| | | | Large accelerated filer | ☐ | | Accelerated filer | ☐☒
| Non-accelerated filer | ☒☐
| | Smaller reporting company | ☐ | | | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒. There were 43,644,14643,788,499 shares of Common Stock ($0.01 par value) outstanding as of November 9, 2020.August 3, 2021.
PROSIGHT GLOBAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
ProSight Global, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) | | | | | | | | | | | | | | | September 30, | | December 31, | ($ in thousands except share amounts) | | 2020 | | 2019 | Assets | | | | | | Investments: | | | | | | | Fixed maturity securities, available-for-sale at fair value (amortized cost $2,176,775 in 2020 and $1,999,403 in 2019, allowance for credit losses $(1,670) in 2020 and $0 in 2019) | | $ | 2,260,193 | | $ | 2,040,682 | Commercial levered loans at amortized cost (fair value $12,991 in 2020 and $13,950 in 2019) | | | 13,433 | | | 14,069 | Non-redeemable preferred stock securities at fair value (cost $11,670 in 2020 and $0 in 2019) | | | 11,913 | | | — | Bond exchange-traded funds at fair value (cost $12,878 in 2020 and $0 in 2019) | | | 12,838 | | | — | Limited partnerships and limited liability companies at fair value (cost $73,358 in 2020 and $62,226 in 2019) | | | 84,608 | | | 66,660 | Short-term investments | | | 154 | | | 43,873 | Total investments | | | 2,383,139 | | | 2,165,284 | Cash and cash equivalents | | | 26,609 | | | 17,284 | Restricted cash | | | 7,625 | | | 10,213 | Accrued investment income | | | 13,967 | | | 13,610 | Premiums and other receivables, net | | | 134,915 | | | 190,004 | Receivable from reinsurers on paid losses, net | | | 2,571 | | | 3,481 | Reinsurance receivables on unpaid losses, net | | | 158,856 | | | 193,952 | Deferred policy acquisition costs | | | 93,298 | | | 98,812 | Prepaid reinsurance premiums | | | 60,392 | | | 42,861 | Net deferred income taxes | | | — | | | 4,803 | Goodwill and net intangible assets | | | 29,166 | | | 29,189 | Fixed assets and capitalized software, net | | | 34,961 | | | 37,167 | Funds withheld related to sale of affiliate | | | 19,529 | | | 19,453 | Other assets | | | 27,708 | | | 29,537 | Assets of discontinued operations | | | 23,484 | | | 21,584 | Total assets | | $ | 3,016,220 | | $ | 2,877,234 | | | | | | | | Liabilities | | | | | | | Reserve for unpaid losses and loss adjustment expenses | | $ | 1,589,162 | | $ | 1,521,648 | Reserve for unearned premiums | | | 443,528 | | | 483,223 | Ceded reinsurance payable | | | 34,693 | | | 17,768 | Notes payable, net of debt issuance costs | | | 199,947 | | | 164,693 | Secured loan payable, net of debt issuance costs | | | 24,243 | | | — | Funds held under reinsurance agreements | | | 21,895 | | | 58,855 | Net deferred income taxes | | | 4,976 | | | — | Other liabilities | | | 55,950 | | | 56,438 | Liabilities of discontinued operations | | | 33,954 | | | 31,578 | Total liabilities | | | 2,408,348 | | | 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; 43,436,134 and 43,071,186 shares issued, 43,423,214 and 43,058,266 shares outstanding in 2020 and 2019, respectively | | | 434 | | | 431 | Paid-in capital | | | 666,875 | | | 661,761 | Accumulated other comprehensive income | | | 71,029 | | | 37,453 | Retained deficit | | | (130,266) | | | (156,414) | Treasury shares - at cost (12,920 shares) | | | (200) | | | (200) | Total stockholders’ equity | | | 607,872 | | | 543,031 | Total liabilities and stockholders’ equity | | $ | 3,016,220 | | $ | 2,877,234 |
| | | | | | | | | | | | | | | June 30, | | December 31, | ($ in thousands except share amounts) | | 2021 | | 2020 | Assets | | | | | | Investments: | | | | | | | Fixed maturity securities, available-for-sale at fair value (amortized cost $1,651,797 in 2021 and $2,159,743 in 2020, allowance for credit losses $(1,011) in 2021 and $(1,457) in 2020) | | $ | 1,686,570 | | $ | 2,266,057 | Commercial levered loans at amortized cost (fair value $5,269 in 2021 and $12,180 in 2020) | | | 5,299 | | | 12,308 | Non-redeemable preferred stock securities at fair value (cost $1,400 in 2021 and $6,541 in 2020) | | | 1,400 | | | 7,049 | Bond exchange-traded funds at fair value (cost $0 in 2021 and $44,679 in 2020) | | | — | | | 44,882 | Limited partnerships and limited liability companies at fair value (cost $72,814 in 2021 and $74,268 in 2020) | | | 97,150 | | | 90,468 | Short-term investments | | | 18,833 | | | 154 | Total investments | | | 1,809,252 | | | 2,420,918 | Cash and cash equivalents | | | 652,374 | | | 12,078 | Restricted cash | | | 24,502 | | | 7,525 | Accrued investment income | | | 9,659 | | | 13,693 | Premiums and other receivables, net | | | 131,145 | | | 146,243 | Receivable from reinsurers on paid losses, net | | | 11,167 | | | 10,481 | Reinsurance receivables on unpaid losses, net | | | 152,075 | | | 170,522 | Deferred policy acquisition costs | | | 98,424 | | | 94,437 | Prepaid reinsurance premiums | | | 46,624 | | | 56,787 | Goodwill and net intangible assets | | | 17,233 | | | 17,248 | Fixed assets and capitalized software, net | | | 31,798 | | | 33,896 | Funds withheld related to sale of affiliate | | | 19,532 | | | 19,534 | Other assets | | | 16,008 | | | 25,996 | Assets of discontinued operations | | | 22,709 | | | 21,354 | Total assets | | $ | 3,042,502 | | $ | 3,050,712 | | | | | | | | Liabilities | | | | | | | Reserve for unpaid losses and loss adjustment expenses | | $ | 1,598,934 | | $ | 1,602,902 | Reserve for unearned premiums | | | 450,278 | | | 448,676 | Ceded reinsurance payable | | | 23,429 | | | 38,152 | Notes payable, net of debt issuance costs | | | 204,029 | | | 203,267 | Secured loan payable, net of debt issuance costs | | | 20,773 | | | 22,668 | Funds held under reinsurance agreements | | | 19,099 | | | 23,179 | Net deferred income taxes | | | 1,669 | | | 10,137 | Other liabilities | | | 59,191 | | | 40,034 | Liabilities of discontinued operations | | | 44,115 | | | 37,729 | Total liabilities | | | 2,421,517 | | | 2,426,744 | | | | | | | | Stockholders’ equity | | | | | | | Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued or outstanding | | | — | | | — | Common stock, $0.01 par value; 200,000,000 shares authorized; 43,632,764 and 43,449,087 shares issued, 43,619,844 and 43,436,167 shares outstanding in 2021 and 2020, respectively | | | 436 | | | 434 | Paid-in capital | | | 672,105 | | | 668,798 | Accumulated other comprehensive income | | | 31,103 | | | 89,122 | Retained deficit | | | (82,459) | | | (134,186) | Treasury shares - at cost (12,920 shares) | | | (200) | | | (200) | Total stockholders’ equity | | | 620,985 | | | 623,968 | Total liabilities and stockholders’ equity | | $ | 3,042,502 | | $ | 3,050,712 |
See accompanying notes to interim consolidated financial statements (unaudited)
ProSight Global, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | ($ in thousands except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | Gross written premiums | | $ | 203,539 | | $ | 227,196 | | $ | 603,717 | | $ | 718,066 | Net earned premiums | | | 172,376 | | | 202,455 | | | 559,667 | | | 600,543 | Net investment income | | | 20,307 | | | 16,974 | | | 52,913 | | | 51,530 | Realized investment gains, net | | | 1,398 | | | 245 | | | 3,521 | | | 495 | Other income | | | 61 | | | 196 | | | 274 | | | 386 | Total revenues | | | 194,142 | | | 219,870 | | | 616,375 | | | 652,954 | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | Net losses and loss adjustment expenses incurred | | | 123,249 | | | 127,196 | | | 363,279 | | | 372,644 | Policy acquisition expenses | | | 40,387 | | | 45,953 | | | 129,406 | | | 138,059 | General and administrative expenses | | | 22,986 | | | 25,967 | | | 76,038 | | | 79,189 | Interest expense | | | 4,216 | | | 3,216 | | | 10,388 | | | 9,725 | Other expense | | | 1,394 | | | 7,162 | | | 4,521 | | | 14,332 | Total expenses | | | 192,232 | | | 209,494 | | | 583,632 | | | 613,949 | Income from continuing operations before income taxes | | | 1,910 | | | 10,376 | | | 32,743 | | | 39,005 | | | | | | | | | | | | | | Income tax provision: | | | | | | | | | | | | | Current | | | 407 | | | 146 | | | 6,154 | | | 369 | Deferred | | | 5 | | | 1,869 | | | 997 | | | 7,884 | Total income tax expense | | | 412 | | | 2,015 | | | 7,151 | | | 8,253 | Net income from continuing operations | | | 1,498 | | | 8,361 | | | 25,592 | | | 30,752 | | | | | | | | | | | | | | Discontinued operations: | | | | | | | | | | | | | Net income (loss) from discontinued operations | | | 20 | | | (49) | | | 556 | | | (382) | Net income | | $ | 1,518 | | $ | 8,312 | | $ | 26,148 | | $ | 30,370 | | | | | | | | | | | | | | Earnings per share – basic: | | | | | | | | | | | | | Net income from continuing operations | | $ | 0.03 | | $ | 0.20 | | $ | 0.58 | | $ | 0.77 | Net income | | $ | 0.03 | | $ | 0.19 | | $ | 0.60 | | $ | 0.76 | | | | | | | | | | | | | | Earnings per share – diluted: | | | | | | | | | | | | | Net income from continuing operations | | $ | 0.03 | | $ | 0.19 | | $ | 0.58 | | $ | 0.76 | Net income | | $ | 0.03 | | $ | 0.19 | | $ | 0.59 | | $ | 0.75 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 | Gross written premiums | | $ | 238,522 | | $ | 186,394 | | $ | 407,913 | | | 400,178 | Net earned premiums | | | 178,897 | | | 181,629 | | | 351,868 | | | 387,291 | Net investment income | | | 14,581 | | | 23,791 | | | 31,260 | | | 32,606 | Realized investment gains, net | | | 15,784 | | | 1,891 | | | 48,892 | | | 2,123 | Other income | | | 45 | | | 101 | | | 117 | | | 213 | Total revenues | | | 209,307 | | | 207,412 | | | 432,137 | | | 422,233 | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | Net losses and loss adjustment expenses incurred | | | 114,400 | | | 112,473 | | | 219,923 | | | 240,030 | Policy acquisition expenses | | | 43,696 | | | 42,033 | | | 86,055 | | | 89,019 | General and administrative expenses | | | 24,457 | | | 26,415 | | | 47,456 | | | 53,052 | Interest expense | | | 2,666 | | | 3,067 | | | 5,324 | | | 6,172 | Other expense | | | 1,339 | | | 1,390 | | | 2,656 | | | 3,127 | Total expenses | | | 186,558 | | | 185,378 | | | 361,414 | | | 391,400 | Income from continuing operations before income taxes | | | 22,749 | | | 22,034 | | | 70,723 | | | 30,833 | | | | | | | | | | | | | | Income tax provision: | | | | | | | | | | | | | Current | | | 2,619 | | | 4,116 | | | 8,465 | | | 5,747 | Deferred | | | 2,068 | | | 635 | | | 6,649 | | | 992 | Total income tax expense | | | 4,687 | | | 4,751 | | | 15,114 | | | 6,739 | Net income from continuing operations | | | 18,062 | | | 17,283 | | | 55,609 | | | 24,094 | | | | | | | | | | | | | | Discontinued operations: | | | | | | | | | | | | | Net (loss) income from discontinued operations | | | (1,544) | | | 279 | | | (3,882) | | | 536 | Net income | | $ | 16,518 | | $ | 17,562 | | $ | 51,727 | | | 24,630 | | | | | | | | | | | | | | Earnings per share – basic: | | | | | | | | | | | | | Net income from continuing operations | | $ | 0.41 | | $ | 0.39 | | $ | 1.27 | | $ | 0.55 | Net income | | $ | 0.38 | | $ | 0.40 | | $ | 1.18 | | $ | 0.56 | | | | | | | | | | | | | | Earnings per share – diluted: | | | | | | | | | | | | | Net income from continuing operations | | $ | 0.40 | | $ | 0.39 | | $ | 1.24 | | $ | 0.55 | Net income | | $ | 0.37 | | $ | 0.40 | | $ | 1.16 | | $ | 0.56 |
See accompanying notes to interim consolidated financial statements (unaudited)
ProSight Global, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (Unaudited) | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | Net income | | $ | 1,518 | | $ | 8,312 | | $ | 26,148 | | $ | 30,370 | Other comprehensive income, net of taxes: | | | | | | | | | | | | | Change in unrealized holding gains on available-for-sale debt securities, net of deferred tax expense of $5,190 and $9,939 in 2020 and $2,651 and $16,098 in 2019 | | | 19,826 | | | 9,292 | | | 37,318 | | | 60,478 | Less: reclassification adjustment for gains included in net income, net of tax expense of $228 and $1,090 in 2020 and $156 and $104 in 2019 | | | 1,303 | | | 4,206 | | | 5,061 | | | 4,233 | Less: reclassification adjustment for credit losses included in net income, net of tax expense (benefit) of $66 and $(351) in 2020 and $0 and $0 in 2019 | | | 250 | | | — | | | (1,319) | | | — | Other comprehensive income | | | 18,273 | | | 5,086 | | | 33,576 | | | 56,245 | Comprehensive income | | $ | 19,791 | | $ | 13,398 | | $ | 59,724 | | $ | 86,615 |
| | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | Net income | | $ | 16,518 | | $ | 17,562 | | $ | 51,727 | | $ | 24,630 | Other comprehensive (loss) income, net of taxes: | | | | | | | | | | | | | Change in unrealized holding gains (losses) on available-for-sale debt securities, net of deferred tax expense (benefit) of $3,206 and $(4,849) in 2021 and $20,851 and $4,749 in 2020 | | | 12,069 | | | 78,456 | | | (18,199) | | | 17,492 | Less: reclassification adjustment for gains included in net income, net of tax expense of $3,310 and $10,174 in 2021 and $726 and $862 in 2020 | | | 13,232 | | | 2,952 | | | 39,468 | | | 3,758 | Less: reclassification adjustment for credit losses included in net income, net of tax expense (benefit) of $5 and $94 in 2021 and $(330) and $(417) in 2020 | | | 18 | | | (1,240) | | | 352 | | | (1,569) | Other comprehensive (loss) income | | | (1,181) | | | 76,744 | | | (58,019) | | | 15,303 | Comprehensive income (loss) | | $ | 15,337 | | $ | 94,306 | | $ | (6,292) | | $ | 39,933 |
See accompanying notes to interim consolidated financial statements (unaudited)
ProSight Global, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | Preferred | | Common | | Paid-In | | Other Comprehensive | | Retained | | Treasury | | | | ($ in thousands) | | Stock | | Stock | | Capital | | Income (Loss) | | Deficit | | Shares | | Total | December 31, 2018 | | $ | — | | $ | 389 | | $ | 607,260 | | $ | (22,315) | | $ | (195,304) | | $ | (200) | | $ | 389,830 | Stock based employee compensation plan | | | — | | | — | | | 77 | | | — | | | — | | | — | | | 77 | Net unrealized gain on available-for-sale debt securities, net of deferred tax expense of $7,265 | | | — | | | — | | | — | | | 27,752 | | | — | | | — | | | 27,752 | Equity distribution | | | — | | | — | | | (4,174) | | | — | | | — | | | — | | | (4,174) | Net income | | | — | | | — | | | — | | | — | | | 13,440 | | | — | | | 13,440 | March 31, 2019 | | $ | — | | $ | 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 | Stock based employee compensation plan | | | — | | | — | | | 6,785 | | | — | | | — | | | — | | | 6,785 | Shares cancelled | | | — | | | (1) | | | 1 | | | — | | | — | | | — | | | — | Net unrealized gain on available-for-sale debt securities, net of deferred tax expense of $2,495 | | | — | | | — | | | — | | | 5,086 | | | — | | | — | | | 5,086 | Retirement of common stock (tax payments on equity compensation) | | | — | | | — | | | (149) | | | — | | | — | | | — | | | (149) | Proceeds from common stock sold in initial public offering, net of offering costs | | | — | | | 42 | | | 51,557 | | | — | | | — | | | — | | | 51,599 | Net income | | | — | | | — | | | — | | | — | | | 8,312 | | | — | | | 8,312 | September 30, 2019 | | $ | — | | $ | 430 | | $ | 661,357 | | $ | 33,930 | | $ | (164,934) | | $ | (200) | | $ | 530,583 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | $ | — | | $ | 431 | | $ | 661,761 | | $ | 37,453 | | $ | (156,414) | | $ | (200) | | $ | 543,031 | Stock based employee compensation plan | | | — | | | 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) | Retirement of common stock (tax payments on equity compensation) | | | — | | | — | | | (2,263) | | | — | | | — | | | — | | | (2,263) | Payments related to offering costs | | | — | | | — | | | (49) | | | — | | | — | | | — | | | (49) | Net income | | | — | | | — | | | — | | | — | | | 7,068 | | | — | | | 7,068 | March 31, 2020 | | $ | — | | $ | 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 | Stock based employee compensation plan | | | — | | | 1 | | | 2,106 | | | — | | | — | | | — | | | 2,107 | Net unrealized gain on available-for-sale debt securities, net of deferred tax expense of $4,896 | | | — | | | — | | | — | | | 18,273 | | | — | | | — | | | 18,273 | Retirement of common stock (tax payments on equity compensation) | | | — | | | — | | | (126) | | | — | | | — | | | — | | | (126) | Net income | | | — | | | — | | | — | | | — | | | 1,518 | | | — | | | 1,518 | September 30, 2020 | | $ | — | | $ | 434 | | $ | 666,875 | | $ | 71,029 | | $ | (130,266) | | $ | (200) | | $ | 607,872 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | Preferred | | Common | | Paid-In | | Other Comprehensive | | Retained | | Treasury | | | | ($ in thousands) | | Stock | | Stock | | Capital | | Income (Loss) | | Deficit | | Shares | | Total | December 31, 2019 | | $ | — | | $ | 431 | | $ | 661,761 | | $ | 37,453 | | $ | (156,414) | | $ | (200) | | $ | 543,031 | Stock based employee compensation plan | | | — | | | 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) | Retirement of common stock (tax payments on equity compensation) | | | — | | | — | | | (2,263) | | | — | | | — | | | — | | | (2,263) | Payments related to offering costs | | | — | | | — | | | (49) | | | — | | | — | | | — | | | (49) | Net income | | | — | | | — | | | — | | | — | | | 7,068 | | | — | | | 7,068 | March 31, 2020 | | $ | — | | $ | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | $ | — | | $ | 434 | | $ | 668,798 | | $ | 89,122 | | $ | (134,186) | | $ | (200) | | $ | 623,968 | Stock based employee compensation plan | | | — | | | 2 | | | 1,918 | | | — | | | — | | | — | | | 1,920 | Share purchase plan | | | — | | | — | | | 60 | | | — | | | — | | | — | | | 60 | Net unrealized loss on available-for-sale debt securities, net of deferred tax benefit of $(15,008) | | | — | | | — | | | — | | | (56,838) | | | — | | | — | | | (56,838) | Retirement of common stock (tax payments on equity compensation) | | | — | | | — | | | (655) | | | — | | | — | | | — | | | (655) | Net income | | | — | | | — | | | — | | | — | | | 35,209 | | | — | | | 35,209 | March 31, 2021 | | $ | — | | $ | 436 | | $ | 670,121 | | $ | 32,284 | | $ | (98,977) | | $ | (200) | | $ | 603,664 | Stock based employee compensation plan | | | — | | | — | | | 1,984 | | | — | | | — | | | — | | | 1,984 | Net unrealized loss on available-for-sale debt securities, net of deferred tax benefit of $(109) | | | — | | | — | | | — | | | (1,181) | | | — | | | — | | | (1,181) | Net income | | | — | | | — | | | — | | | — | | | 16,518 | | | — | | | 16,518 | June 30, 2021 | | $ | — | | $ | 436 | | $ | 672,105 | | $ | 31,103 | | $ | (82,459) | | $ | (200) | | $ | 620,985 |
See accompanying notes to interim consolidated financial statements (unaudited)
ProSight Global, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) | | | | | | | | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | Operating activities | | | | | | | Net income from continuing operations | | $ | 25,592 | | $ | 30,752 | Net income (loss) from discontinued operations | | | 556 | | | (382) | Net income | | | 26,148 | | | 30,370 | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Provision for deferred taxes | | | 997 | | | 7,884 | Realized investment gains, net | | | (3,521) | | | (495) | Net limited partnerships and limited liability companies gains | | | (6,759) | | | (2,917) | Net amortization (accretion) from bonds and commercial loans | | | 2,861 | | | (1,568) | Net change in fair value of non-redeemable preferred stock securities | | | (243) | | | — | Net change in fair value of bond exchange-traded funds | | | 61 | | | — | Depreciation and amortization | | | 6,392 | | | 6,222 | Amortization of debt issuance costs | | | 748 | | | 254 | Stock based compensation | | | 6,920 | | | 6,862 | | | | | | | | Changes in: | | | | | | | Premiums and other receivables, net | | | 55,089 | | | 20,427 | Receivable from reinsurers on paid losses and reinsurance receivable on unpaid losses | | | 36,006 | | | (22,103) | Ceded reinsurance payable | | | 16,925 | | | (9,182) | Accrued investment income | | | (357) | | | (1,173) | Deferred policy acquisition costs | | | 5,514 | | | (9,929) | Prepaid reinsurance premiums | | | (17,531) | | | (2,659) | Reserve for unpaid losses and loss adjustment expenses | | | 67,514 | | | 118,412 | Reserve for unearned premiums | | | (39,695) | | | 36,828 | Funds withheld related to sale of affiliate | | | (76) | | | (169) | Funds held under reinsurance agreements | | | (36,960) | | | 5,078 | Other assets | | | 1,555 | | | 22,249 | Other liabilities | | | (487) | | | 7,555 | Total adjustments | | | 94,953 | | | 181,576 | Net cash provided by operating activities – continuing operations | | | 120,545 | | | 212,328 | Net cash provided by (used in) operating activities – discontinued operations | | | 165 | | | (267) | Net cash provided by operating activities | | | 120,710 | | | 212,061 | | | | | | | | Investing activities | | | | | | | Purchases of available-for-sale fixed maturity securities | | | (574,039) | | | (423,335) | Sales of available-for-sale fixed maturity securities | | | 215,856 | | | 67,848 | Redemptions of available-for-sale fixed maturity securities | | | 182,981 | | | 100,713 | Purchases of non-redeemable preferred stock securities | | | (11,669) | | | — | Redemptions of commercial levered loans | | | 640 | | | 2,298 | Purchases of bond exchange-traded funds | | | (20,985) | | | — | Sales of bond exchange-traded funds | | | 8,085 | | | — | Purchases of limited partnerships | | | (14,329) | | | (13,016) | Distributions and redemptions from limited partnerships | | | 3,139 | | | 4,043 | Purchases of short-term investments | | | (34,955) | | | (293,065) | Sales of short-term investments | | | 78,827 | | | 315,767 | Acquisition of fixed assets and capitalized software | | | (4,164) | | | (4,903) | Net cash used in investing activities – continuing operations | | | (170,613) | | | (243,650) | Net cash provided by (used in) investing activities – discontinued operations | | | 1,286 | | | (380) | Net cash used in investing activities | | | (169,327) | | | (244,030) | | | | | | | | Financing activities | | | | | | | Payments related to offering costs | | | (49) | | | — | Proceeds from shares issued | | | — | | | 51,599 | Tax withholding on stock compensation awards | | | (2,389) | | | (149) | Proceeds from secured loan payable | | | 24,997 | | | — | Repayment of secured loan payable | | | (754) | | | — | Proceeds from notes payable | | | 35,000 | | | — | Repayment of notes payable | | | — | | | (18,000) | Net cash provided by financing activities | | | 56,805 | | | 33,450 | | | | | | | | Net change in cash and cash equivalents | | | 8,188 | | | 1,481 | Cash, cash equivalents and restricted cash at beginning of year – continuing operations | | | 27,497 | | | 29,900 | Cash, cash equivalents and restricted cash at beginning of year – discontinued operations | | | 255 | | | 1,034 | Less: cash, cash equivalents and restricted cash at end of period – discontinued operations | | | (1,706) | | | (387) | Cash, cash equivalents and restricted cash at end of period – continuing operations | | $ | 34,234 | | $ | 32,028 |
| | | | | | | | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | Operating activities | | | | | | | Net income from continuing operations | | $ | 55,609 | | $ | 24,094 | Net (loss) income from discontinued operations | | | (3,882) | | | 536 | Net income | | | 51,727 | | | 24,630 | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Provision for deferred taxes | | | 6,649 | | | 992 | Realized investment gains, net | | | (48,892) | | | (2,123) | Net limited partnerships and limited liability companies gains | | | (8,100) | | | (1,254) | Net amortization from bonds and commercial loans | | | 1,157 | | | 1,808 | Net change in fair value of non-redeemable preferred stock securities | | | 22 | | | (115) | Net change in fair value of bond exchange-traded funds | | | 1,511 | | | — | Depreciation and amortization | | | 4,487 | | | 4,186 | Amortization of debt issuance costs | | | 858 | | | 169 | Stock based compensation | | | 3,904 | | | 4,813 | | | | | | | | Changes in: | | | | | | | Premiums and other receivables, net | | | 15,098 | | | 46,485 | Receivable from reinsurers on paid losses and reinsurance receivable on unpaid losses | | | 17,761 | | | 53,509 | Ceded reinsurance payable | | | (14,723) | | | 2,556 | Accrued investment income | | | 4,034 | | | (509) | Deferred policy acquisition costs | | | (3,987) | | | 4,225 | Prepaid reinsurance premiums | | | 10,163 | | | (4,976) | Reserve for unpaid losses and loss adjustment expenses | | | (3,968) | | | 22,475 | Reserve for unearned premiums | | | 1,602 | | | (32,289) | Funds withheld related to sale of affiliate | | | 2 | | | (76) | Funds held under reinsurance agreements | | | (4,080) | | | (35,997) | Other assets | | | 9,901 | | | (4,465) | Other liabilities | | | 19,157 | | | 10,324 | Total adjustments | | | 12,556 | | | 69,738 | Net cash provided by operating activities – continuing operations | | | 68,165 | | | 93,832 | Net cash provided by operating activities – discontinued operations | | | 68 | | | 115 | Net cash provided by operating activities | | | 68,233 | | | 93,947 | | | | | | | | Investing activities | | | | | | | Purchases of available-for-sale fixed maturity securities | | | (652,395) | | | (408,224) | Sales of available-for-sale fixed maturity securities | | | 1,025,174 | | | 194,904 | Redemptions of available-for-sale fixed maturity securities | | | 182,428 | | | 111,877 | Purchases of non-redeemable preferred stock securities | | | — | | | (11,669) | Sales of non-redeemable preferred stock securities | | | 5,627 | | | — | Redemptions of commercial levered loans | | | 7,026 | | | 608 | Sales of bond exchange-traded funds | | | 43,371 | | | — | Purchases of limited partnerships | | | (2,035) | | | (13,651) | Distributions and redemptions from limited partnerships | | | 3,453 | | | 1,847 | Purchases of short-term investments | | | (161,382) | | | (34,955) | Sales of short-term investments | | | 142,714 | | | 78,485 | Acquisition of fixed assets and capitalized software | | | (2,373) | | | (2,634) | Net cash provided by (used in) investing activities – continuing operations | | | 591,608 | | | (83,412) | Net cash provided by investing activities – discontinued operations | | | 1,599 | | | 634 | Net cash provided by (used in) investing activities | | | 593,207 | | | (82,778) | | | | | | | | Financing activities | | | | | | | Payments related to offering costs | | | — | | | (49) | Tax withholding on stock compensation awards | | | (655) | | | (2,263) | Proceeds from stock purchase plan | | | 60 | | | — | Proceeds from secured loan payable | | | — | | | 24,997 | Repayment of secured loan payable | | | (1,905) | | | — | Net cash (used in) provided by financing activities | | | (2,500) | | | 22,685 | | | | | | | | Net change in cash and cash equivalents | | | 658,940 | | | 33,854 | Cash, cash equivalents and restricted cash at beginning of year – continuing operations | | | 19,603 | | | 27,497 | Cash, cash equivalents and restricted cash at beginning of year – discontinued operations | | | 1,779 | | | 255 | Less: cash, cash equivalents and restricted cash at end of period – discontinued operations | | | (3,446) | | | (1,003) | Cash, cash equivalents and restricted cash at end of period – continuing operations | | $ | 676,876 | | $ | 60,603 |
See accompanying notes to interim consolidated financial statements (unaudited)
Table of Contents 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 20192020 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, 2020.23, 2021. 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,Effective August 4, 2021, the Company was a wholly-owned subsidiary of ProSight Global Holdings Limitedcompleted its previously announced merger with Pedal Merger Sub, Inc. (“PGHL”Merger Sub”), a Bermuda holding company. Effective July 25, 2019, priorpursuant to the completionagreement and plan of the Company’s initial public offeringmerger (the “Merger Agreement”) by and among Pedal Parent Inc. (“IPO”Parent”), PGHLowned by affiliates of TowerBrook Capital Partners L.P. and Further Global Capital Management, and Merger Sub. Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “merger”), with the Company surviving as a wholly owned subsidiary of Parent.
Pursuant to the merger (the “merger”). The prior holders of PGHL’s equity interests then outstanding received, as merger consideration,Merger Agreement, each ProSight common share held by our stockholders converted into the right to receive 6.46 shares$12.85 in cash, without interest. In connection with the merger, the Company executed an adverse development cover and loss portfolio transfer transaction with Cavello Bay Reinsurance Limited. In connection with the merger, all outstanding obligations in respect of principal, interest and fees under the Company’s common stock for each such outstanding PGHL equity interest. All shareCredit Agreement, dated as of June 12, 2020, (the “Credit Agreement”) were repaid and per share amounts inall commitments under 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 toCredit Agreement were terminated. Simultaneously with the consummation of the merger and related conversionthe termination of shares, including reclassifyingthe Credit Agreement, the Company entered into a credit agreement with third-party lenders and an amount equaladministrative agent dated August 4, 2021, with terms that were materially similar to the change in value of common stock to additional paid-in capital, as well as the effectiveness of the Certificate of Incorporation.Credit Agreement.
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. Recently Adopted Accounting Standards Accounting Guidance Adopted In February 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 2016-02 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. The Company adopted ASU 2016-02 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
Table of Contents
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, Financial Instruments — Credit Losses, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 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 2016-13 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 and does not expect a material impact on its financial condition and 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. The Company adopted ASU 2018-15 is effective for public entities for annual periods beginningas of January 1, 2021 and elected to apply the adopted guidance prospectively to all implementation costs incurred after December 15, 2019, including interim periods within those annual periods, with earlythe 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.date. The Company is currently evaluating the impactCompany’s adoption of this guidance did not have a material impact on itsthe Company’s financial condition or results of operations.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) Accounting Guidance Not Yet Adopted 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
Table of Contents
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.
Table of Contents 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 ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | Cash paid (received) during the period for: | | | | | | | Interest | | $ | 6,427 | | $ | 6,783 | Federal income tax | | $ | 5,553 | | $ | (366) | Non-cash activity: | | | | | | | Operating lease right-of-use assets due to the adoption of ASU 2016-02 - continuing operations | | $ | 3,454 | | $ | — | Operating lease right-of-use assets due to the adoption of ASU 2016-02 - discontinued operations | | $ | 2,164 | | $ | — | Operating lease liabilities due to the adoption of ASU 2016-02 - continuing operations | | $ | 3,849 | | $ | — | Operating lease liabilities due to the adoption of ASU 2016-02 - discontinued operations | | $ | 2,506 | | $ | — | Tax benefit on payments related to offering costs | | $ | 635 | | $ | — |
| | | | | | | | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | Cash paid during the period for: | | | | | | | Interest | | $ | 4,385 | | $ | 6,187 | Federal income tax | | $ | 5,850 | | $ | — | Non-cash activity: | | | | | | | Operating lease right-of-use assets due to the adoption of ASU 2016-02 - continuing operations | | $ | 1,461 | | $ | 4,117 | Operating lease right-of-use assets due to the adoption of ASU 2016-02 - discontinued operations | | $ | 1,987 | | $ | 2,174 | Operating lease liabilities due to the adoption of ASU 2016-02 - continuing operations | | $ | 1,665 | | $ | 4,624 | Operating lease liabilities due to the adoption of ASU 2016-02 - discontinued operations | | $ | 2,274 | | $ | 2,526 | Tax benefit on payments related to offering costs | | $ | — | | $ | 635 |
For the ninesix months ended SeptemberJune 30, 2020,2021, the Company withheld 185,80650,926 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 364,948.183,677. 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 loss from discontinued operations was $1.5 million and $3.9 million for the three and six months ended June 30, 2021. Net income from discontinued operations was $0.0$0.3 million and $0.6$0.5 million for the three and ninesix months ended SeptemberJune 30, 2020. Net loss from discontinued operations was $0.0 million and $0.4 million for the three and nine months ended September 30, 2019. The following table represents the carrying amounts of assets and liabilities associated with the exit from the insurance market in the U.K. reported as discontinued operations in its consolidated balance sheets: | | | | | | | | | | | | | | | September 30, | | December 31, | | June 30, | | December 31, | ($ in thousands) | | 2020 | | 2019 | | 2021 | | 2020 | Assets | | | | | | | | | | | | | Cash and investments | | $ | 10,464 | | $ | 10,428 | | $ | 11,032 | | $ | 10,939 | Other assets | | | 13,020 | | | 11,156 | | | 11,677 | | | 10,415 | Total assets | | $ | 23,484 | | $ | 21,584 | | $ | 22,709 | | $ | 21,354 | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | Reserve for unpaid losses and loss adjustment expenses | | $ | 24,418 | | $ | 24,169 | | $ | 38,668 | | $ | 32,414 | Other liabilities | | | 9,536 | | | 7,409 | | | 5,447 | | | 5,315 | Total liabilities | | $ | 33,954 | | $ | 31,578 | | $ | 44,115 | | $ | 37,729 |
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, bond exchange-traded funds, 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.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) (“CMBS”), collateralized loan obligations (“CLO”), asset-backed securities (“ABS”) and corporate debt securities. Corporate debt securities may include 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.
(a) The gross unrealized gains and losses on fixed maturity securities included in assets from continuing operations at SeptemberJune 30, 2020,2021, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost/ | | | | Gross | | Gross | | | | | Cost/ | | | | Gross | | Gross | | | | | | Amortized | | Credit Loss | | Unrealized | | Unrealized | | Fair | | 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 | | $ | 29,426 | | $ | — | | $ | 2,087 | | $ | — | | $ | 31,513 | | $ | 45,555 | | $ | — | | $ | 1,269 | | $ | (28) | | $ | 46,796 | Government agency securities | | | 28,990 | | | — | | | 546 | | | (16) | | | 29,520 | | | 19,935 | | | — | | | 148 | | | (171) | | | 19,912 | Corporate debt securities | | | 1,319,438 | | | (1,052) | | | 72,390 | | | (8,798) | | | 1,381,978 | | | 1,026,771 | | | (508) | | | 38,803 | | | (12,676) | | | 1,052,390 | Municipal debt obligations | | | 179,694 | | | — | | | 6,547 | | | (323) | | | 185,918 | | | 144,356 | | | — | | | 3,100 | | | (435) | | | 147,021 | ABS | | | 53,705 | | | — | | | 574 | | | (732) | | | 53,547 | | | 64,590 | | | — | | | 505 | | | (200) | | | 64,895 | CLO | | | 174,589 | | | (6) | | | 88 | | | (3,501) | | | 171,170 | | | 90,942 | | | — | | | 60 | | | (427) | | | 90,575 | CMBS | | | 113,076 | | | — | | | 7,076 | | | (427) | | | 119,725 | | | 53,219 | | | — | | | 1,570 | | | (217) | | | 54,572 | RMBS - non-agency | | | 112,904 | | | (612) | | | 7,366 | | | (1,723) | | | 117,935 | | | 89,432 | | | (503) | | | 5,262 | | | (474) | | | 93,717 | RMBS - agency | | | 164,953 | | | — | | | 3,947 | | | (13) | | | 168,887 | | | 116,997 | | | — | | | 808 | | | (1,113) | | | 116,692 | Total fixed maturity securities | | $ | 2,176,775 | | $ | (1,670) | | $ | 100,621 | | $ | (15,533) | | $ | 2,260,193 | | $ | 1,651,797 | | $ | (1,011) | | $ | 51,525 | | $ | (15,741) | | $ | 1,686,570 |
The gross unrealized gains and losses on fixed maturity securities included in assets from continuing operations at December 31, 2019,2020, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost/ | | Gross | | Gross | | | | | Cost/ | | | | Gross | | Gross | | | | | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Credit Loss | | Unrealized | | Unrealized | | Fair | ($ in thousands) | | Cost | | Gains | | Losses | | Value | | Cost | | Allowance | | Gains | | Losses | | Value | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury securities | | $ | 49,161 | | $ | 838 | | $ | (14) | | $ | 49,985 | | $ | 50,248 | | $ | — | | $ | 1,909 | | $ | — | | $ | 52,157 | Government agency securities | | | 6,522 | | | 23 | | | (14) | | | 6,531 | | | 30,446 | | | — | | | 561 | | | — | | | 31,007 | Corporate debt securities | | | 1,308,094 | | | 33,743 | | | (3,025) | | | 1,338,812 | | | 1,317,667 | | | (598) | | | 86,447 | | | (6,485) | | | 1,397,031 | Municipal debt obligations | | | 80,338 | | | 243 | | | (766) | | | 79,815 | | | 198,773 | | | — | | | 8,437 | | | (116) | | | 207,094 | ABS | | | 73,068 | | | 854 | | | (340) | | | 73,582 | | | 54,989 | | | — | | | 696 | | | (427) | | | 55,258 | CLO | | | 181,704 | | | 125 | | | (2,280) | | | 179,549 | | | 140,615 | | | — | | | 154 | | | (1,643) | | | 139,126 | CMBS | | | 95,810 | | | 1,863 | | | (147) | | | 97,526 | | | 111,313 | | | — | | | 7,008 | | | (361) | | | 117,960 | RMBS - non-agency | | | 62,343 | | | 9,458 | | | (191) | | | 71,610 | | | 109,110 | | | (859) | | | 8,619 | | | (734) | | | 116,136 | RMBS - agency | | | 142,363 | | | 1,256 | | | (347) | | | 143,272 | | | 146,582 | | | — | | | 3,721 | | | (15) | | | 150,288 | Total fixed maturity securities | | $ | 1,999,403 | | $ | 48,403 | | $ | (7,124) | | $ | 2,040,682 | | $ | 2,159,743 | | $ | (1,457) | | $ | 117,552 | | $ | (9,781) | | $ | 2,266,057 |
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) (b) The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at SeptemberJune 30, 2020,2021, grouped by asset class and by duration of time in a continuous unrealized loss position: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less Than 12 Months | | Greater Than 12 Months | | Total | | Less Than 12 Months | | Greater Than 12 Months | | Total | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | Total | | | Fair | | Unrealized | | Fair | | Unrealized | | Total | | Unrealized | | 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 | | | $ | 23,079 | | $ | (28) | | $ | — | | | — | | $ | 23,079 | | $ | (28) | Government agency securities | | $ | 4,639 | | $ | (16) | | $ | — | | $ | — | | $ | 4,639 | | $ | (16) | | | 11,949 | | | (171) | | | — | | | — | | | 11,949 | | | (171) | Corporate debt securities | | | 71,409 | | | (1,875) | | | 122,671 | | | (6,923) | | | 194,080 | | | (8,798) | | | 193,335 | | | (3,096) | | | 88,194 | | | (9,580) | | | 281,529 | | | (12,676) | Municipal debt obligations | | | 26,466 | | | (237) | | | 3,441 | | | (86) | | | 29,907 | | | (323) | | | 48,243 | | | (431) | | | 2,162 | | | (4) | | | 50,405 | | | (435) | ABS | | | 7,612 | | | (497) | | | 15,264 | | | (235) | | | 22,876 | | | (732) | | | 25,627 | | | (136) | | | 6,421 | | | (64) | | | 32,048 | | | (200) | CLO | | | 30,319 | | | (171) | | | 131,400 | | | (3,330) | | | 161,719 | | | (3,501) | | | 7,596 | | | (17) | | | 41,476 | | | (410) | | | 49,072 | | | (427) | CMBS | | | 13,207 | | | (311) | | | 5,727 | | | (116) | | | 18,934 | | | (427) | | | 12,138 | | | (202) | | | 4,695 | | | (15) | | | 16,833 | | | (217) | RMBS - non-agency | | | 24,347 | | | (762) | | | 9,965 | | | (961) | | | 34,312 | | | (1,723) | | | 15,300 | | | (210) | | | 5,821 | | | (264) | | | 21,121 | | | (474) | RMBS - agency | | | 7,741 | | | (13) | | | — | | | — | | | 7,741 | | | (13) | | | 82,760 | | | (1,113) | | | — | | | — | | | 82,760 | | | (1,113) | Total fixed maturity securities | | $ | 185,740 | | $ | (3,882) | | $ | 288,468 | | $ | (11,651) | | $ | 474,208 | | $ | (15,533) | | $ | 420,027 | | $ | (5,404) | | $ | 148,769 | | $ | (10,337) | | $ | 568,796 | | $ | (15,741) |
The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at December 31, 2019,2020, grouped by asset class and by duration of time in a continuous unrealized loss position: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less Than 12 Months | | Greater Than 12 Months | | Total | | Less Than 12 Months | | Greater Than 12 Months | | Total | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | Total | | | Fair | | Unrealized | | Fair | | Unrealized | | Total | | Unrealized | | 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) | | Government agency securities | | | 3,192 | | | (14) | | | — | | | — | | | 3,192 | | | (14) | | Corporate debt securities | | | 133,341 | | | (2,509) | | | 50,695 | | | (516) | | | 184,036 | | | (3,025) | | $ | 36,450 | | $ | (740) | | $ | 101,628 | | $ | (5,745) | | $ | 138,078 | | $ | (6,485) | Municipal debt obligations | | | 66,355 | | | (766) | | | — | | | — | | | 66,355 | | | (766) | | | 12,211 | | | (73) | | | 3,344 | | | (43) | | | 15,555 | | | (116) | ABS | | | 27,884 | | | (175) | | | 11,165 | | | (165) | | | 39,049 | | | (340) | | | 9,121 | | | (364) | | | 9,461 | | | (63) | | | 18,582 | | | (427) | CLO | | | 28,485 | | | (338) | | | 110,825 | | | (1,942) | | | 139,310 | | | (2,280) | | | 29,909 | | | (215) | | | 82,758 | | | (1,428) | | | 112,667 | | | (1,643) | CMBS | | | 18,307 | | | (102) | | | 6,053 | | | (45) | | | 24,360 | | | (147) | | | 17,559 | | | (348) | | | 800 | | | (13) | | | 18,359 | | | (361) | RMBS - non-agency | | | 2,173 | | | (14) | | | 2,418 | | | (177) | | | 4,591 | | | (191) | | | 11,759 | | | (249) | | | 6,723 | | | (485) | | | 18,482 | | | (734) | RMBS - agency | | | 10,450 | | | (12) | | | 12,367 | | | (335) | | | 22,817 | | | (347) | | | 2,467 | | | (15) | | | — | | | — | | | 2,467 | | | (15) | Total fixed maturity securities | | $ | 290,187 | | $ | (3,930) | | $ | 200,992 | | $ | (3,194) | | $ | 491,179 | | $ | (7,124) | | $ | 119,476 | | $ | (2,004) | | $ | 204,714 | | $ | (7,777) | | $ | 324,190 | | $ | (9,781) |
(c) The Company was holding 290360 and 313212 fixed maturity securities that were in an unrealized loss position as of SeptemberJune 30, 20202021 and December 31, 2019,2020, 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) failure of the issuer of the security to make scheduled interest or principal 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 expected 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 benefit for fixed maturity securities was $0.3$0.0 million and $0.4 million for the three and six months ended SeptemberJune 30, 2020.2021, respectively. The credit loss allowance expense for fixed maturity securities was $1.7$1.6 million and $2.0 million for the ninethree and six months ended SeptemberJune 30, 2020.2020, respectively.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) The following table is a rollforward of the credit loss allowance for fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | Additions | | Reduction | | Reduction | | Change in Securities | | September 30, | | December 31, | | Additions | | Reduction | | Reduction | | Change in Securities | | June 30, | ($ in thousands) | | 2019 | | New Securities | | Sales | | Intent to Sell | | with Previous Allowance | | 2020 | | 2020 | | New Securities | | Sales | | Intent to Sell | | with Previous Allowance | | 2021 | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | — | | $ | 1,171 | | $ | (119) | | $ | — | | $ | — | | $ | 1,052 | | $ | 598 | | $ | — | | $ | (111) | | $ | — | | $ | 21 | | $ | 508 | ABS | | | — | | | 3 | | | (3) | | | — | | | — | | | — | | CLO | | | — | | | 6 | | | — | | | — | | | — | | | 6 | | RMBS - non-agency | | | — | | | 696 | | | (84) | | | — | | | — | | | 612 | | | 859 | | | — | | | (59) | | | — | | | (297) | | | 503 | Total fixed maturity securities allowance | | $ | — | | $ | 1,876 | | $ | (206) | | $ | — | | $ | — | | $ | 1,670 | | $ | 1,457 | | $ | — | | $ | (170) | | $ | — | | $ | (276) | | $ | 1,011 |
| | | | | | | | | | | | | | | | | | | | | December 31, | | Additions | | Reduction | | Reduction | | Change in Securities | | June 30, | ($ in thousands) | | 2019 | | New Securities | | Sales | | Intent to Sell | | with Previous Allowance | | 2020 | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | Corporate debt securities | | $ | — | | $ | 615 | | $ | — | | $ | — | | $ | — | | $ | 615 | ABS | | | — | | | 275 | | | — | | | — | | | — | | | 275 | CLO | | | — | | | 6 | | | — | | | — | | | — | | | 6 | RMBS - non-agency | | | — | | | 1,090 | | | (1) | | | — | | | — | | | 1,089 | Total fixed maturity securities allowance | | $ | — | | $ | 1,986 | | $ | (1) | | $ | — | | $ | — | | $ | 1,985 |
(d) The amortized cost and fair value of fixed maturity securities, excluding the Company’s structured securities portfolio, at SeptemberJune 30, 2020,2021, 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. | | | | | | | | | | | | | | | September 30, 2020 | | June 30, 2021 | | | Amortized | | Fair | | Amortized | | Fair | ($ in thousands) | | Cost | | Value | | Cost | | Value | Due in one year or less | | $ | 120,270 | | $ | 121,506 | | $ | 112,908 | | $ | 114,423 | Due after one through five years | | | 617,687 | | | 643,790 | | | 506,126 | | | 517,934 | Due after five through ten years | | | 513,039 | | | 543,555 | | | 389,723 | | | 400,097 | Due after ten years | | | 277,562 | | | 290,558 | | | 207,925 | | | 213,753 | | | | 1,528,558 | | | 1,599,409 | | | 1,216,682 | | | 1,246,207 | Structured securities: | | | | | | | | | | | | | Government agency securities | | | 28,990 | | | 29,520 | | | 19,935 | | | 19,912 | ABS | | | 53,705 | | | 53,547 | | | 64,590 | | | 64,895 | CLO | | | 174,589 | | | 171,170 | | | 90,942 | | | 90,575 | CMBS | | | 113,076 | | | 119,725 | | | 53,219 | | | 54,572 | RMBS - non-agency | | | 112,904 | | | 117,935 | | | 89,432 | | | 93,717 | RMBS - agency | | | 164,953 | | | 168,887 | | | 116,997 | | | 116,692 | Total fixed maturity securities | | $ | 2,176,775 | | $ | 2,260,193 | | $ | 1,651,797 | | $ | 1,686,570 |
The Company did not have any non-income producing fixed maturity investments as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. (e) The Company records its limited partnership and limited liability companies using net asset value, which the Company has determined to be the best indicator of fair value for these investments. At SeptemberJune 30, 20202021 and December 31, 2019,2020, the fair value of limited partnerships and limited liability companies were $84.6$97.1 million and $66.7$90.5 million, 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 $44.5$49.2 million at SeptemberJune 30, 2020.2021. Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) The carrying values used for investments 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
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
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-day90 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 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 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 no0 allowance for credit losses on loans at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. (g) Proceeds from sales and redemptions in AFS securities totaled $92.0$726.2 million and $71.5$154.0 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Proceeds from sales and redemptions in AFS securities totaled $398.8$1,207.6 million and $168.6$306.8 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Gross realized gains from sales and redemptions in AFS securities totaled $1.1$17.1 million and $0.3$3.7 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Gross realized gains from sales and redemptions in AFS securities totaled $5.8$49.9 million and $0.9$4.7 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Gross realized losses from sales and redemptions of AFS investments totaled $0.0$1.4 million and $0.0$0.2 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Gross realized losses from sales and redemptions of AFS investments totaled $0.6$1.5 million and $0.4$0.6 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively. Table of Contents ProSight Global, Inc. and 2019, respectively.Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) (h) Net investment income included in net income from continuing operations in the consolidated statements of operations from each major category of investments for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | Fixed maturity securities | | $ | 15,040 | | $ | 16,764 | | $ | 47,171 | | $ | 49,414 | | $ | 11,826 | | $ | 15,849 | | $ | 25,585 | | $ | 32,131 | Net limited partnerships and limited liability companies gains | | | 5,508 | | | 468 | | | 6,762 | | | 2,862 | | | 2,917 | | | 8,131 | | | 8,100 | | | 1,254 | Other | | | 685 | | | 309 | | | 1,231 | | | 868 | | | 1,084 | | | 461 | | | (414) | | | 546 | Gross investment income | | | 21,233 | | | 17,541 | | | 55,164 | | | 53,144 | | | 15,827 | | | 24,441 | | | 33,271 | | | 33,931 | Less: investment income attributable to funds withheld liabilities | | | (98) | | | 141 | | | 156 | | | 424 | | | 98 | | | 118 | | | 202 | | | 254 | Less: expenses | | | 1,024 | | | 426 | | | 2,095 | | | 1,190 | | | 1,148 | | | 532 | | | 1,809 | | | 1,071 | Net investment income | | $ | 20,307 | | $ | 16,974 | | $ | 52,913 | | $ | 51,530 | | $ | 14,581 | | $ | 23,791 | | $ | 31,260 | | $ | 32,606 |
(i) Included in investments at SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 $231.5$230.5 million and $210.8$233.4 million, respectively. Fair value and carrying value of assets in the amount of $330.0$254.5 million and $313.5$243.5 million, respectively, were on deposit in collateral agreements at SeptemberJune 30, 2020.2021. Fair value and carrying value of assets in the amount of $367.1$256.4 million and $352.0$241.0 million, respectively, were on deposit in collateral agreements at December 31, 2019.2020. (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.
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
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. The change in fair value recognized in income on non-redeemable preferred stock securities for the three and ninesix months ended SeptemberJune 30, 20202021 was a gain of $0.1 million and $0.2$0.5 million, respectively. The gain consisted of a gain recognized on the sale of non-redeemable preferred stock securities of $0.5 million and an unrealized loss of $0.4 million for the three months ended June 30 2021. The gain consisted of a gain recognized on the sale of non-redeemable preferred stock securities $0.5 million for the six months ended June 30 2021. The change in fair value recognized in income on non-redeemable preferred stock securities for the three and six months ended June 30, 2020 was a gain of $0.4 million and $0.1 million, respectively. The gain consisted of an unrealized gain of $0.4 million and $0.1 million for the three and six months ended June 30 2020, respectively. (l) Bond exchange-traded funds 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. The change in fair value recognized in income on bond exchange-traded funds for the three and ninesix months ended SeptemberJune 30, 20202021 was $0.0a gain of $0.2 million and a loss of $1.3 million, respectively. The gain consisted of a realized gain on the sale of bond exchange-traded funds of $0.2 million for the three months ended June 30, 2021. The loss consisted of a realized loss on the sale of bond exchange-traded funds of $1.3 million for the six months ended June 30, 2021, respectively. Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) (m) The Company began participating in a securities lending program in March 2021. The Company loans certain of its securities to third parties, for short periods through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities and cash collateral received earns income which are both recorded within net investment income on the consolidated statement of operations. Collateral recorded within restricted cash on the consolidated balance sheet is received in an amount that is in excess of fair value at the time of borrowing (102% for domestic loaned securities and 105% for foreign loaned securities), including accrued investment income and is monitored and maintained by the lending agent. A securities lending payable is recorded within other liabilities on the consolidated balance sheet, which represents the Company’s obligation to return collateral upon receiving borrowed securities. An indemnification agreement with the lending agent protects the Company on the event a borrower becomes insolvent or fails to return any securities on loan to the Company. As of June 30, 2021, the fair value of the cash collateral received by the Company was $11.4 million. 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. The Company’s Level 1 assets include bond exchange-traded funds. 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.
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
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, certain non-redeemable preferred stock 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 Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) 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 and non-redeemable preferred stock securities classified under Level 3 in the fair value hierarchy are either provided to the Company by an independent valuation service provider or calculated by the Company. For certain securities, the Company uses observable inputs such as readily available indices as well as change in estimated fund returns provided by third party investment managers. Unobservable inputs, significant to the measurement and valuation of the corporate debt securities are assumptions about prepayment speed, default rates and recovery rates. 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. 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. 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3): | | | | | | | | | | | | | | | September 30, 2020 | ($ in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | Fixed maturity securities: | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 31,513 | | $ | — | | $ | 31,513 | Government agency securities | | | — | | | 29,520 | | | — | | | 29,520 | Corporate debt securities | | | — | | | 1,196,059 | | | 185,919 | | | 1,381,978 | Municipal debt obligations | | | — | | | 185,918 | | | — | | | 185,918 | ABS | | | — | | | 53,547 | | | — | | | 53,547 | CLO | | | — | | | 171,170 | | | — | | | 171,170 | CMBS | | | — | | | 119,725 | | | — | | | 119,725 | RMBS - non agency | | | — | | | 117,935 | | | — | | | 117,935 | RMBS - agency | | | — | | | 168,887 | | | — | | | 168,887 | Total fixed maturity securities | | | — | | | 2,074,274 | | | 185,919 | | | 2,260,193 | Non-redeemable preferred stock securities | | | — | | | 10,513 | | | 1,400 | | | 11,913 | Bond exchange-traded funds | | | 12,838 | | | — | | | — | | | 12,838 | Total categorized | | $ | 12,838 | | $ | 2,084,787 | | $ | 187,319 | | $ | 2,284,944 | | | | | | | | | | | | | | Investments measured at net asset value: | | | | | | | | | | | | | Limited partnerships and limited liability companies | | | | | | | | | | | | 84,608 | Total of invested assets carried at fair value | | | | | | | | | | | $ | 2,369,552 |
| | | | | | | | | | | | | | | June 30, 2021 | ($ in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | Fixed maturity securities: | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 46,796 | | $ | — | | $ | 46,796 | Government agency securities | | | — | | | 19,912 | | | — | | | 19,912 | Corporate debt securities | | | — | | | 741,341 | | | 311,049 | | | 1,052,390 | Municipal debt obligations | | | — | | | 147,021 | | | — | | | 147,021 | ABS | | | — | | | 64,895 | | | — | | | 64,895 | CLO | | | — | | | 90,575 | | | — | | | 90,575 | CMBS | | | — | | | 54,572 | | | — | | | 54,572 | RMBS - non agency | | | — | | | 93,717 | | | — | | | 93,717 | RMBS - agency | | | — | | | 116,692 | | | — | | | 116,692 | Total fixed maturity securities | | | — | | | 1,375,521 | | | 311,049 | | | 1,686,570 | Non-redeemable preferred stock securities | | | — | | | — | | | 1,400 | | | 1,400 | Total categorized | | $ | — | | $ | 1,375,521 | | $ | 312,449 | | $ | 1,687,970 | | | | | | | | | | | | | | Investments measured at net asset value: | | | | | | | | | | | | | Limited partnerships and limited liability companies | | | | | | | | | | | | 97,150 | Total of invested assets carried at fair value | | | | | | | | | | | $ | 1,785,120 |
| | | | | | | | | | | | | | | December 31, 2020 | ($ in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | Fixed maturity securities: | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 52,157 | | $ | — | | $ | 52,157 | Government agency securities | | | — | | | 31,007 | | | — | | | 31,007 | Corporate debt securities | | | — | | | 1,139,066 | | | 257,965 | | | 1,397,031 | Municipal debt obligations | | | — | | | 207,094 | | | — | | | 207,094 | ABS | | | — | | | 55,258 | | | — | | | 55,258 | CLO | | | — | | | 139,126 | | | — | | | 139,126 | CMBS | | | — | | | 117,960 | | | — | | | 117,960 | RMBS - non agency | | | — | | | 116,136 | | | — | | | 116,136 | RMBS - agency | | | — | | | 150,288 | | | — | | | 150,288 | Total fixed maturity securities | | | — | | | 2,008,092 | | | 257,965 | | | 2,266,057 | Non-redeemable preferred stock securities | | | — | | | 5,649 | | | 1,400 | | | 7,049 | Bond exchange-traded funds | | | 44,882 | | | — | | | — | | | 44,882 | Total categorized | | $ | 44,882 | | $ | 2,013,741 | | $ | 259,365 | | | 2,317,988 | | | | | | | | | | | | | | Investments measured at net asset value: | | | | | | | | | | | | | Limited partnerships and limited liability companies | | | | | | | | | | | | 90,468 | Total of invested assets carried at fair value | | | | | | | | | | | $ | 2,408,456 |
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) | | | | | | | | | | | | | | | December 31, 2019 | ($ in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | Fixed maturity securities: | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 49,985 | | $ | — | | $ | 49,985 | Government agency securities | | | — | | | 6,531 | | | — | | | 6,531 | Corporate debt securities | | | — | | | 1,189,181 | | | 149,631 | | | 1,338,812 | Municipal debt obligations | | | — | | | 79,815 | | | — | | | 79,815 | ABS | | | — | | | 73,582 | | | — | | | 73,582 | CLO | | | — | | | 179,549 | | | — | | | 179,549 | CMBS | | | — | | | 97,526 | | | — | | | 97,526 | RMBS - non agency | | | — | | | 71,610 | | | — | | | 71,610 | RMBS - agency | | | — | | | 143,272 | | | — | | | 143,272 | Total categorized | | $ | — | | $ | 1,891,051 | | $ | 149,631 | | $ | 2,040,682 | | | | | | | | | | | | | | Investments measured at net asset value: | | | | | | | | | | | | | Limited partnerships and limited liability companies | | | | | | | | | | | | 66,660 | Total of invested assets carried at fair value | | | | | | | | | | | $ | 2,107,342 |
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 SeptemberJune 30, 20202021 and December 31, 2019:2020: | | | | | | | | | | | | | | | | | | September 30, 2020 | | | Carrying | | Fair Value | ($ in thousands) | | Value | | Total | | Level 1 | | Level 2 | | Level 3 | Assets | | | | | | | | | | | | | | | | Commercial levered loans | | $ | 13,433 | | $ | 12,991 | | $ | — | | $ | — | | $ | 12,991 | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | Notes payable | | $ | 200,000 | | $ | 200,888 | | $ | — | | $ | 200,888 | | $ | — | Unamortized debt issuance costs | | | (53) | | | | | | | | | | | | | Notes payable, net of debt issuance costs | | $ | 199,947 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Secured loan payable | | $ | 24,243 | | $ | 24,502 | | $ | — | | $ | 24,502 | | $ | — | Unamortized debt issuance costs | | | — | | | | | | | | | | | | | Secured loan payable, net of issuance costs | | $ | 24,243 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | June 30, 2021 | | | Carrying | | Fair Value | | 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 | | $ | 5,299 | | $ | 5,269 | | $ | — | | $ | — | | $ | 5,269 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notes payable | | $ | 165,000 | | $ | 167,507 | | $ | — | | $ | 167,507 | | $ | — | | $ | 207,000 | | $ | 207,661 | | $ | — | | $ | 207,661 | | $ | — | Unamortized debt issuance costs | | | (307) | | | | | | | | | | | | | | | (2,971) | | | | | | | | | | | | | Notes payable, net of debt issuance costs | | $ | 164,693 | | | | | | | | | | | | | | $ | 204,029 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Secured loan payable | | | $ | 20,845 | | $ | 21,039 | | $ | — | | $ | 21,039 | | $ | — | Unamortized debt issuance costs | | | | (72) | | | | | | | | | | | | | Secured loan payable, net of issuance costs | | | $ | 20,773 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | December 31, 2020 | | | Carrying | | Fair Value | ($ in thousands) | | Value | | Total | | Level 1 | | Level 2 | | Level 3 | Assets | | | | | | | | | | | | | | | | Commercial levered loans | | $ | 12,308 | | $ | 12,180 | | $ | — | | $ | — | | $ | 12,180 | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | Notes payable | | $ | 207,000 | | $ | 207,537 | | $ | — | | $ | 207,537 | | $ | — | Unamortized debt issuance costs | | | (3,733) | | | | | | | | | | | | | Notes payable, net of debt issuance costs | | $ | 203,267 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Secured loan payable | | $ | 22,750 | | $ | 23,265 | | $ | — | | $ | 23,265 | | $ | — | Unamortized debt issuance costs | | | (82) | | | | | | | | | | | | | Secured loan payable, net of issuance costs | | $ | 22,668 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The fair value of the notes payable at SeptemberJune 30, 2020,2021, approximated a price equal to $200.9$207.7 million or 100.4%100.3% of the par value. The fair value of the secured loan payable at SeptemberJune 30, 2020,2021, approximated a price equal to $24.5$21.0 million or 101.1%101.3% of the par value. The fair value of the notes payable at December 31, 2019,2020, approximated a price equal to $167.5$207.5 million or 101.5%100.3% of the par value. The fair value of the secured loan payable at December 31, 2020, approximated a price equal to $23.3 million or 102.3% of the par value.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) The following tables provides a summary of the changes in the fair value of securities measured using Level 3 inputs during the ninesix months ended SeptemberJune 30, 20202021 and 2019: | | | | | | | | | | | | | | Non-Redeemable | | | | | Corporate Debt | | Preferred Stock | | Level 3 | ($ in thousands) | | Securities | | Securities | | Total | Fair value, December 31, 2019 | | $ | 149,631 | | $ | — | | $ | 149,631 | Total net losses for the period included in: | | | | | | | | | | Other comprehensive loss | | | (355) | | | — | | | (355) | Net realized loss | | | (4) | | | — | | | (4) | Purchases | | | 39,364 | | | 1,400 | | | 40,764 | Sales | | | — | | | — | | | — | Issuances | | | — | | | — | | | — | Settlements | | | (2,717) | | | — | | | (2,717) | Transfers into Level 3 | | | — | | | — | | | — | Transfers out of Level 3 | | | — | | | — | | | — | Fair value, September 30, 2020 | | $ | 185,919 | | $ | 1,400 | | $ | 187,319 |
| | | | | | Level 3 | | | Corporate Debt | ($ in thousands) | | Securities | Fair value, December 31, 2018 | | $ | 126,497 | Total net gains (losses) for the period included in: | | | | Other comprehensive income | | | 1,514 | Net realized loss | | | (4) | Purchases | | | 4,372 | Sales | | | — | Issuances | | | — | Settlements | | | (2,793) | Transfers into Level 3 | | | — | Transfers out of Level 3 | | | — | Fair value, September 30, 2019 | | $ | 129,586 |
2020:
| | | | | | | | | | | | | | Non-Redeemable | | | | | Corporate Debt | | Preferred Stock | | Level 3 | ($ in thousands) | | Securities | | Securities | | Total | Fair value, December 31, 2020 | | $ | 257,965 | | $ | 1,400 | | $ | 259,365 | Total net losses for the period included in: | | | | | | | | | | Other comprehensive loss | | | (2,922) | | | — | | | (2,922) | Net realized loss | | | (165) | | | — | | | (165) | Purchases | | | 70,894 | | | — | | | 70,894 | Sales | | | — | | | — | | | — | Issuances | | | — | | | — | | | — | Settlements | | | (14,723) | | | — | | | (14,723) | Transfers into Level 3 | | | — | | | — | | | — | Transfers out of Level 3 | | | — | | | — | | | — | Fair value, June 30, 2021 | | $ | 311,049 | | $ | 1,400 | | $ | 312,449 |
| | | | | | Level 3 | | | Corporate Debt | ($ in thousands) | | Securities | Fair value, December 31, 2019 | | $ | 149,631 | Total net losses for the period included in: | | | | Other comprehensive loss | | | (8,563) | Net realized loss | | | (2) | Purchases | | | 22,634 | Sales | | | — | Issuances | | | — | Settlements | | | (1,623) | Transfers into Level 3 | | | — | Transfers out of Level 3 | | | — | Fair value, June 30, 2020 | | $ | 162,077 |
7. Accumulated Other Comprehensive Income The following table summarizes the components of accumulated other comprehensive income (“AOCI”) for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | ($ in thousands) | | Gross | | Tax | | Net | June 30, 2020 | | $ | 65,730 | | $ | 12,974 | | $ | 52,756 | Unrealized holding gains on fixed maturity securities | | | 25,016 | | | 5,190 | | | 19,826 | Amounts reclassified into net income | | | 1,531 | | | 228 | | | 1,303 | Amounts reclassified as credit losses | | | 316 | | | 66 | | | 250 | Other comprehensive income | | | 23,169 | | | 4,896 | | | 18,273 | September 30, 2020 | | $ | 88,899 | | $ | 17,870 | | $ | 71,029 |
| | | | | | | | | | | | | | | | | | | ($ in thousands) | | Gross | | Tax | | Net | | Gross | | Tax | | Net | June 30, 2019 | | $ | 34,898 | | $ | 6,054 | | $ | 28,844 | | March 31, 2021 | | | $ | 39,909 | | $ | 7,625 | | $ | 32,284 | Unrealized holding gains on fixed maturity securities | | | 11,943 | | | 2,651 | | | 9,292 | | | 15,275 | | | 3,206 | | | 12,069 | Amounts reclassified into net income | | | 4,362 | | | 156 | | | 4,206 | | | 16,542 | | | 3,310 | | | 13,232 | Other comprehensive income | | | 7,581 | | | 2,495 | | | 5,086 | | September 30, 2019 | | $ | 42,479 | | $ | 8,549 | | $ | 33,930 | | Amounts reclassified as credit losses | | | | 23 | | | 5 | | | 18 | Other comprehensive loss | | | | (1,290) | | | (109) | | | (1,181) | June 30, 2021 | | | $ | 38,619 | | $ | 7,516 | | $ | 31,103 |
| | | | | | | | | | ($ in thousands) | | Gross | | Tax | | Net | 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 | | | 3,678 | | | 726 | | | 2,952 | Amounts reclassified as credit losses | | | (1,570) | | | (330) | | | (1,240) | Other comprehensive income | | | 97,199 | | | 20,455 | | | 76,744 | June 30, 2020 | | $ | 65,730 | | $ | 12,974 | | $ | 52,756 |
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, 2019 | | $ | 46,123 | | $ | 8,670 | | $ | 37,453 | | Unrealized holding gains on fixed maturity securities | | | 47,257 | | | 9,939 | | | 37,318 | | December 31, 2020 | | | $ | 111,755 | | $ | 22,633 | | $ | 89,122 | Unrealized holding losses on fixed maturity securities | | | | (23,048) | | | (4,849) | | | (18,199) | Amounts reclassified into net income | | | 6,151 | | | 1,090 | | | 5,061 | | | 49,642 | | | 10,174 | | | 39,468 | Amounts reclassified as credit losses | | | (1,670) | | | (351) | | | (1,319) | | | 446 | | | 94 | | | 352 | Other comprehensive income | | | 42,776 | | | 9,200 | | | 33,576 | | September 30, 2020 | | $ | 88,899 | | $ | 17,870 | | $ | 71,029 | | Other comprehensive loss | | | | (73,136) | | | (15,117) | | | (58,019) | June 30, 2021 | | | $ | 38,619 | | $ | 7,516 | | $ | 31,103 |
| | | | | | | | | | | | | | | | | | | ($ 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 | | | 76,576 | | | 16,098 | | | 60,478 | | | 22,241 | | | 4,749 | | | 17,492 | Amounts reclassified into net income | | | 4,337 | | | 104 | | | 4,233 | | | 4,620 | | | 862 | | | 3,758 | Amounts reclassified as credit losses | | | | (1,986) | | | (417) | | | (1,569) | Other comprehensive income | | | 72,239 | | | 15,994 | | | 56,245 | | | 19,607 | | | 4,304 | | | 15,303 | September 30, 2019 | | $ | 42,479 | | $ | 8,549 | | $ | 33,930 | | June 30, 2020 | | | $ | 65,730 | | $ | 12,974 | | $ | 52,756 |
The following table presents reclassifications out of AOCI attributable to the Company during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019: | | | | | | | | | | | | | | | | | Line in Consolidated | | Three Months Ended September 30 | | Nine Months Ended September 30 | ($ in thousands) | | Statements of Operations | | 2020 | | 2019 | | 2020 | | 2019 | AOCI | | | | | | | | | | | | | | | Unrealized gains on securities | | Realized investment gains, net | | $ | 1,531 | | $ | 4,362 | | $ | 6,151 | | $ | 4,337 | | | Income tax expense | | | 228 | | | 156 | | | 1,090 | | | 104 | Reclassification adjustment for credit losses included in net income | | Realized investment gains, net | | | 316 | | | — | | | (1,670) | | | — | | | Income tax expense | | | 66 | | | — | | | (351) | | | — | Total reclassifications | | | | $ | 1,553 | | $ | 4,206 | | $ | 3,742 | | $ | 4,233 |
2020:
| | | | | | | | | | | | | | | | | Line in Consolidated | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands) | | Statements of Operations | | 2021 | | 2020 | | 2021 | | 2020 | AOCI | | | | | | | | | | | | | | | Unrealized gains on securities | | Realized investment gains, net | | $ | 16,542 | | $ | 3,678 | | $ | 49,642 | | $ | 4,620 | | | Income tax expense | | | 3,310 | | | 726 | | | 10,174 | | | 862 | Reclassification adjustment for credit losses included in net income | | Realized investment gains, net | | | 23 | | | (1,570) | | | 446 | | | (1,986) | | | Income tax expense | | | 5 | | | (330) | | | 94 | | | (417) | Total reclassifications | | | | $ | 13,250 | | $ | 1,712 | | $ | 39,820 | | $ | 2,189 |
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. 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 $0.4 million for the three months ended September 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 $7.6 million for the nine months ended September 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
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
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.
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. The Company recorded 0 expense for the three months ended June 30, 2021 and 2020, 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 0 expense and $0.3 million for the six months ended June 30, 2021 and 2020, respectively, within other expense in the consolidated statements of operations relating to the severance payments and benefits payable to the former CEO. Additionally, the Company entered into a niche management agreement with an independent agency founded by the former CEO. The Company recorded an expense of $0.2$0.3 million and $0.6 million for the three and ninesix months ended SeptemberJune 30, 2020.2021, respectively. Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) 9. Insurance Operations Total reinsurance ceded and assumed relating to written premiums, earned premiums and losses and loss adjustment expenses incurred, are as follows: | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | Written premiums | | | | | | | | | | | | | Direct written premiums | | $ | 202,972 | | $ | 226,209 | | $ | 601,645 | | $ | 715,500 | Assumed from other companies | | | 567 | | | 987 | | | 2,072 | | | 2,566 | Ceded to other companies | | | 44,135 | | | 17,722 | | | 97,507 | | | 88,122 | Net written premiums | | $ | 159,404 | | $ | 209,474 | | $ | 506,210 | | $ | 629,944 | | | | | | | | | | | | | | Earned premiums | | | | | | | | | | | | | Direct earned premiums | | $ | 205,877 | | $ | 229,816 | | $ | 640,485 | | $ | 683,906 | Assumed from other companies | | | 743 | | | 920 | | | 2,182 | | | 2,794 | Ceded to other companies | | | 34,244 | | | 28,281 | | | 83,000 | | | 86,157 | Net earned premiums | | $ | 172,376 | | $ | 202,455 | | $ | 559,667 | | $ | 600,543 | Percent of amount assumed to net | | | 0.4% | | | 0.5% | | | 0.4% | | | 0.5% | | | | | | | | | | | | | | Losses and loss adjustment expenses incurred | | | | | | | | | | | | | Direct net losses and loss adjustment expenses incurred | | $ | 153,352 | | $ | 129,991 | | $ | 418,409 | | $ | 403,899 | Assumed from other companies | | | 3,086 | | | 1,230 | | | 3,713 | | | 6,162 | Ceded to other companies | | | 33,189 | | | 4,025 | | | 58,843 | | | 37,417 | Net losses and loss adjustment expenses incurred | | $ | 123,249 | | $ | 127,196 | | $ | 363,279 | | $ | 372,644 |
| | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | Written premiums | | | | | | | | | | | | | Direct written premiums | | $ | 239,587 | | $ | 185,722 | | $ | 408,359 | | $ | 398,673 | Assumed from other companies | | | (1,065) | | | 672 | | | (446) | | | 1,505 | Ceded to other companies | | | 26,811 | | | 29,771 | | | 44,281 | | | 53,372 | Net written premiums | | $ | 211,711 | | $ | 156,623 | | $ | 363,632 | | $ | 346,806 | | | | | | | | | | | | | | Earned premiums | | | | | | | | | | | | | Direct earned premiums | | $ | 206,280 | | $ | 206,028 | | $ | 406,212 | | $ | 434,608 | Assumed from other companies | | | (590) | | | 697 | | | 100 | | | 1,439 | Ceded to other companies | | | 26,793 | | | 25,096 | | | 54,444 | | | 48,756 | Net earned premiums | | $ | 178,897 | | $ | 181,629 | | $ | 351,868 | | $ | 387,291 | Percent of amount assumed to net | | | (0.3)% | | | 0.4% | | | 0.0% | | | 0.4% | | | | | | | | | | | | | | Losses and loss adjustment expenses incurred | | | | | | | | | | | | | Direct net losses and loss adjustment expenses incurred | | $ | 136,827 | | $ | 120,680 | | $ | 244,284 | | $ | 265,057 | Assumed from other companies | | | 3,434 | | | 1,984 | | | 3,087 | | | 627 | Ceded to other companies | | | 25,861 | | | 10,191 | | | 27,448 | | | 25,654 | Net losses and loss adjustment expenses incurred | | $ | 114,400 | | $ | 112,473 | | $ | 219,923 | | $ | 240,030 |
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.
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
Allowances for Credit Losses The following table is rollforward of the receivable allowance balances related to the risk of credit default as of September 30, 2020:
| | | | | | | | | | | | | | | | ($ in thousands) | | | | | | | | | | | | | | | | Nine Months Ended September 30, 2020 | | December 31, 2019 | | Current Provision | | Write-offs | | Recoveries | | September 30, 2020 | Premium receivable | | $ | 5,056 | | $ | 3,002 | | $ | (412) | | | — | | $ | 7,646 | Reinsurance receivable on paid and unpaid losses | | | 505 | | | 201 | | | — | | | — | | | 706 | Total receivable allowance | | $ | 5,561 | | $ | 3,203 | | $ | (412) | | | — | | $ | 8,352 |
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 credit loss allowance for premium receivables as of June 30, 2021 and December 31, 2020 were $5.3 million and $6.9 million, respectively. 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 insured level, collection agencies are typically engaged. The amount with collection agencies as of SeptemberJune 30, 20202021 was $6.3$5.5 million. 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 amountcredit loss allowance for reinsurance receivables on paid and unpaid losses as of uncollateralized exposure on unrated or counterparties rated below investment grade at SeptemberJune 30, 2021 and December 31, 2020 is $5.5 million. At September 30, 2020, 95.6% of uncollateralized exposures are rated above investment grade.were $0.7 million and $0.7 million, respectively. Distribution Partners The three3 distribution partners contributing the largest amounts of direct written premium (excluding the former distribution partner) totaled $60.9$96.7 million and $75.4$80.8 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The three3 distribution partners contributing the largest amounts of direct written premium (excluding the former distribution partner) totaled $207.8$153.5 million and $208.4$146.9 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The Company negotiates with distribution partners to write direct premium on behalf of the Company’s affiliates. In January 2019, a distribution partner of the Company was acquired by a third-party insurance carrier. The Company does not anticipate any future premiums from this distribution partner other than audit premiums after the first quarter of 2019.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) Unpaid Losses Unpaid losses are based on individual case estimates for losses reported and include a provision for IBNR losses and loss adjustment expenses. The following table provides a roll forward of the Company’s reserve for unpaid losses and loss adjustment expenses: | | | | | | | | | September 30 | ($ in thousands) | | 2020 | | 2019 | Gross reserve for unpaid losses and loss expenses, at beginning of year | | $ | 1,521,648 | | $ | 1,396,812 | Ceded reserve for unpaid losses and loss expenses, at beginning of year | | | 193,952 | | | 185,295 | Net reserve for unpaid losses and loss expenses, at beginning of year | | | 1,327,696 | | | 1,211,517 | Add: | | | | | | | Incurred losses and loss expenses occurring in the: | | | | | | | Current year | | | 347,955 | | | 356,926 | Prior years | | | 560 | | | 2,367 | Prior years attributable to adjusted premium | | | 14,764 | | | 13,351 | Total net losses and loss adjustment expenses incurred | | | 363,279 | | | 372,644 | Less: | | | | | | | Paid losses and loss expenses for claims occurring in the: | | | | | | | Current year | | | 32,014 | | | 39,742 | Prior years | | | 228,655 | | | 243,172 | Total paid losses and loss expenses for claims | | | 260,669 | | | 282,914 | Net reserve for unpaid losses and loss expenses, at end of period | | | 1,430,306 | | | 1,301,247 | Ceded reserve for unpaid losses and loss expenses, at end of period | | | 158,856 | | | 213,977 | Gross reserve for unpaid losses and loss expenses, at end of period | | $ | 1,589,162 | | $ | 1,515,224 |
| | | | | | | | | June 30 | ($ in thousands) | | 2021 | | 2020 | Gross reserve for unpaid losses and loss expenses, at beginning of year | | $ | 1,602,902 | | $ | 1,521,648 | Ceded reserve for unpaid losses and loss expenses, at beginning of year | | | 170,522 | | | 193,952 | Net reserve for unpaid losses and loss expenses, at beginning of year | | | 1,432,380 | | | 1,327,696 | Add: | | | | | | | Incurred losses and loss expenses occurring in the: | | | | | | | Current year | | | 210,287 | | | 227,842 | Prior years | | | 5,690 | | | 508 | Prior years attributable to adjusted premium | | | 3,946 | | | 11,680 | Total net losses and loss adjustment expenses incurred | | | 219,923 | | | 240,030 | Less: | | | | | | | Paid losses and loss expenses for claims occurring in the: | | | | | | | Current year | | | 24,087 | | | 12,168 | Prior years | | | 181,357 | | | 152,862 | Total paid losses and loss expenses for claims | | | 205,444 | | | 165,030 | Net reserve for unpaid losses and loss expenses, at end of period | | | 1,446,859 | | | 1,402,696 | Ceded reserve for unpaid losses and loss expenses, at end of period | | | 152,075 | | | 141,427 | Gross reserve for unpaid losses and loss expenses, at end of period | | $ | 1,598,934 | | $ | 1,544,123 |
During the ninesix months ended SeptemberJune 30, 2021, the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2020 and prior developed unfavorably by $5.7 million driven by $7.5 million unfavorable development in All Other lines, $4.7 million unfavorable development in Commercial Multiple Peril and $2.9 million unfavorable development in Commercial Auto offset by $6.2 million favorable development in Workers’ Compensation, $3.2 million favorable development in General Liability. In addition, the Company incurred $3.9 million of losses and loss adjustment expenses related to premium adjustments earned during the six months ended June 30, 2021 attributable to accident years 2020 and 2019. The unfavorable development in All Other lines was due mainly to adverse development in accident years 2016 and 2018 from ocean marine liability exposures. The unfavorable development in Commercial Multiple Peril related primarily to accident year 2017 due largely to increased severities. The favorable development in Workers’ Compensation derived from lower than expected claims severity across all customer segments primarily in accident years 2017 and 2020. During the six months ended June 30, 2020, the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2019 and prior developed unfavorably by $0.6$0.5 million driven by $23.2$12.1 million unfavorable development in General Liability and $10.2$4.3 million unfavorable development in Commercial Multiple Peril offset by $24.8$8.3 million favorable development in Workers’ Compensation, $1.0$5.2 million favorable development in Commercial Auto and $7.0$2.4 million favorable development in All Other lines. In addition, the Company incurred $14.8$11.7 million of losses and loss adjustment expenses related to premium adjustments earned during the ninesix months ended SeptemberJune 30, 2020 attributable to prior accident years 2019 and 2018. The unfavorable development in General Liability and Commercial Multiple Peril related to 2013 through 2017 accident years due largely to increased severities in the runoff components.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 and 2015 through 2018.2017. The favorable development in Commercial Auto was derived by physical damage and liability property damage in accident year 2019. During the nine months ended September 30, 2019, the Company’s estimated losses and loss expenses for accident years 2018 and prior developed unfavorably by $2.4 million driven by $23.2 million unfavorable development in General Liability lines partially offset by $18.7 million favorable development in Workers’ Compensation lines and $2.7 million of favorable development in Surety lines. In addition, the Company incurred $13.4 million of losses and loss adjustment expenses on earned premium attributable to prior accident years during the nine months ended September 30, 2019.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) derived by physical damage and liability property damage in accident year 2019. The favorable development in All Other lines was in Ocean Marine, Inland Marine, Fire and Surety lines of business. 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 one1 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 21.6%20.6% and 19.4%21.6% for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The increasedecrease in the effective tax rate for the three months ended SeptemberJune 30, 20202021 compared to the same period in 20192020 was primarily due to the tax effect of share-based compensation. The Company’s effective tax rates were 21.8%21.4% and 21.2%21.9% for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The increasedecrease in the effective tax rate for the ninesix months ended SeptemberJune 30, 20202021 compared to the same period in 20192020 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’s current tax provision. 11. Segment Information The Company has one1 reportable segment, Specialty Insurance, 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’ Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) compensation coverage for exited Self-Insured Groups, (ii) niches exited prior to 2018, many with a concentration in commercial auto, (iii) certain fronting arrangements in which all premium written is ceded to a third party (iv) participation in industry pools, and (v)(iv) emerging new business. | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Customer Segment | | | | | | | | | | | | | | | | | | | | | | Construction | | $ | 27,405 | | 13.5 | % | $ | 27,296 | | 12.0 | % | $ | 79,623 | | 13.2 | % | $ | 83,039 | | 11.6 | % | Consumer Services | | | 23,712 | | 11.7 | | | 35,502 | | 15.6 | | | 95,010 | | 15.7 | | | 100,880 | | 14.0 | | Marine and Energy | | | 27,677 | | 13.6 | | | 26,064 | | 11.5 | | | 87,288 | | 14.5 | | | 71,509 | | 10.0 | | Media and Entertainment | | | 17,334 | | 8.5 | | | 28,702 | | 12.6 | | | 65,255 | | 10.8 | | | 90,796 | | 12.6 | | Professional Services | | | 34,740 | | 17.1 | | | 27,015 | | 11.9 | | | 96,329 | | 16.0 | | | 85,681 | | 11.9 | | Real Estate | | | 34,866 | | 17.1 | | | 41,566 | | 18.3 | | | 115,354 | | 19.1 | | | 116,915 | | 16.3 | | Sports | | | 5,383 | | 2.6 | | | 8,086 | | 3.6 | | | 19,636 | | 3.2 | | | 22,834 | | 3.2 | | Transportation | | | 30,802 | | 15.1 | | | 29,621 | | 13.0 | | | 39,929 | | 6.6 | | | 79,363 | | 11.1 | | Customer segment subtotal | | | 201,919 | | 99.2 | | | 223,852 | | 98.5 | | | 598,424 | | 99.1 | | | 651,017 | | 90.7 | | Other | | | 1,620 | | 0.8 | | | 3,344 | | 1.5 | | | 5,293 | | 0.9 | | | 67,049 | | 9.3 | | Specialty Insurance total | | $ | 203,539 | | 100.0 | % | $ | 227,196 | | 100.0 | % | $ | 603,717 | | 100.0 | % | $ | 718,066 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | | ($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | Customer Segment | | | | | | | | | | | | | | | | | | | | | | Construction | | $ | 38,968 | | 16.3 | % | $ | 27,704 | | 14.9 | % | $ | 65,463 | | 16.0 | % | $ | 52,218 | | 13.0 | % | Consumer Services | | | 41,784 | | 17.5 | | | 40,730 | | 21.8 | | | 64,408 | | 15.8 | | | 71,298 | | 17.8 | | Marine and Energy | | | 33,013 | | 13.8 | | | 26,821 | | 14.4 | | | 57,224 | | 14.0 | | | 59,611 | | 14.9 | | Media and Entertainment | | | 23,013 | | 9.7 | | | 17,454 | | 9.4 | | | 43,861 | | 10.8 | | | 47,921 | | 12.0 | | Professional Services | | | 33,896 | | 14.2 | | | 31,891 | | 17.1 | | | 68,337 | | 16.8 | | | 61,589 | | 15.4 | | Real Estate | | | 40,765 | | 17.1 | | | 47,273 | | 25.3 | | | 60,677 | | 14.9 | | | 80,488 | | 20.1 | | Sports | | | 5,026 | | 2.1 | | | 4,688 | | 2.5 | | | 10,683 | | 2.6 | | | 14,253 | | 3.6 | | Transportation | | | 20,888 | | 8.8 | | | (12,340) | | (6.6) | | | 34,678 | | 8.5 | | | 9,127 | | 2.3 | | Customer segment subtotal | | | 237,353 | | 99.5 | | | 184,221 | | 98.8 | | | 405,331 | | 99.4 | | | 396,505 | | 99.1 | | Other | | | 1,169 | | 0.5 | | | 2,173 | | 1.2 | | | 2,582 | | 0.6 | | | 3,673 | | 0.9 | | Specialty Insurance total | | $ | 238,522 | | 100.0 | % | $ | 186,394 | | 100.0 | % | $ | 407,913 | | 100.0 | % | $ | 400,178 | | 100.0 | % |
23
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
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 September 30 | | Nine Months Ended September 30 | | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | Line of Business | | | | | | | | | | | | | | | | | | | | | | Commercial Auto | | $ | 56,355 | | 27.7 | % | $ | 52,693 | | 23.2 | % | $ | 117,335 | | 19.4 | % | $ | 148,773 | | 20.7 | % | General Liability | | | 80,594 | | 39.6 | | | 84,932 | | 37.4 | | | 241,003 | | 39.9 | | | 239,383 | | 33.4 | | Workers’ Compensation | | | 9,710 | | 4.8 | | | 27,242 | | 12.0 | | | 58,951 | | 9.8 | | | 152,225 | | 21.1 | | Commercial Multiple Peril | | | 14,533 | | 7.1 | | | 16,276 | | 7.1 | | | 41,826 | | 6.9 | | | 52,950 | | 7.4 | | All Other Lines | | | 42,347 | | 20.8 | | | 46,053 | | 20.3 | | | 144,602 | | 24.0 | | | 124,735 | | 17.4 | | Specialty Insurance total | | $ | 203,539 | | 100.0 | % | $ | 227,196 | | 100.0 | % | $ | 603,717 | | 100.0 | % | $ | 718,066 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | | ($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | Line of Business | | | | | | | | | | | | | | | | | | | | | | Commercial Auto | | $ | 58,271 | | 24.4 | % | $ | 20,649 | | 11.1 | % | $ | 94,391 | | 23.1 | % | $ | 60,980 | | 15.2 | % | General Liability | | | 107,612 | | 45.1 | | | 81,876 | | 43.9 | | | 178,505 | | 43.8 | | | 160,409 | | 40.1 | | Workers’ Compensation | | | 12,007 | | 5.0 | | | 20,420 | | 10.9 | | | 23,852 | | 5.9 | | | 49,241 | | 12.3 | | Commercial Multiple Peril | | | 13,915 | | 5.9 | | | 10,928 | | 5.9 | | | 28,167 | | 6.9 | | | 27,293 | | 6.8 | | All Other Lines | | | 46,717 | | 19.6 | | | 52,521 | | 28.2 | | | 82,998 | | 20.3 | | | 102,255 | | 25.6 | | Specialty Insurance total | | $ | 238,522 | | 100.0 | % | $ | 186,394 | | 100.0 | % | $ | 407,913 | | 100.0 | % | $ | 400,178 | | 100.0 | % |
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
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 | (in thousands, except per share amounts) | | Income | | Shares | | Per Share | | Income | | Shares | | Per Share | Three Months Ended September 30, 2020 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income available to common stockholders | | $ | 1,498 | | 43,916 | | $ | 0.03 | | $ | 20 | | 43,916 | | $ | — | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 102 | | | | | | | | 102 | | | | Diluted EPS | | $ | 1,498 | | 44,018 | | $ | 0.03 | | $ | 20 | | 44,018 | | $ | — |
| | | | | | | | | | | | | | | | | | | Continuing Operations | | | Discontinued Operations | (in thousands, except per share amounts) | | Income | | Shares | | Per Share | | Loss | | Shares | | Per Share | Three Months Ended June 30, 2021 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income (loss) available to common stockholders | | $ | 18,062 | | 43,955 | | $ | 0.41 | | $ | (1,544) | | 43,955 | | $ | (0.03) | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 868 | | | | | | | | 868 | | | | Diluted EPS | | $ | 18,062 | | 44,823 | | $ | 0.40 | | $ | (1,544) | | 44,823 | | $ | (0.03) |
| | | | | | | | | | | | | | | | | | | Continuing Operations | | | Discontinued Operations | (in thousands, except per share amounts) | | Income | | Shares | | Per Share | | Loss | | Shares | | Per Share | Three Months Ended September 30, 2019 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income (loss) available to common stockholders | | $ | 8,361 | | 42,642 | | $ | 0.20 | | $ | (49) | | 42,642 | | $ | (0.01) | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 418 | | | | | | | | 418 | | | | Diluted EPS | | $ | 8,361 | | 43,060 | | $ | 0.19 | | $ | (49) | | 43,060 | | $ | — |
| | | | | | | | | | | | | | | | | | | Continuing Operations | | | Discontinued Operations | (in thousands, except per share amounts) | | Income | | Shares | | Per Share | | Income | | Shares | | Per Share | Nine Months Ended September 30, 2020 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income available to common stockholders | | $ | 25,592 | | 43,879 | | $ | 0.58 | | $ | 556 | | 43,879 | | $ | 0.02 | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 151 | | | | | | | | 151 | | | | Diluted EPS | | $ | 25,592 | | 44,030 | | $ | 0.58 | | $ | 556 | | 44,030 | | $ | 0.01 |
| | | | | | | | | | | | | | | | | | | Continuing Operations | | | Discontinued Operations | (in thousands, except per share amounts) | | Income | | Shares | | Per Share | | Loss | | Shares | | Per Share | Nine Months Ended September 30, 2019 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income (loss) available to common stockholders | | $ | 30,752 | | 40,120 | | $ | 0.77 | | $ | (382) | | 40,120 | | $ | (0.01) | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 541 | | | | | | | | 541 | | | | Diluted EPS | | $ | 30,752 | | 40,661 | | $ | 0.76 | | $ | (382) | | 40,661 | | $ | (0.01) |
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited) | | | | | | | | | | | | | | | | | | | Continuing Operations | | | Discontinued Operations | (in thousands, except per share amounts) | | Income | | Shares | | Per Share | | Income | | Shares | | Per Share | Three Months Ended June 30, 2020 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income available to common stockholders | | $ | 17,283 | | 43,810 | | $ | 0.39 | | $ | 279 | | 43,810 | | $ | 0.01 | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 17 | | | | | | | | 17 | | | | Diluted EPS | | $ | 17,283 | | 43,827 | | $ | 0.39 | | $ | 279 | | 43,827 | | $ | 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, 2021 | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | Basic EPS: | | | | | | | | | | | | | | | | | Net income (loss) available to common stockholders | | $ | 55,609 | | 43,946 | | $ | 1.27 | | $ | (3,882) | | 43,946 | | $ | (0.09) | Effect of dilutive securities: | | | | | | | | | | | | | | | | | Stock compensation plans | | | | | 807 | | | | | | | | 807 | | | | Diluted EPS | | $ | 55,609 | | 44,753 | | $ | 1.24 | | $ | (3,882) | | 44,753 | | $ | (0.08) |
| | | | | | | | | | | | | | | | | | | 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 |
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) 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.initial public offering. 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-based or equity-related awards.
Table of Contents
ProSight Global, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
The 2019 Plan is administered by the compensation committee of the Company’s Boardboard of Directors.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. The following table summarizes the stock-based compensation transactions for the 2019 Plan for the ninesix months ended SeptemberJune 30, 2020: | | | | | | | | | | | Number of | | Weighted Average Grant Date | | | | Shares | | Fair Value Per Share | | | | | | | | | Unvested at December 31, 2019 | | | 1,289,396 | | $ | 14.00 | Granted | | | 587,612 | | $ | 12.32 | Vested | | | (134,001) | | $ | 9.96 | Forfeited | | | (27,253) | | $ | 13.57 | Unvested at September 30, 2020 | | | 1,715,754 | | $ | 13.48 |
2021:
| | | | | | | | | | | Number of | | Weighted Average Grant Date | | | | Shares | | Fair Value Per Share | | | | | | | | | Unvested at December 31, 2020 | | | 1,705,441 | | $ | 13.46 | Granted | | | 15,634 | | $ | 12.55 | Vested | | | (76,213) | | $ | 12.97 | Forfeited | | | (31,488) | | $ | 12.60 | Unvested at June 30, 2021 | | | 1,613,374 | | $ | 13.49 |
As of SeptemberJune 30, 2020,2021, The Company had approximately $14.0$7.8 million of total unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 1.91.2 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 no0 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”)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. Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) 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. IssuanceDebt issuance costs of $4.8$4.6 million related to the Credit Agreement were incurred and are amortized over the life of the loan.
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. On July 14, 2020,Debt issuance costs of $0.5 million related to the Company drew down $5.0Agreement were incurred and are being amortized over the life of the agreement.
There were 0 borrowings under the Agreement as of June 30, 2020. There were borrowings of $42.0 million onunder the Revolving Credit Facility and on August 3, 2020, the Company drew down an additional $30.0 million, primarily to make capital contributions to its insurance subsidiaries.Agreement as of June 30, 2021. 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. Leases 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, California, Florida Georgia and the U.K. The weighted average lease term was 2.72.3 years and the weighted average discount rate was 2.0%2.1%.
Table of Contents ProSight Global, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (Unaudited) RentThe Company recorded rent expense $0.7 million and $0.8 million for the three and nine months ended SeptemberJune 30, 2021 and 2020, was $0.7respectively. The Company recorded rent expense $1.4 million and $2.3 million.$1.6 million for the six months ended June 30, 2021 and 2020, respectively. The following table presents the Company’s lease liabilities and right-of-use assets related to operating leases as of SeptemberJune 30, 2020:2021:
| | | | ($ in thousands) | | September 30, 2020 | One year or less | | $ | 3,003 | More than one year to two years | | | 902 | 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 | | | 3,905 | Less: difference between lease payments and discounted lease liabilities | | | 56 | Lease liabilities | | $ | 3,849 | | | | | Right-of-use assets | | $ | 3,454 | Prepaid lease assets, net of lease allowances and incentives | | | 395 | Total | | $ | 3,849 |
| | | | ($ in thousands) | | June 30, 2021 | One year or less | | $ | 1,678 | More than one year to two years | | | — | 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 | | | 1,678 | Less: difference between lease payments and discounted lease liabilities | | | 13 | Lease liabilities | | $ | 1,665 | | | | | Right-of-use assets | | $ | 1,461 | Prepaid lease assets, net of lease allowances and incentives | | | 204 | Total | | $ | 1,665 |
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. 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.
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, 202023, 2021 (the “2019“2020 Annual Report”). Certain restatements have been made to historical information to give effect to the merger and related transactions. SeeNote 1. – 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 outcome of any potential legal proceedings that may be instituted against us; |
| ● | the performance of and our relationship with third-party agents and vendors we rely upon to distribute certain business on our behalf; |
| ● | 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; and |
| ● | 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.Act. |
We discuss many of these risks in greater detail under the section titled Item 1A. “Risk Factors” in the Company’s 20192020 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 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. Merger Agreement and Merger On January 15, 2021, we announced that we had entered into an agreement and plan of merger (the “Merger Agreement”) with Pedal Parent Inc., a Delaware corporation (“Parent”), owned by affiliates of TowerBrook Capital Partners L.P. and Further Global Capital Management, and Pedal Merger Sub, Inc. Effective August 4, 2021, we completed the merger with Pedal Merger Sub, Inc. pursuant to the Merger Agreement. Pursuant to the Merger Agreement, Merger Sub merged with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, at the time the Merger became effective (the “Effective Time”), each outstanding share of the Company common stock, par value $0.01 per share (“Shares”), other than Shares owned by the Company or any of its subsidiaries, Parent or Merger Sub, and Shares that
were owned by stockholders who have perfected and not withdrawn a demand for appraisal rights, converted into the right to receive $12.85 in cash, without interest (the “Per Share Consideration”). In addition, subject to the terms and conditions of the Merger Agreement, at the Effective Time, (1) each vested and unvested time-vesting restricted stock unit award (each, a “Company RSU Award”) that was outstanding immediately prior to the Effective Time was cancelled in exchange for an amount in cash equal to the product of (A) the total number of Shares subject to such award multiplied by (B) the Per Share Consideration; (2) each vested and unvested performance-based restricted stock unit award (each, a “Company PSU Award”) that was outstanding immediately prior to the Effective Time was cancelled in exchange for the right to receive an amount in cash equal to the product of (A) the number of Shares subject to such award that became vested based on the higher of target performance and actual performance through the Effective Time, multiplied by (B) the Per Share Consideration; (3) each vested and unvested award of Shares subject to time-based vesting conditions (each, a “Company Restricted Stock Award”) that was outstanding immediately prior to the Effective Time was cancelled in exchange for the right to receive an amount in cash equal to the product of (A) the total number of shares subject to such award multiplied by (B) the Per Share Consideration; and (4) each vested and unvested award of Shares subject to performance-based vesting conditions (each, a “Company Performance Share Award”) that was outstanding immediately prior to the Effective Time was cancelled in exchange for the right to receive an amount in cash equal to the product of (A) the number of shares subject to such award that became vested based on the higher of target performance and actual performance through the Effective Time multiplied by (B) the Per Share Consideration. Delisting In connection with the consummation of the Merger, the Company notified the New York Stock Exchange (“NYSE”) of the completion of the Merger and requested that trading in the Company common stock be suspended on NYSE prior to the opening of trading August 4, 2021. On August 4, 2021, NYSE filed a notification of removal from listing and/or registration on Form 25 with the SEC with respect to the Company common stock to report the delisting of the Common Shares from NYSE, and to deregister the Company common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Legacy Transfer Transaction In connection with the Merger, the Company executed an adverse development cover and loss portfolio transfer transaction with Cavello Bay Reinsurance Limited (“Cavello Bay”). 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 fixed maturity securities, and may also include cash and cash equivalents, short-term investments, non-redeemable preferred stock securities, bond exchange-traded funds, commercial levered loans, and limited partnerships and limited liability companies. Neither our limited partnerships nor our limited liability companies are 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 (which excludes changes in fair 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 fixed maturity securities 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; |
| ● | 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. 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. 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
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 (loss) 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, impairment of goodwill and 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. Loss and LAE ratio, excluding catastrophe, is the ratio33
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. Combined ratio, excluding catastrophe losses and related items, is the sum of the loss and LAE ratio, excluding catastrophe losses and related items and the expense ratio.
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 Loss and LAE ratio, excluding catastrophe, is the ratio of losses and LAE, allocated and unallocated, excluding the effects of the WAQS, and excluding those losses categorized as catastrophe losses, to net earned premiums, net of the effects of reinsurance, excluding the impact of reinsurance premiums related to catastrophe losses.
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 (loss) 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 (loss) income and adjusted operating income. See “Factors Affecting Our Results of Operations—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 WAQSwhole account quota share reinsurance agreements (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 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. During 2018 and following the transition of the U.S. business 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 remainThere were no ceded loss reserves. Loss reserve development on the reserves ceded under the WAQS is included in continuing operations. Effective January 1, 2020,as of June 30, 2021 and for 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, lossesyears ended June 30, 2021 and LAE, as well as our underwriting, acquisition and insurance expenses. For the three and nine months ended SeptemberJune 30, 2020 there was no impact of WAQS on underwriting results or ratios.
The following tables summarize the effect of the WAQS on our underwriting (loss) income for the three months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 | | | | Including | | Effect of | | Excluding | | Including | | Effect of | | Excluding | | ($ in thousands) | | WAQS | | WAQS | | WAQS | | WAQS | | WAQS | | WAQS | | GWP | | $ | 203,539 | | $ | — | | $ | 203,539 | | $ | 227,196 | | $ | — | | $ | 227,196 | | Ceded written premiums | | | (44,135) | | | — | | | (44,135) | | | (17,722) | | | (6) | | | (17,716) | | Net written premiums | | $ | 159,404 | | $ | — | | $ | 159,404 | | $ | 209,474 | | $ | (6) | | $ | 209,480 | | Net retention (1) | | | 78.3% | | | — | | | 78.3% | | | 92.2% | | | — | | | 92.2% | | Net earned premiums | | $ | 172,376 | | $ | — | | $ | 172,376 | | $ | 202,455 | | $ | — | | $ | 202,455 | | Net losses and LAE incurred | | | 123,249 | | | — | | | 123,249 | | | 127,196 | | | 1,632 | | | 125,564 | | Underwriting, acquisition and insurance expenses | | | 63,373 | | | — | | | 63,373 | | | 71,920 | | | (1,632) | | | 73,552 | | Underwriting (loss) income (2) | | $ | (14,246) | | $ | — | | $ | (14,246) | | $ | 3,339 | | $ | — | | $ | 3,339 | | Loss and LAE ratio | | | 71.5 | % | | — | | | — | | | 62.8 | % | | — | | | — | | Expense ratio | | | 36.8 | % | | — | | | — | | | 35.5 | % | | — | | | — | | Combined ratio | | | 108.3 | % | | — | | | — | | | 98.3 | % | | — | | | — | | Adjusted loss and LAE ratio (3) | | | — | | | — | | | 71.5 | % | | — | | | — | | | 62.0 | % | Adjusted expense ratio (3) | | | — | | | — | | | 36.8 | % | | — | | | — | | | 36.3 | % | Adjusted combined ratio (3) | | | — | | | — | | | 108.3 | % | | — | | | — | | | 98.3 | % |
(1) | Net retention is a non-GAAP measure. We define net retention as the ratio of net written premiums to GWP. |
(2) | Underwriting (loss) income is a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income to underwriting (loss) 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.
The following tables summarize the effect of the WAQS on our underwriting (loss) income for the nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 | | | | Including | | Effect of | | Excluding | | Including | | Effect of | | Excluding | | ($ in thousands) | | WAQS | | WAQS | | WAQS | | WAQS | | WAQS | | WAQS | | GWP | | $ | 603,717 | | $ | — | | $ | 603,717 | | $ | 718,066 | | $ | — | | $ | 718,066 | | Ceded written premiums | | | (97,507) | | | — | | | (97,507) | | | (88,122) | | | (3) | | | (88,119) | | Net written premiums | | $ | 506,210 | | $ | — | | $ | 506,210 | | $ | 629,944 | | $ | (3) | | $ | 629,947 | | Net retention (1) | | | 83.8% | | | — | | | 83.8% | | | 87.7% | | | — | | | 87.7% | | Net earned premiums | | $ | 559,667 | | $ | — | | $ | 559,667 | | $ | 600,543 | | $ | 3 | | $ | 600,540 | | Net losses and LAE incurred | | | 363,279 | | | — | | | 363,279 | | | 372,644 | | | 3,839 | | | 368,805 | | Underwriting, acquisition and insurance expenses | | | 205,444 | | | — | | | 205,444 | | | 217,248 | | | (3,837) | | | 221,085 | | Underwriting (loss) income (2) | | $ | (9,056) | | $ | — | | $ | (9,056) | | $ | 10,651 | | $ | 1 | | $ | 10,650 | | Loss and LAE ratio | | | 64.9 | % | | — | | | — | | | 62.1 | % | | — | | | — | | Expense ratio | | | 36.7 | % | | — | | | — | | | 36.2 | % | | — | | | — | | Combined ratio | | | 101.6 | % | | — | | | — | | | 98.3 | % | | — | | | — | | Adjusted loss and LAE ratio (3) | | | — | | | — | | | 64.9 | % | | — | | | — | | | 61.4 | % | Adjusted expense ratio (3) | | | — | | | — | | | 36.7 | % | | — | | | — | | | 36.8 | % | Adjusted combined ratio (3) | | | — | | | — | | | 101.6 | % | | — | | | — | | | 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 (loss) income is a non-GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income to underwriting (loss) 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 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 made in our technology infrastructure over time, we continue to operate primarily in a remote work environment while maintaining the service and support levels that our customers expect. We are fully operational, and we believe we are capable of working remotely for as long as necessary.
There was a significant impact on our premium revenues in the second and third quarters relating to the pandemic’s effect on the insured exposure base of certain customers, particularly our customers in the Media and Entertainment as well as the Transportation customer segments. It is too early to determine the ultimate effect of the economic shut-down as a result of the pandemic on our losses, however, we continue to evaluate claims individually and pay losses where coverage applies. We have seen 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.
While we have seen an increase in unrealized investment gains in the second and third quarters, we expect there could be continued volatility in the unrealized position and uncertainty for the remainder of the year due to COVID-19.
Results of Operations Three Months Ended SeptemberJune 30, 20202021 Compared to Three Months Ended SeptemberJune 30, 20192020 The following table summarizes the results of continuing operations for the three months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | | Three Months Ended September 30 | | Change | | ($ in thousands) | | 2020 | | 2019 | | $ | | Percent | | GWP | | $ | 203,539 | | $ | 227,196 | | $ | (23,657) | | (10.4) | % | Ceded written premiums | | | (44,135) | | | (17,722) | | | (26,413) | | 149.0 | | Net written premiums | | $ | 159,404 | | $ | 209,474 | | $ | (50,070) | | (23.9) | % | | | | | | | | | | | | | | Net earned premiums | | $ | 172,376 | | $ | 202,455 | | $ | (30,079) | | (14.9) | % | Net losses and LAE incurred: | | | 123,249 | | | 127,196 | | | (3,947) | | (3.1) | | Underwriting, acquisition and insurance expenses | | | 63,373 | | | 71,920 | | | (8,547) | | (11.9) | | Underwriting (loss) income (1) | | | (14,246) | | | 3,339 | | | (17,585) | | (526.7) | | Interest and other expenses, net | | | 5,549 | | | 10,182 | | | (4,633) | | (45.5) | | Net investment income | | | 20,307 | | | 16,974 | | | 3,333 | | 19.6 | | Realized investment gains, net | | | 1,398 | | | 245 | | | 1,153 | | 470.6 | | Income before taxes | | | 1,910 | | | 10,376 | | | (8,466) | | (81.6) | | Income tax expense | | | 412 | | | 2,015 | | | (1,603) | | (79.6) | | Net income from continuing operations | | $ | 1,498 | | $ | 8,361 | | $ | (6,863) | | (82.1) | % | Adjusted operating income (1) | | $ | 1,495 | | $ | 13,825 | | $ | (12,330) | | (89.2) | % | | | | | | | | | | | | | | Adjusted operating return on equity (1) | | | 1.0 | % | | 11.2 | % | | | | | | Return on equity | | | 1.0 | % | | 6.8 | % | | | | | | | | | | | | | | | | | | | Loss and LAE ratio: | | | 71.5 | % | | 62.8 | % | | | | | | Loss and LAE ratio – excluding catastrophe (2) | | | 59.9 | % | | 62.8 | % | | | | | | Loss and LAE ratio – catastrophe losses | | | 11.6 | % | | - | % | | | | | | Expense ratio | | | 36.8 | % | | 35.5 | % | | | | | | Combined ratio | | | 108.3 | % | | 98.3 | % | | | | | | | | | | | | | | | | | | | Adjusted loss and LAE ratio (3) | | | 71.5 | % | | 62.0 | % | | | | | | Adjusted loss and LAE ratio – excluding catastrophe (2) | | | 59.9 | % | | 62.0 | % | | | | | | Adjusted loss and LAE ratio – catastrophe losses | | | 11.6 | % | | - | % | | | | | | Adjusted expense ratio (3) | | | 36.8 | % | | 36.3 | % | | | | | | Adjusted combined ratio (3) | | | 108.3 | % | | 98.3 | % | | | | | |
| | | | | | | | | | | | | | | Three Months Ended June 30 | | Change | | ($ in thousands) | | 2021 | | 2020 | | $ | | Percent | | GWP | | $ | 238,522 | | $ | 186,394 | | $ | 52,128 | | 28.0 | % | Ceded written premiums | | | (26,811) | | | (29,771) | | | 2,960 | | (9.9) | | Net written premiums | | $ | 211,711 | | $ | 156,623 | | $ | 55,088 | | 35.2 | % | | | | | | | | | | | | | | Net earned premiums | | $ | 178,897 | | $ | 181,629 | | $ | (2,732) | | (1.5) | % | Net losses and LAE incurred: | | | 114,400 | | | 112,473 | | | 1,927 | | 1.7 | | Underwriting, acquisition and insurance expenses | | | 68,153 | | | 68,448 | | | (295) | | (0.4) | | Underwriting (loss) income (1) | | | (3,656) | | | 708 | | | (4,364) | | (616.4) | | Interest and other expenses, net | | | 3,960 | | | 4,356 | | | (396) | | (9.1) | | Net investment income | | | 14,581 | | | 23,791 | | | (9,210) | | (38.7) | | Realized investment gains, net | | | 15,784 | | | 1,891 | | | 13,893 | | 734.7 | | Income before taxes | | | 22,749 | | | 22,034 | | | 715 | | 3.2 | | Income tax expense | | | 4,687 | | | 4,751 | | | (64) | | (1.3) | | Net income from continuing operations | | $ | 18,062 | | $ | 17,283 | | $ | 779 | | 4.5 | % | Adjusted operating income (1) | | $ | 6,591 | | $ | 16,890 | | $ | (10,299) | | (61.0) | % | | | | | | | | | | | | | | Adjusted operating return on equity (1) | | | 4.3 | % | | 12.6 | % | | | | | | Return on equity | | | 11.8 | % | | 12.9 | % | | | | | | | | | | | | | | | | | | | Loss and LAE ratio: | | | 63.9 | % | | 61.9 | % | | | | | | Loss and LAE ratio – excluding catastrophe (2) | | | 63.9 | % | | 59.9 | % | | | | | | Loss and LAE ratio – catastrophe losses | | | - | % | | 2.0 | % | | | | | | Expense ratio | | | 38.1 | % | | 37.7 | % | | | | | | Combined ratio | | | 102.0 | % | | 99.6 | % | | | | | | | | | | | | | | | | | | |
(1) | Underwriting (loss) 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 (loss) income and adjusted operating income. |
(2) | Loss and LAE ratio – excluding catastrophe and Adjusted loss and LAE ratio – excluding catastrophe is adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period from net earned premium. |
(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. For additional detail on the impact of the WAQS on our results of operations see “Factors Affecting Our Results of Operations—The WAQS. |
Net Income from Continuing Operations Net income was $1.5$18.1 million for the three months ended SeptemberJune 30, 20202021 compared to $8.4$17.3 million for the three months ended SeptemberJune 30, 2019, a decrease2020, an increase of $6.9$0.8 million, or 82.1%4.5%. The decreaseincrease in net income primarily resulted from catastrophe losses experienced during the period, partially offset by a decrease in interest and other expenses combined with an increase in net investment income. Inrealized gains largely driven by the third quartersale of 2020,fixed maturity securities to generate cash required to fund the Company incurred $16.9 millionceding of
net catastrophe losses and $5.1 million of related reinstatement premiums on reinsurance contracts primarily resulting from Hurricane Laura and the California and Oregon wildfires. In the third quarter of 2019, the Company incurred other expense of $6.8 million due to non-recurring grants of restricted stock units (“RSUs”) in connection loss reserves associated with the initial public offering (“IPO”).proposed reinsurance transaction with Cavello Bay.
Premiums GWP were $203.5$238.5 million for the three months ended SeptemberJune 30, 20202021 compared to $227.2186.4 million for the three months ended SeptemberJune 30, 2019, a decrease2020, an increase of $23.7$52.1 million, or 10.4%28.0%. The following table presents the GWP by customer segment for the three months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | ($ in millions) | | Three Months Ended September 30 | | Customer Segment | | 2020 | | 2019 | | % Change | | Construction | | $ | 27.4 | | $ | 27.3 | | 0.4 | % | Consumer Services | | | 23.7 | | | 35.5 | | (33.2) | | Marine and Energy | | | 27.7 | | | 26.1 | | 6.1 | | Media and Entertainment | | | 17.3 | | | 28.7 | | (39.7) | | Professional Services | | | 34.7 | | | 27.0 | | 28.5 | | Real Estate | | | 34.9 | | | 41.6 | | (16.1) | | Sports | | | 5.4 | | | 8.1 | | (33.3) | | Transportation | | | 30.8 | | | 29.6 | | 4.1 | | Customer segments subtotal | | | 201.9 | | | 223.9 | | (9.8) | | Other | | | 1.6 | | | 3.3 | | (51.5) | | Total | | $ | 203.5 | | $ | 227.2 | | (10.4) | % |
| | | | | | | | | | ($ in millions) | | Three Months Ended June 30 | | Customer Segment | | 2021 | | 2020 | | % Change | | Construction | | $ | 39.0 | | $ | 27.7 | | 40.8 | % | Consumer Services | | | 41.8 | | | 40.7 | | 2.7 | | Marine and Energy | | | 33.0 | | | 26.8 | | 23.1 | | Media and Entertainment | | | 23.0 | | | 17.4 | | 32.2 | | Professional Services | | | 33.9 | | | 31.9 | | 6.3 | | Real Estate | | | 40.7 | | | 47.3 | | (14.0) | | Sports | | | 5.0 | | | 4.7 | | 6.4 | | Transportation | | | 20.9 | | | (12.3) | | 269.9 | | Customer segments subtotal | | | 237.3 | | | 184.2 | | 28.8 | | Other | | | 1.2 | | | 2.2 | | (45.5) | | Total | | $ | 238.5 | | $ | 186.4 | | 28.0 | % |
GWP from customer segments (excluding GWP within “Other”) for the three months ended SeptemberJune 30, 2020 contracted2021 grew by 9.8%28.8% primarily due to reduced insured exposures of customers withinthe rebound from the COVID-19 pandemic in the Transportation and Media & Entertainment andcustomer segments, as well as strong growth in the Construction customer segment, partially offset by contraction in the Real Estate customer segmentssegment due to the economic downturn from the COVID-19 pandemic.strategic exit of certain niches. The changes in GWP were most notable in the following customer segments and niches:segments: | ● | Transportation GWP increased by 4.1%269.9% to $30.8$20.9 million for the three months ended SeptemberJune 30, 20202021, compared to $29.6($12.3) million for the three months ended SeptemberJune 30, 2019.2020. The premium growth iswas driven by $16.8 of new captive opportunities. Excluding new captive opportunities, GWP contracted 52.6%the rebound from September 30, 2019, driven by reduction in new business of $5.7 million in Taxis, $3.9 million in School Bus, $2.5 million in Charter Bus, and $2.2 million in Intermodal due to the economic downturn from COVID-19.related to the COVID-19 pandemic across all niches. |
| ● | Media and EntertainmentConstruction GWP contracted by 39.7%increased 40.8% to $17.339.0 million for the three months ended SeptemberJune 30, 20202021, compared to $28.7$27.7 million for the three months ended SeptemberJune 30, 2019.2020. The premium contraction isgrowth was driven by $4.9 million of declines in renewal business, $4.0 million of exposure reductions and $1.8 million of reduced new business opportunities instrong organic growth across all niches within the Live Entertainment and Film niches primarily due to regulatory restrictions and mandatory social distancing resulting from COVID-19.segment. |
| ● | Consumer ServicesMedia and Entertainment GWP contractedincreased by 33.2%32.2% to $23.7$23.0 million for the three months ended SeptemberJune 30, 20202021, compared to $35.5$17.4 million for the three months ended SeptemberJune 30, 2019.2020. The premium growth was driven by the rebound from the economic downturn related to the COVID-19 pandemic. |
| ● | Real Estate GWP decreased by 14.0% to $40.7 million for the three months ended June 30, 2021, compared to $47.3 million for the three months ended June 30, 2020. The premium contraction is primarily driven by the decision to reduce monoline workers’ compensation.strategic exit of certain niches within the segment. |
| ● | Professional Services GWP increased by 28.5% to $34.7 million for the three months ended September 30, 2020 compared to $27.0 million for the three months ended September 30, 2019. The premium growth is driven by approximately $4.4 million of increased renewal business and $1.4 million of increased new business in the Credit Unions niche. |
| ● | Real Estate GWP contracted by 16.1% to $34.9 million for the three months ended September 30, 2020 compared to $41.6 million for the three months ended September 30, 2019. The premium contraction is driven by approximately $3.1 million of reduced or delayed new business opportunities in Metrobuilders due to the economic downturn from COVID-19. |
Net written premiums decreasedincreased by $50.1$55.1 million, or 23.9%35.2%, to $159.4$211.7 million for the three months ended SeptemberJune 30, 20202021 from $209.5$156.6 million for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease in net written premiums was primarily related to the contractiongrowth in GWP.GWP due to the rebound from the COVID-19 pandemic. Net earned premiums decreased by $30.1$2.7 million, or 14.9%1.5%, to $172.4$178.9 million for the three months ended SeptemberJune 30, 20202021 from $202.5181.6 million for the three months ended SeptemberJune 30, 2019.2020. The decrease in net earned premiums was directly related to the contraction in net written premiums inover the first nine months of 2020 and includes the impact of non-recurring net earned premiums of $11.3 million from the exit of excess workers’ compensation in 2019.past twelve months. Loss and LAE Ratio Our loss and LAE ratio was 71.5%63.9% for the three months ended SeptemberJune 30, 20202021 compared to 62.8%61.9% for the three months ended SeptemberJune 30, 2019.2020. For the three months ended SeptemberJune 30, 2020 our2021 the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 20192020 and prior developed unfavorably by $0.1$5.4 million driven by $11.1$8.1 million unfavorable development of General Liabilityin All Other lines, $3.2 million unfavorable development in Commercial Auto and $5.9$2.7 million unfavorable development in Commercial Multiple Peril offset by $16.5$5.1 million favorable development in Workers’ Compensation.Compensation and $3.6 million favorable development in General Liability. In addition, the Company incurred $3.1$1.4 million of losses and loss adjustment expenses related to premium adjustments earned during the three months ended SeptemberJune 30, 20202021 attributable to prior accident years 20192020 and 2018.2019. Catastrophe losses of $16.9 million for the three months ended September 30, 2020 were driven by Hurricane Laura and the California and Oregon wildfires, adding 9.8 points to the current accident year loss ratio compared to no catastrophe losses for the three months ended September 30, 2019. The Company also incurred $5.1 million of reinsurance reinstatement premiums, related to catastrophe losses during the period, which increased the loss ratio by 1.8 points for the three months ended September 30, 2020. The loss and LAE ratio, excluding catastrophe losses and related items was 59.9% for the three months ended September 30, 2020.
The following tables summarize the effect of the factors indicated above on the loss and LAE ratios and adjusted loss and LAE ratios for the three months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | Three Months Ended September 30 | | | | 2020 | | 2019 | | | | | | | % of Earned | | | | % of Earned | | ($ in thousands) | | Losses and LAE | | Premiums | | Losses and LAE | | Premiums | | Loss and LAE: | | | | | | | | | | | | Current accident year – excluding catastrophe (1) | | $ | 106,304 | | 59.9 | % | $ | 121,701 | | 60.1 | % | Current accident year – catastrophe losses (2) | | | 16,893 | | 11.6 | | | — | | — | | Effect of prior year development | | | 52 | | — | | | 5,495 | | 2.7 | | Total | | $ | 123,249 | | 71.5 | % | $ | 127,196 | | 62.8 | % |
| | | | | | | | | | | | | | Three Months Ended June 30 | | | | 2021 | | 2020 | | | | | | | % of Earned | | | | % of Earned | | ($ in thousands) | | Losses and LAE | | Premiums | | Losses and LAE | | Premiums | | Loss and LAE: | | | | | | | | | | | | Current accident year – excluding catastrophe (1) | | $ | 108,973 | | 60.9 | % | $ | 108,530 | | 59.8 | % | Current accident year – catastrophe losses (2) | | | — | | — | | | 3,633 | | 2.0 | | Effect of prior year development | | | 5,427 | | 3.0 | | | 310 | | 0.1 | | Total | | $ | 114,400 | | 63.9 | % | $ | 112,473 | | 61.9 | % |
| | | | | | | | | | | | | | Three Months Ended September 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 (1) | | $ | 106,304 | | 59.9 | % | $ | 121,701 | | 60.1 | % | Current accident year – catastrophe losses (2) | | | 16,893 | | 11.6 | | | — | | — | | Effect of prior year development | | | 52 | | — | | | 3,863 | | 1.9 | | Total | | $ | 123,249 | | 71.5 | % | $ | 125,564 | | 62.0 | % |
(1) | Earned premiums are adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period. |
(2) | 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 36.8%38.1% for the three months ended SeptemberJune 30, 20202021 compared to 35.5%37.7% for the three months ended SeptemberJune 30, 2019.2020. The increase in the expense ratio is driven primarily by a decreasean increase in net earned premiums, which more than offset a decrease in underwriting and insurance expenses of $3.0 million, during the three months ended September 30, 2020. In addition, the prior yearpolicy acquisition expense ratio was favorably impacted by 0.8 points of non-recurring cede commission on1.3% due to a shift in the WAQS.mix of business and changing reinsurance structure. The following table summarizes the components of the expense ratio for the three months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | Three Months Ended September 30 | | | | 2020 | | 2019 | | | | | | | % of Earned | | | | | % of Earned | | ($ in thousands) | | Expenses | | Premiums | | Expenses | | Premiums | | Underwriting, acquisition and insurance expenses: | | | | | | | | | | | | Policy acquisition expenses, net of ceded reinsurance | | $ | 40,387 | | 23.4 | % | $ | 47,585 | | 23.5 | % | Underwriting and insurance expenses | | | 22,986 | | 13.4 | | | 25,967 | | 12.8 | | Underwriting, acquisition and insurance expenses (1) | | | 63,373 | | 36.8 | | | 73,552 | | 36.3 | | Effect of WAQS (1) | | | — | | — | | | (1,632) | | (0.8) | | Total underwriting, acquisition and insurance expenses | | $ | 63,373 | | 36.8 | % | $ | 71,920 | | 35.5 | % |
| | | | | | | | | | | | | | Three Months Ended June 30 | | | | 2021 | | 2020 | | | | | | | % of Earned | | | | | % of Earned | | ($ in thousands) | | Expenses | | Premiums | | Expenses | | Premiums | | Underwriting, acquisition and insurance expenses: | | | | | | | | | | | | Policy acquisition expenses, net of ceded reinsurance | | $ | 43,696 | | 24.4 | % | $ | 42,033 | | 23.1 | % | Underwriting and insurance expenses | | | 24,457 | | 13.7 | | | 26,415 | | 14.6 | | Total underwriting, acquisition and insurance expenses | | $ | 68,153 | | 38.1 | % | $ | 68,448 | | 37.7 | % |
(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 September 30, 2020 and 2019. |
Underwriting (Loss) Income Underwriting loss was $14.2$3.7 million for the three months ended SeptemberJune 30, 20202021 compared to an underwriting income of $3.3$0.7 million for the three months ended SeptemberJune 30, 2019,2020, a decrease of $17.5$4.4 million. The decrease in underwriting income is primarily due to adverse prior period development and the catastrophe losses experienced during the period combined with the reduction in net earned premium. increased policy acquisition expense ratio. Combined Ratio Our combined ratio and adjusted combined ratio were 108.3%was 102.0% for the three months ended SeptemberJune 30, 20202021 compared to 98.3%99.6% for the three months ended SeptemberJune 30, 2019. The combined ratio, excluding the impact of catastrophes was 96.7% for the three months ended September 30 , 2020 compared to 98.3% for the three months ended September 30, 2019.2020.
Investing Results Our net investment income increaseddecreased by 19.6%38.7% to $20.3$14.6 million for the three months ended SeptemberJune 30, 20202021 from $17.0$23.8 million for the three months ended SeptemberJune 30, 2019.2020. The increasedecrease in net investment income is primarily due to the change in fair value on investments inreduction of income generated by our limited partnerships and limited liability companies.partnerships. Net investment yield was 3.5%2.4% for the three months ended SeptemberJune 30, 20202021 and 3.3%4.3% for the three months ended SeptemberJune 30, 2019. 2020. Realized investment gains, net increased by $12.2
million to $15.7 million for the three months ended June 30, 2021 compared to $3.5 million for the three months ended June 30, 2020, respectively. The increase is largely driven by the sale of fixed maturity securities to generate cash required to fund the ceding of loss reserves associated with the proposed reinsurance transaction with Cavello Bay. The following table summarizes the components of net investment income and net investment gains for the three months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | Three Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | | $ Change | Fixed maturity securities | | $ | 15,040 | | $ | 16,764 | | $ | (1,724) | Other investments | | | 6,193 | | | 777 | | | 5,416 | Gross investment income | | | 21,233 | | | 17,541 | | | 3,692 | Investment expenses | | | (926) | | | (567) | | | (359) | Net investment income | | | 20,307 | | | 16,974 | | | 3,333 | Realized investment gains, net | | | 1,398 | | | 245 | | | 1,153 | Total | | $ | 21,705 | | $ | 17,219 | | $ | 4,486 | Average invested assets | | $ | 2,301,504 | | $ | 2,069,327 | | $ | 232,178 |
| | | | | | | | | | | | Three Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | | $ Change | Fixed maturity securities | | $ | 11,826 | | $ | 15,849 | | $ | (4,023) | Other investments | | | 4,001 | | | 8,592 | | | (4,591) | Gross investment income | | | 15,827 | | | 24,441 | | | (8,614) | Investment expenses | | | (1,246) | | | (650) | | | (596) | Net investment income | | | 14,581 | | | 23,791 | | | (9,210) | Realized investment gains, net | | | 15,784 | | | 1,891 | | | 13,893 | Total | | $ | 30,365 | | $ | 25,682 | | $ | 4,683 | Average invested assets | | $ | 2,437,914 | | $ | 2,234,396 | | $ | 203,518 |
Interest and Other Expenses, Net Our interest and other expenses decreased by $4.6$0.4 million to $5.5$4.0 million for the three months ended SeptemberJune 30, 20202021 compared to $10.2$4.4 million for the three months ended SeptemberJune 30, 2019.2020. The decrease is primarily driven by $6.8 million due to non-recurring grantsthe refinancing of RSUs in connection with the IPO.our long term debt at a lower effective interest rate. Income Tax Expense Our effective tax rate for the three months ended SeptemberJune 30, 2021 and 2020 were 20.6% and 2019 were 21.6% and 19.4%, respectively. The increasedecrease in the effective tax rate for the three months ended SeptemberJune 30, 20202021 compared to the same period in 20192020 was primarily due to the tax effect of share-based compensation. Our income tax expense was $0.4$4.7 million and $2.0$4.8 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The decrease is due to the decrease in income before income taxes compared to the same period in 2019.lower effective tax rate as a result 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’s current tax provision. Adjusted Operating Income Adjusted operating income was $1.5$6.6 million for the three months ended SeptemberJune 30, 2020,2021, a decrease of $12.3$10.3 million, or 89.2%61.0% from the adjusted operating income of $13.8$16.9 million for the three months ended SeptemberJune 30, 2019,2020, primarily due to the reductiondecrease in underwritingnet investment income offset by increased net investmentand underwriting income. Adjusted Operating Return on Equity Our adjusted operating return on equity was 1.0%4.3% for the three months ended SeptemberJune 30, 2020,2021, a decrease of 10.28.3 percentage points from 11.2%12.6% for the three months ended SeptemberJune 30, 20192020 primarily due to the reductiondecrease in adjusted operating income combined with thean increase in average book value.
NineSix Months Ended SeptemberJune 30, 20202021 Compared to NineSix Months Ended SeptemberJune 30, 20192020
The following table summarizes the results of continuing operations for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | | Nine Months Ended September 30 | | Change | | ($ in thousands) | | 2020 | | 2019 | | $ | | Percent | | GWP | | $ | 603,717 | | $ | 718,066 | | $ | (114,349) | | (15.9) | % | Ceded written premiums | | | (97,507) | | | (88,122) | | | (9,385) | | 10.7 | | Net written premiums | | $ | 506,210 | | $ | 629,944 | | $ | (123,734) | | (19.6) | % | | | | | | | | | | | | | | Net earned premiums | | $ | 559,667 | | $ | 600,543 | | $ | (40,876) | | (6.8) | % | Net losses and LAE incurred: | | | 363,279 | | | 372,644 | | | (9,365) | | (2.5) | | Underwriting, acquisition and insurance expenses | | | 205,444 | | | 217,248 | | | (11,804) | | (5.4) | | Underwriting (loss) income (1) | | | (9,056) | | | 10,651 | | | (19,707) | | (185.0) | | Interest and other expenses, net | | | 14,635 | | | 23,671 | | | (9,036) | | (38.2) | | Net investment income | | | 52,913 | | | 51,530 | | | 1,383 | | 2.7 | | Realized investment gains, net | | | 3,521 | | | 495 | | | 3,026 | | 611.3 | | Income before taxes | | | 32,743 | | | 39,005 | | | (6,262) | | (16.1) | | Income tax expense | | | 7,151 | | | 8,253 | | | (1,102) | | (13.4) | | Net income from continuing operations | | $ | 25,592 | | $ | 30,752 | | $ | (5,160) | | (16.8) | % | Adjusted operating income (1) | | $ | 26,374 | | $ | 41,683 | | $ | (15,309) | | (36.7) | % | | | | | | | | | | | | | | Adjusted operating return on equity (1) | | | 6.1 | % | | 12.1 | % | | | | | | Return on equity | | | 5.9 | % | | 8.9 | % | | | | | | | | | | | | | | | | | | | Loss and LAE ratio: | | | 64.9 | % | | 62.1 | % | | | | | | Loss and LAE ratio – excluding catastrophe (2) | | | 60.7 | % | | 61.6 | % | | | | | | Loss and LAE ratio – catastrophe losses | | | 4.2 | % | | 0.5 | % | | | | | | Expense ratio | | | 36.7 | % | | 36.2 | % | | | | | | Combined ratio | | | 101.6 | % | | 98.3 | % | | | | | | | | | | | | | | | | | | | Adjusted loss and LAE ratio (3) | | | 64.9 | % | | 61.4 | % | | | | | | Adjusted loss and LAE ratio – excluding catastrophe (2) | | | 60.7 | % | | 60.9 | % | | | | | | Adjusted loss and LAE ratio – catastrophe losses | | | 4.2 | % | | 0.5 | % | | | | | | Adjusted expense ratio (3) | | | 36.7 | % | | 36.8 | % | | | | | | Adjusted combined ratio (3) | | | 101.6 | % | | 98.2 | % | | | | | |
| | | | | | | | | | | | | | | Six Months Ended June 30 | | Change | | ($ in thousands) | | 2021 | | 2020 | | $ | | Percent | | GWP | | $ | 407,913 | | $ | 400,178 | | $ | 7,735 | | 1.9 | % | Ceded written premiums | | | (44,281) | | | (53,372) | | | 9,091 | | (17.0) | | Net written premiums | | $ | 363,632 | | $ | 346,806 | | $ | 16,826 | | 4.9 | % | | | | | | | | | | | | | | Net earned premiums | | $ | 351,868 | | $ | 387,291 | | $ | (35,423) | | (9.1) | % | Net losses and LAE incurred: | | | 219,923 | | �� | 240,030 | | | (20,107) | | (8.4) | | Underwriting, acquisition and insurance expenses | | | 133,511 | | | 142,071 | | | (8,560) | | (6.0) | | Underwriting (loss) income (1) | | | (1,566) | | | 5,190 | | | (6,756) | | (130.2) | | Interest and other expenses, net | | | 7,863 | | | 9,086 | | | (1,223) | | (13.5) | | Net investment income | | | 31,260 | | | 32,606 | | | (1,346) | | (4.1) | | Realized investment gains, net | | | 48,892 | | | 2,123 | | | 46,769 | | 2,203.0 | | Income before taxes | | | 70,723 | | | 30,833 | | | 39,890 | | 129.4 | | Income tax expense | | | 15,114 | | | 6,739 | | | 8,375 | | 124.3 | | Net income from continuing operations | | $ | 55,609 | | $ | 24,094 | | $ | 31,515 | | 130.8 | % | Adjusted operating income (1) | | $ | 19,253 | | $ | 24,879 | | $ | (5,626) | | (22.6) | % | | | | | | | | | | | | | | Adjusted operating return on equity (1) | | | 6.2 | % | | 8.8 | % | | | | | | Return on equity | | | 17.9 | % | | 8.5 | % | | | | | | | | | | | | | | | | | | | Loss and LAE ratio: | | | 62.5 | % | | 62.0 | % | | | | | | Loss and LAE ratio – excluding catastrophe (2) | | | 62.5 | % | | 61.1 | % | | | | | | Loss and LAE ratio – catastrophe losses | | | - | % | | 0.9 | % | | | | | | Expense ratio | | | 37.9 | % | | 36.7 | % | | | | | | Combined ratio | | | 100.4 | % | | 98.7 | % | | | | | | | | | | | | | | | | | | |
(1) | Underwriting (loss) 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 (loss) income and adjusted operating income. |
(2) | Loss and LAE ratio – excluding catastrophe and Adjusted loss and LAE ratio – excluding catastrophe is adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period from net earned premium. |
(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. For additional detail on the impact of the WAQS on our results of operations see “Factors Affecting Our Results of Operations—The WAQS.” |
Net Income from Continuing Operations Net income was $25.6$55.6 million for the ninesix months ended SeptemberJune 30, 20202021 compared to $30.8$24.1 million for the ninesix months ended SeptemberJune 30, 2019, a decrease2020, an increase of $5.2$31.5 million, or 16.8%130.8%. The decreaseincrease in net income is primarily dueresulted from an increase in realized gains largely driven by the sale of fixed maturity securities to catastrophe losses experienced duringgenerate cash required to fund the third quarterceding of 2020, primarily Hurricane Laura and the California and Oregon wildfires, partially offset by a decrease of interest and other expense which includes $7.6 million of expense for our former CEO for termination of service as CEO and his services as Executive Chairman in the prior period and $6.8 million due to non-recurring grants of RSUs in connectionloss reserves associated with the IPO in the prior period.proposed reinsurance transaction with Cavello Bay.
Premiums GWP were $603.7$407.9 million for the ninesix months ended SeptemberJune 30, 20202021 compared to $718.1$400.2 million for the ninesix months ended SeptemberJune 30, 2019, a decrease2020, an increase of $114.4$7.7 million, or 15.9%1.9%. The following table presents the GWP by customer segment for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | ($ in millions) | | Nine Months Ended September 30 | | Customer Segment | | 2020 | | 2019 | | % Change | | Construction | | $ | 79.6 | | $ | 83.1 | | (4.2) | % | Consumer Services | | | 95.0 | | | 100.9 | | (5.8) | | Marine and Energy | | | 87.3 | | | 71.5 | | 22.1 | | Media and Entertainment | | | 65.3 | | | 90.8 | | (28.1) | | Professional Services | | | 96.3 | | | 85.7 | | 12.4 | | Real Estate | | | 115.4 | | | 116.9 | | (1.3) | | Sports | | | 19.6 | | | 22.8 | | (14.0) | | Transportation | | | 39.9 | | | 79.4 | | (49.7) | | Customer segments subtotal | | | 598.4 | | | 651.1 | | (8.1) | | Other | | | 5.3 | | | 67.0 | | (92.1) | | Total | | $ | 603.7 | | $ | 718.1 | | (15.9) | % |
| | | | | | | | | | ($ in millions) | | Six Months Ended June 30 | | Customer Segment | | 2021 | | 2020 | | % Change | | Construction | | $ | 65.5 | | $ | 52.2 | | 25.5 | % | Consumer Services | | | 64.4 | | | 71.3 | | (9.7) | | Marine and Energy | | | 57.2 | | | 59.6 | | (4.0) | | Media and Entertainment | | | 43.9 | | | 47.9 | | (8.4) | | Professional Services | | | 68.3 | | | 61.6 | | 10.9 | | Real Estate | | | 60.6 | | | 80.5 | | (24.7) | | Sports | | | 10.7 | | | 14.3 | | (25.2) | | Transportation | | | 34.7 | | | 9.1 | | 281.3 | | Customer segments subtotal | | | 405.3 | | | 396.5 | | 2.2 | | Other | | | 2.6 | | | 3.7 | | (29.7) | | Total | | $ | 407.9 | | $ | 400.2 | | 1.9 | % |
GWP from customer segments (excluding GWP within “Other”) for the ninesix months ended SeptemberJune 30, 2020 contracted2021 grew by 8.1%2.2% primarily due to endorsement transactions and reduction in insured exposures within the Transportation and Media and Entertainment customer segments driven byrebound from the COVID-19 pandemic in the secondTransportation customer segment, as well as strong organic growth in the Construction and third quartersProfessional services customer segment, partially offset by contraction in the Real Estate customer segment due to the strategic exit of 2020.certain niches. The changes in GWP were most notable in the following customer segments and niches:segments: | ● | Transportation GWP contractedincreased by 49.7%281.3% to $39.9$34.7 million for the ninesix months ended SeptemberJune 30, 20202021, compared to $79.4$9.1 million for the ninesix months ended SeptemberJune 30, 2019.2020. The premium contraction isgrowth was driven by exposure reduction as well as reduced new business opportunities $28.1 million duethe rebound from the economic downturn related to COVID-19. Negative premium endorsements of $13.5 for School Bus, $9.1 million for Taxis, and $3.7 million for Charter Bus were processed to provide immediate relief to our insureds and align the premium with exposures. The premium contraction was offset by $18.0 million of new business in transportation related captive opportunities.COVID-19 pandemic across all niches. |
| ● | Media and EntertainmentConstruction GWP contractedincreased by 28.1%25.5% to $65.3$65.5 million for the ninesix months ended SeptemberJune 30, 20202021, compared to $90.8$52.2 million for the ninesix months ended SeptemberJune 30, 2019.2020. The premium contraction isgrowth was driven by approximately $9.8 million of exposure reductions due to regulatory actions and mandatory social distancing related to COVID-19, $8.7 million of declines in renewal business, and $6.2 million of reduced new business opportunities instrong organic growth across all niches within the Live Entertainment and Film niches.segment. |
| ● | Marine and Energy GWP increased by 22.1% to $87.3 million for the nine months ended September 30, 2020 compared to $71.5 million for the nine months ended September 30, 2019. The premium growth is primarily due to $5.9 million of new business within the Propane and Fuel Dealers niche and $4.9 million of increased total renewal premiums in Solar Contractors and Propane and Fuel Dealers niches. |
| ● | Professional Services GWP increased by 12.4%10.7% to $96.3$68.3 million for the ninesix months ended SeptemberJune 30, 20202021, compared to $85.7$61.6 million for the ninesix months ended SeptemberJune 30, 2019.2020. Premium growth was driven by strong organic growth across all niches within the segment. |
| ● | Real Estate GWP decreased by 24.7% to $60.6 million for the six months ended June 30, 2021, compared to $80.5 million for the six months ended June 30, 2020. The premium growthcontraction is primarily driven by approximately $9.1 millionthe strategic exit of increased renewal business incertain niches within the Credit Unions niche.segment. |
Net written premiums decreasedincreased by $123.7$16.8 million, or 19.6%4.9%, to $506.2$363.6 million for the ninesix months ended SeptemberJune 30, 20202021 from $629.9$346.8 million for the ninesix months ended SeptemberJune 30, 2019.2020. The reductionincrease in net written premiums was directlyprimarily related to the contractiongrowth in GWP.GWP due to the rebound from the COVID-19 pandemic as well as a change in reinsurance structure.
Net earned premiums decreased by $40.9$35.4 million, or 6.8%9.1%, to $559.7$351.9 million for the ninesix months ended SeptemberJune 30, 20202021 from $600.5$387.3 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease in net earned premiums was directly related to the contraction in net written premiums duringover the first nine months of 2020, which includes the impact of non-recurring net earned premiums of $41.3 million from the exit of excess workers’ compensation in 2019.past twelve months. Loss and LAE Ratio Our loss and LAE ratio was 64.9%62.5% for the ninesix months ended SeptemberJune 30, 20202021 compared to 62.1%62.0% for the ninesix months ended SeptemberJune 30, 2019.2020. For the ninesix months ended SeptemberJune 30, 2020, our2021 the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 20192020 and prior developed unfavorably by $0.6$5.7 million driven by $23.2$7.5 million unfavorable development in General Liability and $10.2All Other lines, $4.7 million unfavorable development in Commercial Multiple Peril and $2.9 million unfavorable development in Commercial Auto offset by $24.8$6.2 million favorable development in Workers’ Compensation, $1.0$3.2 million favorable development in Commercial Auto and $7.0 million favorable development in All Other lines.General Liability. In addition, the Company incurred $14.8$3.9 million of losses and loss adjustment expenses related to premium adjustments earned during the ninesix months ended SeptemberJune 30, 20202021 attributable to prior accident years 20192020 and 2018.2019. Catastrophe losses of $20.5 million for the nine months ended September 30, 2020 were driven by Hurricane Laura, the California and Oregon wildfires, and other weather events across the U.S., during the second and third quarters, adding 3.7 points to the current accident year loss ratio compared to catastrophe losses of $3.0 million for the nine months ended September 30, 2019, driven by weather related events in the second quarter of 2019, which added 0.5 points to the current accident year loss ratio of the prior period. The Company also incurred $5.1 million of reinsurance reinstatement premiums, related to catastrophe losses during the third quarter, which increased the loss ratio by 0.5 points for the nine months ended September 30, 2020. The loss and LAE ratio, excluding catastrophe losses and related items was 60.7% for the nine months ended September 30, 2020.
The following tables summarize the effect of the factors indicated above on the loss and LAE ratios and adjusted loss and LAE ratios for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | Nine Months Ended September 30 | | | | 2020 | | 2019 | | | | | | | % of Earned | | | | % of Earned | | ($ in thousands) | | Losses and LAE | | Premiums | | Losses and LAE | | Premiums | | Loss and LAE: | | | | | | | | | | | | Current accident year – excluding catastrophe (1) | | $ | 342,193 | | 60.6 | % | $ | 367,277 | | 61.2 | % | Current accident year – catastrophe losses (2) | | | 20,526 | | 4.2 | | | 3,000 | | 0.5 | | Effect of prior year development | | | 560 | | 0.1 | | | 2,367 | | 0.4 | | Total | | $ | 363,279 | | 64.9 | % | $ | 372,644 | | 62.1 | % |
| | | | | | | | | | | | | | Six Months Ended June 30 | | | | 2021 | | 2020 | | | | | | | % of Earned | | | | % of Earned | | ($ in thousands) | | Losses and LAE | | Premiums | | Losses and LAE | | Premiums | | Loss and LAE: | | | | | | | | | | | | Current accident year – excluding catastrophe (1) | | $ | 214,233 | | 60.9 | % | $ | 235,889 | | 60.9 | % | Current accident year – catastrophe losses (2) | | | — | | — | | | 3,633 | | 0.9 | | Effect of prior year development | | | 5,690 | | 1.6 | | | 508 | | 0.2 | | Total | | $ | 219,923 | | 62.5 | % | $ | 240,030 | | 62.0 | % |
| | | | | | | | | | | | | | Nine Months Ended September 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 (1) | | $ | 342,193 | | 60.6 | % | $ | 367,277 | | 61.2 | % | Current accident year – catastrophe losses (2) | | | 20,526 | | 4.2 | | | 3,000 | | 0.5 | | Effect of prior year development | | | 560 | | 0.1 | | | (1,472) | | (0.3) | | Total | | $ | 363,279 | | 64.9 | % | $ | 368,805 | | 61.4 | % |
(1) | Earned premiums are adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period. |
(2) | 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 $25.0 million or more in direct insured losses to property and affect a significant number of policyholders and insurers. |
Expense Ratio Our expense ratio was 37.9% for the six months ended June 30, 2021 compared to 36.7% for the ninesix months ended SeptemberJune 30, 2020 compared to 36.2% for the nine months ended September 30, 2019.2020. The increase in the expense ratio is driven primarily by the impact of the WAQS in 2019 and reductions in net earned premiums related to COVID-19an increase in the current year.policy acquisition expense ratio of 1.5% due to a shift in the mix of business and changing reinsurance structure. The following table summarizes the components of the expense ratio for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | | | Nine Months Ended September 30 | | | | 2020 | | 2019 | | | | | | | % of Earned | | | | | % of Earned | | ($ in thousands) | | Expenses | | Premiums | | Expenses | | Premiums | | Underwriting, acquisition and insurance expenses: | | | | | | | | | | | | Policy acquisition expenses, net of ceded reinsurance | | $ | 129,406 | | 23.1 | % | $ | 141,896 | | 23.6 | % | Underwriting and insurance expenses | | | 76,038 | | 13.6 | | | 79,189 | | 13.2 | | Underwriting, acquisition and insurance expenses(1) | | | 205,444 | | 36.7 | | | 221,085 | | 36.8 | | Effect of WAQS(1) | | | — | | — | | | (3,837) | | (0.6) | | Total underwriting, acquisition and insurance expenses | | $ | 205,444 | | 36.7 | % | $ | 217,248 | | 36.2 | % |
| | | | | | | | | | | | | | Six Months Ended June 30 | | | | 2021 | | 2020 | | | | | | | % of Earned | | | | | % of Earned | | ($ in thousands) | | Expenses | | Premiums | | Expenses | | Premiums | | Underwriting, acquisition and insurance expenses: | | | | | | | | | | | | Policy acquisition expenses, net of ceded reinsurance | | $ | 86,055 | | 24.5 | % | $ | 89,019 | | 23.0 | % | Underwriting and insurance expenses | | | 47,456 | | 13.5 | | | 53,052 | | 13.7 | | Underwriting, acquisition and insurance expenses | | $ | 133,511 | | 37.9 | | $ | 142,071 | | 36.7 | |
(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 nine months ended September 30, 2020 and 2019. |
Underwriting (Loss) Income Underwriting loss was $9.1$1.6 million for the ninesix months ended SeptemberJune 30, 20202021 compared to an underwriting income of $10.7$5.2 million for the ninesix months ended SeptemberJune 30, 2019,2020, a decrease of $19.8 million, or 185.0%.$6.8 million. The decrease in underwriting income is primarily due to adverse prior period development and the catastrophe losses experienced during the third quarter of the current year combined with the reduction in net earned premium. increased policy acquisition expense ratio. Combined Ratio Our combined ratio and adjusted combined ratio were 101.6%was 100.4% for the ninesix months ended SeptemberJune 30, 20202021 compared to 98.3%98.7% for the ninesix months ended SeptemberJune 30, 2019. The combined ratio, excluding the impact of catastrophes was 97.4% for the nine months ended September 30 , 2020 compared to 97.8% for the nine months ended September 30, 2019.2020. Investing Results Our net investment income increaseddecreased by 2.7%4.1% to $52.9$31.3 million for the ninesix months ended SeptemberJune 30, 20202021 from $51.5$32.6 million for the ninesix months ended SeptemberJune 30, 2019. The increase in net investment income is primarily due to growth in the investment portfolio partially offset by lower net investment yields in the current year.2020. Net investment yield was 3.1%2.6% for the ninesix months ended SeptemberJune 30, 20202021 and 3.5%3.0% for the ninesix months ended SeptemberJune 30, 2019.2020. Realized investment gains, net includes a $1.7increased by $44.3 million credit loss allowanceto $48.4 million for the six months ended June 30, 2021 compared to $4.1 million for the six months ended June 30, 2020, respectively. The increase is largely driven by the sale of fixed maturity securities forto generate cash required to fund the nine months ended September 30, 2020. The weighted average durationceding of our fixed maturity portfolio, including cash equivalents, was 4.6 years at September 30, 2020 and 3.0 years at September 30, 2019. loss reserves associated with the proposed reinsurance transaction with Cavello Bay.
The following table summarizes the components of net investment income and net investment gains for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020: | | | | | | | | | | | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | | $ Change | Fixed maturity securities | | $ | 47,171 | | $ | 49,414 | | $ | (2,243) | Other investments | | | 7,993 | | | 3,730 | | | 4,263 | Gross investment income | | | 55,164 | | | 53,144 | | | 2,020 | Investment expenses | | | (2,251) | | | (1,614) | | | (637) | Net investment income | | | 52,913 | | | 51,530 | | | 1,383 | Realized investment gains, net | | | 3,521 | | | 495 | | | 3,026 | Total | | $ | 56,434 | | $ | 52,025 | | $ | 4,409 | Average invested assets | | $ | 2,242,729 | | $ | 1,989,131 | | $ | 253,598 |
| | | | | | | | | | | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | | $ Change | Fixed maturity securities | | $ | 25,585 | | $ | 32,131 | | $ | (6,546) | Other investments | | | 7,686 | | | 1,800 | | | 5,886 | Gross investment income | | | 33,271 | | | 33,931 | | | (660) | Investment expenses | | | (2,011) | | | (1,325) | | | (686) | Net investment income | | | 31,260 | | | 32,606 | | | (1,346) | Realized investment gains, net | | | 48,892 | | | 2,123 | | | 46,769 | Total | | $ | 80,152 | | $ | 34,729 | | $ | 45,423 | Average invested assets | | $ | 2,392,782 | | $ | 2,210,278 | | $ | 182,504 |
Interest and Other Expenses, Net Our interest and other expenses decreased by $9.0$1.2 million to $14.6$7.9 million for the ninesix months ended SeptemberJune 30, 20202021 compared to $23.7$9.1 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease is primarily driven by $7.6 millionthe refinancing of expense for our former CEO for termination of service as CEO and his services as Executive Chairman in the prior period and $6.8 million due to non-recurring grants of RSUs in connection with the IPO and an increase in net investment income.long term debt at a lower effective interest rate. Income Tax Expense Our effective tax rate for the ninesix months ended SeptemberJune 30, 2021 and 2020 were 21.4% and 2019 was 21.8% and 21.2%21.9%, respectively. The increasedecrease in the effective tax rate infor the ninesix months ended SeptemberJune 30, 20202021 compared to the same period in 20192020 was primarily due to the tax effect of share-based compensation. Our income tax expense was $7.2$15.1 million and $8.3$6.7 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The decreaseincrease is primarily due to the decreaseincrease in income before income taxes compared to the same period in 2019.2020. 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 $26.4$19.3 million for the ninesix months ended SeptemberJune 30, 2020,2021, a decrease of $15.3$5.6 million, or 36.7%22.6% from the adjusted operating income of $41.7$24.9 million for the ninesix months ended SeptemberJune 30, 2019,2020, primarily due to the reductiondecrease in underwriting income offset by decreased interest and other expenses.income. Adjusted Operating Return on Equity Our adjusted operating return on equity was 6.1%8.1% for the nine six months ended SeptemberJune 30, 2020, a decrease2021, an increase of 6.01.9% percentage points from 12.1%6.2% for the ninesix months ended SeptemberJune 30, 20192020 primarily due to the reductiondecrease in adjusted operating income combined with thean increase in average book value. 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 throughthrough: (i) loans from banks,banks; (ii) draws on a revolving loan agreement,agreement; (iii) issuance of equity and debt securities,securities; (iv) corporate service fees from our operating subsidiaries,subsidiaries; (v)
payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactionstransactions; 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. 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.
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
OnIn 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 $165.0 million delayed draw term loan facility (the “Term Loan Facility”). Borrowings underIn November 2020, the Company used the Term Loan Facility will be usedproceeds to refinancerepay $165.0 million in complete satisfaction of the Notes at 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, borrowingsoutstanding debt under the Term Loan FacilityNotes. (see “— Credit Agreement”).
Management believes that the Company has sufficient liquidity available to meet its operating cash needs 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%,obligations 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 initial Applicable Margin for Base Rate Borrowings is 100 basis points lower than the Applicable Margin for Eurodollar Borrowings. The Applicable Margin is currently 2.75%. We agreed to pay a ticking fee with respect to the undrawn portion of the commitmentscommitted capital expenditures 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 ticking fee and commitment fee (if applicable) are currently 0.25%.
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.
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. 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 an additional $30.0 million,
primarily to make capital contributions to its insurance subsidiaries. Amounts outstanding under the Revolving Credit Facility as of the date of the filing are three-month Eurodollar Borrowings, bearing interest at 3.50%.
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. next 12 months.
Cash Flows The 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 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. The operating 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 ninesix months ended SeptemberJune 30, 2021 and 2020 and 2019 were: | | | | | | | | | Nine Months Ended September 30 | | | 2020 | | 2019 | | ($ in thousands) | | | Cash and cash equivalents provided by (used in): | | | | | | | Operating activities | | $ | 120,710 | | $ | 212,061 | Investing activities | | | (169,327) | | | (244,030) | Financing activities | | | 56,805 | | | 33,450 | Net change in cash and cash equivalents | | $ | 8,188 | | $ | 1,481 |
| | | | | | | | | Six Months Ended June 30 | | | 2021 | | 2020 | | ($ in thousands) | | | Cash and cash equivalents provided by (used in): | | | | | | | Operating activities | | $ | 68,233 | | $ | 93,947 | Investing activities | | | 593,207 | | | (82,778) | Financing activities | | | (2,500) | | | 22,685 | Net change in cash and cash equivalents | | $ | 658,940 | | $ | 33,854 |
The decrease in cash provided by operating activities for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was largely driven by timing of claim payments and premium collection declines due to COVID-19. Cash used in investing activities is primarily funded by cash flow from operations. The decreaseincrease in cash used in investing activities for the ninesix months ended SeptemberJune 30, 2020,2021, compared to the ninesix months ended September 30, 2019, primarily reflected the amount of operating funds available for investment in the current quarter. The increase in cash provided by financing activities for the nine months ended SeptemberJune 30, 2020, comparedwas largely driven by the sale of fixed maturity securities to generate cash required to fund the nine months ended Septemberceding of loss reserves associated with the reinsurance transaction with Cavello Bay.
Credit Agreement On June 12, 2020 (the “Effective Date”), we entered into the Credit Agreement with certain lenders and Truist Bank, N.A., as administrative agent, providing for a $165.0 million delayed draw term loan facility (the “Term Loan Facility”). Borrowings under the Term Loan Facility were used to refinance the Notes at maturity. As of June 30, 2019, was primarily due to proceeds from2021, borrowings under the Term Loan Facility bore interest at 3.75%, however, in connection with the completion of the Merger, on August 4, 2021, all outstanding obligations in respect of principal, interest and fees under the Term Loan Facility were repaid and all commitments under the Term Loan Facility were terminated. 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. As of $35.0June 30, 2021, there was $42.0 million andoutstanding principal under this facility that bore interest at 3.75%. In connection with the issuancecompletion of the $24.9 million secured loanMerger, however, on August 4, 2021, all outstanding obligations in respect of principal, interest and fees under this facility were repaid and all commitments under this facility were terminated. Master Lease Agreement On June 26, 2020, compared to $51.6we sold certain assets, in exchange for approximately $24.9 million of proceeds relatedand agreed to lease such assets back from Citizens Bank (“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 IPO offset by the $18.0 million pay down of theassets from Citizens Revolving Credit agreement in 2019.for one dollar. This transaction is treated as a secured loan payable under U.S. GAAP. 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 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. 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.
The following is a summary of our significant in-force excess of loss reinsurance programs as of SeptemberJune 30, 2020:2021: | | | 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:Liability and Credit Union Fidelity Bonds: $5.0 million excess of $5.0 million | Primary Workers' Compensation | | $37.0 million excess of $3.0 million | Marine | | $45.042.5 million excess of $2.5 million | Custom Bonds | | $38.035.0 million excess of $2.0$5.0 million |
(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 SeptemberJune 30, 20202021 and December 31, 20192020 was $0.7 million and $0.5$0.7 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. 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”���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, 2019December 17, 2020 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 SeptemberJune 30, 2020,2021, total stockholders’ equity was $607.9$621.0 million and tangible stockholders’ equity was $578.7$603.8 million, compared to total stockholders’ equity of $543.0$624.0 million and tangible stockholders’ equity of $513.8$606.7 million at December 31, 2019.2020. The increasedecrease in both total and tangible stockholders’ equity was primarily due to net income from continuing operations of $25.6 million anda reduction in net unrealized gains on available-for-sale fixed maturity securities, net of tax of $33.6$58.0 million, for the nine months ended September 30, 2020.offset by net income from continuing operations of $51.7 million. Tangible stockholders’ equity is a non-GAAP financial measure. We define tangible stockholders’ equity as stockholders’ equity less goodwill and intangible assets. Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders’ equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure. Stockholders’ equity at SeptemberJune 30, 20202021 and December 31, 20192020 reconciles to tangible stockholders’ equity as follows: | | | | | | | | | September 30, 2020 | | December 31, 2019 | | ($ in thousands) | | | | Stockholders’ equity | | $ | 607,872 | | $ | 543,031 | Less: goodwill and net intangible assets | | | 29,166 | | | 29,189 | Tangible stockholders’ equity | | $ | 578,706 | | $ | 513,842 | Book value per share | | $ | 14.00 | | $ | 12.61 | Tangible book value per share | | $ | 13.33 | | $ | 11.93 |
| | | | | | | | | June 30, 2021 | | December 31, 2020 | | ($ in thousands) | | | | Stockholders’ equity | | $ | 620,985 | | $ | 623,968 | Less: goodwill and net intangible assets | | | 17,233 | | | 17,248 | Tangible stockholders’ equity | | $ | 603,752 | | $ | 606,720 | Book value per share | | $ | 14.24 | | $ | 14.37 | Tangible book value per share | | $ | 13.84 | | $ | 13.97 |
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 SeptemberJune 30, 20202021, the majority of the portfolio, or $2.2$1.7 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 income. Also included in our investments were $270.4$408.2 million of alternative investments carried at fair value. Our securities, including cash equivalents, had a weighted average duration of 4.63.4 years and an average rating of “A”“A+” at SeptemberJune 30, 2020.2021.
At SeptemberJune 30, 20202021 and December 31, 2019,2020, the cost and fair value on cash and invested assets were as follows: | | | | | | | | | | | | | | | | | | | | | September 30, 2020 | | | December 31, 2019 | | | | | | | Estimated | | % of Total | | | | | | Estimated Fair | | % of Total Fair | | | | Cost | | Fair Value | | Fair Value | | | Cost | | Value | | Value | | | ($ in thousands) | | | | | | | | | | | Fixed and floating rate securities | | $ | 1,989,098 | | $ | 2,074,391 | | 85.8 | % | | $ | 1,848,964 | | $ | 1,891,148 | | 86.3 | % | Alternate available-for-sale | | | 187,677 | | | 185,802 | | 7.7 | | | | 150,439 | | | 149,534 | | 6.8 | | Total fixed maturity securities | | | 2,176,775 | | | 2,260,193 | | 93.5 | | | | 1,999,403 | | | 2,040,682 | | 93.1 | | Other investments: | | | | | | | | | | | | | | | | | | | Commercial levered loans | | | 13,433 | | | 12,991 | | 0.6 | | | | 14,069 | | | 13,950 | | 0.6 | | Bond exchange-traded funds | | | 12,878 | | | 12,838 | | 0.5 | | | | — | | | — | | — | | Non-redeemable preferred stock securities | | | 11,670 | | | 11,913 | | 0.5 | | | | — | | | — | | — | | Limited partnerships and limited liability companies | | | 84,608 | | | 84,608 | | 3.5 | | | | 66,660 | | | 66,660 | | 3.0 | | Short-term investments | | | 154 | | | 154 | | 0.0 | | | | 43,873 | | | 43,873 | | 2.0 | | Total other investments | | | 122,743 | | | 122,504 | | 5.1 | | | | 124,602 | | | 124,483 | | 5.6 | | Total investments | | | 2,299,518 | | | 2,382,697 | | 98.6 | | | | 2,124,005 | | | 2,165,165 | | 98.7 | | Cash, cash equivalents, and restricted cash | | | 34,234 | | | 34,234 | | 1.4 | | | | 27,497 | | | 27,497 | | 1.3 | | Total | | $ | 2,333,752 | | $ | 2,416,931 | | 100.0 | % | | $ | 2,151,502 | | $ | 2,192,662 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | June 30, 2021 | | | December 31, 2020 | | | | Amortized | | Estimated | | % of Total | | | Amortized | | Estimated | | % of Total | | | | Cost | | Fair Value | | Fair Value | | | Cost | | Fair Value | | Fair Value | | | ($ in thousands) | | | | | | | | | | | Fixed and floating rate securities | | $ | 1,340,034 | | $ | 1,375,521 | | 55.3 | % | | $ | 1,905,891 | | $ | 2,008,210 | | 82.3 | % | Alternate available-for-sale | | | 311,763 | | | 311,049 | | 12.5 | | | | 253,852 | | | 257,847 | | 10.6 | | Total fixed maturity securities | | | 1,651,797 | | | 1,686,570 | | 67.8 | | | | 2,159,743 | | | 2,266,057 | | 92.9 | | Other investments: | | | | | | | | | | | | | | | | | | | Commercial levered loans | | | 5,299 | | | 5,269 | | 0.2 | | | | 12,308 | | | 12,180 | | 0.5 | | Bond exchange-traded funds | | | — | | | — | | — | | | | 44,679 | | | 44,882 | | 1.8 | | Non-redeemable preferred stock securities | | | 1,400 | | | 1,400 | | 0.1 | | | | 6,541 | | | 7,049 | | 0.3 | | Limited partnerships and limited liability companies | | | 97,150 | | | 97,150 | | 3.9 | | | | 90,468 | | | 90,468 | | 3.7 | | Short-term investments | | | 18,833 | | | 18,833 | | 0.8 | | | | 154 | | | 154 | | — | | Total other investments | | | 122,682 | | | 122,652 | | 4.9 | | | | 154,150 | | | 154,733 | | 6.3 | | Total investments | | | 1,774,479 | | | 1,809,222 | | 72.8 | | | | 2,313,893 | | | 2,420,790 | | 99.2 | | Cash, cash equivalents, and restricted cash | | | 676,876 | | | 676,876 | | 27.2 | | | | 19,603 | | | 19,603 | | 0.8 | | Total | | $ | 2,451,355 | | $ | 2,486,098 | | 100.0 | % | | $ | 2,333,496 | | $ | 2,440,393 | | 100.0 | % |
As of September 30, 2020, approximately 14.8% 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 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 fixed maturity securities at SeptemberJune 30, 20202021 and December 31, 2019,2020, as rated by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) or Equivalent Designation: | | | | | | | | | | | | | | | September 30, 2020 | | | December 31, 2019 | | Standard & Poor’s or Equivalent Designation | | Estimated Fair Value | | % of Total | | | Estimated Fair Value | | % of Total | | ($ in thousands) | | | | | | | | | | | AAA | | $ | 218,857 | | 9.7 | % | | $ | 219,696 | | 10.8 | % | AA | | | 542,023 | | 24.0 | | | | 356,924 | | 17.5 | | A | | | 705,998 | | 31.2 | | | | 719,394 | | 35.2 | | BBB | | | 603,282 | | 26.7 | | | | 563,680 | | 27.6 | | Below BBB/Not rated | | | 190,032 | | 8.4 | | | | 180,988 | | 8.9 | | Total | | $ | 2,260,193 | | 100.0 | % | | $ | 2,040,682 | | 100.0 | % |
| | | | | | | | | | | | | | | June 30, 2021 | | | December 31, 2020 | | Standard & Poor’s or Equivalent Designation | | Estimated Fair Value | | % of Total | | | Estimated Fair Value | | % of Total | | ($ in thousands) | | | | | | | | | | | AAA | | $ | 146,833 | | 8.7 | % | | $ | 192,038 | | 8.5 | % | AA | | | 418,602 | | 24.8 | | | | 543,875 | | 24.0 | | A | | | 556,104 | | 33.0 | | | | 679,409 | | 30.0 | | BBB | | | 449,603 | | 26.7 | | | | 662,816 | | 29.2 | | Below BBB/Not rated | | | 115,428 | | 6.8 | | | | 187,919 | | 8.3 | | Total | | $ | 1,686,570 | | 100.0 | % | | $ | 2,266,057 | | 100.0 | % |
The table below presents the credit quality of total fixed maturity securities at SeptemberJune 30, 20202021 and December 31, 2019,2020, either rated below BBB or not rated by Standard & Poor’s and their National Association of Insurance Commissioners (“NAIC”) designation: | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2020 | | | | NAIC Designation (Estimated Fair Value) | Standard & Poor’s or Equivalent Designation | | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | Total | ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | BB | | $ | 2,395 | | $ | 31,587 | | $ | 51,849 | | $ | 889 | | $ | 546 | | $ | - | | $ | 87,266 | B | | | 3,963 | | | 539 | | | 4,342 | | | 6,486 | | | - | | | - | | | 15,330 | CCC | | | 32,226 | | | - | | | 675 | | | 985 | | | 3,508 | | | - | | | 37,394 | CC or lower | | | 27,049 | | | - | | | - | | | - | | | - | | | 22,994 | | | 50,043 | Total | | $ | 65,633 | | $ | 32,126 | | $ | 56,866 | | $ | 8,360 | | $ | 4,053 | | $ | 22,994 | | $ | 190,032 |
| | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2021 | | | | NAIC Designation (Estimated Fair Value) | Standard & Poor’s or Equivalent Designation | | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | Total | ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | BB | | $ | 1,834 | | $ | 8,558 | | $ | 34,183 | | $ | 92 | | $ | - | | $ | - | | $ | 44,667 | B | | | 3,512 | | | 537 | | | 943 | | | 6,652 | | | - | | | - | | | 11,644 | CCC | | | 14,269 | | | 171 | | | 282 | | | 231 | | | 2,350 | | | - | | | 17,303 | CC or lower | | | 20,453 | | | - | | | - | | | - | | | - | | | 21,361 | | | 41,814 | Total | | $ | 40,068 | | $ | 9,266 | | $ | 35,408 | | $ | 6,975 | | $ | 2,350 | | $ | 21,361 | | $ | 115,428 |
| | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | | NAIC Designation (Estimated Fair Value) | Standard & Poor’s or Equivalent Designation | | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | Total | ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | BB | | $ | 4,402 | | $ | 31,031 | | $ | 52,667 | | $ | 874 | | $ | 482 | | $ | - | | $ | 89,456 | B | | | 5,081 | | | 510 | | | 3,779 | | | 6,574 | | | - | | | - | | | 15,944 | CCC | | | 32,089 | | | - | | | 681 | | | 237 | | | 2,408 | | | - | | | 35,415 | CC or lower | | | 24,138 | | | - | | | - | | | 187 | | | - | | | 22,779 | | | 47,104 | Total | | $ | 65,710 | | $ | 31,541 | | $ | 57,127 | | $ | 7,872 | | $ | 2,890 | | $ | 22,779 | | $ | 187,919 |
The amortized cost and fair value of our fixed maturity securities by contractual maturity are shown below as of SeptemberJune 30, 20202021 and December 31, 2019.2020. | | | | | | | | | | | | | | | | | | | | | | September 30, 2020 | | | December 31, 2019 | | | | | | | Estimated | | % of Fair | | | | | | Estimated Fair | | | | | | Amortized Cost | | Fair Value | | Value | | | Amortized Cost | | Value | | % of Fair Value | | | ($ in thousands) | | | | | | | | | | | Due in one year or less | | $ | 120,270 | | $ | 121,506 | | 5.4 | % | | $ | 99,035 | | $ | 99,326 | | 4.9 | % | Due after one year through five years | | | 617,687 | | | 643,790 | | 28.5 | | | | 679,649 | | | 692,219 | | 33.9 | | Due after five years through ten years | | | 513,039 | | | 543,555 | | 24.0 | | | | 507,803 | | | 523,276 | | 25.6 | | Due after ten years | | | 277,562 | | | 290,558 | | 12.8 | | | | 151,105 | | | 153,790 | | 7.5 | | Government agency securities | | | 28,990 | | | 29,520 | | 1.3 | | | | 6,523 | | | 6,532 | | 0.3 | | Asset-backed securities | | | 53,705 | | | 53,547 | | 2.4 | | | | 73,068 | | | 73,582 | | 3.6 | | Collateralized loan obligations | | | 174,589 | | | 171,170 | | 7.6 | | | | 181,704 | | | 179,549 | | 8.8 | | Commercial mortgage-backed securities | | | 113,076 | | | 119,725 | | 5.3 | | | | 95,810 | | | 97,526 | | 4.8 | | Residential mortgage-backed securities – non-agency | | | 112,904 | | | 117,935 | | 5.2 | | | | 62,343 | | | 71,610 | | 3.5 | | Residential mortgage-backed securities – agency | | | 164,953 | | | 168,887 | | 7.5 | | | | 142,363 | | | 143,272 | | 7.0 | | Total fixed maturities | | $ | 2,176,775 | | $ | 2,260,193 | | 100.0 | % | | $ | 1,999,403 | | $ | 2,040,682 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | June 30, 2021 | | | December 31, 2020 | | | | Amortized | | Estimated | | % of Fair | | | Amortized | | Estimated | | % of Fair | | | | Cost | | Fair Value | | Value | | | Cost | | Fair Value | | Value | | | ($ in thousands) | | | | | | | | | | | Due in one year or less | | $ | 112,908 | | $ | 114,423 | | 6.8 | % | | $ | 103,243 | | $ | 104,316 | | 4.6 | % | Due after one year through five years | | | 506,126 | | | 517,934 | | 30.7 | | | | 628,897 | | | 657,996 | | 29.1 | | Due after five years through ten years | | | 389,723 | | | 400,097 | | 23.7 | | | | 522,749 | | | 561,775 | | 24.8 | | Due after ten years | | | 207,925 | | | 213,753 | | 12.7 | | | | 311,799 | | | 332,195 | | 14.7 | | Government agency securities | | | 19,935 | | | 19,912 | | 1.2 | | | | 30,446 | | | 31,007 | | 1.4 | | Asset-backed securities | | | 64,590 | | | 64,895 | | 3.8 | | | | 54,989 | | | 55,258 | | 2.4 | | Collateralized loan obligations | | | 90,942 | | | 90,575 | | 5.4 | | | | 140,615 | | | 139,126 | | 6.1 | | Commercial mortgage-backed securities | | | 53,219 | | | 54,572 | | 3.2 | | | | 111,313 | | | 117,960 | | 5.2 | | Residential mortgage-backed securities – non-agency | | | 89,432 | | | 93,717 | | 5.6 | | | | 109,110 | | | 116,136 | | 5.1 | | Residential mortgage-backed securities – agency | | | 116,997 | | | 116,692 | | 6.9 | | | | 146,582 | | | 150,288 | | 6.6 | | Total fixed maturities | | $ | 1,651,797 | | $ | 1,686,570 | | 100.0 | % | | $ | 2,159,743 | | $ | 2,266,057 | | 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 $561.5$485.0 million at SeptemberJune 30, 2020.2021. This includes $153.2$76.0 million of funds in trust for the mutual benefit of our insurance companies due to participation in our intercompany pooling agreement. Restricted investments decreased 2.8%1.0%, or $16.4$4.8 million, when compared to December 31, 20192020 primarily due to the closure of two collateral trust accountsdecreases in the third quarter offset by an increase in reinsurance collateral and state deposits, andinterest rates that led to market appreciation fromfor fixed maturity securities.securities during the quarter. Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements as of SeptemberJune 30, 2020.2021. 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 RBCrisk based capital ratio and maintain specified liquidity levels. The requirement for us to provide the Funds At Lloyd’s were expected to terminate by June 30, 2020. However, the buyer disputed its contractual obligation with respect to substituting our Funds At Lloyd’s at that time. In February 2021, a U.K. court granted summary judgment in our favor requiring the buyer to substitute our Funds At Lloyds. The buyer is in the process of substituting our Funds At Lloyd’s Reconciliation of Non-GAAP Financial Measures Reconciliation of Underwriting (Loss) Income Underwriting (loss) income is a non-GAAP financial measure that we believe is useful in evaluating our underwriting performance without regard to investment income. Underwriting (loss) 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 (loss) 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 (loss) income should not be considered in isolation or viewed as a substitute for net income from continuing operations calculated in accordance with GAAP, and other companies may calculate underwriting (loss) income differently. Net income from continuing operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 reconciles to underwriting (loss) income as follows: | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | Net income from continuing operations | | $ | 1,498 | | $ | 8,361 | | $ | 25,592 | | $ | 30,752 | Income tax expense | | | 412 | | | 2,015 | | | 7,151 | | | 8,253 | Income from continuing operations before taxes | | | 1,910 | | | 10,376 | | | 32,743 | | | 39,005 | Net investment income | | | 20,307 | | | 16,974 | | | 52,913 | | | 51,530 | Realized investment gains, net | | | 1,398 | | | 245 | | | 3,521 | | | 495 | Interest and other expense, net | | | 5,549 | | | 10,182 | | | 14,635 | | | 23,671 | Underwriting (loss) income | | $ | (14,246) | | $ | 3,339 | | $ | (9,056) | | $ | 10,651 |
| | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | Net income from continuing operations | | $ | 18,062 | | $ | 17,283 | | $ | 55,609 | | $ | 24,094 | Income tax expense | | | 4,687 | | | 4,751 | | | 15,114 | | | 6,739 | Income from continuing operations before taxes | | | 22,749 | | | 22,034 | | | 70,723 | | | 30,833 | Net investment income | | | 14,581 | | | 23,791 | | | 31,260 | | | 32,606 | Realized investment gains, net | | | 15,784 | | | 1,891 | | | 48,892 | | | 2,123 | Interest and other expense, net | | | 3,960 | | | 4,356 | | | 7,863 | | | 9,086 | Underwriting (loss) income | | $ | (3,656) | | $ | 708 | | $ | (1,566) | | $ | 5,190 |
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 from continuing operations calculated in accordance with GAAP. Other companies may calculate adjusted operating income differently.
Net income from continuing operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 reconciles to adjusted operating income as follows: | | | | | | | | | | | | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | Net income from continuing operations | | $ | 1,498 | | $ | 8,361 | | $ | 25,592 | | $ | 30,752 | Income tax expense | | | 412 | | | 2,015 | | | 7,151 | | | 8,253 | Income from continuing operations before taxes | | | 1,910 | | | 10,376 | | | 32,743 | | | 39,005 | Other expense | | | 1,394 | | | 7,162 | | | 4,521 | | | 14,332 | Realized investment gains, net | | | (1,398) | | | (245) | | | (3,521) | | | (495) | Adjusted operating income before taxes | | | 1,906 | | | 17,293 | | | 33,743 | | | 52,842 | Less: income tax expense on adjusted operating income | | | 411 | | | 3,468 | | | 7,369 | | | 11,159 | Adjusted operating income | | $ | 1,495 | | $ | 13,825 | | $ | 26,374 | | $ | 41,683 |
| | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | ($ in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | Net income from continuing operations | | $ | 18,062 | | $ | 17,283 | | $ | 55,609 | | $ | 24,094 | Income tax expense | | | 4,687 | | | 4,751 | | | 15,114 | | | 6,739 | Income from continuing operations before taxes | | | 22,749 | | | 22,034 | | | 70,723 | | | 30,833 | Other expense | | | 1,337 | | | 1,390 | | | 2,655 | | | 3,127 | Realized investment gains, net | | | (15,784) | | | (1,891) | | | (48,892) | | | (2,123) | Adjusted operating income before taxes | | | 8,302 | | | 21,533 | | | 24,486 | | | 31,837 | Less: income tax expense on adjusted operating income | | | 1,711 | | | 4,643 | | | 5,233 | | | 6,958 | Adjusted operating income | | $ | 6,591 | | $ | 16,890 | | $ | 19,253 | | $ | 24,879 |
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, 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 criticalFor a detailed discussion of our accounting policies, see Note 2. Summary of Significant Accounting Policies in Item 8. Financial Statement and estimates are describedSupplementary Data in the Company’s 20192020 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 1. – 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 20192020 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, 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) and 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) and 15d-15(f) under the Exchange Act) occurred during the quarter ended SeptemberJune 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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 20192020 Annual Report. 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 and third quarters 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 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.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds None.
Item 3: Defaults Upon Senior Securities None.
Item 4: Mine Safety Disclosures Not applicable
Item 5: Other Information None.
Item 6: Exhibits We have filed the exhibits listed on the accompanying Exhibit Index, which is incorporated herein by reference. | | | Exhibit Index | Exhibit Number | Description | 2.1 | Agreement and Plan of Merger, dated as of January 14, 2021, among ProSight Global, Inc., Pedal Parent, Inc., and Pedal Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed January 19, 2021). | 2.2 | Stockholder Support Agreement, dated as of January 14, 2021, by and among Pedal Parent, Inc. and certain affiliates of the Goldman Sachs Group, Inc. and TPG Advisors VI, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed January 19, 2021). | 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)August 4, 2021). | 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)August 4, 2021). | 4.131.1*
| 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
| Transition Agreement, dated September 2, 2020, between the Company and Frank Papalia.
| 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. | 31.231.2*
| 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.INS101.INS*
| Inline XBRL Instance Document | 101.SCH101.SCH*
| Inline XBRL Taxonomy Extension Schema Document | 101.CAL101.CAL*
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | 101.DEF101.DEF*
| Inline XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB101.LAB*
| Inline XBRL Taxonomy Extension Label Linkbase Document | 101.PRE101.PRE*
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | 104*
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | * | Filed herewith | ** | These certifications are furnished and are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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. | | | Dated: November 10, 2020August 9, 2021 | By: | /s/ Lawrence Hannon | | | Lawrence Hannon | | | President and Chief Executive Officer | | | | Dated: November 10, 2020August 9, 2021 | By: | /s/ Anthony S. Piszel | | | Anthony S. Piszel | | | Chief Financial Officer |
|