Post-IPO Review: ProSight Global Touts Limited Pandemic Policy Exposure

IPOStreet

ProSight Global (PROS) went public in July 2019, raising $111 million in gross proceeds and selling shares at $14.00 each.

The firm provides insurance coverage for specific industry verticals that it views as most addressable and profitable.

PROS management has done well to limit the Covid19 pandemic’s downside from aspects of its business within its control.

While my bias on the stock is Neutral, I’m watchlisting PROS for a potential entry point in the second half of 2020.

NEUTRAL-BullishBearish

Morristown, New Jersey-based ProSight Global was founded in 2009 to provide clients with insurance coverage focused on specific industry verticals.

Management is led by co-founder, president and CEO Lawrence Hannon, who was previously Chief Sales and Marketing Officer at the Fireman’s Fund Insurance Company and before that held leadership positions at Chubb Limited.

Below is a brief overview video of ProSight:

Source: ProSight Specialty Insurance

According to a 2017 market research report by the National Association of Insurance Commissioners (NAIC), the total direct written premium for all types of property & casualty insurance reached $634 billion in 2017.

This represents year-over-year growth of 5% from 2016, as can be seen on the chart below:

prosightmkt

Source: NAIC

As of the 2017 report, ProSight was ranked in the top ten firms in certain states and U.S. possessions for various specialty insurance categories.

The firm currently provides coverage in seven industries and revenue distribution is more or less evenly distributed between them:

  • Media and Entertainment
  • Real Estate
  • Professional Services
  • Transportation
  • Construction
  • Consumer Services
  • Marine and Energy

PROS’ topline revenue by quarter has varied and Q1 2020’s results were only slightly higher than the same period in 2019:

prosrev

Operating income by quarter was steady until Q1 2020’s drop:

prosop

Earnings per share (Diluted) have trended lower, with Q1 2020’s results producing the lowest earnings per share over the past five quarters:

proseps

Source for chart data: Seeking Alpha

In the past 12 months, PROS’ stock price has dropped 36.6 percent vs. the U.S. Insurance index’ fall of 21.7 percent and the overall U.S. market’s rise of 3.1 percent, as the chart below indicates:

proschart2
Source: Simply Wall Street

Commentary

In its last earnings call, management significantly highlighted the types of insurance the firm does NOT write, which includes ‘publicly traded DNO, medical malpractice, mortgage insurance, accident, and health...We do not write event cancellation, opioid manufacturers or distributors, or hospitals and first responders.’

However, management stated it will not be able to meet its goals of double digit ROE in 2020.

The firm’s net loss ratio is under threat of rising one to three points ‘from Covid related claims and expenses in the current accident year.’

Also, high bad debts may occur due to state mandates regarding collection deferrals and lower written premiums may negatively affect its expense ratios.

Net investment income from its limited partnership interests may fluctuate significantly in 2020, affecting this important line item.

Management reiterated its ‘niche strategy, exclusive distribution arrangements and careful exposure management will leave [it] well positioned for profitable growth as [it] exits 2020.’

So, we are now in May and it appears management is deprecating 2020, or perhaps lowering expectations in hopes of exceeding them in the back half of 2020.

In any event, management spent much of the call demonstrating how its exposure to Covid19’s effects has been minimized in its policy coverage decisions.

But, new policy growth and net investment income have been negatively affected, so there’s no getting around that.

In all, I view the report as indicating management has done well to manage what it can control while suffering the effects of what it can’t control.

As credit and equity markets improve, the effects of the pandemic become more quantified and the firm explores debt refinancing options, PROS may be positioned for an upward catalyst, at least as we advance into 2021.

Although I’m cautiously optimistic on PROS, for the short term, my bias is NEUTRAL on the stock. I’m putting it on my watchlist for a potential entry point in the second half of 2020.

NEUTRAL-BullishBearish

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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