Our corporate headquarters are located in Morristown, New Jersey on a site of approximately 95,000 rentable square feet leased by us. The term of that lease expires on January 31, 2022. We lease a total of six additional offices located in California, Georgia, New York, Florida and London. The office in London is subleased to a third party. We do not own any real property. We believe that our facilities are adequate for our current needs.
The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.
The combined ratio is the sum of the loss and LAE ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Adjusted loss and LAE ratio, adjusted expense ratio and adjusted combined ratio are non-GAAP financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Our Results of Operations - The WAQS.”
Adjusted operating return on equity is a non-GAAP financial measure. 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Financial Measures” for a reconciliation of net income in accordance with GAAP to adjusted operating income.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Certain restatements have been made to historical information to give effect to the merger and related transactions. See Note 1 - Background in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk factors” included under Part I, Item 1A and elsewhere in this Annual Report on this Form 10-K. See “Special Note Regarding Forward-Looking Statements.”
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 founded ProSight, with capital commitments from affiliates of each of The Goldman Sachs Group, Inc. (“Goldman Sachs”) and TPG Global, LLC (“TPG”) as a different type of insurer that leverages customized technology infrastructure, underwriting expertise and unique niche focus to develop products, services and solutions that deliver distinct value to customers in the manner they prefer.
Our Company is led by a highly experienced and entrepreneurial team with decades of insurance leadership experience at ProSight and other leading insurers. We write property and casualty insurance with a focus on underwriting specialty risks by partnering with a select number of distributors, often on an exclusive basis. We have a diverse business mix covering specialty niches within the eight customer segments in which we operate. We market and distribute our insurance product offerings in all 50 states on both an admitted and non-admitted basis. We are focused on delivering consistent underwriting profitability with low volatility of underwriting results.
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:
Average size and premium rate of newly issued and renewed policies; and
We earn investment income on our portfolio of cash and invested assets. Our cash and invested assets are primarily comprised of debt securities, and may also include cash and cash equivalents, short-term investments, and alternative investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates and credit spreads), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive from our insureds less payments on policyholder claims and operating expenses.
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.
Adjusted combined ratio is the combined ratio excluding the effects of the WAQS.
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.
Underwriting income is a non-GAAP measure. See “Reconciliation of Non-GAAP Financial Measures.”
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 effects of the WAQS.
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.
Net income from continuing operations was $45.5 million for the year ended December 31, 2019 compared to $53.7 million for the year ended December 31, 2018, a decrease of $8.2 million, or 15.3%. The decrease in net income primarily resulted from an increase in interest and other expenses of $16.7 million, and a decrease in underwriting income of $8.0 million, partially offset by an increase in net investment income of $12.9 million.
GWP were $968.0 million for the year ended December 31, 2019 compared to $895.1 million for the year ended December 31, 2018, an increase of $72.9 million, or 8.1%.
Premium growth in 2019 was primarily driven by new business and increased renewals within previously existing niches combined with entry into new niches, primarily within Real Estate, Consumer Services and Transportation customer segments. Excluding the decline of GWP within “Other,” premiums for the year ended December 31, 2019 increased 16.7% compared to the year ended December 31, 2018.
Real Estate GWP increased by 26.3% to $167.6 million for the year ended December 31, 2019 compared to $132.7 million for the year ended December 31, 2018. The premium growth is primarily due to increases in the Metrobuilders and Builders Risk niches. Premium growth in these niches is driven by an increase in new business of $13.0 million and $8.0 million, respectively compared to 2018.
Consumer Services GWP increased by 24.8% to $133.7 million for the year ended December 31, 2019 compared to $107.1 million for the year ended December 31, 2018. The premium growth is due to continued maturity of the Auto Dealers niche, as well as the addition of the new Parking Facilities niche partially offset by declines in premium within the Social Services and Professional Employer Organizations niches. Auto Dealers, a new niche in 2018, increased $24.7 million during 2019 driven by new business growth in addition to a renewal book of premium. Parking Facilities is a new niche in 2019 which produced $14.8 million of new business during the year. In the Professional Employer Organization and Social Services niches, premiums declined during 2019 by $8.8 million and $6.7 million, respectively, when compared to 2018, where new business growth and renewal premium retention were limited by unfavorable pricing conditions in primary workers’ compensation.
Transportation GWP increased by 21.7% to $112.2 million for the year ended December 31, 2019 compared to $92.2 million for the year ended December 31, 2018. The premium growth is due to high premium retention and increased rate (7.3%) within the Taxi niche and new business growth within the Charter Bus and Intermodal niches.
Net written premiums increased by $2.1 million, or 0.2%, to $852.1 million for the year ended December 31, 2019 from $850.1 million for the year ended December 31, 2018. The increase in net written premiums was due to an increase in gross written premiums of $72.9 million, partially offset by an increase in ceded written premium of $70.8 million, an increase of 157.3% from the year ended December 31, 2018, primarily due to the termination of the WAQS.
The termination of the WAQS resulted in a reversal of $58.9 million of ceded premiums for the year ended December 31, 2018. Our net retention ratio excluding the WAQS was 88.0% and 88.4% for the years ended December 31, 2019 and 2018, respectively.
Net earned premiums increased by $77.1 million, or 10.5%, to $807.9 million for the year ended December 31, 2019 from $730.8 million for the year ended December 31, 2018. The increase in net earned premiums was directly related to the growth in written premiums. Excluding the effects of the WAQS, net earned premiums for the year ended December 31, 2019 were $807.9 million, compared to $745.3 million for the year ended December 31, 2018, an increase of 8.4%.
Our loss and LAE ratio was 62.0% for the year ended December 31, 2019 compared to 59.5% for the year ended December 31, 2018. The increase is primarily due to an increase in the current accident year (excluding catastrophe losses) ratio combined with an unfavorable change in prior period development. For the year ended December 31, 2019 the current accident year (excluding catastrophe losses) was 61.2%, compared to 59.7% for the year ended December 31, 2018. For the year ended December 31, 2019, before adjusting for the WAQS, we incurred unfavorable prior period development of $3.2 million as compared to favorable development of $5.0 million for the year ended December 31, 2018. After adjusting for the WAQS, we incurred favorable development in both 2019 and 2018.
The following tables summarize the effect of the factors indicated above on the loss and LAE ratios and adjusted loss and LAE ratios for the years ended December 31, 2019 and 2018:
The following table presents the loss and LAE ratio before and after the effects of reinsurance, for the years ended December 31, 2019 and 2018:
The following table summarizes the components of the expense ratio for the years ended December 31, 2019 and 2018:
Underwriting, acquisition and insurance expenses is calculated based on the net earned premiums excluding the effects of the WAQS for the years ended December 31, 2019 and 2018.
Our net investment income increased by 23.1% to $68.9 million for the year ended December 31, 2019 from $56.0 million for the year ended December 31, 2018. Our average invested assets increased 15.3% from $1.7 billion for the year ended December 31, 2018, to $2.0 billion for the year ended December 31, 2019. Net investment yield increased by 0.2 percentage points, to 3.4% as of December 31, 2019 compared to 3.2% as of December 31, 2018. Gross investment income increased by $13.1 million to $71.2 million for the year ended December 31, 2019 compared to $58.1 million for the year ended December 31, 2018.
Realized investment gains (losses), net increased by $2.3 million due to non-recurring realized gains on the sale of certain securities as part of the repositioning of the investment portfolio, calls, and corporate actions during a favorable price environment for the year ended December 31, 2019.
The following table summarizes the components of net investment income and realized investment gains (losses), net for the years ended December 31, 2019 and 2018:
The weighted average duration of our fixed income portfolio, including cash equivalents, was 3.4 years at December 31, 2019 and 2.9 years at December 31, 2018.
Our effective tax rate for the year ended December 31, 2019 was 21.1% compared to 20.0% for the year ended December 31, 2018. On December 22, 2017, the TCJA was signed into law, which reduced the Company’s statutory corporate tax rate from 35% to 21% beginning with the 2018 tax year.
Our income tax expense was $12.1 million and $13.4 million for the years ended December 31, 2019 and 2018.
Our adjusted operating return on equity was 12.4% for the year ended December 31, 2019, a decrease of 2.0% percentage points from 14.4% for the year ended December 31, 2018.
The following table summarizes the results of continuing operations for the years ended December 31, 2018 and 2017:
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. For additional detail on the impact of the WAQS on our results of operations see “- Factors Affecting Our Results of Operations - The WAQS.”
The following table presents the GWP by customer segment for the years ended December 31, 2018 and 2017:
Premium growth in 2018 was primarily driven by the expansion of our business within the existing niches, including expanded product offerings. Excluding the decline of GWP within “Other,” premiums for the year ended December 31, 2018 increased 8.1% compared to the year ended December 31, 2017.
Transportation GWP increased by 8.3% to $92.2 million for the year ended December 31, 2018 compared to $85.1 million for the year ended December 31, 2017. The majority of premium growth is due to increases in renewal premium retention within the School Bus niche and rate increases across all niches within the Transportation customer segment. The School Bus niche increased renewal premium retention by $6.8 million in 2018, when compared to 2017.
Net earned premiums increased by $121.0 million, or 19.8%, to $730.8 million for the year ended December 31, 2018 from $609.8 million for the year ended December 31, 2017. The increase in net earned premiums was directly related to the growth in written premiums and a reduction in ceded earned premiums due to the impact of the WAQS of $72.8 million, a decrease of 83.3% from the year ended December 31, 2017. Excluding the effects of the WAQS, net earned premiums for the year ended December 31, 2018 were $745.3 million, an increase of 6.9% from the year ended December 31, 2017.
Underwriting, acquisition and insurance expenses is calculated based on the net earned premiums excluding the effects of the WAQS for the years ended December 31, 2018 and 2017.
The following table summarizes the components of net investment income and realized investment (losses) gains, net for the years ended December 31, 2018 and 2017:
Our effective tax rate for the year ended December 31, 2018 was 20.0% compared to 122.0% for the year ended December 31, 2017. On December 22, 2017, the TCJA was signed into law, which reduced the Company’s statutory corporate tax rate from 35% to 21% beginning with the 2018 tax year. The Company revalued its 2017 deferred tax assets and liabilities in response to this reduction which resulted in a $25.1 million charge to income in 2017.
Our income tax expense was $13.4 million and $38.2 million for the years ended December 31, 2018 and 2017.
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, 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. These reimbursements are based on the actual costs that we expect to incur, with no mark-up above our expected costs.
State insurance laws restrict the ability of the insurance subsidiaries to declare stockholder dividends without prior regulatory approval. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. No insurance subsidiary may declare or distribute any dividend to stockholders which, together with all dividends declared or distributed by it during the preceding twelve months, exceeds the lesser of ten percent of its surplus to policyholders or 100 percent of adjusted net investment income. The maximum amount of dividends the insurance subsidiaries can pay us during 2020 without regulatory approval is $54.7 million. Insurance regulators have broad powers to ensure that statutory surplus remains at adequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. In the future, state insurance regulatory authorities that have jurisdiction over the payment of dividends by the insurance subsidiaries may adopt statutory provisions more restrictive than those currently in effect. The insurance subsidiaries did not pay any dividends to us during 2019, 2018 or 2017.
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.
For the year ended December 31, 2019, net cash used in investing activities was $288.6 million, a decrease of $9.3 million from 2018, and primarily reflected purchases of fixed income securities.
On January 29, 2018, ProSight entered into a revolving loan agreement with certain lenders and Citizens Bank, N.A., as agent, providing for a revolving loan facility of up to $25.0 million. On March 15, 2019, the Company entered into an amended and restated revolving loan agreement, which increased the facility to $50.0 million (as amended, the “revolving facility”). The maturity date of the revolving facility is the earlier of (i) March 15, 2022, or (ii) 91 days before the maturity of the senior notes due November 2020 or, if such senior notes are amended or replaced, 91 days before the maturity of such amendment or replacement.
Borrowings under the revolving facility accrue interest, at our option, at a rate equal to either; (a) a base rate determined by reference to the highest of; (i) the administrative agent’s prime lending rate; (ii) the federal funds effective rate plus 0.50%; and (iii) the LIBOR rate for a one-month interest period plus 1.00%, in each case plus 2.00% or (b) the LIBOR rate for the interest period relevant to such borrowing plus the applicable margin. The applicable margins range from 1.75% to 3.00% based on our financial strength ratings and credit ratings. In addition, the revolving facility provides for a fee ranging from 0.20% to 0.75%, also based on our financial strength ratings and credit ratings, on the amount of undrawn commitments thereunder.
facility also permits us, at any time or from time to time, to voluntarily prepay loans. The revolving facility includes certain covenants, including restrictions on the disposition of assets, restrictions on the incurrence of liens and indebtedness, restrictions on making restricted payments and requirements to maintain specified liquidity levels.
On August 8, 2019, the Company used IPO proceeds to repay $18.0 million in complete satisfaction of the outstanding debt under the revolving facility. As of December 31, 2019, there were no amounts outstanding and the revolving facility had a borrowing capacity of $50.0 million.
We actively use ceded reinsurance across our book of business to reduce our overall risk position and to protect our capital. Reinsurance involves a primary insurance company transferring, or “ceding”, a portion of its premium and losses in order to limit its exposure. The ceding of liability to a reinsurer does not relieve the obligation of the primary insurance to the policyholder. The primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement. Our reinsurance is primarily contracted under excess of loss agreements. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses, in excess of a specified amount. In excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses.
We purchased adverse development reinsurance contracts (together, the “ADC”) in 2018, 2017 and 2016 that limit the amount of future development on primary and excess workers’ compensation reserves reported for accident years 2017 and prior. The expected cost of the ADC contract is fully expensed at the inception of the contract. As of December 31, 2018, there have been no losses ceded to the ADC.
Factors - Risks Related to Our Business” on this Annual Report on Form 10-K. A decline in our financial strength rating may adversely affect the amount of business we write.
Reserves for losses and LAE represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. Estimating reserves for losses and LAE is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by period are based on industry and peer group claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period will be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on reserves for losses and LAE are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on reserves for paid and unpaid losses and LAE totaled $197.4 million, $197.7 million and $218.4 million at December 31, 2019, 2018 and 2017, respectively. These recoverable balances include $33.1 million and $43.7 million related to the WAQS at December 31, 2019 and 2018, respectively.
At December 31, 2019, total stockholders’ equity was $543.0 million and tangible stockholders’ equity was $513.8 million compared to total stockholders’ equity of $389.8 million and tangible stockholders’ equity of $360.6 million at December 31, 2018. The increase in both total and tangible stockholders’ equity was primarily due to net income of $38.9 million, net increase in accumulated other comprehensive income of $59.8 million, and proceeds from common stock sold in the initial public offering of $50.8 million for the year ended December 31, 2019.
On July 24, 2019, the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) became effective immediately prior to the effectiveness of the registration statement filed in connection with the IPO. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, RSUs, dividend equivalent rights, performance-based shares and other cash-based or share-based awards.
A total of 4,500,000 shares of common stock are initially authorized and reserved for issuance under the 2019 Plan, including shares underlying RSUs granted under the 2010 Plan.
1,267,912 supplemental RSU awards, 100% of which are time-vesting RSUs, was granted to management on July 25, 2019 in connection with the IPO and subject to vesting as follows: 25% vested at grant date, 25% will vest on the second anniversary of the grant date, subject to continued service and 50% will vest on the third anniversary of the grant date, subject to continued service. The fair value of the supplemental RSUs is $17.8 million.
Vested RSUs awaiting conversion into common stock were 906,182 for the year ended December 31, 2019, 548,292 for the year ended December 31, 2018 and 517,446 for the year ended December 31, 2017, respectively.
The following table summarizes RSU transactions for the 2019 Plan for the years ended December 31, 2019 and 2018:
There was no expense recognized related to the 2019 ESPP for the year ended December 31, 2019.
We did not declare any dividends in the years ended December 31, 2019, 2018 and 2017.
At December 31, 2019, the majority of the portfolio, or $2.0 billion, was comprised of securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities, net of applicable taxes, reported as a separate component of accumulated other comprehensive income. Also included in our investments were $216.2 million of alternative investments carried at fair value. Our securities, including cash equivalents, had a weighted average duration of 3.4 years and an average rating of “A” at December 31, 2019.
The amortized cost and fair value of our available-for-sale investments in fixed maturity securities presented by contractual maturity as of December 31, 2019 and 2018, were as follows:
In order to conduct business in certain states, we are required to maintain letters of credit or assets on deposit to support state-mandated insurance regulatory requirements and to comply with certain third-party agreements. Assets held on deposit or in trust accounts are primarily in the form of cash or certain high-grade securities.
The fair value of our restricted assets was $577.9 million at December 31, 2019. This includes $127.2 million of funds in trust for the mutual benefit of our insurance companies due to participation in our intercompany policy agreement. Restricted investments increased 5.6%, or $30.8 million, when compared to December 31, 2018 primarily due to state deposits and market appreciation from fixed income securities.
Net income from continuing operations for the years ended December 31, 2019, 2018 and 2017, reconciles to underwriting income as follows:
Adjusted operating income for the years ended December 31, 2019, 2018 and 2017, reconciles to net income from continuing operations as follows:
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 on this Annual Report on Form 10-K.
The reserves for unpaid losses and LAE are the largest and most complex estimate in our consolidated balance sheets. The reserves for unpaid losses and LAE represent our estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the balance sheet date. The loss reserves are not discounted, with the exception of certain workers’ compensation claims loss reserves. The amounts of discount related to workers’ compensation reserves were $47.4 million, $37.0 million and $34.2 million at December 31, 2019, 2018 and 2017, respectively.
The following tables present our gross and net reserves for unpaid losses and LAE at December 31, 2019, 2018, and 2017:
Case reserves are established for individual claims that have been reported to us. We are notified of losses by our insureds or their brokers. Based on the information provided, we establish case reserves by estimating the ultimate losses from the claim, including defense costs associated with the ultimate settlement of the claim. Our claims department personnel use their knowledge of the specific claim along with advice from internal and external experts, including underwriters and legal counsel, to estimate the expected ultimate losses. We utilize the services of two Third Party Administrators (“TPAs”) to assist in the adjustment of workers’ compensation claims and one TPA to assist in the adjustment of builders’ risk claims within the Real Estate customer segment. Our TPAs are not affiliated with our distribution partners. Other than in limited cases, our managing general underwriters (“MGUs”) do not handle claims. Our internal claims managers oversee TPA and MGU claims-related activities and monitor their individual claim handling activities to prescribed ProSight standards.
In addition, we retain an independent external actuarial firm to perform an annual loss reserve analysis. The independent actuarial firm is not involved in the establishment and recording of our loss reserve. The independent actuarial firm prepares its own estimate of our reserves for loss and LAE, and we review their estimate to the reserves for losses and LAE reviewed and approved by the Reserve Committee.
The table below quantifies the impact of potential reserve deviations from our carried reserve at December 31, 2019. We applied sensitivity factors to incurred losses for the three most recent accident years and to the carried reserve for all prior accident years combined. In the selection of the volatility factors, we have considered the potential impact of changes in current loss trends, pricing trends, and other actuarial reserving assumptions. The aggregate development depicted in the sensitivity analysis is consistent with the average development in recent calendar periods and a
reasonable depiction of the potential volatility of the reserve estimates for the current calendar period. We believe that potential changes such as these would not have a material impact on our liquidity.
In 2019, the effective rate was consistent with the U.S. corporate income tax rate of 21% and is used to estimate the potential impact to stockholders’ equity.
The Company has established a framework for valuing financial assets and financial liabilities. The framework is based on a hierarchy of inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The standard describes three levels of inputs that may be used to measure fair value and categorize the assets and liabilities within the hierarchy:
Management reviews fixed income securities for other-than-temporary impairments (“OTTI”) based upon quantitative and qualitative criteria that include, but are not limited to, downgrades in rating agency levels for securities,
The Company may also consider cash flow models and matrix analyses in connection with its OTTI evaluation. The Company will record credit impairment in the consolidated statements of operations and comprehensive income (loss) when the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security. In addition, any portion of such decline to arise from factors other than credit is recorded as a component of other comprehensive income (“OCI”).
We have audited the accompanying consolidated balance sheets of ProSight Global, Inc. and Subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedules (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
The Company was incorporated in Delaware in 2010 and is owned by ProSight Investment LLC (“PI”), ProSight Parallel Investment LLC (“PPI”), and ProSight TPG, LP (“PT”). PI and PPI are wholly-owned by ProSight Equity Management Inc., which is held as an investment within the GS Capital Partners VI funds. PT is held as an investment within TPG Partners VI, LP. The Company is the parent of ProSight Specialty Insurance Group, Inc. (“PSIG”). PSIG conducts its specialty insurance business through three insurance subsidiaries: New York Marine and General Insurance Company (“New York Marine”), Gotham Insurance Company (“Gotham”), and Southwest Marine and General Insurance Company (“Southwest Marine”). On October 1, 2016, ProSight Specialty Insurance Solutions, LLC (“PSIS”) became a direct subsidiary of PSIG. Effective April 19, 2018, PSIS changed its name to ProSight Specialty Insurance Brokerage, LLC (“PSIB”). The Company is also the parent of ProSight Specialty Management Company (“PSMC”), which manages a risk-sharing pool of the Company’s subsidiaries, and ProSight Specialty Bermuda Ltd. (“PSBL”).
Prior to July 25, 2019, the Company was a wholly-owned subsidiary of ProSight Global Holdings Limited (“PGHL”), a Bermuda holding company. Effective July 25, 2019, prior to the completion of the Company’s initial public offering (“IPO”), PGHL merged with and into the Company, with the Company surviving the merger (the “merger”). The prior holders of PGHL’s equity interests then outstanding received, as merger consideration, the right to receive 6.46 shares of the Company’s common stock for each such outstanding PGHL equity interest. The total merger consideration was 38,851,369 shares of the Company’s common stock, which then comprised 100% of the shares of the Company’s outstanding common stock.
As a result of the merger, the assets and liabilities of the Company include, effective July 25, 2019, the assets and liabilities of PGHL. In addition, on July 24, 2019, in connection with the merger, the Company’s duly adopted amended and restated certificate of incorporation (the “Certificate of Incorporation”) became effective, providing for, among other things, the authorization of 200,000,000 shares of common stock and 50,000,000 shares of preferred stock. The consolidated financial statements, related notes and schedules have been restated for all historical periods prior to and including June 30, 2019, presented to give effect to the merger and related conversion of shares, including reclassifying an amount equal to the change in value of common stock to additional paid-in capital, as well as the effectiveness of the Certificate of Incorporation.
Prior to the merger, PGHL’s subsidiaries ProSight Specialty International Holdings Limited (“PSIH”) and ProSight Specialty European Holdings Limited (“PSEH”) were merged with and into ProSight Global, Inc., effective February 5, 2019. Additionally, effective February 5, 2019, PSBL became a wholly-owned subsidiary of the Company. Prior to February 5, 2019, PSBL was a wholly-owned subsidiary of PSEH.
On July 29, 2019, the Company completed its IPO with the sale of 7,857,145 shares of the Company’s common stock, including the issuance and sale by the Company of 4,285,715 shares of the Company’s common stock and the sale by PI and PPI (collectively, the “GS Investors”) and PT, TPG PS 1, L.P., TPG PS 2, L.P., TPG PS 3, L.P. and TPG PS 4, L.P. (collectively the “TPG Investors” and together with the GS Investors, the “Principal Stockholders”) of 3,571,430 shares of the Company’s common stock.
Unless otherwise noted, the consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany balances and transactions, and relate to continuing operations. Discontinued operations are reported separately.
Fixed income securities categorized as available-for-sale (“AFS”) are reported at estimated fair value and include those fixed income investments where the Company’s intent to carry such investments to maturity may be affected in future periods by changes in market interest rates, tax position or credit quality. Unrealized gains and losses, net of related deferred income taxes, on AFS securities are reflected in accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity.
Management reviews fixed income securities for other-than-temporary impairments (“OTTI”) based upon quantitative and qualitative criteria that include, but are not limited to, downgrades in rating agency levels for securities, the duration and extent of declines in fair value of the security below its cost or amortized cost, interest rate trends, the Company’s intent to sell or hold the security, market conditions, and the regulatory environment for the security’s issuer.
The Company may also consider cash flow models and matrix analyses in connection with its OTTI evaluation. The Company will record credit impairment in the consolidated statements of operations when the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security. In addition, any portion of such decline to arise from factors other than credit is recorded as a component of other comprehensive income (“OCI”).
The Company’s insurance subsidiaries participate in various reinsurance agreements on both an assumed and ceded basis. The Company uses various types of reinsurance, including quota share, excess of loss and facultative agreements, to spread the risk of loss among several reinsurers and to limit its exposure from losses on any one occurrence. Any recoverable due from reinsurers is recorded in the period in which the related gross liability is established.
Other depreciable assets, primarily leasehold improvements, as of December 31, 2019 and 2018, had unamortized balances of $3.3 million and $3.8 million, respectively. The Company recorded depreciation expense of $1.2 million and $1.5 million and $1.7 million, for the years ended 2019, 2018 and 2017, respectively.
The Company provides deferred income taxes on temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities based upon enacted tax rates. The effect of a change in tax rates is recognized in income in the period of change. The Company provides for a valuation allowance on certain deferred tax assets primarily as a result of the uncertainty that the Company can fully utilize all deferred taxes that arose from net operating losses (NOL) incurred. This uncertainty stems from issues relating to the current economic conditions and limitations on the period that such losses can be carried forward prior to expiring. To the extent the Company generates future operating income to offset these losses, it may recover some or the entire amount of the deferred income taxes associated with temporary differences.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted which reduced the corporate tax rate from 35% to 21% effective January 1, 2018. This resulted in a re-measurement of the Company’s net deferred taxes to reflect the new rate at which the deferred items will be realized. The re-measurement of the net deferred tax asset as another income tax expense resulted in tax effects of items within AOCI, which did not reflect the current enacted tax rate. As a result, the Company elected to early adopt Accounting Standards Update 2018-02 (“ASU 2018-02”), Income Statement - Reporting Comprehensive Income at December 31, 2017, by making a one-time adjustment of $1.6 million to reclassify the stranded tax effects from accumulated other comprehensive income to retained earnings, that was associated with net unrealized gains on our investment portfolio resulting from the enactment of Tax Reform.
Losses and loss adjustment expenses are a function of the amount and type of insurance contracts the Company writes, the loss experience associated with the underlying coverage, and the expenses incurred in the handling of the losses. In general, the Company’s losses and loss adjustment expenses are affected by the frequency of claims associated with the particular types of insurance contracts, trends in the average size of losses incurred on a particular type of business, mix of business, changes in the legal or regulatory environment related to the business, trends in legal defense costs, wage inflation, and inflation in medical costs.
Bornhuetter-Ferguson Method: the results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.
In February 2016, the FASB issued ASU 2016-02, Leases to improve the financial reporting of leasing transactions. Under this ASU, lessees will recognize a right-of-use asset and corresponding liability on the balance sheet for all leases, except for leases covering a period of fewer than 12 months. The liability is to be measured as the present value of the future minimum lease payments taking into account renewal options if applicable plus initial incremental direct costs such as commissions. The minimum payments are discounted using the rate implicit in the lease or, if not known, the lessee’s incremental borrowing rate. The lessee’s income statement treatment for leases will vary depending on the nature of what is being leased. A financing type lease is present when, among other matters, the asset is being leased for a substantial portion of its economic life or has an end-of-term title transfer or a bargain purchase option as in today’s practice. The payment of the liability set up for such leases will be apportioned between interest and principal; the right-of use asset will be generally amortized on a straight-line basis. If the lease does not qualify as a financing type lease, it will be accounted for on the income statement as rent on a straight-line basis. ASU 2016-02 requires the application of a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU 2016-02 is effective for public entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods with early adoption permitted. For the Company, ASU 2016-02 is effective for annual periods beginning after December 15, 2019 and interim periods within annual periods beginning after December 15, 2020. The Company will adopt ASU 2016-02 in the first quarter of 2020, and expects to recognize, at adoption, a right-of-use asset of $6.8 million and a corresponding lease liability of $6.8 million in continuing operations. The Company expects to recognize, at adoption, a right-of-use asset of $2.6 million and a corresponding lease liability of $2.6 million in discontinued operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, trade receivables, and reinsurance receivables. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets and that they be presented on the financial statements net of the valuation allowance. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is referred to as the current expected credit loss model. ASU 2016-13 is effective for public entities for annual periods beginning after December 15,
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. This update shall be applied retrospectively and is effective for all entities annual and interim periods beginning after December 15, 2019, with early adoption permitted. As the requirements of this literature are disclosure only, ASU 2018-13 will not impact the Company’s financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other -  Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 provides the option to apply prospectively to costs for activities performed on or after the date that the entity first adopts or retrospectively in accordance with guidance on accounting changes. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. For the Company, ASU 2018-15 is effective for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition and results of operations.
In 2019, there was a conversion of 59,169 RSUs into common shares accounted for as a non-cash transaction.
Intangible assets acquired include the value of licenses, trade names, agency relationships, non-compete agreements, renewal rights, and valuation of business acquired. Intangible assets acquired included $17.1 million, which
are not subject to amortization, and $13.6 million that amortizes over a period of 2 to 15 years. Of the $13.6 million intangible assets acquired, $0.2 million remain to be amortized at December 31, 2019.
The estimated amortization of intangible assets for the next five years is as follows:
Loss from discontinued operations, net of taxes in its consolidated statements of operations are comprised of the following:
(b) The gross unrealized gains and losses on AFS securities included in assets from continuing operations at December 31, 2019, are as follows:
The gross unrealized gains and losses on AFS securities included in assets from continuing operations at December 31, 2018, are as follows:
The following table summarizes all securities in an unrealized loss position at December 31, 2018, the fair value and gross unrealized loss by asset class and by length of time those securities have been in a loss position:
(d) The amortized cost and fair value of fixed income securities, which excludes the Company’s structured securities portfolio, at December 31, 2019, by contractual maturity are shown below. Expected maturities will differ
(e) The Company elected to account for its investments in limited partnership and limited liability companies of $66.7 million and $53.4 million at December 31, 2019 and 2018, respectively, at fair value. 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 $36.6 million at December 31, 2019.
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 is 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 loan losses. Interest on loans is calculated using the simple interest method on the daily principal amount outstanding. The allowance for loan losses related to impaired loans is determined based on the difference of the carrying value of loans and the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the loan’s observable market price. There was no allowance for loan losses at December 31, 2019 and 2018, respectively.
(h) Net investment income included in net income (loss) from continuing operations in the consolidated statements of operations from each major category of investments for the years ended December 31, 2019, 2018 and 2017, is as follows:
The Company has established a framework for valuing financial assets and financial liabilities. The framework is based on a hierarchy of inputs used in valuation and gives the highest priority to quoted prices in active markets and
requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The standard describes three levels of inputs that may be used to measure fair value and categorize the assets and liabilities within the hierarchy:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These prices generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information publicly available.
As of December 31, 2019 and 2018, the Company does not hold any Level 1 securities.
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.
There were no transfers between Levels 1 and 2 for the years ended December 31, 2019 and 2018.
Management believes that the use of the fair value option as specified in Accounting Standards Codification No. 825, Financial Instruments (ASC 825) to record limited partnerships is consistent with its objective for such investments. As such, the entire limited partnership portfolio of $66.7 million and $53.4 million at December 31, 2019 and 2018, was recorded using net asset value, which the Company has determined to be the best indicator of fair value for these investments.
The following tables disclose the carrying value and fair value of financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of December 31, 2019 and 2018:
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs:
On May 3, 2019, the Company entered into a Transition and Separation Agreement (the “Separation Agreement”) with its former Chief Executive Officer (the “former CEO”). Under the Separation Agreement, the former CEO and the Company agreed to a general release of claims and his compliance with the restrictive covenants. The Company recorded an expense of $8.0 million within Other Expense in the consolidated statements of operations for the year ended December 31, 2019 relating to the severance payments and benefits payable to the former CEO. Per the terms of the Separation Agreement, the former CEO’s profit interests (“P Shares”) were forfeited and outstanding RSUs are treated in accordance with the terms of the applicable award agreements. Additionally, the Company cancelled 137,987 shares of common stock in July 2019 with no consideration as per the terms of the Separation Agreement.
Total reinsurance ceded and assumed relating to premiums written, earned premiums and net losses and loss adjustment expenses incurred for the years ended December 31, 2019, 2018 and 2017 are as follows:
In 2016, the Company entered a retroactive reinsurance agreement with an authorized reinsurer covering accident year 2015 and prior Primary and Excess Workers’ Compensation net losses and loss adjustment expenses incurred. Subject carried reserves at the January 1, 2016 effective date were $306.4 million. The reinsurance provides $100.0 million limit on respective paid losses excess of $315.0 million retention. The reinsurance cover has a retrospective rating feature of $47.6 million of additional premium accumulating at approximately 3% per annum. This amount is 100% recoverable to the Company to the extent losses do not exceed the retention. At December 31, 2019, the Company’s estimate of respective loss development remains below the retention.
In 2018, the Company entered into a retroactive reinsurance agreement for the 2017 accident year. Subject carried reserves at the January 1, 2018 effective date were $107.8 million. The reinsurer provides a $40.0 million limit on respective paid losses in excess of $119.3 million. The reinsurance cover has a retrospective rating feature of $21.0 million of premium accumulating at approximately 4% per annum. These are 100% recoverable to the Company to the extent losses do not exceed the retention. At December 31, 2019, the Company’s estimate of respective loss development remains below the retention and the adjustable premium is accrued as fully recoverable.
The Company negotiates with distribution partners to write direct premium on behalf of the Company’s affiliates. In January 2019, a distribution partner of the Company was acquired by a third-party insurance carrier. The Company has sourced 7.1% and 13.5% of direct premium from this distribution partner as of December 31, 2019 and
primary Workers’ Compensation and $8.2 million came from 2014 and 2015 accident years in excess Workers’ Compensation. Favorable development in Commercial Auto was driven mainly by the 2013, 2015 and 2016 accident years where severity trends of the previous two calendar year periods improved during 2018 across multiple niches. Marine Liability is a low frequency, high severity line of business and as a result, development often varies significantly from the average expectation. The $16.5 million adverse development in General Liability primarily related to 2013, 2014 and 2015 accident years due to increased severities in the Construction customer segment from reduced effectiveness of risk transfer from our general contractor insureds to subcontractors. The $12.2 million in adverse development in Commercial Multiple Peril is primarily from the Media and Entertainment customer segment driven by a longer development trend than that underlying the historic performance of premises liability.
The following table presents the historical average annual percentage payout of incurred claims, net of reinsurance, as of December 31, 2019:
The following tables represent information on unpaid losses and loss adjustment expenses incurred and cumulative paid losses, since 2010 for the Company’s Workers’ Compensation line, in thousands except claim counts:
The following tables represent information on unpaid losses and loss adjustment expenses incurred and cumulative paid losses, since 2010 for the Company’s all other lines in thousands except claim counts:
Estimates of salvage and subrogation recoverable on paid and unpaid losses have been recorded as a reduction of unpaid losses and amounted to $27.5 million and $27.4 million at December 31, 2019 and 2018, respectively.
The following table presents a roll forward of the deferred policy acquisition costs and are net of reinsurance:
PSIH acquired several entities in the U.K. in order to build the Syndicate. The Company changed its strategic direction with respect to its U.K. operations and placed the Syndicate into run-off, and then entered into a two-phase sale transaction to exit its U.K. operations, which closed in October 2017 and March 2018. There was no gain or loss
recognized from the sale of the U.K. operations. Additionally, there were no U.K. income taxes paid or recovered for the years ended December 31, 2018 and 2017.
The components of deferred tax assets and liabilities as of December 31, 2019 and 2018, are as follows:
On December 22, 2017, Tax Reform was signed into law, which among other implications, reduced the Company’s statutory corporate tax rate from 35% to 21% beginning with the 2018 tax year. The Company revalued its 2017 deferred tax assets and liabilities in response to this reduction, which resulted in a $25.1 million charge to income as illustrated in the rate reconciliation table below.
As of December 31, 2019, the Company’s valuation allowance of $17.6 million is attributable to the uncertainty in the realization of certain deferred tax assets attributable to U.S. federal and state NOLs.
The Company files tax returns subject to the tax regulations of federal, state and local tax authorities. A tax benefit taken in the tax return but not in the financial statements is known as an “unrecognized tax benefit.” A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The income tax provisions from the amounts computed by applying the federal statutory rate to the income before income taxes due to the following:
Although the Company is not currently under audit, the U.S. domestic entities are subject to federal and state examinations by tax authorities for tax year 2015 and subsequent and for the tax year 2009 and subsequent for examinations by local tax authorities.
The Company’s insurance subsidiaries are limited under state insurance laws, in the amount of ordinary dividends they may pay without regulatory approval. As of December 31, 2019, the maximum dividend that can be paid from the Company’s U.S. insurance subsidiaries to the Company without prior approval from the New York State Department of Financial Services is $54.7 million. Factors affecting the ability to pay dividends include levels of investment income in recent years and the Company’s statutory surplus position of the Company. Combined statutory net income and surplus of the Company’s domestic insurance subsidiaries as reported in the Combined Annual Statement were as follows:
The U.S. insurance company subsidiaries file statutory financial statements with each state in the format specified by the National Association of Insurance Commissioners (“NAIC”). The NAIC provides accounting guidelines for companies to file statutory financial statements and provides minimum solvency standards for all companies in the form of risk-based capital requirements. The policyholders’ surplus of each of the domestic insurance companies is above the minimum amount required by the NAIC. The actual statutory capital and surplus of the Company’s insurance subsidiaries was significantly above the amount of statutory capital and surplus necessary to satisfy regulatory requirements.
In January 2015, the Company issued an additional $25.0 million 6.5% senior notes due November 2020. The notes provide for semi-annual interest payments and are to be repaid in full in November 2020. The indenture contains certain covenants that restrict the Company’s ability to, among other items, incur indebtedness, make restricted payments, incur liens and require the Company to maintain specified liquidity levels. The Company remains in compliance with the covenants. Debt issuance costs of $0.2 million were incurred and are being amortized over the life of the loan.
The operating leases also include provisions for additional payments based on certain annual cost increases. Rent expense amounted to $3.3 million, $3.1 million and $3.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The lease of the U.K. office had rent expense of $0.5 million for the years ended December 31, 2019, 2018 and 2017, and sublease income of $0.6 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively. There was no sublease income for the year ended December 31, 2017. These amounts are included in discontinued operations.
The Company’s insurance agency subsidiary maintains separate underwriting accounts, which record all of the underlying insurance transactions of the insurance pools that it manages. These transactions primarily include collecting premiums from the insureds, collecting paid receivables from reinsurers, paying claims as losses become payable,
The Company is not aware of any uncertainties that could result in any possible defaults by either of the two unaffiliated pool members with respect to their pool obligations, which might impact liquidity or results of operations of the Company, but there can be no assurance that such events will not occur in the future.
181,118 annual long-term incentive awards in respect of 2019, 90,559 of which are time-vesting RSUs and 90,559 of which are performance-vesting RSUs, were granted to management on July 25, 2019 in connection with the IPO. Time-vesting RSUs are subject to vesting as follows: one-third annual installments on each anniversary of grant date, subject to continued service. Performance-vesting RSUs are subject to vesting as follows: cliff vesting on the third anniversary of the grant date to the extent performance metrics are met, subject to continued service. The fair value of such awards is $2.5 million at grant date.
250,000 founders grant awards in the form of time-vesting RSUs with a fair value of $3.5 million at grant date, July 25, 2019. These awards will cliff vest on the third anniversary of the grant date.
33,839 non-employee director RSU awards, 26,399 of which were granted on July 25, 2019 and 7,440 of which were granted on November 15, 2019, with a fair value of $0.5 million at grant date. These awards are fully vested on grant date.
Stock-based compensation expense was $8.6 million, $0.9 million and $1.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The tax benefit recognized for the same was $1.8 million, $0.2 million and $0.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019, The Company had approximately $14.5 million of total unrecognized stock-based compensation expense related to the RSUs expected to be recognized over a weighted-average period of 2.4 years.
For the benefit of its U.S.-based employees who meet certain service and age requirements, the Company offers a voluntary defined contribution 401(k) plan, a tax-qualified retirement plan subject to the Employee Retirement Income Security Act of 1974. The Company has elected to make matching contributions to eligible participants in an amount up to 100% of the first 4% of eligible compensation and 50% of the next 2% of eligible compensation contributed to the plan as deferral contributions. Expense recorded for this plan was $1.8 million, $2.1 million and $1.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
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) certain fronting arrangements in which all premium written is ceded to a third party (iv) participation in industry pools, and (v) emerging new business.