Net income is the amount of profit or loss remaining after deducting all incurred expenses, including income taxes, from the total earned revenues for an accounting period.
Our expense ratio was 36.0% for the year ended December 31, 2019 compared to 37.2% for the year ended December 31, 2018. This reduction is primarily due to the increase in net earned premiums exceeding the increase in underwriting and insurance expenses combined with a slight reduction in the net policy acquisition expense ratio.
Adjusted operating income was $57.6 million for the year ended December 31, 2019, an increase of $2.4 million, or 4.3% from the adjusted operating income of $55.3 million for the year ended December 31, 2018.
Net income was $53.7 million for the year ended December 31, 2018 compared to a net loss of $6.9 million for the year ended December 31, 2017, an increase of $60.6 million, or 878.2%. The increase in net income primarily resulted from an increase in underwriting income of $22.2 million, a $19.8 million increase in net investment income, and a decrease in income tax expense of $24.8 million.
Our largest quota share reinsurance agreements were the WAQS. In connection with the divestment of our U.K. business, New York Marine as reinsured entered into the WAQS with third party reinsurers to maintain reasonable underwriting leverage within New York Marine and its subsidiary insurance companies during a transition period following the U.K. divestment. During 2018, and following the transition of the U.S. business back to New York Marine, the WAQS were terminated.
We identified the accounting estimates which are critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. We use significant
Our Reserve Committee includes our Chief Actuary, Chief Executive Officer, Chief Financial Officer, Chief Underwriting and Risk Officer, and Chief Claims Officer. The Reserve Committee meets quarterly to review the actuarial reserving recommendations made by the Chief Actuary. In establishing the actuarial recommendation for the reserves for losses and LAE, our actuary’s estimate of the current Initial Expected Loss Ratio (“IELR”) is derived from the pricing IELR at the niche level, policy year, and reserving group. Our reserve estimate is derived from our proprietary reserving model that calculates a point estimate for our ultimate losses. Although we believe that our assumptions and methodology are reasonable, our ultimate payments may vary, potentially materially, from the estimates we have made.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The TCJA did not specify the application of certain elements of the legislation and the U.S. Treasury has yet to issue interpretive guidance to specify the loss payment patterns and the corporate bond yield curve under the new law for 2018. The Company has recognized a provisional tax impact of $9.0 million related to the transition adjustment for loss discounting which has been included in its components of deferred tax assets and liabilities as part of its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. The accounting is expected to be complete when the U.S. Treasury issues further guidance.
On November 23, 2010, the Company acquired 100% of NYMAGIC, Inc.’s outstanding common stock for a cash price of $25.75 per share or approximately $231.9 million. The acquisition of NYMAGIC, Inc. provided a platform for which the Company could issue insurance policies. The fair value of net assets acquired amounted to $220.0 million after 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.
PSIH acquired several entities in the U.K. in order to build Lloyd’s Syndicate 1110 (“Syndicate”). The Company changed its strategic direction with respect to its U.K. operations and placed the Syndicate into run-off. The Company 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.
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, 2019, the Company deposited cash and securities of $10.4 million and arranged for placement $23.2 million in Letters of Credit and securities.
(a) A summary of the Company’s investment components is presented below:
(c) The following table summarizes all securities in an unrealized loss position at December 31, 2019, the fair value and gross unrealized loss by asset class and by length of time those securities have been in a loss position:
Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, nonbinding quotes in markets that are not active for identical or similar assets and other market observable inputs (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.).
The following are the major categories of assets measured at fair value on a recurring basis at December 31, 2019 and 2018, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
Reinsurance receivables included an allowance for uncollectible reinsurance receivables of $10.9 million and $10.0 million, for the years ended December 31, 2019 and 2018, respectively.
The table below shows the tax benefit of the U.S. federal NOLs generated by year and expiration date:
On July 25, 2019, the Company merged with PGHL and the holders of PGHL equity interests received 6.46 shares of the Company’s common stock. The total merger consideration was 38,851,369 shares of the Company’s common stock which was 100% of the Company’s outstanding common stock. The Company did not experience an ownership change under Section 382. On July 29, 2019, the Company completed its IPO. The principal stockholders retained 80.3% of the Company’s outstanding common stock which did not result in an ownership change of 50% or more under Section 382.