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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission file number: 001-39392

TREAN INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-4512647
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
150 Lake Street West
Wayzata, MN 55391
(Address of principal executive offices and zip code)
 (952) 974-2200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareTIGThe Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," a "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☒Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No ☒ 
As of November 4, 2022, there were 51,220,485 shares of the registrant's common stock outstanding.

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TREAN INSURANCE GROUP, INC.
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2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
September 30, 2022December 31, 2021
Assets(unaudited)
Fixed maturities, at fair value (amortized cost of $581,935 and $465,459, respectively)
$530,118 $471,061 
Equity securities, at fair value (cost $39,838 and $984, respectively)
35,296 969 
Total investments565,414 472,030 
Cash and cash equivalents81,489 129,577 
Restricted cash16,320 407 
Accrued investment income3,441 2,344 
Premiums and other receivables153,440 141,920 
Income taxes receivable1,584 460 
Reinsurance recoverable384,204 377,241 
Prepaid reinsurance premiums119,389 129,411 
Deferred policy acquisition cost, net15,011 13,344 
Property and equipment, net7,369 7,632 
Right of use asset3,292 4,530 
Deferred tax asset3,454 — 
Goodwill142,347 142,347 
Intangible assets, net68,616 73,114 
Other assets16,205 8,658 
Total assets$1,581,575 $1,503,015 
Liabilities
Unpaid loss and loss adjustment expenses$578,751 $544,320 
Unearned premiums220,891 219,940 
Funds held under reinsurance agreements204,828 199,410 
Reinsurance premiums payable49,512 45,130 
Accounts payable, accrued expenses and other liabilities43,449 29,448 
Lease liability3,629 4,976 
Deferred tax liability— 7,520 
Debt77,459 30,362 
Total liabilities1,178,519 1,081,106 
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value per share (600,000,000 authorized; 51,220,485 and 51,176,887 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively)
512 512 
Additional paid-in capital289,618 288,623 
Retained earnings153,795 128,390 
Accumulated other comprehensive income (loss)(40,869)4,384 
Total stockholders' equity403,056 421,909 
Total liabilities and stockholders' equity$1,581,575 $1,503,015 

See accompanying notes to the condensed consolidated financial statements.
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Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenues
Gross written premiums$162,183 $177,624 $477,775 $480,905 
Increase in gross unearned premiums(1,061)(28,478)(972)(64,836)
Gross earned premiums161,122 149,146 476,803 416,069 
Ceded earned premiums(89,741)(97,191)(275,235)(275,037)
Net earned premiums71,381 51,955 201,568 141,032 
Net investment income2,951 2,187 5,136 6,562 
Net realized gains9 49 311 72 
Other revenue2,140 2,799 7,145 8,683 
Total revenue76,481 56,990 214,160 156,349 
Expenses
Losses and loss adjustment expenses45,647 32,129 125,727 86,735 
General and administrative expenses23,256 13,788 63,235 40,946 
Other expenses— — 268 845 
Intangible asset amortization1,499 1,499 4,498 4,326 
Noncash stock compensation460 468 1,019 1,098 
Interest expense931 419 1,806 1,271 
Total expenses71,793 48,303 196,553 135,221 
Gains (losses) on embedded derivatives4,871 (121)14,463 1,869 
Other income29 35 76 191 
Income before taxes9,588 8,601 32,146 23,188 
Income tax expense2,014 2,083 6,741 5,102 
Net income$7,574 $6,518 $25,405 $18,086 
Earnings per share:
Basic$0.15 $0.13 $0.50 $0.35 
Diluted$0.15 $0.13 $0.50 $0.35 
Weighted average shares outstanding:
Basic51,216,869 51,171,416 51,197,296 51,157,726 
Diluted51,217,005 51,171,416 51,197,482 51,172,602 
See accompanying notes to the condensed consolidated financial statements.
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Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net income$7,574 $6,518 $25,405 $18,086 
Other comprehensive loss, net of tax:
Unrealized investment losses:
Unrealized investment losses arising during the period(19,059)(2,419)(58,333)(8,670)
Income tax benefit(3,996)(508)(12,243)(1,821)
Unrealized investment losses, net of tax(15,063)(1,911)(46,090)(6,849)
Less reclassification adjustments to:
Net realized investment gains (losses) included in net realized gains (losses)21 49 (1,060)72 
Income tax expense (benefit)4 10 (223)15 
Total reclassifications included in net income, net of tax17 39 (837)57 
Other comprehensive loss(15,080)(1,950)(45,253)(6,906)
Total comprehensive income (loss)$(7,506)$4,568 $(19,848)$11,180 
See accompanying notes to the condensed consolidated financial statements.
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Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
For the Three and Nine Months Ended September 30, 2022 and 2021
(in thousands, except share and unit data)
(unaudited)
Common StockAdditional Paid in CapitalAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal Stockholders' Equity
SharesAmount
Balance at June 30, 202251,202,136 $512 $289,174 $(25,789)$146,221 $410,118 
Stock compensation expense— — 460 — — 460 
Common stock issued pursuant to equity compensation awards, net of shares repurchased18,349 — (16)— — (16)
Other comprehensive loss— — — (15,080)— (15,080)
Net income— — — — 7,574 7,574 
Balance at September 30, 202251,220,485 $512 $289,618 $(40,869)$153,795 $403,056 

Balance at June 30, 202151,157,004 $511 $287,734 $8,470 $120,628 $417,343 
Stock compensation expense— — 468 — — 468 
Common stock issuances pursuant to equity compensation awards, net of shares repurchased17,883 1 (88)— — (87)
Other comprehensive loss— — — (1,950)— (1,950)
Net income— — — — 6,518 6,518 
Balance at September 30, 202151,174,887 $512 $288,114 $6,520 $127,146 $422,292 

Balance at December 31, 202151,176,887 $512 $288,623 $4,384 $128,390 $421,909 
Stock compensation expense— — 1,019 — — 1,019 
Common stock issuances pursuant to equity compensation awards, net of shares repurchased43,598 — (24)— — (24)
Other comprehensive loss— — — (45,253)— (45,253)
Net income— — — — 25,405 25,405 
Balance at September 30, 202251,220,485 $512 $289,618 $(40,869)$153,795 $403,056 

See accompanying notes to the condensed consolidated financial statements.
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Balance at December 31, 202051,148,782 $511 $287,110 $13,426 $109,060 $410,107 
Stock compensation expense— — 1,098 — — 1,098 
Common stock issuances pursuant to equity compensation awards, net of shares repurchased26,105 1 (94)— — (93)
Other comprehensive loss— — — (6,906)— (6,906)
Net income— — — — 18,086 18,086 
Balance at September 30, 202151,174,887 $512 $288,114 $6,520 $127,146 $422,292 
See accompanying notes to the condensed consolidated financial statements.
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Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30,
20222021
Operating activities
Net income$25,405 $18,086 
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization5,100 5,123 
Stock compensation1,019 1,098 
Unrealized gains on embedded derivatives(16,848)(3,761)
Net gains on investments(311)(72)
Unrealized losses on equity securities4,542 — 
Bond amortization and accretion996 1,715 
Deferred income taxes1,046 (2,259)
Amortization of debt discount and deferred financing costs131 126 
Changes in operating assets and liabilities:
Accrued investment income(1,097)80 
Premiums and other receivables(11,520)(25,167)
Reinsurance recoverable on paid and unpaid losses(6,963)(18,460)
Prepaid reinsurance premiums10,022 (30,252)
Right of use asset1,238 1,444 
Other assets(9,040)(10,863)
Unpaid loss and loss adjustment expenses34,431 52,975 
Unearned premiums951 64,879 
Funds held under reinsurance agreements25,016 19,585 
Reinsurance premiums payable4,382 (7,829)
Accounts payable, accrued expenses and other liabilities10,518 (11,430)
Lease liability(1,347)(1,537)
Income taxes payable and receivable(1,124)(71)
Net cash provided by operating activities76,547 53,410 
Investing activities
Payments for capital expenditures(339)(92)
Return of capital on equity method investment— 232 
Purchase of investments, available for sale(257,929)(129,474)
Proceeds from investments sold, matured or repaid103,526 61,998 
Acquisition of subsidiary, net of cash received— (3,795)
Net cash used in investing activities(154,742)(71,131)
Financing activities
Shares redeemed for payroll taxes(23)(94)
Proceeds from surplus notes48,455 — 
Principal payments on debt(1,238)(1,031)
Payment for deferred financing costs(251)— 
Payment for interest rate cap(173)— 
Payment for acquisition of subsidiary(750)— 
Net cash provided by (used in) financing activities46,020 (1,125)
Net decrease in cash, cash equivalents and restricted cash(32,175)(18,846)
Cash, cash equivalents and restricted cash – beginning of period
129,984 157,234 
Cash, cash equivalents and restricted cash – end of period
$97,809 $138,388 
See accompanying notes to the condensed consolidated financial statements.
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Table of Contents
Trean Insurance Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Disaggregation of cash and restricted cash:September 30, 2022December 31, 2021
Cash and cash equivalents$81,489 $129,577 
Restricted cash16,320 407 
Total cash, cash equivalents and restricted cash$97,809 $129,984 


Nine Months Ended September 30,
Supplemental disclosure of cash flow information:20222021
Cash paid during the year for:
Interest$1,319 $1,145 
Income taxes7,081 7,395 
Non-cash investing and financing activity:
Right-of-use assets obtained in exchange for new operating lease liabilities307 319 
Non-cash transfer of investments to settle funds held for reinsurance2,750 13,562 
Non-cash transfer of investments to settle amounts held for others in accounts payable— 26,211 
Contingent consideration for the acquisition of subsidiary— 1,500 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases1,890 1,824 

See accompanying notes to the condensed consolidated financial statements.
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Table of Contents
Notes to the Condensed Consolidated Financial Statements

Note 1. Business and Basis of Presentation
Trean Insurance Group, Inc. (together with its wholly owned subsidiaries, the "Company") provides products and services to the specialty insurance market. Historically, the Company has focused on specialty casualty markets management believes are 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 Company owned managing general agencies ("Owned MGAs"). Additionally, the Company 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.

The Company's wholly owned subsidiaries include: (i) Benchmark Holding Company, a property and casualty insurance holding company, which owns Benchmark Insurance Company ("Benchmark"), a property and casualty insurance company domiciled in the state of Kansas, American Liberty Insurance Company ("ALIC"), a property and casualty insurance company domiciled in the state of Utah, 7710 Insurance Company ("7710"), a property and casualty insurance company domiciled in the state of South Carolina and Benchmark Specialty Insurance Company ("BSIC"), a property and casualty insurance company domiciled in the state of Arkansas; (ii) Compstar Insurance Services LLC, a California-based general agency; and (iii) Trean Corporation ("Trean Corp"), a reinsurance intermediary manager and a managing general agent, which consists of the following wholly owned subsidiaries: (a) Trean Reinsurance Services, LLC ("TRS"), a reinsurance intermediary broker; Benchmark Administrators LLC ("BIC Admin"), a claims third-party administrator; (b) Western Integrated Care, LLC ("WIC"), a managed care organization; and (c) Westcap Insurance Services, LLC ("Westcap"), a managing general agent based in California.

The accompanying condensed consolidated 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 the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934, as amended. Accordingly, they do not contain all of the information included in the Company's annual consolidated 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 consolidated 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 consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Form 10-K"). Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Use of estimates

While preparing the condensed consolidated financial statements, the Company has made certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require extensive use of estimates include the reserves for unpaid losses and loss adjustment expenses ("LAE"), reinsurance recoverables, investments, goodwill, and other intangible assets. Except for the captions on the condensed consolidated balance sheets and condensed consolidated statements of comprehensive income, generally, the term loss(es) is used to collectively refer to both losses and LAE.

The Company tests for goodwill impairment at the reporting unit level during the fourth quarter of each year and between annual tests if a triggering event indicates the possibility of an impairment. The Company monitors changing business conditions as well as industry and economic factors, among others, for events which could trigger the need for an interim impairment analysis. The declining share price of the Company’s stock has caused the market capitalization to fall below the book value as of September 30, 2022. As a result of the decrease in share price, the Company performed an interim impairment analysis at September 30, 2022 and concluded that no impairment relating to goodwill existed as of September 30, 2022.

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Accounting pronouncements

Recently adopted policies

In January 2020, the Financial Accounting Standards Board ("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 adopted this standard effective January 1, 2022. Adoption of this standard did not have a material impact on the condensed consolidated financial statements.

Pending policies

The Company completed its initial public offering in July 2020, and is an emerging growth company as defined under federal securities laws. 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 on items such as (i) the application of fair value option disclosures; (ii) the accounting for fees related to modifications of debt; and (iii) aligning the contractual term of a net investment in a lease in accordance with ASC Topic 326, Financial Instruments - Credit Losses, and the lease term determined in accordance with ASC Topic 842, Leases. The Company adopted items (i) and (ii) effective January 1, 2020 and will adopt item (iii) on January 1, 2023. Adoption of this standard has not had, and is not expected to have, a material impact on the condensed consolidated financial statements.

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 consolidated financial statements.


Note 2. Acquisitions
Western Integrated Care

Effective July 6, 2021, Trean Corp acquired 100% ownership of WIC for a total purchase price of $5,500, which includes $1,500 that is contingent on WIC's future earnings, as defined in the agreement. WIC is a managed care organization that offers services to workers' compensation insurers to enable employees who are injured on the job to access qualified medical treatment. The Company recorded $1,501 of goodwill and intangible assets of $3,624 associated with the business combination. The Company made an earn-out payment of $750 during the three months ended September 30, 2022.


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.

September 30, 2022
Level 1Level 2Level 3Total
Fixed maturities:
U.S. government and government securities$56,899 $— $— $56,899 
Foreign governments— 392 — 392 
States, territories and possessions— 14,380 — 14,380 
Political subdivisions of states territories and possessions— 33,863 — 33,863 
Special revenue and special assessment obligations— 103,318 — 103,318 
Industrial and public utilities— 118,252 — 118,252 
Commercial mortgage-backed securities— 123,478 — 123,478 
Residential mortgage-backed securities— 24,171 — 24,171 
Other loan-backed securities— 50,339 — 50,339 
Hybrid securities— 5,026 — 5,026 
Total fixed maturities56,899 473,219 — 530,118 
Equity securities12,180 23,116 — 35,296 
Total investments$69,079 $496,335 $— $565,414 
Embedded derivatives on funds held under reinsurance agreements$(2,103)$(14,474)$— $(16,577)
Interest rate cap agreement— 173 — 173 
Debt— 79,700 — 79,700 


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December 31, 2021
Level 1Level 2Level 3Total
Fixed maturities:
U.S. government and government securities$2,392 $39,042 $— $41,434 
Foreign governments— 2,490 — 2,490 
States, territories and possessions— 10,766 — 10,766 
Political subdivisions of states, territories and possessions— 40,002 — 40,002 
Special revenue and special assessment obligations— 95,991 — 95,991 
Industrial and public utilities— 103,257 — 103,257 
Commercial mortgage-backed securities— 118,218 — 118,218 
Residential mortgage-backed securities— 17,368 — 17,368 
Other loan-backed securities— 41,425 — 41,425 
Hybrid securities— 110 — 110 
Total fixed maturities2,392 468,669 — 471,061 
Equity securities— 969 — 969 
Total investments$2,392 $469,638 $— $472,030 
Embedded derivatives on funds held under reinsurance agreements$(4)$275 $— $271 
Debt— 30,938 — 30,938 

Fixed maturities and equity securities: The Company, through its third-party pricing service provider, uses a variety of sources to estimate the fair value of investments such as Refinitiv (formerly Reuters), PricingDirect, ICE Data Services, and for equities, Bloomberg or S&P Capital IQ Pro. Equity securities are generally 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 indications. Values obtained from third-party pricing services can utilize several market data sources for inputs such as transaction data, yield, quality, coupon rate, maturity, issue type, trading characteristics, and other market activity. To validate the reasonableness of the prices, the Company performs various qualitative and quantitative procedures such as analysis of recent trading activity, analytical review of fair values and an evaluation of the underlying pricing methodologies. Based on these procedures, the Company did not adjust the prices or quotes from the third-party pricing service.

Embedded derivatives: The Company enters into funds held contracts under reinsurance agreements, which create embedded derivatives on the underlying investments. These embedded derivatives are valued based upon the unrealized gain or loss position of the funds held portfolio, which is determined consistent with 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.

Interest rate cap agreement: The Company entered into an interest cap agreement to hedge cash flows associated with interest rate fluctuations on variable rate debt. The fair value of the interest rate cap agreement is based on the terms of the agreement and commonly quoted data for forward interest rate curves and an implied market volatility. The Company also assessed the significance of credit valuation adjustments to appropriately reflect the respective nonperformance risk in the fair value measurement and determined the credit valuation adjustment is not significant to the overall valuation of the interest rate cap.

Debt: The Company holds debt related to its secured credit facility and surplus notes. The Company has determined that the remaining balance of the debt reflected its fair value as this would represent the total amount to repay the debt.


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Note 4. Investments
Fixed income securities include bonds, asset-backed securities, and redeemable preferred securities. Fixed income securities, which may be sold prior to their contractual maturity, are designated as available-for-sale and are carried at fair value. Equity securities primarily include common stocks, mutual funds, and non-redeemable preferred stocks, which are carried at fair value.

The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company's fixed maturities investments are as follows:

September 30, 2022
Cost or
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
Fixed maturities:
U.S. government and government securities$59,974 $14 $(3,089)$56,899 
Foreign governments400 — (8)392 
States, territories and possessions16,088 — (1,708)14,380 
Political subdivisions of states, territories and possessions38,614 1 (4,752)33,863 
Special revenue and special assessment obligations116,311 5 (12,998)103,318 
Industrial and public utilities125,572 — (7,320)118,252 
Commercial mortgage-backed securities141,552 20 (18,094)123,478 
Residential mortgage-backed securities25,769 16 (1,614)24,171 
Other loan-backed securities51,857 — (1,518)50,339 
Hybrid securities5,798 — (772)5,026 
Total fixed maturities available for sale$581,935 $56 $(51,873)$530,118 


December 31, 2021
Cost or
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
Fixed maturities:
U.S. government and government securities$41,490 $113 $(169)$41,434 
Foreign governments2,500 — (10)2,490 
States, territories and possessions10,593 189 (16)10,766 
Political subdivisions of states, territories and possessions39,170 975 (143)40,002 
Special revenue and special assessment obligations93,664 2,920 (593)95,991 
Industrial and public utilities100,774 2,835 (352)103,257 
Commercial mortgage-backed securities119,378 591 (1,751)118,218 
Residential mortgage-backed securities16,549 843 (24)17,368 
Other loan-backed securities41,236 248 (59)41,425 
Hybrid securities105 5 — 110 
Total fixed maturities available for sale$465,459 $8,719 $(3,117)$471,061 


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The following table illustrates the Company’s gross unrealized losses and fair value of fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

September 30, 2022
Less Than 12 Months12 Months or MoreTotal
Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
Fixed maturities:
U.S. government and government securities$47,377 $(2,691)$4,623 $(398)$52,000 $(3,089)
Foreign governments392 (8)— — 392 (8)
States, territories and possessions14,150 (1,612)229 (96)14,379 (1,708)
Political subdivisions of states, territories and possessions27,617 (3,574)5,725 (1,178)33,342 (4,752)
Special revenue and special assessment obligations86,592 (8,560)15,668 (4,438)102,260 (12,998)
Industrial and public utilities107,179 (5,541)11,074 (1,779)118,253 (7,320)
Commercial mortgage-backed securities72,893 (7,836)44,600 (10,258)117,493 (18,094)
Residential mortgage-backed securities19,794 (1,551)1,437 (63)21,231 (1,614)
Other loan-backed securities46,109 (1,316)4,231 (202)50,340 (1,518)
Hybrid securities5,026 (772)— — 5,026 (772)
Total fixed maturities$427,129 $(33,461)$87,587 $(18,412)$514,716 $(51,873)


December 31, 2021
Less Than 12 Months12 Months or MoreTotal
Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
Fixed maturities:
U.S. government and government securities$26,935 $(168)$23 $(1)$26,958 $(169)
Foreign governments2,490 (10)— — 2,490 (10)
States, territories and possessions935 (16)— — 935 (16)
Political subdivisions of states, territories and possessions11,115 (143)— — 11,115 (143)
Special revenue and special assessment obligations29,917 (593)— — 29,917 (593)
Industrial and public utilities24,042 (286)1,058 (66)25,100 (352)
Commercial mortgage-backed securities80,126 (1,565)6,212 (186)86,338 (1,751)
Residential mortgage-backed securities4,539 (24)— — 4,539 (24)
Other loan-backed securities20,153 (36)2,477 (23)22,630 (59)
Hybrid securities— — — — — — 
Total fixed maturities$200,252 $(2,841)$9,770 $(276)$210,022 $(3,117)


The unrealized losses on the Company’s available for sale securities as of September 30, 2022 and December 31, 2021 were primarily attributable to an increase in interest rates, which predominantly impacted fixed maturities acquired since the second quarter of 2020.

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The amortized cost and estimated fair value of fixed maturities as of September 30, 2022, by contractual maturity, are as follows:
Cost or Amortized CostFair Value
Available for sale:
Due in one year or less$31,666 $31,433 
Due after one year but before five years162,478 153,776 
Due after five years but before ten years96,488 86,189 
Due after ten years72,125 60,732 
Commercial mortgage-backed securities141,552 123,478 
Residential mortgage-backed securities25,769 24,171 
Other loan-backed securities51,857 50,339 
Total$581,935 $530,118 

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 consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021 are as follows:

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Fixed maturities:
Gains$21 $52 $134 $150 
Losses— — (1,194)(75)
Total fixed maturities21 52 (1,060)75 
Funds held investments:
Gains— 110 19 110 
Losses(12)(1)(29)(1)
Total funds held investments(12)109 (10)109 
Equity securities:
Equity method investments:
Gains— — 1,400 — 
Losses— (112)(19)(112)
Total equity securities— (112)1,381 (112)
Total net realized gains$9 $49 $311 $72 

Net investment income consists of the following for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Fixed maturities$2,628 $1,597 $6,189 $4,734 
Income on funds held investments953 585 2,395 1,783 
Equity securities421 5 1,031 41 
Unrealized losses on equity securities(1,101)— (4,542)— 
Interest earned on cash and short-term investments50 — 63 4 
Net investment income$2,951 $2,187 $5,136 $6,562 

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Net realized and unrealized gains (losses) on equity securities recognized during the three and nine months ended September 30, 2022 and 2021 are as follows:

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Equity securities:
Net realized gains (losses) on sales of equity securities$— $(112)$1,381 $(112)
Change in net unrealized gains (losses) of equity securities still held as of September 30, 2022 and 2021(1,101)(6)(4,542)11 
Net realized and unrealized gains (losses) on equity securities$(1,101)$(118)$(3,161)$(101)

Embedded derivatives

The Company enters into funds held contracts under reinsurance agreements, which create embedded derivatives that are measured at fair value. The embedded derivatives within the Company's funds held under reinsurance agreements relate to a total return swap on the underlying investments. These embedded derivatives had no impact on total operating, investing, and financing activities as presented on the Company’s condensed consolidated statements of cash flows during the nine months ended September 30, 2022 and 2021. Total funds held under reinsurance agreements include the following:

September 30, 2022December 31, 2021
Funds held under reinsurance agreements, at cost$221,405 $199,139 
Embedded derivatives, at fair value(16,577)271 
Total funds held under reinsurance agreements$204,828 $199,410 

Gains (losses) on embedded derivatives consists of the following for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Change in fair value of embedded derivatives$5,812 $573 $16,848 $3,761 
Effect of net investment income on funds held investments(953)(585)(2,395)(1,783)
Effect of realized losses (gains) on funds held investments12 (109)10 (109)
Total gains (losses) on embedded derivatives$4,871 $(121)$14,463 $1,869 


Note 5. Equity Method Investments

On January 3, 2020, the Company sold 15% of its previous 25% ownership in Trean Intermediaries ("TRI") for cash proceeds of $3,000, resulting in a remaining ownership interest of 10%. The Company sold all of its remaining ownership interest in TRI during the third quarter of 2021 for $1,888, resulting in a realized loss of $112, which was included in net realized gains (losses) on the consolidated statements of operations for the three and nine months ended September 30, 2021. The sale agreement included an earn-out that would increase the amount received based on TRI's future performance. The Company received an earn-out payment of $1,400, which was included in net realized gains (losses) on the consolidated statements of operations for the nine months ended September 30, 2022.

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The Company recorded $0 and $50 of revenue for the three months ended September 30, 2022 and 2021, respectively, and $100 and $150 of revenue for the nine months ended September 30, 2022 and 2021, respectively, for consulting services provided to TRI.


Note 6. Debt
Debt consisted of the following:
September 30, 2022December 31, 2021
Face ValueUnamortized Discount and Issuance CostsCarrying ValueFace ValueUnamortized Discount and Issuance CostsCarrying Value
Secured credit facility$29,700 $(449)$29,251 $30,938 $(576)$30,362 
Surplus notes50,000 (1,792)48,208 — — — 
Total debt$79,700 $(2,241)$77,459 $30,938 $(576)$30,362 

Secured Credit Facility

In July 2020, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") that, among other things, extended the Company's credit facility for a period of five years through May 26, 2025, and increased its term loan facility by $11,707, resulting in a total term loan debt amount of $33,000 and a revolving credit facility of $2,000 at the time of closing. The outstanding principal balance of the loan is to be repaid in quarterly installments, which escalate from $206 to $825. All equity securities of the subsidiaries of the Company (other than Benchmark Holding Company and its subsidiaries) have been pledged as collateral.

On May 6, 2022, the Company entered into a First Amendment to the Credit Agreement to, among other things, facilitate the approval of certain internal distributions among the Company and certain of its subsidiaries as part of the Company’s overall capital management strategy.

On September 28, 2022, the Company entered into a Second Amendment to the new Credit Agreement that, among other things, replaced LIBOR as the benchmark rate with Term SOFR (as defined in the Credit Agreement), reduced the applicable margin under the Credit Agreement on Eurodollar loans from 4.50% to 3.50% and on ABR loans from 3.50% to 2.50%, and converted all extant Eurodollar loans under the Credit Agreement to Term SOFR loans. The variable interest rate plus applicable margin was 6.76% and 4.64% as of September 30, 2022 and December 31, 2021, respectively.

During the three months ended September 30, 2022 and 2021, the Company recorded interest expense of $563 and $419, respectively, on its credit facility including amortization of debt issuance costs. During the nine months ended September 30, 2022 and 2021, the Company recorded interest expense of $1,438 and $1,271, respectively, on its credit facility including amortization of debt issuance costs.

The terms of the credit facility require the Company to maintain certain financial covenants and ratios. The Company was in compliance with all covenants and ratios as of September 30, 2022.

Interest Rate Cap Agreement

In September 2022, the Company entered into an interest rate cap agreement that became effective September 30, 2022, to hedge cash flows associated with interest rate fluctuations on its secured credit facility, with a termination date of May 31, 2024 ("Interest Rate Cap Agreement"). The Interest Rate Cap Agreement has a notional amount of $29,700 that effectively converted the outstanding balance of the secured credit facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month SOFR plus the applicable margin (as provided by the secured credit facility) to a one-month SOFR interest rate, capped at 5.00%, plus the applicable margin. The notional amount of the Interest Rate Cap Agreement decreases quarterly in proportion to the quarterly principal payments on the secured credit facility. The Interest Rate Cap Agreement is designated as a cash flow hedge and the change in fair value is recorded in accumulated other comprehensive income and is subsequently reclassified to interest expense in the period when
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the hedged forecasted interest payments affect earnings. The Company paid a fixed amount of $173 for the Interest Rate Cap Agreement.

Surplus Notes

On August 24, 2022, Benchmark, a subsidiary of the Company, issued $50,000 in aggregate principal amount of Benchmark’s 6.75% surplus notes due 2042 (the “Surplus Notes”) in a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). In connection with the issuance of the Surplus Notes, Benchmark entered into a fiscal agency agreement, dated as of August 24, 2022 (the “Fiscal Agency Agreement”), with The Bank of New York Mellon, as fiscal agent, paying agent, registrar and transfer agent, providing for the terms of the Surplus Notes.

The Surplus Notes are unsecured, subordinated debt obligations of the Company and are reflected as debt on the condensed consolidated balance sheets of the Company. All principal and interest payments on the Surplus Notes are subject to prior approval by the Commissioner of the Kansas Insurance Department. Interest on the Surplus Notes accrues at the rate of 6.75% per year, and is payable quarterly in arrears on February 24, May 24, August 24 and November 24 of each year, commencing on November 24, 2022.

The Surplus Notes may be redeemed after 10 years, in full or in part, for 100% of the principal amount plus accrued but unpaid interest, and the Company may at any time repurchase Surplus Notes from the underlying holders thereof on the open market, after which such Surplus Notes will be cancelled and not re-issued. In addition, the Surplus Notes may be redeemed before August 24, 2032 upon the occurrence of certain changes in applicable tax laws or regulations that would require the Company to pay additional amounts necessary to reimburse the noteholders for new or changed withholding or deduction obligations.

In addition, pursuant to the Fiscal Agency Agreement, the Company made certain customary representations and warranties and made certain customary covenants. The covenants, among other things, (i) prevent Benchmark from incurring indebtedness exceeding 35% of its total surplus (as set forth in its statutory financial statements, and including the Surplus Notes), and restrict Benchmark’s ability to pay dividends to the Company if such ratio were to exceed 35% or would exceed 35% as a result of such payment; (ii) limit Benchmark’s ability to engage in a merger, sale or consolidation and require it to preserve its corporate existence; and (iii) require it to provide certain financial information and insurance regulatory filings to the noteholders. All of these covenants are subject to a number of important exceptions, limitations and qualifications. Notwithstanding the foregoing, noteholders do not have the right to declare the Surplus Notes to immediately mature or otherwise become immediately payable as a result of any breach of Benchmark’s covenants or under any other circumstances. Benchmark’s obligations under the Surplus Notes will only be accelerated in the event that any state or federal agency were to obtain an order or grant approval for the rehabilitation, liquidation, conservation or dissolution of Benchmark.

During the three and nine months ended September 30, 2022, the Company recorded interest expense of $368 on its Surplus Notes including amortization of debt issuance costs.


Note 7. Revenue from Contracts with Customers
Revenue from contracts with customers, included in other revenue, includes brokerage, management, third-party administrative, and consulting and other fee-based revenue. The following table presents the revenues recognized from contracts with customers included in the condensed consolidated statements of operations.

Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Brokerage$1,581 $1,989 $5,396 $6,214 
Managing general agent fees83 88 251 407 
Third-party administrator fees266 437 838 1,191 
Consulting and other fee-based revenue210 285 660 871 
Total revenue from contracts with customers$2,140 $2,799 $7,145 $8,683 

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The Company did not have any contract liabilities as of September 30, 2022 or December 31, 2021. The following table provides information related to the contract assets from contracts with customers. Contract assets are included within other assets on the condensed consolidated balance sheets.
September 30, 2022December 31, 2021
Contract assets$4,878 $3,353 


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 21.0% for the three and nine months ended months ended September 30, 2022.

The Company’s effective tax rate was 24.2% and 22.0% for the three and nine months ended September 30, 2021, respectively, which differed from the statutory rate primarily due the impact of recording the Company's 2020 tax return accrual to return true-up in the third quarter of 2021.


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 September 30,Nine Months Ended September 30,
2022202120222021
Unpaid losses and LAE reserves at beginning of period$577,686 $502,560 $544,320 $457,817 
Less losses ceded through reinsurance(379,274)(358,601)(369,008)(335,655)
Net unpaid losses and LAE at beginning of period198,412 143,959 175,312 122,162 
Incurred losses and LAE related to:
Current period45,673 32,947 126,545 88,032 
Prior period(26)(818)(818)(1,297)
Total incurred losses and LAE45,647 32,129 125,727 86,735 
Paid losses and LAE, net of reinsurance, related to:
Current period19,570 12,638 41,268 25,111 
Prior period12,859 7,092 48,141 27,428 
Total paid losses and LAE32,429 19,730 89,409 52,539 
Net unpaid losses and LAE at end of period211,630 156,358 211,630 156,358 
Plus losses ceded through reinsurance367,121 354,434 367,121 354,434 
Unpaid losses and LAE reserves at end of period$578,751 $510,792 $578,751 $510,792 

As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and LAE decreased by approximately $26 and $818 for the three and nine months ended September 30, 2022, respectively, and $818 and $1,297 for the three and nine months ended September 30, 2021, respectively.


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:

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Three Months Ended September 30,
20222021
GrossAssumedCededNetGrossAssumedCededNet
Written premiums$160,505 $1,678 $(93,790)$68,393 $175,516 $2,108 $(114,374)$63,250 
Earned premiums158,643 2,479 (89,741)71,381 146,170 2,976 (97,191)51,955 

Nine Months Ended September 30,
20222021
GrossAssumedCededNetGrossAssumedCededNet
Written premiums$470,391 $7,384 $(265,234)$212,541 $473,463 $7,442 $(305,164)$175,741 
Earned premiums469,403 7,400 (275,235)201,568 408,936 7,133 (275,037)141,032 


Note 11. Leases
The Company's leases consist of operating leases for office space and equipment. The Company determines if an arrangement is a lease at its inception. Leases with an initial term of twelve 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 the commencement date in determining the present value of lease payments. Some of the Company's leases include options to extend the term, which are only included in the lease liability and right-of-use asset calculation when it is reasonably certain the Company will exercise an option. The Company's leases have remaining terms ranging from one month to 57 months, some of which have options to extend the lease for up to an additional 60 months. As of September 30, 2022, 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 September 30, 2022 was $615, inclusive of $17 in variable lease expense. Total lease expense for the three months ended September 30, 2021 was $626, inclusive of $29 in variable lease expense. The Company also sublets some of its leased office space and recorded $27 and $33 of sublease income for the three months ended September 30, 2022 and 2021, respectively, which is included in other income on the condensed consolidated statements of operations.

Total lease expense for the nine months ended September 30, 2022 was $1,855, inclusive of $68 in variable lease expense. Total lease expense for the nine months ended September 30, 2021 was $1,831, inclusive of $56 in variable lease expense. The Company also sublets some of its leased office space and recorded $70 and $74 of sublease income for the nine months ended September 30, 2022 and 2021, respectively, which is included in other income on the condensed consolidated statement of operations.

Supplemental balance sheet information, the weighted average remaining lease term and weighted average discount rate related to leases were as follows:

September 30, 2022December 31, 2021
Right of use asset$3,292 $4,530 
Lease liability$3,629 $4,976 
Weighted average remaining lease term1.95 years2.42 years
Weighted average discount rate6.04 %6.33 %

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Future maturities of lease liabilities as of September 30, 2022 are as follows:

Operating Leases
2022$621 
20231,940 
20241,064 
2025164 
202644 
Thereafter2 
Total lease payments
3,835 
Less: imputed interest(206)
Total lease liabilities
$3,629 


Note 12. Equity
Common Stock

The Company currently has authorized 600,000,000 shares of common stock with a par value of $0.01. As of September 30, 2022 and December 31, 2021, there were 51,220,485 and 51,176,887 shares of common stock issued and outstanding, respectively.


Note 13. Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares outstanding during reported periods. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during reported periods and is calculated using the treasury stock method.

The following table presents the calculation of basic and diluted EPS of common stock:

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net income — basic and diluted$7,574 $6,518 $25,405 $18,086 
Weighted average number of shares outstanding — basic51,216,869 51,171,416 51,197,296 51,157,726 
Effect of dilutive securities:
Restricted stock units136 — 186 14,876 
Dilutive shares136 — 186 14,876 
Weighted average number of shares outstanding — diluted51,217,005 51,171,416 51,197,482 51,172,602 
Earnings per share:
Basic$0.15 $0.13 $0.50 $0.35 
Diluted$0.15 $0.13 $0.50 $0.35 

At September 30, 2022 and September 30, 2021, there were restricted stock units and stock options outstanding totaling 561,537 and 396,044, respectively, excluded from the computation of diluted weighted-average shares outstanding because their inclusion would have been anti-dilutive.

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Note 14. 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 September 30,Nine Months Ended September 30,
2022202120222021
Balance at beginning of period$(25,789)$8,470 $4,384 $13,426 
Other comprehensive loss, net of tax:
Unrealized investment losses:
Unrealized investment losses arising during the period(19,059)(2,419)(58,333)(8,670)
Income tax benefit(3,996)(508)(12,243)(1,821)
Unrealized investment losses, net of tax(15,063)(1,911)(46,090)(6,849)
Less reclassification adjustments to:
Net realized investment gains (losses) included in net realized gains (losses)21 49 (1,060)72 
Income tax expense (benefit)4 10 (223)15 
Total reclassifications included in net income, net of tax17 39 (837)57 
Other comprehensive loss(15,080)(1,950)(45,253)(6,906)
Balance at end of period$(40,869)$6,520 $(40,869)$6,520 


Note 15. Stock Compensation
As of September 30, 2022, the Company has one incentive plan, the Trean Insurance Group, Inc. 2020 Omnibus Incentive Plan (the "2020 Omnibus Plan"). The purposes of the 2020 Omnibus Plan are to provide additional incentive to selected officers, employees, non-employee directors, independent contractors, and consultants of the Company whose contributions are essential to the growth and success of the business of the Company and its affiliates, to strengthen the commitment and motivate such individuals to faithfully and diligently perform their responsibilities and to attract competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company and its affiliates. The 2020 Omnibus Plan is administered by the Compensation, Nominating, and Corporate Governance Committee of the Company's board of directors and provides for the issuance of up to 5,058,085 shares of the Company's common stock granted in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses, other stock awards, or any combination of the foregoing.

Stock Options

Stock compensation expense related to stock option awards was $53 and $49 for the three months ended September 30, 2022 and 2021, respectively, and $149 and $118 for the nine months ended September 30, 2022 and 2021, respectively. Actual forfeitures are recognized as they occur.

Employee stock option awards granted set forth, among other things, the option exercise price, the option term, provisions regarding option exercisability, and whether the option is intended to be an incentive stock option ("ISO") or a nonqualified stock option ("NQ"). Stock options may be granted to employees at such exercise prices as the Company’s board of directors may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. Employee options vest one third annually over a period of three years and have contractual terms of ten years from the date of grant.

The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table. The Company’s expected volatility for the period was based on a weighted average expected volatility of an industry peer group of insurance companies of similar size, life cycle, and lines of business. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company’s stock option grants qualify as plain vanilla options and as such the Company uses the simplified method in estimating its expected option term as the Company does not have sufficient historical exercise data to
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provide a reasonable basis upon which to estimate expected term due to the limited period of time its common shares have been publicly traded. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.

Fiscal 2022Fiscal 2021
Expected volatility29.8%29.8%
Expected term6 years6 years
Risk-free interest rate
1.92%
1.32%

A summary of the status of the Company's stock option activity as of September 30, 2022 and changes during the nine-month period then ended are as follows:
Stock OptionsWeighted Average Exercise Price Per ShareAggregate Intrinsic ValueWeighted Average Remaining Contract Term
Balance outstanding, December 31, 2021120,187 $16.06 
Granted64,694 $7.04 
Forfeited or cancelled(20,158)$14.76 
Balance outstanding, September 30, 2022164,723 $12.68 $— 8.59 years
Balance vested and exercisable, September 30, 202253,956 $15.68 $— 7.98 years

The weighted average grant-date fair value of options granted in the nine months ended September 30, 2022 and 2021 was $2.30 and $5.49, respectively. As of September 30, 2022, total unrecognized compensation cost related to stock options was $304 and is expected to be recognized over a weighted average period of approximately 1.0 years.

Restricted Stock Units

Compensation expense relating to restricted stock unit grants was $407 and $419 for the three months ended September 30, 2022 and 2021, respectively, and $870 and $980 for the nine months ended September 30, 2022 and 2021, respectively. Actual forfeitures are recognized as they occur. As of September 30, 2022, there was $2,453 of total unrecognized compensation cost related to non-vested restricted stock unit grants, which is expected to be recognized over a weighted average life of 1.7 years. The total fair value of restricted stock units vested during the three and nine months ended September 30, 2022 was $113 and $257, respectively, and $342 and $478 during the three and nine months ended September 30, 2021.

The Company has granted time-based restricted stock units ("RSUs"), performance stock units ("PSUs"), and market-based stock units ("MSUs") to certain key employees as part of the Company's long-term incentive program. The estimated fair value of restricted stock units is based on the grant date closing price of the Company's common stock for time-based and performance-based vesting awards. A Monte Carlo valuation model is used to estimate the fair value for market-based vesting awards. RSUs generally vest in three equal annual installments beginning one year from the grant date and are amortized as compensation expense over the three-year vesting period. The Company has also granted time-based restricted stock units to non-employee directors as part of the Company's annual director compensation program. Each time-based restricted stock grant to non-employee directors vests on the day immediately preceding the next annual meeting of stockholders following the date of grant. The grants are amortized as director compensation expense over the vesting period. The Company recognizes compensation expense on PSUs ratably over the requisite performance period of the award and to the extent management views the performance goal attainment as probable. The Company recognizes compensation expense on MSUs ratably over the requisite performance period of the award.

For the 2022 and 2021 fiscal year, the Company granted PSUs to certain key employees pursuant to the Company's 2020 Omnibus Plan. The number of shares earned is based on the Company’s achievement of pre-established target threshold goals for total gross written premiums over a three-year performance measurement period. The performance goals allow for a
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payout ranging from 0% to 200% of the target award. If performance satisfies minimum requirements to result in shares of Company common stock being awarded, the number of shares will be determined between 50% and 200% of target thresholds, as defined in the applicable award agreements. Any earned PSU will vest if the employee’s service has been continuous through the vesting date. Any PSU not earned because of failure to achieve the minimum performance goal at the end of the performance period will be immediately forfeited. The grant date fair value of the PSUs was determined based on the grant date closing price of the Company’s stock.

For the 2022 and 2021 fiscal year, the Company granted MSUs to certain key employees pursuant to the Company's 2020 Omnibus Plan. The number of restricted stock units earned is based on the Company’s cumulative total shareholder return ("TSR"), as defined in the applicable award agreement, over a three-year performance measurement period. If TSR satisfies minimum requirements to result in shares being awarded, the number of shares will be determined between 50% and 200% shown in the table below. Any MSU not earned because of failure to achieve the minimum performance goal at the end of the performance period will be immediately forfeited. Grant date fair values were determined using a Monte Carlo valuation model based on the following assumptions:

Fiscal 2022Fiscal 2021
Total grant date fair value$391 $845 
Total grant date fair value per share$6.04 $13.92 
Expected volatility40.0 %35.0 %
Weighted average expected life2.81 years2.77 years
Risk-free interest rate1.79 %0.27 %

The percent of the target MSU that will be earned based on the Company’s TSR is as follows:

Cumulative TSR %
Fiscal 2022Fiscal 2021Percent of Units Vested
Below 29.2%
Below 25.1%
0%
29.2%25.1%50%
52.1%47.2%100%
74.9% and above
69.3% and above
200%

A summary of the status of the Company’s non-vested restricted stock unit activity as of September 30, 2022 and changes during the nine-month period then ended is as follows:

RSUsMSUsPSUsTotal
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Non-vested outstanding, December 31, 2021117,109 $15.53 50,861 $13.92 101,748 $17.50 269,718 $15.97 
Granted97,808 $6.67 64,709 $6.04 64,693 $7.04 227,210 $6.60 
Vested(48,236)$15.05 — $— — $— (48,236)$15.05 
Forfeited or cancelled(17,129)$13.43 (9,854)$11.67 (16,895)$15.76 (43,878)$13.93 
Non-vested outstanding, September 30, 2022149,552 $10.13 105,716 $9.31 149,546 $13.17 404,814 $11.04 


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations for the three and nine months ended September 30, 2022 is qualified by reference to and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included herein and the audited consolidated financial statements and notes included in our 2021 Form 10-K. The discussion and analysis below are based on comparisons between our historical financial data for different periods and include certain forward-looking statements about our business, operations, and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors described in Item 1A — "Risk Factors" in our 2021 Form 10-K. Our actual results may differ materially from those expressed in, or implied by, those forward-looking statements. See "Forward-Looking Statements."

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

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial performance or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "would," "potential," or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. 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 involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements if the underlying assumptions prove to be incorrect or as a result of risks, uncertainties, and other factors, including the impact of the COVID-19 pandemic, inflationary pressures and other macroeconomic factors on the business and operations of the Company, our program partners and other business relations. Other factors that may cause such differences include the risks described in the Company’s filings with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These forward-looking statements speak only as of the date on which they are made. Except as required by applicable securities laws, the Company disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, changes in assumptions or otherwise. Investors are cautioned not to place undue reliance on the forward-looking statements contained in this press release or in other filings and public statements of the Company.

The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and assumptions, which in many cases are beyond our control, as described in "Item 1A — Risk Factors" in our 2021 Form 10-K and in this Quarterly Report on Form 10-Q. Our statements reflecting these risks and uncertainties are not exhaustive, and other risks and uncertainties may currently exist or may arise in the future that could have material effects on our business, operations, and financial condition. We cannot assure you that the results, events, and circumstances reflected in the forward looking statements reflected in this Quarterly Report on Form 10-Q and our other public statements and securities filings will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward looking statements.

These forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation, and do not intend, to update any forward looking statements after the date of this Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by applicable securities laws or the rules and regulations of the Securities and Exchange Commission ("SEC").

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Table of Contents
Overview

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

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

Coronavirus ("COVID-19") Impact

We are monitoring the ongoing COVID-19 pandemic on our business, including how it may impact our premium revenue, loss experience and loss expense, liquidity, and our regulatory capital and surplus, and operations. Significant progress has been made to combat the outbreak of COVID-19; however, the global pandemic, including resulting inflationary pressures and other macroeconomic factors on the business and operations of the Company, has adversely impacted both the domestic and foreign economies and could still have a materially adverse impact on the Company.

Workforce Operations

Following the emergence of the COVID-19 pandemic in early 2020, we took a number of actions to protect the health of the public and our employees and to comply with directives and advice of governmental authorities and public health experts. We responded by developing a Preparedness Plan that outlined both corporate-wide and location-specific modifications to working conditions and operations in our offices.

We continue to navigate through these challenges with a sharp focus on and goal of safeguarding our employees, helping our customers and managing impacts on our business. Despite the unprecedented environment, our teams are executing at a high level and we are advancing our strategy.

Premium Revenue, Claims and Losses

We have not experienced a material impact to our premium revenue as a result of the COVID-19 pandemic. During the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, gross written premiums decreased by (0.7)% and net earned premiums increased by 42.9%. The decrease in gross written premiums was driven by the Company’s continued focus on maintaining underwriting discipline in an unusually competitive environment. The increase in net earned premiums was primarily driven by increased retention in our existing Program Partner business. Because a majority of our gross written premiums are related to workers’ compensation insurance, revenue trends could be impacted in future periods if the COVID-19 pandemic were to continue or significantly get worse. However, a significant portion of our workers’ compensation premiums are pay-as-you-go programs, which reduces our downside risk from future premium audits or refunds.

We also have not experienced a material impact in our reported claims or incurred losses in the first nine months of 2022 as a specific result of the COVID-19 pandemic.

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Table of Contents
Investment Portfolio

With respect to our investment portfolio, we seek to hold a high-quality, diversified portfolio of investments, which are primarily in fixed maturity and available-for-sale investments and, as such, our investment portfolio has limited exposure to equity market volatility. For the nine months ended September 30, 2022, we experienced a decrease of $58,333 in the fair value of our fixed maturities investment portfolio. The decline in the fair value of our fixed maturity investments is primarily attributable to the recent rise in interest rates driven primarily by changing conditions in the financial markets as compared to the comparatively lower rates that prevailed during the initial part of the COVID-19 pandemic in 2020 and 2021, rather than underlying credit risk within our investment portfolio. If there were to be continued equity and debt financial market volatility, which in turn could create mark-to-market investment valuation decreases, we expect there could be additional or increased unrealized losses recorded or realized losses, if sold, in future reporting periods. However, given the conservative nature of our investment portfolio, we expect that any adverse impact on the value of our investment portfolio, as it relates to COVID-19, will be temporary, and we do not expect a long-term negative impact on our financial condition, results of operations or cash flows.

Other Concerns

Adverse events such as changes in the overall public health environment, changing infection patterns and new variants of COVID-19, health-related concerns about working in our offices, restrictions on travel, the potential impact on our business partners and customers, and other matters affecting our general work and business environment could harm our business and delay the implementation of our business strategy. We cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in the future.

Significant Components of Results of Operations

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

•addition and retention of Program Partners;
•new business submissions to our Program Partners;
•binding of new business submissions into policies;
•renewals of existing policies; and
•average size and premium rate of bound policies.

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

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

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

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

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

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

Loss and loss adjustment expenses (LAE): Losses and LAE are net of reinsurance and include claims paid, estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending, and servicing claims. In general, our losses and LAE are affected by:

•frequency of claims associated with the particular types of insurance contracts that we write;
•trends in the average size of losses incurred on a particular type of business;
•mix of business written by us;
•changes in the legal or regulatory environment related to the business we write;
•trends in legal defense costs;
•wage inflation; and
•inflation in medical costs.

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

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

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

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

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

Interest expense: Interest expense consists primarily of interest paid on our Secured Credit Facility and Surplus Notes (See "Financial Condition, Liquidity and capital resources — Debt and Credit Agreements").
Other income: Other income consists primarily of sublease revenue and other miscellaneous income items.


Key Metrics

We discuss certain key financial and operating metrics, described below, which provide useful information about our business and the operational factors underlying our financial performance.

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Table of Contents
Underwriting income is a non-GAAP financial measure defined as income before taxes excluding net investment income, investment revaluation gains, net realized gains or losses, intangible asset amortization, noncash stock compensation, noncash changes in fair value of embedded derivatives, interest expense, other revenue, and other income and expenses. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of underwriting income to income before taxes in accordance with GAAP.

Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of certain items, including noncash intangible asset amortization and stock compensation, noncash changes in fair value of embedded derivatives, other expenses, and gains or losses that we believe do not reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results across periods. See "Reconciliation of Non-GAAP Financial Measures" for a reconciliation of adjusted net income to net income in accordance with GAAP.

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

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

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

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

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

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

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

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

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Table of Contents
Results of Operations

Consolidated Results of Operations for the Three Months Ended September 30, 2022 Compared to September 30, 2021

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021:

Three Months Ended September 30,Change
Percentage Change (1)
(in thousands, except for percentages)20222021
Revenues
Gross written premiums$162,183 $177,624 $(15,441)(8.7)%
Increase in gross unearned premiums(1,061)(28,478)27,417 (96.3)%
Gross earned premiums161,122 149,146 11,976 8.0%
Ceded earned premiums(89,741)(97,191)7,450 (7.7)%
Net earned premiums71,381 51,955 19,426 37.4%
Net investment income2,951 2,187 764 34.9%
Net realized gains9 49 (40)(81.6)%
Other revenue2,140 2,799 (659)(23.5)%
Total revenue76,481 56,990 19,491 34.2%
Expenses
Losses and loss adjustment expenses45,647 32,129 13,518 42.1%
General and administrative expenses23,256 13,788 9,468 68.7%
Intangible asset amortization1,499 1,499 — —%
Noncash stock compensation460 468 (8)(1.7)%
Interest expense931 419 512 122.2%
Total expenses71,793 48,303 23,490 48.6%
Gains (losses) on embedded derivatives4,871 (121)4,992 NM
Other income29 35 (6)(17.1)%
Income before taxes9,588 8,601 987 11.5%
Income tax expense2,014 2,083 (69)(3.3)%
Net income$7,574 $6,518 $1,056 16.2%
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.
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Three Months Ended September 30,
(in thousands, except for percentages)20222021
Key metrics:
Underwriting income(1)
$2,478 $6,038 
Adjusted net income(1)
$5,455 $7,678 
Loss ratio63.9 %61.8 %
Expense ratio32.6 %26.5 %
Combined ratio96.5 %88.3 %
Return on equity7.5 %6.2 %
Adjusted return on equity(1)
5.4 %7.3 %
Return on tangible equity(1)
15.5 %12.7 %
Adjusted return on tangible equity(1)
11.2 %15.0 %
(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.

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

Three Months Ended September 30,ChangePercentage Change
(in thousands, except for percentages)20222021
Revenues
Gross written premiums$162,183 $177,624 $(15,441)(8.7)%
Increase in gross unearned premiums(1,061)(28,478)27,417 (96.3)%
Gross earned premiums161,122 149,146 11,976 8.0%
Ceded earned premiums(89,741)(97,191)7,450 (7.7)%
Net earned premiums$71,381 $51,955 $19,426 37.4%

Gross written premiums: Gross written premiums decreased $15,441, or 8.7%, to $162,183 for the three months ended September 30, 2022, compared to $177,624 for the three months ended September 30, 2021. The decrease was primarily driven by the Company’s termination of an underwriting partner in a higher-risk segment at the end of the third quarter of 2021 as the Company focuses on maintaining underwriting discipline in a highly competitive environment.

Workers' compensation represented 54.9% of our gross written premiums for the three months ended September 30, 2022, compared to 54.3% for the three months ended September 30, 2021. For the three months ended September 30, 2022, gross written premiums for workers' compensation decreased by $7,389, or 7.7%, compared to the same period in 2021, reflecting the intentional decrease in California business that resulted from the Company's measures undertaken to exit certain unfavorable risks in 2021 in keeping with our overall strategy to prioritize underwriting discipline, coupled with a recent highly competitive market.

All other non-workers' compensation liability represented 45.1% of our gross written premiums for the three months ended September 30, 2022, compared to 45.7% for the three months ended September 30, 2021. For the three months ended September 30, 2022, gross written premiums for all other non-workers' compensation liability decreased $8,052, or 9.9%, compared to the same period in 2021. The decrease is due primarily to a decline in our other liability line of business, partially offset by growth in our accident & health, commercial and commercial auto lines, a result of continued line of business diversification.

Gross earned premiums: Gross earned premiums increased $11,976, or 8.0%, to $161,122 for the three months ended September 30, 2022, compared to $149,146 for the three months ended September 30, 2021. The increase in gross earned premiums reflects the change in the increase in gross unearned premiums of $27,417 net of a decrease in gross written
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premiums of $15,441. Gross earned premiums as a percentage of gross written premiums increased to 99.3% for the three months ended September 30, 2022, compared to 84.0% for the three months ended September 30, 2021.

Ceded earned premiums: Ceded earned premiums decreased $7,450, or 7.7%, to $89,741 for the three months ended September 30, 2022, compared to $97,191 for the three months ended September 30, 2021. The decrease in ceded earned premiums is primarily driven by an increase in our retention, partially offset by the growth in gross earned premiums as described above. Ceded earned premiums as a percentage of gross earned premiums decreased to 55.7% for the three months ended September 30, 2022, compared to 65.2% for the three months ended September 30, 2021, reflecting the Company's strategic decision to retain more gross written premiums.

Net earned premiums: Net earned premiums increased $19,426, or 37.4%, to $71,381 for the three months ended September 30, 2022, compared to $51,955 for the three months ended September 30, 2021. The increase is primarily due to the growth in gross earned premiums as described above and the Company's strategic decision to retain more gross written premiums.

Net investment income (loss): Net investment income increased $764, or 34.9%, to $2,951 for the three months ended September 30, 2022, compared to $2,187 for the three months ended September 30, 2021. The increase reflects the investment of the surplus notes proceeds and the reinvestment of funds from lower yielding maturities into higher yielding investments due to higher interest rates. The increase was partially offset by the unrealized losses on equity securities of $1,101. During the first quarter of 2022, we purchased high-yield equity securities, which we believe will improve the yield on our portfolio.

Net realized gains: Net realized gains were $9 for the three months ended September 30, 2022, compared to $49 for the three months ended September 30, 2021.

Other revenue: Other revenue decreased $659, or 23.5%, to $2,140 for the three months ended September 30, 2022, compared to $2,799 for the three months ended September 30, 2021. The decrease is primarily driven by a decrease in brokerage revenue of $408 primarily due to lower placement fees reflecting the Company's increase in retention year over year.

Losses and loss adjustment expenses: Losses and LAE increased $13,518, or 42.1%, to $45,647 for the three months ended September 30, 2022, compared to $32,129 for the three months ended September 30, 2021. The increase is primarily attributable to the growth in earned premiums and increased retention during the three months ended September 30, 2022. This resulted in a loss ratio of 63.9% for the three months ended September 30, 2022 compared to 61.8% for the three months ended September 30, 2021.

General and administrative expenses: General and administrative expenses increased $9,468, or 68.7%, to $23,256 for the three months ended September 30, 2022, compared to $13,788 for the three months ended September 30, 2021. The expense ratio was 32.6% for the three months ended September 30, 2022, compared to 26.5% for the three months ended September 30, 2021.

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

Three Months Ended September 30,
20222021Change
Direct commissions$28,650 $27,594 $1,056 
Ceding commissions(23,916)(31,655)7,739 
Net commissions4,734 (4,061)8,795 
Insurance-related expenses6,038 5,371 667 
General and administrative operating expenses12,484 12,478 6 
Total general and administrative expenses$23,256 $13,788 $9,468 
General and administrative expenses — % of gross written premiums7.7 %7.0 %
Retention rate (1)
44.3 %34.8 %
Direct commission rate (2)
17.8 %18.5 %
Ceding commission rate (3)
26.7 %32.6 %
(1) Net earned premium as a percentage of gross earned premiums.
(2) Direct commissions as a percentage of gross earned premiums.
(3) Ceding commissions as a percentage of ceded earned premiums.

Direct commissions increased $1,056 primarily due to an increase in gross earned premiums. Ceding commissions decreased $7,739 primarily due to an increase in retention. Insurance-related expenses increased $667 primarily as a result of an increase in gross earned premiums. General and administrative operating expenses increased $6.

Intangible asset amortization: Intangible asset amortization was $1,499 for the three months ended September 30, 2022, compared to $1,499 for the three months ended September 30, 2021.

Noncash stock compensation: Noncash stock compensation was $460 for the three months ended September 30, 2022, compared with $468 for the three months ended September 30, 2021. Expenses incurred during both periods relate to the fair value of restricted stock units and stock options granted under the Company's 2020 Omnibus Plan recognized over the requisite service periods.

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

Three Months Ended September 30,
20222021Change
Change in fair value of embedded derivatives$5,812 $573 $5,239 
Effect of net investment income on funds held investments(953)(585)(368)
Effect of realized losses (gains) on funds held investments12 (109)121 
Total gains (losses) on embedded derivatives$4,871 $(121)$4,992 

Gains on embedded derivatives increased $4,992 to $4,871 for the three months ended September 30, 2022, compared to a loss of $121 for the three months ended September 30, 2021. The gain reflected an increase in the fair value of embedded derivatives of $5,239, the effect of investment income on funds held investments of $368 and the effect of realized losses on funds held investments of $121. The increase in fair value of the embedded derivatives resulted primarily from the increase in interest rates between periods, which has reduced the fair value of the underlying funds held under reinsurance agreements.

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Income tax expense: Income tax expense was $2,014 for the three months ended September 30, 2022, which resulted in an effective tax rate of 21.0%. The effective tax rate equaled the statutory rate of 21% since the impact of state taxes were offset by the impact of tax-exempt municipal income on the Company's investments. For the three months ended September 30, 2021, income tax expense was $2,083, which resulted in an effective tax rate of 24.2%. The increase in the effective tax rate from the statutory rate of 21% is due primarily to the impact of recording our 2020 tax return accrual to return true-up in the third quarter of 2021.

Owned MGAs and Program Partner Premiums:

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

Three Months Ended September 30, 2022
Owned MGAsProgram PartnerTotal
Gross written premiums$58,567 $103,616 $162,183 
Increase in gross unearned premiums2,627 (3,688)(1,061)
    Gross earned premiums61,194 99,928 161,122 
Ceded earned premiums(20,454)(69,287)(89,741)
    Net earned premiums$40,740 $30,641 $71,381 

We utilize both quota share and catastrophe excess of loss ("XOL") contracts in our reinsurance strategy for our Owned MGAs and Program Partners. For the three months ended September 30, 2022, the Company retained 66.6% of gross earned premiums for Owned MGAs, compared to 30.7% for Program Partners.

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Consolidated Results of Operations for the Nine Months Ended September 30, 2022 Compared to September 30, 2021

The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,Change
Percentage Change (1)
(in thousands, except for percentages)20222021
Revenues
Gross written premiums$477,775 $480,905 $(3,130)(0.7)%
Increase in gross unearned premiums(972)(64,836)63,864 (98.5)%
Gross earned premiums476,803 416,069 60,734 14.6 %
Ceded earned premiums(275,235)(275,037)(198)0.1 %
Net earned premiums201,568 141,032 60,536 42.9 %
Net investment income5,136 6,562 (1,426)(21.7)%
Net realized gains311 72 239 NM
Other revenue7,145 8,683 (1,538)(17.7)%
Total revenue214,160 156,349 57,811 37.0 %
Expenses
Losses and loss adjustment expenses125,727 86,735 38,992 45.0 %
General and administrative expenses63,235 40,946 22,289 54.4 %
Other expenses268 845 (577)(68.3)%
Intangible asset amortization4,498 4,326 172 4.0 %
Noncash stock compensation1,019 1,098 (79)(7.2)%
Interest expense1,806 1,271 535 42.1 %
Total expenses196,553 135,221 61,332 45.4 %
Gains on embedded derivatives14,463 1,869 12,594 NM
Other income76 191 (115)(60.2)%
Income before taxes32,146 23,188 8,958 38.6 %
Income tax expense6,741 5,102 1,639 32.1 %
Net income$25,405 $18,086 $7,319 40.5 %
(1) The Company defines increases or decreases greater than 200% as "NM" or not meaningful.





36
Nine Months Ended September 30,
(in thousands, except for percentages)20222021
Key metrics:
Underwriting income(1)
$12,606 $13,351 
Adjusted net income(1)
$19,305 $20,103 
Loss ratio62.4 %61.5 %
Expense ratio31.4 %29.0 %
Combined ratio93.8 %90.5 %
Return on equity8.2 %5.8 %
Adjusted return on equity(1)
6.2 %6.4 %
Return on tangible equity(1)
17.0 %12.1 %
Adjusted return on tangible equity(1)
12.9 %13.4 %
(1) This metric represents a non-GAAP financial measure. See 'Reconciliation of Non-GAAP Financial Measures' for a reconciliation of this metric to the applicable GAAP metric.

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

Nine Months Ended September 30,ChangePercentage Change
(in thousands, except for percentages)20222021
Revenues
Gross written premiums$477,775 $480,905 $(3,130)(0.7)%
Increase in gross unearned premiums(972)(64,836)63,864 (98.5)%
Gross earned premiums476,803 416,069 60,734 14.6 %
Ceded earned premiums(275,235)(275,037)(198)0.1 %
Net earned premiums$201,568 $141,032 $60,536 42.9 %

Gross written premiums: Gross written premiums decreased $3,130, or 0.7%, to $477,775 for the nine months ended September 30, 2022, compared to $480,905 for the nine months ended September 30, 2021. The decrease was primarily driven by the Company’s termination of an underwriting partner in a higher-risk segment at the end of the third quarter of 2021 as the Company focuses on maintaining underwriting discipline in a highly competitive environment.

Workers' compensation represented 58.3% of our gross written premiums for the nine months ended September 30, 2022, compared to 60.2% for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, gross written premiums for workers' compensation decreased by $11,222, or 3.9%, compared to the same period in 2021, reflecting the intentional decrease in California business that resulted from the Company's measures undertaken to reduce certain unfavorable risks in 2021 in keeping with our overall strategy to prioritize underwriting discipline, coupled with a recent highly competitive market.

All other non-workers' compensation liability represented 41.7% of our gross written premiums for the nine months ended September 30, 2022, compared to 39.8% for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, gross written premiums for all other non-workers' compensation liability increased $8,092, or 4.2%, compared to the same period in 2021. The increase is due primarily to growth in our accident & health, commercial, and commercial auto lines, partially offset by decreases in our other liability and homeowners lines, which is a result of continued line of business diversification.

Gross earned premiums: Gross earned premiums increased $60,734, or 14.6%, to $476,803 for the nine months ended September 30, 2022, compared to $416,069 for the nine months ended September 30, 2021. The increase in gross earned premiums reflects the change in the increase in gross unearned premiums of $63,864, slightly offset by a decrease in gross
37
written premiums of $3,130. Gross earned premiums as a percentage of gross written premiums increased to 99.8% for the nine months ended September 30, 2022, compared to 86.5% for the nine months ended September 30, 2021.

Ceded earned premiums: Ceded earned premiums increased $198, or 0.1%, to $275,235 for the nine months ended September 30, 2022, compared to $275,037 for the nine months ended September 30, 2021. The slight increase in ceded earned premiums is primarily driven by the growth in gross earned premiums as described above, mostly offset by an increase in our retention. Ceded earned premiums as a percentage of gross earned premiums decreased to 57.7% for the nine months ended September 30, 2022, compared to 66.1% for the nine months ended September 30, 2021, reflecting the Company's strategic decision to retain more gross written premiums.

Net earned premiums: Net earned premiums increased $60,536, or 42.9%, to $201,568 for the nine months ended September 30, 2022, compared to $141,032 for the nine months ended September 30, 2021. The increase is primarily due to the growth in gross earned premiums as described above and the Company's strategic decision to retain more gross written premiums.

Net investment income: Net investment income decreased $1,426, or 21.7%, to $5,136 for the nine months ended September 30, 2022, compared to $6,562 for the nine months ended September 30, 2021. The decrease reflects unrealized losses of $4,542 on equity securities, partially offset by higher interest and dividend income. During the first quarter of 2022, we purchased high-yield securities, which we believe will improve the yield on our portfolio.

Net realized gains: Net realized gains were $311 for the nine months ended September 30, 2022, compared to net realized gains of $72 for the nine months ended September 30, 2021. Net realized gains for the nine months ended September 30, 2022 includes earn-out proceeds received of $1,400 related to the Company's sale of TRI in 2021. The net realized gain was offset by our repositioning strategy to sell our lower-yielding assets and purchase higher-yielding investments, prior to anticipated interest rate increases. This turnover in our portfolio resulted in realized losses of $1,022 during the first quarter of 2022.

Other revenue: Other revenue decreased $1,538, or 17.7%, to $7,145 for the nine months ended September 30, 2022, compared to $8,683 for the nine months ended September 30, 2021. The decrease is primarily driven by a reduction in brokerage revenue of $818 due to lower placement fees reflecting the Company's increase in retention year over year. In addition, managing general agent fees, third-party administrator fees, consulting and other fee-based revenue were all lower during the period.

Losses and loss adjustment expenses: Losses and LAE increased $38,992, or 45.0%, to $125,727 for the nine months ended September 30, 2022, compared to $86,735 for the nine months ended September 30, 2021. The increase is primarily attributable to the growth in earned premiums and increased retention during the nine months ended September 30, 2022. This resulted in a loss ratio of 62.4% for the nine months ended September 30, 2022, compared to 61.5% for the nine months ended September 30, 2021.

General and administrative expenses: General and administrative expenses increased $22,289, or 54.4%, to $63,235 for the nine months ended September 30, 2022, compared to $40,946 for the nine months ended September 30, 2021. The expense ratio was 31.4% for the nine months ended September 30, 2022, compared to 29.0% for the nine months ended September 30, 2021.

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

Nine Months Ended September 30,
20222021Change
Direct commissions$85,691 $78,304 $7,387 
Ceding commissions(77,541)(89,547)12,006 
Net commissions8,150 (11,243)19,393 
Insurance-related expenses17,698 14,796 2,902 
General and administrative operating expenses37,387 37,393 (6)
Total general and administrative expenses$63,235 $40,946 $22,289 
General and administrative expenses — % of gross written premiums7.8 %7.8 %
Retention rate (1)
42.3 %33.9 %
Direct commission rate (2)
18.0 %18.8 %
Ceding commission rate (3)
28.2 %32.6 %
(1) Net earned premium as a percentage of gross earned premiums.
(2) Direct commissions as a percentage of gross earned premiums.
(3) Ceding commissions as a percentage of ceded earned premiums.

Direct commissions increased $7,387 primarily due to an increase in gross earned premiums. Ceding commissions decreased $12,006 primarily due to an increase in retention. Insurance-related expenses increased $2,902 primarily as a result of an increase in gross earned premiums. General and administrative operating expenses decreased $6. The decrease in general and administrative operating expense reflects an increase in salaries and benefits of $1,295, which related primarily to a general increase in workforce, and a decrease in professional fees of $806 and depreciation expense of $183.

Other expenses: Other expenses were $268 for the nine months ended September 30, 2022 and primarily relates to management and office transition costs. Other expenses were $845 for the nine months ended September 30, 2021 and primarily relates to secondary offering costs of $555 and executive transition costs totaling $290.

Intangible asset amortization: Intangible asset amortization increased $172 to $4,498 for the nine months ended September 30, 2022, compared to $4,326 for the nine months ended September 30, 2021. The increase is primarily driven by the addition of intangible assets acquired in the acquisition of WIC in the third quarter of 2021.

Noncash stock compensation: Noncash stock compensation was $1,019 for the nine months ended September 30, 2022, compared with $1,098 for the nine months ended September 30, 2021. Expenses incurred during both periods relate to the fair value of restricted stock units and stock options granted under the Company's 2020 Omnibus Plan recognized over the requisite service periods.

Gains on embedded derivatives:
The table below shows the components of gains (losses) on embedded derivatives for the respective nine-month periods:

Nine Months Ended September 30,
20222021Change
Change in fair value of embedded derivatives$16,848 $3,761 $13,087 
Effect of net investment income on funds held investments(2,395)(1,783)(612)
Effect of realized losses (gains) on funds held investments10 (109)119 
Total gains on embedded derivatives$14,463 $1,869 $12,594 

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Gains on embedded derivatives increased $12,594 to $14,463 for the nine months ended September 30, 2022, compared to $1,869 for the nine months ended September 30, 2021. The gain reflected an increase in the fair value of embedded derivatives of $13,087, the effect of investment income on funds held investments of $612 and the effect of realized losses (gains) on funds held investments of $119. The increase in fair value of the embedded derivatives resulted primarily from an increase in interest rates between periods, which has reduced the value of the underlying funds held under reinsurance agreements.

Income tax expense: Income tax expense was $6,741 for the nine months ended September 30, 2022, which resulted in an effective tax rate of 21.0%. The effective tax rate equaled the statutory rate of 21% since the impact of state taxes were offset by the impact of tax-exempt municipal income on the Company's investments. For the nine months ended September 30, 2021, income tax expense was $5,102, which resulted in an effective tax rate of 22.0%. The increase in the effective tax rate from the statutory rate of 21% is due primarily to the impact of recording our 2020 tax return accrual to return true-up in the third quarter of 2021.

Owned MGAs and Program Partner Premiums:

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

Nine Months Ended September 30, 2022
Owned MGAsProgram PartnerTotal
Gross written premiums$187,050 $290,725 $477,775 
Increase in gross unearned premiums(1,732)760 (972)
    Gross earned premiums185,318 291,485 476,803 
Ceded earned premiums(67,781)(207,454)(275,235)
    Net earned premiums$117,537 $84,031 $201,568 

We utilize both quota share and XOL contracts in our reinsurance strategy for our Owned MGAs and Program Partners. Direct commissions for Program Partners include third-party agent commissions and MGA service fees, while Owned MGA direct commissions include only third-party agent commissions. For the nine months ended September 30, 2022, the Company retained 63.4% of gross earned premiums for Owned MGAs compared to 28.8% for Program Partners.
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Reconciliation of Non-GAAP Financial Measures

Underwriting income

We define underwriting income as income before taxes excluding net investment income, investment revaluation gains, net realized gains or losses, intangible asset amortization, noncash stock compensation, noncash changes in fair value of embedded derivatives, interest expense, other revenue, and other income and expenses. Underwriting income represents the pre-tax profitability of our underwriting operations and allows us to evaluate our underwriting performance without regard to investment income, intangible asset amortization, noncash stock compensation, interest expense, other revenue, and other income and expenses. We use this metric because we believe it gives our management and other users of our financial information useful insight into our underwriting business performance by adjusting for these expenses and sources of income. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.

Three Months Ended September 30,
(in thousands, except percentages)20222021
Net income$7,574 $6,518 
Income tax expense2,014 2,083 
Income before taxes9,588 8,601 
Other revenue(2,140)(2,799)
(Gains) losses on embedded derivatives(4,871)121 
Net investment income(2,951)(2,187)
Net realized gains(9)(49)
Interest expense931 419 
Intangible asset amortization1,499 1,499 
Noncash stock compensation460 468 
Other income(29)(35)
Underwriting income$2,478 $6,038 

Nine Months Ended September 30,
(in thousands, except percentages)20222021
Net income$25,405 $18,086 
Income tax expense6,741 5,102 
Income before taxes32,146 23,188 
Other revenue(7,145)(8,683)
Gains on embedded derivatives(14,463)(1,869)
Net investment income(5,136)(6,562)
Net realized gains(311)(72)
Other expenses268 845 
Interest expense1,806 1,271 
Intangible asset amortization4,498 4,326 
Noncash stock compensation1,019 1,098 
Other income(76)(191)
Underwriting income$12,606 $13,351 

41
Adjusted net income

We define adjusted net income as net income excluding the impact of certain items, including noncash intangible asset amortization and stock compensation, noncash changes in fair value of embedded derivatives, other expenses and gains or losses that we believe do not reflect our core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of our results across periods. We calculate the tax impact only on adjustments that would be included in calculating our income tax expense using an expected effective tax rate for the applicable years. We use adjusted net income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance by eliminating the effects of these items. Adjusted net income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted net income differently.

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except percentages)2022202120222021
Net income$7,574 $6,518 $25,405 $18,086 
Intangible asset amortization1,499 1,499 4,498 4,326 
Noncash stock compensation460 468 1,019 1,098 
Change in fair value of embedded derivative(5,812)(573)(16,848)(3,761)
Unrealized losses on equity securities1,101 — 4,542 — 
Realized loss (gain) on sale of investment— 112 (1,400)112 
Other expenses— — 268 845 
Total adjustments(2,752)1,506 (7,921)2,620 
Tax impact of adjustments633 (346)1,821 (603)
Adjusted net income$5,455 $7,678 $19,305 $20,103 

Adjusted return on equity

We define adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period. We use adjusted return on equity as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance by adjusting for items that we believe do not reflect our core operating performance and that may diminish comparability across periods. Adjusted return on equity should not be viewed as a substitute for return on equity calculated in accordance with GAAP, and other companies may define adjusted return on equity differently.

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except percentages)2022202120222021
Adjusted return on equity calculation:
Numerator: adjusted net income$5,455 $7,678 $19,305 $20,103 
Denominator: average equity 406,587 419,818 412,483 416,200 
Adjusted return on equity5.4 %7.3 %6.2 %6.4 %
Return on equity7.5 %6.2 %8.2 %5.8 %

Return on tangible equity and adjusted return on tangible equity

We define tangible stockholders' equity as stockholders' equity less goodwill and other intangible assets. We define return on tangible equity as net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders' equity during the period. We define adjusted return on tangible equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders' equity during the period. We regularly evaluate acquisition opportunities and have historically made acquisitions that affect stockholders' equity. We use return on tangible equity and adjusted return on tangible equity as internal performance measures in the management of our
42
operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance by adjusting for the effects of acquisitions on our stockholders' equity and, in the case of adjusted return on tangible equity, by adjusting for the items that we believe do not reflect our core operating performance and that may diminish comparability across periods. Return on tangible equity and adjusted return on tangible equity should not be viewed as a substitute for return on equity or return on tangible equity, respectively, calculated in accordance with GAAP, and other companies may define return on tangible equity and adjusted return on tangible equity differently.
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except percentages)2022202120222021
Return on tangible equity calculation:
Numerator: net income$7,574 $6,518 $25,405 $18,086 
Denominator:
Average stockholders' equity406,587 419,818 412,483 416,200 
Less: average goodwill and other intangible assets211,713 214,942 213,212 216,356 
Average tangible stockholders' equity194,874 204,876 199,271 199,844 
Return on tangible equity15.5 %12.7 %17.0 %12.1 %
Return on equity7.5 %6.2 %8.2 %5.8 %

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except percentages)2022202120222021
Adjusted return on tangible equity calculation:
Numerator: adjusted net income$5,455 $7,678 $19,305 $20,103 
Denominator: average tangible equity194,874 204,876 199,271 199,844 
Adjusted return on tangible equity11.2 %15.0 %12.9 %13.4 %
Return on equity7.5 %6.2 %8.2 %5.8 %


Financial Condition, Liquidity and Capital Resources

Sources and Uses of Funds

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

State insurance laws restrict the ability of insurance companies to declare stockholder dividends without prior regulatory approval. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus.

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

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

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

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

The maximum amount of dividends the insurance subsidiaries can pay us during 2022 without regulatory approval is approximately $17,000 based on our wholly-owned insurance subsidiaries' latest filed annual statements. Insurance regulators have broad powers to ensure that statutory surplus remains at adequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. In the future, state insurance regulatory authorities that have jurisdiction over the payment of dividends by the insurance subsidiaries may adopt statutory provisions more restrictive than those currently in effect.

Our insurance subsidiaries are also required by state law to maintain a minimum level of policyholders' surplus. Kansas, Utah, Arkansas, and South Carolina utilize a risk-based capital requirement as promulgated by the National Association of Insurance Commissioners. Such requirements are designed to identify the various business risks (e.g., investment risk, underwriting profitability risk, etc.) of insurance companies and their subsidiaries. As of September 30, 2022 and December 31, 2021, the total adjusted capital of our insurance subsidiaries was in excess of their respective prescribed risk-based capital requirements.

As of September 30, 2022, we had $81,489 in cash and cash equivalents, compared to $129,577 as of December 31, 2021.

Management believes that we have sufficient liquidity available to meet our operating cash needs and obligations and committed capital expenditures for the next twelve 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 flows.

Nine Months Ended September 30,
20222021
Cash, cash equivalents and restricted cash provided by (used in):
Operating activities$76,547 $53,410 
Investing activities(154,742)(71,131)
Financing activities46,020 (1,125)
Net increase (decrease) in cash, cash equivalents and restricted cash$(32,175)$(18,846)


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Operating Activities: Net cash provided by operating activities for the nine months ended September 30, 2022 was $76,547, compared to $53,410 for the same period in 2021. Net cash provided by operating activities includes net income as adjusted for depreciation and amortization, stock compensation, unrealized gains and losses on embedded derivatives, net realized gains and losses on investments, unrealized gains and losses on equity securities, bond amortization and accretion, the change in deferred income taxes, and amortization of deferred financing costs. Net cash provided by operating activities for the nine months ended September 30, 2022 primarily reflects increased unpaid loss and loss adjustment expenses of $34,431; increased funds held under reinsurance agreements of $25,016; an increase in accounts payable, accrued expenses and other liabilities of $10,518; decreased prepaid reinsurance premiums of $10,022; partially offset by increases in premiums and other receivables of $11,520; an increase in other assets of $9,040; and an increase in reinsurance recoverables of $6,963. Unpaid loss and loss adjustment expenses increased primarily due to growth in gross earned premiums and an increase in our retention. The decrease in prepaid reinsurance premiums was the result of increased retention. Funds held under reinsurance agreements increased due to a reduction in the derivatives. The increases in premiums and other receivables and reinsurance recoverables were primarily a result of steady gross written premiums during the period and the timing of payments. The increase in accounts payable, accrued expenses and other liabilities is primarily due to an increase in funds held by our reinsurance brokerage services division for insurance contracts not yet executed. Other assets increased primarily as a result of increases in our deferred policy acquisition costs, prepaid software, and brokerage contract asset balances.

Net cash provided by operating activities for the nine months ended September 30, 2021 reflects increases in unpaid loss and loss adjustment expenses of $52,975; unearned premiums of $64,879; and funds held under reinsurance agreements of $19,585; partially offset by increases in premiums and other receivables of $25,167; reinsurance recoverables of $18,460; prepaid reinsurance premiums of $30,252; other assets of $10,863 and decreases in reinsurance premiums payable of $7,829; and accounts payable, accrued expenses and other liabilities of $11,430. Unpaid loss and loss adjustment expenses and unearned premiums increased primarily due to an increase in gross written premiums. The increases in premiums and other receivables and reinsurance recoverables were primarily a result of an increase in gross written premiums during the period. Other assets increased as a result of increases in our deferred acquisition costs and contract asset balances. Funds held under reinsurance agreements decreased due to an arbitration settlement in the fourth quarter of 2020, resulting in the non-cash transfer of certain investments held as collateral. Excluding non-cash transfers, funds held under reinsurance agreements increased as a result of an increase in gross written premium.

Investing Activities: Net cash used in investing activities for the nine months ended September 30, 2022 was $154,742, compared to net cash used in investing activities of $71,131 for the same period in 2021. Net cash used in investing activities for the nine months ended September 30, 2022 includes $154,403 net cash used in the purchase and sale of investments and $339 in capital expenditures. Net cash used in investing activities for the nine months ended September 30, 2021 includes $67,476 net cash used in the purchase and sale of investments, $3,795 in cash used in the acquisition of a subsidiary, net of cash received, $232 in cash received for the sale of equity method investments and $92 in capital expenditures.

Financing Activities: Net cash provided by financing activities for the nine months ended September 30, 2022 was $46,020, compared to net cash used in financing activities of $1,125 for the same period in 2021. Net cash provided by financing activities for the nine months ended September 30, 2022 primarily includes $48,455 of net cash proceeds received from the issuance of surplus notes, partially offset by principal payment made on the Company's debt of $1,238, an earn-out payment of $750 related to our 2021 acquisition of WIC, payments for deferred financing costs of $251 and a payment for our interest rate cap of $173. Net cash used in financing activities for the nine months ended September 30, 2021 primarily includes the principal payments made on the Company's debt.

Debt and Credit Agreements

Secured Credit Facility

On July 16, 2020, we entered into the Credit Agreement with First Horizon Bank, which, among other things, extended our credit facility for a period of five years through May 26, 2025 and increased its term loan facility by $11,707, resulting in a total term loan debt amount of $33,000 and a revolving credit facility of $2,000.

On May 6, 2022, we entered into a First Amendment to the Credit Agreement to, among other things, facilitate the approval of certain internal distributions among the Company and certain of its subsidiaries as part of the Company’s overall capital management strategy.

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On September 28, 2022, we entered into a Second Amendment to the Second Amended and Restated Credit Agreement that, among other things, replaces LIBOR as the benchmark rate with Term SOFR (as defined in the Credit Agreement), reduces the applicable margin under the Credit Agreement on Eurodollar loans from 4.50% to 3.50% and on ABR loans from 3.50% to 2.50%, and convert all extant Eurodollar loans under the Credit Agreement to Term SOFR loans. The variable interest rate plus applicable margin was 6.76% and 4.64% as of September 30, 2022 and December 31, 2021, respectively. The outstanding principal balance of the loan is to be repaid in quarterly installments that escalate from approximately $206 to $825 until March 2025. All equity securities of the subsidiaries of the Company (other than Benchmark Holding Company and its subsidiaries) have been pledged as collateral.

Hedging Arrangement

In September 2022, we entered into the Interest Rate Cap Agreement that became effective September 30, 2022, to hedge cash flows associated with interest rate fluctuations on our secured credit facility, with a termination date of May 31, 2024. The Interest Rate Cap Agreement has a notional amount of $29,700 that effectively converted the outstanding balance of the secured credit facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month SOFR plus the applicable margin (as provided by the secured credit facility) to one-month SOFR interest rate, capped at 5.00%, plus the applicable margin. The notional amount of the Interest Rate Cap Agreement decreases quarterly in proportion to the quarterly principal payments on the secured credit facility. The Interest Rate Cap Agreement is designated as a cash flow hedge and the change in fair value is recorded in accumulated other comprehensive income and is subsequently reclassified to interest expense in the period when the hedged forecasted interest payments affect earnings. The Company paid a fixed amount of $173 for the Interest Rate Cap Agreement.

Surplus Notes

On August 24, 2022, Benchmark issued Surplus Notes which consisted of $50,000 in aggregate principal amount of 6.75% surplus notes due 2042 in a private placement exempt from registration under the Securities Act. In connection with the issuance of the Surplus Notes, Benchmark entered into the Fiscal Agency Agreement with The Bank of New York Mellon, as fiscal agent, paying agent, registrar and transfer agent, providing for the terms of the Surplus Notes.

The Surplus Notes are unsecured, subordinated debt obligations of the Company and are reflected as debt on our condensed consolidated balance sheets. All payments of principal and interest, which accrues at the rate of 6.75% per year and is payable quarterly, on the Surplus Notes are subject to prior approval by the Commissioner of the Kansas Insurance Department.

We recorded $368 of interest expense with its Surplus Notes during the three and nine months ended September 30, 2022.

Reinsurance

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

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

The financial strength ratings assigned by A.M. Best have an impact on the ability of insurance companies to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that 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

There have been no material changes in the Company's contractual obligations as of September 30, 2022 compared to December 31, 2021.

Financial condition

Stockholders' Equity

As of September 30, 2022, total stockholders' equity was $403,056, compared to $421,909 as of December 31, 2021, a decrease of $18,853. The decrease in stockholders' equity over the period was driven primarily by $19,848 of net comprehensive loss.

We had $2,757 of unrecognized stock compensation as of September 30, 2022 related to non-vested stock compensation granted. The Company recognized $1,019 of stock compensation during the nine months ended September 30, 2022.

Investment Portfolio

Our invested asset portfolio consists of fixed maturities, equity securities, other investments, and short-term investments. The majority of the investment portfolio was comprised of fixed maturity securities of $530,118 at September 30, 2022, that were classified as available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income.

Our investment portfolio objectives are to maintain liquidity, facilitating financial strength and stability and ensuring regulatory and legal compliance. Our investment portfolio consists of available-for-sale fixed maturities and other equity investments, all of which are carried at fair value. We seek to hold a high-quality portfolio of investments that is managed by a professional investment advisory management firm in accordance with the Company's investment policy and routinely reviewed by our management team. Our investments, however, are subject to general economic conditions and market risks as well as risks inherent to particular securities. The Company's investment portfolio has the following objectives:

•meet insurance regulatory requirements with respect to investments under the applicable insurance laws;
•maintain an appropriate level of liquidity to satisfy the cash requirements of current operations and long-term obligations;
•adjust investment risk to offset or complement insurance risk based on our total corporate risk tolerance; and
•realize the highest possible levels of investment income and after-tax total rates of return.

47
The composition of our investment portfolio is shown in the following table as of September 30, 2022 and December 31, 2021.

September 30, 2022
Cost or
Amortized Cost		Fair Value
Fixed maturities:
U.S. government and government securities$59,974 $56,899 
Foreign governments400 392 
States, territories and possessions16,088 14,380 
Political subdivisions of states, territories and possessions38,614 33,863 
Special revenue and special assessment obligations116,311 103,318 
Industrial and public utilities125,572 118,252 
Commercial mortgage-backed securities141,552 123,478 
Residential mortgage-backed securities25,769 24,171 
Other loan-backed securities51,857 50,339 
Hybrid securities5,798 5,026 
Total fixed maturities581,935 530,118 
Equity securities39,838 35,296 
Total investments$621,773 $565,414 

December 31, 2021
Cost or
Amortized Cost		Fair Value
Fixed maturities:
U.S. government and government securities$41,490 $41,434 
Foreign governments2,500 2,490 
States, territories and possessions10,593 10,766 
Political subdivisions of states, territories and possessions39,170 40,002 
Special revenue and special assessment obligations93,664 95,991 
Industrial and public utilities100,774 103,257 
Commercial mortgage-backed securities119,378 118,218 
Residential mortgage-backed securities16,549 17,368 
Other loan-backed securities41,236 41,425 
Hybrid securities105 110 
Total fixed maturities465,459 471,061 
Equity securities984 969 
Total investments$466,443 $472,030 

The following table shows the percentage of the total estimated fair value of our fixed maturity securities as of September 30, 2022 and December 31, 2021 by credit rating category, using the lower of ratings assigned by Moody's Investor Service or S&P.

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September 30, 2022
(in thousands, except percentages)Fair Value% of Total
AAA$104,952 19.8 %
AA298,615 56.3 %
A93,376 17.6 %
BBB29,651 5.6 %
BB3,501 0.7 %
Below investment grade23 0.0 %
Total fixed maturities$530,118 100.0 %

December 31, 2021
(in thousands, except percentages)Fair Value% of Total
AAA$80,455 17.1 %
AA278,557 59.1 %
A77,097 16.4 %
BBB33,959 7.2 %
BB947 0.2 %
Below investment grade46 0.0 %
Total fixed maturities$471,061 100.0 %

Critical Accounting Policies and Estimates

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

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

We test for goodwill impairment at the reporting unit level during the fourth quarter of each year and between annual tests if a triggering event indicates the possibility of an impairment. We monitor changing business conditions as well as industry and economic factors, among others, for events which could trigger the need for an interim impairment analysis. The declining share price our stock has caused the market capitalization to fall below the book value as of September 30, 2022. As a result of the decrease in share price, we performed an interim impairment analysis at September 30, 2022 and concluded that no impairment relating to goodwill existed as of September 30, 2022.

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Item 3. 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, which are described in detail in Item 7A — "Quantitative and Qualitative Disclosures About Market Risk" in our 2021 Form 10-K. During the three months ended September 30, 2022, we entered into an interest rate cap agreement to mitigate our variable interest rate risk on our secured credit facility, as discussed above under "Financial Condition, Liquidity and Capital Resources—Debt and Credit Agreements—Hedging Arrangement." We do not have exposure to foreign currency exchange rate risk or commodity risk.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2022 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

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Table of Contents
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time-to-time, the Company may be involved in legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position.

Item 1A. Risk Factors

We have disclosed in our 2021 Form 10-K the most significant risk factors that can impact year-to-year comparisons and that may affect the future performance of the Company's business. On a quarterly basis, we review these disclosures and update the risk factors, as appropriate. As of the date of this report, there have been no material changes to the risk factors from those disclosed in our 2021 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

The following table sets forth information concerning purchases of our common stock for the three months ended September 30, 2022:

PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2022 - July 31, 20222,491 $5.39 — — 
August 1, 2022 - August 31, 2022— $— — — 
September 1, 2022 - September 30, 2022495 $4.17 — — 
2,986 — 

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.
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Table of Contents
Item 6. Exhibits

Exhibit NumberDescription
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference to any filing under the Securities Act of 1933, as amended, or the Exchange Act.
+ Filed herewith.

52
Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


TREAN INSURANCE GROUP, INC.
Date:November 8, 2022By:/s/ Julie A. Baron
Julie A. Baron
Chief Executive Officer and President
(Principal Executive Officer)
Date:November 8, 2022By:/s/ Nicholas J. Vassallo
Nicholas J. Vassallo
Chief Financial Officer
(Principal Financial and Accounting Officer)

53

Exhibit 31.1

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Julie A. Baron, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Trean Insurance Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.[Reserved];
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:November 8, 2022
/s/ Julie A. Baron
Julie A. Baron
Chief Executive Officer and President
(Principal Executive Officer)

Exhibit 31.2

Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Nicholas J. Vassallo, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Trean Insurance Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.[Reserved];
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:November 8, 2022/s/ Nicholas J. Vassallo
Nicholas J. Vassallo
Chief Financial Officer
(Principal Financial Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Trean Insurance Group, Inc. (the Company) for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned hereby, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:November 8, 2022
/s/ Julie A. Baron
Julie A. Baron
Chief Executive Officer and President
(Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Trean Insurance Group, Inc. (the Company) for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned hereby, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to her knowledge:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:November 8, 2022/s/ Nicholas J. Vassallo
Nicholas J. Vassallo
Chief Financial Officer
(Principal Financial Officer)