Insurance

TREAN INSURANCE GROUP, INC. – 10-Q – Management report and analysis of the financial situation and operating results

The following discussion and analysis of financial condition and results of
operations for the three and six months ended June 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
significant.

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 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").

                                       24
--------------------------------------------------------------------------------
  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.

Impact of Coronavirus (“COVID-19”)

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, 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 income, claims and losses

We have not experienced a material impact to our premium revenue as a result of
the COVID-19 pandemic. During the six months ended June 30, 2022, compared to
the six months ended June 30, 2021, gross written premiums increased by 4.1% and
gross earned premiums increased by 18.3%, primarily driven by both significant
growth in our existing Program Partner business as well as the addition of new
Program Partners. 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 have also not experienced any significant impact on our reported claims or
suffered losses in the first six months of 2022 due in particular to the
Covid19 pandemic.

                                       25
--------------------------------------------------------------------------------
  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 six months ended June 30, 2022, we
experienced a decrease of $39,274 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 Operating Results

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;

• submissions of new businesses to our Program Partners;

• incorporating new business submissions into policies;

•renewals of existing policies; and

• average size and premium rate of linked 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.

                                       26
--------------------------------------------------------------------------------
  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 particular types of insurance contacts
that we write;

•changes in the average size of losses incurred on a particular type of activity;

•mix of cases written by us;

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

•changes in legal defense costs;

•wage inflation; and

•the inflation of medical costs.

Losses and LAE are based on an actuarial analysis of estimated losses,
including losses incurred during the period and changes in estimates
periods. Losses and LAEs can be paid 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.

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

Gains 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
term loan facility (See "Financial Condition, Liquidity and capital resources -
Debt and Credit Agreements").

Other income: Other income mainly includes income from subletting and other
various income items.

Income from investments in affiliated companies, net of tax: Income from shares in affiliated companies, net of tax
the tax includes the company’s share in the profits of investments accounted for using the equity method.

                                       27
--------------------------------------------------------------------------------
  Table of Contents
Key Metrics

We discuss certain key financial and operational measures, described below, which
provide useful information about our business and operational factors
underpinning our financial performance.

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

Adjusted net income is a non-GAAP financial measure defined as net income
excluding the impact of certain items, including noncash intangible asset
amortization and stock compensation, noncash changes in 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.

The loss ratio, expressed as a percentage, is the ratio of claims and LAE to net
premiums earned.

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

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
average opening and closing 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 equity is defined as shareholders’ equity minus 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 tangible equity in accordance with GAAP.

                                       28
--------------------------------------------------------------------------------
  Table of Contents
Results of Operations

Consolidated operating results for the three months ended June 30, 2022
Compared to June 30, 2021

The following table summarizes our operating results for the three months
ended June 30, 2022 and 2021:

                                            Three Months Ended June 30,
(in thousands, except for percentages)       2022                   2021                Change            Percentage Change (1)

Revenue

Gross written premiums                 $      154,189          $   156,551          $    (2,362)                 (1.5)%
Decrease (increase) in gross unearned
premiums                                        2,953              (17,927)              20,880                 (116.5)%
Gross earned premiums                         157,142              138,624               18,518                   13.4%
Ceded earned premiums                         (91,132)             (90,681)                (451)                  0.5%
Net earned premiums                            66,010               47,943               18,067                   37.7%
Net investment income                            (391)               2,103               (2,494)                (118.6)%

Net realized gains                              1,349                   10                1,339                    NM
Other revenue                                   1,804                1,229                  575                   46.8%
Total revenue                                  68,772               51,285               17,487                   34.1%
Expenses
Losses and loss adjustment expenses            40,887               29,725               11,162                   37.6%
General and administrative expenses            21,679               15,267                6,412                   42.0%
Other expenses                                    268                  845                 (577)                 (68.3)%
Intangible asset amortization                   1,500                1,413                   87                   6.2%
Noncash stock compensation                        403                  419                  (16)                 (3.8)%
Interest expense                                  467                  425                   42                   9.9%
Total expenses                                 65,204               48,094               17,110                   35.6%
Gains (losses) on embedded derivatives          3,356                 (686)               4,042                    NM
Other income                                       24                   35                  (11)                 (31.4)%
Income before taxes                             6,948                2,540                4,408                  173.5%
Income tax expense                              1,457                  414                1,043                    NM

Net income                             $        5,491          $     2,126          $     3,365                  158.3%

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


                                       29
--------------------------------------------------------------------------------
  Table of Contents
The table below shows the total premiums earned on a gross and net basis for the
respective three-month periods:
                                                                     Three Months Ended June 30,
(in thousands, except for percentages)                                2022                     2021
Key metrics:
Underwriting income(1)                                       $         3,444              $     2,951
Adjusted net income(1)                                       $         5,546              $     4,316
Loss ratio                                                              61.9      %              62.0  %
Expense ratio                                                           32.8      %              31.8  %
Combined ratio                                                          94.7      %              93.8  %
Return on equity                                                         5.3      %               2.0  %
Adjusted return on equity(1)                                             5.4      %               4.2  %
Return on tangible equity(1)                                            11.0      %               4.2  %
Adjusted return on tangible equity(1)                                   11.1      %               8.6  %

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


                                           Three Months Ended June 30,
(in thousands, except for
percentages)                                2022                   2021                Change             Percentage Change
Revenues
Gross written premiums                $      154,189          $   156,551          $    (2,362)                (1.5)%
Increase in gross unearned premiums            2,953              (17,927)              20,880                (116.5)%
Gross earned premiums                        157,142              138,624               18,518                  13.4%
Ceded earned premiums                        (91,132)             (90,681)                (451)                 0.5%
Net earned premiums                   $       66,010          $    47,943          $    18,067                  37.7%



Gross written premiums: Gross written premiums decreased $2,362, or (1.5)%, to
$154,189 for the three month ended June 30, 2022, compared to $156,551 for the
three months ended June 30, 2021. The decrease was primarily driven by the
Company's continued focus on maintaining underwriting discipline in an unusually
competitive environment and a more
gradual increase of current year premium from new program partners added in 2021
and 2022 than originally estimated.

Workers' compensation represented 58.8% of our gross written premiums for the
three months ended June 30, 2022, compared to 60.0% for the three months ended
June 30, 2021. For the three months ended June 30, 2022, gross written premiums
for workers' compensation decreased by $3,240, or 3.4%, 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 41.2% of our gross
written premiums for the three month ended June 30, 2022, compared to 40.0% for
the three months ended June 30, 2021. For the three months ended June 30, 2022,
gross written premiums for all other non-workers' compensation liability
increased $878, or 1.4%, compared to the same period in 2021. The increase is
due primarily to growth in our accident & health, commercial auto and commercial
lines, a result of continued line of business diversification.

Gross earned premiums: Gross earned premiums increased $18,518, or 13.4%, to
$157,142 for the three months ended June 30, 2022, compared to $138,624 for the
three months ended June 30, 2021. The increase in gross earned premiums reflects
the increase in gross unearned premiums of $20,880 net of a decrease in gross
written premiums of $2,362. Gross earned premiums as a percentage of gross
written premiums increased to 101.9% for the three months ended June 30, 2022,
compared to 88.5% for the three months ended June 30, 2021.

                                       30
--------------------------------------------------------------------------------
  Table of Contents
Ceded earned premiums: Ceded earned premiums increased $451, or 0.5%, to $91,132
for the three months ended June 30, 2022, compared to $90,681 for the three
months ended June 30, 2021. The increase in ceded earned premiums is primarily
driven by the growth in gross earned premiums as described above, partially
offset by an increase in our retention. Ceded earned premiums as a percentage of
gross earned premiums decreased to 58.0% for the three months ended June 30,
2022, compared to 65.4% for the three months ended June 30, 2021, reflecting the
Company's strategic decision to retain more gross written premiums.

Net earned premiums: Net earned premiums increased $18,067, or 37.7%, to $66,010
for the three months ended June 30, 2022, compared to $47,943 for the three
months ended June 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 decreased $2,494, or 118.6%,
to a loss of $391 for the three months ended June 30, 2022, compared to $2,103
for the three months ended June 30, 2021. The decrease reflects unrealized
losses on equity securities of $3,441, partially offset by interest income.
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 $1,349 for the three months ended
June 30, 2022, compared to $10 for the three months ended June 30, 2021. The
increase was primarily due to earn-out proceeds received of $1,400 related to
the Company's sale of TRI in 2021.

Other income: Other income increased $575i.e. 46.8%, at $1,804 for the three
months ended June 30, 2022compared to $1,229 for the three months ended
June 30, 2021. The increase is mainly due to an increase in brokerage
income from $452.

Losses and loss adjustment expenses: Losses and LAE increased $11,162, or 37.6%,
to $40,887 for the three months ended June 30, 2022, compared to $29,725 for the
three months ended June 30, 2021. The increase is primarily attributable to the
growth in earned premiums and increased retention during the three months ended
June 30, 2022. This resulted in a loss ratio of 61.9% for the three months ended
June 30, 2022 compared to 62.0% for the three months ended June 30, 2021.

General and administrative expenses: General and administrative expenses
increased $6,412, or 42.0%, to $21,679 for the three months ended June 30, 2022,
compared to $15,267 for the three months ended June 30, 2021. The expense ratio
was 32.8% for the three months ended June 30, 2022, compared to 31.8% for the
three months ended June 30, 2021.

                                       31
--------------------------------------------------------------------------------
  Table of Contents
The table below shows the components of general and administrative expenses for
the respective three-month periods:

                                                         Three Months Ended June 30,
                                                          2022                   2021                Change
Direct commissions                                  $      29,133           $    27,602          $     1,531
Ceding commissions                                        (26,628)              (29,684)               3,056
Net commissions                                             2,505                (2,082)               4,587
Insurance-related expenses                                  5,889                 5,149                  740
General and administrative operating expenses              13,285                12,200                1,085
Total general and administrative expenses           $      21,679           

$15,267 $6,412

General and administrative expenses - % of gross
written premiums                                              8.6   %               7.8  %
Retention rate (1)                                           42.0   %              34.6  %
Direct commission rate (2)                                   18.5   %              19.9  %
Ceding commission rate (3)                                   29.2   %              32.7  %

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


Direct commissions increased $1,531 primarily due to an increase in gross earned
premiums. Ceding commissions decreased $3,056 primarily due to an increase in
retention, partially offset by an increase in ceded earned premiums reflecting
the increase in gross earned premiums. Insurance-related expenses increased $740
primarily as a result of an increase in gross earned premiums. General and
administrative operating expenses increased $1,085. The increase in general and
administrative operating expense is primarily the result of an increase in
salaries and benefits of $1,074 which related primarily to a general increase in
workforce.

Intangible asset amortization: Intangible asset amortization increased $87 to
$1,500 for the three months ended June 30, 2022, compared to $1,413 for the
three months ended June 30, 2021. The increase is driven by the addition of
intangible assets acquired in the acquisition of WIC in the third quarter of
2021.

Noncash stock compensation: Noncash stock compensation was $403 for the three
months ended June 30, 2022, compared with $419 for the three months ended
June 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 

June 30th,

                                                     2022                    2021                 Change

Change in fair value of embedded derivatives $4,140 $

     (167)         $      4,307
Effect of net investment income on funds held
investments                                               (774)                 (519)                 (255)
Effect of realized gains on funds held
investments                                                (10)                    -                   (10)

Total gains (losses) on embedded derivatives $3,356

(686) $4,042


Gains on embedded derivatives increased $4,042 to $3,356 for the three months
ended June 30, 2022, compared to a loss of $686 for the three months ended
June 30, 2021. The gain reflected an increase in the fair value of embedded
derivatives of $4,307, the effect of investment income on funds held investments
of $(255) and the effect of realized losses on funds held
                                       32
--------------------------------------------------------------------------------
  Table of Contents
investments of $10. 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.

Income tax expense: Income tax expense was $1,457 for the three months ended
June 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 June 30, 2021, income tax expense was
$414, which resulted in an effective tax rate of 16.3%. The decrease in the
effective tax rate from the statutory rate of 21% is due primarily to the impact
of tax exempt municipal income on the Company's investments.

MGAs held and rewards from program partners:

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

                                                   Three Months Ended June 30, 2022
                                            Owned MGAs          Program Partner         Total
Gross written premiums                 $    59,839             $         94,350      $ 154,189
Increase in gross unearned premiums            900                        2,053          2,953
  Gross earned premiums                     60,739                       96,403        157,142
Ceded earned premiums                      (21,938)                     (69,194)       (91,132)
  Net earned premiums                  $    38,801             $         27,209      $  66,010



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 June 30, 2022, the Company retained 63.9% of gross earned premiums
for Owned MGAs, compared to 28.2% for Program Partners.

                                       33

————————————————– ——————————

Contents
Consolidated operating results for the six months ended June 30, 2022
Compared to June 30, 2021

The following table summarizes our operating results for the six months
ended June 30, 2022 and 2021:

                                             Six Months Ended June 30,                                    Percentage Change
(in thousands, except for percentages)       2022                   2021                Change                   (1)

Revenue

Gross written premiums                 $      315,592          $   303,281          $    12,311                       4.1  %
Increase in gross unearned premiums                89              (36,358)              36,447                    (100.2) %
Gross earned premiums                         315,681              266,923               48,758                      18.3  %
Ceded earned premiums                        (185,494)            (177,846)              (7,648)                      4.3  %
Net earned premiums                           130,187               89,077               41,110                      46.2  %
Net investment income                           2,185                4,375               (2,190)                    (50.1) %

Net realized gains                                302                   23                  279                           NM
Other revenue                                   5,005                5,884                 (879)                    (14.9) %
Total revenue                                 137,679               99,359               38,320                      38.6  %
Expenses
Losses and loss adjustment expenses            80,080               54,606               25,474                      46.7  %
General and administrative expenses            39,979               27,158               12,821                      47.2  %

Intangible asset amortization                   2,999                2,827                  172                       6.1  %
Noncash stock compensation                        559                  630                  (71)                    (11.3) %
Interest expense                                  875                  852                   23                       2.7  %
Total expenses                                124,760               86,918               37,842                      43.5  %
Gains (losses) on embedded derivatives          9,592                1,990                7,602                           NM
Other income                                       47                  156                 (109)                    (69.9) %
Income before taxes                            22,558               14,587                7,971                      54.6  %
Income tax expense                              4,727                3,019                1,708                      56.6  %

Net income                             $       17,831          $    11,568          $     6,263                      54.1  %

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



                                       34
--------------------------------------------------------------------------------
  Table of Contents
The table below shows the total premiums earned on a gross and net basis for the
respective six-month periods:

                                                                       Six Months Ended June 30,
(in thousands, except for percentages)                                 2022                      2021
Key metrics:
Underwriting income(1)                                       $         10,128               $     7,313
Adjusted net income(1)                                       $         13,850               $    12,425
Loss ratio                                                               61.5       %              61.3  %
Expense ratio                                                            30.7       %              30.5  %
Combined ratio                                                           92.2       %              91.8  %
Return on equity                                                          8.6       %               5.6  %
Adjusted return on equity(1)                                              6.7       %               6.0  %
Return on tangible equity(1)                                             17.6       %              11.6  %
Adjusted return on tangible equity(1)                                    13.7       %              12.5  %

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


                                            Six Months Ended June 30,
(in thousands, except for
percentages)                                2022                   2021                Change            Percentage Change
Revenues
Gross written premiums                $      315,592          $   303,281          $    12,311                       4.1  %
Increase in gross unearned premiums               89              (36,358)              36,447                    (100.2) %
Gross earned premiums                        315,681              266,923               48,758                      18.3  %
Ceded earned premiums                       (185,494)            (177,846)              (7,648)                      4.3  %
Net earned premiums                   $      130,187          $    89,077          $    41,110                      46.2  %



Gross written premiums: Gross written premiums increased $12,311, or 4.1%, to
$315,592 for the six months ended June 30, 2022, compared to $303,281 for the
six months ended June 30, 2021. The increase is primarily attributable to the
growth in our existing Program Partner business and the following changes in
gross written premiums by line of business:

Workers' compensation represented 60.0% of our gross written premiums for the
six months ended June 30, 2022, compared to 63.7% for the six months ended June
30, 2021. For the six months ended June 30, 2022, gross written premiums for
workers' compensation decreased by $3,833, or 2.0%, 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 40.0% of our gross
written premiums for the six months ended June 30, 2022, compared to 36.3% for
the six months ended June 30, 2021. For the six months ended June 30, 2022,
gross written premiums for all other non-workers' compensation liability
increased $16,144, or 14.7%, compared to the same period in 2021. The increase
is due primarily to growth in our accident & health, commercial auto,
commercial, and auto physical damage lines, which is a result of continued line
of business diversification.

Gross earned premiums: Gross earned premiums increased $48,758, or 18.3%, to
$315,681 for the six months ended June 30, 2022, compared to $266,923 for the
six months ended June 30, 2021. The increase in gross earned premiums reflects
the increase in gross written premiums of $12,311 and an increase in gross
unearned premiums of $36,447. Gross earned premiums as a percentage of gross
written premiums increased to 100.0% for the six months ended June 30, 2022,
compared to 88.0% for the six months ended June 30, 2021.

                                       35
--------------------------------------------------------------------------------
  Table of Contents
Ceded earned premiums: Ceded earned premiums increased $7,648, or 4.3%, to
$185,494 for the six months ended June 30, 2022, compared to $177,846 for the
six months ended June 30, 2021. The increase in ceded earned premiums is
primarily driven by the growth in gross earned premiums as described above,
partially offset by an increase in our retention. Ceded earned premiums as a
percentage of gross earned premiums decreased to 58.8% for the six months ended
June 30, 2022, compared to 66.6% for the six months ended June 30, 2021,
reflecting the Company's strategic decision to retain more gross written
premiums.

Net earned premiums: Net earned premiums increased $41,110, or 46.2%, to
$130,187 for the six months ended June 30, 2022, compared to $89,077 for the six
months ended June 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 $2,190, or 50.1%, to
$2,185 for the six months ended June 30, 2022, compared to $4,375 for the six
months ended June 30, 2021. The decrease reflects unrealized losses of $3,441 on
equity securities, partially offset by higher interest 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 $302 for the six months ended June
30, 2022, compared to net realized gains of $23 for the six months ended June
30, 2021. Net realized gains for the six months ended June 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. We believe the payback period on the realized losses
will be 12 months or less.

Other revenue: Other revenue decreased $879, or 14.9%, to $5,005 for the six
months ended June 30, 2022, compared to $5,884 for the six months ended June 30,
2021. The decrease is largely driven by a reduction in brokerage revenue of $410
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 $25,474, or 46.7%,
to $80,080 for the six months ended June 30, 2022, compared to $54,606 for the
six months ended June 30, 2021. The increase is primarily attributable to the
growth in earned premiums and increased retention during the six months ended
June 30, 2022. This resulted in a loss ratio of 61.5% for the six months ended
June 30, 2022, compared to 61.3% for the six months ended June 30, 2021.

General and administrative expenses: General and administrative expenses
increased $12,821, or 47.2%, to $39,979 for the six months ended June 30, 2022,
compared to $27,158 for the six months ended June 30, 2021. The expense ratio
was 30.7% for the six months ended June 30, 2022, compared to 30.5% for the six
months ended June 30, 2021.

                                       36
--------------------------------------------------------------------------------
  Table of Contents
The table below shows the components of general and administrative expenses for
the respective six-month periods:

                                                          Six Months Ended June 30,
                                                          2022                  2021                Change
Direct commissions                                  $     57,041           $    50,710          $     6,331
Ceding commissions                                       (53,625)              (57,892)               4,267
Net commissions                                            3,416                (7,182)              10,598
Insurance-related expenses                                11,660                 9,425                2,235
General and administrative operating expenses             24,903                24,915                  (12)
Total general and administrative expenses           $     39,979           

$27,158 $12,821

General and administrative expenses - % of gross
written premiums                                             7.9   %               8.2  %
Retention rate (1)                                          41.2   %              33.4  %
Direct commission rate (2)                                  18.1   %              19.0  %
Ceding commission rate (3)                                  28.9   %              32.6  %

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


Direct commissions increased $6,331 primarily due to an increase in gross earned
premiums. Ceding commissions decreased $4,267 primarily due to an increase in
retention, partially offset by an increase in ceded earned premiums reflecting
the increase in gross earned premiums. Insurance-related expenses increased
$2,235 primarily as a result of an increase in gross earned premiums. General
and administrative operating expenses decreased $12. The decrease in general and
administrative operating expense is primarily the result of an increase in
salaries and benefits of $1,242, which related primarily to a general increase
in workforce, partially offset by a decrease in professional fees of $955 and
depreciation expense of $157.

Intangible asset amortization: Intangible asset amortization increased $172 to
$2,999 for the six months ended June 30, 2022, compared to $2,827 for the six
months ended June 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.

Non-cash stock-based compensation: Non-cash stock-based compensation has been $559 for the six
months ended June 30, 2022compared to $630 for the six months ended June 30th,
2021
. The charges incurred during the two periods relate to the fair value of the
restricted stock units and stock options granted under the Company’s 2020 agreement
Recognized Omnibus scheme over required periods of service.

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

                                                                Six Months 

Ended June 30th,

                                                     2022                   2021                 Change
Change in fair value of embedded derivatives  $      11,036            $      3,189          $      7,847
Effect of net investment income on funds held
investments                                          (1,442)                 (1,199)                 (243)
Effect of realized gains on funds held
investments                                              (2)                      -                    (2)
Total gains on embedded derivatives           $       9,592            $    

1990 $7,602


Gains on embedded derivatives increased $7,602 to $9,592 for the six months
ended June 30, 2022, compared to $1,990 for the six months ended June 30, 2021.
The gain reflected an increase in the fair value of embedded derivatives of
$7,847, the effect of investment income on funds held investments of $243 and
the effect of realized losses on funds held investments of
                                       37
--------------------------------------------------------------------------------
  Table of Contents
$2. 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 $4,727 for the six months ended June
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 six months ended June 30, 2021, income tax expense was
$3,019, which resulted in an effective tax rate of 20.7%. The decrease in the
effective tax rate from the statutory rate of 21% is due primarily to the impact
of tax-exempt municipal income on the Company's investments.

MGAs held and rewards from program partners:

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

                                                  Six Months Ended June 30, 2022
                                          Owned MGAs        Program Partner         Total
Gross written premiums                 $   128,483         $        187,109      $ 315,592
Increase in gross unearned premiums         (4,359)                   4,448             89
  Gross earned premiums                    124,124                  191,557        315,681
Ceded earned premiums                      (47,327)                (138,167)      (185,494)
  Net earned premiums                  $    76,797         $         53,390      $ 130,187



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 six
months ended June 30, 2022, the Company retained 61.9% of gross earned premiums
for Owned MGAs compared to 27.9% for Program Partners.
                                       38
--------------------------------------------------------------------------------
  Table of Contents
Reconciliation of Non-GAAP Financial Measures

Technical result

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, gains and losses on 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 June 30,
(in thousands, except percentages)                   2022                   2021
Net income                               $        5,491                   $ 2,126
Income tax expense                                1,457                       414

Income before taxes                               6,948                     2,540
Other revenue                                    (1,804)                   (1,229)
Gains (losses) on embedded derivatives           (3,356)                      686
Net investment income                               391                    (2,103)

Net realized gains                               (1,349)                      (10)
Other expenses                                      268                       845
Interest expense                                    467                       425
Intangible asset amortization                     1,500                     1,413
Noncash stock compensation                          403                       419
Other income                                        (24)                      (35)
Underwriting income                      $        3,444                   $ 2,951



                                               Six Months Ended June 30,
(in thousands, except percentages)                 2022                 2021
Net income                               $      17,831               $ 11,568
Income tax expense                               4,727                  3,019

Income before taxes                             22,558                 14,587
Other revenue                                   (5,005)                (5,884)
Gains (losses) on embedded derivatives          (9,592)                (1,990)
Net investment income                           (2,185)                (4,375)

Net realized gains                                (302)                   (23)
Other expenses                                     268                    845
Interest expense                                   875                    852
Intangible asset amortization                    2,999                  2,827
Noncash stock compensation                         559                    630
Other income                                       (47)                  (156)
Underwriting income                      $      10,128               $  7,313



                                       39
--------------------------------------------------------------------------------
  Table of Contents
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 June 30,                 Six Months Ended June 30,
(in thousands, except percentages)         2022                  2021                  2022                 2021
Net income                           $        5,491          $    2,126          $      17,831          $   11,568
Intangible asset amortization                 1,500               1,413                  2,999               2,827
Noncash stock compensation                      403                 419                    559                 630
Change in fair value of embedded
derivative                                   (4,140)                167                (11,036)             (3,189)
Unrealized losses on equity
securities                                    3,441                   -                  3,441                   -
Realized gain on sale of investment          (1,400)                  -                 (1,400)                  -
Other expenses                                  268                 845                    268                 845

Total adjustments                                72               2,844                 (5,169)              1,113
Tax impact of adjustments                       (17)               (654)                 1,188                (256)
Adjusted net income                  $        5,546          $    4,316          $      13,850          $   12,425



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 June 30,                   Six Months Ended June 30,
(in thousands, except
percentages)                            2022                   2021                   2022                  2021
Adjusted return on equity
calculation:
Numerator: adjusted net income    $       5,546           $      4,316          $     13,850           $    12,425
Denominator: average equity             413,258                415,159               416,014               413,725
Adjusted return on equity                   5.4   %                4.2  %                6.7   %               6.0  %
Return on equity                            5.3   %                2.0  %                8.6   %               5.6  %


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
                                       40
--------------------------------------------------------------------------------
  Table of Contents
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 June 30,                  Six Months Ended June 30,
(in thousands, except percentages)             2022                   2021                  2022                 2021
Return on tangible equity calculation:
Numerator: net income                    $       5,491           $     2,126          $     17,831           $   11,568
Denominator:
Average stockholders' equity                   413,258               415,159               416,014              413,725
Less: average goodwill and other
intangible assets                              213,213               213,836               213,962              214,543
Average tangible stockholders' equity          200,045               201,323               202,052              199,182
Return on tangible equity                         11.0   %               4.2  %               17.6   %             11.6  %
Return on equity                                   5.3   %               2.0  %                8.6   %              5.6  %



                                             Three Months Ended June 30,                  Six Months Ended June 30,
(in thousands, except percentages)            2022                   2021                  2022                 2021
Adjusted return on tangible equity
calculation:
Numerator: adjusted net income          $       5,546           $     4,316          $     13,850           $   12,425
Denominator: average tangible equity          200,045               201,323               202,052              199,182
Adjusted return on tangible equity               11.1   %               8.6  %               13.7   %             12.5  %
Return on equity                                  5.3   %               2.0  %                8.6   %              5.6  %



Financial position, 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 report
dividends from shareholders without prior regulatory approval. State insurance
regulators require insurance companies to maintain specified levels of
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.

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
                                       41
--------------------------------------------------------------------------------
  Table of Contents
Insurance Department; or (ii) 100% of net income during the applicable twelve-
month period (not including realized gains). Dividends shall not include pro
rata distributions of any class of ALIC's own securities.

Under South Carolina law, dividends payable from 7710 without the prior approval
of the applicable insurance commissioner are limited to the following during the
preceding twelve months: (a) when paid from other than earned surplus must not
exceed the lesser of: (i) 10% of 7710's surplus as regards policyholders as
shown in 7710's most recent annual statement; or (ii) the net income, not
including net realized gains or losses as shown in 7710's most recent annual
statement; or (b) when paid from earned surplus must not exceed the greater of:
(i) 10% of 7710's surplus as regards policyholders as shown in 7710 Insurance
Company's most recent annual statement; or (ii) the net income, not including
net realized gains or losses as shown in 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 $21,000. 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
June 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.

From June 30, 2022we have had $100,716 in cash and cash equivalents, compared to
$129,577 of the December 31, 2021.

Management believes that we have sufficient liquidity to meet our
operating cash requirements and obligations and capital expenditures incurred to
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.

                                                                 Six Months 

Ended June 30th,

                                                                2022                    2021
Cash, cash equivalents and restricted cash provided by
(used in):
Operating activities                                      $       40,075          $      22,820
Investing activities                                             (68,212)               (65,599)
Financing activities                                                (832)                  (625)
Net increase (decrease) in cash, cash equivalents and
restricted cash                                           $      (28,969)         $     (43,404)




Operating Activities: Net cash provided by operating activities for the six
months ended June 30, 2022 was $40,075, compared to $22,820 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
                                       42
--------------------------------------------------------------------------------
  Table of Contents
in deferred income taxes, and amortization of deferred financing costs. Net cash
provided by operating activities for the six months ended June 30, 2022
primarily reflects increased unpaid loss and loss adjustment expenses of
$33,366, decreased prepaid reinsurance premiums of $13,952, increased funds held
under reinsurance agreements of $11,963, partially offset by increases in
premiums and other receivables of $11,902, an increase in reinsurance
recoverables of $11,560, a decrease in accounts payable and accrued expenses of
$5,616, and an increase in other assets of $5,101. Unpaid loss and loss
adjustment expenses increased primarily due to an increase in gross written
premiums and an increase in our retention. The decrease in prepaid reinsurance
premiums was the result of increased retention, partially offset by the increase
in ceded premiums. Funds held under reinsurance agreements increased due a
reduction in the derivatives, partially offset by an increase in ceded premiums.
The increases in premiums and other receivables and reinsurance recoverables
were primarily a result of an increase in gross written premiums during the
period. The decrease in accounts payable and accrued expenses is due to
reductions in the accrued bonus, accrued 401(k) match and accrued premium taxes
paid in the first quarter of 2022. Other assets increased as a result of
increases in our deferred acquisition costs and contract asset balances.

Net cash provided by operating activities for the six months ended June 30, 2021
reflects increases in unpaid loss and loss adjustment expenses of $44,742,
unearned premiums of $36,401 and funds held under reinsurance agreements of
$3,080; partially offset by increases in premiums and other receivables of
$22,714, reinsurance recoverables of $18,730, prepaid reinsurance premiums of
$13,033, other assets of $6,623 and decreases in reinsurance premiums payable of
$5,388, accounts payable and accrued expenses of $4,011 and income taxes payable
of $3,791. 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. Net cash provided by operating activities for
the six months ended June 30, 2020 reflects distributions received from equity
method investments and incremental cash received for operating assets and
liabilities.

Investing Activities: Net cash used in investing activities for the six months
ended June 30, 2022 was $68,212, compared to net cash used in investing
activities of $65,599 for the same period in 2021. Net cash used in investing
activities for the six months ended June 30, 2022 includes $67,873 net cash used
in the purchase and sale of investments and $339 in capital expenditures. Net
cash provided by investing activities for the six months ended June 30, 2021
includes $65,758 net cash used in the purchase and sale of investments, $73 in
capital expenditures, and $232 in cash received for the sale of equity method
investments.

Financing Activities: Net cash used in financing activities for the six months
ended June 30, 2022 was $832, compared to net cash used in financing activities
of $625 for the same period in 2021. Net cash used in financing activities for
the six months ended June 30, 2022 and 2021 primarily includes the principal
payments made on the Company's debt.

Debt and credit agreements

Premier Horizon Credit Agreement

On July 16, 2020, the Company entered into an Amended and Restated Credit
Agreement with First Horizon Bank, which, among other things, extended the
Company's credit facility for a period of five years through May 26, 2025 and
increased its term loan facility by $11,707, resulting in a total term loan debt
amount of $33,000 and a revolving credit facility of $2,000. Borrowings under
the facility are secured by substantially all of the assets of the Company other
than Benchmark Holding Company and its subsidiaries. The loan has a variable
interest rate of 3-month LIBOR plus 4.50%, which was 5.51% as of June 30, 2022
and 4.64% as of December 31, 2021 (under the 2018 First Horizon Credit
Agreement). The outstanding principal balance of the loan is to be repaid in
quarterly installments that escalate from approximately $206 to $825 until March
2025. All equity securities of the subsidiaries of the Company (other than
Benchmark Holding Company and its subsidiaries) have been pledged as collateral.

Reinsurance

We cede some of the risk we accept on our balance sheet to third parties
reinsurers through a variety of reinsurance arrangements. We manage these
provisions to align the risks with our Program Partnersoptimize our network
retention against our financial targets, balance sheet size and ratings
requirements, as well as to limit our maximum loss resulting from any

                                       43
--------------------------------------------------------------------------------
  Table of Contents
single program or a single event. We utilize both quota share and XOL
reinsurance as tools in our overall risk management strategy to achieve these
goals, usually in conjunction with each other. Quota share reinsurance involves
the proportional sharing of premiums and losses of each defined program. We
utilize quota share reinsurance for several purposes, including (i) to cede risk
to Program Partners, which allows us to share economics and align incentives,
and (ii) to cede risk to third-party reinsurers in order to manage our net
written premiums appropriately based on our financial objectives, capital base,
A.M. Best financial strength rating, and risk appetite. It is a core pillar of
our underwriting philosophy that Program Partners retain a portion of the
underwriting risk of their program. We believe this best aligns interests,
attracts higher quality programs, and leads to better underwriting results.
Under XOL reinsurance, losses in excess of a retention level are paid by the
reinsurer, subject to a limit, and are customized per program or across multiple
programs. We utilize XOL reinsurance to protect against catastrophic or other
unforeseen extreme loss activity that could otherwise negatively impact our
profitability and capital base. The majority of our exposure to catastrophe risk
stems from the workers' compensation premium we retain. Potential catastrophic
events include an earthquake, terrorism, or another event that could cause more
than one covered employee working at the same location to be injured in the
event. We believe we mitigate this risk by our focus on small- to mid-sized
accounts, which means that we generally do not have concentrated employee counts
at single locations that could be exposed to a catastrophic loss. The cost and
limits of the reinsurance coverage we purchase vary from year to year based on
the availability of quality reinsurance at an acceptable price and our desired
level of retention.

Ratings

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

The financial strength ratings assigned by A.M. Best have an impact on the
ability of 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.

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

Financial condition

Equity

From June 30, 2022total equity was $410,118compared to
$421,909 of the December 31, 2021a decrease of $11,791. The decrease in
shareholders’ equity over the period was driven mainly by $12,342 fillet
total loss.

We have had $3,269 stock-based compensation not recognized as of June 30, 2022 relative to
unearned stock compensation granted. The Company has recognized $559 of stock
remuneration during the half-year ended June 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 $466,819 at June 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.

                                       44
--------------------------------------------------------------------------------
  Table of Contents
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 regulatory requirements for insurance in respect of investments under the
applicable insurance laws;

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

• adjust investment risk to offset or supplement insurance risk based on our
total business risk tolerance; and

• Achieve the highest possible levels of investment income and total after-tax
rate of return.

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

                                                                          June 30, 2022
                                                                 Cost or
                                                              Amortized Cost            Fair Value
Fixed maturities:
U.S. government and government securities                   $        53,592          $       51,678
Foreign governments                                                     400                     392
States, territories and possessions                                  11,102                  10,274
Political subdivisions of states, territories and
possessions                                                          39,098                  35,925
Special revenue and special assessment obligations                  107,939                  99,528
Industrial and public utilities                                     106,575                 102,514
Commercial mortgage-backed securities                               110,538                  98,807
Residential mortgage-backed securities                               20,076                  19,087
Other loan-backed securities                                         44,880                  43,830
Hybrid securities                                                     5,344                   4,784
Total fixed maturities                                              499,544                 466,819

Equity securities                                                    34,248                  30,698
Total investments                                           $       533,792          $      497,517



                                       45

————————————————– ——————————

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

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



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

                                                June 30, 2022
(in thousands, except percentages)       Fair Value        % of Total
AAA                                    $      77,745           16.7  %
AA                                           272,331           58.3  %
A                                             83,549           17.9  %
BBB                                           29,786            6.4  %
BB                                             3,382            0.7  %
Below investment grade                            26            0.0  %
Total fixed maturities                 $     466,819          100.0  %



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

0.0%

         Total fixed maturities                 $        471,061          

100.0%

Significant 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.

                                       46

————————————————– ——————————

  Table of Contents
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.