Table of Contents

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 001-38996


ProSight Global, Inc.

(Exact name of registrant as specified in its charter)


Delaware

    

35‑240566435-2405664

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

412 Mt. Kemble Avenue

Suite 300

Morristown, NJ 07960

(973) 532-1900

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

N/A

(Former name, former address and former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 per share

PROS

New York Stock Exchange

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 and posted pursuant to Rule 405 of Regulation S-T 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑212b-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‑212b-2 of the Exchange Act). Yes    No  .

There were 43,342,39943,587,642 shares of Common Stock ($0.01 par value) outstanding as of May 12,August 10, 2020.


Table of Contents

PROSIGHT GLOBAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

   

PART I. FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

Consolidated Balance Sheets (Unaudited) as of March 31,June 30, 2020 and December 31, 2019

2

2

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March 31,June 30, 2020 and 2019

3

3

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and Six Months Ended March 31,June 30, 2020 and 2019

4

4

Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the ThreeSix Months Ended March 31,June 30, 2020 and 2019

5

5

Consolidated Statements of Cash Flows (Unaudited) for the ThreeSix Months Ended March 31,June 30, 2020 and 2019

6

6

Notes to Interim Consolidated Financial Statements (Unaudited)

7

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

45

Item 4.

Controls and Procedures

45

51

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

51

46

Item 1A.

Risk Factors

51

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

47

Item 3.

Defaults Upon Senior Securities

53

47

Item 4.

Mine Safety Disclosures

53

47

Item 5.

Other Information

53

47

Item 6.

Exhibits

53

48

Signatures

54

49

1


Table of Contents

ProSight Global, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

June 30, 

    

December 31, 

($ in thousands except share amounts)

 

2020

 

2019

2020

2019

Assets

 

 

  

 

 

 

  

 

Investments:

 

 

  

 

 

  

 

  

 

  

Fixed maturity securities, available-for-sale at fair value (amortized cost $2,038,469 in 2020 and $1,999,403 in 2019, allowance for credit losses $(416) in 2020 and $0 in 2019)

 

$

2,002,420

 

$

2,040,682

Commercial levered loans at amortized cost (fair value $12,246 in 2020 and $13,950 in 2019)

 

 

13,725

 

 

14,069

Non-redeemable preferred stock securities at fair value (amortized cost $11,669 in 2020 and $0 in 2019)

 

 

11,378

 

 

 —

Limited partnerships and limited liability companies at fair value (cost $67,445 in 2020 and $62,226 in 2019)

 

 

65,011

 

 

66,660

Fixed maturity securities, available-for-sale at fair value (amortized cost $2,102,989 in 2020 and $1,999,403 in 2019, allowance for credit losses $(1,985) in 2020 and $0 in 2019)

 

$

2,162,780

$

2,040,682

Commercial levered loans at amortized cost (fair value $12,628 in 2020 and $13,950 in 2019)

 

 

13,463

 

14,069

Non-redeemable preferred stock securities at fair value (amortized cost $11,670 in 2020 and $0 in 2019)

11,785

Limited partnerships and limited liability companies at fair value (cost $74,019 in 2020 and $62,226 in 2019)

 

 

79,717

 

66,660

Short-term investments

 

 

19,229

 

 

43,873

 

 

496

 

43,873

Total investments

 

 

2,111,763

 

 

2,165,284

 

 

2,268,241

 

2,165,284

Cash and cash equivalents

 

 

43,141

 

 

17,284

 

 

50,637

 

17,284

Restricted cash

 

 

8,786

 

 

10,213

 

9,966

 

10,213

Accrued investment income

 

 

13,812

 

 

13,610

 

 

14,119

 

13,610

Premiums and other receivables, net

 

 

156,241

 

 

190,004

 

 

143,519

 

190,004

Receivable from reinsurers on paid losses, net

 

 

4,876

 

 

3,481

 

 

2,497

 

3,481

Reinsurance receivables on unpaid losses, net

 

 

156,866

 

 

193,952

 

 

141,427

 

193,952

Deferred policy acquisition costs

 

 

99,842

 

 

98,812

 

 

94,587

 

98,812

Prepaid reinsurance premiums

 

 

40,383

 

 

42,861

 

 

47,837

 

42,861

Net deferred income taxes

 

 

20,598

 

 

4,803

 

 

 

4,803

Goodwill and net intangible assets

 

 

29,181

 

 

29,189

 

 

29,174

 

29,189

Fixed assets and capitalized software, net

 

 

36,313

 

 

37,167

 

 

35,630

 

37,167

Funds withheld related to sale of affiliate

 

 

19,529

 

 

19,453

 

 

19,529

 

19,453

Other assets

 

 

21,615

 

 

29,537

 

 

34,218

 

29,537

Assets of discontinued operations

 

 

23,342

 

 

21,584

 

 

23,171

 

21,584

Total assets

 

$

2,786,288

 

$

2,877,234

 

$

2,914,552

$

2,877,234

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

 

  

 

  

Reserve for unpaid losses and loss adjustment expenses

 

$

1,545,799

 

$

1,521,648

 

$

1,544,123

$

1,521,648

Reserve for unearned premiums

 

 

468,486

 

 

483,223

 

 

450,934

 

483,223

Ceded reinsurance payable

 

 

13,148

 

 

17,768

 

 

20,324

 

17,768

Notes payable, net of debt issuance costs

 

 

164,778

 

 

164,693

 

 

164,862

 

164,693

Secured loan payable, net of issuance costs

24,997

Funds held under reinsurance agreements

 

 

23,374

 

 

58,855

 

 

22,858

 

58,855

Net deferred income taxes

75

Other liabilities

 

 

48,843

 

 

56,438

 

 

66,762

 

56,438

Liabilities of discontinued operations

 

 

33,758

 

 

31,578

 

 

33,517

 

31,578

Total liabilities

 

 

2,298,186

 

 

2,334,203

 

 

2,328,452

 

2,334,203

 

 

 

 

 

 

Stockholders’ equity

 

 

  

 

 

  

 

 

  

 

  

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued or outstanding

 

 

 —

 

 

 —

Common stock, $0.01 par value; 200,000,000 shares authorized; 43,355,319 and 43,071,186 shares issued, 43,342,399 and 43,058,266 shares outstanding in 2020 and 2019, respectively

 

 

433

 

 

431

 

 

433

 

431

Paid-in capital

 

 

661,203

 

 

661,761

 

 

664,895

 

661,761

Accumulated other comprehensive (loss) income

 

 

(23,988)

 

 

37,453

Accumulated other comprehensive income

 

 

52,756

 

37,453

Retained deficit

 

 

(149,346)

 

 

(156,414)

 

 

(131,784)

 

(156,414)

Treasury shares - at cost (12,920 shares)

 

 

(200)

 

 

(200)

 

 

(200)

 

(200)

Total stockholders’ equity

 

 

488,102

 

 

543,031

 

 

586,100

 

543,031

Total liabilities and stockholders’ equity

 

$

2,786,288

 

$

2,877,234

 

$

2,914,552

$

2,877,234

See accompanying notes to interim consolidated financial statements (unaudited)

2


Table of Contents

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

 

 

 

 

 

 

Three Months Ended March 31 

Three Months Ended June 30

Six Months Ended June 30

($ in thousands except per share amounts)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

Gross written premiums

 

$

213,784

 

$

255,838

$

186,394

$

235,032

$

400,178

$

490,870

Net earned premiums

 

 

205,662

 

 

195,608

 

181,629

 

202,480

 

387,291

 

398,088

Net investment income

 

 

8,815

 

 

17,158

 

23,791

 

17,398

 

32,606

 

34,556

Realized investment gains, net

 

 

232

 

 

113

 

1,891

 

137

 

2,123

 

250

Other income

 

 

112

 

 

93

 

101

 

97

 

213

 

190

Total revenues

 

 

214,821

 

 

212,972

 

207,412

 

220,112

 

422,233

 

433,084

 

 

 

 

 

 

Expenses:

 

 

  

 

 

  

 

  

 

  

 

  

 

  

Net losses and loss adjustment expenses incurred

 

 

127,557

 

 

118,333

 

112,473

 

127,115

 

240,030

 

245,448

Policy acquisition expenses

 

 

46,986

 

 

46,573

 

42,033

 

45,533

 

89,019

 

92,106

General and administrative expenses

 

 

26,637

 

 

27,194

 

26,415

 

26,028

 

53,052

 

53,222

Interest expense

 

 

3,105

 

 

3,362

 

3,067

 

3,147

 

6,172

 

6,509

Other expense

 

 

1,737

 

 

 —

1,390

7,170

3,127

7,170

Total expenses

 

 

206,022

 

 

195,462

 

185,378

 

208,993

 

391,400

 

404,455

Income from continuing operations before income taxes

 

 

8,799

 

 

17,510

 

22,034

 

11,119

 

30,833

 

28,629

 

 

 

 

 

 

Income tax provision:

 

 

  

 

 

  

 

  

 

  

 

  

 

  

Current

 

 

1,631

 

 

141

 

4,116

 

82

 

5,747

 

223

Deferred

 

 

357

 

 

3,674

 

635

 

2,341

 

992

 

6,015

Total income tax expense

 

 

1,988

 

 

3,815

 

4,751

 

2,423

 

6,739

 

6,238

Net income from continuing operations

 

 

6,811

 

 

13,695

 

17,283

 

8,696

 

24,094

 

22,391

 

 

 

 

 

 

Discontinued operations:

 

 

  

 

 

  

 

  

 

  

 

  

 

  

Net income (loss) from discontinued operations

 

 

257

 

 

(255)

 

279

 

(78)

 

536

 

(333)

Net income

 

$

7,068

 

$

13,440

$

17,562

��

$

8,618

$

24,630

$

22,058

 

 

 

 

 

 

Earnings per share – basic:

 

 

  

 

 

  

 

  

 

  

 

  

 

  

Net income from continuing operations

 

$

0.16

 

$

0.35

$

0.39

$

0.22

$

0.55

$

0.58

Net income

 

$

0.16

 

$

0.35

$

0.40

$

0.22

$

0.56

$

0.57

 

 

 

 

 

 

Earnings per share – diluted:

 

 

  

 

 

 

 

  

 

  

 

  

 

Net income from continuing operations

 

$

0.15

 

$

0.35

$

0.39

$

0.22

$

0.55

$

0.57

Net income

 

$

0.16

 

$

0.34

$

0.40

$

0.22

$

0.56

$

0.56

See accompanying notes to interim consolidated financial statements (unaudited)

3


Table of Contents

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

($ in thousands)

    

2020

    

2019

Net income

 

$

7,068

 

$

13,440

Other comprehensive (loss) income, net of taxes:

 

 

  

 

 

 

Change in unrealized holding (losses) gains on available-for-sale debt securities, net of deferred tax (benefit) expense of $(16,102) in 2020 and $7,241 in 2019

 

 

(60,964)

 

 

27,562

Less: reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of $136 in 2020 and $(24) in 2019

 

 

806

 

 

(190)

Less: reclassification adjustment for credit losses included in net income, net of tax benefit of $(87) in 2020 and $0 in 2019

 

 

(329)

 

 

 —

Other comprehensive (loss) income

 

 

(61,441)

 

 

27,752

Comprehensive (loss) income

 

$

(54,373)

 

$

41,192

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

Net income

$

17,562

$

8,618

$

24,630

$

22,058

Other comprehensive income, net of taxes:

 

  

 

  

 

  

 

Change in unrealized holding gains on available-for-sale debt securities, net of deferred tax expense of $20,851 and $4,749 in 2020 and $6,206 and $13,447 in 2019

 

78,456

 

23,624

 

17,492

 

51,186

Less: reclassification adjustment for gains included in net income, net of tax expense (benefit) of $726 and $862 in 2020 and $(28) and $(52) in 2019

 

2,952

 

217

 

3,758

 

27

Less: reclassification adjustment for credit losses included in net income, net of tax benefit of $(330) and $(417) in 2020 and $0 and $0 in 2019

(1,240)

(1,569)

Other comprehensive income

 

76,744

 

23,407

 

15,303

 

51,159

Comprehensive income

$

94,306

$

32,025

$

39,933

$

73,217

See accompanying notes to interim consolidated financial statements (unaudited)

4


Table of Contents

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

    

 

 

    

 

 

 

Preferred

 

Common

 

Paid-In

 

Other Comprehensive

 

Retained

 

Treasury

 

 

 

    

    

    

    

Accumulated

    

    

    

Preferred

Common

Paid-In

Other Comprehensive

Retained

Treasury

($ in thousands)

 

Stock

 

Stock

 

Capital

 

(Loss) Income

 

Deficit

 

Shares

 

Total

Stock

Stock

Capital

Income (Loss)

Deficit

Shares

Total

December 31, 2018

 

$

 —

 

$

389

 

$

607,260

 

$

(22,315)

 

$

(195,304)

 

$

(200)

 

$

389,830

$

$

389

$

607,260

$

(22,315)

$

(195,304)

$

(200)

$

389,830

Stock based employee compensation plan

 

 

 —

 

 

 —

 

 

77

 

 

 —

 

 

 —

 

 

 —

 

 

77

 

 

77

 

 

 

 

77

Net unrealized gain on available-for-sale debt securities, net of deferred tax expense of $7,265

 

 

 —

 

 

 —

 

 

 —

 

 

27,752

 

 

 —

 

 

 —

 

 

27,752

 

 

 

27,752

 

 

 

27,752

Equity distribution

 

 

 —

 

 

 —

 

 

(4,174)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,174)

 

 

(4,174)

 

 

 

 

(4,174)

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,440

 

 

 —

 

 

13,440

 

 

 

 

13,440

 

 

13,440

March 31, 2019

 

$

 —

 

$

389

 

$

603,163

 

$

5,437

 

$

(181,864)

 

$

(200)

 

$

426,925

$

$

389

$

603,163

$

5,437

$

(181,864)

$

(200)

$

426,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on available-for-sale debt securities, net of deferred tax expense of $6,234

23,407

23,407

Net income

8,618

8,618

June 30, 2019

$

$

389

$

603,163

$

28,844

$

(173,246)

$

(200)

$

458,950

December 31, 2019

 

$

 —

 

$

431

 

$

661,761

 

$

37,453

 

$

(156,414)

 

$

(200)

 

$

543,031

$

$

431

$

661,761

$

37,453

$

(156,414)

$

(200)

$

543,031

Stock based employee compensation plan

 

 

 —

 

 

 2

 

 

1,754

 

 

 —

 

 

 —

 

 

 —

 

 

1,756

2

 

1,754

 

 

 

1,756

Net unrealized loss on available-for-sale debt securities, net of deferred tax benefit of $(16,151)

 

 

 —

 

 

 —

 

 

 —

 

 

(61,441)

 

 

 —

 

 

 —

 

 

(61,441)

 

 

(61,441)

 

 

(61,441)

Retirement of common stock (tax payments on equity compensation)

 

 

 —

 

 

 —

 

 

(2,263)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,263)

(2,263)

(2,263)

Payments related to offering costs

 

 

 —

 

 

 —

 

 

(49)

 

 

 —

 

 

 —

 

 

 —

 

 

(49)

 

(49)

 

 

 

(49)

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,068

 

 

 —

 

 

7,068

 

 

 

7,068

 

7,068

March 31, 2020

 

$

 —

 

$

433

 

$

661,203

 

$

(23,988)

 

$

(149,346)

 

$

(200)

 

$

488,102

$

$

433

$

661,203

$

(23,988)

$

(149,346)

$

(200)

$

488,102

Stock based employee compensation plan

3,057

3,057

Net unrealized gain on available-for-sale debt securities, net of deferred tax expense of $20,455

76,744

76,744

Tax benefit on payments related to offering costs

635

635

Net income

17,562

17,562

June 30, 2020

$

$

433

$

664,895

$

52,756

$

(131,784)

$

(200)

$

586,100

See accompanying notes to interim consolidated financial statements (unaudited)

5


Table of Contents

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

Three Months Ended March 31 

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

Operating activities

 

 

  

 

 

  

 

  

 

  

Net income from continuing operations

 

$

6,811

 

$

13,695

$

24,094

 

$

22,391

Net income (loss) from discontinued operations

 

 

257

 

 

(255)

 

536

 

 

(333)

Net income

 

 

7,068

 

 

13,440

 

24,630

 

 

22,058

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

 

 

  

 

  

 

 

  

Provision for deferred taxes

 

 

357

 

 

3,674

 

992

 

 

6,015

Realized investment gains, net

 

 

(232)

 

 

(113)

 

(2,123)

 

 

(250)

Net limited partnerships losses (gains)

 

 

6,877

 

 

(1,251)

Net limited partnerships and limited liability companies gains

 

(1,254)

 

 

(2,449)

Net amortization (accretion) from bonds and commercial loans

 

 

598

 

 

(861)

 

1,808

 

 

(2,227)

Net change in fair value of non-redeemable preferred stock securities

 

 

291

 

 

 —

(115)

Depreciation and amortization

 

 

1,987

 

 

2,100

 

4,186

 

 

4,131

Amortization of debt issuance costs

 

 

85

 

 

 —

169

162

Stock based compensation

 

 

1,754

 

 

77

 

4,813

 

 

77

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

 

 

Premiums and other receivables, net

 

 

33,763

 

 

3,857

 

46,485

 

 

4,219

Receivable from reinsurers on paid losses and reinsurance receivable on unpaid losses

 

 

35,691

 

 

(20,033)

 

53,509

 

 

(22,225)

Ceded reinsurance payable

 

 

(4,620)

 

 

2,271

 

2,556

 

 

2,706

Accrued investment income

 

 

(202)

 

 

(229)

 

(509)

 

 

(1,035)

Deferred policy acquisition costs

 

 

(1,030)

 

 

(6,768)

 

4,225

 

 

(8,127)

Prepaid reinsurance premiums

 

 

2,478

 

 

(19,501)

 

(4,976)

 

 

(14,592)

Reserve for unpaid losses and loss adjustment expenses

 

 

24,151

 

 

52,723

 

22,475

 

 

86,848

Reserve for unearned premiums

 

 

(14,737)

 

 

34,027

 

(32,289)

 

 

36,974

Funds withheld related to sale of affiliate

 

 

(76)

 

 

 —

 

(76)

 

 

(137)

Funds held under reinsurance agreements

 

 

(35,481)

 

 

14,621

 

(35,997)

 

 

9,197

Other assets

 

 

7,924

 

 

21,198

(4,465)

20,149

Other liabilities

 

 

(7,595)

 

 

(14,571)

 

10,324

 

 

17,819

Total adjustments

 

 

51,983

 

 

71,221

 

69,738

 

 

137,255

Net cash provided by operating activities – continuing operations

 

 

58,794

 

 

84,916

 

93,832

 

 

159,646

Net cash provided by (used in) operating activities – discontinued operations

 

 

62

 

 

(107)

 

115

 

 

(305)

Net cash provided by operating activities

 

 

58,856

 

 

84,809

 

93,947

 

 

159,341

 

 

 

 

 

 

Investing activities

 

 

  

 

 

  

 

  

 

  

Purchases of available-for-sale fixed maturity securities

 

 

(191,915)

 

 

(80,986)

 

(408,224)

(221,287)

Sales of available-for-sale fixed maturity securities

 

 

114,474

 

 

5,228

 

194,904

32,791

Redemptions of available-for-sale fixed maturity securities

 

 

38,376

 

 

38,218

 

111,877

64,310

Purchases of non-redeemable preferred stock securities

 

 

(11,669)

 

 

 —

(11,669)

Redemptions of commercial levered loans

 

 

346

 

 

111

 

608

350

Purchases of limited partnerships

 

 

(6,873)

 

 

(1,944)

 

(13,651)

(8,244)

Distributions and redemptions from limited partnerships

 

 

1,644

 

 

793

 

1,847

1,775

Purchases of short-term investments

 

 

(25,634)

 

 

(126,088)

 

(34,955)

(241,574)

Sales of short-term investments

 

 

50,323

 

 

93,761

 

78,485

228,765

Acquisition of fixed assets and capitalized software

 

 

(1,125)

 

 

(1,654)

 

(2,634)

(3,260)

Net cash used in investing activities - continuing operations

 

 

(32,053)

 

 

(72,561)

 

(83,412)

 

(146,374)

Net cash (used in) provided by investing activities - discontinued operations

 

 

(15)

 

 

466

Net cash provided by (used in) investing activities - discontinued operations

 

634

 

(320)

Net cash used in investing activities

 

 

(32,068)

 

 

(72,095)

 

(82,778)

 

(146,694)

 

 

 

 

 

 

Financing activities

 

 

  

 

 

  

 

  

 

  

Payments related to offering costs

 

 

(49)

 

 

 —

(49)

Tax withholding on stock compensation awards

 

 

(2,263)

 

 

 —

(2,263)

Net cash used in financing activities

 

 

(2,312)

 

 

 —

 

 

 

 

 

 

Proceeds from secured notes payable

24,997

Net cash provided by financing activities

 

22,685

 

Net change in cash and cash equivalents

 

 

24,476

 

 

12,714

 

33,854

 

12,647

Cash, cash equivalents and restricted cash at beginning of year - continuing operations

 

 

27,497

 

 

29,900

 

27,497

29,900

Cash, cash equivalents and restricted cash at beginning of year- discontinued operations

 

 

255

 

 

1,034

 

255

1,034

Less: cash, cash equivalents and restricted cash at end of period - discontinued operations

 

 

(301)

 

 

(1,348)

 

(1,003)

(411)

Cash, cash equivalents and restricted cash at end of period - continuing operations

 

$

51,927

 

$

42,300

$

60,603

 

$

43,170

See accompanying notes to interim consolidated financial statements (unaudited)

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

1. Basis of Reporting

The accompanying unaudited interim consolidated financial statements of ProSight Global, Inc. and its subsidiaries (the “Company”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and do not contain all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2020, as amended by Amendment No. 1 to Form 10-K filed with the SEC on March 10, 2020. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All significant intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

Prior to July 25, 2019, the Company was a wholly-owned subsidiary of ProSight Global Holdings Limited (“PGHL”), a Bermuda holding company. Effective July 25, 2019, prior to the completion of the Company’s initial public offering (“IPO”), PGHL merged with and into the Company, with the Company surviving the merger (the “merger”). The prior holders of PGHL’s equity interests then outstanding received, as merger consideration, the right to receive 6.46 shares of the Company’s common stock for each such outstanding PGHL equity interest.

All share and per share amounts in the unaudited interim consolidated financial statements and related notes have been restated for all historical periods prior to July 25, 2019, presented to give effect to the merger and related conversion of shares, including reclassifying an amount equal to the change in value of common stock to additional paid-in capital, as well as the effectiveness of the Certificate of Incorporation.

Use of Estimates

The preparation of the unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statement balances, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management periodically reviews its estimates and assumptions.

2.2. Recently Adopted Accounting Standards

Accounting Guidance Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑02, 2016-02, Leases (“ASU 2016-02”)to improve the financial reporting of leasing transactions. Under this ASU, lessees will recognize a right-of-use asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be measured as the present value of the future minimum lease payments taking into account renewal options, if applicable, plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate. The lessee’s income statement treatment for leases will vary depending on the nature of  the lease. A financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The payment of the liability set up for such leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. ASU 2016‑022016-02 requires the application of a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The Company adopted ASU 2016‑022016-02 in the first quarter of 2020, and as part of its implementation, elected the modified retrospective method approach at the beginning of the period of adoption and did not retrospectively adjust prior periods presented. The Company elected to not separate lease components from non-lease components (such as office cleanings, security and maintenance services provided by the Company’s lessors for certain of its leases). The Company

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

also elected the package of practical expedients under the transition guidance, which allowed the Company to not reevaluate existing lease classifications, among others. As of January 1, 2020, the Company’s adoption of this guidance resulted in recognition of a right-of-use asset of $5.6 million and a corresponding lease liability of $6.3 million in continuing operations, and a right-of-use asset of $2.5 million and a corresponding lease liability of $3.0 million in discontinued operations. The adoption of this guidance did not have a material impact on the Company’s retained earnings. See Note 15. Leases for further information on the Company’s leases.

In June 2016, the FASB issued ASU 2016‑13, 2016-13, Financial Instruments — Credit Losses, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016‑132016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, trade receivables, and reinsurance receivables. ASU 2016‑132016-13 requires a valuation allowance to be calculated on these financial assets and that they be presented on the financial statements net of the valuation allowance. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is referred to as the current expected credit loss model. The Company adopted ASU 2016-13 in the first quarter of 2020 using a modified retrospective approach. As of January 1, 2020, the Company’s adoption of this guidance did not have a material impact on the Company’s retained earnings.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted ASU 2018-13 in the first quarter of 2020 using a retrospective approach and as the requirements of this literature are disclosure only, ASU 2018-13 did not have an impact on the Company’s financial condition or results of operations.

Accounting Guidance Not Yet Adopted

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 shortens the amortization period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. ASU 2017-08 is effective for public entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2017-08 is effective for annual periods beginning after December 15, 2019 and interim periods within annual periods beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2016-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 provides the option to apply prospectively to costs for activities performed on or after the date that the entity first adopts or retrospectively in accordance with guidance on accounting changes. ASU

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

2018-15 is effective for public entities for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2018-15 is effective for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

changes and year-to-date losses in interim periods.  An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates.  Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective.  This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate.  Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis.  However, current guidance provides an exception that when a loss in an interim period exceeds the anticipate loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year.  ASU 2019-12 removes this exception and provides that in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate.  ASU 2019-12 is effective for public entities for annual periods beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2019-12 is effective for annual periods beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”). ASU 2020-01 will clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. ASU 2020-01 is effective for public entities for annual periods beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2020-01 is effective for annual periods beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. Companies can elect to adopt ASU 2020-04 as of the beginning of the interim period that includes March 2020, or any date thereafter through December 31, 2022. The Company is currently evaluating the impact of this guidance on its financial condition and results of operations.

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

3. Supplemental Cash Flow

The following table represents the supplemental cash flow information for the threesix months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

($ in thousands)

    

2020

    

2019

Non-cash activity:

 

 

 

 

 

 

Operating lease right-of-use assets due to adoption of ASU 2016-02 - continuing operations

 

$

4,810

 

$

 —

Operating lease right-of-use assets due to adoption of ASU 2016-02 - discontinued operations

 

$

2,287

 

$

 —

Operating lease liabilities due to adoption of ASU 2016-02 - continuing operations

 

$

5,533

 

$

 —

Operating lease liabilities due to adoption of ASU 2016-02 - discontinued operations

 

$

2,665

 

$

 —

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

Cash paid during the period for:

 

  

 

  

Interest

$

6,187

$

6,566

Non-cash activity:

Operating lease right-of-use assets due to the adoption of ASU 2016-02 - continuing operations

$

4,117

$

Operating lease right-of-use assets due to the adoption of ASU 2016-02 - discontinued operations

$

2,174

$

Operating lease liabilities due to the adoption of ASU 2016-02 - continuing operations

$

4,624

$

Operating lease liabilities due to the adoption of ASU 2016-02 - discontinued operations

$

2,526

$

Tax benefit on payments related to offering costs

$

635

$

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

In MarchFor the six months ended June 30, 2020, the Company withheld 154,629 shares of common stock from employees related to tax liabilities incurred upon the settlement of vested restricted stock units (“RSUs”). The number of shares of common stock issued, upon the settlement of vested RSUs net of tax withholding, was 284,133.

4. Discontinued Operations

In March 2017, the Company announced its exit from the United Kingdom (“U.K.”) insurance market. The financial results and subsequent expenses directly attributable to U.K. operations are included in the Company’s financial statements and classified within discontinued operations for all periods presented. Net income forfrom discontinued operations was $0.3 million and $0.5 million for the three and six months ended March 31,June 30, 2020. Net loss forfrom discontinued operations was $0.1 million and $0.3 million for the three and six months ended March 31,June 30, 2019.

The following table represents the carrying amounts of assets and liabilities associated with the exit from the insurance market in the U.K. reported as discontinued operations in its consolidated balance sheets:

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

June 30, 

    

December 31, 

($ in thousands)

 

2020

 

2019

2020

2019

Assets

 

 

 

 

 

 

Cash and investments

 

$

10,080

 

$

10,428

$

10,120

$

10,428

Other assets

 

 

13,262

 

 

11,156

 

13,051

 

11,156

Total assets

 

$

23,342

 

$

21,584

$

23,171

$

21,584

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

  

 

  

Reserve for unpaid losses and loss adjustment expenses

 

$

24,149

 

$

24,169

$

24,146

$

24,169

Other liabilities

 

 

9,609

 

 

7,409

 

9,371

 

7,409

Total liabilities

 

$

33,758

 

$

31,578

$

33,517

$

31,578

5. Investments

The Company’s investment portfolio consists of fixed maturity securities, commercial levered loans, limited partnerships and limited liability companies, non-redeemable preferred stock securities, and short-term investments. Fixed maturity securities may include U.S. Treasury securities, government agency securities, municipal debt obligations, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), collateralized loan obligations (“CLO”), asset-backed securities (“ABS”) and corporate debt securities. Corporate debt securities may include

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

investment grade and below investment grade bonds, bank loan investments and redeemable preferred stock securities. The Company has designated its investments in fixed maturity securities as available-for-sale (“AFS”) securities.

10

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

(a) The gross unrealized gains and losses on fixed maturity securities included in assets from continuing operations at March 31,June 30, 2020, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost/

 

 

 

Gross

    

Gross

    

 

 

 

Amortized

 

Credit Loss

 

Unrealized

 

Unrealized

 

Fair

    

Cost/

    

    

Gross

    

Gross

    

Amortized

Credit Loss

Unrealized

Unrealized

Fair

($ in thousands)

 

Cost

 

Allowance

 

Gains

 

Losses

 

Value

Cost

Allowance

Gains

Losses

Value

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

40,679

 

$

 —

 

$

2,643

 

$

 —

 

$

43,322

 

$

36,265

$

$

2,204

 

$

$

38,469

Government agency securities

 

 

27,998

 

 

 —

 

 

591

 

 

 —

 

 

28,589

28,358

526

28,884

Corporate debt securities

 

 

1,317,091

 

 

(293)

 

 

22,167

 

 

(37,278)

 

 

1,301,687

 

1,302,996

(615)

 

65,651

 

(15,795)

 

1,352,237

Municipal debt obligations

 

 

103,271

 

 

 —

 

 

813

 

 

(3,443)

 

 

100,641

 

158,464

 

5,623

 

(792)

 

163,295

ABS

 

 

49,205

 

 

(1)

 

 

26

 

 

(3,210)

 

 

46,020

 

49,723

(275)

 

347

 

(1,064)

 

48,731

CLO

 

 

177,411

 

 

(6)

 

 

 —

 

 

(19,842)

 

 

157,563

 

175,687

(6)

 

41

(7,201)

 

168,521

CMBS

 

 

94,816

 

 

 —

 

 

1,603

 

 

(1,945)

 

 

94,474

 

99,218

 

5,245

 

(986)

 

103,477

RMBS - non-agency

 

 

92,189

 

 

(116)

 

 

3,411

 

 

(4,851)

 

 

90,633

 

115,588

(1,089)

 

6,369

 

(2,008)

 

118,860

RMBS - agency

 

 

135,809

 

 

 —

 

 

3,738

 

 

(56)

 

 

139,491

 

136,690

 

3,616

 

 

140,306

Total fixed maturity securities

 

$

2,038,469

 

$

(416)

 

$

34,992

 

$

(70,625)

 

$

2,002,420

$

2,102,989

$

(1,985)

$

89,622

$

(27,846)

$

2,162,780

The gross unrealized gains and losses on fixed maturity securities included in assets from continuing operations at December 31, 2019, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost/

 

Gross

    

Gross

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

    

Cost/

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

Cost

Gains

Losses

Value

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

49,161

 

$

838

 

$

(14)

 

$

49,985

 

$

49,161

$

838

 

$

(14)

 

$

49,985

Government agency securities

 

 

6,522

 

 

23

 

 

(14)

 

 

6,531

6,522

23

(14)

6,531

Corporate debt securities

 

 

1,308,094

 

 

33,743

 

 

(3,025)

 

 

1,338,812

 

1,308,094

33,743

 

(3,025)

 

1,338,812

Municipal debt obligations

 

 

80,338

 

 

243

 

 

(766)

 

 

79,815

 

80,338

243

 

(766)

 

79,815

ABS

 

 

73,068

 

 

854

 

 

(340)

 

 

73,582

 

73,068

854

 

(340)

 

73,582

CLO

 

 

181,704

 

 

125

 

 

(2,280)

 

 

179,549

 

181,704

125

 

(2,280)

 

179,549

CMBS

 

 

95,810

 

 

1,863

 

 

(147)

 

 

97,526

 

95,810

1,863

 

(147)

 

97,526

RMBS - non-agency

 

 

62,343

 

 

9,458

 

 

(191)

 

 

71,610

 

62,343

9,458

 

(191)

 

71,610

RMBS - agency

 

 

142,363

 

 

1,256

 

 

(347)

 

 

143,272

 

142,363

1,256

 

(347)

 

143,272

Total fixed maturity securities

 

$

1,999,403

 

$

48,403

 

$

(7,124)

 

$

2,040,682

$

1,999,403

$

48,403

$

(7,124)

$

2,040,682

(b) The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at March 31,June 30, 2020, grouped by asset class and by duration of time in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

Greater Than 12 Months

 

Total

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Total

 

Unrealized

Less Than 12 Months

Greater Than 12 Months

Total

    

    

    

    

    

    

Total

Fair

Unrealized

Fair

Unrealized

Total

Unrealized

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Fair Value

 

Losses

Value

Losses

Value

Losses

Fair Value

Losses

Corporate debt securities

 

$

495,656

 

$

(31,005)

 

$

83,577

 

$

(6,273)

 

$

579,233

 

$

(37,278)

 

$

131,043

$

(10,502)

 

$

76,754

 

$

(5,293)

 

$

207,797

 

$

(15,795)

Municipal debt obligations

 

 

66,579

 

 

(3,278)

 

 

5,584

 

 

(165)

 

 

72,163

 

 

(3,443)

 

25,587

 

(456)

 

11,372

 

(336)

 

36,959

 

(792)

ABS

 

 

33,474

 

 

(2,604)

 

 

8,425

 

 

(606)

 

 

41,899

 

 

(3,210)

 

9,504

 

(693)

 

16,883

 

(371)

 

26,387

 

(1,064)

CLO

 

 

59,491

 

 

(5,053)

 

 

98,072

 

 

(14,789)

 

 

157,563

 

 

(19,842)

 

47,434

 

(1,278)

 

116,188

 

(5,923)

 

163,622

 

(7,201)

CMBS

 

 

26,478

 

 

(1,935)

 

 

3,031

 

 

(10)

 

 

29,509

 

 

(1,945)

 

16,564

 

(859)

 

4,725

 

(127)

 

21,289

 

(986)

RMBS - non-agency

 

 

45,431

 

 

(3,042)

 

 

12,115

 

 

(1,809)

 

 

57,546

 

 

(4,851)

 

36,568

 

(1,189)

 

9,317

 

(819)

 

45,885

 

(2,008)

RMBS - agency

 

 

6,585

 

 

(55)

 

 

 1

 

 

(1)

 

 

6,586

 

 

(56)

Total fixed maturity securities

 

$

733,694

 

$

(46,972)

 

$

210,805

 

$

(23,653)

 

$

944,499

 

$

(70,625)

 

$

266,700

$

(14,977)

$

235,239

$

(12,869)

$

501,939

$

(27,846)

11


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at December 31, 2019, grouped by asset class and by duration of time in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

Greater Than 12 Months

 

Total

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Total

 

Unrealized

Less Than 12 Months

Greater Than 12 Months

Total

    

    

    

    

    

    

Total

Fair

Unrealized

Fair

Unrealized

Total

Unrealized

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Fair Value

 

Losses

Value

Losses

Value

Losses

Fair Value

Losses

U.S. Treasury securities

 

$

 —

 

$

 —

 

$

7,469

 

$

(14)

 

$

7,469

 

$

(14)

$

$

$

7,469

$

(14)

$

7,469

$

(14)

Government agency securities

 

 

3,192

 

 

(14)

 

 

 —

 

 

 —

 

 

3,192

 

 

(14)

3,192

(14)

3,192

(14)

Corporate debt securities

 

 

133,341

 

 

(2,509)

 

 

50,695

 

 

(516)

 

 

184,036

 

 

(3,025)

 

133,341

 

(2,509)

 

50,695

 

(516)

 

184,036

 

(3,025)

Municipal debt obligations

 

 

66,355

 

 

(766)

 

 

 —

 

 

 —

 

 

66,355

 

 

(766)

 

66,355

 

(766)

 

 

 

66,355

 

(766)

ABS

 

 

27,884

 

 

(175)

 

 

11,165

 

 

(165)

 

 

39,049

 

 

(340)

 

27,884

 

(175)

 

11,165

 

(165)

 

39,049

 

(340)

CLO

 

 

28,485

 

 

(338)

 

 

110,825

 

 

(1,942)

 

 

139,310

 

 

(2,280)

 

28,485

 

(338)

 

110,825

 

(1,942)

 

139,310

 

(2,280)

CMBS

 

 

18,307

 

 

(102)

 

 

6,053

 

 

(45)

 

 

24,360

 

 

(147)

 

18,307

 

(102)

 

6,053

 

(45)

 

24,360

 

(147)

RMBS - non-agency

 

 

2,173

 

 

(14)

 

 

2,418

 

 

(177)

 

 

4,591

 

 

(191)

 

2,173

 

(14)

 

2,418

 

(177)

 

4,591

 

(191)

RMBS - agency

 

 

10,450

 

 

(12)

 

 

12,367

 

 

(335)

 

 

22,817

 

 

(347)

 

10,450

 

(12)

 

12,367

 

(335)

 

22,817

 

(347)

Total fixed maturity securities

 

$

290,187

 

$

(3,930)

 

$

200,992

 

$

(3,194)

 

$

491,179

 

$

(7,124)

$

290,187

$

(3,930)

$

200,992

$

(3,194)

$

491,179

$

(7,124)

(c) The Company was holding 500286 and 313 fixed maturity securities that were in an unrealized loss position as of March 31,June 30, 2020 and December 31, 2019, respectively. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

The Company analyzes fixed maturity securities in an unrealized loss position for credit losses if they meet the following criteria: (i) they are trading in a significant loss position, (ii) there arefailure of the issuer of the security to make scheduled interest or principal or interest payment issues,payments, (iii) there have been negative credit events with respect to the issuer, or (iv) there have been negative current events surrounding an issuer or the environment in which an issuer operates.

For fixed maturity securities in an unrealized loss position that require a credit loss analysis, the Company estimates a present value of expectexpected cash flows. If the results of the cash flow analysis indicate that the Company will not recover the full amount of its amortized cost basis, the Company records a credit loss for the excess of amortized cost over the present value of expected cash flows, not to exceed the unrealized loss. Changes in the credit loss allowance are recognized through realized investment gains, net on the consolidated statements of operations. The credit loss allowance expense for fixed maturity securities was $0.4$1.6 million and $2.0 million for the three and six months ended March 31,June 30, 2020.

The following table is a rollforward of the credit loss allowance for fixed maturity securities as of March 31, 2020:securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

Additions

 

Reduction

 

Reduction

 

Change in Securities

 

Ending

December 31,

Additions

Reduction

Reduction

Change in Securities

June 30,

($ in thousands)

 

Balance

 

New Securities

 

Sales

 

Intent to Sell

 

with Previous Allowance

 

Balance

    

2019

    

New Securities

    

Sales

    

Intent to Sell

    

with Previous Allowance

    

2020

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 —

 

$

293

 

$

 —

 

$

 —

 

$

 —

 

$

293

 

$

 

$

615

 

$

$

$

$

615

ABS

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

275

 

275

CLO

 

 

 —

 

 

 6

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

6

 

6

RMBS - non-agency

 

 

 —

 

 

116

 

 

 —

 

 

 —

 

 

 —

 

 

116

1,090

(1)

1,089

Total fixed maturity securities allowance

 

$

 —

 

$

416

 

$

 —

 

$

 —

 

$

 —

 

$

416

 

$

 

$

1,986

 

$

(1)

$

$

$

1,985

12


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

(d) The amortized cost and fair value of fixed maturity securities, excluding the Company’s structured securities portfolio, at March 31,June 30, 2020, by contractual maturity are shown below. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

March 31, 2020

 

Amortized

 

Fair

June 30, 2020

Amortized

Fair

($ in thousands)

    

Cost

    

Value

    

Cost

    

Value

Due in one year or less

 

$

103,407

 

$

103,498

$

107,187

 

$

108,224

Due after one through five years

 

 

659,203

 

 

657,184

 

641,649

 

 

661,544

Due after five through ten years

 

 

449,535

 

 

445,004

 

494,186

 

 

520,225

Due after ten years

 

 

248,896

 

 

239,964

 

254,703

 

 

264,008

 

 

1,461,041

 

 

1,445,650

 

1,497,725

 

 

1,554,001

Structured securities:

 

 

 

 

 

 

 

Government agency securities

 

 

27,998

 

 

28,589

28,358

28,884

ABS

 

 

49,205

 

 

46,020

 

49,723

 

 

48,731

CLO

 

 

177,411

 

 

157,563

 

175,687

 

 

168,521

CMBS

 

 

94,816

 

 

94,474

 

99,218

 

 

103,477

RMBS - non-agency

 

 

92,189

 

 

90,633

 

115,588

 

 

118,860

RMBS - agency

 

 

135,809

 

 

139,491

 

136,690

 

 

140,306

Total fixed maturity securities

 

$

2,038,469

 

$

2,002,420

$

2,102,989

 

$

2,162,780

The Company did not have any non-income producing fixed maturity investments as of March 31,June 30, 2020 and December 31, 2019, respectively.

(e) The Company electedrecords its limited partnership and limited liability companies using net asset value, which the Company has determined to accountbe the best indicator of fair value for its investments inthese investments. At June 30, 2020 and December 31, 2019, the fair value of limited partnerships and limited liability companies of $65.0were $79.7 million and $66.7 million, at March 31, 2020 and December 31, 2019, respectively, at fair value.respectively. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income. The largest investment within the portfolio is the Pacific Investment Management Company LLC Tactical Opportunities fund, which is carried at $34.0$43.0 million at March 31,June 30, 2020.

The carrying values used for investmentinvestments in limited partnerships and limited liability companies generally are established on the basis of the current valuations provided by the managers of such investments. These valuations are determined based upon the valuation criteria established by the governing documents of such investments or utilized in the normal course of such manager’s business, which are reflective of fair value. Such valuations may differ significantly from the values that would have been used had available markets for these investments existed and the differences could be material.

The Company’s strategies for its investments in limited partnerships and limited liability companies include investment funds that employ diverse and fundamentally driven approaches to investing which include effective risk management, hedging strategies and leverage. The portfolio of investments in limited partnerships and limited liability companies consists of common stocks, real estate assets, options, swaps, derivative instruments and other structured products.

The limited partnerships and limited liability companies in which the Company invests sometimes impose limitations on the timing of withdrawals from the funds. The Company’s inability to withdraw its investment quickly from a particular limited partnership or a limited liability company that is performing poorly could result in losses and may affect liquidity. All of the Company’s limited partnerships and limited liability companies have timing limitations. Most limited partnerships and limited liability companies require a 90-day notice period in order to withdraw funds. Some limited partnerships and limited liability companies may require a withdrawal only at the end of their fiscal year. The Company may also be subject to withdrawal fees in the event the limited partnerships and limited liability companies are

13

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

sold within a minimum holding period, which may be up to one year. Many limited partnerships and limited liability companies have invoked gated provisions that allow the fund to disperse redemption proceeds to investors over an

13


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

extended period. The Company is subject to such restrictions, which may delay the receipt of proceeds from limited partnerships and limited liability companies.

(f) The Company invests in commercial loans, which are private placements. Loans are reported at the principal amount outstanding, reduced by unearned discounts, net deferred loan fees, and an allowance for credit losses on loans. Interest on loans is calculated using the simple interest method on the daily principal amount outstanding. There was no allowance for credit losses on loanloans at March 31,June 30, 2020 and December 31, 2019, respectively.

(g) Proceeds from sales and redemptions in AFS securities totaled $152.8$154.0 million and $43.4$53.7 million for the three months ended March 31,June 30, 2020 and 2019, respectively. Proceeds from sales and redemptions in AFS securities totaled $306.8 million and $97.1 million for the six months ended June 30, 2020 and 2019, respectively. Gross realized gains from sales and redemptions in AFS securities totaled $1.0$3.7 million and $0.2$0.4 million for the three months ended March 31,June 30, 2020 and 2019, respectively. Gross realized gains from sales and redemptions in AFS securities totaled $4.7 million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively. Gross realized losses from sales and redemptions of AFS investments totaled $0.4$0.2 million and $0.1$0.3 million for the three months ended March 31,June 30, 2020 and 2019, respectively. Gross realized losses from sales and redemptions of AFS investments totaled $0.6 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively.

(h) Net investment income included in net income from continuing operations in the consolidated statements of operations from each major category of investments for the three and six months ended March 31,June 30, 2020 and 2019, is as follows:

 

 

 

 

 

 

    

Three Months Ended March 31 

   

Three Months Ended June 30

   

Six Months Ended June 30

($ in thousands)

 

2020

    

2019

2020

    

2019

2020

    

2019

Fixed maturity securities

 

$

16,282

 

$

16,119

 

$

15,849

 

$

16,531

$

32,131

 

$

32,650

Commercial levered loans

 

 

95

 

 

219

 

139

 

159

234

 

378

Net limited partnerships (losses) gains

 

 

(6,877)

 

 

1,251

Net limited partnerships and limited liability companies gains

 

8,131

 

1,143

1,254

 

2,394

Other

 

 

(10)

 

 

89

 

322

 

92

312

 

181

Gross investment income

 

 

9,490

 

 

17,678

 

24,441

 

17,925

33,931

 

35,603

Less: investment income attributable to funds withheld liabilities

 

 

136

 

 

142

118

141

254

283

Less: expenses

 

 

539

 

 

378

 

532

 

386

1,071

 

764

Net investment income

 

$

8,815

 

$

17,158

$

23,791

 

$

17,398

$

32,606

 

$

34,556

(i) Included in investments at March 31,June 30, 2020 and December 31, 2019, are securities required to be held by the Company (or those that are on deposit) with various regulatory authorities as required by law with a fair value of $208.3$230.4 million and $210.8 million, respectively. Fair value and carrying value of assets in the amount of $376.9$399.7 million and $379.5$381.5 million, respectively, were on deposit in collateral agreements at March 31,June 30, 2020. Fair value and carrying value of assets in the amount of $367.1 million and $352.0 million, respectively, were on deposit in collateral agreements at December 31, 2019.

(j) The investment portfolio has exposure to market risks, which include the effect of adverse changes in interest rates, credit quality, limited partnership value and illiquid securities, including commercial loan values, on the portfolio. Interest rate risk includes the changes in the fair value of fixed maturities based upon changes in interest rates. Credit quality risk includes the risk of default by issuers of debt securities. Risks from investments in limited partnerships and limited liability companies and illiquid securities risks include the potential loss from the diminution in the value of the underlying investment of the limited partnerships and limited liability companies and the potential loss from changes in the fair value of commercial loans.

(k) Non-redeemable preferred stock securities with readily determinable fair values are recorded at fair value. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income.

14


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The change in fair value recognizedrecognized in income on non-redeemable preferred stock securities for the three and six months ended March 31,June 30, 2020 was $0.3 million.a gain of $0.4 million and $0.1 million, respectively.

14

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

6. Fair Value Measurements

The Company has established a framework for valuing financial assets and financial liabilities. The framework is based on a hierarchy of inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The standard describes three levels of inputs that may be used to measure fair value and categorize the assets and liabilities within the hierarchy:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These prices generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information publicly available.

As of March 31,June 30, 2020, and December 31, 2019, the Company does not hold any Level 1 securities.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, nonbinding quotes in markets that are not active for identical or similar assets and other market observable inputs (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.).

The Company’s Level 2 assets include U.S. Treasury securities, government agency securities, municipal debt obligations, RMBS, CMBS, CLO, ABS, corporate debt securities and non-redeemable preferred stock securities.

The Company generally obtains valuations from third-party pricing services and/or security dealers for identical or comparable assets or liabilities by obtaining nonbinding broker quotes (when pricing service information is not available) in order to determine an estimate of fair value. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm’s-length transaction.

Level 3 – Fair value is based on at least one or more significant unobservable inputs that are supported by little or no market activity for the asset. These inputs reflect the Company’s understanding about the assumptions market participants would use in pricing the asset or liability.

The Company’s Level 3 assets include its investments in certain corporate debt securities and commercial levered loans as they are illiquid and trade in inactive markets. These markets are considered inactive as a result of the low level of trades of such investments. Commercial levered loans are also not considered within the Level 3 tabular disclosure, because they are in the “held for investment” category and are also not measured at fair value on a recurring basis.

The corporate debt securities classified under Level 3 in the fair value hierarchy are provided to the Company by an independent valuation service provider which use both observable and unobservable inputs in the calculation of fair value. Unobservable inputs, significant to the measurement and valuation of the corporate debt securities are assumptions about prepayment speed, default rates and reinvestment parameters. Significant changes to any of these inputs, or combination of inputs, could significantly change the fair value measurement for these securities when using the income approach.

15


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The primary pricing sources for the Company’s investments in commercial levered loans are reviewed for reasonableness, based on the Company’s understanding of the respective market. Prices may then be determined using valuation methodologies such as discounted cash flow models, as well as matrix pricing analyses performed on nonbinding quotes from brokers or other market makers.

15

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following are the major categories of assets measured at fair value on a recurring basis at March 31,June 30, 2020 and December 31, 2019, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

June 30, 2020

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Fixed maturity securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

 

  

 

  

U.S. Treasury securities

 

$

 —

 

$

43,322

 

$

 —

 

$

43,322

$

 

$

38,469

 

$

 

$

38,469

Government agency securities

 

 

 —

 

 

28,589

 

 

 —

 

 

28,589

28,884

28,884

Corporate debt securities

 

 

 —

 

 

1,149,269

 

 

152,418

 

 

1,301,687

 

 

1,190,160

 

162,077

 

1,352,237

Municipal debt obligations

 

 

 —

 

 

100,641

 

 

 —

 

 

100,641

 

 

163,295

 

 

163,295

ABS

 

 

 —

 

 

46,020

 

 

 —

 

 

46,020

 

 

48,731

 

 

48,731

CLO

 

 

 —

 

 

157,563

 

 

 —

 

 

157,563

 

 

168,521

 

 

168,521

CMBS

 

 

 —

 

 

94,474

 

 

 —

 

 

94,474

 

 

103,477

 

 

103,477

RMBS - non agency

 

 

 —

 

 

90,633

 

 

 —

 

 

90,633

 

 

118,860

 

 

118,860

RMBS - agency

 

 

 —

 

 

139,491

 

 

 —

 

 

139,491

 

 

140,306

 

 

140,306

Total fixed maturity securities

 

 

 —

 

 

1,850,002

 

 

152,418

 

 

2,002,420

2,000,703

162,077

2,162,780

Non-redeemable preferred stock securities

 

 

 —

 

 

11,378

 

 

 —

 

 

11,378

11,785

11,785

Total investments measured at fair value

 

$

 —

 

$

1,861,380

 

$

152,418

 

 

2,013,798

 

 

 

 

 

 

 

 

 

 

 

 

Total categorized

$

 

$

2,012,488

 

$

162,077

 

$

2,174,565

Investments measured at net asset value:

 

 

  

 

 

  

 

 

  

 

 

  

Limited partnerships and limited liability companies

 

 

 

 

 

 

 

 

 

 

 

65,011

79,717

Total assets at fair value

 

 

 

 

 

 

 

 

 

 

$

2,078,809

Total of invested assets carried at fair value

 

$

2,254,282

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

December 31, 2019

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 —

 

$

49,985

 

$

 —

 

$

49,985

$

$

49,985

$

 

$

49,985

Government agency securities

 

 

 —

 

 

6,531

 

 

 —

 

 

6,531

6,531

6,531

Corporate debt securities

 

 

 —

 

 

1,189,181

 

 

149,631

 

 

1,338,812

 

 

1,189,181

 

149,631

 

1,338,812

Municipal debt obligations

 

 

 —

 

 

79,815

 

 

 —

 

 

79,815

 

 

79,815

 

 

79,815

ABS

 

 

 —

 

 

73,582

 

 

 —

 

 

73,582

 

 

73,582

 

 

73,582

CLO

 

 

 —

 

 

179,549

 

 

 —

 

 

179,549

 

 

179,549

 

 

179,549

CMBS

 

 

 —

 

 

97,526

 

 

 —

 

 

97,526

 

 

97,526

 

 

97,526

RMBS - non agency

 

 

 —

 

 

71,610

 

 

 —

 

 

71,610

 

 

71,610

 

 

71,610

RMBS - agency

 

 

 —

 

 

143,272

 

 

 —

 

 

143,272

 

 

143,272

 

 

143,272

Total investments measured at fair value

 

$

 —

 

$

1,891,051

 

$

149,631

 

 

2,040,682

 

 

 

 

 

 

 

 

 

 

 

 

Total categorized

$

$

1,891,051

$

149,631

$

2,040,682

Investments measured at net asset value:

 

 

  

 

 

  

 

 

  

 

 

  

Limited partnerships and limited liability companies

 

 

 

 

 

  

 

 

  

 

 

66,660

66,660

Total assets at fair value

 

 

 

 

 

  

 

 

  

 

$

2,107,342

Total of invested assets carried at fair value

$

2,107,342

Management believes that the use of the fair value option as specified in Accounting Standards Codification No. 825, Financial Instruments to record limited partnerships and limited liability companies is consistent with its objective for such investments. As such, the entire limited partnership portfolio of $65.0 million and $66.7 million as of March 31, 2020 and December 31, 2019, respectively, was recorded using net asset value, which the Company has determined to be the best indicator of fair value for these investments.

16


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following tables disclose the carrying value and fair value of financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of March 31,June 30, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

Carrying

 

Fair Value

June 30, 2020

Carrying

Fair Value

($ in thousands)

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

 

  

 

  

 

  

Commercial levered loans

 

$

13,725

 

$

12,246

 

$

 —

 

$

 —

 

$

12,246

$

13,463

 

$

12,628

 

$

 

$

 

$

12,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

 

  

 

  

 

  

Notes payable

 

$

165,000

 

$

166,288

 

$

 —

 

$

166,288

 

$

 —

$

165,000

 

$

166,961

 

$

 

$

166,961

 

$

Unamortized debt issuance costs

 

 

(222)

 

 

 

 

 

 

 

 

 

 

 

 

 

(138)

 

Notes payable, net of debt issuance costs

 

$

164,778

 

 

 

 

 

 

 

 

 

 

 

 

$

164,862

 

Secured loan payable

$

24,997

 

$

24,997

 

$

 

$

24,997

 

$

Unamortized debt issuance costs

 

 

Secured loan payable, net of issuance costs

$

24,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Carrying

 

Fair Value

December 31, 2019

Carrying

Fair Value

($ in thousands)

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

 

  

 

  

 

  

Commercial levered loans

 

$

14,069

 

$

13,950

 

$

 —

 

$

 —

 

$

13,950

$

14,069

 

$

13,950

 

$

 

$

 

$

13,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

  

 

  

 

  

 

  

Notes payable

 

$

165,000

 

$

167,507

 

$

 —

 

$

167,507

 

$

 —

$

165,000

 

$

167,507

 

$

 

$

167,507

 

$

Unamortized debt issuance costs

 

 

(307)

 

 

 

 

 

 

 

 

 

 

 

 

 

(307)

 

Notes payable, net of debt issuance costs

 

$

164,693

 

 

 

 

 

 

 

 

 

 

 

 

$

164,693

 

The fair value of the notes payable at March 31,June 30, 2020, approximated a price equal to $166.3$167.0 million or 100.8%101.2% of the par value. The fair value of the secured loan payable at June 30, 2020, approximated a price equal to $24.9 million or 100.0% of the par value. The fair value of the notes payable at December 31, 2019, approximated a price equal to $167.5 million or 101.5% of the par value.

17


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following tables provides a summary of the changes in the fair value of securities measured using Level 3 inputs during the threesix months ended March 31,June 30, 2020 and 2019:

 

 

 

    

Level 3

 

Corporate Debt 

    

Level 3

Corporate Debt 

($ in thousands)

 

Securities

Securities

Fair value, December 31, 2019

 

$

149,631

$

149,631

Total net (losses) gains for the period included in:

 

 

 

Total net losses for the period included in:

 

Other comprehensive loss

 

 

(10,703)

(8,563)

Net realized gain

 

 

 1

Net realized loss

 

(2)

Purchases

 

 

14,241

 

22,634

Sales

 

 

 —

 

Issuances

 

 

 —

 

Settlements

 

 

(752)

 

(1,623)

Transfers into Level 3

 

 

 —

 

Transfers out of Level 3

 

 

 —

 

Fair value, March 31, 2020

 

$

152,418

Fair value, June 30, 2020

$

162,077

 

 

 

    

Level 3

 

Corporate Debt 

    

Level 3

Corporate Debt 

($ in thousands)

 

Securities

Securities

Fair value, December 31, 2018

 

$

126,497

$

126,497

Total net losses for the period included in:

 

 

  

Other comprehensive loss

 

 

(1,273)

Total net gains (losses) for the period included in:

 

  

Other comprehensive income

921

Net realized loss

 

 

(40)

 

(71)

Purchases

 

 

2,329

 

3,516

Sales

 

 

 —

 

Issuances

 

 

 —

 

Settlements

 

 

(1,373)

 

(2,845)

Transfers into Level 3

 

 

 —

 

Transfers out of Level 3

 

 

 —

 

Fair value, March 31, 2019

 

$

126,140

Fair value, June 30, 2019

$

128,018

7. Accumulated Other Comprehensive (Loss) Income

The following table summarizes the components of accumulated other comprehensive (loss) income (“AOCI”) for the three and six months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

($ in thousands)

 

Gross

 

Tax

 

Net

    

Gross

    

Tax

    

Net

December 31, 2019

 

$

46,123

 

$

8,670

 

$

37,453

Unrealized holding losses on fixed maturity securities

 

 

(77,066)

 

 

(16,102)

 

 

(60,964)

March 31, 2020

 

$

(31,469)

 

$

(7,481)

$

(23,988)

Unrealized holding gains on fixed maturity securities

 

99,307

 

20,851

78,456

Amounts reclassified into net income

 

 

942

 

 

136

 

 

806

 

3,678

 

726

2,952

Amounts reclassified as credit losses

 

 

(416)

 

 

(87)

 

 

(329)

(1,570)

(330)

(1,240)

Other comprehensive loss

 

 

(77,592)

 

 

(16,151)

 

 

(61,441)

March 31, 2020

 

$

(31,469)

 

$

(7,481)

 

$

(23,988)

Other comprehensive income

 

97,199

 

20,455

 

76,744

June 30, 2020

$

65,730

 

$

12,974

$

52,756

($ in thousands)

    

Gross

    

Tax

    

Net

March 31, 2019

 

$

5,257

 

$

(180)

$

5,437

Unrealized holding gains on fixed maturity securities

 

29,830

 

6,206

23,624

Amounts reclassified into net income

 

189

 

(28)

217

Other comprehensive income

 

29,641

 

6,234

23,407

June 30, 2019

$

34,898

 

$

6,054

$

28,844

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

  

  

 

($ in thousands)

    

Gross

    

Tax

    

Net

Gross

Tax

Net

December 31, 2018

 

$

(29,760)

 

$

(7,445)

 

$

(22,315)

December 31, 2019

    

$

46,123

 

$

8,670

 

$

37,453

Unrealized holding gains on fixed maturity securities

 

 

34,803

 

 

7,241

 

 

27,562

 

22,241

 

4,749

 

17,492

Amounts reclassified into net income

 

 

(214)

 

 

(24)

 

 

(190)

 

4,620

 

862

 

3,758

Amounts reclassified as credit losses

(1,986)

(417)

(1,569)

Other comprehensive income

 

 

35,017

 

 

7,265

 

 

27,752

 

19,607

 

4,304

 

15,303

March 31, 2019

 

$

5,257

 

$

(180)

 

$

5,437

June 30, 2020

 

$

65,730

 

$

12,974

 

$

52,756

($ in thousands)

    

Gross

    

Tax

    

Net

December 31, 2018

 

$

(29,760)

 

$

(7,445)

$

(22,315)

Unrealized holding gains on fixed maturity securities

 

64,633

 

13,447

51,186

Amounts reclassified into net income

 

(25)

 

(52)

27

Other comprehensive income

 

64,658

 

13,499

51,159

June 30, 2019

$

34,898

 

$

6,054

$

28,844

The following table presents reclassifications out of AOCI attributable to the Company during the three and six months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

Line in Consolidated

 

Three Months Ended March 31 

Line in Consolidated

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

    

Statements of Operations

    

2020

    

2019

   

Statements of Operations

   

2020

   

2019

   

2020

   

2019

AOCI

 

  

 

 

 

 

 

  

 

  

 

 

  

 

 

  

Unrealized gains (losses) on securities

 

Realized investment gains, net

 

$

942

 

$

(214)

 

Realized investment gains, net

$

3,678

$

189

$

4,620

$

(25)

 

Income tax expense

 

 

136

 

 

(24)

 

Income tax expense

726

(28)

862

(52)

Reclassification adjustment for credit losses included in net income

 

Realized investment losses, net

 

 

(416)

 

 

 —

Realized investment losses, net

(1,570)

(1,986)

 

Income tax expense

 

 

(87)

 

 

 —

Income tax expense

(330)

(417)

Total reclassifications

 

 

 

$

477

 

$

(190)

 

$

1,712

$

217

$

2,189

$

27

8. Related-Party Information

Loans to Executives and Equity Distribution

The Company made loans of $4.2 million to certain executive officers, including the CEO. Most of the loans were made in connection with the settlement of RSUs and related tax withholdings.withholdings. On March 15, 2019, all such loans were deemed repaid. On the same date, a special equity distribution of $4.2 million was made by the Company to the same executive officers, which was accounted for as a non-cash transaction on the Company’s consolidated balance sheets.

Transition and Separation Agreement

On May 3, 2019, the Company entered into a Transition and Separation Agreement (the “Separation Agreement”) with its former Chief Executive Officer (the “former CEO”). Under the Separation Agreement, the former CEO and the Company agreed to a general release of claims and his compliance with the restrictive covenants. The Company recorded no expense and an expense of $0.3$7.2 million for the three months ended March 31,June 30, 2020 and 2019, respectively, within other expense in the consolidated statements of operations relating to the severance payments and benefits payable to the former CEO. The Company recorded an expense of $0.3 million and $7.2 million for the six months ended June 30, 2020 and 2019, respectively, within other expense in the consolidated statements of operations relating to the severance payments and benefits payable to the former CEO. Per the terms of the Separation Agreement, the former CEO’s profit interests (“P Shares”) were forfeited and outstanding RSUs are treated in accordance with the terms of the applicable award agreements. Additionally, the Company cancelled 137,987 shares of common stock in July 2019, with no consideration as per the terms of the Separation Agreement.

19


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

On January 23, 2020, the Company and the former CEO entered into an amendment to the Separation Agreement, which, among other things, provides that effective as of February 1, 2020, the former CEO resigned from his position as Executive Chairman of the Company and its subsidiaries.

19

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

Company.

9. Insurance Operations

Total reinsurance ceded and assumed relating to written premiums, written, earned premiums and losses and loss adjustment expenses incurred, are as follows:

 

 

 

 

 

 

 

Three Months Ended March 31 

Three Months Ended June 30

 

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

Written premiums

 

 

  

 

 

  

 

  

 

  

  

 

  

Direct written premiums

 

$

212,951

 

$

254,985

 

$

185,722

 

$

234,306

$

398,673

 

$

489,291

Assumed from other companies

 

 

833

 

 

853

 

672

 

726

1,505

 

1,579

Ceded to other companies

 

 

23,601

 

 

45,936

 

29,771

 

24,464

53,372

 

70,400

Net written premiums

 

$

190,183

 

$

209,902

$

156,623

 

$

210,568

$

346,806

 

$

420,470

 

 

 

 

 

 

Earned premiums

 

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

Direct earned premiums

 

$

228,580

 

$

223,002

$

206,028

 

$

231,088

$

434,608

 

$

454,090

Assumed from other companies

 

 

742

 

 

942

 

697

 

 

932

 

1,439

 

 

1,874

Ceded to other companies

 

 

23,660

 

 

28,336

 

25,096

 

 

29,540

 

48,756

 

 

57,876

Net earned premiums

 

$

205,662

 

$

195,608

$

181,629

 

$

202,480

$

387,291

 

$

398,088

Percent of amount assumed to net

 

 

0.4%

 

 

0.5%

 

0.4%

0.5%

 

0.4%

0.5%

 

 

 

 

 

 

Losses and loss adjustment expenses incurred

 

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

Direct net losses and loss adjustment expenses incurred

 

$

144,377

 

$

135,348

$

120,680

 

$

138,560

$

265,057

 

$

273,908

Assumed from other companies

 

 

(1,357)

 

 

2,819

 

1,984

 

 

2,113

 

627

 

 

4,932

Ceded to other companies

 

 

15,463

 

 

19,834

 

10,191

 

 

13,558

 

25,654

 

 

33,392

Net losses and loss adjustment expenses incurred

 

$

127,557

 

$

118,333

$

112,473

 

$

127,115

$

240,030

 

$

245,448

In 2017, the Company ceded significant amounts of premium under the whole account quota share reinsurance agreements (“WAQS”). In 2018, the WAQS were terminated. To the extent of unearned premium at the time of termination, ceded written premiums, net of the ceding commission, was returned. In January 2020, the WAQS were commuted at no gain or loss to the Company.

Allowances for Credit Losses

The following table is rollforward of the receivable allowance balances related to the risk of credit default as of March 31,June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

Beginning Balance

 

Current Provision

 

Write-offs

 

Recoveries

 

Ending Balance

Six Months Ended June 30, 2020

   

December 31, 2019

   

Current Provision

   

Write-offs

   

Recoveries

   

June 30, 2020

Premium receivable

 

$

5,056

 

$

1,076

 

$

(130)

 

$

54

 

$

6,056

 

$

5,056

 

$

2,854

(204)

7,706

Reinsurance receivable on paid and unpaid losses

 

 

505

 

 

52

 

 

 —

 

 

 —

 

 

557

 

505

 

201

706

Total receivable allowance

 

$

5,561

 

$

1,128

 

$

(130)

 

$

54

 

$

6,613

 

$

5,561

 

$

3,055

(204)

8,412

The allowance for credit loss for premium receivable is an assessment of ultimate non-collectability based on historical experience applicable to the respective current collection action status, age of the amount outstanding and expected collection costs.  

The majority of the allowance relates to audit premium on workers’ compensation coverages assessed during or after the period of coverage whereby there is limited ability to cancel or limit coverage. In the final collection action at the

20


Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

insured level, collection agencies are typically engaged. The amount currently with collection agencies is $5.2as of June 30, 2020 was $5.7 million.

20

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The reinsurance receivable allowance for credit loss is based on sources of credit ratings of reinsurers and applies probabilities of default and loss given default to the total uncollateralized exposure including incurred but not reported (“IBNR”) by rating class. The amount of uncollateralized exposure on unrated or counterparties rated below investment grade at March 31,June 30, 2020 is $2.8$4.0 million. At March 31,June 30, 2020, 97.6%96.3% of uncollateralized exposures are rated above investment grade.

Distribution Partners

The three distribution partners contributing the largest amounts of direct written premium (excluding the distribution partner below) totaled $69.1$80.8 million and $50.2$80.4 million for the three months ended March 31,June 30, 2020 and 2019, respectively. The three distribution partners contributing the largest amounts of direct written premium (excluding the distribution partner below) totaled $146.9 million and $133.3 million for the six months ended June 30, 2020 and 2019, respectively.

The Company negotiates with distribution partners to write direct premium on behalf of the Company’s affiliates. In January 2019, a distribution partner of the Company was acquired by a third-party insurance carrier. The Company does not anticipate any future premiums from this distribution partner other than audit premiums after the first quarter of 2019.

Unpaid Losses

Unpaid losses are based on individual case estimates for losses reported and include a provision for IBNR losses and loss adjustment expenses. The following table provides a roll forward of the Company’s reserve for unpaid losses and loss adjustment expenses:

 

 

 

 

 

 

 

March 31 

June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

Gross reserve for unpaid losses and loss expenses, at beginning of year

 

$

1,521,648

 

$

1,396,812

$

1,521,648

$

1,396,812

Ceded reserve for unpaid losses and loss expenses, at beginning of year

 

 

193,952

 

 

185,295

193,952

185,295

Net reserve for unpaid losses and loss expenses, at beginning of year

 

 

1,327,696

 

 

1,211,517

1,327,696

1,211,517

Add:

 

 

  

 

 

  

  

  

Incurred losses and loss expenses occurring in the:

 

 

  

 

 

  

  

  

Current year

 

 

121,001

 

 

118,728

227,842

238,634

Prior years

 

 

198

 

 

(395)

508

(3,128)

Prior years attributable to adjusted premium

 

 

6,358

 

 

 —

11,680

9,942

Total net losses and loss adjustment expenses incurred

 

 

127,557

 

 

118,333

240,030

245,448

Less:

 

 

  

 

 

  

  

  

Paid losses and loss expenses for claims occurring in the:

 

 

  

 

 

  

  

  

Current year

 

 

3,665

 

 

3,528

12,168

18,725

Prior years

 

 

62,655

 

 

78,676

152,862

164,601

Total paid losses and loss expenses for claims

 

 

66,320

 

 

82,204

165,030

183,326

Net reserve for unpaid losses and loss expenses, at end of period

 

 

1,388,933

 

 

1,247,646

1,402,696

1,273,639

Ceded reserve for unpaid losses and loss expenses, at end of period

 

 

156,866

 

 

201,889

141,427

210,021

Gross reserve for unpaid losses and loss expenses, at end of period

 

$

1,545,799

 

$

1,449,535

$

1,544,123

$

1,483,660

During the threesix months ended March 31,June 30, 2020, the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2019 and prior developed unfavorably by $0.2$0.5 million driven by $7.1 million unfavorable development of  Commercial Multiple Peril and $4.4$12.1 million unfavorable development in General Liability and $4.3 million unfavorable development in Commercial Multiple Peril offset by $8.3 million favorable development in Workers’ Compensation, $5.2 million favorable development in Commercial Auto $4.9and $2.4 million in Workers’ Compensation and $1.3 millionfavorable development in All Other lines. In addition, the Company incurred $6.4$11.7 million of losses and loss

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

adjustment expenses related to premium adjustments earned during the threesix months ended March 31,June 30, 2020 attributable to prior accident years 2019 and 2018.

The unfavorable development in General Liability and Commercial Multiple Peril and General Liability related to 2013 through 2017 accident years due largely to increased severities in the runoff components within the Other customer segment. The favorable development in Workers’ Compensation derived from lower than expected claims severity across all customer segments primarily in accident years 2013 throughand 2015 andthrough 2017. The favorable development in Commercial Auto was

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

driven derived by physical damage and liability bodily injuryproperty damage in accident years 2017 throughyear 2019. The favorable development in All Other lines was in SuretyOcean Marine, Inland Marine, Fire and Ocean MarineSurety lines of business.

There were no significant drivers ofDuring the six months ended June 30, 2019, the Company’s estimated losses and loss expenses for accident years 2018 and prior developed favorably by $3.1 million driven by $14.5 million favorable development in Workers’ Compensation lines and $6.7 million favorable development in Auto Liability lines. The favorable experience was partially offset by $13.2 million in unfavorable development in General Liability lines and $4.6 million unfavorable development in Marine Liability lines within the All Other Lines category. The Company incurred $9.9 million of $0.4 forlosses and loss adjustment expenses on earned premium attributable to prior accident years during the threesix months ended March 31,June 30, 2019.

10. Income Taxes

The Company is subject to the tax laws and regulations of the United States and various state jurisdictions. The Company files a consolidated federal tax return.

The Company has one non-U.S. subsidiary, ProSight Specialty Bermuda Limited (“PSBL”), which has received an undertaking from the Minister of Finance in Bermuda that would exempt such company from Bermudian taxation until March 2035. In 2019, PSBL became a direct subsidiary of the Company and is subject to U.S. tax on its income.

The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company’s best estimate of the effective tax rate expected for the full year. The estimated annual effective tax rate typically differs from the U.S. statutory tax rate primarily as a result of non-deductible expenses and discrete items recognized during the period. The Company’s effective tax rates were 22.6%21.6% and 21.8% for the three months ended March 31,June 30, 2020 and 2019, respectively. The decrease in the effective tax rate for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to the decrease in non-deductible expenses. The Company’s effective tax rates were 21.9% and 21.8% for the six months ended June 30, 2020 and 2019, respectively. The increase in the effective tax rate infor the threesix months ended March 31,June 30, 2020 compared to the same period in 2019 was primarily due to the tax effect of share-based compensation.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes certain income tax provisions for individuals and corporations; however, these benefits do not impact the Company’sCompany’s current tax provision.

11. Segment Information

The Company has one reportable segment, Specialty Insurance segment, which primarily offers property and casualty insurance products through its customers segments that include Construction, Consumer Services, Marine and Energy, Media and Entertainment, Professional Services, Real Estate, Sports, and Transportation. The primary criteria to determine the Company’s reportable segment is based on the fact that the Company’s senior management reviews, assesses and allocates resources both on a financial and personnel basis on an entity-wide level.

The following table provides a summary of the Company’s gross written premiums by customer segments within our Specialty Insurance segment. “Other” includes gross written premiums from; (i) primary and excess workers’ compensation coverage for exited Self-Insured Groups, (ii) niches exited prior to 2018, many with a concentration in

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

commercial auto,,  (iii) certain fronting arrangements in which all premium written is ceded to a third party (iv) participation in industry pools, and (v) emerging new business.

business.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

($ in thousands)

    

2020

    

2019

 

    

2020

    

2019

 

2020

    

2019

 

Customer Segment

    

 

 

    

  

    

 

  

    

  

 

    

    

  

    

  

    

  

    

    

  

    

  

    

  

Construction

 

$

24,514

 

11.5

%

$

23,248

 

9.1

%

$

27,704

 

14.9

%

$

32,495

 

13.8

%

$

52,218

 

13.0

%

$

55,743

 

11.4

%

Consumer Services

 

 

30,568

 

14.3

 

 

27,485

 

10.7

 

 

40,730

 

21.8

 

 

37,893

 

16.1

 

 

71,298

 

17.8

 

 

65,378

 

13.3

Marine and Energy

 

 

32,790

 

15.3

 

 

19,812

 

7.8

 

 

26,821

 

14.4

 

 

25,633

 

10.9

 

59,611

 

14.9

 

 

45,445

 

9.3

Media and Entertainment

 

 

30,467

 

14.3

 

 

29,692

 

11.6

 

 

17,454

 

9.4

 

 

32,402

 

13.8

 

47,921

 

12.0

 

 

62,094

 

12.6

Professional Services

 

 

29,698

 

13.9

 

 

29,562

 

11.6

 

 

31,891

 

17.1

 

 

29,104

 

12.4

 

61,589

 

15.4

 

 

58,666

 

12.0

Real Estate

 

 

33,215

 

15.5

 

 

28,735

 

11.2

 

 

47,273

 

25.3

 

 

46,614

 

19.8

 

80,488

 

20.1

 

 

75,349

 

15.3

Sports

 

 

9,565

 

4.5

 

 

7,850

 

3.1

 

4,688

2.5

6,898

3.0

14,253

 

3.6

 

 

14,748

 

3.0

Transportation

 

 

21,467

 

10.0

 

 

30,757

 

12.0

 

 

(12,340)

 

(6.6)

 

 

18,985

 

8.1

 

9,127

 

2.3

 

 

49,742

 

10.1

Customer segment subtotal

 

 

212,284

 

99.3

 

 

197,141

 

77.1

 

 

184,221

 

98.8

 

 

230,024

 

97.9

 

396,505

 

99.1

 

 

427,165

 

87.0

Other

 

 

1,500

 

0.7

 

 

58,697

 

22.9

 

 

2,173

 

1.2

 

 

5,008

 

2.1

 

3,673

 

0.9

 

 

63,705

 

13.0

Specialty Insurance total

 

$

213,784

 

100.0

%

$

255,838

 

100.0

%

$

186,394

 

100.0

$

235,032

 

100.0

$

400,178

 

100.0

$

490,870

 

100.0

%

The following table provides a summary of the Company’s gross written premiums by line of business within our Specialty Insurance segment:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

 

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

 

    

2020

    

2019

    

2020

    

2019

Line of Business

    

 

 

    

  

    

 

  

    

  

 

    

    

  

    

  

    

  

    

    

  

    

  

    

  

Commercial Auto

 

$

40,331

 

18.9

%

$

41,784

 

16.3

%

$

20,649

 

11.1

%

$

54,296

 

23.1

%

$

60,980

 

15.2

%

$

96,080

 

19.6

%

General Liability

 

 

78,533

 

36.7

 

 

71,295

 

27.9

 

 

81,876

 

43.9

 

83,156

 

35.4

 

160,409

 

40.1

 

 

154,451

 

31.5

 

Workers’ Compensation

 

 

28,821

 

13.5

 

 

90,062

 

35.2

 

 

20,420

 

10.9

 

34,921

 

14.9

 

49,241

 

12.3

 

 

124,983

 

25.4

 

Commercial Multiple Peril

 

 

16,365

 

7.6

 

 

19,634

 

7.7

 

 

10,928

 

5.9

 

17,040

 

7.2

 

27,293

 

6.8

 

 

36,674

 

7.5

 

All Other Lines

 

 

49,734

 

23.3

 

 

33,063

 

12.9

 

 

52,521

 

28.2

 

45,619

 

19.4

 

102,255

 

25.6

 

 

78,682

 

16.0

 

Specialty Insurance total

 

$

213,784

 

100.0

%

$

255,838

 

100.0

%

$

186,394

 

100.0

$

235,032

 

100.0

$

400,178

 

100.0

$

490,870

 

100.0

%

12. Earnings per Share

The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share (“EPS”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

 

Discontinued Operations

Continuing Operations

Discontinued Operations

(in thousands, except per share amounts)

 

Income

 

Shares

 

Per Share

 

Income

 

Shares

 

Per Share

Income

Shares

Per Share

Income

Shares

Per Share

Three Months Ended March 31, 2020

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Three Months Ended June 30, 2020

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

6,811

 

43,910

 

$

0.16

 

$

257

 

43,910

 

$

 —

$

17,283

 

43,810

 

$

0.39

 

$

279

 

43,810

 

$

0.01

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

 

 

364

 

 

 

 

 

 

 

364

 

 

 

 

 

17

 

 

 

 

 

17

 

 

Diluted EPS

 

$

6,811

 

44,274

 

$

0.15

 

$

257

 

44,274

 

$

0.01

$

17,283

 

43,827

 

$

0.39

 

$

279

 

43,827

 

$

0.01

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

 

Discontinued Operations

Continuing Operations

Discontinued Operations

(in thousands, except per share amounts)

 

Income

 

Shares

 

Per Share

 

Loss

 

Shares

 

Per Share

Income

Shares

Per Share

Loss

Shares

Per Share

Three Months Ended March 31, 2019

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Three Months Ended June 30, 2019

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

13,695

 

38,851

 

$

0.35

 

$

(255)

 

38,851

 

$

 —

$

8,696

 

38,851

 

$

0.22

 

$

(78)

 

38,851

 

$

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

 

 

604

 

 

 

 

 

 

 

604

 

 

 

 

 

604

 

 

 

604

 

Diluted EPS

 

$

13,695

 

39,455

 

$

0.35

 

$

(255)

 

39,455

 

$

(0.01)

$

8,696

 

39,455

 

$

0.22

 

$

(78)

 

39,455

 

$

Continuing Operations

Discontinued Operations

(in thousands, except per share amounts)

Income

Shares

Per Share

Income

Shares

Per Share

Six Months Ended June 30, 2020

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

Net income available to common stockholders

$

24,094

 

43,866

 

$

0.55

 

$

536

 

43,866

 

$

0.01

Effect of dilutive securities:

 

Stock compensation plans

 

 

190

 

 

 

 

 

190

 

 

Diluted EPS

$

24,094

 

44,056

 

$

0.55

 

$

536

 

44,056

 

$

0.01

Continuing Operations

Discontinued Operations

(in thousands, except per share amounts)

Income

Shares

Per Share

Loss

Shares

Per Share

Six Months Ended June 30, 2019

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

 

 

 

 

Net income (loss) available to common stockholders

$

22,391

 

38,851

 

$

0.58

 

$

(333)

 

38,851

 

$

(0.01)

Effect of dilutive securities:

 

Stock compensation plans

 

 

604

 

 

 

604

 

Diluted EPS

$

22,391

 

39,455

 

$

0.57

 

$

(333)

 

39,455

 

$

(0.01)

13. Share-Based Compensation

On July 24, 2019, the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) became effective immediately prior to the effectiveness of the registration statement filed in connection with the IPO. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted shares, RSUs, dividend equivalent rights, performance-based shares or other equity‑basedequity-based or equity-related awards.

The 2019 Plan is administered by the compensation committee of the Company’s Board of Directors. Subject to the provisions of the 2019 Plan, the compensation committee determines in its discretion, the persons to whom and the times at which awards are granted, the size of awards (subject to certain limitations set forth in the compensation committee charter) and the terms and conditions of awards.

A total of 4,500,000 shares of common stock are initially authorized and reserved for issuance under the 2019 Plan, including shares underlying RSUs granted under the Company’s Amended and Restated 2010 Equity Incentive Plan.

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following table summarizes the stock-based compensation transactions for the 2019 Plan for the threesix months ended March 31,June 30, 2020:

 

 

 

 

 

 

 

Number of

 

Weighted Average Grant Date

    

Shares

    

Fair Value Per Share

 

 

 

 

 

 

Number of

Weighted Average Grant Date

    

Shares

    

Fair Value Per Share

Unvested at December 31, 2019

 

 

1,289,396

 

$

14.00

1,289,396

 

$

14.00

Granted

 

 

458,515

 

$

13.40

587,612

$

12.42

Vested

 

 

(179)

 

$

14.00

(106,460)

$

8.91

Forfeited

 

 

(5,358)

 

$

14.00

(5,358)

$

14.00

Unvested at March 31, 2020

 

 

1,742,374

 

$

13.84

Unvested at June 30, 2020

1,765,190

$

13.77

As of March 31,June 30, 2020, The Company had approximately $18.8$16.9 million of total unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 2.42.1 years.

14. Debt

Recent Financing Transactions

Termination of the Prior Credit Agreement

The Company, as borrower, was a party to a revolving loan agreement (the “Prior Credit Agreement”) dated January 29, 2018 and amended on March 15, 2019, for $50.0 million which was scheduled to mature on the earlier of (i) March 15, 2022, or (ii) 91 days before maturity of the Company’s 7.5% Senior Unsecured Notes due November 2020 and the Company’s 6.5% Senior Unsecured Notes due November 2020 (collectively, the “Notes”) or, if the Notes are amended or replaced, 91 days before the maturity of such amendment or replacement. The Company exercised its termination rights under the Prior Credit Agreement on June 12, 2020. There were no borrowings under the Prior Credit Agreement on the date of termination.

Credit Agreement

On June 12, 2020 (the “Effective Date”), the Company entered into a credit agreement (the “Credit Agreement”) with third-party lenders and an administrative agent. The Credit Agreement, which matures on June 11, 2023 (the “Maturity Date”), provides for (i) a delayed draw term loan facility in the aggregate principal amount of up to $165.0 million (the “Term Loan Facility”), and (ii) an uncommitted revolving credit facility of up to $35.0 million (the “Revolving Credit Facility”), for which commitments had not been obtained as of the closing date.

Interest on borrowings under the Term Loan Facility and the Revolving Credit Facility are calculated at each drawdown date based on variable rates described in the Credit Agreement.

Issuance costs of $4.5 million related to the Credit Agreement were incurred and are amortized over the life of the loan.  

There were no borrowings under the Credit Agreement as of June 30, 2020.

Incremental Facility Agreement

On June 30, 2020, the Company entered into an Incremental Facility Agreement and Amendment (the “Agreement”), in the aggregate amount of $65.0 million, subject to the terms of the Credit Agreement. The Agreement had lenders commit to the previously uncommitted Revolving Credit Facility, and increased the available amount from the $35.0 million noted above to an aggregate of $65.0 million.

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Notes to Interim Consolidated Financial Statements (Unaudited)

There were no borrowings under the Agreement as of June 30, 2020. On July 14, 2020, the Company drew down $5.0 million on the Revolving Credit Facility and on August 3, 2020, the Company drew down $30.0 million on the Revolving Credit Facility, primarily to make capital contributions to its insurance subsidiaries.

14.Secured Loan Payable

In June 2020, the Company entered into a $24.9 million lease transaction that for accounting purposes is treated as a loan secured by a portion of the Company’s fixed assets and capitalized software, payable at 4.83% interest with a maturity date of July 1, 2025 and providing for monthly interest and principal payments.

15. Commitments and Contingencies

Leases

The Company determines if an arrangement is a lease on the commencement date of the contract. The right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The right-of-use assets and lease liabilities are measured by the present value of the future minimum lease payments over the lease term. The Company uses the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate. The right-of-use asset is then adjusted to exclude lease incentives. Certain leases may contain rental escalation, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. Variable lease payment amounts that cannot be determined at the commencement of the lease are not included in the right-to-use assets or lease liabilities. LeasesLeases covering a period of fewer than 12 months are not recorded on the Company’s consolidated balance sheets. Rent expense is calculated using the straight-line method.

The Company leases certain facilities and equipment under non-cancelable lease agreements that expire at various dates through 2025, which are generally renewed or replaced by similar leases. The lease agreements do not contain any material restrictive covenants, do not contain any conditions of residual value guarantees and are substantially all considered to be operating leases. The Company’s leases relate to office facilities in New Jersey, New York, California, Florida, Georgia and the U.K. The weighted average lease term was 2.92.8 years and the weighted average discount rate was 2.0%.

Rent expense for the three and six months ended March 31,June 30, 2020 was $0.8 million and $1.6 million. The following table presents the Company’s lease liabilities and right-of-use assets related to operating leases as of March 31,June 30, 2020:

 

 

 

($ in thousands)

    

March 31, 2020

    

June 30, 2020

One year or less

 

$

3,188

$

3,025

More than one year to two years

 

 

2,449

 

1,677

More than two years to three years

 

 

 —

 

More than three years to four years

 

 

 —

More than four years to five years

 

 

 —

More than five years

 

 

 —

 

Total undiscounted future minimum lease payments

 

 

5,637

 

4,702

Less: difference between lease payments and discounted lease liabilities

 

 

104

 

78

Lease liabilities

 

$

5,533

$

4,624

 

 

 

Right-of-use assets

 

$

4,810

$

4,117

Prepaid lease assets, net of lease allowances and incentives

 

 

723

 

507

Total

 

$

5,533

$

4,624

The right-of-use assets are reported as a component of other assets and the lease liabilities are reported as a component of other liabilities on the Company’s consolidated balance sheets.  

Coronavirus Disease 2019 Impact

The World Health Organization declared the coronavirus disease 2019 (“COVID-19”) outbreak a pandemic on March 11, 2020. The COVID-19 outbreak has caused an economic downturn on a global scale, including temporary closures of many businesses and reduced consumer spending due to aggressive shelter-in-place measures implemented by state governments, as well as significant market disruption and volatility. The magnitude and duration of the COVID-19 pandemic and the impact of actions taken by governmental authorities, businesses and consumers to mitigate its effects create significant uncertainty. The Company continues to actively monitor the impact of COVID-19 as it continues to

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Notes to Interim Consolidated Financial Statements (Unaudited)

unfold and cannot, at this time, predict the impact the pandemic will have on its future consolidated financial position, cash flows or results of operations, however the impact could be material. See Item 1A. Risk Factors for additional information.

15.16. Legal Proceedings

In the normal course of business, the Company’s insurance subsidiaries are subject to disputes, including litigation and arbitration, arising out of the ordinary course of business. The Company’s estimates of the costs of settling such matters are reflected in its reserves for losses and loss expenses, and the Company does not believe that the ultimate outcome of such matters will have a material adverse effect on its financial condition or results of operations.

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Table of Contents

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”), and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2020, as amended by Amendment No. 1 to Form 10-K filed with the SEC on March 10, 2020 (the “2019 Annual Report”).

Certain restatements have been made to historical information to give effect to the merger and related transactions.  SeeNote 11. – Basis of Reporting in the notes to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

References to the "Company," "ProSight," "we," "us," and "our" are to ProSight Global, Inc. and its consolidated subsidiaries unless the context otherwise requires. References to “insurance subsidiaries” are to New York Marine and General Insurance Company (“New York Marine”), Gotham Insurance Company (“Gotham”) and Southwest Marine and General Insurance Company (“Southwest Marine”) unless the context otherwise requires.

Special Note Regarding Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in “Risk Factors” in this Quarterly Report. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. Forward-looking statements include statements relating to future developments in our business or expectations for our future financial performance and any statement not involving a historical fact. Forward-looking statements use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “should,” “seek,” and other words and terms of similar meaning. Forward-looking statements in this Quarterly Report include, but are not limited to, statements about:

·

our strategies to continue our growth trajectory, expand our distribution network and maintain underwriting profitability;

·

the impact of coronavirus disease 2019 (“COVID-19”) and related economic conditions and governmental actions, including the Company's assessment of the vulnerability of certain categories of investments to the economic disruptions associated with COVID-19;

·

future growth in existing niches or by entering into new niches;

·

our loss expectations and expectation to decrease our loss ratio; and

·

our expectations with respect to the ultimate financial obligations to the buyers of our United Kingdom (“U.K.”) operations.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and cash flows, and the development of the market in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include:

·

the performance of and our relationship with third-party agents and vendors we rely upon to distribute certain business on our behalf;

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Table of Contents

·

the adequacy of our loss reserves, including as a result of changes in the legal, regulatory, and economic environments in which the Company operates or the impacts of COVID-19;

·

the direct and indirect impacts of COVID-19 and related risks such as governmental responses and economic contraction, including on the Company’s investments and business operations, its distribution or other key partners and its customers;

·

the effects of uncertain emerging claim and coverage issues on the Company’s business, and court decisions or legislative or regulatory changes that take place after the Company issues its policies, including those taken in response to COVID-19 (such as effectively expanding workers’ compensation coverage by instituting presumptions of compensability of claims for certain types of workers or requiring insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage);

·

the effectiveness of our risk management policies and procedures;

·

potential technology breaches or failure of our or our business partners’ systems;

·

adverse changes in the economy which could lower the demand for our insurance products;

·

our ability to effectively start up or integrate new product opportunities;

·

cyclical changes in the insurance industry;

·

the effects of natural and man-made catastrophic events;

·

our ability to adequately assess risks and estimate losses;

·

the availability and affordability of reinsurance;

·

changes in interest rates, government monetary policies, general economic conditions, liquidity and overall market conditions;

·

changes in the business, financial condition or results of operations of the entities in which we invest;

·

increased costs as a result of operating as a public company, and time our management will be required to devote to new compliance initiatives;

·

our ability to protect intellectual property rights;

·

the impact of government regulation, including the impact of restrictions on our business activities under the Bank Holding Company (“BHC”) Act;

·

our status as an emerging growth company;

·

the absence of a previous public market for shares of our common stock; and

·

potential conflicts of interests with our principal stockholders.

We discuss many of these risks in greater detail under the section titled Item 1A. “Risk Factors.”Factors” in the Company’s 2019 Annual Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking statements in this Quarterly Report by these cautionary statements. Except as

28

required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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Table of Contents

Overview

We are an entrepreneurial specialty insurance company that since our founding in 2009 has built products, services and solutions with the goal of significantly improving the experience and value proposition for our customers. We write property and casualty insurance with a focus on underwriting specialty risks by partnering with a select number of distributors, often on an exclusive basis. We currently write insurance coverage in eight customer segments across a broad range of specialty lines of business. Our customer segments currently include: Media and Entertainment, Real Estate, Professional Services, Transportation, Construction, Consumer Services, Marine and Energy, and Sports. Within each customer segment, we have multiple niches which represent similar groups of customers. We believe having deep expertise in these niches across our organization is critical and therefore, we have aligned various functional areas at the niche level, including underwriting, operations and claims. We focus on small and medium-sized customers, a market segment which we believe has been, and will continue to be, less affected by intense competitive dynamics of the broader property and casualty insurance industry. Over time, the composition of business within our customer segments evolves as we identify certain niches that present opportunities to develop distinct customer solutions with attractive profit potential and others that were at one time attractive but may become less so. We are focused on delivering consistent underwriting profitability with low volatility of underwriting results. We market and distribute our insurance product offerings in all 50 states on both an admitted and non-admitted basis.

Components of Our Results of Operations

Gross Written and Earned Premiums

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

·

Expansion or retraction of business within existing niches;

·

Entrance into new customer segments or niches;

·

Exit from customer segments or niches;

·

Average size and premium rate of newly issued and renewed policies; and

·

The amount of policy endorsements, audit premiums, and cancellations.

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. Net earned premiums represent the earned portion of our GWP, less that portion of our GWP that is earned and ceded to third-party reinsurers under our reinsurance agreements.

Ceded Written and Earned Premiums

Ceded written premiums are the amount of GWP ceded to reinsurers. We actively use ceded reinsurance across our book of business to reduce our overall risk position and to protect our capital. Ceded written premiums are earned over the reinsurance contract period in proportion to the period of risk covered and the underlying policies. The volume of our ceded written premiums is impacted by the level of our GWP and any decision we make to increase or decrease retention levels.

Net Investment Income

We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of debtfixed maturity securities, and may also include cash and cash equivalents, short-term investments, non-

29

redeemablenon-redeemable preferred stock securities, commercial levered loans, and limited partnerships. Ourpartnerships and limited liability companies. Neither our limited partnerships nor our limited liability companies are not accounted for on a lag and thus reflect the current period fair value adjustments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair

30


value, such as changes in interest rates and credit spreads), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive from our insureds less payments on policyholder claims and operating expenses.

Realized Investment Gains and Losses

Realized investment gains and losses are a function of the difference between the amount received by us on the sale of a security and the security’s amortized cost, as well as any change in current expected credit loss allowance for available-for-sale investments recognized in earnings.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses (“LAE”) are a function of the amount and type of insurance contracts we write, the loss experience associated with the underlying coverage, and the expenses incurred in the handling of the losses. 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 paid and estimated outstanding losses, including losses incurred during the period and changes in estimates from prior periods. Losses and LAE may be paid out over a number of years.years.

Within Losses and LAE, we report catastrophe losses separately. Catastrophe losses are unusual in nature and do not reflect upon the normal loss results of our underlying business. We define catastrophe losses as any one claim, or group of claims, with an accumulation of paid and estimated outstanding losses equal to or greater than $1.0 million related to a single, natural or man-made loss event as designated by Property Claims Services (“PCS”).

Underwriting, Acquisition and Insurance Expenses

Underwriting, acquisition and insurance expenses include policy acquisition costs and other underwriting expenses. Policy acquisition costs are principally comprised of the commissions we pay our distribution partners and ceding commissions we receive on business ceded under certain reinsurance contracts. Policy acquisition costs that are directly related to the successful acquisition of those policies are deferred. The amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the policy life. Other underwriting expenses represent the general and administrative expenses of our insurance business including employment costs, telecommunication and technology costs, the costs of our leases, and legal and auditing fees.

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Income Tax Expense

Substantially all of our income tax expense relates to U.S. federal income taxes. Our insurance companies are generally not subject to income taxes in the states in which they operate; however, our non-insurance subsidiaries are subject to state income taxes. The amount of income tax expense or benefit recorded in future periods will depend on the

31


jurisdictions in which we operate and the tax laws and regulations in effect. Our income tax expense for periods beginning in 2018 is based on the U.S. federal corporate income tax rate of 21%.

Key Metrics

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

Net income is the amount of profit or loss remaining after deducting all incurred expenses, including income taxes, from the total earned revenues for an accounting period.

Underwriting income is calculated by subtracting losses and LAE and underwriting, acquisition and insurance expenses from net earned premiums.

Adjusted operating income is net income excluding net realized investment gains and losses, expenses relating to various transactions that we consider to be unique and non-recurring in nature (net of estimated tax impact).

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

Expense ratio, expressed as a percentage, is the ratio of underwriting, acquisition and insurance expenses to net earned premiums.

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

Adjusted loss and LAE ratio is the loss and LAE ratio excluding the effects of the whole account quota share reinsurance agreement (“WAQS”) (as defined below).

Adjusted expense ratio is the expense ratio excluding the effects of the WAQS.

Adjusted combined ratio is the combined ratio excluding the effects of the WAQS.

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

Net retention ratio is the ratio of net written premiums to GWP.

Underwriting income, adjusted operating income, adjusted loss and LAE ratio, adjusted expense ratio, adjusted combined ratio and adjusted operating return on equity are non-generally accepted accounting principles (“GAAP”) financial measures. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income in accordance with GAAP to underwriting income and adjusted operating income. See “Factors Affecting Our Results of Operations—The WAQS” for additional detail on the impact of the WAQS on our results of operations.  

Factors Affecting Our Results of Operations

The WAQS

In connection with the divestment of our U.K. business, New York Marine as reinsured entered into the WAQS with third party reinsurers to maintain reasonable underwriting leverage within New York Marine and its subsidiary insurance companies during a transition period following the U.K. divestment. The effective date of the WAQS was April

31

1, 2017. The reinsurers’ ceding participation is an aggregate 26.0%. A provisional ceding commission of 30.0% to 30.5% is received as a reduction in the amount of ceded premium. Subject to limits, these ceding commissions will vary in subsequent periods based on contractual ultimate loss ratios. During 2018 and following the transition of the U.S. business

32


back to New York Marine, the WAQS were terminated. Previously ceded written and unearned premium, net of the ceding commission, was reversed. Loss reserves on premium earned prior to the cut-off termination remain ceded loss reserves. Loss reserve development on the reserves ceded under the WAQS is included in continuing operations. Effective January 1, 2020, the WAQS was commuted at an amount equal to ceded reserves.

The effect of the WAQS on our results of operations is primarily reflected in our ceded written premiums, losses and LAE, as well as our underwriting, acquisition and insurance expenses. For the three and six months ended March 31,June 30, 2020 and 2019, respectively, there was no impact of WAQS on underwriting results or ratios.

The following tables summarize the effect of the WAQS on our underwriting income for the three months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

Three Months Ended March 31, 2019

 

    

Including

    

Effect of

    

Excluding

    

Including

    

Effect of

    

Excluding

 

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

 

    

Including

    

Effect of

    

Excluding

    

Including

    

Effect of

    

Excluding

 

($ in thousands)

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

WAQS

WAQS

WAQS

WAQS

WAQS

 

GWP

 

$

213,784

 

$

 —

 

$

213,784

 

$

255,838

 

$

 —

 

$

255,838

 

$

186,394

$

$

186,394

$

235,032

$

$

235,032

Ceded written premiums

 

 

(23,601)

 

 

 —

 

 

(23,601)

 

 

(45,936)

 

 

 —

 

 

(45,936)

 

 

(29,771)

 

 

(29,771)

 

(24,464)

 

 

(24,464)

Net written premiums

 

$

190,183

 

$

 —

 

$

190,183

 

$

209,902

 

$

 —

 

$

209,902

 

$

156,623

$

$

156,623

$

210,568

$

$

210,568

Net retention (1)

 

89.0%

 

 

 —

 

 

89.0%

 

 

82.0%

 

 

 —

 

 

82.0%

 

 

84.0%

 

 

84.0%

 

89.6%

 

 

89.6%

Net earned premiums

 

$

205,662

 

$

 —

 

$

205,662

 

$

195,608

 

$

 —

 

$

195,608

 

$

181,629

$

$

181,629

$

202,480

$

$

202,480

Net losses and LAE incurred

 

127,557

 

 

 —

 

 

127,557

 

 

118,333

 

 

 —

 

 

118,333

 

 

112,473

 

 

112,473

 

127,115

 

2,255

 

124,860

Underwriting, acquisition and insurance expenses

 

 

73,623

 

 

 —

 

 

73,623

 

 

73,767

 

 

 —

 

 

73,767

 

 

68,448

 

 

68,448

 

71,561

 

(2,255)

 

73,816

Underwriting income (2)

 

$

4,482

 

$

 —

 

$

4,482

 

$

3,508

 

$

 —

 

$

3,508

 

$

708

$

$

708

$

3,804

$

$

3,804

Loss and LAE ratio

 

62.0

%

 

 —

 

 

 —

 

 

60.5

%

 

 —

 

 

 —

 

 

61.9

 

 

 

62.8

 

 

Expense ratio

 

35.8

%

 

 —

 

 

 —

 

 

37.7

%

 

 —

 

 

 —

 

 

37.7

%

 

 

 

35.3

%

 

 

Combined ratio

 

97.8

%

 

 —

 

 

 —

 

 

98.2

%

 

 —

 

 

 —

 

 

99.6

%

 

 

 

98.1

%

 

 

Adjusted loss and LAE ratio (3)

 

 —

 

 

 —

 

 

62.0

%

 

 —

 

 

 —

 

 

60.5

%

 

 

 

61.9

 

 

 

61.7

%

Adjusted expense ratio (3)

 

 —

 

 

 —

 

 

35.8

%

 

 —

 

 

 —

 

 

37.7

%

 

 

 

37.7

%

 

 

 

36.4

%

Adjusted combined ratio (3)

 

 —

 

 

 —

 

 

97.8

%

 

 —

 

 

 —

 

 

98.2

%

 

 

 

99.6

%

 

 

 

98.1

%

(1)

(1)

Net retention is a non-GAAP measure. We define net retention as the ratio of net written premiums to GWP.

(2)

(2)

Underwriting income is a non-GAAP financial measure. See “—Reconciliation“Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income to underwriting income.

(3)

(3)

Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio excluding the effects of the WAQS. We use these adjusted ratios as internal performance measures in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Our adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio should not be viewed as substitutes for our loss and LAE ratio, expense ratio and combined ratio, respectively.

Our results of operations may be difficult to compare from year to year due to the origination and termination of the WAQS.  In light of the impact of the WAQS on our results of operations, we internally evaluated our financial performance both including and excluding the effect of the WAQS.

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The following tables summarize the effect of the WAQS on our underwriting income for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

 

    

Including

    

Effect of

    

Excluding

    

Including

    

Effect of

    

Excluding

 

($ in thousands)

WAQS

WAQS

WAQS

WAQS

WAQS

WAQS

 

GWP

$

400,178

$

$

400,178

$

490,870

$

$

490,870

Ceded written premiums

 

(53,372)

 

 

(53,372)

 

(70,400)

 

3

 

(70,403)

Net written premiums

$

346,806

$

$

346,806

$

420,470

$

3

$

420,467

Net retention (1)

 

86.7%

 

 

86.7%

 

85.7%

 

 

85.7%

Net earned premiums

$

387,291

$

$

387,291

$

398,088

$

3

$

398,085

Net losses and LAE incurred

 

240,030

 

 

240,030

 

245,448

 

2,207

 

243,241

Underwriting, acquisition and insurance expenses

 

142,071

 

 

142,071

 

145,328

 

(2,205)

 

147,533

Underwriting income (2)

$

5,190

$

$

5,190

$

7,312

$

1

$

7,311

Loss and LAE ratio

 

62.0

 

 

 

61.7

 

 

Expense ratio

 

36.7

%

 

 

 

36.5

%

 

 

Combined ratio

 

98.7

%

 

 

 

98.2

%

 

 

Adjusted loss and LAE ratio (3)

 

 

 

62.0

 

 

 

61.1

%

Adjusted expense ratio (3)

 

 

 

36.7

%

 

 

 

37.1

%

Adjusted combined ratio (3)

 

 

 

98.7

%

 

 

 

98.2

%

(1)Net retention is a non-GAAP measure. We define net retention as the ratio of net written premiums to GWP.
(2)Underwriting income is a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income to underwriting income.
(3)Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio excluding the effects of the WAQS. We use these adjusted ratios as internal performance measures in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Our adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio should not be viewed as substitutes for our loss and LAE ratio, expense ratio and combined ratio, respectively.

Our results of operations may be difficult to compare from year to year due to the origination and termination of the WAQS.  In light of the impact of the WAQS on our results of operations, we internally evaluated our financial performance both including and excluding the effect of the WAQS.

Outlook

As the coronavirus (COVID-19)COVID-19 pandemic continues to impact individuals and businesses worldwide, we are focused on the health and safety of our employees while fulfilling our obligations to our customers and distribution partners.  Through the investments we have made in our technology infrastructure over time, we were ablecontinued to seamlessly transition tooperate in a remote work modelenvironment while maintaining the service and support levels that our customers expect.  We are fully operational, and we believe we are in a good position to continuecapable of working remotely for as long as necessary.

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There was noa significant impact on our premiums and lossespremium revenues in the firstsecond quarter relating to the pandemic.pandemic’s effect on the insured exposure base of certain customers. It is too early to determine the ultimate effect of the economic shut-down as a result of the pandemic on our revenues,losses, however, assuming a sluggish economic recovery that beginswe continue to take hold in the third quarter of 2020, we estimate that this event could have a negative impact on GWP for the remainder of the year, with the most significant impact expected in the second quarter.  Additionally, we may have a modest decline in yield with respect to our fixed maturity portfolio for 2020, with potential volatility in net investment income for the remainder of the year due to our limited partnership investments.  Also, weevaluate claims individually and pay losses where coverage applies. We may see an increase in claims activity and expense due to the pandemic, and potentially higher expense costs due to bad debt provisioning related to regulatory actions taken in response to COVID-19 to provide premium refunds, grant extended grace periods for premium payments, and provide extended time to pay past due premiums.

Our investment portfolio incurred significant valuation adjustmentsexperienced an appreciation in fair value during the firstsecond quarter as credit spreads widened and liquidity contracted;narrowed; this was reflectedoffset a decline in fair value experienced in first quarter financial results and whiledriven by widening credit spreads during the onset of the COVID-19 pandemic. While we have seen an improvement in unrealized investment positions, as of the end of April, we expect there could be continued volatility in the unrealized position and uncertainty for the remainder of the year.

year due to COVID-19.

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Results of Operations

Three Months Ended March 31,June 30, 2020 Compared to Three Months Ended March 31,June 30, 2019

The following table summarizes the results of continuing operations for the three months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

 

Change

 

Three Months Ended June 30

Change

 

($ in thousands)

    

2020

    

2019

 

$

    

Percent

 

    

2020

    

2019

    

$

    

Percent

GWP

 

$

213,784

 

$

255,838

 

$

(42,054)

 

(16.4)

%

$

186,394

$

235,032

$

(48,638)

(20.7)

%

Ceded written premiums

 

 

(23,601)

 

 

(45,936)

 

 

22,335

 

(48.6)

 

 

(29,771)

 

(24,464)

 

(5,307)

21.7

Net written premiums

 

$

190,183

 

$

209,902

 

$

(19,719)

 

(9.4)

 

$

156,623

$

210,568

$

(53,945)

(25.6)

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

205,662

 

$

195,608

 

$

10,054

 

5.1

 

$

181,629

$

202,480

$

(20,851)

(10.3)

Net losses and LAE incurred:

 

 

127,557

 

 

118,333

 

 

9,224

 

7.8

 

 

112,473

 

127,115

 

(14,642)

(11.5)

Underwriting, acquisition and insurance expenses

 

 

73,623

 

 

73,767

 

 

(144)

 

(0.2)

 

 

68,448

 

71,561

 

(3,113)

(4.4)

Underwriting income (1)

 

 

4,482

 

 

3,508

 

 

974

 

27.8

 

 

708

 

3,804

 

(3,096)

(81.4)

Interest and other expenses, net

 

 

4,730

 

 

3,269

 

 

1,461

 

44.7

 

 

4,356

 

10,220

 

(5,864)

(57.4)

Net investment income

 

 

8,815

 

 

17,158

 

 

(8,343)

 

(48.6)

 

 

23,791

 

17,398

 

6,393

36.7

Realized investment gains, net

 

 

232

 

 

113

 

 

119

 

105.3

 

 

1,891

 

137

 

1,754

1,280.3

Income before taxes

 

 

8,799

 

 

17,510

 

 

(8,711)

 

(49.7)

 

 

22,034

 

11,119

 

10,915

98.2

Income tax expense

 

 

1,988

 

 

3,815

 

 

(1,827)

 

(47.9)

 

 

4,751

 

2,423

 

2,328

96.1

Net income from continuing operations

 

$

6,811

 

$

13,695

 

$

(6,884)

 

(50.3)

 

$

17,283

$

8,696

$

8,587

98.7

Adjusted operating income (1)

 

$

7,976

 

$

13,582

 

$

(5,606)

 

(41.3)

%

$

16,890

$

14,228

$

2,662

18.7

%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating return on equity (1)

 

 

6.2

%

 

13.3

%

 

 

 

 

 

12.6

 

12.8

Return on equity

 

 

5.3

%

 

13.4

%

 

 

 

 

 

12.9

%

 

7.9

%

 

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE ratio:

 

 

62.0

%

 

60.5

%

 

 

 

 

 

61.9

%

 

62.8

%

Loss and LAE ratio – excluding catastrophe

 

 

62.0

%

 

60.5

%

 

 

 

 

 

59.9

%

 

61.3

%

Loss and LAE ratio – catastrophe losses

 

 

–  

 

 

–  

 

 

 

 

 

 

2.0

%

 

1.5

%

Expense ratio

 

 

35.8

%

 

37.7

%

 

 

 

 

 

37.7

%

 

35.3

%

Combined ratio

 

 

97.8

%

 

98.2

%

 

 

 

 

 

99.6

%

 

98.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted loss and LAE ratio (2)

 

 

62.0

%

 

60.5

%

 

 

 

 

 

61.9

%

 

61.7

%

Adjusted loss and LAE ratio – excluding catastrophe

 

 

62.0

%

 

60.5

%

 

 

 

 

 

59.9

%

 

60.2

%

Adjusted loss and LAE ratio – catastrophe losses

 

 

 -

 

 

 -

 

 

 

 

 

 

2.0

%

 

1.5

%

Adjusted expense ratio (2)

 

 

35.8

%

 

37.7

%

 

 

 

 

 

37.7

%

 

36.4

%

Adjusted combined ratio (2)

 

 

97.8

%

 

98.2

%

 

 

 

 

 

99.6

%

 

98.1

%

(1)

(1)

Underwriting income, adjusted operating income and adjusted operating return on equity are non-GAAP financial measures. See “—Reconciliation“Reconciliation of Non-GAAP Financial Measures” for reconciliations of net income in accordance with GAAP to underwriting income and adjusted operating income.

(2)

(2)

Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio excluding the effects of the WAQS. For additional detail on the impact of the WAQS on our results of operations see “—Factors“Factors Affecting Our Results of Operations—The WAQS.”

Net Income from Continuing Operations

Net income was $6.8 million for the three months ended March 31, 2020 compared to $13.7$17.3 million for the three months ended March 31,June 30, 2020 compared to $8.7 million for the three months ended June 30, 2019, a decreasean increase of $6.9$8.6 million, or 50.3%98.7%.The decreaseincrease in net income primarily resulted from a mark-to-market valuation adjustment of $8.2 millionan increase in March 2020net investment income driven by the unrealized gains on investments in limited partnerships within net investment income.

partnerships.

3435


Premiums

Premiums

GWP were $213.8$186.4 million for the three months ended March 31,June 30, 2020 compared to $255.8$235.0 million for the three months ended March 31,June 30, 2019, a decrease of $42.1$48.6 million, or 16.4%20.7%.

The following table presents the GWP by customer segment for the three months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

($ in millions)

 

Three Months Ended March 31 

 

Three Months Ended June 30

 

Customer Segment

    

2020

    

2019

    

% Change

 

    

2020

    

2019

    

% Change

 

Construction

 

$

24.5

 

$

23.3

 

5.2

%

$

27.7

$

32.5

 

(14.8)

%

Consumer Services

 

 

30.6

 

 

27.5

 

11.3

 

 

40.7

 

37.9

 

7.4

Marine and Energy

 

 

32.8

 

 

19.8

 

65.7

 

 

26.8

 

25.6

 

4.7

Media and Entertainment

 

 

30.5

 

 

29.7

 

2.7

 

 

17.4

 

32.4

 

(46.3)

Professional Services

 

 

29.7

 

 

29.6

 

0.3

 

 

31.9

 

29.1

 

9.6

Real Estate

 

 

33.2

 

 

28.7

 

15.7

 

 

47.3

 

46.6

 

1.5

Sports

 

 

9.5

 

 

7.8

 

21.8

 

4.7

6.9

(31.9)

Transportation

 

 

21.5

 

 

30.7

 

(30.0)

 

 

(12.3)

 

19.0

 

(164.7)

Customer segments subtotal

 

$

212.3

 

$

197.1

 

7.7

 

184.2

230.0

 

(19.9)

Other

 

 

1.5

 

 

58.7

 

(97.4)

 

 

2.2

 

5.0

 

(56.0)

Total

 

$

213.8

 

$

255.8

 

(16.4)

%

$

186.4

$

235.0

 

(20.7)

%

GWP from customer segments (excluding GWP within “Other”) for the three months ended March 31,June 30, 2020 grewcontracted by 7.7%19.9% primarily driven by new business and increased renewals within previously existing niches combined with entry into new niches. The growth was most significant within the Marine and Energy, Real Estate, and Consumer Services customer segments, offset by contractiondue to endorsement transactions within the Transportation customer segment.segment due to exposure reductions driven by the COVID-19 pandemic. The contraction was also significant within the Media and Entertainment customer segment due to a reduction in insured exposure due to COVID-19.

The changes in GWP were most notable in the following customer segments and niches:

·

Marine and EnergyTransportation GWP increasedcontracted by 65.7%164.7% to $32.8($12.3) million for the three months ended March 31,June 30, 2020 compared to $19.8$19.0 million for the three months ended March 31,June 30, 2019. The reduction of premium growth isfor the period was driven by endorsement transactions for changes in exposure due to growth across allCOVID-19. Negative premium endorsements of $12.6 million for School Bus, $7.0 million for Taxis, and $3.0 million for Charter Bus niches within this segment. Premium growth in these niches is primarily drivenwere processed to provide immediate relief to our insureds and align the premium with exposure base. 

Media and Entertainment GWP contracted by an increase in new business of $12.4 million when compared46.3% to the first quarter of 2019.

·

Real Estate GWP increased by 15.7% to $33.2$17.4 million for the three months ended March 31,June 30, 2020 compared to $28.7$32.4 million for the three months ended March 31,June 30, 2019. The premium growthcontraction is primarilydriven by approximately $4.0 million of exposure reductions due to increasesCOVID-19, $6.0 of declines in the Metrobuilders and Builders’ Risk niches. Premium growth in these niches is primarily due to an increase of $5.2 million for Metrobuilders driven by both new and renewal business, and an increase in$4.0 million of reduced new business of $2.7 million for Builders’ Risk, when comparedopportunities in the Live Entertainment and Film niches.

Construction GWP contracted by 14.8% to 2019.

·

Consumer Services GWP increased by 11.3% to $30.6$27.7 million for the three months ended March 31,June 30, 2020 compared to $27.5$32.5 million for the three months ended March 31,June 30, 2019. The premium growthcontraction is due to continued maturity of several niches, partially offset by premium contraction within the Professional Employer Organizationsreduced new business opportunities and Social Services niches due to market conditions in primary workers’ compensation.

·

Transportation GWP decreased by 30.0% to $21.5 million for the three months ended March 31, 2020 compared to $30.7 million for the three months ended March 31, 2019. The premium reduction isrenewals due to the contraction from underwriting actions within the Intermodal niche. 

impact of COVID-19 across several niches.

Net written premiums decreased by $19.7$53.9 million, or 9.4%25.6%, to $190.2$156.6 million for the three months ended March 31,June 30, 2020 from $209.9$210.6 million for the three months ended March 31,June 30, 2019. The change in net written premiums was primarily related to the contraction in GWP.

Net earned premiums decreased by $20.9 million, or 10.3%, to $181.6 million for the three months ended June 30, 2020 from $202.5 million for the three months ended June 30, 2019.  The decrease in net earned premiums was directly related to the contraction in GWP.

Net earnednet written premiums increased by $10.1 million, or 5.1%, to $205.7 million forin the three months ended March 31,first half of 2020 from $195.6 million for and includes the three months ended March 31, 2019.  The increase inimpact of non-recurring net earned premiums was

35

directly related to$21.2 million from the growth in net written premiums throughout 2019. Due to the lag effectexit of earned premium, the contraction of net written premium in the first quarter of 2020 will not be fully realized in earned premium during the first quarter. excess workers’ compensation.

Loss and LAE Ratio

Our loss and LAE ratio was 62.0%61.9% for the three months ended March 31,June 30, 2020 compared to 60.5%62.8% for the three months ended March 31,June 30, 2019. For the three months ended March 31,June 30, 2020 our reserve for unpaid losses and loss adjustment

36


expenses for accident years 2019 and prior developed unfavorably by $0.2$0.3 million driven by $7.1$7.7 million unfavorable development of  General Liability offset by $3.4 million favorable development in Workers’ Compensation, $2.8 million in Commercial Multiple Peril and $4.4 million unfavorable development in General Liability offset by $5.2 million favorable development in Commercial Auto, $4.9 million in Workers’ Compensation and $1.3$1.1 million in All Other lines. In addition, the Company incurred $6.4$5.3 million of losses and loss adjustment expenses related to premium adjustments earned during the three months ended March 31,June 30, 2020 attributable to prior accident years 2019 and 2018. There were no significant driversCatastrophe losses of favorable development of $0.4$3.6 million for the three months ended March 31, 2019.June 30, 2020 were driven by civil unrest in various cities across the U.S., adding 2.0 points to the current accident year loss ratio compared to catastrophe losses of $3.0 million for the three months ended June 30, 2019, driven by weather related events, which added 1.5 points to the current accident year loss ratio of the prior period.

The following tables summarize the effect of the factors indicated above on the loss and LAE ratios and adjusted loss and LAE ratios for the three months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

 

 

2020

 

2019

 

    

 

 

    

% of Earned

    

 

    

% of Earned

 

Three Months Ended June 30

 

2020

2019

 

    

    

% of Earned

    

    

% of Earned

 

($ in thousands)

 

Losses and LAE

 

Premiums

 

Losses and LAE

 

Premiums

 

Losses and LAE

Premiums

Losses and LAE

Premiums

 

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE:

 

 

 

 

  

 

 

  

 

  

 

 

 

  

  

 

  

Current accident year – excluding catastrophe

 

$

127,359

 

61.9

%

$

118,728

 

60.7

%

$

108,530

 

59.8

$

126,848

 

62.6

%

Current accident year – catastrophe losses (1)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

3,633

 

2.0

 

3,000

 

1.5

Effect of prior year development

 

 

198

 

0.1

 

 

(395)

 

(0.2)

 

 

310

 

0.1

 

(2,733)

 

(1.3)

Total

 

$

127,557

 

62.0

%

$

118,333

 

60.5

%

$

112,473

 

61.9

%

$

127,115

 

62.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

 

 

2020

 

2019

 

 

 

 

 

% of Earned

 

 

 

 

% of Earned

 

Three Months Ended June 30

 

2020

2019

 

% of Earned

% of Earned

 

($ in thousands)

 

Losses and LAE

 

Premiums

 

Losses and LAE

 

Premiums

 

Losses and LAE

Premiums

Losses and LAE

Premiums

 

Adjusted loss and LAE:

    

 

  

    

  

 

 

  

    

  

 

    

  

    

  

  

    

  

Current accident year – excluding catastrophe

 

$

127,359

 

61.9

%

$

118,728

 

60.7

%

$

108,530

 

59.8

$

126,848

 

62.6

%

Current accident year – catastrophe losses (1)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

3,633

 

2.0

 

3,000

 

1.5

Effect of prior year development

 

 

198

 

0.1

 

 

(395)

 

(0.2)

 

 

310

 

0.1

 

(4,988)

 

(2.4)

Total

 

$

127,557

 

62.0

%

$

118,333

 

60.5

%

$

112,473

 

61.9

%

$

124,860

 

61.7

%

(1)

(1)

Catastrophe losses are any one claim, or group of claims, equal or greater than $1.0 million related to a single PCS designated catastrophe event. PCS is Property Claim Services, a Verisk company. PCS has defined catastrophes in the United States, Puerto Rico, and the U.S. Virgin Islands as events that cause $25.0 million or more in direct insured losses to property and affect a significant number of policyholders and insurers.

Expense Ratio

Our expense ratio was 35.8%37.7% for the three months ended March 31,June 30, 2020 compared to 37.7%35.3% for the three months ended March 31,June 30, 2019.  The improvementincrease in the expense ratio is driven primarily by an increasea decrease in net earned premiums in the period and reduced acquisition costs, partially offset by an increase in the$1.5 million of increased credit allowance related to premium collections impacted by COVID-19. In addition, the prior year expense ratio was favorably impacted by 1.1 points of non-recurring cede commission on premium receivables due to COVID-19. 

36

the WAQS.

The following table summarizes the components of the expense ratio for the three months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

 

 

2020

 

2019

 

 

 

 

 

% of Earned

 

 

 

 

% of Earned

 

Three Months Ended June 30

 

2020

2019

 

% of Earned

% of Earned

 

($ in thousands)

 

Expenses

 

Premiums

 

Expenses

 

Premiums

 

Expenses

Premiums

Expenses

Premiums

 

Underwriting, acquisition and insurance expenses:

    

 

  

    

  

 

 

  

    

  

 

    

  

    

  

  

    

  

Policy acquisition expenses, net of ceded reinsurance

 

$

46,986

 

22.8

%

$

46,573

 

23.8

%

$

42,033

 

23.1

$

47,788

 

23.6

%

Underwriting and insurance expenses

 

 

26,637

 

13.0

 

 

27,194

 

13.9

 

 

26,415

 

14.6

 

26,028

 

12.8

Underwriting, acquisition and insurance expenses (1)

 

 

73,623

 

35.8

 

 

73,767

 

37.7

 

 

68,448

 

37.7

 

73,816

 

36.4

Effect of WAQS (1)

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 

 

(2,255)

 

(1.1)

Total underwriting, acquisition and insurance expenses

 

$

73,623

 

35.8

%

$

73,767

 

37.7

%

$

68,448

 

37.7

%

$

71,561

 

35.3

%

(1)

(1)

Total underwriting, acquisition and insurance expenses and the effect of the WAQS are calculated based on the net earned premiums including the effects of the WAQS for three months ended March 31,June 30, 2020 and 2019.

37


Underwriting Income

Underwriting income was $4.5$0.7 million for the three months ended March 31,June 30, 2020 compared to $3.5$3.8 million for the three months ended March 31,June 30, 2019, an increasea decrease of $1.0 million, or 27.8%.$3.1 million. The increasedecrease in underwriting income is primarily due an improvementto the reduction in net earned premium and the increase in the expense ratio.credit allowance for premium receivable due to COVID-19.  

Combined Ratio

Our combined ratio and adjusted combined ratio was 97.8%were 99.6% for the three months ended March 31, 2020June 30, 2020 compared to 98.2%98.1% for the three months ended March 31, 2019.  June 30, 2019.

Investing Results

Our net investment income decreasedincreased by 48.6%36.7% to $8.8$23.8 million for the three months ended March 31,June 30, 2020 from $17.2$17.4 million for the three months ended March 31, 2019. June 30, 2019. The decreaseincrease in net investment income is primarily due to a mark-to-market valuation adjustment of $8.2 million in Marchunrealized gains on investments in limited partnerships.partnerships and limited liability companies.  Net investment yield was 1.6%4.3% for the three months ended March 31,June 30, 2020 and 3.6%3.5% for the three months ended March 31,June 30, 2019. Realized investment gains, net includes a $0.4$1.6 million credit loss allowance expense for fixed maturity securities for the three months ended March 31,June 30, 2020.

The weighted average duration of our fixed maturity portfolio, including cash equivalents, was 4.14.5 years at March 31,June 30, 2020 and 2.82.9 years at March 31,June 30, 2019.  

The following table summarizes the components of net investment income and net investment gains for the three months ended March 31,June 30, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 

Three Months Ended June 30

($ in thousands)

 

2020

 

2019

 

$ Change

2020

2019

$ Change

Interest from securities

    

$

16,282

    

$

16,119

    

$

163

Fixed maturity securities

    

$

15,849

    

$

16,531

    

$

(682)

Other investments

 

 

(6,792)

 

 

1,559

 

 

(8,351)

 

8,592

 

1,394

 

7,198

Gross investment income

 

 

9,490

 

 

17,678

 

 

(8,188)

 

24,441

 

17,925

 

6,516

Investment expenses

 

 

(675)

 

 

(520)

 

 

(155)

 

(650)

 

(527)

 

(123)

Net investment income

 

 

8,815

 

 

17,158

 

 

(8,343)

 

23,791

 

17,398

 

6,393

Realized investment gains, net

 

 

232

 

 

113

 

 

119

 

1,891

 

137

 

1,754

Total

 

$

9,047

 

$

17,271

 

$

(8,224)

$

25,682

$

17,535

$

8,147

Average invested assets at book value

 

$

2,175,621

 

$

1,908,971

 

$

266,650

Average cash and invested assets

$

2,234,396

$

1,964,254

$

270,142

Interest and Other Expenses, Net

Our interest and other expenses increaseddecreased by $1.5$5.9 million to $4.7$4.4 million for the three months ended March 31,June 30, 2020 compared to $3.3$10.2 million for the three months ended March 31, 2019.June 30, 2019. The increasedecrease is primarily driven by $7.2 million of payments made to our former Chief Executive Officer (“CEO”) for termination of service as CEO and his service as Executive Chairman in the prior period.

Income Tax Expense

Our effective tax rate for the three months ended June 30, 2020 and 2019 was 21.6% and 21.8%, respectively. The decrease in the effective tax rate for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to a reduction in non-deductible expenses.  

Our income tax expense was $4.8 million and $2.4 million for the three months ended June 30, 2020 and 2019, respectively. The increase is due to the increase in income before income taxes compared to the same period in 2019.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes certain income tax provisions for individuals and corporations; however, these benefits do not impact the Company’s current tax provision.

3738


Adjusted Operating Income

Adjusted operating income was $16.9 million for the three months ended June 30, 2020, an increase of $2.7 million, or 18.7% from the adjusted operating income of $14.2 million for the three months ended June 30, 2019.

Adjusted Operating Return on Equity

Our adjusted operating return on equity was 12.6% for the three months ended June 30, 2020, a decrease of 0.2 percentage points from 12.8% for the three months ended June 30, 2019 primarily due to the increase in average book value.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The following table summarizes the results of continuing operations for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30

Change

 

($ in thousands)

    

2020

    

2019

    

$

    

Percent

GWP

$

400,178

$

490,870

$

(90,692)

(18.5)

%

Ceded written premiums

 

(53,372)

 

(70,400)

 

17,028

(24.2)

Net written premiums

$

346,806

$

420,470

$

(73,664)

(17.5)

Net earned premiums

$

387,291

$

398,088

$

(10,797)

(2.7)

Net losses and LAE incurred:

 

240,030

 

245,448

 

(5,418)

(2.2)

Underwriting, acquisition and insurance expenses

 

142,071

 

145,328

 

(3,257)

(2.2)

Underwriting income (1)

 

5,190

 

7,312

 

(2,122)

(29.0)

Interest and other expenses, net

 

9,086

 

13,489

 

(4,403)

(32.6)

Net investment income

 

32,606

 

34,556

 

(1,950)

(5.6)

Realized investment gains, net

 

2,123

 

250

 

1,873

749.2

Income before taxes

 

30,833

 

28,629

 

2,204

7.7

Income tax expense

 

6,739

 

6,238

 

501

8.0

Net income from continuing operations

$

24,094

$

22,391

$

1,703

7.6

Adjusted operating income (1)

$

24,879

$

27,858

$

(2,979)

(10.7)

%

Adjusted operating return on equity (1)

 

8.8

 

13.1

 

Return on equity

 

8.5

%

 

10.6

%

 

Loss and LAE ratio:

 

62.0

%

 

61.7

%

 

Loss and LAE ratio – excluding catastrophe

61.1

%

 

60.9

%

 

Loss and LAE ratio – catastrophe losses

0.9

%

 

0.8

%

 

Expense ratio

 

36.7

%

 

36.5

%

 

Combined ratio

 

98.7

%

 

98.2

%

 

Adjusted loss and LAE ratio (2)

 

62.0

%

 

61.1

%

 

Adjusted loss and LAE ratio – excluding catastrophe

61.1

%

 

60.3

%

 

Adjusted loss and LAE ratio – catastrophe losses

0.9

%

 

0.8

%

 

Adjusted expense ratio (2)

 

36.7

%

 

37.1

%

 

Adjusted combined ratio (2)

 

98.7

%

 

98.2

%

 

(1)Underwriting income, adjusted operating income and adjusted operating return on equity are non-GAAP financial measures. See “—Reconciliation of Non-GAAP Financial Measures” for reconciliations of net income in accordance with GAAP to underwriting income and adjusted operating income.
(2)Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio excluding the effects of the WAQS. For additional detail on the impact of the WAQS on our results of operations see “Factors Affecting Our Results of Operations—The WAQS.”

39


expensesNet Income from Continuing Operations

Net income was $24.1 million for the six months ended June 30, 2020 compared to $22.4 million for the six months ended June 30, 2019, an increase of $1.7 million, or 7.6%. The increase in net income is due to non-recurring stock compensation grants in connection with our IPO anda reduction of other expense which includes $7.2 million of payments made to our former CEO for termination of service as CEO and his service as Executive Chairman.Chairman in the prior period, partially offset by the reduction in underwriting profit driven by reduced net earned premium.

Premiums

GWP were $400.2 million for the six months ended June 30, 2020 compared to $490.9 million for the six months ended June 30, 2019, a decrease of $90.7 million, or 18.5%.

The following table presents the GWP by customer segment for the six months ended June 30, 2020 and 2019:

($ in millions)

Six Months Ended June 30

Customer Segment

    

2020

    

2019

    

% Change

Construction

$

52.2

$

55.8

 

(6.5)

%

Consumer Services

 

71.3

 

65.4

 

9.0

Marine and Energy

 

59.6

 

45.5

 

31.0

Media and Entertainment

 

47.9

 

62.1

 

(22.9)

Professional Services

 

61.6

 

58.7

 

4.9

Real Estate

 

80.5

 

75.3

 

6.9

Sports

14.3

14.7

(2.7)

Transportation

 

9.1

 

49.7

 

(81.7)

Customer segments subtotal

396.5

427.2

 

(7.2)

Other

 

3.7

 

63.7

 

(94.2)

Total

$

400.2

$

490.9

 

(18.5)

%

GWP from customer segments (excluding GWP within “Other”) for the six months ended June 30, 2020 contracted by 7.2% primarily due to endorsement transactions within the Transportation customer segment due to exposure reductions driven by the COVID-19 pandemic in the second quarter of 2020. The contraction was also significant within the Media and Entertainment customer segment due to a reduction in insured exposure due to COVID-19 during the second quarter of 2020.

The changes in GWP were most notable in the following customer segments and niches:

Transportation GWP contracted by 81.7% to $9.1 million for the six months ended June 30, 2020 compared to $49.7 million for the six months ended June 30, 2019. The premium contraction is driven by exposure reductions as well as reduced renewal and new business opportunities due to COVID-19. Negative premium endorsements of due to exposure reductions of $12.6 million for School Bus, $7.0 million for Taxis, and $3.0 million for Charter Bus niches were processed during the second quarter of 2020, to provide immediate relief to our insureds and align premium with exposures.
Media and Entertainment GWP contracted by 22.9% to $47.9 million for the six months ended June 30, 2020 compared to $62.1 million for the six months ended June 30, 2019. The premium contraction is driven by exposure reductions due to COVID-19 and reduced renewal and new business opportunities during the second quarter of 2020 in both the Live Entertainment and Film niches.
Marine and Energy GWP grew by 31.0% to $59.6 million for the six months ended June 30, 2020 compared to $45.5 million for the six months ended June 30, 2019. The premium growth is primarily due to new business within the Propane and Fuel Dealers niche and increased renewal premium in Solar Contractors and Marine & Excess Energy niches.

40


Net written premiums decreased by $73.7 million, or 17.5%, to $346.8 million for the six months ended June 30, 2020 from $420.5 million for the six months ended June 30, 2019. The reduction in net written premiums was directly related to the contraction in GWP.

Net earned premiums decreased by $10.8 million, or 2.7%, to $387.3 million for the six months ended June 30, 2020 from $398.1 million for the six months ended June 30, 2019.  The decrease in net earned premiums was directly related to the contraction in net written premiums during the first half of 2020, which includes the impact of non-recurring net earned premiums of $39.9 million from the exit of excess workers’ compensation.

Loss and LAE Ratio

Our loss and LAE ratio was 62.0% for the six months ended June 30, 2020 compared to 61.7% for the six months ended June 30, 2019. For the six months ended June 30, 2020, our reserve for unpaid losses and loss adjustment expenses for accident years 2019 and prior developed unfavorably by $0.5 million driven by $12.1 million unfavorable development in General Liability and $4.3 million unfavorable development in Commercial Multiple Peril offset by $8.3 million favorable development in Workers’ Compensation, $5.2 million in Commercial Auto and $2.4 million favorable development in All Other lines. In addition, the Company incurred $11.7 million of losses and loss adjustment expenses related to premium adjustments earned during the six months ended June 30, 2020 attributable to prior accident years 2019 and 2018. Catastrophe losses of $3.6 million for the six months ended June 30, 2020 were driven by civil unrest in various cities across the U.S. during the second quarter, adding 0.9 points to the current accident year loss ratio compared to catastrophe losses of $3.0 million for the six months ended June 30, 2019, driven by weather related events in the second quarter of 2019, which added 0.8 points to the current accident year loss ratio of the prior period.

The following tables summarize the effect of the factors indicated above on the loss and LAE ratios and adjusted loss and LAE ratios for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30

2020

2019

    

% of Earned

    

    

% of Earned

($ in thousands)

    

Losses and LAE

Premiums

Losses and LAE

Premiums

Loss and LAE:

 

  

  

 

  

Current accident year – excluding catastrophe 

$

235,889

 

60.9

$

245,576

 

61.7

Current accident year – catastrophe losses (1)

 

3,633

 

0.9

 

3,000

 

0.8

Effect of prior year development

 

508

 

0.2

 

(3,128)

 

(0.8)

Total

$

240,030

 

62.0

%

$

245,448

 

61.7

Six Months Ended June 30

2020

2019

% of Earned

% of Earned

($ in thousands)

Losses and LAE

Premiums

Losses and LAE

Premiums

Adjusted loss and LAE:

    

  

    

  

    

  

    

  

Current accident year – excluding catastrophe

$

235,889

 

60.9

$

245,576

 

61.7

Current accident year – catastrophe losses (1)

 

3,633

 

0.9

 

3,000

 

0.8

Effect of prior year development

 

508

 

0.2

 

(5,335)

 

(1.4)

Total

$

240,030

 

62.0

%

$

243,241

 

61.1

(1)Catastrophe losses are any one claim, or group of claims, equal or greater than $1.0 million related to a single PCS designated catastrophe event. PCS is Property Claim Services, a Verisk company. PCS has defined catastrophes in the United States, Puerto Rico, and the U.S. Virgin Islands as events that cause $25.0 million or more in direct insured losses to property and affect a significant number of policyholders and insurers.

Expense Ratio

Our expense ratio was 36.7% for the six months ended June 30, 2020 compared to 36.5% for the six months ended June 30, 2019.  The increase in the expense ratio is driven primarily by the impact of the WAQS in 2019 and $2.5 million of increased credit allowance related to premium collections impacted by COVID-19.

41


The following table summarizes the components of the expense ratio for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30

 

2020

2019

 

% of Earned

% of Earned

 

($ in thousands)

Expenses

Premiums

Expenses

Premiums

 

Underwriting, acquisition and insurance expenses:

    

  

    

  

    

  

    

  

Policy acquisition expenses, net of ceded reinsurance

$

89,019

 

23.0

$

94,311

 

23.7

%

Underwriting and insurance expenses

 

53,052

 

13.7

 

53,222

 

13.4

Underwriting, acquisition and insurance expenses(1)

 

142,071

 

36.7

 

147,533

 

37.1

Effect of WAQS(1)

 

 

 

(2,205)

 

(0.6)

Total underwriting, acquisition and insurance expenses

$

142,071

 

36.7

%

$

145,328

 

36.5

%

(1)Total underwriting, acquisition and insurance expenses and the effect of the WAQS are calculated based on the net earned premiums including the effects of the WAQS for six months ended June 30, 2020 and 2019.

Underwriting Income

Underwriting income was $5.2 million for the six months ended June 30, 2020 compared to $7.3 million for the six months ended June 30, 2019, a decrease of $2.1 million, or 29.0%. The decrease in underwriting income is primarily due the reduction in net earned premium.  

Combined Ratio

Our combined ratio and adjusted combined ratio were 98.7% for the six months ended June 30, 2020 compared to 98.2% for the six months ended June 30, 2019.

Investing Results

Our net investment income decreased by 5.6% to $32.6 million for the six months ended June 30, 2020 from $34.6 million for the six months ended June 30, 2019. The decrease in net investment income is primarily due lower net investment yields in the current year. Net investment yield was 3.0% for the six months ended June 30, 2020 and 3.5% for the six months ended June 30, 2019.  Realized investment gains, net, includes a $1.9 million credit loss allowance for fixed maturity securities for the six months ended June 30, 2020.

The weighted average duration of our fixed maturity portfolio, including cash equivalents, was 4.5 years at June 30, 2020 and 2.9 years at June 30, 2019.  

The following table summarizes the components of net investment income and net investment gains for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30

($ in thousands)

2020

2019

$ Change

Fixed maturity securities

    

$

32,131

    

$

32,650

    

$

(519)

Other investments

1,800

 

2,953

 

(1,153)

Gross investment income

33,931

 

35,603

 

(1,672)

Investment expenses

(1,325)

 

(1,047)

 

(278)

Net investment income

32,606

 

34,556

 

(1,950)

Realized investment gains, net

2,123

 

250

 

1,873

Total

$

34,729

$

34,806

$

(77)

Average cash and invested assets

$

2,210,278

$

1,965,651

$

244,627

Interest and Other Expenses, Net

Our interest and other expenses decreased by $4.4 million to $9.1 million for the six months ended June 30, 2020 compared to $13.5 million for the six months ended June 30, 2019. The decrease is primarily driven by $7.2 million of

42


payments made to our former CEO for termination of services as CEO and his service as Executive Chairman in the prior period.

Income Tax Expense

Our effective tax rate for the periodssix months ended March 31,June 30, 2020 and 2019 was 22.6%21.9% and 21.8%, respectively. The increase in the effective tax rate in the threesix months ended March 31,June 30, 2020 compared to the same period in 2019 was primarily due to the tax effect of share-based compensation.

Our income tax expense was $2.0$6.7 million and $3.8$6.2 million for the periods ended March 31, 2020June 30, 2020 and 2019, respectively. The decreaseincrease is due to the decreaseincrease in income before income taxes compared to the same period in 2019.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes certain income tax provisions for individuals and corporations; however, these benefits do not impact the Company’s current tax provision.

Adjusted Operating Income

Adjusted operating income was $8.0$24.9 million for the threesix months ended March 31, 2020,June 30, 2020, a decrease of $5.6$3.0 million, or 41.3%10.7% from the adjusted operating income of $13.6$27.9 million for the threesix months ended March 31, 2019.June 30, 2019.

Adjusted Operating Return on Equity

Our adjusted operating return on equity was 6.2%8.8% for the three six months ended March 31,June 30, 2020,, a decrease of 7.1%4.3% percentage points from 13.3%13.1% for the threesix months ended March 31, 2019June 30, 2019 primarily due to the increase in average book value following our raise of primary equity during our initial public offering in 2019 combined with the decrease in adjusted operating income combined with an increase in stockholders’ equity from $426.9 million in the first quarter of 2019 to $488.1 million in the first quarter of 2020.income.

Liquidity and Capital Resources

Sources and Uses of Funds

We are organized as a holding company with our operations primarily conducted by our wholly owned insurance subsidiaries, New York Marine and Gotham, which are domiciled in New York, and Southwest Marine, which is domiciled in Arizona. 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) 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, and pay dividends and taxes and for other business purposes.

We receive corporate service fees from the operating subsidiaries to reimburse us for most of the operating expenses that we incur. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.

Management believes that the Company has sufficient liquidity available to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.

Our outstanding $140.0 million aggregate principal amount of 7.5% Senior Unsecured Notes and $25.0 million aggregate principal amount of 6.5% Senior Notes (collectively, the “Notes”) mature in November 2020.  We are currently in discussions

Management believes that the Company has sufficient liquidity available to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.

Credit Agreement

On June 12, 2020 (the “Effective Date”), we entered into a credit agreement (the “Credit Agreement”) with certain lenders and Truist Bank, N.A., as administrative agent (“Truist”), providing for a number of counterparties related to different options$165.0 million delayed draw term loan facility (the “Term Loan Facility”). Borrowings under the Term Loan Facility will be used to refinance the Notes and expect to enter into agreements with one or more counterparties to provide for the refinancing of the Notes prior to their maturity date.  We believe that we will be able to close on such a refinancing transaction effectively and in a timely manner.

at

3843


maturity. The Credit Agreement includes a letter of credit sub-limit of up to $5.0 million and a swingline loan sub-limit of up to $5.0 million. Further, the Credit Agreement provided for an uncommitted revolving loan facility (the “Revolving Credit Facility”) in an initial aggregate amount of $35.0 million, which subsequently became committed and increased to an aggregate of $65.0 million pursuant to the Incremental Agreement (defined below).  At our option, borrowings under the Term Loan Facility and the Revolving Credit Facility would be (i) a “Base Rate Borrowing” which would bear interest at the Base Rate (as defined below) plus the Applicable Margin (as described below), or (ii) an “Eurodollar Borrowing” which would bear interest at the Adjusted LIBO Rate (defined as reserve-adjusted LIBOR, subject to a floor of 0.75%), for periods of one, two, three or six months, plus the Applicable Margin. The Base Rate is the highest of (a) the rate of interest announced publicly by Truist as its prime lending rate, (b) 0.5% above the federal funds rate, (c) the Adjusted LIBO Rate determined on a daily basis for a one-month period (subject to a floor of 0.75%) plus 1.00%, and (d) zero percent. The Applicable Margin for a Eurodollar Borrowing will range from 2.00% to 3.25% per annum based upon ProSight’s Debt to Capitalization Ratio (as defined in the Credit Agreement) in effect on such date. The Applicable Margin for Base Rate Borrowings is 100 basis points lower than the Applicable Margin for Eurodollar Borrowings. The initial Applicable Margin was 3.00% and applied from the Effective Date until the date of the filing of this Quarterly Report. Following such date, the Applicable Margin will be determined as set forth above.

We agreed to pay a ticking fee with respect to the undrawn portion of the commitments for the Term Loan Facility, ranging from 0.20% to 0.30% per annum based upon our Debt to Capitalization Ratio (as defined in the Credit Agreement) in effect on such date. We also agreed to pay a commitment fee on the unused portion of the Revolving Credit Facility, ranging from 0.20% to 0.30% per annum and determined in the same way as ticking fee with respect to the Term Loan Facility. The initial ticking fee and commitment fee (if applicable) were 0.30% and applied from the Effective Date until the date of the filing of this Form 10-Q.  Following such date, the ticking fee and the commitment fee will be determined as set forth above.

As a condition precedent to entry into the Credit Agreement, we terminated our amended and restated revolving loan agreement, dated as of March 15, 2019, with Citizens Bank, N.A. (“Citizens”), which had previously provided for a $50.0 million revolving credit facility.  No amounts were outstanding at termination.  

As of June 30, 2020, there were no amounts outstanding under the Credit Agreement.  

Revolving Credit Facility

On June 30, 2020, we entered into an incremental facility agreement and amendment (the “Incremental Agreement”) with certain lenders and Truist as administrative agent.  The Incremental Agreement supplemented the Credit Agreement by obtaining from lenders commitments with respect to the Revolving Credit Facility provided for under the Credit Agreement, and increasing the Revolving Credit Facility from $35.0 million as stated in the Credit Agreement to an aggregate amount of $65.0 million.

The Revolving Credit Facility may be used for general corporate purposes, including, without limitation, to support business growth and to provide additional liquidity if needed. As of June 30, 2020, there were no amounts outstanding under the Revolving Credit Facility, however, subsequent to the quarter, we drew $5.0 million and $30.0 million under the Revolving Credit Facility on July 14, 2020 and August 3, 2020, respectively.  

Master Lease Agreement

On June 26, 2020, we sold certain assets, in exchange for approximately $24.9 million of proceeds and agreed to lease such assets back from Citizens in exchange for monthly payments bearing interest at 4.83%.  The lease expires on July 1, 2025, on which date we will repurchase the assets from Citizens for one dollar.  This transaction is treated as a secured loan payable under U.S. GAAP. For a discussion of the secured loan payable, see Note 14. Debt – Recent Financing Transactions – Secured Loan Payable.  

Cash Flows

OurThe  most significant source of cash for our operating subsidiaries is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period, and 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. We

44


also use cash to pay for operating expenses such as salaries, rent and taxes and capital expenditures such as technology systems. Because the payment of claims occurs well after the receipt of the premium, we invest the cash in various investment securities that generally earn interest and dividends. We also use cash to pay forThe operating expenses such as salaries, rent and taxes and capital expenditures such as technology systems.subsidiaries’ investment portfolios represent an additional source of liquidity that could be accessed if needed.  As described under “—Reinsurance” below, we use reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.

The casualty-focused nature of our products, and limited property exposures, typically allow us to generate significant operating cash flow. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, and as a result their timing can influence cash flows from operating activities in any given period. Management believes that cash receipts from premiums, proceeds from investment sales and maturities, and investment income are sufficient to cover cash outflows in the foreseeable future.

Our cash flows for the threesix months ended March 31,June 30, 2020 and 2019 were:

 

 

 

 

 

 

 

Three Months Ended March 31 

Six Months Ended June 30

2020

2019

 

2020

 

2019

($ in thousands)

 

 

Cash and cash equivalents provided by (used in):

    

 

 

 

 

 

    

    

Operating activities

 

$

58,856

 

$

84,809

 

$

93,947

 

$

159,341

Investing activities

 

 

(32,068)

 

 

(72,095)

 

(82,778)

 

(146,694)

Financing activities

 

 

(2,312)

 

 

 —

 

22,685

 

Change in cash and cash equivalents

 

$

24,476

 

$

12,714

Net change in cash and cash equivalents

$

33,854

$

12,647

The decrease in cash provided by operating activities for the threesix months ended March 31, 2020,June 30, 2020, compared to the threesix months ended March 31,June 30, 2019, was largely driven by timing of claim payments and premium collections.collection declines due to COVID-19. Cash used byin investing activities is primarily funded by cash flow from operations. The decrease in cash used byin investing activities  of $40.0 million for the threesix months ended March 31,June 30, 2020, compared to the threesix months ended March 31,June 30, 2019, primarily reflected the amount of operating funds available for investment in the current quarter. The decreaseincrease in cash provided by financing activities of $2.3 million for the threesix months ended March 31,June 30, 2020, compared to the threesix months ended March 31,June 30, 2019, was primarily due to the issuance of the $24.9 million secured loan in June 2020, offset partly by cash outflows related to stock compensation plans in the current quarter.

Reinsurance

We actively use ceded reinsurance across our book of business to reduce our overall risk position and to protect our capital. Reinsurance involves a primary insurance company transferring, or “ceding”, a portion of its premium and losses in order to limit its exposure. The ceding of liability to a reinsurer does not relieve the obligation of the primary insurance to the policyholder. The primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement. Our reinsurance agreements are primarily contracted under excess of loss agreements. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses, in excess of a specified amount. In excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses.  

We use quota share and facultative reinsurance in selected niches, on a limited basis.reinsurance. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.

39

Our largest quota share reinsurance agreements were the WAQS.  In connection with the divestment of our U.K. business, New York Marine as reinsured entered into the WAQS with third party reinsurers to maintain reasonable underwriting leverage within New York Marine and its subsidiary insurance companies during a transition period following the U.K. divestment. During 2018, and following the transition of the U.S. business back to New York Marine, the WAQS were terminated. Effective January 1, 2020, the WAQS were commuted.

4045


The following is a summary of our significant in-force excess of loss reinsurance programs as of March 31,June 30, 2020:

Line of Business Covered

    

Line of Business Covered

Reinsurance Coverage

Property - per risk

$37.0 million excess of $3.0 million

Property - catastrophe

$195.0 million excess of $5.0 million

Casualty

Supported Umbrella: $6.0 million excess of $4.0 million
Unsupported Umbrella: $5.0 million excess of $5.0 million
Professional Liability: $5.0 million excess of $5.0 million

Primary WorkersWorkers' Compensation

$37.0 million excess of $3.0 million

Excess Workers CompensationMarine

$95.0 million excess of $5.0 million

Marine

$42.545.0 million excess of $2.5 million

(1)

(1)

Our excess of loss reinsurance reduces the financial impact of a loss occurrence.  Our excess of loss reinsurance includes reinstatement provisions, inuring relationships, and other clauses that may impact the amount recovered on a loss occurrence.

At each annual renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties.

Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of the reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible. The allowance related to credit default with respect to our reinsurance assets as of March 31,June 30, 2020 and December 31, 2019 was $0.6$0.7 million and $0.5 million respectively. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers. At March 31, 2020, all reinsurance contracts that our insurance subsidiary was a party to were with companies with A.M. Best ratings of "A-" (Excellent) or better.

Ratings

ProSight and its insurance subsidiaries 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 “F” (In Liquidation). 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—A downgrade in our Financial Strength Ratings (“FSRs”) from A.M. Best could negatively affect our results of operations.”

The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance subsidiaries to attract and retain our distribution partners and on the risk profiles of the submissions for insurance that the insurance subsidiaries receive. The “A-” (Excellent) rating affirmed by A.M. Best on November 22, 2019 is consistent with our business plan and allows us to actively pursue relationships with the distribution partners identified in our marketing plan.

Financial Condition

Stockholders’ Equity

At March 31,June 30, 2020, total stockholders’ equity was $488.1$586.1 million and tangible stockholders’ equity was $458.9$556.9 million, compared to total stockholders’ equity of $543.0 million and tangible stockholders’ equity of $513.8 million at December 31, 2019. The decreaseincrease in both total and tangible stockholders’ equity was primarily due to net income from continuing operations of $24.1 million and net unrealized lossesgains on investment securities, net of $61.4 million, partially offset by net incometax of $7.1$15.3 million, for the threesix months ended March 31,June 30, 2020.

Tangible stockholders’ equity is a non-GAAP financial measure. We define tangible stockholders’ equity as stockholders’ equity less goodwill and intangible assets. Our definition of tangible stockholders’ equity may not be

41

comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders’ equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.

46


Stockholders’ equity at March 31,June 30, 2020 and December 31, 2019 reconciles to tangible stockholders’ equity as follows:

 

 

 

 

 

 

    

June 30, 2020

    

December 31, 2019

    

March 31, 2020

    

December 31, 2019

($ in thousands)

 

 

 

Stockholders’ equity

 

$

488,102

 

$

543,031

 

$

586,100

$

543,031

Less: goodwill and net intangible assets

 

 

29,181

 

 

29,189

 

 

29,174

 

29,189

Tangible stockholders’ equity

 

$

458,921

 

$

513,842

 

$

556,926

$

513,842

Book value per share

 

$

11.26

 

$

12.61

 

$

13.52

$

12.61

Tangible book value per share

 

$

10.59

 

$

11.93

 

$

12.85

$

11.93

Investment Portfolio

Our cash and invested assets consist of debt securities, cash and cash equivalents, short-term investments, commercial levered loans and alternative investments.

At March 31,June 30, 2020, the majority of the portfolio, or $2.0$2.1 billion, was comprised of securities that are classified as available-for sale and 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 loss. Also included in our investments were $217.4$240.1 million of alternative investments carried at fair value. Our securities, including cash equivalents, had a weighted average duration of 4.14.5 years and an average rating of “A” at March 31,June 30, 2020.

At March 31,June 30, 2020 and December 31, 2019,, the cost and fair value on cash and invested assets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

 

 

Estimated

 

% of Total

 

 

 

 

Estimated Fair

 

% of Total Fair

 

June 30, 2020

December 31, 2019

 

Estimated

% of Total

Estimated Fair

% of Total Fair

 

Cost

    

Fair Value

Fair Value

Cost

    

Value

Value

 

 

Cost

 

Fair Value

 

Fair Value

 

 

Cost

 

Value

 

Value

 

($ in thousands)

    

 

    

  

    

    

 

    

  

 

    

    

  

    

  

    

  

 

Fixed and floating rate securities

 

$

1,875,903

 

$

1,850,002

 

85.6

%

 

$

1,848,964

 

$

1,891,148

 

86.3

%

 

$

1,934,536

 

$

2,002,420

 

86.0

%

 

$

1,848,964

 

$

1,891,148

 

86.3

%

Alternate available-for-sale

 

 

162,566

 

 

152,418

 

7.0

 

 

 

150,439

 

 

149,534

 

6.8

 

 

 

168,453

 

 

160,360

 

6.9

 

 

150,439

 

 

149,534

 

6.8

Total bonds

 

 

2,038,469

 

 

2,002,420

 

92.6

 

 

 

1,999,403

 

 

2,040,682

 

93.1

 

Total fixed maturity securities

 

 

2,102,989

 

 

2,162,780

 

92.9

 

 

1,999,403

 

 

2,040,682

 

93.1

Other investments:

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

  

 

 

 

 

 

  

 

 

  

 

  

Commercial levered loans

 

 

13,725

 

 

12,246

 

0.6

 

 

14,069

 

 

13,950

 

0.6

 

 

 

13,463

 

 

12,628

 

0.5

 

 

14,069

 

 

13,950

 

0.6

Non-redeemable preferred stock securities

 

 

11,669

 

 

11,378

 

0.5

 

 

 —

 

 

 —

 

 —

 

11,670

11,785

0.5

Limited partnerships

 

 

65,011

 

 

65,011

 

3.0

 

 

66,660

 

 

66,660

 

3.0

 

Limited partnerships and limited liability companies

 

 

79,717

 

 

79,717

 

3.4

 

 

66,660

 

 

66,660

 

3.0

Short-term investments

 

 

19,229

 

 

19,229

 

0.9

 

 

 

43,873

 

 

43,873

 

2.0

 

 

 

496

 

 

496

 

0.0

 

 

43,873

 

 

43,873

 

2.0

Total other investments

 

 

109,634

 

 

107,864

 

5.0

 

 

 

124,602

 

 

124,483

 

5.6

 

 

 

105,346

 

 

104,626

 

4.5

 

 

124,602

 

 

124,483

 

5.6

Total investments

 

 

2,148,103

 

 

2,110,284

 

97.6

 

 

 

2,124,005

 

 

2,165,165

 

98.7

 

2,208,335

2,267,406

97.4

2,124,005

2,165,165

98.7

Cash and cash equivalents

 

 

51,927

 

 

51,927

 

2.4

 

 

 

27,497

 

 

27,497

 

1.3

 

Cash, cash equivalents, and restricted cash

 

 

60,603

 

 

60,603

 

2.6

 

 

27,497

 

 

27,497

 

1.3

Total

 

$

2,200,030

 

$

2,162,211

 

100.0

%

 

$

2,151,502

 

$

2,192,662

 

100.0

%

 

$

2,268,938

 

$

2,328,009

 

100.0

%

 

$

2,151,502

 

$

2,192,662

 

100.0

%

As of March 31,June 30, 2020, approximately 16.1%15.7% of our fixed maturity securities portfolio was comprised of investment securities that have a floating interest rate compared to approximately 33.1%, as of December 31, 2019. Included in December 31, 2019, within our floating interest rate securities was 12.2% of total fair value that is no longer considered floating interest rate securities such as asset-backed securities, corporate securities, commercial mortgage-backed securities, agency residential mortgage-backed securities and non-agency residential mortgage-backed securities. These securities were reclassified by our new investment accounting service provider to fixed rate securities due to characteristics

4247


characteristics that better align with coupon variability. Our floating rate securities are classified as having coupons that reset at a set schedule off of an index rate.  

The table below presents the credit quality of total bondsfixed maturity securities at March 31,June 30, 2020 and December 31, 2019, as rated by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) or Equivalent Designation:

June 30, 2020

December 31, 2019

 

Standard & Poor’s or Equivalent Designation

    

Estimated Fair Value

    

% of Total

    

 

Estimated Fair Value

    

% of Total

 

($ in thousands)

 

AAA

 

$

205,898

 

9.5

$

219,696

 

10.8

%

AA

 

 

491,628

 

22.8

 

356,924

 

17.5

A

 

 

684,047

 

31.6

 

719,394

 

35.2

BBB

 

 

569,274

 

26.3

 

563,680

 

27.6

Below BBB/Not rated

 

 

211,933

 

9.8

 

180,988

 

8.9

Total

 

$

2,162,780

 

100.0

$

2,040,682

 

100.0

%

The table below presents the credit quality of total fixed maturity securities at June 30, 2020 and December 31, 2019, either rated below BBB or not rated by Standard & Poor’s and their National Association of Insurance Commissioners (“NAIC”) designation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Standard & Poor’s or Equivalent Designation

    

Estimated Fair Value

    

% of Total

    

    

Estimated Fair Value

    

% of Total

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

AAA

 

$

188,248

 

9.4

%

 

$

219,696

 

10.8

%

AA

 

 

432,544

 

21.6

 

 

 

356,924

 

17.5

 

A

 

 

653,760

 

32.6

 

 

 

719,394

 

35.2

 

BBB

 

 

512,253

 

25.6

 

 

 

563,680

 

27.6

 

Below BBB/Not rated

 

 

215,615

 

10.8

 

 

 

180,988

 

8.9

 

Total

 

$

2,002,420

 

100.0

%

 

$

2,040,682

 

100.0

%

June 30, 2020

NAIC Designation (Estimated Fair Value)

Standard & Poor’s or Equivalent Designation

    

1

    

2

    

3

    

4

    

5

    

6

    

Total

($ in thousands)

BB

$

2,495

$

30,526

$

47,369

$

1,680

$

-

$

-

$

82,070

B

1,573

492

4,619

7,622

-

-

14,306

CCC

33,088

25

671

1,397

1,725

-

36,906

CC or lower

33,053

19,809

59

3,144

5

22,581

78,651

Total

$

70,209

$

50,852

$

52,718

$

13,843

$

1,730

$

22,581

$

211,933

December 31, 2019

NAIC Designation (Estimated Fair Value)

Standard & Poor’s or Equivalent Designation

    

1

    

2

    

3

    

4

    

5

    

6

    

Total

($ in thousands)

BB

$

11,533

$

-

$

60,917

$

2,516

$

-

$

-

$

74,966

B

698

-

111

12,691

-

-

13,500

CCC

33,893

-

-

-

-

-

33,893

CC or lower

35,590

32

-

-

-

23,007

58,629

Total

$

81,714

$

32

$

61,028

$

15,207

$

-

$

23,007

$

180,988

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Table of Contents

The amortized cost and fair value of our fixed maturity securities by contractual maturity are shown below as of March 31,June 30, 2020 and December 31, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

    

 

 

    

Estimated

    

% of Fair

    

    

 

 

    

Estimated Fair

    

 

 

June 30, 2020

December 31, 2019

 

    

    

Estimated

    

% of Fair

    

    

    

Estimated Fair

    

 

Amortized Cost

Fair Value

Value

Amortized Cost

Value

% of Fair Value

 

 

Amortized Cost

 

Fair Value

 

Value

 

 

Amortized Cost

 

Value

 

% of Fair Value

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

103,407

 

$

103,498

 

5.2

%

 

$

99,035

 

$

99,326

 

4.9

%

 

$

107,187

 

$

108,224

 

5.0

%

$

99,035

$

99,326

 

4.9

%

Due after one year through five years

 

 

659,203

 

 

657,184

 

32.8

 

 

679,649

 

 

692,219

 

33.9

 

 

 

641,649

 

 

661,544

 

30.6

 

679,649

 

692,219

 

33.9

Due after five years through ten years

 

 

449,535

 

 

445,004

 

22.2

 

 

507,803

 

 

523,276

 

25.6

 

 

 

494,186

 

 

520,225

 

24.1

 

507,803

 

523,276

 

25.6

Due after ten years

 

 

248,896

 

 

239,964

 

12.0

 

 

151,105

 

 

153,790

 

7.5

 

 

 

254,703

 

 

264,008

 

12.2

 

151,105

 

153,790

 

7.5

Government agency securities

 

 

27,998

 

 

28,589

 

1.4

 

 

6,523

 

 

6,532

 

0.3

 

28,358

28,884

1.3

6,523

6,532

0.3

Asset-backed securities

 

 

49,205

 

 

46,020

 

2.3

 

 

73,068

 

 

73,582

 

3.6

 

 

 

49,723

 

 

48,731

 

2.3

 

73,068

 

73,582

 

3.6

Collateralized loan obligations

 

 

177,411

 

 

157,563

 

7.9

 

 

181,704

 

 

179,549

 

8.8

 

 

 

175,687

 

 

168,521

 

7.8

 

181,704

 

179,549

 

8.8

Commercial mortgage-backed securities

 

 

94,816

 

 

94,474

 

4.7

 

 

95,810

 

 

97,526

 

4.8

 

 

 

99,218

 

 

103,477

 

4.8

 

95,810

 

97,526

 

4.8

Residential mortgage-backed securities – non-agency

 

 

92,189

 

 

90,633

 

4.5

 

 

62,343

 

 

71,610

 

3.5

 

 

 

115,588

 

 

118,860

 

5.5

 

62,343

 

71,610

 

3.5

Residential mortgage-backed securities – agency

 

 

135,809

 

 

139,491

 

7.0

 

 

 

142,363

 

 

143,272

 

7.0

 

 

 

136,690

 

 

140,306

 

6.5

 

142,363

 

143,272

 

7.0

Total fixed maturities

 

$

2,038,469

 

$

2,002,420

 

100.0

%

 

$

1,999,403

 

$

2,040,682

 

100.0

%

 

$

2,102,989

 

$

2,162,780

 

100.0

%

$

1,999,403

$

2,040,682

 

100.0

%

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and the lenders may have the right to put the securities back to the borrower.

Restricted Investments

In order to conduct business in certain states, we are required to maintain letters of credit or assets on deposit to support state-mandated insurance regulatory requirements and to comply with certain third-party agreements. Assets held on deposit or in trust accounts are primarily in the form of cash or certain high-grade securities.

The fair value of our restricted assets was $585.2$630.2 million at March 31, 2020.June 30, 2020.  This includes $145.1$151.8 million of funds in trust for the mutual benefit of our insurance companies due to participation in our intercompany pooling agreement.  Restricted investments increased 1.3%9.0%, or $7.3$52.3 million, when compared to December 31, 2019 primarily due to an increase in reinsurance collateral and state deposits, offset byand  market depreciationappreciation from fixed maturity securities.

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Table of Contents

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements as of March 31, 2020.June 30, 2020.

As part of the 2017 sale transaction to divest our U.K. business, we entered into Aggregate Stop-Loss and 100% Quota Share reinsurance agreements as reinsurer, with Lloyd’s Syndicate 1110 as our reinsured and committed to fund Lloyd’s Syndicate 1110’s “Funds At Lloyd’s” requirements until June 30, 2020, though such Funds at Lloyd’s obligations would effectively terminate when the 2017 Year of Account completes a “Reinsurance to Close” transaction, which is expected by March 2020. We entered into a Letter of Credit facility arranged to fulfill a portion of these requirements. The facility has a principal amount of £17.7 million and contains certain covenants that require us, among other items, to maintain a minimum net worth, to remain within maximum leverage ratios, meet a minimum RBC ratio and maintain specified liquidity levels.

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Table of Contents

Reconciliation of Non-GAAP Financial Measures

Reconciliation of Underwriting Income

Underwriting income is a non-GAAP financial measure that we believe is useful in evaluating our underwriting performance without regard to investment income. Underwriting income represents the pre-tax profitability of our insurance operations and is derived by subtracting losses and LAE and underwriting, acquisition and insurance expenses from net earned premiums. We use underwriting income as an internal performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of operations and our underlying business performance. Underwriting income should not be considered in isolation or viewed as a substitute for net income calculated in accordance with GAAP, and other companies may calculate underwriting income differently.

Net income for the three and six months ended March 31,June 30, 2020 and 2019 reconciles to underwriting income as follows:

 

 

 

 

 

 

 

Three Months Ended March 31 

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

Net income from continuing operations

 

$

6,811

 

$

13,695

 

$

17,283

 

$

8,696

$

24,094

 

$

22,391

Income tax expense

 

 

1,988

 

 

3,815

 

4,751

 

2,423

6,739

 

6,238

Income before taxes

 

 

8,799

 

 

17,510

Income from continuing operations before taxes

 

 

22,034

 

 

11,119

 

30,833

 

 

28,629

Net investment income

 

 

8,815

 

 

17,158

 

 

23,791

 

 

17,398

 

32,606

 

 

34,556

Realized investment gains, net

 

 

232

 

 

113

 

 

1,891

 

 

137

 

2,123

 

 

250

Interest and other expense, net

 

 

4,730

 

 

3,269

 

 

4,356

 

 

10,220

 

9,086

 

 

13,489

Underwriting income

 

$

4,482

 

$

3,508

 

$

708

 

$

3,804

$

5,190

 

$

7,312

Reconciliation of Adjusted Operating Income

Adjusted operating income is a non-GAAP financial measure that we use 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 underlying business performance, by excluding items that are not part of our underlying profitability drivers or likely to re-occur in the foreseeable future. Adjusted operating income should not be considered in isolation or viewed as a substitute for our net income calculated in accordance with GAAP. Other companies may calculate adjusted operating income differently.

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Table of Contents

Adjusted operating income for the three and six months ended March 31,June 30, 2020 and 2019 reconciles to net income as follows:

 

 

 

 

 

 

 

Three Months Ended March 31 

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

Net income from continuing operations

 

$

6,811

 

$

13,695

$

17,283

$

8,696

$

24,094

$

22,391

Income tax expense

 

 

1,988

 

 

3,815

 

4,751

 

2,423

6,739

 

6,238

Income before taxes

 

 

8,799

 

 

17,510

Income from continuing operations before taxes

 

 

22,034

 

 

11,119

 

30,833

 

 

28,629

Other expense

 

 

1,737

 

 

 —

1,390

7,170

3,127

7,170

Realized investment (gains), net

 

 

(232)

 

 

(113)

Realized investment gains, net

 

 

(1,891)

 

 

(137)

 

(2,123)

 

 

(250)

Adjusted operating income before taxes

 

 

10,304

 

 

17,397

 

 

21,533

 

 

18,152

 

31,837

 

 

35,549

Less: income tax expense on adjusted operating income

 

 

2,328

 

 

3,815

 

 

4,643

 

 

3,924

 

6,958

 

 

7,691

Adjusted operating income

 

$

7,976

 

$

13,582

 

$

16,890

 

$

14,228

$

24,879

 

$

27,858

Critical Accounting Estimates

We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities,

50


Table of Contents

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 consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. Our critical accounting policies and estimates are described in the Company’s 2019 Annual Report.

For additional information about our critical accounting policies and estimates, see the disclosure included in the Company’s 2019 Annual Report, as well as Note 11. – Basis of Reporting in the notes to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information about market risk set forth in the Company’s 2019 Annual Report. The COVID-19 pandemic does present new and emerging uncertainty to the financial markets. See further discussion in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A., Risk Factors, of this Quarterly Report on Form 10-Q.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10‑Q,10-Q, the Company’s management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures defined under Rules 13a‑15(e)13a-15(e) and 15d‑15(e)15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective in ensuring that material information relating to the Company required to be disclosed in the Company’s periodic SEC filings is made known to them in a timely manner.

Changes in Internal Controls over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) under the Exchange Act) occurred during the quarter ended March 31,June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

45

Inherent Limitations on Effectiveness of Controls

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.

Part II: Other Information

Item 1: Legal Proceedings

We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our condensed consolidated financial position.

Item 1A: Risk Factors

Except as set forth below, as of the date of this report, there have been no material changes with respect to those risk factors previously disclosed in our 2019 Annual Report.

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Table of Contents

The impact of COVID-19 and related risks could materially affect our results of operations, financial position or liquidity.

Beginning in March 2020, the pandemic related to the novel coronavirus COVID-19 began to impact the global economy. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. Risks presented by the ongoing effects of COVID-19 could include, without limitation, the following:

·

Revenues. The impact of COVID-19 on general economic activity has negatively impacted our premium volumes in the second quarter of 2020, and may continue to negatively impact our premium volumes to a degree that will vary based on the extent and duration of any economic contraction or related behavioral changes.    

·

Adverse Legislative and/or Regulatory Action.  Federal, state and local government actions to address the impact of COVID-19 may continue to adversely affect us. We may become subject to legislative and/or regulatory action that retroactively mandates coverage for losses that our insurance policies were not intended or priced to cover, including business interruption claims, despite terms included in our policies to preclude coverage or that creates presumptions of compensability not otherwise present (including for example in workers’ compensation exposures). Regulatory requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies, collect premiums, or requiring us to refund premiums in a manner not otherwise required.

·

Claims and Claim Adjustment Expenses.  We may incur higher claims and claim adjustment expenses in certain lines of business due to increases in claims frequency and/or severity.  Short-term and long-term impacts of COVID-19 could impact our various product lines in ways we cannot adequately predict.

·

Losses and Loss Reserves.  Anticipated and unknown risks related to COVID-19 may cause uncertainty in the process of estimating losses and loss reserves. As a result, our estimated loss reserves may change. Higher inflation than anticipated could lead to an increase in our loss costs and a need to strengthen loss reserves. Such impacts could be more pronounced for those lines of business requiring a relatively longer period of time to finalize and settle claims.

·

Investments.  The value of corporate, municipal and structured securities (including mortgage-backed securities) in our investment portfolio may be adversely impacted by ratings downgrades, government deficits, increased bankruptcies, credit spread widening, and real estate market disruption/devaluation, or could be subject to

46

impairment as a result of issuer creditworthiness deterioration, default, and/or interest rate increases. Further disruption in global financial markets due to the continuing pandemic could result in net realized investment losses.

·

Operational Disruptions and Heightened Cybersecurity Risks.  Our operations could be disrupted if key members of management, a significant percentage of our workforce, or the workforce of certain third parties (including our agents, brokers or service providers) are unable to continue to work because of illness, government directives or otherwise. The interruption of system capabilities for our agents, brokers or service providers could result in deterioration of our ability to perform necessary business functions, and the shift to remote work arrangements by us, our business partners, and our service providers could heighten the risk of cybersecurity or data security incidents.

The extent of the impact of COVID-19 on our business, results of operations, financial position or liquidity will depend largely on future developments, which are highly uncertain and cannot be predicted. To the extent the COVID-19 pandemic continues to adversely affect the U.S. or global economy or adversely affects our business, results of operations, financial position or liquidity, it may also have the effect of increasing the likelihood or magnitude of the other risks described in our 2019 Annual Report or in our other filings with  the SEC.  Additional risks and uncertainties not currently known to us or that we deem to be immaterial also may materially and adversely affect our business, results of operations, financial position or liquidity.

52


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

(b) Use of ProceedsNone.

On July 29, 2019, we closed our initial public offering of 7,857,145 shares of common stock, including the issuance and sale by the Company of 4,285,715 shares of common stock and the sale by the selling stockholders of 3,571,430 shares of common stock. On August 15, 2019, the selling stockholders completed the sale of 1,178,570 shares of common stock pursuant to the underwriters’ exercise of their over-allotment option granted in connection with the initial public offering.

The offer and sale of all of the shares in the initial public offering (including pursuant to the underwriters’ overallotment option) were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-232440), which was declared effective by the SEC on July 24, 2019. Goldman Sachs & Co. LLC and Barclays acted as the lead underwriters. The public offering price of the shares sold in the offering was $14.00 per share. The total gross proceeds from the offering to us were approximately $60.0 million. After deducting underwriting discounts and commissions of approximately $3.9 million and offering expenses payable by us of approximately $5.3 million, we received approximately $50.8 million. We did not receive any of the proceeds from the sale of the shares of common stock sold by the selling stockholders in the initial public offering or pursuant to the underwriters’ exercise of the overallotment option.  On August 8, 2019, a portion of such proceeds was used to repay $18.0 million in outstanding debt under our amended and restated revolving loan agreement. The remainder of such net proceeds were used throughout fiscal 2019 and first quarter of fiscal 2020 for general corporate purposes, including capital contributions to our insurance subsidiaries. As of March 31, 2020, none of such proceeds were remaining. There was no material change in the use of proceeds from our initial public offering as described in our final prospectus (dated July 24, 2019) filed with the SEC on July 25, 2019 pursuant to Rule 424(b) of the Securities Act.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable

Item 5: Other Information

None.

47

Item 6: Exhibits

We have filed the exhibits listed on the accompanying Exhibit Index, which is incorporated herein by reference.

Exhibit Index

Exhibit
Number

Exhibit Index

Description

Exhibit Number3.1

Description

3.1

Amended and Restated Certificate of Incorporation of ProSight Global, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 29, 2019).

3.2

Amended and Restated Bylaws of ProSight Global, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed July 29, 2019).

4.1

Form of Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K/A filed March 10, 2020.

4.2

Registration Rights Agreement between ProSight Global, Inc. and the Holders party thereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 29, 2019).

10.1

Amendment to Transition and SeparationCredit Agreement, dated January 23,as of June 12, 2020, betweenamong Prosight Global, Inc., the lenders from time to time party thereto, and Truist Bank as administrative agent.

10.2

Incremental Facility Agreement and Amendment, dated as of June 30, 2020, by and among ProSight Global, Inc., each other loan party signatory thereto, Truist Bank as administrative agent, and Joseph Beneducci (incorporated by reference to Exhibit 10.18 toeach of the Company’s Annual Report on Form 10-K/A filed March 10, 2020).incremental revolving lenders.

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*

These certifications are furnished and are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

4853


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.

ProSight Global, Inc.

ProSight Global, Inc.

Dated:  May 12,August 11, 2020

By:

/s/ Lawrence Hannon

Lawrence Hannon

President and Chief Executive Officer

Dated:  May 12,August 11, 2020

By:

/s/ Anthony S. Piszel

Anthony S. Piszel

Chief Financial Officer

4954