranties of Trean, BIC Holdings and Trean Holdings. Each of Trean, BIC Holdings, Trean Holdings, Trean Corporation and Trean Compstar hereby represents and warrants with respect to itself that, as of the date hereof:


(a)
It is a corporation, duly incorporated, or a limited liability company, duly organized, in each case, validly existing and in good standing under the laws of its state of organization.


(b)
It has the requisite power, authority and legal right to execute and deliver this Agreement and to consummate the transactions contemplated hereby.


(c)
This Agreement has been duly executed, delivered and authorized by it and constitutes the legal, valid and binding obligation of it, and assuming the due execution, delivery and authorization of this Agreement by the other parties hereto, is enforceable against it in accordance with its terms, except to the extent such enforcement may be limited by applicable bankruptcy laws and other similar laws affecting creditors’ rights generally.


(d)
Neither the execution, delivery and performance by it of this Agreement, nor the consummation by it of the transactions contemplated hereby, nor compliance by it with the terms and provisions hereof, will (with or without notice or lapse of time or both), (i) result in a breach, termination or suspension of, constitute a default under, or accelerate the payment or performance required by the terms, conditions or provisions of, any material contracts to which it is a party, (ii) constitute a material violation by it of any existing law, rule, or regulation or of any judgment, award, order or other determination of any governmental authority, in each case applicable to it or any of its respective properties, rights or assets or (iii) result in the creation of any Lien upon any equity interests, properties, rights or assets of it, except, in the case of clauses (i), (ii) and (iii), as would not reasonably be expected to result in, individually or in the aggregate, a material adverse effect on its ability to consummate the transactions contemplated by this Agreement.


(e)
No authorization, filing or notification with any governmental authority, any counterparty to any of the contracts to which it is a party or any other Person is required to be made or obtained by it in connection with the execution, delivery or performance by it of this Agreement, or the consummation of the transactions contemplated hereby by it, except for the registration of the Common Stock under the Securities Act and those authorizations, filings and notifications already obtained or made and any such authorization, filing or notification, the failure of which to make or obtain would not reasonably be expected to result in, individually or in the aggregate, a material adverse effect on its ability to consummate the transactions contemplated by this Agreement.

5

8.
Term. This Agreement shall remain in full force and effect until the earlier of the completion of all of the transactions contemplated by this Agreement and the exhibits attached hereto or the determination of the board of directors of Trean not to consummate the IPO.

9.
Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the successors and permitted assigns of each of the Parties.

10.
Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute the same instrument. This Agreement may be executed by electronic transmission (including by .pdf) and such execution shall have the same force and effect as manually executed counterparts.

11.
Amendment. This Agreement may not be altered, modified, changed or amended, in whole or in part with respect to any Party, except by a written instrument signed by each such affected Party and, if applicable, authorized by each such Party’s board of directors, board of managers, managing member or general partner, as the case may be.

12.
Severability. If one or more provisions of this Agreement are found by a court or arbitrator of competent jurisdiction, or any governmental authority with competent jurisdiction over the Parties to be illegal, invalid or unenforceable, in whole or in part, the remaining terms and provisions of this Agreement (including the remaining portion of a provision found to be illegal, invalid or unenforceable in part) shall remain in full force and effect disregarding such illegal, invalid or unenforceable provision or portion thereof and such court, arbitrator or governmental authority shall be empowered to modify such illegal, invalid or unenforceable provision or portion thereof to the extent necessary to make this Agreement enforceable in accordance with the intent and purposes of the Parties expressed in this Agreement to the fullest extent practicable and as permitted by applicable law.

13.
Headings. Headings used in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

14.
Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of Delaware. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted exclusively in the Chancery Court of the State of Delaware (or, in the event, but only in the event, that such court does not have subject matter jurisdiction over such action or proceeding, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware). Service of process, summons, notice or other document by mail to such Party’s principal office shall be effective service of process for any suit, action or other proceeding brought in any such court. The Parties hereto irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or any proceeding in such courts and irrevocably waive and agree not to plead or claim in any such court that any such suit, action or proceeding has been brought in an inconvenient forum.

[Signature Pages Follow]
6

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  TREAN INSURANCE GROUP, INC.  
       

By:

 
  Name:
Andrew M. O’Brien  
  Title: Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  BIC HOLDINGS LLC  
       

By:

 
  Name: Andrew M. O’Brien  
  Title: Authorized Signatory
 
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  TREAN HOLDINGS LLC  
       

By:

 
  Name Andrew M. O’Brien  
  Title: Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  TREAN CORPORATION
 
       

By:

 
  Name: Andrew M. O’Brien  
  Title: Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  TREAN COMPSTAR HOLDINGS, LLC
 
       

By:

 
  Name: Andrew M. O’Brien  
  Title: Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  AHP-TH LLC  
       

By:

 
  Name Daniel G. Tully
 
  Title Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  ACP-TH LLC  
       

By:

 
  Name:
Daniel G. Tully  
  Title:
Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  ACP-BHC LLC  
       

By:

 
  Name:
Daniel G. Tully  
  Title: Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  ACP-BHC LLC  
       

By:

 
  Name:
Daniel G. Tully  
  Title: Authorized Signatory  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.


  ANDREW M. O’BRIEN PREMARITAL TRUST  
       

By:

 
  Name: Andrew M. O’Brien  
  Title: Trustee  
       


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.





 
 
STEVEN B. LEE  
 

 


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.





 
 
KYLE A. PLATH  
   
 


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.





 
 
DANIEL E. FOSTERLING  
   
 


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.





 
 
BRAD D. SCHMITZ  
   
 


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.





 
    SEAN P. RYAN  
   
 


[Signature Page to Reorganization Agreement]

IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed on its behalf as of the date first written above.





 
    RANDALL D. JONES  
   
 


[Signature Page to Reorganization Agreement]

Index of Exhibits and Schedules

 Exhibit A:    
 HoldCo Contribution Agreement
 Exhibit B:
 Compstar Holding Contribution Agreement
 Exhibit C:
 LLC Agreement of Compstar Holding
 Exhibit D:
 Termination Agreement
 Exhibit E:
 Amended and Restated By-Laws


  

Schedule I:
Trean Holdings LLC and BIC Holdings LLC Capitalization Table


Exhibit A
HoldCo Contribution Agreement

A-1

Exhibit B
Compstar Holding Contribution Agreement

B-1

Exhibit C
LIMITED LIABILITY COMPANY AGREEMENT
OF
COMPSTAR HOLDING COMPANY LLC

This Limited Liability Company Agreement (this “Agreement”) of Compstar Holding Company LLC (the “Company”) is entered into as of _________, 2020 by Trean Compstar Holdings LLC as the sole member of the Company (the “Member”).

WHEREAS, the Company was formed on February 5, 2018 as a Delaware limited liability company;

WHEREAS, the initial limited liability company agreement of the Company was entered into as of April 3, 2018 (as amended, the “Original Agreement”); and

WHEREAS, the Original Agreement was terminated as of the date hereof by the parties thereto, and the Member, which effective as of the date hereof owns 100% of the equity interests of the Company, desires to enter into this Agreement to set forth certain governance, capitalization and other terms with respect to the Company.

NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Member, intending to be legally bound, hereby agrees as follows:

1.          Organization.  The Company has been organized as a Delaware limited liability company by executing and delivering a Certificate of Formation to the Secretary of State of the State of Delaware on February 5, 2018 in accordance with and pursuant to the provisions of the Delaware Limited Liability Company Act, as amended (the “Act”).

2.          Name.   The name of the Company is “Compstar Holding Company LLC”.  The Member may change the name of the Company at any time and from time-to-time.  The Company’s business may be conducted under its name and/or any other name or names deemed advisable by the Member.

3.          Purpose.  The purpose and business of the Company shall be any business which may lawfully be conducted by a limited liability company organized pursuant to the Act.  The Company shall possess and may exercise all powers and privileges granted by the Act, any other law, or by this Agreement, including incidental powers thereto, to the extent that such powers and privileges are necessary, customary, convenient or incidental to the attainment of the Company’s purpose.

4.          Principal Office; Agent for Service of Process.  The principal office of the Company shall be at such place or places and in such jurisdictions as the Member may deem advisable.  The name and address of the Company’s registered agent for service of process in the State of Delaware is National Registered Agents, Inc., 160 Greentree Drive, Suite 101, in the City of Dover, Kent County, Delaware 19904.  The Company may change its registered agent or registered office from time-to-time as the Member deems advisable.

5.          Management.  The right to manage, control and conduct the business and affairs of the Company shall be vested solely in the Member, and the Member shall have the power and authority to exercise all of the rights, powers and privileges granted under the Act, any other applicable law and this Agreement.  The Member may appoint (and remove) such officers of the Company as the Member may from time-to-time determine to carry out the management, control and conduct of the business and affairs of the Company, all as aforesaid.  Any such appointments and any removals by the Member shall be in writing and shall be filed with the records of the Company.  The Member and any such officers so appointed shall have the authority to act as agent for the Company for purposes of conducting its business and affairs, including, without limitation, the opening of bank accounts, the making of deposits and withdrawals therefrom and the issuance of wire-transfer instructions with respect thereto, and the execution and delivery of any and all documents or agreements in the name of the Company and to which the Company shall be bound.  The Member and, except for situations in which members’ approval is expressly required by nonwaivable provisions of the Act, such officers shall have the right, authority and powers of an authorized person with respect to the business and assets of the Company as set forth in the Act and no person dealing with the Company shall be required to inquire into (and such persons may be entitled, without investigation, to rely upon) the authority of the Member or such officers to take any action on behalf of the Company.
C-1

6.          Membership Interests.  As of the date hereof, the only type of ownership interests in the Company are membership interests.  For the avoidance of doubt, all Class A Units and Class B Units (as such terms were defined in the Original Agreement) outstanding immediately prior to the effectiveness of this Agreement are hereby recapitalized by operation of this Agreement, with each such Class A Unit and Class B Unit now being a “membership interest” under this Agreement without any class designation.  As of the date hereof, 100% of the membership interests are owned by the Member.

7.          Additional Contributions.  The Member is not required to make additional capital contributions to the Company.  All capital contributions shall be made at the option of the Member and shall be made as and when the Member deems appropriate.

8.          Membership Interests.  Membership interests of the Company may be represented by certificates at the sole discretion of the Member.  The Company hereby irrevocably elects that, to the extent certificates representing membership interests are issued, all membership interests shall be deemed securities governed by Article 8 of the Uniform Commercial Code.  In the event the Member elects to issue certificates representing membership interests, such certificates shall bear the following legend:

“THIS CERTIFICATE EVIDENCES AN INTEREST IN THE COMPANY AND SHALL BE A SECURITY FOR PURPOSES OF ARTICLE 8 OF THE UNIFORM COMMERCIAL CODE.”

9.          Term.  The Company shall continue in existence in perpetuity until the termination of the Company in accordance with the provisions of Section 16 below.

10.          Limited Liability.  Except as otherwise required by the Act, (a) the debts, expenses, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, expenses, obligations and liabilities of the Company and (b) the Member shall not have any liability for the obligations or liabilities of the Company solely by reason of being a member or acting as the Member of the Company.

11.          Exculpation and Indemnification.

(a)          The Company shall, to the full extent permitted by law, indemnify and hold harmless the Member and the officers of the Company and each affiliate, officer, controlling person, partner, employee or shareholder of any of the foregoing, together with their respective successors and assigns, heirs, executors and administrators (each, an “Indemnified Person”), from and against any and all losses, claims, costs, damages, liabilities, expenses (including legal fees and expenses), suits or proceedings (whether civil, criminal, administrative or investigative), judgments, fines, settlements and other amounts (collectively, “Claims”) arising from, related to or incurred or imposed upon such Indemnified Person in connection with, which arise out of, or relate to (i) the fact that such Indemnified Person is or was a member, officer, employee or agent of the Company, or is or was serving at the request of the Company as a manager, director, officer, employee or agent of another corporation, company, partnership, joint venture, trust or other enterprise, or (ii) otherwise with respect to the Company’s property, business or affairs.  An Indemnified Person’s expenses paid or incurred in investigating, preparing or defending itself against any Claim shall be reimbursed by the Company as paid or incurred.
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(b)          The indemnification provided by this Section 11 shall not be deemed exclusive of any other rights to which an Indemnified Person may have or hereafter acquire under any statute, agreement, vote of members or otherwise.

(c)          The Company may purchase and maintain insurance on behalf of any person or entity who is or was a Member, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, manager, officer, employee or agent of another corporation, company, partnership, joint venture, trust or other enterprise, against any liability asserted against such person or entity incurred by such person or entity in any such capacity, or arising out of such person’s or entity’s status as such, whether or not the Company would have the power to indemnify such person or entity against such liability under the provisions of this Section 11.

(d)          For purposes of this Section 11, references to “the Company” shall include, in addition to the surviving company, any merging company (including any company having merged with a merging company) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its members, directors, managers, officers, employees or agents, so that any person or entity that is or was a member, director, manager, officer, employee or agent of such merging company, or is or was serving at the request of such merging company as a director, manager, officer, employee or agent of another corporation, company, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 11 with respect to the surviving company as such person or entity would have with respect to such merging corporation if its separate existence had continued.

12.          Allocations and Distributions.  Each item of income, gain, loss, deduction and credit of the Company for Federal income tax purposes shall be allocated to the Member.  All distributions in respect of the ownership interests in the Company shall be made to the Member.

13.          Fiscal Year.  The fiscal year of the Company shall end on December 31, unless otherwise determined by the Member.

14.          Method of Accounting.  The method of accounting used by the Company shall be determined by the Member.

15.          Business with the Company.   The Member shall be permitted to transact business with the Company.

16.          Dissolution.  The Company will be dissolved upon the occurrence of any of the following events:

(a)          the written agreement of the Member; or

(b)          the entry of a decree of judicial dissolution under Section 18‑802 of the Act.
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Dissolution of the Company will be effective on the day on which an event described in clause (a) or (b) above occurs, but the Company will not terminate until a certificate of cancellation is filed with the Secretary of State of the State of Delaware and the assets of the Company are distributed in accordance with the Act or applicable law.  Notwithstanding the dissolution of the Company, prior to the termination of the Company, the business of the Company will continue to be governed by this Agreement.

17.          Successors and Assigns.  This Agreement shall be binding upon and shall inure to the benefit of the Company, the Member and their respective successors, successors-in-title, legal representatives, heirs and assigns.  None of the provisions of this Agreement shall be for the benefit of or enforceable by any person or entity other than a member or the Company, including without limitation any creditor of any member or the Company.

18.          Amendments; Waivers.  No waiver, modification or amendment of this Agreement shall be valid or binding unless such waiver, modification or amendment is in writing duly executed by the Member.  No delay or omission in exercising any right under this Agreement shall operate as a waiver of that or any other right.

19.          Governing Law.  This Agreement shall be governed by and interpreted, construed and enforced in accordance with the internal laws of Delaware.

[Signature Page Follows]
C-4

The Member has executed this Agreement as of the day and year first above set forth.

 
TREAN COMPSTAR HOLDINGS LLC
     
 
By:

 
Name:
Andrew M. O’Brien
 
Title:
Authorized Signatory

Compstar Holding Company LLC
Limited Liability Company Agreement
C-5

Exhibit D
Termination Agreement

D-1

Exhibit E
Amended and Restated By-Laws

E-1

Schedule I
Trean Holdings LLC and BIC Holdings LLC Capitalization Table


I-1

Exhibit 10.3

CONTRIBUTION AGREEMENT

THIS CONTRIBUTION AGREEMENT (this “Agreement”), is made and entered into as of [•], 2020, by and among Trean Insurance Group, Inc., a Delaware corporation (“Trean”), BIC Holdings LLC, a Delaware limited liability company (“BIC Holdings”) and Trean Holdings LLC, a Delaware limited liability company (“Trean Holdings”).  Each of Trean, BIC Holdings and Trean Holdings is referred to individually as a “Party” and collectively with the other Party as the “Parties”.

R E C I T A L S

WHEREAS, in order to facilitate the consummation of an initial public offering of Trean (“IPO”), Trean, BIC Holdings, Trean Holdings and certain other parties intend to effect certain reorganization transactions, including the Contribution (as defined below), pursuant to the Reorganization Agreement, by and among Trean, BIC Holdings, Trean Holdings and such other parties named therein (the “Reorganization Agreement”);

WHEREAS, each of BIC Holdings and Trean Holdings desire to make a capital contribution to Trean pursuant to which each of BIC Holdings and Trean Holdings will transfer all of their respective assets, including all equity interests in their respective subsidiaries, to Trean on the terms and subject to the conditions set forth herein (collectively, the “Contributed Interests”);

WHEREAS, each of BIC Holdings and Trean Holdings desire to enter into this Agreement, pursuant to which each of BIC Holdings and Trean Holdings will contribute the Contributed Interests to Trean;

WHEREAS, the respective boards of managers of each of BIC Holdings and Trean Holdings have determined that it is advisable and in the best interests of each of BIC Holdings and Trean Holdings and their respective unit holders to contribute, assign, transfer, convey and deliver to Trean all of their respective rights, titles and interests in and to the Contributed Interests (the “Contribution”) in exchange for an economically equivalent amount of shares of common stock, par value $0.01 per share, of Trean (the “Common Stock”);

WHEREAS, Trean desires to accept the Contribution from each of BIC Holdings and Trean Holdings in exchange for the Common Stock;

WHEREAS, the pre-IPO equity value of Trean is $[•], of which (i) [•]% is allocable to BIC Holdings which equates to an implied equity value of $[•], (ii) [•]% is allocable to Trean Holdings which equates to an implied equity value of $[•] and (iii) [•]% is allocable to Compstar Holding Company LLC, a Delaware limited liability company (“Compstar Holding”) which equates to an implied equity value of $[•], or (a) [•]% allocable to Trean Compstar Holdings LLC, a Delaware limited liability company (“Trean Compstar”) which equates to an implied equity value of $[•] and (b) [•]%, in the aggregate, allocable to Blake Enterprises I, Inc., a Delaware corporation, Blake Enterprises II, Inc., a Delaware corporation and Blake Enterprises III, Inc., a Delaware corporation (collectively, “Blake Enterprises”) which equates to an implied equity value of $[•];

WHEREAS, Trean Compstar owns 18,000,000 units designated as Class A Units of Compstar Holding, representing [•]% of the issued and outstanding equity interests of the Company or $[•] of the implied equity value of Compstar Holding;


WHEREAS, the combined pre-IPO equity value allocable to the Blake Enterprises is $[•] or [•]%  pre-IPO ownership of Trean;

WHEREAS, the combined pre-IPO equity value allocable to the unit holders of BIC Holdings and Trean Holdings is $[•] or [•]% pre-IPO ownership of Trean;

WHEREAS, the Blake Enterprises will receive, in the aggregate, [•]% of the shares of Common Stock outstanding immediately before giving effect to the shares of Common Stock to be issued in connection with the IPO in exchange for all 22,000,000 units designated as Class B Units of Compstar Holding; and

WHEREAS, BIC Holdings and Trean Holdings will receive, in the aggregate, [•]% of the shares of Common Stock outstanding immediately before giving effect to the shares of Common Stock to be issued in connection with the IPO in exchange for the Contributed Interests.

A G R E E M E N T

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.          Contribution; Assumption; and Exchange.

1.1          Contribution of the Contributed Interests; Exchange for Common Stock.  In reliance on the representations and warranties contained herein, each of BIC Holdings and Trean Holdings hereby contributes, assigns, transfers, conveys and delivers, as of the date hereof, the Contributed Interests to Trean.

1.2          Assumption of Liabilities and Obligations; Entitle to Rights and Benefits.  Trean hereby assumes and agrees to perform all of the liabilities and obligations of each of BIC Holdings and Trean Holdings and accepts all of the rights and benefits of each of BIC Holdings and Trean Holdings, in each case, resulting from, relating to or arising out of the Contributed Interests of whatever kind or nature.

1.3          Transfer of Common Stock.  Trean shall transfer to BIC Holdings and Trean Holdings [•]% of the shares of Common Stock outstanding immediately before giving effect to the shares of Common Stock to be issued in connection with the IPO in exchange for the Contributed Interests.

2.          Representations and Warranties of the Parties.  Each Party hereby represents and warrants to the other Party as follows:

2.1          Organization.  It is a corporation, duly incorporated, or a limited liability company, duly organized, in each case, validly existing and in good standing under the laws of its state of organization.

2.2          Authority.  It has all requisite corporate power and authority to execute and deliver this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.  It has obtained all necessary corporate approvals for the execution and delivery of this Agreement, the performance of its obligations hereunder and the consummation of the transactions contemplated hereby.  This Agreement has been duly executed and delivered by it and (assuming due authorization, execution and delivery by the other Parties) constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.

2

3.          Miscellaneous.

3.1          Further Assurances.  From and after the date of this Agreement, each Party, at the request of the other Party, shall take all such action and deliver all such documents as shall be reasonably necessary or appropriate to effect the Contribution as set forth in this Agreement and otherwise enable each Party to enjoy the benefits contemplated by this Agreement.

3.2          Entire Agreement.  This Agreement, together with the Reorganization Agreement and the other agreements being entered into in connection with the transactions contemplated thereby, constitutes the sole and entire agreement of the Parties with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings, representations and warranties and agreements, both written and oral, with respect to such subject matter.

3.3          Successors and Assigns.  This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.  None of the Parties may assign its rights or obligations hereunder without the prior written consent of the other Parties, which consent shall not be unreasonably withheld or delayed. Any attempted assignment without such consent shall be null and void.

3.4          No Third-Party Beneficiaries.  This Agreement is for the sole benefit of the Parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Agreement.

3.5          Headings.  The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

3.6          Amendment and Modification; Waiver.  This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each of the Parties. No waiver by any of the Parties of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the Party so waiving. Except as otherwise set forth in this Agreement, no failure to exercise, or delay in exercising, any rights, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

3.7          Governing Law; Submission to Jurisdiction.  This Agreement is made under, and shall be construed and enforced in accordance with, the laws of the State of Delaware, without giving effect to principles of conflicts of law.

3.8          Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement.  A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

[signature page follows]

3

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.
 
  TREAN INSURANCE GROUP, INC.
 
     
  By:
   
  Name:
Andrew M. O’Brien
 
  Title: 
Authorized Signatory
 
     
  BIC HOLDINGS LLC  
       
 
By:
 
 
 
Name:
Andrew M. O’Brien
 
 
Title:
Authorized Signatory  

  TREAN HOLDINGS LLC  
       
 
By:
 
 
 
Name:
Andrew M. O’Brien
 
 
Title:
Authorized Signatory  



[Signature Page to HoldCo Contribution Agreement]


Exhibit 10.4


CONTRIBUTION AGREEMENT

THIS CONTRIBUTION AGREEMENT (this “Agreement”), is made and entered into as of [•], 2020, by and among Trean Insurance Group, Inc., a Delaware corporation (“Trean”), and Trean Compstar Holdings LLC, a Delaware limited liability company (“Trean Compstar”).  Each of Trean and Compstar Holding is referred to individually as a “Party” and collectively with the other Party as the “Parties”.

R E C I T A L S

WHEREAS, Trean Compstar entered into an agreement (the “Exchange Agreement”) with Blake Enterprises I, Inc., a Delaware corporation, Blake Enterprises II, Inc., a Delaware corporation and Blake Enterprises III, Inc., a Delaware corporation (collectively, “Blake Enterprises”), Blake Baker, and Trean Holdings LLC, dated as of June 3, 2020, pursuant to which Blake Enterprises agreed to transfer all of its 22,000,000 units designated as Class B Units (the “Class B Units”) of Compstar Holding Company LLC, a Delaware limited liability company (“Compstar Holding”), owned by Blake Enterprises, which represents [•]% of the issued and outstanding equity interests of Compstar Holding, to Trean in exchange for [•]% of the  shares of common stock, par value $0.01 per share, of Trean outstanding immediately prior to giving effect to the IPO (as defined below) of Trean;

WHEREAS, Trean Compstar currently owns 18,000,000 units designated as Class A Units (the “Class A Units”) of Compstar Holding, which represents [•]% of the issued and outstanding equity interests of Compstar Holding;

WHEREAS, Trean desires to contribute all 22,000,000 Class B Units it acquired from Blake Enterprises to Trean Compstar such that following such contribution Trean Compstar will be the sole unit holder of Compstar Holding;

WHEREAS, pursuant to the Exchange Agreement, the Limited Liability Company Agreement of Compstar Holding, as amended (the “Former LLC Agreement”), will terminate immediately following Trean’s contribution of the Class B Units to Trean Compstar, and, immediately thereafter, Trean Compstar will adopt the Limited Liability Company Agreement of Compstar Holding substantially in the form attached hereto as Exhibit A (the “New LLC Agreement”);

WHEREAS, in order to facilitate the consummation of an initial public offering of Trean (“IPO”), the board of directors of Trean has determined that it is advisable and in the best interests of Trean to contribute, assign, transfer, convey and deliver to Trean Compstar all of Trean’s right, title and interest in and to the Class B Units; and

WHEREAS, Trean Compstar desires to accept the Class B Units from Trean.

A G R E E M E N T

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.          Contribution and Acceptance.

1.1          Contribution.  In reliance on the representations and warranties contained herein, Trean hereby contributes, assigns, transfers, conveys and delivers to Trean Compstar all of Trean’s right, title and interest in and to all of the issued and outstanding Class B Units.

1.2          Acceptance.  Trean Compstar hereby accepts the contribution, assignment, transfer conveyance and deliver of all of Trean’s right, title and interest in and to the Class B Units in accordance with the terms set forth herein.

1.3         Transfer of Class B Units.  The transfer of the Class B Units will take place substantially simultaneously with (and immediately following) the closing of the transaction contemplated by the Exchange Agreement.  Under the terms of the Exchange Agreement, the Former LLC Agreement, will terminate effective immediately following Trean’s contribution of Class B Units to Trean Compstar.  Immediately following the termination of such agreement, Trean Compstar will be entering into the New LLC Agreement.

2.          Representations and Warranties of the Parties.  Each Party hereby represents and warrants to the other Party as follows:

2.1         Organization.  It is a corporation, duly incorporated, or a limited liability company, duly organized, in each case, validly existing and in good standing under the laws of its state of organization.

2.2          Authority.  It has all requisite corporate power and authority to execute and deliver this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.  It has obtained all necessary corporate approvals for the execution and delivery of this Agreement, the performance of its obligations hereunder and the consummation of the transactions contemplated hereby.  This Agreement has been duly executed and delivered by it and (assuming due authorization, execution and delivery by the other Parties) constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms.

3.          Miscellaneous.

3.1          Further Assurances.  From and after the date of this Agreement, each Party, at the request of the other Party, shall take all such action and deliver all such documents as shall be reasonably necessary or appropriate to effect the Contribution as set forth in this Agreement and otherwise enable each Party to enjoy the benefits contemplated by this Agreement.

3.2          Entire Agreement.  This Agreement, together with the Reorganization Agreement, by and among Trean and such other parties named therein and the other agreements being entered into in connection with the transactions contemplated thereby, constitutes the sole and entire agreement of the Parties with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings, representations and warranties and agreements, both written and oral, with respect to such subject matter.

3.3          Successors and Assigns.  This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.  None of the Parties may assign its rights or obligations hereunder without the prior written consent of the other Parties, which consent shall not be unreasonably withheld or delayed. Any attempted assignment without such consent shall be null and void.

2

3.4          No Third-Party Beneficiaries.  This Agreement is for the sole benefit of the Parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Agreement.

3.5          Headings.  The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.

3.6          Amendment and Modification; Waiver.  This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each of the Parties. No waiver by any of the Parties of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the Party so waiving. Except as otherwise set forth in this Agreement, no failure to exercise, or delay in exercising, any rights, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

3.7         Governing Law; Submission to Jurisdiction.  This Agreement is made under, and shall be construed and enforced in accordance with, the laws of the State of Delaware, without giving effect to principles of conflicts of law.

3.8          Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement.  A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.


[signature page follows]

3


IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.


  TREAN INSURANCE GROUP, INC.  
       
  By:
   
  Name:
Andrew M. O’Brien
 
  Title:
Authorized Signatory
 
       
       
  TREAN COMPSTAR HOLDINGS LLC  
       
  By:
   
  Name:
Andrew M. O’Brien  
  Title:
Authorized Signatory  
       
       



[Signature Page to Compstar Holding Contribution Agreement]

Exhibit A
LLC Agreement of Compstar Holding




Exhibit 10.5

AGREEMENT

This Agreement (this “Agreement”), dated as of June 3, 2020, is entered into by and among Blake Enterprises I, Inc., a Delaware corporation, Blake Enterprises II, Inc., a Delaware corporation, and Blake Enterprises III, Inc., a Delaware corporation (collectively, the “Baker Entities”), Blake Baker, Compstar Holding Company LLC, a Delaware limited liability company (the “Company”), Trean Holdings LLC, a Delaware limited liability company (“Trean”), and Trean Compstar Holdings LLC, a Delaware limited liability company (“Trean Compstar”).  Capitalized terms used and not defined in this Agreement shall have the respective meanings ascribed to such terms in the Company’s Limited Liability Company Agreement, dated as of April 2, 2018 (as amended) (the “LLC Agreement”).

1.           (a)          In connection with any Initial Public Offering for the IPO Entity (as such terms are defined below) that occurs before December 31, 2020 and promptly after the closing (the “Closing”) of reorganization transactions pursuant to which the equity interests, or all or substantially all of the assets and liabilities, of Trean and of BIC Holdings LLC (“BIC”) will be directly or indirectly contributed or transferred to the IPO Entity in exchange for shares of common stock (“Common Stock”) in the IPO Entity (the “Trean and BIC Reorganization”), the transactions set forth in subsections (i) through (iii) of this Section 1(a) shall be effected by the parties to this Agreement (and the parties to this Agreement will not conduct an Initial Public Offering of the IPO Entity prior to December 31, 2020 without effecting the Trean and BIC Reorganization and the transactions set forth in the following subsections (i) through (iii) of this Section 1(a)):

(i)          the Baker Entities will (and will cause their Permitted Transferees to) substantially concurrent with the Closing, exchange all of their Class B Units (and all rights under the LLC Agreement relating thereto) for a number of shares of Common Stock (to be allocated amongst the Baker Entities in the same proportions in which the Baker Entities hold Class B Units as of immediately prior to the Exchange) of the IPO Entity equal to an aggregate of 14.45% of the total number of shares of Common Stock of the IPO Entity outstanding immediately before giving effect to the shares of Common Stock to be issued in the Initial Public Offering for the IPO Entity (and calculated without giving effect to (i.e., without counting) (A) any shares of Common Stock issuable upon the exercise of any greenshoe option in connection with the Initial Public Offering, and (B) up to an additional number of shares of Common Stock issuable upon the exercise of options or warrants (excluding the greenshoe option described in the foregoing clause (A)) that are then outstanding and that, if exercised, would be equal to two percent (2%) of the fully-diluted shares of Common Stock of the IPO Entity at such time) (such exchange transaction, the “Exchange”);

(ii)         the Baker Entities will (and will cause their Permitted Transferees to) sell in the Initial Public Offering, on the same terms as the other shares of Common Stock of the IPO Entity that are being sold in the Initial Public Offering (including by entering into customary agreements (including underwriting and lockup agreements) requested by the IPO Entity or the underwriters in connection therewith), a number of shares of Common Stock of the IPO Entity received by them in the Exchange that would result in the Baker Entities and their Permitted Transferees owning an aggregate of 9.99% of the total number of shares of Common Stock of the IPO Entity outstanding immediately after giving effect to the completion of the Initial Public Offering (calculated before giving effect to the exercise of any greenshoe option in connection with the Initial Public Offering, and calculated without giving effect to any Common Stock issuable upon the exercise of any options or warrants); provided that all Registration Expenses (as defined below, and excluding, for the avoidance of doubt, any selling commissions, underwriter discounts or similar fees, and legal fees and expenses of legal counsel and other advisors of the Baker Entities, if any) shall be borne by the IPO Entity. “Registration Expenses” means all expenses of the IPO Entity in connection with the Initial Public Offering, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, travel expenses, filing expenses, messenger and delivery expenses, fees and disbursements of custodians, reimbursement of fees and expenses of the underwriter(s) for the Initial Public Offering (to the extent the Company is responsible for such reimbursement, and excluding, for the avoidance of doubt, selling commissions, underwriter discounts and similar fees applicable to the Common Stock to be sold by the Baker Entities in the Initial Public Offering) and fees and disbursements of counsel for the IPO Entity, fees and disbursements of all independent certified public accountants of the IPO Entity, the expense of any annual audit or quarterly review of the IPO Entity, and the expenses and fees for listing the Common Stock of the IPO Entity to be registered on any applicable securities exchange; and

(iii)        substantially concurrent with such Closing, (A) Blake Baker will, and the Company will cause OpCo to, enter into an amendment to the Employment Agreement between Blake Baker and Opco, dated as of April 2, 2018, in the form attached as Exhibit A hereto, it being understood and agreed that such amendment will not limit or affect the covenants and agreements contained in Section 5 of the Management Incentive Unit Agreement between the Company and Blake Baker, which Management Incentive Unit Agreement will continue in effect after such Closing, and (B) the LLC Agreement will terminate and cease to apply without any further action by the parties thereto immediately following the completion of the Exchange and the contribution by the IPO Entity to Trean Compstar of the Class B Units acquired by the IPO Entity in the Exchange; provided, however, that (1) the rights and obligations of the parties to the LLC Agreement under Sections 13.1 and 13.2 thereto (Exculpation and Indemnification) with respect to acts or omissions occurring prior to the Closing shall survive the termination of the LLC Agreement; (2) the provisions of Article V (Distributions) and Article VI (Allocations) shall continue to govern as they relate to periods prior to the Closing; and (3) such termination of the LLC Agreement shall not relieve any party thereto from liability for breaches thereof that occurred prior to such termination. For the sake of clarity, and without limiting the generality of previous sentence, the forfeiture restrictions applicable to the Class B Units held by Baker and his Permitted Transferees (including without limitation the Baker Entities) and the corresponding repurchase rights, each as set forth in Section 9.3 of the LLC Agreement, will automatically terminate upon the occurrence of the Exchange and be of no further force or effect, and shall not apply to any shares of Common Stock of the IPO Entity acquired by the Baker Entities in the Exchange.

(b)          As used in this Agreement, (i) “Initial Public Offering” means an initial public offering of the securities of the IPO Entity in accordance with the provisions of the Securities Act, other than pursuant to a registration statement on Form S-4 or Form S-8 or any similar or successor form, and (ii) “IPO Entity” means any of Trean, BIC, any direct or indirect parent, subsidiary or other Affiliate of or successor to Trean or BIC, or any other Person that acquires all or substantially all of the equity interests or the assets and liabilities of Trean and BIC, that in any such case is the issuer of Common Stock in an Initial Public Offering (which entity may be formed after the date hereof), which shall for applicable purposes hereunder be deemed to be a Successor Entity under the LLC Agreement.

(c)          In connection with the Exchange, (i) the Baker Entities represent that the amount of consolidated EBITDA of the Company for the twelve-month period ended December 31, 2019 (“Consolidated Company EBITDA”), as disclosed by the Baker Entities to Trean Compstar prior to the date hereof, was derived from the books and records of the Company and its subsidiaries, which books and records are accurate and complete in all material respects, and calculated in all material respects in accordance with U.S. generally accepted accounting principles (“GAAP”), and (ii) Trean Compstar represents that the combined EBITDA of Trean and its subsidiaries (other than the Company and its subsidiaries) and BIC and its subsidiaries for the twelve-month period ended December 31, 2019 (“Combined Trean/BIC EBITDA”), as disclosed by Trean or its Affiliates to Blake Baker prior to the date hereof, was derived from the books and records of Trean and its subsidiaries (other than the Company and its subsidiaries) and BIC and its subsidiaries, which books and records are accurate and complete in all material respects, and calculated in all material respects in accordance with GAAP, except that (A) certain items and amounts included in the calculation of Combined Trean/BIC EBITDA were not calculated in accordance with GAAP but were calculated in all material respects in accordance with the historical accounting practices of Trean and its subsidiaries (other than the Company and its subsidiaries) and BIC and its subsidiaries, and with respect to those items and amounts not calculated in accordance with GAAP, Trean or its Affiliates has provided to Baker and the Baker Entities the adjustments that have been made to the Combined Trean/BIC EBITDA in respect of such non-GAAP items (the “Adjustments”), and (B) for the avoidance of doubt, no portion of the Consolidated Company EBITDA was included in the Combined Trean/BIC EBITDA.  Trean Compstar further represents that the Adjustments (which increase the Combined Trean/BIC EBITDA) are reversals of actual expenses taken into account in the pre-Adjustment calculation of the Combined Trean/BIC EBITDA.
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(d)          The parties to this Agreement intend that the Trean and BIC Reorganization, the Initial Public Offering (together with the exercise of any greenshoe option in connection with the Initial Public Offering) and the transaction set forth in subsection (i) of Section 1(a) above will be treated as part of an integrated transaction qualifying for tax-free treatment under Section 351 of the Code (subject to the application of Section 351(h)(1) and Section 357 of the Code), and shall not take any position on a tax return or otherwise that is inconsistent with such treatment, except as required by law. The parties agree that they will not enter into any transactions, including but not limited to the sale of shares or the grant of options and excluding the sale of Common Stock by stockholders in the Initial Public Offering, that would result in the control requirement of Section 351(a) of the Code not being satisfied immediately after the completion of such integrated transaction.

(e)          The parties to this Agreement acknowledge that the percentage of shares of Common Stock of the IPO Entity to be issued to the Baker Entities in the Exchange (i.e., 14.45%) was  calculated based, in part, upon the respective capitalizations (including without limitation levels of indebtedness) of the Company, Trean and BIC as of December 31, 2019.  If a material change to the capitalization of the Company, Trean or BIC occurs after December 31, 2019 and prior to the consummation of the Initial Public Offering (other than the Trean and BIC Reorganization, the Exchange, and the transactions contemplated by and relating to the Trean and BIC Reorganization and the Exchange), the parties hereto agree to equitably adjust the percentage of shares of Common Stock of the IPO Entity to be issued to the Baker Entities in the Exchange in the same manner as would have been effected had such change occurred as of December 31, 2019 in order to equitably reflect the purposes and intentions of the parties in entering into this Agreement (it being understood that if any such change results in the Baker Entities receiving a larger percentage of the shares of Common Stock of the IPO Entity in the Exchange than is provided in Section 1(a)(i) above, the Baker Entities will still be required to sell a sufficient number of shares of Common Stock in the IPO as contemplated by Section 1(a)(ii) above such that the aggregate ownership of shares of Common Stock by the Baker Entities will be 9.99% of the total number of shares of Common Stock of the IPO Entity outstanding immediately after giving effect to the completion of the Initial Public Offering (calculated before giving effect to the exercise of any greenshoe option in connection with the Initial Public Offering, and calculated without giving effect to any Common Stock issuable upon the exercise of any options or warrants).

2.           Representations and Warranties of Baker and the Baker Entities. Baker and the Baker Entities hereby jointly and severally represent and warrant to Trean, Trean Compstar and the IPO Entity as follows:

(a)          Ownership; No Encumbrances. Immediately prior to the Exchange, the Baker Entities will be the only record and beneficial owner of the Class B Units, with good and marketable title thereto, free and clear of all liens, pledges, charges and other encumbrances and restrictions of any nature (other than the pledge of such Class B Units in favor of Oak Street Funding LLC, which the parties hereto agree to use commercially reasonable efforts to remove (or to replace with a similar pledge by Trean Compstar of such Class B Units following the Exchange), and are not subject to any adverse claim thereon (other than with respect to any restrictions on transfer imposed by the LLC Agreement, which the parties hereto hereby waive solely in connection with effecting the Exchange).
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(b)          Authority.  Each of the Baker Entities has the requisite power and authority to execute and deliver this Agreement, to perform its respective obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Baker and each of the Baker Entities. The execution, delivery and performance of this Agreement has been duly authorized by each of the Baker Entities. The execution and delivery of this Agreement and performance by Baker and each of the Baker Entities of his or its respective obligations hereunder, the consummation of the transactions contemplated hereby and the compliance by Baker and each of the Baker Entities with any of the provisions hereof will not (i) violate or conflict with the organizational documents of each of the Baker Entities, (ii) violate or conflict with any action, suit or order affecting any of the Baker Entities or the Class B Units, or (iii) require any consent or other action by any other Person under, or constitute a default under, any provision of any contract, agreement or other instrument to which Baker or any of the Baker Entities is a party or to which Baker or any of the Baker Entities assets are bound (other than with respect to any restrictions on transfer imposed by the LLC Agreement, which the parties hereto hereby waive solely in connection with effecting the Exchange). This Agreement constitutes the valid and binding obligation of Baker and each of the Baker Entities, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies.

(c)          Accredited Investor.  Each of the Baker Entities is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any successor federal law then in force.

(d)          Access to Information. Each of Baker and the Baker Entities has had an opportunity to ask Trean questions and receive answers regarding the IPO Entity and Trean’s and BIC’s operations and financial performance and has had access to such other information concerning the IPO Entity and Trean’s and BIC’s operations and financial performance as Baker and the Baker Entities has requested.

(e)          Independent Analysis.  Each of Baker and the Baker Entities has conducted its own independent investigation into the IPO Entity, Trean, BIC, their respective businesses and their respective prospects and has relied solely on the results of its own due diligence inquiries, and the representations and warranties of Trean and Trean Compstar contained herein.

(f)          No General Solicitation. None of Baker or the Baker Entities is entering into this Agreement as a result of any advertisement, article, notice or other communication regarding the transactions contemplated hereby published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

3.           Representations and Warranties of Trean and Trean Compstar.  Trean and Trean Compstar hereby jointly and severally represent and warrant to each of the Baker Entities as follows:

(a)          Issuance; No Encumbrances. At the time of the Exchange, the IPO Entity will have the authority to issue the Common Stock to be issued in the Exchange.  Immediately following the consummation of the Exchange, the Baker Entities will acquire good title to the Common Stock to be issued to the Baker Entities in the Exchange, free and clear of all liens, pledges, charges and other encumbrances and restrictions of any nature (subject to any such encumbrances that may be imposed as a result of any agreements or obligations of Baker or the Baker Entities, and subject to any restrictions under applicable securities laws).
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(b)          Authority.  Each of Trean and Trean Compstar has the requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Trean and Trean Compstar. The execution, delivery and performance of this Agreement has been duly authorized by Trean and Trean Compstar. The execution and delivery of this Agreement and performance by Trean and Trean Compstar of their respective obligations hereunder, the consummation of the transactions contemplated hereby and the compliance by Trean and Trean Compstar with any of the provisions hereof will not (i) violate, or conflict with, the organizational documents of Trean or Trean Compstar, (ii) violate or conflict with any action, suit or order affecting Trean or Trean Compstar, or (iii) require any consent or other action by any other Person under, or constitute a default under, any provision of any contract, agreement or other instrument to which Trean or Trean Compstar is a party or to which any of Trean’s or Trean Compstar’s assets are bound. This Agreement constitutes the valid and binding obligation of Trean and of Trean Compstar, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies.

(c)          Access to Information. Trean and Trean Compstar have had an opportunity to ask Baker and the Baker Entities questions and receive answers regarding the Company and the Company’s operations and financial performance and have had access to such other information concerning the Company and the Company’s operations and financial performance as Trean and Trean Compstar have requested.

4.           Sections 17.7-17.10, 17.12-17.13 and 17.21 of the LLC Agreement shall apply to this Agreement as if fully set forth herein (notwithstanding Section 1(a)(iii)(B) above), mutatis mutandis.  This Agreement shall not be assignable by any party without the prior written consent of the other parties hereto, except that the Company, Trean and Trean Compstar may assign any or all of their rights hereunder to the IPO Entity. This Agreement and the other documents referred to herein embody the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt all prior understandings or agreements by or among such parties which may have related to the subject matter hereof, and in the event of any conflict between the terms of this Agreement and the LLC Agreement, the terms of this Agreement shall control. This Agreement may be amended only by the mutual written agreement of the parties hereto.  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which taken together shall be considered one and the same agreement.  In the event that any signature to this Agreement is delivered by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such “.pdf” signature page were an original thereof.

[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above.

 
COMPSTAR HOLDING COMPANY LLC
       
 
By:
/s/ Andrew M. O'Brien
   
Name:
Andrew M. O’Brien
   
Title:
Authorized Signatory

 
TREAN COMPSTAR HOLDINGS LLC
       
 
By:
/s/ Andrew M. O'Brien
   
Name:
Andrew M. O’Brien
   
Title:
Authorized Signatory

 
TREAN HOLDINGS LLC
       
 
By:
/s/ Andrew M. O'Brien
   
Name:
Andrew M. O’Brien
   
Title:
Authorized Signatory
       
  By:
/s/ Blake Baker 
  Blake Baker

 
BLAKE ENTERPRISE I, INC.
 
BLAKE ENTERPRISES II, INC.
 
BLAKE ENTERPRISES III, INC.
       
 
By:
/s/ Blake Baker
   
Name:
Blake Baker
   
Title:
President

Exhibit A

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT











Exhibit 10.6

DIRECTOR NOMINATION AGREEMENT

DIRECTOR NOMINATION AGREEMENT, dated as of          , 2020 (this “Agreement”), by and among Trean Insurance Group, Inc., a Delaware corporation (the “Company”), AHP-BHC LLC, AHP-TH LLC, ACP-BHC LLC and ACP TH LLC (collectively, together with their respective Permitted Transferees, the “Altaris Funds”).

WHEREAS, the Company has determined that it is in its best interests to effect an initial public offering (“IPO”) of shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”); and

WHEREAS, in connection with the IPO, the Company and the Altaris Funds desire to enter into this Agreement setting forth certain rights and obligations with respect to the nomination of directors to the Board of Directors of the Company (the “Board”) and other matters relating to the Board from and after the IPO.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

Section 1.   Definitions. As used in this Agreement, the following terms shall have the meanings ascribed to them below:

Affiliate” means, with respect to a specified Person, any Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. For purposes of this definition, “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

By-Laws” means the Amended and Restated By-Laws of the Company, as may be amended from time to time.

First Threshold Date” means the first date on which the Altaris Funds cease to beneficially own 35% or more of the total number of shares of Common Stock outstanding.

Certificate of Incorporation” means the Amended and Restated Certificate of Incorporation of the Company, as may be amended from time to time.

Permitted Transferee” shall mean, with respect to the Altaris Funds, (i) any Affiliates of the Altaris Funds, which for purposes of this definition only includes any investment fund or holding company that is directly or indirectly managed or advised by the same manager or investment adviser as the Altaris Funds or by an Affiliate of such manager or investment adviser, and (ii) any member or general or limited partner of the Altaris Funds.


Person” means any individual, corporation, partnership, limited liability company, joint venture, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

Second Threshold Date” means the first date on which the Altaris Funds cease to beneficially own 20% or more of the total number of shares of Common Stock outstanding.

Third Threshold Date” means the first date on which the Altaris Funds cease to beneficially own 10% or more of the total number of shares of Common Stock outstanding.

Section 2.   Board Number; Board Nomination.

(a)       Until the First Threshold Date, the Altaris Funds shall have the right (but not the obligation) pursuant to this Agreement to submit for nomination to the Board three (3) individuals and the Company shall obtain any necessary approvals from the Board, the Compensation, Nominating and Corporate Governance Committee of the Board or other duly authorized committee of the Board and shall include in the slate of nominees recommended to stockholders of the Company (the “Stockholders”) for election as a director at any annual or special meeting of the Stockholders (or, if permitted, by any action by written consent of the Stockholders) at which directors of the Company are to be elected, the up to three individuals identified in advance by the Altaris Funds.

(b)       After the First Threshold Date and until the Second Threshold Date, the Altaris Funds shall have the right (but not the obligation) pursuant to this Agreement to submit for nomination to the Board two (2) individuals and the Company shall obtain any necessary approvals from the Board, the Compensation, Nominating and Corporate Governance Committee of the Board or other duly authorized committee of the Board and shall include in the slate of nominees recommended to the Stockholders for election as a director at any annual or special meeting of the Stockholders (or, if permitted, by any action by written consent of the Stockholders) at which directors of the Company are to be elected, the up to two individuals identified in advance by the Altaris Funds.

(c)       After the Second Threshold Date and until the Third Threshold Date, the Altaris Funds shall have the right (but not the obligation) pursuant to this Agreement to submit for nomination to the Board one (1) individual and the Company shall obtain any necessary approvals from the Board, the Compensation, Nominating and Corporate Governance Committee of the Board or other duly authorized committee of the Board and shall include in the slate of nominees recommended to the Stockholders for election as a director at any annual or special meeting of the Stockholders (or, if permitted, by any action by written consent of the Stockholders) at which directors of the Company are to be elected, the one individual identified in advance by the Altaris Funds (any such individuals identified pursuant to Section 2(a), Section 2(b) or Section 2(c) hereof, the “Altaris Nominees”).

(d)       In the event that the Altaris Funds have nominated less than the total number of individuals that the Altaris Funds shall be entitled to nominate pursuant to this Section 2(a), Section 2(b) or Section 2(c), then the Altaris Funds shall have the right, at any time, to nominate such additional individual(s) to which the Altaris Funds are entitled, in which case, the Company shall cause the Board to take all necessary corporate action to (1) increase the size of the Board as required to enable the Altaris Funds to so nominate such additional individuals and (2) nominate such additional individuals identified by the Altaris Funds to fill such newly created vacancies.

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(e)       Vacancies arising through the death, resignation or removal of any Altaris Nominee who was nominated to the Board pursuant to this Section 2, may be filled by the Board only with a Altaris Nominee, and the director so chosen shall hold office until the next election and until his or her successor is duly elected and qualified, or until his or her earlier death, resignation or removal.

(f)       Notwithstanding the provisions of this Section 2, the Altaris Funds shall not be entitled to designate a Person as a nominee to the Board upon a written determination by the Compensation, Nominating and Corporate Governance Committee of the Board or equivalent duly authorized committee of the Board with nominating responsibility (which determination shall set forth in writing reasonable grounds for such determination) that such Person would not be qualified under any applicable law, rule or regulation to serve as a director of the Company. In such an event, the Altaris Funds shall be entitled to select a Person as a replacement nominee and the Company shall cause such Person to be nominated as the Altaris Nominee at the same meeting (or, if permitted, pursuant to the same action by written consent of the Stockholders) as such initial Person was to be nominated. Other than with respect to the issue set forth in the first sentence of this Section 2(f), neither the Company nor any other party to this Agreement shall have the right to object to any Altaris Nominee. Notwithstanding anything in this Agreement to the contrary, no Altaris Nominee shall be required to qualify as an independent director under applicable rules or regulations of the U.S. Securities and Exchange Commission or a stock exchange on which shares of Common Stock are listed.

(g)       Until the Third Threshold Date, the Company shall notify the Altaris Funds in writing of the date on which proxy materials are expected to be mailed by the Company in connection with an election of directors at an annual or special meeting of the Stockholders (and the Company shall deliver such notice at least 60 days (or such shorter period to which the Altaris Funds consent, which consent need not be in writing) prior to such expected mailing date or such earlier date as may be specified by the Company reasonably in advance of such earlier delivery date on the basis that such earlier delivery is necessary so as to ensure that such nominee may be included in such proxy materials at the time such proxy materials are mailed). The Company shall provide the Altaris Funds with a reasonable opportunity to review and provide comments on any portion of the proxy materials relating to the Altaris Nominees or the rights and obligations provided under this Agreement and to discuss any such comments with the Company. The Company shall notify the Altaris Funds of any opposition to a Altaris Nominee in accordance with Section 2(f) sufficiently in advance of the date on which such proxy materials are to be mailed by the Company in connection with such election of directors so as to enable the Altaris Funds to propose a replacement Altaris Nominee, if necessary, in accordance with the terms of this Agreement, and the Altaris Funds shall have 10 business days to identify such replacement Altaris Nominee.

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(h)       The Company shall cause the Board to maintain a Compensation, Nominating and Corporate Governance Committee (or equivalent duly authorized committee of the Board) and subject to applicable laws and stock exchange regulations (including any phase in periods or other limitations thereunder), the Altaris Funds shall have the right (but not the obligation) to have a Altaris Nominee that is then a director of the Company serve as a member of the Compensation, Nominating and Corporate Governance Committee (or equivalent duly authorized committee of the Board).

(i)        In the event that the Altaris Funds cease to have the requisite nomination rights pursuant to Section 2, the Altaris Funds shall use their best efforts to cause the applicable Altaris Nominee to resign as promptly as practicable thereafter.

(j)        Except as required by applicable law or the listing standards of the stock exchange on which shares of Common Stock are listed and subject to Section 2(d) the Company shall not, without the prior written consent of the Altaris Funds, take any action to increase the number of directors on the Board.

(k)       So long as this Agreement shall remain in effect, subject to applicable legal requirements, the By-Laws and the Certificate of Incorporation shall accommodate and be subject to and not in any respect conflict with the rights and obligations set forth herein.

Section 3.   Miscellaneous.

(a)       Effective Date. This Agreement shall become effective upon the closing of the IPO.

(b)       Governing Law. This Agreement and the rights and obligations of the parties hereto and the Persons subject hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of Delaware, without giving effect to the choice of law principles thereof.

(c)       Certain Adjustments. The provisions of this Agreement shall apply to the full extent set forth herein with respect to any and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution for the shares of Common Stock, by combination, recapitalization, reclassification, merger, consolidation or otherwise and the term “Common Stock” shall include all such other securities.

(d)       Enforcement. Each of the parties hereto agrees that in the event of a breach of any provision of this Agreement, the aggrieved party may elect to institute and prosecute proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach of this Agreement. Such remedies, however, shall be cumulative and not exclusive, and shall be in addition to any other remedy which any party hereto may have.

(e)       Jurisdiction. In any judicial proceeding involving any dispute, controversy or claim arising out of or relating to this Agreement, each of the parties hereto unconditionally accepts the non-exclusive jurisdiction and venue of any United States District Court located in the State of Delaware, or of the Court of Chancery of the State of Delaware, and the appellate courts to which orders and judgments thereof may be appealed. In any such judicial proceeding, each of the parties hereto agrees that in addition to any method for the service of process permitted or required by such courts, to the fullest extent permitted by law, service of process may be made by delivery provided pursuant to the directions in Section 3(h). EACH OF THE PARTIES HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING ANY DISPUTE, CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT.

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(f)       Successors and Assigns. Except as otherwise provided herein, the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.

(g)       Entire Agreement; Termination. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof and supersedes all prior oral or written (and all contemporaneous oral) agreements or understandings with respect to the subject matter hereof. This Agreement shall terminate and be of no further force and effect at such time as the Altaris Funds cease to beneficially own at least 10% of the total number of shares of Common Stock outstanding.

(h)       Notices. All notices, requests, demands, waivers, consents and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by certified or registered mail with postage prepaid, (c) sent by next-day or overnight mail or delivery with proof of receipt maintained or (d) sent by fax, to the following addresses (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof):

If to the Company:

Trean Insurance Group, Inc.
150 Lakes West Street
Wayzata, MN 55391
Attention: Andrew O’Brien
Facsimile No.: (952) 974-2222

If to the Altaris Funds:

c/o Altaris Capital Partners, LLC
10 East 53rd Street, 31st floor
New York, NY 10022
Attention: Daniel Tully and David Ellison
Facsimile No.: (212) 931-0236

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with a copy (which shall not constitute notice) to:

Skadden, Arps, Slate, Meagher & Flom LLP
One Manhattan West
New York, NY 10001
Attention: Dwight S. Yoo
Facsimile No.: (917) 777-2573

All such notices, requests, demands, waivers, consents and other communications shall be deemed to have been received by (a) if by personal delivery, on the day delivered, (b) if by electronic delivery, on the day delivered, provided that such delivery is confirmed (c) if by certified or registered mail, on the fifth business day after the mailing thereof, (d) if by next-day or overnight mail or delivery, on the day delivered, or (e) if by fax, on the day delivered, provided that such delivery is confirmed.

(i)        Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party to assert its or his or her rights hereunder on any occasion or series of occasions.

(j)        Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(k)       Headings. The headings in this Agreement are for the convenience of the parties only and shall not control or affect the meaning or construction of any provision hereof.

(l)        Invalidity of Provision. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction.

(m)      Amendments and Waivers. The provisions of this Agreement may be amended at any time and from time to time, and particular provisions of this Agreement may be waived or modified, with and only with an agreement or consent in writing signed by each of the parties hereto.

(n)       Further Assurances. Each party hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto or Person subject hereto may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement. The Company shall not directly or indirectly take any action that is intended to, or would reasonably be expected to result in, the Altaris Funds being deprived of the rights contemplated by this Agreement.

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(o)       No Third-Party Beneficiaries. This Agreement is not intended to, and does not, confer upon any Person other than the parties hereto any rights or remedies.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF this Agreement has been signed by each of the parties hereto, and shall be effective as of the date first above written.

 
TREAN INSURANCE GROUP, INC.
       
 
By:
 
   
Name:
Andrew O’Brien
   
Title:
President and Chief Executive Officer

 
AHP-BHC LLC
     
 
By:
Altaris Health Partners III, L.P.,
   
its Sole Member
     
 
By:
AHP III GP, L.P.
   
its General Partner
     
 
By:
Altaris Partners, LLC
   
its General Partner

 
By:

   
Name:
Daniel Tully
   
Title:
Managing Director

 
AHP-TH LLC
     
 
By:
Altaris Health Partners III, L.P.,
   
its Sole Member
     
 
By:
AHP III GP, L.P.
   
its General Partner
     
 
By:
Altaris Partners, LLC
 
its General Partner

  By:

   
Name:
Daniel Tully
   
Title:
Managing Director

[Signature Page to Director Nomination Agreement]


 
ACP-BHC LLC
     
 
By:
Altaris Constellation Partners, L.P.
 
its Sole Member
     
 
By:
AHP Constellation GP, L.P.
 
its General Partner
     
 
By:
Altaris Partners, LLC
 
its General Partner

 
By:

   
Name:
Daniel Tully
   
Title:
Managing Director

 
ACP-TH LLC
     
 
By:
Altaris Constellation Partners, L.P.
 
its Sole Member
     
 
By:
AHP Constellation GP, L.P.
 
its General Partner
     
 
By:
Altaris Partners, LLC
 
its General Partner

 
By:

   
Name:
Daniel Tully
   
Title:
Managing Director

[Signature Page to Director Nomination Agreement]




Exhibit 10.7
TREAN INSURANCE GROUP, INC.
2020 OMNIBUS INCENTIVE PLAN
Section 1.
Purpose of Plan.
The name of the Plan is the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan (the “Plan”). The purposes of the Plan are to provide an additional incentive to selected officers, employees, non-employee directors, independent contractors, and consultants of the Company or its Affiliates whose contributions are essential to the growth and success of the business of the Company and its Affiliates, in order to strengthen the commitment of such persons to the Company and its Affiliates, motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in the long-term growth and profitability of the Company and its Affiliates. To accomplish such purposes, the Plan provides that the Company may grant Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Stock Bonuses, Other Stock-Based Awards, Cash Awards or any combination of the foregoing.
Section 2.
Definitions.
For purposes of the Plan, the following terms shall be defined as set forth below:
(a)   Administrator” means the Board, or, if and to the extent the Board does not administer the Plan, the Committee in accordance with Section 3 hereof.
(b)   Affiliate” means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified.
(c)   Altaris Entity” means (i) Altaris Capital Partners, LLC (“Altaris”); (ii) any Affiliate of Altaris; or (iii) any private equity, investment or similar fund or other entity managed directly or indirectly by Altaris or any of its Affiliates.
(d)   Award” means any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Stock Bonus, Other Stock-Based Award or Cash Award granted hereunder.
(e)   Award Agreement” means any written agreement, contract or other instrument or document evidencing an Award, including through electronic medium, which shall contain such terms and conditions with respect to an Award as the Administrator shall determine, consistent with the Plan. Each Participant who is granted an Award shall enter into an Award Agreement with the Company, containing such terms and conditions as the Administrator shall determine, in its sole discretion.
(f)   Base Price” has the meaning set forth in Section 8(b) hereof.
(g)     Beneficial Owner” (or any variant thereof) has the meaning defined in Rule 13d-3 under the Exchange Act.
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(h)   Board” means the Board of Directors of the Company.
(i)     By-Laws” means the amended and restated by-laws of the Company, as may be further amended and/or restated from time to time.
(j)    Cash Award” means an Award granted pursuant to Section 12 hereof.
(k)   Cause” has the meaning assigned to such term in the Award Agreement or in any individual employment, service or severance agreement with the Participant or, if any such agreement does not define “Cause,” Cause means (i) the commission of an act of fraud or dishonesty by the Participant in the course of the Participant’s employment or service; (ii) the indictment of, or conviction of, or entering of a plea of nolo contendere by, the Participant for a crime constituting a felony or in respect of any act of fraud or dishonesty; (iii) the commission of an act by the Participant which would make the Participant or the Company (including any of its Subsidiaries or Affiliates) subject to being enjoined, suspended, barred or otherwise disciplined for violation of federal or state securities laws, rules or regulations, including a statutory disqualification; (iv) gross negligence or willful misconduct in connection with the Participant’s performance of his or her duties in connection with the Participant’s employment by or service to the Company (including any Subsidiary or Affiliate for whom the Participant may be employed by or providing services to at the time) or the Participant’s failure to comply with any of the restrictive covenants to which the Participant is subject; (v) the Participant’s willful failure to comply with any material policies or procedures of the Company as in effect from time to time, provided that the Participant shall have been delivered a copy of such policies or notice that they have been posted on a Company website prior to such compliance failure; or (vi) the Participant’s failure to perform the material duties in connection with the Participant’s position, unless the Participant remedies the failure referenced in this clause (vi) no later than ten (10) days following delivery to the Participant of a written notice from the Company (including any of its Subsidiaries or Affiliates) describing such failure in reasonable detail (provided that the Participant shall not be given more than one opportunity in the aggregate to remedy failures described in this clause (vi)).
(l)     Certificate of Incorporation” means the amended and restated certificate of incorporation of the Company, as may be further amended and/or restated from time to time.
(m)  Change in Capitalization” means any (i) merger, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase or other reorganization or corporate transaction or event; (ii) special or extraordinary dividend or other extraordinary distribution (whether in the form of cash, Common Stock, or other property), stock split, reverse stock split, subdivision or consolidation; (iii) combination or exchange of shares; or (iv) other change in corporate structure, which, in any such case, the Administrator determines, in its sole discretion, affects the Common Stock such that an adjustment pursuant to Section 5 hereof is appropriate.
(n)    Change in Control” means, unless otherwise defined in an Award Agreement, an event set forth in any one of the following paragraphs shall have occurred:
(1)   any Person (or any group of Persons acting together which would constitute a “group” for purposes of Section 13(d) of the Exchange Act), excluding any Altaris Entity or any group of Altaris Entities, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (I) of paragraph (2) below;
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(2)   there is consummated a merger or consolidation of the Company or any direct or indirect Subsidiary with any other corporation or other entity, other than (I) a merger or consolidation (A) which results in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, more than fifty percent (50%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation and (B) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or, if the Company or the entity surviving such merger or consolidation is then a subsidiary, the ultimate parent thereof, or (II) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities;
(3)   the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than (A) a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by shareholders of the Company following the completion of such transaction in substantially the same proportions as their ownership of the Company immediately prior to such sale or (B) a sale or disposition of all or substantially all of the Company’s assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or, if such entity is a subsidiary, the ultimate parent thereof; or
(4)   the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended.
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Notwithstanding the foregoing, (i) a Change in Control shall not be deemed to have occurred as a result of any transaction or series of integrated transactions following which any Altaris Entity (or any group of Altaris Entities) possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company (or any successor thereto), whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the Board or the board of directors or similar body governing the affairs of any successor to the Company and (ii) for each Award that constitutes deferred compensation under Section 409A of the Code, and to the extent required to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, a Change in Control shall be deemed to have occurred under the Plan with respect to such Award only if a change in the ownership or effective control of the Company or a change in ownership of a substantial portion of the assets of the Company shall also be deemed to have occurred under Section 409A of the Code.
(o)   Code” means the Internal Revenue Code of 1986, as amended from time to time.
(p)   Committee” means any committee or subcommittee the Board may appoint to administer the Plan. Subject to the discretion of the Board, the Committee shall be composed entirely of individuals who meet the qualifications of (i) a “non-employee director” within the meaning of Rule 16b-3 and (ii) any other qualifications required by the applicable stock exchange on which the Common Stock is traded. If at any time or to any extent the Board shall not administer the Plan, then the functions of the Administrator specified in the Plan shall be exercised by the Committee. Except as otherwise provided in the Certificate of Incorporation or By-Laws, any action of the Committee with respect to the administration of the Plan shall be taken by a majority vote at a meeting at which a quorum is duly constituted or unanimous written consent of the Committee’s members.
(q)   Common Stock” means the common stock, par value $0.01 per share, of the Company.
(r)    Company” means Trean Insurance Group, Inc., a Delaware corporation (or any successor company, except as the term “Company” is used in the definition of “Change in Control” above).
(s)    Disability” has the meaning assigned to such term in the Award Agreement or in any individual employment, service or severance agreement with the Participant or, if any such agreement does not define “Disability,” Disability means, with respect to any Participant, that such Participant, as determined by the Administrator in its sole discretion, is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company or an Affiliate thereof.
(t)    Effective Date” has the meaning set forth in Section 20 hereof.
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(u)    Eligible Recipient” means an officer, employee, non-employee director, independent contractor or consultant of the Company or any Subsidiary or Affiliate of the Company who has been selected as an eligible participant by the Administrator; provided, however, to the extent required to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, an Eligible Recipient of an Option or a Stock Appreciation Right means an employee, non-employee director, independent contractor or consultant of the Company or any Subsidiary or Affiliate of the Company with respect to whom the Company is an “eligible issuer of service recipient stock” within the meaning of Section 409A of the Code.
(v)    Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.
(w)   Exercise Price” means, with respect to any Option, the per share price at which a holder of such Option may purchase such shares of Common Stock issuable upon the exercise of such Option.
(x)    Fair Market Value” of Common Stock or another security as of a particular date shall mean the fair market value as determined by the Administrator in its sole discretion; provided, however, (i) if the Common Stock or other security is admitted to trading on a national securities exchange, the fair market value on any date shall be the closing sale price reported on the day prior to such date, or if no shares were traded on such date, on the last preceding date for which there was a sale of a share of Common Stock or other security on such exchange, or (ii) if the Common Stock or other security is then traded in an over-the-counter market, the fair market value on any date shall be the average of the closing bid and asked prices for such share of Common Stock or other security in such over-the-counter market for the last preceding date on which there was a sale of such share of Common Stock or other security in such market.
(y)    Free Standing Right” has the meaning set forth in Section 8(a) hereof.
(z)    Good Reason” has the meaning assigned to such term in the Award Agreement or in any individual employment, service or severance agreement with the Participant; provided that if no such agreement exists or if such agreement does not define “Good Reason,” Good Reason and any provision of the Plan that refers to Good Reason shall not be applicable to such Participant.
(aa)   ISO” means an Option intended to be and designated as an “incentive stock option” within the meaning of Section 422 of the Code.
(bb)   Nonqualified Stock Option” means an Option that is not designated as an ISO.
(cc)   Option” means an option to purchase shares of Common Stock granted pursuant to Section 7 hereof. The term “Option” as used in the Plan includes the terms “Nonqualified Stock Option” and “ISO.”
(dd)   Other Stock-Based Award” means an Award granted pursuant to Section 10 hereof.
(ee)   Participant” means any Eligible Recipient selected by the Administrator, pursuant to the Administrator’s authority provided for in Section 3 hereof, to receive grants of Awards, and, upon his or her death, his or her successors, heirs, executors and administrators, as the case may be.
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(ff)   Performance Goals” means performance goals based on criteria selected by the Administrator in its sole discretion, including, without limitation, one or more of the following criteria: (i) earnings, including one or more of operating income, net operating income, earnings before or after taxes, earnings before or after interest, depreciation, amortization, adjusted EBITDA, economic earnings, or extraordinary or special items or book value per share (which may exclude nonrecurring items); (ii) pre-tax income or after-tax income; (iii) earnings per share (basic or diluted); (iv) operating profit; (v) revenue, revenue growth or rate of revenue growth; (vi) return on assets (gross or net), return on investment, return on capital, or return on equity; (vii) returns on sales or revenues; (viii) operating expenses; (ix) stock price appreciation; (x) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (xi) implementation or completion of critical projects or processes; (xii) cumulative earnings per share growth; (xiii) operating margin or profit margin; (xiv) stock price or total shareholder return; (xv) cost targets, reductions and savings, productivity and efficiencies; (xvi) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion, customer satisfaction, employee satisfaction, human resources management, supervision of litigation and information technology goals, and goals relating to acquisitions, divestitures, joint ventures and similar transactions, and budget comparisons; (xvii) personal professional objectives, including any of the foregoing performance goals, the implementation of policies and plans, the negotiation of transactions, the development of long term business goals, formation of joint ventures, research or development collaborations, and the completion of other corporate transactions; and (xviii) any combination of, or a specified increase in, any of the foregoing. Where applicable, the Performance Goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the Company or any Affiliate thereof, or a division or strategic business unit of the Company or any Affiliate thereof, or may be applied to the performance of the Company relative to a market index, a group of other companies or a combination thereof, all as determined by the Administrator. The Performance Goals may include a threshold level of performance below which no payment shall be made (or no vesting shall occur), levels of performance at which specified payments shall be made (or specified vesting shall occur), and a maximum level of performance above which no additional payment shall be made (or at which full vesting shall occur). The Administrator shall have the authority to make equitable adjustments to the Performance Goals as may be determined by the Administrator, in its sole discretion.
(gg)   Person” has the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof.
(hh)   Plan” has the meaning set forth in Section 1 hereof.
(ii)      Related Right” has the meaning set forth in Section 8(a) hereof.
(jj)      Restricted Stock” means Shares granted pursuant to Section 9 hereof subject to certain restrictions that lapse at the end of a specified period or periods.
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(kk)   Restricted Stock Unit” means the right, granted pursuant to Section 9 hereof, to receive an amount in cash or Shares (or any combination thereof) equal to the Fair Market Value of a Share subject to certain restrictions that lapse at the end of a specified period or periods.
(ll)     Rule 16b-3” has the meaning set forth in Section 3(a) hereof.
(mm)      Shares” means Common Stock reserved for issuance under the Plan, as adjusted pursuant to the Plan, and any successor (pursuant to a merger, consolidation or other reorganization) security.
(nn)   Stock Appreciation Right” means the right to receive, upon exercise of the right, the applicable amounts as described in Section 8 hereof.
(oo)   Stock Bonus” means a bonus payable in fully vested shares of Common Stock granted pursuant to Section 11 hereof.
(pp)   Subsidiary” means, with respect to any Person, as of any date of determination, any other Person as to which such first Person owns or otherwise controls, directly or indirectly, more than 50% of the voting shares or other similar interests or a sole general partner interest or managing member or similar interest of such other Person.
(qq)   Transfer” has the meaning set forth in Section 18 hereof.
Section 3.
Administration.
(a)      The Plan shall be administered by the Administrator and shall be administered in accordance with the requirements of Rule 16b-3 under the Exchange Act (“Rule 16b-3”), to the extent applicable.
(b)          Pursuant to the terms of the Plan, the Administrator, subject, in the case of any Committee, to any restrictions on the authority delegated to it by the Board, shall have the power and authority, without limitation:
(1)   to select those Eligible Recipients who shall be Participants;
(2)   to determine whether and to what extent Awards are to be granted to Participants;
(3)   to determine the number of Shares to be covered by each Award;
(4)   to determine the terms and conditions, not inconsistent with the terms of the Plan, of each Award (including, but not limited to, (i) the restrictions applicable to Restricted Stock or Restricted Stock Units and the conditions under which restrictions applicable to such Restricted Stock or Restricted Stock Units shall lapse, (ii) the Performance Goals and periods applicable to Awards, (iii) the Exercise Price of each Option and the Base Price of each Stock Appreciation Right, (iv) the vesting schedule applicable to each Award, (v) the number of Shares or amount of cash or other property subject to each Award and (vi) subject to the requirements of Section 409A of the Code (to the extent applicable), any amendments to the terms and conditions of outstanding Awards, including, but not limited to, extending the exercise period of such Awards and accelerating the vesting schedule of such Awards);
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(5)   to determine the terms and conditions, not inconsistent with the terms of the Plan, which shall govern all written instruments evidencing Awards;
(6)   to determine the Fair Market Value in accordance with the terms of the Plan;
(7)   to determine the duration and purpose of leaves of absence which may be granted to a Participant without constituting termination of the Participant’s employment or service for purposes of Awards;
(8)   to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable;
(9)   to prescribe, amend and rescind rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws or qualifying for favorable tax treatment under applicable foreign laws, which rules and regulations may be set forth in an appendix or appendices to the Plan; and
(10)   to construe and interpret the terms and provisions of the Plan and any Award (and any Award Agreement relating thereto), and to otherwise supervise the administration of the Plan and to exercise all powers and authorities either specifically granted under the Plan or necessary and advisable in the administration of the Plan.
(c)   All decisions made by the Administrator pursuant to the provisions of the Plan shall be final, conclusive and binding on all Persons, including the Company and the Participants. No member of the Board or the Committee, nor any officer or employee of the Company or any Subsidiary thereof acting on behalf of the Board or the Committee, shall be personally liable for any action, omission, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company and of any Subsidiary thereof acting on their behalf shall, to the maximum extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, omission, determination or interpretation.
(d)   The Administrator may, in its sole discretion, delegate its authority, in whole or in part, under this Section 3 (including, but not limited to, its authority to grant Awards under the Plan, other than its authority to grant Awards under the Plan to any Participant who is subject to reporting under Section 16 of the Exchange Act) to one or more officers of the Company, subject to the requirements of applicable law or any stock exchange on which the Shares are traded.
Section 4.
Shares Reserved for Issuance; Certain Limitations
(a)   The maximum number of shares of Common Stock reserved for issuance under the Plan shall be __________ shares (subject to adjustment as provided in Section 5).
(b)   Shares issued under the Plan may, in whole or in part, be authorized but unissued Shares or Shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any Shares subject to an Award are forfeited, cancelled, exchanged or surrendered (including Shares that are exchanged by a Participant or withheld by the Company as full or partial payment in connection with the exercise of any Option or Stock Appreciation Right under the Plan or the payment of any purchase price with respect to any other Award under the Plan, as well as any Shares exchanged by a Participant or withheld by the Company or any Subsidiary to satisfy the tax withholding obligations related to any Award under the Plan) or if an Award otherwise terminates or expires without a distribution of Shares to the Participant, the Shares with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Awards under the Plan. With respect to any Stock Appreciation Right that is settled by the delivery of a net number of shares of Common Stock, only the net number of shares of Common Stock delivered in settlement of such Stock Appreciation Right shall not be available for subsequent Awards under the Plan. In addition, (i) to the extent an Award is denominated in shares of Common Stock, but paid or settled in cash, the number of shares of Common Stock with respect to which such payment or settlement is made shall again be available for grants of Awards pursuant to the Plan and (ii) shares of Common Stock underlying Awards that can only be settled in cash shall not be counted against the aggregate number of shares of Common Stock available for Awards under the Plan.
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(c)   No Participant who is a non-employee director of the Company shall be granted Awards during any calendar year that, when aggregated with such non-employee director’s cash fees with respect to such calendar year, exceed $__________ in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for the Company’s financial reporting purposes).
Section 5.
Equitable Adjustments.
(a)   In the event of any Change in Capitalization (including a Change in Control), an equitable substitution or proportionate adjustment shall be made, in each case, as may be determined by the Administrator, in its sole discretion, in (i) the aggregate number of shares of Common Stock reserved for issuance under the Plan, (ii) the kind and number of securities subject to, and the Exercise Price or Base Price of, any outstanding Options and Stock Appreciation Rights granted under the Plan, (iii) the kind, number and purchase price of shares of Common Stock, or the amount of cash or amount or type of other property, subject to outstanding Restricted Stock, Restricted Stock Units, Stock Bonuses and Other Stock-Based Awards granted under the Plan or (iv) the Performance Goals and performance periods applicable to any Awards granted under the Plan; provided, however, that any fractional shares resulting from the adjustment shall be eliminated unless otherwise determined by the Administrator. Such other equitable substitutions or adjustments shall be made as may be determined by the Administrator, in its sole discretion.
(b)   Without limiting the generality of the foregoing, in connection with a Change in Capitalization (including a Change in Control), the Administrator may provide, in its sole discretion, but subject in all events to the requirements of Section 409A of the Code, for the cancellation of any outstanding Award in exchange for payment in cash or other property having an aggregate Fair Market Value equal to the Fair Market Value of the shares of Common Stock, cash or other property covered by such Award, reduced by the aggregate Exercise Price or Base Price thereof, if any; provided, however, that if the Exercise Price or Base Price of any outstanding Award is equal to or greater than the Fair Market Value of the shares of Common Stock, cash or other property covered by such Award, the Administrator may cancel such Award without the payment of any consideration to the Participant.
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(c)          The determinations made by the Administrator pursuant to this Section 5 shall be final, binding and conclusive.
Section 6.
Eligibility.
The Participants under the Plan shall be selected from time to time by the Administrator, in its sole discretion, from those individuals that qualify as Eligible Recipients.
Section 7.
Options.
(a)   General. Each Participant who is granted an Option shall enter into an Award Agreement with the Company, containing such terms and conditions as the Administrator shall determine, in its sole discretion, which Award Agreement shall set forth, among other things, the Exercise Price of the Option, the term of the Option and provisions regarding exercisability of the Option, and whether the Option is intended to be an ISO or a Nonqualified Stock Option (and in the event the Award Agreement has no such designation, the Option shall be a Nonqualified Stock Option). The provisions of each Option need not be the same with respect to each Participant. More than one Option may be granted to the same Participant and be outstanding concurrently hereunder. Options granted under the Plan shall be subject to the terms and conditions set forth in this Section 7 and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable and set forth in the applicable Award Agreement.
(b)   Exercise Price. The Exercise Price of Shares purchasable under an Option shall be determined by the Administrator in its sole discretion at the time of grant, but, except as provided in the applicable Award Agreement, in no event shall the exercise price of an Option be less than one hundred percent (100%) of the Fair Market Value of the related shares of Common Stock on the date of grant.
(c)   Option Term. The maximum term of each Option shall be fixed by the Administrator, but no Option shall be exercisable more than ten (10) years after the date such Option is granted. Each Option’s term is subject to earlier expiration pursuant to the applicable provisions in the Plan and the Award Agreement.
(d)   Exercisability. Each Option shall be exercisable at such time or times and subject to such terms and conditions, including the attainment of Performance Goals, as shall be determined by the Administrator in the applicable Award Agreement. The Administrator may also provide that any Option shall be exercisable only in installments, and the Administrator may waive such installment exercise provisions at any time, in whole or in part, based on such factors as the Administrator may determine in its sole discretion. Notwithstanding anything to the contrary contained herein, an Option may not be exercised for a fraction of a share.
(e)   Method of Exercise. Options may be exercised in whole or in part by giving written notice of exercise to the Company specifying the number of whole Shares to be purchased, accompanied by payment in full of the aggregate Exercise Price of the Shares so purchased in cash or its equivalent, as determined by the Administrator. As determined by the Administrator, in its sole discretion, with respect to any Option or category of Options, payment in whole or in part may also be made (i) by means of consideration received under any cashless exercise procedure approved by the Administrator (including the withholding of Shares otherwise issuable upon exercise), (ii) in the form of unrestricted Shares already owned by the Participant which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (iii) any other form of consideration approved by the Administrator and permitted by applicable law or (iv) any combination of the foregoing.
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(f)   ISOs. The terms and conditions of ISOs granted hereunder shall be subject to the provisions of Section 422 of the Code and the terms, conditions, limitations and administrative procedures established by the Administrator from time to time in accordance with the Plan. At the discretion of the Administrator, ISOs may be granted only to an employee of the Company, its “parent corporation” (as such term is defined in Section 424(e) of the Code) or a Subsidiary of the Company. All of the shares of Common Stock reserved for issuance under the Plan pursuant to Section 4(a) hereof (subject to adjustment as provided in Section 5 hereof) may be granted as ISOs.
(i)          ISO Grants to 10% Stockholders. Notwithstanding anything to the contrary in the Plan, if an ISO is granted to a Participant who owns shares representing more than ten percent (10%) of the voting power of all classes of shares of the Company, its “parent corporation” (as such term is defined in Section 424(e) of the Code) or a Subsidiary of the Company, the term of the ISO shall not exceed five (5) years from the time of grant of such ISO and the Exercise Price shall be at least one hundred and ten percent (110%) of the Fair Market Value of the Shares on the date of grant.
(ii)          $100,000 Per Year Limitation For ISOs. To the extent the aggregate Fair Market Value (determined on the date of grant) of the Shares for which ISOs are exercisable for the first time by any Participant during any calendar year (under all plans of the Company) exceeds $100,000, such excess ISOs shall be treated as Nonqualified Stock Options.
(iii)          Disqualifying Dispositions. Each Participant awarded an ISO under the Plan shall notify the Company in writing immediately after the date the Participant makes a “disqualifying disposition” of any Share acquired pursuant to the exercise of such ISO. A “disqualifying disposition” is any disposition (including any sale) of such Shares before the later of (i) two years after the date of grant of the ISO and (ii) one year after the date the Participant acquired the Shares by exercising the ISO. The Company may, if determined by the Administrator and in accordance with procedures established by it, retain possession of any Shares acquired pursuant to the exercise of an ISO as agent for the applicable Participant until the end of the period described in the preceding sentence, subject to complying with any instructions from such Participant as to the sale of such Shares.
(g)   Rights as Stockholder. Except as provided in the applicable Award Agreement, a Participant shall have no rights to dividends, dividend equivalents or distributions or any other rights of a stockholder with respect to the Shares subject to an Option until the Participant has given written notice of the exercise thereof, has paid in full for such Shares and has satisfied the requirements of Section 17 hereof.
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(h)   Termination of Employment or Service. In the event of the termination of employment or service with the Company and all Affiliates thereof of a Participant who has been granted one or more Options, such Options shall be exercisable at such time or times and subject to such terms and conditions as set forth in the Award Agreement.
(i)     Other Change in Employment or Service Status. An Option shall be affected, both with regard to vesting schedule and termination, by leaves of absence, including unpaid and un-protected leaves of absence, changes from full-time to part-time employment, partial Disability or other changes in the employment status or service status of a Participant, in the discretion of the Administrator.
Section 8.
Stock Appreciation Rights.
(a)   General. Stock Appreciation Rights may be granted either alone (“Free Standing Rights”) or in conjunction with all or part of any Option granted under the Plan (“Related Rights”). Related Rights may be granted either at or after the time of the grant of such Option. The Administrator shall determine the Eligible Recipients to whom, and the time or times at which, grants of Stock Appreciation Rights shall be made, the number of Shares to be awarded, the Base Price, and all other conditions of Stock Appreciation Rights. Notwithstanding the foregoing, no Related Right may be granted for more Shares than are subject to the Option to which it relates. The provisions of Stock Appreciation Rights need not be the same with respect to each Participant. Stock Appreciation Rights granted under the Plan shall be subject to the following terms and conditions set forth in this Section 8 and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable, as set forth in the applicable Award Agreement.
(b)   Base Price. Except as provided in the applicable Award Agreement, each Stock Appreciation Right shall be granted with a base price that is not less than one hundred percent (100%) of the Fair Market Value of the related shares of Common Stock on the date of grant (such amount, the “Base Price”).
(c)   Rights as Stockholder. Except as provided in the applicable Award Agreement, a Participant shall have no rights to dividends, dividend equivalents or distributions or any other rights of a stockholder with respect to the Shares, if any, subject to a Stock Appreciation Right until the Participant has given written notice of the exercise thereof and has satisfied the requirements of Section 17 hereof.
(d)   Exercisability.
(1)          Stock Appreciation Rights that are Free Standing Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Administrator in the applicable Award Agreement.
(2)          Stock Appreciation Rights that are Related Rights shall be exercisable only at such time or times nd to the extent that the Options to which they relate shall be exercisable in accordance with the provisions of Section 7 hereof and this Section 8.
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(e)          Consideration Upon Exercise.
(1)          Upon the exercise of a Free Standing Right, the Participant shall be entitled to receive up to, but not more than, that number of Shares equal in value to (i) the excess of the Fair Market Value of a share of Common Stock as of the date of exercise over the Base Price per share specified in the Free Standing Right, multiplied by (ii) the number of Shares in respect of which the Free Standing Right is being exercised.
(2)          A Related Right may be exercised by a Participant by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the Participant shall be entitled to receive up to, but not more than, that number of Shares equal in value to (i) the excess of the Fair Market Value of a share of Common Stock as of the date of exercise over the Exercise Price specified in the related Option, multiplied by (ii) the number of Shares in respect of which the Related Right is being exercised. Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the Related Rights have been so exercised.
(3)          Notwithstanding the foregoing, the Administrator may determine to settle the exercise of a Stock Appreciation Right in cash (or in any combination of Shares and cash), to the extent set forth in the Award Agreement.
(f)          Termination of Employment or Service.
(1)          In the event of the termination of employment or service with the Company and all Affiliates thereof of a Participant who has been granted one or more Free Standing Rights, such rights shall be exercisable at such time or times and subject to such terms and conditions as set forth in the Award Agreement.
(2)          In the event of the termination of employment or service with the Company and all Affiliates thereof of a Participant who has been granted one or more Related Rights, such rights shall be exercisable at such time or times and subject to such terms and conditions as set forth in the related Options.
(g)          Term.
(1)          The term of each Free Standing Right shall be fixed by the Administrator, but no Free Standing Right shall be exercisable more than ten (10) years after the date such right is granted.
(2)          The term of each Related Right shall be the term of the Option to which it relates, but no Related Right shall be exercisable more than ten (10) years after the date such right is granted.
(h)          Other Change in Employment or Service Status. Stock Appreciation Rights shall be affected, both with regard to vesting schedule and termination, by leaves of absence, including unpaid and un-protected leaves of absence, changes from full-time to part-time employment, partial Disability or other changes in the employment status or service status of a Participant, in the discretion of the Administrator.
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Section 9.
Restricted Stock and Restricted Stock Units.
(a)   General. Restricted Stock and Restricted Stock Units may be granted under the Plan. The Administrator shall determine the Eligible Recipients to whom, and the time or times at which, Restricted Stock or Restricted Stock Units shall be made; the number of Shares to be awarded; the price, if any, to be paid by the Participant for the acquisition of Restricted Stock or Restricted Stock Units; the period of time prior to which Restricted Stock or Restricted Stock Units become vested and free of restrictions on Transfer (the “Restricted Period”); the Performance Goals (if any); and all other conditions of the Restricted Stock and Restricted Stock Units. If the restrictions, Performance Goals and/or conditions established by the Administrator are not attained, a Participant shall forfeit his or her Restricted Stock or Restricted Stock Units, in accordance with the terms of the grant. The provisions of Restricted Stock or Restricted Stock Units need not be the same with respect to each Participant.
(b)   Awards and Certificates.
(1)   Except as otherwise provided in Section 9(b)(3) hereof, (i) each Participant who is granted an Award of Restricted Stock may, in the Company’s sole discretion, be issued a stock certificate in respect of such Restricted Stock; and (ii) any such certificate so issued shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to any such Award. The Company may require that the stock certificates, if any, evidencing Restricted Stock granted hereunder be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of any award of Restricted Stock, the Participant shall have delivered a stock transfer form, endorsed in blank, relating to the Shares covered by such award. Certificates for shares of unrestricted Common Stock may, in the Company’s sole discretion, be delivered to the Participant only after the Restricted Period has expired without forfeiture in respect of such Restricted Stock.
(2)   With respect to an Award of Restricted Stock Units to be settled in Shares, at the expiration of the Restricted Period, stock certificates in respect of the shares of Common Stock underlying such Restricted Stock Units may, in the Company’s sole discretion, be delivered to the Participant, or his or her legal representative, in a number equal to the number of shares of Common Stock underlying the Award of Restricted Stock Units.
(3)   Notwithstanding anything in the Plan to the contrary, any Restricted Stock or Restricted Stock Units to be settled in Shares (at the expiration of the Restricted Period) may, in the Company’s sole discretion, be issued in uncertificated form.
(4)   Further, notwithstanding anything in the Plan to the contrary, with respect to Restricted Stock Units, at the expiration of the Restricted Period, Shares (either in certificated or uncertificated form) or cash, as applicable, shall promptly be issued to the Participant, unless otherwise deferred in accordance with procedures established by the Company in accordance with Section 409A of the Code, and such issuance or payment shall in any event be made no later than March 15th of the calendar year following the year of vesting or within such other period as is required to avoid accelerated taxation and/or tax penalties under Section 409A of the Code.
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(c)       Restrictions and Conditions. The Restricted Stock and Restricted Stock Units granted pursuant to this Section 9 shall be subject to the following restrictions and conditions and any additional restrictions or conditions as determined by the Administrator at the time of grant or, subject to Section 409A of the Code where applicable, thereafter:
(1)          The Award Agreement may provide for the lapse of restrictions in installments and may accelerate or waive such restrictions in whole or in part based on such factors and such circumstances as set forth in the Award Agreement, including, but not limited to, the attainment of Performance Goals, the Participant’s termination of employment or service with the Company or any Affiliate thereof, or the Participant’s death or Disability. Notwithstanding the foregoing, upon a Change in Control, the outstanding Awards shall be subject to Section 13 hereof.
(2)          Except as provided in the applicable Award Agreement, the Participant shall generally have the rights of a stockholder of the Company with respect to shares of Restricted Stock during the Restricted Period, including the right to vote such shares and to receive any dividends declared with respect to such shares; provided, however, that except as provided in the applicable Award Agreement, any dividends declared during the Restricted Period with respect to such shares shall only become payable if (and to the extent) the underlying Restricted Shares vest. Except as provided in the applicable Award Agreement, the Participant shall generally not have the rights of a stockholder with respect to shares of Common Stock subject to Restricted Stock Units during the Restricted Period; provided, however, that, subject to Section 409A of the Code, an amount equal to any dividends declared during the Restricted Period with respect to the number of shares of Common Stock covered by Restricted Stock Units may, to the extent set forth in an Award Agreement, be provided to the Participant at the time (and to the extent) that shares of Common Stock in respect of the related Restricted Stock Units are delivered to the Participant.
(d)         Termination of Employment or Service. The rights of Participants granted Restricted Stock or Restricted Stock Units upon termination of employment or service with the Company and all Affiliates thereof for any reason during the Restricted Period shall be set forth in the Award Agreement.
(e)          Form of Settlement. The Administrator reserves the right in its sole discretion to provide (either at or after the grant thereof) that any Restricted Stock Unit represents the right to receive the amount of cash per unit that is determined by the Administrator in connection with the Award, to the extent set forth in the Award Agreement.
Section 10.
Other Stock-Based Awards.
Other forms of Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, including but not limited to dividend equivalents, may be granted either alone or in addition to other Awards (other than in connection with Options or Stock Appreciation Rights) under the Plan. Any dividend or dividend equivalent awarded hereunder shall be subject to the same restrictions, conditions and risks of forfeiture as the underlying Awards and shall only become payable if (and to the extent) the underlying Awards vest. Subject to the provisions of the Plan, the Administrator shall have sole and complete authority to determine the Eligible Recipients to whom and the time or times at which such Other Stock-Based Awards shall be granted, the number of shares of Common Stock to be granted pursuant to such Other Stock-Based Awards, or the manner in which such Other Stock-Based Awards shall be settled (e.g., in shares of Common Stock, cash or other property), or the conditions to the vesting and/or payment or settlement of such Other Stock-Based Awards (which may include, but not be limited to, achievement of Performance Goals) and all other terms and conditions of such Other Stock-Based Awards.
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Section 11.
Stock Bonuses.
In the event that the Administrator grants a Stock Bonus, the Shares constituting such Stock Bonus shall, as determined by the Administrator, be evidenced in uncertificated form or by a book entry record or a certificate issued in the name of the Participant to whom such grant was made and delivered to such Participant as soon as practicable after the date on which such Stock Bonus is payable.
Section 12.
Cash Awards.
The Administrator may grant Awards that are payable solely in cash, as deemed by the Administrator to be consistent with the purposes of the Plan, and such Cash Awards shall be subject to the terms, conditions, restrictions and limitations determined by the Administrator, in its sole discretion, from time to time. Cash Awards may be granted with value and payment contingent upon the achievement of Performance Goals.
Section 13.
Change in Control Provisions.
Except as provided in the applicable Award Agreement, in the event that (a) a Change in Control occurs and (b) either (x) an outstanding Award is not assumed or substituted in connection therewith or (y) an outstanding Award is assumed or substituted in connection therewith and the Participant’s employment or service is terminated by the Company, its successor or an Affiliate thereof without Cause or by the Participant for Good Reason (if applicable) on or after the effective date of the Change in Control but prior to twenty-four (24) months following the Change in Control, then:
(a)   any unvested or unexercisable portion of each Award carrying a right to exercise shall become fully vested and exercisable; and
(b)   the restrictions, deferral limitations, payment conditions and forfeiture conditions applicable to each Award shall lapse and such Awards shall be deemed fully vested and any Performance Goals imposed with respect to such Awards shall be deemed to be achieved at target performance levels.
For purposes of this Section 13, an outstanding Award shall be considered to be assumed or substituted for if, following the Change in Control, the Award remains subject to terms and conditions that are no less favorable in any respect than those that were applicable to the Award immediately prior to the Change in Control except that, if the Award related to Shares, the Award instead may instead confer the right to receive common stock of the acquiring entity (or such other security or entity as may be determined by the Administrator, in its sole discretion, pursuant to Section 5 hereof) with an aggregate Fair Market Value that is at least equal to the aggregate Fair Market Value of the Shares subject to the Award immediately prior to the Change in Control.
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Section 14.
Voting Proxy
The Company reserves the right to require the Participant, to the fullest extent permitted by applicable law, to appoint such Person as shall be determined by the Administrator in its sole discretion as the Participant’s proxy with respect to all applicable unvested Awards of which the Participant may be the record holder of from time to time to (a) attend all meetings of the holders of the shares of Common Stock, with full power to vote and act for the Participant with respect to such Awards in the same manner and extent that the Participant might were the Participant personally present at such meetings, and (b) execute and deliver, on behalf of the Participant, any written consent in lieu of a meeting of the holders of the shares of Common Stock in the same manner and extent that the Participant might but for the proxy granted pursuant to this sentence.
Section 15.
Amendment and Termination.
The Board may amend, alter or terminate the Plan, but no amendment, alteration, or termination shall be made that would materially impair the rights of a Participant under any Award theretofore granted without such Participant’s consent. Unless the Board determines otherwise, the Board shall obtain approval of the Company’s stockholders for any amendment to the Plan that would require such approval in order to satisfy any rules of the stock exchange on which the Common Stock is traded or other applicable law. The Administrator may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Section 5 hereof and the immediately preceding sentence, no such amendment shall materially impair the rights of any Participant without his or her consent.
Section 16.
Unfunded Status of Plan.
The Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.
Section 17.
Withholding Taxes.
Each Participant shall, no later than the date as of which the value of an Award first becomes includible in the gross income of such Participant for purposes of applicable taxes, pay to the Company, or make arrangements satisfactory to the Company regarding payment of, an amount in respect of such taxes up to the maximum statutory rates in the Participant’s applicable jurisdiction with respect to the Award, as determined by the Company. The obligations of the Company under the Plan shall be conditional on the making of such payments or arrangements, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to such Participant. Whenever cash is to be paid pursuant to an Award, the Company shall have the right to deduct therefrom an amount sufficient to satisfy any applicable withholding tax requirements related thereto as determined by the Company. Whenever Shares or property other than cash are to be delivered pursuant to an Award, the Company shall have the right to require the Participant to remit to the Company in cash an amount sufficient to satisfy any related taxes to be withheld and applied to the tax obligations as determined by the Company; provided, that, with the approval of the Administrator, a Participant may satisfy the foregoing requirement by either (i) electing to have the Company withhold from such delivery Shares or other property, as applicable, or (ii) delivering already owned unrestricted shares of Common Stock, in each case, having a value not exceeding the applicable taxes to be withheld and applied to the tax obligations as determined by the Company. Such already owned and unrestricted shares of Common Stock shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined and any fractional share amounts resulting therefrom shall be settled in cash. Such an election may be made with respect to all or any portion of the Shares to be delivered pursuant to an award. The Company may also use any other method of obtaining the necessary payment or proceeds, as permitted by law, to satisfy its withholding obligation with respect to any Award as determined by the Company.
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Section 18.
Transfer of Awards.
Until such time as the Awards are fully vested and/or exercisable in accordance with the Plan or an Award Agreement, no purported sale, assignment, mortgage, hypothecation, transfer, charge, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any Award or any agreement or commitment to do any of the foregoing (each, a “Transfer”) by any holder thereof in violation of the provisions of the Plan or an Award Agreement will be valid, except with the prior written consent of the Administrator, which consent may be granted or withheld in the sole discretion of the Administrator. Any purported Transfer of an Award or any economic benefit or interest therein in violation of the Plan or an Award Agreement shall be null and void ab initio, and shall not create any obligation or liability of the Company, and any Person purportedly acquiring any Award or any economic benefit or interest therein transferred in violation of the Plan or an Award Agreement shall not be entitled to be recognized as a holder of any shares of Common Stock or other property underlying such Award. Unless otherwise determined by the Administrator in accordance with the provisions of the immediately preceding sentence, an Option or Stock Appreciation Right may be exercised, during the lifetime of the Participant, only by the Participant or, during any period during which the Participant is under a legal disability, by the Participant’s guardian or legal representative.
Section 19.
Continued Employment or Service.
Neither the adoption of the Plan nor the grant of an Award hereunder shall confer upon any Eligible Recipient any right to continued employment or service with the Company or any Affiliate thereof, as the case may be, nor shall it interfere in any way with the right of the Company or any Affiliate thereof to terminate the employment or service of any of its Eligible Recipients at any time.
Section 20.
Effective Date.
The Plan was adopted by the Board on __________, 2020 and became effective on __________, 2020 (the “Effective Date”).
Section 21.
Term of Plan.
No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.
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Section 22.
Securities Matters and Regulations.
(a)          Notwithstanding anything herein to the contrary, the obligation of the Company to sell or deliver Common Stock with respect to any Award shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Administrator. The Administrator may require, as a condition of the issuance and delivery of certificates evidencing shares of Common Stock pursuant to the terms hereof, that the recipient of such shares make such agreements and representations, and that such certificates bear such legends, as the Administrator, in its sole discretion, deems necessary or advisable.
(b)          Each Award is subject to the requirement that, if at any time the Administrator determines that the listing, registration or qualification of Common Stock issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Common Stock, no such Award shall be granted or payment made or Common Stock issued, in whole or in part, unless such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Administrator.
(c)          In the event that the disposition of Common Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act and is not otherwise exempt from such registration, such Common Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Administrator may require a Participant receiving Common Stock pursuant to the Plan, as a condition precedent to receipt of such Common Stock, to represent to the Company in writing that the Common Stock acquired by such Participant is acquired for investment only and not with a view to distribution.
Section 23.
Notification of Election Under Section 83(b) of the Code.
If any Participant shall, in connection with the acquisition of shares of Common Stock under the Plan, make the election permitted under Section 83(b) of the Code, such Participant shall notify the Company of such election within ten (10) days after filing notice of the election with the Internal Revenue Service.
Section 24.
No Fractional Shares.
No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Administrator shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
Section 25.
Beneficiary.
A Participant may file with the Administrator a written designation of a beneficiary on such form as may be prescribed by the Administrator and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Participant, the executor or administrator of the Participant’s estate shall be deemed to be the Participant’s beneficiary.
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Section 26.
Paperless Administration.
In the event that the Company establishes, for itself or using the services of a third party, an automated system for the documentation, granting or exercise of Awards, such as a system using an internet website or interactive voice response, then the paperless documentation, granting or exercise of Awards by a Participant may be permitted through the use of such an automated system.
Section 27.
Severability.
If any provision of the Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan.
Section 28.
Clawback.
(a)          Each Award shall be subject to any applicable recoupment policy maintained by the Company or any of its Affiliates as in effect from time to time.
(b)         Notwithstanding any other provisions in this Plan, any Award which is subject to recovery under any law, government regulation or stock exchange listing requirement, will be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement).
Section 29.
Section 409A of the Code.
The Plan as well as payments and benefits under the Plan are intended to be exempt from, or to the extent subject thereto, to comply with Section 409A of the Code, and, accordingly, to the maximum extent permitted, the Plan shall be interpreted in accordance therewith. Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A of the Code, the Participant shall not be considered to have terminated employment or service with the Company for purposes of the Plan and no payment shall be due to the Participant under the Plan or any Award until the Participant would be considered to have incurred a “separation from service” from the Company and its Affiliates within the meaning of Section 409A of the Code. Any payments described in the Plan that are due within the “short term deferral period” as defined in Section 409A of the Code shall not be treated as deferred compensation unless applicable law requires otherwise. Notwithstanding anything to the contrary in the Plan, to the extent that any Awards (or any other amounts payable under any plan, program or arrangement of the Company or any of its Affiliates) are payable upon a separation from service and such payment would result in the imposition of any individual tax and penalty interest charges imposed under Section 409A of the Code, the settlement and payment of such awards (or other amounts) shall instead be made on the first business day after the date that is six (6) months following such separation from service (or upon the Participant’s death, if earlier). Each amount to be paid or benefit to be provided under this Plan shall be construed as a separate identified payment for purposes of Section 409A of the Code. The Company makes no representation that any or all of the payments or benefits described in this Plan will be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to any such payment. The Participant shall be solely responsible for the payment of any taxes and penalties incurred under Section 409A of the Code.
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Section 30.
Governing Law.
The Plan shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of law of such state.
Section 31.
Titles and Headings.
The titles and headings of the sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
Section 32.
Successors.
The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company.
Section 33.
Relationship to other Benefits.
No payment pursuant to the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare, or other benefit plan of the Company or any Affiliate except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.

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Exhibit 10.8

INDEMNIFICATION AGREEMENT

This Indemnification Agreement, dated as of [●], 2020 (this “Agreement”), is entered into between Trean Insurance Group, Inc., a Delaware corporation (the “Company”), and [__________] (“Indemnitee”).

WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available;

WHEREAS, Indemnitee is a director and/or officer of the Company;

WHEREAS, both the Company and Indemnitee recognize the risk of litigation and other claims being asserted against directors and officers of public companies;

WHEREAS, the Company’s Amended and Restated Certificate of Incorporation, as amended from time to time (the “Certificate of Incorporation”), and Amended and Restated By-Laws, as amended from time to time (the “By-Laws”), require the Company to indemnify and advance expenses to its directors and officers to the fullest extent permitted by law and Indemnitee has been serving and continues to serve as a director and/or officer of the Company, in part, in reliance on such Certificate of Incorporation and By-Laws;

WHEREAS, uncertainties as to the availability of indemnification may increase the risk that the Company will be unable to retain and attract as directors and officers the most capable persons available;

WHEREAS, the board of directors of the Company (the “Board”) has determined that enhancing the ability of the Company to retain and attract as directors and officers the most capable persons is in the best interests of the Company and its stockholders, and that the Company therefore should seek to assure such persons that indemnification and insurance coverage will be available in the future; and

WHEREAS, in recognition of Indemnitee’s need for protection against personal liability in order to enhance Indemnitee’s continued service to the Company in an effective manner, in recognition of Indemnitee’s reliance on the Certificate of Incorporation and By-Laws and, in part, to provide Indemnitee with specific contractual assurance that the protection promised by the Certificate of Incorporation and By-Laws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate of Incorporation and By-Laws or change in the composition of the Board or acquisition transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and to the extent insurance is maintained, for the continued coverage of Indemnitee under the directors’ and officers’ liability insurance policy of the Company.


NOW, THEREFORE, in consideration of the premises and of Indemnitee’s agreement to serve or continue to serve the Company as a director and/or officer directly or, at its request, of another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows:

1.            Certain Definitions. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement:


(a)
Change in Control: shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than (A) AHP-BHC LLC, AHP-TH LLC, ACP-BHC LLC, ACP TH LLC (together, the “Altaris Funds”) and their respective affiliates, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or (C) a corporation or other entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of shares of common stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the total voting power represented by the Company’s then-outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the effective date of a merger or consolidation of the Company with any other entity other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 51% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company’s assets.


(b)
Claim: means any threatened, asserted, pending or completed action, suit or proceeding, whether civil, criminal, regulatory, administrative, investigative or other, including any arbitration or other alternative dispute resolution mechanism, or any appeal of any kind thereof, or any inquiry or investigation, whether instituted by (or in the right of) the Company or any governmental agency or any other person or entity, in which Indemnitee was, is, may be or will be involved as a party, witness or otherwise.


(c)
ERISA: means the Employee Retirement Income Security Act of 1974, as amended.

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(d)
Expenses: include attorneys’ fees and all other direct or indirect costs, expenses and obligations, including judgments, fines, penalties, interest, appeal bonds, amounts paid in settlement with the approval of the Company (which approval shall not be unreasonably delayed, withheld or conditioned), and counsel fees and disbursements (including, without limitation, experts’ fees, court costs, retainers, appeal bond premiums, transcript fees, duplicating, printing and binding costs, as well as telecommunications, postage and courier charges) paid or incurred in connection with investigating, prosecuting, defending, settling, arbitrating, being a witness in or participating in (including on appeal), or preparing to investigate, prosecute, defend, settle, arbitrate, be a witness in or participate in, any Claim relating to any Indemnifiable Event, and shall include (without limitation) all attorneys’ fees and all other expenses incurred by or on behalf of an Indemnitee in connection with preparing and submitting any requests or statements for indemnification, advancement or any other right provided by this Agreement (including, without limitation, such fees or expenses incurred in connection with legal proceedings contemplated by Section 2(d) hereof).


(e)
Indemnifiable Amounts: means (i) any and all liabilities, Expenses, damages, judgments, fines, penalties, ERISA excise taxes and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such liabilities, Expenses, damages, judgments, fines, penalties, ERISA excise taxes or amounts paid in settlement) arising out of or resulting from any Claim relating to an Indemnifiable Event, (ii) any liability pursuant to a loan guaranty or otherwise, for any indebtedness of the Company or any subsidiary of the Company, including, without limitation, any indebtedness which the Company or any subsidiary of the Company has assumed, and (iii) any liabilities which an Indemnitee incurs as a result of acting on behalf of the Company (whether as a fiduciary or otherwise) in connection with the operation, administration or maintenance of an employee benefit plan or any related trust or funding mechanism (whether such liabilities are in the form of excise taxes assessed by the United States Internal Revenue Service, penalties assessed by the United States Department of Labor, restitutions to such a plan or trust or other funding mechanism or to a participant or beneficiary of such plan, trust or other funding mechanism, or otherwise). To the fullest extent permitted by law, Indemnifiable Amounts shall include any punitive, special or exemplary damages, and the multiple portion of a multiplied damages award.


(f)
Indemnifiable Event: means any event or occurrence, whether occurring before, on or after the date of this Agreement, related to the fact that Indemnitee is or was (or agreed to serve as) a director and/or officer or fiduciary of the Company, or is or was serving (or agreed to serve) at the request of the Company as a director, officer, employee, manager, member, partner, tax matter partner, trustee, agent, fiduciary or in a similar capacity, of or for another company, corporation, limited liability company, partnership, joint venture, employee benefit plan, trust or other entity or enterprise, or by reason of anything done or not done by Indemnitee in any such capacity (in all cases whether or not Indemnitee is acting or serving in any such capacity or has such status at the time any Indemnifiable Amount is incurred for which indemnification, advancement or any other right can be provided by this Agreement). The term “Company,” where the context requires when used in this Agreement, may be construed to include such other company, corporation, limited liability company, partnership, joint venture, employee benefit plan, trust or other entity or enterprise.

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(g)
Indemnitee-Related Entity: means any company, corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other entity or enterprise (other than the Company or any other company, corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other entity or enterprise Indemnitee has agreed, on behalf of the Company or at the Company’s request, to serve as a director, officer, employee or agent and which service is covered by the indemnity described in this Agreement) from whom an Indemnitee may be entitled to indemnification or advancement of Expenses with respect to which, in whole or in part, the Company may also have an indemnification or advancement obligation.


(h)
Independent Legal Counsel: means an attorney or firm of attorneys (following a Change in Control, selected in accordance with the provisions of Section 3 hereof) who or which is experienced in matters of corporate law and who or which shall not have otherwise performed services for the Company or Indemnitee on any matter material to such party within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements).


(i)
Jointly Indemnifiable Claim: means any Claim for which Indemnitee may be entitled to indemnification from both an Indemnitee-Related Entity and the Company pursuant to applicable laws, any indemnification agreements or the certificate of incorporation, By-Laws, partnership agreement, operating agreement, certificate of formation, certificate of limited partnership or comparable organizational documents of the Company or an Indemnitee-Related Entity.


(j)
Reviewing Party: means any appropriate person or body consisting of a member or members of the Board or any other person or body appointed by the Board who or which is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel.


(k)
Voting Securities: means any securities of the Company which vote generally in the election of directors.

2.            Basic Indemnification Arrangement; Advancement of Expenses.


(a)
In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law as soon as practicable but in any event no later than thirty (30) days after written demand is presented to the Company, and hold Indemnitee harmless against any and all Indemnifiable Amounts.

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(b)
If so requested by Indemnitee, the Company shall advance promptly (and in any event within five (5) business days of such request) any and all Expenses incurred by Indemnitee (an “Expense Advance”). The Company shall, in accordance with such request (but without duplication), either (i) pay such Expenses on behalf of Indemnitee or (ii) if Indemnitee shall have elected to pay such Expenses and have such Expenses reimbursed, reimburse Indemnitee for such Expenses. Subject to Section 2(d), Indemnitee’s right to an Expense Advance is absolute and shall not be subject to any prior determination by the Reviewing Party that Indemnitee has satisfied any applicable standard of conduct for indemnification.


(c)
Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to indemnification or advancement of Expenses pursuant to this Agreement in connection with any Claim initiated by Indemnitee unless (i) the Company has joined in or the Board has authorized or consented to the initiation of such Claim or (ii) the Claim is one to enforce Indemnitee’s rights under this Agreement.


(d)
Notwithstanding the foregoing, (i) the indemnification obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written legal opinion, in any case in which the Independent Legal Counsel is involved as required by Section 3 hereof) that Indemnitee would not be permitted to be indemnified under applicable law and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(b) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines (in a written legal opinion, in any case in which the Independent Legal Counsel is involved as required by Section 3 hereof) that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid (it being understood and agreed that the foregoing agreement by Indemnitee shall be deemed to satisfy any requirement that Indemnitee provide the Company with an undertaking to repay any Expense Advance if it is ultimately determined that Indemnitee is not entitled to indemnification under applicable law); provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made that Indemnitee is not permitted to be indemnified under applicable law (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee’s undertaking herein to repay such Expense Advances shall be unsecured and interest-free. If there has not been a Change in Control, the Reviewing Party shall be selected by the Board, and if there has been such a Change in Control, the Reviewing Party shall be the Independent Legal Counsel referred to in Section 3 hereof. If there has been no determination by the Reviewing Party within thirty (30) days after written demand is presented to the Company or if the Reviewing Party determines that Indemnitee would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the State of Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee.

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3.            Change in Control. The Company agrees that if there is a Change in Control then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any provision of the Certificate of Incorporation or By-Laws now or hereafter in effect, the Company shall seek legal advice only from Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably delayed, conditioned or withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Legal Counsel and to indemnify fully such counsel against any and all expenses (including attorneys’ fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

4.            Indemnification for Additional Expenses. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall advance such Expenses to Indemnitee subject to and in accordance with Section 2(b), which are incurred by Indemnitee in connection with any action brought by Indemnitee for (i) indemnification or an Expense Advance by the Company under this Agreement or any provision of the Certificate of Incorporation or By-Laws now or hereafter in effect or (ii) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advance or insurance recovery, as the case may be; provided that Indemnitee shall be required to reimburse such Expenses in the event that a final judicial determination is made (as to which all rights of appeal therefrom have been exhausted or lapsed) that such action brought by Indemnitee, or the defense by Indemnitee of an action brought by the Company or any other person, as applicable, was frivolous or in bad faith.

5.            Partial Indemnity, Etc. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses or other Indemnifiable Amounts in respect of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.

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6.            Burden of Proof, Etc. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the Reviewing Party, any court, any finder of fact or any other relevant person shall presume that Indemnitee has satisfied the applicable standard of conduct and is entitled to indemnification, and the burden of proof shall be on the Company (or any other person or entity disputing such conclusions) to establish, by clear and convincing evidence, that Indemnitee is not so entitled.

7.            Reliance as Safe Harbor. For purposes of this Agreement, and without creating any presumption as to a lack of good faith if the following circumstances do not exist, Indemnitee shall be deemed to have acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, without reasonable cause to believe Indemnitee’s conduct was unlawful, if Indemnitee’s actions or omissions to act were taken in good faith reliance upon the records of the Company or any of its subsidiaries, including its financial statements, or upon information, opinions, reports or statements furnished to Indemnitee by the officers or employees of the Company or any of its subsidiaries in the course of their duties, or by committees of the Board, or by any other person (including legal counsel, accountants and financial advisors) as to matters Indemnitee reasonably believed at the time were within such other person’s professional or expert competence and who had been selected with reasonable care by or on behalf of the Company. In addition, the knowledge and actions, or failures to act, of any director, officer, agent or employee of the Company shall not be imputed to Indemnitee for purposes of determining the right to indemnity hereunder.

8.            No Other Presumptions. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or did not have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee did not meet any particular standard of conduct or did not have any particular belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee’s claim or create a presumption that Indemnitee did not meet any particular standard of conduct or did not have any particular belief.

9.            Nonexclusivity, Etc. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Certificate of Incorporation or By-Laws, the General Corporation Law of the State of Delaware or otherwise. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded as of the date hereof under the Certificate of Incorporation or By-Laws or this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. To the extent that there is a conflict or inconsistency among the terms of this Agreement, the Certificate of Incorporation and By-Laws, it is the intent of the parties hereto that Indemnitee shall enjoy the greatest benefits regardless of whether contained herein or in the Certificate of Incorporation or By-Laws. No agreement or amendment or alteration of the Certificate of Incorporation or By-Laws or of any agreement, other than of this Agreement pursuant to the terms hereof, shall adversely affect the rights provided to Indemnitee under this Agreement. No change in applicable law shall have the effect of reducing the benefits available to Indemnitee hereunder.

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10.          Liability Insurance. The Company shall maintain a policy or policies of insurance with insurance companies (with an A.M Best rating of A or higher in the case of primary coverage and with an A.M. Best rating of A- or higher in the case of excess coverage) providing directors and officers with coverage for any liability asserted by reason of the fact that they are serving as a director or officer or have agreed to serve as a director, officer, employee or agent of another enterprise. Indemnitee shall be covered by such policies in accordance with their terms to the maximum extent of the coverage available for any of the Company’s directors and officers. If the Company receives from Indemnitee any notice of the commencement of an action, suit, proceeding or Claim, the Company shall give prompt notice of the commencement of such action, suit, proceeding or Claim to its insurers thereunder in accordance with the procedures set forth therein. The Company shall thereafter take all necessary or desirable actions to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of any such action, suit, proceeding or Claim in accordance with the terms of such policies.

11.           Period of Limitations. No legal action shall be brought and no claim or cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee’s spouse, heirs, executors or personal or legal representatives after the expiration of two (2) years from the date of accrual of such claim or cause of action, and any claim or cause of action of or on behalf of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within that two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to such claim or cause of action, such shorter period shall govern.

12.          Amendments, Etc. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to, or shall, constitute a waiver of any other provisions hereof (whether or not similar), nor shall such a waiver constitute a continuing waiver.

13.          Subrogation. Subject to Section 14 hereof, in the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers reasonably required and shall do everything that may be reasonably necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. The Company shall pay or reimburse all Expenses actually and reasonably incurred by Indemnitee in connection with such subrogation.

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14.          Jointly Indemnifiable Claims. Given that certain Jointly Indemnifiable Claims may arise due to the relationships between an Indemnitee-Related Entity and the Company and the service of Indemnitee as a director and/or officer of the Company at the request of that Indemnitee-Related Entity, the Company acknowledges and agrees that the Company shall be the indemnitor of first resort and shall be fully and primarily responsible for the payment to Indemnitee in respect of indemnification and advancement of expenses in connection with any such Jointly Indemnifiable Claim, pursuant to and in accordance with the terms of this Agreement, irrespective of any right of recovery Indemnitee may have from the Indemnitee-Related Entity. Under no circumstance shall the Company be entitled to any right of subrogation or contribution by the Indemnitee-Related Entity, and no right of recovery Indemnitee may have from the Indemnitee-Related Entity shall reduce or otherwise alter the rights of Indemnitee or the obligations of the Company hereunder. In the event that any Indemnitee-Related Entity shall make any payment to Indemnitee in respect of indemnification or advancement of Expenses with respect to any Jointly Indemnifiable Claim, the Company agrees that such payment or advancement shall not extinguish or affect in any way the rights of Indemnitee under this Agreement and further agrees that the Indemnitee-Related Entity making such payment shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee against the Company. Every Indemnitee-Related Entity shall be a third-party beneficiary with respect to this Section 14, entitled to enforce this Section 14 against the Company as though such Indemnitee-Related Entity were a party to this Agreement.

15.          No Duplication of Payments. Subject to Section 14 hereof, the Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent that Indemnitee has otherwise actually received payment of such amount otherwise indemnifiable hereunder, whether under any insurance policy, provision of the Certificate of Incorporation or By-Laws, or otherwise.

16.          Defense of Claims. The Company shall be entitled to participate in the defense of any Claim relating to an Indemnifiable Event or to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee; provided that if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (i) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict of interest, (ii) the named parties in any such Claim (including any impleaded parties) include both the Company, or any subsidiary of the Company, and Indemnitee, and Indemnitee concludes that there may be one or more legal defenses available to him or her that are different from or in addition to those available to the Company or such subsidiary, or (iii) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any Claim relating to an Indemnifiable Event effected without the Company’s prior written consent. The Company shall not, without the prior written consent of Indemnitee, effect any settlement of any Claim relating to an Indemnifiable Event to which Indemnitee is, was or could have been a party unless such settlement solely involves the payment of money and includes a complete and unconditional release of Indemnitee from all liability on all claims that are the subject matter of such Claim. Neither the Company nor Indemnitee shall unreasonably withhold, condition or delay its or his or her consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee. In no event shall Indemnitee be required to waive, prejudice or limit attorney-client privilege or work-product protection or other applicable privilege or protection.

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17.          No Adverse Settlement. The Company shall not seek, nor shall it agree to, consent to, support, or agree not to contest any settlement or other resolution of, any Claim, action, proceeding, demand, investigation or other matter that has the actual or purported effect of extinguishing, limiting or impairing Indemnitee’s rights hereunder, including, without limitation, any entry of a bar order or other order, decree or stipulation, pursuant to 15 U.S.C. § 78u-4 (the Private Securities Litigation Reform Act) or any similar foreign, federal or state statute, regulation, rule or law.

18.          Binding Effect, Etc. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor or continuing company by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee and his or her counsel, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer and/or director of the Company or of any other entity or enterprise at the Company’s request.

19.          Security. To the extent requested by Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to Indemnitee for the obligations of the Company hereunder through an irrevocable bank line of credit, a funded trust or other collateral or by other means. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of such Indemnitee.

20.          Severability. If any provision of this Agreement is held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) will not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to the terms of this Agreement.

21.          Specific Performance, Etc. The parties recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute proceedings, either in law or at equity, to obtain damages, enforce specific performance, enjoin that violation, or obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue.

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22.          Notices. Any notice, request, consent or other communication hereunder to any party shall be deemed to be sufficient if contained in a written document delivered in person or sent by facsimile, nationally recognized overnight courier or personal delivery, addressed to such party at the address or addresses indicated below. Such a communication shall be sent instead to such other address as may designated from time to time in writing by a party to the other party.

 
(a)
If to the Company, to:
     
   
Trean Insurance Group, Inc.
   
150 Lake Street West
   
Wayzata, MN 55391
   
Attention: Andrew O’Brien (President and Chief Executive Officer)
   
Telephone Number: (952) 974-2200
     
   
with a copy (which shall not constitute notice) to:
     
   
Skadden, Arps, Slate, Meagher & Flom LLP
   
One Manhattan West
   
New York, NY 10001
   
Attention: Dwight S. Yoo
   
Telephone Number: (212) 735-2573
   
Fax Number: (917) 777-2573
     
 
(b)
If to Indemnitee, to the address set forth below his or her signature hereto.

All such notices, requests, consents and other communications shall be deemed to have been given or made if and when received (including by overnight courier) by the parties at the aforementioned addresses, with confirmation received, to the facsimile numbers specified above (or at such other address or facsimile number for a party as shall be specified by like notice). Any notice delivered by any party hereto to any other party hereto shall also be delivered to each other party hereto simultaneously with delivery to the first party receiving such notice.

23.          Counterparts. This Agreement may be executed in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

24.          Headings. The headings of the sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction or interpretation hereof.

25.          Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 
TREAN INSURANCE GROUP, INC.
     
 
By:

   
Name:

   
Title:


 
INDEMNITEE
   
 
Name:
   
 
Indemnitee’s Address:
   
   
   
   

[Signature Page to Indemnification Agreement]



Exhibit 10.9

TERMINATION AGREEMENT

This TERMINATION AGREEMENT (this “Agreement”), dated as of ________, 2020, is by and among Altaris Capital Partners, LLC, a Delaware limited liability company (“Advisor”), BIC Holdings LLC, a Delaware limited liability company (“BIC Holdings”), Trean Holdings LLC, a Delaware limited liability company (“Trean Holdings”), and Trean Insurance Group, Inc., a Delaware corporation (“Trean Insurance Group”).  The parties hereto are referred to herein as the “Parties”.

WITNESSETH:

WHEREAS, Advisor and BIC Holdings entered into that certain Consulting Agreement, dated as of July 31, 2015 (the “BIC Consulting Agreement”);

WHEREAS, Advisor and Trean entered into that certain Amended and Restated Consulting Agreement, dated as of April 29, 2016 (as amended, the “Trean Consulting Agreement” and, collectively with the BIC Consulting Agreement, the “Consulting Agreements”);

WHEREAS, reference is made to that certain Reorganization Agreement, dated as of the date hereof (the “Reorganization Agreement”), by and among Trean Insurance Group, BIC Holdings, Trean Holdings, Trean Corporation, a Minnesota corporation, Trean Compstar Holdings LLC, a Delaware limited liability company, and the Pre-IPO Unitholders (as defined therein), pursuant to which, among other things, all of the assets and obligations of BIC Holdings and Trean Holdings (including those under the Consulting Agreements) were transferred to and assumed by Trean Insurance Group; and

WHEREAS, pursuant to each Consulting Agreement, the Parties have agreed to terminate the Consulting Agreements immediately prior to the IPO (as defined in the Reorganization Agreement), subject to the terms set forth below.

NOW, THEREFORE, in consideration of the foregoing, the mutual promises, covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.          Termination.  The Parties acknowledge and agree that, (i) as promptly as practicable, and in any event within three business days after the commencement of the IPO, Trean Insurance Group (as assignee of BIC Holdings’ obligations under the BIC Consulting Agreement) shall pay or cause to be paid to Advisor [●] Dollars ($[●]) (the “BIC Exit Fee Amount”), and Trean Insurance Group (as assignee of Trean Holdings’ obligations under the Trean Consulting Agreement) shall pay or cause to be paid to Advisor [●] Dollars ($[●]) (the “Trean Exit Fee Amount” and, collectively with the BIC Exit Fee Amount, the “Exit Fee Amounts”), which represent all amounts owing to Advisor under the Consulting Agreements, including without limitation the outstanding amount of all accrued and unpaid reimbursable expenses and Consulting Fees (as defined in the Trean Consulting Agreement), and (ii) effective at the time of the IPO (but subject to the following sentence) the Consulting Agreements shall be terminated. Upon payment of the Exit Fee Amounts to Advisor by Trean Insurance Group and such termination of the Consulting Agreements, notwithstanding any provision to the contrary contained in the Consulting Agreements, the Consulting Agreements shall be of no further force or effect, and no party thereto shall have any surviving obligations, rights or duties thereunder, except (a) the obligation of Trean Insurance Group to pay the Exit Fee Amounts to Advisor as provided above, and (b) the obligations of Trean Insurance Group (as assignee of BIC Holdings’ and Trean Holdings’ obligations under the Consulting Agreements) provided under Section 9 of each Consulting Agreement.



2.          Binding Effect.  This Agreement shall be binding upon and inure to the benefit of each Party and its respective successors and assigns.

3.          Further Assurances.  Each Party will execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement.

4.          Entire Agreement.  This Agreement contains the entire understanding of the Parties with respect to the subject matter hereof and supersede any prior communication or agreement with respect thereto.

5.          Governing Law.  This Agreement shall be governed by the law of the State of Delaware (regardless of the laws that might otherwise govern under applicable Delaware principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies.

6.          Severability.  If any term or other provision of this Agreement is held by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced under any applicable law in any particular respect or under any particular circumstances, such finding shall in no event invalidate any other provision of this Agreement.  This Agreement shall be construed and enforced as if such provision were not contained in this Agreement to the fullest extent possible consistent with expressing the original intent of this Agreement.

7.          Counterparts.  This Agreement may be executed in two or more counterparts, including by facsimile or electronic mail, all of which shall be considered one and the same instrument and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Parties.

[The remainder of this page is intentionally left blank]

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the date first written above.

 
BIC HOLDINGS LLC
     
 
By:

 
Name:
Andrew M. O’Brien
 
Title:
Authorized Signatory
     
 
TREAN HOLDINGS LLC
     
 
By:

 
Name:
Andrew M. O’Brien
 
Title:
Authorized Signatory
     
 
TREAN INSURANCE GROUP, INC.
     
 
By:

 
Name:
Andrew M. O’Brien
 
Title:
Authorized Signatory
     
 
ALTARIS CAPITAL PARTNERS, LLC
     
 
By:

 
Name:
George Aitken-Davies
 
Title:
Authorized Signatory

[Signature Page to Termination Agreement]

Exhibit 10.10 

 

EXECUTION VERSION

 

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

among

 

TREAN HOLDINGS LLC,

as the Parent Guarantor,

 

TREAN CORPORATION,

 

TREAN COMPSTAR HOLDINGS LLC, and

 

BENCHMARK ADMINISTRATORS, LLC,

as the Borrower,

 

The Other Loan Parties from Time to Time Parties Hereto,

 

The Several Lenders from Time to Time Parties Hereto,

 

and

 

FIRST HORIZON BANK,

as Administrative Agent

 

Dated as of May 26, 2020

 

 

FIRST HORIZON BANK,

as Sole Lead Arranger and Book Runner

 

 


 

TABLE OF CONTENTS

 

Page

SECTION 1.         DEFINITIONS 1
1.1    Defined Terms 1
1.2    Other Definitional Provisions 30
SECTION 2.        AMOUNT AND TERMS OF COMMITMENTS 31
2.1    Term Commitments 31
2.2    Procedure for Term Loan Borrowing 32
2.3    Repayment of Term Loans 32
2.4    Revolving Commitments 33
2.5    Procedure for Revolving Loan Borrowing 33
2.6    Swingline Commitment 34
2.7    Procedure for Swingline Borrowing; Refunding of Swingline Loans 34
2.8    Commitment Fees, etc. 36
2.9    Termination or Reduction of Revolving Commitments 36
2.10    Optional Prepayments 36
2.11    Mandatory Prepayments and Commitment Reductions 37
2.12    Conversion and Continuation Options 39
2.13    Limitations on Eurodollar Tranches 39
2.14    Interest Rates and Payment Dates 39
2.15    Computation of Interest and Fees 40
2.16    Inability to Determine Interest Rate 40
2.17    Pro Rata Treatment and Payments 41
2.18    Requirements of Law 42
2.19    Taxes 44
2.20    Indemnity 46
2.21    Change of Lending Office 47
2.22    Replacement of Lenders 47
2.23    Defaulting Lenders 48
2.24    Eurodollar Replacement Rate 49
SECTION 3.        RESERVED 50
SECTION 4.        REPRESENTATIONS AND WARRANTIES 50
4.1    Financial Condition 50
4.2    No Change 51
4.3    Existence; Compliance with Law 51
4.4    Power; Authorization; Enforceable Obligations 52
4.5    No Legal Bar 52
4.6    Litigation 52
4.7    No Default 52
4.8    Ownership of Personal Property; Liens 52
4.9    Ownership of Real Property; Liens 53
4.10    Intellectual Property 53
4.11    Taxes 53

 


 

4.12    Federal Regulations 53
4.13    Labor Matters 54
4.14    ERISA 54
4.15    Investment Company Act; Other Regulations 54
4.16    Subsidiaries 54
4.17    Use of Proceeds 54
4.18    Environmental Matters 55
4.19    Accuracy of Information, etc 56
4.20    Guarantee and Collateral Agreement 56
4.21    Solvency 56
4.22    Insurance 56
4.23    [Reserved] 57
4.24    Material Contracts 57
4.25    OFAC 57
4.26    USA PATRIOT Act 57
4.27    Anti-Corruption Laws 57
4.28    EEA Financial Institution 58
SECTION 5.        CONDITIONS PRECEDENT 58
5.1    Conditions to Initial Extension of Credit 58
5.2    Conditions to Each Extension of Credit Subsequent to the Closing Date 61
SECTION 6.        AFFIRMATIVE COVENANTS 62
6.1    Financial Statements 62
6.2    Certificates; Other Information 63
6.3    Payment of Obligations 65
6.4    Maintenance of Existence; Compliance with Laws and Other Agreements 65
6.5    Maintenance of Property; Insurance 65
6.6    Inspection of Property; Books and Records; Discussions 66
6.7    Notices 66
6.8    Environmental Laws 67
6.9    Additional Collateral, etc. 67
6.10    Field Audit 69
6.11    Use of Proceeds 69
6.12    Primary Depository Banking Relationships 69
6.13    Real Estate Items 69
6.14    [Reserved] 69
6.15    Other Post-Closing Matters 70
6.16    Further Assurances 70
SECTION 7.        NEGATIVE COVENANTS 70
7.1    Financial Condition Covenants 70
7.2    Indebtedness 72
7.3    Liens 73
7.4   Fundamental Changes 75
7.5   Disposition of Property 75
7.6    Restricted Payments 76

 

-ii-

 

7.7    Investments 78
7.8    Modifications of Certain Instruments 79
7.9    Transactions with Affiliates 79
7.10    Sales and Leasebacks 80
7.11    Swap Agreements 80
7.12    Changes in Fiscal Periods 80
7.13    Negative Pledge Clauses 80
7.14    Clauses Restricting Subsidiary Distributions 81
7.15    Lines of Business 81
7.16    Trean Indenture, BIC/Trean Agreement 81
SECTION 8.         EVENTS OF DEFAULT 81
SECTION 9.        THE AGENTS 85
9.1    Appointment 85
9.2    Delegation of Duties 85
9.3    Exculpatory Provisions 85
9.4    Reliance by Administrative Agent 86
9.5    Notice of Default 86
9.6    Non-Reliance on Administrative Agent and Other Lenders 86
9.7    Indemnification 87
9.8    Administrative Agent in Its Individual Capacity 87
9.9    Successor Administrative Agent 87
SECTION 10.        MISCELLANEOUS 88
10.1    Amendments and Waivers 88
10.2    Notices 89
10.3    No Waiver; Cumulative Remedies 90
10.4    Survival of Representations and Warranties 91
10.5    Payment of Expenses and Taxes 91
10.6    Successors and Assigns; Participations and Assignments 92
10.7    Adjustments; Setoff 95
10.8    Counterparts 96
10.9    Severability 96
10.10    Integration 96
10.11    GOVERNING LAW 96
10.12    SUBMISSION TO JURISDICTION; WAIVERS 96
10.13    Acknowledgements 96
10.14    Termination; Releases of Guarantees and Liens 98
10.15    Interest and Loan Charges 98
10.16    Confidentiality 98
10.17    WAIVERS OF JURY TRIAL 99
10.18    Patriot Act Notice 99
10.19    Acknowledgement and Consent to Bail-In of EEA Financial Institutions 99
10.20    Joint and Several 100
10.21    Amendment and Restatement 100

 

-iii-

 

SCHEDULES

 

1.1-A Permitted IPO Related Amendments / Permitted IPO Restructuring

1.1-C Lender Commitments

2.5 Authorized Persons

4.4 Consents, Authorizations, Filings and Notices

4.9 Real Property

4.16 Subsidiaries

4.20 UCC Filing Jurisdictions

4.24 Material Contracts

6.15 Post-Closing Matters

7.2(c) Existing Indebtedness

7.3(f) Existing Liens

 

EXHIBITS:

 

A Form of Closing Certificate

B Form of Compliance Certificate

C Form of Assignment and Assumption

2.5 Form of Notice of Revolving Borrowing

2.7 Form of Notice of Swingline Borrowing

2.19(d) Form of Exemption Certificate

 

-iv-

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

THIS AMENDED AND RESTATED CREDIT AGREEMENT (this “Agreement”) is made and entered into as of May 26, 2020, by and among TREAN HOLDINGS LLC, a Delaware limited liability company (“Holdings”), TREAN CORPORATION, a Minnesota corporation (“Trean”), TREAN COMPSTAR HOLDINGS LLC, a Delaware limited liability company (“Trean Compstar”) and BENCHMARK ADMINISTRATORS, LLC (“Benchmark” and together with Trean and Trean Compstar, collectively the “Borrower”), the other Loan Parties (as defined herein) from time to time party hereto, the several banks and other financial institutions and lenders from time to time party hereto (the “Lenders”), and FIRST HORIZON BANK, in its capacity as administrative agent and collateral agent for the Lenders (the “Administrative Agent”) and as swingline lender (the “Swingline Lender”).

 

W I T N E S S E T H :

 

WHEREAS, Borrower, the other Loan Parties party thereto, the Existing Lenders and Administrative Agent entered into that Credit Agreement dated as of the Initial Closing Date (as the same has been amended, restated or otherwise modified prior to the date hereof, the “Existing Credit Agreement”) pursuant to which the Existing Lenders made available to the Borrower a $27,500,000 term loan facility and a $3,000,000 revolving credit facility, on the terms and conditions contained therein;

 

WHEREAS, the parties hereto have agreed to amend and restate the Existing Credit Agreement as provided in this Agreement, which Agreement shall become effective upon the satisfaction of the conditions precedent set forth in Section 5;

 

WHEREAS, it is the intent of the parties hereto that this Agreement (i) not constitute a novation of the obligations and liabilities existing under the Existing Credit Agreement or evidence repayment of any of such obligations and liabilities and (ii) amend and restate in its entirety the Existing Credit Agreement and re-evidence the obligations of each Borrower and each other Loan Party outstanding thereunder;

 

WHEREAS, the Loan Parties desire to secure or to continue to secure all of their Obligations under the Loan Documents by granting or continuing and reaffirming a security interest in and lien granted to Administrative Agent, for the benefit of the Lenders, upon the Collateral;

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

SECTION 1.      DEFINITIONS

 

1.1              Defined Terms. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1. Where the meaning of any term is stated to be “None”, “Not applicable” or “N/A”, provisions of this Agreement using such term shall be disregarded as to such term.

 


 

ABR”: for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus ½ of 1%, and (c) if then being determined in accordance with the definition thereof, the Eurodollar Base Rate applicable to U.S. dollars for a period of one month (“One Month LIBOR”) plus 1.00% (such One Month LIBOR to be based on such rate as appearing on the Bloomberg reporting service (or other commercially available source providing such quotations as designated by the Administrative Agent from time to time) at approximately 11:00 a.m. London time on such day). For purposes hereof: “Prime Rate” shall mean the per annum rate which the Administrative Agent publicly announces from time to time to be its prime lending rate, as in effect from time to time (the Prime Rate not being intended to be the lowest or best rate of interest charged by the Administrative Agent in connection with extensions of credit to debtors). Any change in the ABR due to a change in the Prime Rate, the Federal Funds Rate or One Month LIBOR shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Federal Funds Rate, or One Month LIBOR, as the case may be. Notwithstanding anything to the contrary herein, ABR shall not be less than zero.

 

ABR Loans”: Loans the rate of interest applicable to which is based upon the ABR.

 

Acquired Business”: the entity or assets comprising a division or business line, segment or unit, in each case engaged in the Business, acquired by Borrower or a Subsidiary of Borrower in an Acquisition, whether before or after the date hereof.

 

Acquisition”: the acquisition by any Person, in a single transaction or in a series of related transactions, of all or any substantial portion of the Property of another Person, or of a division or other business segment, line or unit of another Person, or at least a majority of the voting Capital Stock of another Person, in each case whether or not involving a merger or consolidation with such other Person and whether for cash, property, services, assumption of Indebtedness, securities or otherwise.

 

Administrative Agent”: First Horizon Bank, together with its affiliates, as the administrative agent and collateral agent for the Lenders under this Agreement and the other Loan Documents, together with its successors and assigns in such capacity.

 

Affiliate”: as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

 

Aggregate Exposure”: with respect to any Lender at any time, an amount equal to (a) until the Closing Date, the aggregate amount of such Lender’s Commitments at such time and (b) thereafter, the sum of (i) the aggregate then unpaid principal amount of such Lender’s Term Loans and (ii) the amount of such Lender’s Revolving Commitment then in effect or, if the Revolving Commitments have been terminated, the amount of such Lender’s Revolving Extensions of Credit then outstanding.

 

2

 

Aggregate Exposure Percentage”: with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender’s Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time.

 

Agreement”: as defined in the preamble hereto.

 

Amendment”: as defined in Section 2.24.

 

Anti-Corruption Laws”: the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq, the UK Bribery Act of 2010 and all other laws, rules, and regulations of any jurisdiction applicable to any Loan Party or any of its Affiliates from time to time concerning or relating to bribery or corruption.

 

Applicable Margin”: for Eurodollar Loans, 4.50% and for ABR Loans, 3.50%.

 

Approved Fund”: as defined in Section 10.6(b).

 

Asset Sale”: any Disposition or series of related Dispositions of Property (including Capital Stock, but excluding any such Disposition permitted by Section 7.5, other than clause (h) thereof) that yields gross proceeds to any Group Member (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $100,000.

 

Assignee”: as defined in Section 10.6(b).

 

Assignment and Assumption”: an Assignment and Assumption, substantially in the form of Exhibit C.

 

Available Revolving Commitment”: as to any Revolving Lender at any time, an amount equal to the excess, if any, of (a) such Lender’s Revolving Commitment then in effect over (b) such Lender’s Revolving Extensions of Credit then outstanding; provided that in calculating any Lender’s Revolving Extensions of Credit for the purpose of determining such Lender’s Available Revolving Commitment pursuant to Section 2.8(a), the aggregate principal amount of Swingline Loans then outstanding shall be deemed to be zero.

 

Average Life”: as of any date of determination, with respect to any Indebtedness, the quotient obtained by dividing (a) the sum of the products of the number of years (rounded to the nearest one-twelfth of one year) from the date of determination to the date of each scheduled principal payment of such Indebtedness multiplied by the amount of such payment by (b) the sum of all such payments.

 

Bail-In Action”: the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.

 

Bail-In Legislation”: with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.

 

3

 

Benchmark”: Benchmark Holding Company.

 

Benchmark Entities”: Benchmark and each of its Subsidiaries.

 

Beneficial Ownership Certification” means a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.

 

Beneficial Ownership Regulation” means 31 C.F.R. § 1010.230.

 

Benefited Lender”: as defined in Section 10.7(a).

 

BIC”: means BIC Holdings, LLC.

 

BIC Subordination Agreement”: that certain subordination agreement of even date herewith by and among the Administrative Agent, BIC, and Trean Reinsurance Services, LLC.

 

BIC/Trean Agreement”: that certain Brokerage Sharing Agreement dated as of July 1, 2016 between Trean Reinsurance Services, LLC and BIC.

 

Board”: the Board of Governors of the Federal Reserve System of the United States (or any successor).

 

Borrower”: as defined in the preamble hereto.

 

Borrowing Date”: any Business Day specified by the Borrower as a date on which the Borrower requests the relevant Lenders to make Loans hereunder.

 

Business”: the business of providing insurance management, insurance and reinsurance consulting and reinsurance placement services, together with activities and businesses incidental or otherwise reasonably related to that primary business.

 

Business Day”: a day other than a Saturday, Sunday or other day on which commercial banks in Tennessee or New York are authorized or required by law to close, provided that with respect to notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in US Dollar deposits in the London interbank market.

 

Business Disposition”: any Disposition of its property or series of related Dispositions of its property or a division or other business unit or segment, or a majority of its voting Capital Stock (whether or not involving a merger or consolidation with any other Person).

 

Capital Expenditures”: for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries (other than (a) Permitted Acquisitions and (b) any expenditures made with proceeds of (i) any Disposition to the extent such expenditures are used to purchase Property that is useful in the Business or (ii) Excluded Issuances) that are required to be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries.

 

4

 

Capital Lease Obligations”: as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.

 

Capital Stock”: any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, member interests in a limited liability company or partner interests in a partnership, any and all equivalent ownership interests in any other type of Person and any and all warrants, rights or options to purchase any of the foregoing.

 

Cash Collateralize”: in respect of any obligations, to provide and pledge (as a first priority perfected security interest) cash collateral for such obligations in US Dollars, with the Administrative Agent, pursuant to documentation in form and substance substantially consistent with the Security Documents and otherwise reasonably satisfactory to the Administrative Agent (and “Cash Collateralization” has a corresponding meaning).

 

Cash Equivalents”: (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of 12 months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $500,000,000, or any bank whose short-term commercial paper rating from S&P is at least A-2 or the equivalent thereof or from Moody’s is at least P-2 or the equivalent thereof (any such bank being an “Approved Bank”); (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any commercial paper or variable or fixed rate notes issued by, or guaranteed by, any domestic corporation rated A-2 (or the equivalent thereof) or better by S&P or P-2 (or the equivalent thereof) or better by Moody’s and maturing within 270 days from the date of acquisition; (d) repurchase obligations of any Lender, Approved Bank or recognized securities dealer having capital and surplus in excess of $500,000,000, having a term of not more than ninety (90) days, with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody’s; (f) securities with maturities of 12 months or less from the date of acquisition backed by standby letters of credit issued by any Lender or any Approved Bank; (g) money market mutual or similar funds that invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition; or (h) money market funds that (i) comply with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of at least $500,000,000.

 

5

 

Client Mark”: as defined in Section 10.16.

 

Closing Date”: the date on which the conditions precedent set forth in Section 5.1 shall have been satisfied or waived, which date is the date hereof.

 

Closing Date Distribution”: as defined in Section 4.17.

 

Code”: the Internal Revenue Code of 1986, as amended from time to time.

 

Collateral”: all property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document.

 

Commitment”: as to any Lender, the sum of the Term Commitment and the Revolving Commitment of such Lender.

 

Commitment Fee Rate”: 0.50% per annum.

 

Commodity Exchange Act”: the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.

 

Commonly Controlled Entity”: an entity, whether or not incorporated, that is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes the Borrower and that is treated as a single employer under Section 414 of the Code.

 

Compliance Certificate”: a certificate duly executed by a Responsible Officer substantially in the form of Exhibit B.

 

Compstar”: Compstar Insurance Services, LLC a California limited liability company.

 

Compstar Acquisition”: that acquisition by Compstar Holdco of all of the equity interests of Compstar from Exstar Financial Corporation.

 

Compstar Acquisition Documents”: Membership Interest Purchase Agreement, dated as of the Initial Closing Date, by and among Exstar Financial Corporation, Compstar Holdco and Compstar, and Restrictive Covenant Agreement, dated as of the Initial Closing Date, by and between Steven Shinn and Compstar

 

Compstar Holdco”: Compstar Holding Company, LLC, a Delaware limited liability company.

 

Compstar/Oak Street Credit Agreement”: Credit Agreement, dated as of the Initial Closing Date, by and among Compstar Holdco, Compstar, Blake A. Baker and Oak Street Funding LLC (as amended, restated, supplemented or modified from time to time), whereby Oak Street Funding LLC has provided certain financial accommodations to Compstar Holdco and Compstar.

 

6

 

Consolidated Adjusted EBITDA”: Consolidated EBITDA, adjusted as follows for the purposes of calculating adjustments to Consolidated EBITDA for any Reference Period solely for purposes of determining the Consolidated Senior Leverage Ratio or the Consolidated Fixed Charge Coverage Ratio: If at any time during such Reference Period Trean or any Subsidiary shall have made any Permitted Acquisition or Business Disposition, Consolidated EBITDA for such Reference Period shall be calculated after giving pro forma effect thereto as if such Permitted Acquisition or Business Disposition, as the case may be, occurred on the first day of the Reference Period. Consolidated EBITDA amounts attributable to such business in any Permitted Acquisition or Business Disposition shall be calculated in a manner consistent with that used in determining Consolidated EBITDA for Trean, and to the extent such amounts are not based on audited financial statements, then such amounts to be reflected in determining Consolidated Adjusted EBITDA shall be approved by the Administrative Agent in its reasonable discretion.

 

Consolidated Current Assets”: at any date, all amounts that would, in conformity with GAAP, be set forth opposite the caption “total current assets” (or any like caption) on a consolidated balance sheet of Trean and its Subsidiaries at such date.

 

Consolidated Current Liabilities”: at any date, all amounts that would, in conformity with GAAP, be set forth opposite the caption “total current liabilities” (or any like caption) on a consolidated balance sheet of Trean and its Subsidiaries at such date, but excluding (a) the current portion of any Funded Debt of Trean and its Subsidiaries and (b) without duplication of the preceding clause (a), all Indebtedness consisting of the outstanding principal amount of any Revolving Loans or Swingline Loans to the extent otherwise included therein.

 

Consolidated EBITDA”: for any Reference Period, Consolidated Net Income of Trean for such period plus, without duplication and to the extent reflected as an expense or charge in the determination of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) Consolidated Interest Expense, (c) depreciation and amortization expense, (d) non-cash compensation charges or other non-cash expenses or charges arising from the grant of or issuance or repricing of stock, stock options or other equity-based awards to the directors, officers or employees of Holdings and its Subsidiaries incurred during such period, (e) legal fees, closing fees and expenses incurred in connection with the execution and delivery of this Agreement and paid within sixty days after the Closing Date, (f) one-time transaction costs or charges (whether cash or non-cash) paid or incurred during such period in respect of the Facilities (including, for the avoidance of doubt, any reasonable and documented costs or charges incurred in connection with any Permitted IPO Related Amendments), (g) one-time reasonable and documented transaction costs or charges paid or incurred during such period in relation to a Qualified Initial Public Offering, any Permitted IPO Restructuring, any Permitted Acquisition or any financing of any such Permitted Acquisition, to the extent such costs or charges are (1) cash amounts paid during such period, or (2) non-cash amounts approved by the Administrative Agent for inclusion in this clause (g), (h) amounts paid in cash or accrued pursuant to the Sponsor Management Agreement during such period and that are otherwise permitted to be paid or not prohibited from being accrued, as applicable, hereunder, (i) Specified Shareholder Bonus Payments made in cash during such period to the extent permitted by Section 7.6(h), (j) non-cash charges arising from non-cash dividends or distributions on Capital Stock during such period, (k) any (1) extraordinary or non-recurring charges, expenses or losses including, costs related to severance, relocations, integration, facilities opening and closing and other restructuring costs, and (2) other non-cash charges incurred during such period as approved by the Administrative Agent for purposes of calculating Consolidated EBITDA, provided that all such charges, expenses and losses described in the preceding subclauses (1) and (2) shall in no event exceed (for purposes of such calculation) $750,000 in any Reference Period, and (l) solely for purposes of determining compliance with the financial covenants set forth in Section 7.1, in respect of any period in which a Specified Equity Contribution was made, the amount of such Specified Equity Contribution, minus, to the extent included in the determination of such Consolidated Net Income for such period, the sum of (i) interest income, and (ii) income tax credits (to the extent not netted from income tax expense), (iii) any other non-cash income or other non-cash items.

 

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Consolidated Fixed Charge Coverage Ratio”: as of the last day of any Reference Period, the ratio of (a) Consolidated Adjusted EBITDA for the most recently ended Reference Period minus the sum of (i) income taxes paid or payable in cash for such period, (ii) Capital Expenditures (to the extent not financed with the proceeds of permitted Funded Debt (other than the Loans) or the proceeds of any Recovery Event) for such period, (iii) payments made in cash pursuant to the Sponsor Management Agreement during such period to the extent permitted by the Management Fee Subordination Agreement and Section 7.9(a), and (iv) Specified Shareholder Bonus Payments made in cash during such period to the extent permitted by Section 7.6(h), all as determined in accordance with GAAP, to (b) Consolidated Fixed Charges for such period (adjusted in the case of any Reference Period in which a Permitted Acquisition or Business Disposition occurs in a similar manner as set forth in the definition of Consolidated Adjusted EBITDA);provided, however, that solely for the purpose of calculating the Fixed Charge Coverage Ratio for the first three fiscal quarters following the Closing Date, Consolidated Fixed Charges shall be calculated on an annualized basis such that, for the first fiscal quarter following the Closing Date, the Consolidated Fixed Charges shall be the actual Consolidated Fixed Charges incurred by Trean and its Subsidiaries during such fiscal quarter multiplied by 4; for the second fiscal quarter following the Closing Date, the Consolidated Fixed Charges shall be the actual Consolidated Fixed Charges incurred by Trean and its Subsidiaries during such two-quarter period multiplied by 2; and, for the third fiscal quarter following the Closing Date, the Consolidated Fixed Charges shall be the actual Consolidated Fixed Charges incurred by Trean and its Subsidiaries during such three-quarter period multiplied by 1.33. Such calculations shall take into account all Indebtedness incurred or assumed, or repaid, as the case may be, in connection with Permitted Acquisitions or Business Dispositions, effective as of the first day of such Reference Period.

 

Consolidated Fixed Charges”: for any period, the sum (without duplication) of the following for Trean and its Subsidiaries on a consolidated basis: (a) Consolidated Interest Expense paid or payable in cash for such period and (b) payments scheduled to be made during such period on account of principal of Indebtedness of Trean or any of its Subsidiaries (including principal amounts attributable to Capital Lease Obligations and scheduled principal payments in respect of the Term Loans and required payments made to the holders of the Series A Preferred Stock) all as determined in accordance with GAAP.

 

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Consolidated Interest Expense”: for any Reference Period, the sum of total interest expense (including the interest component attributable to Capital Lease Obligations and the interest component attributable to the Trean Indenture) of Trean and its Subsidiaries for such period, regardless of whether expensed or capitalized and regardless of whether paid during such period, with respect to all outstanding Indebtedness of Trean and its Subsidiaries (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing and net costs under Swap Agreements in respect of interest rates to the extent such net costs are allocable to such period in accordance with GAAP, whether or not actually paid or received during such period).

 

Consolidated Net Income”: for any Reference Period, the consolidated net income (or loss) of Trean and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded from such net income (or loss) during such period, to the extent included or reflected therein (a) extraordinary gains, charges, expenses and losses, (b) any gains, charges, expenses and losses attributable to write-ups or write-downs of assets, asset dispositions or discontinued operations, (c) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of Trean or is merged into or consolidated with Trean or any of its Subsidiaries, or the date that such Person’s assets are otherwise acquired in any Acquisition by Trean or any of its Subsidiaries, (d) the income (or deficit) of any Person (other than a Subsidiary of Trean) in which Trean or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by Trean or such Subsidiary in the form of cash dividends or similar distributions and (e) the undistributed earnings of any Subsidiary of Trean to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under any Loan Document) or Requirement of Law applicable to such Subsidiary. For the avoidance of doubt, Consolidated Net Income shall not include (to the extent otherwise included therein (except as permitted pursuant to clause (d) of this definition)) the net income (or loss) of Compstar Holdco and its Subsidiaries.

 

Consolidated Senior Debt”: Consolidated Total Debt (other than Indebtedness under the Trean Indenture and any other Subordinated Indebtedness).

 

Consolidated Total Debt”: at any date, the aggregate principal amount of all Indebtedness of Trean and its Subsidiaries outstanding at such date (other than Indebtedness of the type described in clause (k) of the definition of Indebtedness), determined on a consolidated basis in accordance with GAAP.

 

Consolidated Senior Leverage Ratio”: as of the last day of any Reference Period, the ratio of (a) Consolidated Senior Debt on such day to (b) Consolidated Adjusted EBITDA for such period. Such calculations shall take into account all Indebtedness incurred or assumed, or repaid, as the case may be, in connection with Permitted Acquisitions or Business Dispositions, effective as of the first day of such Reference Period.

 

Consolidated Working Capital”: at any time, the excess of (i) Consolidated Current Assets at such time minus cash and Cash Equivalents at such time, over (ii) Consolidated Current Liabilities at such time; provided, that Consolidated Working Capital shall be calculated on a pro forma basis to address the impact of any Permitted Acquisition consummated during such period of determination.

 

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Contractual Obligation”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

 

Controlled Investment Affiliate”: with respect to the Sponsor, any Person (other than a natural Person) that (a) is organized by the Sponsor or an Affiliate of the Sponsor for the purpose of making equity investments in one or more companies and (b) is controlled by, or is under common control with, the Sponsor. For purposes of this definition “control” means the power to direct or cause the direction of management and policies of a Person, whether by contract or otherwise.

 

Cure Right”: as defined in Section 7.1(c).

 

Default”: any of the events specified in Section 8, regardless of whether any requirement for the giving of notice, the lapse of any cure period, or both (in each case as set forth in Section 8), has been satisfied.

 

Defaulting Lender”: at any time, a Lender as to which the Administrative Agent has notified the Borrower that (a) such Lender has failed for three (3) or more Business Days to comply with its obligations under this Agreement to make a Loan or make a payment to the Swingline Lender in respect of a Swingline Loan (each a “funding obligation”), (b) such Lender has notified the Administrative Agent, or has stated publicly, that it will not comply with any such funding obligation hereunder, (c) such Lender has, for three (3) or more Business Days, failed to confirm in writing to the Administrative Agent, in response to a written request of the Administrative Agent, that it will comply with its funding obligations hereunder, or (d) a Lender Insolvency Event has occurred and is continuing with respect to such Lender. Any determination that a Lender is a Defaulting Lender pursuant to the foregoing will be made by the Administrative Agent in its sole discretion acting in good faith. The Administrative Agent will send promptly to all parties hereto a copy of any notice to the Borrower provided for in this definition.

 

Disposition”: with respect to any property, any sale, lease, sale and leaseback, assignment, conveyance, transfer, Division of a limited liability company or otherwise or other disposition thereof (but excluding any disposition occurring in connection with a Recovery Event). The terms “Dispose” and “Disposed of” shall have correlative meanings.

 

Disqualified Capital Stock”: Capital Stock that, by its terms (or by the terms of any security or other Capital Stock into which it is convertible or for which it is exchangeable), or upon the happening of any event or condition (a) matures or is mandatorily redeemable (other than solely for Capital Stock that is not otherwise Disqualified Capital Stock or in connection with a change of control or sale of such issuer or its Subsidiaries), pursuant to a sinking fund obligation or otherwise, (b) is redeemable at the option of the holder thereof (other than solely for Capital Stock that is not otherwise Disqualified Capital Stock or in connection with a change of control or sale of such issuer or its Subsidiaries), in whole or in part, (c) provides for the scheduled payments or dividends in cash, or (d) is or becomes convertible into or exchangeable for Indebtedness or any other Capital Stock that would constitute Disqualified Capital Stock, in each case, prior to the first anniversary of the Term Loan Maturity Date.

 

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Dividing Person” has the meaning assigned to it in the definition of “Division.”

 

Division” means the division of the assets, liabilities and/or obligations of a Person (the “Dividing Person”) among two or more Persons (whether pursuant to a “plan of division” pursuant to Section 18-217 of the Delaware Limited Liability Company Act or similar arrangement), which may or may not include the Dividing Person and pursuant to which the Dividing Person may or may not survive.

 

Division Successor” means any Person that, upon the consummation of a Division of a Dividing Person, holds all or any portion of the assets, liabilities and/or obligations previously held by such Dividing Person immediately prior to the consummation of such Division.  A Dividing Person which retains any of its assets, liabilities and/or obligations after a Division shall be deemed a Division Successor upon the occurrence of such Division.

 

Domestic Subsidiary”: any Subsidiary of Holdings organized under the laws of any jurisdiction within the United States.

 

EEA Financial Institution”: (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

 

EEA Member Country”: any of the member states of the European Union, Iceland, Liechtenstein, and Norway.

 

EEA Resolution Authority”: any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

 

Environmental Laws”: any and all Requirements of Law regulating, relating to or imposing liability or standards of conduct concerning protection of human health (with respect to environmental and exposure hazards) or the environment, including those relating to the generation, recycling, use, reuse, sale, storage, handling, transport, treatment or disposal of Hazardous Materials, including the Comprehensive Environmental Response Compensation Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §9601 et seq., the Resource Conservation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. §6901 et seq., the Toxic Substances Control Act, 15 U.S.C. §2601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. §1801, et seq., the Clean Air Act, 42 U.S.C. §7401, et seq., the Clean Water Act of 1977, 33 U.S.C. §1251, et seq., and any rules and regulations promulgated or published thereunder, and any state, regional, county or local statute, law, rule, regulation or ordinance now or hereafter in effect that relates to public health and safety (with respect to environmental and exposure hazards) or the discharge, emission or disposal of Hazardous Materials in or to air, water, land or groundwater, to the use, handling or disposal of asbestos, polychlorinated biphenyls, petroleum, petroleum derivatives or by-products, other hydrocarbons or urea formaldehyde, to the treatment, transportation, release, storage, disposal or management of Hazardous Materials, or to exposure to Hazardous Materials.

 

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ERISA”: the Employee Retirement Income Security Act of 1974, as amended from time to time.

 

EU Bail-In Legislation Schedule”: the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.

 

Eurodollar Base Rate”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum equal to the greater of (i) 0.50%, and (ii) the offered rate for deposits in US Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on the Bloomberg reporting service at or about 11:00 a.m., London time, two (2) Business Days prior to the beginning of such Interest Period. In the event that the rate described in clause (ii) does not appear on the Bloomberg reporting service, such rate described in clause (ii) shall be determined by reference to such other comparable publicly available service for displaying eurodollar rates as may be selected by the Administrative Agent or, in the absence of such availability, by reference to the rate at which major U.S. banks are offered US Dollar deposits at or about 11:00 a.m. (London, England time) two (2) Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where their eurodollar and foreign currency and exchange operations are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein, as determined by the Administrative Agent. If Bloomberg reporting service no longer reports the rate described in clause (ii) and the Administrative Agent in good faith determines that it cannot determine the rate described in clause (ii) as provided in the immediately preceding sentence, then, subject to Section 2.24 in the circumstances described therein, the Administrative Agent shall determine the Eurodollar Base Rate utilizing a comparable or successor rate as approved by the Administrative Agent and the Borrower, provided, that until such time as the Administrative Agent and the Borrower approve a successor rate, then the provisions of Section 2.16 shall apply.

 

Eurodollar Loans”: Loans the rate of interest applicable to which is based upon the Eurodollar Rate.

 

Eurodollar Rate”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%):

 

Eurodollar Rate = Eurodollar Base Rate ÷ (1.00 – Eurodollar Reserve Requirements)

 

Eurodollar Replacement Rate”: as defined in Section 2.24.

 

Eurodollar Replacement Rate Conforming Changes”: as defined in Section 2.24.

 

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Eurodollar Reserve Requirements”: for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board) maintained by a member bank of the Federal Reserve System.

 

Eurodollar Tranche”: the collective reference to Eurodollar Loans under a particular Facility the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (regardless of whether such Loans shall originally have been made on the same day).

 

Event of Default”: any of the events specified in Section 8, provided that any requirement for the giving of notice, the lapse of a cure period, or both (in each case as set forth in Section 8), has been satisfied.

 

Excess Cash Flow”: for any period of Trean and its Subsidiaries, an amount equal to (a) Consolidated EBITDA for such period, minus (b) the sum of (i) Capital Expenditures paid in cash during such period (other than any such amounts financed with Indebtedness (other than the Revolving Loans)), (ii) Consolidated Interest Expense paid in cash during such period, (iii) the aggregate of all income taxes paid in cash during such period, (iv) cash payments made on account of principal amounts scheduled to be paid during such period in respect of Indebtedness during such period (including principal amounts attributable to Capital Lease Obligations and scheduled principal payments in respect of the Term Loans), (v) the amount of any mandatory cash principal prepayments (other than any mandatory prepayments made in respect of prior year Excess Cash Flow) made in respect of the Loans during such period (but only, in the case of payments in respect of Revolving Loans, to the extent that the Revolving Commitments are permanently reduced by the amount of such payments), (vi) cash payments made in respect of the items described in clauses (e), (f) and (g) in the definition of Consolidated EBITDA, and (vii) any increase in Consolidated Working Capital during such period, plus (c) any decrease in Consolidated Working Capital during such period.

 

Excluded Issuance”: (a) any capital contribution by, or issuance of Capital Stock to, any Person holding Capital Stock in a Group Member on the Closing Date or any Affiliates of such Persons, (b) any capital contribution by, or issuance of Capital Stock to, management of any Group Member in connection with option or other compensation arrangements and (c) any capital contribution by, or issuance of Capital Stock to, any Person, the proceeds of which are used to make Capital Expenditures or Permitted Acquisitions permitted hereunder.

 

Excluded Swap Obligation”: with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guarantee of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the Guarantee of such Guarantor or the grant of such security interest becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guarantee or security interest is or becomes illegal.

 

13

 

Excluded Taxes”: with respect to any Lender or the Administrative Agent (a) net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on such Person as a result of a present or former connection between such Person and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein; (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which such Person is located; (c) any backup withholding tax required by the Code to be withheld from amounts payable to any such Person that has failed to comply with Section 2.19(f); and (d) any taxes that are imposed by reason of FATCA.

 

Existing Lenders” means, collectively, the “Lenders” and the “Administrative Agent”, each as defined in the Existing Credit Agreement.

 

Facility”: each of (a) the Term Commitments and the Term Loans made hereunder (the “Term Facility”) and (b) the Revolving Commitments and the extensions of credit made thereunder (the “Revolving Facility”).

 

FATCA”: Sections 1471, 1472, 1473 and 1474 of the Code.

 

Federal Funds Rate”: for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day of such transactions received by Administrative Agent from three federal funds brokers of recognized standing selected by it.

 

Fee Payment Date”: (a) the last Business Day of each March, June, September and December occurring after the Closing Date, and (b) the last day of the Revolving Commitment Period.

 

Financial Covenant Standstill Period”: as defined in Section 7.1(c).

 

First Horizon Bank”: First Horizon Bank and its successors and assigns.

 

Foreign Subsidiary”: any Subsidiary of Holdings that is not a Domestic Subsidiary.

 

Funded Debt”: as to any Person, all Indebtedness of such Person that matures more than one year from the date of its creation or matures within one year from such date but is renewable or extendible, at the option of such Person, to a date more than one year from such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during a period of more than one year from such date, including all current maturities and current sinking fund payments in respect of such Indebtedness whether or not required to be paid within one year from the date of its creation and, in the case of the Borrower, Indebtedness in respect of the Loans.

 

14

 

Funding Office”: the office of the Administrative Agent specified in Section 10.2 or such other office as may be specified from time to time by the Administrative Agent as its funding office by written notice to the Borrower and the Lenders.

 

Funds Flow”: the closing statement dated as of the Closing Date, setting forth the sources and uses of funds in connection with the closing of Facilities.

 

GAAP”: generally accepted accounting principles in the United States as in effect from time to time, except that for purposes of Section 7.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements referred to in Section 4.1(a). In the event that any Accounting Change shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower, the Administrative Agent and the Lenders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the Borrower’s financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower, the Administrative Agent and Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “Accounting Change” refers to a change in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC. Notwithstanding the foregoing, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made, without giving effect to the changes to GAAP under FASB ASU 2016-02 which, upon the effectiveness thereof, would require the capitalization of leases previously characterized as “operating leases”.

 

Governmental Authority”: any nation or government, any federal, state, municipal, local or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, tribunal, arbitral body, department, administration, authority, program, plan, office, commission, board, bureau, division, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners).

 

Group Members”: the collective reference to Holdings and each of its Subsidiaries.

 

Guarantee and Collateral Agreement”: the Amended and Restated Guarantee and Collateral Agreement of even date herewith, executed and delivered by each Loan Party in favor of the Administrative Agent.

 

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Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation, including a reimbursement, counterindemnity or similar obligation, of the guaranteeing Person that guarantees or in effect guarantees, or that is given to induce the creation of a separate obligation by another Person (including any bank under any letter of credit) that guarantees or in effect guarantees, any Indebtedness, leases, dividends or other monetary obligations (the “primary obligations”) of any other third Person (the “primary obligor”) in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (x) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (y) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by Holdings and the Borrower in good faith.

 

Guarantors”: collectively, the Parent Guarantor and the Subsidiary Guarantors.

 

Hazardous Material”: any material, substance, pollutant or waste that is defined or designated as a hazardous material, hazardous substance, hazardous waste, pollutant, contaminant or toxic substance under any Environmental Law or otherwise is regulated under any Environmental Law, including asbestos, polychlorinated biphenyls, petroleum, petroleum derivatives or by-products, other hydrocarbons, urea formaldehyde and medical and infectious wastes.

 

Holdings”: as defined in the preamble hereto.

 

Indebtedness”: of any Person at any date, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (including all obligations (including contingent obligations) described in Section 7.2(g) to the extent the same constitute any portion of the consideration payable in respect of any Acquisition, but excluding trade payables incurred in the ordinary course of such Person’s business on terms customary in such business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Purchase Money Debt and Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements (other than trade letters of credit), (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire, for cash or Cash Equivalents or for any obligation of such Person otherwise constituting Indebtedness as herein defined, any Disqualified Capital Stock of such Person, valued, in the case of redeemable preferred Disqualified Capital Stock, at its involuntary liquidation preference plus, without duplication, accrued and unpaid dividends, (h) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above, (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, regardless of whether such Person has assumed or become liable for the payment of such obligation, (j) off-balance sheet liability retained in connection with asset securitization programs, synthetic leases, sale and leaseback transactions or other similar obligations arising with respect to any other transaction that is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheet of such Person, and (k) the net obligations of such Person in respect of Swap Agreements.

 

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The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor. The amount of any net obligation under any Swap Agreement on any date shall be deemed to be the Swap Termination Value thereof as of such date.

 

Initial Closing Date”: means April 3, 2018.

 

Insolvency”: with respect to any Multiemployer Plan, the condition that such plan is insolvent within the meaning of Section 4245 of ERISA.

 

Insolvent”: pertaining to a condition of Insolvency.

 

Intellectual Property”: as defined in the Guarantee and Collateral Agreement.

 

Interest Payment Date”: (a) as to any ABR Loan (other than a Swingline Loan), the last Business Day of each March, June, September and December to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan, the last day of the applicable Interest Period and, for Interest Periods longer than three months, each of the respective dates that fall every three months after the beginning of such Interest Period, (c) as to any Swingline Loan, the last Business Day of each calendar month, and (d) as to any Loan (other than any Revolving Loan that is an ABR Loan and any Swingline Loan), the date of any repayment or prepayment made in respect thereof.

 

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Interest Period”: as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not later than 10:00 a.m., Central time, on the date that is three (3) Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following:

 

(a)       if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day;

 

(b)       the Borrower may not select an Interest Period under the Revolving Facility that would extend beyond the Revolving Termination Date or an Interest Period under the Term Facility that would extend beyond the date final payment is due on the Term Loans;

 

(c)       any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and

 

(d)       the Borrower shall select Interest Periods so as not to require a payment or prepayment of any other outstanding Eurodollar Loan during an Interest Period for such Loan.

 

Investment”: the making of any loan, advance, extension of credit or capital contribution to, or the acquisition of any stock, bonds, notes, debentures or other obligations or securities of, or the acquisition of any other interest in or the making of any other investment in, any Person. For purposes of Section 7.7, the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Borrower or any of its Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by any repayment of principal or a return of capital, as the case may be; provided that no such repayment of principal, return of capital, payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such repayment of principal, return of capital, payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Borrower or any Subsidiary Disposes of any Capital Stock of any direct or indirect Subsidiary of the Borrower such that, after giving effect to any such Disposition, such Subsidiary ceases to be a Subsidiary of the Borrower, the Borrower shall be deemed to have made an Investment on the date of any such Disposition equal to the fair market value of the Capital Stock of such Subsidiary not Disposed of.

 

Landlord Agreement”: with respect to any Leasehold Property, a letter, certificate or other instrument in writing, in form and substance reasonably satisfactory to the Administrative Agent, from the lessor under the related lease.

 

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Leasehold Property”: any leasehold interest of any Loan Party as lessee under any lease of real property.

  

Lender Insolvency Event”: a Lender or its Parent Company (a) is insolvent, or is generally unable to pay its debts as they become due, or admits in writing its inability to pay its debts as they become due, or makes a general assignment for the benefit of its creditors, (b) is the subject of a bankruptcy, insolvency, reorganization, conservatorship, liquidation or similar proceeding, or a receiver, trustee, conservator, intervenor or sequestrator or the like has been appointed for such Lender or its Parent Company, or such Lender or its Parent Company has taken any action indicating its consent to or acquiescence in any such proceeding or appointment or (c) becomes the subject of a Bail-In Action.

 

Lenders”: as defined in the preamble hereto, which term shall also include the Swingline Lender, as the context shall require.

 

Lien”: any mortgage, pledge, hypothecation, assignment, encumbrance, lien (statutory or other), charge or other security interest or any other security agreement of any kind or nature whatsoever in respect of property of any Person (including any deposit arrangement, preference, priority, conditional sale or other title retention agreement, and any capital lease, in any such case having substantially the same economic effect as any of the foregoing). 

 

Loan”: any loan made by any Lender pursuant to this Agreement, whether as a Revolving Loan, a Term Loan or a Swingline Loan.

 

Loan Documents”: this Agreement, any Notes, the Security Documents, the BIC Subordination Agreement and any other instruments, documents and agreements further evidencing, securing or otherwise related to the Obligations and any amendment, waiver, supplement or other modification to any of the foregoing.

 

Loan Parties”: collectively, the Borrower, the Guarantors and any other Group Member that is a party to any Loan Document.

 

Management Fee Subordination Agreement”: the Consulting Fee Subordination Agreement of dated as of the Initial Closing Date by and among the Administrative Agent, Altaris Capital Partners, LLC, Holdings and the Borrower; provided, that, as of the Closing Date, Exhibit A of such Consulting Fee Subordination Agreement shall be deemed to have been amended, as of May 1, 2017, in accordance with the amendment, dated as of May 1, 2017, to the Sponsor Management Agreement, and all payments made prior to the Closing Date in accordance with the terms of such amendment shall be deemed to have been, and hereby are, approved for all purposes by the Administrative Agent and the Lenders.

 

Material Adverse Effect”: (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), or condition (financial or otherwise) of the Borrower and the Guarantors taken as a whole; (b) a material impairment of the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document to which it is a party.

 

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Material Contract”: as defined in Schedule 4.24

 

Material Real Estate Asset”: (a) each Real Estate Asset owned in fee by a Loan Party and (b) each Leasehold Property held under a lease that is a Material Contract and at which a Loan Party conducts operations in connection with the Business. 

 

Moody’s”: Moody’s Investors Service, Inc. (or any successor thereto).

 

Mortgage Instrument”: any mortgage, deed of trust or deed to secure debt executed by a Loan Party in favor of the Administrative Agent with respect to a Material Real Estate Asset. 

 

Multiemployer Plan”: a plan as defined in Section 4001(a)(3) of ERISA. 

 

Net Cash Proceeds”: (a) in connection with any Asset Sale or any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds as and when received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received), net of attorneys’ fees, accountants’ fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset that is the subject of such Asset Sale or Recovery Event (other than any Lien pursuant to a Security Document), and other reasonable fees and expenses actually incurred and paid in connection therewith, and net of taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), reserves taken in accordance with GAAP and amounts held in escrow (until reduced, eliminated or released) and (b) in connection with any issuance or sale of Capital Stock (other than Excluded Issuances) or any incurrence of Indebtedness (other than any incurrence of Indebtedness by any Group Member payable to any other Group Member), the cash proceeds received from such issuance or incurrence, net of attorneys’ fees, investment banking fees, accountants’ fees, underwriting discounts and commissions and other reasonable fees and expenses actually incurred and paid in connection therewith. 

 

Non-Defaulting Lender”: at any time, a Lender that is not a Defaulting Lender.

 

Non-Excluded Taxes”: as defined in Section 2.19(a).

 

Non-U.S. Lender”: as defined in Section 2.19(d).

 

Notes”: the collective reference to any promissory note evidencing Loans.

 

Notice of Revolving Borrowing”: as defined in Section 2.5

 

Notice of Swingline Borrowing”: as defined in Section 2.7.

 

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Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, regardless of whether a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower (and with respect to any Treasury Management Agreement, any other Group Member) to the Administrative Agent or to any Lender (or, in the case of Specified Swap Agreements and Treasury Management Agreements, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, that may arise under, out of or in connection with this Agreement, any other Loan Document or any Specified Swap Agreement or Treasury Management Agreement with a Lender or an affiliate of a Lender, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise; provided, however, the definition of ‘Obligations’ shall not include or create any guarantee by any Loan Party of (or grant of security interest by any Loan Party to support, as applicable) any Excluded Swap Obligations of such Loan Party for purposes of determining any obligations of any Loan Party.

 

Other Taxes”: any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

 

Parent Company”: with respect to a Lender, the bank holding company (as defined in Federal Reserve Board Regulation Y), if any, of such Lender, or any Person owning, beneficially or of record, directly or indirectly, a majority of the shares of such Lender.

 

Parent Guarantor”: Holdings and its successors and permitted assigns.

 

Participant”: as defined in Section 10.6(c).

 

Patriot Act”: as defined in Section 10.18.

 

PBGC”: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).

 

Permits”: as defined in Section 4.23(a).

 

Permitted Acquisition”: any Acquisition by (i) the Borrower or any wholly-owned Subsidiary (other than qualifying shares required by law) of Borrower of substantially all of the assets of an Acquired Business or (ii) the Borrower or any wholly-owned (other than qualifying shares required by law) Subsidiary of Borrower of 100% of the Stock and Stock Equivalents of an Acquired Business to the extent that each of the following conditions shall have been satisfied: 

 

(a)       the Acquisition shall not be a hostile Acquisition; 

 

(b)       to the extent the Acquisition will be financed in whole or in part with the proceeds of any Loan, the conditions set forth in Section 5.2 shall have been satisfied; 

 

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(c)       the Borrower shall have furnished to the Administrative Agent and Lenders at least ten (10) Business Days prior to the consummation of such Acquisition (1) an executed term sheet and/or commitment letter (setting forth in reasonable detail the terms and conditions of such Acquisition) and, at the request of the Administrative Agent, such other information and documents that the Administrative Agent may request, including, without limitation, executed counterparts of the respective agreements, documents or instruments pursuant to which such Acquisition is to be consummated (including, without limitation, any related management, non-compete, employment, option or other material agreements), any schedules to such agreements, documents or instruments and all other material ancillary agreements, instruments and documents to be executed or delivered in connection therewith, (2) pro forma financial statements of Trean and its Subsidiaries after giving effect to the consummation of such Acquisition, (3) a duly and properly completed Compliance Certificate executed by a responsible officer of the Borrower demonstrating on a pro forma basis compliance with the covenants set forth in Section 7.1 hereof after giving effect to the consummation of such Acquisition and (4) copies of such other agreements, instruments and other documents as the Administrative Agent reasonably shall request; 

 

(d)       the Borrower and its Subsidiaries (including any new Subsidiary) shall execute and deliver the agreements, instruments and other documents required by Sections 6.9, 6.13 and 6.16

 

(e)       no Default or Event of Default shall then exist or would exist after giving effect thereto; 

 

(f)       except with the prior written consent of Administrative Agent, the Acquired Business has EBITDA, subject to pro forma adjustments reasonably acceptable to the Administrative Agent, for the most recent four quarters prior to the acquisition date for which financial statements are available, greater than zero; 

 

(g)       except in the case of a proposed Acquisition in which the total consideration paid or payable is less than in excess of $3,000,000 (and solely to the extent not available), to the extent requested by Administrative Agent, a financial due diligence report or businessman’s review from a big four or other nationally recognized accounting firm reasonably acceptable to the Administrative Agent with respect to any Acquired Business; and 

 

(h)       the total cash consideration (excluding proceeds of an Excluded Issuance and Subordinated Indebtedness) paid or payable, including any earn-out or similar obligations, shall not exceed $5,000,000 per Acquisition (excluding any assumed Indebtedness permitted under Section 7.2(e)), provided that the total consideration for all such Acquisitions, including any earn-out or similar obligations, shall not exceed $5,000,000 (excluding any assumed Indebtedness permitted under Section 7.2(e)) in any fiscal year or $10,000,000 (excluding any assumed Indebtedness permitted under Section 7.2(e)) during the term of this Agreement. 

 

Permitted IPO Related Amendments”: as defined on Schedule 1.1-A

 

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Permitted IPO Restructuring”: as defined on Schedule 1.1-A

 

Permitted Joint Venture”: a limited liability entity with no recourse to any Group Member for the obligations of such limited liability entity. 

 

Permitted Refinancing Indebtedness”: any Indebtedness that Refinances any other Indebtedness, including any successive Refinancings, so long as (a) such Indebtedness is in an aggregate principal amount (or if incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if incurred with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being Refinanced, and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Indebtedness is equal to or greater than the Average Life of the Indebtedness being Refinanced, (c) the Stated Maturity of such Indebtedness is not earlier than the Stated Maturity of the Indebtedness being Refinanced, and (d) such Indebtedness is not senior in right of payment to the Indebtedness that is being Refinanced.

 

Person”: an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.

 

Plan”: at a particular time, any employee benefit plan, other than a Multiemployer Plan, that is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 or Section 4212(c) of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

 

Proceeding”: any proceeding, charge, complaint, claim, demand, notice, action, suit, litigation, hearing, audit, investigation, arbitration, mediation, dispute, cause of action, inquiry, grievance, allegation, indictment, assessment, or legal, administrative or other proceeding (in each case, whether civil, criminal, administrative, investigative or informal, but not including ex parte proceedings in the U.S. Patent and Trademark Office or U.S. Copyright Office). 

 

Projections”: the financial projections for Borrower and its Subsidiaries as delivered on behalf of the Borrower by the Sponsor to the Administrative Agent prior to the date hereof, and covering (a) each of the fiscal years ending December 31, 2020 through December 31, 2024 on a quarterly basis and (b) each of the fiscal years ending thereafter, on an annual basis. 

 

Properties”: any interests of any kind in any properties or assets, whether real, personal or mixed, and whether tangible or intangible.

 

Purchase Money Debt”: (a) Indebtedness of the Borrower or any of its Subsidiaries that, within thirty (30) days of the purchase of fixed or capital assets in which neither the Borrower nor any of its Subsidiaries at any time prior to such purchase had any interest, is incurred to finance part or all of (but not more than) the purchase price of such assets, and (b) Indebtedness that constitutes a renewal, extension, refunding or refinancing of, but not an increase in the principal amount of, Purchase Money Debt that is such by virtue of clause (a), is binding only upon the obligor or obligors under the Purchase Money Debt being renewed, extended or refunded.

 

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Qualified Capital Stock”: with respect to any Person, any Capital Stock of such Person that is not Disqualified Capital Stock. 

 

Qualified ECP Guarantor”: in respect of any Swap Obligation, each Loan Party that has total assets exceeding $10,000,000 at the time the relevant guarantee or grant of the relevant security interest becomes effective with respect to such Swap Obligation or such other person as constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an “eligible contract participant” at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act. 

 

Qualified Initial Public Offering”: as defined in Section 8(k). 

 

Real Estate Asset”: at any time of determination, any interest (fee, leasehold or otherwise) then owned by any Group Member in any real property. 

 

Recovery Event”: any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of any Group Member in excess of $250,000.

 

Reference Period”: any period of four consecutive fiscal quarters of Trean. 

 

Refinance”: in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, repurchase, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. “Refinanced” and “Refinancing” shall have correlative meanings. 

 

Refunded Swingline Loans”: as defined in Section 2.7.

 

Register”: as defined in Section 10.6(b).

 

Regulation U”: Regulation U of the Board as in effect from time to time.

 

Reinvestment Deferred Amount”: with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by any Group Member in connection therewith that are not applied to prepay the Term Loans or reduce the Revolving Commitments pursuant to Section 2.11(c) as a result of the delivery of a Reinvestment Notice.

 

Reinvestment Event”: any Asset Sale or Recovery Event in respect of which the Borrower has delivered a Reinvestment Notice.

 

Reinvestment Notice”: a written notice executed by a Responsible Officer stating that no Event of Default has occurred and is continuing and that the Borrower (directly or indirectly through a Guarantor) intends and expects to use all or a specified portion of the Net Cash Proceeds of an Asset Sale or Recovery Event to acquire (whether through a purchase or other acquisition of assets or Capital Stock, directly or pursuant to a merger, consolidation or amalgamation) or repair assets useful in its business.

 

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Reinvestment Prepayment Amount”: with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less (a) any amount expended prior to the relevant Reinvestment Prepayment Date to acquire, construct or repair assets useful in the Borrower’s Business (directly or indirectly through a Guarantor), and (b) any amount required to be expended within ninety (90) days thereafter pursuant to a Contractual Obligation entered into prior to such Reinvestment Prepayment Date with respect to such acquisition, construction or repair.

 

Reinvestment Prepayment Date”: with respect to any Reinvestment Event, the earlier of (a) the date occurring ninety (90) days after such Reinvestment Event and (b) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire, construct or repair assets useful in the Borrower’s Business (directly or indirectly through a Guarantor) with all or any portion of the relevant Reinvestment Deferred Amount.

 

Reorganization”: with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.

 

Reportable Event”: any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty (30) day notice period is waived under the PBGC regulations.

 

Required Lenders”: at any time, the holders of more than 66-2/3% of (a) until the Closing Date, the Commitments then in effect and (b) thereafter, the sum of (i) the aggregate unpaid principal amount of the Term Loans then outstanding and (ii) the Total Revolving Commitments then in effect or, if the Revolving Commitments have been terminated, the Total Revolving Extensions of Credit then outstanding, provided that to the extent that any Lender is a Defaulting Lender, such Defaulting Lender and all of its Aggregate Exposure shall be excluded for purposes of determining Required Lenders.

 

Requirement of Law”: as to any Person, the certificate or articles of incorporation or formation, bylaws, limited liability company or partnership agreement, and other organizational or governing documents of such Person, and any United States, federal, state, local or municipal constitution, law, treaty, statute, regulation, rule, code, ordinance, principle of common law, judgment, decree, order, injunction or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property, business or operations or to which such Person or any of its property, business or operations is subject.

 

Responsible Officer”: each of the chief executive officer, president, chief operating officer, chief financial officer, treasurer, general counsel (but subject to any limitations on disclosures arising from attorney-client privilege), or any executive or senior vice president of the Borrower or any other Group Member, but in any event, with respect to matters set forth in Section 6.2 and other financial matters, the chief financial officer of the Borrower or Holdings or another executive serving a similar function.

 

Restricted Payments”: as defined in Section 7.6.

 

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Revolving Commitment”: as to any Lender, the obligation of such Lender, if any, to make Revolving Loans and participate in Swingline Loans in an aggregate principal or face amount not to exceed the amount set forth under the heading “Revolving Commitment” opposite such Lender’s name on Schedule 1.1-C or in the Assignment and Assumption pursuant to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof.

 

Revolving Commitment Period”: the period from and including the Initial Closing Date to the Revolving Termination Date.

 

Revolving Extensions of Credit”: as to any Revolving Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Loans held by such Lender then outstanding and (b) such Lender’s Revolving Percentage of the aggregate principal amount of all Swingline Loans then outstanding.

 

Revolving Lender”: each Lender that has a Revolving Commitment or that holds Revolving Loans.

 

Revolving Loans”: as defined in Section 2.4(a).

 

Revolving Percentage”: as to any Revolving Lender at any time, the percentage that such Lender’s Revolving Commitment then constitutes of the Total Revolving Commitments or, at any time after the Revolving Commitments shall have expired or terminated, the percentage that the aggregate principal amount of such Lender’s Revolving Loans then outstanding constitutes of the aggregate principal amount of the Revolving Loans then outstanding, provided that, in the event that the Revolving Loans are paid in full prior to the reduction to zero of the Total Revolving Extensions of Credit, the Revolving Percentages shall be determined in a manner designed to ensure that the other outstanding Revolving Extensions of Credit shall be held by the Revolving Lenders on a comparable basis.

 

Revolving Termination Date”: May 26, 2025.

 

S&P”: Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc., together with its successors.

 

Sanctioned Country”: (a) a country, territory or a government of a country or territory, (b) an agency of the government of a country or territory, or (c) an organization directly or indirectly owned or controlled by a country, territory or its government, that is subject to Sanctions.

 

Sanctioned Person”: (a) a Person named on the list of “Specially Designated Nationals” or any other Sanctions related list of designated Persons maintained by OFAC, the U.S. Department of State, the United Nations Security Council, the European Union or any European Union member state, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b).

 

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Sanctions”: economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State, (b) the United Nations Security Council, (c) the European Union, (d) any European Union member state, (e) Her Majesty’s Treasury of the United Kingdom or (f) any other relevant sanctions authority. 

 

SEC”: the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority. 

 

Security Documents”: the collective reference to the Guarantee and Collateral Agreement and all other instruments, documents and agreements delivered by any Loan Party pursuant to this Agreement, or any of the other Loan Documents to the Administrative Agent granting or perfecting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document, whether pursuant to the Guarantee and Collateral Agreement or otherwise.

 

Series A Preferred Stock”: the outstanding shares of Series A preferred stock in Trean Corporation.

 

Single Employer Plan”: any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan.

 

Solvent”: when used with respect to any Person, means that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, property constituting an unreasonably small capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) “debt” means liability on a “claim”, and (ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.

 

Specified Equity Contribution”: as defined in Section 7.1(c)

 

Specified Shareholders”: means Andrew M. O’Brien and Steven B. Lee. 

 

Specified Shareholder Bonus Payments” means any and all bonus payments paid by Borrower to the Specified Shareholders permitted to be paid pursuant to the terms and conditions of Section 7.6(h)

 

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Specified Shareholder Subordination Agreement”: means any subordination agreement, in form and substance satisfactory to the Administrative Agent, providing, among other things, for the subordination of the applicable Specified Shareholder Bonus Payments to the Obligations as to right and time of payment and as to other rights and remedies thereunder. 

 

Specified Swap Agreement”: any Swap Agreement entered into by the Borrower and any Lender or affiliate thereof in respect of interest rates.

 

Sponsor”: Altaris Capital Partners, LLC, a Delaware limited liability company, and its Controlled Investment Affiliates. 

 

Sponsor Management Agreement”: the Amended and Restated Consulting Agreement dated as of April 29, 2016, by and among Altaris Capital Partners, LLC and Holdings, as amended by that certain amendment thereto dated as of May 1, 2017, and as further amended, restated, supplemented or otherwise modified from time to time in accordance with the terms of the Management Fee Subordination Agreement.

 

Stark Law”: 42 U.S.C. §1395nn, and the regulations promulgated thereto, all as amended from time to time, and any successor statute and regulations.

 

Stated Maturity”: with respect to any Indebtedness, the date specified in the governing documents thereof as the fixed date on which the final or only, as the case may be, payment of principal of such Indebtedness is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such Indebtedness at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer).

 

Subordinated Debt Documents”: collectively, any indentures, promissory notes, bonds, loan agreements, subordination agreements, intercreditor agreements, or other agreements evidencing or governing any Subordinated Indebtedness.

 

Subordinated Indebtedness”: collectively, the Indebtedness expressly permitted in Section 7.2(f), (g) or (k) that is subordinated to the Obligations on terms satisfactory to the Administrative Agent.

 

Subsidiary”: as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership, limited liability company, or other entity (giving effect to the number of votes exercisable by such directors or other managers in the ordinary course and absent the happening of a contingency) are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.

 

Subsidiary Guarantors”: collectively, all Subsidiaries of Holdings other than the Borrower and any Foreign Subsidiaries.

 

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Swap Agreement”: (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, that are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement.

 

Swap Obligation”: with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act. 

 

Swap Termination Value”: in respect of any one or more Swap Agreements, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Agreements, (a) for any date on or after the date such Swap Agreements have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Agreements, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Agreements (which may include the Lender or any Affiliate of the Lender).

 

Swingline Commitment”: the obligation of the Swingline Lender to make Swingline Loans pursuant to Section 2.6 in an aggregate principal amount at any one time outstanding not to exceed $500,000.

 

Swingline Exposure”: as defined in Section 2.23.

 

Swingline Lender”: First Horizon Bank, in its capacity as the lender of Swingline Loans.

 

Swingline Loans”: as defined in Section 2.6.

 

Swingline Participation Amount”: as defined in Section 2.7.

 

Term Commitment”: as defined in Section 2.1.

 

Term Lender”: each Lender that has a Term Commitment or that holds a Term Loan.

 

Term Loan Maturity Date”: May 26, 2025.

 

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Term Loans”: as defined in Section 2.1.

 

Term Percentage”: as to any Term Lender at any time prior to the Closing Date, the percentage that such Lender’s Term Commitment then constitutes of the aggregate Term Commitments (or, at any time after the Closing Date, the percentage that the aggregate principal amount of such Lender’s Term Loans then outstanding constitutes of the aggregate principal amount of the Term Loans then outstanding).

 

Total Revolving Commitments”: at any time, the aggregate amount of the Revolving Commitments of all Revolving Lenders then in effect. The amount of the Total Revolving Commitments on the Closing Date is $2,000,000.

 

Total Revolving Extensions of Credit”: at any time, the aggregate amount of the Revolving Extensions of Credit of the Revolving Lenders outstanding at such time.

 

Transferee”: any Assignee or Participant.

 

Trean Compstar Pledge Agreement”: that certain Collateral Assignment of Membership Interest, dated as of the Closing Date, between Trean Compstar and Oak Street Funding LLC.

 

Trean Indenture”: that certain Indenture dated as of June 22, 2006, by and among Trean Corporation, as issuer, and Wells Fargo Bank, National Association, as trustee (as amended, restated, supplemented or otherwise modified from time to time).

 

Treasury Management Agreement”: any agreement governing the provision of treasury, cash management or business credit card services, including deposit accounts, funds transfer, automated clearinghouse, zero balance accounts, returned check concentration, controlled disbursement, lockbox, account reconciliation and reporting, trade finance and business credit card services.

 

Type”: as to any Loan, its nature as an ABR Loan or a Eurodollar Loan.

 

United States”: the United States of America.

 

US Dollars” and “$”: dollars in lawful currency of the United States.

 

U.S. Lender”: as defined in Section 2.19(f).

 

Write-Down and Conversion Powers”: with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.

 

1.2         Other Definitional Provisions.

 

(a)       Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto.

 

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(b)       As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, (i) accounting terms relating to any Group Member not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, (ii) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, (iii) the word “incur” shall be construed to mean incur, create, issue, assume, become liable in respect of or suffer to exist (and the words “incurred” and “incurrence” shall have correlative meanings), (iv) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, leasehold interests and contract rights, (v) unless the context clearly indicates otherwise, the disjunctive “or” includes the conjunctive “and”, and (vi) references to instruments, documents, agreements or other Contractual Obligations shall, unless otherwise specified, be deemed to refer to such instruments, documents, agreements or Contractual Obligations as amended, supplemented, restated or otherwise modified from time to time.

 

(c)       The words “hereof”, “herein” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.

 

(d)       In the event that performance of any obligation is due on a day that is not a Business Day, then, except as expressly provided herein, the time for such performance shall be extended to the next Business Day.

 

(e)       The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

 

SECTION 2. AMOUNT AND TERMS OF COMMITMENTS

 

2.1         Term Commitments. Immediately prior to the effectiveness of this Agreement, the outstanding principal balance of the “Term Loan” under and as defined in the Existing Credit Agreement is $21,293,000, as described on Schedule 1.1-C under the heading “Outstanding Term Loans Under Existing Credit Agreement” (the “Existing Term Loans”). The outstanding principal balance of the “Term Loan” advanced by each Existing Lender under the Existing Credit Agreement shall be deemed to be, and hereby is converted into, on the Closing Date, a portion of the Term Loans of such Existing Lender hereunder. Subject to the terms and conditions hereof, each Term Lender severally agrees to make a term loan (a “Term Loan”) to the Borrower on the Closing Date in the amount set forth opposite such Term Lender’s name in Schedule 1.1-C under the heading “New Term Loan Commitments to be Funded on the Closing Date” (collectively with the amount set forth opposite such Term Lender’s name in Schedule 1.1-C under the heading “Outstanding Term Loans Under Existing Credit Agreement”, and as amended to reflect assignments permitted hereunder and as such amount may be reduced pursuant to this Agreement, such amount being referred to herein as such Lender’s “Term Commitment”). The Term Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.12.

 

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2.2         Procedure for Term Loan Borrowing. The Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 a.m., Central time, (a) three (3) Business Days prior to the anticipated Closing Date, in the case of Eurodollar Loans, or (b) one (1) Business Day prior to the anticipated Closing Date, in the case of ABR Loans) requesting that the Term Lenders make the Term Loans on the Closing Date. Upon receipt of such notice, the Administrative Agent shall promptly notify each Term Lender thereof. Not later than 12:00 Noon, Central time, on the Closing Date each Term Lender shall make available to the Administrative Agent at the Funding Office an amount in immediately available funds equal to the Term Loan to be made by such Lender. The Administrative Agent shall credit the account of the Borrower on the books of such office of the Administrative Agent, or such other account as set forth in the Funds Flow, with the aggregate of the amounts made available to the Administrative Agent by the Term Lenders in immediately available funds.

 

2.3         Repayment of Term Loans. The outstanding principal balance of the Term Loan of each Lender shall be repaid in consecutive quarterly installments, commencing June 30, 2020, each of which shall be in an amount equal to such Lender’s Term Percentage of the Term Loans multiplied by the amount set forth below opposite such installment:

 

Installment   Principal Amount

June 30, 2020

 

  $206,250

September 30, 2020 

 

  $206,250

December 31, 2020 

 

  $206,250

March 31, 2021 

 

  $206,250

June 30, 2021 

 

  $412,500

September 30, 2021 

 

  $412,500

December 31, 2021 

 

  $412,500

March 31, 2022 

 

  $412,500

June 30, 2022 

 

  $412,500

September 30, 2022 

 

  $412,500

December 31, 2022 

 

  $412,500

March 31, 2023 

 

  $412,500

June 30, 2023 

  $825,000

 

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Installment   Principal Amount

September 30, 2023 

 

  $825,000

December 31, 2023  

 

  $825,000

March 31, 2024

 

  $825,000

June 30, 2024 

 

  $825,000

September 30, 2024 

 

  $825,000

December 31, 2024

 

  $825,000

March 31, 2025

 

  $825,000

 

 

and the remaining outstanding principal balance of the Term Loans shall be repaid in full on the Term Loan Maturity Date.

 

2.4           Revolving Commitments.

 

(a)       Subject to the terms and conditions hereof, each Revolving Lender severally agrees to make revolving credit loans (“Revolving Loans”) to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender’s Revolving Percentage the aggregate principal amount of all Swingline Loans then outstanding, does not exceed the amount of such Lender’s Revolving Commitment. During the Revolving Commitment Period, the Borrower may use the Revolving Commitments by borrowing, repaying the Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Revolving Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Section 2.5 or Section 2.12.

 

(b)       The Borrower shall repay all outstanding Revolving Loans on the Revolving Termination Date.

 

2.5           Procedure for Revolving Loan Borrowing. The Borrower may borrow under the Revolving Commitments during the Revolving Commitment Period on any Business Day, provided that the Borrower shall give the Administrative Agent irrevocable telephonic notice confirmed promptly in writing signed by one of the authorized individuals set forth on Schedule 2.5 in substantially the form attached hereto as Exhibit 2.5 (a “Notice of Revolving Borrowing”) (which telephonic notice must be received by the Administrative Agent prior to 10:00 a.m., Central time, (a) three (3) Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one (1) Business Day prior to the requested Borrowing Date, in the case of ABR Loans), specifying (i) the amount and Type of Revolving Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Periods therefor. Each borrowing under the Revolving Commitments shall be in an amount equal to $100,000 or a whole multiple of $50,000 in excess thereof; provided that the Swingline Lender may request, on behalf of the Borrower, borrowings under the Revolving Commitments that are ABR Loans in other amounts pursuant to Section 2.7. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each Revolving Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, Central time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office, or as otherwise directed in writing by the Borrower, with the aggregate of the amounts made available to the Administrative Agent by the Revolving Lenders and in like funds as received by the Administrative Agent.

 

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2.6           Swingline Commitment.

 

(a)       Subject to the terms and conditions hereof, the Swingline Lender may, in its sole discretion and in reliance upon the agreements of the Revolving Lenders set forth in Section 2.7, make a portion of the credit otherwise available to the Borrower under the Revolving Commitments from time to time during the Revolving Commitment Period by making swing line loans (“Swingline Loans”) to the Borrower; provided that (i) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed the Swingline Commitment then in effect, and (ii) the Borrower shall not request, and the Swingline Lender shall not make, any Swingline Loan if, after giving effect to the making of such Swingline Loan, the aggregate amount of the Available Revolving Commitments would be less than zero. During the Revolving Commitment Period, the Borrower may use the Swingline Commitment by borrowing, repaying and reborrowing, all in accordance with the terms and conditions hereof. Swingline Loans shall be ABR Loans only.

 

(b)       The Borrower shall repay to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the Revolving Termination Date; provided that on each date that a Revolving Loan is borrowed, the Borrower shall repay all Swingline Loans then outstanding.

 

2.7           Procedure for Swingline Borrowing; Refunding of Swingline Loans.

 

(a)       Whenever the Borrower desires that the Swingline Lender make a Swingline Loan it shall give the Swingline Lender irrevocable telephonic notice confirmed promptly in writing in substantially the form attached hereto as Exhibit 2.7 (a “Notice of Swingline Borrowing”) (which telephonic notice must be received by the Swingline Lender not later than 10:00 a.m., Central time on the proposed Borrowing Date), specifying (i) the amount to be borrowed, and (ii) the requested Borrowing Date (which shall be a Business Day during the Revolving Commitment Period). Each borrowing under the Swingline Commitment shall be in an amount equal to $100,000 or a whole multiple of $50,000 in excess thereof. Not later than 3:00 p.m., Central time, on the Borrowing Date specified in a notice in respect of Swingline Loans, the Swingline Lender may, in its sole discretion and in reliance upon the agreements of the Revolving Lenders set forth in this Section 2.7, make available to the Administrative Agent at the Funding Office an amount in immediately available funds equal to the amount of the Swingline Loan. The Administrative Agent shall make the proceeds of such Swingline Loan available to the Borrower on such Borrowing Date by depositing such proceeds in the account of the Borrower with the Administrative Agent, or as otherwise directed in writing by the Borrower, on such Borrowing Date in immediately available funds.

 

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(b)       The Swingline Lender, at any time and from time to time in its sole discretion may, on behalf of the Borrower (which hereby irrevocably directs the Swingline Lender to act on its behalf), upon notice given by the Swingline Lender no later than 10:00 a.m., Central time, request each Revolving Lender to make, and each Revolving Lender hereby agrees to make, a Revolving Loan, in an amount equal to such Revolving Lender’s Revolving Percentage of the aggregate amount of the Swingline Loans (the “Refunded Swingline Loans”) outstanding on the date of such notice, to repay the Swingline Lender. Each Revolving Lender shall make the amount of such Revolving Loan available to the Administrative Agent at the Funding Office in immediately available funds, not later than 3:00 p.m., Central time, on the date of such notice. The proceeds of such Revolving Loans shall be immediately made available by the Administrative Agent to the Swingline Lender for application by the Swingline Lender to the repayment of the Refunded Swingline Loans. The Borrower irrevocably authorizes the Swingline Lender to charge the Borrower’s accounts with the Administrative Agent (up to the amount available in each such account) in order to immediately pay the amount of such Refunded Swingline Loans to the extent amounts received from the Revolving Lenders are not sufficient to repay in full such Refunded Swingline Loans.

 

(c)       If prior to the time a Revolving Loan would have otherwise been made pursuant to Section 2.7(b), one of the events described in Section 8(f) shall have occurred and be continuing with respect to the Borrower or if for any other reason, as determined by the Swingline Lender in its sole discretion, Revolving Loans may not be made as contemplated by Section 2.7(b), each Revolving Lender shall, on the date such Revolving Loan was to have been made pursuant to the notice referred to in Section 2.7(b), purchase for cash an undivided participating interest in the then outstanding Swingline Loans by paying to the Swingline Lender an amount (the “Swingline Participation Amount”) equal to (i) such Revolving Lender’s Revolving Percentage times (ii) the sum of the aggregate principal amount of Swingline Loans then outstanding that were to have been repaid with such Revolving Loans.

 

(d)       Whenever, at any time after the Swingline Lender has received from any Revolving Lender such Lender’s Swingline Participation Amount, the Swingline Lender receives any payment on account of the Swingline Loans, the Swingline Lender will distribute to such Lender its Swingline Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender’s participating interest was outstanding and funded and, in the case of principal and interest payments, to reflect such Lender’s pro rata portion of such payment if such payment is not sufficient to pay the principal of and interest on all Swingline Loans then due); provided, however, that in the event that such payment received by the Swingline Lender is required to be returned, such Revolving Lender will return to the Swingline Lender any portion thereof previously distributed to it by the Swingline Lender.

 

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(e)       Each Revolving Lender’s obligation to make the Loans referred to in Section 2.7(b) and to purchase participating interests pursuant to Section 2.7(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim, recoupment, defense or other right that such Revolving Lender or the Borrower may have against the Swingline Lender, the Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 5, (iii) any adverse change in the business, operations, properties, assets, financial condition or business prospects of the Borrower or any other Group Member, (iv) any breach of this Agreement or any other Loan Document by the Borrower, any other Loan Party or any other Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.

 

2.8         Commitment Fees, etc.

 

(a)       The Borrower agrees to pay to the Administrative Agent, for the account of each Revolving Lender, a commitment fee for the period from and including the Closing Date to the last day of the Revolving Commitment Period, computed at the Commitment Fee Rate in effect from time to time on the average daily amount of the Available Revolving Commitment of such Lender during the period for which payment is made, payable in arrears on each Fee Payment Date, commencing on the first such date to occur after the date hereof.

 

(b)       The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the dates as set forth in any written fee agreements with the Administrative Agent and to perform any other obligations contained therein, including without limitation that certain Fee Letter dated as of May 26, 2020.

 

2.9         Termination or Reduction of Revolving Commitments. The Borrower shall have the right, upon not less than five (5) Business Days’ prior written notice to the Administrative Agent, to terminate the Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided that no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans and Swingline Loans made on the effective date thereof, the Total Revolving Extensions of Credit then outstanding would exceed the Total Revolving Commitments then in effect. Any such reduction shall be in an amount equal to $500,000, or a whole multiple of $100,000 in excess of that amount, and shall reduce permanently the Revolving Commitments then in effect.

 

2.10       Optional Prepayments.

 

(a)       The Borrower may at any time and from time to time prepay the Loans, in whole or in part, upon irrevocable notice (provided, that any notice for the prepayment in full of the Facilities given in connection with a proposed Refinancing of the Facilities or a proposed Disposition of a Group Member or involving the sale of all or substantially all of the Collateral may be revocable and conditioned upon the closing of such Refinancing or Disposition) delivered to the Administrative Agent no later than (i) 10:00 a.m., Central time on the date of any prepayment of Swingline Loans, which notice in each case shall specify the date and amount of prepayment and (ii) 10:00 a.m., Central time, three (3) Business Days prior thereto, in the case of all other Loans, which notice in each case shall specify the date and amount of prepayment and whether the prepayment is of Eurodollar Loans or ABR Loans; provided that if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.20. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with (except in the case of Revolving Loans that are ABR Loans and Swingline Loans) accrued interest to such date on the amount prepaid. Partial prepayments of Loans shall be in a minimum amount of $100,000 and a whole multiple of $50,000.

 

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(b)       Prepayments pursuant to this Section 2.10 shall be made without premium or penalty (other than any amounts due pursuant to Section 2.20) and shall be applied to either the Term Loans or the Revolving Loans as directed by the Borrower. Notwithstanding anything in this Section 2.10 to the contrary, amounts received from any Loan Party that is not a Qualified ECP Guarantor shall not be applied to any Excluded Swap Obligation of such Loan Party.

 

2.11       Mandatory Prepayments and Commitment Reductions.

 

(a)       [Reserved].

 

(b)       If any Indebtedness shall be incurred by any Group Member (other than any Indebtedness incurred in accordance with Section 7.2), an amount equal to 100% of the Net Cash Proceeds thereof shall be applied as set forth in Section 2.11(g) not later than the Business Day following receipt of such Net Cash Proceeds.

 

(c)       If during any fiscal year of Holdings one or more Loan Parties shall receive Net Cash Proceeds from Asset Sales and Recovery Events aggregating in excess of $100,000, then unless a Reinvestment Notice shall be delivered in respect thereof, such Net Cash Proceeds in excess of said $100,000 amount shall be applied as set forth in Section 2.11(g) not later than the Business Day following receipt of such Net Cash Proceeds; provided that notwithstanding the foregoing, on each Reinvestment Prepayment Date an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied as set forth in Section 2.11(g).

 

(d)       Within 120 days after the end of each fiscal year of Trean commencing with the fiscal year ending December 31, 2020, the Borrower shall prepay the Obligations in accordance with Section 2.11(g) in an aggregate amount equal to the following percentages of Excess Cash Flow for such preceding fiscal year as applicable: 50% with respect to each fiscal year; provided, however, that any mandatory prepayment pursuant to this Section 2.11(d) may be waived with the written consent of all Lenders. Any voluntary prepayments made in respect of the Term Loans and the Revolving Loans (but only to the extent that the Revolving Commitments are permanently reduced by the amount of such payments in accordance with Section 2.9 hereof) during the applicable period shall be treated as a credit against any Excess Cash Flow mandatory prepayment that would otherwise be required to be made pursuant to this Section 2.11(d) with respect to such period. Any prepayment pursuant to this Section 2.11(d) shall be applied as set forth in Section 2.11(g) below.

 

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(e)       Not later than the first Business Day following the date of receipt by the Borrower of any proceeds of any Specified Equity Contribution pursuant to Section 7.1(c), the Borrower shall prepay the outstanding Obligations in an aggregate amount equal to 100% of such proceeds. The proceeds of any such Specified Equity Contribution shall be applied as set forth in Section 2.11(g).

 

(f)       If for any reason the Revolving Extensions of Credit at any time exceed the aggregate Revolving Commitments then in effect, the Borrower shall immediately prepay Revolving Loans or any Swingline Loans then outstanding in an aggregate amount equal to such excess.

 

(g)       All amounts required to be prepaid pursuant to this Section 2.11 shall be applied as follows:

 

(i)       with respect to all amounts prepaid pursuant to the foregoing subsections (b), (c) and e, first to the Term Loans, in inverse order of maturity (including the final payment due on the Term Loan Maturity Date), then (after the Term Loans have been paid in full) to the Swingline Loans, and then (after the Swingline Loans have been paid in full) to the Revolving Loans (but without a corresponding reduction in the aggregate Revolving Commitments then in effect);

 

(ii)       with respect to all amounts prepaid pursuant to the foregoing subsection (d), first to the Term Loans, pro rata across remaining amortization payments (including the final payment due on the Term Loan Maturity Date), then (after the Term Loans have been paid in full) to the Swingline Loans, and then (after the Swingline Loans have been paid in full) to the Revolving Loans (but without a corresponding reduction in the aggregate Revolving Commitments then in effect); and

 

(iii)       with respect to all amounts prepaid pursuant to the foregoing subsection (f), first to the Swingline Loans, and then (after the Swingline Loans have been paid in full) to the Revolving Loans.

 

Within the parameters of the applications set forth above, prepayments shall be applied first to ABR Loans and then to Eurodollar Loans. All prepayments under this Section 2.11 shall be subject to Section 2.20, but otherwise without premium or penalty, and shall be accompanied by interest on the principal amount prepaid through the date of prepayment. Notwithstanding anything in this Section 2.11 to the contrary, amounts received from any Loan Party that is not a Qualified ECP Guarantor shall not be applied to any Excluded Swap Obligation of such Loan Party.

 

(h)       Each prepayment made pursuant to this Section 2.11 shall be accompanied by a certificate of a Responsible Officer in reasonable detail setting forth the calculation of the amount prepaid.

 

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2.12       Conversion and Continuation Options.

 

(a)       The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent prior irrevocable notice of such election no later than 10:00 a.m., Central time, on the third Business Day preceding the proposed conversion date, provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto, and provided further that if the Borrower shall fail to give any required notice as described above in this sentence, such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent prior irrevocable notice of such election no later than 10:00 a.m., Central time, on the third Business Day preceding the proposed conversion date (which notice shall specify the length of the initial Interest Period therefor), provided that no ABR Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing unless the Administrative Agent and Required Lenders have determined in their sole discretion to permit such conversions. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.

 

(b)       Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Periods with respect thereto by the Borrower giving the Administrative Agent prior irrevocable notice of such election no later than 10:00 a.m. Central time, on the third Business Day preceding the proposed continuation date that (any such continuation of Eurodollar Loans to be made only on the last day of the current Interest Period with respect thereto), which notice shall specify the length of the Interest Period to be applicable upon such continuation of such Eurodollar Loans, provided that no Eurodollar Loan may be continued as such when any Event of Default has occurred and is continuing unless the Administrative Agent and Required Lenders have determined in their sole discretion to permit such continuations, and provided further that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso, such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.

 

2.13       Limitations on Eurodollar Tranches. Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions and continuations of Eurodollar Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $400,000 or a whole multiple of $100,000 in excess thereof and (b) no more than five (5) Eurodollar Tranches shall be outstanding at any one time.

 

2.14       Interest Rates and Payment Dates.

 

(a)       Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate in effect for such Interest Period plus the Applicable Margin for Eurodollar Loans from time to time in effect during such Interest Period.

 

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(b)       Each ABR Loan shall bear interest at a rate per annum equal to the ABR plus the Applicable Margin for ABR Loans, in each case as from time to time in effect.

 

(c)        (i) If all or a portion of the principal amount of any Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), all outstanding Loans (whether or not overdue) shall thereafter bear interest at a rate per annum equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus an additional 2% per annum, (ii) if any other Event of Default shall have occurred and be continuing, all outstanding Loans (whether or not overdue) shall, upon election by the Required Lenders and written notice thereof to the Borrower, thereafter bear interest at a rate per annum equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus an additional 2% per annum, and (iii) if all or a portion of any interest payable on any Loan or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall, upon election by the Required Lenders and written notice thereof to the Borrower, thereafter bear interest at a rate per annum equal to the rate then applicable to ABR Loans plus an additional 2% per annum, in each case, with respect to clauses (i), (ii) and (iii) above, from the date of such nonpayment until such amount is paid in full (after as well as before judgment).

 

(d)       Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to Section 2.14(c) shall be payable from time to time on demand.

 

2.15       Computation of Interest and Fees; Notes.

 

(a)       Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurodollar Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective.

 

(b)       Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error

 

(c)       Upon receipt by an Lender of any Note under this Agreement evidencing its Loans, such Lender agrees that any promissory notes issued under the Existing Credit Agreement in favor of such Lender with respect to the same type of Loans as such Note shall be deemed replaced by such Note (without effecting a novation with respect to any “Obligations” as defined in the Existing Credit Agreement).

 

2.16       Inability to Determine Interest Rate. If:

 

(a)       the Administrative Agent shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, or

 

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(b)       prior to the first day of any Interest Period the Administrative Agent shall have received notice from Required Lenders that they have concluded in good faith that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice (confirmed promptly in writing) thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made shall be made as ABR Loans, (y) any Loans that were to have been converted to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the last day of the then-current Interest Period or monthly period, as the case may be, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans.

 

2.17       Pro Rata Treatment and Payments.

 

(a)       Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee, and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Term Percentages or Revolving Percentages, as the case may be, of the relevant Lenders.

 

(b)       Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be made pro rata according to the respective outstanding principal amounts of the Term Loans then held by the Term Lenders. The amount of each mandatory prepayment of the Term Loans made pursuant to Section 2.11 shall be applied as set forth in Section 2.11(g). The amount of each voluntary principal prepayment of the Term Loans made pursuant to Section 2.10 shall be applied as set forth in Section 2.10. Amounts repaid or prepaid on account of the Term Loans may not be reborrowed.

 

(c)       Each payment (including each prepayment) by the Borrower on account of (i) principal of the Revolving Loans shall be made pro rata according to the respective outstanding principal amounts of the Revolving Loans then held by the Revolving Lenders and (ii) interest on the Revolving Loans shall be made pro rata in accordance with the amounts of interest on the Revolving Loans then due and payable to the Revolving Lenders.

 

(d)       All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 10:00 a.m., Central time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Funding Office, in US Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders, as applicable, promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension.

 

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(e)       Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon, at a rate equal to the greater of (i) the Federal Funds Rate plus 1.00% and (ii) a rate determined by the Administrative Agent in accordance with current banking industry practices on interbank compensation, for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lender’s share of such borrowing is not made available to the Administrative Agent by such Lender within three (3) Business Days after such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to ABR Loans, on demand, from the Borrower. Nothing herein shall be deemed to limit the rights of the Borrower against any Lender for such Lender’s failure to fund any borrowing as required by this Agreement.

 

(f)       Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower on such due date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the greater of (i) the daily average Federal Funds Rate plus 1.00%, and (ii) a rate determined by the Administrative Agent in accordance with current banking industry practices on interbank compensation. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower.

 

(g)       Notwithstanding anything in this Section 2.17 to the contrary, amounts received from any Loan Party that is not a Qualified ECP Guarantor shall not be applied to any Excluded Swap Obligation of such Loan Party.

 

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2.18       Requirements of Law.

 

(a)       If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

 

(i)       shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.19 and Excluded Taxes);

 

(ii)       shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate; or

 

(iii)       shall impose on such Lender any other condition;

 

and the result of any of the foregoing is to increase the cost to such Lender of making, converting into, continuing or maintaining Eurodollar Loans, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled.

 

(b)       If any Lender shall have determined in good faith that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its Commitment or other obligations hereunder or under or in respect of any Loan to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy), then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor (which shall include the certificate described in clause (d) below), the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction.

 

(c)       If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful or impossible for any Lender to make, maintain or fund any Eurodollar Loan and such Lender shall so notify the Administrative Agent, the Administrative Agent shall promptly give notice thereof to the Borrower and the other Lenders, whereupon until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of such Lender to make Eurodollar Loans, or to continue or convert outstanding Loans as or into Eurodollar Loans, shall be suspended. In the case of the making of a Eurodollar borrowing, such Lender’s Revolving Loan shall be made as an ABR Loan as part of the same borrowing for the same Interest Period and if the affected Eurodollar Loan is then outstanding, such Loan shall be converted to an ABR Loan either (i) on the last day of the then current Interest Period applicable to such Eurodollar Loan if such Lender may lawfully continue to maintain such Loan to such date or (ii) immediately if such Lender shall determine that it may not lawfully continue to maintain such Eurodollar Loan to such date. Notwithstanding the foregoing, the affected Lender shall, prior to giving such notice to the Administrative Agent, designate a different lending office if such designation would avoid the need for giving such notice and if such designation would not otherwise be disadvantageous to such Lender in the good faith exercise of its discretion.

 

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(d)       A certificate in reasonable detail as to the calculation of any additional amounts payable pursuant to this Section submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. Notwithstanding anything to the contrary in this Section, the Borrower shall not be required to compensate a Lender pursuant to this Section for any amounts incurred more than six months prior to the date such Lender notifies the Borrower of its intention to seek such compensation, provided that if the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include such period of retroactive effect. The obligations of the Borrower pursuant to this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

 

2.19       Taxes.

 

(a)       All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding any Excluded Taxes. If any such taxes, levies, imposts, duties, charges, fees, deductions or withholdings other than Excluded Taxes (“Non-Excluded Taxes”) or Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lender’s failure to comply with the requirements of paragraph (d), (e) or (f) of this Section 2.19 or (ii) that are United States withholding taxes imposed on amounts payable to such Lender at the time such Lender becomes a party to this Agreement, except to the extent that such Lender’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph.

 

(b)       In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

 

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(c)       Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of the relevant Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof or other documentation evidencing such payment reasonably acceptable to the Administrative Agent. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure.

 

(d)       Each Lender (or Transferee) that is not a “U.S. Person” as defined in Section 7701(a)(30) of the Code (a “Non-U.S. Lender”) shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either (A) U.S. Internal Revenue Service Form W-8BEN-E or W-8BEN, as applicable, Form W-8IMY or Form W-8ECI, or, (B) in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a written statement substantially in the form of Exhibit 2.19(d) and a Form W-8BEN-E or W-8BEN, as applicable, Form W-8IMY or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender (including a Non-U.S. Lender who becomes a party by assignment under Section 10.6) on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver. In addition, if a payment made to a Lender hereunder or under any Notes would be subject to U.S. federal withholding tax imposed by FATCA if such Lender fails to comply with the applicable reporting requirements of FATCA (including those contained in section 1471(b) or 1472(b) of the Code, as applicable), such Lender, upon request by either the Administrative Agent or the Borrower, shall deliver to the Administrative Agent and the Borrower (A) a certification signed by an appropriate officer and (B) other documentation reasonably requested by the Administrative Agent and the Borrower sufficient for the Administrative Agent and the Borrower to comply with their obligations under FATCA and to determine that such Lender has complied with such applicable reporting requirements.

 

(e)       A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender’s judgment such completion, execution or submission would not materially prejudice the legal position of such Lender.

 

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(f)       Each Lender that is not a Non-U.S. Lender (each such Lender, a “U.S. Lender”) and which is not an “exempt recipient” within the meaning of the Treasury Regulation Section 1.6049-4(c)(1)(ii) and (A) is a party hereto on the Closing Date or (B) becomes an assignee of an interest under this Agreement shall (w) on or prior to the date such U.S. Lender becomes a party hereunder, (x) on or prior to the date on which any such form or certification expires or becomes obsolete, (y) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it, and (z) from time to time if requested by Borrower, provide Borrower and Administrative Agent with two completed originals of Form W-9 (certifying that such U.S. Lender is entitled to an exemption from U.S. backup withholding tax) or any successor form.

 

(g)       The Administrative Agent and each Lender agree to cooperate with the Borrower, at the Borrower’s sole cost and expense, with any application or other request to, or proceeding with, the applicable Governmental Authority for a refund of any Non-Excluded Taxes or Other Taxes that are subject to the indemnity pursuant to this Section 2.19. If the Administrative Agent or any Lender determines that it has received a refund of any Non-Excluded Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.19, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.19 with respect to the Non-Excluded Taxes or Other Taxes giving rise to such refund), net of all reasonable expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

 

(h)       The agreements in this Section 2.19 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

 

2.20       Indemnity. The Borrower agrees to indemnify each Lender for, and to hold each Lender harmless from, any loss (other than the loss of anticipated profits) or expense that such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of or conversion from Eurodollar Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making by the Borrower of a prepayment of Eurodollar Loans on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein) over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate in reasonable detail as to the calculation of any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. Any payments pursuant to this Section 2.20 shall be due within five (5) Business Days after receipt of such certificate. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

 

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2.21       Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.18 or 2.19(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to (or, if reasonably requested by the Borrower, to file any certificate or document to) designate another lending office for any Commitment or Loans affected by such event with the object of avoiding the consequences of such event; provided that such designation is made on terms that, in the good faith judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided further that nothing in this Section shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Section 2.18 or 2.19(a).

 

2.22       Replacement of Lenders. The Borrower shall be permitted to replace any Lender that (a) requests payment of, or reimbursement for, amounts under Section 2.18 or 2.19(a), (b) defaults in its obligation to make Loans hereunder or to purchase for cash an undivided participating interest in the then outstanding Swingline Loans under Section 2.7(c), or (c) fails to consent to any amendment, modification, supplement or waiver with respect to any of the provisions of the Loan Documents as contemplated in Section 10.1 where such amendment, modification, supplement or waiver has been approved by the Required Lenders in accordance with such Section, but the consent of each Lender is required with respect thereto, with a replacement financial institution; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.21 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.18 or 2.19(a), (iv) the replacement financial institution shall purchase, at par, all Loans, interest, fees, and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.21 if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 10.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.18 or 2.19(a), as the case may be, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender.

 

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2.23       Defaulting Lenders.

 

(a)       Anything herein to the contrary notwithstanding, during such period as any Revolving Lender is a Defaulting Lender, such Defaulting Lender will not be entitled to any commitment fees accruing during such period pursuant to Section 2.8(a) (but without prejudice to the rights of the Revolving Lenders other than any Defaulting Lenders in respect of such fees), and the pro rata payment provisions of Section 2.17 will automatically be deemed adjusted to reflect the provisions of this Section 2.23(a).

 

(b)       Anything herein to the contrary notwithstanding, with the prior written approval of the Administrative Agent, the Borrower may terminate (on a non-ratable basis) the unused amount of the Revolving Commitment of any Defaulting Lender on not less than five (5) Business Days’ prior written notice to the Administrative Agent (which will promptly notify the other Lenders thereof), and in such event the provisions of Section 2.23(c) will apply to all amounts thereafter paid by the Borrower for the account of any such Defaulting Lender in respect of its Revolving Commitment and Revolving Extensions of Credit (whether on account of principal, interest, fees, indemnity or other amounts), provided that such termination will not be deemed to be a waiver or release of any claim the Borrower, the Administrative Agent, the Swingline Lender, or any other Revolving Lender may have against such Defaulting Lender.

 

(c)       If any Revolving Lender becomes, and during the period it remains, a Defaulting Lender, the following provisions shall apply with respect to such Defaulting Lender’s Revolving Percentage of the aggregate principal amount of all Swingline Loans then outstanding (such Defaulting Lender’s “Swingline Exposure”):

 

(i)       The Swingline Lender is hereby authorized by the Borrower (which authorization is irrevocable and coupled with an interest) to give, in its discretion, through the Administrative Agent, a borrowing notice pursuant to Section 2.5 in such amounts and at such times as may be required to repay an outstanding Swingline Loan, as applicable;

 

(ii)       The Borrower will, not later than three (3) Business Days after demand by the Administrative Agent (at the direction of the Swingline Lender) (x) Cash Collateralize a portion of the obligations of the Borrower to the Swingline Lender equal to such Defaulting Lender’s Swingline Exposure, (y) in the case of such Swingline Exposure, prepay all Swingline Loans, or (z) make other arrangements satisfactory to the Administrative Agent and the Swingline Lender, as the case may be, in their sole discretion, to protect them against the risk of non-payment by such Defaulting Lender; provided that no such Cash Collateralization will constitute a waiver or release of any claim the Borrower, the Administrative Agent, the Swingline Lender or any other Lender may have against such Defaulting Lender, or cause such Defaulting Lender to be a Non-Defaulting Lender; and

 

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(iii)       Any amount paid by the Borrower for the account of a Defaulting Lender in respect of its Revolving Commitment or its Revolving Extensions of Credit (whether on account of principal, interest, fees, indemnity payments or other amounts) will not be paid or distributed to such Defaulting Lender, but will instead be retained by the Administrative Agent in a segregated non-interest bearing account until the termination of the Revolving Commitments, at which time the funds in such account will be applied by the Administrative Agent, to the fullest extent permitted by law, in the following order of priority: first, to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent under this Agreement; second, to the payment of any amounts owing by such Defaulting Lender to the Swingline Lender under this Agreement; third, to the payment of post-default interest and then current interest due and payable to the Non-Defaulting Lenders, ratably among them in accordance with the amounts of such interest then due and payable to them; fourth, to the payment of fees then due and payable to the Non-Defaulting Lenders hereunder, ratably among them in accordance with the amounts of such fees then due and payable to them; fifth, to pay principal then due and payable to the Non-Defaulting Lenders hereunder ratably in accordance with the amounts thereof then due and payable to them; sixth, to the ratable payment of other amounts then due and payable to the Non-Defaulting Lenders; and seventh, to pay amounts owing under this Agreement to such Defaulting Lender or as a court of competent jurisdiction may otherwise direct.

 

2.24       Eurodollar Replacement Rate. Notwithstanding the foregoing, if at any time:

 

(a)       (i) the Administrative Agent reasonably determines in good faith (which determination shall be conclusive absent manifest error) that, by reason of circumstances affecting the London interbank eurodollar market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, or (ii) the Administrative Agent shall have determined in good faith that the Eurodollar Rate applicable pursuant to Section 2.14(a) for any requested Interest Period does not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of funding such Loan and in either event, such circumstances are unlikely to be temporary; or

 

(b)        the circumstances set forth in (a) above have not arisen, but the supervisor for the administrator of the Eurodollar Base Rates or a Governmental Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after which the Eurodollar Rate shall no longer be used for determining interest rates for loans or that the Eurodollar Rate will no longer be representative, then, in either event, reasonably promptly thereafter the Administrative Agent shall notify the Borrower of such event and the Administrative Agent and the Borrower shall endeavor to designate an alternate rate of interest to the Eurodollar Base Rates that gives due consideration to any evolving or then-existing convention for the use of alternative benchmarks and adjustments in the context of similar U.S. dollar denominated credit facilities (such rate being referred to as the “Eurodollar Replacement Rate”) and, notwithstanding anything in Section 10.1 to the contrary or any other provision of this Agreement, shall enter into an amendment amending this Agreement and any other relevant Loan Documents (the “Amendment”), to reflect such alternate rate of interest and such other related changes (including without limitation changes with respect to the Applicable Margin) as may be necessary or appropriate in the reasonable opinion of the Administrative Agent to effect the provisions of this paragraph and to achieve a final all-in interest rate substantially similar as of the effective date of the Amendment to that in effect prior to the occurrence of the event set forth above (collectively, “Eurodollar Replacement Rate Conforming Changes”). The Amendment shall become effective upon the date specified in the notice. No replacement of the Eurodollar Rates with a Eurodollar Replacement Rate pursuant to this paragraph shall occur prior to the effective date for such Amendment.

 


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The Eurodollar Replacement Rate shall specify that in no event shall such Eurodollar Replacement Rate be less than 0.50%. Such Eurodollar Replacement Rate and Eurodollar Replacement Rate Conforming Changes shall be applied in a manner consistent with market practice; provided that, in each case, to the extent such market practice is not administratively feasible for the Administrative Agent, such Eurodollar Replacement Rate and Eurodollar Replacement Rate Conforming Changes shall be applied as otherwise reasonably determined by the Administrative Agent and the Borrower.

  

SECTION 3. RESERVED

 

SECTION 4. REPRESENTATIONS AND WARRANTIES

 

To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans, each of Holdings and the Borrower represents and warrants to the Administrative Agent and each Lender that:

 

4.1          Financial Condition.

 

(a)       (i) The audited consolidated balance sheet of Trean and its Subsidiaries as at December 31, 2019 and the related consolidated statements of income and of cash flows for the fiscal year ended on such dates, reported on by and accompanied by an unqualified report from Deloitte, (ii) the unaudited balance sheet of Trean and its Subsidiaries as at February 29, 2020 and the related statements of income and of cash flows for the period ended on such date, and (iii) a pro forma balance sheet balance sheet of Trean and its Subsidiaries reflecting the closing of this Agreement and the payment of the Closing Date Distribution, present fairly in all material respects the financial position of Trean and its Subsidiaries, as at such dates, and the results of operations and cash flows of Trean and its Subsidiaries, as applicable, for the respective fiscal periods then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except, in the case of the audited financial statements, as approved by the aforementioned firm of accountants and disclosed therein, and except, in the case of the unaudited financial statements, for the absence of customary year-end adjustments and notes thereto). As of December 31, 2019, Trean and its Subsidiaries, had no material Guarantee Obligations or other material contingent liabilities or liabilities for taxes or long term leases, including any interest rate swap or exchange transaction or other obligation in respect of derivatives, that were not reflected in the most recent financial statements referred to in this paragraph or in the notes thereto that otherwise would be required to be disclosed as liabilities in accordance with GAAP.

 


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(b)       The Projections have been prepared by Trean based upon estimates and assumptions that Trean believes to be reasonable and fair on the Closing Date in light of current conditions and facts known to Trean and, as of the Closing Date, reflect Trean’s good faith estimates of the future financial performance of Trean and its Subsidiaries on a consolidated basis and of the other information projected therein for the periods set forth therein. Notwithstanding the foregoing, it is understood that such Projections are subject to uncertainties and contingencies, many of which are beyond the control of the Group Members, and that no assurance can be given that such Projections will actually be realized.

 

(c)       The pro forma unaudited consolidated balance sheet of Trean and its Subsidiaries, a copy of which has been delivered to each Lender, has been prepared as of March 31, 2020 (which was prepared using the February 29, 2020 balance sheet referred to in clause (a) above) and presents fairly in all material respects as of such date, on a pro forma basis, the consolidated financial position of Trean and its Subsidiaries after giving pro forma effect to the transactions contemplated by this Agreement and the other Loan Documents.

 

4.2          No Change. Since December 31, 2019, there has been no development, event or change in condition that has had or could reasonably be expected to have a Material Adverse Effect.

 

4.3          Existence; Compliance with Law.

 

(a)       Each Group Member (i) is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, and is in compliance with its charter, by-laws or other organizational documents, (ii) has the corporate or other organizational power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, and (iii) is duly qualified as a foreign corporation or other organization and in good standing under the laws of each jurisdiction where its ownership, leasing or operation of property or the conduct of its business requires such qualification and where the failure to be so qualified and in good standing could reasonably be expected to have a Material Adverse Effect.

 

(b)       None of the Group Members (i) has been, is or will be in violation of any applicable Requirement of Law, including any building, zoning, occupational safety, products warranty or liability, fair employment, equal opportunity, pension, or similar federal, state or local law, statute, ordinance or regulation, relating to the ownership or operation of its business or assets, (ii) has failed to obtain any license, permit, certificate, consent, qualification, waiver, approval, registration or other governmental authorization necessary for the conduct of its business or the ownership and operation of its assets, (iii) to the knowledge of the Responsible Officers, has received any notice from any Governmental Authority, and no such notice is pending or threatened, alleging that any Group Member has violated, or has not complied with, any Requirement of Law, condition or standard applicable with respect to any of the foregoing, or (iv) is subject to any judgment, order, or writ, except to the extent that any violation, noncompliance, failure, judgment, etc. as described in this Section 4.3(b), either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

 


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4.4       Power; Authorization; Enforceable Obligations. Each Loan Party has the power and authority to make, deliver and perform its obligations under the Loan Documents to which it is a party and, in the case of the Borrower, to obtain extensions of credit hereunder. Each Loan Party has taken all necessary organizational action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the extensions of credit on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required to be obtained or made by or on behalf of a Loan Party in connection with transactions contemplated by this Agreement or the other Loan Documents, or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the other Loan Documents, except (i) consents, authorizations, filings and notices described in Schedule 4.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect and (ii) the filings referred to in Section 4.20. Each Loan Document has been duly executed and delivered on behalf of each Loan Party that is a party thereto. This Agreement constitutes, and each other Loan Document upon execution and delivery will constitute, a legal, valid and binding obligation of each Loan Party party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

 

4.5       No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents and the borrowings hereunder will not violate any Requirement of Law applicable to any Group Member or any material Contractual Obligation of any Group Member, and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to any of the Loan Parties could reasonably be expected to have a Material Adverse Effect.

 

4.6       Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of any of the Responsible Officers, threatened in writing by or against any Group Members or against any of their respective properties or revenues (i) with respect to this Agreement or any of the other Loan Documents or any of the transactions contemplated hereby or thereby, or (ii) that could reasonably be expected to have a Material Adverse Effect.

 

4.7       No Default. No Group Members are in default under or with respect to any of their Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.

 

4.8       Ownership of Personal Property; Liens. Each Group Member has good title to, a valid leasehold interest in, or otherwise has rights to use, all its personal Property, in each case where such personal Property is used or contemplated for use in the Business or reflected in such Group Member’s financial statements, and none of such personal property is subject to any Lien except as expressly permitted by Section 7.3.

 


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4.9       Ownership of Real Property; Liens. Each Group Member has (a) good, sufficient and legal title to (in the case of fee interests in Real Estate Assets), and (b) valid leasehold interests in (in the case of leasehold interests in Real Estate Assets), in each case where such property is used or contemplated for use in the Business or reflected in such Group Member’s financial statements, and none of such property is subject to any Lien except Liens permitted by Sections 7.3(a), (b), (e) or (h). As of the Closing Date, Schedule 4.9 contains a true, accurate and complete list of (i) all Material Real Estate Assets and (ii) all leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each leasehold interests in Real Estate Assets, regardless of whether such Loan Party is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. Except as would not reasonably be expected to have a Material Adverse Effect, each agreement listed in clause (ii) of the immediately preceding sentence is in full force and effect, the Borrower does not have knowledge of any default that has occurred and is continuing thereunder and each such agreement constitutes the legally valid and binding obligation of each applicable Loan Party, enforceable against such Loan Party in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors’ rights generally or by equitable principles.

 

4.10       Intellectual Property. Each Group Member owns, or is licensed to use, all Intellectual Property necessary for the conduct of the Business as currently conducted, except where the failure to own or possess any licenses to use such Intellectual Property could not reasonably be expected to have a Material Adverse Effect. The use of Intellectual Property by each Group Member does not infringe on the rights of any Person, except where, individually or in the aggregate, any such infringement could not reasonably be expected to have a Material Adverse Effect. No claims have been asserted and are pending by any Persons challenging the use of any such Intellectual Property or the validity or effectiveness of any Intellectual Property owned by such Group Member, nor does the Borrower or Holdings know of any valid basis for any such claim, except where, individually or in the aggregate, any such claims could not reasonably be expected to have a Material Adverse Effect.

 

4.11       Taxes. Each Group Member has filed or caused to be filed all Federal and material state tax returns that are required to be filed and has paid prior to delinquency thereof all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property with respect to such Federal and material state tax returns (other than any taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the relevant Group Member).

 

4.12       Federal Regulations. No part of the proceeds of any Loans, and no other extensions of credit hereunder, will be used (a) for “buying” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect, of the Board or (b) for any purpose that violates the provisions of the regulations of the Board.

 


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4.13       Labor Matters. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) there are no strikes or other labor disputes against any Group Member pending or, to the knowledge of any of the Responsible Officers, threatened; (b) hours worked by and payment made to employees of each Group Member have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters; and (c) all payments due from any Group Member on account of employee health and welfare insurance have been paid or accrued as a liability on the books of the relevant Group Member to the extent required under GAAP.

 

4.14       ERISA. Neither a Reportable Event nor a failure to satisfy the minimum funding standard applicable to any Plan for any plan year (as described in Section 412 of the Code or Section 302 of ERISA, whether or not waived) has occurred during the five-year period prior to the date on which this representation is made with respect to any Plan, and each Plan has complied with the applicable provisions of ERISA and the Code, except where, individually or in the aggregate, such occurrence or non-compliance has not resulted and could not reasonably be expected to result in a material liability to the Group Members taken as a whole. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period, except where, individually or in the aggregate, such termination or Lien has not resulted and could not reasonably be expected to result in a material liability to the Group Members taken as a whole. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither Holdings nor the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither Holdings nor the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if Holdings, the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.

 

4.15       Investment Company Act; Other Regulations. No Loan Party is an “investment company”, or a company “controlled” by an “investment company” required to be registered as such, within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law that limits its ability to incur Indebtedness.

 

4.16       Subsidiaries. As of the Closing Date, (a) Schedule 4.16 sets forth the name and jurisdiction of organization or formation of each Subsidiary of Holdings and, as to each such Subsidiary, the percentage of each class of Capital Stock owned by any Loan Party and (b) there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than those granted to current or former officers, employees or directors and current or former directors’ qualifying shares) of any nature relating to any Capital Stock of Holdings or any other Group Member, except as disclosed on Schedule 4.16.

 


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4.17       Use of Proceeds. The proceeds of the Term Loans made on the Closing Date shall (which shall not be deemed to include, for the avoidance of doubt, the Existing Term Loans) be used (i) for Borrower to pay a one-time distribution to Holdings in an amount not to exceed $18,153,897, which will in turn pay a one-time distribution to its equity holders (the “Closing Date Distribution”), and (ii) to pay transaction costs and expenses arising in connection with this Agreement and the other Loan Documents. The proceeds of all Revolving Loans made after the Closing Date shall be used to finance Permitted Acquisitions, to provide for working capital, to fund capital expenditures, and for other lawful general corporate purposes of the Borrower and its Subsidiaries. No part of the proceeds of any Loan will be used, whether directly or indirectly, (a) for any purpose that would violate any rule or regulation of the Board, including Regulations T, U or X, (b) to refinance any commercial paper, (c) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, or (d) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country.

 

4.18       Environmental Matters. Except as, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect:

 

(a)       the facilities and Real Estate Assets owned, leased or operated by any Group Members do not contain, and have not previously contained, any Hazardous Materials in amounts or concentrations or under circumstances that constitute or constituted a violation of, or would reasonably be expected to give rise to liability under, any Environmental Law;

 

(b)       no Group Members have received any written notices of violation or alleged violations of non-compliance with, or liability or potential liability under Environmental Laws with regard to any of their facilities or the businesses operated by any Group Members, nor does Holdings or the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened;

 

(c)       Hazardous Materials have not been transported or disposed of from the Group Members’ facilities in violation of, or in a manner or to a location that would reasonably be expected to give rise to liability under, any Environmental Law, nor have any Hazardous Materials been generated, treated, stored or disposed of at, on or under any of their facilities in violation of, or in a manner that would reasonably be expected to give rise to liability under, any applicable Environmental Law;

 

(d)       no judicial proceedings or governmental or administrative actions are pending or, to the knowledge of any of the Responsible Officers, threatened, under any Environmental Laws to which any Group Members are or will be named as parties with respect to their facilities or their businesses, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial determinations outstanding under any Environmental Law to which any Group Members are or would reasonably be expected to be named as parties with respect to their facilities or businesses;

 

(e)       there have been no releases or threats of releases of Hazardous Materials at or from any Group Members’ facilities or businesses, or arising from or related to the operations of any Group Members in connection with their facilities or businesses, or otherwise in connection with their facilities and businesses, in violation of or in amounts or in a manner that would reasonably be expected to give rise to liability under Environmental Laws;

 


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(f)       the facilities and business operations of the Group Members are in compliance, and have been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about their facilities and businesses or violation of any Environmental Law with respect to their facilities and businesses; and

 

(g)       no Group Members have expressly assumed any liabilities of any other Persons under any Environmental Laws.

 

4.19       Accuracy of Information, Beneficial Ownership, etc;

 

(a)       No statement or information contained in this Agreement, any other Loan Document (or, to the Borrower’s knowledge with respect to statements made, or information provided by, a non-Group Member, in any Loan Document) or any other document or certificate (excluding the Projections, pro forma financial information or estimates) furnished by or at the direction of any Loan Party to the Administrative Agent or the Lenders, or any of them, for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, when taken together with all such statements, information, documents and certificates, contained as of the date such statement, information, document or certificate was so furnished, any untrue statement of a material fact or omitted to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances when made.

 

(b)       As of the Closing Date, the information included in the Beneficial Ownership Certification (if applicable) is true and correct in all respects.

 

4.20       Guarantee and Collateral Agreement. The Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock (as defined in the Guarantee and Collateral Agreement), when any certificates representing any such Pledged Stock are delivered to the Administrative Agent, and in the case of the other Collateral described in the Guarantee and Collateral Agreement in which a security interest may be perfected by filing a financing statement or other governmental filing, when financing statements and other filings specified on Schedule 4.20 in appropriate form are filed in the offices specified on Schedule 4.20, the security interest granted by the Guarantee and Collateral Agreement shall constitute a perfected security interest in all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the respective Grantors’ Obligations (as defined in the Guarantee and Collateral Agreement), in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged Stock, Liens expressly permitted by Section 7.3).

 

4.21       Solvency. The Loan Parties, taken as a whole, are, and immediately after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith, will be Solvent.

 

4.22       Insurance. All policies of insurance required to be maintained under Section 6.5(b) are in full force and effect.

 


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4.23       [Reserved].

 

4.24       Material Contracts. Schedule 4.24 sets forth a list of any contracts (other than the Loan Documents) between any Group Member and any third party in effect as of the Closing Date having a termination date after the one-year anniversary of the Closing Date and involving an annual amount in excess of $500,000 (each, a “Material Contract”), with respect to the amount of annual revenues and aggregate annual payments received or made, as applicable, by the Group Members thereunder. The Borrower has not received written notice that any party to a Material Contract will not continue after the Closing Date to perform its material obligations thereunder other than as a result of scheduled contract terminations/expirations.

 

4.25       OFAC. No Group Member, nor any Affiliate of any Group Member, (a) is a Sanctioned Person, (b) has more than 15% of its assets in Sanctioned Countries, or (c) derives more than 15% of its operating income from investments in, or transactions with Sanctioned Persons or Sanctioned Countries. No part of the proceeds of any Loans hereunder will be used directly or indirectly to fund any operations in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Country or for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.

 

4.26       USA PATRIOT Act. No Group Member is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act of the United States of America (50 U.S.C. App. §§ 1 et seq.), as amended or any enabling legislation or executive order relating thereto. No Group Member is in violation of (a) the Trading with the Enemy Act, as amended, (b) any of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto or (c) the Patriot Act. No Group Member (i) is a blocked person described in Section 1 of the Anti-Terrorism Order or (ii) to the best of its knowledge, engages in any dealings or transactions, or is otherwise associated, with any such blocked person.

 

4.27       Anti-Corruption Laws. Each of the Loan Parties and their Subsidiaries and, to the knowledge of each Loan Party and its Subsidiaries, each of their respective directors, officers, employees and Affiliates, is in compliance with Anti-Corruption Laws. Each Loan Party and its Subsidiaries has implemented and maintains in effect policies and procedures designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws. None of the Loan Parties or their respective Subsidiaries has made a payment, offering, or promise to pay, or authorized the payment of, money or anything of value (a) in order to assist in obtaining or retaining business for or with, or directing business to, any foreign official, foreign political party, party official or candidate for foreign political office, (b) to a foreign official, foreign political party or party official or any candidate for foreign political office, and (c) with the intent to induce the recipient to misuse his or her official position to direct business wrongfully to such Loan Party or any of its Subsidiaries or to any other Person, in violation of any Anti-Corruption Law. No part of the proceeds of any Loan or other transaction contemplated by this Agreement or any other Loan Document will violate Anti-Corruption Laws.

 


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4.28       EEA Financial Institution. No Loan Party is an EEA Financial Institution.

 

SECTION 5. CONDITIONS PRECEDENT

 

5.1       Conditions to Initial Extension of Credit. The agreement of each Lender to make the initial extension of credit requested to be made by it on the Closing Date is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date, of the following conditions precedent:

 

(a)       Guarantee and Collateral Agreement and other Loan Documents. The Administrative Agent shall have received the Guarantee and Collateral Agreement, the Management Fee Subordination Agreement, the BIC Subordination Agreement, the Solvency Certificate and the other Loan Documents required hereunder, in each case as executed and delivered by each Person that is a party thereto.

 

(b)       Financial Statements. Lenders shall have received the financial information described in Section 4.1.

 

(c)       Financial Projections. The Administrative Agent shall have received the Projections.

 

(d)       Approvals. All governmental and third party approvals necessary or, in the reasonable judgment of the Administrative Agent, advisable, in connection with the transactions contemplated by this Agreement and the other Loan Documents shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose material adverse conditions on the operations of the Group Members or the transactions contemplated hereby or thereby.

 

(e)       Credit Agreement and Notes. The Administrative Agent shall have received this Agreement as executed and delivered by the Administrative Agent, the Borrower, Holdings, the other Loan Parties party hereto and each Lender listed on Schedule 1.1-C, together with any Notes evidencing Loans to be made hereunder as executed by the Borrower and as may have been requested by any Lender.

 

(f)       Lien Searches. The Administrative Agent shall have received the results of recent Lien searches in each jurisdiction where the Loan Parties are organized or formed, and in the United States Patent, Trademark and Copyright Offices, and such searches shall reveal no Liens on any of the assets of the Loan Parties, except for Liens expressly permitted by Section 7.3 or Liens being discharged on or prior to the Closing Date pursuant to documentation satisfactory to the Administrative Agent.

 

(g)       Perfection Certificate. The Administrative Agent shall have received a perfection certificate in form and substance reasonably satisfactory to the Administrative Agent, duly executed on behalf of the Borrower.

 

(h)       Fees. Subject to the following sentence, Lenders and the Administrative Agent shall have received all fees required to be paid, and all expenses required to be paid and for which invoices have been presented (including the reasonable fees and expenses of legal counsel for the Administrative Agent), on or before the Closing Date. All such amounts will be paid with proceeds of Loans made on the Closing Date or with cash on hand and will be reflected in the funding instructions given by the Borrower to the Administrative Agent on or before the Closing Date.

 


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(i)       Certified Organizational Documents; Good Standing Certificates. The Administrative Agent shall have received (i) a certificate of the Borrower and each other Loan Party dated the Closing Date, with respect to the organizational documents of such Person, the authorization of the Loan Documents by the board of directors or other appropriate governing board or body of such Person, and the incumbency and specimen signatures of officers of such Person authorized to execute and deliver the Loan Documents to which such Person is party, with appropriate attachments, including the articles or certificate of incorporation or formation of each such Person certified by the relevant authority of the jurisdiction of organization or formation of each such Person, by-laws, limited liability company agreements and authorizing resolutions, and (ii) a short form good standing certificate for each such Person from its jurisdiction of organization.

 

(j)       Legal Opinions. The Administrative Agent shall have received the legal opinion of (i) Schiff Hardin LLP, special New York counsel to Holdings, (ii) Fafinski Mark & Johnson, P.A., special Minnesota counsel to the Borrower and certain of the Guarantors, and (iii) Fenigstein & Kaufman, special California counsel to certain of the Guarantors, in form and substance satisfactory to the Administrative Agent, addressing such matters incident to the transactions contemplated by this Agreement as the Administrative Agent reasonably may require.

 

(k)       Pledged Stock; Stock Powers; Pledged Notes. The Administrative Agent shall have received (i) any certificates representing the shares or other interests of Capital Stock of the Loan Parties pledged pursuant to the Guarantee and Collateral Agreement, together with an undated stock or other applicable transfer power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof, and (ii) each promissory note (if any) pledged to the Administrative Agent by the Loan Parties pursuant to the Guarantee and Collateral Agreement, endorsed in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof.

 

(l)       Filings, Registrations and Recordings. Each document (including any Uniform Commercial Code financing statement) required by the Security Documents or reasonably required by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the Collateral related to the Loan Parties described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 7.3), shall be in proper form for filing, registration or recordation.

 

(m)       Insurance. The Administrative Agent shall have received insurance certificates satisfying the requirements of Section 5.2(b) of the Guarantee and Collateral Agreement.

 


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(n)       Payoff Letter. The Administrative Agent shall have received copies of duly executed payoff letters, in form and substance reasonably satisfactory to Administrative Agent, executed by each lender to the Loan Parties (or their representatives) not permitted under Section 7.3, together with (i) UCC-3 or other appropriate termination statements or releases, in form and substance reasonably satisfactory to Administrative Agent, releasing all Liens (other than Liens expressly permitted hereunder) upon any of the property of the Loan Parties, and (ii) any other releases, terminations or other documents reasonably requested by the Administrative Agent.

 

(o)       Financial Conditions. After giving effect to the closing of this Agreement, (i) since December 31, 2019, there shall have been no Material Adverse Effect and (ii) the Loan Parties on a consolidated basis shall be Solvent.

 

(p)       Leverage Ratio. The Administrative Agent shall have received evidence in the form of a certificate from the chief financial officer or other Responsible Officer dated as of the Closing Date and addressed to the Administrative Agent and the Lenders that, the Consolidated Senior Leverage Ratio (calculated as of March 31, 2020, after giving pro forma effect to the funding of the extensions of credit on the Closing Date) is not greater than 3.00:1:00.

 

(q)       Financial Covenants. The Administrative Agent shall have received evidence that Trean and its Subsidiaries are in pro forma compliance with the Financial Covenants set forth in Section 7.1 with respect to the most recently completed trailing twelve month period after giving effect to the funding of the extensions of credit on the Closing Date.

 

(r)       No Revolving Loans. No Revolving Loans shall be outstanding on the Closing Date.

 

(s)       No Default. No Default or Event of Default shall have occurred and be continuing on the Closing Date or after giving effect to the extensions of credit requested to be made on the Closing Date.

 

(t)       Closing Certificate and Disbursement Instructions. The Administrative Agent shall have received an executed Closing Certificate substantially in the form of Exhibit A, and the Funds Flow.

 

(u)       Patriot Act; Anti-Money Laundering Laws; Beneficial Ownership. The Administrative Agent shall have received all documentation and other information that the Administrative Agent or any Lender requests at least five (5) Business Days prior to the Closing Date in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act, and any Borrower that qualifies as a “legal entity customer” under the Beneficial Ownership Regulation shall deliver a Beneficial Ownership Certification in relation to such Borrower.

 

(v)       [Reserved].

 

(w)       Payment of Closing Date Distribution. The Closing Date Distribution shall have been paid.

 


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(x)       [Reserved].

 

(y)       [Reserved].

 

(z)       Additional Documents. The Administrative Agent shall have received such other documents, instruments and certificates as it reasonably may have requested.

 

5.2       Conditions to Each Extension of Credit Subsequent to the Closing Date. The agreement of each Lender to make any extension of credit requested to be made by it on any date subsequent to the Closing Date, and of the Swingline Lender to make Swingline Loans, is subject to the satisfaction of the following conditions precedent (after giving effect to such extension of credit or such issuance, increase or extension of the expiration date):

 

(a)       Representations and Warranties. Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects (other than those representations and warranties that are expressly qualified by a Material Adverse Effect or other materiality qualification, in which case such representations and warranties shall be true and correct in all respects) on and as of such date as if made on and as of such date, except (i) for representations and warranties expressly stated to relate to a specific earlier date, in which case such representations and warranties shall remain true and correct in all material respects as of such earlier date (other than those representations and warranties that are expressly qualified by a Material Adverse Effect or other materiality qualification, in which case such representations and warranties shall be true and correct in all respects as of such earlier date) and (ii) that for the purposes of this Section 5.2(a), the representations and warranties contained in Section 4.1(a) shall be deemed to refer to the most recent financial statements described in Section 4.1(a) or furnished pursuant to subsection (a) or (b), as applicable, of Section 6.1, as the case may be.

 

(b)       No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date.

 

(c)       No Material Adverse Change. Since December 31, 2019, there shall have been no change, occurrence, development or condition that has had or could reasonably be expected to have a Material Adverse Effect.

 

(d)       Request for Credit Extension. The Administrative Agent and, if applicable, the Swingline Lender, shall have received a request for such extension of credit or such issuance, increase, or extension of the expiration date, in accordance with the requirements of this Agreement, including the delivery of a Notice of Revolving Borrowing or Notice of Swingline Borrowing, as applicable.

 

In addition to the other conditions precedent herein set forth, if any Lender is a Defaulting Lender at the time of and immediately after giving effect to any such extension of credit that is a Swingline Loan, the Swingline Lender will not be required to make any Swingline Loan unless the Swingline Lender is satisfied that any exposure that would result therefrom is fully covered or eliminated by the Borrower Cash Collateralizing the obligations of the Borrower in respect of such Swingline Loan in an amount at least equal to the aggregate amount of the obligations (contingent or otherwise) of such Defaulting Lender in respect of such Swingline Loan, or by the Borrower making other arrangements satisfactory to the Administrative Agent and the Swingline Lender in their good faith judgment to protect them against the risk of non-payment of such Defaulting Lender; provided, however, that no such Cash Collateralization will constitute a waiver or release of any claim the Borrower, the Administrative Agent, the Swingline Lender or any other Revolving Lender may have against such Defaulting Lender, or cause such Defaulting Lender to be a Non-Defaulting Lender.

 


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Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in this Section 5.2 have been satisfied.

 

SECTION 6. AFFIRMATIVE COVENANTS

 

Each of Holdings and the Borrower hereby agrees that, so long as any Commitments remain in effect or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, each of Holdings and the Borrower shall, and shall cause each of its Subsidiaries to:

 

6.1           Financial Statements. Furnish to the Administrative Agent and each Lender:

 

(a)       as soon as available, but in any event within 120 days after the end of each fiscal year of Trean, a copy of the audited balance sheet of Trean and its Subsidiaries as at the end of such year and the related statements of income, of shareholder’s equity and of cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by (i) Deloitte or (ii) other independent certified public accountants of nationally or regionally recognized standing or otherwise approved by the Administrative Agent;

 

(b)       as soon as available, but in any event within forty-five (45) days after the end of each fiscal quarter of Trean, the unaudited balance sheet of Trean and its Subsidiaries as at the end of such quarter and the related unaudited statements of income, of shareholder’s equity and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for corresponding periods of the previous fiscal year and of the budget for the current fiscal year, respectively, certified by a Responsible Officer as presenting fairly in all material respects the financial position of Trean and its Subsidiaries as at such date;

 

(c)       as soon as available, but in any event within the time period set forth in the Compstar/Oak Street Credit Agreement, a copy of the audited balance sheet of Compstar Holdco and its Subsidiaries as at the end of each fiscal year, in accordance with the terms and conditions set forth the Compstar/Oak Street Credit Agreement;

 

(d)       as soon as available, but in any event within the time period set forth in the Compstar/Oak Street Credit Agreement, a copy of the unaudited balance sheet of Compstar Holdco and its Subsidiaries as at the end of each fiscal quarter, in accordance with the terms and conditions set forth the Compstar/Oak Street Credit Agreement;

 


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(e)       as soon as available, but in any event within thirty (30) days after the end of each calendar month thereafter (in each case, other than a month which is the last month of a fiscal quarter), a copy of the balance sheet of Trean and its Subsidiaries as at the end of such month and the related unaudited statements of income and of cash flows for such month and for the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects;

 

All such financial statements shall be (x) provided on a consolidated basis, (y) complete and correct in all material respects, and (z) prepared in reasonable detail and in accordance with GAAP (subject, in the case of quarterly and monthly financial statements, to normal year-end audit adjustments and the absence of notes thereto) applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants and disclosed in reasonable detail therein).

 

6.2           Certificates; Other Information. Furnish:

 

(a)       to the Administrative Agent and each Lender concurrently with the delivery of the financial statements referred to in Section 6.1(a), (i) a written statement of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default in respect of the covenants set forth in Section 7.1, except as specified in such written statement (it being understood that such written statement shall be limited to the items that independent certified public accountants are permitted to cover in such written statements pursuant to their professional standards and practices) and (ii) updated insurance certificates, to the extent any insurance certificates previously delivered to the Administrative Agent contain incorrect or out-of-date information with respect to the insurance required pursuant to Section 6.5(b) hereof and Section 5.2 of the Guarantee and Collateral Agreement;

 

(b)       to the Administrative Agent and each Lender concurrently with the delivery of any financial statements pursuant to Section 6.1(a) and Section 6.1(b), (i) a certificate of a Responsible Officer stating that, to the best of such Responsible Officer’s knowledge, each Loan Party during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default, in each case except as specified in such certificate, (ii) a Compliance Certificate containing all information and calculations necessary for determining compliance with the covenants set forth in Sections 7.1 as of the last day of the fiscal quarter or fiscal year of Trean, as the case may be and (iii) to the extent not previously disclosed to the Administrative Agent, a description of any change in the jurisdiction of organization or formation of any Loan Party and a list of any material Intellectual Property registrations or applications to register any material Intellectual Property within the United States, in each case acquired by any Loan Party since the date of the most recent report delivered pursuant to this clause (iii);

 

(c)       to the Administrative Agent and each Lender concurrently with the delivery of the financial statements pursuant to Section 6.1(a) and Section 6.1(b) a written analysis by the Borrower’s management of the results reflected in the financial statements furnished in respect of such period, including a comparative analysis of actual results relative to budget and the corresponding period of the prior fiscal year;

 


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(d)       [reserved];

 

(e)       to the Administrative Agent and each Lender as soon as available, and in any event no later than sixty (60) days after the beginning of each fiscal year of Trean, a projected consolidated balance sheet of Trean and its Subsidiaries as of the end of such fiscal year, together with a description of the underlying assumptions applicable thereto, and, as soon as available, significant revisions, if any, of such projections with respect to such fiscal year, and the related projected consolidated statements of income, cash flow and capital expenditures for such fiscal year, which projections shall in each case be accompanied by a certificate of a Responsible Officer stating that such projections are based on estimates, information and assumptions believed to be reasonable;

 

(f)       to the Administrative Agent no later than five (5) Business Days after the effectiveness thereof, copies of substantially final drafts of any proposed amendment, supplement, waiver or other modification with respect to any Indebtedness of any Loan Party in a principal amount in excess of $250,000;

 

(g)       to the Administrative Agent within five (5) Business Days after the same are sent, copies of all financial statements and related reports that Holdings or the Borrower sends to the holders of any class of its debt securities or equity securities and, within ten (10) Business Days after the same are filed, copies of all financial statements and reports that Holdings or the Borrower may make to, or file with, the SEC, in each case, to the extent not already furnished under other provisions hereof;

 

(h)       to the Administrative Agent within five (5) Business Days after acquisition or creation of any Subsidiary of Holdings after the Closing Date, the information with respect to such Subsidiary as provided in Section 4.16;

 

(i)       to the Administrative Agent within five (5) Business Days after the receipt thereof, copies of each management letter, exception report, recommendation report or similar letter or report received by any Group Member from its independent certified public accountants; and

 

(j)       promptly to the Administrative Agent such additional information regarding the operations, business or financial condition of the Group Members as the Administrative Agent may from time to time reasonably request.

 

In addition to the written analysis by the Borrower’s management required by clause (c) above, the Borrower’s management, upon reasonable prior notice by the Administrative Agent at any reasonable time during normal business hours, shall participate in a teleconference with the Administrative Agent and the Lenders to discuss the results reflected in the financial statements furnished in respect of the previous quarter pursuant to Section 6.1(b).

 


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6.3           Payment of Obligations. Pay and discharge its obligations and liabilities as the same shall become due and payable, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP are being maintained by the Borrower or other applicable Group Member, as follows: (i) all federal and material state income taxes, ad valorem and other taxes, assessments and governmental charges and levies imposed on the Collateral, and all other material tax liabilities, assessments and governmental charges and levies, (ii) all material claims that, if unpaid, would become a Lien (other than any Lien expressly permitted by Section 7.3) upon its Property, and (iii) all of its other obligations and liabilities, except where the nonpayment of any such other obligations and liabilities referred to in this clause (iii) could not reasonably be expected to have a Material Adverse Effect.

 

6.4          Maintenance of Existence; Compliance with Laws and Other Agreements.

 

(a)       (i) Preserve, renew and keep in full force and effect its organizational existence and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary in the normal conduct of its business, except, in each case, as otherwise expressly permitted by Section 7.4 or 7.5, and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

(b)       Except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, maintain their respective business operations and property necessary for the operation thereof in compliance with (i) all applicable laws, regulations, rules, guidelines, ordinances, decrees, orders and other Requirements of Law, and (ii) all material agreements, licenses, franchises, indentures, deeds of trust, mortgages and other Contractual Obligations.

 

6.5           Maintenance of Property; Insurance.

 

(a)       Maintain and preserve (i) in good working order and condition, normal wear and tear and casualty excepted, all of its facilities and equipment necessary for the conduct of its business, (ii) all rights, permits, licenses, certificates, consents, registrations, accreditations, approvals, waivers, exemptions, contracts, provider or supplier agreements and privileges reasonably necessary in the conduct of its business, and (iii) all registered patents, trademarks, trade names, copyrights and service marks with respect to its business, except where failure to maintain and preserve any of the foregoing could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

 

(b)       Maintain in full force and effect insurance (including liability insurance, product liability insurance, property/casualty insurance and workers’ compensation insurance) with financially sound and reputable insurance companies, in such amounts, and with such deductibles covering such risks, as are customarily carried by companies engaged in similar businesses and owning similar Properties, all such insurance in respect of the Collateral to be in form and amounts and having such coverage as may be reasonably satisfactory to the Administrative Agent. Except to the extent it conflicts with the applicable real Property lease, the Administrative Agent shall be named as lenders loss payee or mortgagee, as its interests may appear, with respect to any property/casualty insurance providing coverage in respect of any Collateral, and the Administrative Agent and the Lenders shall be named as additional insureds with respect to liability insurance coverages, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Administrative Agent, that it will give the Administrative Agent thirty (30) days’ (or such shorter period as the Administrative Agent may approve) prior written notice before any such policy or policies shall be altered in any material respect or cancelled.

 


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6.6       Inspection of Property; Books and Records; Discussions. (i) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (ii) permit representatives of any Lender, at such Lender’s expense, (1) to visit and inspect any of its properties and examine and make abstracts from any of its books and records upon reasonable prior notice at any reasonable time during normal business hours and as often as may reasonably be desired, provided, however, that such activities shall be conducted without undue interference or interruption of the Group Members’ business and operations and each Lender shall coordinate its visit and inspection through the Administrative Agent and, so long as no Event of Default shall have occurred and be continuing, reasonable prior written notice thereof shall have been given to the Borrower and (2) to discuss the business, operations, properties and financial and other condition of the Group Members with senior officers of the Group Members and with their independent certified public accountants (so long as a representative of the Group Members has been afforded an opportunity to participate in such discussions).

 

6.7           Notices. Promptly give notice to the Administrative Agent and each Lender of:

 

(a)       the occurrence of any Default under this Agreement or the other Loan Documents, or any default or event of default under the Trean Indenture or any Subordinated Debt Documents;

 

(b)       any (i) default or event of default under any Contractual Obligation of any Group Member or (ii) litigation, investigation or proceeding that may exist at any time between any Group Member and any Governmental Authority, that in either case, if not cured or if not dismissed or terminated, as the case may be, could reasonably be expected to have a Material Adverse Effect;

 

(c)       the termination of any agreement between a Loan Party and a customer thereof, if such agreement within the most recent two (2) fiscal years has accounted, or was reasonably expected to account, for revenues in excess of 20% of the revenues of the Loan Parties on a consolidated basis during any period of twelve consecutive months;

 

(d)       any litigation or proceeding affecting any Group Member (i) in which the amount of damages sought from such Group Member exceeds any applicable insurance coverage by $250,000, (ii) in which material injunctive or similar relief is sought or (iii) which relates to any Loan Document;

 

(e)       the following events, as soon as possible and in any event within thirty (30) days after any Responsible Officer knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or any Group Member or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan;

 


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(f)       any material change in accounting or financial reporting practices by any Group Member;

 

(g)       any default or event of default with respect to any material indebtedness of Compstar or any of its Affiliates; and

 

(h)       any other development or event that has had or could reasonably be expected to have a Material Adverse Effect.

 

Each notice pursuant to this Section 6.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating the action the relevant Group Member proposes to take with respect thereto.

 

6.8           Environmental Laws.

 

(a)       Comply with all applicable Environmental Laws, and obtain and comply with and maintain any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws, except where, either individually or in the aggregate, such failure with respect to any of the foregoing could not reasonably be expected to result in a Material Adverse Effect.

  

(b)       Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions, required under Environmental Laws, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding such Environmental Laws; provided, however, that no violation of this paragraph (b) shall be deemed to have occurred if the applicable Group Member promptly challenges in good faith any such order or directive of any Governmental Authority in a manner consistent with all applicable Environmental Laws and pursues such challenge or challenges diligently, and the pendency of such challenges, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

 

6.9           Additional Collateral, etc.

  

(a)       With respect to any Properties acquired after the Closing Date by any Loan Party (including by Division or otherwise) (other than Real Estate Assets, any property described in paragraph (c) below, any Property acquired by a Foreign Subsidiary, or any property subject to a Lien expressly permitted by Section 7.3(g) or (i)), as to which the Administrative Agent, for the benefit of the Lenders, does not have a perfected Lien, promptly (i) execute and deliver to the Administrative Agent such amendments or supplements, as applicable, to the Guarantee and Collateral Agreement or such other documents as the Administrative Agent in good faith deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a security interest in such Property and (ii) take all actions as the Administrative Agent in good faith deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in such Property, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may in good faith be requested by the Administrative Agent.

 


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(b)       With respect to any Material Real Estate Asset acquired after the Closing Date by any Loan Party, promptly (i) execute and deliver to the Administrative Agent a Mortgage Instrument for such Material Real Estate Asset and take all other actions as the Administrative Agent in good faith deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in such Material Real Estate Asset, and (ii) execute, as applicable, and deliver to the Administrative Agent the other documents and items required by Section 6.13 with respect to such Material Real Estate Asset.

 

(c)       With respect to any new Subsidiary (other than (x) any Foreign Subsidiary or (y) any Subsidiary with respect to which the Administrative Agent shall reasonably agree that the cost of taking the steps set forth in this clause (c) will exceed the benefit to the Lenders to be afforded thereby) created or acquired (including by Division or otherwise) after the Closing Date by Holdings or any of its Domestic Subsidiaries, promptly (i) execute and deliver to the Administrative Agent such supplements or amendments to the Guarantee and Collateral Agreement as the Administrative Agent in good faith deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary that is owned by Holdings or any of its Domestic Subsidiaries, (ii) deliver to the Administrative Agent any certificates representing such Capital Stock, together with undated stock or other applicable transfer powers, in blank, executed and delivered by a duly authorized officer of Holdings or any such Domestic Subsidiary, (iii) cause such new Subsidiary to (A) become a party to the Guarantee and Collateral Agreement, (B) take such actions as the Administrative Agent in good faith deems necessary or advisable to grant to the Administrative Agent for the benefit of the Lenders a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement in which such new Subsidiary has an interest, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may in good faith be requested by the Administrative Agent and (C) deliver to the Administrative Agent a perfection certificate of such Subsidiary in form reasonably satisfactory to the Administrative Agent, duly executed on behalf of such Subsidiary, and (iv) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance substantially similar to the legal opinions delivered pursuant to Section 5.1(j) and otherwise in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent.

 

(d)       With respect to any new first-tier Foreign Subsidiary created or acquired (including by Division or otherwise) after the Closing Date by Holdings or any of its Subsidiaries (other than by any Group Member that is itself a Foreign Subsidiary), promptly (i) execute and deliver to the Administrative Agent such supplements or amendments to the Guarantee and Collateral Agreement as the Administrative Agent in good faith deems necessary to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary that is owned by any such Group Member (provided that in each case such pledge shall be limited to 66% of the outstanding voting Capital Stock of any Foreign Subsidiary), (ii) deliver to the Administrative Agent any certificates representing such Capital Stock, together with undated stock or other applicable transfer powers, in blank, executed and delivered by a duly authorized officer of Holdings or such relevant Subsidiary, as the case may be, and take such other action as the Administrative Agent in good faith deems necessary to perfect the Administrative Agent’s security interest therein, and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance substantially similar to the legal opinions delivered pursuant to Section 5.1(j) and otherwise in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent.

 


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6.10       Field Audit. Cooperate with the Administrative Agent and its employees, agents, and third party audit firms, in the completion of field audits of accounts, inventory and equipment of the Group Members, such field audits to be conducted at the request of the Administrative Agent or Required Lenders not more frequently than once per fiscal year (or any time upon the occurrence and during the continuation of any Event of Default), with each such field audit to be conducted in a manner reasonably satisfactory to the Administrative Agent, and with all reasonable fees and expenses actually incurred thereof (not to exceed $15,000 per audit) to be paid by the Borrower.

 

6.11       Use of Proceeds. Use the proceeds of the Loans for the purposes set forth in Section 4.17, and in no event for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board), or to extend credit to others for the purpose of purchasing or carrying any such margin stock.

 

6.12       Primary Depository Banking Relationships. As soon as practicable but in no event later than ninety (90) days after the Closing Date, establish and maintain, and cause each of the other Loan Parties to establish and maintain, with First Horizon Bank their respective primary depository banking relationships; provided, however, if any deposit accounts are acquired in connection with a Permitted Acquisition, the Group Members shall have a reasonable period of time after the closing of such Permitted Acquisition (but in no event longer than ninety (90) days), to comply with the requirements of this Section 6.12 regarding to such deposit accounts.

 

6.13       Real Estate Items. To the extent not delivered to the Administrative Agent on the Closing Date, deliver to the Administrative Agent within ninety (90) days following the Closing Date (or such extended period of time as reasonably agreed to by the Administrative Agent), in the case of each Leasehold Property that (i) is the location of a chief executive office of any Loan Party (other than (x) 430 N. Vineyard Ave, Suite 200, 260 & 280, Ontario, CA 91764 and (y) 2029 Village Lane, Suite 200, Solvang, CA 93463), (ii) contains books and records or (iii) contains Collateral valued in excess of $50,000, a Landlord Agreement in form and substance satisfactory to Administrative Agent;

 

6.14       [Reserved].

 


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6.15       Other Post-Closing Matters. Deliver to the Administrative Agent each item listed on Schedule 6.15 prior to the deadline (which deadline may be extended by the Administrative Agent in its sole discretion) therefor as set forth on said schedule.

 

6.16       Further Assurances. At the request of the Administrative Agent, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements and other documents), that may be required under any applicable law, or that the Administrative Agent may otherwise reasonably request, to effect the transactions contemplated by the Loan Documents or to grant, preserve, protect or perfect the Liens created or intended to be created by the Security Documents or the validity or intended priority of any such Liens, all at the expense of the Loan Parties.

 

SECTION 7. NEGATIVE COVENANTS

 

Each of Holdings and the Borrower hereby agrees that, so long as any Commitments remain in effect or any Loan or other amount (other than contingent indemnification obligations not yet due and payable) is owing to any Lender or the Administrative Agent hereunder, neither Holdings nor the Borrower shall, or shall permit any of its Subsidiaries to, directly or indirectly:

 

7.1          Financial Condition Covenants

 

(a)       Consolidated Senior Leverage Ratio. Permit the Consolidated Senior Leverage Ratio as at the end of any fiscal quarter of Trean ending on or after June 30, 2020 to exceed the applicable ratio set forth below opposite such fiscal quarter:

 

 

Fiscal Quarter Ending 

Consolidated

Senior Leverage Ratio

 
June 30, 2020 through September 30, 2020 4.25 to 1.00
December 31, 2020 through March 31, 2021 4.00 to 1.00
June 30, 2021 through March 31, 2022 3.75 to 1.00
June 30, 2022 through March 31, 2023 3.50 to 1.00
June 30, 2023 through March 31, 2024 3.25 to 1.00
June 30, 2024 and each fiscal quarter thereafter 3.00 to 1.00

 

(b)       Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated Fixed Charge Coverage Ratio as at the end of any fiscal quarter of Trean ending on or after June 30, 2020 to be less than 1.20:1.00.

 


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(c)       Cure Right. In the event that the Borrower fails to comply with one or both of the financial covenants set forth in this Section 7.1 for any fiscal quarter, subject to the terms and conditions hereof, the Borrower shall have the right (the “Cure Right”), until the expiration of the tenth (10th) Business Day subsequent to the date the applicable financial statements are required to be delivered for such fiscal quarter, to obtain an equity contribution, in cash, in an aggregate amount equal to, but not in excess of, the amount necessary to cure the breach, Default or Event of Default in connection with the relevant financial covenant (the “Specified Equity Contribution”) if such Specified Equity Contribution constituted Consolidated EBITDA for purposes of determining compliance with such financial covenants, and upon the receipt by the Borrower of the cash proceeds thereof, the financial covenants shall then be recalculated giving effect to the following pro forma adjustments: (i) Consolidated EBITDA shall be deemed to be increased for the applicable fiscal quarter and for the subsequent three consecutive fiscal quarters by an amount equal to the Specified Equity Contribution and paid over to the Administrative Agent for application to the Obligations in accordance with Section 2.11; (ii) the mandatory prepayment of the Obligations made with respect to such Specified Equity Contribution shall not serve as: (A) a reduction or increase to Excess Cash Flow or (B) a reduction to Indebtedness for purposes of calculating the Consolidated Senior Leverage Ratio or the Consolidated Fixed Charge Coverage Ratio for the applicable fiscal quarter and the subsequent three consecutive fiscal quarters; (iii) if, after giving effect to the foregoing recalculations, the Borrower shall then be in compliance with the requirements of all financial covenants in this Section 7.1, the Borrower shall be deemed to have been in compliance with such financial covenants as of the relevant date of determination with the same effect as though there had been no failure to comply therewith at such date, and the applicable breach, Default or Event of Default in connection with such financial covenants that had occurred shall be deemed not to have occurred for this purpose of this Agreement; and (iv) the deemed increase in Consolidated EBITDA pursuant to clause (i) above shall be for the sole purpose of measuring the financial covenants and not for any other purpose under this Agreement including determining availability under any covenant basket or determining any ability to consummate any Permitted Acquisition. In the event that: (i) no Default or Event of Default exists other than that arising due to failure of the Borrower to comply with the financial covenants set forth in this Section 7.1, and (ii) the Borrower shall have delivered to Administrative Agent written notice of its intention to exercise the Cure Right (which notice shall be delivered no earlier than fifteen (15) days prior to, and no later than the fifth (5th) day subsequent to, the date the applicable financial statements are required to be delivered for the applicable fiscal quarter hereunder), which exercise if fully consummated would be sufficient in accordance with the terms hereof to cause the Borrower to be in compliance with the financial covenants as of the relevant date of determination, then from and following receipt by Administrative Agent of any such notice and until the date that is the earlier of: (x) the tenth (10th) Business Day subsequent to the date the applicable financial statements are required to be delivered and (y) the date, if any, on which the Borrower notifies the Administrative Agent in writing that such Cure Right shall not be exercised (such period referred to herein as the “Financial Covenant Standstill Period”), then neither Administrative Agent nor any Lender shall exercise any remedies set forth in Section 8, exercise any rights with respect to the Collateral or exercise any other remedies available to such parties under the Loan Documents or otherwise during such period; provided that (A) there shall be no limitation upon the ability of Administrative Agent or the Lenders to exercise remedies if a Default or Event of Default other than one arising by reason of the breach of the financial covenants has occurred and is continuing during the Financial Covenant Standstill Period and (B) during the Financial Covenant Standstill Period, the Borrower shall not be permitted to borrow Loans hereunder or otherwise take actions hereunder that may only be taken when no Default or Event of Default then exists. Notwithstanding anything herein to the contrary, in no event shall the Borrower be permitted to exercise the Cure Right hereunder (x) more than two (2) times in any four consecutive fiscal quarters, (y) in any two (2) consecutive fiscal quarters, or (z) more than four (4) times in the aggregate during the term of this Agreement.

 


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7.2          Indebtedness. Create, issue, incur, assume, become liable in respect of or suffer to exist any Indebtedness, except:

 

(a)           Indebtedness of any Loan Party pursuant to any Loan Document;

 

(b)           Indebtedness of the Borrower to any Guarantor and of any Guarantor to the Borrower or any other Guarantor;

 

(c)           Indebtedness outstanding on the date hereof and listed on Schedule 7.2(c) and any Permitted Refinancing Indebtedness incurred in respect thereof;

 

(d)           Purchase Money Debt and Capital Lease Obligations incurred after the Closing Date (whether unsecured or secured by Liens permitted by Section 7.3(g)) in an aggregate principal amount not to exceed $250,000 at any one time outstanding;

 

(e)           Indebtedness (i) of any Person that becomes a Subsidiary after the Closing Date or (ii) assumed by any Group Member in connection with any acquisition of assets after the Closing Date, in each case in a transaction expressly permitted by this Agreement, provided that (A) such Indebtedness exists at the time such Person becomes a Subsidiary, or such assets are acquired, and is not created in contemplation of or in connection with such Person becoming a Subsidiary or in connection with such acquisition, as the case may be, and (B) the aggregate principal amount of all such Indebtedness shall not exceed $250,000 at any one time outstanding; in each case together with any Permitted Refinancing Indebtedness of the same obligor in respect thereof;

 

(f)           unsecured Indebtedness of the Borrower incurred pursuant to the Trean Indenture; provided, that, (i) such Indebtedness is subordinated pursuant to the terms of the Trean Indenture and (ii) the Obligations of the Loan Parties shall at all times constitute “Senior Indebtedness” (as such term is defined in the Trean Indenture);

 

(g)           unsecured Indebtedness of any Group Member owing to any seller as payment of the purchase price of a Permitted Acquisition, which Indebtedness qualifies as Subordinated Indebtedness and has a maturity date after and prohibits any cash payment (other than, subject to appropriate subordination provisions, regularly scheduled interest payments) prior to the first anniversary of the Revolving Termination Date or the Term Loan Maturity Date, provided that the aggregate principal amount of all such Indebtedness shall not exceed $500,000 at any one time outstanding;

 

(h)           contingent liabilities of any Group Member in respect of any customary purchase price adjustment, earn-out provision, non-competition or consulting agreement or deferred compensation agreement, or other indemnity obligations in each case owing to the seller or any Affiliate thereof or officers or directors of any of them in connection with any Permitted Acquisition;

 

(i)            obligations (contingent or otherwise) of any Group Member existing or arising under any Swap Agreement permitted under Section 7.11;

 


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(j)            Indebtedness (i) resulting from a bank or other financial institution honoring a check, draft or similar instrument in the ordinary course of business or (ii) arising under or in connection with cash management services in the ordinary course of business;

 

(k)           Guarantee Obligations of a Loan Party resulting from such Loan Party guaranteeing Indebtedness of another Loan Party permitted under this Section 7.2 (provided that, in the case of any guaranteed Subordinated Indebtedness, such Guarantee Obligations are subordinated on terms consistent with those provided with respect to such guaranteed Subordinated Indebtedness);

 

(l)            Indebtedness, if any, secured by Liens permitted under clause (c) or (d) of Section 7.3;

 

(m)           unsecured Indebtedness of any Group Member owing to any director, officer, employee or consultant of a Group Member in connection with the repurchase of Capital Stock of Holdings owned by any such Person upon termination of such Person’s relationship with the applicable Group Member in connection with the exercise of stock options, stock appreciation rights or similar equity incentives or equity-based incentives pursuant to management incentive plans, which Indebtedness qualifies as Subordinated Indebtedness and has a maturity date after and prohibits any cash payment (other than, subject to appropriate subordination provisions, regularly scheduled interest payments and payments that would be permitted pursuant to Section 7.6(d)) prior to the first anniversary of the Revolving Termination Date or the Term Loan Maturity Date, provided that the aggregate principal amount of all such Indebtedness shall not exceed $500,000 at any one time outstanding; and

 

(n)           additional Indebtedness not described in the preceding clauses of this Section 7.2 in an aggregate principal amount not to exceed $250,000 at any one time outstanding.

 

7.3          Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired, except:

 

(a)           Liens for taxes not yet due and payable or that are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Group Members in conformity with GAAP;

 

(b)           landlord’s, carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business that are not overdue for a period of more than ninety (90) days or that are being contested in good faith by appropriate proceedings;

 

(c)           pledges or deposits in connection with workers’ compensation, unemployment insurance and other social security legislation;

 

(d)           deposits and other liens to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

 


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(e)           easements, rights-of-way, conditions, restrictions and other similar encumbrances incurred in the ordinary course of business (which, for the avoidance of doubt, includes covenants running with the land) that, in the aggregate, are not substantial in amount and that do not in any case materially detract from the value of any material property subject thereto or materially interfere with the ordinary conduct of the business of the Group Members;

 

(f)            Liens in existence on the date hereof listed on Schedule 7.3(f), securing Indebtedness permitted by Section 7.2(c), and Liens securing any refinancings, refundings, replacement, renewals or extensions thereof, in whole or in part, provided that no such Lien is extended to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased;

 

(g)           Liens securing Purchase Money Debt or Capital Lease Obligations provided that (i) such Liens are created within thirty (30) days after the acquisition of the subject property, and (ii) such Liens do not at any time encumber any property other than the property so financed;

    

(h)           Liens created pursuant to the Security Documents;

 

(i)            any Lien existing on any property or asset prior to the acquisition thereof by a Group Member or existing on any property or asset of any Person that becomes a Subsidiary after the Closing Date prior to the time such Person becomes a Subsidiary; provided that (x) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (y) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary, and (z) such Lien shall secure only Indebtedness that is expressly permitted pursuant to Section 7.2(e) on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be, and any refinancings, refundings, replacements, renewals or extensions thereof, in whole or in part, as permitted by Section 7.2(e);

 

(j)            Liens for the benefit of the seller deemed to attach solely because of the existence of cash deposits and attaching solely to cash deposits made in connection with any letter of intent or acquisition or purchase agreement with respect to any Permitted Acquisition;

 

(k)           Liens securing judgments (including judgment or appeal bonds) so long as the judgment so secured does not otherwise give rise to an Event of Default under Section 8(h) or result in any levy or other execution with respect to any of the Collateral;

 

(l)            normal and customary rights of setoff or bankers’ liens upon deposits of cash in favor of banks or other depository institutions;

 

(m)           Liens not otherwise permitted by the preceding clauses of this Section 7.3 so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto, exceeds (as to all Group Members) $250,000 at any one time; and

 

(n)           Lien resulting from a pledge by Trean Compstar of not more 45% of the Capital Stock of Compstar Holdco (including the proceeds thereof) in favor of Oak Street Funding LLC pursuant to the Trean Compstar Pledge Agreement (and any lender that refinances the Indebtedness of Compstar owing to Oak Street Funding LLC); provided that no such Lien is extended to cover any additional property.

 


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Notwithstanding the foregoing, neither the Borrower nor any other Group Member shall grant any Lien on any of its Property that is otherwise expressly permitted by this Section 7.3 as security for any Subordinated Indebtedness, unless the Borrower or such Group Member, as the case may be, has granted through documentation in form and substance consistent with the Security Documents or otherwise reasonably satisfactory to the Administrative Agent, for the ratable benefit of the Lenders, a perfected Lien on such Property as security for the Obligations that is in all respects prior and senior in priority to such Lien granted as security for such Subordinated Indebtedness.

 

7.4       Fundamental Changes. Enter into any transaction of merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of its property or business, except that:

 

(a)           any Subsidiary of Holdings (other than the Borrower) may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation) or with or into any other Subsidiary (provided that if either such Subsidiary is a Guarantor, the continuing or surviving entity shall be or become a Guarantor);

 

(b)           any Subsidiary of Holdings (other than the Borrower) (i) may Dispose of any or all of its assets to the Borrower or any Guarantor (upon voluntary liquidation, dissolution or otherwise) or (ii) make Dispositions expressly permitted by Section 7.5;

 

(c)           any Subsidiary of Holdings (other than the Borrower) may liquidate, wind up its affairs or dissolve; provided, however, that if Holdings does not own, directly or indirectly, all of the Capital Stock of such Subsidiary, any Disposition of property allocated or to be distributed to a Person that is not a Loan Party shall be otherwise permitted under Section 7.5; and

 

(d)           any Investment expressly permitted by Section 7.7 and any Disposition expressly permitted by Section 7.5 may be structured as a merger, consolidation or amalgamation.

 

7.5          Disposition of Property. Dispose of any of its Property, whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary’s Capital Stock to any Person, except:

 

(a)           the Disposition of damaged, obsolete, worn-out or surplus property in the ordinary course of business;

 

(b)           the sale of inventory in the ordinary course of business;

 

(c)           Dispositions expressly permitted by Section 7.4(a), by clause (i) of Section 7.4(b) or Section 7.4(e);

 


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(d)           the sale or issuance of (i) any Subsidiary’s Capital Stock to the Borrower or any Guarantor, (ii) the Borrower’s Capital Stock to Holdings and (iii) of Holdings’ Capital Stock;

 

(e)           the Disposition of Cash Equivalents;

 

(f)            Dispositions constituting (i) Investments otherwise expressly permitted pursuant to Section 7.7, and (ii) Restricted Payments expressly permitted pursuant to Section 7.6;

 

(g)           the discount or write-off of accounts receivable overdue by more than 120 days or the sale of any such account receivables for the purpose of collection to any collection agency, in each case in the ordinary course of business;

 

(h)           the Disposition of the Capital Stock of Compstar Holdco so long as the net cash proceeds thereof are applied to the prepayment of the Term Loans; and

 

(i)            the Disposition of other Properties not subject to a Mortgage Instrument having a fair market value not to exceed $250,000 in the aggregate for any fiscal year of Holdings (exclusive of any Reinvestment Deferred Amounts arising in such fiscal year).

 

7.6         Restricted Payments. Declare or pay any dividends or distributions (other than dividends or distributions payable solely in Qualified Capital Stock of the Person paying or making such dividends or distributions) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of any Capital Stock, the Trean Indenture or any Subordinated Indebtedness of any Group Member, whether now or hereafter outstanding, or make any other payment or distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of any Group Member (collectively, “Restricted Payments”), except:

 

(a)           any Subsidiary may make Restricted Payments to the Borrower or any Guarantor;

 

(b)           the Borrower may make payments (in the form of cash, additional Subordinated Indebtedness or otherwise) on any Subordinated Indebtedness (not including the Trean Indenture), to the extent any such payment is permitted by the terms of the Subordinated Debt Documents applicable to such Subordinated Indebtedness;

 

(c)           So long as no Default or Event of Default has occurred and is continuing, a Permitted Joint Venture may make Restricted Payments to its joint venture partners from time to time so long as such Restricted Payments are made on a pro rata basis with the Group Member that is a joint venture partner;

 


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(d)           the Borrower may, or may make distributions to Holdings so that Holdings may, repurchase Capital Stock of Holdings, as applicable, owned by any director, officer, employee or consultant of a Group Member or make cash payments to any director, officer, employee or consultant of a Group Member upon termination of such Person’s relationship with the applicable Group Member in connection with the exercise of stock options, stock appreciation rights or similar equity incentives or equity-based incentives pursuant to management incentive plans, provided all of the following conditions are satisfied:

 

(i)            no Default or Event of Default has occurred and is continuing or would arise as a result of such Restricted Payment;

 

(ii)           after giving effect to such Restricted Payment, Holdings is in compliance on a pro forma basis with the covenants set forth in Section 7.1, recomputed for the most recent quarter for which financial statements have been delivered; and

 

(iii)          the aggregate Restricted Payments permitted pursuant to this clause (d) in any fiscal year of Holdings shall not exceed $500,000;

 

(e)       the Borrower may make required scheduled payments of interest under the Trean Indenture, provided all of the following conditions are satisfied:

 

(i)           no Default or Event of Default has occurred and is continuing or would arise as a result of such Restricted Payment;

 

(ii)           after giving effect to such Restricted Payment, Borrower is in compliance on a pro forma basis with the covenants set forth in Section 7.1, recomputed for the most recent quarter for which financial statements have been delivered; and

 

(iii)          the aggregate Restricted Payments permitted pursuant to this clause (e) in any fiscal year of Holdings shall not exceed $400,000;

 

(f)            the Borrower may make required distributions pursuant to the Series A Preferred Shares, provided all of the following conditions are satisfied:

 

(i)            no Default or Event of Default has occurred and is continuing or would arise as a result of such Restricted Payment;

 

(ii)           after giving effect to such Restricted Payment, Borrower is in compliance on a pro forma basis with the covenants set forth in Section 7.1, recomputed for the most recent quarter for which financial statements have been delivered; and

 

(iii)          the aggregate Restricted Payments permitted pursuant to this clause (f) in any fiscal year of Holdings shall not exceed $500,000;

 

(g)       to the extent Trean Compstar is treated as a pass-through or disregarded entity for federal and state income tax purposes, Trean Compstar may make distributions to Holdings and, to the extent Holdings is taxed as a partnership, Holdings may make distributions to its equityholders (collectively, “Tax Distributions”) attributable to the taxable income of Trean Compstar and/or Holdings, as applicable; provided, that the amount of such Tax Distribution for any taxable year shall not be greater than the taxable income of Holdings attributable to Trean Compstar and Holdings for such taxable year multiplied by the combined maximum marginal federal, state and local income tax rates applicable to individuals for such taxable year;

 


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(h)           Borrower may make Specified Shareholder Bonus Payments, provided all of the following conditions are satisfied:

 

(i)            no Default or Event of Default has occurred and is continuing or would arise as a result of such Specified Shareholder Bonus Payment;

 

(ii)           after giving effect to such Specified Shareholder Bonus Payment, Borrower is in compliance on a pro forma basis with the covenants set forth in Section 7.1, recomputed for the most recent quarter for which financial statements have been delivered;

 

(iii)           the aggregate Specified Shareholder Bonus Payments permitted pursuant to this clause (h) in any fiscal year of Holdings shall not exceed $765,000; provided, that to the extent any Specified Shareholder Bonus Payments are not permitted to be paid pursuant to the preceding clauses (i) through (ii), the cap referenced in this clause (iii) shall be increased in any subsequent fiscal year or fiscal years of Holdings only by the amount of such Specified Shareholder Bonus Payments that Borrower shall elect and otherwise be permitted to pay in such fiscal year or fiscal years; and

 

(iv)          to the extent the Specified Shareholder Bonus Payments are documented in an agreement with any shareholder and the Borrower, such agreement shall be subordinated to the Obligations subject to a Specified Shareholder Subordination Agreement in form and substance satisfactory to the Administrative Agent; and

 

(i)           the Closing Date Distribution.

 

7.7          Investments. On or after the Closing Date, make any Investment except:

 

(a)           extensions of trade credit in the ordinary course of business;

 

(b)           Investments in Cash Equivalents;

 

(c)           Guarantee Obligations permitted by Section 7.2;

 

(d)           intercompany Investments by any Group Member in the Borrower or any Guarantor;

 

(e)           Investments constituting Permitted Acquisitions;

 

(f)           any Investments received as non-cash consideration for sales, transfers, leases and other Dispositions otherwise expressly permitted by Section 7.5 not to exceed $250,000 at any time outstanding;

 


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(g)           Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts with, customers and suppliers, in each case in the ordinary course of business;

 

(h)           payroll, travel and similar advances to employees and loans to employees made in the ordinary course of business and that do not exceed $100,000 in the aggregate at any one time outstanding;

 

(i)            Investments in the form of Swap Agreements permitted under Section 7.2(i);

 

(j)            Investments by the Borrower or any of its Subsidiaries in Permitted Joint Ventures in an aggregate amount not to exceed $250,000 at any time outstanding; and

 

(k)           in addition to Investments otherwise expressly permitted by this Section 7.7, Investments by Holdings or any of its Subsidiaries in an aggregate amount not to exceed $300,000.

 

7.8       Modifications of Certain Instruments. Except with the prior written consent of Required Lenders (and, to the extent any such amendment, modification, waiver or other change would affect the rights, duties, obligations or liabilities of the Administrative Agent pursuant to any such documents, the prior written consent of the Administrative Agent), designate any Indebtedness (other than Obligations as provided in the Loan Documents) as “Senior Debt” (or any other defined term having a similar purpose) for the purposes of any Subordinated Debt Documents.

 

7.9      Transactions with Affiliates. Enter into any transaction, including any purchase, sale, lease or exchange of property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (including, for the avoidance of doubt, all Benchmark Entities and Compstar) (other than the Borrower or any Guarantor) unless such transaction is existing as of the Closing Date and specified on Schedule 7.9 or is otherwise expressly permitted under this Agreement, or in the ordinary course of business of the relevant Group Member, and upon fair and reasonable terms not less favorable in any material respect to the relevant Group Member than it would obtain in a comparable arm’s length transaction with a Person that is not an Affiliate. Notwithstanding the foregoing, Holdings and its Subsidiaries may:

 

(a)           subject to the terms of the Management Fee Subordination Agreement, pay fees, expenses and indemnities to the Sponsor pursuant to the Sponsor Management Agreement;

 

(b)           make Restricted Payments permitted pursuant to Section 7.6 and Investments permitted pursuant to Section 7.7;

 

(c)           pay reasonable and customary compensation to officers, directors, consultants, managers and employees of Holdings, the Borrower or any of its Subsidiaries; and

 


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(d)           pay the applicable Benchmark Entities under the BIC/Trean Agreement, provided all of the following conditions are satisfied:

 

(i)           no Default or Event of Default has occurred and is continuing or would arise as a result of such payments; and

 

(ii)           after giving effect to such payments, Loan Parties are in compliance on a pro forma basis with the covenants set forth in Section 7.1, recomputed for the most recent quarter for which financial statements have been delivered.

 

7.10       Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by any Group Member of real or personal property that has been or is to be sold or transferred by a Group Member to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of a Group Member.

 

7.11       Swap Agreements. Enter into any Swap Agreement, except Swap Agreements entered into with counterparties reasonably satisfactory to the Lenders for the sole purpose of directly mitigating risks associated with liabilities, commitments, investments, assets or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person, and not for purposes of speculation or taking a “market view;” provided that no such Swap Agreement contains any provision exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party.

 

7.12       Changes in Fiscal Periods; Changes in Accounting; Change in Structure. Permit a change in Holdings’ method of determining fiscal years or fiscal quarters, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or permit any Group Member to amend any of its organizational documents in any respect materially adverse to the Administrative Agent or the Lenders. Each of Holdings and Trean Compstar shall not engage in any business activities or own any Property other than (i) with respect to Holdings, ownership of the Capital Stock of its Subsidiaries and, with respect to Trean Compstar, ownership of the Capital Stock of Compstar Holdco, (ii) activities and contractual rights incidental to maintenance of its corporate or organizational existence, (iii) with respect to Trean Compstar, performance of its obligations under the Compstar Acquisition Documents and the Trean Compstar Pledge Agreement and (iv) activities relating to the performance of obligations under the Loan Documents to which it is a party.

 

7.13       Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of any Group Member (other than Trean Compstar solely with respect to the pledge of the Capital Stock of Compstar Holdco as permitted by Section 7.3(n)) to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, to secure its obligations under the Loan Documents to which it is a party, other than (a) this Agreement and the other Loan Documents and any Specified Swap Agreements, (b) any agreements governing any Liens or Capital Lease Obligations otherwise expressly permitted by Section 7.3(d), (f), (g) or (i) (in which case, any such prohibition or limitation shall only be effective against the assets subject to such Lien or Capital Lease Obligation), (c) agreements relating to any Disposition permitted pursuant to Section 7.5, provided that such prohibitions and limitations apply only to the property to be sold and (d) leases, licenses and other agreements containing customary provisions prohibiting or limiting the assignment thereof.

 

 

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7.14       Clauses Restricting Subsidiary Distributions. Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Borrower to (a) make Restricted Payments in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, any Group Member, (b) make loans or advances to, or other Investments in, any Group Member, or (c) transfer any of its assets to any Group Member, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents or any Specified Swap Agreements, (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (iii) any restrictions contained in agreements governing any Liens or Capital Lease Obligations otherwise expressly permitted hereby (in which case, any such prohibition or limitation shall only be effective against the assets subject to such Lien or Capital Lease Obligation), (iv) leases, licenses and other agreements containing customary provisions prohibiting or limiting the transfer or assignment thereof, (v) applicable law, (vi) customary provisions restricting the assignment of rights under contracts, (vii) any agreement for the sale of a Subsidiary that restricts distributions by that Subsidiary pending a sale of such Subsidiary permitted hereby, (viii) restrictions on cash or other deposits or net worth imposed by customers under contracts entered in the ordinary course of business, and (ix) restrictions on rights to dispose of assets subject to Liens permitted hereunder.

 

7.15        Lines of Business. Engage to any material extent in any business, either directly or through any Subsidiary, except for the Business.

 

7.16        Trean Indenture, BIC/Trean Agreement and Trean Compstar Pledge Agreement. Amend, supplement or otherwise modify the Trean Indenture, the BIC/Trean Agreement or the Trean Compstar Pledge Agreement in a manner that would be materially adverse to the Borrower, Administrative Agent or any Lender, without the prior written consent of the Administrative Agent, such consent not to be unreasonably withheld, conditioned or delayed.

 

7.17        Specified Shareholder Subordination Agreement. Enter into any written agreement providing any Specified Shareholder with rights to Specified Shareholder Bonus Payments unless such rights are subordinated to the Obligations pursuant to a Specified Shareholder Subordination Agreement.

 

SECTION 8. EVENTS OF DEFAULT

 

If any of the following events shall occur and be continuing:

 

(a)           the Borrower shall fail to pay any principal of any Loan when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan, or any other fee or amount payable hereunder or under any other Loan Document, within three (3) Business Days after any such interest, fee or other amount becomes due in accordance with the terms hereof; or

 


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(b)           any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made (other than those representations and warranties that are expressly qualified by a Material Adverse Effect or other materiality qualification, in which case such representations and warranties shall be true and correct in all respects when made or deemed made); or

 

(c)           any Loan Party shall default in the observance or performance of any agreement contained in Section 6.4(a) (with respect to the Borrower and Holdings only), Section 6.6, Section 6.7(a), Section 6.11, Section 6.12, Section 6.14, Section 6.15 or Section 7 of this Agreement, or Sections 5.5, 5.6 or 5.7(b) of the Guarantee and Collateral Agreement; or

 

(d)           any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of thirty (30) days after (i) any Responsible Officer of the Borrower or Holdings becomes aware thereof, or (ii) written notice to the Borrower from the Administrative Agent or Required Lenders; or

 

(e)           (i) any Loan Party shall (A) default in making any payment of any principal of any Indebtedness (including any Guarantee Obligation, but excluding the Loans and Indebtedness under Swap Agreements) on the due date with respect thereto and beyond the period of grace, if any; or (B) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (C) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; provided that a default, event or condition described in subclause (A), (B) or (C) of this clause (i) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in subclauses (A), (B) and (C) of this clause (i) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $500,000; (ii) there occurs, under one more Swap Agreements to which a Loan Party is a party, an Early Termination Date (as defined in such Swap Agreements) resulting from (A) any event of default under such Swap Agreements as to which such Loan Party is the Defaulting Party (as defined in such Swap Agreements) or (B) any Termination Event (as so defined) under such Swap Agreements as to which such Loan Party is an Affected Party (as so defined) and, in either event, the aggregate Swap Termination Value owed by such Loan Party as a result thereof is greater than $500,000 and such Swap Termination Value remains unpaid for thirty (30) days; or (iii) a default shall occur under any Contractual Obligation of a Loan Party, which default results in the termination of one or more material agreements, instruments or undertakings to which such Loan Party is a party and which termination(s) reasonably could be expected to have a Material Adverse Effect; or

 


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(f)           (i) any Loan Party shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Loan Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Loan Party any case, proceeding or other action of a nature referred to in clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed or undischarged for a period of sixty (60) days; or (iii) there shall be commenced against any Loan Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (iv) any Loan Party shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Loan Party shall admit in writing its inability to pay its debts generally as they become due; or

 

(g)           (i) any Person shall engage in any non-exempt “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any Plan shall fail to satisfy the minimum funding standard applicable to the Plan for any plan year (as described in Section 302 of ERISA and Section 412 of the Code), whether or not waived, or any Lien in favor of the PBGC or a Plan shall arise on the assets of any Loan Party or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) any Loan Party or any Commonly Controlled Entity shall, or in the reasonable opinion of Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, would have a Material Adverse Effect; or

 

(h)           one or more judgments or decrees shall be entered against any Loan Party involving in the aggregate liabilities (to the extent not paid or covered by insurance as to which the relevant insurance company has acknowledged coverage) of $500,000 or more, and all such judgments or decrees shall not have been satisfied, vacated, discharged, stayed or bonded pending appeal within sixty (60) days from the entry thereof; or

 

(i)            any of the Security Documents shall cease, for any reason, to be in full force and effect (except due to any action or inaction by the Administrative Agent or the Lenders), or any Loan Party or any Affiliate of any Loan Party shall so assert in writing, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby (except due to any action or inaction by the Administrative Agent or the Lenders), or any Loan Party or any Affiliate of any Loan Party shall so assert in writing; or

 


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(j)            the guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, other than in accordance with the terms, conditions and limitations of any Loan Document, to be in full force and effect or any Loan Party or any Affiliate of any Loan Party shall so assert in writing; or

 

(k)           (i) (a) prior to the occurrence of the first public offering by Holdings (or by its direct or indirect parent company) of Capital Stock in Holdings (or in its direct or indirect parent company, as the case may be) after the Closing Date pursuant to a registration statement filed with the Securities and Exchange Commission in accordance with the Securities Act (a “Qualified Initial Public Offering”), failure of the Sponsor to maintain ownership, directly or indirectly, beneficially and of record, of 51% or more of the outstanding voting Capital Stock in Holdings or (b) after the occurrence of a Qualified Initial Public Offering, any “person” or “group” (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Securities Exchange Act of 1934, but excluding any employee benefit plan and/or person acting as the trustee, agent or other fiduciary or administrator therefor) other than the Sponsor is or shall at any time become the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of the greater of (I) 30% or more on a fully diluted basis of the voting interests in Holdings’ Capital Stock and (II) the percentage (measured on a fully diluted basis) of the voting interests in Holdings’ Capital Stock then owned, directly or indirectly, by Sponsor free and clear of all Liens or (ii) Holdings ceases to own one hundred percent (100%) of the issued and outstanding Capital Stock of the Borrower, in each instance in clauses (i) and (ii), free and clear of all Liens, rights, options, warrants or other similar agreements or understandings, other than Liens in favor of the Administrative Agent, for the benefit of the Lenders; or

 

(l)            any “Event of Default” shall exist or have occurred and be continuing as provided in any Subordinated Debt Document; or

 

(m)          any Subordinated Indebtedness, or any guarantees thereof, shall not be or shall cease to be, for any reason, validly subordinated to the Obligations of the Loan Parties, or to the Liens granted to the Administrative Agent pursuant to the Guarantee and Collateral Agreement, as the case may be, as provided in the relevant Subordinated Debt Documents, or any Loan Party or any Affiliate of any Loan Party shall so assert; or

 

(n)           any “Default” or “Event of Default” shall exist or have occurred and be continuing as provided in the Trean Indenture; and

 

(o)           Benchmark at any time fails to maintain a rating of at least “B+” from AM Best Rating (as published by the AM Best & Company, Inc.);

 


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then, and in any such event, (A) if such event is an Event of Default specified in paragraph (f) above with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of Required Lenders, the Administrative Agent may, or upon the request of Required Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of Required Lenders, the Administrative Agent may, or upon the request of Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower.

 

SECTION 9. THE AGENTS

 

9.1          Appointment. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent.

 

9.2          Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys in fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in fact selected by it with reasonable care.

 

9.3          Exculpatory Provisions. Neither the Administrative Agent nor any of its respective officers, directors, employees, agents, attorneys in fact or affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person’s own gross negligence or willful misconduct) or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party a party thereto to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party.

 


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9.4          Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to any Loan Party), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all Lenders and all future holders of the Loans and other Obligations.

 

9.5          Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by Required Lenders (or, if so specified by this Agreement, all Lenders); provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders.

 

9.6          Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its respective officers, directors, employees, agents, attorneys in fact or affiliates have made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any affiliate of a Loan Party that may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys in fact or affiliates.

 


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9.7          Indemnification. Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower in accordance with Section 10.5 and without limiting the obligation of the Borrower to do so), ratably according to their respective Aggregate Exposure Percentages in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Aggregate Exposure Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the Administrative Agent’s gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder.

 

9.8           Administrative Agent in Its Individual Capacity. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though the Administrative Agent were not the Administrative Agent. With respect to its Loans made or renewed by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” shall include the Administrative Agent in its individual capacity.

 

9.9          Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon ten (10) days’ notice to the Lenders and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then Required Lenders shall appoint from among Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is ten (10) days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective, and the Lenders shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as Required Lenders and, if applicable, the Borrower, appoint a successor agent as provided for above. After any retiring Administrative Agent’s resignation as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents.

 


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SECTION 10. MISCELLANEOUS

 

10.1       Amendments and Waivers. None of this Agreement, any other Loan Document or any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.1. The Required Lenders and each Loan Party party to the relevant Loan Document may, or, with the written consent of Required Lenders, the Administrative Agent and each Loan Party party to the relevant Loan Document may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such terms and conditions as Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) reduce the principal amount or extend the final scheduled date of maturity of any Loan, reduce the amount or extend the scheduled date of any amortization payment in respect of any Term Loan, reduce the stated rate of any interest or fee payable hereunder (except (x) in connection with the waiver of applicability of any post-default increase in interest rates (which waiver shall be effective with the consent of Required Lenders) and (y) that any amendment or modification of defined terms used in the financial covenants in this Agreement shall not constitute a reduction in the rate of interest or fees for purposes of this clause (i)) or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lender’s Revolving Commitment (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of mandatory reduction of Commitments shall not constitute an increase of the Commitment of any Lender), in each case without the written consent of each Lender directly affected thereby; (ii) eliminate or reduce the voting rights of any Lender under this Section 10.1 without the written consent of such Lender; (iii) reduce any percentage specified in the definition of Required Lenders (or otherwise modify the definition of Required Lender), consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or any substantial portion of the Collateral, or release all or any substantial portion of the Guarantors from their obligations under the Guarantee and Collateral Agreement, in each case without the written consent of all Lenders unless otherwise expressly permitted herein or in any other Loan Document; (iv) amend, modify or waive any provision of Sections 2.17(a), 2.17(b) or 2.17(c), or of the first two sentences of Section 2.17(d), without the written consent of each Lender directly and adversely affected thereby; (v) amend, modify or waive any provision of Section 9 without the written consent of the Administrative Agent; (vi) amend, modify or waive any provision of Section 2.6 or 2.7 without the written consent of the Swingline Lender; (vii) eliminate or reduce the amount of any prepayment of Term Loans or Revolving Loans required to be made pursuant to Section 2.11 without the written consent of all of the Lenders; or (viii) amend, modify or waive any provision of Section 6.5 of the Guarantee and Collateral Agreement without the written consent of the Lenders directly and adversely affected thereby. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, Lenders, the Administrative Agent and all future holders of the Loans or other Obligations. No waiver of any Default or Event of Default under this Agreement or any other Loan Document shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon.

 


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Notwithstanding the foregoing, this Agreement may be amended (or amended and restated) with the written consent of Required Lenders, the Administrative Agent and the Borrower (a) to add one or more additional credit facilities to this Agreement and to permit the extensions of credit from time to time outstanding thereunder and the accrued interest and fees in respect thereof to share ratably in the benefits of this Agreement and the other Loan Documents with the Term Loans and Revolving Extensions of Credit and the accrued interest and fees in respect thereof and (b) to include appropriately Lenders holding such credit facilities in any determination of Required Lenders, provided, that, in no event shall this provision be construed to imply that any Lender shall have any obligation of provide such additional credit facilities or extensions of credit.

 

Notwithstanding the foregoing this Agreement may be amended (or amended and restated), from time to time at the written request of the Borrower, in order to give effect the Permitted IPO Related Amendments, in accordance with the provisions set forth in Schedule 1.1-A.

 

10.2       Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three (3) Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Borrower and the Administrative Agent, and addressed as set forth on the signature pages hereto with respect to each other Lender, or to such other address as may be hereafter notified by the respective parties hereto:

 

Borrower, each other Loan Party and Holdings:

 

Trean Corporation

100 Lake Street West

Wayzata. MN 55391

Attention: Andrew O’Brien

 

and 

 


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Trean Holdings LLC
100 Lake Street West
Wayzata. MN 55391

Attention: Andrew O’Brien

 

With a copy to:

 

Altaris Capital Partners, LLC

10 East 53rd Street, 31st Floor

New York, New York 10022

Attention: David Ellison

Telecopy: (212) 931-0236

 

and

 

Schiff Hardin LLP

233 South Wacker Drive, Suite 7100

Chicago, Illinois 60606

Attention: Steve Isaacs

Telecopy: (312) 258-5600

 

Administrative Agent and
Swingline Lender:

First Horizon Bank

211 Franklin Road, Suite 300

Brentwood, Tennessee 37027

Attention: Leslie Johnson

Telecopy: (629) 208-2029

 

With a copy to:

McGuireWoods LLP

201 North Tryon Street, Suite 3000

Charlotte, North Carolina

Attention: Raj Natarajan

Telecopy: (704) 353-6147

 

provided that any notice, request or demand to or upon the Administrative Agent or the Lenders shall not be effective until received.

 

Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Section 2 unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

 

10.3       No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

 


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10.4       Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder.

 

10.5       Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all its reasonable costs and expenses actually incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including the reasonable fees and disbursements of counsel to the Administrative Agent and filing and recording fees and expenses, (b) to pay or reimburse each Lender and the Administrative Agent for all its reasonable costs and expenses actually incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including reasonable attorneys fees and disbursements of counsel to the Lenders and the Administrative Agent, (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying any Non-Excluded Taxes or any Other Taxes, if any, that may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Administrative Agent and their respective officers, directors, employees, affiliates, agents, trustees, advisors and controlling persons (each, an “Indemnitee”) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of any Group Member or any of the Properties and the reasonable fees and expenses of legal counsel in connection with claims, actions or proceedings by any Indemnitee against any Loan Party under any Loan Document (all the foregoing in this clause (d), collectively, the “Indemnified Liabilities”), provided that the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee, or from the breach by such Indemnitee of its material obligations to the Borrower, Holdings or another Indemnitee under this Agreement or the other Loan Documents. Without limiting the foregoing, and to the extent permitted by applicable law, each of Holdings and the Borrower agrees not to assert and to cause its Subsidiaries not to assert, and hereby waives and agrees to cause its Subsidiaries to waive, all rights for contribution or any other rights of recovery with respect to all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. All amounts due under this Section 10.5 shall be payable not later than 10 (ten) Business Days after written demand therefor. The agreements in this Section 10.5 shall survive repayment of the Loans and all other amounts payable hereunder, the termination of any Commitments hereunder, and the expiration or termination of this Agreement and the other Loan Documents. Notwithstanding the foregoing, no Group Member shall be required to reimburse the legal fees and expenses of (i) more than one outside counsel (in addition to special counsel and up to one local outside counsel in each applicable local jurisdiction) for all the Indemnitees, unless, in the reasonable opinion of the Administrative Agent, representation of all such Indemnitees would be inappropriate due to the existence of an actual or potential conflict of interest or (ii) the in-house counsel of any Lender or the Administrative Agent.

 


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10.6       Successors and Assigns; Participations and Assignments.

 

(a)           The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section.

 

(b)           (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees (each, an “Assignee”) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans at the time owing to it) with the prior written consent of:

 

(A)        the Borrower (such consent not to be unreasonably withheld or delayed), provided that no consent of the Borrower shall be required for an assignment to a Lender, an affiliate of a Lender who is under common control with such Lender, an Approved Fund (as defined below) or, if an Event of Default has occurred and is continuing, any other Person; and

 

(B)         the Administrative Agent (such consent not to be unreasonably withheld or delayed), provided that no consent of the Administrative Agent shall be required for an assignment of (I) all or any portion of a Term Loan to a Lender, an affiliate of a Lender or an Approved Fund or (II) all or any portion of a Revolving Loan or Revolving Commitment to a Lender that is a Revolving Lender immediately prior to such assignment.

 

(ii)          Assignments shall be subject to the following additional conditions:

 

(A)        except in the case of an assignment to a Lender, an affiliate of a Lender who is under common control with such Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender’s Commitments or Loans under any Facility, the amount of the Commitments or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 (in the case of the Revolving Facility) or $3,000,000 (in the case of the Term Facility) unless each of the Borrower and the Administrative Agent otherwise consent, provided that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing;

 


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(B)        the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; and

 

(C)        the Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an administrative questionnaire.

 

For the purposes of this Section 10.6, “Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course and that is administered or managed by (a) a Lender, (b) an affiliate of a Lender or (c) an entity or an affiliate of an entity that administers or manages a Lender.

 

(iii)         Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) below, from and after the effective date specified in each Assignment and Assumption the Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.18 2.19, 2.20 and 10.5); provided that the assignment of a Revolving Commitment by any Lender to an Approved Fund shall not relieve the assigning Lender of any of its obligations to fund a Loan under such Revolving Commitment if, for any reason, its Approved Fund fails to fund any such Loan, unless the Borrower has given its prior written consent to such assignment (such consent not to be unreasonably withheld). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 10.6 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this Section.

 

(iv)         The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.

 


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(v)          Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an Assignee, the Assignee’s completed administrative questionnaire (unless the Assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. This Section 10.6(b) shall be construed so that the Loans are at all times maintained in “registered form” within the meanings of Section 163(f), 871(h)(2) and 881(c)(2) of the Code.

 

(c)           (i) Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans owing to it); provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver that (1) requires the consent of each Lender directly affected thereby pursuant to the proviso to the second sentence of Section 10.1 and (2) directly affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.18, 2.19 and 2.20 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.7(b) as though it were a Lender, provided that such Participant shall be subject to Section 10.7(a) as though it were a Lender.

 

(ii)           A Participant shall not be entitled to receive any greater payment under Section 2.18, 2.19 or 2.20 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. Any Participant that is a Non-U.S. Lender shall not be entitled to the benefits of Section 2.19 unless such Participant complies with Section 2.19(d).

 

(iii)          Each Lender that sells a participation shall, acting solely for this purpose as an agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents (the “Participant Register”); provided, that no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participant’s interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) to any Person, except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations or, if different, under Sections 871(h) or 881(c) of the Code. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.

 


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(d)           Any Lender may (without the consent of the Borrower or the Administrative Agent) at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including the Loans and any Notes or any other instrument evidencing its rights as a Lender under this Agreement) to secure obligations or securities of such Lender to a Federal Reserve Bank, and any pledge or assignment to any holder of, trustee for, or any other representative of holders of, obligations owed or securities issued by such Lender, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or Assignee for such Lender as a party hereto.

 

(e)           The Borrower, upon receipt of written notice from the relevant Lender, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type described in paragraph (d) above.

 

10.7        Adjustments; Setoff.

 

(a)           Except to the extent that this Agreement expressly provides for payments to be allocated to a particular Lender or to the Lenders under a particular Facility, if any Lender (a “Benefited Lender”) shall, at any time after the Loans and other amounts payable hereunder shall immediately become due and payable pursuant to Section 8, receive any payment of all or part of the Obligations owing to it, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by setoff, pursuant to events or proceedings of the nature referred to in Section 8(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of the Obligations owing to such other Lender, such Benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of the Obligations owing to each such other Lender, or shall provide such other Lenders with the benefits of any such collateral, as shall be necessary to cause such Benefited Lender to share the excess payment or benefits of such collateral ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest.

 

(b)       In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, upon the occurrence and during the continuation of any Event of Default, without prior notice to the Borrower or any other Loan Party, any such notice being expressly waived by the Loan Parties to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower or any Loan Party hereunder or under any other Loan Document (whether at the stated maturity, by acceleration or otherwise), to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), and any other credits, indebtedness or claims, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of such Loan Party, as the case may be. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application.

 


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10.8       Counterparts. This Agreement may be executed in multiple counterparts or copies, each of which shall be deemed an original hereof for all purposes. One or more counterparts or copies of this Agreement may be executed by one or more of the parties hereto, and some different counterparts or copies executed by one or more of the other parties. Each counterpart or copy hereof executed by any party hereto shall be binding upon the party executing same even though other parties may execute one or more different counterparts or copies, and all counterparts or copies hereof so executed shall constitute but one and the same agreement. Each party hereto, by execution of one or more counterparts or copies hereof, expressly authorizes the Administrative Agent to detach the signature pages from any such counterpart or copy hereof executed by the authorizing party and affix same to one or more other identical counterparts or copies hereof so that upon execution of multiple counterparts or copies hereof by all parties hereto, there shall be one or more counterparts or copies hereof to which is(are) attached signature pages containing signatures of all parties hereto. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent.

 

10.9       Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

10.10     Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents.

 

10.11     GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK) WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF OTHER THAN SUCH SECTION 5-1401.

 


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10.12     SUBMISSION TO JURISDICTION; WAIVERS. EACH OF THE BORROWER AND HOLDINGS HEREBY IRREVOCABLY AND UNCONDITIONALLY:

 

(a)           SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS FROM ANY THEREOF;

 

(b)           CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;

 

(c)           AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT ITS ADDRESS SET FORTH IN SECTION 10.2 OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO;

 

(d)           AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND

 

(e)           WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

 

10.13     Acknowledgements. The Borrower hereby acknowledges that:

 

(a)           it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents;

 

(b)           neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent and the Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

 

(c)           no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among Lenders or among the Borrower and the Lenders.

 


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10.14       Termination; Releases of Guarantees and Liens.

 

(a)           Notwithstanding anything to the contrary contained herein or in any other Loan Document, the Administrative Agent is hereby irrevocably authorized by each Lender (without requirement of notice to or consent of any Lender except as expressly required by Section 10.1) to take any action requested by the Borrower having the effect of releasing any Collateral or guarantee obligations (i) to the extent necessary to permit consummation of any transaction expressly permitted by any Loan Document or that has been consented to in accordance with Section 10.1 or (ii) under the circumstances described in paragraph (b) below.

 

(b)           At such time as the Loans and the other obligations under the Loan Documents (other than contingent indemnification obligations not yet due and payable and obligations under or in respect of Specified Swap Agreements) shall have been paid in full, the Commitments have been terminated and the obligations under or in respect of Specified Swap Agreements shall have been cash collateralized, this Agreement shall automatically terminate, and the Collateral shall be released from the Liens created by the Security Documents, and the Security Documents and all obligations (other than those stated to survive such termination) of the Administrative Agent and each Loan Party under the Security Documents shall terminate, all without delivery of any instrument or performance of any act by any Person.

 

10.15     Interest and Loan Charges. Anything in this Agreement, the Notes or any of the other Loan Documents to the contrary notwithstanding, in no event whatsoever, whether by reason of advancement of proceeds of the Loans, acceleration of the maturity of the unpaid balance of the Loans or otherwise, shall the interest and loan charges agreed to be paid to any Lender for the use of money advanced or to be advanced hereunder exceed the maximum amounts collectible under applicable laws in effect from time to time. It is understood and agreed by the parties that, if for any reason whatsoever the interest or loan charges paid or contracted to be paid by the Borrower in respect of the Loans or any of the other Obligations shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then ipso facto, the obligation to pay such interest or loan charges shall be reduced to the maximum amounts collectible under applicable laws in effect from time to time, and any amounts collected by any Lender that exceed such maximum amounts shall be applied to the reduction of the principal balance of the Obligations or refunded to the Borrower so that at no time shall the interest or loan charges paid or payable in respect of the Loans and the other Obligations exceed the maximum amounts permitted from time to time by applicable law.

 

10.16     Confidentiality. Each of the Administrative Agent and each Lender agrees to keep confidential all non-public information provided to it by any Loan Party, the Administrative Agent or any Lender pursuant to or in connection with this Agreement; provided that nothing herein shall prevent the Administrative Agent or any Lender from disclosing any such information (a) to the Administrative Agent, any other Lender or any affiliate thereof, (b) subject to an agreement to comply with the provisions of this Section, to any actual or prospective Transferee or any direct or indirect counterparty to any Swap Agreement (or any professional advisor to such counterparty), (c) to its employees, directors, agents, attorneys, accountants and other professional advisors or those of any of its affiliates, (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and instructed to keep such information confidential pursuant to the terms hereof), (d) upon the request or demand of any Governmental Authority, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (f) if required to do so in connection with any litigation or similar proceeding, (g) that has been publicly disclosed, other than as a result of a breach of this Section 10.16, (h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender’s investment portfolio in connection with ratings issued with respect to such Lender, or (i) if an Event of Default has occurred and is continuing, to the extent reasonably necessary or appropriate in connection with the exercise of any remedy hereunder or under any other Loan Document. Notwithstanding the foregoing, the Administrative Agent shall be permitted to use information related to the arrangement of the Facilities in connection with marketing, press releases and other transactional announcements and updates provided to investor or trade publications, including the placement of “tombstone” advertisements in publications of their choice, and the Borrower grants to the Administrative Agent permission to use the logos and marks of the Sponsor and the Borrower, as well as the names of the Sponsor and the Borrower (together, the “Client Mark”), in such press releases and transactional announcements. The Administrative Agent acknowledges that the Client Mark shall remain the sole property of the Sponsor and the Borrower and that all references to the Sponsor, the Borrower or the Client Mark by Administrative Agent will be truthful and not misleading in any way. This Section 10.16 shall survive the termination of this Agreement.

 


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10.17     WAIVERS OF JURY TRIAL. EACH OF HOLDINGS, THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

 

10.18     Patriot Act Notice. Each Lender (for itself and not on behalf of any other party) hereby notifies each of the Loan Parties that, pursuant to the requirements of the USA PATRIOT Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Loan Parties, which information includes the name and address of the Loan Parties and other information that will allow such Lender to identify the Loan Parties in accordance with the Act.

 

10.19     Acknowledgement and Consent to Bail-In of EEA Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Lender that is an EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by (a) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any Lender that is an EEA Financial Institution; and (b) the effects of any Bail-in Action on any such liability, including, if applicable: (i) a reduction in full or in part or cancellation of any such liability; (ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or (iii) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.

 


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10.20     Joint and Several. The obligations of the Loan Parties hereunder and under the other Loan Documents are joint and several. Without limiting the generality of the foregoing, reference is hereby made to Section 2 of the Guarantee and Collateral Agreement, to which the obligations of Borrowers and the other Loan Parties are subject.

 

10.21     Acknowledgement Regarding any Supported QFCs. To the extent that the Loan Documents provide support, through a guarantee or otherwise, for Swap Agreements or any other agreement or instrument that is a QFC (such support, “QFC Credit Support” and each such QFC a “Supported QFC”), the parties acknowledge and agree as follows with respect to the resolution power of the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (together with the regulations promulgated thereunder, the “U.S. Special Resolution Regimes”) in respect of such Supported QFC and QFC Credit Support (with the provisions below applicable notwithstanding that the Loan Documents and any Supported QFC may in fact be stated to be governed by the laws of the State of New York and/or of the United States or any other state of the United States):

 

(a)           In the event a Covered Entity that is party to a Supported QFC (each, a “Covered Party”) becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer of such Supported QFC and the benefit of such QFC Credit Support (and any interest and obligation in or under such Supported QFC and such QFC Credit Support, and any rights in property securing such Supported QFC or such QFC Credit Support) from such Covered Party will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if the Supported QFC and such QFC Credit Support (and any such interest, obligation and rights in property) were governed by the laws of the United States or a state of the United States. In the event a Covered Party or a BHC Act Affiliate of a Covered Party becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under the Loan Documents that might otherwise apply to such Supported QFC or any QFC Credit Support that may be exercised against such Covered Party are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if the Supported QFC and the Loan Documents were governed by the laws of the United States or a state of the United States. Without limitation of the foregoing, it is understood and agreed that rights and remedies of the parties with respect to a Defaulting Lender shall in no event affect the rights of any Covered Party with respect to a Supported QFC or any QFC Credit Support.

 

(b)           As used in this Section 10.21, the following terms have the following meanings:

 

(i)            “BHC Act Affiliate” of a party means an “affiliate” (as such term is defined under, and interpreted in accordance with, 12 U.S.C. 1841(k)) of such party.

 


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(ii)           “Covered Entity” means any of the following:

 

(A)         a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);

 

(B)          a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or

 

(C)          a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).

 

(iii)          “Default Right” has the meaning assigned to that term in, and interpreted in accordance with, 12 C.F.R. § § 252.81, 47.2 or 382.1 as applicable.

 

(iv)          “QFC” has the meaning assigned to the term “qualified financial contract” in, and shall be interpreted in accordance with, 12 U.S.C. 5390(c)(8)(D).

 

10.22     Amendment and Restatement.

 

(a)           The parties acknowledge and agree that this Agreement and the other Loan Documents to be dated on or before the Closing Date and not already in effect do not constitute a novation, payment and reborrowing or termination of the obligations under the Existing Credit Agreement or any other Loan Document and that all such obligations are in all respects continued and outstanding as Obligations under this Agreement except to the extent such Obligations are modified from and after the Closing Date as provided in this Agreement and the other Loan Documents. Each Lender that was a Lender (as defined in the Existing Credit Agreement) party to the Existing Credit Agreement hereby agrees that this Agreement amends and restates the Existing Credit Agreement in its entirety effective as of the Closing Date; provided that for the avoidance of doubt, the Borrower hereby reaffirms that the Collateral and the Loan Documents shall continue to secure, guarantee, support and otherwise benefit the Obligations on the same terms as prior to the effectiveness hereof. Upon the effectiveness of this Agreement, each Loan Document (other than the Existing Credit Agreement) that was in effect immediately prior to the date of this Agreement shall continue to be effective on its terms unless otherwise expressly stated herein.

 

(b)           The Borrower, the other Loan Parties and Administrative Agent agree that all principal, interest, fees, costs, reimbursable expenses and indemnification obligations accruing or arising under or in connection with the Existing Credit Agreement which remain unpaid and outstanding as of the Closing Date shall be and remain outstanding and payable as an obligation under this Agreement and the other Loan Documents.

 

[Signature Pages Follow]

 


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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

 

  BORROWER:
   
  TREAN CORPORATION, a Minnesota
  corporation
   
  By: /s/ Andrew O’ Brien  
  Name: Andrew O' Brien
 
  Title:  President
 
   
  TREAN COMPSTAR HOLDINGS LLC, a
  Delaware limited liability company
   
  By: /s/ Andrew O’ Brien  
  Name:  Andrew O’ Brien  
  Title:  President
 
   
  BENCHMARK ADMINISTRATORS, LLC, a
  California limited liability company
   
  By: /s/ Andrew O’ Brien  
  Name:  Andrew O’ Brien  
  Title:  Manager
 
   
  HOLDINGS:
   
  TREAN HOLDINGS LLC, a Delaware limited
  liability company
   
  By: /s/ Andrew O’ Brien  
  Name: Andrew O’ Brien  
  Title: Managing Director
 
   
  OTHER LOAN PARTIES:
   
  WESTCAP INSURANCE SERVICES, LLC, a
  California limited liability company
   
  By: /s/ Andrew O’ Brien  
  Name: Andrew O’ Brien  
  Title:
Manager
 

 

Signature Page to Credit Agreement - Trean 

 


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  TREAN REINSURANCE SERVICES, LLC, a
  Minnesota limited liability company
   
  By: /s/ Andrew O’ Brien  
  Name: Andrew O’ Brien  
  Title:  President
 

 

Signature Page to Credit Agreement - Trean

 


 

 

  FIRST HORIZON BANK, as Administrative
  Agent, Swingline Lender and a Lender
     
  By: /s/ Rob Harrington  
  Name: Rob Harrington  
  Title:
Vice President  
     
  ADDRESS FOR NOTICES:
     
  First Horizon Bank
  211 Franklin Road, Suite 300
  Brentwood, Tennessee 37027
  Attention:   Leslie Johnson
  Telecopy:   (629) 208-2029

 

Signature Page to Credit Agreement - Trean 

 

 




Exhibit 16.1


June 19, 2020

Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549

Commissioners:

We have read the statements made by Trean Insurance Group, Inc. pursuant to Item 304(a)(1) of Regulation S-K, filed with the Securities and Exchange Commission as part of the Registration Statement on Form S-1 of Trean Insurance Group, Inc. dated June 19, 2020 and we agree with such statements concerning our firm.

Sincerely,

/s/ RSM US LLP




Exhibit 21.1

SUBSIDIARIES OF TREAN INSURANCE GROUP, INC.

Subsidiary
 
Jurisdiction of Incorporation or Formation
American Liberty Insurance Company
 
Utah
Benchmark Administrators, LLC
 
California
Benchmark Holding Company
 
Minnesota
Benchmark Insurance Company
 
Kansas
Compstar Holding Company LLC
 
Delaware
Compstar Insurance Services, LLC
 
California
Trean Compstar Holdings LLC
 
Delaware
Trean Corporation
 
Minnesota
Trean Reinsurance Services, LLC
 
Minnesota
Westcap Insurance Services, LLC
 
California




Exhibit 23.1

 
Deloitte & Touche LLP
50 South 6th Street
Suite 2800
Minneapolis, MN 55402-1538
USA
 
Tel: +1 612 397 4000
Fax: +1 612 397 4450
www.deloitte.com

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the use in this Registration Statement on Form S-1 of our report dated April 9, 2020 relating to the financial statements of Trean Insurance Group, Inc. We also consent to the reference to us under the heading “Experts” in such Registration Statement.
 
/s/ Deloitte & Touche LLP
 
Minneapolis, Minnesota
June 19, 2020



Exhibit 23.2

 
Deloitte & Touche LLP
50 South 6th Street
Suite 2800
Minneapolis, MN 55402-1538
USA
 
Tel: +1 612 397 4000
Fax: +1 612 397 4450
www.deloitte.com
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the use in this Registration Statement on Form S-1 of our report dated April 9, 2020 relating to the combined financial statements of BIC Holdings LLC and Trean Holdings LLC. We also consent to the reference to us under the heading “Experts” in such Registration Statement.
 
/s/ Deloitte & Touche LLP
 
Minneapolis, Minnesota
June 19, 2020