10-Q 1 pros-20200630x10q.htm 10-Q

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 June 30, 2020

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 43,587,642 shares of Common Stock ($0.01 par value) outstanding as of August 10, 2020.


PROSIGHT GLOBAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

   

Item 1.

Financial Statements

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

2

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

3

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

4

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

5

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

6

Notes to Interim Consolidated Financial Statements (Unaudited)

7

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

Controls and Procedures

51

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3.

Defaults Upon Senior Securities

53

Item 4.

Mine Safety Disclosures

53

Item 5.

Other Information

53

Item 6.

Exhibits

53

Signatures

54

1


ProSight Global, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

    

June 30, 

    

December 31, 

($ in thousands except share amounts)

2020

2019

Assets

 

  

 

Investments:

 

  

 

  

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

 

$

2,162,780

$

2,040,682

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

 

 

13,463

 

14,069

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

11,785

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

 

 

79,717

 

66,660

Short-term investments

 

 

496

 

43,873

Total investments

 

 

2,268,241

 

2,165,284

Cash and cash equivalents

 

 

50,637

 

17,284

Restricted cash

 

9,966

 

10,213

Accrued investment income

 

 

14,119

 

13,610

Premiums and other receivables, net

 

 

143,519

 

190,004

Receivable from reinsurers on paid losses, net

 

 

2,497

 

3,481

Reinsurance receivables on unpaid losses, net

 

 

141,427

 

193,952

Deferred policy acquisition costs

 

 

94,587

 

98,812

Prepaid reinsurance premiums

 

 

47,837

 

42,861

Net deferred income taxes

 

 

 

4,803

Goodwill and net intangible assets

 

 

29,174

 

29,189

Fixed assets and capitalized software, net

 

 

35,630

 

37,167

Funds withheld related to sale of affiliate

 

 

19,529

 

19,453

Other assets

 

 

34,218

 

29,537

Assets of discontinued operations

 

 

23,171

 

21,584

Total assets

 

$

2,914,552

$

2,877,234

Liabilities

 

 

  

 

  

Reserve for unpaid losses and loss adjustment expenses

 

$

1,544,123

$

1,521,648

Reserve for unearned premiums

 

 

450,934

 

483,223

Ceded reinsurance payable

 

 

20,324

 

17,768

Notes payable, net of debt issuance costs

 

 

164,862

 

164,693

Secured loan payable, net of issuance costs

24,997

Funds held under reinsurance agreements

 

 

22,858

 

58,855

Net deferred income taxes

75

Other liabilities

 

 

66,762

 

56,438

Liabilities of discontinued operations

 

 

33,517

 

31,578

Total liabilities

 

 

2,328,452

 

2,334,203

Stockholders’ equity

 

 

  

 

  

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

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

 

 

433

 

431

Paid-in capital

 

 

664,895

 

661,761

Accumulated other comprehensive income

 

 

52,756

 

37,453

Retained deficit

 

 

(131,784)

 

(156,414)

Treasury shares - at cost (12,920 shares)

 

 

(200)

 

(200)

Total stockholders’ equity

 

 

586,100

 

543,031

Total liabilities and stockholders’ equity

 

$

2,914,552

$

2,877,234

See accompanying notes to interim consolidated financial statements (unaudited)

2


ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

Three Months Ended June 30

Six Months Ended June 30

($ in thousands except per share amounts)

    

2020

    

2019

    

2020

    

2019

Gross written premiums

$

186,394

$

235,032

$

400,178

$

490,870

Net earned premiums

 

181,629

 

202,480

 

387,291

 

398,088

Net investment income

 

23,791

 

17,398

 

32,606

 

34,556

Realized investment gains, net

 

1,891

 

137

 

2,123

 

250

Other income

 

101

 

97

 

213

 

190

Total revenues

 

207,412

 

220,112

 

422,233

 

433,084

Expenses:

 

  

 

  

 

  

 

  

Net losses and loss adjustment expenses incurred

 

112,473

 

127,115

 

240,030

 

245,448

Policy acquisition expenses

 

42,033

 

45,533

 

89,019

 

92,106

General and administrative expenses

 

26,415

 

26,028

 

53,052

 

53,222

Interest expense

 

3,067

 

3,147

 

6,172

 

6,509

Other expense

1,390

7,170

3,127

7,170

Total expenses

 

185,378

 

208,993

 

391,400

 

404,455

Income from continuing operations before income taxes

 

22,034

 

11,119

 

30,833

 

28,629

Income tax provision:

 

  

 

  

 

  

 

  

Current

 

4,116

 

82

 

5,747

 

223

Deferred

 

635

 

2,341

 

992

 

6,015

Total income tax expense

 

4,751

 

2,423

 

6,739

 

6,238

Net income from continuing operations

 

17,283

 

8,696

 

24,094

 

22,391

Discontinued operations:

 

  

 

  

 

  

 

  

Net income (loss) from discontinued operations

 

279

 

(78)

 

536

 

(333)

Net income

$

17,562

$

8,618

$

24,630

$

22,058

Earnings per share – basic:

 

  

 

  

 

  

 

  

Net income from continuing operations

$

0.39

$

0.22

$

0.55

$

0.58

Net income

$

0.40

$

0.22

$

0.56

$

0.57

Earnings per share – diluted:

 

  

 

  

 

  

 

Net income from continuing operations

$

0.39

$

0.22

$

0.55

$

0.57

Net income

$

0.40

$

0.22

$

0.56

$

0.56

See accompanying notes to interim consolidated financial statements (unaudited)

3


ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

    

2020

    

2019

Net income

$

17,562

$

8,618

$

24,630

$

22,058

Other comprehensive income, net of taxes:

 

  

 

  

 

  

 

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

 

78,456

 

23,624

 

17,492

 

51,186

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

 

2,952

 

217

 

3,758

 

27

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

(1,240)

(1,569)

Other comprehensive income

 

76,744

 

23,407

 

15,303

 

51,159

Comprehensive income

$

94,306

$

32,025

$

39,933

$

73,217

See accompanying notes to interim consolidated financial statements (unaudited)

4


ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

    

    

    

    

Accumulated

    

    

    

Preferred

Common

Paid-In

Other Comprehensive

Retained

Treasury

($ in thousands)

Stock

Stock

Capital

Income (Loss)

Deficit

Shares

Total

December 31, 2018

$

$

389

$

607,260

$

(22,315)

$

(195,304)

$

(200)

$

389,830

Stock based employee compensation plan

 

 

77

 

 

 

 

77

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

 

 

 

27,752

 

 

 

27,752

Equity distribution

 

 

(4,174)

 

 

 

 

(4,174)

Net income

 

 

 

 

13,440

 

 

13,440

March 31, 2019

$

$

389

$

603,163

$

5,437

$

(181,864)

$

(200)

$

426,925

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

23,407

23,407

Net income

8,618

8,618

June 30, 2019

$

$

389

$

603,163

$

28,844

$

(173,246)

$

(200)

$

458,950

December 31, 2019

$

$

431

$

661,761

$

37,453

$

(156,414)

$

(200)

$

543,031

Stock based employee compensation plan

2

 

1,754

 

 

 

1,756

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

 

 

(61,441)

 

 

(61,441)

Retirement of common stock (tax payments on equity compensation)

(2,263)

(2,263)

Payments related to offering costs

 

(49)

 

 

 

(49)

Net income

 

 

 

7,068

 

7,068

March 31, 2020

$

$

433

$

661,203

$

(23,988)

$

(149,346)

$

(200)

$

488,102

Stock based employee compensation plan

3,057

3,057

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

76,744

76,744

Tax benefit on payments related to offering costs

635

635

Net income

17,562

17,562

June 30, 2020

$

$

433

$

664,895

$

52,756

$

(131,784)

$

(200)

$

586,100

See accompanying notes to interim consolidated financial statements (unaudited)

5


ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

Operating activities

 

  

 

  

Net income from continuing operations

$

24,094

 

$

22,391

Net income (loss) from discontinued operations

 

536

 

 

(333)

Net income

 

24,630

 

 

22,058

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

 

  

 

 

  

Provision for deferred taxes

 

992

 

 

6,015

Realized investment gains, net

 

(2,123)

 

 

(250)

Net limited partnerships and limited liability companies gains

 

(1,254)

 

 

(2,449)

Net amortization (accretion) from bonds and commercial loans

 

1,808

 

 

(2,227)

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

(115)

Depreciation and amortization

 

4,186

 

 

4,131

Amortization of debt issuance costs

169

162

Stock based compensation

 

4,813

 

 

77

Changes in:

 

 

 

Premiums and other receivables, net

 

46,485

 

 

4,219

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

 

53,509

 

 

(22,225)

Ceded reinsurance payable

 

2,556

 

 

2,706

Accrued investment income

 

(509)

 

 

(1,035)

Deferred policy acquisition costs

 

4,225

 

 

(8,127)

Prepaid reinsurance premiums

 

(4,976)

 

 

(14,592)

Reserve for unpaid losses and loss adjustment expenses

 

22,475

 

 

86,848

Reserve for unearned premiums

 

(32,289)

 

 

36,974

Funds withheld related to sale of affiliate

 

(76)

 

 

(137)

Funds held under reinsurance agreements

 

(35,997)

 

 

9,197

Other assets

(4,465)

20,149

Other liabilities

 

10,324

 

 

17,819

Total adjustments

 

69,738

 

 

137,255

Net cash provided by operating activities – continuing operations

 

93,832

 

 

159,646

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

 

115

 

 

(305)

Net cash provided by operating activities

 

93,947

 

 

159,341

Investing activities

 

  

 

  

Purchases of available-for-sale fixed maturity securities

 

(408,224)

(221,287)

Sales of available-for-sale fixed maturity securities

 

194,904

32,791

Redemptions of available-for-sale fixed maturity securities

 

111,877

64,310

Purchases of non-redeemable preferred stock securities

(11,669)

Redemptions of commercial levered loans

 

608

350

Purchases of limited partnerships

 

(13,651)

(8,244)

Distributions and redemptions from limited partnerships

 

1,847

1,775

Purchases of short-term investments

 

(34,955)

(241,574)

Sales of short-term investments

 

78,485

228,765

Acquisition of fixed assets and capitalized software

 

(2,634)

(3,260)

Net cash used in investing activities - continuing operations

 

(83,412)

 

(146,374)

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

 

634

 

(320)

Net cash used in investing activities

 

(82,778)

 

(146,694)

Financing activities

 

  

 

  

Payments related to offering costs

(49)

Tax withholding on stock compensation awards

(2,263)

Proceeds from secured notes payable

24,997

Net cash provided by financing activities

 

22,685

 

Net change in cash and cash equivalents

 

33,854

 

12,647

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

 

27,497

29,900

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

 

255

1,034

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

 

(1,003)

(411)

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

$

60,603

 

$

43,170

See accompanying notes to interim consolidated financial statements (unaudited)

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

1. Basis of Reporting

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

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

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

Use of Estimates

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

2. Recently Adopted Accounting Standards

Accounting Guidance Adopted

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

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

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

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

Accounting Guidance Not Yet Adopted

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

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2016-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 provides the option to apply prospectively to costs for activities performed on or after the date that the entity first adopts or retrospectively in accordance with guidance on accounting changes. ASU 2018-15 is effective for public entities for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2018-15 is effective for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.

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

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

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

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

3. Supplemental Cash Flow

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

Six Months Ended June 30

($ in thousands)

    

2020

    

2019

Cash paid during the period for:

 

  

 

  

Interest

$

6,187

$

6,566

Non-cash activity:

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

$

4,117

$

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

$

2,174

$

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

$

4,624

$

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

$

2,526

$

Tax benefit on payments related to offering costs

$

635

$

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

4. Discontinued Operations

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

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

    

June 30, 

    

December 31, 

($ in thousands)

2020

2019

Assets

Cash and investments

$

10,120

$

10,428

Other assets

 

13,051

 

11,156

Total assets

$

23,171

$

21,584

Liabilities

 

  

 

  

Reserve for unpaid losses and loss adjustment expenses

$

24,146

$

24,169

Other liabilities

 

9,371

 

7,409

Total liabilities

$

33,517

$

31,578

5. Investments

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

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

    

Cost/

    

    

Gross

    

Gross

    

Amortized

Credit Loss

Unrealized

Unrealized

Fair

($ in thousands)

Cost

Allowance

Gains

Losses

Value

Fixed maturity securities:

U.S. Treasury securities

 

$

36,265

$

$

2,204

 

$

$

38,469

Government agency securities

28,358

526

28,884

Corporate debt securities

 

1,302,996

(615)

 

65,651

 

(15,795)

 

1,352,237

Municipal debt obligations

 

158,464

 

5,623

 

(792)

 

163,295

ABS

 

49,723

(275)

 

347

 

(1,064)

 

48,731

CLO

 

175,687

(6)

 

41

(7,201)

 

168,521

CMBS

 

99,218

 

5,245

 

(986)

 

103,477

RMBS - non-agency

 

115,588

(1,089)

 

6,369

 

(2,008)

 

118,860

RMBS - agency

 

136,690

 

3,616

 

 

140,306

Total fixed maturity securities

$

2,102,989

$

(1,985)

$

89,622

$

(27,846)

$

2,162,780

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

    

Cost/

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

($ in thousands)

Cost

Gains

Losses

Value

Fixed maturity securities:

U.S. Treasury securities

 

$

49,161

$

838

 

$

(14)

 

$

49,985

Government agency securities

6,522

23

(14)

6,531

Corporate debt securities

 

1,308,094

33,743

 

(3,025)

 

1,338,812

Municipal debt obligations

 

80,338

243

 

(766)

 

79,815

ABS

 

73,068

854

 

(340)

 

73,582

CLO

 

181,704

125

 

(2,280)

 

179,549

CMBS

 

95,810

1,863

 

(147)

 

97,526

RMBS - non-agency

 

62,343

9,458

 

(191)

 

71,610

RMBS - agency

 

142,363

1,256

 

(347)

 

143,272

Total fixed maturity securities

$

1,999,403

$

48,403

$

(7,124)

$

2,040,682

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

Less Than 12 Months

Greater Than 12 Months

Total

    

    

    

    

    

    

Total

Fair

Unrealized

Fair

Unrealized

Total

Unrealized

($ in thousands)

Value

Losses

Value

Losses

Fair Value

Losses

Corporate debt securities

 

$

131,043

$

(10,502)

 

$

76,754

 

$

(5,293)

 

$

207,797

 

$

(15,795)

Municipal debt obligations

 

25,587

 

(456)

 

11,372

 

(336)

 

36,959

 

(792)

ABS

 

9,504

 

(693)

 

16,883

 

(371)

 

26,387

 

(1,064)

CLO

 

47,434

 

(1,278)

 

116,188

 

(5,923)

 

163,622

 

(7,201)

CMBS

 

16,564

 

(859)

 

4,725

 

(127)

 

21,289

 

(986)

RMBS - non-agency

 

36,568

 

(1,189)

 

9,317

 

(819)

 

45,885

 

(2,008)

Total fixed maturity securities

 

$

266,700

$

(14,977)

$

235,239

$

(12,869)

$

501,939

$

(27,846)

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

Less Than 12 Months

Greater Than 12 Months

Total

    

    

    

    

    

    

Total

Fair

Unrealized

Fair

Unrealized

Total

Unrealized

($ in thousands)

Value

Losses

Value

Losses

Fair Value

Losses

U.S. Treasury securities

$

$

$

7,469

$

(14)

$

7,469

$

(14)

Government agency securities

3,192

(14)

3,192

(14)

Corporate debt securities

 

133,341

 

(2,509)

 

50,695

 

(516)

 

184,036

 

(3,025)

Municipal debt obligations

 

66,355

 

(766)

 

 

 

66,355

 

(766)

ABS

 

27,884

 

(175)

 

11,165

 

(165)

 

39,049

 

(340)

CLO

 

28,485

 

(338)

 

110,825

 

(1,942)

 

139,310

 

(2,280)

CMBS

 

18,307

 

(102)

 

6,053

 

(45)

 

24,360

 

(147)

RMBS - non-agency

 

2,173

 

(14)

 

2,418

 

(177)

 

4,591

 

(191)

RMBS - agency

 

10,450

 

(12)

 

12,367

 

(335)

 

22,817

 

(347)

Total fixed maturity securities

$

290,187

$

(3,930)

$

200,992

$

(3,194)

$

491,179

$

(7,124)

(c) The Company was holding 286 and 313 fixed maturity securities that were in an unrealized loss position as of June 30, 2020 and December 31, 2019, respectively. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

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

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

The following table is a rollforward of the credit loss allowance for fixed maturity securities:

December 31,

Additions

Reduction

Reduction

Change in Securities

June 30,

($ in thousands)

    

2019

    

New Securities

    

Sales

    

Intent to Sell

    

with Previous Allowance

    

2020

Fixed maturity securities:

Corporate debt securities

 

$

 

$

615

 

$

$

$

$

615

ABS

 

 

275

 

275

CLO

 

6

 

6

RMBS - non-agency

1,090

(1)

1,089

Total fixed maturity securities allowance

 

$

 

$

1,986

 

$

(1)

$

$

$

1,985

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Notes to Interim Consolidated Financial Statements (Unaudited)

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

June 30, 2020

Amortized

Fair

($ in thousands)

    

Cost

    

Value

Due in one year or less

$

107,187

 

$

108,224

Due after one through five years

 

641,649

 

 

661,544

Due after five through ten years

 

494,186

 

 

520,225

Due after ten years

 

254,703

 

 

264,008

 

1,497,725

 

 

1,554,001

Structured securities:

 

Government agency securities

28,358

28,884

ABS

 

49,723

 

 

48,731

CLO

 

175,687

 

 

168,521

CMBS

 

99,218

 

 

103,477

RMBS - non-agency

 

115,588

 

 

118,860

RMBS - agency

 

136,690

 

 

140,306

Total fixed maturity securities

$

2,102,989

 

$

2,162,780

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

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

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

The Company’s strategies for its investments in limited partnerships and limited liability companies include investment funds that employ diverse and fundamentally driven approaches to investing which include effective risk management, hedging strategies and leverage. The portfolio of investments in limited partnerships and limited liability 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

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

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

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

   

Three Months Ended June 30

   

Six Months Ended June 30

($ in thousands)

2020

    

2019

2020

    

2019

Fixed maturity securities

 

$

15,849

 

$

16,531

$

32,131

 

$

32,650

Commercial levered loans

 

139

 

159

234

 

378

Net limited partnerships and limited liability companies gains

 

8,131

 

1,143

1,254

 

2,394

Other

 

322

 

92

312

 

181

Gross investment income

 

24,441

 

17,925

33,931

 

35,603

Less: investment income attributable to funds withheld liabilities

118

141

254

283

Less: expenses

 

532

 

386

1,071

 

764

Net investment income

$

23,791

 

$

17,398

$

32,606

 

$

34,556

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

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

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

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

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

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

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

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

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

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

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

June 30, 2020

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Fixed maturity securities:

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

 

$

38,469

 

$

 

$

38,469

Government agency securities

28,884

28,884

Corporate debt securities

 

 

1,190,160

 

162,077

 

1,352,237

Municipal debt obligations

 

 

163,295

 

 

163,295

ABS

 

 

48,731

 

 

48,731

CLO

 

 

168,521

 

 

168,521

CMBS

 

 

103,477

 

 

103,477

RMBS - non agency

 

 

118,860

 

 

118,860

RMBS - agency

 

 

140,306

 

 

140,306

Total fixed maturity securities

2,000,703

162,077

2,162,780

Non-redeemable preferred stock securities

11,785

11,785

Total categorized

$

 

$

2,012,488

 

$

162,077

 

$

2,174,565

Investments measured at net asset value:

Limited partnerships and limited liability companies

79,717

Total of invested assets carried at fair value

 

$

2,254,282