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PROS Prosight Global

Filed: 4 May 21, 5:02pm

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 March 31, 2021

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 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 43,779,316 shares of Common Stock ($0.01 par value) outstanding as of May 03, 2021.

ProSight Global, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

    

March 31, 

    

December 31, 

($ in thousands except share amounts)

2021

2020

Assets

 

  

 

Investments:

 

  

 

  

Fixed maturity securities, available-for-sale at fair value (amortized cost $2,215,629 in 2021 and $2,159,743 in 2020, allowance for credit losses $(1,034) in 2021 and $(1,457) in 2020)

 

$

2,250,898

$

2,266,057

Commercial levered loans at amortized cost (fair value $11,979 in 2021 and $12,180 in 2020)

 

 

12,077

 

12,308

Non-redeemable preferred stock securities at fair value (cost $6,541 in 2021 and $6,541 in 2020)

6,952

7,049

Bond exchange-traded funds at fair value (cost $29,082 in 2021 and $44,679 in 2020)

28,100

44,882

Limited partnerships and limited liability companies at fair value (cost $74,906 in 2021 and $74,268 in 2020)

 

 

96,307

 

90,468

Short-term investments

 

 

35

 

154

Total investments

 

 

2,394,369

 

2,420,918

Cash and cash equivalents

 

 

37,434

 

12,078

Restricted cash

 

27,938

 

7,525

Accrued investment income

 

 

12,306

 

13,693

Premiums and other receivables, net

 

 

114,535

 

146,243

Receivable from reinsurers on paid losses, net

 

 

9,343

 

10,481

Reinsurance receivables on unpaid losses, net

 

 

155,828

 

170,522

Deferred policy acquisition costs

 

 

90,968

 

94,437

Prepaid reinsurance premiums

 

 

46,607

 

56,787

Net deferred income taxes

 

 

290

 

Goodwill and net intangible assets

 

 

17,240

 

17,248

Fixed assets and capitalized software, net

 

 

32,851

 

33,896

Funds withheld related to sale of affiliate

 

 

19,529

 

19,534

Other assets

 

 

33,608

 

25,996

Assets of discontinued operations

 

 

22,052

 

21,354

Total assets

 

$

3,014,898

$

3,050,712

Liabilities

 

 

 

  

Reserve for unpaid losses and loss adjustment expenses

 

$

1,601,968

$

1,602,902

Reserve for unearned premiums

 

 

417,446

 

448,676

Ceded reinsurance payable

 

 

27,826

 

38,152

Notes payable, net of debt issuance costs

 

 

203,648

 

203,267

Secured loan payable, net of debt issuance costs

21,915

22,668

Funds held under reinsurance agreements

 

 

23,074

 

23,179

Net deferred income taxes

10,137

Other liabilities

 

 

74,215

 

40,034

Liabilities of discontinued operations

 

 

41,142

 

37,729

Total liabilities

 

 

2,411,234

 

2,426,744

Stockholders’ equity

 

 

 

  

Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued or outstanding

Common stock, $0.01 par value; 200,000,000 shares authorized; 43,621,696 and 43,449,087 shares issued, 43,608,766 and 43,436,167 shares outstanding in 2021 and 2020, respectively

 

 

436

 

434

Paid-in capital

 

 

670,121

 

668,798

Accumulated other comprehensive income

 

 

32,284

 

89,122

Retained deficit

 

 

(98,977)

 

(134,186)

Treasury shares - at cost (12,920 shares)

 

 

(200)

 

(200)

Total stockholders’ equity

 

 

603,664

 

623,968

Total liabilities and stockholders’ equity

 

$

3,014,898

$

3,050,712

See accompanying notes to interim consolidated financial statements (unaudited)

2

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

Three Months Ended March 31 

($ in thousands except per share amounts)

    

2021

    

2020

    

Gross written premiums

$

169,391

$

213,784

Net earned premiums

 

172,971

 

205,662

Net investment income

 

16,679

 

8,815

Realized investment gains, net

 

33,108

 

232

Other income

 

72

 

112

Total revenues

 

222,830

 

214,821

Expenses:

 

 

  

Net losses and loss adjustment expenses incurred

 

105,523

 

127,557

Policy acquisition expenses

 

42,359

 

46,986

General and administrative expenses

 

22,999

 

26,637

Interest expense

 

2,658

 

3,105

Other expense

1,317

1,737

Total expenses

 

174,856

 

206,022

Income from continuing operations before income taxes

 

47,974

 

8,799

Income tax provision:

 

 

  

Current

 

5,846

 

1,631

Deferred

 

4,581

 

357

Total income tax expense

 

10,427

 

1,988

Net income from continuing operations

 

37,547

 

6,811

Discontinued operations:

 

 

  

Net (loss) income from discontinued operations

 

(2,338)

 

257

Net income

$

35,209

$

7,068

Earnings per share – basic:

 

 

  

Net income from continuing operations

$

0.85

$

0.16

Net income

$

0.80

$

0.16

Earnings per share – diluted:

 

 

  

Net income from continuing operations

$

0.84

$

0.15

Net income

$

0.79

$

0.16

See accompanying notes to interim consolidated financial statements (unaudited)

3

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Net income

$

35,209

$

7,068

Other comprehensive loss, net of taxes:

 

  

 

Change in unrealized holding losses on available-for-sale debt securities, net of deferred tax benefit of $(8,055) in 2021 and $(16,102) in 2020

 

(30,268)

 

(60,964)

Less: reclassification adjustment for gains included in net income, net of tax expense of $6,864 in 2021 and $136 in 2020

 

26,236

 

806

Less: reclassification adjustment for credit losses included in net income, net of tax expense (benefit) of $89 in 2021 and $(87) in 2020

334

(329)

Other comprehensive loss

 

(56,838)

 

(61,441)

Comprehensive loss

$

(21,629)

$

(54,373)

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, 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

December 31, 2020

$

$

434

$

668,798

$

89,122

$

(134,186)

$

(200)

$

623,968

Stock based employee compensation plan

2

1,918

1,920

Share purchase plan

60

60

Net unrealized loss on available-for-sale debt securities, net of deferred tax benefit of $(15,008)

(56,838)

(56,838)

Retirement of common stock (tax payments on equity compensation)

(655)

(655)

Payments related to offering costs

Net income

35,209

35,209

March 31, 2021

$

$

436

$

670,121

$

32,284

$

(98,977)

$

(200)

$

603,664

See accompanying notes to interim consolidated financial statements (unaudited)

5

ProSight Global, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Operating activities

 

  

 

  

Net income from continuing operations

$

37,547

 

$

6,811

Net (loss) income from discontinued operations

 

(2,338)

 

 

257

Net income

 

35,209

 

 

7,068

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

 

  

 

 

  

Provision for deferred taxes

 

4,581

 

 

357

Realized investment gains, net

 

(33,108)

 

 

(232)

Net limited partnerships and limited liability companies (gains) losses

 

(5,183)

 

 

6,877

Net amortization from bonds and commercial loans

 

604

 

 

598

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

97

291

Net change in fair value of bond exchange-traded funds

1,748

Depreciation and amortization

 

2,218

 

 

1,987

Amortization of debt issuance costs

429

85

Stock based compensation

 

1,920

 

 

1,754

Changes in:

 

 

 

Premiums and other receivables, net

 

31,708

 

 

33,763

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

 

15,832

 

 

35,691

Ceded reinsurance payable

 

(10,326)

 

 

(4,620)

Accrued investment income

 

1,387

 

 

(202)

Deferred policy acquisition costs

 

3,469

 

 

(1,030)

Prepaid reinsurance premiums

 

10,180

 

 

2,478

Reserve for unpaid losses and loss adjustment expenses

 

(934)

 

 

24,151

Reserve for unearned premiums

 

(31,230)

 

 

(14,737)

Funds withheld related to sale of affiliate

 

5

 

 

(76)

Funds held under reinsurance agreements

 

(105)

 

 

(35,481)

Other assets

(7,657)

7,924

Other liabilities

 

34,181

 

 

(7,595)

Total adjustments

 

19,816

 

 

51,983

Net cash provided by operating activities – continuing operations

 

57,363

 

 

58,794

Net cash provided by operating activities – discontinued operations

 

31

 

 

62

Net cash provided by operating activities

 

57,394

 

 

58,856

Investing activities

 

  

 

  

Purchases of available-for-sale fixed maturity securities

 

(505,101)

(191,915)

Sales of available-for-sale fixed maturity securities

 

411,977

114,474

Redemptions of available-for-sale fixed maturity securities

 

69,436

38,376

Purchases of non-redeemable preferred stock securities

(11,669)

Redemptions of commercial levered loans

 

233

346

Sales of bond exchange-traded funds

15,034

Purchases of limited partnerships

 

(2,035)

(6,873)

Distributions and redemptions from limited partnerships

 

1,379

1,644

Purchases of short-term investments

 

(25,634)

Sales of short-term investments

 

50,323

Acquisition of fixed assets and capitalized software

 

(1,165)

(1,125)

Net cash used in investing activities – continuing operations

 

(10,242)

 

(32,053)

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

 

392

 

(15)

Net cash used in investing activities

 

(9,850)

 

(32,068)

Financing activities

 

  

 

  

Payments related to offering costs

(49)

Tax withholding on stock compensation awards

(655)

(2,263)

Proceeds from stock purchase plan

60

Repayment of secured loan payable

(757)

Net cash used in financing activities

 

(1,352)

 

(2,312)

Net change in cash and cash equivalents

 

46,192

 

24,476

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

 

19,603

27,497

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

 

1,779

255

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

 

(2,202)

(301)

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

$

65,372

 

$

51,927

See accompanying notes to interim consolidated financial statements (unaudited)

6

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 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2021. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. Such adjustments consist only of normal recurring items. All significant intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results of operations for the full year.

On January 14, 2021, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Pedal Parent Inc. (“Parent”), owned by affiliates of TowerBrook Capital Partners L.P. and Further Global Capital Management, and Pedal Merger Sub, Inc., pursuant to which, subject to the terms and conditions of the Merger Agreement, Pedal Merger Sub, Inc. would merge with and into the Company (the “proposed merger”), with the Company surviving as a wholly owned subsidiary of Parent.

Pursuant to the Merger Agreement, each ProSight common share held by our stockholders will be converted into the right to receive $12.85 in cash. In connection with the proposed merger, the Company has also entered into a loss portfolio binder with Cavello Bay Reinsurance Limited (“Cavello Bay”) in connection with an adverse development cover and loss portfolio transfer transaction (a “legacy transfer transaction”) to be implemented immediately after the effective time of the proposed merger. In the event that this loss portfolio binder is terminated under certain circumstances including those related to the termination of the Merger Agreement, the Company may be required to pay Cavello Bay approximately $3 million plus certain costs.

The proposed merger is anticipated to close in the third quarter of 2021, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities.  The stockholder approval required to consummate the proposed merger has been obtained, and no further action by our stockholders in connection with the proposed merger is required.

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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2016-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 provides the option to apply prospectively to costs for activities performed on or after the date that the entity first adopts or retrospectively in accordance with guidance on accounting changes. The Company adopted ASU 2018-15 as of January 1, 2021 and elected to apply the adopted guidance prospectively to all implementation costs incurred after the adoption date. The Company’s adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

Accounting Guidance Not Yet Adopted

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

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

3. Supplemental Cash Flow

The following table represents the supplemental cash flow information for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Cash paid (received) during the period for:

 

  

 

  

Interest

$

2,175

$

45

Federal income tax

$

(448)

$

Non-cash activity:

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

$

2,129

$

4,810

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

$

2,087

$

2,287

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

$

2,426

$

5,533

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

$

2,399

$

2,665

For the three months ended March 31, 2021, the Company withheld 50,077 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 172,609.

4. Discontinued Operations

In March 2017, the Company announced its exit from the United Kingdom (“U.K.”) insurance market. The financial results and subsequent expenses directly attributable to U.K. operations are included in the Company’s financial statements and classified within discontinued operations for all periods presented. Net loss from discontinued operations was $2.3 million for the three months ended March 31, 2021. Net income from discontinued operations was $0.3 million for the three months ended March 31, 2020.

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

    

March 31, 

    

December 31, 

($ in thousands)

2021

2020

Assets

Cash and investments

$

10,996

$

10,939

Other assets

 

11,056

 

10,415

Total assets

$

22,052

$

21,354

Liabilities

 

  

 

  

Reserve for unpaid losses and loss adjustment expenses

$

35,663

$

32,414

Other liabilities

 

5,479

 

5,315

Total liabilities

$

41,142

$

37,729

5. Investments

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

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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 March 31, 2021, 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

 

$

56,376

$

$

1,311

 

$

(60)

$

57,627

Government agency securities

26,606

402

(272)

26,736

Corporate debt securities

 

1,297,778

(546)

 

41,922

 

(13,086)

 

1,326,068

Municipal debt obligations

 

196,250

 

1,659

 

(2,627)

 

195,282

ABS

 

132,377

 

646

 

(883)

 

132,140

CLO

 

138,895

 

225

(676)

 

138,444

CMBS

 

56,733

 

885

 

(583)

 

57,035

RMBS - non-agency

 

111,296

(488)

 

8,886

 

(669)

 

119,025

RMBS - agency

 

199,318

 

2,203

 

(2,980)

 

198,541

Total fixed maturity securities

$

2,215,629

$

(1,034)

$

58,139

$

(21,836)

$

2,250,898

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

 

$

50,248

$

 

$

1,909

 

$

$

52,157

Government agency securities

30,446

561

31,007

Corporate debt securities

 

1,317,667

(598)

 

 

86,447

 

(6,485)

1,397,031

Municipal debt obligations

 

198,773

 

 

8,437

 

(116)

207,094

ABS

 

54,989

 

 

696

 

(427)

55,258

CLO

 

140,615

 

 

154

 

(1,643)

139,126

CMBS

 

111,313

 

 

7,008

 

(361)

117,960

RMBS - non-agency

 

109,110

(859)

 

 

8,619

 

(734)

116,136

RMBS - agency

 

146,582

 

 

3,721

 

(15)

150,288

Total fixed maturity securities

$

2,159,743

$

(1,457)

$

117,552

$

(9,781)

$

2,266,057

10

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

(b) The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at March 31, 2021, grouped by asset class and by duration of time in a continuous unrealized loss position:

Less Than 12 Months

Greater Than 12 Months

Total

    

    

    

    

    

    

Total

Fair

Unrealized

Fair

Unrealized

Total

Unrealized

($ in thousands)

Value

Losses

Value

Losses

Fair Value

Losses

U.S. Treasury securities

 

$

28,511

$

(60)

 

$

 

$

28,511

 

$

(60)

Government agency securities

 

12,674

(272)

12,674

(272)

Corporate debt securities

 

362,520

(8,725)

 

101,036

(4,361)

 

463,556

 

(13,086)

Municipal debt obligations

 

104,561

 

(2,612)

 

5,562

(15)

 

110,123

 

(2,627)

ABS

 

94,386

 

(821)

 

9,453

(62)

 

103,839

 

(883)

CLO

 

18,068

 

(32)

 

73,959

(644)

 

92,027

 

(676)

CMBS

 

19,467

 

(554)

 

6,727

(29)

 

26,194

 

(583)

RMBS - non-agency

 

16,929

 

(265)

 

10,747

(404)

 

27,676

 

(669)

RMBS - agency

 

140,466

 

(2,980)

 

 

140,466

 

(2,980)

Total fixed maturity securities

 

$

797,582

$

(16,321)

$

207,484

$

(5,515)

$

1,005,066

$

(21,836)

The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at December 31, 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

$

36,450

$

(740)

 

$

101,628

 

$

(5,745)

 

$

138,078

 

$

(6,485)

Municipal debt obligations

 

12,211

 

(73)

 

3,344

 

(43)

 

15,555

 

(116)

ABS

 

9,121

 

(364)

 

9,461

 

(63)

 

18,582

 

(427)

CLO

 

29,909

 

(215)

 

82,758

 

(1,428)

 

112,667

 

(1,643)

CMBS

 

17,559

 

(348)

 

800

 

(13)

 

18,359

 

(361)

RMBS - non-agency

 

11,759

 

(249)

 

6,723

 

(485)

 

18,482

 

(734)

RMBS - agency

 

2,467

 

(15)

 

 

 

2,467

 

(15)

Total fixed maturity securities

$

119,476

$

(2,004)

$

204,714

$

(7,777)

$

324,190

$

(9,781)

(c) The Company was holding 528 and 212 fixed maturity securities that were in an unrealized loss position as of March 31, 2021 and December 31, 2020, respectively. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

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

For fixed maturity securities in an unrealized loss position that require a credit loss analysis, the Company estimates a present value of expected cash flows. If the results of the cash flow analysis indicate that the Company will not recover the full amount of its amortized cost basis, the Company records a credit loss for the excess of amortized cost over the present value of expected cash flows, not to exceed the unrealized loss. Changes in the credit loss allowance are recognized through realized investment gains, net on the consolidated statements of operations. The credit loss allowance benefit for fixed maturity securities was $0.4 million for the three months ended March 31, 2021. The credit loss allowance expense for fixed maturity securities was $0.4 million for the three months ended March 31, 2020.

11

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

December 31,

Additions

Reduction

Reduction

Change in Securities

March 31,

($ in thousands)

2020

New Securities

Sales

Intent to Sell

with Previous Allowance

2021

Fixed maturity securities:

Corporate debt securities

 

$

598

 

$

 

$

(87)

$

$

35

$

546

RMBS - non-agency

859

(46)

(325)

488

Total fixed maturity securities allowance

 

$

1,457

 

$

 

$

(133)

$

$

(290)

$

1,034

December 31,

Additions

Reduction

Reduction

Change in Securities

March 31,

($ in thousands)

2019

New Securities

Sales

Intent to Sell

with Previous Allowance

2020

Fixed maturity securities:

Corporate debt securities

 

$

 

$

293

 

$

$

$

$

293

ABS

 

 

1

 

1

CLO

 

6

 

6

RMBS - non-agency

116

116

Total fixed maturity securities allowance

 

$

 

$

416

 

$

$

$

$

416

(d) The amortized cost and fair value of fixed maturity securities, excluding the Company’s structured securities portfolio, at March 31, 2021, by contractual maturity are shown below. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2021

Amortized

Fair

($ in thousands)

    

Cost

    

Value

Due in one year or less

$

116,455

 

$

118,009

Due after one through five years

 

747,657

 

 

767,003

Due after five through ten years

 

451,693

 

 

460,956

Due after ten years

 

234,599

 

 

233,009

 

1,550,404

 

 

1,578,977

Structured securities:

 

Government agency securities

26,606

26,736

ABS

 

132,377

 

 

132,140

CLO

 

138,895

 

 

138,444

CMBS

 

56,733

 

 

57,035

RMBS - non-agency

 

111,296

 

 

119,025

RMBS - agency

 

199,318

 

 

198,541

Total fixed maturity securities

$

2,215,629

 

$

2,250,898

The Company did not have any non-income producing fixed maturity investments as of March 31, 2021 and December 31, 2020, respectively.

(e) The Company records its limited partnership and limited liability companies using net asset value, which the Company has determined to be the best indicator of fair value for these investments. At March 31, 2021 and December 31, 2020, the fair value of limited partnerships and limited liability companies were $96.3 million and $90.5 million, respectively. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income. The largest investment within the portfolio is the Pacific Investment Management Company LLC Tactical Opportunities fund, which is carried at $48.2 million at March 31, 2021.

12

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ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

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

(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 0 allowance for credit losses on loans at March 31, 2021 and December 31, 2020, respectively.

(g) Proceeds from sales and redemptions in AFS securities totaled $481.4 million and $152.8 million for the three months ended March 31, 2021 and 2020, respectively. Gross realized gains from sales and redemptions in AFS securities totaled $32.8 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively. Gross realized losses from sales and redemptions of AFS investments totaled $0.1 million and $0.4 million for the three months ended March 31, 2021 and 2020, 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 months ended March 31, 2021 and 2020, is as follows:

    

Three Months Ended March 31 

($ in thousands)

2021

    

2020

Fixed maturity securities

 

$

13,759

 

$

16,282

Net limited partnerships and limited liability companies gains (losses)

 

5,183

 

(6,877)

Other

 

(1,498)

 

85

Gross investment income

 

17,444

 

9,490

Less: investment income attributable to funds withheld liabilities

104

136

Less: expenses

 

661

 

539

Net investment income

$

16,679

 

$

8,815

(i) Included in investments at March 31, 2021 and December 31, 2020, are securities required to be held by the Company (or those that are on deposit) with various regulatory authorities as required by law with a fair value of $229.9 million and $233.4 million, respectively. Fair value and carrying value of assets in the amount of $251.3 million and $242.3 million, respectively, were on deposit in collateral agreements at March 31, 2021. Fair value and carrying value

13

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

of assets in the amount of $256.4 million and $241.0 million, respectively, were on deposit in collateral agreements at December 31, 2020.

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

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

The change in fair value recognized in income on non-redeemable preferred stock securities for the three months ended March 31, 2021 was a gain of $0.4 million. The gain consisted of an unrealized gain on non-redeemable preferred stock securities of $0.4 million.

The change in fair value recognized in income on non-redeemable preferred stock securities for the three months ended March 31, 2020 was a loss of $0.3 million. The loss consisted of an unrealized loss on non-redeemable preferred stock securities of $0.3 million.

(l) Bond exchange-traded funds with readily determinable fair values are recorded at fair value. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income.

The change in fair value recognized in income on bond exchange-traded funds for the three months ended March 31, 2021 was a loss of $1.5 million. The loss consisted of an unrealized loss on bond exchange-traded funds securities of $1.0 million and a loss recognized on the sale of bond exchange-traded funds of $0.5 million.

(m) The Company began participating in a securities lending program in March 2021. The Company loans certain of its securities to third parties, for short periods through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities and cash collateral received earns income which are both recorded within net investment income on the consolidated statement of operations. Collateral recorded within restricted cash on the consolidated balance sheet is received in an amount that is in excess of fair value at the time of borrowing (102% for domestic loaned securities and 105% for foreign loaned securities), including accrued investment income and is monitored and maintained by the lending agent. A securities lending payable is recorded within other liabilities on the consolidated balance sheet, which represents the Company’s obligation to return collateral upon receiving borrowed securities. An indemnification agreement with the lending agent protects the Company on the event a borrower becomes insolvent or fails to return any securities on loan to the Company. As of March 31, 2021, the fair value of the cash collateral received by the Company was $21.8 million.

6. Fair Value Measurements

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

14

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

describes three levels of inputs that may be used to measure fair value and categorize the assets and liabilities within the hierarchy:

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

The Company’s Level 1 assets include bond exchange-traded funds.

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

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

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

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

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

The corporate debt securities and non-redeemable preferred stock securities classified under Level 3 in the fair value hierarchy are either provided to the Company by an independent valuation service provider or calculated by the Company.  For certain securities, the Company uses observable inputs such as readily available indices as well as change in estimated fund returns provided by third party investment managers. Unobservable inputs, significant to the measurement and valuation of the corporate debt securities are assumptions about prepayment speed, default rates and recovery rates. Significant changes to any of these inputs, or combination of inputs, could significantly change the fair value measurement for these securities when using the income approach.

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

15

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following are the major categories of assets measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

March 31, 2021

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Fixed maturity securities:

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

 

$

57,627

 

$

 

$

57,627

Government agency securities

26,736

26,736

Corporate debt securities

 

 

1,035,164

 

290,904

 

1,326,068

Municipal debt obligations

 

 

195,282

 

 

195,282

ABS

 

 

132,140

 

 

132,140

CLO

 

 

138,444

 

 

138,444

CMBS

 

 

57,035

 

 

57,035

RMBS - non agency

 

 

119,025

 

 

119,025

RMBS - agency

 

 

198,541

 

 

198,541

Total fixed maturity securities

1,959,994

290,904

2,250,898

Non-redeemable preferred stock securities

5,552

1,400

6,952

Bond exchange-traded funds

28,100

 

28,100

Total categorized

$

28,100

 

$

1,965,546

 

$

292,304

 

$

2,285,950

Investments measured at net asset value:

Limited partnerships and limited liability companies

96,307

Total of invested assets carried at fair value

 

$

2,382,257

December 31, 2020

($ in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Fixed maturity securities:

U.S. Treasury securities

$

$

52,157

$

 

$

52,157

Government agency securities

31,007

31,007

Corporate debt securities

 

 

1,139,066

 

257,965

 

1,397,031

Municipal debt obligations

 

 

207,094

 

 

207,094

ABS

 

 

55,258

 

 

55,258

CLO

 

 

139,126

 

 

139,126

CMBS

 

 

117,960

 

 

117,960

RMBS - non agency

 

 

116,136

 

 

116,136

RMBS - agency

 

 

150,288

 

 

150,288

Total fixed maturity securities

2,008,092

257,965

2,266,057

Non-redeemable preferred stock securities

5,649

1,400

7,049

Bond exchange-traded funds

44,882

44,882

Total categorized

$

44,882

$

2,013,741

$

259,365

2,317,988

Investments measured at net asset value:

Limited partnerships and limited liability companies

90,468

Total of invested assets carried at fair value

$

2,408,456

16

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following tables disclose the carrying value and fair value of financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of March 31, 2021 and December 31, 2020:

March 31, 2021

Carrying

Fair Value

($ in thousands)

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets

 

  

 

  

 

  

 

  

 

  

Commercial levered loans

$

12,077

 

$

11,979

 

$

 

$

 

$

11,979

Liabilities

 

  

 

  

 

  

 

  

 

  

Notes payable

$

207,000

 

$

207,649

 

$

 

$

207,649

 

$

Unamortized debt issuance costs

 

(3,352)

 

Notes payable, net of debt issuance costs

$

203,648

 

Secured loan payable

$

21,992

 

$

22,105

 

$

 

$

22,105

 

$

Unamortized debt issuance costs

 

(77)

 

Secured loan payable, net of issuance costs

$

21,915

 

December 31, 2020

Carrying

Fair Value

($ in thousands)

    

Value

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets

 

  

 

  

 

  

 

  

 

  

Commercial levered loans

$

12,308

 

$

12,180

 

$

 

$

 

$

12,180

Liabilities

 

  

 

  

 

  

 

  

 

  

Notes payable

$

207,000

 

$

207,537

 

$

 

$

207,537

 

$

Unamortized debt issuance costs

 

(3,733)

 

Notes payable, net of debt issuance costs

$

203,267

Secured loan payable

$

22,750

 

$

23,265

 

$

 

$

23,265

 

$

Unamortized debt issuance costs

 

(82)

 

Secured loan payable, net of issuance costs

$

22,668

 

 

The fair value of the notes payable at March 31, 2021, approximated a price equal to $207.6 million or 100.3% of the par value. The fair value of the secured loan payable at March 31, 2021, approximated a price equal to $22.1 million or 100.5% of the par value.

The fair value of the notes payable at December 31, 2020, approximated a price equal to $207.5 million or 100.3% of the par value. The fair value of the secured loan payable at December 31, 2020, approximated a price equal to $23.3 million or 102.3% of the par value.

17

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following tables provides a summary of the changes in the fair value of securities measured using Level 3 inputs during the three months ended March 31, 2021 and 2020:

    

Non-Redeemable

Corporate Debt 

Preferred Stock

Level 3

($ in thousands)

Securities

 

Securities

Total

Fair value, December 31, 2020

$

257,965

$

1,400

$

259,365

Total net losses for the period included in:

 

Other comprehensive loss

(3,866)

(3,866)

Net realized loss

 

(41)

 

 

(41)

Purchases

 

41,977

 

 

41,977

Sales

 

 

 

Issuances

 

 

 

Settlements

 

(5,131)

 

 

(5,131)

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Fair value, March 31, 2021

$

290,904

$

1,400

$

292,304

    

Level 3

Corporate Debt 

($ in thousands)

Securities

Fair value, December 31, 2019

$

149,631

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

 

  

Other comprehensive loss

(10,703)

Net realized gain

 

1

Purchases

 

14,241

Sales

 

Issuances

 

Settlements

 

(752)

Transfers into Level 3

 

Transfers out of Level 3

 

Fair value, March 31, 2020

$

152,418

7. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the components of accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2021 and 2020:

($ in thousands)

Gross

Tax

Net

December 31, 2020

 

$

111,755

 

$

22,633

 

$

89,122

Unrealized holding losses on fixed maturity securities

 

(38,323)

 

(8,055)

 

(30,268)

Amounts reclassified into net income

 

33,100

 

6,864

 

26,236

Amounts reclassified as credit losses

423

89

334

Other comprehensive loss

 

(71,846)

 

(15,008)

 

(56,838)

March 31, 2021

 

$

39,909

 

$

7,625

 

$

32,284

($ in thousands)

    

Gross

    

Tax

    

Net

December 31, 2019

 

$

46,123

 

$

8,670

$

37,453

Unrealized holding losses on fixed maturity securities

 

(77,066)

 

(16,102)

(60,964)

Amounts reclassified into net income

 

942

 

136

806

Amounts reclassified as credit losses

(416)

(87)

(329)

Other comprehensive loss

 

(77,592)

(16,151)

(61,441)

March 31, 2020

$

(31,469)

 

$

(7,481)

$

(23,988)

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The following table presents reclassifications out of AOCI attributable to the Company during the three months ended March 31, 2021 and 2020:

Line in Consolidated

Three Months Ended March 31 

($ in thousands)

    

Statements of Operations

    

2021

    

2020

AOCI

 

  

 

 

  

Unrealized gains on securities

 

Realized investment gains, net

$

33,100

$

942

 

Income tax expense

6,864

136

Reclassification adjustment for credit losses included in net income

Realized investment gains, net

423

(416)

Income tax expense

89

(87)

Total reclassifications

 

$

26,570

$

477

8. Related-Party Information

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.

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

The Company recorded 0 expense and $0.3 million for the three months ended March 31, 2021 and 2020, respectively, within other expense in the consolidated statements of operations relating to the severance payments and benefits payable to the former CEO.

Additionally, the Company entered into a niche management agreement with an independent agency founded by the former CEO.  The Company recorded an expense of $0.3 million for the three months ended March 31, 2021.

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

9. Insurance Operations

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

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Written premiums

 

  

 

  

Direct written premiums

 

$

168,772

 

$

212,951

Assumed from other companies

 

619

 

833

Ceded to other companies

 

17,470

 

23,601

Net written premiums

$

151,921

 

$

190,183

Earned premiums

 

  

 

 

  

Direct earned premiums

$

199,932

 

$

228,580

Assumed from other companies

 

690

 

 

742

Ceded to other companies

 

27,651

 

 

23,660

Net earned premiums

$

172,971

 

$

205,662

Percent of amount assumed to net

 

0.4%

0.4%

Losses and loss adjustment expenses incurred

 

  

 

 

  

Direct net losses and loss adjustment expenses incurred

$

107,457

 

$

144,377

Assumed from other companies

 

(347)

 

 

(1,357)

Ceded to other companies

 

1,587

 

 

15,463

Net losses and loss adjustment expenses incurred

$

105,523

 

$

127,557

Allowances for Credit Losses

The allowance for credit loss for premium receivable is an assessment of ultimate non-collectability based on historical experience applicable to the respective current collection action status, age of the amount outstanding and expected collection costs.  The credit loss allowance for premium receivables as of March 31, 2021 and December 31, 2020 were $5.4 million and $6.9 million, respectively.

The majority of the allowance relates to audit premium on workers’ compensation coverages assessed during or after the period of coverage whereby there is limited ability to cancel or limit coverage. In the final collection action at the insured level, collection agencies are typically engaged. The amount with collection agencies as of March 31, 2021 was $5.4 million.

The reinsurance receivable allowance for credit loss is based on sources of credit ratings of reinsurers and applies probabilities of default and loss given default to the total uncollateralized exposure including incurred but not reported (“IBNR”) by rating class. The credit loss allowance for reinsurance receivables on paid and unpaid losses as of March 31, 2021 and December 31, 2020 were $0.7 million and $0.7 million, respectively.

Distribution Partners

The 3 distribution partners contributing the largest amounts of direct written premium totaled $57.9 million and $69.1 million for the three months ended March 31, 2021 and 2020, respectively.

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

Unpaid Losses

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

March 31 

($ in thousands)

    

2021

    

2020

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

$

1,602,902

$

1,521,648

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

170,522

193,952

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

1,432,380

1,327,696

Add:

  

  

Incurred losses and loss expenses occurring in the:

  

  

Current year

102,723

121,001

Prior years

263

198

Prior years attributable to adjusted premium

2,537

6,358

Total net losses and loss adjustment expenses incurred

105,523

127,557

Less:

  

  

Paid losses and loss expenses for claims occurring in the:

  

  

Current year

6,819

3,665

Prior years

84,944

62,655

Total paid losses and loss expenses for claims

91,763

66,320

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

1,446,140

1,388,933

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

155,828

156,866

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

$

1,601,968

$

1,545,799

During the three months ended March 31, 2021, the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2020 and prior developed unfavorably by $0.3 million driven by $2.0 million unfavorable development in Commercial Multiple Peril and $0.4 million unfavorable development in General Liability offset by $1.1 million favorable development in Workers’ Compensation, $0.3 million favorable development in Commercial Auto and $0.6 million favorable development in All Other lines. In addition, the Company incurred $2.5 million of losses and loss adjustment expenses related to premium adjustments earned during the three months ended March 31, 2021 attributable to prior accident years 2020 and 2019.

The unfavorable development in General Liability and Commercial Multiple Peril related primarily to accident year 2017 due largely to increased severities. The favorable development in Workers’ Compensation derived from lower than expected claims severity across all customer segments primarily in accident years 2017 and 2018. The favorable development in All Other lines was driven mostly by Inland Marine & Fire.

During the three months ended March 31, 2020, the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2019 and prior developed unfavorably by $0.2 million driven by $7.1 million unfavorable development of  Commercial Multiple Peril and $4.4 million unfavorable development in General Liability offset by $5.2 million favorable development in Commercial Auto, $4.9 million in Workers’ Compensation and $1.3 million in All Other lines. In addition, the Company incurred $6.4 million of losses and loss adjustment expenses related to premium adjustments earned during the three months ended March 31, 2020 attributable to prior accident years 2019 and 2018.

The unfavorable development in Commercial Multiple Peril and General Liability related to 2013 through 2017 accident years due largely to increased severities in the runoff components within the Other customer segment. The favorable development in Workers’ Compensation derived from lower than expected claims severity across all customer segments primarily in accident years 2013 through 2015 and 2017. The favorable development in Commercial Auto was driven by physical damage and liability bodily injury in accident years 2017 through 2019. The favorable development in All Other lines was in Surety and Ocean Marine lines of business.

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

10. Income Taxes

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

The Company has 1 non-U.S. subsidiary, ProSight Specialty Bermuda Limited (“PSBL”), which has received an undertaking from the Minister of Finance in Bermuda that would exempt such company from Bermudian taxation until March 2035. In 2019, PSBL became a direct subsidiary of the Company and is subject to U.S. tax on its income.

The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company’s best estimate of the effective tax rate expected for the full year. The estimated annual effective tax rate typically differs from the U.S. statutory tax rate primarily as a result of non-deductible expenses and discrete items recognized during the period. The Company’s effective tax rates were 21.7% and 22.6% for the three months ended March 31, 2021 and 2020, respectively. The decrease in the effective tax rate for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to the tax effect of share-based compensation.

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

11. Segment Information

The Company has 1 reportable segment, Specialty Insurance, which primarily offers property and casualty insurance products through its customers segments that include Construction, Consumer Services, Marine and Energy, Media and Entertainment, Professional Services, Real Estate, Sports, and Transportation. The primary criteria to determine the Company’s reportable segment is based on the fact that the Company’s senior management reviews, assesses and allocates resources both on a financial and personnel basis on an entity-wide level.

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

Three Months Ended March 31 

 

($ in thousands)

    

2021

    

2020

 

Customer Segment

    

    

  

    

  

    

  

Construction

$

26,495

 

15.7

%

$

24,514

 

11.5

%

Consumer Services

 

22,624

 

13.4

 

 

30,568

 

14.3

Marine and Energy

 

24,211

 

14.3

 

 

32,790

 

15.3

Media and Entertainment

 

20,848

 

12.3

 

 

30,467

 

14.3

Professional Services

 

34,441

 

20.3

 

 

29,698

 

13.9

Real Estate

 

19,912

 

11.8

 

 

33,215

 

15.5

Sports

5,657

 

3.3

 

 

9,565

 

4.5

Transportation

 

13,790

 

8.1

 

 

21,467

 

10.0

Customer segment subtotal

 

167,978

 

99.2

 

 

212,284

 

99.3

Other

 

1,413

 

0.8

 

 

1,500

 

0.7

Specialty Insurance total

$

169,391

 

100.0

%

$

213,784

 

100.0

%

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

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

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Line of Business

    

    

  

    

  

    

  

Commercial Auto

$

36,120

 

21.3

%

$

40,331

 

18.9

%

General Liability

 

70,893

 

41.9

 

 

78,533

 

36.7

 

Workers’ Compensation

 

11,845

 

7.0

 

 

28,821

 

13.5

 

Commercial Multiple Peril

 

14,252

 

8.4

 

 

16,365

 

7.6

 

All Other Lines

 

36,281

 

21.4

 

 

49,734

 

23.3

 

Specialty Insurance total

$

169,391

 

100.0

%

$

213,784

 

100.0

%

12. Earnings per Share

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

Continuing Operations

Discontinued Operations

(in thousands, except per share amounts)

Income

Shares

Per Share

Loss

Shares

Per Share

Three Months Ended March 31, 2021

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

Net income(loss) available to common stockholders

$

37,547

 

43,937

 

$

0.85

 

$

(2,338)

 

43,937

 

$

(0.05)

Effect of dilutive securities:

 

Stock compensation plans

 

 

746

 

 

 

 

 

746

 

 

Diluted EPS

$

37,547

 

44,683

 

$

0.84

 

$

(2,338)

 

44,683

 

$

(0.05)

Continuing Operations

Discontinued Operations

(in thousands, except per share amounts)

Income

Shares

Per Share

Income

Shares

Per Share

Three Months Ended March 31, 2020

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic EPS:

 

 

 

 

 

Net income available to common stockholders

$

6,811

 

43,910

 

$

0.16

 

$

257

 

43,910

 

$

Effect of dilutive securities:

 

Stock compensation plans

 

 

364

 

 

 

364

 

Diluted EPS

$

6,811

 

44,274

 

$

0.15

 

$

257

 

44,274

 

$

0.01

23

Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

13. Share-Based Compensation

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

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

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

The following table summarizes the stock-based compensation transactions for the 2019 Plan for the three months ended March 31, 2021:

Number of

Weighted Average Grant Date

    

    

Shares

    

Fair Value Per Share

Unvested at December 31, 2020

1,705,441

 

$

13.46

Granted

15,634

$

12.55

Vested

(73,479)

$

13.12

Forfeited

(22,265)

$

13.78

Unvested at March 31, 2021

1,625,331

$

13.48

As of March 31, 2021, The Company had approximately $9.9 million of total unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 1.4 years.

14. Commitments and Contingencies

Leases

The Company leases certain facilities and equipment under non-cancelable lease agreements that expire at various dates through 2025, which are generally renewed or replaced by similar leases. The lease agreements do not contain any material restrictive covenants, do not contain any conditions of residual value guarantees and are substantially all considered to be operating leases. The Company’s leases relate to office facilities in New Jersey, California, Florida and the U.K. The weighted average lease term was 2.6 years and the weighted average discount rate was 2.1%.

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Table of Contents

ProSight Global, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

The Company recorded rent expense $0.7 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively. The following table presents the Company’s lease liabilities and right-of-use assets related to operating leases as of March 31, 2021:

($ in thousands)

    

March 31, 2021

One year or less

$

2,450

More than one year to two years

 

More than two years to three years

 

More than three years to four years

More than four years to five years

More than five years

 

Total undiscounted future minimum lease payments

 

2,450

Less: difference between lease payments and discounted lease liabilities

 

24

Lease liabilities

$

2,426

Right-of-use assets

$

2,129

Prepaid lease assets, net of lease allowances and incentives

 

297

Total

$

2,426

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

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.

25

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”), and in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2021 (the “2020 Annual Report”).

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

Special Note Regarding Forward-Looking Statements

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

our strategies to continue our growth trajectory, expand our distribution network and maintain underwriting profitability;
the impact of coronavirus disease 2019 (“COVID-19”) and related economic conditions and governmental actions, including the Company's assessment of the vulnerability of certain categories of investments to the economic disruptions associated with COVID-19;
future growth in existing niches or by entering into new niches;
our loss expectations and expectation to decrease our loss ratio;
our expectations with respect to the ultimate financial obligations to the buyers of our United Kingdom (“U.K.”) operations; and
statements we make relating to the proposed merger.

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:

risks relating to our ability to obtain regulatory approvals of the proposed merger (as defined below), including the timing, terms and conditions of any such approvals, which could affect our ability to complete the proposed merger;
26
the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement (as defined below), including a termination of the Merger Agreement under circumstances that could require us to pay a termination fee;
the risk that the parties to the proposed merger may not be able to satisfy the conditions of the proposed merger in a timely manner or at all;
risks related to disruption of management time from ongoing business operations due to the proposed merger;
risk that the proposed merger could have an adverse effect on our ability to retain and hire key personnel and maintain relationships with our customers, agents or business counterparties, and on our operating results and businesses generally;
the outcome of any potential legal proceedings that may be instituted against us;
the performance of and our relationship with third-party agents and vendors we rely upon to distribute certain business on our behalf;
the adequacy of our loss reserves, including as a result of changes in the legal, regulatory, and economic environments in which the Company operates or the impacts of COVID-19;
the direct and indirect impacts of COVID-19 and related risks such as governmental responses and economic contraction, including on the Company’s investments and business operations, its distribution or other key partners and its customers;
the effects of uncertain emerging claim and coverage issues on the Company’s business, and court decisions or legislative or regulatory changes that take place after the Company issues its policies, including those taken in response to COVID-19 (such as effectively expanding workers’ compensation coverage by instituting presumptions of compensability of claims for certain types of workers or requiring insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage);
the effectiveness of our risk management policies and procedures;
potential technology breaches or failure of our or our business partners’ systems;
adverse changes in the economy which could lower the demand for our insurance products;
our ability to effectively start up or integrate new product opportunities;
cyclical changes in the insurance industry;
the effects of natural and man-made catastrophic events;
our ability to adequately assess risks and estimate losses;
the availability and affordability of reinsurance;
changes in interest rates, government monetary policies, general economic conditions, liquidity and overall market conditions;
changes in the business, financial condition or results of operations of the entities in which we invest;
increased costs as a result of operating as a public company, and time our management will be required to devote to new compliance initiatives;
27
our ability to protect intellectual property rights;
the impact of government regulation, including the impact of restrictions on our business activities under the Bank Holding Company (“BHC”) Act;
our status as an emerging growth company;
the absence of a previous public market for shares of our common stock; and
potential conflicts of interests with our principal stockholders.

We discuss many of these risks in greater detail under the section titled Item 1A. “Risk Factors” in the 2020 Annual Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking statements in this Quarterly Report by these cautionary statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Merger Agreement

On January 15, 2021, we announced that we had entered into an agreement and plan of merger (the “Merger Agreement”) with Pedal Parent Inc., a Delaware corporation (“Parent”), owned by affiliates of TowerBrook Capital Partners L.P. and Further Global Capital Management, and Pedal Merger Sub, Inc., pursuant to which, subject to the terms and conditions of the Merger Agreement, Pedal Merger Sub, Inc. would merge with and into the Company (the “proposed merger”), with the Company surviving as a wholly owned subsidiary of Parent.

Pursuant to the Merger Agreement, each ProSight common share held by our stockholders will be converted into the right to receive $12.85 in cash. In connection with the proposed merger, the Company has also entered into a loss portfolio binder with Cavello Bay Reinsurance Limited (“Cavello Bay”) in connection with an adverse development cover and loss portfolio transfer transaction (a “legacy transfer transaction”) to be implemented immediately after the effective time of the proposed merger. In the event that this loss portfolio binder is terminated under certain circumstances including those related to the termination of the Merger Agreement, the Company may be required to pay Cavello Bay approximately $3 million plus certain costs.

The proposed merger is anticipated to close in the third quarter of 2021, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities including those related to the legacy transfer transaction.

The stockholder approval required to consummate the proposed merger has been obtained, and no further action by our stockholders in connection with the proposed merger is required.

Overview

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

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 fixed maturity securities, and may also include cash and cash equivalents, short-term investments, non-redeemable preferred stock securities, bond exchange-traded funds, commercial levered loans, and limited partnerships and limited liability companies. Neither our limited partnerships nor our limited liability companies are accounted for on a lag and thus reflect the current period fair value adjustments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates and credit spreads), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive from our insureds less payments on policyholder claims and operating expenses.

Realized Investment Gains and Losses

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

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses (“LAE”) are a function of the amount and type of insurance contracts we write, the loss experience associated with the underlying coverage, and the expenses incurred in the handling of the losses. In general, our losses and LAE are affected by:

Frequency of claims associated with the particular types of insurance contracts that we write;

29

Trends in the average size of losses incurred on a particular type of business;
Mix of business written by us;
Changes in the legal or regulatory environment related to the business we write;
Trends in legal defense costs;
Wage inflation; and
Inflation in medical costs.

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

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

Underwriting, Acquisition and Insurance Expenses

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

Income Tax Expense

Substantially all of our income tax expense relates to U.S. federal income taxes. Our insurance companies are generally not subject to income taxes in the states in which they operate; however, our non-insurance subsidiaries are subject to state income taxes. The amount of income tax expense or benefit recorded in future periods will depend on the jurisdictions in which we operate and the tax laws and regulations in effect. Our income tax expense for periods beginning in 2018 is based on the U.S. federal corporate income tax rate of 21%.

Key Metrics

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

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

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

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

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

30

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

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

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

Factors Affecting Our Results of Operations

The WAQS

In connection with the divestment of our U.K. business, New York Marine as reinsured entered into the 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. 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. There were no ceded loss reserves under the WAQS as of March 31, 2021 and for the years ended March 31, 2021 and March 31, 2020 there was no impact of WAQS on underwriting results or ratios.

31

Results of Operations

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The following table summarizes the results of continuing operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31 

Change

 

($ in thousands)

    

2021

    

2020

$

    

Percent

GWP

$

169,391

$

213,784

$

(44,393)

(20.8)

%

Ceded written premiums

 

(17,470)

 

(23,601)

 

6,131

(26.0)

Net written premiums

$

151,921

$

190,183

$

(38,262)

(20.1)

%

Net earned premiums

$

172,971

$

205,662

$

(32,691)

(15.9)

%

Net losses and LAE incurred:

 

105,523

 

127,557

 

(22,034)

(17.3)

Underwriting, acquisition and insurance expenses

 

65,358

 

73,623

 

(8,265)

(11.2)

Underwriting income (1)

 

2,090

 

4,482

 

(2,392)

(53.4)

Interest and other expenses, net

 

3,903

 

4,730

 

(827)

(17.5)

Net investment income

 

16,679

 

8,815

 

7,864

89.2

Realized investment gains, net

 

33,108

 

232

 

32,876

14,170.7

Income before taxes

 

47,974

 

8,799

 

39,175

445.2

Income tax expense

 

10,427

 

1,988

 

8,439

424.5

Net income from continuing operations

$

37,547

$

6,811

$

30,736

451.3

%

Adjusted operating income (1)

$

12,401

$

7,976

$

4,425

55.5

%

Adjusted operating return on equity (1)

8.1

%

 

6.2

%

Return on equity

24.5

%

 

5.3

%

Loss and LAE ratio:

61.0

%

 

62.0

%

Loss and LAE ratio – excluding catastrophe (2)

61.0

%

 

62.0

%

Loss and LAE ratio – catastrophe losses

-

%

 

-

%

Expense ratio

37.8

%

 

35.8

%

Combined ratio

98.8

%

 

97.8

%

(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)Loss and LAE ratio – excluding catastrophe is adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period from net earned premium.

Net Income from Continuing Operations

Net income was $37.5 million for the three months ended March 31, 2021 compared to $6.8 million for the three months ended March 31, 2020, an increase of $30.7 million, or 451.3%. The increase in net income primarily resulted from an increase in realized gains taken in order to capitalize on elevated security pricing across most market sectors of the portfolio as well as an increase in net investment income.

Premiums

GWP were $169.4 million for the three months ended March 31, 2021 compared to $213.8 million for the three months ended March 31, 2020, a decrease of $44.4 million, or 20.8%.

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The following table presents the GWP by customer segment for the three months ended March 31, 2021 and 2020:

($ in millions)

Three Months Ended March 31 

 

Customer Segment

    

2021

    

2020

    

% Change

 

Construction

$

26.5

$

24.5

 

8.2

%

Consumer Services

 

22.6

 

30.6

 

(26.1)

Marine and Energy

 

24.2

 

32.8

 

(26.2)

Media and Entertainment

 

20.9

 

30.5

 

(31.5)

Professional Services

 

34.4

 

29.7

 

15.8

Real Estate

 

19.9

 

33.2

 

(40.1)

Sports

5.7

9.5

(40.0)

Transportation

 

13.8

 

21.5

 

(35.8)

Customer segments subtotal

168.0

212.3

 

(20.9)

Other

 

1.4

 

1.5

 

(6.7)

Total

$

169.4

$

213.8

 

(20.8)

%

GWP from customer segments (excluding GWP within “Other”) for the three months ended March 31, 2021 contracted by 20.9% primarily due to reduced insured exposures of customers within the Real Estate, Media & Entertainment, Transportation, and Marine and Energy customer segments due to the economic downturn from the COVID-19 pandemic.

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

Real Estate GWP decreased by 40.1% to $19.9 million for the three months ended March 31, 2021 compared to $33.2 million for the three months ended March 31, 2020. The premium contraction is primarily driven by a $11.4 million reduction in new business primarily due to the continued impact of COVID-19 on the Metrobuilders niche and exit of the Builders Risk niche.

Media and Entertainment GWP decreased by 31.5% to $20.9 million for the three months ended March 31, 2021 compared to $30.5 million for the three months ended March 31, 2020. The premium contraction is driven by reduced insured exposures primarily within the Live Entertainment niche due to the economic downturn from the COVID-19 pandemic.

Transportation GWP decreased by 35.8% to $13.8 million for the three months ended March 31, 2021 compared to $21.5 million for the three months ended March 31, 2020. The premium contraction is driven by reduced insured exposures due to the economic downturn from the COVID-19 across all niches.

Marine and Energy GWP decreased by 26.2% to $24.2 million for the three months ended March 31, 2021 compared to $32.8 million for the three months ended March 31, 2020. The premium contraction is primarily driven by a reduction in the Solar Contractors niche due to the economic downturn from the COVID-19 pandemic.

Consumer Services GWP decreased by 26.1% to $22.6 million for the three months ended March 31, 2021 compared to $30.6 million for the three months ended March 31, 2020. The premium contraction is primarily driven by the decision to exit monoline workers’ compensation, partially offset by organic growth of the Auto Dealers niche.

Net written premiums decreased by $38.3 million, or 20.1%, to $151.9 million for the three months ended March 31, 2021 from $190.2 million for the three months ended March 31, 2020. The decrease in net written premiums was primarily related to the contraction in GWP.

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Net earned premiums decreased by $32.7 million, or 15.9%, to $173.0 million for the three months ended March 31, 2021 from $205.7 million for the three months ended March 31, 2020.  The decrease in net earned premiums was directly related to the contraction in net written premiums over the past twelve months.

Loss and LAE Ratio

Our loss and LAE ratio was 61.0% for the three months ended March 31, 2021 compared to 62.0% for the three months ended March 31, 2020. For the three months ended March 31, 2021 the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2020 and prior developed unfavorably by $0.3 million driven by $2.0 million unfavorable development in Commercial Multiple Peril and $0.4 million unfavorable development in General Liability offset by $1.1 million favorable development in Workers’ Compensation, $0.3 million favorable development in Commercial Auto and $0.6 million favorable development in All Other lines. In addition, the Company incurred $2.5 million of losses and loss adjustment expenses related to premium adjustments earned during the three months ended March 31, 2021 attributable to prior accident years 2020 and 2019.

The following tables summarize the effect of the factors indicated above on the loss and LAE ratios and adjusted loss and LAE ratios for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31 

 

2021

2020

 

    

    

% of Earned

    

    

% of Earned

 

($ in thousands)

Losses and LAE

Premiums

Losses and LAE

Premiums

 

Loss and LAE:

 

 

  

  

 

  

Current accident year – excluding catastrophe (1)

$

105,260

 

60.9

%

$

127,359

 

61.9

%

Current accident year – catastrophe losses (2)

 

 

 

 

Effect of prior year development

 

263

 

0.1

 

198

 

0.1

Total

$

105,523

 

61.0

%

$

127,557

 

62.0

%

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

Expense Ratio

Our expense ratio was 37.8% for the three months ended March 31, 2021 compared to 35.8% for the three months ended March 31, 2020. The increase in the expense ratio is driven primarily by an increase in the policy acquisition expense ratio of 1.7% due to a shift in the mix of business and changing reinsurance structure.

The following table summarizes the components of the expense ratio for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31 

 

2021

2020

 

% of Earned

% of Earned

 

($ in thousands)

Expenses

Premiums

Expenses

Premiums

 

Underwriting, acquisition and insurance expenses:

    

  

    

  

  

    

  

Policy acquisition expenses, net of ceded reinsurance

$

42,359

 

24.5

%

$

46,986

 

22.8

%

Underwriting and insurance expenses

 

22,999

 

13.3

 

26,637

 

13.0

Total underwriting, acquisition and insurance expenses

$

65,358

 

37.8

%

$

73,623

 

35.8

%

Underwriting Income

Underwriting income was $2.1 million for the three months ended March 31, 2021 compared to $4.5 million for the three months ended March 31, 2020, a decrease of $2.4 million. The decrease in underwriting income is primarily due to the increased policy acquisition expense ratio.

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Combined Ratio

Our combined ratio was 98.8% for the three months ended March 31, 2021 compared to 97.8% for the three months ended March 31, 2020.

Investing Results

Our net investment income increased by 89.2% to $16.7 million for the three months ended March 31, 2021 from $8.8 million for the three months ended March 31, 2020. The three months ended March 31, 2020 includes an adverse mark-to market valuation adjustment of $8.2 million on investments in limited partnerships due to the initial economic impact of the COVID-19 pandemic. Net investment yield was 2.8% for the three months ended March 31, 2021 and 1.6% for the three months ended March 31, 2020. Realized investment gains, net includes the sale of $32.8 million of fixed maturity securities for the three months ended March 31, 2021.

The following table summarizes the components of net investment income and net investment gains for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31 

($ in thousands)

2021

2020

$ Change

Fixed maturity securities

    

$

13,759

    

$

16,282

    

$

(2,523)

Other investments

 

3,685

 

(6,792)

 

10,477

Gross investment income

 

17,444

 

9,490

 

7,954

Investment expenses

 

(765)

 

(675)

 

(90)

Net investment income

 

16,679

 

8,815

 

7,864

Realized investment gains, net

 

33,108

 

232

 

32,876

Total

$

49,787

$

9,047

$

40,740

Average invested assets

$

2,379,340

$

2,175,621

$

203,719

Interest and Other Expenses, Net

Our interest and other expenses decreased by $0.8 million to $3.9 million for the three months ended March 31, 2021 compared to $4.7 million for the three months ended March 31, 2020. The decrease is primarily driven by the refinancing of our long term debt at a lower effective interest rate.

Income Tax Expense

Our effective tax rate for the three months ended March 31, 2021 and 2020 were 21.7% and 22.6%, respectively. The decrease in the effective tax rate for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to the tax effect of share-based compensation.

Our income tax expense was $10.4 million and $2.0 million for the three months ended March 31, 2021 and 2020, respectively. The increase is due to the increase in income before income taxes compared to the same period in 2020.

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

Adjusted Operating Income

Adjusted operating income was $12.4 million for the three months ended March 31, 2021, an increase of $4.4 million, or 55.5% from the adjusted operating income of $8.0 million for the three months ended March 31, 2020, primarily due to the increase in net investment income partially offset by the reduction in underwriting income.

35

Adjusted Operating Return on Equity

Our adjusted operating return on equity was 8.1% for the three months ended March 31, 2021, an increase of 1.9% percentage points from 6.2% for the three months ended March 31, 2020 primarily due to the increase in adjusted operating income partially offset by an increase in average book value.

Liquidity and Capital Resources

Sources and Uses of Funds

We are organized as a holding company with our operations primarily conducted by our wholly owned insurance subsidiaries, New York Marine and Gotham, which are domiciled in New York, and Southwest Marine, which is domiciled in Arizona. Accordingly, the holding company may receive cash through: (i) loans from banks; (ii) draws on a revolving loan agreement; (iii) issuance of equity and debt securities; (iv) corporate service fees from our operating subsidiaries; (v) payments from our subsidiaries pursuant to our consolidated tax allocation agreement and other transactions; and (vi) subject to certain limitations discussed below, dividends from our insurance subsidiaries. We also may use the proceeds from these sources to contribute funds to the insurance subsidiaries in order to support premium growth, reduce our reliance on reinsurance, and pay dividends and taxes and for other business purposes.

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

In June 2020, we entered into a credit agreement (the “Credit Agreement”) with certain lenders and Truist Bank, N.A., as administrative agent (“Truist”), providing for a $165.0 million delayed draw term loan facility (the “Term Loan Facility”). The Company used the Term Loan Facility proceeds to repay $165.0 million in complete satisfaction of the outstanding debt under the Notes. (see “— Credit Agreement”).

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

The most significant source of cash for our operating subsidiaries is from premiums received from our insureds, which, for most policies, we receive at the beginning of the coverage period, and net of the related commission amount for the policies. Our most significant cash outflow is for claims that arise when a policyholder incurs an insured loss. We also use cash to pay for operating expenses such as salaries, rent and taxes and capital expenditures such as technology systems. Because the payment of claims occurs well after the receipt of the premium, we invest the cash in various investment securities that generally earn interest and dividends. The operating subsidiaries’ investment portfolios represent an additional source of liquidity that could be accessed if needed.  As described under “— Reinsurance” below, we use reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.

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

36

Our cash flows for the three months ended March 31, 2021 and 2020 were:

Three Months Ended March 31 

2021

2020

($ in thousands)

Cash and cash equivalents provided by (used in):

    

Operating activities

 

$

57,394

 

$

58,856

Investing activities

 

(9,850)

 

(32,068)

Financing activities

 

(1,352)

 

(2,312)

Net change in cash and cash equivalents

$

46,192

$

24,476

The decrease in cash used in investing activities for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, was largely driven by the implementation of a bond exchange traded fund strategy to expedite the investment of cash in portfolios.

Credit Agreement

On June 12, 2020 (the “Effective Date”), we entered into the Credit Agreement with certain lenders and Truist Bank, N.A., as administrative agent, providing for a $165.0 million delayed draw term loan facility (the “Term Loan Facility”). Borrowings under the Term Loan Facility were used to refinance the Notes at maturity. Borrowings under the Term Loan Facility bear interest at 3.75% as of the filing date of this Quarterly Report.

Prior to draw, we agreed to pay a ticking fee with respect to the undrawn portion of the commitments for the Term Loan Facility, ranging from 0.20% to 0.30% per annum based upon our Debt to Capitalization Ratio (as defined in the Credit Agreement) in effect on such date. We also agreed to pay a commitment fee on the unused portion of the Revolving Credit Facility, ranging from 0.20% to 0.30% at the Effective Date. We ceased payment of the ticking fee upon the drawdown of the Term Loan Facility in November 2020. We continue to pay the commitment fee of 0.30% on the unused portion of the Revolving Credit Facility as of the filing date of this Quarterly Report. Following such date, the commitment fee will be determined as set forth above.

The Credit Agreement includes certain covenants, including restrictions on the disposition of assets, restrictions on the incurrence of liens and indebtedness, limits on making restricted payments and requirements to maintain specified capitalization levels.

Revolving Credit Facility

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

The Revolving Credit Facility may be used for general corporate purposes, including, without limitation, to support business growth and to provide additional liquidity if needed. As of the date of this filing, there is $42.0 million outstanding under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at 3.75% as of the filing date of this Quarterly Report. 

Master Lease Agreement

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

37

Reinsurance

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

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

The following is a summary of our significant in-force excess of loss reinsurance programs as of March 31, 2021:

Line of Business Covered

Reinsurance Coverage

Property - per risk

$37.0 million excess of $3.0 million

Property - catastrophe

$195.0 million excess of $5.0 million

Casualty

Supported Umbrella: $6.0 million excess of $4.0 million
Unsupported Umbrella: $5.0 million excess of $5.0 million
Professional Liability and Credit Union Fidelity Bonds: $5.0 million excess of $5.0 million

Primary Workers' Compensation

$37.0 million excess of $3.0 million

Marine

$45.0 million excess of $2.5 million

Custom Bonds

$38.0 million excess of $2.0 million

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

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

Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of the reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible. The allowance related to credit default with respect to our reinsurance assets as of March 31, 2021 and December 31, 2020 was $0.7 million and $0.7 million respectively. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers. 

Ratings

ProSight and its insurance subsidiaries have a financial strength rating of “A-” (Excellent) from A.M. Best. A.M. Best assigns 16 ratings to insurance companies, which currently range from “A++” (Superior) to “F” (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.”

38

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 December 17, 2020 is consistent with our business plan and allows us to actively pursue relationships with the distribution partners identified in our marketing plan.

Financial Condition

Stockholders’ Equity

At March 31, 2021, total stockholders’ equity was $603.7 million and tangible stockholders’ equity was $586.4 million, compared to total stockholders’ equity of $624.0 million and tangible stockholders’ equity of $606.7 million at December 31, 2020. The decrease in both total and tangible stockholders’ equity was primarily due a reduction in net unrealized gains on available-for-sale fixed maturity securities, net of tax of $56.8 million, offset by net income from continuing operations of $37.5 million.

Tangible stockholders’ equity is a non-GAAP financial measure. We define tangible stockholders’ equity as stockholders’ equity less goodwill and intangible assets. Our definition of tangible stockholders’ equity may not be comparable to that of other companies, and it should not be viewed as a substitute for stockholders’ equity calculated in accordance with GAAP. We use tangible stockholders’ equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure.

Stockholders’ equity at March 31, 2021 and December 31, 2020 reconciles to tangible stockholders’ equity as follows:

    

March 31, 2021

    

December 31, 2020

($ in thousands)

Stockholders’ equity

 

$

603,664

$

623,968

Less: goodwill and net intangible assets

 

 

17,240

 

17,248

Tangible stockholders’ equity 

 

$

586,424

$

606,720

Book value per share

 

$

13.84

$

14.37

Tangible book value per share 

 

$

13.45

$

13.97

Investment Portfolio

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

At March 31, 2021, the majority of the portfolio, or $2.3 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 $387.2 million of alternative investments carried at fair value. Our securities, including cash equivalents, had a weighted average duration of 4.1 years and an average rating of “A” at March 31, 2021.

39

At March 31, 2021 and December 31, 2020, the cost and fair value on cash and invested assets were as follows:

March 31, 2021

December 31, 2020

 

Amortized

Estimated

% of Total

Amortized

Estimated

% of Total

 

Cost

Fair Value

Fair Value

Cost

Fair Value

Fair Value

 

($ in thousands)

    

    

  

    

    

    

  

 

Fixed and floating rate securities

 

$

1,923,921

 

$

1,959,995

 

79.7

%

 

$

1,905,891

 

$

2,008,210

 

82.3

%

Alternate available-for-sale

 

 

291,708

 

 

290,903

 

11.8

 

 

253,852

 

 

257,847

 

10.6

Total fixed maturity securities

 

 

2,215,629

 

 

2,250,898

 

91.5

 

 

2,159,743

 

 

2,266,057

 

92.9

Other investments:

 

 

 

 

  

 

 

  

 

  

Commercial levered loans

 

 

12,077

 

 

11,979

 

0.5

 

 

12,308

 

 

12,180

 

0.5

Bond exchange-traded funds

29,082

28,100

1.1

44,679

44,882

1.8

Non-redeemable preferred stock securities

6,541

6,952

0.3

6,541

7,049

0.3

Limited partnerships and limited liability companies

 

 

96,307

 

 

96,307

 

3.9

 

 

90,468

 

 

90,468

 

3.7

Short-term investments

 

 

35

 

 

35

 

0.0

 

 

154

 

 

154

 

Total other investments

 

 

144,042

 

 

143,373

 

5.8

 

 

154,150

 

 

154,733

 

6.3

Total investments

2,359,671

2,394,271

97.3

2,313,893

2,420,790

99.2

Cash, cash equivalents, and restricted cash

 

 

65,372

 

 

65,372

 

2.7

 

 

19,603

 

 

19,603

 

0.8

Total

 

$

2,425,043

 

$

2,459,643

 

100.0

%

 

$

2,333,496

 

$

2,440,393

 

100.0

%

The table below presents the credit quality of total fixed maturity securities at March 31, 2021 and December 31, 2020, as rated by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) or Equivalent Designation:

March 31, 2021

December 31, 2020

 

Standard & Poor’s or Equivalent Designation

    

Estimated Fair Value

    

% of Total

    

    

Estimated Fair Value

    

% of Total

 

($ in thousands)

 

AAA

 

$

208,332

 

9.3

%

$

192,038

 

8.5

%

AA

 

 

574,003

 

25.5

 

543,875

 

24.0

A

 

 

718,143

 

31.8

 

679,409

 

30.0

BBB

 

 

577,654

 

25.7

 

662,816

 

29.2

Below BBB/Not rated

 

 

172,764

 

7.7

 

187,919

 

8.3

Total

 

$

2,250,898

 

100.0

%

$

2,266,057

 

100.0

%

40

The table below presents the credit quality of total fixed maturity securities at March 31, 2021 and December 31, 2020, either rated below BBB or not rated by Standard & Poor’s and their National Association of Insurance Commissioners (“NAIC”) designation:

March 31, 2021

NAIC Designation (Estimated Fair Value)

Standard & Poor’s or Equivalent Designation

1

2

3

4

5

6

Total

($ in thousands)

BB

$

2,221

$

20,130

$

50,208

$

775

$

513

$

-

$

73,847

B

4,615

506

3,736

6,574

-

-

15,431

CCC

30,423

-

682

235

1,908

-

33,248

CC or lower

27,808

17

-

-

-

22,413

50,238

Total

$

65,067

$

20,653

$

54,626

$

7,584

$

2,421

$

22,413

$

172,764

December 31, 2020

NAIC Designation (Estimated Fair Value)

Standard & Poor’s or Equivalent Designation

1

2

3

4

5

6

Total

($ in thousands)

BB

$

4,402

$

31,031

$

52,667

$

874

$

482

$

-

$

89,456

B

5,081

510

3,779

6,574

-

-

15,944

CCC

32,089

-

681

237

2,408

-

35,415

CC or lower

24,138

-

-

187

-

22,779

47,104

Total

$

65,710

$

31,541

$

57,127

$

7,872

$

2,890

$

22,779

$

187,919

The amortized cost and fair value of our fixed maturity securities by contractual maturity are shown below as of March 31, 2021 and December 31, 2020.

March 31, 2021

December 31, 2020

 

    

Amortized

    

Estimated

    

% of Fair

    

    

Amortized

    

Estimated

    

% of Fair

 

Cost

Fair Value

Value

Cost

Fair Value

Value

 

($ in thousands)

 

Due in one year or less

 

$

116,455

 

$

118,009

 

5.2

%

$

103,243

$

104,316

 

4.6

%

Due after one year through five years

 

 

747,657

 

 

767,003

 

34.1

 

628,897

 

657,996

 

29.1

Due after five years through ten years

 

 

451,693

 

 

460,956

 

20.5

 

522,749

 

561,775

 

24.8

Due after ten years

 

 

234,599

 

 

233,009

 

10.4

 

311,799

 

332,195

 

14.7

Government agency securities

26,606

26,736

1.2

30,446

31,007

1.4

Asset-backed securities

 

 

132,377

 

 

132,140

 

5.9

 

54,989

 

55,258

 

2.4

Collateralized loan obligations

 

 

138,895

 

 

138,444

 

6.1

 

140,615

 

139,126

 

6.1

Commercial mortgage-backed securities

 

 

56,733

 

 

57,035

 

2.5

 

111,313

 

117,960

 

5.2

Residential mortgage-backed securities – non-agency

 

 

111,296

 

 

119,025

 

5.3

 

109,110

 

116,136

 

5.1

Residential mortgage-backed securities – agency

 

 

199,318

 

 

198,541

 

8.8

 

146,582

 

150,288

 

6.6

Total fixed maturities

 

$

2,215,629

 

$

2,250,898

 

100.0

%

$

2,159,743

$

2,266,057

 

100.0

%

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

Restricted Investments

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

41

The fair value of our restricted assets was $481.3 million at March 31, 2021. This includes $75.1 million of funds in trust for the mutual benefit of our insurance companies due to participation in our intercompany pooling agreement.  Restricted investments decreased 1.7%, or $8.5 million, when compared to December 31, 2020 primarily due to increases in interest rates that led to market depreciation for fixed maturity securities during the quarter.  

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements as of March 31, 2021.

As part of the 2017 sale transaction to divest our U.K. business, we entered into Aggregate Stop-Loss and 100% Quota Share reinsurance agreements as reinsurer, with Lloyd’s Syndicate 1110 as our reinsured and committed to fund Lloyd’s Syndicate 1110’s “Funds At Lloyd’s” requirements until June 30, 2020. 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 risk based capital ratio and maintain specified liquidity levels. The requirement for us to provide the Funds At Lloyd’s were expected to terminate by June 30, 2020. However, the buyer disputed its contractual obligation with respect to substituting our Funds At Lloyd’s at that time. In February 2021, a U.K. court granted summary judgment in our favor requiring the buyer to substitute our Funds At Lloyds; however, such judgment is subject to appeal by the buyer.

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 from continuing operations calculated in accordance with GAAP, and other companies may calculate underwriting income differently.

Net income from continuing operations for the three months ended March 31, 2021 and 2020 reconciles to underwriting income as follows:

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Net income from continuing operations

 

$

37,547

 

$

6,811

Income tax expense

 

10,427

 

1,988

Income from continuing operations before taxes

 

 

47,974

 

 

8,799

Net investment income

 

 

16,679

 

 

8,815

Realized investment gains, net

 

 

33,108

 

 

232

Interest and other expense, net

 

 

3,903

 

 

4,730

Underwriting income

 

$

2,090

 

$

4,482

Reconciliation of Adjusted Operating Income

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

42

Net income from continuing operations for the three months ended March 31, 2021 and 2020 reconciles to adjusted operating income as follows:

Three Months Ended March 31 

($ in thousands)

    

2021

    

2020

Net income from continuing operations

$

37,547

$

6,811

Income tax expense

 

10,427

 

1,988

Income from continuing operations before taxes

 

 

47,974

 

 

8,799

Other expense

1,317

1,737

Realized investment gains, net

 

 

(33,108)

 

 

(232)

Adjusted operating income before taxes

 

 

16,183

 

 

10,304

Less: income tax expense on adjusted operating income

 

 

3,782

 

 

2,328

Adjusted operating income

 

$

12,401

 

$

7,976

Critical Accounting Estimates

We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. These judgments and estimates affect our reported amounts of assets, liabilities, revenues and expenses and the disclosure of our material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. For a detailed discussion of our accounting policies, see Note 2. Summary of Significant Accounting Policies in Item 8. Financial Statement and Supplementary Data in the 2020 Annual Report.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information about market risk set forth in the Company’s 2020 Annual Report.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2021 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.

43

Part II: Other Information

Item 1: Legal Proceedings

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

Item 1A: Risk Factors

Except as set forth below, as of the date of this report, there have been no material changes with respect to those risk factors previously disclosed in our 2020 Annual Report.

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

None.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable

Item 5: Other Information

None.

44

Item 6: Exhibits

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

Exhibit Index

Exhibit Number

    

Description

2.1

Agreement and Plan of Merger, dated as of January 14, 2021, among ProSight Global, Inc., Pedal Parent, Inc., and Pedal Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed January 19, 2021).

2.2

Stockholder Support Agreement, dated as of January 14, 2021, by and among Pedal Parent, Inc. and certain affiliates of the Goldman Sachs Group, Inc. and TPG Advisors VI, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed January 19, 2021).

3.1

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

3.2

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

4.1

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

4.2

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

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*

Inline XBRL Instance Document

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

Filed herewith

**

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

45

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:  May 4, 2021

By:

/s/ Lawrence Hannon

Lawrence Hannon

President and Chief Executive Officer

Dated:  May 4, 2021

By:

/s/ Anthony S. Piszel

Anthony S. Piszel

Chief Financial Officer

46