PROSIGHT GLOBAL, INC. : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

November 11, 2020 at 03:34 am IST

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

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

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

Special Note Regarding Forward-Looking Statements



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

? our strategies to continue our growth trajectory, expand our distribution

network and maintain underwriting profitability;

the impact of coronavirus disease 2019 ("COVID-19") and related economic

? conditions and governmental actions, including the Company's assessment of the

vulnerability of certain categories of investments to the economic disruptions

associated with COVID-19;

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

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

? our expectations with respect to the ultimate financial obligations to the

buyers of our United Kingdom ("U.K.") operations.




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

? the performance of and our relationship with third-party agents and vendors we

rely upon to distribute certain business on our behalf;

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the adequacy of our loss reserves, including as a result of changes in the

? legal, regulatory, and economic environments in which the Company operates or

the impacts of COVID-19;

the direct and indirect impacts of COVID-19 and related risks such as

? governmental responses and economic contraction, including on the Company's

investments and business operations, its distribution or other key partners and

its customers;

the effects of uncertain emerging claim and coverage issues on the Company's

business, and court decisions or legislative or regulatory changes that take

place after the Company issues its policies, including those taken in response

? to COVID-19 (such as effectively expanding workers' compensation coverage by

instituting presumptions of compensability of claims for certain types of

workers or requiring insurers to cover business interruption claims

irrespective of terms, exclusions or other conditions included in the policies

that would otherwise preclude coverage);

? the effectiveness of our risk management policies and procedures;

? potential technology breaches or failure of our or our business partners'

systems;

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

products;

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

? cyclical changes in the insurance industry;

? the effects of natural and man-made catastrophic events;

? our ability to adequately assess risks and estimate losses;

? the availability and affordability of reinsurance;

? changes in interest rates, government monetary policies, general economic

conditions, liquidity and overall market conditions;

? changes in the business, financial condition or results of operations of the

entities in which we invest;

? increased costs as a result of operating as a public company, and time our

management will be required to devote to new compliance initiatives;

? our ability to protect intellectual property rights;

? the impact of government regulation, including the impact of restrictions on

our business activities under the Bank Holding Company ("BHC") Act;

? our status as an emerging growth company;

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

? potential conflicts of interests with our principal stockholders.




We discuss many of these risks in greater detail under the section titled Item
1A. "Risk Factors" in the Company's 2019 Annual Report. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We qualify all of the forward-looking statements in this Quarterly
Report by these cautionary statements. Except as required by law, we undertake
no obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise.

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Overview



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

Components of Our Results of Operations

Gross Written and Earned Premiums



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

? Expansion or retraction of business within existing niches;

? Entrance into new customer segments or niches;

? Exit from customer segments or niches;

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

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




We earn insurance premiums on a pro rata basis over the term of the policy. Our
insurance policies generally have a term of one year. Net earned premiums
represent the earned portion of our GWP, less that portion of our GWP that is
earned and ceded to third-party reinsurers under our reinsurance agreements.

Ceded Written and Earned Premiums



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

Net Investment Income



We earn investment income on our portfolio of cash and invested assets. Our cash
and invested assets are primarily comprised of fixed maturity securities, and
may also include cash and cash equivalents, short-term investments,
non-redeemable preferred stock securities, bond exchange-traded funds,
commercial levered loans, and limited partnerships and limited liability
companies. Neither our limited partnerships nor our limited liability companies
are accounted for on a lag and thus reflect the current period fair value
adjustments. The principal factors that influence net investment income are the
size of our investment portfolio and the yield on that portfolio. As measured by
amortized cost

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

Realized Investment Gains and Losses



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

Losses and Loss Adjustment Expenses



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

? Frequency of claims associated with the particular types of insurance contracts

that we write;

? Trends in the average size of losses incurred on a particular type of business;

? Mix of business written by us;

? Changes in the legal or regulatory environment related to the business we

write;

? Trends in legal defense costs;

? 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

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

Key Metrics

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

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

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



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

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



Loss and LAE ratio, excluding catastrophe, is the ratio of losses and LAE,
allocated and unallocated, excluding those losses categorized as catastrophe
losses, to net earned premiums, net of the effects of reinsurance, excluding the
impact of reinsurance premiums related to catastrophe losses.

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



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

Combined ratio, excluding catastrophe losses and related items, is the sum of
the loss and LAE ratio, excluding catastrophe losses and related items and the
expense ratio.

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



Adjusted Loss and LAE ratio, excluding catastrophe, is the ratio of losses and
LAE, allocated and unallocated, excluding the effects of the WAQS, and excluding
those losses categorized as catastrophe losses, to net earned premiums, net of
the effects of reinsurance, excluding the impact of reinsurance premiums related
to catastrophe losses.

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

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

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



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

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



Underwriting (loss) income, adjusted operating income, adjusted loss and LAE
ratio, adjusted expense ratio, adjusted combined ratio and adjusted operating
return on equity are non-generally accepted accounting principles ("GAAP")
financial measures. See "Reconciliation of Non-GAAP Financial Measures" for a
reconciliation of net income

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in accordance with GAAP to underwriting (loss) income and adjusted operating income. See "Factors Affecting Our Results of Operations-The WAQS" for additional detail on the impact of the WAQS on our results of operations.

Factors Affecting Our Results of Operations

The WAQS



In connection with the divestment of our U.K. business, New York Marine as
reinsured entered into the WAQS with third party reinsurers to maintain
reasonable underwriting leverage within New York Marine and its subsidiary
insurance companies during a transition period following the U.K. divestment.
The effective date of the WAQS was April 1, 2017. The reinsurers' ceding
participation is an aggregate 26.0%. A provisional ceding commission of 30.0% to
30.5% is received as a reduction in the amount of ceded premium. During 2018 and
following the transition of the U.S. business back to New York Marine, the WAQS
were terminated. Previously ceded written and unearned premium, net of the
ceding commission, was reversed. Loss reserves on premium earned prior to the
cut-off termination remain ceded loss reserves. Loss reserve development on the
reserves ceded under the WAQS is included in continuing operations. Effective
January 1, 2020, the WAQS was commuted at an amount equal to ceded reserves.

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

The following tables summarize the effect of the WAQS on our underwriting (loss) income for the three months ended September 30, 2020 and 2019:




                                          Three Months Ended September 30, 2020              Three Months Ended September 30, 2019
                                      Including           Effect of         Excluding       Including        Effect of      Excluding
($ in thousands)                         WAQS                WAQS             WAQS            WAQS              WAQS           WAQS
GWP                                $        203,539      $          -

$ 203,539 $ 227,196 $ - $ 227,196 Ceded written premiums

                     (44,135)                 -         (44,135)         (17,722)              (6)      (17,716)
Net written premiums               $        159,404      $          -

$ 159,404 $ 209,474 $ (6) $ 209,480 Net retention (1)

                             78.3%                 -            78.3%            92.2%                -         92.2%
Net earned premiums                $        172,376      $          -

$ 172,376 $ 202,455 $ - $ 202,455 Net losses and LAE incurred

                 123,249                 -          123,249          127,196            1,632       125,564
Underwriting, acquisition and
insurance expenses                           63,373                 -           63,373           71,920          (1,632)        73,552

Underwriting (loss) income (2) $ (14,246) $ - $ (14,246) $ 3,339 $ - $ 3,339 Loss and LAE ratio

                             71.5 %               -                -             62.8 %              -             -
Expense ratio                                  36.8 %               -                -             35.5 %              -             -
Combined ratio                                108.3 %               -                -             98.3 %              -             -
Adjusted loss and LAE ratio (3)                   -                 -             71.5 %              -                -          62.0 %
Adjusted expense ratio (3)                        -                 -             36.8 %              -                -          36.3 %
Adjusted combined ratio (3)                       -                 -            108.3 %              -                -          98.3 %

(1) Net retention is a non-GAAP measure. We define net retention as the ratio of

net written premiums to GWP.

(2) Underwriting (loss) income is a non-GAAP financial measure. See

"Reconciliation of Non-GAAP Financial Measures" for a reconciliation of net

income to underwriting (loss) income.

(3) Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined

ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio,

adjusted expense ratio and adjusted combined ratio as the corresponding ratio

excluding the effects of the WAQS. We use these adjusted ratios as internal

performance measures in the management of our operations because we believe

they give our management and other users of our financial information useful

insight into our results of operations and our underlying business

performance. Our adjusted loss and LAE ratio, adjusted expense ratio and

adjusted combined ratio should not be viewed as substitutes for our loss and

LAE ratio, expense ratio and combined ratio, respectively.




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

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The following tables summarize the effect of the WAQS on our underwriting (loss) income for the nine months ended September 30, 2020 and 2019:




                                             Nine Months Ended September 30, 2020                Nine Months Ended September 30, 2019
                                        Including         Effect of

Excluding Including Effect of Excluding ($ in thousands)

                          WAQS               WAQS              WAQS              WAQS              WAQS           WAQS
GWP                                  $       603,717     $          -     $

603,717 $ 718,066 $ - $ 718,066 Ceded written premiums

                      (97,507)                -            (97,507)         (88,122)              (3)      (88,119)
Net written premiums                 $       506,210     $          -     $       506,210    $     629,944     $        (3)    $  629,947
Net retention (1)                              83.8%                -               83.8%            87.7%                -         87.7%
Net earned premiums                  $       559,667     $          -     $

559,667 $ 600,543 $ 3 $ 600,540 Net losses and LAE incurred

                  363,279                -             363,279          372,644            3,839       368,805
Underwriting, acquisition and
insurance expenses                           205,444                -

205,444 217,248 (3,837) 221,085 Underwriting (loss) income (2) $ (9,056) $ - $


      (9,056)    $      10,651     $          1    $   10,650
Loss and LAE ratio                              64.9 %              -                   -             62.1 %              -             -
Expense ratio                                   36.7 %              -                   -             36.2 %              -             -
Combined ratio                                 101.6 %              -                   -             98.3 %              -             -
Adjusted loss and LAE ratio (3)                    -                -                64.9 %              -                -          61.4 %
Adjusted expense ratio (3)                         -                -                36.7 %              -                -          36.8 %
Adjusted combined ratio (3)                        -                -               101.6 %              -                -          98.2 %