ProSight Announces First Quarter 2019 Results

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May 21, 2019, 09:00 ET

MORRISTOWN, N.J., May 21, 2019 /PRNewswire/ -- ProSight Global, Inc. today reported results for the quarter ended March 31, 2019. Net income from continuing operations was $13.7 million for the first quarter of 2019, compared to $10.0 million for the first quarter of 2018. Adjusted operating income ⁽¹⁾ was $13.6 million for the first quarter of 2019, compared to $10.3 million for the first quarter of 2018.

First Quarter 2019 Highlights

Gross written premiums for on-going niches increased 6.3% compared to the first quarter of 2018, or 2.6% including Other ⁽²⁾. Growth was driven by strong results within the Transportation and Consumer Services customer segments. Thus far in 2019, the Company added three new niches, one each within Consumer Services, Construction and Media & Entertainment customer segments.
Underwriting income ⁽³⁾ of $3.5 million, increased $1.5 million when compared to the first quarter of 2018. The combined ratio was 98.2%, including $0.4 million or 0.2 points of favorable prior period reserve development and no impact from catastrophe losses in the first quarter of 2019.
Net investment income increased 25.2% to $17.2 million, when compared to the first quarter of 2018, driven by a larger investment portfolio and an improved portfolio yield.
Adjusted operating income ⁽¹⁾ was $13.6 million, growth of 31.9% when compared to the first quarter of 2018. Adjusted operating return on equity was 13.3% for the first quarter of 2019.

ProSight President and CEO Larry Hannon commented, "Our first quarter 2019 results were a strong start to the year. We achieved profitable growth across our specialty niche portfolio, added three new niches, have a healthy pipeline of potential new niches, and continue to position the company for profitable growth going forward. Our underwriting and solid investment income results combined to create a strong 13.3% adjusted operating ROE for the quarter. We continue to believe that ProSight's focus on delivering value to the customer is a sustainable advantage and view the first quarter 2019 results as another strong data point to support that thesis."

First Quarter 2019 Results

Gross written premiums were $255.8 million for the first quarter of 2019, compared to $249.4 million for the first quarter of 2018, an increase of 2.6%. Gross written premium growth was driven by particularly strong growth within the Transportation (+26.4%) and Consumer Services (+25.5%) customer segments, offset primarily by Other ⁽²⁾ (-8.2%), which was driven by a planned decline in the excess workers compensation niche.

Net premiums earned increased 16.8% to $195.6 million for the first quarter of 2019, compared to $167.5 million for the first quarter of 2018, or 8.3% excluding the impact of the Whole Account Quota Share (WAQS). Primarily due to the termination of WAQS reinsurance agreement, net written premiums declined 19.7% to $209.9 million for the first quarter of 2019, compared to $261.4 million for the first quarter of 2018.

Underwriting income ⁽³⁾ was $3.5 million for the first quarter of 2019, compared to $2.0 million for the first quarter of 2018, an increase of $1.5 million. The combined ratio was 98.2% for the first quarter of 2019, compared to 98.8% for the first quarter of 2018. The improvement in combined ratio was due to a decrease in both the loss and loss adjustment expense (LAE) ratio and the expense ratio, as discussed below:

The loss and LAE ratio was 60.5% for the first quarter of 2019, compared to 60.8% for the first quarter of 2018. The first quarter of 2019 included favorable prior period reserve development of $0.4 million (0.2 points) compared to $1.3 million (0.8 points) of favorable prior period reserve development in the first quarter of 2018. Catastrophe losses had no impact in the first quarter of 2019 and 2018 respectively.
The expense ratio was 37.7% for the first quarter of 2019, compared to 38.0% for the first quarter of 2018. Excluding the effect of the WAQS, the policy acquisition expense ratio was 23.8% in the first quarter of 2019, compared to 23.6% in the first quarter of 2018 and general & administrative expense ratio was 13.9% in the first quarter of 2019 compared to 14.0% in the first quarter of 2018.

Net investment income increased by 25.2% to $17.2 million for the first quarter of 2019 from $13.7 million for the first quarter of 2018. The increase was driven by an increase in the size of the investment portfolio and an increased portfolio yield due to actions taken to improve portfolio returns while maintaining credit quality. Total cash and invested assets were $2.0 billion at March 31, 2019 compared to $1.6 billion at March 31, 2018. The net annualized return on total cash and investments was 3.6% for the first quarter of 2019 compared to 3.4% for the first quarter of 2018. Realized investment gains for the first quarter of 2019 were $0.1 million, compared to realized investment losses of $0.3 million for the first quarter of 2018.

Interest expense was $3.4 million for the first quarter of 2019, compared to $3.0 million for the first quarter of 2018. Total debt was $182.4 million at both March 31, 2019 and December 31, 2018, equating to a debt-to-total capitalization ratio of 29.9% and 31.9%, respectively.

The effective tax rate for the first quarter of 2019 was 21.8%, compared to 20.4% in the prior year's quarter. The modest increase in the effective tax rate is primarily the result of favorable state income tax items benefitting the first quarter of 2018 tax rate.

Net income from continuing operations was $13.7 million for the first quarter of 2019, compared to $10.0 million for the first quarter of 2018. Adjusted operating income ⁽¹⁾ was $13.6 million for the first quarter of 2019, compared to $10.3 million for the first quarter of 2018.

Total shareholders' equity was $426.9 million as of March 31, 2019, compared to $389.8 million as of December 31, 2018. Tangible shareholders' equity was $397.7 million as of March 31, 2019, compared $360.6 million as of December 31, 2018. The increases in total shareholders' equity and tangible shareholders' equity were driven by net income produced during the first quarter of 2019, coupled with a meaningful increase in accumulated other comprehensive income (AOCI) of $27.7 million when compared to December 31, 2018. The significant increase in AOCI related to the impact of tightening credit spreads on our investments in the first quarter of 2019.

Adjusted operating return on equity was 13.3% and adjusted operating return on tangible equity was 14.3%, for the first quarter of 2019 respectively.

Other Items

In January 2019, ProSight decided to strategically exit the excess workers compensation product line. The Company does not expect future performance of the line to offer the same underwriting profit potential as the recent past. In 2018, ProSight wrote $98.2 million of excess workers compensation gross written premiums. Results for the first quarter of 2019 include $36.4 million of excess workers compensation gross written premiums, compared to $46.6 million in the first quarter of 2018, with each amount reflected in Other⁽²⁾ and excluded from the on-going niches. Beyond the first quarter of 2019, the Company does not anticipate writing any future excess workers compensation premium other than premium adjustments to existing policies.

(1)	Adjusted operating income is a non-GAAP financial measure. See discussion on "Non-GAAP Financial Measures."
(2)	Other includes GWP from certain niches that are no longer part of our ongoing business. All GWP from exited niches are included in "Other" which consists of (i) primary and excess workers' compensation coverage for Self-Insured Groups (ii) niches exited prior to 2018, many with a concentration in commercial auto, (iii) fronting arrangements in which all premium written is ceded to a third party, (iv) participation in industry pools, and (v) emerging new business.
(3)	Underwriting income is a non-GAAP financial measure. See discussion on "Non-GAAP Financial Measures."

Forward-Looking Statements

This release contains forward-looking statements. 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 release include, but are not limited to, statements about (i) our strategies to continue our growth trajectory, expand our distribution network and maintain underwriting profitability; (ii) future growth in existing niches or by entering into new niches; and (iii) our loss expectations and expectation to decrease our loss ratio. 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 release. 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 release, 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. 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.

Non-GAAP Financial Measures

In presenting ProSight Global, Inc.'s results, management has included financial measures that are not calculated under standards or rules that comprise of accounting principles generally accepted in the United States (GAAP). Such measures, including underwriting income and adjusted operating income, are referred to as non-GAAP measures. These non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those measures determined in accordance with GAAP. Reconciliations of such measures to the most comparable GAAP figures are included at the end of this press release.

About ProSight

Founded in 2009 and headquartered in Morristown, New Jersey, ProSight Global, Inc. is an innovative property and casualty insurance company that designs unique insurance solutions to help customers improve their business and realize value from their insurance purchasing decision. The company focuses on select niche industries, deploying differentiated underwriting and claims expertise with the goal of enhancing each customer's operating performance. ProSight's products are sold through a limited and select group of retail and wholesale distribution partners. Each of ProSight's regulated insurance company subsidiaries are rated "A-" (Excellent) by A.M. Best. To learn more about ProSight visit www.prosightspecialty.com.

PROSIGHT GLOBAL, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)

	(Unaudited)
	March 31,	December 31,
	2019	2018
Assets
Investments:
Fixed income securities, available-for-sale at fair value (amortized cost $1,767,340 in 2019 and $1,729,755 in 2018)	$ 1,766,478	$ 1,693,382
Commercial levered loans at amortized cost (fair value $16,146 in 2019 and $15,858 in 2018)	16,796	16,915
Limited partnerships and limited liability companies at fair value (cost $53,044 in 2019 and $51,903 in 2018)	55,835	53,432
Short-term investments	69,007	36,661
Total investments	1,908,116	1,800,390

Cash and cash equivalents	34,099	22,279
Restricted cash	8,201	7,621
Accrued investment income	12,508	12,279
Premiums and other receivables, net	196,490	200,347
Receivable from reinsurers on paid losses	15,867	12,428
Reinsurance receivables on unpaid losses	201,889	185,295
Deferred policy acquisition costs	100,381	93,613
Prepaid reinsurance premiums	64,127	44,626
Net deferred income taxes	22,300	33,239
Goodwill and net intangible assets	29,211	29,219
Fixed assets and capitalized software, net	38,563	39,001
Funds withheld related to sale of affiliate	19,309	19,397
Other assets	32,362	57,653
Assets of discontinued operations	19,607	19,719
Total assets	$ 2,703,030	$ 2,577,106

Liabilities
Unpaid losses and loss adjustment expenses	$ 1,449,535	$ 1,396,812
Reserve for unearned premiums	469,960	435,933
Ceded reinsurance payable	15,552	13,281
Notes payable, net of debt issuance costs	182,439	182,355
Funds held under reinsurance agreements	77,786	63,165
Other liabilities	58,812	73,474
Liabilities of discontinued operations	22,021	22,256
Total liabilities	2,276,105	2,187,276

Shareholders' equity
Common stock, $0.01 par value; 15,038,000 shares authorized; 6,016,144 shares issued and 6,014,144 shares outstanding	60	60
Paid-in capital	603,492	607,589
Accumulated other comprehensive income (loss), net of taxes	5,437	(22,315)
Retained deficit	(181,864)	(195,304)
Treasury shares - at cost (2,000 shares)	(200)	(200)
Total shareholders' equity	426,925	389,830
Total liabilities and shareholders' equity	$ 2,703,030	$ 2,577,106

PROSIGHT GLOBAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands)

	Three Months Ended March 31
	2019	2018
Revenues:
Gross written premiums	$ 255,838	$ 249,420
Net premiums earned	195,608	167,456
Net investment income	17,158	13,709
Realized investment gains (losses), net	113	(287)
Other income, net	93	168
Total revenues	212,972	181,046

Expenses:
Net losses and loss adjustment expenses incurred	118,333	101,854
Policy acquisition expenses	46,573	38,371
General and administrative expenses	27,194	25,222
Interest expense	3,362	3,031
Total expenses	195,462	168,478

Income from continuing operations before income taxes	17,510	12,568

Income tax provision:
Current	141	(7)
Deferred	3,674	2,565
Total income tax expense	3,815	2,558

Net income from continuing operations	13,695	10,010

Discontinued operations:
Net (loss) income from discontinued operations	(255)	785

Net income (loss)	$ 13,440	$ 10,795

PROSIGHT GLOBAL, INC.
FACTORS AFFECTING THE RESULTS OF OPERATIONS (WAQS) (UNAUDITED)
($ in thousands)


	Three Months Ended March 31, 2019							Three Months Ended March 31, 2018
	Including			Effect of		Excluding		Including		Effect of		Excluding
($ in thousands)	WAQS			WAQS		WAQS		WAQS		WAQS		WAQS
Gross written premiums	$	255,838	$	—		$	255,838	$	249,420	$	—	$	249,420
Ceded written premiums		45,936		—			45,936		(11,932)		49,969		38,037
Net written premiums	$	209,902	$	—		$	209,902	$	261,352	$	49,969	$	211,383
Net retention⁽¹⁾		82.0%		—			82.0%		104.8%		—		84.7%
Net earned premiums	$	195,608	$	—		$	195,608	$	167,456	$	(13,176)	$	180,632
Losses and LAE		118,333		—			118,333		101,854		(7,906)		109,760
Underwriting, acquisition and insurance expenses		73,767		—			73,767		63,593		(4,282)		67,875
Underwriting income (loss)⁽²⁾	$	3,508	$	—		$	3,508	$	2,009	$	(988)	$	2,997
Loss and LAE ratio		60.5%		—	%		—		60.8%		60.0%		—
Expense ratio		37.7%		—	%		—		38.0%		32.5%		—
Combined ratio		98.2%		—	%		—		98.8%		92.5%		—
Adjusted loss and LAE ratio⁽³⁾		—		—			60.5%		—		—		60.8%
Adjusted expense ratio⁽³⁾		—		—			37.7%		—		—		37.6%
Adjusted combined ratio⁽³⁾		—		—			98.2%		—		—		98.4%

⁽¹⁾	The ratio of net written premiums to gross written premiums.

⁽²⁾	Underwriting income is a non-GAAP financial measure. See discussion on "Non-GAAP Financial Measures."

⁽³⁾	Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. We define adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio as the corresponding ratio (calculated in accordance with GAAP) excluding the effects of the WAQS. We use these adjusted ratios as internal performance measures in the management of our operations because we believe they give our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Our adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio should not be viewed as substitutes for our loss and LAE ratio, expense ratio and combined ratio, respectively.

PROSIGHT GLOBAL, INC.
SUPPLEMENTARY UNDERWRITING INFORMATION (UNAUDITED)
($ in thousands)

	Three Months Ended March 31
	2019	2018

Gross written premiums	$ 255,838	$ 249,420
Net written premiums	209,902	261,352
Net premiums earned	195,608	167,456

Net losses and LAE	118,333	101,854
(Favorable) prior period development	(395)	(1,270)
Catastrophe losses and LAE	0	0
Underwriting, acquisition, and insurance expenses	73,767	63,593
Policy acquisition expenses	46,573	38,371
General and administrative expenses	27,194	25,222

Underwriting income	$ 3,508	$ 2,009

Underwriting Ratios

Excluding catastrophes current accident year loss and LAE ratio	60.7%	61.6%
(Favorable) prior period development ratio	(0.2%)	(0.8%)
Catastrophe losses and LAE ratio	0.0%	0.0%
Loss and LAE ratio	60.5%	60.8%

Policy acquisition expense ratio	23.8%	22.9%
General and administrative expense ratio	13.9%	15.1%
Expense ratio	37.7%	38.0%

Combined ratio	98.2%	98.8%

PROSIGHT GLOBAL, INC.
GROSS WRITTEN PREMIUM BY CUSTOMER SEGMENT (UNAUDITED)
($ in thousands)

	Three Months Ended March 31
	2019	2018	% Change
Construction	$ 23,248	$ 22,953	1.3%
Consumer Services	27,485	21,907	25.5%
Marine and Energy	15,934	15,262	4.4%
Media and Entertainment	37,542	40,254	-6.7%
Professional Services	29,562	29,565	0.0%
Real Estate	28,735	27,958	2.8%
Transportation	34,015	26,914	26.4%
Customer Segments Subtotal	196,521	184,813	6.3%
Other	59,317	64,607	(8.2%)
Total	$ 255,838	$ 249,420	2.6%

Reconciliation of Non-GAAP Financial Measures

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

Net income for the three months ended March 31, 2019 and 2018 reconciles to underwriting income as follows:

	Three Months Ended March 31
($ in thousands)	2019	2018
Net income from continuing operations	$ 13,695	$ 10,010
Income tax expense	3,815	2,558
Income before taxes	17,510	12,568
Net investment income	17,158	13,709
Net investment gains (losses)	113	(287)
Interest and other expense, net	3,269	2,863
Underwriting income	$ 3,508	$ 2,009

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

Adjusted operating income for the three months ended March 31, 2019 and 2018 reconciles to net income as follows:

	Three Months Ended March 31
($ in thousands)	2019	2018
Net income from continuing operations	$ 13,695	$ 10,010
Income tax expense	3,815	2,558
Income before taxes	17,510	12,568
Net investment gains (losses)	113	(287)
Adjusted operating income before taxes	17,397	12,855
Income tax expense	3,815	2,558
Adjusted operating income	$ 13,582	$ 10,297