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 five additional offices located in California, Georgia, 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 following tables present our selected consolidated financial data as of the dates and for the periods indicated. The selected consolidated financial data as of and for the periods presented December 31, 2020, 2019, 2018, 2017 and 2016 are derived from our audited consolidated financial statements and the accompanying notes for those years.
(2) Underwriting (loss) income is a non-GAAP financial measure. We calculate underwriting income by subtracting losses and loss adjustment expenses (“LAE”) and underwriting, acquisition and insurance expenses from net earned premiums. 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 underwriting income.
(6) 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.
(7) 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.”
(8) 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.
(10) Debt to total capitalization ratio is the ratio, expressed as a percentage, of total indebtedness for borrowed money to the sum of total indebtedness for borrowed money and stockholders’ equity.
This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
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 Annual 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 Annual Report include, but are not limited to, statements about:
● future growth in existing niches or by entering into new niches;
● risks relating to our ability to obtain regulatory approvals of the proposed merger, including the timing, terms and conditions of any such approvals, which could affect our ability to complete the proposed merger;
● risks related to disruption of management time from ongoing business operations due to the proposed merger;
● risk that the proposed merger could have an adverse effect on our ability to retain and hire key personnel and maintain relationships with our customers, agents or business counterparties, and on our operating results and businesses generally;
● the performance of and our relationship with third-party agents and vendors we rely upon to distribute certain business on our behalf;
● the adequacy of our loss reserves, including as a result of changes in the legal, regulatory, and economic environments in which the Company operates or the impacts of COVID-19;
● the direct and indirect impacts of COVID-19 and related risks such as governmental responses and economic contraction, including on the Company’s investments and business operations, its distribution or other key partners and its customers;
● the effects of uncertain emerging claim and coverage issues on the Company’s business, and court decisions or legislative or regulatory changes that take place after the Company issues its policies, including those taken in response to COVID-19 (such as effectively expanding workers’ compensation coverage by instituting presumptions of compensability of claims for certain types of workers or requiring insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage);
● 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;
● 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;
● the impact of government regulation, including the impact of restrictions on our business activities under the Bank Holding Company (“BHC”) Act;
We discuss many of these risks in greater detail under the section titled Item 1A. “Risk Factors” of this 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 Annual 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.
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.
Shares of the Company’s common stock were initially offered to the public by the underwriters in the IPO at a per-share price of $14.00. The Company did not receive any of the proceeds from the sale of the shares of the Company’s common stock sold by the Principal Stockholders in the IPO. Following the IPO, the GS Investors held approximately 40.9% of the Company’s outstanding common stock and the TPG Investors held approximately 39.4% of the Company’s outstanding common stock.
On August 15, 2019 the Principal Stockholders completed the sale of 1,178,570 shares of the Company’s common stock at a price of $14.00 per share less the underwriting discount pursuant to the underwriters’ exercise of their over-allotment option granted in connection with the IPO. The Company did not receive any of the proceeds from the sale of the shares of common stock of the Company sold by the Principal Stockholders in this offering. Following this offering, the GS Investors held approximately 39.5% of the Company’s outstanding common stock and the TPG Investors held approximately 38.0% of the Company’s outstanding common stock.
The tables below set forth the gross written premiums (“GWP”), gross written commission ratios, and gross loss and allocated loss adjustment expense (“ALAE”) ratios by customer segment for the years ended December 31, 2020, 2019, and 2018. We have one reportable segment, Specialty Insurance. “Other” includes GWP from: (i) primary and excess workers’ compensation coverage for exited Self-Insured Groups; (ii) niches exited prior to 2018, many with a concentration in commercial auto; (iii) participation in industry pools; and (iv) emerging new business.
Gross Loss and ALAE Ratio, excluding Unallocated Loss Adjustment Expense (“ULAE”) Ratio
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.
● Frequency of claims associated with the particular types of insurance contracts that we write;
● Changes in the legal or regulatory environment related to the business we write;
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.
Substantially all of our income tax expense relates to U.S. federal income taxes. Our insurance companies are generally not subject to income taxes in the states in which they operate; however, our non-insurance subsidiaries are subject to state income taxes. The amount of income tax expense or benefit recorded in future periods will depend on the jurisdictions in which we operate and the tax laws and regulations in effect.
Adjusted operating income is net income excluding net realized investment gains and losses, impairment of goodwill and expenses relating to various transactions that we consider to be unique and non-recurring in nature (net of estimated tax impact).
Net retention ratio is the ratio of net written premiums to GWP.
(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.
Our results of operations may be difficult to compare from year to year due to the origination and termination of the WAQS. While there was no impact of WAQS on underwriting results or ratios for the year ended December 31, 2020, the impact of WAQS on prior periods is shown above. In light of the impact of the WAQS on our results of operations for prior periods, we internally evaluated our financial performance both including and excluding the effect of the WAQS.
(2) Loss and LAE ratio - excluding catastrophe and Adjusted loss and LAE ratio - excluding catastrophe is adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period from net earned premium.
(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. 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, 2020 and 2019:
Gross written premium contraction in 2020 was primarily driven by decreased new business and reduced insureds exposures within the Transportation and Media & Entertainment due to the economic downturn from the COVID-19 pandemic.
● Consumer Services GWP decreased by 8.0% to $123.0 million for the year ended December 31, 2020 compared to $133.7 million for the year ended December 31, 2019. The premium contraction is primarily driven by the decision to exit monoline workers’ compensation, partially offset by organic growth of the Auto Dealers niche.
Catastrophe losses of $14.3 million for the year ended December 31, 2020 were driven primarily by Hurricane Laura and the Oregon wildfires, adding 2.0 points to the current accident year loss ratio compared to $3.0 million of catastrophe losses for the year ended December 31, 2019. The Company also incurred $6.1 million of reinsurance reinstatement premiums, related to catastrophe losses during the period, which increased the loss ratio by 0.5 points for the year ended December 31, 2020. The loss and LAE ratio, excluding catastrophe losses and related items was 61.6% for the year ended December 31, 2020.
(1) Earned premiums are adjusted to exclude the impact of reinsurance reinstatement premiums related to catastrophe losses incurred during the period.
(2) Catastrophe losses are any one claim, or group of claims, equal or greater than $1.0 million related to a single PCS designated catastrophe event. PCS is Property Claim Services, a Verisk company. PCS has defined catastrophes in the United States, Puerto Rico, and the U.S. Virgin Islands as events that cause $25.0 million or more in direct insured losses to property and affect a significant number of policyholders and insurers.
(1) 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, 2020 and 2019.
Underwriting loss was $7.8 million for the year ended December 31, 2020 compared to an underwriting income of $16.4 million for the year ended December 31, 2019, a decrease of $24.2 million, or 147.4%. The decrease is driven by a reduction in net earned premium due to the contraction of gross written premium and reduced insured exposures resulting from the economic downturn caused by the COVID-19 pandemic, combined with a higher net loss ratio due to catastrophe losses in the third quarter.
Our interest and other expenses, net increased by $3.3 million to $31.8 million for the year ended December 31, 2020 compared to $28.4 million for the year ended December 31, 2019. The increase is primarily driven by the impairment of goodwill in the fourth quarter of $11.9 million in relation to the acquisition of the Company announced on January 15, 2021, partially offset by a decline of non-recurring expenses related to the transition of our former CEO and vesting of restricted stock units granted at the IPO in 2019.
Our income tax expense was $10.7 million and $12.1 million for the years ended December 31, 2020 and 2019, respectively. The decrease is primarily due to the decrease in income before income taxes compared to the same period in 2019.
Our adjusted operating return on equity was 6.9% for the year ended December 31, 2020, a decrease of 5.5% from 12.4% for the year ended December 31, 2019, primarily due to the reduction in adjusted operating income combined with the increase in average book value.
We receive corporate service fees from the operating subsidiaries to reimburse us for most of the operating expenses that we incur. Reimbursement of expenses through corporate service fees is based on the actual costs that we expect to incur with no mark-up above our expected costs.
The casualty-focused nature of our products, and limited property exposures, typically allow us to generate significant operating cash flow. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, and as a result their timing can influence cash flows from operating activities in any given
period. Management believes that cash receipts from premiums, proceeds from investment sales and maturities, and investment income are sufficient to cover cash outflows in the foreseeable future.
The decrease in cash provided by operating activities for the year ended December 31, 2020, compared to the year ended December 31, 2019, was largely driven by timing of claim payments and premium collection declines due to COVID-19. Cash used in investing activities is primarily funded by cash flow from operations. The decrease in cash used in investing activities for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily reflected the amount of operating funds available for investment in the year.
The increase in cash provided by financing activities for the year ended December 31, 2020, compared to the year ended December 31, 2019, was primarily due to proceeds from the Revolving Credit Facility of $42.0 million and the issuance of the $24.9 million secured loan in 2020, compared to $50.9 million of proceeds related to the IPO offset by the $18.0 million utilized to pay down the Citizens Revolving Credit agreement in 2019. The Term Loan Facility proceeds of $165.0 million received in November 2020 were used to repay all outstanding debt under the maturing Notes.
We agreed to pay a ticking fee with respect to the undrawn portion of the commitments for the Term Loan Facility, ranging from 0.20% to 0.30% per annum based upon our Debt to Capitalization Ratio (as defined in the Credit Agreement) in effect on such date. We also agreed to pay a commitment fee on the unused portion of the Revolving Credit Facility, ranging from 0.20% to 0.30% at the Effective Date. We ceased payment of the ticking fee upon the drawdown of the Term Loan Facility in November 2020. We continue to pay the commitment fee of 0.30% on the unused portion of the Revolving
The Credit Agreement includes certain covenants, including restrictions on the disposition of assets, restrictions on the incurrence of liens and indebtedness, limits on making restricted payments and requirements to maintain specified capitalization levels.
On June 26, 2020, we sold certain assets, in exchange for approximately $24.9 million of proceeds and agreed to lease such assets back from Citizens in exchange for monthly payments bearing interest at 4.83%. The lease expires on July 1, 2025, on which date we will repurchase the assets from Citizens for one dollar. This transaction is treated as a secured loan payable under U.S. GAAP. For a discussion of the secured loan payable, see Note 14. Debt - Secured Loan Payable.
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 previously noted, we terminated this revolving loan agreement as a condition precedent to entry into the Credit Agreement in June 2020. No amounts were outstanding under this facility at termination.
On November 25, 2020, the Company used the Term Loan Facility proceeds to repay $165.0 million in complete satisfaction of the outstanding debt under the 7.5% Senior Unsecured Notes due November 2020 and the 6.5% Senior Notes due November 2020.
We use quota share and facultative reinsurance. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums, net of a ceding commission. Facultative coverage refers to a reinsurance contract on individual risks as opposed to a group or class of business. It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.
(1) Our excess of loss reinsurance reduces the financial impact of a loss occurrence. Our excess of loss reinsurance includes reinstatement provisions, inuring relationships, and other clauses that may impact the amount recovered on a loss occurrence.
At each annual renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss activity, the level of our capital and surplus, changes in our risk appetite and the cost and availability of reinsurance treaties.
Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of the reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible. The allowance related to credit default with respect to our reinsurance assets as of December 30, 2020 and December 31, 2019, was $0.7 million and $0.5 million respectively. In formulating our reinsurance programs, we are selective in our choice of reinsurers and we consider numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation. In an effort to minimize our exposure to the insolvency of our reinsurers, we review the financial condition of each reinsurer annually. In addition, we continually monitor for rating downgrades involving any of our reinsurers.
(1) Amounts represent the principal balance and are not necessarily the carrying value of the Company’s debt on the balance sheet, which includes unamortized debt issuance costs.
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 $181.0 million, $197.4 million and $197.7 million at December 31, 2020, 2019 and 2018, respectively. These recoverable balances include $0.0 million and $33.1 million related to the WAQS at December 31, 2020 and 2019, respectively.
The 2019 Plan is administered by the compensation committee of the Company’s Board of Directors. Subject to the provisions of the 2019 Plan, the compensation committee determines in its discretion, the persons to whom and the
times at which awards are granted, the size of awards (subject to certain limitations set forth in the compensation committee charter) and the terms and conditions of awards.
RSUs vest annually over three years subject to continued employment through each such date. 142,739 and 90,559 time-vesting RSUs were granted in 2020 and 2019 and the fair value of the awards on grant date was $1.8 million and $1.3 million, respectively.
PSAs vest based on the average book value per share growth over a three-year performance period and cliff vest on the third anniversary of the grant date to the extent performance metrics are met, subject to continued service. 110,466 PSAs were granted in 2020 and the fair value of the awards on grant date was $1.5 million.
(ii) Supplemental RSUs: 1,267,912 supplemental RSU awards, 100% of which are time-vesting RSUs, were granted to management on July 25, 2019 in connection with the IPO and are 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 at grant date was $17.8 million.
The Company began recognizing stock-based compensation expense relating to its 2019 Plan upon its inception and initial stock grants in July 2019.
The compensation committee of the Board of Directors administers the 2019 ESPP and has full authority to interpret the terms of the 2019 ESPP. The 2019 ESPP is a shareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 90% of the fair market value of the stock on the purchase date at the end of the offering period. An employee’s payroll deductions under the Purchase Plan are limited to 15% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year.
The table below presents the credit quality of total fixed maturity securities at December 31, 2020 and 2019, as rated by Standard & Poor’s Financial Services, LLC (“Standard & Poor’s”) or Equivalent Designation:
The table below presents the credit quality of total fixed maturity securities at December 31, 2020 and 2019, either rated below BBB or not rated by Standard & Poor’s and their National Association of Insurance Commissioners (“NAIC”) designation:
As part of the 2017 sale transaction to divest our U.K. business, we entered into Aggregate Stop-Loss and 100% Quota Share reinsurance agreements as reinsurer, with Lloyd’s Syndicate 1110 as our reinsured and committed to fund Lloyd’s Syndicate 1110’s “Funds At Lloyd’s” requirements until June 30, 2020. The facility has a principal amount of £17.7 million and contains certain covenants that require us, among other items, to maintain a minimum net worth, to remain within maximum leverage ratios, meet a minimum RBC ratio and maintain specified liquidity levels. The requirement for us to provide the Funds At Lloyd’s were expected to terminate by June 30, 2020. However, the buyer disputed its contractual obligation with respect to substituting our Funds At Lloyd’s at that time. In February 2021, a U.K. court granted summary judgment in our favor requiring the buyer to substitute our Funds At Lloyds; however, such judgment is subject to appeal by the buyer.
Underwriting (loss) income is a non-GAAP financial measure that we believe is useful in evaluating our underwriting performance without regard to investment income. Underwriting (loss) 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 (loss) 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 (loss) 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 (loss) income differently.
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 $48.2 million, $47.4 million and $37.0 million at December 31, 2020, 2019 and 2018, respectively.
We categorize our reserves for unpaid losses and LAE into two types: case reserves and incurred but not reported (“IBNR”). Our gross reserves for losses and LAE at December 31, 2020 were $1.6 billion, and of this amount, 69.0% related to IBNR. Our net reserves for losses and LAE at December 31, 2020 were $1.4 billion, and of this amount, 69.1% related to IBNR.
Our gross reserves for losses and LAE at December 31, 2019 were $1.5 billion, and of this amount, 70.6% related to IBNR. Our net reserves for losses and LAE at December 31, 2019 were $1.3 billion, and of this amount, 69.4% related to IBNR.
The following tables present our gross and net reserves for unpaid losses and LAE at December 31, 2020, 2019, and 2018:
(1) In 2020, 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 amount by which estimated losses differ from those originally reported for a period is known as “development.” Development is unfavorable when the losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.
During the year ended December 31, 2019 our reserve for unpaid losses and loss adjustment expenses for accident years 2018 and prior developed unfavorably by $3.2 million driven primarily by unfavorable development of $16.4 million in Commercial Multiple Peril and $11.3 million in General Liability, partially offset by favorable development of $22.8 million in Workers’ Compensation. The unfavorable development in Commercial Multiple Peril was primarily from the Media and Entertainment customer segment in accident years 2013 through 2016 from a longer development trend than that underlying the historical performance of premises liability. The unfavorable development in General Liability primarily related to 2013 through 2016 accident years due to increased severities in the Real Estate customer segment and run off components within the Other customer segment. The favorable development in Workers Compensation derived from lower than expected claims severity across all customer segments primarily in accident years 2013 through 2015 and accident year 2017. In addition, the Company incurred $14.9 million of loss and loss adjustment expenses related to premium earned during the year ended December 31, 2019, attributable to accident year 2018.
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These prices generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: (i) many transactions; (ii) current prices; (iii) price quotes not varying substantially among market makers; (iv) narrow bid/ask spreads; and (v) most information publicly available.
The Company analyzes fixed maturity securities in an unrealized loss position for credit losses if they meet the following criteria: (i) they are trading in a significant loss position; (ii) failure of the issuer of the security to make scheduled interest or principal payments; (iii) there have been negative credit events with respect to the issuer; or (iv) there have been negative current events surrounding an issuer or the environment in which an issuer operates
For fixed maturity securities in an unrealized loss position that require a credit loss analysis, the Company estimates a present value of expected cash flows. If the results of the cash flow analysis indicate that the Company will not recover the full amount of its amortized cost basis, the Company records a credit loss for the excess of amortized cost over the present value of expected cash flows, not to exceed the unrealized loss. Changes in the credit loss allowance are recognized through realized investment gains, net on the consolidated statements of operations.
The Company’s insurance subsidiaries participate in various reinsurance agreements. 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
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 “IPO 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.
On August 15, 2019 the Principal Stockholders completed the sale of 1,178,570 shares of the Company’s common stock at a price of $14.00 per share less the underwriting discount pursuant to the underwriters’ exercise of their over-allotment option granted in connection with the IPO. The offering was registered pursuant to the registration statement on Form S-1, which the SEC declared effective on July 24, 2019. The Company did not receive any of the proceeds from the sale of the shares of common stock of the Company sold by the Principal Stockholders in this offering. Following this offering, the GS Investors held approximately 39.5% of the Company’s outstanding common stock and the TPG Investors held approximately 38.0% of the Company’s outstanding common stock.
Bond exchange-traded funds with readily determinable fair values are recorded at fair value. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income.
The Company has elected to carry investments in limited partnerships and limited liability companies at fair value. Interest income, dividend income and movements in fair value respective to cost basis are recorded as investment income. The fair values are obtained from statements of net asset value made available by the respective limited partnerships and limited liability companies.
Short-term investments, which have maturities of one year or less at acquisition, are carried at amortized cost, which approximates fair value.
Cash and cash equivalents include cash on deposit with banks and treasury bills with maturities of less than 90 days at acquisition. The Company considers all highly liquid debt instruments with maturities of three months or less at acquisition to be cash equivalents. Restricted cash consists of escrow funds, trust funds and collateral related to funds withheld.
The Company analyzes fixed maturity securities in an unrealized loss position for credit losses if they meet the following criteria: (i) they are trading in a significant loss position; (ii) failure of the issuer of the security to make scheduled interest or principal payments; (iii) there have been negative credit events with respect to the issuer; or (iv) there have been negative current events surrounding an issuer or the environment in which an issuer operates.
For fixed maturity securities, quoted prices in active markets are used to determine the fair value. When such information is not available, as in the case of securities that are not publicly traded, other valuation techniques are employed. These valuation techniques may include, but are not limited to, using third-party pricing sources (dealer marks), identifying comparable securities with quoted market prices and using internally prepared valuations based on certain modeling and pricing methods. For limited partnerships and limited liability companies, the Company utilizes statements of net asset value made available by the respective limited partnerships and limited liability companies. For notes payable, the Company takes into consideration, the interest-rate environment for benchmark interest rates, credit spreads for similar securities, as well as the Company’s rating and financial performance to calculate the fair value.
Reinsurance reinstatement premiums are incurred by the Company based upon the provisions of the reinsurance contracts. In the event of a loss, the Company may be obligated to pay additional reinstatement premiums under its excess of loss reinsurance treaties. In such instances, the respective reinstatement premium is expensed immediately.
The Company accounts for reinsurance receivables and prepaid reinsurance premiums as assets.
Profit commission revenue derived from reinsurance transactions is recognized when such amounts become earned as provided in the treaties with the respective reinsurers.
Capitalized software as of December 31, 2020 and 2019, had unamortized balances of $31.4 million and $33.8 million, respectively. Depreciation on capitalized software commences once the software is placed into service. The Company recorded depreciation expense of $7.9 million, $7.0 million and $5.8 million for the years ended 2020, 2019 and 2018, respectively.
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.
The Company’s loss reserve review processes use actuarial methods that may vary by line of business. The actuarial methods used include the following methods:
● Reported Loss Development Method: a reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;
● Expected Loss Ratio Method: expected loss ratios are applied to premiums earned, based on actuarial pricing expectation, or historical insurance industry results when company experience is deemed not to be sufficient; and
Although considerable variability is inherent in the estimates of reserves for losses and loss adjustment expenses, management believes the reserve is adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations.
From time to time we reallocate existing niches to new or different customer segments in order to align them more efficiently, for reasons that may include the evolution of business or customers in that niche, the establishment or discontinuance of related niches, changes in responsibilities of our management team handling the segments, among others. All historical customer segment information is presented in accordance with the current composition of our customer segments and such reallocation of premium amounts, and as a result some customer segment information may differ from amounts previously reported in Note 18. Segments.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted ASU 2018-13 in the first quarter of 2020 using a retrospective approach and as the requirements of this
literature are disclosure only, ASU 2018-13 did not have an impact on the Company’s financial condition or results of operations.
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 shortens the amortization period of the premium for certain callable debt securities, from the contractual maturity date to the earliest call date. ASU 2017-08 is effective for public entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2017-08 is effective for annual periods beginning after December 15, 2019 and interim periods within annual periods beginning after December 15, 2020. The Company’s adoption of this guidance did not have a material impact on its financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) (“ASU 2017-04”). ASU 2017-04 modifies the goodwill impairment test by eliminating Step 2. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, however the loss recognized should not exceed the total amount of goodwill. ASU 2017-04 is effective for public entities for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. For the Company, ASU 2017-04 is effective for its annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company’s adoption of this guidance did not have a material impact on its financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other -  Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 provides the option to apply prospectively to costs for activities performed on or after the date that the entity first adopts or retrospectively in accordance with guidance on accounting changes. This update ASU 2018-15 is effective for public entities for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2018-15 is effective for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. The Company will adopt ASU 2018-15 in the first quarter of 2021 and does not currently believe that the implementation will have a material impact to the Company’s financial condition or results of operations.
within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”). ASU 2020-01 will clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. ASU 2020-01 is effective for public entities for annual periods beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. For the Company, ASU 2020-01 is effective for annual periods beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of this guidance on its financial condition or results of operations.
Supplemental cash flow information for the years ended December 31, 2020, 2019 and 2018, is as follows:
In 2020, there was a conversion of 364,948 RSUs into common shares accounted for as a non-cash transaction.
fair value adjustments of $9.5 million. The cash purchase price paid in excess of the fair value of net assets acquired was equal to goodwill of $11.9 million.
Goodwill and other intangible assets not subject to amortization are tested for impairment annually, in the fourth quarter. As of December 31, 2020, there was no impairment of other intangible assets not subject to amortization.
The status of the goodwill and net intangible assets is presented in the following tables:
In terms of the sale agreement, the Company will continue to meet Funds at Lloyd’s (“FAL”) obligations with respect to the Syndicate. In that regard, at December 31, 2020, the Company has placed collateral of $35.2 million in the form of cash, securities and Letters of Credit.
(b) The gross unrealized gains and losses on fixed maturity securities included in assets from continuing operations at December 31, 2020, are as follows:
The gross unrealized gains and losses on fixed maturity securities included in assets from continuing operations at December 31, 2019, are as follows:
(c) The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at December 31, 2020, grouped by asset class and by duration of time in a continuous unrealized loss position:
The following table summarizes the fair values and gross unrealized losses for fixed maturity securities in an unrealized loss position at December 31, 2019, grouped by asset class and by duration of time in a continuous unrealized loss position:
(d) The Company was holding 212 and 313 fixed maturity securities that were in an unrealized loss position at December 31, 2020 and 2019, respectively. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.
The Company analyzes fixed maturity securities in an unrealized loss position for credit losses if they meet the following criteria: (i) they are trading in a significant loss position, (ii) failure of the issuer of the security to make scheduled interest or principal payments, (iii) there have been negative credit events with respect to the issuer, or (iv) there have been negative current events surrounding an issuer or the environment in which an issuer operates.
The following table is a rollforward of the credit loss allowance for fixed maturity securities:
(f) The Company records its limited partnership and limited liability companies using net asset value, which the Company has determined to be the best indicator of fair value for these investments. At December 31, 2020 and 2019, the fair value of limited partnerships and limited liability companies was $90.5 million and $66.7 million, respectively. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income. The largest investment within the portfolio is the Pacific Investment Management Company LLC Tactical Opportunities fund, which is carried at $46.6 million at December 31, 2020.
the normal course of such manager’s business, which are reflective of fair value. Such valuations may differ significantly from the values that would have been used had available markets for these investments existed and the differences could be material.
The Company’s strategies for its investments in limited partnerships and limited liability companies include investment funds that employ diverse and fundamentally driven approaches to investing which include effective risk management, hedging strategies and leverage. The portfolio of investments in limited partnerships and limited liability companies consists of common stocks, real estate assets, options, swaps, derivative instruments and other structured products.
The limited partnerships and limited liability companies in which the Company invests sometimes impose limitations on the timing of withdrawals from the funds. The Company’s inability to withdraw its investment quickly from a particular limited partnership or a limited liability company that is performing poorly could result in losses and may affect liquidity. All of the Company’s limited partnerships and limited liability companies have timing limitations. Most limited partnerships and limited liability companies require a 90-day notice period in order to withdraw funds. Some limited partnerships and limited liability companies may require a withdrawal only at the end of their fiscal year. The Company may also be subject to withdrawal fees in the event the limited partnerships and limited liability companies 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.
(g) The Company invests in commercial loans, which are private placements. Loans are reported at the principal amount outstanding, reduced by unearned discounts, net deferred loan fees, and an allowance for credit losses on loans. Interest on loans is calculated using the simple interest method on the daily principal amount outstanding. There was no allowance for credit losses on loans at December 31, 2020 and 2019, respectively.
respectively, were on deposit in collateral agreements at December 31, 2020. Fair value and carrying value of assets in the amount of $367.1 million and $352.0 million, respectively, were on deposit in collateral agreements at December 31, 2019.
(k) The investment portfolio has exposure to market risks, which include the effect of adverse changes in interest rates, credit quality, limited partnership value and illiquid securities, including commercial loan values, on the portfolio. Interest rate risk includes the changes in the fair value of fixed maturities based upon changes in interest rates. Credit quality risk includes the risk of default by issuers of debt securities. Risks from investments in limited partnerships and limited liability companies and illiquid securities risks include the potential loss from the diminution in the value of the underlying investment of the limited partnerships and limited liability companies and the potential loss from changes in the fair value of commercial loans.
(l) Non-redeemable preferred stock securities with readily determinable fair values are recorded at fair value. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income.
(m) Bond exchange-traded funds with readily determinable fair values are recorded at fair value. Changes in fair value of such investments are recorded in the consolidated statements of operations within net investment income.
The change in fair value recognized in income on bond exchange-traded funds for the year ended December 31, 2020 was a gain of $0.1 million. The gain consisted of an unrealized gain on bond exchange-traded funds securities of $0.2 million and a loss recognized on the sale of bond exchange-traded funds of $0.1 million.
nonbinding quotes in markets that are not active for identical or similar assets and other market observable inputs (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.).
The following are the major categories of assets measured at fair value on a recurring basis at December 31, 2020 and 2019, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
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, 2020 and 2019:
The fair value of the notes payable at December 31, 2020, approximated a price equal to $207.5 million or 100.3% of the par value. The fair value of the secured loan payable at December 31, 2020, approximated a price equal to $23.3 million or 102.3% of the par value. The fair value of the notes payable at December 31, 2019, approximated a price equal to $167.5 million or 101.5% of the par value.
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs during the years ended December 31, 2020 and 2019:
The following table presents reclassifications out of AOCI attributable to the Company during the years ended December 31, 2020, 2019 and 2018:
The Company made loans of $4.2 million to certain executive officers, including the CEO. Most of the loans were made in connection with the settlement of RSUs and related tax withholding. On March 15, 2019, all such loans were deemed repaid. On the same date, a special equity distribution of $4.2 million was made by the Company to the same executive officers, which was accounted for as a non-cash transaction on the Company’s consolidated balance sheets.
Additionally, the Company entered into a niche management agreement with an independent agency founded by the former CEO. The Company recorded an expense of $0.6 million for the year ended December 31, 2020.
A portion of the Company’s investment portfolio is managed by Goldman Sachs Asset Management, a related party. The Company is an investee of PI, which is held as an investment within GS Capital Partners VI funds. Related fees paid were $1.2 million, $1.3 million and $1.1 million in 2020, 2019 and 2018 respectively.
The reinsurers with the three largest uncollateralized obligations to the Company at December 31, 2020, were the Swiss Reinsurance America Corporation, Munich Reinsurance America Inc. and Harco National Insurance Company, which represented 26.0%, 8.0% and 8.4%, respectively, of the Company’s reinsurance recoverables, net of funds held and collateral. Swiss Reinsurance America Corporation and Munich Reinsurance America Inc. and are rated A+ (Superior) by A.M. Best Company. Harco National Insurance Company is rated A- (Excellent) by A.M. Best Company.
In connection with the divestment of the Company’s U.K. business, New York Marine as reinsured entered into whole account quota share agreements (“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.
During 2018 and following the transition of the U.S. business back to New York Marine, the WAQS were terminated. To the extent of unearned premium at the time of termination, ceded written premiums, net of the ceding commission, was returned. Reserve for unpaid losses and loss adjustment expenses on premium earned prior to the cut-off termination remained in reinsurance receivables on unpaid losses on the consolidated balance sheets. The reinsurance receivables on unpaid losses under the WAQS were $0.0 million and $33.1 million as of December 31, 2020 and 2019. In January 2020, the WAQS were commuted at no gain or loss to the Company. Loss reserve development on the reserves ceded under the WAQS is included in continuing operations.
For the years ended December 31, 2020, 2019 and 2018 under the WAQS the Company recorded the following:
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, 2020, the Company’s estimate of respective loss development remains below the retention.
In 2017, the Company entered into a retroactive reinsurance agreement for the 2016 accident year. Subject carried reserves at the January 1, 2017 effective date were $96.5 million. The reinsurer provides a $35.0 million limit on respective paid losses in excess of $106.5 million. The reinsurance cover has a retrospective rating feature of $18.0 million of premium accumulating at approximately 4% per annum. These amounts are 100% recoverable to the Company to the extent losses do not exceed the retention. At December 31, 2020, the Company’s estimate of respective loss development remains below the retention and the adjustable premium is accrued as fully recoverable.
The following table is rollforward of the receivable allowance balances related to the risk of credit default as of December 31, 2020:
The majority of the allowance for credit loss for premium receivables relates to audit premium on workers’ compensation coverages assessed during or after the period of coverage whereby there is limited ability to cancel or limit coverage. In the final collection action at the insured level, collection agencies are typically engaged. The amount with collection agencies as of December 31, 2020 was $6.9 million.
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 not received any premiums from this distribution partner other than audit premiums after the first quarter of 2019.
The three distribution partners contributing the largest amounts of direct written premium (excluding the former distribution partner) totaled $275.0 million, $267.8 million and $240.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Unpaid losses are based on individual case estimates for losses reported and include a provision for incurred but not reported and for losses and loss adjustment expenses. The following table provides a roll forward of the Company’s reserve for unpaid losses and loss adjustment expenses:
During the year ended December 31, 2019 the Company’s reserve for unpaid losses and loss adjustment expenses for accident years 2018 and prior developed unfavorably by $3.2 million driven primarily by unfavorable development of $16.4 million in Commercial Multiple Peril, $11.3 million in General Liability, partially offset by favorable development of $22.8 million in Workers’ Compensation. The unfavorable development in Commercial Multiple Peril was primarily from the Media and Entertainment customer segment in accident years 2013 through 2016 from a longer development trend than that underlying the historical performance of premises liability. The unfavorable development in General Liability primarily related to 2013 through 2016 accident years due to increased severities in the Real Estate customer segment and run off components within the Other customer segment. The favorable development in Workers’ Compensation derived from lower than expected claims severity across all customer segments primarily in accident years 2013 through 2015 and accident year 2017. In addition, the Company incurred $14.9 million of losses and loss adjustment expenses related to premium earned during the year ended December 31, 2019, attributable to accident year 2018.
The following tables represent information on unpaid losses and loss adjustment expenses incurred and cumulative paid losses, since 2011 for the Company’s General Liability line, in thousands except claim counts:
The Company participated in an insurance pool in both the issuance of umbrella casualty insurance and ocean marine liability insurance during the period from 1978 to 1996. Depending on the underwriting year, the insurance pools’ net retention per occurrence after applicable reinsurance ranged from $250,000 to $2,000,000. The Company’s effective pool participation on such risks varied from 11% in 1978 to 59% in 1985, which exposed the Company to asbestos and environmental losses. Subsequent to this period, the pools substantially reduced their umbrella writings and coverage was provided to smaller insureds.
Additionally, the Company has assumed asbestos and environmental reserves on a retroactive basis from prior members of the pool. The gross liability related to the same was $7.9 million and $8.4 million as of December 31, 2020 and 2019 respectively.
The Company believes that the uncertainty surrounding asbestos and environmental exposures, including issues as to insureds’ liabilities, ascertainment of loss date, definitions of occurrence, scope of coverage, policy limits and application and interpretation of policy terms, including exclusions, all affect the estimation of ultimate losses. Under such circumstances, it is difficult to determine the ultimate loss for asbestos and environmental-related claims. Given the uncertainty in this area, losses from asbestos and environmental-related claims may develop adversely and accordingly, management is unable to estimate the range of possible loss that could arise from asbestos and environmental-related claims. However, the Company’s net unpaid reserves for loss and loss adjustment expenses, in the aggregate, as of December 31, 2020, represent management’s best estimate.
Estimates of salvage and subrogation recoverable on paid and unpaid losses have been recorded as a reduction of unpaid losses and amounted to $52.1 million and $27.5 million at December 31, 2020 and 2019, respectively.
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 has recorded a $6.1 million increase to its deferred tax asset related to the change in methodology for loss reserves as a result of Tax Reform. An offsetting deferred tax liability was also recorded at December 31, 2017, which is amortized into income over 8 years. The deferred tax liability as of December 31, 2020 is $3.8 million.
The Company’s valuation allowance account with respect to the deferred tax asset and the change in the account is as follows:
As of December 31, 2020, the Company recorded insignificant amount of interest and penalties and reduced its positions by $0.3 million as a result of an audit settlement.
There were $5.6 million and $0.1 million of U.S. income taxes paid for the years ended December 31, 2020 and 2018, respectively. There were $0.8 million of U.S. income taxes received for the year ended December 31, 2019. The U.S. federal income tax recoverable included in other assets amounted to $1.6 million, $0.2 million and $0.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Section 382 of the Internal Revenue Code (“Section 382”) contains rules that limit the ability of a corporation that experiences an “ownership change” to utilize its net operating and capital loss carry forwards and certain built-in losses recognized in periods following the ownership change. An ownership change is generally any change in ownership of more than 50-percentage points of a corporation’s stock over a three-year period. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the stock of a corporation or any change in ownership arising from a new issuance of stock by the corporation. If a Section 382 limitation were to manifest, a portion of the tax losses could be deferred or could expire before the Company would be able to use them to offset positive taxable income in current or future tax periods. The Company’s inability to utilize tax losses could have a negative impact on the Company’s financial position and results of operations. This limitation is generally determined by multiplying the value of the entity as of the ownership change date by the applicable long-term tax-exempt rate.
On November 23, 2010, the Company acquired 100% of PSIG (formerly NYMAGIC, Inc.) outstanding common stock for a cash price of $25.75 per share or approximately $231.9 million; as a result, the Company experienced an ownership change for purposes of Section 382. As a result of this ownership change, the Company’s ability to utilize the NOL that existed as of November 23, 2010, is limited to approximately $9.0 million annually. As of December 31, 2020, a valuation allowance of $0.6 million has been recorded as a result of the NOL limitation.
On August 15, 2019 the Principal Stockholders completed the sale of 1,178,570 shares of the Company’s outstanding common stock and retained 77.5% of the outstanding common stock. The transaction did not result in an ownership change under Section 382.
In November 2013, the Company issued $140.0 million of 7.5% senior unsecured notes (“Senior Unsecured Notes”) due November 2020 and provided for semi-annual interest payments. The Company repaid the Senior Unsecured Notes in its entirety on November 25, 2020.
The Company, as borrower, was a party to a revolving loan agreement (the “Prior Credit Agreement”) dated January 29, 2018 and amended on March 15, 2019, for $50.0 million which was scheduled to mature on the earlier of (i) March 15, 2022, or (ii) 91 days before maturity of the Company’s 7.5% Senior Unsecured Notes due November 2020 and the Company’s 6.5% Senior Unsecured Notes due November 2020 (collectively, the “Notes”) or, if the Notes are amended or replaced, 91 days before the maturity of such amendment or replacement. The Company exercised its termination rights under the Prior Credit Agreement on June 12, 2020. There were no borrowings under the Prior Credit Agreement on the date of termination.
On June 12, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with third-party lenders and an administrative agent. The Credit Agreement, which matures on June 11, 2023, provides for (i) a delayed draw term loan facility in the aggregate principal amount of up to $165.0 million (the “Term Loan Facility”), and (ii) an uncommitted revolving credit facility of up to $35.0 million (the “Revolving Credit Facility”), for which commitments had not been obtained as of the closing date.
Interest on borrowings under the Term Loan Facility and the Revolving Credit Facility are calculated at each drawdown date based on variable rates described in the Credit Agreement.
On June 30, 2020, the Company entered into an Incremental Facility Agreement and Amendment (the “Agreement”), in the aggregate amount of $65.0 million, subject to the terms of the Credit Agreement. The Agreement had lenders commit to the previously uncommitted Revolving Credit Facility, and increased the available amount from the $35.0 million noted above to an aggregate of $65.0 million. Debt issuance costs of $0.5 million related to the Agreement were incurred and are being amortized over the life of the agreement.
The Company leases certain facilities and equipment under non-cancelable lease agreements that expire at various dates through 2025, which are generally renewed or replaced by similar leases. The lease agreements do not contain any material restrictive covenants, do not contain any conditions of residual value guarantees and are substantially all considered to be operating leases. The Company’s leases relate to office facilities in New Jersey, California, Florida, Georgia and the U.K. The weighted average lease term was 2.7 years and the weighted average discount rate was 2.0%.
Rent expense for the years ended December 31, 2020, 2019 and 2018 was $3.0 million, $3.3 million and $3.1 million, respectively. The operating leases also include provisions for additional payments based on certain annual cost increases. The following table presents the Company’s lease liabilities and right-of-use assets related to operating leases as of December 31, 2020:
The lease of the U.K. office had rent expense of $0.5 million for the years ended December 31, 2020, 2019 and 2018, and sublease income of $0.7 million, $0.6 million and $0.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts are included in discontinued operations.
The 2019 Plan is administered by the compensation committee of the Company’s Board of Directors. Subject to the provisions of the 2019 Plan, the compensation committee determines in its discretion, the persons to whom and the times at which awards are granted, the size of awards (subject to certain limitations set forth in the compensation committee charter) and the terms and conditions of awards.
(iii) Founders grant awards: 250,000 founders grant awards in the form of time-vesting RSUs were granted on July 25, 2019. The fair value of the grants was $3.5 million and will cliff vest on the third anniversary of the grant date.
(v) Pre-IPO RSUs: 668,170 RSUs initially granted under the 2010 Plan were converted into RSUs based on shares of the Company’s common stock upon the consummation of the IPO merger of PGHL into PGI.
The following table summarizes equity award transactions for the 2019 Plan for the years ended December 31, 2020 and 2019:
The Company has one reportable segment, Specialty Insurance segment, which primarily offers property and casualty insurance products through its customers segments that include Construction, Consumer Services, Marine and Energy, Media and Entertainment, Professional Services, Real Estate, Sports, and Transportation. The primary criteria to determine the Company’s reportable segment is based on the fact that the Company’s senior management reviews, assesses and allocates resources both on a financial and personnel basis on an entity-wide level.
On January 14, 2021, the Company entered into the Merger Agreement with Parent and Pedal Merger Sub, Inc., pursuant to which, subject to the terms and conditions of the Merger Agreement, Pedal Merger Sub, Inc. would merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent.
In connection with the proposed merger, each ProSight common share held by our stockholders will be converted into the right to receive $12.85 in cash valued at approximately $586.0 million.