10-Q 1 pros-20190930x10q.htm 10-Q pros_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from           to

Commission file number 001-38996


 

ProSight Global, Inc.

 

(Exact name of registrant as specified in its charter)


Delaware

    

35‑2405664

 

 

 

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

412 Mt. Kemble Avenue

Suite 300

 Morristown,  NJ 07960

(973) 532-1900

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

N/A

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


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

 

 

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 per share

PROS

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes        No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No  .

There were 43,021,300 shares of Common Stock ($0.01 par value) outstanding as of November 6, 2019.

 

 

 

 

PROSIGHT GLOBAL, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Page

 

 

 

 

 

 

Item 1.

 

 

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets (Unaudited) as of September 30, 2019 and December 31, 2018

 

2

 

 

 

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018

 

3

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018

 

4

 

 

 

Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018

 

5

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018

 

6

 

 

 

Notes to Interim Consolidated Financial Statements (Unaudited)

 

7

Item 2. 

 

 

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

 

27

Item 3. 

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

50

Item 4. 

 

 

Controls and Procedures

 

51

 

 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

 

 

Legal Proceedings

 

51

Item 1A. 

 

 

Risk Factors

 

52

Item 2. 

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

Item 3. 

 

 

Defaults Upon Senior Securities

 

52

Item 4. 

 

 

Mine Safety Disclosures

 

52

Item 5. 

 

 

Other Information

 

52

Item 6. 

 

 

Exhibits

 

53

 

 

 

Signatures

 

55

 

 

1

ProSight Global, Inc.

Consolidated Balance Sheets (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

($ in thousands except share amounts)

 

2019

 

2018

Assets

 

 

  

 

(As restated)

Investments:

 

 

  

 

 

  

Fixed income securities, available-for-sale at fair value (amortized cost $1,985,250 in 2019 and $1,729,755 in 2018)

 

$

2,025,955

 

$

1,693,382

Commercial levered loans at amortized cost (fair value $14,323 in 2019 and $15,858 in 2018)

 

 

14,601

 

 

16,915

Limited partnerships and limited liability companies at fair value (cost $61,015 in 2019 and $51,903 in 2018)

 

 

65,322

 

 

53,432

Short-term investments

 

 

14,398

 

 

36,661

Total investments

 

 

2,120,276

 

 

1,800,390

Cash and cash equivalents

 

 

24,577

 

 

22,279

Restricted cash

 

 

7,451

 

 

7,621

Accrued investment income

 

 

13,452

 

 

12,279

Premiums and other receivables, net

 

 

179,920

 

 

200,347

Receivable from reinsurers on paid losses

 

 

5,849

 

 

12,428

Reinsurance receivable on unpaid losses

 

 

213,977

 

 

185,295

Deferred policy acquisition costs

 

 

103,542

 

 

93,613

Prepaid reinsurance premiums

 

 

47,285

 

 

44,626

Net deferred income taxes

 

 

9,361

 

 

33,239

Goodwill and net intangible assets

 

 

29,196

 

 

29,219

Fixed assets and capitalized software, net

 

 

37,679

 

 

39,001

Funds withheld related to sale of affiliate

 

 

19,566

 

 

19,397

Other assets

 

 

31,255

 

 

57,653

Assets of discontinued operations

 

 

20,098

 

 

19,719

Total assets

 

$

2,863,484

 

$

2,577,106

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

Reserve for unpaid losses and loss adjustment expenses

 

$

1,515,224

 

$

1,396,812

Reserve for unearned premiums

 

 

472,761

 

 

435,933

Ceded reinsurance payable

 

 

4,099

 

 

13,281

Notes payable, net of debt issuance costs

 

 

164,609

 

 

182,355

Funds held under reinsurance agreements

 

 

68,243

 

 

63,165

Other liabilities

 

 

81,029

 

 

73,474

Liabilities of discontinued operations

 

 

26,936

 

 

22,256

Total liabilities

 

 

2,332,901

 

 

2,187,276

 

 

 

 

 

 

 

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; 43,034,220 and 38,864,289 shares issued and 43,021,300 and 38,851,369 shares outstanding in 2019 and 2018, respectively

 

 

430

 

 

389

Paid-in capital

 

 

661,357

 

 

607,260

Accumulated other comprehensive income (loss)

 

 

33,930

 

 

(22,315)

Retained deficit

 

 

(164,934)

 

 

(195,304)

Treasury shares - at cost (12,920 shares)

 

 

(200)

 

 

(200)

Total stockholders’ equity

 

 

530,583

 

 

389,830

Total liabilities and stockholders’ equity

 

$

2,863,484

 

$

2,577,106

 

See accompanying notes to interim consolidated financial statements (unaudited)

2

ProSight Global, Inc.

Consolidated Statements of Operations (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands except per share amounts)

    

2019

    

2018

    

2019

    

2018

Gross written premiums

 

$

227,196

 

$

201,296

 

$

718,066

 

$

673,271

Net premiums earned

 

 

202,455

 

 

187,108

 

 

600,543

 

 

537,687

Net investment income

 

 

16,974

 

 

14,044

 

 

51,530

 

 

43,301

Realized investment gains, net

 

 

245

 

 

406

 

 

495

 

 

805

Other income

 

 

196

 

 

168

 

 

386

 

 

504

Total revenues

 

 

219,870

 

 

201,726

 

 

652,954

 

 

582,297

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Net losses and loss adjustment expenses incurred

 

 

127,196

 

 

109,976

 

 

372,644

 

 

321,763

Policy acquisition expenses

 

 

45,953

 

 

44,195

 

 

138,059

 

 

125,819

General and administrative expenses

 

 

25,967

 

 

25,051

 

 

79,189

 

 

75,153

Interest expense

 

 

3,216

 

 

3,092

 

 

9,725

 

 

9,207

Other expense

 

 

7,162

 

 

 —

 

 

14,332

 

 

 —

Total expenses

 

 

209,494

 

 

182,314

 

 

613,949

 

 

531,942

Income from continuing operations before income taxes

 

 

10,376

 

 

19,412

 

 

39,005

 

 

50,355

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision:

 

 

  

 

 

  

 

 

  

 

 

  

Current

 

 

146

 

 

184

 

 

369

 

 

(220)

Deferred

 

 

1,869

 

 

3,625

 

 

7,884

 

 

10,310

Total income tax expense

 

 

2,015

 

 

3,809

 

 

8,253

 

 

10,090

Net income from continuing operations

 

 

8,361

 

 

15,603

 

 

30,752

 

 

40,265

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

  

 

 

  

 

 

  

 

 

  

Net (loss) income from discontinued operations

 

 

(49)

 

 

(429)

 

 

(382)

 

 

158

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,312

 

$

15,174

 

$

30,370

 

$

40,423

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic:

 

 

  

 

 

  

 

 

  

 

 

  

Net income from continuing operations

 

$

0.20

 

$

0.40

 

$

0.77

 

$

1.04

Net income

 

$

0.19

 

$

0.39

 

$

0.76

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – diluted:

 

 

  

 

 

  

 

 

  

 

 

 

Net income from continuing operations

 

$

0.19

 

$

0.40

 

$

0.76

 

$

1.02

Net income

 

$

0.19

 

$

0.38

 

$

0.75

 

$

1.02

 

See accompanying notes to interim consolidated financial statements (unaudited)

3

ProSight Global, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Net income

 

$

8,312

 

$

15,174

 

$

30,370

 

$

40,423

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes:

 

 

  

 

 

  

 

 

  

 

 

  

Change in unrealized holding gains (losses) on securities, net of deferred tax expense (benefit) of $2,651 and $16,098 in 2019 and $335 and $(8,090) in 2018

 

 

9,292

 

 

(528)

 

 

60,478

 

 

(32,134)

Less: reclassification adjustment for gains included in net income, net of tax expense of $156 and $104 in 2019 and $278 and $169 in 2018

 

 

4,206

 

 

29

 

 

4,233

 

 

1,112

Other comprehensive income (loss)

 

 

5,086

 

 

(557)

 

 

56,245

 

 

(33,246)

Comprehensive income

 

$

13,398

 

$

14,617

 

$

86,615

 

$

7,177

 

See accompanying notes to interim consolidated financial statements (unaudited)

4

ProSight Global, Inc.

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, 2017 (As restated)

 

$

 —

 

$

387

 

$

606,346

 

$

19,297

 

$

(249,847)

 

$

(200)

 

$

375,983

Stock based employee compensation plan

 

 

 —

 

 

 —

 

 

238

 

 

 —

 

 

 —

 

 

 —

 

 

238

Net unrealized loss on investment securities, net of deferred tax benefit of $(5,502)

 

 

 —

 

 

 —

 

 

 —

 

 

(21,459)

 

 

 —

 

 

 —

 

 

(21,459)

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,795

 

 

 —

 

 

10,795

March 31, 2018

 

$

 —

 

$

387

 

$

606,584

 

$

(2,162)

 

$

(239,052)

 

$

(200)

 

$

365,557

Stock based employee compensation plan

 

 

 —

 

 

 —

 

 

160

 

 

 —

 

 

 —

 

 

 —

 

 

160

Net unrealized loss on investment securities, net of deferred tax benefit of $(2,814)

 

 

 —

 

 

 —

 

 

 —

 

 

(11,230)

 

 

 —

 

 

 —

 

 

(11,230)

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,454

 

 

 —

 

 

14,454

June 30, 2018

 

$

 —

 

$

387

 

$

606,744

 

$

(13,392)

 

$

(224,598)

 

$

(200)

 

$

368,941

Stock based employee compensation plan

 

 

 —

 

 

 —

 

 

161

 

 

 —

 

 

 —

 

 

 —

 

 

161

Net unrealized loss on investment securities, net of deferred tax expense of $57

 

 

 —

 

 

 —

 

 

 —

 

 

(557)

 

 

 —

 

 

 —

 

 

(557)

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,174

 

 

 —

 

 

15,174

September 30, 2018

 

$

 —

 

$

387

 

$

606,905

 

$

(13,949)

 

$

(209,424)

 

$

(200)

 

$

383,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 (As restated)

 

$

 —

 

$

389

 

$

607,260

 

$

(22,315)

 

$

(195,304)

 

$

(200)

 

$

389,830

Stock based employee compensation plan

 

 

 —

 

 

 —

 

 

77

 

 

 —

 

 

 —

 

 

 —

 

 

77

Net unrealized gain on investment 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 investment 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

Net unrealized gain on investment securities, net of deferred tax expense of $2,495

 

 

 —

 

 

 —

 

 

 —

 

 

5,086

 

 

 —

 

 

 —

 

 

5,086

Proceeds from common stock sold in initial public offering, net of offering costs

 

 

 —

 

 

42

 

 

51,557

 

 

 —

 

 

 —

 

 

 —

 

 

51,599

Shares cancelled

 

 

 —

 

 

(1)

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Retirement of common stock (tax payments on equity compensation)

 

 

 —

 

 

 —

 

 

(149)

 

 

 —

 

 

 —

 

 

 —

 

 

(149)

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,312

 

 

 —

 

 

8,312

September 30, 2019

 

$

 —

 

$

430

 

$

661,357

 

$

33,930

 

$

(164,934)

 

$

(200)

 

$

530,583

 

See accompanying notes to interim consolidated financial statements (unaudited)

5

ProSight Global, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

Operating activities

 

 

  

 

 

  

Net income from continuing operations

 

$

30,752

 

$

40,265

Net (loss) income from discontinued operations

 

 

(382)

 

 

158

Net income

 

 

30,370

 

 

40,423

 

 

 

 

 

 

 

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

 

 

  

 

 

  

Provision for deferred taxes

 

 

7,884

 

 

10,310

Net realized investment gains

 

 

(495)

 

 

(805)

Net limited partnerships gains

 

 

(2,917)

 

 

(2,893)

Net accretion from bonds and commercial loans

 

 

(1,568)

 

 

(3,017)

Depreciation and amortization

 

 

6,222

 

 

5,383

Amortization of debt issuance costs

 

 

254

 

 

254

Stock based compensation

 

 

6,862

 

 

559

 

 

 

 

 

 

 

Changes in:

 

 

  

 

 

  

Premiums and other receivables

 

 

20,427

 

 

(34,112)

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

 

 

(22,103)

 

 

(13,555)

Ceded reinsurance payable

 

 

(9,182)

 

 

23,085

Accrued investment income

 

 

(1,173)

 

 

(4,201)

Deferred policy acquisition costs

 

 

(9,929)

 

 

(34,388)

Prepaid reinsurance premiums

 

 

(2,659)

 

 

62,666

Reserve for unpaid losses and loss adjustment expenses

 

 

118,412

 

 

110,871

Reserve for unearned premiums

 

 

36,828

 

 

72,184

Funds withheld related to sale of affiliate

 

 

(169)

 

 

518

Funds held under reinsurance agreements

 

 

5,078

 

 

(45,369)

Other assets

 

 

22,249

 

 

11,155

Other liabilities

 

 

7,555

 

 

9,395

Total adjustments

 

 

181,576

 

 

168,040

Net cash provided by operating activities – continuing operations

 

 

212,328

 

 

208,305

Net cash used in operating activities – discontinued operations

 

 

(267)

 

 

(230)

Net cash provided by operating activities

 

 

212,061

 

 

208,075

 

 

 

 

 

 

 

Investing activities

 

 

  

 

 

  

Purchases of available-for-sale fixed income securities

 

 

(423,335)

 

 

(315,137)

Sales of available-for-sale fixed income securities

 

 

67,848

 

 

78,488

Redemptions of available-for-sale fixed income securities

 

 

100,713

 

 

60,806

Purchases of commercial levered loans

 

 

 —

 

 

(2,612)

Redemptions of commercial levered loans

 

 

2,298

 

 

10,142

Purchases of limited partnerships

 

 

(13,016)

 

 

(32,472)

Distributions and redemptions from limited partnerships

 

 

4,043

 

 

2,351

Purchases of short-term investments

 

 

(293,065)

 

 

(146,351)

Sales of short-term investments

 

 

315,767

 

 

115,728

Acquisition of fixed assets and capitalized software

 

 

(4,903)

 

 

(5,964)

Net cash used in investing activities - continuing operations

 

 

(243,650)

 

 

(235,021)

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

 

 

(380)

 

 

2,501

Net cash used in investing activities

 

 

(244,030)

 

 

(232,520)

 

 

 

 

 

 

 

Financing activities

 

 

  

 

 

  

Proceeds from shares issued

 

 

51,599

 

 

 —

Tax withholding on stock compensation awards

 

 

(149)

 

 

 —

Proceeds from notes payable

 

 

 —

 

 

5,000

Repayment of notes payable

 

 

(18,000)

 

 

 —

Net cash provided by financing activities

 

 

33,450

 

 

5,000

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

1,481

 

 

(19,445)

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

 

 

29,900

 

 

77,872

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

 

 

1,034

 

 

1,322

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

 

 

(387)

 

 

(3,570)

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

 

$

32,028

 

$

56,179

 

See accompanying notes to interim consolidated financial statements (unaudited)

 

 

6

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

1. Basis of Reporting

The accompanying unaudited interim consolidated financial statements of ProSight Global, Inc. (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 as of and for the year ended December 31, 2018, included in the Company’s final prospectus filed with the Securities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the Securities Act) on July 25, 2019 (the Prospectus). 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.

 

Reorganization

 

The Company was incorporated in Delaware in 2010.  Prior to July 25, 2019, the Company was a wholly-owned subsidiary of ProSight Global Holdings Limited (PGHL), a Bermuda holding company.  Effective July 25, 2019, prior to the completion of the Company’s initial public offering (IPO), PGHL merged with and into the Company, with the Company surviving the merger (the merger). The prior holders of PGHL’s equity interests then outstanding received, as merger consideration, the right to receive 6.46 shares of the Company’s common stock for each such outstanding PGHL equity interest. The total merger consideration was 38,851,369 shares of the Company’s common stock, which then comprised 100% of the shares of the Company’s outstanding common stock.

 

As a result of the merger, the assets and liabilities of the Company include, effective July 25, 2019, the assets and liabilities of PGHL. In addition, on July 24, 2019, in connection with the merger, the Company’s duly adopted amended and restated certificate of incorporation (the Certificate of Incorporation) became effective, providing for, among other things, the authorization of 200,000,000 shares of common stock and 50,000,000 shares of preferred stock. All share and per share amounts in the unaudited interim consolidated financial statements and related notes have been restated for all historical periods prior to and including June 30, 2019, presented to give effect to the merger and related conversion of shares, including reclassifying an amount equal to the change in value of common stock to additional paid-in capital, as well as the effectiveness of the Certificate of Incorporation.

 

Prior to the merger, PGHL’s subsidiaries ProSight Specialty International Holdings Limited (PSIH) and ProSight Specialty European Holdings Limited (PSEH) were merged with and into the Company, effective February 5, 2019.  Additionally, effective February 5, 2019, ProSight Specialty Bermuda Limited (PSBL) became a wholly owned subsidiary of the Company. Prior to February 5, 2019, PSBL was a wholly owned subsidiary of PSEH.

 

Initial Public Offering

On July 29, 2019, the Company completed the IPO with the sale of 7,857,145  shares of the Company’s common stock, including the issuance and sale by the Company of 4,285,715 shares of the Company’s common stock and the sale by ProSight Parallel Investment LLC and ProSight Investment LLC (collectively, the GS Investors) and ProSight TPG, L.P., TPG PS 1, L.P., TPG PS 2, L.P., TPG PS 3, L.P. and TPG PS 4, L.P. (collectively the TPG Investors and together with the GS Investors, the Principal Stockholders) of 3,571,430 shares of the Company’s common stock.

Shares of the Company’s common stock were initially offered to the public by the underwriters in the IPO at a per-share price of $14.00. After deducting underwriting discounts and commissions and estimated offering expenses, the net proceeds to the Company from the IPO were approximately $51.6 million. The Company did not receive any of the proceeds from the sale of the shares of the Company’s common stock sold by the Principal Stockholders in the IPO. Following the IPO, the GS Investors held approximately 40.9% of the Company’s outstanding common stock and the TPG Investors held approximately 39.4% of the Company’s outstanding common stock.

7

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

 

On August 15, 2019 the Principal Stockholders completed the sale of 1,178,570 shares of the Company’s common stock at a price of $14.00 per share less the underwriting discount pursuant to the underwriters’ exercise of their over-allotment option granted in connection with the IPO. The offering was registered pursuant to the registration statement on Form S-1, which the SEC declared effective on July 24, 2019. The Company did not receive any of the proceeds from the sale of the shares of common stock of the Company sold by the Principal Stockholders in this offering. Following this offering, the GS Investors held approximately 39.5% of the Company’s outstanding common stock and the TPG Investors held approximately 38.0% of the Company’s outstanding common stock.

 

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

 

No Accounting Standards Updates (ASU) have been adopted during the nine months ended September 30, 2019.

 

Accounting Guidance Not Yet Adopted

 

In January 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-01, Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance: (i) requires equity investments to be measured at fair value with changes in fair value recognized in earnings; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; (iv) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) clarifies that the need for a valuation allowance on a deferred tax asset related to an available-for-sale (AFS) security should be evaluated with other deferred tax assets. The Company shall apply ASU 2016-01 by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. ASU 2016-01 is effective for public entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2016-01 is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. The Company is currently evaluating ASU 2016-01 and does not expect a material impact on its financial condition and results of operations.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) 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 what is being leased. 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

8

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

period presented in the financial statements. ASU 2016-02 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 2016-02 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 ASU 2016-02, and does not expect a material impact on its financial condition or results of operations from the adoption of this guidance.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Instruments. 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. ASU 2016-13 is effective for public entities annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2016-13 is effective for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of ASU 2016-13 on its financial condition and results of operations.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. ASU 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for public entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted.  For the Company, ASU 2016-16 is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019.  The Company is currently evaluating the impact of ASU 2016-16 and does not expect a material impact on its financial condition or results of operations.

 

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 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. This update shall be applied retrospectively and is effective for all entities annual and interim periods beginning after December 15, 2019, with early adoption permitted. As the requirements of this literature are disclosure only, ASU 2018-13 will not impact the Company’s financial condition or results of operations.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 provides the option to apply prospectively to costs for activities performed on or after the date that the entity first adopts or retrospectively in accordance with guidance on accounting changes. ASU 2018-15 is effective for public entities for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2018-15 is effective for annual periods beginning after

9

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.

 

3. Supplemental Cash Flow

Supplemental cash flow information for the nine months ended September 30, 2019 and 2018, is as follows:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

Cash paid during the period for:

 

 

  

 

 

  

Interest

 

$

6,783

 

$

6,159

 

In September 2019, the Company withheld 8,388 shares of common stock from an employee related to a tax liability 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 22,203.

 

4. Discontinued Operations

 

In March 2017, the Company announced its exit from the 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 for discontinued operations was an insignificant amount and $0.4 million for the three and nine months ended September 30, 2019, respectively. Net loss for discontinued operations was $0.4 million and net income for discontinued operations was $0.2 million for the three and nine months ended September 30, 2018, respectively.

 

The following 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 sheet:

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

($ in thousands)

 

2019

 

2018

Assets

 

 

 

 

 

 

Total cash and investments

 

$

9,993

 

$

10,436

Other assets

 

 

10,105

 

 

9,283

Total assets

 

$

20,098

 

$

19,719

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

Unpaid losses and loss adjustment expenses

 

$

19,189

 

$

14,030

Other liabilities

 

 

7,747

 

 

8,226

Total liabilities

 

$

26,936

 

$

22,256

 

 

5. Investments

Fixed income 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.

 

10

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

(a) The gross unrealized gains and losses on AFS securities included in assets from continuing operations at September 30, 2019, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost/

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

72,175

 

$

1,280

 

$

(104)

 

$

73,351

Government agency securities

 

 

4,840

 

 

 6

 

 

 —

 

 

4,846

Corporate debt securities

 

 

1,348,716

 

 

31,712

 

 

(4,646)

 

 

1,375,782

Municipal debt obligations

 

 

14,434

 

 

323

 

 

(1)

 

 

14,756

ABS

 

 

84,227

 

 

1,139

 

 

(150)

 

 

85,216

CLO

 

 

181,843

 

 

160

 

 

(2,259)

 

 

179,744

CMBS

 

 

67,986

 

 

2,416

 

 

(42)

 

 

70,360

RMBS - non-agency

 

 

63,803

 

 

10,690

 

 

(179)

 

 

74,314

RMBS - agency

 

 

147,226

 

 

940

 

 

(580)

 

 

147,586

Total fixed income securities

 

$

1,985,250

 

$

48,666

 

$

(7,961)

 

$

2,025,955

 

The gross unrealized gains and losses on AFS securities included in assets from continuing operations at December 31, 2018, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost/

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

92,219

 

$

126

 

$

(2,017)

 

$

90,328

Corporate debt securities

 

 

1,231,352

 

 

1,216

 

 

(40,138)

 

 

1,192,430

Municipal debt obligations

 

 

6,238

 

 

 —

 

 

(153)

 

 

6,085

ABS

 

 

82,603

 

 

1,095

 

 

(117)

 

 

83,581

CLO

 

 

161,421

 

 

160

 

 

(4,668)

 

 

156,913

CMBS

 

 

55,980

 

 

 —

 

 

(2,137)

 

 

53,843

RMBS - non-agency

 

 

68,594

 

 

11,078

 

 

(121)

 

 

79,551

RMBS - agency

 

 

31,348

 

 

 —

 

 

(697)

 

 

30,651

Total fixed income securities

 

$

1,729,755

 

$

13,675

 

$

(50,048)

 

$

1,693,382

 

(b) The following table summarizes all securities in an unrealized loss position at September 30, 2019, the fair value and gross unrealized loss by asset class and by length of time those securities have been in a loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

Greater Than 12 Months

 

Total

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Total

 

Unrealized

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Fair Value

 

Losses

U.S. Treasury securities

 

$

9,666

 

$

(12)

 

$

19,521

 

$

(92)

 

$

29,187

 

$

(104)

Corporate debt securities

 

 

116,619

 

 

(1,934)

 

 

127,966

 

 

(2,712)

 

 

244,585

 

 

(4,646)

Municipal debt obligations

 

 

6,163

 

 

(1)

 

 

 —

 

 

 —

 

 

6,163

 

 

(1)

ABS

 

 

21,344

 

 

(95)

 

 

4,746

 

 

(55)

 

 

26,090

 

 

(150)

CLO

 

 

72,748

 

 

(672)

 

 

63,636

 

 

(1,587)

 

 

136,384

 

 

(2,259)

CMBS

 

 

6,555

 

 

(9)

 

 

6,081

 

 

(33)

 

 

12,636

 

 

(42)

RMBS - non-agency

 

 

922

 

 

(2)

 

 

2,532

 

 

(177)

 

 

3,454

 

 

(179)

RMBS - agency

 

 

54,026

 

 

(157)

 

 

11,736

 

 

(423)

 

 

65,762

 

 

(580)

Total

 

$

288,043

 

$

(2,882)

 

$

236,218

 

$

(5,079)

 

$

524,261

 

$

(7,961)

 

11

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ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

The following table summarizes all securities in an unrealized loss position at December 31, 2018, the fair value and gross unrealized loss by asset class and by length of time those securities have been in a loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

Greater Than 12 Months

 

Total

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Total

 

Unrealized

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Fair Value

 

Losses

U.S. Treasury securities

 

$

8,263

 

$

(82)

 

$

69,727

 

$

(1,935)

 

$

77,990

 

$

(2,017)

Corporate debt securities

 

 

393,931

 

 

(10,241)

 

 

710,482

 

 

(29,897)

 

 

1,104,413

 

 

(40,138)

Municipal debt obligations

 

 

 —

 

 

 —

 

 

6,085

 

 

(153)

 

 

6,085

 

 

(153)

ABS

 

 

25,258

 

 

(61)

 

 

4,249

 

 

(56)

 

 

29,507

 

 

(117)

CLO

 

 

146,004

 

 

(4,668)

 

 

 —

 

 

 —

 

 

146,004

 

 

(4,668)

CMBS

 

 

 —

 

 

 —

 

 

53,843

 

 

(2,137)

 

 

53,843

 

 

(2,137)

RMBS - non-agency

 

 

529

 

 

(13)

 

 

2,449

 

 

(108)

 

 

2,978

 

 

(121)

RMBS - agency

 

 

27,150

 

 

(513)

 

 

3,502

 

 

(184)

 

 

30,652

 

 

(697)

Total

 

$

601,135

 

$

(15,578)

 

$

850,337

 

$

(34,470)

 

$

1,451,472

 

$

(50,048)

 

The Company was holding 336 and 708 fixed income securities that were in an unrealized loss position as of September 30, 2019 and December 31, 2018, respectively. The Company believes these unrealized losses are temporary, as they resulted from changes in market conditions, including interest rates or sector spreads, and are not considered to be credit risk related. Other-than-temporary impairments (OTTI) charges are recognized as a realized loss to the extent that they are credit related, unless the Company has the intent to sell the security or it is more-likely-than not that the Company will be required to sell the security. In those circumstances, the security is written down to fair value with the entire amount of the write-down charged to earnings as a component of realized losses. The Company had no OTTI charges for the three and nine months ended September 30, 2019 and 2018.

(c) The amortized cost and fair value of fixed income securities, which excludes the Company’s structured securities portfolio, at September 30, 2019, 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, 2019

 

 

Amortized

 

Fair

($ in thousands)

    

Cost

    

Value

Due in one year or less

 

$

97,372

 

$

97,585

Due after one through five years

 

 

722,887

 

 

733,382

Due after five through ten years

 

 

514,633

 

 

531,014

Due after ten years

 

 

105,273

 

 

106,754

 

 

 

1,440,165

 

 

1,468,735

Structured securities:

 

 

 

 

 

 

ABS

 

 

84,227

 

 

85,216

CLO

 

 

181,843

 

 

179,744

CMBS

 

 

67,986

 

 

70,360

RMBS - non-agency

 

 

63,803

 

 

74,314

RMBS - agency

 

 

147,226

 

 

147,586

Total

 

$

1,985,250

 

$

2,025,955

 

The Company did not have any non-income producing fixed income investments as of September 30, 2019 and December 31, 2018, respectively.

(d) The Company elected to account for its investments in limited partnerships and limited liability companies of $65.3 million and $53.4 million at September 30, 2019 and December 31, 2018, respectively, at fair value. Changes in fair

12

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

value of such investments are recorded in the consolidated statements of operations within net investment income. The largest investment within the portfolio is the PIMCO Tactical Opportunities fund, which is carried at $35.2 million at September 30, 2019.

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

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

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

(e) The Company invests in commercial levered 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 loan losses. Interest on loans is calculated using the simple interest method on the daily principal amount outstanding. The allowance for loan losses related to impaired loans is determined based on the difference of the carrying value of loans and the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the loan’s observable market price. There was no allowance for loan losses at September 30, 2019 and December 31, 2018, respectively.

(f) Proceeds from sales and redemptions in AFS securities totaled $71.5 million and $19.2 million for the three months ended September 30, 2019 and 2018, respectively. Proceeds from sales and redemptions in AFS securities totaled $168.6 million and $139.3 million for the nine months ended September 30, 2019 and 2018, respectively. Gross realized gains from sales and redemptions in AFS securities totaled $0.3 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, and $0.9 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively. Gross realized losses from sales and redemptions of AFS investments totaled an insignificant amount and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $0.4 million and $0.5 million for the nine months ended September 30, 2019 and 2018.

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ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

(g) 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 nine months ended September 30, 2019 and 2018, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

2019

    

2018

    

2019

    

2018

Fixed income securities

 

$

16,764

 

$

14,422

 

$

49,414

 

$

40,830

Commercial levered loans

 

 

208

 

 

149

 

 

586

 

 

814

Net limited partnerships gains

 

 

468

 

 

68

 

 

2,862

 

 

2,893

Other

 

 

101

 

 

56

 

 

282

 

 

79

Gross investment income

 

 

17,541

 

 

14,695

 

 

53,144

 

 

44,616

Less: expenses

 

 

567

 

 

651

 

 

1,614

 

 

1,315

Net investment income

 

$

16,974

 

$

14,044

 

$

51,530

 

$

43,301

 

(h) Included in investments at September 30, 2019 and December 31, 2018, 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 $209.1 million and $188.6 million, respectively. Fair value and carrying value of assets in the amount of $364.6 million and $353.0 million, respectively, were on deposit in collateral agreements at September 30, 2019. Fair value and carrying value of assets in the amount of $358.5 million and $368.0 million, respectively, were on deposit in collateral agreements at December 31, 2018.

(i) 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 levered loans and RMBS values on the portfolio. Interest rate risk includes the changes in the fair value of fixed maturities based upon changes in interest rates. Credit quality risk includes the risk of default by issuers of debt securities. Risks from investments in limited partnerships and limited liability companies and illiquid securities 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 levered loans and RMBS.

 

6. Fair Value Measurements

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

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

As of September 30, 2019 and December 31, 2018, the Company does not hold any Level 1 securities.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, nonbinding quotes in

14

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ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

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 and corporate debt securities.

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

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

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

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

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

15

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

The following are the major categories of assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018, 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, 2019

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

($ in thousands)

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Fixed income securities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury securities

 

$

 —

 

$

73,351

 

$

 —

 

$

73,351

Government agency securities

 

 

 —

 

 

4,846

 

 

 —

 

 

4,846

Corporate debt securities

 

 

 —

 

 

1,246,196

 

 

129,586

 

 

1,375,782

Municipal debt obligations

 

 

 —

 

 

14,756

 

 

 —

 

 

14,756

ABS

 

 

 —

 

 

85,216

 

 

 —

 

 

85,216

CLO

 

 

 —

 

 

179,744

 

 

 —

 

 

179,744

CMBS

 

 

 —

 

 

70,360

 

 

 —

 

 

70,360

RMBS - non agency

 

 

 —

 

 

74,314

 

 

 —

 

 

74,314

RMBS - agency

 

 

 —

 

 

147,586

 

 

 —

 

 

147,586

Total fixed income securities

 

$

 —

 

$

1,896,369

 

$

129,586

 

 

2,025,955

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments measured at net asset value:

 

 

  

 

 

  

 

 

  

 

 

  

Limited partnerships and limited liability companies

 

 

 

 

 

 

 

 

 

 

 

65,322

Total assets at fair value

 

 

 

 

 

 

 

 

 

 

$

2,091,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

($ in thousands)

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 —

 

$

90,328

 

$

 —

 

$

90,328

Corporate debt securities

 

 

 —

 

 

1,065,933

 

 

126,497

 

 

1,192,430

Municipal debt obligations

 

 

 —

 

 

6,085

 

 

 —

 

 

6,085

ABS

 

 

 —

 

 

83,581

 

 

 —

 

 

83,581

CLO

 

 

 —

 

 

156,913

 

 

 —

 

 

156,913

CMBS

 

 

 —

 

 

53,843

 

 

 —

 

 

53,843

RMBS - non agency

 

 

 —

 

 

79,551

 

 

 —

 

 

79,551

RMBS - agency

 

 

 —

 

 

30,651

 

 

 —

 

 

30,651

Total fixed income securities

 

$

 —

 

$

1,566,885

 

$

126,497

 

 

1,693,382

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments measured at net asset value:

 

 

  

 

 

  

 

 

  

 

 

  

Limited partnerships and limited liability companies

 

 

 

 

 

  

 

 

  

 

 

53,432

Total assets at fair value

 

 

 

 

 

  

 

 

  

 

$

1,746,814

 

There were no transfers between Levels 1 and 2 for the nine months ended September 30, 2019 and the year ended December 31, 2018.

In 2018, securities in the amount of $126.5 million were transferred from Level 2 into Level 3 as it was determined that these securities trade in inactive markets.

16

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

Management believes that the use of the fair value option as specified in Accounting Standards Codification No. 825, Financial Instruments to record limited partnerships and limited liability companies is consistent with its objective for such investments. As such, the entire limited partnership portfolio of $65.3 million and $53.4 million as of September 30, 2019 and December 31, 2018, respectively, was recorded using net asset value, which the Company has determined to be the best indicator of fair value for these investments.

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 September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Carrying

 

Fair Value

($ in thousands)

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial levered loans

 

$

14,601

 

$

14,323

 

$

 —

 

$

 —

 

$

14,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Notes payable

 

$

165,000

 

$

167,736

 

$

 —

 

$

167,736

 

$

 —

Unamortized debt issuance costs

 

 

(391)

 

 

 

 

 

 

 

 

 

 

 

 

Total notes payable

 

$

164,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Carrying

 

Fair Value

($ in thousands)

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial levered loans

 

$

16,915

 

$

15,858

 

$

 —

 

$

 —

 

$

15,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Notes payable

 

$

183,000

 

$

183,999

 

$

 —

 

$

183,999

 

$

 —

Unamortized debt issuance costs

 

 

(645)

 

 

 

 

 

 

 

 

 

 

 

 

Total notes payable

 

$

182,355

 

 

 

 

 

 

 

 

 

 

 

 

 

The fair value of the notes payable at September 30, 2019, approximated a price equal to $167.7 million or 101.7% of the par value. The fair value of the notes payable at December 31, 2018, approximated a price equal to $184.0 million or 100.5% of the par value.

17

Table of Contents

ProSight Global, Inc.

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 nine months ended September 30, 2019 and 2018:

 

 

 

 

 

    

Level 3

 

 

Corporate 

($ 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

 

 

 

 

 

 

    

Level 3

 

 

Corporate 

($ in thousands)

 

Securities

Fair value, December 31, 2017

 

$

 —

Total net losses for the period included in:

 

 

  

Other comprehensive loss

 

 

(362)

Net realized loss

 

 

(9)

Purchases

 

 

7,228

Sales

 

 

 —

Issuances

 

 

 —

Settlements

 

 

(1,333)

Transfers into Level 3

 

 

119,004

Transfers out of Level 3

 

 

 —

Fair value, September 30, 2018

 

$

124,528

 

 

7. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the components of accumulated other comprehensive income (loss) (AOCI) for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

Gross

    

Tax

    

Net

June 30, 2019

 

$

34,898

 

$

6,054

 

$

28,844

Unrealized holding gains on fixed income securities

 

 

11,943

 

 

2,651

 

 

9,292

Amounts reclassified into net income

 

 

4,362

 

 

156

 

 

4,206

Other comprehensive income

 

 

7,581

 

 

2,495

 

 

5,086

September 30, 2019

 

$

42,479

 

$

8,549

 

$

33,930

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

Gross

    

Tax

    

Net

June 30, 2018

 

$

(18,740)

 

$

(5,348)

 

$

(13,392)

Unrealized holding losses on fixed income securities

 

 

(193)

 

 

335

 

 

(528)

Amounts reclassified into net income

 

 

307

 

 

278

 

 

29

Other comprehensive loss

 

 

(500)

 

 

57

 

 

(557)

September 30, 2018

 

$

(19,240)

 

$

(5,291)

 

$

(13,949)

 

18

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

($ in thousands)

 

Gross

 

Tax

 

Net

December 31, 2018

 

$

(29,760)

 

$

(7,445)

 

$

(22,315)

Unrealized holding gains on fixed income securities

 

 

76,576

 

 

16,098

 

 

60,478

Amounts reclassified into net income

 

 

4,337

 

 

104

 

 

4,233

Other comprehensive income

 

 

72,239

 

 

15,994

 

 

56,245

September 30, 2019

 

$

42,479

 

$

8,549

 

$

33,930

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

  

  

 

($ in thousands)

    

Gross

    

Tax

    

Net

December 31, 2017

 

$

22,265

 

$

2,968

 

$

19,297

Unrealized holding losses on fixed income securities

 

 

(40,224)

 

 

(8,090)

 

 

(32,134)

Amounts reclassified into net income

 

 

1,281

 

 

169

 

 

1,112

Other comprehensive loss

 

 

(41,505)

 

 

(8,259)

 

 

(33,246)

September 30, 2018

 

$

(19,240)

 

$

(5,291)

 

$

(13,949)

 

The following table presents reclassifications out of AOCI attributable to the Company during the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Line in Consolidated

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

Statements of Operations

    

2019

    

2018

    

2019

    

2018

AOCI

 

  

 

 

 

 

 

  

 

 

 

 

 

  

Unrealized gains on securities

 

Realized investment gains

 

$

4,362

 

$

307

 

$

4,337

 

$

1,281

 

 

Income tax expense

 

 

156

 

 

278

 

 

104

 

 

169

Total reclassifications

 

Net realized investment gains

 

$

4,206

 

$

29

 

$

4,233

 

$

1,112

 

 

8. Related-Party Information

Loans to Executives and Equity Distribution

 

At December 31, 2018, the Company had $4.2 million in loans to executives. On March 15, 2019, the $4.2 million in loans to executives were repaid. On the same date, a special equity distribution of $4.2 million was made by the Company, which was accounted for as a non-cash transaction on the Company’s consolidated balance sheet.

 

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 an expense of $0.4 million and $7.6 million within Other Expense in the consolidated statements of operations for the three and nine months ended September 30, 2019 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 will be treated in accordance with the terms of the applicable award agreements. Additionally, the Company cancelled 137,987 shares of common stock in July 2019 with no consideration as per the terms of the Separation Agreement.

 

19

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

9. Insurance Operations

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Written premiums

 

 

  

 

 

  

 

 

  

 

 

  

Direct written premiums

 

$

226,209

 

$

200,316

 

$

715,500

 

$

668,521

Assumed from other companies

 

 

987

 

 

980

 

 

2,566

 

 

4,750

Ceded to other companies

 

 

17,722

 

 

21,780

 

 

88,122

 

 

19,368

Net written premiums

 

$

209,474

 

$

179,516

 

$

629,944

 

$

653,903

 

 

 

 

 

 

 

 

 

 

 

 

 

Earned premiums

 

 

  

 

 

  

 

 

  

 

 

  

Direct earned premiums

 

$

229,816

 

$

212,084

 

$

683,906

 

$

623,820

Assumed from other companies

 

 

920

 

 

1,603

 

 

2,794

 

 

8,767

Ceded to other companies

 

 

28,281

 

 

26,579

 

 

86,157

 

 

94,900

Net earned premiums

 

$

202,455

 

$

187,108

 

$

600,543

 

$

537,687

Percent of amount assumed to net

 

 

0.5%

 

 

0.9%

 

 

0.5%

 

 

1.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses incurred

 

 

  

 

 

  

 

 

  

 

 

  

Direct net losses and loss adjustment expenses incurred

 

$

101,855

 

$

109,524

 

$

403,899

 

$

364,977

Assumed from other companies

 

 

29,366

 

 

4,440

 

 

6,162

 

 

(2,238)

Ceded to other companies

 

 

4,025

 

 

3,988

 

 

37,417

 

 

40,976

Net losses and loss adjustment expenses incurred

 

$

127,196

 

$

109,976

 

$

372,644

 

$

321,763

 

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.

 

For the three and nine months ended September 30, 2019 and 2018 under the WAQS, the Company recorded the following:

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

($ in thousands)

    

2019

    

2018

Ceded written premium

 

$

 6

 

$

55

Ceded earned premium

 

 

 —

 

 

56

(Increase) reduction to net loss and loss adjustment expenses incurred

 

 

(1,632)

 

 

874

Reduction (increase) to policy acquisition expenses

 

 

1,632

 

 

(823)

Reduction to pre-tax income

 

$

 -

 

$

 5

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

Ceded written premium (return of ceded prepaid)

 

$

 3

 

$

(68,745)

Ceded earned premium

 

 

(3)

 

 

14,600

(Increase) reduction to net loss and loss adjustment expenses incurred

 

 

(3,839)

 

 

9,422

Reduction to policy acquisition expenses

 

 

3,837

 

 

4,083

(Increase) reduction to pre-tax income

 

$

(1)

 

$

1,095

 

Distribution Partners

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. In 2018, the

20

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

Company has sourced 13.5% of direct premium from this distribution partner. The Company does not anticipate any future premiums from this distribution partner after the first quarter of 2019. The three distribution partners contributing the largest amounts of direct written premium (excluding the distribution partner above) totaled $75.4 million and $52.0 million for the three months ended September 30, 2019 and 2018, respectively. The three distribution partners contributing the largest amounts of direct written premium (excluding the distribution partner above) totaled $208.4 million and $183.9 million for the nine months ended September 30, 2019 and 2018, respectively.

Unpaid Losses

Unpaid losses are based on individual case estimates for losses reported and include a provision for incurred but not reported (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)

    

2019

    

2018

Gross unpaid losses and loss expenses, at beginning of year

 

$

1,396,812

 

$

1,258,237

Ceded unpaid losses and loss expenses, at beginning of year

 

 

185,295

 

 

201,156

Net reserves for losses and loss expenses, at beginning of year

 

 

1,211,517

 

 

1,057,081

Add:

 

 

  

 

 

  

Incurred losses and loss expenses occurring in the:

 

 

  

 

 

  

Current year

 

 

356,926

 

 

325,810

Prior years

 

 

2,367

 

 

(4,047)

Prior years attributable to adjusted premium

 

 

13,351

 

 

 —

Total incurred losses and loss expenses

 

 

372,644

 

 

321,763

Less:

 

 

  

 

 

  

Paid losses and loss expenses for claims occurring in the:

 

 

  

 

 

  

Current year

 

 

39,742

 

 

34,359

Prior years

 

 

243,172

 

 

178,268

Total paid losses and loss expenses for claims

 

 

282,914

 

 

212,627

Net reserves for losses and loss expenses, at end of period

 

 

1,301,247

 

 

1,166,217

Ceded unpaid losses and loss expenses, at end of period

 

 

213,977

 

 

202,891

Gross unpaid losses and loss expenses, at end of period

 

$

1,515,224

 

$

1,369,108

 

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 in Surety lines. In addition, the Company incurred $13.4 million of losses and loss adjustment expenses related to premium adjustments earned during the nine months ended September 30, 2019 attributable to prior accident years.

 

During the nine months ended September 30, 2018, the Company’s estimated losses and loss expenses for accident years 2017 and prior developed favorably by $4.0 million driven by $10.8 million of favorable development in Workers’ Compensation, $11.7 million of favorable development in Commercial Auto lines and $3.1 million of favorable development in Marine Liability lines within the All Other Lines category, partially offset by $12.4 million of unfavorable development in General Liability lines and $9.2 million of unfavorable development in Commercial Multiple Peril lines.

 

10. Income Taxes

The Company and its respective U.S. subsidiaries are subject to the tax laws and regulations of the United States and various state jurisdictions. The Company files a consolidated federal tax return that includes all domestic subsidiaries.

 

The Company has one non-U.S. subsidiary, PSBL, which has received an undertaking from the Minister of Finance in Bermuda that would exempt it from Bermudian taxation until March 2035.

21

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

 

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 applying the Bermuda statutory tax rate of 0% to Bermuda income before taxes and any discrete items recognized during the period. The Company’s effective tax rates were 19.4% and 19.6% for the three months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate in the three months ended September 30, 2019 compared to the same period in 2018 was primarily due to the tax effect of share-based compensation and state income taxes. The Company’s effective tax rates were 21.2% and 20.0% for the nine months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate in the nine months ended September 30, 2019 compared to the same period in 2018 was primarily due to adjustments recorded on state income taxes.

 

11. Debt

On March 15, 2019, the Company entered into an amended and restated revolving loan agreement (as amended, the revolving facility), among other things, (a) extended the maturity date to the earlier of (i) March 15, 2022, or (ii) 91 days before the maturity of the senior notes due November 2020 or, if such senior notes are amended or replaced, 91 days before the maturity of such amendment or replacement and (b) increased the aggregate principal amount of borrowing capacity from $25.0 million to $50.0 million.

 

On August 8, 2019, the Company used IPO proceeds to repay $18.0 million in outstanding debt under the revolving facility. As of September 30, 2019, the revolving facility had a borrowing capacity of $50.0 million.

 

12. Segment Information

The following table provides a summary of the Company’s gross written premium by customer segments within our Specialty Insurance reportable segment. Gross written premiums included in “Other” consist: of (i) primary and excess workers’ compensation coverage for Self-Insured Groups; (ii) niches exited prior to 2018, many with a concentration in commercial auto; (iii) fronting arrangements in which all premium written is ceded to a third party; (iv) participation in industry pools; and (v) emerging new business customer segments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

 

2019

    

2018

Customer Segment

    

 

 

    

  

    

 

  

    

  

    

 

 

    

  

    

 

  

    

  

Construction

 

$

27,296

 

12.0%

 

$

22,451

 

11.1%

 

$

83,039

 

11.6%

 

$

71,979

 

10.7%

Consumer Services

 

 

35,502

 

15.6%

 

 

29,874

 

14.8%

 

 

100,880

 

14.0%

 

 

80,168

 

11.9%

Marine and Energy

 

 

18,151

 

8.0%

 

 

15,433

 

7.7%

 

 

54,930

 

7.7%

 

 

49,579

 

7.4%

Media and Entertainment

 

 

36,788

 

16.2%

 

 

31,590

 

15.7%

 

 

113,630

 

15.8%

 

 

109,821

 

16.3%

Professional Services

 

 

27,015

 

11.9%

 

 

24,750

 

12.3%

 

 

85,681

 

11.9%

 

 

82,254

 

12.2%

Real Estate

 

 

41,566

 

18.3%

 

 

19,477

 

9.7%

 

 

116,915

 

16.3%

 

 

91,507

 

13.6%

Transportation

 

 

38,180

 

16.8%

 

 

33,134

 

16.5%

 

 

95,694

 

13.3%

 

 

83,496

 

12.4%

Customer Segment subtotal

 

 

224,498

 

98.8%

 

 

176,709

 

87.8%

 

 

650,769

 

90.6%

 

 

568,804

 

84.5%

Other

 

 

2,698

 

1.2%

 

 

24,587

 

12.2%

 

 

67,297

 

9.4%

 

 

104,467

 

15.5%

Specialty Insurance total

 

$

227,196

 

  

 

$

201,296

 

  

 

$

718,066

 

  

 

$

673,271

 

  

 

22

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Line of Business

    

 

 

    

  

    

 

  

    

  

    

 

 

    

  

    

 

  

    

  

Commercial Auto

 

$

52,693

 

23.2%

 

$

41,701

 

20.7%

 

$

148,773

 

20.7%

 

$

114,403

 

17.0%

General Liability

 

 

84,932

 

37.4%

 

 

58,022

 

28.9%

 

 

239,383

 

33.4%

 

 

203,652

 

30.3%

Workers’ Compensation

 

 

27,242

 

12.0%

 

 

54,858

 

27.3%

 

 

152,225

 

21.1%

 

 

198,906

 

29.5%

Commercial Multiple Peril

 

 

16,276

 

7.1%

 

 

15,266

 

7.5%

 

 

52,950

 

7.4%

 

 

49,338

 

7.3%

All Other Lines

 

 

46,053

 

20.3%

 

 

31,449

 

15.6%

 

 

124,735

 

17.4%

 

 

106,972

 

15.9%

Specialty Insurance total

 

$

227,196

 

  

 

$

201,296

 

  

 

$

718,066

 

  

 

$

673,271

 

  

 

 

 

13. Earnings per Share

The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share (EPS) based on restated shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

0.01

 

 

 

 

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

 

Loss

 

Shares

 

Per Share

Three Months Ended September 30, 2018

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

15,603

 

38,743

 

$

0.40

 

$

(429)

 

38,743

 

$

(0.01)

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

 

 

698

 

 

 —

 

 

 

 

698

 

 

 

Diluted EPS

 

$

15,603

 

39,441

 

$

0.40

 

$

(429)

 

39,441

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

0.01

 

 

 

 

541

 

 

 

Diluted EPS

 

$

30,752

 

40,661

 

$

0.76

 

$

(382)

 

40,661

 

$

(0.01)

 

23

Table of Contents

ProSight Global, Inc.

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

Nine Months Ended September 30, 2018

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

40,265

 

38,743

 

$

1.04

 

$

158

 

38,743

 

$

 —

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

 

 

698

 

 

0.02

 

 

 

 

698

 

 

 

Diluted EPS

 

$

40,265

 

39,441

 

$

1.02

 

$

158

 

39,441

 

$

 —

 

 

14. Share-Based Compensation

2019 Equity Incentive Plan

In connection with, and prior to the completion of the IPO, the Company’s Amended and Restated 2010 Equity Incentive Plan (the 2010 Plan) was terminated. Immediately prior to the merger, all outstanding P Shares granted under the 2010 Plan prior to the IPO, were cancelled, and all outstanding RSUs granted under the 2010 Plan converted into RSUs based on the shares of common stock of the Company.

On July 24, 2019, the Company’s 2019 Equity Incentive Plan (the 2019 Plan) became effective immediately prior to the effectiveness of the registration statement filed in connection with the IPO. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, RSUs, performance shares, and units and other cash‑based or share‑based awards.

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

A total of 4,500,000 shares of common stock are initially authorized and reserved for issuance under the 2019 Plan, including shares underlying RSUs granted under the 2010 Plan, which converted into the Company’s common stock, effective July 25, 2019, as a result of the merger.

The following is a summary of the post-offering compensation included in the 2019 Plan, including the number of common stock granted to each award mentioned below:

 

(i)

181,118 annual long-term incentive awards in respect of 2019, 90,559 of which are time-vesting RSUs and 90,559 of which are performance-vesting RSUs, granted to management in connection with the IPO. Time-vesting RSUs are subject to vesting as follows: one-third annual installments on each anniversary of grant date, subject to continued service. Performance-vesting RSUs are subject to vesting as follows: cliff vesting on the third anniversary of the grant date to the extent performance metrics are met, subject to continued service. The fair value of such awards is $2.5 million at grant date.

(ii)

1,267,912 supplemental RSU awards, 100% of which are time-vesting RSUs, granted to management in connection with the IPO and subject to vesting as follows: 25% vested at grant date, 25% will vest on the second anniversary of the grant date, subject to continued service and 50% will vest on the third anniversary of the grant date, subject to continued service. The fair value of the supplemental RSUs is $17.8 million.

(iii)

250,000 founders grant awards in the form of time-vesting RSUs with a fair value of $3.5 million at grant date. These awards will cliff vest on the third anniversary of the grant date.

24

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

(iv)

26,399 non-employee director RSU awards with a fair value of $0.4 million at grant date (other than RSUs granted to non-employee directors designated by the Company’s principal stockholders, if any, which will be determined by the Board of Directors). These awards are fully vested on grant date.

(v)

668,170 RSUs initially granted under the 2010 Plan that were converted into RSUs based on shares of the Company’s common stock upon the consummation of the merger.

The table below summarizes the Company’s stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

  

 

 

  

 

 

  

Stock-based compensation

 

$

6,785

 

$

161

 

$

6,862

 

$

559

 

Stock-based compensation expense is recognized on a straight-line basis over the vesting period of all awards except when an award requires accelerated recognition. The Company does not apply a forfeiture rate to unvested awards and accounts for forfeitures as they occur. Stock-based compensation expense related to long-term incentive awards and director RSUs are included in General and administrative expenses in the Company’s consolidated statements of operations. Stock-based compensation expense related to supplemental RSU’s and founders grant awards are included in other expenses in the Company’s consolidated statements of operations.

The Company began recognizing stock-based compensation expense relating to its 2019 Plan upon its inception and initial stock grants in July 2019. All stock-based compensation expense recognized during the three months ended September 30, 2019 relates to the 2019 Plan.

The following table summarizes RSU transactions for the 2019 Plan for the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

    

Number of Shares

    

Weighted Average Grant
Date Fair Value

 

 

 

 

 

 

  

Unvested outstanding at December 31, 2018

 

55,264

 

$

11.09

Granted

 

1,725,429

 

$

14.00

Vested

 

398,641

 

$

13.60

Forfeited

 

92,657

 

$

14.00

Unvested outstanding at September 30, 2019

 

1,289,395

 

$

14.00

 

As of September 30, 2019, The Company had approximately $16.1 million of total unrecognized stock-based compensation expense related to RSUs expected to be recognized over a weighted-average period of 2.6 years.

2019 Employee Stock Purchase Plan

On July 24, 2019, the 2019 Employee Stock Purchase Plan (the 2019 ESPP) became effective immediately prior to the effectiveness of the registration statement filed in connection with the IPO.  A total of 1,000,000 shares of the Company’s common stock will be reserved and available for sale under the 2019 ESPP.

The compensation committee of the Board of Directors administers the 2019 ESPP and have full authority to interpret the terms of the 2019 ESPP.

There was no expense recognized related to the 2019 ESPP for the nine months ended September 30, 2019.

 

25

Table of Contents

ProSight Global, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

 

15. 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.

 

 

26

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 the final prospectus filed with the Securities and Exchange Commission (SEC) on July 25, 2019 (the Prospectus).

Certain restatements have been made to historical information to give effect to the merger and related transactions.  See Note 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;

·

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 U.K. operations.

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

·

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

·

the adequacy of our loss reserves;

·

the effectiveness of our risk management policies and procedures;

27

·

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

·

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

·

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

·

cyclical changes in the insurance industry;

·

the effects of natural and man-made catastrophic events;

·

our ability to adequately assess risks and estimate losses;

·

the availability and affordability of reinsurance;

·

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

·

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

·

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

·

our ability to protect intellectual property rights;

·

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

·

our status as an emerging growth company;

·

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

·

potential conflicts of interests with our principal stockholders.

We discuss many of these risks in greater detail under the section titled “Risk Factors” in our prospectus filed with the SEC pursuant to Rule 424(b) and the Securities Act of 1933, as amended, on July 25, 2019. 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.

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 have a diverse business mix covering specialty niches within the seven customer segments in which we operate. Our customer segments currently include: Media and Entertainment, Real Estate, Professional Services, Transportation, Construction, Consumer Services and Marine and Energy. Within each customer segment, we have multiple niches which represent similar groups of customers.  We market and distribute our insurance product offerings in all 50 states on both an admitted and non-admitted basis. We are focused on delivering consistent underwriting profitability with low volatility of underwriting results.

28

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 debt securities, and may also include cash and cash equivalents, short-term investments, and alternative investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair 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 other-than-temporary impairments 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;

29

·

Mix of business written by us;

·

Changes in the legal or regulatory environment related to the business we write;

·

Trends in legal defense costs;

·

Wage inflation; and

·

Inflation in medical costs.

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

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. Among other things, the Tax Cuts and Jobs Act (the TCJA), which was signed into law on December 22, 2017, lowered the U.S. federal corporate tax rate from 35% to 21% starting January 1, 2018. Our income tax expense for periods beginning in 2018 is based on the U.S. federal corporate income tax rate of 21%.

Key Metrics

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

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

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

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

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

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

30

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

Adjusted loss and LAE ratio is the loss and LAE ratio excluding the effects of the WAQS (as defined below).

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

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

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

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

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

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

Factors Affecting Our Results of Operations

The WAQS

In connection with the divestment of our U.K. business, New York Marine as reinsured entered into Whole 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% to 30.5% is received as a reduction in the amount of ceded premium. Subject to limits, these ceding commissions will vary in subsequent periods based on contractual ultimate loss ratios. During 2018 and following the transition of the U.S. business back to New York Marine, the WAQS were terminated. Previously ceded written and unearned premium, net of the ceding commission, was reversed. Loss reserves on premium earned prior to the cut-off termination remain ceded loss reserves. Loss reserve development on the reserves ceded under the WAQS is included in continuing operations.

The effect of the WAQS on our results of operations is primarily reflected in our ceded written premiums, losses and LAE, as well as our underwriting, acquisition and insurance expenses.

31

The following tables summarize the effect of the WAQS on our underwriting income for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

Three Months Ended September 30, 2018

 

 

    

Including

    

Effect of

    

Excluding

    

Including

    

Effect of

    

Excluding

 

($ in thousands)

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

Gross written premiums

 

$

227,196

 

$

 —

 

$

227,196

 

$

201,296

 

$

 —

 

$

201,296

 

Ceded written premiums

 

 

(17,722)

 

 

(6)

 

 

(17,716)

 

 

(21,780)

 

 

(55)

 

 

(21,725)

 

Net written premiums

 

$

209,474

 

$

(6)

 

$

209,480

 

$

179,516

 

$

(55)

 

$

179,571

 

Net retention(1)

 

 

92.2%

 

 

 —

 

 

92.2%

 

 

89.2%

 

 

 —

 

 

89.2%

 

Net premiums earned

 

$

202,455

 

$

 —

 

$

202,455

 

$

187,108

 

$

(56)

 

$

187,164

 

Net losses and LAE

 

 

127,196

 

 

1,632

 

 

125,564

 

 

109,976

 

 

(874)

 

 

110,850

 

Underwriting, acquisition and insurance expenses

 

 

71,920

 

 

(1,632)

 

 

73,552

 

 

69,246

 

 

823

 

 

68,423

 

Underwriting income (loss)(2)

 

$

3,339

 

$

 —

 

$

3,339

 

$

7,886

 

$

(5)

 

$

7,891

 

Loss and LAE ratio

 

 

62.8%

 

 

 —

 

 

 —

 

 

58.8%

 

 

 —

 

 

 —

 

Expense ratio

 

 

35.5%

 

 

 —

 

 

 —

 

 

37.0%

 

 

 —

 

 

 —

 

Combined ratio

 

 

98.3%

 

 

 —

 

 

 —

 

 

95.8%

 

 

 —

 

 

 —

 

Adjusted loss and LAE ratio(3)

 

 

 —

 

 

 —

 

 

62.0%

 

 

 —

 

 

 —

 

 

59.2%

 

Adjusted expense ratio(3)

 

 

 —

 

 

 —

 

 

36.3%

 

 

 —

 

 

 —

 

 

36.6%

 

Adjusted combined ratio(3)

 

 

 —

 

 

 —

 

 

98.3%

 

 

 —

 

 

 —

 

 

95.8%

 

 

(1)

The ratio of net written premiums to GWP.

(2)

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

(3)

Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio (calculated in accordance with GAAP) 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.

32

The following tables summarize the effect of the WAQS on our underwriting income for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

Nine Months Ended September 30, 2018

 

 

 

Including

    

Effect of

    

Excluding

    

Including

    

Effect of

    

Excluding

 

($ in thousands)

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

WAQS

 

Gross written premiums

 

$

718,066

 

$

 —

 

$

718,066

 

$

673,271

 

$

 —

 

$

673,271

 

Ceded written premiums

 

 

(88,122)

 

 

(3)

 

 

(88,119)

 

 

(19,368)

 

 

68,745

 

 

(88,113)

 

Net written premiums

 

$

629,944

 

$

(3)

 

$

629,947

 

$

653,903

 

$

68,745

 

$

585,158

 

Net retention(1)

 

 

87.7%

 

 

 —

 

 

87.7%

 

 

97.1%

 

 

 —

 

 

86.9%

 

Net premiums earned

 

$

600,543

 

$

 3

 

$

600,540

 

$

537,687

 

$

(14,600)

 

$

552,287

 

Net losses and LAE

 

 

372,644

 

 

3,839

 

 

368,805

 

 

321,763

 

 

(9,422)

 

 

331,185

 

Underwriting, acquisition and insurance expenses

 

 

217,248

 

 

(3,837)

 

 

221,085

 

 

200,972

 

 

(4,083)

 

 

205,055

 

Underwriting income (loss)(2)

 

$

10,651

 

$

 1

 

$

10,650

 

$

14,952

 

$

(1,095)

 

$

16,047

 

Loss and LAE ratio

 

 

62.1%

 

 

 —

 

 

 —

 

 

59.8%

 

 

64.5%

 

 

 —

 

Expense ratio

 

 

36.2%

 

 

 —

 

 

 —

 

 

37.4%

 

 

28.0%

 

 

 —

 

Combined ratio

 

 

98.3%

 

 

 —

 

 

 —

 

 

97.2%

 

 

92.5%

 

 

 —

 

Adjusted loss and LAE ratio(3)

 

 

 —

 

 

 —

 

 

61.4%

 

 

 —

 

 

 —

 

 

60.0%

 

Adjusted expense ratio(3)

 

 

 —

 

 

 —

 

 

36.8%

 

 

 —

 

 

 —

 

 

37.1%

 

Adjusted combined ratio(3)

 

 

 —

 

 

 —

 

 

98.2%

 

 

 —

 

 

 —

 

 

97.1%

 

 

(1)

The ratio of net written premiums to GWP.

(2)

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

(3)

Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio (calculated in accordance with GAAP) 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.

33

Results of Operations

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

The following table summarizes the results of continuing operations for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Change

($ in thousands)

    

2019

    

2018

 

$

    

Percent

Gross written premiums

 

$

227,196

 

$

201,296

 

$

25,900

 

12.9%

Ceded written premiums

 

 

(17,722)

 

 

(21,780)

 

 

4,058

 

(18.6%)

Net written premiums

 

$

209,474

 

$

179,516

 

$

29,958

 

16.7%

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

202,455

 

$

187,108

 

$

15,347

 

8.2%

Losses and LAE:

 

 

127,196

 

 

109,976

 

 

17,220

 

15.7%

Underwriting, acquisition and insurance expenses

 

 

71,920

 

 

69,246

 

 

2,674

 

3.9%

Underwriting income(1)

 

 

3,339

 

 

7,886

 

 

(4,547)

 

(57.7%)

Interest and other expenses, net

 

 

10,182

 

 

2,924

 

 

7,258

 

248.2%

Net investment income

 

 

16,974

 

 

14,044

 

 

2,930

 

20.9%

Realized investment gains, net

 

 

245

 

 

406

 

 

(161)

 

(39.7%)

Income before taxes

 

 

10,376

 

 

19,412

 

 

(9,036)

 

(46.5%)

Income tax expense

 

 

2,015

 

 

3,809

 

 

(1,794)

 

(47.1%)

Net income from continuing operations

 

$

8,361

 

$

15,603

 

$

(7,242)

 

(46.4%)

Adjusted operating income(1)

 

$

13,825

 

$

15,282

 

$

(1,457)

 

(9.5%)

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating return on equity(1)

 

 

11.2%

 

 

16.2%

 

 

 

 

 

Return on equity

 

 

6.8%

 

 

16.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE ratio:

 

 

62.8%

 

 

58.8%

 

 

 

 

 

Loss and LAE ratio –  excluding catastrophe

 

 

62.8%

 

 

58.8%

 

 

 

 

 

Loss and LAE ratio –  Catastrophe

 

 

–  

 

 

–  

 

 

 

 

 

Expense ratio

 

 

35.5%

 

 

37.0%

 

 

 

 

 

Combined ratio

 

 

98.3%

 

 

95.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted loss and LAE ratio(2)

 

 

62.0%

 

 

59.2%

 

 

 

 

 

Adjusted loss and LAE ratio – excluding catastrophe

 

 

62.0%

 

 

59.2%

 

 

 

 

 

Adjusted loss and LAE ratio – Catastrophe

 

 

–  

 

 

–  

 

 

 

 

 

Adjusted expense ratio(2)

 

 

36.3%

 

 

36.6%

 

 

 

 

 

Adjusted combined ratio(2)

 

 

98.3%

 

 

95.8%

 

 

 

 

 

 

(1)

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

 

(2)

Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio (calculated in accordance with GAAP) 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

Net income was $8.4 million for the three months ended September 30, 2019 compared to $15.6 million for the three months ended September 30, 2018, a decrease of $7.2 million, or 46.4%. The decrease in net income primarily resulted from an increase in other expenses of $6.8 million due to non-recurring grants of restricted stock units (RSUs) in connection with the initial IPO.

34

Premiums

GWP were $227.2 million for the three months ended September 30, 2019 compared to $201.3 million for the three months ended September 30, 2018, an increase of $25.9 million, or 12.9%. 

The following table presents the GWP by customer segment for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

Three Months Ended September 30

 

Customer Segment

    

2019

    

2018

    

% Change

 

Construction

 

$

27.3

 

$

22.5

 

21.3%

 

Consumer Services

 

 

35.5

 

 

29.9

 

18.7%

 

Marine and Energy

 

 

18.1

 

 

15.4

 

17.5%

 

Media and Entertainment

 

 

36.8

 

 

31.6

 

16.5%

 

Professional Services

 

 

27.0

 

 

24.7

 

9.3%

 

Real Estate

 

 

41.6

 

 

19.5

 

113.3%

 

Transportation

 

 

38.2

 

 

33.1

 

15.4%

 

Customer segments subtotal

 

$

224.5

 

$

176.7

 

27.1%

 

Other

 

 

2.7

 

 

24.6

 

(89.0%)

 

Total GWP

 

$

227.2

 

$

201.3

 

12.9%

 

 

Premium growth for the three months ended September 30, 2019 was primarily driven by new business and renewals within existing niches and the addition of new niches.  Excluding the decline of GWP within “Other,” premiums for the three months ended September 30, 2019 increased 27.1% compared to the three months ended September 30, 2018.

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

·

Real Estate GWP increased by 113.3% to $41.6 million for the three months ended September 30, 2019 compared to $19.5 million for the three months ended September 30, 2018.  There was premium growth across all niches. The Property Managers and Metrobuilders niches had increases in new business of $11.1 million and $6.1 million, respectively, in the third quarter of 2019 when compared to the third quarter of 2018.

·

Construction GWP increased by 21.3% to $27.3 million for the three months ended September 30, 2019 compared to $22.5 million for the three months ended September 30, 2018.  There was premium growth across all niches.  The Scaffolding and Luxury Home Builders niches had increases in renewal premium retention of $2.5 million and $1.9 million, respectively, in the third quarter of 2019 when compared to the third quarter of 2018.

·

Consumer Services GWP increased by 18.7% to $35.5 million for the three months ended September 30, 2019 compared to $29.9 million for the three months ended September 30, 2018.  The premium growth is due to new business of $7.2 million in the Parking Facilities niche, partially offset by a decline in premium within the Professional Employer Organizations and Social Services niches.  New business and renewal premium retention was limited by unfavorable pricing conditions in primary workers compensation. 

·

Other GWP decreased by 89.0% to $2.7 million for the three months ended September 30, 2019 compared to $24.6 million for the three months ended September 30, 2018.  The decline in premium was driven by the exit of the excess workers compensation niche.

Net written premiums increased by $30.0 million, or 16.7%, to $209.5 million for the three months ended September 30, 2019 from $179.5 million for the three months ended September 30, 2018. The increase in net written premiums was directly related to the growth in GWP.

35

Net earned premiums increased by $15.3 million, or 8.2%, to $202.5 million for the three months ended September 30, 2019 from $187.1 million for the three months ended September 30, 2018.  The increase in net earned premiums was directly related to the growth in GWP.  

Loss and LAE ratio

Our loss and LAE ratio was 62.8% for the three months ended September 30, 2019 compared to 58.8% for the three months ended September 30, 2018. For the three months ended September 30, 2019 we incurred unfavorable prior period development of $5.5 million which includes unfavorable development in general liability of $10.0 million and commercial auto of $7.0 million, partially offset by favorable development in all other of $7.3 million and workers compensation of $4.2 million, as compared to favorable development of $1.4 million for the three months ended September 30, 2018. 

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 September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

 

2019

 

2018

 

    

 

 

    

% of Earned

    

 

    

% of Earned

($ in thousands)

 

Losses and LAE

 

Premiums

 

Losses and LAE

 

Premiums

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE:

 

 

 

 

  

 

 

  

 

  

Current accident year – excluding catastrophe 

 

$

121,701

 

60.1%

 

$

111,418

 

59.5%

Current accident year – catastrophe losses

 

 

 —

 

0.0%

 

 

 —

 

0.0%

Effect of prior year development 

 

 

5,495

 

2.7%

 

 

(1,442)

 

(0.7%)

Total

 

$

127,196

 

62.8%

 

$

109,976

 

58.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

 

2019

 

2018

 

 

 

 

 

% of Earned

 

 

 

 

% of Earned

($ in thousands)

 

Losses and LAE

 

Premiums

 

Losses and LAE

 

Premiums

Adjusted loss and LAE:

    

 

  

    

  

    

 

  

    

  

Current accident year – excluding catastrophe

 

$

121,701

 

60.1%

 

$

112,292

 

60.0%

Current accident year – catastrophe losses

 

 

 —

 

0.0%

 

 

 —

 

0.0%

Effect of prior year development

 

 

3,863

 

1.9%

 

 

(1,442)

 

(0.8%)

Total

 

$

125,564

 

62.0%

 

$

110,850

 

59.2%

 

Expense ratio

Our expense ratio was 35.5% for the three months ended September 30, 2019 compared to 37.0% for the three months ended September 30, 2018.  The improvement in the expense ratio reflects an increase in net earned premiums and the effect of WAQS for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

The following table summarizes the components of the expense ratio for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

 

 

2019

 

2018

 

 

 

 

 

 

% of Earned

 

 

 

 

% of Earned

 

($ in thousands)

 

Expenses

 

Premiums

 

Expenses

 

Premiums

 

Underwriting, acquisition and insurance expenses:

    

 

  

    

  

    

 

  

    

  

 

Policy acquisition expenses, net of ceded reinsurance

 

$

47,585

 

23.5%

 

$

43,372

 

23.2%

 

Underwriting and insurance expenses

 

 

25,967

 

12.8%

 

 

25,051

 

13.4%

 

Underwriting, acquisition and insurance expenses(1)

 

 

73,552

 

36.3%

 

 

68,423

 

36.6%

 

Effect of WAQS(1)

 

 

(1,632)

 

(0.8%)

 

 

823

 

0.4%

 

Total underwriting, acquisition and insurance expenses

 

$

71,920

 

35.5%

 

$

69,246

 

37.0%

 

 

(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, 2019 and 2018.  

36

Underwriting income

Underwriting income was $3.3 million for the three months ended September 30, 2019 compared to $7.9 million for the three months ended September 30, 2018, a decrease of $4.5 million, or 57.7%.  The change from the three months ended September 30, 2018 to the three months ended September 30, 2019 is primarily due an increase in the loss and LAE ratio offset by a decrease in the expense ratio. 

Combined ratio

Our combined ratio and adjusted combined ratio was 98.3% for the three months ended September 30, 2019 compared to 95.8% for the three months ended September 30, 2018.  

Investing results

Our net investment income increased by 20.9% to $17.0 million for the three months ended September 30, 2019 from $14.0 million for the three months ended September 30, 2018.  The increase in net investment income is primarily due to a larger portfolio size and a slight increase in net investment yield.  Net investment yield was 3.3% for the three months ended September 30, 2019 and 3.2% for the three months ended September 30, 2018.    

The weighted average duration of our fixed income portfolio, including cash equivalents, was 3.0 years at September 30, 2019 and 3.1 years at September 30, 2018.    

The following table summarizes the components of net investment income and net investment gains for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

($ in thousands)

 

2019

 

2018

 

$ Change

Interest from securities

    

$

16,764

    

$

14,422

    

$

2,342

Other investments

 

 

777

 

 

273

 

 

504

Gross investment income

 

 

17,541

 

 

14,695

 

 

2,846

Investment expenses

 

 

(567)

 

 

(651)

 

 

84

Net investment income

 

 

16,974

 

 

14,044

 

 

2,930

Realized investment gains, net

 

 

245

 

 

406

 

 

(161)

Total

 

$

17,219

 

$

14,450

 

$

2,769

Average invested assets at book value

 

$

2,069,327

 

$

1,789,970

 

$

279,357

 

Interest and other expenses, net

Our interest and other expenses increased by $7.3 million to $10.2 million for the three months ended September 30, 2019 compared to $2.9 million for the three months ended September 30, 2018. The increase is primarily driven by other expenses of $7.2 million due to non-recurring grants of RSU’s in connection with the IPO.

Income tax expense

Our effective tax rate for the three months ended September 30, 2019 was 19.4% compared to 19.6% for the three months ended September 30, 2018. The decrease in the effective tax rate in the third quarter of 2019 compared to the third quarter of 2018 was primarily due to the effect of share-based compensation and state income taxes. For the three months ended September 30, 2019 we received a net income tax refund of $0.3 million, and for the three months ended September 30, 2018 net income tax payments were $0.1 million.  

Adjusted operating income

Adjusted operating income was $13.8 million for the three months ended September 30, 2019, a decrease of $1.5 million, or 9.5% from the adjusted operating income of $15.3 million for the three months ended September 30, 2018.

37

Adjusted operating return on equity

Our adjusted operating return on equity was 11.2% for the three months ended September 30, 2019, a decrease of 5.1% percentage points from 16.2% for the three months ended September 30, 2018 primarily due to the increase in stockholders’ equity from $383.7 million in the third quarter of 2018 to $530.6 million in the third quarter of 2019.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

The following table summarizes the results of continuing operations for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

 

Change

($ in thousands)

 

2019

    

2018

    

$

    

Percent

Gross written premiums

 

$

718,066

 

$

673,271

 

$

44,795

 

6.7%

Ceded written premiums

 

 

(88,122)

 

 

(19,368)

 

 

(68,754)

 

355.0%

Net written premiums

 

$

629,944

 

$

653,903

 

$

(23,959)

 

(3.7%)

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

600,543

 

$

537,687

 

$

62,856

 

11.7%

Losses and LAE:

 

 

372,644

 

 

321,763

 

 

50,881

 

15.8%

Underwriting, acquisition and insurance expenses

 

 

217,248

 

 

200,972

 

 

16,276

 

8.1%

Underwriting income(1)

 

 

10,651

 

 

14,952

 

 

(4,301)

 

(28.8%)

Interest and other expenses, net

 

 

23,671

 

 

8,703

 

 

14,968

 

172.0%

Net investment income

 

 

51,530

 

 

43,301

 

 

8,229

 

19.0%

Realized investment gains, net

 

 

495

 

 

805

 

 

(310)

 

(38.5%)

Income before taxes

 

 

39,005

 

 

50,355

 

 

(11,350)

 

(22.5%)

Income tax expense

 

 

8,253

 

 

10,090

 

 

(1,837)

 

(18.2%)

Net income from continuing operations

 

$

30,752

 

$

40,265

 

$

(9,513)

 

(23.6%)

Adjusted operating income(1)

 

$

41,683

 

$

39,629

 

$

2,054

 

5.2%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating return on equity(1)

 

 

12.1%

 

 

13.9%

 

 

 

 

 

Return on equity

 

 

8.9%

 

 

14.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE ratio:

 

 

62.1%

 

 

59.8%

 

 

 

 

 

Loss and LAE ratio –  excluding catastrophe

 

 

61.6%

 

 

59.8%

 

 

 

 

 

Loss and LAE ratio –  Catastrophe

 

 

0.5%

 

 

–  

 

 

 

 

 

Expense ratio

 

 

36.2%

 

 

37.4%

 

 

 

 

 

Combined ratio

 

 

98.3%

 

 

97.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted loss and LAE ratio(2)

 

 

61.4%

 

 

60.0%

 

 

 

 

 

Adjusted loss and LAE ratio – excluding catastrophe

 

 

60.9%

 

 

60.0%

 

 

 

 

 

Adjusted loss and LAE ratio – Catastrophe

 

 

0.5%

 

 

–  

 

 

 

 

 

Adjusted expense ratio(2)

 

 

36.8%

 

 

37.1%

 

 

 

 

 

Adjusted combined ratio(2)

 

 

98.2%

 

 

97.1%

 

 

 

 

 

 

(1)

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

(2)

Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio (calculated in accordance with GAAP) 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.”

38

Net Income

Net income was $30.8 million for the nine months ended September 30, 2019 compared to $40.3 million for the nine months ended September 30, 2018, a decrease of $9.5 million, or 23.6%.  The decrease in net income primarily resulted from an increase in other expenses of $14.3 million due to non-recurring grants of RSUs in connection with the IPO and costs associated with the transition of our former Chief Executive Officer, partially offset by an increase in net investment income of $8.2 million.

Premiums

GWP were $718.1 million for the nine months ended September 30, 2019 compared to $673.3 million for the nine months ended September 30, 2018, an increase of $44.8 million, or 6.7%. 

The following table presents the GWP by customer segment for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

Nine Months Ended September 30

 

Customer Segment

 

2019

    

2018

    

% Change

 

Construction

 

$

83.1

 

$

72.0

 

15.4%

 

Consumer Services

 

 

100.9

 

 

80.1

 

26.0%

 

Marine and Energy

 

 

54.9

 

 

49.6

 

10.7%

 

Media and Entertainment

 

 

113.6

 

 

109.8

 

3.5%

 

Professional Services

 

 

85.7

 

 

82.3

 

4.1%

 

Real Estate

 

 

116.9

 

 

91.5

 

27.8%

 

Transportation

 

 

95.7

 

 

83.5

 

14.6%

 

Customer segments subtotal

 

$

650.8

 

$

568.8

 

14.4%

 

Other

 

 

67.3

 

 

104.5

 

(35.6%)

 

Total GWP

 

$

718.1

 

$

673.3

 

6.7%

 

 

Premium growth for the nine months ended September 30, 2019 was primarily driven by increases in new business and premium retention within previously existing niches.  Excluding the decline of GWP within “Other,” premiums for the nine months ended September 30, 2019 increased 14.4% compared to the nine months ended September 30, 2018. 

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

·

Real Estate GWP increased by 27.8% to $116.9 million for the nine months ended September 30, 2019 compared to $91.5 million for the nine months ended September 30, 2018.  There is premium growth across all niches. The Metrobuilders, Builders Risk, and Residential niches had increases in new business of $10.8 million, $4.3 million, and $1.2 million, respectively.  In addition, Residential and Metrobuilders niches had increases in renewal premium retention of $2.6 million and $1.3 million, respectively, during the first nine months of 2019 when compared to the nine months of 2018. 

·

Consumer Services GWP increased by 26.0% to $100.9 million for the nine months ended September 30, 2019 compared to $80.1 million for the nine months ended September 30, 2018.  The premium growth is due to increases in the Auto Dealers niche, addition of the Parking Facilities niche, and partially offset by declines in premium within the Professional Employer Organizations and Social Services niches.  Auto Dealers increased $20.7 million during the nine months of 2019 when compared to the nine months of 2018, primarily due to new business of $12.3 million and renewal premium retention of $9.0 million.  Parking Facilities generated $13.7 million in premium in the nine months ended September 30, 2019.  The Professional Employer Organizations and Social Services niches, premiums declined by $7.7 million and $5.4 million, respectively, during the first nine months of 2019 when compared to the nine months of 2018.  New business growth and renewal premium retention were limited by unfavorable pricing conditions in primary workers compensation.

39

·

Construction GWP increased by 15.4% to $83.1 million for the nine months ended September 30, 2019 compared to $72.0 million for the nine months ended September 30, 2018.  There was premium growth across all niches for the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018, due to new business and average rate increases of 5.3% across the customer segment also contributed to the growth during the nine months ended September 30, 2019.

·

Other GWP decreased by 35.6% to $67.3 million for the nine months ended September 30, 2019 compared to $104.5 million for the nine months ended September 30, 2018.  The decline in premium during the first nine months of 2019 when compared to the first nine months of 2018 was driven by a decline in the excess workers compensation niche.

Net written premiums decreased by $24.0 million, or 3.7%, to $629.9 million for the nine months ended September 30, 2019 from $653.9 million for the nine months ended September 30, 2018. The decrease in net written premiums was directly related to the termination of the WAQS in 2018. Our net retention ratio was 87.7% and 97.1% for the nine months ended September 30, 2019 and 2018, respectively.  Excluding the effects of the WAQS, net written premiums for the nine months ended September 30, 2019 increased by $44.8 million, or 7.7%, to $629.9 million, from $585.2 million for the nine months ended September 30, 2018 primarily related to the growth in GWP in 2019.  Our net retention ratio was 87.7% and 86.9% for the nine months ended September 30, 2019 and 2018, respectively.

Net earned premiums increased by $62.9 million, or 11.7%, to $600.5 million for the nine months ended September 30, 2019 from $537.7 million for the nine months ended September 30, 2018.  The increase in net earned premiums for the first nine months of 2019 compared to the first nine months of 2018 was due to the to the growth in written premium in 2019, and due to the termination of the WAQS in 2018. Excluding the effects of the WAQS, net earned premiums for the nine months ended September 30, 2019 were $600.5 million, an increase of 8.7% from the nine months ended September 30, 2018 of $552.3 million. 

Loss and LAE ratio

Our loss and LAE ratio was 62.1% for the nine months ended September 30, 2019 compared to 59.8% for the nine months ended September 30, 2018.  Included within the loss and LAE ratio of 62.1% is a catastrophe loss of $3.0 million, or 0.5%, from one tornado event in the first nine months of 2019 compared to no catastrophes in the first nine months of 2018.

For the nine months ended September 30, 2019, we incurred unfavorable prior period development of $2.4 million as compared to favorable development of $4.0 million for the first nine months ended September 30, 2018 due to unfavorable development in general liability of $23.2 million, partially offset by favorable development in workers compensation of $18.7 million and all other of $2.7 million.

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 nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

 

 

2019

 

2018

 

 

 

 

    

% of Earned

    

 

    

% of Earned

($ in thousands)

 

Losses and LAE

 

Premiums

 

Losses and LAE

 

Premiums

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE:

 

 

 

 

  

 

 

  

 

  

Current accident year – excluding catastrophe 

 

$

367,277

 

61.2%

 

$

325,810

 

60.6%

Current accident year – catastrophe losses

 

 

3,000

 

0.5%

 

 

 —

 

0.0%

Effect of prior year development 

 

 

2,367

 

0.4%

 

 

(4,047)

 

(0.8%)

Total

 

$

372,644

 

62.1%

 

$

321,763

 

59.8%

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

 

 

2019

 

2018

 

 

 

 

 

% of Earned

 

 

 

 

% of Earned

($ in thousands)

 

Losses and LAE

 

Premiums

 

Losses and LAE

 

Premiums

Adjusted loss and LAE:

 

 

  

    

  

    

 

  

    

  

Current accident year – excluding catastrophe

 

$

367,277

 

61.2%

 

$

335,232

 

60.7%

Current accident year – catastrophe losses

 

 

3,000

 

0.5%

 

 

 —

 

0.0%

Effect of prior year development

 

 

(1,472)

 

(0.3%)

 

 

(4,047)

 

(0.7%)

Total

 

$

368,805

 

61.4%

 

$

331,185

 

60.0%

 

Expense ratio

Our expense ratio was 36.2% for the nine months ended September 30, 2019 compared to 37.4% for the nine months ended September 30, 2018. The decrease in expense ratio was driven by premium growth in excess of expense growth and due to the effect of the WAQS. The effect of WAQS resulted in a 0.6% percentage points improvement in the underwriting, acquisition and insurance expense ratio. Excluding the impact of the WAQS our expense ratio was 36.8% and 37.1% for the nine months ended September 30, 2019 and September 30, 2018, respectively. 

The following table summarizes the components of the expense ratio for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

 

 

 

2019

 

2018

 

 

 

 

 

 

% of Earned

 

 

 

 

% of Earned

 

($ in thousands)

 

Expenses

 

Premiums

 

Expenses

 

Premiums

 

Underwriting, acquisition and insurance expenses:

 

 

  

    

  

    

 

  

    

  

 

Policy acquisition expenses, net of ceded reinsurance

 

$

141,896

 

23.6%

 

$

129,902

 

23.5%

 

Underwriting and insurance expenses

 

 

79,189

 

13.2%

 

 

75,153

 

13.6%

 

Underwriting, acquisition and insurance expenses(1)

 

 

221,085

 

36.8%

 

 

205,055

 

37.1%

 

Effect of WAQS(1)

 

 

(3,837)

 

(0.6%)

 

 

(4,083)

 

0.3%

 

Total underwriting, acquisition and insurance expenses

 

$

217,248

 

36.2%

 

$

200,972

 

37.4%

 

 

(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 the nine months ended September 30, 2019 and 2018.

Underwriting income

Underwriting income was $10.7 million for the nine months ended September 30, 2019 compared to $15.0 million for the nine months ended September 30, 2018, a decrease of $4.3 million, or 28.8%. The change from nine months ended September 30, 2018 to September 30, 2019 was due to the change in prior period loss development from favorable of $4.0 million to unfavorable of $2.4 million.

Combined ratio

Our combined ratio was 98.3% for the nine months ended September 30, 2019 compared to 97.2% for the nine months ended September 30, 2018. Our adjusted combined ratio was 98.2% for the nine months ended September 30, 2019 compared to 97.1% for the nine months ended September 30, 2018.

Investing results

Our net investment income increased by 19.0% to $51.5 million for the nine months ended September 30, 2019 from $43.3 million for the nine months ended September 30, 2018.  The increase in net investment income is primarily due to an increase in the amount of invested assets and a slight increase in net investment yield.  Net investment yield was 3.5%  for the nine months ended September 30, 2019 and 3.4% for the nine months ended September 30, 2018.    

The weighted average duration of our fixed income portfolio, including cash equivalents, was 3.0 years at September 30, 2019 and 3.1 years at September 30, 2018. 

41

The following table summarizes the components of net investment income and net investment gains for the nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

($ in thousands)

 

2019

 

2018

 

$ Change

Interest from securities

 

$

49,414

    

$

40,830

    

$

8,584

Other investments

 

 

3,730

 

 

3,786

 

 

(56)

Gross investment income

 

 

53,144

 

 

44,616

 

 

8,528

Investment expenses

 

 

(1,614)

 

 

(1,315)

 

 

(299)

Net investment income

 

 

51,530

 

 

43,301

 

 

8,229

Realized investment gains, net

 

 

495

 

 

805

 

 

(310)

Total

 

$

52,025

 

$

44,106

 

$

7,919

Average invested assets at book value

 

$

1,989,131

 

$

1,715,601

 

$

273,530

 

Interest and other expenses, net

Our interest and other expenses increased by $15.0 million to $23.7 million for the nine months ended September 30, 2019 compared to $8.7 million for the nine months ended September 30, 2018. The increase is primarily driven by other expenses of $14.4 million due to non-recurring grants of RSU’s in connection with the IPO and costs associated with the transition of our former Chief Executive Officer.

Income tax expense

Our effective tax rate for the nine months ended September 30, 2019 was 21.2% compared to 20.0% for the nine months ended September 30, 2018. The increase in the effective tax rate in 2019 compared to the same period in 2018 was primarily due to adjustments recorded on state income taxes.  For the nine months ended September 30, 2019 we received a net income tax refund of $0.4 million, and for the nine months ended September 30, 2018 net income tax payments were $0.1 million.

Adjusted operating income

Adjusted operating income was $41.7 million for the nine months ended September 30, 2019, an increase of $2.1 million, or 5.2% from the adjusted operating income of $39.6 million for nine months ended September 30, 2018.

Adjusted operating return on equity

Our adjusted operating return on equity was 12.1% for the nine months ended September 30, 2019, and 13.9% for the nine months ended September 30, 2018.

Liquidity and Capital Resources

Sources and Uses of Funds

We are organized as a holding company with our operations primarily conducted by our wholly owned insurance subsidiaries, New York Marine and Gotham, which are domiciled in New York, and Southwest Marine, which is domiciled in Arizona. Accordingly, the holding company may receive cash through (1) loans from banks, (2) draws on a revolving loan agreement, (3) issuance of equity and debt securities, (4) corporate service fees from our operating subsidiaries, (5) payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions and (6) 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.

42

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.

Cash Flows

Our most significant source of cash 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. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that generally earn interest and dividends. We also use cash to pay for operating expenses such as salaries, rent and taxes and capital expenditures such as technology systems. 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, enabled significant and increasing operating cash flow generation. The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. 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 investment income are sufficient to cover cash outflows in the foreseeable future.

Our cash flows for the nine months ended September 30, 2019 and 2018 were:

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30

 

 

2019

 

2018

($ in thousands)

 

 

Cash and cash  equivalents provided by (used in):

    

 

 

 

 

 

Operating activities

 

$

212,061

 

$

208,075

Investing activities

 

 

(244,030)

 

 

(232,520)

Financing activities

 

 

33,450

 

 

5,000

Change in cash and cash equivalents

 

$

1,481

 

$

(19,445)

 

The increase in cash provided by financing activities of $28.5 million for the nine months ended September 30 2019, compared to the nine months ended September 30, 2018 was due to the net proceeds from shares issued in the IPO of $51.6 million, offset by a repayment of our outstanding debt and restated revolving loan agreement of $18.0 million.  The increase in cash provided by operating activities for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was largely driven by the timing of reinsurance activity.

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 is primarily contracted under excess of loss agreements. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses, in excess of a specified amount. In excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses. 

We use quota share and facultative reinsurance in selected niches, on a limited basis. 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.

43

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.

The following is a summary of our significant excess of loss reinsurance programs as of September 30, 2019:

 

 

 

Line of Business Covered

 

Reinsurance Coverage

Property - per risk

 

$37.0 million excess of $3.0 million

Property - catastrophe

 

$195.0 million excess of $5.0 million

Casualty

 

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

Primary Workers Compensation

 

$37.0 million excess of $3.0 million

Excess Workers Compensation

 

$95.0 million excess of $5.0 million

Marine

 

$42.5 million excess of $2.5 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. At each of September 30, 2019 and 2018 the allowance for uncollectible reinsurance was $7.7 million, and $5.5 million respectively. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers.  At September 30, 2019, all reinsurance contracts that our insurance subsidiary was a party to were with companies with A.M. Best ratings of "A-" (Excellent) or better. The remaining reinsurance recoverable with non rated reinsurers is collateralized through funds held and letters of credit.

Ratings

ProSight and its insurance subsidiaries have a financial strength rating of “A-” (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from “A++” (Superior) to “F” (In Liquidation). The “A-” (Excellent) rating is assigned to insurers that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders. This rating is intended to provide an independent opinion of an insurer’s ability to meet its obligation to policyholders and is not an evaluation directed at investors. See also “Risk Factors—Risks Related to Our Business—A downgrade in our Financial Strength Ratings (FSRs) from A.M. Best could negatively affect our results of operations.”

The financial strength ratings assigned by A.M. Best have an impact on the ability of the insurance subsidiaries to attract and retain our distribution partners and on the risk profiles of the submissions for insurance that the insurance subsidiaries receive. The “A-” (Excellent) rating affirmed by A.M. Best on November 1, 2018 is consistent with our business plan and allows us to actively pursue relationships with the distribution partners identified in our marketing plan.

44

Financial Condition

Stockholders’ equity

At September 30, 2019, total stockholders’ equity was $530.6 million and tangible stockholders’ equity was $501.4 million, compared to total stockholders’ equity of $389.8 million and tangible stockholders’ equity of $360.6 million at December 31, 2018. The increase in both total and tangible stockholders’ equity was primarily due to net unrealized gains on investment securities of $56.2 million, proceeds from common stock sold in the IPO of $51.6 million, and net income of $30.4 million, for the nine months ended September 30, 2019.

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 September 30, 2019 and December 31, 2018 reconciles to tangible stockholders’ equity as follows:

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

($ in thousands)

 

 

 

Stockholders’ equity

 

$

530,583

 

$

389,830

Less: goodwill and net intangible assets

 

 

29,196

 

 

29,219

Tangible stockholders’ equity 

 

$

501,387

 

$

360,611

Book value per share

 

$

12.33

 

$

10.03

Tangible book value per share 

 

$

11.65

 

$

9.28

 

Initial Public Offering

On July 29, 2019, the Company completed the IPO with the sale of 7,857,145  shares of the Company’s common stock, including the issuance and sale by the Company of 4,285,715 shares of the Company’s common stock and the sale by ProSight Parallel Investment LLC and ProSight Investment LLC (collectively, the GS Investors) and ProSight TPG, L.P., TPG PS 1, L.P., TPG PS 2, L.P., TPG PS 3, L.P. and TPG PS 4, L.P. (collectively the TPG Investors and together with the GS Investors, the Principal Stockholders) of 3,571,430 shares of the Company’s common stock.

Shares of the Company’s common stock were initially offered to the public by the underwriters in the IPO at a per-share price of $14.00. After deducting underwriting discounts and commissions and estimated offering expenses, the net proceeds to the Company from the IPO were approximately $51.6 million. The Company did not receive any of the proceeds from the sale of the shares of the Company’s common stock sold by the Principal Stockholders in the IPO. Following the IPO, the GS Investors held approximately 40.9% of the Company’s outstanding common stock and the TPG Investors held approximately 39.4% of the Company’s outstanding common stock. 

 

On August 15, 2019 the Principal Stockholders completed the sale of 1,178,570 shares of the Company’s common stock at a price of $14.00 per share less the underwriting discount pursuant to the underwriters’ exercise of their over-allotment option granted in connection with the IPO. The offering was registered pursuant to the registration statement, which the SEC declared effective on July 24, 2019. The Company did not receive any of the proceeds from the sale of the shares of common stock of the Company sold by the Principal Stockholders in this offering. Following this offering, the GS Investors held approximately 39.5% of the Company’s outstanding common stock and the TPG Investors held approximately 38.0% of the Company’s outstanding common stock.

 

2019 Equity Incentive Plan

In connection with, and prior to the completion of the IPO, the Company’s Amended and Restated 2010 Equity Incentive Plan (the 2010 Plan) was terminated. Immediately prior to the merger, all outstanding P Shares granted under

45

the 2010 Plan prior to the IPO, were cancelled, and all outstanding RSUs granted under the 2010 Plan converted into RSUs based on the shares of common stock of the Company.

On July 24, 2019, the Company’s 2019 Equity Incentive Plan (the 2019 Plan) became effective immediately prior to the effectiveness of the registration statement filed in connection with the IPO. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, RSUs, performance shares, and units and other cash‑based or share‑based awards.

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

A total of 4,500,000 shares of common stock are initially authorized and reserved for issuance under the 2019 Plan, including shares underlying RSUs granted under the 2010 Plan, which converted into the Company’s common stock, effective July 25, 2019, as a result of the merger.

The following is a summary of the post-offering compensation included in the 2019 Plan, including the number of common stock granted to each award mentioned below:

 

(i)

181,118 annual long-term incentive awards in respect of 2019, 90,559 of which are time-vesting RSUs and 90,559 of which are performance-vesting RSUs, granted to management in connection with the IPO. Time-vesting RSUs are subject to vesting as follows: one-third annual installments on each anniversary of grant date, subject to continued service. Performance-vesting RSUs are subject to vesting as follows: cliff vesting on the third anniversary of the grant date to the extent performance metrics are met, subject to continued service. The fair value of such awards is $2.5 million at grant date.

(ii)

1,267,912 supplemental RSU awards, 100% of which are time-vesting RSUs, granted to management in connection with the IPO and subject to vesting as follows: 25% vested at grant date, 25% will vest on the second anniversary of the grant date, subject to continued service, and 50% will vest on the third anniversary of the grant date, subject to continued service. The fair value of the supplemental RSUs is $17.8 million.

(iii)

250,000 founders grant awards in the form of time-vesting RSUs with a fair value of $3.5 million at grant date in connection with the IPO. These awards will cliff vest on the third anniversary of the grant date.

(iv)

26,399 non-employee director RSU awards with a fair value of $0.4 million at grant date (other than RSUs granted to non-employee directors designated by the Company’s principal stockholders, if any, which will be determined by the Board of Directors). These awards are fully vested on grant date.

(v)

668,170 RSUs initially granted under the 2010 Plan that were converted into RSUs based on shares of the Company’s common stock upon the consummation of the merger.

2019 Employee Stock Purchase Plan

On July 24, 2019, the 2019 Employee Stock Purchase Plan (the 2019 ESPP) became effective immediately prior to the effectiveness of the registration statement filed in connection with the IPO.  A total of 1,000,000 shares of the Company’s common stock will be reserved and available for sale under the 2019 ESPP.

The compensation committee of the Board of Directors administers the 2019 ESPP and have full authority to interpret the terms of the 2019 ESPP.

There was no expense recognized related to the 2019 ESPP for the nine months ended September 30, 2019

46

Investment portfolio

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

At September 30, 2019, $2.0 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 $194.9 million of alternative investments carried at fair value. Our securities, including cash equivalents, had a weighted average duration of 3.0 years and an average rating of “A” at September 30, 2019.

 

At September 30, 2019 and December 31, 2018, the amortized cost and fair value on fixed-maturity securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

 

 

 

Estimated

 

% of Total

 

 

 

 

 

Estimated Fair

 

% of Total Fair

 

 

 

Amortized Cost

 

Fair Value

 

Fair Value

 

 

Amortized Cost

 

Value

 

Value

 

($ in thousands)

    

 

    

  

    

    

 

    

  

 

Fixed rate securities:

 

$

1,138,479

 

$

1,167,205

 

54.2

%

 

$

1,045,990

 

$

1,010,781

 

55.3

%

Floating rate securities:

 

 

715,315

 

 

729,163

 

33.9

%

 

 

554,626

 

 

556,104

 

30.4

%

Alternate available-for-sale:

 

 

131,456

 

 

129,587

 

6.0

%

 

 

129,139

 

 

126,497

 

6.9

%

Total Bonds

 

 

1,985,250

 

 

2,025,955

 

94.1

%

 

 

1,729,755

 

 

1,693,382

 

92.6

%

Other investments:

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

  

 

Commercial levered loans

 

 

14,601

 

 

14,323

 

0.7

%

 

 

16,915

 

 

15,858

 

0.9

%

Limited partnerships

 

 

65,322

 

 

65,322

 

3.0

%

 

 

53,432

 

 

53,432

 

2.9

%

Short-term investments

 

 

14,398

 

 

14,398

 

0.7

%

 

 

36,661

 

 

36,661

 

2.0

%

Cash and cash equivalents

 

 

32,028

 

 

32,028

 

1.5

%

 

 

29,900

 

 

29,900

 

1.6

%

Total other investments

 

 

126,349

 

 

126,071

 

5.9

%

 

 

136,908

 

 

135,851

 

7.4

%

Total Investments

 

$

2,111,599

 

$

2,152,026

 

100.0

%

 

$

1,866,663

 

$

1,829,233

 

100.0

%

 

The table below presents the credit quality of total bonds at September 30, 2019 and December 31, 2018, as rated by Standard & Poor’s Financial Services, LLC (Standard & Poor’s) or Equivalent Designation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Standard & Poor’s or Equivalent Designation

    

Estimated Fair Value

    

% of Total

    

    

Estimated Fair Value

    

% of Total

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

AAA

 

$

214,253

 

10.6

%

 

$

172,575

 

10.2

%

AA

 

 

334,222

 

16.5

%

 

 

295,704

 

17.4

%

A

 

 

678,568

 

33.5

%

 

 

570,846

 

33.7

%

BBB

 

 

612,380

 

30.2

%

 

 

493,900

 

29.2

%

Below BBB/Not rated

 

 

186,532

 

9.2

%

 

 

160,357

 

9.5

%

Total

 

$

2,025,955

 

100.0

%

 

$

1,693,382

 

100.0

%

 

47

The amortized cost and fair value of our available-for-sale investments in fixed maturity securities presented by contractual maturity as of September 30, 2019 and December 31, 2018, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

    

 

 

    

Estimated

    

% of Fair

    

    

 

 

    

Estimated Fair

    

 

 

 

 

Amortized Cost

 

Fair Value

 

Value

 

 

Amortized Cost

 

Value

 

% of Fair Value

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

97,372

 

$

97,585

 

4.8

%

 

$

82,048

 

$

81,553

 

4.8

%

Due after one year through five years

 

 

722,887

 

 

733,382

 

36.2

%

 

 

613,707

 

 

602,223

 

35.6

%

Due after five years through ten years

 

 

514,633

 

 

531,014

 

26.2

%

 

 

552,061

 

 

529,257

 

31.2

%

Due after ten years

 

 

105,273

 

 

106,754

 

5.3

%

 

 

81,993

 

 

75,810

 

4.5

%

Asset-backed securities

 

 

84,227

 

 

85,216

 

4.2

%

 

 

82,603

 

 

83,581

 

4.9

%

Collateralized Loan Obligations

 

 

181,843

 

 

179,744

 

8.9

%

 

 

161,421

 

 

156,913

 

9.3

%

Commercial Mortgage Backed Securities

 

 

67,986

 

 

70,360

 

3.5

%

 

 

55,980

 

 

53,843

 

3.2

%

Residential Mortgage Backed Securities– non-agency

 

 

63,803

 

 

74,314

 

3.6

%

 

 

68,594

 

 

79,551

 

4.7

%

Residential Mortgage Backed Securities – agency

 

 

147,226

 

 

147,586

 

7.3

%

 

 

31,348

 

 

30,651

 

1.8

%

Total fixed maturities

 

$

1,985,250

 

$

2,025,955

 

100.0

%

 

$

1,729,755

 

$

1,693,382

 

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 $573.7 million at September 30, 2019.  This includes $126.7 million of funds in trust for the mutual benefit of our insurance companies due to participation in our intercompany pooling agreement.  Restricted investments increased 4.9%, or $26.6 million, when compared to December 31, 2018 primarily due to state deposits and market appreciation from fixed income securities.

Off-balance sheet arrangements

We do not have any material off-balance sheet arrangements as of September 30, 2019.

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

48

Reconciliation of Non-GAAP Financial Measures

Reconciliation of underwriting income

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

Net income for the three and nine months ended September 30, 2019 and 2018 reconciles to underwriting income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Net income

 

$

8,361

 

$

15,603

 

$

30,752

 

$

40,265

Income tax expense

 

 

2,015

 

 

3,809

 

 

8,253

 

 

10,090

Income before taxes

 

 

10,376

 

 

19,412

 

 

39,005

 

 

50,355

Net investment income

 

 

16,974

 

 

14,044

 

 

51,530

 

 

43,301

Realized investment gains, net

 

 

245

 

 

406

 

 

495

 

 

805

Interest and other expense, net

 

 

10,182

 

 

2,924

 

 

23,671

 

 

8,703

Underwriting income

 

$

3,339

 

$

7,886

 

$

10,651

 

$

14,952

 

Reconciliation of adjusted operating income

Adjusted operating income is a non-GAAP financial measure that we use as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and underlying business performance, by excluding items that are not part of our underlying profitability drivers or likely to re-occur in the foreseeable future. Adjusted operating income should not be considered in isolation or viewed as a substitute for our net income calculated in accordance with GAAP. Other companies may calculate adjusted operating income differently.

Adjusted operating income for the three and nine months ended September 30, 2019 and 2018 reconciles to net income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

($ in thousands)

    

2019

    

2018

    

2019

    

2018

Net income

 

$

8,361

 

$

15,603

 

$

30,752

 

$

40,265

Income tax expense

 

 

2,015

 

 

3,809

 

 

8,253

 

 

10,090

Income before taxes

 

 

10,376

 

 

19,412

 

 

39,005

 

 

50,355

Other Expense

 

 

7,162

 

 

 —

 

 

14,332

 

 

 —

Realized investment (gains), net

 

 

(245)

 

 

(406)

 

 

(495)

 

 

(805)

Adjusted operating income before taxes

 

 

17,293

 

 

19,006

 

 

52,842

 

 

49,550

Less: income tax expense on adjusted operating income

 

 

3,468

 

 

3,724

 

 

11,159

 

 

9,921

Adjusted operating income

 

$

13,825

 

$

15,282

 

$

41,683

 

$

39,629

 

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

49

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 critical accounting policies and estimates are described in our annual consolidated financial statements and the related notes in the Prospectus.

For additional information about our critical accounting policies and estimates, see the disclosure included in the Prospectus, 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

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, foreign currency exchange rates and commodity prices. The primary components of market risk affecting us are credit risk and interest rate risk. We do not have significant exposure to equity risk, foreign currency exchange rate risk or commodity risk.

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We have exposure to credit risk as a holder of debt instruments. Our risk management strategy and investment policy is to primarily invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. At December 31, 2018, our securities portfolio had an average rating of  “A,” with approximately 66.2% of securities in that portfolio rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment-grade securities and to limit investments in fixed maturities that are unrated or rated below investment-grade. At December 31, 2018, approximately 7.4% of our securities portfolio was unrated or rated below investment-grade. We monitor the financial condition of all of the issuers of securities in our portfolio.

 

In addition, we are subject to credit risk with respect to our third-party reinsurers. Although our third-party reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and we might not collect amounts recoverable from our reinsurers. We address this credit risk by selecting reinsurers that generally have an A.M. Best rating of  “A-” (Excellent) or better at the time we enter into the agreement and by performing, along with our reinsurance broker, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation and letters of credit.

 

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The primary market risk to our investment portfolio is interest rate risk associated with investments in securities. Fluctuations in interest rates have a direct effect on the market valuation of these securities. When market interest rates rise, the fair value of our securities decreases. Conversely, as interest rates fall, the fair value of our securities increases. We manage this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio in directional relation to the duration of our reserves. Expressed in years, duration is the weighted average payment period of cash flows, where the weighting is based on the present value of the cash flows. We set duration targets for our fixed income investment portfolios after consideration of the estimated duration of our liabilities and other factors. The effective weighted average duration of the portfolio, including cash equivalents, was 2.9 years as of December 31, 2018.

 

50

We had securities that were subject to interest rate risk with a fair value of $1.7 billion at December 31, 2018 and $1.5 billion at December 31, 2017. The table below illustrates the sensitivity of the fair value of our securities to selected hypothetical changes in interest rates as of December 31, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

December 31, 2017

 

($ in thousands)

    

Estimated
Fair Value

    

Estimated
Change in
Fair Value

    

Estimated %
Increase
(Decrease) in
Fair Value

    

    

Estimated
Fair Value

    

Estimated
Change in
Fair Value

    

Estimated %
Increase
(Decrease) in
Fair Value

 

200 basis points increase

 

$

1,600,239

 

$

(93,143)

 

(5.5)

%

 

$

1,376,647

 

$

(107,784)

 

(7.3)

%

100 basis points increase

 

$

1,645,364

 

$

(48,018)

 

(2.8)

%

 

$

1,428,390

 

$

(56,041)

 

(3.8)

%

No Change

 

$

1,693,382

 

$

-

 

-

%

 

$

1,484,431

 

$

 -

 

-

%

100 basis points decrease

 

$

1,744,292

 

$

50,910

 

3.0

%

 

$

1,544,770

 

$

60,399

 

4.1

%

200 basis points decrease

 

$

1,798,095

 

$

104,713

 

6.2

%

 

$

1,609,406

 

$

124,975

 

8.4

%

 

 

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 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 September 30, 2019 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.

51

Item 1A: Risk Factors

There have been no material changes to our risk factors previously disclosed in the Company’s Prospectus filed with the Securities and Exchange Commission on July 25, 2019 pursuant to Rule 424(b) of the Securities Act of 1933, as amended.

 

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

(b) Use of Proceeds

On July 29, 2019, the Company completed its IPO with the sale of 7,857,145 shares of the Company’s common stock, including the issuance and sale by the Company of 4,285,715 shares of the Company’s common stock and the sale by the Principal Stockholders of 3,571,430 shares of the Company’s common stock. Shares of the Company’s common stock were initially offered to the public by the underwriters in the IPO at a per-share price of $14.00 pursuant to the Prospectus that formed part of the Company’s Registration Statement on Form S-1 (File No. 333-232440), which became effective on July 24, 2019. After deducting underwriting discounts and commissions and estimated offering expenses, net proceeds from the IPO were approximately $51.6 million. On August 8, 2019, a portion of such proceeds was used to repay $18.0 million in outstanding debt under our amended and restated revolving loan agreement. The Company did not receive any of the proceeds from the sale of the shares of the Company’s common stock sold by the Principal Stockholders in the IPO.

We intend to use the net proceeds from the IPO for general corporate purposes, which may include capital contributions to our insurance subsidiaries in conjunction with future growth of premiums written. The principal purposes of the IPO are to create a public market for our common stock, obtain additional capital, facilitate future access to public equity markets, increase awareness of our company in the market, facilitate the use our common stock as a means of attracting and retaining key employees and provide liquidity to our current stockholders.

 

Item 3: Defaults Upon Senior Securities

None.

 

Item 4: Mine Safety Disclosures

Not applicable

 

Item 5: Other Information

None.

 

52

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

3.1

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

3.2

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

4.1

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

Stockholders’ Agreement among ProSight Global, Inc., the GS Investors and the TPG Investors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 29, 2019).

10.2

Form of Amendment No. 1 to ProSight Global Holdings Limited Amended and Restated 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.3

ProSight Global, Inc. 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.4

Form of Restricted Stock Unit Agreement under ProSight Global, Inc. 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.5

Form of Performance Restricted Stock Unit Agreement under ProSight Global, Inc. 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.6

Form of Supplemental Restricted Stock Unit Agreement under ProSight Global, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.7

Form of Founders Grant Restricted Stock Unit Award Agreement under ProSight Global, Inc. 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.8

Form of Non-Employee Director Restricted Stock Unit Award Agreement under ProSight Global, Inc. 2019 Equity Incentive Plan​ (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.9

ProSight Global, Inc. 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1, as amended (File No. 333-232440)).

10.10

Employment Agreement between ProSight Global, Inc. and Lawrence Hannon (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 29, 2019).

10.11

Employment Agreement between ProSight Global, Inc. and Anthony S. Piszel (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 29, 2019).

10.12

Form of Indemnification Agreement between ProSight Global, Inc. and each of its directors and executive officers.

31.1

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

31.2

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

32.1*

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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

53

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

*

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

 

54

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 6, 2019

By:

/s/ Lawrence Hannon

 

 

Lawrence Hannon

 

 

President and Chief Executive Officer

 

 

 

Dated:  November 6, 2019

By:

/s/ Anthony S. Piszel

 

 

Anthony S. Piszel

 

 

Chief Financial Officer

 

55